“Rent” Is Indispensable

Economic rent, which economists simply call “rent”, has nothing to do with the monthly fee that you might pay a landlord in exchange for the use of a dwelling owned by him. Economic rent

means the payment to a factor of production in excess of what is required to keep that factor in its present use. So, for example, if I am paid $150,000 in my current job but I would stay in that job for any salary over $130,000, I am making $20,000 in rent.

The quotation comes from David Henderson’s article on rent-seeking. Henderson continues:

What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.”

With that crucial distinction in mind, consider the firm that makes millions of dollars in “rent” because it was the first (and still only or dominant) producer of a gee-whiz widget. The prospect of making “rent” is one of the things that causes inventors, innovators, and entrepreneurs to risk their time and money in devising and bringing to market new and improved products and processes.

The role of “rent” in economic progress has been long understood. The Framers of the Constitution clearly understood it. This is one of the enumerated powers of Congress, from Article I, Section 8, of the Constitution:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries

The extension of the life of patents and copyrights over the years, and the misuse of patents to block competition, are examples of “privilege-seeking”. It is probably the case that patent and copyright protections have been extended well beyond what is needed to incentivize invention, innovation, and entrepreneurship.

But let us not throw out the baby with the bath water. The prospect of “rent” is a vital to economic progress. “Rent” is good; “privilege” is bad. The trick is to reduce or eliminate the latter without sacrificing the former.

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