Business Societies society

The Problem of Rent-Seeking

Money is in theory just a liquid means of exchange so every bit of it should represent real world wealth.
The core problem of a society based on financialization is everyone starts to believe money itself is wealth.  Then society rewards the manipulation of money more than it does the creation of real wealth that actually helps people.

Why would anyone of means do anything productive if they can just collect interest and rent?
Rent-seekers use property to extract wealth indefinitely, making their living from a distortion of reality.
In the world of material things, there is no such thing as a gold mine that never runs out.  There is a limit in value to all things.  Yet those who control property can extract rents in perpetuity.

Patent law recognizes a limit in the claim to the rights of an idea or invention.  In time, the patented material becomes the natural inheritance of those who benefit from it.  So by what principle then does rented property stay forever in the hands of an owner who never uses it for themselves and never produces anything?

In Cincinnati, where I currently live, I noticed there are small patches of land used as paid parking in downtown.  Someone bought a small lot, threw down some asphalt on it, installed a ticket machine and voila, they can rake in cash every day.
The person who provides the parking lot, I thought, provides a useful service.  Not to mention most of these lots are cheaper than the parking garages, so they can save people money too.
On the other hand, I noticed these lots were minimally maintained. The asphalt was worn down, cracked, with weeds growing through it.  I supposed other than checking for freeloaders every once in awhile, there was no incentive for the property owner to do anything else while they reaped their dividends forever.

So the problem here is we need people to develop property and provide services but the value they bring to the table must also be recognized as finite.
The property owner must make a reasonable profit if we want them to bother but it is unnatural and improper for them to bring in an indefinite and infinite harvest once they have long since ceased to contribute new value.

So would it not make sense if there were limits to ownership of property that collects rents?  Like patents, you profit for awhile, but eventually it passes on into the public domain.
This could be especially relevant where there is opportunity cost.
Those little flat, run-down parking lots in Cincinnati are surrounded by 10 story buildings.
So while the land is put to a use that creates some value, surely it would create far more value if it re-entered the market and was used for a multiple story building owned and used by a business that actively creates new value every day.

The total gain appropriate to a renter could be determined by a number of factors.

-Absolute quantity of wealth invested in the property.(Did someone spend millions or billions of dollars on it?)
-Percentage of personal wealth invested.(Did someone put a lot of their money into the property?)
-Riskiness of the investment.
-Amount of effort to develop and maintain.
-Value the property gives back to society.(Penalize houses that sit empty just to get flipped later and/or keep rents artifically high.)
-Opportunity cost to society based on the property’s location.
-Is the property a strategic chokepoint that people have to pay for and therefore easy to command unreasonably high prices for?

The point would be to impose especially harsh penalties against large, lazy property holders who try to be dogs in the manger using the state’s monopoly on force— without which they own nothing—to parasitize others.  Without the threat of armed enforcers, they would probably be shot in the head trying to impose their will.  Why do they deserve state backing that not only hurts society, but delegitimizes the state by association?

Money acquired through parasitism is heresy.  Not only is the sacred relationship of money and wealth desecrated and distorted, every penny of false money-as-wealth is real wealth stolen from those who are trying to help the social order.  Once a society rewards clever defectors, while punishing honest cooperators, it is doomed.  Society cannot exist without maintaining the integrity of its wealth.

A worthwhile society understands that money used as counterfeit real-world wealth is nothing but theft and fraud—not just against one person but against the entire social order.  There could be a generous grace period after implementing such rules after which, perpetrators would be regarded as far worse than mere murderers.

See Also: White Collar Criminals Are Worse Than Street Criminals

By Giovanni Dannato

In 1547 I was burnt at the stake in Rome for my pernicious pamphlet proclaiming that the heavens were not filled with a profusion of aether, but rather an extensive vacuum.
Now, the phlogiston that composed my being has re-manifested centuries in the future so that I may continue the task that was inconveniently disrupted so long ago.
Now, I live in Rome on the very street where I (and others) were publicly burnt. To this day, the street is known as what I would translate as 'Heretic's Way'. My charming residence is number 6 on this old road. Please, do come inside and pay me a visit; I should be delighted to spew out endless pedagoguery to one and all...

22 replies on “The Problem of Rent-Seeking”

The idea is that if the land value tax gets too expensive for the owner to make a profit on, the owner either sells the land to someone with a more profitable enterprise, or, if no buyer can be found, the market value of the land (and thus the land value tax) decreases until there is some venture that can be profitably run on it.

The owner will pass on costs to customers, but since the state now has the extra income from the land value tax it can reduce other taxes, like income tax, which will offset the increased costs.

You do a good job of explaining the idea here, though I wonder how well this is implemented in real life.

What if it’s a service people need to use, though, like parking, housing, or transportation?
Does the tax money go towards a general population or specifically to alleviate the pockets of those who suffer from their local monopoly?

And as before what stops the formation of multi-generational dynasties who live off rent in perpetuity long after they’ve ceased to make any new improvements?

Estonia is one place I know of that has implemented the land value tax in a big way, so it’s probably a good place to look if you want to see how it works in practice. The proceeds of the tax goes to the local/municipal government. The main result has been a very high rate of owner-occupied residency (about 90%, compared to 67% in the US). I don’t know how it has affected commercial property, but I suspect many businesses would still prefer to rent due to risk management and accounting reasons.

It doesn’t outright prevent multi-generational real-estate dynasties from forming, but it makes it more difficult to maintain them. Land-owners don’t necessarily have to continue to work to bring in a profit, but they do have to make sure that the purpose they use the land for is at least as profitable as what other buyers would want to use the land for – if they refuse to sell, the effective price goes up, driving up the tax. They can’t leave a property vacant for too long while holding out for a higher rent, because they still need to pay tax on it. They can’t swoop in during a recession and buy too much undervalued land, because as soon as the property values return to normal, they will be stuck with a massively increased tax bill.

A lot of this requires having accurate property valuations, which could be a problem, but I understand that property valuers have this down to a fine art, and it only gets tricky when you need to take the value of the building into account.

The main downside that I see, is that if property in a location suddenly increases in value, long-time residents may be force to move out as they can no longer afford the tax. Economically, this is probably for the best, but it may have other adverse effects and it’s bad PR.

I’m for property rights and being able to profit from property as one see’s fit. The only exceptions are the classic European ones, generally held in German language countries, which Anglos and Americans have only partially adopted and observe, or actively disallow, these are: Fore shore rights are public, up to 20 metres from highwater mark. Riparian areas on navigable waterways are public. The public has a right to cross a property which obstructs reasonable travel, (a property of larger than 50 hectares which straddles a valley for example) the property owner is responsible to provide gates, paths and signage. Fallow and wilderness areas are public and can only be leased.
Other than that, realizing value in property creates investment and is vital to an economy. A person owning a parking lot in a high value area is generally taxed out. A person owning said lot in a low value area is providing a service and creating cash flow which effects the rest of the economy positively. You go too far in negatively stereotyping ‘rent seeking’. There are many types of negative rntsking, but in general to garner reasonable rents requires investment and maintenance appropriate to the cash flow generated. A person negatively rntsking usually can only get away with it in a low value area – where the simple act of making money instead of losing money is enough to usually leave it alone.

I suspect far more people believe property should be permanent when rented out, because property owners far outnumber patent holders and land itself has a more visceral meaning for people than ideas. But if there are patent trolls, surely there are also property trolls the state has to deal with. Yet the petty gentry think of their white picket fences and their cookie cutter house and recoil at the thought of limits.

I find you guys know more about property than I do so have started doing some reading on it. I find immediately much property law is based on very old conventions and assumes land is used for farming, producing new, tangible value every year, in an age when people thought of farmland the way we think of jobs now.
Do these concepts really work for a parking spot or hotel bed that’s nearly the same each time it’s used, even if it is a service that people benefit from?

Even in the “good old days” parasitic rent extraction from tenant farmers was one of the single major causes of social problems around the world for thousands of years. A modern system that figures most things in intangible “services” is far more abusable still.

The Hebrew text have the solution to rent seeking and fair distribution of land: land can only be transfered by inheritance. If a family dies out, it goes to nearest kin. Otherwise, in the natural course of things, the land gets subdivided further and further, instead of being concentrated into few hands. Because reproduction and childbirth is as natural as falling off a log. And if any fail to reproduce, then their more fecund kin get it. So this is a motivator to breed.

Secondly, land leasing is limited to 50 years, and all land leases are cancelled in the same 50th year. No perpetuities; every 50 years, if someone wants to rent and use the land, they have to contend with the current crop of heirs. As each generation passes and the number of heirs grow, they are more likely to just take the land and live on it, rather than leasing it out and rent seeking… it is more valuable to live on and farm yourself!

This is commonly known as the Jubilee land system. It works. It prevents the kind of ugly perpetuities you speak of, on the time span of generations.

50 years. Very straightforward, hard to game. Provides a time window of one adult lifetime for the original property owner. Modern society moves fast enough I think more rules necessary, but this is a pretty solid starting point.
As before, I think property used to dispense services has to be treated differently than farmland.
I observe that with the smaller scale of most ancient groups, there was more of an appreciation for the lifeboat aspect, that if their neighbors wouldn’t support the state against conquering armies, they’d lose all their land and very likely their lives.

Truth be told, while I understand where you’re coming from, I’m hesitant to agree.

If the land is really worth that much, I almost guarantee someone is willing to buy it at a price the owner would part with it for.

In my own city, I believe such lots are basically “junk land”, built on odds and ends that you can’t really build much on (oddly shaped or small lot, land problems that prevent a deep foundation from being laid, etc.).

As a broader point, rent seeking behavior is more of a problem when it’s artificial. Either guild style problems ( medical student slots were static between 1980-2006), or government/big business collusion (any number of businesses).

Additionally, as long as a business is making money, it’s generating new value. As long as people keep needing to park there, it’s valuable to them.

You may be right about this junk land, though I’ve seen corner stores, all kinds of shops crammed into small, awkward lots.

I would think someone would need a huge lump sum of money for low-maintenance rent-extracting property that will always be there. At least I would provided land taxes aren’t eating all my profits. I’d hold on to the parking lot pretty aggressively and use its proceeds to acquire other rental property, and so on.

In my mind, property ownership itself is artificial in the sense it only exists because some guys with guns backed up your claim to something.
So it’s really a question of how the rulers want to interfere since their interference creates all markets, ownership, contracts to begin with. Generally, if they are rational, they want people to be prosperous so they can get bigger and better guns to secure more territory.

The state then, wants to manage wealth as best fulfills its goals. Does a guy who takes consumer dollars for a parking space that just sits there really contribute?
Let’s do a thought experiment: The state lets him charge people for parking for 15 years and then simply takes over the lot and lets people park for free. Instead of paying for parking, people spend on more substantial and valuable services instead.

I think we get in trouble when we think money is interchangeable with value. Then money deceives us into thinking broken windows are the same as new windows.

I get what you’re saying, however if the government takes property and repurposes it, men will invest less as a reaction. You also get a tragedy of the commons where people who don’t want to pay the fee now start parking there, a scarce resource is now allocated randomly; better or worse is anyone’s guess.

Governments are rational to the extent that people are rational, which only makes sense in the context of deeply personal values and preferences. Some governments nuke functioning systems for more “power” as they conceive it while others preserve it for the same reason.

That guy just taking rent doesn’t usually sit on his money. He spends it or invests it. He can use it to fund a soup kitchen or a coke habit. Or as a stepping stone to another business, etc.

I’m not full blown ancap, but economic decisions are so numerous and varied that attempts to manage them centrally is fraught with peril. Money represents value as long as it is “honest”, by which I mean stable not inflated. If you let people manage their economic affairs at the lowest level possible it all works out provided stable and reliable order is maintained.

So it seems to me that order is the business of the state. If people have faith that as long as they pay intelligible taxes that their assets won’t be subject to seizure by the state, bandits, or invaders things will shake out pretty well. If you can’t be sure of your own ownership, you won’t work very hard because you won’t know if your work will benefit you and yours or others.

Is it a reasonable assumption anymore that money, even if ill-gotten eventually “trickles down” to a more honorable purpose?
This is exactly the sort of economic thinking that is becoming discredited.

It is possible that a dollar from renting out a parking space ends up in the hand of a productive farmer. But what has been observed in practice is that captital from ventures that are parasitic or don’t benefit society much tends to keep growing more low-effort capital. Why work hard or take risks to create value if you don’t have to?

After the 20th century’s disastrous centrally planned economies, I can fully understand why people would want to leave everything alone. But I question the notion that the failure of excessive micro-management means we should go about the serious business of society with no plan.
I’ve always taken pleas for completely free markets, like trickle-down just to be glibly mouthed excuses from people who benefit from the way the system is now.

I’ve noted in previous posts that in practice, society does intervene in the value of exchange. For example, a sin tax. If society believes that alcohol is an inferior or negative value to the social body, it refuses to let $1 of alcohol be equivalent to $1 of rice. Instead, you have to pay $1.10 cents for the equivalent measure of liquor. The extra 10 cents then serves as an indemnity to society.
It also sounds like something like this is done when land taxes penalize unimproved or under-used land in valuable areas.

So why not discriminate more between value of exchange through incentives rather than central planning? Unless of course you think 15 minutes of parking you get for $1 is perfectly equivalent to a couple pounds of rice.

Thanks for the reply.

Society does interfere in exchange. I also understand the idea that money will be misused.

I’d be less opposed if results were measured and then policies changed. The fear I have is that interference never goes away if it doesn’t work as intended.

As I said, I understand the “worst except for all the others” argument. Even klepto-capitalism seems to make sure eggs and bread are cheap because it’s cheaper than putting down food riots. Ironically, the best bargaining power of the citizenry is their potential to cause mayhem. Could they not be violent, there would be no food stamps.

But we are discovering being afraid of touching the levers of control becomes as bad and dysfunctional as too much control.
It’s been less than 30 years since the Soviet collapse and look at how the situation has deteriorated since the “end of history.”
Sooner or later someone has to try to give the machine a direction and a purpose again.
Well met, GMHoyos, thanks for stopping by.

A desirable property is like a beautiful woman; she’s not going to sleep with ugly, poor men.

Property, like sex, is hard core fundemental because it’s at the very center, it’s literally life and death. The rich and powerful eventually find a way to drive out the less powerful if a certain territory becomes desirable. For example, in Paris, each arronndisement is required to house a certain percent minority or “disadvantaged”. But, they can pay a fine if the quota is not met. So, the wealthier ones simply pay and the poorer ones acquire the rif-raff. The wealthy Parisians can score cheap diversity points while avoiding the consequences.

Another system to consider is the Singaporean leasehold system. A lot of property in Singapore is owned by the state, but leased out on 99-year leases to people. The lease can be renewed at the end of its term, but it requires approval from the state. Lessees can resell the lease on the free market, but the value typically depreciates, reflecting the time left on the lease. Regular ‘freehold’ property still exists in Singapore, however, which still enables all the usual problems.

You are talking about places with no Muslims (or few) and blacks, no disparate impact, no redlining, no ACLU lawsuits, no community organizers backed by Soros picketing your business, demanding their rights to close the housing gap.

Damn, you know your stuff. Thanks for sharing.
Interesting how a state like Singapore with very limited land has to have some mandatory circulation, however slow. Estonia, which, isn’t huge either just gives strong disincentives.

We’ve been discussing mostly land ownership so far, so I wonder to what exent these principles are applied to other forms of property. Especially less tangible things like shares of financial products.

Interesting topic.

Seems to me rent seeking is the abuse of prisoner dilemma; ideally society would defect on those renting property and buy instead, but practically too many people cant afford to buy property. Society eventually pays the bill, but that includes renter AND rentee.

There’s another aspect to high property taxes. I had an aunt who lived in New Jersey. Her property taxes were higher than her mortgage payments so she had to sell. Property taxes can be so high that you can’t afford a roof over your house. I’m generally against high property taxes for this reason. You get old you can’t conjurer up new money on a fixed income. I read this very good, or so I remembered it as, book on taxes.

“For Good and Evil: The Impact of Taxes on the Course of Civilization” by Charles Adams

He talked a great deal about balance. I can’t remember all he said it was a while ago. It’s reviewed rather highly and I agree with that sentiment.

Here’s a stupendously interesting take on taxes by the guy actually invented Mortgage Securities! I’m not sure if it can’t be gamed but the HUGE advantage it has is to take a small portion of a big pool. This was something Charles Adams also went on and on about. This link is his run for President page. He has some GREAT ideas but they’re a little wacky compared to the present day way of thinking. He would pay off the debt in five years and his reasoning is not crazy at all. It makes perfect sense. He would also break the power of the banking cartel. He ideas are really something. Well worth reading as is also the book on taxes I quoted.

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