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Definitions and Basics
"Rent seeking" is one of the most important insights in the last fifty years of economics and, unfortunately, one of the most inappropriately labeled. Gordon Tullock originated the idea in 1967, and Anne Krueger introduced the label in 1974. The idea is simple but powerful. People are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher social security payments; steel producers often seek restrictions on imports of steel; and licensed electricians and doctors often lobby to keep regulations in place that restrict competition from unlicensed electricians or doctors.Unintended Consequences, by Rob Norton, from the Concise Encyclopedia of Economics
The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or "unintended." Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it....Public Choice Theory, by William F. Shughart II, from the Concise Encyclopedia of Economics
Public choice theory is a branch of economics that developed from the study of taxation and public spending. It emerged in the fifties and received widespread public attention in 1986, when James Buchanan, one of its two leading architects (the other was his colleague Gordon Tullock), was awarded the Nobel Prize in economics....Political Behavior, by Richard L. Stroup, from the Concise Encyclopedia of Economics
Political activity, however, is startlingly different from voluntary exchange in markets. In a democracy groups can accomplish many things in politics that they could not in the private sector. Some of these are vital to the broader community's welfare, such as control of health-threatening air pollution from myriad sources affecting millions of individuals, or the provision of national defense. Other public-sector actions provide narrow benefits that fall far short of their costs....Government Spending, by Gordon Tullock, from the Concise Encyclopedia of Economics
In the past, government spending increased during wars and then typically took some time to fall back to its previous level. Because the effects of World War I were not totally gone by 1929, the line for the United States from 1790 to 1929 has a very slight upward slant. But in the second quarter of the twentieth century, government spending began a rapid and steady increase. While economists and political scientists have offered many theories about what determines the level of government spending, there really is no known explanation for either part of this historical record....
In the News and Examples
MERRILL, Wis.— A service station that offered discounted gas to senior citizens and people supporting youth sports has been ordered by the state to raise its prices.Lessons From Solyndra, by Robert P. Murphy.
In September 2011, solar energy giant Solyndra filed for bankruptcy and laid off all of its approximately 1,100 employees. The collapse was a major embarrassment for the Obama Administration because both President Obama and Vice President Biden had publicly singled out Solyndra--recipient of some half a billion dollars in taxpayer-backed loan guarantees--as a shining success of their approach to job creation and climate change. The embarrassment soon turned to scandal, however, as legislators discovered that the Administration had apparently ignored early warnings about extending such loans to Solyndra. As of this writing (four months after Solyndra's collapse), Republican legislators are still pressing the Administration to release more emails between key officials to determine when they learned the true situation.Drug Lag, by Daniel Henninger, from the Concise Encyclopedia of Economics
The modern history of drug regulation in the United States has been marked by the simultaneous pursuit of two goals—safety and efficacy. Since passage of the 1962 amendments to the Food and Drug Act, most members of the medical and regulatory establishment have regarded those two goals as complementary. By the early seventies, however, critics had begun to charge that the Food and Drug Administration (FDA), in its pursuit of these goals, was delaying or preventing the timely introduction of promising new drugs for seriously ill patients....Rent-Seek and You Will Find, by Mike Munger on Econlib
"I don't know if we should stay in this business." That city official was just being honest, but his framing of the problem surprised me. The "business" he was referring to was writing and winning grants from the Department of Housing and Urban Development (HUD), the federal agency charged with improving home ownership and low-income housing availability. Fifteen years ago, when I had this conversation, I didn't understand what he meant....Munger on Private and Public Rent-Seeking (and Chilean Buses), EconTalk podcast.
Mike Munger of Duke University talks with EconTalk host Russ Roberts about private and public rent-seeking. When firms compete for either private profit opportunities or government contracts, there are inevitably firms or people who spend resources but end up earning little or nothing. What are the differences, if any between these two forms of competition? How do they related to competitions that award prizes for discovering new technologies? The conversation begins with a discussion of a recent trip Munger took to Chile where he observed the current state of the Chilean bus system, a topic he has discussed in the past.Satire on lobbying illustrating the unintended consequences of government policies: "A Petition", by Frédéric Bastiat (pronounced bas-tee-AH). Chapter 7 in Economic Sophisms
From the Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street Lamps,....Bruce Bueno de Mesquita on Democracies and Dictatorships. Podcast on EconTalk
Bruce Bueno de Mesquita of NYU and Stanford University's Hoover Institution talks about the incentives facing dictators and democratic leaders. Both have to face competition from rivals. Both try to please their constituents and cronies to stay in power. He applies his insights to foreign aid, the Middle East, Venezuela, the potential for China's evolution to a more democratic system, and Cuba. Along the way, he explains why true democracy is more than just elections--it depends crucially on freedom of assembly and freedom of the press....Lobbying is rent seeking. Zingales on Capitalism and Crony Capitalism. EconTalk Podcast.
Luigi Zingales of the University of Chicago and author of A Capitalism for the People talks with EconTalk host Russ Roberts about the ideas in his book. Zingales argues that the financial sector has used its political power to enhance the size of the sector and the compensations executives receive. This is symptomatic of a larger problem where special interests steer resources and favors based on their political influence. Zingales argues for a capitalism for the people rather than a capitalism for cronies or the politically powerful. The conversation concludes with a plea by Zingales to his fellow economists to speak out against behavior that is legal but immoral--lobbying Congress for special treatment that exploits others to benefit one's own industry, for example.Economists agree about the drawbacks of rent seeking even if they disagree about other things. Stiglitz on Inequality. EconTalk Podcast.
Nobel Laureate Joseph Stiglitz of Columbia University talks with EconTalk host Russ Roberts about the ideas in his recent book, The Price of Inequality. Stiglitz argues that the American economy is dysfunctional, benefitting only those at the very top while the bulk of the workforce sees little or no gain in their standard of living over recent decades. Stiglitz blames this result on deregulation and the political power of the financial sector and others at the top. He wants an increase in regulation and the role of government in the economy and a more transparent Federal Reserve Bank that he blames for coddling the financial sector. The conversation also includes a discussion of the Keynesian multiplier.Peltzman on Regulation. Podcast on EconTalk
Sam Peltzman of the University of Chicago talks about his views on safety, regulation, unintended consequences and the political economy of bad regulation. The focus is on his pioneering studies of automobile safety and FDA pharmaceutical regulation and the perverse incentives that even good intentions can produce....Podcast Archive on Public Choice. EconTalk
A Little History: Primary Sources and References
I find a remarkable illustration of this in a Bordeaux newspaper.James M. Buchanan, biography from the Concise Encyclopedia of Economics
James Buchanan is the cofounder, along with Gordon Tullock, of public choice theory. Buchanan entered the University of Chicago's graduate economics program as a "libertarian socialist."...Representative Democracy, in Lalor's Cyclopedia of Political Economy
History. The idea and the word (democracy) are of Hellenic origin. In their relations with foreigners or the barbarians, the Greeks looked upon themselves as aristocrats. In their relations with one another at home, in their petty states, they were democrats, and felt as such....
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