A Snarky look at Free Markets and the Exploitation Inherent in Economic Rents

I believe in free markets. And so do the wealth maximizing Rapacious Capitalists that are killing our communities and limiting our capacity to love. So, what is a free market? Last night I sat up in bed at 3:30 am, jet lagged after a week in Uganda, with an epiphany so I donned my armchair economist cape and started typing.  (Yup, I have a cape.)

The Rapacious Capitalist's definition of freedom is characterized by exploitation - the freedom to exploit. Exploitation has a negative connotation. In economic terms, negative exploitation is defined as rent-seeking or using one's position to extract wealth without creating commensurate value. However, exploitation can also be positive simply meaning to use fully and to derive benefit. Most examples of this have to do with a failure to exploit.  For example, not funding education and health care reduces the the total pool of human capital that is available to "exploit" or damaging natural resources creates an inability to exploit those resources over time. This line of thinking quickly moves to amelioration through regulation and regulation is always fought by the Rapacious Capitalist as impinging on his freedom to exploit.  Vicious circle.  (There is another post here about stewardship and common pool resources and Elinor Ostrom....)

I would like to propose a different way to understand the free market where freedom is characterized by agency or the freedom of opportunity. Agency is what economist Amartya Sen calls substantial or positive freedom. Agency can be defined simply as the capacity to pursue a livelihood.  By focusing on agency we eliminate the vicious circle and we are compelled to invest in human capital which is the raw material of any economy. Additionally, by having more capable economic actors we get a more vibrant and more resilient economy.  This is not an opposite or counter definition to exploitation.  It is wholly different.  It states that in order to have a free market all actors must be free to participate.  The role of government is not to govern abuse but to ensure agency.

To be fair, what the rapacious Capitalist would say is that he is not limiting anyone's agency - he is not limiting any one's ability to be a capable economic actor.  This is true and it is what Sen called negative freedom or the freedom to not be constrained by others.  So, how would a focus on agency in free markets be different than a focus on exploitation? I think the answer lies in the concept of economic rent.

Economic rent is defined as the amount one pays for an input to production that is in excess of the opportunity cost of that input.  The classic example of this - and the source of the more common use of the term rent - involves a landowner and a farmer.  Imagine the landowner has some land she is not going to farm.  She would like to rent it to a farmer.  In order to set a price she figures out how much she might have profited if she farmed the land herself.  This is her opportunity cost.  It may be that the landowner is a sucky farmer or she might just be lazy.  She may be an excellent farmer but has more land than what she can exploit.  Maybe she has decided to give up farming and become a poet. Whatever the specifics, she sets the price at what an excellent farmer would make by farming the land and negotiates with the farmer to try and get that price.

Now imagine that our landowner is the only landowner in town or the town is very isolated and she also owns all of the transportation routes to market or is able to limit the information that gets to the farmer about seed and fertilizer price or even lies to the farmer about  market prices.  With this added control of the economic environment, through monopoly or fraud, she can demand a price for her land that is above her opportunity cost.  This excess cost above her opportunity cost is an economic rent. Essentially, the landowner is using her position to extract wealth without creating additional value and in so doing, she is limiting the agency of the farmer.

We have laws against monopoly and fraud that are designed to address this issue; however, we understand these laws in terms of how they limit or regulate the actions of the landowner and less so in terms of how they limit the agency of the farmer.

Now let's replace the agricultural context of our example with the context of financial services.  Instead of access to land, we are concerned with access to the economy.  In this case, the definition of rent-seeking - working to extract wealth beyond the opportunity cost without adding commensurate value - could double as a job description for many professionals in the financial services industry.  The Rapacious Capitalist might respond with a hearty "So what?" arguing that they are not impinging on anyone's right to do exactly the same thing.  More to the point, the Rapacious Capitalist (aka Sam Zell) says everyone should be just like them.

Let's go back to the farmer. I was just in Uganda where I met with small holder farmers.  Small holder means less than about two hectares.  These farmers were skilled and industrious.  At Grameen Foundation, through our Community Knowledge Worker program, we equip local leaders with smart phones connected to an agriculture data base.  These trusted farmers - Community Knowledge Workers or CKW's - help their neighbors with critical information about managing and selling crops.  However, the one thing that they can't get is financing.  (We are working on this.) The global economy has made access to credit so precious that we have broken down the fundamental physics of the market.  Our global financial gatekeepers blather on about risk and exits and hedges and the like while, at the economic foundations of humanity, people who could be growing more food cannot.  They cannot because the the rent-seeking oligarchs demand tribute in order to access their casino.