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.A software engineer wrote this rather than an economist. Of course. Neoclassical economics purged from the term "economic rent" form the vocabulary of economics and replaced it with marginalism, which remains the standard model. This is a fundamental difference between classical economics and neoclassical economics, along with formalization.
Formalization results in superficial economics, which Michael Hudson calls "junk economics." Owing to restrictive assumptions based on economists' intuition rather than empirics, analysis seeks to limit the variables considered, supposedly for tractability, but actually reflecting ideological bias.
Classical economics including Mark and Engels was refined economics, based on analysis of how economic systems operate in practice. Business people tend not to pay much attention to superficial economics because it doesn't yield results useful to them. They employ what might be called crude economics or vulgar economics, which looks at symptoms rather than diagnosing causes. The are concerned with the direction of interest rates, for example. Refined economics looks more deeply in search of causal factors and transmission. Refined economists seek to discover why interest rates operate the way they do as a cause influence on economic behavior and how the causal transmission actually operates.
Superficial economics or conventional economics deals with the ideal rather than the real. Crude and refined economies deal with the real. Crude economics or vulgar economics deals with the real superficially and practically, asking who, what, when and where questions without inquiring into how and why. Refined economics deals with the real in depth, including causal transmission in terms of not only institutional and operational factors, but also social and political factors in addition to economic factors. Refined real analysis was continued by Veblen and the Institutionalists, and this became a strong influence on Post Keynesian economics.
Neoclassical economics assumes perfect competition in an environment of free markets, free trade, and free capital flows in a stylized world, while economic rent implies the intrusion of market power as a thumb on the scale. Neoclassical economics assumes that market power is competed away in a free market.
Neoliberalism is an iteration of neoclassical economics, which is based on economic liberalism, taking the role of government into account. Neoliberals realized that government is an indispensable institution financially and economically and that whoever controls the levers of political power controls the levers of economic power through institutional arrangements that create artificial scarcity and market power.
Where as economic liberalism (laissez-faire) was about minimizing the role of government in the economy, neoliberalism is about harnessing government and influencing institutional arrangement through law and regulation, and oversight and enforcement. However, neoliberalism is sold as economic liberalism without any admission of the hidden ideological agenda in policy formulation. This is capitalism in name only from the point of view of economic liberalism and the real capitalism in terms of classical economics, Marx and Engels, and the Institutionalists, as well as economic sociologists like Adolph Lowe and Geoffrey Ingham.
Economics based on economic liberalism is sold as a policy neutral science based on natural laws that spontaneously lead to the best outcomes for all unless there is intrusion into free markets. Neoliberals realize that this is merely a narrative and it is used rhetorically to create cover for government capture by the ownership class aka a the "donor class" through campaign finance, lobbying and the revolving door. This opens the way for economic rent and rent-seeking in the name of competition based on free markets, free trade and free capital flow. Failures such as the financial crisis and rising owner share and inequality are explained away as imperfect competition resulting from government imposed "socialism."
Evonomics
How Economists Duped You into Attacking Capitalism
Dustin Mineau, software engineer
This is a reprint of a post, Time to resurrect an old idea: Economic Rent at Daily Kos, Oct 24, 2011, submitted under the handle, maddog. There are some interesting comments there.
Related
Finance Is Not the Economy
An economy based increasingly on rent extraction by the few and debt buildup by the many is a feudal model
Related
Finance Is Not the Economy
An economy based increasingly on rent extraction by the few and debt buildup by the many is a feudal model
Dirk Bezemer and Michael Hudson
13 comments:
Would you explain marginalism and formalization a little more? Also, it is my understanding that Smith only criticized land rent and not the economic rent engendered on the economy by the financial class. I don't see that Smith, Ricardo and Malthus ever criticized usury and monopoly rent. Am I wrong?
Finally, I understand that Marx simply divided up the industrialist and the workers and neglected considering the rentiers. Is that the case?
Finally, I understand that Marx simply divided up the industrialist and the workers and neglected considering the rentiers. Is that the case?
I don't think so, I haven't read it (only some passages), but I think the last volume of Das Kapital is precisely about this. I think Marx 'discovered' something while writing that, something hit his head and figured something, but he didn't continue developing that idea.
(Later in the XX century some economist drew on 'finanzialitation' and the rent issues, from Keynes to the PK tradition etc.).
Ignacio: Now that you mentioned it, it seems as if I have heard the same thing. But, it seems to me like Marx was more of a divider than showing that labor and industry were in the same boat against rent.
Would you explain marginalism and formalization a little more?
Marginalism is concerned with impact of the extra gained or lost owing to an interaction rather than the additive effect on the total. Classical economics focused on totals, which led to some paradoxes. Neoclassical economics aka "marginalism" switched the focus to what happens at the margin and its effects.
Formalization is the replacement of concepts and conceptual reasoning with symbols presenting variables and constants and operators, and mathematical reasoning. Formalization is more precise but less rich. So there are tradeoffs.
Neoclassical economics formalized marginalize, e.g., as marginal utility and marginal product.
Also, it is my understanding that Smith only criticized land rent and not the economic rent engendered on the economy by the financial class. I don't see that Smith, Ricardo and Malthus ever criticized usury and monopoly rent. Am I wrong?
The British classical economics were writing at the beginning of the Industrial Age when agriculture was dominant economic and therefore land was still the chief means of production. This was the time that the feudal age was winding down but the great landowners were still the owners of the principal means of production. They were living high off the hog on the backs the agricultural workers. So it was natural that they would focus on rentierism based on land. Moreover, the focus of these classicists was more on trade than industry, since Great Britain was a trading nation.
Rule Britannia
Marx was writing during the flowering of the industrial age when factories had replaced fields as the primary means of production. Smith had divided the economic gain into wages, profit of firms and rent from land ownership. Marx saw that in the transition from the Agricultural Age to the Industrial Age and from feudalism to capitalism that ownership of the chief means of production was shifting away from land ownership to ownership of capital. So he sought to show that profit is also a form of economic rent, that is, the expropriation of the surplus above production cost by capital. To do this he adopted the labor theory of value of classical economics based on the agriculturalists farming the land for land owners who did no work themselves and applied his version to factory workers and capitalists.
Finally, I understand that Marx simply divided up the industrialist and the workers and neglected considering the rentiers. Is that the case?
I would not put it that way. The focus had shifted. Marx certainly agreed with the classical economists about rentierism based on land ownership but by the time he was writing, the issue had shifted largely to capitalist production and factory work exploitation. In the transition, farm workers had been impressed en masse into factory work. In Marx's terms the economic infrastructure had changed.
"Marginalism is concerned with impact of the extra gained or lost owing to an ITERATION (rather than interaction) rather than the additive effect on the total"
Thanks
@GLH and Ignacio
I am afraid that post is rather deficient, both in its history of economic thought and its economic theory. It's biased by the work of an economist called Mason Gaffney (referenced by the author himself). It gets it right in a few things, though.
We need to place ourselves in late 18th century/early 19th century Britain to understand the situation. It was the initial decades of the Industrial Revolution and early capitalists (represented politically by the Whigs) were raising in economic and political power, while landowners, represented by the Tories, were struggling to keep their preeminence.
Essentially all early political economists (perhaps with the exception of Malthus) were decidedly Whigs and their views about the landowner gentry was extremely negative (perhaps a bit unfairly so). In this the post is right. For centuries landowners enjoyed the free labour of their serfs: serfs needed to work some two/three days a week for their landlord in exchange for the use of plots of land allocated to themselves. That's the first occurrence of what today we call "rent": unearned income from the use of land.
Ricardo, Malthus, and Torrens identified a mechanism through which landlords managed to extract "rent" from their capitalist tenants: more fertile land would produce more output for the same investment than less fertile land; but there was only a single price for the produce; therefore, farmers in more fertile land had an excedent compared to farmers in less fertile land. Being tenants, however, capitalists had to bid to lease the land, they had to compete against each other, and through this landowners would appropriate that excedent for themselves. Rents would go up and erode the excedent: it would "flow" from the farmer's pocket to his landlord's.
Marx (and other authors, like Proudhon) generalised that finding by identifying a similar mechanism through which capitalists (acting in similar fashion to landowners) extract profit from their workers: in essence, what a capitalist does is to rent her capital to her workers.
By then, however, capitalists and landowners were already merging into a single class: capitalists (like Ricardo, for instance) were becoming landowners and landowners were becoming capitalists, families were marrying, friendships and alliances were forming, and the theory that once proved useful to Whigs/capitalists in their fight against Tories/landowners, now was becoming dangerous to all of them.
The Marginal Revolution of the 1870s was an attempt to create a new political economy (now re-branded as economics) to solve that problem. You don't need to take my word for that. Read Jevons and Menger (I haven't read Walras): they clearly address their criticism against Ricardo's theory of rent and its implications (not against Marx, as Das Kapital was published just a few years before the so-called Revolution). The author wrongly depicts the Marginal Revolution as being against the notion of land as a separate thing. That's bullshit. Capital in the neoclassical terminology is "asset" and land is an asset. That's perfectly justified, for all one might dislike neoclassical economics. The myth that land is somehow mystically different is just that: a myth.
The author is a georgist. Georgism was named after Henry George. George's main work (basically a selective reading of Ricardo keeping the rent idea, but discarding its implications for wages) was only published (in the US), after the Marginal Revolution. Jevons, Menger and Malthus were not clairvoyants to guess a Yank was going to fashion a political movement on the idea of rent.
The Marginal Revolution was addressed against the extension of rent to wages.
In fact, eventually neoclassicals adopted the idea of "rent" in the sense the author uses: unearned income. Ironically, given that post Keynesians almost to a man ignore this, Joan Robinson was instrumental in this adoption. In effect, The Lord, Keynes himself mentioned "rent" in the last chapter of his "General Theory".
Neoclassicals believe under perfect competition, in the long run, said "rent" (also known as economic profit, as opposed to accounting profit) is 0. But they don't deny in monopoly/oligopoly situations "rent" is not 0.
What the author and post Keynesians deliberately forget is that whether under perfect competition or under monopoly/oligopoly, the extension of the idea of rent to wages, unpalatable as it may be for them, has not been disproved: economic profit may be 0, accounting profit still comes from the workers' effort.
What the author and post Keynesians deliberately forget is that whether under perfect competition or under monopoly/oligopoly, the extension of the idea of rent to wages, unpalatable as it may be for them, has not been disproved: economic profit may be 0, accounting profit still comes from the workers' effort.
This is the point of Marx's analysis of profit surplus value, which is unearned income extracted by owners of the means of production before super-profit, e.g., monopoly rent.
Even with no rent in the neoclassical sense under perfect competition, profit as surplus value is still unearned income to owners.
Thus, factory workers in industry were in the same position as tenant farmers who had to work without pay for a period — hours apportioned over a day or days over a week.
Why is this unfair. Marx explains it in terms of "primitive accumulation." Locke held that private property arose from use. Marx disagree and say that it grew out of enclosure of the commons, mostly by force historically, which is largely the case.
The argument is basically about distribution of the produce of the commons from work. Some people have managed to insert themselves in the process to extract unearned gains by ownership that results ultimately from expropriation of the commons and others' work.
profit surplus value should be profit as surplus value.
Marx "sought to show that profit is also a form of economic rent, that is, the expropriation of the surplus above production cost by capital." But, Marx, like Ricardo never sought to show that debt was a form of economic rent?
Classical economics divided economic gain into wages, profit and rent, corresponding to workers, and owners of property — land and capital. Rent was related to the factors of production as gain in excess of that required to bring the factor into production. The obvious focus was land (natural resources).
Financial interest was folded into classical price theory. The price of labor was wages, the price of land was land rent, and the price of saving was interest paid to those borrowing to invest.
Workers did not save, so financial interest was included in gain to owners of property. Owners of property that lived exclusively or predominantly on rent were rentiers. Earlier writers on economics saw this as chiefly the privilege of owners of land. Marx viewed capitalism as the transition of land ownership under feudalism to capitalist ownership of factories under capitalism and both as sources of rent for the owners, who did no actual work.
The classical theory of financial interest as based on equilibration of saving and investment through the interest rate. Banks were not added until later, when the theory became the loanable funds their of bank intermediation.
Some were savers and some were borrowers at any point in time. So it is wash among owners of the means of production and money they gain from it.
At that time only owners of property could acquire debt since workers were not eligible for credit since they lacked collateral. A wealthy person could be ruined by going into debt and being unable to pay, having the collateral foreclosed.
For Marx, financial interest is the portion of profit from operations that the capitalist must pay to the money capitalists (savers as owners of money).
Capital Volume 3, Part 5, Chapter 22. Division of Profit. Rate of Interest. Natural Rate of Interest.
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