What is rent seeking behavior?

John buys an iPhone from Apple. Do you think this made John happy or sad? Well, no one was forcing John to do this. It was completely voluntary. He wouldn’t have done it if he didn’t want to, so it probably didn’t make him sad. Presumably, he wanted to exchange his money for the iPhone. At worst he may have been indifferent.

Similarly, we could assume that selling the iPhone to John made Apple happy. After all, they wouldn’t have done it if they didn’t want to.

This is a basic assumption of economics — that voluntary exchange of goods implies that both parties are happy. That both parties come out better than they were before. Each party is receiving something that is more valuable to them than what they exchanged. In this sense, value is being created (each party received more value than they created).

Rent-Seeking

Bullies

Imagine that every time you go to school, a bully says, “give me your lunch money”. This is rent-seeking. He’s just collecting money from you. He’s better off, and you’re worse off. Value is being transferred from you to him.

Government

Imagine that the government says “give me your lunch money”, and then just uses it on fancy dinners and other luxuries. Ie. they don’t use it on things that will benefit you and other citizens. This is the same thing as the bully — rent-seeking.

Now imagine that they say, “give me your lunch money”. This time they use some of it on you and other citizens, but also use some of it for themselves. This is still rent-seeking, but less so. For example, if they take $10 from you and only keep $3 for themselves, they only collected $3 worth of rent.

Real Estate

Imagine that there was an empty plot of land somewhere in (crowded) NYC. For whatever reason no one is taking advantage of it. No one is turning it into something useful. And no one is maintaining it. So it starts to smell and attract bugs, and soon enough, people are driven away from the surrounding area.

Now imagine that real-estate Rob comes along and claims the land. He starts to maintain it. It now no longer smells and attracts bugs, and people return to the surrounding area. But Rob doesn’t want to do anything with it. He wants to sell it to someone to make a profit.

Rob has created value by tending to the land. Rob’s a nice guy, but he isn’t that nice. He wouldn’t have done this if he wasn’t able to profit. So if the government said, “if you’re not using the land, you can’t claim ownership to it”, then people like real-estate Rob wouldn’t exist, land would rot, and people would suffer. They wouldn’t benefit from the value that Rob created when he tended to the land.

The reason why governments should allow you to claim ownership in these sorts of situation is because it leads to value creation that otherwise wouldn’t exist.

But what if the land didn’t rot if left untended to? Well, let’s assume that is the case. Say that Rob claims ownership to the land, but doesn’t want to use it for anything. Now, say that entrepreneur Evan wants to use that land to open a business. Evan’s business would create value for Evan and for Evan’s customers (remember how the iPhone created value for Apple and for John?). But it’s not Evan’s land, and Rob is charging Evan a hefty price for it, so Evan just says “forget it” and abandons his business idea. In this case, Rob is preventing value from being created.

But what if Rob charges a more reasonable fee to Evan, and Evan opens the business. Evan was going to use the $100 he paid Rob to expand his business. Expanding his business would create value. Rob’s presence has prevented this value from being created.

But let’s say that Evan wasn’t going to use the $100 he paid Rob for anything business related. He was just going to use it to buy a new TV. Instead, Rob collected that $100 and bought a TV himself. In this case, value is really just being transferred from Evan to Rob, not destroyed. Which isn’t inherently bad. Guys like Rob destroy value when they 1) prevent businesses from being created and 2) prevent businesses from expanding. 

Things could get messy though. Let’s say that the government recognizes this, and says, “Hey Rob, if you’re not going to use the land, you can’t claim ownership of it.” So Rob opens a small little lemonade stand. He doesn’t put much effort into it, and thus doesn’t create much value (doesn’t sell that much). If Evan had the land, he would be creating much more value.

So what’s going on in this last example? What should the government do? Well, society would be better off if guys like Evan could just take the land from Rob if they could prove they’d create more value with it. The first problem with this is obvious: how could Evan prove that he’d create more value? But there’s another problem: who would claim land and start a business on it if everything could just be taken away from you? We need ownership rights because the incentivize business/value creation. But it should still be noted that the downside to this is that it does act as a barrier to guys like Evan with better ideas.