[OPE] John Kay on rent-seeking

From: Jurriaan Bendien <adsl675281@telfort.nl>
Date: Wed Nov 11 2009 - 13:48:38 EST

John Kay has an interesting article on rent-seeking in the FT, making some
points about about the nature of capital accumulation similar to my own on

Powerful interests are trying to control the market
By John Kay
FT November 10 2009

You can become wealthy by creating wealth or by appropriating wealth created
by other people. When the appropriation of the wealth of others is illegal
it is called theft or fraud. When it is legal, economists call it
rent-seeking. (...) Rent-seeking can be effected through rake-offs on
government contracts, or the appropriation of state assets by oligarchs and
the relatives of politicians.
But in more advanced economies, rent-seeking takes more sophisticated forms.
(...) Rents are often extracted indirectly from consumers rather than
directly from government: as in protection from competition from foreign
goods and new entrants, and the clamour for the extension of intellectual
property rights. Rents can also be secured through overpaid employment in
overmanned government activities. Rent-seeking is found whenever economic
power is concentrated - in the state, in large private business, in groups
of co-operating and colluding firms. (...) Control of rent-seeking requires
decentralisation of economic power. (...) Privatisation and the breaking up
of statutory monopolies has reduced rent-seeking by organised groups of
public employees. But the scale of corporate rent-seeking activities by
business and personal rent-seeking by senior individuals in business and
finance has increased sharply. (...)

I'm not sure that I agree with everything in this article (at least here in
Holland, the public service for example is often understaffed, so that
public servants on average work more hours than they really contracted for,
and can obtain extra income only through promotion, or through a redivision
of tasks which makes certain activities more lucrative; frequently pay
scales do not compare favourably with the private sector) but some of the
points John Kay makes are surely quite valid. The end result of competition
is, that the supply of many resources is controlled by a few organizations
or only one large organization, who, with their large market share, are able
to extract economic rents. Of course, in Marx's theory, "appropriating
wealth created by other people" occurs already at the point of production
through the extraction of surplus labour and surplus-value, even assuming
equal exchange of equal values, and also through "profit upon alienation"
(in a word, capital gains from trading in already existing assets).

Is the appropriation of economic rents simply a result of economic
concentration, as John Kay argues? If that was true, then breaking up supply
monopolies would indeed reduce or end the ability to extract such rents. But
in fact serious economic theory tells us otherwise - if there is strong
demand for any scarce resource, prices will inflate in response, enabling an
economic rent simply because the supply/demand relationship favours supply.
Above-average profits may occur even in an otherwise declining market, by
enterprises with superior productivity. Thus, the potential for obtaining
economic rents is intrinsic to market functioning - it is, most simply, a
matter of a favourable market position or bargaining position - and it will
tend to assert itself unless prices are regulated. It is limited only by the
fact that if prices rise strongly, this not only curbs demand, but also
attracts competitors who try to undersell the monopolists. But the entry of
competitors into the market depends on their ability to acquire sufficient
capital resources and market position to make it possible. If however the
requirements for market entry are very costly or technically difficult,
price-cutting competition may become practically impossible. The advocacy of
free trade in this sense has little to do with promoting price-cutting
competition, as in the ideological story, but with market expansion (the
ability to trade in a new area), of a type that would permit more money to
be made by selling to more customers. Privatisation does not automatically
end supply monopolies, since it may just be that a private sector monopoly
substitutes for a public sector monopoly, and consequently it does not
necessarily mean that prices will be lowered - in fact, typically, they are
not lowered, but increase. Conversely, a public service may not attract an
economic rent at all, simply because the supply price is an "administered
price" deemed to be a just price appropriate for citizens' needs.

I would argue that in the modern economy, rent-seeking (or surplus-profit in
Marx's terminology) has become common commercial practice - for a majority
of new products, a few outlets dominate the market, and the exceptions are
mainly in the area of various kinds of services. Official economic theory
unfortunately doesn't cope well with this reality, since it lacks any
adequate theory of real-world competition. The standard story is that if
obstacles to free trade and competitive markets are removed, then economic
rents are impossible. Ignored is that in the course of competition, many
competitors are blocked or outcompeted, and the strong prevail over the
weak, so that the result is less competition than there was before. Also,
national accounts data do not make capital gains and economic rents
explicit, because they were really not designed for an economy in which
rent-seeking and asset revaluations have become common practice, and in
which the largest part of the capital stock is unrelated to production. The
accounting categorization often hides more, than it reveals.

At a deeper level, it is difficult for economic theory to specify what a
valuation of a product or service at "fair value" actually is, other than
relatively, since that idea can be specified only with reference to average
market prices and "normal" costs and yields/returns, in other words, what
most people are currently prepared to pay for something (see e.g. William
Poundstone, Priceless: the Myth of Fair Value). If however buying a product
or service is not optional, because it is indispensable to use or consume it
for some or other reason, then the economic rent becomes a "natural"
addition to the "average market price". In that case, the economic rent is
contained in the very definition of "fair value". All of this means that
pricing policies are often not simply a matter of commercial calculation
about "what the market will bear", but a political consideration, since if
prices for indispensable goods rise too high, and mark-ups are too large,
they will invoke social protest about unjust prices.


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Received on Wed Nov 11 14:01:09 2009

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