Friday, 10 February 2017

Rent seeking behaviour

Rent seeking is defined as the practice of manipulating public policy or economic conditions as a strategy for increasing profits. Rent-seeking lobbyists or cronyism and rent-seeking have become an integral part of the way our biggest companies do business. Rent-seeking results in reduced economic efficiency through poor allocation of resources, reduced actual wealth creation, lost government revenue, increased income inequality, and national decline. The classic example of rent-seeking is that of a feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee to lower the chain.
  • Rent-seeking often requires spending your own resources so that you can own someone else’s surplus in the end. 
  • Weak property rights allows rent seekers gain more by trying to appropriate that wealth than by producing themselves. 
  • Rent-seeking can include piracy, lobbying the government or even just giving away money.
  • Hired lobbyists sway public policy to benefit their companies and punish their competitors. The work of lobbyists does not add value to the larger marketplace. Stable property rights would have eliminated role for lobbyists.
  • Rent-seeking doesn’t add any national value. Rent-seeking is coerced trade and benefits only one side. 
  • Rent-seeking of pirates motivates merchants to spend their resources to prevent the theft.
  • Rent-seeking never encourages productivity. 
  • The production of valuable goods and services is maximized with strong property rights. In strong economy, there are fewer incentives for rent-seeking.
  • Weak economic times make it difficult to produce and rent-seeking becomes attractive.
  • Downward spiraling gets created because the rewards of rent-seeking are often constant. 
  • In poor economy, the burden of fixed rent-seeking costs on producers drives surpluses even lower and makes rent-seeking more attractive, which in turn burdens those who remain productive.
  • Much rent-seeking is redistributing the surplus of one group to another group via the government. There might be great incentives for one group to seek another’s surplus but there is no added value for society as a whole.
  • Rent-seeking is a normal impulse. Much of what we do in wealth management is rent-seeking. We practice tax management and look for ways to reduce government-legislated rent-seeking.
  • Tax planning doesn’t add value to society as a whole, but it is personally profitable.
  • Any legislation to subsidize or bail out struggling businesses is rent-seeking. 
  • When banks take excessive risks to gain excessive returns, they are risking that the returns will be worth the hazards involved. But when government bails out these risky banks, they were able to privatize any profits from their risky ventures and through rent-seeking and they have managed to coerce the public to pay for their failures. Thus prudent lenders are punished and reckless lending is rewarded.
  • A wasteful amount of rent-seeking accompanies most government spending. The best way to improve the situation is to reduce the size of government. When there is less money, there will be less corruption and less incentive to rent-seek.

In India, governmental intervention only creates further rent-seeking opportunities and still further resource diversion into unproductive activities. The tax base in such a society is generated by the losers in the rent-seeking game who are forced into value-producing activity at governmentally depressed rates of return. These shopkeepers, cultivators, masons, carpenters, construction workers, agricultural laborers, and so forth are forced into market activity, and their consumption is then heavily taxed to meet the rent requirements of government job /contract seekers. The rents procured, therefore, are usually invested in personal assets—such as automobiles, ostentatious housing, gold and silver jewelry, children’s education, and savings bank accounts—in amounts that reflect individual marginal rates of substitution between current and future consumption. 

Any proposal for reform must drastically reduce the magnitudes of these rents. While this may seem to imply steep reductions in government salaries and perquisites, such a step alone may only exacerbate the problem as office holders try to compensate for lost income through increased bribery, extortion, and obstruction. The more significant component of the rents is lodged in the discretionary powers attaching to public offices. Especially important among these are the extraction of bribes for permits, licenses, and the awarding of government contracts; opportunities for theft of public assets; and threats of job nonperformance. Failing the drastic curtailment of these discretionary powers, rent-seeking losses will continue to be significant. Although the theory of rent seeking dictates random allocation as the solution, it also predicts that it is the solution least likely to be adopted by the political/ bureaucratic process. 

No good man has ever made fortune in this world.

Honesty is incompatible with amassing a large fortune - Mahatma Gandhi 

Amassing of wealth is associated with exploitation of people or 
looting governments or destruction of ecological assets.

My View:
Most rich people on this planet are rent seekers, either legally or morally, at some point of time or other. In India they are in very large numbers. There is no rich man who hasn't visited power corridors seeking favors and doling out bribes for their enrichment at the expense of others. Ambani is an exceptional expert in these matters. Ambani's riches are primarily due to their ability to extract favours worth crores by doling out few lakhs destroying their competitors. Banks NPAs in excess of Rs.Ten lakh crores threatening nation's economic collapse is a glaring example. the stories are endless. The proposed BTT (Banking transaction tax) is glaring example of government's rent seeking activity only take away public wealth with no return of any tangible benefit to people. Modi in the name of demonetization is expanding government and unleashed police & inspector raj and our heading southwards is unstoppable. Modi's utterances of all pain now and gain in long run is unacceptable nonsense.

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