Rent-seeking

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Rent-seeking
/rɛnt ˈsiːkɪŋ/ (n.)

The extraction of payment by one (a “rentier” or in the JC’s own phrase, a “rentsmith”) from those who pass by, for the simple privilege of crossing one’s turf, whether they are transgressing one’s real property — that’s the classic notion of “rent” — personal property — unusual, but renting a car, or skis — or intellectual property — and this is where the real monkey business happens.

Rent-seeking only becomes problematic where there are conditions of monopoly. Since few landlords or rental companies have monopoly positions, it doesn’t tend to present a problem here. Since intellectual property is more or less a state-sanctioned form of monopoly, this is where the problems arise.

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 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 her agency altogether, you can be sure this proposition will struggle to find voice in the advice she offers her client.

For example, take the contract negotiation process: there are a bunch of stakeholders in the contracting process 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 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.

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. 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. It is predicated on the tech provider earning not just a profit, but an annuity. Legaltech addresses inefficiencies which manifest themselves as negative annuities: ongoing costs and resource drains for quotidian tasks with minimal value.

Legaltech thinking: if customers have an ongoing cost of ten, they will be prepared to pay an ongoing cost of one to remove it. But the work required to remove that ten is done, there is no-longer an ongoing cost of ten. My question is now: what on earth am I paying this one for? If the legaltech solution continues to require costs and resources equating to one then this is not legaltech: it is deft process-reengineering coupled with outsourcing — and outsourcing has its own drawbacks.

If the legaltech solution does not consume ongoing resources and costs, then once I have paid for its implementation, why should I pay an ongoing marginal cost per unit? The machine is solving my problem for nothing: the ongoing cost its vendor seeks is pure rent extraction.

See also

• ClauseHub: theory
• Reg tech
• Intermediaries