Rent-seeking

State interventions in the economy - whether they come in the form of tariffs, quotas, subsidies, price supports, import licences, export credits, health and safety directives, planning requirements, regulatory pricing agreements or any one of a hundred other forms - create both economic winners and losers.

Consider the subsidies paid to farmers through the Common Agricultural Policy. These benefit European farmers with large, high-intensity, farms. They harm European consumers who must, on average, pay around twelve pounds more a week for their food. They also harm Third-World farmers on whose domestic markets European surpluses are ‘dumped’. How can we explain the decision of the state to intervene in some areas of the economy but not others? The answer public choice theorists would like to see themselves as debunking is that the state acts on the basis of judgements about the public interest to correct market failures. The very different public choice answer is that the state intervenes to create special economic privileges, or rents, benefiting its political supporters and campaign contributors and harming its political opponents (Tullock 1976 and 1989; Tollison 1997). Farming is not subsidized because it is in the public interest to do so. It is subsidized because farmers are a powerful political lobby whose criticisms politicians must seek to avoid and whose money they must try to attract.

Rent-seeking, the investment of resources by firms and pressure groups in the expectation of securing economic privileges, is, public choice theorists maintain, economically crippling. Indeed ‘for those concerned with advancing the nation’s wealth, the elimination of rent-seeking... is on a par (almost) with support of the flag, motherhood and apple pie’ (Rowley and Tullock 1988: 3). Rent-seeking is damaging for two reasons. Firstly, because state intervention, any state intervention, distorts competition and impedes the operation of the invisible hand.

Consider the ‘clear-cut’ (Tullock 1989: 55) example of a struggling American steel firm which, in an effort to revive its profits, invests resources in an effort to secure a ban on the imports of a rival Korean firm’s goods on the ‘grounds that [they are] environmentally dangerous’. Tullock’s example is an entirely hypothetical one although it might be noted that George W. Bush imposed a set of tariffs on the import of steel in March 2002. Much of the American steel industry was located in the key ‘swing’ states of Ohio, Pennsylvania and West Virginia. The tariffs were eventually lifted in December 2003 after the World Trade Organization had ruled the American tariffs illegal and the European Union had threatened to impose sanctions on imports from America.

What are we to make of such behaviour? Tullock argues that competition will be reduced and price increased if the firm successfully secures the ban. At a first glance, rent-seeking theorists would, at this point, seem to be in danger of overstating their case. For as we have already seen markets do sometimes fail. Surely this means that state intervention cannot always be damaging? But one of the reasons why markets fail is because of the presence of monopoly. What public choice theorists are arguing here is that government intervention routinely takes the form of creating and supporting monopolies by rewarding some firms with subsidies and export credits and punishing others with pricing agreements and draconian health and safety rulings. Monopolies do not, in other words, simply appear. They are created. State intervention is damaging because it leads to market failure. Rent-seeking is also damaging because resources invested in the pursuit of state-supported privileges cannot then be productively invested in ways that will benefit the consumer. Whether or not its lobbying is successful, resources invested by the American firm in trying to secure a ban on Korean imports cannot be used to buy new machinery which will lower production costs and prices.

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Source: Hay Colin, Lister Michael, Marsh David (eds.). The State: Theories and Issues. Palgrave,2005. — 336 p.. 2005

Rent-seeking

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