CHAPTER 4A
Rent Seeking by Lawyers ?
A brief list of earlier studies describing the varied definitions of rent-seeking enlightens us greatly. Emotions run high on both sides of the stereotypical rent-seeking lawyer issue. Can we survive ourselves ? Are we in danger of internal self-destruction due to parasitic redistribution?
"For the most part, however, [civilizations] self-destruct from within, as the forces of redistribution overwhelm those of entrepreneurial zeal " (Rowley, Tollison, and Tullock 1988: 13).
We need to define the terms - Rent seeking and it's distant cousin Profit Seeking
Honderich (1996) describes three forms of rent-seeking :
• the tautological: begging the question - self interested behavior through direct political allocation. Now you have excluded productive state-oriented rent (social gain) seeking and market directed rent (social loss) seeking. No model should dismiss market-created negatives (Greenspan, Ruben & etc. not withstanding) and governmental regulation positive outcomes.
• the contextual: the rent-seeking which involves government regulation, transaction cost, redistribution of resources, and other factors which skew the absolute right and wrong in a model which considers both positive and negative results. (Honderich 1996)
• the unselfconscious uses: this application of the term is purely ideological, devoid of related factors, as in the original free-market, non-intervention definition of rent-seeking.
Lets look over the history of rent-seeking, beginning when the term was lifted from the "have-not's" historical belief that the capital asset of land did not deserve a return to capital. Rent was "unearned and undeserved." Where did the economist's use of the term begin ?
• Harberger (1959) pointed out the dead-weight loss represented by triangle "A". Rectangle "B" was considered to be redistributed.
• Tullock (1967) described how rectangle B was "consumed". Tullock describes costs as redistributed, possibly from consumers to politicians and lawyers.- converted from consumer surplus to redistributor surplus. (but not subtracted from the sum-total of mobile resources)
• Krueger (1974) was using the term rent-seeking, while looking at trade restrictions. One source claimed that her use was first.
• Posner (1975) attempted to describe exact conditions or limits whereby the entire rectangle B was wasted. He named five.
Posner's five conditions are:
˚ 1) obtaining the monopoly itself is a competitive activity.
˚ 2) the long run supply of all inputs used in rent seeking is perfectly elastic (otherwise some of the rents would be passed on as infra-marginal rents to inputs).
˚ 3) rent seeking itself creates no externalities.
˚ 4) time of monopoly is one period only.
˚ 5) individual rent seekers are rent neutral.
• Fisher (1985) suggest that Posner's five conditions are not sufficient in themselves.
• Baysinger & Tollison (1980 : 22-26) added the rent-avoidance condition, (anti-lobbying by consumers) defined as further waste. Others mentioned that the "free rider" problem would dampen the rent-avoidance zeal.
• Varian (1983) argued that partial equilibrium analysis is an overestimation
• Ricketts (1987) defines rent-seeking as using resources to challenge existing property rights. You gain property rights by: trade, or: theft, infringement, political manipulation.
• Brooks & Heijdra (1989) point out that Varian's model assumes that the resources spent on lobbying offer NO (0, zero) utility to anyone. They vanish from the economic earth, yet elicit a positive response, or such perks would not be forthcoming again.
• Conveyancing (property transfers) in Great Britain was a monopoly until
1984, at which time a licensed conveyancer law was passed. The cost of the
transfer (percent of total price) decreased by 33% before the law's
effective date of 1987. (.6% to .4%, or .004 x cost of home) (Domberger &
Sherr 1989)
The lawyers had argued that conveyancing (very lucrative) supported other
less lucrative services, and overall quality would suffer. The mere threat of
competition created significant welfare benefits. Price discrimination was
reduced; conveyancing costs were reduced, consumer satisfaction increased.
( Domberger & Sherr 1989)
The four elements which Price discrimination requires:
˚ impossibility of arbitrage (price leveling)..
˚ restricted entry to outsiders, who might supply a lower price service.
˚ no price competition from other lawyers.
˚ limited information, by advertising ban, with powerful enforcement sanctions (creating effective collusion).
• Magee (1991) claims that the average lawyer causes a $1,000,000 reduction in the US GNP. His regression analysis fails to support his hypothesis that a rent-seeking core of lawyers and government employees are choking off the US income growth. Mixon & Sellers (1992) find that it is certainly plausible that the average lawyer causes a certain reduction in the GNP, below that million dollar waste Magee wished to blame upon each.
• Lawyers have been accused of the following:
1) Redistribute wealth to themselves - rent-seeking - harm productivity
2) Redistribute wealth from producers to non-producers - skews investment
3) Divert Resources into non-productive activities, as agents for whomever.
4) Divert talent with an attractive career facade as a lawyer.
Because rent-seeking is primarily concerned with redistribution, the potential loser from rent-seeking could choose to compensates the potential winner, and still remain better off. (Suddenly I feel a Coase-like solution coming on. )