Rents and Rent-Seeking

The idea of rent is quite old, going back thousands of years to the ancient world. It originally applied primarily to land, and meant that some people had ownership rights to the land and could demand payment (rent) from anyone who sought to use the land. What tended to happen over time is that land ownership would get concentrated in the hands of a few people ultra-rich people and the rest of the population would become impoverished. At some point this would create pressure leading to land reform, which would mean taking some of the l and from the wealthy and giving it to the lower classes. In Rome (both Republican and Imperial) this frequently meant getting land to give to soldiers who had completed their service. After all, you don’t want a large group of armed veterans who are pissed-off to march on the government.

As the Western world moved into the middle ages the Roman institutions evolved into what we call feudalism, a system whereby the monarch was the legal owner, at least in the first instance, of all the land in the kingdom. The monarch would then distribute land to the nobility in exchange for military service. And the nobility would use their derived ownership of land to extract rent from the peasantry, and turn that relationship into serfdom, in which the peasants were legally prohibited from leaving the land. The serfs would be required to work the lord’s land (this is where the term landlord comes from) in exchange for being able to farm a little bit for themselves. What became clear when people looked closely at this is that feudalism was a very backwards system that was a brake on development, and that it had to be overturned for the industrial revolution to succeed. The first economists, such as Adam Smith, saw this very clearly.

Smith divided the sources of income into three pieces: Rents, Profits, and Wages. Wages are the income to people who work, Profits are the income to the capitalists who invest in machines and raise productivity, and Rents go to people who own land. But what does that mean exactly? To Smith, they were taking money that derived originally from productive activity and devoting it to non-productive enrichment of the already wealthy:

“Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which best bear to have a particular tax imposed upon them.”

“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.”

“A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.”

As economists built on Smith’s insights, they expanded the definition of rent to include and payment that is due solely to ownership and not derived from productive activity. A prime example is a monopoly. If I am the sole owner of a desirable resource I can charge a much higher price for it. But the most general definition would include what we used to call “coupon clippers”, people with great wealth, often inherited, that can just live off of the dividends and interest without doing anything productive. Here is the definition:

Rent-seeking = the act or process of using one’s assets and resources to increase one’s share of existing wealth without creating new wealth.

What many people do not realize is that Smith saw clearly that restraining rent-seeking would require government action. He did definitely like what would happen with the development of industry, and but saw that this development was endangered by the rent-seeking behavior of the wealthy. and I submit this is just as true in 2017 as it was in 1776 when Smith published his great work.

This entry was posted in History, Politics. Bookmark the permalink.

Comments are closed.