Most firms and business people are in my view rent seekers rather than entrepreneurs. This statement ofcourse immediately begs the question: what is the difference? According to Investopedia, rent seekers are organizations or people which use "their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation." Entrepreneurs by contrast are risk takers who obtain an economic gain from other but in return they give something of value back. The free market economic system depends on entities being entrepreneurial. This way new products, service and ideas percolate through the economy enriching all of us in the process.
However, what happens when entities within an economy start engaging in rent seeking behavior instead of entrepreneurial behavior? Instead of developing new products or new kinds of services, such entities increasingly seek to lock in the advantages that originally gave them the edge over their competitors. The net result is that consumers are saddled with increasingly higher prices and less advanced products and services. Often these effects take hold gradually. Consumers are then like the proverbial frog in a pot which is gradually brought to a boil. As the change in temperature is slow, the frog does not realize about the increasing danger and is thus cooked alive. Similarly, when entities start engaging in rent seeking behavior, the products and services that their consumers buy gradually deteriorate in quality. Without realizing it, the expectations of their consumers gradually diminish. What would have once been considered low quality becomes routine and what used to be routine now becomes a mark of quality. Why don't consumers realize what is going on? There are various types of rent seeking activities many of which are often difficult to distinguish from entrepreneurial ones. In any case, the change in behavior is seldom sudden but instead takes place over a period (sometimes a very long period) of time.
There are many examples of rent seeking behavior in the corporate world. Virtually the entire car industry has engaged in such behavior for much of its existence. In the 1950s and 60s, the emphasis was on producing flashy cars with tail fins and spikes and other such accoutrements. Technological development such as developing new kinds of engine technology or even improving the existing technology was a very low priority. Many manufacturers did not even seek the kind of production efficiencies that would result in increasing quality and lowering costs. Most of such companies were the industry's market leaders. Those companies that were more entrepreneurial and sought out the production efficiencies eventually usurped the pole position occupied the market leaders.
In another example, General Motors was one of the first companies to develop an all electric car back in the 1990s. What happened next is a beautiful example of rent seeking. The company not only abandoned the technology it had developed, it also recalled all the cars it had made and physically destroyed them. This despite the consumers pleading to be allowed to keep these cars.
Oil companies are another case of firms engaged in rent seeking behavior. All of them are aware that there is a finite supply of the commodity. At some point, viable alternatives will need to be developed. All of them devote far more resources to marketing and public relations than to developing alternatives to oil - a step that is going to be necessary for them to remain relevant in a post oil world.
Even technology companies which are supposed to be highly entrepreneurial and operating in a fast changing environment behave in rent seeking ways. The rush to patent and copyright software tools, algorithms and protocols is an example of this.
Economic theory insists that such behavior is unsustainable in the long run. Most business people also subscribe to a similar view. Why then would any organization, much less a profit seeking one, engage in activities that are essentially rent seeking in nature? One answer is that successful rent seeking activities act as toll gates. They will generate steady and usually large sums of money for very little effort. Another effect of successful rent seeking is that competition is stymied or at least dampened for a period of time. This allows for extra-ordinary profits which can sometimes border (or even be) monopolistic. Rent seeking activities can also be encouraged by sometimes strong network effects. Many industries have a winner take most characteristic. Once one company has established itself and taken advantage of network effects, it can be very hard to dislodge. This increases the inducement to do rent seeking. Furthermore, we must keep in mind that truly entrepreneurial activities are very hard to do on a consistent basis. They are also risky with an uncertain payoff. Rent seeking on the other hand is much easier to do with a more certain payoff. Most managers specially in public companies are evaluated on a yearly or even a quarterly basis. By the time any negative effects of rent seeking become evident, an individual manager will have moved on or retired. It is thus not surprising that organizations specially as they grow larger would engage in rent seeking activities.
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