What is rent? You don't make it past the elementary economics class
unless you know that's a trick question. In economics there are two
kinds of rent: common or garden rent and "economic rent".
Obviously,
ordinary rent is what you pay for the use of a building or land. By
contrast, economic rent (also called quasi rent) is the amount paid for
any "factor of production" - land, labour or capital - in excess of the
amount it needs to be paid to keep it in its present use (which is its
"opportunity cost").
If you think you've never heard of economic
rent before, you're probably wrong - unless you haven't heard of the
minerals resource rent tax or of "rent-seeking".
It doesn't get
talked about a lot, but economic rent is widespread in every real-world
economy, making it something worth talking about. You never know, you
may be getting a bit yourself (I'm getting loads).
Economic rent
isn't a cost of production that contributes to the selling price of the
factor - the land, the physical capital or the labour. Rather, it's
earnings to the owner of the factor determined by the selling price.
Economic
rent is equivalent to "producer surplus" in the market for goods and
services. When it's received by a business it's also known as
"above-normal profits" or "super profits" (does that term ring a bell?).
Economists
define profit differently to accountants. To an accountant, profit is
sales revenue minus actual costs. To an economist, costs involve actual
costs plus the opportunity cost of the financial capital invested in the
business - that is, the most the capital would earn in a different
industry with an equivalent degree of risk. (For unincorporated
businesses, the opportunity cost also includes the highest wage the
proprietor could earn in a different job.)
The opportunity cost of
the capital invested in the business is what economists call "normal
profit". Any actual profit in excess of actual costs plus normal profit
is above-normal profit and likely to be the consequence of economic
rents.
What is it that allows some factors of production to earn
economic rent - higher returns than those needed to keep them in the
business? Scarcity or, better, exclusivity. The factor possesses some
highly desirable characteristic that means there's not enough of it to
go around, so people fight over it and, in the process, bid up its
price.
In a textbook economy such a situation wouldn't last long
because the market would have an incentive to increase the supply of the
desirable factor to meet the high demand. In real-world economies,
economic rents can persist because they're not easily replicated. The
supply of harbourside land, for instance, is fixed.
The
exclusivity of factors may be natural or contrived. Governments often
create economic rents by limiting the number of licences they're willing
to issue to participants in particular industries - taxi plates, for
example.
Patents and copyright are designed to allow creators to
enjoy economic rents for a fixed time. This implies monopoly profits are
a form of economic rent, although rents can be enjoyed by multiple
firms in an industry.
And don't forget many workers benefit from
rents. Unions may be able to limit the supply of a particular occupation
and so force wages above what they would otherwise be. In this,
however, trade unions are amateurs compared with the colleges of medical
specialists.
But some rents aren't contrived. If I were prepared
to do my job for $60,000 a year but my boss paid me $100,000, I'd be
enjoying economic rent of $40,000 a year. Why would he pay me more than
my "reservation wage"? Because if he didn't, a rival employer would.
Of
course, the people who do best in the rent stakes are film stars,
sports stars and the like. Such people have far more talent than the
rest of us, but they also have a name - are a brand - that attracts more
customers than other actors or players do.
The point of all this
is that, from a social (community-wide) point of view, economic rent is a waste. It's a
price customers pay that does nothing to increase the production of
goods and services. If we could eliminate it - say by taxing it away -
it wouldn't reduce production, just the incomes of the owners of scarce
resources.
This, of course, is the justification for the minerals
resource rent tax. There is a lot of economic rent associated with the
exploitation of mineral deposits, particularly in Australia, because
world reserves of certain minerals are relatively limited and because
much of our supply is high quality and easily won.
Since these
resources belong to us, not the mining companies we permit to extract
them, we'd be mugs not to tax much of that rent rather than letting
largely foreign companies walk away with most of it.
I hope by now
you understand why the Abbott government's talk of all the damage the
mining tax is doing to the economy is tosh, intended to mislead the
economically undereducated. (Which is not to say Labor's tax was well
designed - it wasn't.)
It is rational for workers to be
"rent-seekers" in the sense that they equip themselves with scarce
skills and work hard at being the best in their field. Similarly,
it is rational for firms to seek out niches where prices far exceed
costs.
But that's not what the term "rent-seeker" - which comes from the
libertarian "public choice theory" - is usually taken to mean. It
refers to groups that lobby the government for tax, spending or
regulatory policies that benefit the lobbyists at the expense of
taxpayers or consumers, or their rivals.
As The Economist magazine
puts it in its business dictionary, it means "cutting yourself a bigger
slice of the cake rather than making the cake bigger".
