The Problem of Economic "Rent"
The basic problem, in a nutshell, is that much of the financial sector is engaged in economic activity which extracts income from others without making any meaningful contribution to overall growth or productivity. The financial sector is not increasing the size of the pie; it is just cutting itself a bigger and bigger slice.
In economics, this form of economic activity is usually called “rent.” Think of it this way: Wages and salaries are paid in exchange for labor or expertise. Profit is earned when investors add value to a product or service—and the revenues from selling the good exceed the costs of producing it. Rent is the extra return or profit that a firm or individual can claim due to some unique advantage—such as a patent, a professional license, or some other constraint on competition. Rentiers make more money without producing more. Rent-seekers often improve their advantages by influencing legislation and policy.
All of this describes the financial sector, where much of the economic activity is predatory and speculative, and where most of the political attention has been devoted to deregulatory schemes that make further predation and speculation possible.
See Dean Baker, The Conservative Nanny State (2006) and Baker, Taking Economics Seriously (2010); James K. Galbraith, The Predator-State (2009); Michael Lind’s three-part series on Private Sector Parasites in Salon (2013); Michael Hudson, The Bubble and Beyond (2012); and Larry Mishel and Josh Bivens, The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes (EPI, June 1013).
In economics, this form of economic activity is usually called “rent.” Think of it this way: Wages and salaries are paid in exchange for labor or expertise. Profit is earned when investors add value to a product or service—and the revenues from selling the good exceed the costs of producing it. Rent is the extra return or profit that a firm or individual can claim due to some unique advantage—such as a patent, a professional license, or some other constraint on competition. Rentiers make more money without producing more. Rent-seekers often improve their advantages by influencing legislation and policy.
All of this describes the financial sector, where much of the economic activity is predatory and speculative, and where most of the political attention has been devoted to deregulatory schemes that make further predation and speculation possible.
See Dean Baker, The Conservative Nanny State (2006) and Baker, Taking Economics Seriously (2010); James K. Galbraith, The Predator-State (2009); Michael Lind’s three-part series on Private Sector Parasites in Salon (2013); Michael Hudson, The Bubble and Beyond (2012); and Larry Mishel and Josh Bivens, The Pay of Corporate Executives and Financial Professionals as Evidence of Rents in Top 1 Percent Incomes (EPI, June 1013).
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