Here’s a question only an economist or a five-year-old would ask: what is rent?
Non-economists might define “rent” as payment received by a property owner for allowing someone else to use that property. Take for example the owner of a house who rents it to a family for $800 a month. While socialists might excoriate the landlord for expropriating wealth from his tenants, capitalist economists would see the relationship as purely positive: the landlord and the tenants freely contract and arrive at a mutually agreed-upon price. The landlord gets money; the tenants get a place to live. It’s a win-win situation, as are all voluntary exchanges in the free market.
Why then did the classical capitalist economists of the eighteenth and nineteenth centuries castigate the seekers of rent as parasites and worse? It has to do with varying definitions of rent, then and now, economic and non-economic. The etymology of the term is quite fascinating.
For the moment, let’s stick with land rents. A landowner who has more property than he can use should be entitled to rent that property to those who don’t own land of their own, right? Who would stand to lose in such a transaction? Although socialists would argue that the landowner should not be permitted to “own” property that he himself cannot use, the classical economists who railed against rent were capitalists (or proto-capitalists), and it is their argument against rent that’s most interesting. Why were they so dead-set against rent seeking?
A Medieval Practice
For the answer, we need to study the etymology of another term—real estate. The real in real estate is derived from “royal.” This dates back to the feudalist age where all land was owned by the king. He parceled it out to barons and earls, who then gave it to lesser lords, but the land belonged to the king and the king alone: it was part of the royal estate.
Under feudalism, barons—land lords—would assess rents to the occupiers of their lands. Although acreage might stay within a peasant family for centuries, the land was still subject to rents—much like property taxes—assessed by the baron, who would then kick money back to the king. In this fashion, barons could live handsomely without lifting a finger to do much of anything other than collecting their rents. They did not work hard, save money, and buy the lands that they rented out—they were given the privilege to collect rents by monarchial fiat.
The vernacular use of the word “rent,” as applied to real estate, is largely the same today as it was in feudal times. The differences, however, between “rent” under feudalism and “rent” under capitalism are twofold: first, ownership under capitalism is not (or at least shouldn’t be) obtained through government privilege, but instead, through legitimate and legal means. Secondly, the amount of rent charged under capitalism is mutually agreed upon by all parties involved rather than arbitrarily set by a feudal lord and subject to change upon his whim.
Modern English speakers took the term “rent” and applied it any instance in which a property owner allowed his property to be used by another party in exchange for financial consideration. Economists, however, took the word in an entirely different direction. To them, “rent” meant the profit derived from any activity made possible due to government privilege. Land ownership, of course, was the most striking example of this, but not the only one.
Regulation by Another Name
The classical-conservative feudal economies were heavily regulated—even more so than the post-New Deal/Great Society United States. Virtually every possible economic activity required a license from the king or one of his subordinate lords. An earl, for example, would have to pay a hefty fee and get permission before allowing a market to take place in his earldom. And once he had such a license, he might expend resources ensuring his neighboring earls were denied market licensure. Rather than investing to make his own market better, the earl would engage in “rent-seeking” activity—currying political favor to shut out competition and derive an unfair economic advantage enforced by law.
This kind of rent seeking is alive and well in the United States, and it greatly hampers our standard of living. Most regulations are lobbied for by the very industries they’re intended to regulate because regulations shut out smaller competitors who can’t afford to abide by them.
The ultimate rent-seeking “success story,” of course, is the creation of the Federal Reserve. Here private bankers wrote and passed a law, through their congressional proxies, that gave them the exclusive monopoly on money creation. Instead of spending resources to make their banks better, they lobbied hard for the government privilege, and it paid off. Now ninety-five years old, the Fed is a cartel of private banks (your local branch included) that has the full backing of the government. Fed banks (again, your local branch is one) cannot fail. If they make bad loans, no problem—the central bank can bail them. The Fed has the authority to create money out of thin air and charge interest on it—if that isn’t economic rent, I don’t know what is.
Government intervention into the economy causes economic distortions and opportunities for rent seeking. Rather than investing to make better products or services, corporations spend billions of dollars pursuing economic rent. Anti-corporate activists of the political left need to wake up and realize this, rather than agitating for the very regulations the corporations actually want in the first place. Then the word “rent” could lose its double meaning and be defined as a five-year-old would understand it, leaving economists with one fewer tool with which to confuse the laity.