What is the optimal level of rent-seeking?

Note: This is the sixth of seven blog posts reviewing Tyler Cowen’s book “Big Business: A Love Letter to an American Anti-Hero.”

Let’s proceed into Chapters 7 & 8 of Tyler Cowen’s “Love Letter to Big Business.” Like the previous two chapters (Chs. 5 & 6, which I reviewed in my previous post), these two chapters do not appear to be related. Chapter 6 (“What is Wall Street good for, anyway?”) is devoted to the financial services industry, e.g. banks, brokers, credit card companies, insurance firms, payday lenders, etc., while Chapter 7 (“How much does big business control the American government?”) is about rent-seeking behavior or “crony capitalism.” Nevertheless, I am lumping these two chapters together because among the usual crony-capitalist suspects are big banks, especially the ones that are supposedly “too big too fail”!

First off, what is rent-seeking or “crony capitalism”? Professor Cowen provides the best definition of these terms that I have seen to date (p. 171): rent seekers and crony capitalists are business firms who “suck[] up to power and cultivat[e] the coercive power of the state to be on one’s side.” Whether it be bribing bureaucrats for government contracts, lobbying elected officials for favorable legislative treatment, or spending millions of dollars on TV ads to shape public opinion in one’s favor–all these things and more fall under the rubric of rent-seeking. Alas, as Cowen admits, all business firms engage in rent-seeking to a lesser or greater extent, if only to ensure their own survival; the real question, however, is how destructive are these pervasive rent-seeking activities to the overall economy?

Cowen makes a persuasive case that rent-seeking is not that big of a problem. Although corporations spend about $3 billion per year lobbying the federal government, they spend over $200 billion per year to advertise their products and services. (See note 3 on p. 224 of Cowen’s book.) Furthermore, if you were to scrutinize the yearly budgets of both State and federal governments, as Cowen does (pp. 173-175), the only real evidence of rent-seeking you will find are farm subsidies, but even this egregious example of rent seeking represents only $20 billion per year out of a total federal budget of $4.4 trillion. If anything, then, if Cowen is to be believed, non-agricultural business firms are not rent-seeking enough?

What about rent-seeking by big banks? Cowen employs a different strategy to defend big banks and the financial services industry writ large. He admits that the financial services industry in the U.S. is “relatively large” in terms of GDP or Gross Domestic Product, the standard method used by economists to measure the size of the economy, but Cowen argues that this growth in the financial sector is actually a good thing! To the point, Cowen’s argument is that a large financial sector reflects a healthy economy, or in Cowen’s own words (p. 153): “There may be specific parts of the financial sector that are too large …, but a large financial sector relative to GDP is frequently a sign of previous economic success and stability.”

For my part, although I am inclined to give Professor Cowen the benefit of the doubt (that rent-seeking is exaggerated), his complete loss of credibility in Chapters 3 & 4 of his big business book (where he simultaneously defends high CEO compensation and stagnant worker pay) gives me pause. At the same time, perhaps Cowen is right. That is, perhaps there is an “optimal level” of rent-seeking, and perhaps we are below or right at that optimal level. But rent-seeking, by definition, does not generate any new economic value (unlike trade), so why is the optimal level of rent-seeking not zero? Easy. Because efforts spent trying to eradicate or reduce rent-seeking behavior might be more costly than the inefficiencies generated by such rent-seeking in the first place! I will conclude my review of Professor Cowen’s “Love Letter to Big Business” in my next post.

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About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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