Rent Seeking:

Not to be confused with simply paying rent….rent seeking is an economic term to describe extracting an economic “rent” (i.e. some sort of value) on a transaction where the party adds no actual value.  Another definition (from investopedia.com) is when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.

This is easily applied to the current financial industry.  It is a simplification; however, if the high-finance industry simply ceased to exist, no harm would be done.  They don’t actually produce anything…they simply extract rent as a piece of other, hopefully productive, activities.

Finance claims to do risk assessment. That is almost laughable.  They failed to properly evaluate the risk they themselves created with their fancy debt instruments……and we ended up bailing them out.  If I were them….and they were smart….I would fire themselves.  They are obviously incompetent and a self-contradiction:  If their purpose is to mitigate financial risk and they themselves are the largest risk to global finance…the only logical conclusion is to close their doors and go home.

Rent seekers are bad. They produce nothing and extract a “rent’ (i.e. are a burden) on people who do.  If the rent seekers get bad enough….the producers simply stop producing.

Wealth creation:

Who then are the non-rent seekers?  What actually is a productive pursuit?  This is the more interesting question by far.

I argue that productive pursuits improve lives.

Productive:  Growing food is productive.  Building houses is productive.  Air conditioning, plumbing, refrigerators.

If you have these things….your life will be better.  No doubt.  Black and White.  It gets more difficult though.  Some things are necessary to make things that make life better.

Compliments to wealth creation:  Roads, electricity, computers, telephones, etc.

These are necessary to make the things that make life better.  It gets even harder.

Ambiguous:  What about lawyers?  Are they navigating the law for the wealth creators so they can do their job or are they using their special knowledge of our byzantine legal system to bend the rules in their favor….to rent seek?

What about the health insurance industry?  Are they helping people get health care or are they using their legally created special status to rent seek on people trying to get health care?  If the whole industry simply disappeared, would it really matter?

What about service industry jobs? Are barber shops and nail salons creating wealth? No.  They are not.  They are compliments.  Theses industries (and many others) do not create wealth; they exist solely because of the excess wealth of the industries which create things that make our lives better.

Only when the first dude created enough excess wealth from his labor would their ever be demand for a service job like laundry or cleaning.

After all…..imagine a society where everyone is cleaning for everyone else and cutting their hair….where do these people live?  What would they have to clean if nothing were being produced?  The service industry exists as a compliment.

So……I’ve probably lumped over half (forgive the imprecision) of US economy into non-wealth creating pursuits.  Most people work in service or rent seeking industries.

If this is the case, what about the US economy with its dwindling manufacturing base and increasing service sector?

Can a purely service economy exist?

No.  I don’t think so.  Not for any extended period of time and be prosperous.

There are a precious few things that truly make life better….and the vast, vast majority are all actual THINGS.  They are things enabled by advances in technology.

That’s what true wealth creation is:  Technology enabled stuff we produce that makes our lives better.

Everything else exists on the coattails of those very few items, because without those very few items all the other stuff wouldn’t NEED to exist.

Example:  It might be true that the greatness of the Seinfeld TV show made lives better.  I could agree with that; however, without food, a roof, warmth, indoor plumbing, electricity, etc….no one would care about TV.

What does all this mean?

1) Technology is the basis of everything that makes our life better.  Invest in it.  Waste money on it if needed (don’t waste money on foreign wars).

2) Make stuff that improves lives.  Everything else is either service for those that make things…..or rent seekers.  If you don’t make things, you’ll soon be lining up to be friends with those who do.

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