Sunday, April 22, 2018

Rent Seeking Plutocrats Undermine Capitalism and Democracy

Vijay K. Mathur

Doubts are often raised about capitalism and its corollary free enterprise system.  Karl Marx recognized that capitalism is one of the stages of development of a society.  But he argued that capitalism would eventually end up with a class structure of bourgeoisie (capitalists) and proletariat (wage earners). Conflict of economic interest between these classes would breed the destruction of capitalism.

According to Martin Spechler inPerspectives In Economic Thought(1990) Marx theorized that, in the class conflict, the most important organization that supports the bourgeoisie is the state.  Capitalists primarily accumulate capital by suppressing wages of the proletariat class.  Reform and laws enacted by the state often popularized to benefit workers are mainly aimed at keeping capitalists’ control of the economic system.  

These arguments of Marx are prophetic. Any impartial observer of the US economy today would notice economic hardships of the middle and low income working class and enrichment of wealthy, many of whom are rent seeking plutocrats.  Even though the concept of rent as surplus in the value of a factor of production in fixed supply was fully developed by English economist David Ricardo in 18thcentury England, it has now been generally applied to other activities, including political favors to lobbyists and their clients with deep pockets. Mercantilists in 18thcentury Europe used royal favors to gain economic benefits at the cost of the rest of the citizens.  Following Mercantilist footsteps, rent seeking behavior in the current political context arises when any entity earns income or rewards from the political system without undertaking any productive effort.  

Ideally in a democracy, all citizens are supposed to have the same political influence in the enactment of rules, regulations, and tax and expenditure policies.  However, political inequality complemented by income inequality breeds a class of political elitists and rich plutocrats who have undue influence on the political system to gain more economic favors. These favors are called rents.  Professor Joseph Stiglitz states that rents could also arise when businesses charge above market prices for products sold to government, monopolies charge prices higher than competitive market prices, and financial advisors and/or banks extract higher prices and commissions from those less informed about financial matters.  

Let me provide a few examples of rents. The recent Congressional bill meant to lighten the regulatory burden of small banks under Dodd-Frank Act of 2010, after the Great Recession, will also end up increasing profitability of large banks, such as Bank of New York Mellon and State Street  (The Wall Street Journal, March 15, 2018). Other examples are the use of tax breaks for land conservation by syndicated conservation easements (The Wall Street Journal, March, 15, 2018), reduction in the cost of pollution control of coal mining companies by relaxing environmental regulations and reducing the size of Bears Ears and Grand Staircase-Escalante National Monuments by the Trump administration for the benefit of oil, gas and uranium companies.  

The Salt Lake Tribune (SLT), January 22, 2018, reported that in Utah 92 percent of the money raised by legislators in 2017 came from special interest groups. TheSLT, March17, 2018, also reported that UtahRepresentative Mike Noel stands to reap substantial gains in the value of his land and water rights if he succeeds in his efforts in the construction of the taxpayer-funded 140-mile Lake Powell Pipeline, that brings Colorado River water to Southern Utah.  It is also well known that Senator Orrin Hatch is a great benefactor of the pharmaceutical industry, as well as a receiver of large campaign contributions from that industry.  It seems politicians at state and local levels are not immune to this behavior. 
Government intervention is required if competition fails to regulate market forces in the provision of goods and services. However, it is problematic for the sustainable functioning of the private enterprise system and democracy when the government implements rules, regulations, tax, and expenditure laws to promote the economic interest of a minority of rent seeking wealthy capitalists. Historian Walter Scheidel cogently argues in The Great Leveler(2017), that historically states, usually monarchies, have always openly bestowed economic favors on the wealthy and even made them an integral part of their rule.   History has repeated itself in the Trump administration.  However, extreme income and wealth inequality with explicit or implicit support of the government, in a private enterprise system, cannot sustain a dynamic and vibrant private enterprise in a democracy in the long run. 

Frustration of middle and lower income Americans with the loss of economic status, wealth, diminished hopes of future well being and lack of influence on the political system is not a recipe for a peaceful and thriving populist democracy. A survey in The Wall Street Journal, December 7, 2017, reveals increasing acceptance of socialism among Millennials.  Hopefully, politicians pay attention to the economic plight of middle and lower income Americans for the preservation of capitalism, private enterprise and democracy.

Mathur is former chair and professor of economics, now professor emeritus, Department of Economics, Cleveland State University, Cleveland, OH.  He resides in Ogden.

No comments:

Post a Comment