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Explanation of Rent Seeking with example: public lending rights in South Africa

Wednesday, July 22nd, 2009

What is rent seeking? Using the non market processes such as the political process to obtain a monopoly. Rent seeking is a term of art in economics. The Economist explains the term

“Rent-seeking

Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers. Classic examples of rent-seeking, a phrase coined by an economist, Gordon Tullock, include:

• a protection racket, in which the gang takes a cut from the shopkeeper’s PROFIT;

• a CARTEL of FIRMS agreeing to raise PRICES;

• a UNION demanding higher WAGES without offering any increase in PRODUCTIVITY;

• lobbying the GOVERNMENT for tax, spending or regulatory policies that benefit the lobbyists at the expense of taxpayers or consumers or some other rivals.

Whether legal or illegal, as they do not create any value, rent-seeking activities can impose large costs on an economy.

The term has been more formally defined by Gordon Tullock as “the use of resources for the purpose of obtaining rents for people where the rents themselves come from some activity that has some negative social value.”(1)

What concerns economists about rent seeking behaviour is that resources are not used to produce more or better goods or services but instead to alter the structure of the economy so that the rent seeker is able to charge higher prices, in other words to reduce competition.

All of this may seem somewhat theoretical, so I will illustrate it with an example. The Academic and Non-Fiction Authors’ Association of South Africa (ANFASA) is lobbying the Department of Arts and Culture to spend its slender budget which has already been depleted to pay publishers for the books in public libraries to pay again for every time that public libraries lends the books out. In other words ANFASA want Arts and Culture to pay multiple times, to mulitple intermediaries (publishers and collecting agencies) for public library books, once when they buy them, and then annually for as long as they own them.

This is contrary to the idea that once one has purchased something, like a book, that one owns the book, and as a result one can do what one likes with it. According to the economic literature it is a characteristic trait of rent seeking that it often interferes with property rights. This is an issue long ago resolved in the utilitarian tradition of copyright law, a tradition which includes South Africa, by the doctrine of first sale. The doctrine of first sale, first articulated by the United States Supreme Court in 1908 states that once a publisher has sold a book the publisher cannot make claims about what happens to that book. This probably seems like common sense to most readers of this blog, if Ford sold you a ‘bakkie’ (3) you would be astonished if Ford subsequently claimed that it is entitled to charge you each time you drive it, or even (if you ran a rental car business) every time you lent it.
However one of the pernicious effects of rent seeking according to economists is that it undermines the ‘common’ sense of a society that profit is the appropriate return for socially productive activity, and not due to manipulation of regulatory processes.

Its important at this point not to become confused by the term ‘intellectual property’. You couldn’t use your ownership of your Ford bakkie to justify making many replica Ford bakkies. Ford holds copyright, design and patents in the design of the bakkie. However that Ford holds those statutory rights doesn’t permit it to claim a rent every time you use the bakkie or even every time you use your bakkie for a particular purpose.

In this example the resources devoted to seeking monopoly rents are not only those devoted by ANFASA to lobbying but also those devoted to responses to ANFASA’s lobbying, primarily by libraries and associations of librarians, and also the resources which the state, specifically the Department of Arts and Culture will devote responding to the lobbying. The resources of ANFASA, libraries and DAC would better used to challenge the far more urgent issue of the oligopolistic conditions prevailing in South Africa’s publishing industry, and the remittance of a majority of copyright royalties to the global North.

The resources used for rent seeking are referred to as input costs. Economists are concerned the resources are used inefficiently as well as with consequent effects of the monopoly on the efficiency of the economy as a whole.

Why focus on the input costs? Because it seems unlikely that a government committed to development will agree to a scheme in which it pays more money for the same number of books. According to reports on libraries commissioned for the Department of Arts and Culture the libraries are severely under-resourced, and most libraries do not have the funds to buy new books, the Status Quo Report states:

Municipal expenditure on public libraries is mainly for staff and general operating costs. Staffing accounts for about 60% of the municipal funding of public libraries. The bulk of the spending burden on libraries has been carried by the six metros, and capital expenditure has been almost non-existent outside the six metro’s” (4)

A permanent statutory monopoly rent from publicly libraries would run contrary to the recommendation of the Funding Model Report for public libraries in South Africa:

It is important for long-term sustainability that no model, or even allocation of functions, be regarded as cast in stone. Development with regard to a sustainable public library model for South Africa is a relatively new concept, and changes such as technological renewal occur with increasing frequency. Conditions and requirements change from time to time and therefore there should always be flexibility and a willingness to improve or adjust.“(5)

In other words a sustainability model for public libraries is still being developed in South Africa. Increasing the overhead costs of libraries forever without increasing the holdings or offerings of libraries is likely to prevent the development of a sustainability model, thus rendering public libraries unsustainable outside of the six metro’s referred to in the report. Economists refer to such outcomes as Net Negative Effects. Net Negative Effects occur when the Net Effect from the Rent Outcome is negative, either because the Costs of Rent seeking outweigh the net social benefits, or when the net social benefits are themselves negative. In the example the net social benefits claimed for the rent seeking, increased income for authors, is not just outweighed by failure of ANFASA to address the monopolistic competition prevalent in the industry but the social outcome is negative.

A rational government in a developing country would resist rent seeking. A few authors possibly receiving more money (after intermediaries such as collecting agencies have been paid) is outweighed by the failure to challenge the failure of the publishing industry in South Africa to massify, but is far more outweighed by depriving millions of children of access to books.

What is at stake is set out in the Funding Model Report to Arts and Culture:
“Goal 2 of the millennium development goals says that by 2015 all boys and girls should complete their primary education. In South Africa public libraries can be seen to be making a contribution to this ideal by providing the relevant information in an appropriate environment to help boys and girls complete their primary education.”(6)

1. (Gordon Tullock, Gordon Brady, and Arthur Seldon, Government Failure (Washington, D.C.: Cato Institute, 2002), p. 43.).
2. The First Sale doctrine was first enunciated in Harrison v. Maynard, Merrill & Co., 61 F. 689, 691 (2 Cir. 1894), and confirmed by the United States Supreme Court in Bobbs-Merril Co v Straus 210 U. S. 339 (1908) and subsequently codified in § 109(a) of the Unites States Copyright Act of 1976.
3. For readers from outside South Africa, the vernacular term ‘bakkie’ refers to a light pick up truck (LUV/LDV), it stems from the Afrikaans “bak” a box, pronounced “buck-ee”.
4. p2, Status Quo Report.
It is worth pointing out that the Reports, produced with taxpayer funds, bears the following notice on front page:
“This report has been compiled by KPMG for the sole and exclusive use of the Department and should not be quoted in whole or in part without our prior written consent.”
This raises the interesting question of what legal basis there could be for such a claim by KPMG. I confess that I can find none. Section 12 (8) of the Copyright Act states that there is no copyright in official texts of a legislative, administrative or legal nature. Since the reports in question were commissioned by the Department of Arts and Culture, and subsequently published on its website it seems that if the texts are not official texts then at least the copyright of the texts subsist in the Department of Arts and Culture. In any event if copyright does subsist in the reports how could a mere notice do away with the provisions of section 12 (1) of the Copyright Act which permits reproduction for the purposes of fair dealing for criticism, review, reporting, as well section 12 (3) of the Copyright Act which permits quotation.
5. p49 of the Funding Model Report
6. p3 of the Funding Model Report