Source: Technorati June 21, 2011
Source: Technorati June 21, 2011

People can always be expected to act in their own self interest. Rent seeking occurs when profit is sought through manipulating politics, rather than creating wealth through voluntary exchanges in a competitive market. If governments are given the power to regulate and control, those with the most power to influence the authorities will purchase favor. They will hire lobbyists to ensure that regulations only serve as barriers to prevent small competitors and start ups from entering the market.

In most industries, small businesses are able to compete with big businesses. Small competitors have less infrastructure and overhead, which makes it hard for them to control a large market share, but more adaptable to market forces. Within their niche a small business can better react to their customer base, reduce overhead costs, and increase profit margins. While a single small business is no threat to a behemoth, a number of small businesses controlling the market share of local areas can eventually cause a large business to collapse.

Big businesses have massive infrastructure, but also massive overhead, and require a large market share to stay profitable. They are also able to better absorb short term increases in costs and single expenses. If a regulatory agency at the behest of a major corporation creates a barrier to entry, such as a license that costs a million dollars, it will price out most small competitors. That same cost will only be a small burden for a large company, easily paid for by maintaining their increased share of the market. Taxes can be used in the same way. Large corporate entities can pay teams of accountants and lawyers to reduce their tax burden, but a small company has no such luxury.

Large firms are happy to use the State to increase the per-item cost of production in order to price out smaller competitors. They are able to operate on a smaller profit margin thanks to increased production. This is called an “economy of scale”. Scale is also a limiting factor for a large scale producer, however. Customers like variety, and more choices are offered by smaller businesses. The competition between large and small producers of a good benefits the consumer by offering them a range of quality and price options.

Corporations are not the only organizations engaging in rent seeking. Unions are one of the biggest special interest groups lobbying politicians. Unions often push for increases to the minimum wage, despite the fact that union workers almost never earn minimum wage. Union labor is generally done by skilled workers who are more efficient, but also more expensive. More unskilled workers are required to do the same job, but they are willing to work for less money. By raising the minimum wage, employing unskilled workers is made more expensive than employing skilled union labor. 

Efforts may be made in vain to “get the money out of politics”. This will never happen because corporations, government officials, and lobbyists all stand to benefit by allowing the rent seeking to continue. If cash transactions are made illegal, then the same exchanges will take place using lavish gifts. If that is made illegal, then transactions will occur through shell corporations and charities. As long as the incentive remains for all sides to profit at the expense of the public, the process will continue. It is easy for the participants in rent seeking to stay one step ahead. They are the ones writing the rules.

Rent seeking not only kills competition in the market, it also wastes tax dollars. Government contracts are often awarded based on cronyism and bribery. Passing legislation is also an expensive process, as is law enforcement. The money wasted in government comes from either tax payers, or turning on the printing press, inflating the currency. Either way, the wealth is robbed from the public and redirected toward ends that do not benefit them. This is wealth that would have otherwise been spent on opening new businesses, hiring employees, bringing new products to market, and improving the lives of individuals.

The more regulations are passed, the more large corporations control the market. Socializing an industry, and eliminating all competition, is the end result of this process. Those at the top, cronies from both the public and private sector, can then loot the industry for all it is worth. They will not care if the result is shortage or price inflation. They will never feel the pain of the common man. The misconception is that hierarchies and classes no longer exist in a Socialist or Communist society. This is false. There are two classes: The State, and the slave. Socialism does not create a society without corporate greed, it creates a society without limits on greed.

Socialism is not “a good idea that has never been implemented right”. It is not something that is magically made effective by the voting process, as “Democratic” Socialists seem to claim. It is a system of control, the abandonment of freedom, and the eventual enslavement of the masses. Even if it was a morally superior economic system (which it isn’t), it still always results in corruption, shortages, and economic collapse. The Federation of Star Trek is not what Socialism yields. It yields only death, destruction, and poverty.

This is the third installment in my ongoing rebuttal of everything Socialist. Click here to read my first piece, addressing the problems with making economic calculations in a Socialist system, and here to read my second, concerning unintended consequences and perverse incentives.