Renters! Yes, we’re talking to you. We might have found the answer to the lifelong economic problem of rent-seeking. And yes, you also might’ve guessed it. One of our favorite cryptocurrencies might just be the solution. But first things first, rent-seeking involves more than just renting. This concept involves several practices that are common in our society today.
To give you some background, the economy operates on the exchange of goods and services. This means in the perfect world every give and trade would be equally beneficial to each party. You might be laughing at this point. After all, this is far from what we see in the economy today. People often exchange their goods at a high cost to exploit buyers or buyers may take advantage of low demand to exploit the seller. Economists recognize this and from this arose the term rent-seeking.
Origins of the Rent-Seeking Concept
The concept is far from new and has been around since 1967 by a man named Gordan Tullock. Although it was Tullock who discovered the concept, it was actually another economist, Anne Kruegar who coined the term “rent-seeking”. We refer to rent-seeking as any economic wealth earned by manipulating or gaming the distribution of goods and services. Any related activities are incredibly harmful to the economic efficiency of society as a whole. This is because rent-seeking can lead to income inequality, high barriers to entry and less competition as a result of monopolized industries.
But why do we refer to this concept as “rent” seeking? As the great economist, Adam Smith would say, rent actually refers to any activity that led to using one’s own resources in exchange for a financial benefit. Rent is just one example of this. Any rent-seeking activity results in a benefit by doing little or no “work” when compared to other sources of income like working you’re typical 9 to 5.
When we work, we create things of value. As a writer, you might work by creating novels. These novels are valuable due to their ability to entertain. Similarly, a farmer grows food which is necessary for the survival of humans. By working, both individuals have something to show for their work that society sees as valuable. However, a farmer might not be a good writer. As a result, he may exchange his earnings from growing food in an exchange for a book. Although we don’t exchange these items directly, we view this trade as an (almost) equal exchange of value.
The model changes a bit when we consider the concept of someone buying a product such as a house and renting it to someone. The home buyer gets something of value while also charging rent to someone. At the end of the term, the individual paying rent has nothing to show for the money they spent. Homeowners who decide to rent receive income in the form of rent money. Additionally, they also have ownership of the rental profit which still holds value.
A Real Life Example (Or Two)
Any sort of “Passive” income or income earned without working, falls under the rent-seeking concept. One example that Tullock noted in his Tullock Paradox was in the political landscape. While the paradox, initially referred to the bribing of political parties many also consider the actions of political parties themselves as rent-seeking. Parties in power often sway the masses by spending money on campaigns and other marketing materials to the detriment of the other side. You might agree that this is quite the rent-seeking behavior.
In an example, government regulation can support rent-seeking actions. Consider, that the government can choose to reward businesses by offering incentives in some industries or choosing to bail at banks in times of need. Governments also instill regulations regarding intellectual property (IP), patents, franchises or granted monopolies all of which give the business owner more money without providing value to society as a whole.
A Solution to Rent-Seeking
Rent-seeking individuals spend their resources in order to own the gains of others. This only adds to the inefficiencies we see in the economy today, where the rich get richer and the poor get poorer. Part of the reason is believed to be the number of intermediaries that exist between the buyers and sellers. This means that any solutions should consider the avoidance of intermediaries.
Rent-seeking is often accelerated by the government. This means the solution will likely have to consider a lack of government intervention.
Intermediaries No More
Banks are also a prime example of rent-seekers when it comes to the role they play in the exchange of money between two parties. Banks act as intermediaries between the parties. Though not creating any real wealth themselves in the exchange, they take their share of the wealth by charging a fee for their service.
Bitcoin eliminates the need for intermediaries because it is a decentralized, trustless system. Its use of blockchain technology makes this possible. Bitcoin has a ledger that is public, anonymous, and immutable. The transactions that occur between two parties can take place without the need for a trusted intermediary like a bank. These transactions are recorded and validated on a ledger that is managed mutually by all users. The ledger cannot be changed. The transactions can not be corrupted because any attempts to do so are easily detected. The data is not stored in one central place but is distributed among the network of users, making it more secure. The information on the ledger can be trusted by everyone.
Now contrast this with banks and other financial institutions. Any time a transaction takes place between buyers and sellers, it must go through a complex settlement process. The data may need to be verified, and stored in a secure place. Multiple ledgers may need to be reconciled. All of this comes at a cost that is passed on to you in the way of fees. Like any rent-seeking parasite, the banks don’t create any new wealth, it merely sucks you of wealth.
All Available Wealth Currently Exists
As we might recall from earlier, rent-seeking is about a person increasing their own wealth without creating new wealth. How could Bitcoin be a potential solution? Consider for example, that Bitcoin is a Proof of Work (PoW coin). For new wealth or new coins to be produced, miners must put in the work to actually mine it. This can only be done to a certain point when all coins are mined. By setting a limit to how many coins currently exist, we can expect less inflation will exist.
This also means that in times of distress the government can’t simply pump more money into the economy to stimulate the economy, which ultimately allows the poor to get by while the rich to keep getting richer. With a set number of coins in existence, individuals can’t create new wealth because all the wealth is currently in circulation.
The inflationary monetary policy of central banks is another good example of rent-seeking by an elite few. With the current banking system, central banks are able to print money ad nauseum to increase the money supply in a country. When more money is printed, the currency begins to lose some of its value. This results in drastic inflation. When this gets out of hand, as in the case of Venezuela, hyper-inflation results. The currency becomes valueless. Here is an example of a situation that may create wealth for a few. But it is to the detriment of many.
This situation is one that Bitcoin hopes to solve. You see, Bitcoin actually has a deflationary monetary policy. This is because there is a maximum amount of Bitcoins that will be in circulation. This amount has been set at 21 million. By 2140, all of the possible Bitcoins will have been mined.
This means that there will only be a certain amount of wealth that can be exchanged. Bitcoins should theoretically hold or increase in value as the supply of new Bitcoins dwindles. This monetary policy is hardcoded and cannot be changed by anyone. It is, therefore, a form of money that is not subject to manipulation by an elite few.
Although, the theoretical concepts of Bitcoin might have us believing this coin is a solution to rent-seeking there are a couple of considerations that still need to be made. Bitcoin is currently not the dominant currency we use to make everyday payments like rent. This means the widespread solving abilities of this coin are still theoretical in concept.
While Bitcoin could theoretically be a solution to rent-seeking, realistically it might not be quite there yet. For example, let’s consider that with Bitcoin’s volatile nature there are still arbitrage opportunities out there for the taking. Consider that Bitcoin is currently bought and sold on many different exchanges. This means although rare, there are times when a cryptocurrency is worth more on one exchange than it is on another if prices are slow to update on the platform.
What does this look like? Say you notice on one platform that 1 Bitcoin is worth 1200 Canadian dollars. You might compare this to a second platform where Bitcoin is worth 1300 Canadian dollars. With these numbers, you might notice that buying Bitcoin for 1200 Canadian dollars on platform one and selling it on platform two will result in a 100 dollar profit. Therefore, if you have lots of time to watch the charts you may be able to profit off the mistakes of platforms, not creating new value in the economy but increasing your own wealth.
Bitcoin Wealth is Subjective
We need to remember one more thing, the concept of Bitcoin wealth is subjective. Remember, Bitcoin is just one of the many cryptocurrencies that exist. It, like other fiat money only holds value because we say it does. That means if many begin to lose faith in the currency, the currency might not be worth anything at all. This also has to do with the fact that no central authority can guarantee that the coin is worth something. Therefore, if the masses decide this coin has no value, all those that have invested their life savings into this cryptocurrency might be out of luck. This also means that for those who are major owners they have more power to determine the fate of Bitcoin. If they continue to use it other Bitcoin holders will follow suit.
This means that the decentralization we love in Bitcoin does have a slightly negative side. However, if we could guarantee that Bitcoin will always and forever hold value we may be looking at a more plausible solution.
Intermediaries May Still Exist
The Blockchain, in theory, cuts out intermediaries, that is until we integrate Blockchain into our world (which is exactly what we are trying to do). There will be other databases that will have to intertwine with the Bitcoin world due to the amount of information currently not stored on the ledger. We will still need a data ownership platform that will verify the identity of each new user on the blockchain. This means it is unlikely that we will get rid of intermediaries completely.
Consider too, if an individual using this platform loses their private key. Without any intermediaries, they would be unable to retrieve this information and gain their place back on the blockchain. With the introduction of an intermediary, we can no longer address this condition in the rent-seeking problem.
Bitcoin As A Future Solution
After carefully considering some of the pros and cons of bitcoin as a solution to rent-seeking you might’ve noticed one thing. That is Bitcoin if used as a primary currency by the masses, does over a pretty good solution to the rent-seeking problem. However, with the current way we use Bitcoin, as a type of currency for online transactions and trading, there are some gaps that have still yet to be filled.
So, while this is not a perfect solution to rent-seeking we know this is definitely a step in the right direction. Bitcoin has also paved the way for other cryptocurrencies to address some of the initial problems experienced.