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Work and prosperity
12 December 2012

Feeding parasites is no way to grow an economy

We sometimes assume that the big state is a modern phenomenon. But according to John Kay this is not the case: 

  • "Like most visitors to northern India, I visited the Taj Mahal. Unlike most visitors, I asked economic questions. Reports of his tax policies suggest that Shah Jahan may have appropriated as much as 40 per cent of what we now call gross domestic product to support a lifestyle of exceptional ostentation and self-indulgence. He was overthrown by his son, who was exasperated by his father’s penchant for monumental building, anxious to maximise his own share of the loot and concerned by the scale of the levies on the population. But it was all too late. The Mogul empire was in irretrievable decline." 

Though the modern British state manages to outdo Shah Jahan when it comes to the share it takes of GDP, it does provide rather more in return: 

  • "The activities of Shah Jahan epitomise rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people." 

Rent-seeking in modern, democratic nations is more complicated: 

  • "In modern India, rent-seeking takes the form of endemic corruption and the crony capitalism that describes too-close relationships between big business and the state. Western economies are afflicted with their own versions of crony capitalism. Instinctive corporatism is characteristic of many European states. The US demonstrates an unhealthy affinity between politicians and leaders of finance and business, facilitated by lobbyists and lubricated with campaign finance." 

So what would be an example of a rent-seeking business? Kay doesn’t name individual companies, but rather entire industries: 

  • "If information technology is the big driver of current economic progress, it is also the sector least affected by this growth of corporatism. Successive waves of innovative entry have marginalised established products and corporations and destroyed established market positions. 
  • "But in other industries, such as media, pharmaceuticals and defence, mutually enhancing political influence and economic clout allow incumbent companies to maintain their business models and resist disruptive change." 

Kay names the financial sector as the biggest rent-seeker of them all. Is he right to do so? The money men certainly played a clever regulatory game, effectively privatising the gains and nationalising the losses of their reckless investments. But, even so, can the scale of such rent-seeking behaviour really compare to that of the state itself? Though modern Government provides us with useful public services instead of marble mausoleums, for half our GDP we should be getting a lot more in return – or, failing that, some of our money back.


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