On November 19, 2016, Dustin Mineau writes on Economics:
Have you ever heard of the term “economic rent”? No? That’s probably because of the greatest political coup in the history of our republic. In politics, true power comes – not from your argument – but from the ability to steer the conversation to what you want to talk about and away from what you don’t want to talk about. The true elites in our society have continued “winning” the political debate by removing a very important concept from the political conversation.
I admit, reading the term, “economic rent” can cause eyes to glaze over quickly. A more accurate description is “unearned income”. It is people and companies who make money by doing zero work and risk little or none of their own assets.
Taking Back Adam Smith and “Classic Liberalism”
Many conservative economists claim to be staunch followers of Adam Smith. They shout slogans such as “Supply and Demand!” “Capitalism”! “ “Let the markets work!” However, for anyone who actually read Adam Smith, you would note that the “invisible hand” was not his only observation of the inner workings of capitalism. Adam Smith recognized that many in the economy were making gobs of money, but weren’t contributing anything. He was referring to what was eventually called “economic rent”.
Smith observed that all production required 3 things. Land, Capital, and Labor. A very simple example would be a brick factory. The building and oven needed to create the bricks are the “capital” – the owners are the capitalists. The people making the bricks is the “labor” – the people doing the actual work. The Land the factory occupies and the clay used to make the bricks is the “land” – the owners of the land are the “Rentiers”. Any money made by selling the bricks is then divided up between these three groups: the rentiers, the capitalists, and the workers.
Adam Smith observed that only 2 of the 3 groups made any real contribution to the production process. The workers contributed their time. The capitalists contributed their capital that they either bought, but is now used and worth less than before it was used. The Rentiers contributed their land, but have lost nothing. Once the manufacturing of the bricks is done, they get their land back and it is still worth the same as it was before. Any income they made by renting out their land was made without work, and without risk to their assets. There is a word for someone that only takes, but doesn’t give back: a parasite. Smith and those who carried on his work used the nicer term, Rentier. This is where the phrase “economic rent” originates. It originally described a no value-ad landlord.
Adam Smith and future classical economists existed in a time where the noble families of medieval Europe were still the large landowners. The nobles had just turned into Rentiers. Because they owned the land, they were able to rent it out to capitalist and workers and claim a portion of their profits and wages by charging “rent”. They were able to do this without ever working. It was unearned income.
Much of the work done by economists from Adam Smith until the late 19th century was all about finding and identifying “rent-seeking”. These classical economists didn’t want to overthrow capitalism, they wanted to free it from the “rent-seeking” parasites.
The Neoclassical School “loses” rent
Right before the turn of the 20th century a new school of economists appeared. They were later named the Neoclassical school and it continues today. When the transition from classical to neoclassical occurred, one of the things that was lost was the concept of “economic rent”. The Neoclassicals started treating land and capital as the same thing and therefore interchangeable. In a world without land, economic rent no longer makes sense. Some would argue(e.g. Gaffney’s Neo-classical Economics as a Stratagem against Henry George – pdf) that this was intentional. If it was intentional, it was the greatest coup of ideas the elite class came up with to justify their existence since The Divine Right of Kings. On the other hand, It may have just been a simple intellectual decision based on their new approach to economics.
In any case, the decision to treat land and capital as the same, haunts us to this day. If land is treated as capital then the concept of “rent” goes away and rentiers can masquerade as capitalists and cloak their unearned “rent” income as justifiable profit. John Maynard Keynes blew away everybody and what they thought they knew about economics in the 20s and 30s. In response to Keynesian economics, the neoclassical economists didn’t die, they decided to fight back. Milton Friedman is the most famous of this group. To fight against keynesian economics, he and his contemporaries tried to lay claim as resurrecting the classic school of economics that said “less government is good”. They even called themselves New Classicals. However, this “revival” of the classical economics was actual a revival of the neoclassical school. They, like the neoclassicals before, again conflated capital and land. Therefore, many modern economists no longer make a distinction between land and capital. They group together income from rent and income from capital and call it profit. This school remains in the mainstream and therefore the concept of economic rent is no longer discussed in our politics.
Rent-Seeking
In the late 60s and early 70s “economic rent” saw a small revival among select economists. For those select few, “Rent-seeking” was no longer defined as just “ownership of the land”. It can take several shapes. Rent-seeking is any income that is unearned. An alternative definition is “profit without a corresponding cost of production”. “Economic Rent” can come from ownership of land and just “renting” it out for money. It can also come from collecting so much capital that a firm now has a monopoly and can set the price independent of supply demand considerations, It can be from government monopoly granting, control of other “land” like our rivers, broadband spectrum, or “mineral rights” of land. It can come from control of financial assets like capital gains, dividends, and interest on loans(especially usury). It can also come from political favors from the government.
Political Implications
Economic rent was something I’d learned about in school several years ago and quickly forgot about it once the class was over. Now in a post bank-bailout world, I ran across it again one day while researching another article, It was like a light-bulb clicking on in my head. (A high-efficiency light bulb). This is what progressives are currently fighting against. This is the concept, the vocabulary, the name for the rage I feel in my gut at what’s happened. The rentiers have taken over our country by masquerading as capitalists. How did this happen?
It was simple, once the neoclassicals removed the entire concept of “rentier” from the economic, and eventually political, conversation. It was all capitalism and capitalists in their world. Therefore, now when progressives rail against the unearned income of the rentiers, we lack the vocabulary to properly express what is happening. Instead, conservatives try to make it look like liberals are railing against capitalism itself or against businesses in general. In some cases we may even come to believe it ourselves. Many times when we’re fighting against the “excesses of capitalism”, what we are actually fighting is parasitic rentiers that are hurting the true capitalists as much as the workers.
- When a company has a monopoly and can charge whatever they want, that’s not being a capitalist or an entrepreneur, that’s being a “Rentier”.
- When oil company’s make “windfall profits” as the price of oil goes up, that’s not profit, that’s “economic rent”.
- When a drug company can keep the government from negotiating lower prices, that isn’t capitalism, that’s classic “rent-seeking” behavior.
- 99% of the money made on wall street is nothing but pure rent-seeking.
- Companies lobbying for tax loop holes is just more unproductive rent-seeking.
Fortunately, some well known economists do talk about The Rentiers. Unfortunately, not nearly enough are. I’m guessing it’s because the vast majority of influential economists are still neoclassicals and don’t believe land and rentiers exist. They can try to deny their existence, but when I see the top 1% of the country make more money in one night while they are sleeping then most will make working at their job for 6 months, it’s hard to deny their existence. It’s unfortunately that our intellectual class “lost” these words and concepts from the mainstream discussion.
So where does that leave us now? One could argue history is repeating itself. 200 years ago, the conservative vs. liberal mantra was that conservatives were fighting to keep the power of the nobles and large landlords intact. The liberals were the ones trying to free themselves politically and economically from their control. Today it’s the same. Conservatives are fighting to maintain the privilege of the Rentiers by pretending to defend capitalism itself. And once again, us liberals are fighting to free the market from the parasitical Rentiers.
Dustin Mineau, as well as Joseph Stieglitz, who recently wrote about “unearned income,” unfortunately views the economic world and thus his approach to solutions with one-factor eyes (labor creating wealth).
His description of rent seeking is “‘unearned income’. It is people and companies who make money by doing zero work and risk little or none of their own assets.”
Because they think that wealth creation is ONLY the product of human labor or the non-human factor “capital” they exclude land as also a non-human factor or “capital” in their understanding of economics. But, in reality, economic value is created through human and non-human contributions. You can dice it how into many components but it all boils down to human and non-human contributions (which includes land).
The real problem is monopoly ownership of the non-human factor of production. Such privileged ownership has been designed into the system, and our financial institutions are structured to continually enhance the capital wealth accumulation of the few, because the system does not free economic growth from the slavery of past savings.
Economic rent should not be confused with producer surplus, or normal profit, both of which involve productive human action or productive contribution.
In the case of financial services, banks and institutions tied to buying and selling securities on behalf of individuals and institutions representing groups of individuals serve as a mediator between those selling and those buying. Their income is essentially a transaction fee. And yes it is true that they do not create wealth. Nor does a doctor, a lawyer, an owner of a independent shop who leases a property to set up a retail operation. People in the economy earn fees or profits, or in the case of employees of a company, incorporated or not, wages and wage salaries.
In the case of land, virtually all the land is owned by individuals or associations of individuals, or State owned. With land being fixed and population growing, the land owners are able to contract at higher and higher rates for the use of their land when they seek to lease its use to others. This applies to housing as well, which is meant for consumption (providing shelter for people). Any multi-family housing, not offered as individual units for sale (e.g. condominiums), is rental housing. Again depending on the supply, with a relativity fixed supply and growing demand for housing, the owners can command rents in accordance with demand and ability to pay.
But these examples are not what I would term rent seeking. And yet it is true that no physical productive capital wealth has been created other than the actual initial building of the structures and rental housing that occupants live in or use to conduct their business in. Actual housing built to provide a structure for living consumption for their owners or buildings erected to conduct business in for their owners are examples of created wealth. The business structures and the land under them (whether outright owned or leased) are part of the capital assets of the owners of the business.
In all cases, whether rental housing or business structures, these are capital assets owned by individuals or associations of individuals. Housing purchased for consumption is a consumer item, until the time it is sold for gain or loss measured against the original purchase price.
Ownership is the invisible structure of the economy based on millions of contractual agreements and property rights.
No where in Mine’s article does he ever use the words “capital ownership” or define what “capital ownership” means. And this is why, without this understanding, he cannot conceive of solutions.
What Mineau needs to understand is that fundamentally, economic value is created through human and non-human contributions. Some people will contribute services while others will contribute to the actual production of goods and products by providing land resources and all manner of non-human means. Increasingly, people, due to tectonic shifts in the technologies of production and globalized shifts to low-cost and less regulated off-shore opportunities, are facing job insecurity and loss, as the production of goods, products services no longer is solely dependent on human labor, or labor exclusive to our country to produce competitively.
With millions of citizens not woking for a corporation, and constantly being threatened with underemployment and unemployment due to advancing technological invention and innovation, any solution for reviving unions as presently represented — bargaining for higher wages for the same or less work — is not a viable solution. To effectively work, the labor union movement should transform to a producers’ ownership union movement, representing workers employed by companies as well as all citizens seeking to become capital owners. Unfortunately, at the present time the movement is built on one-factor economics, as is Stieglitz’s thinking — the labor worker. The insufficiency of labor worker earnings to purchase increasingly physical capital-produced products and services gave rise to labor laws and labor unions designed to coerce higher and higher prices for the same or reduced labor input. With government assistance, unions have gradually converted productive enterprises in the private and public sectors into welfare institutions.
Also calling for intensified education is not the solution to empowering EVERY citizen to become productive. Given the current invisible structure of the economy, except for a relative few, the majority of the population, no matter how well educated, will not be able to find a job that pays sufficient wages or salaries to support a family or prevent a lifestyle, which is gradually being crippled by near poverty or poverty earnings. Thus, education is not the panacea, though it is critical for our future societal development. And younger, as well as older people, will increasingly find it harder and harder to secure a well-paying job — for most, their ONLY source of income — and will find themselves dependent on taxpayer-supported government welfare, open or disguised.
Nor will more investment in “public goods” such as infrastructure, which is absolutely needed make EVERY citizen a productive contributor to the economy. This needs to be pursued but let the contractual requirement be that those companies seeking tax-payer-funded government contracts are employee-owned, and not just pursue a repeat of the past where tax-payers have made already wealthy owners more wealthy.
Part of the solution, which Mineau does not address is the need for far stronger anti-trust and anti-discrimination laws.
We need to reform and better regulate the financial system by requiring the Federal Reserve to be owned by each citizen residing in each of the 12 Regional Districts. The Federal Reserve should provide interest-free capital credit loans via local banks specifically for investment in qualified, responsible and ethical corporations growing the economy, thereby broadening and creating new capital owners who will then contribute productively to new wealth creation and earn a new source of income (a second income if they are employed as well). The capital credit would be repayable out of the future earnings of the investment, with no requirement of past savings (denial of consumption). The the loan recipient’s promissory note can be offset to the government’s central Federal Reserve Bank in return for the cash equivalent of the amount of the loan, less a local bank administrative fee. The only cost to the direct lending bank in making a loan would be the administrative fee, or about 2 percent of the loan’s principal and then another 2 percent for capital credit insurance, with an additional quarter of a percent paid to the Federal Reserve Bank to monetize the loan and give the lender the same cash as it would have had if it had actually loaned money to a corporation that receives the investment. Also the loans should be insured against failure to perform, using commercial capital credit insurance or a government re-insurance agency (aka the Federal Housing Administration concept). National capital credit insurance would replace the requirement for past savings to pledge security. Fixed loan amounts could be established annual based on projected economic growth and new capital formation, and an equal loan amount made available to EVERY American child, woman and man, to be strictly for new capital asset investment, in which the loan is paid off exclusively with the earnings of the investments.
Capital formation investments are made by companies annually based on projections a number of years out (at least 5 to 10 years) with the expectation that the investment will pay for itself as a result of sustainable growth and consumer demand within a reasonable time (typically 3 to 7 years). Thus, the concept embraces the idea that capital formation is self-financing. The question is who pledges the security and takes the risk of failure to return the expected yield from which to repay the loan. This is the critical role of capital credit insurance that is necessary to broaden capital ownership whereby EVERY child, woman, and man can become a capital owner.
Conventionally, most people do not have the right to acquire productive capital with the self-financing earnings of capital; they are left to acquire, as best as they can, with their earnings as labor workers and the pledge of past savings. This is fundamentally hard to do and limiting. Thus, the most important economic right Americans need and should demand is the effective right to acquire capital with the earnings of capital. Note, though, millions of Americans own diluted stock value through the “stock market exchanges,” purchased with their earnings as labor workers, their stock holdings are relatively minuscule, as are their dividend payments compared to the top 10 percent of capital owners.
What historically empowered America’s original capitalists was conventional savings-based finance and the pledging or mortgaging of assets, with access to further ownership of new productive capital available only to those who were already well capitalized. As has been the case, credit to purchase capital is made available by financial institutions ONLY to people who already own capital and other forms of equity, such as the equity in their home that can be pledged as loan security — those who meet the universal requirement for collateral. Lenders will only extend credit to people who already have assets. Thus, the rich are made ever richer through their continuous accumulation of capital asset ownership, while the poor (people without a viable capital estate) remain poor and dependent on their labor to produce income. Thus, the system is restrictive and capital ownership is clinically denied to those who need it.
The resulting impact of our current approaches has been plutocratic government and concentration of capital ownership, which denies every citizen his or her pursuit of economic happiness (property). Market-sourced income (through concentrated capital ownership) has concentrated in individuals and families who will not recycle it back through the market as payment for consumer products and services. They already have most of what they want and need so they invest their excess in new productive power, making them richer and richer through greater capital ownership. This is the source of the distributional bottleneck that makes the private property, market economy ever more dysfunctional. The symptoms of dysfunction are capital ownership concentration and inadequate consumer demand, the effects of which translate into poverty and economic insecurity for the 99 percent majority of people who depend entirely on wages from their labor or welfare and cannot survive more than a week or two without a paycheck. The production side of the economy is under-nourished and hobbled as a result.
We need to tax corporations heavily with the caveat that dividend payouts to their owners are tax deductible, thus eliminating the corporate tax and shifting the tax burden to the owners at personal income tax rates.
Also, as a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose holdings exceeded $1 million, thus encouraging the super-rich to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
Mine is ripe for expanding his “solutions” understanding by learning about the system reform solutions advocated by the Center for Economic and Social Justice (www.cesj.org), based on binary economist Louis Kelso’s “eureka” analyses and conceptual solutions.
Broadening future productive, wealth-creating, income-producing capital assets simultaneously with the growth of the economy, and propelling that growth to realize a future economy that can support general affluence and leisure for EVERY citizen by creating “customers with money” who are self-sufficient and able to meet their own consumption needs is the agenda of the JUST Third Way (note: not the neoliberal Third Way) and the various solutions it advocates. This includes monetary reform and enacting the Capital Homestead Act. The end result is that citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing current global trends where all citizens will eventually become dependent for their economic well-being on the State and whatever elite controls the coercive powers of government.
I am not going to elaborate further, as I have already written extensively, here and in other writings, about solutions that create universally equal opportunity for EVERY child, woman, and man be become a capital owner and put our nation on the path to inclusive prosperity, inclusive opportunity, and inclusive economic justice.
Support the Agenda of The Just Third Way Movement at http://foreconomicjustice.org/?p=5797, http://www.cesj.org/resources/articles-index/the-just-third-way-basic-principles-of-economic-and-social-justice-by-norman-g-kurland/, http://www.cesj.org/wp-content/uploads/2014/02/jtw-graphicoverview-2013.pdf and http://www.cesj.org/resources/articles-index/the-just-third-way-a-new-vision-for-providing-hope-justice-and-economic-empowerment/.
Support Monetary Justice at http://capitalhomestead.org/page/monetary-justice.
Support the Capital Homestead Act (aka Economic Democracy Act) at http://www.cesj.org/learn/capital-homesteading/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/, http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/ and http://www.cesj.org/learn/capital-homesteading/ch-vehicles/.
