Jul 24, 2019

Fifty Years of "Rent Seeking": A Q&A with Matthew Mitchell

Matthew D. Mitchell Senior Research Fellow , Andrea O'Sullivan Feature Writer

Just over five decades ago, the late economist Gordon Tullock published a paper titled “The Welfare Costs of Tariffs, Monopolies, and Theft.” Largely ignored at first, the article has come to be celebrated for initiating the study of “rent seeking,” one of the 20th Century’s most important advancements in economic theory.

In recognition of Tullock’s insight, Mercatus Senior Research Fellow Matthew Mitchell recently guest-edited a volume in the journal Public Choice. The volume includes original articles by Roger Congleton; James Robinson and Daron Acemoglu; Federica Carugati, Josiah Ober, and Barry Weingast; David Laband and John Sophocleus; Joshua Hall, Josh Matti, and Amir Ferreira Neto; Michael Munger; Seung Ginny Choi and Virgil Henry Storr; Randall Holcombe; Vlad Tarko and Andrew Farrant; and Mitchell himself.

We sat down with Mitchell to discuss the issue, and what insights policymakers and staff can draw from this academic work. Here's what he had to say.

Congratulations on the publication of your special issue of Public Choice, which dives deep into Gordon Tullock’s work on rent-seeking. It comes on the heels of the 50th publication anniversary of Tullock’s landmark article, “The Welfare Costs of Tariffs, Monopolies, and Theft” in the, as you say, “rather obscure” Western Economic Journal. Can you tell us a bit about how the Public Choice issue came to be, and why it is so relevant at this particular time?

Well, I’m biased of course, but I view rent seeking as one of the most important advances in economic thinking of the 20th Century. And it isn’t just me. If you do a Google Scholar search of the term “rent seeking” you will get 190,000 hits. Kenneth Arrow and several distinguished coauthors listed Anne Krueger’s article that coined the term among the top 20 most influential papers in the American Economic Review. And clearly the idea has had a profound effect on economics and even other fields.

Beyond its academic import, rent seeking is as relevant as ever. This is the era of Carrier and Foxconn, of Amazon HQ2 and Tesla. Rent seeking is everywhere you look. And yet it seemed to me that there was this disconnect. Here we have this theoretical and empirical literature which seems to explain so much of what we see today in business and politics. And yet outside of academia, few people have much familiarity with the term. So, after the 50th anniversary of Tullock’s paper, I wanted to do more to draw attention to his important and relevant paper.    

Before we get more into the weeds on the issue, can you tell us what rent seeking is?

Sure. When either real resources or economic surplus can be transferred involuntarily, those who might be favored or disfavored by the transfer will expend effort to seek or oppose the transfer. So, for example, if the government can transfer cash to a private firm in the form of a subsidy, or if it can contrive a monopoly for a firm through regulations, then anyone who might benefit or lose from those policies will expend effort attempting to influence them. They will lobby, they will ingratiate themselves to politicians, and they may even alter their business practices as a way to curry favor with policymakers and the public.

Those efforts are socially costly. And unlike costly-but-productive activity like building a new factory or performing a life-saving surgery, these efforts come with no social benefits because nothing of value is generated; the costs are undertaken in an effort to effect a transfer rather than to effect value creation.

One reason rent seeking may not be better known is that it has a technical and obscure name. Economists refer to above-normal or monopoly profits as “rent” and so Anne Krueger, working independently from Tullock, referred to efforts to seek above-normal profit as “rent seeking.” The term stuck with economists but I think it is safe to say that it hasn’t exactly caught on among the public.   

The issue covers a lot of ground, and your introductory piece provides a great overview of what readers can expect.

One article that will be particularly interesting to people who work in the policy world is the one by Daron Acemoglu and James Robinson. These economists wrote a very popular book called Why Nations Fail, which tried to answer the age old question of why some nations are wealthy and others struggle with mass poverty. They argue that institutional inclusiveness is a key determinant of economic prosperity.

Can you talk a little bit about how Tullock’s work influenced Acemoglu and Robinson?

One of the interesting things about their book is that it was not originally titled Why Nations Fail. They had wanted to title it something like Why Nations Succeed because failure is, in their view, the norm. The more interesting question is why a few nations somehow managed to break out of that norm. (Whatever the substantive merits of that claim, someone convinced them that failure sells better than success, so they changed the title.)

And at the center of this standard account of failure is rent seeking. Their view is that most nations develop what they call “extractive institutions.” These are a set of rules designed to extract wealth from some for the benefit of others. Think of: slavery, feudalism, and communism (actual, real-world communism, not the communism of wishful thinking). In their account “rent seeking, in the guise of ‘extractive institutions,’ provides the dominant explanation for patterns of comparative development.”

Relatedly, Seung Ginny Choi and Virgil Storr discuss how perceptions that government privilege is necessary to get ahead can build a “culture of rent-seeking.” This might explain why two different countries with comparable institutions may have differing levels of actual rent-seeking: cultures of rent-seeking become a kind of self-fulfilling outcome.

In March, you published a major Mercatus study called “A Culture of Favoritism” yourself. It’s a fascinating, if a bit disheartening, survey of business leaders’ attitudes on markets and government intervention.

It probably didn’t surprise you to see that favored firms think their protections are justified, and think that the government should do more to regulate markets. But there is a kind of cognitive dissonance there. They understand that freer markets serve the public interest, and that markets should generally be free. But they are more likely to believe that competition is unfair to business, and that our markets are currently “too free.”  They were also more inclined to believe that favoritism was compatible with free enterprise.

Do you think we have a general culture of rent-seeking in the United States? If so, how should we address it, and if not, how can we make sure that we stay that way?

In general, no, I do not think we have a culture of rent-seeking. In the paper you mention, we zeroed in on business leaders and their beliefs. Fully 70 percent of them rejected the idea that government should favor particular firms or industries. (Unfortunately, among those whose firms benefit from privilege, opposition was lower, but a clear majority, 61 percent, still opposed favoritism). Predictably, views toward favoritism were a bit more sympathetic when we asked the question in a more neutral way, referring to “government assistance” rather than to “favoritism,” but the results were pretty robust.  

Soon we will release some additional charts that look not only at business leader perceptions, but at perceptions of the broader public. Among the broader public, there is even less support for favoritism. Among both business leaders and the broader public, seventy-six percent said that government should not favor particular firms or industries.

This is consistent with other social science research that suggests many people have a moral taste for equity.

Still, if Acemoglu and Robinson are right, we can’t take this for granted. Extractive institutions are the norm, not the exception. So we have to constantly work to strengthen countervailing, inclusive, institutions and cultural norms that limit favoritism. 

It is fitting that Public Choice would dedicate an issue to Tullock’s work on rent-seeking; not only did he help create the eponymous literature, he was actually the founding editor of the journal, Public Choice.

One thing Tullock saw a need for was a method to quantify the costs and perhaps overall amount of rent-seeking. But as an article by David Laband and John Sophocleus discusses, this has proven quite hard to do.

Do you think that part of the reason that people do not fully appreciate the costs of rent seeking is that it is so hard to measure?

Absolutely. As James Buchanan emphasized in his contributions to this literature, rent seeking can take place on many levels. For example, people may seek to gain or avoid losses once the government is in the business of making transfers. But people may also seek to institute or oppose transfer-making policies. Beyond that, they may seek the rent-distribution offices. On some of these levels, rent seeking is very hard to measure. And people may attempt to seek rent in very subtle ways on any of these dimensions. 

Speaking of measurement problems, Tullock himself puzzled over a seeming paradox in rent-seeking. The gains from rent seeking can be quite great, but we often witness less actual rent seeking (in terms of witnessed expenditures) than we would expect. Our faculty director Tyler Cowen recently made this observation in his latest book, Big Business.

I understand that your take differs from Cowen’s. What are your thoughts?

It does a bit. Both Tyler and Tullock observed the amount of lobbying and other political activities by firms and noted that it paled in comparison to government activities. From this they concluded that rent seeking must actually be a pretty small activity.

They certainly have a point. Thankfully, much of what government does is not for sale. To use Acemoglu and Robinson’s terms, we largely live in a world of inclusive institutions, not extractive institutions.

But I’m not as optimistic as Tyler is. And one reason goes back to your previous question about measurement—I think a lot of rent seeking is very hard to measure, and so it simply goes unmeasured. For example, a firm might seek rent in the easily-measurable way by lobbying. But it might also seek rent by subtly altering its business practices, for example by tilting its labor-capital mix a bit more toward labor than it otherwise might since labor votes and machines don’t. Or it might locate in certain districts or buy inputs made in certain districts in order to curry favor with policy makers. It’s very hard to measure this stuff. But it can still be socially costly. 

Different authors in the issue provide different ideas to resolve the Tullock paradox. Choi and Storr discuss culture, another article by Vlad Tarko and Andrew Farrant suggests that regulatory arbitrage—or the tendency for firms to locate to more hospitable municipalities—puts downward pressure on expected (as opposed to potential) rents.

You put forth a new concept in your article, called “uncontestable favoritism.” Can you talk a little bit about that, and how it fits into the so-called Tullock paradox?

Well I’m not sure how new the point is with me, but I’d note that sometimes people don’t seek or oppose favoritism because it is uncontestable.

Sometimes, favors are not doled out to the highest bidder, but instead they are doled-out on the basis of race, gender, tribe, religion, connection, or—more recently—on the basis of political correctness or maybe even having a good cover story. Some of those things are not easy to acquire, and so people may be locked out of the rent seeking market. If you aren’t of the “right” race, gender, tribe, or religion, if you aren’t especially politically correct or if you don’t have a good cover story, then you actually have very little incentive to seek or to oppose the favor or disfavor. But the transfer can still be unjust. The favor or disfavor can still be offensive and perhaps quite costly along other dimensions. Slavery, of course, was staggeringly unjust. And it was also economically inefficient as all that labor could have been doing other things for society. But, until the Civil War, it may not have involved all that much rent-seeking loss as the system was perceived by many to be uncontestable.

This, by the way, is another answer to Tyler’s point. in this case, I concede the point that there may not be that much rent seeking. But it doesn’t mean that we should be blasé about favoritism. 

Other articles in the issue make it clear that rent-seeking has a kind of built-in inertia to it. For example, Randall Holcombe’s article discusses Tullock’s “transitional gains trap.” This refers to a situation where reforming rent-seeking would impose major losses on incumbents—the classic example being taxi drivers in New York who paid large sums for a medallion to operate under the rent-creation system.

The problem is that the gains from rent seeking are largely short-term. Taxi medallions cost millions of dollars because the value of being a protected business is capitalized into the cost of the license. We see similar phenomena with things like the mortgage interest deduction and farm subsidies—the value of these privileges are reflected in the higher cost of homes and farm land. So these “protected” groups aren’t really any better off than before the policies were enacted, but reforming them would hurt them a lot.

What solutions do you see for overcoming transitional gains traps in policy?

There are really no easy answers here. Tullock himself said the best answer is not to create the privilege in the first place and I think that remains the best answer.

As it happens, creative destruction will take care of some of this in the long run. Ironically, the more minutely the government regulates a market, the more detailed and complex the regulations become. This creates a stronger incentive for entrepreneurs to come along and serve the same need, but to do so in a way that doesn’t meet the detailed and specific regulatory definition of the market. Uber did this with the rides-for-hire market. Bitcoin is doing this in the market for money. 

What in this issue might most surprise people who work in policy—whether they work for policymakers or write about it for a living?

I think the issue is chock-full of policy-relevant insights. Besides the ones we’ve already mentioned, Carugati, Ober, and Weingast have a fascinating discussion of ancient Athens and how it transitioned from a rent-seeking society to an open and more competitive society. This should be highly relevant to development officials. Roger Congleton has a nice, detailed account of how Tullock’s article came to be, and the influence that it has had in economics. Joshua Hall and his coauthors discuss rent seeking in the classroom; a must-read for anyone who wants to teach the subject. Mike Munger has a great and nuanced account of corruption. Even moderate corruption—sometimes thought to “grease the wheels” in societies with poor institutions—can ossify into rigid and serious, even deadly, corruption.

Thanks for the time and your thoughts, Matt!

Readers interested in learning more should see the edited volume of Public Choice, Volume 181, Issue 1-2, “Rent Seeking at 52.”

Photo credit: Louis Velazquez/Unsplash.

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