Largesse & Economic Rent vs. Capitalism

Of late, I’ve been thinking about the various misuses of the word “Capitalism” to which our society is being subjected by the media, politicians, and so forth.  Indeed, I frequently see forms of income that economists call “Rent” being defended or decried as capitalistic, when the opposite is in fact true.

The term “Rent” can be a bit confusing, since Adam Smith was writing prior to 1776 when the term almost always referred to monies paid by serfs and tenant farmers to noblemen whose only economic “contribution” was taxing the peasants.  In this sense, “Rent” meant economic gain that is not the result of creating value and distributing it to others.  Adam Smith distinctly separated this form of income from “Wages” and “Profit”, both of which required the production of value- either through direct labor or through investing resources to support or enhance the labor of others.

Economists therefore call any sort of income that involves skimming value produced by others or manipulating the rules to protect an unfair advantage “Economic Rent”.  Those who seek to benefit from Economic Rent engage in “Rent-Seeking” behavior.

Unfortunately, the term isn’t terribly applicable in the modern world.  Today’s landlords, as opposed to the 18th Century kind, often invest substantial sums on improving and maintaining their properties.  Where an English nobleman might have told a peasant to fix his own roof, in most modern jurisdictions that responsibility falls on the landlord.  In most places, rental property is a risky investment.  In Massachusetts, it is an extremely risky investment!

My wife and I are still smarting from the losses we suffered from two bad tenants.  It is so difficult to evict anyone or to reclaim damages in Massachusetts that we are having to be extra careful in selecting future tenants.  This makes it really hard to rent out an apartment in a down economy.  So, today’s rent is not “Rent”, but rather “Profit” in that the investor carries a substantial downside risk and must offer something of value to the economy.

That’s why I prefer to describe “Economic Rent” using the term “Largesse”, particularly in the older sense of a gift from a king or other noble of higher rank.  Largesse was often undeserved, representing more the power of social connections than any ability or desire to improve the economic conditions of one’s demesne.  Once Largesse was bestowed, the recipient’s primary job was to stay in the king’s good graces and to milk the gift for all it was worth.

Does this sound familiar?  Far too much of the economic activity of our nation falls into this same category.  It is practically cliché to talk about corporations lobbying to protect their interests from competition.  Such protection is, in fact, anathema to Capitalism.  Adam Smith profoundly distrusted unearned advantages and other practices that discouraged fair competition.

How we dismantle this parasitic Largesse Economy may be the most difficult and important task facing my generation.  At its present rate of growth, I fear that someday soon all but a tiny share of the productive value created in our society will be appropriated by two classes of Largess-Seekers:

  • Accumulators who manipulate the laws to protect and grow their wealth.
  • Mendicants who manipulate the laws to protect and grow their poverty.

To see the proof that such a scenario is indeed possible, we need look no further than some of the economies in Europe- Greece, for example.  There, sociopolitical interests trumped common sense, and even math- to divide the nation’s productivity between Largesse-Seekers at the top and bottom of the economic ladder.

This is going to be a challenge- one that we cannot shirk as a nation.  If our economy goes the way of Greece, the ripple effects could be catastrophic, not just for us, but for billions of people worldwide.  That’s why I’m trying to explore new ways to be productive outside of the traditional 9-to-5 workaday mentality.  That wage-driven mindset is limiting in a world of instant global communication and commerce.  We need to embrace the full extent of our ability to create value to share with others if we are going to deny the Largess-Seekers the opportunity to parasitize us and those we care about.