What is rent seeking?

in corporatism •  last year  (edited)

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Rent seeking is the type of behavior GekeVenns seek to expose: the act of tapping into government funds. Auburn University's Glossary of Political Economy Terms defines it this way: “all of the various ways by which individuals or groups lobby government for taxing, spending and regulatory policies that confer financial benefits or other special advantages upon them at the expense of the taxpayers or of consumers or of other groups or individuals with which the beneficiaries may be in economic competition.”

The concept originated in 1967 with Gordon Tullock, the father of public-choice economic theory, but it was Anne Krueger in 1974 who coined the term, “rent seeking.” And it's the type of behavior people mean when they criticize a company for only caring about profits. Of course, all companies care about profits, even the most enlightened and sincere companies. If they didn't, they'd fail. But when we typically fault a company's actions in this way, it's not for profit-seeking, but for rent-seeking. Economics professor Sandy Ikeda at fee.org explains the difference:

If the rules say that the acceptable way to improve your situation is to provide a product or service that consumers would be willing to pay more for than the opportunity cost of the resources used, then that’s what you’ll tend to do. In that case, if you’re correct, and if you can out-compete your rivals in the market for those consumers’ dollars, then your actions will have added wealth to society. This is profit-seeking.
 
On the other hand, if the rules say that it’s okay to use political means—the government’s authority to initiate violent aggression and fraud—to contrive rents by preventing others from competing with you or by forcibly taking the wealth of others, people will naturally tend to spend valuable resources trying to gain access to them. This is rent-seeking.
 

The main difference between the two is in the end result: profit-seeking creates wealth while rent seeking transfers wealth. When an economic activity creates wealth, both sides of the resulting exchange are better off. When an economic activity transfers wealth, only one side is better off, while the other side is worse off. In rent seeking, the corporations winning government “rents” are better off, but their competitors and taxpayers in general are worse off. In fact, we might even say that rent seeking destroys wealth, because it consumes resources spent in pursuit of government favors.

There are several ways corporations seek rents: through government subsidies, regulations that penalize their competitors, but the most egregious way is asking government to force consumers to buy their product or service. We've seen this happen repeatedly in the insurance industry, the members of which lobby to make certain types of insurance legally mandatory, including car insurance and, under Obama, health insurance.

Another interesting form of rent seeking is when pharmaceutical companies pressure the government to mandate drugs. Most people support this type of rent-seeking without really questioning it. They assume the vaccines are necessary for public health and see no other way to force others to take them.

In mandating vaccines, the government has created a $24 billion industry, and Technavio, a company in the business of predicting such things, estimates this number will grow to $61 billion in two short years. This isn't an industry big pharma has created. They couldn't; the demand for vaccines simply isn't as high as it becomes by legally mandating them. No, the government created this industry and big pharma is simply cashing in.

You may question the claim that demand for vaccines isn't high. It may be higher for the big three: polio, MMR (measles, mumps, rubella), and DTaP (diphtheria, tetanus, pertussis) vaccines, but even for these three, demand is not as high as most people assume. In third-world countries, a lack of education is blamed for individuals and families choosing not to vaccinate. Here in the US, it's the opposite: individuals and families that refuse vaccines have usually done quite a bit of research on the drugs' side effects.

And this is true, despite the fact that advertising for these products isn't only managed by the pharmaceutical companies, themselves; the government is actively trying to increase demand for these products by recommending them through various government agencies. Why? Most people assume it's because the government is promoting public health. Some people in government may think they're doing that. But the bigger reason is because drug companies are embedded in the federal government, inside the FDA, the CDC, and in congressional committees that write and pass these laws in the first place.

And actual consumer demand for vaccines outside the big three mentioned above vary widely, including demand for easily obtained flu vaccines. One low-demand drug being heavily promoted, government-recommended, and increasingly discussed for legal mandate is the HPV (human papilloma virus) vaccine.

In fact, Gardisil, manufactured by Merck, is now mandated for girls in middle school Virginia, Rhode Island, and the District of Columbia. It was also mandated early on in Texas by executive order (later overturned) of then Governor Rick Perry, a move many blamed on Perry's revolving-door ties to Merck: Perry's former chief of staff and good friend, Mike Toomey, was a Merck lobbyist at the time Perry signed the executive order. (A GekeVenn for Merck will follow in its own separate, searchable post.)

Merck had been lobbying state legislatures to mandate HPV vaccinations, but they stopped their lobbying efforts in 2007. Why? They expained the move by saying their lobbying efforts were distracting them from more important business, but GlaxoSmithKline came out with their own HPV vaccine, Cervarix, in 2007. The Merck monopoly on HPV vaccines was over, and GSK was likely to begin lobbying efforts of their own.

But the story of the HPV vaccine is also interesting because it's a great example of a vaccination suffering from extremely low demand. In fact, due to its low demand, GSK has taken Cervarix out of the US market. The lesson? Vaccinations dont' enjoy the high consumer demand you might assume, and this is why rent-seeking behavior occurs with such vigor. The only way to create profitable demand in HPV vaccines is to legally mandate their use, and the same is true, to varying degrees, with other vaccines, as well.

However – and this is a big however – drug companies are starting to get wise to how self-lobbying looks. So they're creating new entities to do it for them, entities like NACCHO, the National Association of County and City Health Officials. NACCHO discloses the CDC as one of their funders, as well as the Immunization Action Coalition. When Oregon sponsored a bill to remove vaccine exemptions based on religious or philosophical reasons, members of the Oregon legislature reported that they were aggressively lobbied by NACCHO in support of the bill. Their position on the issue has been clearly articulated: “The National Association of County and City Health Officials (NACCHO) urges that personal belief exemptions be removed from state immunization laws and regulations.”

And in fact, their position on immunizations in general is extremely ambitious:

"The National Association of County and City Health Officials (NACCHO) urges the federal government to support the creation of a comprehensive national immunization program that addresses all stages of life (cradle to grave) with the intention of achieving the Healthy People 2020 immunization goals and standards. Such a program will help protect our nation's population from vaccine-preventable diseases by increasing rates of childhood, adolescent, and adult immunization coverage.”
 

Bringing vaccine mandates under the federal umbrella would certainly save vaccine lobbyists a lot of time, trouble, and expense. But considering the fact that NACCHO is funded largely by the CDC, you can see how incestuously centralized the business of vaccinations has become, and hopes to further become. The rent-seeking of corporations is turning into an internal government process.

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[ cover art image courtesy of picserver.org, Nick Youngson
used under a Creative Commons Attribution-ShareAlike license ]

[vaccine image courtesy of pixabay.com, whitesession ]

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  ·  last year (edited)

Thank you for this thought-provoking post. I loved your clear explanation of the important difference between profit-seeking and rent-seeking. The insurance and vaccination mandates are interesting examples as both seem to illustrate rent-seeking in action, but both also have an intended social benefit. (I'm thinking a purer example of rent-seeking might be the petro industries lobbying for massive oil and gas subsidies.)

Echoing @curtiscolwell's comment, the vaccination mandate intends to improve overall public health and the insurance mandate seeks to spread the cost of insurance more evenly. Putting aside the debate about whether or not government should play a role in these concerns, there is a least some rationale for arguing these mandates are beneficial to society irrespective of any financial benefits to insurance and pharma corporations.

Where things get dicey is that the big insurance and pharma companies have a clear vested financial interest in these mandates. And given the out-sized influence corporations have in our government, it becomes very difficult to tease apart their social and financial motives. In fact, the presence of social benefits can serve as a sort of cloak, concealing their true motives and allowing them to sanctimoniously adopt postures of altruism while padding their bottom-lines.

In the larger context, I am perhaps less willing than you to grant profit-seeking behavior a pass. Pure profit-maximization (even without the abuses of rent-seeking) tends to establish financial profit as the sole measure of corporate success -- with disastrous results on natural resources and polarization of wealth. By contrast, the triple bottom-line approaches (profit, people and planet) adopted by Public Benefit Corporations and B-Corps offer a more holistic framework for well-being.

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Whether or not an activity is beneficial to society is not a justification for using corrupt means to bring it about. And my personal views on profit-seeking behavior encompass this separate area you describe regarding public benefit corporations; no company can maximize profits while disregarding people and planet. When you see it occur, look for the company's connections to government before you blame the market's consumers for enriching a corporation that clearly disrespects them.

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I agree with you about the ends not justifying corrupt means and also your sound advice for us to explore corporate/government connections. And your post does that brilliantly. It reveals the depth of overlap between the public and private sector (love your venn diagram!) as well as the increasingly sophisticated methods they use to hide their behind-closed-doors maneuvering. Thanks again for bringing this to light. Much respect and gratitude.

While I would agree that most drug companies adopt the rent-seeking strategy by getting their patients addicted (opioid drugs) or requiring continual treatment (symptom treating instead of curing), I don't agree with you on vaccines. I think this is profit-seeking behaviour because in vaccinating whole populations the population becomes less sick and therefore more productive. You could argue that the cost of the vaccination pale in comparison to the offset losses in productivity. Taking HPV as an example, vaccinations lower the odds of developing cancer which is very expensive to treat. https://www.sciencealert.com/the-hpv-vaccine-has-halved-cervical-cancer-rates-in-the-past-10-years

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  ·  last year (edited)

I don't take a stand for or against vaccines, but if you want to argue that pharmaceutical companies are engaged in profit-seeking behavior, then you must point to their efforts in the free market and their attempts to market and sell their product without government protections, mandates, recommendations, subsidies, or revolving-door employees. I see no evidence of that occurring with any Big PhRMA vaccine-producing corporations.

I'm sorry, my comments are out of context that you discuss and write. Some of your posts discuss about corruption. I am sure you have an understanding of corruption.
Introduce, I baihaqi from Indonesia. I am currently working with an NGO focusing on anti-corruption issues in Aceh Indonesia.
I offer you, what if we write about anticorruption ranging from basic to advanced understanding. I think the anti-corruption understanding is important for all because corruption is an unfinished problem to date in many countries.
If possible, some of your posts will be translated into Indonesian so that can be understood by many people in my country. I hope you answer my offer. Thank you

corruption......
great to share..
love it

The content has written a lot of beautifully, you have given a post very well. I respect you.

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Thank you for this incredible article @geke
Regards
@el-nailul

Thank for this, you spoke well

  ·  last year (edited)

Hmmm. I learned a new term today.

And we have a perfect example of what you mentioned there abt vaccine: the Dengvaxia scandal.