Fantasy economics is driving our world to destruction. Confirmation of why this is so comes from The Economist, the London business magazine that claims to make sense of global markets. Its critique of “crony capitalism” relies on crass stupidities that pass for economic theory. Trouble is, politicians believe this nonsense.
The Economist was founded in 1843 to oppose the Corn Laws, which rigged markets to favour British landlords. The journal championed free trade, and censured those who sought to squeeze rents out of the working population.
In the 19th century, The Economist had no doubt that rent existed to enrich the privileged people who rigged the laws of the land to their advantage. And that was supposed to be the theme of their editorial on March 15, 2014, headed: “The new age of crony capitalism”.
Cronyism, it explained, was based on “rent-seeking”. This is defined as “a special type of money-making: the sort made possible by political connections. This can range from outright graft to a lack of competition, poor regulation and the transfer of public assets to firms at bargain prices”. And to put some numbers on the damage inflicted by this behaviour, The Economist created a “crony-capitalism index”.
That index conceals more than it reveals.
The Cheating Index
We do need an index that exposes how lives are perverted by rent-seeking. But The Economist omits the single biggest activity under the heading of rent-seeking. Which It defines thus: “An economic rent is the difference between what people are paid and what they would have to be paid for their labour, capital, land (or any other inputs into production) to remain in their current use”.
Don’t struggle to disentangle that one. It’s the red herring that was cooked up by economists a hundred years ago. Their intent: to suppress knowledge of the way in which land owners were reaping what they did not sow. For the origins of that intellectual scandal, read Mason Gaffney in The Corruption of Economics (1994).
“Rent would not exist”
The Economist’s ideological prejudice is revealed by this statement: “In a world of perfect competition, rent would not exist”. So, it wants to drive out the cheating that is the basis of the power of the oligarchs, on terms that would see rent eliminated!
Here’s the problem:
- In the real world, rent cannot be eliminated. If the cheating described by The Economist was somehow outlawed, what would happen? Rents claimed by land owners would rise by an equivalent sum… and that would do nothing to moderate problems like housing unaffordability.
- For the sake of both economic efficiency, and social justice, we need rent to exist. When competitive markets equalise the returns to labour and capital, spatial differences arise. These reveal differences in productivity, which become the rents of location. Those rents would exist, no matter how close the economy moved to the economists’ theoretical notion of “perfect competition”.
The philosophical problem for The Economist is this. Today, rent is privatised. That privatisation is the general mechanism for redistributing income from those who create that value, to those who own (or who can control the revenue flowing to) land. Middle-class home-owners are “rent-seekers”. That is why (in the Anglo-Saxon world, at any rate) there is a collective psychosis known as “getting on the property ladder”. This is disturbing to The Economist’s editorial writers, who are reluctant to acknowledge that all forms of rents, when privatised, distort economic activity and social justice. That is why they rely on the tortured definition of rent-seeking. It confines that activity to a relatively few billionaires.
Towards Perfect Competition
The closest we can get to “perfect” competition in the real world would be under the following terms:
- abolition of taxes on value-adding activities; and
- collection of rents from all sources to defray public expenditures on the principle that people should “pay for the benefits they receive”.
Full employment would be one result, income would be correctly distributed (people would keep what they created) and governance would perform as steward of the common good.
That’s what The Economist should be campaigning for. It did so in 1843, when the people collecting the nation’s rents were an easy target: the aristocracy. But today, many of the magazine’s readers are rent-seekers. So The Economist would rather not tell the whole truth. One result: political debate about public policy is chaotic. That, in turn, explains why governments add to, rather than solve, the world’s problems.