Ed Driscoll

Of Rent-Seeking, Creative Destruction and Societal Reboot

In “Future tense, X: The fourth revolution,” James Piereson’s magnum opus in the New Criterion, Piereson defines the term “rent-seeking coalitions” thusly:

The regime of public spending has at last drawn so many groups into the public arena in search of public dollars that it has paralyzed the political process and driven governments to the edge of bankruptcy. These groups are widely varied: trade associations, educational lobbies, public employee unions, government contractors, ideological and advocacy organizations, health-care providers, hospital associations that earn revenues from Medicare and Medicaid programs, and the like. These are what economists call rent-seeking groups because they are concerned with the distribution of resources rather than with the creation of wealth. They consume rather than create wealth. These groups are highly influential in the political process because they are willing to invest large sums in lobbying and election campaigns in order to protect their sources of income. While rent-seeking groups can be found in both political parties, the largest and most influential of them (at least on the spending side) have congregated within the Democratic Party. To expand on what was said earlier, one might describe the Democratic Party as a coalition of rent-seekers.

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Rent-seeking coalitions have little interest in moderating their demands in the interests of the broader economy because, as their leaders reason, the economy will be little affected by the small share of it to which they are laying claim. In addition, they calculate that if they do not take the money, then someone else will—and so they are not inclined to be “fools” for the public interest. But since the leaders of all rent-seeking groups think this way, the interest group system as a whole operates with little concern for the requirements of economic growth and wealth generation. This is one reason why, in times of crisis, rent-seeking coalitions demand tax increases to pay for their programs instead of recommending policies to accelerate growth.

The late economist Mancur Olson has argued that economies tend to grow more slowly as rent-seeking coalitions become pervasive and ubiquitous, since they divert resources from wealth-creating to wealth-consuming uses. This is one reason, he argues, why the United States grew so rapidly in the nineteenth century, and why West Germany and Japan grew so rapidly in the two or three decades after World War II. At such times, these economies were open to investment and entrepreneurship, and, as a consequence, they enjoyed historically high rates of growth. With the passage of time, all of these systems were gradually encumbered by coalitions seeking benefits through the state. Political paralysis and slow growth, Olson argues, are by-products of political systems captured by rent-seeking coalitions. These groups, operating collectively, can block any overall effort to cut spending or to address the problems of deficits and debt.

Which dovetails remarkably well with this passage from the latest issue of National Review On Dead Tree — and on iPad, Android, etc., but sadly behind the subscriber firewall, in which Jonah Goldberg explores Wisconsin, “creative destruction” and economist Joseph Schumpeter:

Schumpeter is most famous for updating and popularizing the concept of “creative destruction” found in Marx’s writing. The basic idea of this version of creative destruction, also known as Schumpeter’s Gale, is that capitalism is constantly breaking down inefficient means of production and creating new and better ones. Creative destruction describes how candlemakers got replaced by light-bulb manufacturers. Creative destruction is why there’s so much churn in the list of the top 50 companies. Firms grow big, are challenged by more innovative and nimble firms, and eventually die (or adapt). Schumpeter (and Marx) recognized that creative destruction generated enormous amounts of productivity and wealth.

So far, so good. But Schumpeter also had a gloomy side. He predicted that capitalism was doomed in the long run because the very wealth it created would produce a new class of workers who would undermine it from within. This new class of managers, lawyers, social workers, and intellectuals, despite benefiting enormously from the prosperity capitalism makes possible, would personify values hostile to capitalism. It would advocate policies of social democracy and technocracy, policies that would further empower the new class and enfeeble capitalism. Like a parasitic infection that wears down the host over time, the new class would ensure the demise of capitalism and the birth of corporatism (not socialism, as Marx had predicted).

Anyone looking at what has happened to Europe and the United States over the last few decades can acknowledge that Schumpeter was at least on to something. Just look at the role public-sector unions are playing in California. A diverse coalition of new-class activists has driven that state to the brink of oblivion. Or look at the relationship between Obama and Wall Street, GE, the insurance companies, and the auto industry.

What Schumpeter didn’t fully appreciate was the capacity for democratic societies to self-correct. In Wisconsin, the first state to legalize public-sector unions and the intellectual birthplace of the corporatist-progressive project, the election results dealt the new class a terrible blow.

Which the Ruling Class is responding to by burrowing their heads in the sand, and promising to raise even more taxes and ban even more consumer choices, including Big Gulps, Styrofoam cups, plastic bags, and in California, foie gras. That last gesture in particular seems oddly appropriate — why would government allow you to cook your own goose, when they can use your money to flambé an entire state?

Related: Speaking of Wisconsin and an out of touch Ruling Class, “Scott Walker: Obama’s Comments Reflect a Fundamental Misunderstanding of the Economy.” Perhaps best illustrated by this Michael Ramirez cartoon from 2009: