Template:M intro systems rent-seeking

We all know about rent. Who has not, at a formative stage in life, rented a dingy room while studying Petrarch by guttering candle? Some rent for their whole lives — in Europe it is the rule and not the exception: even north of la Manche we are given to understand that in the coming decades, it will become commonplace.

But when economists talk about extraction of economic rent they have a darker purpose. Here one, by dint of her contractual relations, market position, or legal rights, occupies a space that others must occupy whether they like to or not.

In these pages we call such a person a “rentsmith”, whether she charges you for land, property or services, and she only becomes problematic where circumstances contrive to make it hard to avoid her land, goods or services or if, once you have signed up for them, it is hard to stop. These are similar to monopoly conditions: you have no choice but to take the terms and pay the fees. There is no easily-had alternative to occupuying her space.

Since few landlords or rental companies have monopoly positions, it doesn’t tend to present a problem here. But since intellectual property is more or less a state-sanctioned form of monopoly, and the economics of the network are such that it tends to monopoly, we should not be surprised if here we find rent-seekers galore. And so we do.

For such an important concept — it is really hard to understand our piebald world without it — it is very hard to pin down.

It comes in many guises:

• Physical property: you know, literal rent-seeking
• Intellectual property: Rather than using the fruits of your blood, toil, tears and sweat you use antediluvian intellectual property rules to gouge everyone else. In this way Mick Jagger and Keith Richards can extract tens of millions over 60 years from 15 minutes of work — in Richards’ case, while, on his own account, he was asleep — composing Satisfaction.
• Franchising: Taking an idea or a business model someone else has invented — McDonald’s is the best example — and paying them a franchise fee to operate it. Here is double rent-seeking: the franchisee pays the franchisor, and the customer pays the franchisee.
• Software as a service: The simple answer to the question why is reg tech so disappointing? — is that tech businesses can’t make money if all they get paid for is writing software. This would be like Mick Jagger only getting paid for fifteen minutes’ work — where is the logic, or the justice in that?
• Regulatory rent-seeking: A regulatory fine for some impermissible behaviour which, while significant, pales into insignificance with the value accrued to the miscreant who carries out the behaviour, such that it suits both of them to carry on with the activity. Where the time doesn’t match the crime.

Legal eagles as rent-seekers

Rent-seeking is at the heart of the agency problem. An agent seeks to advance her principal’s interests but, above all, she wants to remain an agent, so she can be paid. If her principal’s best interests are served by doing away with her agency, you can be sure she will struggle to voice this proposition to her client.

Take the contract negotiation process: it features a bunch of stakeholders who like being involved in it, who want to stay involved in it, even though, by the lights of the new model, they don’t add any value. Their primary purpose is to extract rent. They have structured themselves into the architecture of their organisations and the market. They don’t want any “solution” which prevents them from continuing to extract rent. It is the agency problem, par excellence.

This is what is so interesting about OneNDA. It may be small and seemingly insignificant in its subject matter, but it strikes the rent extraction problem at its root. Rather than changing the mode of “service delivery” (for which, read, “mode of rent extraction”) or automating, accelerating or otherwise making more efficient the process of extracting rent, OneNDA banishes rent altogether. Business owners can fill out a form, and sign it, by themselves. No agents required.

There has been much thought leadership on the subject of reforming contracting processes, but all of it takes as read that some rent extraction must take place. The OneNDA is different. The forces of rent extraction are deep, and persistent, and powerful, and do not expect them to lay down in front of a shepherd-boy with a sling the way Goliath did.

Legaltech as a rent-extraction machine

We talk about this elsewhere, but herein is the fundamental problem with legaltech. Legaltech addresses inefficiencies which manifest themselves as negative annuities: ongoing costs and resource drains for quotidian tasks with minimal value. Its business model is therefore predicated on the vendor earning not just a fee, but an annuity. The rationale is this:

If customers have an ongoing cost of ten, they will be prepared to pay me an ongoing cost of two to remove it.

Mathematically, unimpeachable logic.

But there is a paradox here: If your legaltech solution itself generates ongoing labour, soaking up costs and resources to keep working, such that that two represents an honest margin on that ongoing work, then itis not legaltech but something else. This is more like process-reengineering coupled with outsourcing. That is not legaltech. That is management consultancy.

If your solution really is legaltech: if everything needed to remove the customer’s ongoing cost of ten is done upon implementation then, once the customer has paid for it, why should it pay any more to operate the machine? Why should there be an ongoing marginal cost per unit?

Here there is no longer an ongoing cost of ten: the customer’s problem is solved. The machine costs nothing. The customer’s question is now: what on earth am I paying this ongoing running cost for?