Friday, June 21, 2013

Krugman on Rents

There's a tantalizing possibility--okay, I wouldn't bet on it, but still a possibility--that Paul Krugman may just have kicked off a useful public debate over the meaning of a central but, I think, ill-articulated fundamental concept in economics.

The takeoff point is this morning's NYT column which (news in itself) is not about the evils of austerity and the need for more stimulus spending.   Rather it's a more general inquiry into burgeoning inequality, declining investment and the fizzling middle class.  None of this is entirely new but you've still got to salute Krugman for putting the points so crisply and so well, and from his bully pulpit.  But look at  Krugman's culprit, right there in paragraph three: "rents," more particularly "profits that don’t represent returns on investment."

Rents?  Really?  Now, perhaps uncharacteristically I was awake that morning in Econ 1A so I have at least a 1A notion of what rents are to an economist: as set forth in the world's most popular economics textbook, "an analytic term for the portion of income paid to a factor of production in excess of that which is needed to keep it employed in its current use."  Contrast "perfect competition," where nobody makes a penny beyond what is necessary to keep him in the market.   Cf. (I repeat myself, I am sure) the last thing you want in the world is a job where you get paid what you're worth.  Think Warren Buffet's legendary "castle with a moat around it," or more exactly "enduring competitive advantage."

That much I understood even through my sleep-deprived undergraduate haze.  A little more time and a little more patience made me realize that the concept of "rent" may be far more protean than they taught in 1A--or, indeed, than its expositors ever suspected.   Two-head Gruskin, the pitcher who can watch first and third at the same time, draws down a gazillion a year from the Pawtucket Piranhas, although truth be told, he'd probably pitch for free.  Is he enjoying an economic rent?  Or just born lucky?  

The notion gets even trickier as it gets more "social."  Consider my lakeside cottage with its mountain view.  Grandpa got the land for a dollar because nobody wanted to live out in the woods in those days.   I know what you are thinking but no, I wouldn't take a million dollars for it today.  And don't even think of driving your pickup in through the strawberry patch so you can picnic on the beach.  If need be I'll enlist the power of the sovereign to protect my (thanks, Warren) "enduring competitive advantage."   We think competition is great.  We think property rights are inviolable.  Three into two don't go.

I can now admit that I cheated in quoting Krugman's definition of rents (above).  Here's the fuller version:
[M]onopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance.
Ahah.  So, Krugman, the master dialectician, has anticipated my paltry cavil and has tried to squash me coming out of the gate.  He's concerned about "the value of market dominance."  So what can we make of this limitation?   I'd put it this way: sure, Apple (say) enjoys "market dominance"--but it is far from clear that "market dominance" per se is an actionable evil.   Skip out of 1A and on to law school.  One of the first things you learn in the anti-trust course is that bigness alone is not an offense.  You conspire to restrain trade, you may wide up in the clink, you merely grow big, you may get a Presidential Medal of Freedom.

And this may be more than a mere tic in the law: not everybody thinks bigness is per se  bad; by corollary, not everybody thinks that competition is per se a social good.  Just coming of Jean Strouse's fine biography of J.P. Morgan, I'm recalling how the great buccaneer felt pretty near to exactly the opposite: he thought excessive competition an appalling waste: too many railroads and nobody can run an effective railroad.  Some people would make the same kind of argument about, e.g., airlines today.

[Krugman himself seems to wobble on the point.  He says that "You can argue that Apple earned its special position — although I’m not sure how many would make a similar claim for Microsoft..."  Exactly.  I suspect quite a few people would regard Steve Jobs as an unusual human being with a knack for thinking up things to sell us that we didn't know were possible until he thought them up.  Bill Gates, by contrast, may well count as just a guy who figured out how to put up toll bridges and charge for stuff that was going to happen anyway,.]

I suspect that Krugman may get closer to his target when he says that "Apple ... seems barely tethered to the material world."  Unh hnh,.  I think his point here may have something to do with intellectual property laws, the modern enclosure system, a once-good idea that has metastasized into a monster whose virtues are pretty much invisible to everyone other than the folks who get to sluice up all the money.  It may well  be these that provoke the disconnect between activity and reward--the disconnect that seems to trouble Krugman and might justly trouble us all.

I don't particularly want to pick a fight with Krugman here (it is my great good fortune that he'll never notice). My point is that this column looks uncharacteristically like a promising first draft--a beginning effort to grasp hold of a problem which deserves--nay, desperately needs--the kind of attention that he is empowered to offer.


Anonymous said...

Krugman sketches out a model backing the column in his blog:

mere mortal said...

It was Econ 51 in my neck of the woods, but we spent a bit of time on monopoly. The rent reflects the ability to collect profit for the monopolist which is greater than would happen in a functioning market. That is interesting to economics because it is less than what society could simply gift the monopolist with all parties still being better off. That area of difference was called the "deadweight loss".

If I recall, Krugman's point was noting that much of modern business (or more precisely the largest businesses) is less about employing people to make useful things out of raw materials than it once was, and the discussion ran to the implications of that on the traditional idea of an economy with workers who built, extractors who sold inputs, and businesses who guided both into making things that all three groups wanted and could afford by their efforts.

The point he's trying to get at is, well that's not quite right, he's just trying to understand the implications for an economy where one of those groups is massively advantaged, and others diminished or even eliminated from the old equation. Steve Jobs was not Henry Ford, with massive numbers of workers using raw materials that supported another powerful industry, all of which could afford, through their labor, the product of their effort. It's an important discussion if the implications are such that the mechanism by which consumers can afford products is changed or destabilized.

"I don't particularly want to pick a fight with Krugman here (it is my great good fortune that he'll never notice)."

Thoma noted your piece, which changes the calculus.

"Three into two don't go."

You clearly have not seen very much porn.

Anonymous said...

hahaha. be very careful. the professor is reading oyur article right now... well. if you're lucky.