Rent-seeking and its implications for the economy

As part of my work with startups and companies, I’m often asked to evaluate the business opportunity or the potential profitability/revenue of the Company. Investors most of the time evaluate whether to invest in a company depending on, in simple terms, how profitable they see the company being in the future.

What I find though is that there sometimes is a missing piece of the puzzle, which is whether the fundamental operation of the business brings value to the economy, and whether it brings value in an efficient way. When the economy recovers from this Covid-19 pandemic, it will be a great time to re-evaluate the type of businesses we want to support, how we want to support, and what more can be done.

There’s a pretty well-written article on medium which has been circulating which has prompted some thoughts on rent-seeking behaviour. The article can be found here, and its main thesis is that rent-seeking behaviour has destroyed the economy. As Investopedia puts it:

• Rent seeking (or rent-seeking) is an economic concept that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity.
• The term rent in rent seeking is based on an economic rent which was defined by economist Adam Smith to mean payments made in excess of resource costs.  
• An example of rent seeking is when a company lobbies the government for grants, subsidies, or tariff protection.

The basic thesis here is that if we keep encouraging businesses which exhibit a high propensity for rent-seeking behaviour, we build and encourage a less efficient market because resources which we paid for (economic) rent could have been better utilised for other resources to build up the economy.

As stated at the end of the article: I highly encourage further research on Rent-Seeking to anyone who found this article interesting. This introduction should help readers better understand the work of academics and specialists.

Finally, here’s a short clip on understanding a bit of basic economics if you want to put some context into the economic theories discussed in the article.

I’m on a journey to try to make knowledge and education more accessible and affordable, and to sieve out the noise in an age saturated with information. Practicing lawyer by day (I specialize in working with clients in the technology industry), and aspiring technology educator by night, I read widely on four main themes which I believe will change the world we live in: How businesses run and operate, how technology will change the way we do things, how key historical moments changed the way we do things, and how the financial system of the world supports the economy we live in.