In Glenn’s recent post on the political fight against Tesla, he references an informative article by Steve Blank on “rent seeking” in the digital economy. It describes a phenomenon oft-documented here on DisCo.
Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.
Academically, rent seeking is defined as an attempt to obtain (or maintain) economic rents by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth (aka “adding value”).
To understand rent seeking, one must understand the concept of “economic rents,” which are different from the rent you pay to your landlord (although not entirely unrelated because Adam Smith originally derived “rent” from money generated by stodgy landlords who risked neither their own capital or labor in the production process). The academic definition of “economic rent” is the portion of income paid to a factor of production in excess of what is needed to keep it in production. In English, that translates to more money being paid to someone (or some company) than is necessary for them to perform a task or supply a product (aka supracompetitive profits). Or, in plain English, the inefficient use of resources.
Why Rent-Seekers Target Internet Services
So, with those definitions in hand, I’ll move on to the question at the heart of this blog post: why is the Internet, in general, on the receiving end of so much rent-seeking behavior?
The short answer is that the Internet is challenging old business models and introducing furious competition into many sectors that are not accustomed to it. Furthermore, the scope, scale and ease of use of the Internet is making whole job categories obsolete. Many of these can be classified as “middlemen” — whether those middlemen be record labels, independent auto dealers, or local banks. Facing economic and technological advancements that would make their whole industry obsolete (or squeeze their economic rents at the very least), these vested interests often respond by lobbying aggressively to protect their privileged economic positions. In the process, they hamper economic efficiency and harm consumers (which is ironic, as many of the protectionist legislative and regulatory policies they push for are in the guise of “consumer protection”).
For a more thorough answer to the question, a stroll through Economics 101 and the dynamics of the Internet are necessary.