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Rent-Seeking: One Small Example

My late colleague Gordon Tullock is known, correctly so, for his important role in launching public-choice scholarship.  But if you ask economists to name one specific contribution for which Gordon is best known, most would likely say “the theory of rent-seeking.”  Although Gordon did not introduce this term – the term “rent-seeking” was later introduced in this 1974 article by Anne Krueger – he introduced the insight in his 1967 Western Economic Journal paper “The Welfare Costs of Tariffs, Monopolies and Theft.”

The insight is as brilliant and important as it is straightforward.  And like so many important insights, it’s obvious when stated but was unknown before it was first stated.  Gordon’s insight is this: resources used to pursue unproductive (or destructive) privileges are wasted from the perspective of everyone other than (1) those who use resources in such ways, (2) those who directly receive such resources.

Economists have long understood that people with special privileges – say, producers protected from foreign competition by tariffs – act in ways that generate outcomes that are less valuable than are the outcomes that would be generated in the absence of such privileges.  But in 1967 Gordon said, in effect, ‘The costs of those long-understood inefficiencies, while real and regrettable, are small in comparison with the wastes of resources used when people strive to get such privileges – that is, to seek rents.’  If, say, U.S. tire producers expect that their profits will rise by $200 million if Uncle Sam slaps a punitive tax on Americans who buy non-American-made tires, these tire producers won’t sit around twiddling their steel belts hoping that Uncle Sam will impose such a tariff.  These tire producers will actively seek such a tariff; they’ll lobby for it.

Yet lobbying requires resources: the buildings and office supplies used by lobbyists, the vehicles and fuel used to ferry lobbyists to and fro in their privilege-seeking efforts, but mostly the time and effort of the lobbyists themselves.  And the greater the expected benefit of securing a special privilege, the greater is the amount of resources those in search of such privileges will use in that search.  Such resource expenditures are beneficial to the rent-seekers themselves, for these expenditures increase these rent-seekers’ prospects of actually securing the sought-after special privileges that yield rents (that is, excess profits).  But from society’s perspective these expenditures are wasteful: the building used to house lawyers who seek rents for their clients is not available to be used for genuinely productive activities (such as serving as office space for tech start-ups, or for lawyers who specialize in helping commercial clients write better contracts).

The lobbyists themselves are typically hard-working, highly educated, and creative.  So when they use their education, time, and creativity working hard for clients seeking special privileges, they do not use their education, time, and creativity actually producing outputs that expand the size of the economic pie.  All that hard work and creativity is wasted in simply trying to redraw the slice-lines of a given-sized pie.  Over time, society loses because, and to the extent that, productive resources are wasted in acts of seeking special privileges.

In this recent Marketplace report on that great geyser of cronyism, the U.S. Export-Import Bank, Dan Stohr – a lobbyist for Aerospace Industries Association (you can read that, without much loss of precision, as “Boeing”) – says that he spends one-third of his time working simply to ensure that this privilege-dispensing monstrosity of a government agency remains open. (Incidentally, my Mercatus Center colleague Matt Mitchell is quoted in this report.)

I have no idea what Mr. Stohr is paid.  So let’s low-ball it – I mean really low-ball it: let’s assume that he’s paid a mere $100,000 annually.  If so, then at least $33,333 worth of valuable resources – Mr. Stohr’s time, effort, and creativity – are spent simply trying to maintain that which ought not be maintained, namely, subsidies – a special privilege – for American aircraft manufacturers.  (I say “at least $33,333” because I don’t know how Mr. Stohr spends the other 2/3rds of his work time.)  That’s $33,333 of one person’s time, effort, and creativity diverted from doing something that would add to the flow of goods and services available to his fellow human beings into his trying to persuade the state to continue to seize goods and services from his fellow human beings.

Mr. Stohr, of course, is only one among thousands of professional lobbyists – and professional lobbyists are only some of the people who spend at least part of their time seeking special privileges.  Over time, all this waste adds up.  How much wealthier (and, by the way, freer) would we be if government offered no opportunities for anyone to profit from hiring  the Mr. Dan Stohrs of the world to seek special privileges for them?


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