
The Rent Hypothesis - ddeck
http://esoltas.blogspot.com/2015/03/the-rent-hypothesis.html
======
baddox
> Rents are not always bad. Protections for intellectual property make sense
> not in spite of the rents they generate, but rather because of them. A
> patent, after all, is a temporary monopoly. These monopoly rents give
> incentives for innovation and allow innovators to cover the costs of
> research and development.

This is a weird way to talk about IP and rent. Is profit from IP necessarily
rent? The problem is that "rent" is defined as "profits earned above what
would be earned in a competitive market," but "competitive market" isn't well-
defined until you define a system of rights (namely property rights). Markets
are just systems of trade, and "trade" is the exchange of _ownership_.

Thus, an action which most of us believe constitutes a violation of property
rights (e.g. I buy a laptop and someone takes it from a cafe without my
permission and then sells it to a third party) is not "trade in a competitive
market." So is an IP right a legitimate instance of ownership? Many people
(and most Western legal systems) consider it to be so. There are also people
who _don 't_ consider it to be so, pointing out differences between physical
property and intellectual property. And, to be clear, there are people who
don't even accept certain aspects of well-accepted physical property rights.

~~~
spinlock
The philosophy behind patents is that they encourage the sharing of research
so that the total cost of rnd to society is minimized. Whithout ip protection,
firms would rely on trade secrets. They would still charge more for their
products but a competitor would have to spend the money on research to
compete. I don't know if you would still call the premium they could charge
rent or if you would amortize rnd over the product lifetime.

~~~
collyw
Linux and the open source movement pretty much disproves that theory. Better
(or "at least as good") quality kernels than the two biggest software
companies and biggest defenders of intellectual property rights on the planet
could manage.

We should really look at the evidence rather than repeating the mantra.

~~~
Yen
I don't know if Linux/Open Source/Free Software disproves the theory, or
actually proves it.

The argument would be: Microsoft and Apple feel that existing IP protections
on software would not sufficiently prevent competitors or consumers from
'stealing' the results of their work. So, they don't release the source code.
Because they don't release the source code, there's a duplication of effort
between Microsoft, Apple, and any other kernel-writers.

If there existed extremely strong IP protection laws for software, that
required release of source (like a patent, basically), then Apple and
Microsoft might release source, duplicate less effort, and their disadvantage
to Linux would be reduced.

Open Source is what happens when you have a system that encourages these
secrets to be shared. The _only_ difference is, Linux manages to get R&D
effort without the benefit of a monopoly-grant, or indeed, without any direct
profit motivation.

~~~
collyw
Apple didn't manage to build a decent kernel themselves so took a "free" one.
Nothing to do with stealing their work. You are aware that Apple uses an open
source kernel?

------
wppick
At the beginning of civilization, the research budget for the invention of
fire was zero, while the benefits of fire were incalculable. Compare this to
the development costs of the next generation of Boeing aircraft relative to
the small improvements in air travel. This dynamic has enormous implications
for the presumed benefits of increases in government spending beyond some low
base.

Over time and with increasing complexity, returns on investment in society
begin to level off and turn negative. Once the easy irrigation projects are
completed, society begins progressively larger projects covering longer
conduits with progressively smaller amounts of water produced. Bureaucracies
that started out as efficient organizers turn into inefficient obstacles to
improvement more concerned with their own perpetuation than with service to
society. Elites who manage the institutions of society slowly become more
concerned with the their own share of a shrinking pie than with the welfare of
society as a whole. The elite echelons of society go from leading to leeching.
Elites behave like parasites on the host body of society and engage in what
economists call "rent seeking," or the accumulation of wealth through
nonproductive means--postmodern finance being one example.

Excerpt from: [http://www.amazon.com/Currency-Wars-Making-Global-
Crisis/dp/...](http://www.amazon.com/Currency-Wars-Making-Global-
Crisis/dp/1591845564)

~~~
dalke
David Graeber has made me not trust any allusions to archeological events
which aren't based in archeological understanding. We have had bureaucracies
since at least the Sumerians, and its growth has not been monotonic across the
last 5,000+ years, which the paragraph you quoted implies.

Presumably many people died or were injured, and property and landscape burned
down during the development of fire as a commodity item. While there was no
formal budget or currency, lives, property, and R&D time surely are not zero
in the budget.

It's also a bit odd to refer to the incalculable benefits from a process done
by our Homo erectus ancestor. The controlled use of fire surely pales in
significance to our early tetrapod ancestors who learned to live on land.

~~~
Terr_
> We have had bureaucracies since at least the Sumerians, and its growth has
> not been monotonic

People gain experience as they age, but that doesn't mean people are wiser
today than 1000 years ago... _because they 're different people_.

Similarly, bureaucracies and societies also "die" and dissolve.

~~~
dalke
I can't tell, but it seems that you agree with me?

That is, as given, the quote gives a sketch of cultural development which
almost unconnected to archeology and history.

------
nwah1
See also: The Law of Rent

Land, and natural opportunities in general, are the original and most
fundamental source of rent.

Even the electromagnetic spectrum is monopolized. And although the holders of
these exclusive rights do pay the FCC, they pay very little compared to the
actual value.

Likewise, people pay very little in taxes compared to the true value of their
land. Imagine if instead of having to pay income taxes and sales taxes, which
disincentivize labor and business, we instead charged people for the use of
land.

We could reform property taxes such that we exempt all building and
improvement value, and just tax land.

This would encourage efficient use of land, reduce sprawl, and boost
productivity because it would remove the deadweight loss of other taxes.

It would also be cheaper and simpler to collect, and less invasive.

~~~
scotty79
My gripes with land tax and property tax is that they are linear.

They should be highly progressive. It should be so high that it would be more
economical for you, if you own 10 apartments to sell one or few than to pay
tax on all 10.

To avoid loopholes ... if you own entity that owns some land or property, you
need to pay the tax as if that property was your own (minus the tax already
paid by this entity).

Also arable land should have slower progression to not discourage efficient
farming.

~~~
nwah1
Taxing land by value encourages efficient farming. It will make farmers want
to economize on land, just like a carbon tax would make people want to have
fewer emissions.

Also, the gini coefficient for landownership, by value, is actually higher
than income virtually everywhere. Thus, a land value tax is actually more
progressive than an income tax.

Taxing by market value also raises the most revenue, for the same reason why a
rational landlord only wants to charge market rent. Charging either more or
less is just leaving money on the table.

And if it is less, the difference _will_ be pocketed by landlords. Because
they know what the market value is.

------
ccvannorman
This is a very important topic as robotics and automation begin their
exponential curve of running our lives. Who will own the robots? Will the
majority of humanity be enslaved to rent-seekers who own patents on a robot
hinge?

~~~
jerf
"Will the majority of humanity be enslaved to rent-seekers who own patents on
a robot hinge?"

Actually, that's easy: No. Humanity will not be enslaved to a small number of
capital owners.

But the reason isn't necessarily a happy one, which is that humanity will
revolt and start destroying and probably kill lots of people and even
potentially kill the goose laying the golden egg by destroying the robotic
infrastructure. Should they fail to destroy it, then you still face questions
as to who ends up with the power and how it is distributed after the fact; you
can find places in history where there was a lot of blood and violence on a
recurring basis to answer the question "who gets the power?" because the
matter wasn't settled even after the first victory.

That's the outcome I'm more worried about, not the possibility of somehow
getting 99% of the population "enslaved".

~~~
moron4hire
I don't think violent revolt is quite necessary. We certainly seem to be
seeing a non-violent revolt happening in the entertainment industry. People,
unhappy with the way the music and movie industry have been trying to leverage
their monopolistic power over certain franchises, have turned to non-violently
pirating media, to the point that, for a lot of people, and many properties,
the easiest mode of obtaining them _is_ piracy.

Étienne de La Boétie wrote in one of his earliest writings 'Discourse on
Voluntary Servitude"[0] that tyrants only have power because people
voluntarily give it. All that the people must do to overthrow the tyrant is to
just sit down on the ground and give up helping him, because the tyrant has no
true power of his own.

One of the more reassuring aspects about the Internet and the global economy
is that ideas can spread in an instant, and it really enables people to be
able to freely associate, even in many cases despite their governments'
express attempts to prevent them from doing so. I think the Internet is
growing a sense of global community, where it's a lot harder for the average
joe to think of someone on the other side of the planet as a faceless enemy,
specifically because it puts a face on people.

And it also allows us to trade with so much more ease. It doesn't matter if
it's in dollars or bitcoins or euros or whatever. Currency is whatever is
convenient. And the technology we have today makes it incredibly more
convenient than ever before.

So in sum total, I think it means that it's so much easier today to just
ignore the tyrants and go about life in your own way, on your own terms. The
more people do that, the less support the tyrants have, until they either
capitulate to be able to capture at least some of the pie for themselves, or
starve to death.

[0] granted, the full text is a bit childish in its view of the world, but I
think there are some decent take-aways to be had.

~~~
thesteamboat
> All that the people must do to overthrow the tyrant is to just sit down on
> the ground and give up helping him, because the tyrant has no true power of
> his own.

I think the fear here is that at some point the relevant servants of the
tyrant will all be technological constructs unable of sitting down. If we're
really careful about making sure our robot army doesn't revolt then what
happens when a tyrant controls them?

~~~
moron4hire
I would call that a phobia, not a fear.

------
bandrami
Wait. Historically, the purpose behind patents was to spur _the theft of other
states' property_, not "innovation". The King would grant a patent to whatever
foreign engineer was willing to immigrate with a particular invention or
industrial technique that another state was keeping secret (printing presses
and coal refining both crossed the English Channel that way). The same
language of "patent" was used for early colonial charters, too, because it was
the same process: somebody willing to take something from somebody else is
granted (some) legal protection by the state that benefits from that taking.

Patents were developed as a way to aid piracy, not a way to prevent it.

------
panglott
It seems that he's mostly considering the value of the idea of economic rents
in terms of how well they explain corporate profits as a means of testing the
idea of economic rents themselves. However, the core idea of economic rents
comes from analyses of land rents and monopoly rents in the 19th century:
application to contemporary corporate profits is a derivative application of
the idea.

Land rents, for example, were the rents generated by idle 18th and 19th
century gentility simply for inheriting the land at the basis of economic
production in an agricultural economy, rather than for contributing useful
labor towards agricultural production. This idea has gained renewed attention
with the rise of extreme inequality and inherited capital.

He also seems to be conflating these different kinds of rents together: land
rents, monopoly rents, IP rents. The economic value of IP rents can be easily
seen in patent trolling, defensive patents, &c. But trying to explain the
corporate profits in terms of unspcified "rents" sound more like a project to
discredit the idea of economic rents by conflating a lot of variables. That
might be because I'm skeptical that economic rents are a predominant
explanation of rising corporate profits, of course.

~~~
esoltas
It's true that I'm talking about all different types of rents in the article.
I've written about land rents and land taxes here, if you're interested:
[http://esoltas.blogspot.com/2012/06/on-land-
taxes.html](http://esoltas.blogspot.com/2012/06/on-land-taxes.html). Also, as
old as the Henry George analysis of land rents is, it is still quite relevant.
If you look at some of the rebuttals to Piketty's capital (eg., this one:
[https://ideas.repec.org/p/spo/wpecon/infohdl2441-30nstiku669...](https://ideas.repec.org/p/spo/wpecon/infohdl2441-30nstiku669glbr66l6n7mc2oq.html)),
what you see is that most the growth in capital/income ratios comes from
increases in the value of land capital. That would suggest George is still
relevant to our world, and that conversations about IP might be secondary.

~~~
panglott
Thanks, I've long wished there was a well-informed contemporary reappraisal of
Henry George. There were a few municipalities in the U.S. that went to land
value taxation in the late 19th century, but their economic history is not
especially remarkable. Most, IIRC, have shifted to conventional property
taxes, mostly because the original impetus for Georgist taxes are now obscure
and out of fashion, and there is a perceived value to having tax structures
common to other municipalities (easier to attract businesses and professionals
if taxes aren't unusual).

------
bcg1
I agree with the author about the problem with rents; unfortunately this
argument is almost always framed politically (including, probably not
intentionally, this article).

The arguments he is making are logical, but the premises he is using are only
true in the academic economics echo chamber. For instance, he doesn't even
mention the fact that government is, almost by definition, either the largest
or second largest rentier in modern America (their main competitor being "to-
big-to-fail" financial institutions). This is probably unintentional on his
part but not on the economists he mentions such as Tom Piketty and Paul
Krugman, because of their personal politics. To exclude government from this
discussion is probably not correct.

It is not hard to see evidence of this by the way... take healthcare.gov for
instance. If your company had $500 million CASH to build a website, what level
of quality could you produce? Government also encourages rent seeking by other
actors in the economy, even leads to rent seeking becoming the main game in
town. Real entrepreneurs end up getting hurt by this because it steals away
resources from their customers. Also economists like Piketty and Krugman then
paint all companies with a broad brush and advocate that their legitimately
earned profits be redistributed, which thankfully the author of the article
seems to be defending against.

------
skilesare
I'm going to be proposing a solution to the issues with economic rent in a
upcoming talk at the Texas Bitcoin Conference on March 29th at 9am.

The solution involves insuring the inalienable right to the full output of
one's labor and a social contract that lets the economic rent seeking
continue. It probably won't work, but sure has been fun unwinding the thread.

------
pinky1417
Wow, impressive article especially considering it comes from (I think) a
junior at Princeton [https://www.linkedin.com/pub/evan-
soltas/29/5/b44](https://www.linkedin.com/pub/evan-soltas/29/5/b44)

My only gripe is that he thinks that entrepreneurship and investment are
struggling. If they're struggling now, then they've been struggling through
all of human history.

~~~
cowsandmilk
> My only gripe is that he thinks that entrepreneurship and investment are
> struggling.

Entrepreneurship is extremely hyped right now, despite being at a relative low
historically (Figure 1 of [1]). More companies are failing in their first year
(Figure 4, 5, D1, D3 of [2]) and an increasing percentage of employment is at
firms 16+ years old (Figure 2, A2, C2 of [2]).

Less people starting companies, more companies failing in the first year, more
people employed at well-established companies. That sounds like
entrepreneurship is struggling to me.

[1]
[http://www.kauffman.org/~/media/kauffman_org/resources/2015/...](http://www.kauffman.org/~/media/kauffman_org/resources/2015/soe/2015_state_of_entrepreneurship_address.pdf)
[2]
[http://www.brookings.edu/~/media/research/files/papers/2014/...](http://www.brookings.edu/~/media/research/files/papers/2014/07/aging-
america-increasing-dominance-older-firms-
litan/other_aging_america_dominance_older_firms_hathaway_litan.pdf)

~~~
esoltas
Someone beat me to posting the Kauffman research... Also, the investment to
GDP ratio is here, although a lot of the decline was housing:
[http://research.stlouisfed.org/fred2/graph/?g=14LZ](http://research.stlouisfed.org/fred2/graph/?g=14LZ).

------
artur_makly
im posting this comment for my friend :

It's funny how high the inverse correlation is with CEO pay and start-up
success. I think Shumpeterian forces may invert in the near future and leave
these examples like Oracle/Larry Ellison relatively dated.

When automation dominates economic growth, you'll be in this situation where
basic income is the only way most people can get by - how to facilitate that?
90% taxes on high capital gains incomes like in the mid-20th century? That's
more of the communism angle, where fixed property becomes de-facto state
owned. Pikkety doesn't get it, there was a good interview with Andreesen to
that effect.

What about stuff like bitcoin and decentralized apps that are open source,
thus not protected by rent-levy's in IP law, yet gain huge economic power
directly through usage? Could basic income be tied into that? Perhaps indeed
it could, a more decentralized alternative to the commie scenario (which
probably isn't politically feasible in the US anyway, hopefully...)

\- Patrick Dugan @patrick_dugan

------
logicallee
Look at all the rent Apple is seeking on the new 12 inch Macbook, for example.
In 2015 the world supply of 12 inch Macbooks increased suddenly and
unexpectedly. Nobody saw it coming. The world simply has a great new product
in it starting in 2015 that it didn't have in 2014 or 2013. On HN there were
1269 comments:

[https://news.ycombinator.com/item?id=9172373](https://news.ycombinator.com/item?id=9172373)

One thousand, two hundred, sixty-nine! The current front-page has 6-12
comments on most stories, and tops out at 59 for a popular OpenSSL security
advisory people care about and are discussing, to up to 141 for a large piece
of news about Tesla direct sales being allowed in NJ. (A big issue because
people feel strongly about this.)

1269 comments on the 12 inch macbook. Clearly people feel strongly about the
sudden discovery of 12 inch Macbook deposits worldwide! It's a totally new
thing, amazing.

The top comment at that link states that this is a beautiful machine. Another
comment says "The overall design of the new MacBook is revolutionary."

This is a spontaneous revolution that happened worldwide in 2015. Now let's
turn to rents. As another poster said in the present thread[1],

"A graph of world economic growth since the invention of fire shows anything
but diminishing returns however. If rent-seeking behaviour is increasing, it's
because the pie is - at least on a global level - growing at an accelerating
rate."

The amount of value this machine has for users is way more than the
incremental increase in what was available between 1982 and 1983, for example,
at the same number of inflation-adjusted dollars.

But that other poster continues in the same comment (still [1], in this
thread):

"Elites always have and always will seek to take disproportionate shares of
that wealth because they can."

Apple is an elite market-maker. Although there is a spontaneous increase in
2015 in the availability of the highly desirable 12-inch Macbook, in fact
Apple is not giving them away at cost. Or even within 5% of cost. It has
positioned itself as a rentier sitting on its laurels and enjoying the profits
of the worldwide spontaneous existence of a large deposit of totally new 12
inch Macbooks. It is taking a _disproportionate share_ of the wealth, the
actual, true, value that has just spontaneously sprung into existence this
year without any work from Apple.

Out of nowhere, you have a trackpad that responds to a force-push.

Out of nowhere, you have a machine that weighs just a hair over 2 pounds, a
full pound lighter than the previous 13-inch macbook air and 16% lighter than
the previous, impossibly small 11-inch Macbook air. But with a full-size 12
inch retina display, and lasting 9 hours on a charge.

People want it. I want it. But Apple is hoarding this spontaneous innovation
and creation. Truly, no clearer example could possibly be found of "Elites
have and will always take disproportionate share of wealth", than Apple, which
has secured a one hundred percent monopoly on a spontaneous natural resource
that everyone could enjoy.

This is rent in action. It has led to a smart phone in every single person's
pocket when they did it with the iPhone in 2007. It has led to a proliferation
of tablet PC's that changed the face of mobile computing the world over, when
they did it with the iPad.

And it makes my blood boil to see them do it with the 12 inch Macbook. It's
just bald-faced theft of a disproportionate share of the world's wealth.
They're even blatant about it, with this graph:

[http://www.patentlyapple.com/.a/6a0120a5580826970c01b8d0e769...](http://www.patentlyapple.com/.a/6a0120a5580826970c01b8d0e769c0970c-800wi)

How can they get away with this? This is an absolute blatant boast that they
are taking a disproportionate share of the wealth that is spontaneously
created, and that they have absolutely nothing to do with. They do so at
prices that show obvious and blatant rent.

Are we just going to idly sit by and let them do it? Even cheer them on?

 _(for the satire-impaired: yes)_

[1]
[https://news.ycombinator.com/item?id=9233624](https://news.ycombinator.com/item?id=9233624)

~~~
bcg1
What you're describing is just smart business. Producing a desirable product
that people choose to buy is not rent-seeking, it is the free market
fulfilling a need/want at price people are willing to pay.

An example of rent-seeking however would be if Apple set up deals with schools
and colleges to roll the cost of devices into their tuition, which is really
mostly malinvestment paid with student loan debt. If the amount of student
loans were to reach $1 trillion for example, the government might start
talking about forgiving those loans or making them eligible for bankruptcy...
if that happens, Apple doesn't have their profits clawed back, even though
they actively contributed to the problem. That would be rent-seeking.

~~~
logicallee
you didn't read the author's definition of rent, which was more technical than
"rent-seeking". For example, if you self-publish an ebook for $49, nearly 100%
of that would be considered rent by the author. Read his definition carefully.

~~~
bcg1
My apologies, I got lost inside my own brain, as I often do. After re-reading
I realize that I did not detect the tone of your commentary, so I respectfully
withdraw any criticism of it. I still stand by my own statement however :)

------
xnull6guest
I'm happy to see frank and intelligent conversation about rent. There seems to
be a general understanding that the wages earned and the capital inherited by
the very tip of our society does not speak to high levels of merit but instead
to some form of malfeasance or at least market failure.

But when pressed to pronounce what mechanism explains these impressions,
theories depart - sometimes violently. There are hundreds of thousands of
wealthy families in this upper crust and hundreds of millions of people
churning in the domestic system that in part begets it. What's more, the
finances of the US are owed to far more than domestic productivity - for
example its role in the IMF and World Bank as well as its being the defacto
fiat currency make international activity, macro- and eventually micro-,
spanning between a billion or two people crucial to understanding its economy.

Any explanation of the impression that the class society forming in America is
not due to actually earned wealth must be sufficiently complicated to capture
around _2 billion_ people and close to a half of the globe! This is a tall
order to demand of a blog post.

In any case, let us examine some of the questions the author asks - in
particular about finance.

> Why does finance make so much money? Can it really cost that much to do what
> financial intermediaries do?

There's a number of reasons. Moral hazard, quite plainly. Regulatory capture
([http://www.propublica.org/series/fed-
tapes](http://www.propublica.org/series/fed-tapes)) too. These are domestic
explanations and do go to some length to explain how these powerful
enterprises are able to meet with law enforcement and regulatory bodies.
Others say that HFT, legal barriers to trading, and delayed entry into IPO
concentrate the gains of Wall Street into small hands. On the macro side
Piketty offers a simple and compelling mathematical model (plus data to back
it) that suggests that large wealth all on its own balloons exponentially over
smaller wealth because both grow as an exponential over time but large
starting wealth increasingly will win out in terms of total proportion - this
would be exacerbated by the savings rate available to those 'in the know' of
the finance industry (whose full time job it is to grow wealth through
investment and speculation as fast as possible).

But in a country where it's difficult to find investments that grow fast
enough to beat inflation, where do the mammoth amounts of growth that sustain
and feed the highest levels of American finance come from? Outside the
country, unfortunately. Take Soros who seems to have wizard like capabilities
to predict the future given his alien levels of success 'speculating' on
currency exchanges and international companies. Soros does not speculate on
markets - at least not in the traditional sense. Nor do the top brass. Soros
actively partners with the US government to install organizations in countries
around the world encouraging their 'transition' to foreign investment -
usually through revolution and regime change.

He, others who do the same, and those others in the sphere of 'civil society',
are able to invest early in existing and new international companies as
American companies consume the revenues and bring the customer base of newly
freed local resources to the international community. The US government is
happy to partner here because it can engineer regime change in its and its
allies favor but launder the activity through private citizens and companies -
this allows it to continue to wave the banner of self-determination, of
individual rights and of international law.

Do these things count as rent seeking? Probably. Actually, almost certainly.
But its important to understand how complicated - and more importantly opaque
- the system that benefits the few is. I hope the conversation continues to
make it mainstream - maybe some day we will be able to have a mass informed
debate.

------
spinlock
Is entrepreneurship struggling. I would have assumed we were in an
entrepreneurship bubble.

------
ngoel36
Unrelated to the content - do people find that the bolding of linked
words/phrases makes the article easier or harder to read?

~~~
c22
Yes. I didn't realize they were links till I got to the ones labeled "here".
If those hadn't been on the page I would have likely finished reading and left
completely oblivious to the links.

