Capitalism and Rent-Seeking, Part I

1. Very few people, even among academics, professionals and economists of all kinds, or well-educated people, understand the difference between the concepts of capitalism and rent-seeking. All will have some idea about the difference between capitalists and proletarians or workers and are content with the knowledge of that discrimination.

This is especially so with Marxists and anarchists of all kinds. They frequently repeat slogans and state that they take part in the fight against “capitalists” on behalf of the downtrodden workers and the proletariat. They believe, like most of us, following decades of Marxist, socialist and anarchist propaganda, that “capitalists” are rich, heartless, exploiters of the people worldwide. The tiresome, dull, repetition of catchphrases without thought or research is another common characteristic.

It is lost to them that, each time they swear and curse capitalists, they are speaking ill of the corner-shop owner who sells novelties, the garage owner who maintains your car, the plumber who fixed your bathroom, the tailor, electrician and the carpenter. All these hard-working people, and many others like them, are holders of capital, since use of capital is needed so they can go about their business. Money is indeed capital; but so is the measuring tape, sewing machine, scissors, thread and pins of the tailor and the seamstress: all these are capital, and the people using them are, therefore, “capitalists”! The baker with the small shop has capital: an oven, a fridge, a bench, platters, disks, knives etc. The real culprits, thieves and exploiters are not capitalists, but rent-seekers, those who receive economic rent without any labour or contribution!

 

2. Who is to blame for this confusion in semantics? To a large extent, Marx, and to an even larger extent, his faithful patron, industrialist, capitalist and rent-seeker, F. Engels, neither of which provided the clarification needed.

Marx did indeed refer to this. In the Communist Manifesto, in the beginning of which he states that the ghost of communism is wandering over elderly Europe, toward the end of the second part, Marx declares that the first (out of ten) measures that a proletarian government should take is to “expropriate the lands held by the grand landowners and use the economic rent to pay for government expenditure”. In this case, as well as in other later writings, Marx does not mention capital, but economic rent.

Unfortunately, neither Marx nor the outspoken Marxists make clear the distinction between capital and economic rent. But let us move on from this confusion.

 

3. Britain, where Marx lived in the second half of the 19th century, financially supported by Engels, was where the so-called “capitalism” developed and where the Industrial Revolution peaked.

In this historic nation with the age-old conservative traditions, the Monarchy, the faded aristocracy, the great land-owners, the bankers and insurers, the imperialist diplomats and colonialism, it was there that “capitalism” blossomed. Yet the initial prediction of Marx that in exactly such a nation the revolution of the proletariat would take place never came to pass!

The Financial Times, a newspaper in the thrall of “capital” as some would argue, a regular contributor to the financial columns, John Kay, wrote (27/12/2009): “You can become rich either by creating wealth or by appropriating the wealth that others have created. When the appropriation of wealth is illegal it is called “theft” or “fraud”. When it is legal, economists call it “rent-seeking” (= the appropriation of the increasing the land-value). Joseph Stiglitz, a Nobel laureate economist, gives a warning in his book The Price of Inequality (2012, New York, W.Norton): Western economies will not survive, he writes, if they continue to endorse the income disparity caused by rent-seekers. He defines rent-seeking as corporations with large economic influence that manipulate the markets or legislation for their own gain so that they can appropriate income which would normally belong to others.

 

4. So what is, economic rent, exactly?

cap rent A

The British economist and historian F. Harrison defines it thus: “Economic rent is the surplus above the income that is due to labour and capital” (p.32 The Traumatized Society, 2012, Shepheard-Walwyn, London). There are other explanatory definitions.

Economic rent has also been (rather loosely and incorrectly) called the ‘surplus’ or ‘unearned increment’ or ‘public value’ by Alfred Marshall and others.

Also see: Tax Reform – Part II for more on this.

The diagram above demonstrates a large city, or a prefecture or a state, that has a harbour (H) and zones of production where, according to Ricardo’s law, economic rent diminishes with the increasing distance from the harbour/centre. The columns can stand for, e.g. corn or wheat fields, textiles factories, supermarkets, banks or anything else. The column marked as X represents (purely schematicaaly) lands that are kept out of use. All the other columns (units of production) make equal use of capital and labour. Since that is the case, why is it then that there’s a difference in the economic rent? What is it caused by?

Let us imagine that the columns represent five shoe factories. It is certain that A and B, the ones closer to the harbour (and to the capital-city or metropolis) enjoy benefits due to their proximity to the raw materials, the markets where their products are sold, the central government offices, the population centres for the workers, cultural events and others. The further they are from the centre, the larger the expenditure becomes. The same would hold for the textiles or other industries, supermarkets, other retail shops etc.

In the case of agriculture and crops, an important factor is the proximity to a river or a water tank or some other water supply, as well as the fertility of the soil, and to the markets.

There are variations, of course, owing to the presence of valuable natural resources, such as uranium or diamonds. A goldmine has a much larger income than the best supermarket in the centre of the capital city. But a goldmine near the harbour/centre would enjoy a much larger income than some other that lies 100km away, tucked away in the desert – as long as the assumption of equal capital and labour holds. So, what is causing the differences in the economic rent?

 

5. It is clear that the economic rent is due to the location of the production unit within the broad framework of the city, area or state and the corresponding advantages that it enjoys from its proximity to markets, better transport and other public services. In other words, it owes its existence to the presence and development of society.

Let us now make another observation. Each location has a value or price, which is larger in the central zones where the economic rent is higher, and smaller in the zones where the economic rent is smaller – albeit with the variations that are caused by the presence of precious raw materials, soil fertility and others. But such rare factors are not due to human labour or the capital that is being used for utilising them. Therefore, in every case, the value or price of a plot is normally due to its location within a developed society.

Economic rent, surplus or difference in price, does not only apply to commercial locations, but residential ones as well. A residential plot in a desirable part of town, that is picturesque and close to amenities, has a much larger value than a plot of equal surface area in an undeveloped suburb or a filthy and noisy part of the town.

 

6. This surplus, this difference in the land values, is due to the existence and progress of society in population, knowledge, technology, public services and other manifestations of cultural development.

This economic rent, owing its existence to society, should therefore be returned back to society (the state), to fund public services and necessary government functions.

Unfortunately, this is not the case. It is true that part of the economic rent is indeed directed into the government coffers through taxation. But that is too small a part. The rest, the lion’s share, ends up in private pockets. Since the government income from economic rent is small, the government is forced to tax the private value which is due to labour and capital investment and their reward. Therefore, the workers end up with a smaller take home pay than they really produce; Marxists are absolutely right on this point (and, moreover, the state ends up getting loans from the rent-seekers, who accumulate wealth they never laboured for, and is thus in danger of going bankrupt).

This is how theft manifests doubly:

On the one hand, the government is taking away from the workers by appropriating through an unfair, irrational mode of taxation part of the natural reward of their labour. On the other hand, private individuals are stealing the economic rent and thus take away a large part of the natural reward of the government. Those that appropriate public value are the rent-seekers.

 

7. And this begs the question: why is this double theft allowed to pass by the people and their governments? It is so because the governments and the governed suffer from ignorance, arrogance and greed. But this requires an approach and treatment of a different kind.

-Nikodemos

 

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