Rent-Seeking Experts

Two thought-provoking paragraphs from Matt Ridley:

From ancient Egypt to modern North Korea, always and everywhere, economic planning and control have caused stagnation; from ancient Phoenicia to modern Vietnam, economic liberation has caused prosperity. In the 1960s, Sir John Cowperthwaite, the financial secretary of Hong Kong, refused all instruction from his LSE-schooled masters in London to plan, regulate and manage the economy of his poor and refugee-overwhelmed island. Set merchants free to do what merchants can, was his philosophy. Today Hong Kong has higher per capita income than Britain.

In July 1948 Ludwig Erhard, director of West Germany’s economic council, abolished food rationing and ended all price controls on his own initiative. General Lucius Clay, military governor of the US zone, called him and said: “My advisers tell me what you have done is a terrible mistake. What do you say to that?” Erhard replied: “Herr General, pay no attention to them! My advisers tell me the same thing.” The German economic miracle was born that day; Britain kept rationing for six more years.

This is standard libertarianism. I like the stories but I don’t agree with the interpretation. I don’t think it is “economic planning and control” that causes stagnation in these examples.  I believe  it is expertise — more precisely, rent-seeking experts who know too little and extract too much rent. There are libertarian experts, too. They too are capable of doing immense damage (e.g., Alan Greenspan), contradicting Ridley’s view that “economic liberation” always causes  prosperity. In both of Ridley’s examples, the experts give advice that empowers the experts. In the first example, Cowperthwaite is told by “LSE-schooled” economists to “plan, regulate and manage the economy.” All that planning, regulation and management require expertise, in particular expertise similar to that of the experts who advised it. Which you cannot buy — you have to rent it. You must pay the experts year after year after year to plan, regulate, and manage. Because the advice must empower the experts, there is  a strong bias away from truth. That is the fundamental problem.

Freud is the classic rent-seeking expert. You are sick because of X, Y, and Z — and if you pay me for my time week after week, I will cure you, said Freud. Curiously no treatment that did not involve paying people like Freud would work. Curiously psychoanalytic patients never got better. Therapy lasted forever. You might think this is transparently ridiculous, but professors at esteemed universities such as Berkeley still take Freud seriously. Millions of people pay for psychotherapy. The latest psychotherapeutic fad is cognitive-behavioral therapy — which again requires paying experts to get better, week after week. Berkeley professors take that seriously, too.

Evidence-based medicine advocates are among the newest rent-seeking experts. Like Freud, they focus on process (you must follow a certain process) rather than results. (What they call process in other contexts is called ritual. Rituals always empower experts.) Rather than trying to learn from all the evidence — which might seem like a good idea, and a simple one — evidence-based medicine advocates preach that only a tiny fraction of the evidence (which you need a Cochrane expert to select and analyze) can actually tell us anything. Again, this might seem transparently ridiculous, but many people take it seriously. Evidence-based medicine has an amusing twist which is that its advocates tell the rest of us how stupid we are (for example, “correlation does not equal causation”).

The workhorses of the rent-seeking expert ecology — the ones that extract the most rent — are doctors. They are incapable of giving inexpensive advice. However they propose to help you, it always involves expensive treatment. This might seem like a recipe for crummy solutions, but again many people take a doctor’s advice seriously (by failing to do their own research). My introduction to the world of rent-seeking solutions was the dermatologist who told me I should take antibiotics for my acne. I was to take the antibiotics week after week — and because I was taking a dangerous drug, I should also see my doctor regularly. During these regular visits, the doctor never figured out that the antibiotic did nothing to cure my acne. I learned that by self-experimentation.

Like anthropologists who fail to notice their own weird beliefs  (a recently-deceased Berkeley professor of anthropology took Freud seriously, for example), the profession that came up with the rent-seeking concept has failed to notice that many of them do exactly that.

One clue that you are dealing with a rent-seeking expert is that they literally ask for something like rent. Religious experts tell you to attend church week after week. Psychotherapists want you to attend therapy week after week. Psychiatrists tell you to take an anti-depressant daily for the rest of your life. My dermatologist told me to take an antibiotic daily (and to renew the prescription I needed to see him). And so on. As these examples suggest, rent-seeking experts thrive in areas of knowledge where our understanding is poor.  Which includes economics.

“Rent-seeking experts” in education.

More What I call “standard libertarianism” Tyler Cowen calls “crude libertarianism”. Maybe I should have called it “off-the-shelf libertarianism”. In addition to what Tyler says, which I agree with, I would say that governments and their “central planners” have sponsored innovation (e.g., the Internet, the greenback, basic scientific discoveries) much better than Ridley seems to give them credit for. Innovation is a huge part of economic development.

19 Responses to “Rent-Seeking Experts”

  1. Mark Cancellieri Says:

    I actually agree with Matt Ridley. There is a distinct correlation between economic freedom and prosperity. Here is just one index of economic freedom.

    http://www.heritage.org/index/

    With all due respect, it is laughable to associate Alan Greenspan with libertarianism. He headed the Federal Reserve and was incredibly interventionist in the economy. The job of the Fed is to centrally plan the money supply (although that was supposedly not the original intent), and we can the disastrous consequences of this central planning.

    There was no “economic liberation.” There was instead massive government intervention: artificially low interest rates, political “affordable housing” goals by Fannie Mae and Freddie Mac, the FHA, Sarbanes-Oxley, BASEL capital standards, and on and on.

    Seth: You don’t remember that Greenspan admitted he was wrong? My point is that when an expert has little understanding and requires a lot of rent, any intervention is likely to do more harm than good. The ideology of that expert is irrelevant. The empirical generalization Ridley noticed — which I agree with — he explained by saying economic control is bad. I am saying the same set of observations can be explained by an idea that applies more widely. My explanation implies that the real reason that economic control is bad is that the economists involved are too ignorant and seek too much rent. With more knowledgeable economists seeking less rent, economic control would turn out much better.

  2. Txomin Says:

    Greenspan describes himself as libertarian something or other… which could mean Austrian liberalism or anything whatsoever. I too agree Greenspan is decidedly in whatsoever territory. And I too agree with Ridley. Ideally, political regulation of economic affairs works. In practice, it amounts to no more than a leech.

  3. rezzrovv Says:

    When you have so many variables involved in a system as diverse as a semi-free economy, you can’t “rent” expertise knowledgeable enough to fulfill the role necessary for central management to work. Wasn’t that Hayek’s main premise? The more free an economy, the greater likelihood individuals seek their own self-interest filling the vacuums necessary for a viable economy. A central planner can decide how many steak knives need to be manufactured for New York City or entrepreneurs can see the potential profit and provide them doing so with far greater efficiency. I don’t disagree with the rent-seeking paradigm you describe but think the economy might not be the best example.

    Also, I like the concepts of cognitive-behavior therapy. I don’t claim anything other than intuition but it would seem to me the idea of changing the structure of thoughts to effect change in behavior does have a finite end of therapy with much greater potential result than talking therapies.

    Seth: Hmm. One “concept” of cognitive-behavior therapy is to ignore the environmental causes of things. For example, the environmental causes of depression. I wonder if you like that.

  4. Three Pipe Problem Says:

    1) Greenspan admitted he was wrong long after he abandoned most of his libertarian principles. Compare his recent writing to his chapters in Ayn Rand’s Capitalism: The Unknown Ideal and you will see two different philosophies. Of course, Rand claimed she was not a libertarian, and disliked libertarians. I think you are using the term in a very general way that does not correspond very closely with how many libertarians view libertarianism.

    2) That being said, most of what libertarians like or dislike about government can be equated to rent-seeking on one level or another. For example, look at the libertarian position on professional licensing. They don’t dislike it because it is bad in some vague, unspecified way. They dislike it because it’s a power grab by insiders, allowing them to charge higher rates than they would in a free market.

  5. Daniel Lemire Says:

    I agree with other commenters… Greenspan does not favor economic freedom. Rather he works for the financial system and as an “expert” in the financial system, he made sure that this system and its experts played an increasingly important role in the economy. Not long ago, the financial industry was a relatively minor industry. Under Greenspan, it grew and grew in importance, along with the compensation for financial experts.

    The USA is not getting freer, it is getting more bogged down in crony capitalism.

    In effect, I agree with Ridley.

  6. Leslie Says:

    Psychoanalysis is something I wouldn’t bother with, for the same reasons you gave; you don’t necessarily get better, therapy can last forever, it’s expensive.

    I did have a very successful experience with cognitive behavioral therapy though. For may years I used to have a real problem with panic attacks, so I found an MD with an interest in non pharmaceutical treatment of mental health problems. I did three half hour sessions of cbt, which virtually eliminated the panic attacks. On the now rare occasion when I get one, it feels much more mild than in the past.

    You can also find computerized cognitive behavior therapy programs online, which are free. I haven’t tried them, so can’t comment on effectiveness.

    Seth: Interesting. I think it would be better to figure out the environmental cause of panic attacks and eliminate that cause, as we eliminate scurvy by giving people adequate Vitamin C. A subject in a morning-faces experiment of mine found that at the same time that the faces raised her mood, they also eliminated the minor panic attacks she frequently had.

  7. Darrin Thompson Says:

    Like all the other commenters I thought: Greenspan? GREENSPAN????

    If you want to find an example of a libertarian rent seeker maybe go for the jugular and accuse Ron Paul of rent seeking. He is, after all, a doctor.

  8. Tuck Says:

    Great post.

    Greenspan was a libertarian who took the job of a central planner. I think you can attribute his failure to the latter fact, rather than the former.

    The central libertarian argument against central planning was that the planner can never know what the sum of all the people, with all their experiments and individual knowledge, know.

    I think Ridley at you are in perfect agreement, Seth, although approaching it from too different perspectives. You starting at the micro, and he’s starting at the macro. You’re at different ends of the elephant, in otherwords. ;)

    The expert can never know as much as all the individuals he interacts with know.

    Seth: I don’t think I am in agreement with Ridley’s explanation. I am in agreement with his empirical generalization, namely that central economic planning has a terrible record.

  9. CC Says:

    Seth, interesting post, but you should be aware that (as far as I can tell) you’re using the term “rent seeking” in a way totally different from the way economists use it. It could be confusing to readers. Someone correct me if I’m wrong.

    It’s a very cool concept you’ve introduced though, so it’d be good to find a catchy name for it.

    Seth: “Totally different”? What is the difference?

  10. CC Says:

    Quoting wikipedia:
    “In economics, rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. One example is spending money on political lobbying in order to be given a share of wealth that has already been created. A famous example of rent-seeking is the limiting of access to lucrative occupations, as by medieval guilds or modern state certifications and licensures.”

    and

    “Rent … is obtained when a third party deprives one party of access to otherwise accessible transaction opportunities, making nominally “consensual” transactions a rent-collection opportunity for the third party.”

    An example would be convincing the government that everyone should have to buy product X only from me and not anybody else, because I’m the only one who provides it safely.

    What you’re describing is a system where experts convince people that the only acceptable treatment for some problem is to make recurring payments to those experts to provide dubious services. There’s not necessarily government restriction of options, but rather there’s just a commanding respect for those experts that allows them to dupe us.

    Like I said, it’s a very cool concept you’ve introduced.

    Anyway, I really like your blog and I hope you’ll keep posting as often as you have been. Btw, I’m a fan of both ELOO for AS, and zinc picolinate for acne. The zinc wasn’t a miracle cure for me, but it did help quite a bit with no real effort required on my part. So go pat yourself on the back for improving some random internet stranger’s life. :)

    Seth: Thanks. I didn’t know about using zinc picolinate for acne, but it’s got to be better than taking an antibiotic. Did Freud manipulate the “social environment” of his day? Hard to say, the term is vague. People chatted enthusiastically about his work — is that the social environment? He certainly manipulated the intellectual environment. So I am talking about rent-seeking in a broader sense, yeah. Maybe the definition of rent-seeking should be expanded to say “social or political or intellectual environment”.

  11. CC Says:

    Interesting, Seth.

    Yeah, rent seeking typically refers to using the law to restrict people choices so that they have to enrich you somehow.

    You’re saying that there’s some notion of “generalized rent seeking” where you manipulate social conventions so that people enrich you. Cool.

    I should point out, though, that economists are using the word “rent” in a weird technical sense. Requiring licensing to become an interior decorator is an example of rent-seeking, but no one’s renting anything (in the everyday sense of the word).

    You’re using the word “rent” in a figurative sense. Doctors convince you to rent them in the sense that you have to drop by once a month so that they can say “yup, keep taking those drugs I prescribed.”

    Maybe this is why you never hear the medical establishment pushing the SLD! You don’t need to rent a doctor to execute the diet.

    Seth: I agree. Many good solutions to everyday health problems are ignored by doctors, quite possibly because you don’t need to rent a doctor for them. I wonder if that is part of the reason for the strictures of evidence-based medicine: To make more sure you choose a treatment that requires a doctor (e.g., prescription drug). As you say, economists expanded the notion of “rent” in their use of “rent-seeking”, I am expanding it again.

  12. Adam Says:

    Seth said, “With more knowledgeable economists seeking less rent, economic control would turn out much better.”

    How about no economic control and no rent-seeking?

    What sorts of economic control do you advocate?

    Seth: The underlying problems are poverty (poor people seek more rent than rich people) and ignorance (the less experts know, the worse advice they give; the less their audience knows, the more gullible they are). In the case of economics, the ignorance perpetuates the poverty. I don’t advocate any particular economic control. I advocate better economics research. For example, as I have blogged, economists pay far too little attention to the causes of innovation. Judging from economics textbooks, they don’t even understand or recognize simple things about innovation, such as war is a cause of innovation.

  13. dearieme Says:

    “they don’t even understand or recognize simple things about innovation, such as war is a cause of innovation.” That’s a special case of the general problem that economists don’t study enough Economic History.

  14. MikeB Says:

    Joseph Schumpeter, prophet of innovation

    I think Schumpeter is the most penetrating analyst of capitalism who ever lived. He saw things other people didn’t see, partly because he lived in 7 different countries. He also served briefly as Austria’s finance minister and worked for 3 years as an investment banker, where he made a fortune that he promptly lost in a stock market crash. So he wasn’t a typical academic, even though he spent most of his career as a professor, including almost 20 years at Harvard.

    As for my title, here’s the quotation that inspired it: “Without innovations, no entrepreneurs; without entrepreneurial achievement, no capitalist returns and no capitalist propulsion.” Schumpeter wrote this sentence during the Great Depression of the 1930s. Many, many smart people of that time believed that technology had reached its limits and capitalism had passed its peak. Schumpeter believed the exact opposite, and of course he was right.”

    http://innovationzen.com/blog/2007/05/10/schumpeter-prophet-of-innovation/

    Seth: Faint praise. I’m sure many people believed “the exact opposite”. What did Schumpeter figure out about what makes innovation more or less likely? Something less obvious than war increases innovation, I hope.

  15. Peter Says:

    Libertarianism as I understand it is a political philosophy marked by a preference for less, or even no, control of society by the State.

    Rent-seeking is vastly strengthened by state control. For example, as educated and affluent as I am, I still must do business with the medical rent-seekers if I want medicine or medical tests since the state has a gun pointed at those who might help me outside of the medical profession.

    The matter of experts and their rent seems somewhat unrelated to the idea of libertarianism. Suppose the experts employed by the Soviet commissars extracted little or no rent, would theirs be a libertarian society?

    I’d also point out that some economists study innovation. For example, see the blog “Organizations and Markets”.

    I’m not clear on what is meant by “war increases innovation”. Wars also increase death and destruction of property. Surely this is a bad thing. Also, suppose that among the many killed in the Iraq and Afghanistan wars is a young and undiscovered innovative genius or that society is impoverished by the wartime destruction of capital and resources to the point that a crucial laboratory is not built. I think a better question is whether the innovation in weapons and war tactics outweigh the unrealized civil society innovation that is lost.

    Seth: “War increases innovation”: see http://www.ingenious.org.uk/Read/Conflict/Waristhemotherofinvention/

    for examples of specific inventions. More broadly, war upsets the power structure among the losers. All sorts of things previously blocked by the top-ranked people are able to move forward. Likewise, when property is destroyed, it creates a demand for replacements, which will be more modern. I’m not saying that the benefits of war outweigh the costs, I am just saying that one effect of war is an increase in innovation. A simple analogy is forest fires, which have beneficial effects.

  16. Rent-Seeking Expert, I Abjure Ye! | Brown Pundits Says:

    [...] Seth Roberts, a twist on Matt Ridley’s post on the European [...]

  17. Phil Goetz Says:

    Re. cognitive behavioral therapy: Why do you believe it doesn’t work?

    Seth: I don’t believe that. Many therapies, including cognitive behavioral therapy, produce modest improvement. The fact that therapies based on much different theories produce the same improvement is one support for my view that CBT is little better than earlier therapies. My problem with CBT is that there is no serious interest in environmental causes. For example, the environmental cause of scurvy is lack of Vitamin C. Once you know that, you can easily and safely cure scurvy. What are the environmental causes of depression? Lack of CBT in everyday life? Surely not. Many facts about depression don’t fit that theory, such as the strong correlation between depression and insomnia. The fact that CBT produces modest improvement means little. It is perfectly possible to modestly improve Disease X without having any idea what caused it. Think of duct tape.

  18. Lemmy Caution Says:

    cognitive behavior therapy is particularly effective for panic attacks:

    http://www.paniccure.com/Approaches/CBT/overcome/overcome_panic_attacks.htm

    A panic attack is really nothing more than bodily sensations of anxiety and a catastrophic misinterpretation of those sensations as dangerous. Your belief that you are in danger results in increased anxiety, which then leads to more sensations and more catastrophic thoughts, creating a vicious cycle between bodily sensations, distorted thoughts, and anxiety, which can rather quickly result in a panic attack. The real problem is actually your mistaken belief that you are in danger – not the panic itself – since panic is in fact an appropriate emotional reaction when you are convinced that you may be in danger. However, your belief is untrue, and when you understand this on a deeper level, you will master your panic.


    My bet is that depression is harder to deal with because much of the time there is no real false belief. Depressives tend to be more realistic that non-depressives.

    you could probably cure yourself of panic attacks.

    Seth: What are the environmental causes of panic attacks? I don’t know, do you? Perhaps eliminating the environmental causes would be more effective than CBT.

  19. Lemmy Caution Says:

    If cognitive behavior theory really does “result in 80% to 85% of people becoming panic free, usually within eight treatment sessions ” why worry about environmental causes that no one can figure out.

    Plus, panic disorders seem like they would be very likely to helped by the placebo effect. Anything can break the cycle of catastrophic thoughts if you think it will.

    My bet is a google search “panic attack and x” where x is almost anything will find someone who believes it will help with the panic attacks. I randomly searched for x = milk and aspirin.

    http://www.livestrong.com/article/353540-foods-that-help-panic-attacks/

    http://www.doctorslounge.com/psychiatry/forums/backup/topic-1848.html

    This study found the environmental factors to be general ill health, separation from a parent by death or divorce, high interpersonal sensitivity, low social class, and unmarried marital status:

    http://www.ncbi.nlm.nih.gov/pubmed/8245920

    Seth: Why worry about environmental causes? Because, once found, they are likely to lead to a better solution (cheaper, more powerful, longer lasting). The environmental factors you list (ill health, etc.) are correlated with a large number of problems, there are probably factors more specific to panic attacks.