The devil in the title is our oldest enemy. Not the hoofed and horned one, but rent.
Rent is gains in excess of what is required to mobilize a factor of production. The term comes from land as gains accrue to ownership with no relation to the merit or exertion of the owner. For millenia specialists in violence have thought over this rent, and then constructed myths to justify their privilege. Even in this century we saw this in the Congo. One of the great epics in liberal history is the repeal of the corn laws. These were extensive barriers enacted in 19th century against the importation of grain. This acted against the interests of the labouring classes (and the industrialists who employed them), but in favour of established land owners. The repeal of the corn laws is taken as a victory against rents by fiat and a triumph of liberalism. Yet I think many classical liberals now often neglect the fact that these laws were made possible by their backing by the land holdings.
Natural rents can beget rents by fiat, and spread. They are just as unjustified, and just as dangerous.
Rent is a force for this ill in some fairly straightforward ways. It provides the funds to employ hordes of interested sophists, professional spivs and content providers. This was the source of a great deal of Adam Smith’s skepticism about governments. Active policy would generally be in the interests of those who could pay for thinkers to spruik their interest as independent thinkers (he included himself) were rare. As such is was best to avoid active policy where possible. [fn1]
There’s something more than merely the ability to fund sophistry though. There seems to be tendency to give authority to those made wealthy by rent; to listen dutifully and respectfully as they tell us that it is for the good of all and only right that they continue to receive this wealth. Rent does not just pay for the dissemination of views, but also gives weight to its arguments, including those for its expansion.
I think this is important to understand for good policy into the future. Whilst things are far less perverted than they were prior to the industrial revolution, rents arising from resources, or from regulations, professional cartels and especially managerialism are still enemies of good policy. The gains accrued to the top 1% of the American population far in excess of any demonstratable contribution in itself makes efficient taxation and resolution of the fiscal position far more difficult than it should and finance rents have made that sector more dangerous.
A number of times Paul Frijters and I have debated this in comments here, this being a good example.
Paul sees this as a result of misguided notions of economic mobility on the part of “aspirationals”. A large body of the population (and voters) envision that they can one day join the rentiers in their affluence. At the least they want to self identify with “winners” and avoid associating their identity with “losers”. They are loathe to see anyone act against the interests of their future selves or their imagined peers. If the affluence concerned was the fruit of merit or perspiration this would be fine – these can be pursued and perhaps realised to the boon of all involved. But rent seeking is at best zero sum, and usually negative sum. The losses of all exceed the benefits of the winner.
I believe however that it comes from a natural bias, similar to the status quo bias. The ownership of unearned wealth is justified merely because that’s how things are. Privilege vindicates itself.In 1982 Galbraith espoused a version of this when he said “Wealth, in even the most improbable cases, manages to convey the aspect of intelligence.”.
A while ago when some research appeared to demonstrate that increased inequality was associated with increased conservatism I considered it consistent with my hypothesis. Paul likewise thought the same with his hypothesis.
The main point of this post is to set out these hypotheses and a few more. Just a public record.
Adam Smith had very strong feelings on this, and immense contempt for the respect that the rich and powerful were given. Take this passage from Moral Sentiments.
This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.
In his day, more than our own, disparities in income and wealth were clearly attributable to privilege rather than merit. Since this has been “the complaint of moralists in all ages”, he clearly thought it was from a basic element of human nature.
When we consider the condition of the great, in those delusive colours in which the imagination is apt to paint it. it seems to be almost the abstract idea of a perfect and happy state. It is the very state which, in all our waking dreams and idle reveries, we had sketched out to ourselves as the final object of all our desires. We feel, therefore, a peculiar sympathy with the satisfaction of those who are in it. We favour all their inclinations, and forward all their wishes. What pity, we think, that any thing should spoil and corrupt so agreeable a situation! We could even wish them immortal; and it seems hard to us, that death should at last put an end to such perfect enjoyment. It is cruel, we think, in Nature to compel them from their exalted stations to that humble, but hospitable home, which she has provided for all her children. Great King, live for ever! is the compliment, which, after the manner of eastern adulation, we should readily make them, if experience did not teach us its absurdity. Every calamity that befals them, every injury that is done them, excites in the breast of the spectator ten times more compassion and resentment than he would have felt, had the same things happened to other men. It is the misfortunes of Kings only which afford the proper subjects for tragedy. They resemble, in this respect, the misfortunes of lovers. Those two situations are the chief which interest us upon the theatre; because, in spite of all that reason and experience can tell us to the contrary, the prejudices of the imagination attach to these two states a happiness superior to any other. To disturb, or to put an end to such perfect enjoyment, seems to be the most atrocious of all injuries. The traitor who conspires against the life of his monarch, is thought a greater monster than any other murderer. All the innocent blood that was shed in the civil wars, provoked less indignation than the death of Charles I. A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations.
One way of parsing this is to say it sounds fairly close to Paul’s hypothesis about associating with winners, particularly when Smith also describes contempt for the poor, or “losers”. Another way is to use the terminology of behavioral economics and say that people are exhibiting sympathetic loss aversion. Losing a fortune is more painful than gaining one is pleasurable, and we do not wish this to happen to someone else.
I’ll also mention this post by Matt Yglesias the other day, since it raises the possibility that the false authority attributed to the powerful comes from another source.
Business occupies a “privileged position” in a mixed-market economy. In other words, neither government bureaucrats nor union organizers nor anyone else wants to eliminate private business or private businessmen. On the contrary, all mainstream figures espouse the view that it’s in the nature of the market economy that prosperity hinges in essential ways on the activities of private businessmen and private businesses. This means that when rich businessmen speak—to their employees, to reporters, to politicians, to people in the community—they aren’t heard in the same way that politicians or talk radio hosts or lobbyists are heard. They’re heard, at least in part, as practical everyday people who happen to have relevant knowledge about the important question of what will and won’t increase business activity. That’s why politicians like to talk about the discussions they’ve had with small business owners back in Fargo/Philly/Framingham/Whateverville. Politicians have a lot of authority when talking to their base, but little authority when talking to the crucial swing constituency of people who are unable to develop a coherent partisan/ideological perspective on politics. “Apolitical” businessmen, by contrast, speak somewhat authoritatively to an apolitical audience.
I remain unconvinced though. The attribution of authority to the powerful predates the concept of “businessmen” as a distinct group by some time. It is mere coincidence that today the greatest rentiers are called business men instead of lords or daimyo or the like.
I started thinking about this because of the ease the most transparently unearned of rents argued their case in regard to the mining rent tax last year. To Paul it was a “real wake up call”. This week polling suggests their case was not as effective as we believed. With all the usual caveats, perhaps time is on the side of the angels.
[fn1] It’s worth noting that this is milder than Marx’s belief that the sole purpose of the state was protecting expropriators of unearned income, such that once true producers in the proletariat got what they deserved, there would be no need for a state. The difference between Smith and Marx was Marx’s far greater cynicism about the ability of the state to produce good policy, which is bemusing given the cartoonish portrayals of each in popular conversation.