Rent-seeking

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The Devil’s Advocate


In which the curmudgeonly old sod puts the world to rights.

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Rent-seeking is what happens when a fellow (a “rentier” or in the JC’s own phrase, a “rentsmith”) monopolises access to property (including, for modern readings, intellectual property) and takes profits out of it that arise purely because of that monopoly right (or barrier to entry).

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[1] 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?[2]
  • 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 don’t match the crime.

Legal eagles as rent seekers

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

For example, take the contract negotiation process. There are a bunch of stakeholders in the contracting process, who like being involved in it and 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 extracting 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 at the rent extraction problem as its root. Rather than changing the mode of “service delivery” (for which, read, “mode of rent removal”) or automating, accelerating of marketing more efficient the process of extracting rent, OneNDA has removed all rent altogether.

There has been much thought leadership on the subject of reforming contracting processes, but all of it takes it as read that some rent extraction must take place. The OneNDA is different.

See also

References

  1. Lawrence Lessig’s Code: Version 2.0 is a compulsory read.
  2. Irony alert.