Abstract
We make a critical distinction between inequalities arising from profits and wages on the one hand and inequalities arising from rents on the other. Arguably, if rent-seeking exceeds profit-seeking, it creates legitimation problems for market capitalism and may lead to economic stagnation or even state collapse. We identify three types of rent-seeking behavior which can be observed in any capitalist country, but they play a particularly important role in post-communist transition: (i) market capture by political elites; (ii) state capture by oligarchs; and (iii) capture of oligarchs by autocratic rulers through selective criminalization and the redistribution of their wealth to loyal new rich.
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Notes
- 1.
- 2.
For example, Summers (2016).
- 3.
It is another—though not unimportant—matter that the epoch between 1910 and 1970, when measured inequalities fell, was far from ideal. This period was burdened with, inter alia, the Great Depression, two world wars, and the Iron Curtain.
- 4.
In Mihályi and Szelényi (2016b), we deal with interpretations of the adjective “excessive” at length. Piketty’s entire argument is based on his alleged discovery that r > g, where r is the average growth of profits and g represents the average growth of GDP/capita. We show that the r > g model is a statistical artefact arising from the intermingling of the concepts of profit and rent on the one hand, and capital and wealth on the other.
- 5.
Keynes (1920, 1971), p. 20.
- 6.
Ibid., pp. 18–19. Italics in original.
- 7.
Roemer (1982), p. 196. Using another metaphor, this idealised capitalism is a win-win situation for workers and capitalists.
- 8.
One qualification, however, is justified. Profit-maximising behaviour can reduce wealth at the national level. A classic example is outsourcing (especially in case of off-shore investments of capital gains), which can cut wages and create unemployment at home, though it still creates wealth globally and tends to reduce global inequality.
- 9.
In economic textbooks, this is often called “economic rent”.
- 10.
As Ricardo put it, “The rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never the cause of wealth” (our emphasis). (op. cit., p. 40.)
- 11.
Ricardo (1817, 2004), p. 34.
- 12.
Another way of formulating our criticism is that Piketty (2013) conflates profits and rents and—as Weil (2015), Stiglitz (2015), and Atkinson (2015) have pointed out, among others—deliberately disregards the differences between capital and wealth. By contrast, Hodgson (2014) argues that the extended definition of capital—which includes cash, bonds, collateralisable assets such as buildings, and intellectual property—has analytical advantages as well.
- 13.
Perhaps this was one of the reasons why his book was so well received in many mainstream macroeconomic departments.
- 14.
According to the FAO’s definition, agricultural land covers only 33 per cent of the world’s landmass.
- 15.
In The Mind and Society, Pareto made an interesting distinction between “speculators” (foxes) and “rentiers” (lions)—that is, between those who seek profits and those who seek rents. A balanced market economy needs both foxes and lions; dynamism and innovation have to be counterbalanced by stability.
- 16.
The Economist, 20 August, 2016, pp. 15–17.
- 17.
- 18.
See Weber (1920, 1978), pp. 43–44.
- 19.
Solow (2014) calls supermanagers’ rent a “sort of adjunct to capital”.
- 20.
On first glance, the Weberian concept of “closed ” and “open” relationships looks identical to the proposition in Acemoglu and Robinson (2012), who coined the terms “exclusive” and “inclusive” societies. However, the two are not the same. The American authors—as the title of their book emphasises—analyse the growth process at the level of nations. Weber speaks of “closed ” and “open” relationships within a given economy—and this is the right approach, if we are analysing inequalities within a given country. The same can be said about the dual concept of “open and limited access orders”, presented in North et al. (2012). Nevertheless, we strongly agree with their other assertion about the ubiquity of rent in every society, including the most advanced countries.
- 21.
Between 1980 and 2013, average trade-union density in OECD countries fell from 33 per cent to 17 per cent. This decline was uniform across all member countries, with the notable exception of the Scandinavian countries and Iceland. https://stats.oecd.org/Index.aspx?DataSetCode=UN_DEN# accessed on July 10, 2015.
- 22.
op. cit., p. 1536.
- 23.
op. cit., p. 1537.
- 24.
It is noteworthy that in The World Top Income Database, one of the bases of Piketty’s book, consumer durables and unfunded defined-benefit pensions are not taken into account.
- 25.
In the context of globalisation, however, the number of companies is growing in every industry worldwide, and thus competition is actually increasing at the international level.
- 26.
For many years, the World Bank has been regularly publishing country time-series under the label Total natural resources rents (percent of GDP), whereby rents are defined as the sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents, and forest rents.
- 27.
As we explained earlier, this is a temporary advantage.
- 28.
This finding was first demonstrated by the founder of the Boston Consulting Group, Bruce Henderson (1976), then reconfirmed empirically by Reeves et al. (2012), using a much larger data set. Since then, successful companies like General Electric and others have lived according to this maxim. If they cannot be number one or two in an industry, they get out of that market and reinvest their resources elsewhere.
- 29.
See The Economist, 26 March 2016.
- 30.
The renowned charity Oxfam (2015) timed the publication of its fresh research for the opening of the Davos economic summit, thereby skilfully capturing headlines at many news outlets. Another sensational formulation of this same report was that the “85 richest people on the planet have the same wealth as the poorest 50 percent (3.5 billion people)”.
- 31.
The authors are grateful to Daniel Treisman for this observation.
- 32.
Greenwood et al. (2014).
- 33.
op. cit., pp. 485–486.
- 34.
For example, the meticulously collected data for the 1946 cohort suggest that women born in socially better-off families had a death rate about half that of everyone else born in 1946. Pearson (2016), pp. 301–302.
- 35.
We might add to this list the post-Soviet Central Asian republics, Belorussia, Ukraine, and Hungary—and since 2010, especially (but not exclusively) Romania, Bulgaria, Serbia, Albania, and Macedonia.
- 36.
Theodore Roosevelt’s anti-monopoly legislation of the early 1900s is a prime example of regulating rent-seeking.
- 37.
- 38.
One good example is Victor Chernomyrdin. In the mid1990s, the CIA estimated his net worth at $5 billion, though he claimed to possess only a few million. In 1978, he was already working at the Central Committee of the Communist Party; he later went back and forth between high government posts (deputy minister, minister of the gas industry) and major managerial positions (chairman of Gazprom). He was prime minister of Russia between 1991 and 1998. He passed away in 2010, taking his secrets to his grave. See Szelényi (2010).
- 39.
Voszka (1993).
- 40.
For an excellent comparison of Central European post-communist capitalisms, see Bohle Dorothee and Bela Greskovits (2012). However, it is important to underscore that none of the Central Europeans included on the Forbes billionaires list are known to have been high-ranking officials of the communist party prior to 1989; see Szelényi (2010).
- 41.
There are contradictory assessments of the personal wealth of former prime minister Wen Jiabao and current president Xi Jinping. The New York Times reported that the net worth of each man’s family may be in the range of $1–2 billion. If there is wealth in the Xi family, most of it was made by the president’s daughter, Qi Qiaoqiao, and her husband Deng Jiagui. It is also rumoured that many large, nominally state-owned, firms are led by CEOs who are “princelings”, the children of former “revolutionary heroes” (President Xi is one such example). Thus, in reality, these firms are entirely privately owned (Lu Peng, personal communication).
- 42.
Boris Berezovsky (1946–2013) was one of the first and the most prominent founding member of the club of newly emergent oligarchs. In 1983, Berezovsky earned a Ph.D. in mathematics and became the director of one of the laboratories at the Institute of Management of the Soviet Academy of Sciences. There is no definitive indication that Berezovsky was close to high-ranking Soviet party officials. He had good relationship with the young reformers Yegor Gaidar, Anatoly Chubais, and Valentin Yumashev. Yumashev was a journalist who eventually became Yeltsin’s chief of staff and the second husband of Tanya (or Tatyana) Yeltsin. However, in the early 1990s, Yumashev was only a ghostwriter for the president. He helped Yeltsin write his 1989 book and helped him with “Notes of a President,” published in 1994. It was Yumashev who introduced Berezovsky to Tatyana, who at that time was married to Dyachenko, a commodity trader who later became Berezovsky’s business partner at Sibneft. With his newly acquired contacts, Berezovsky managed to take major managerial positions at—and eventually ownership in—the car-manufacturing firm Avtovaz, the Russian national airline Aeroflot, and the major oil company Sibneft.
- 43.
The Big Seven—Russia’s Financial Empires, www.worldbank.org/html/prddr/trans/feb98/bigseven.htm
- 44.
For an empirical study of the situation in Romania, see Pirvu (2015).
- 45.
Vladimir Putin’s personal wealth is the subject of wild speculation. Some commentators claim he is the wealthiest man in the world, with a personal net worth of $40–$70 billion. Putin’s official disclosures suggest that he owns two apartments and one spot at a garage, worth a total of $119,000. There are also similarly wild and unconfirmed conjectures about the private wealth of Hungary’s prime minister, Viktor Orbán. The personal wealth of current political office-holders may be overestimated by political opponents. In any case, smart political bosses do not accumulate wealth in their own names, but rather pass it on to their extended family and friends. Thus, if Putin has indeed managed to accumulate wealth of his own, it may be under the name of his daughter Yekaterina and her husband; it has been reported that the couple holds a $2.83 billion share of the Silberg Company. Putin’s friend, the cellist Sergei Roldugin, is also believed to have acted as his surrogate; Roldugin has reportedly moved billions of dollars into Panama.
- 46.
While no murder charges against him were ever proven in a fair court of law, he was suspected of involvement in the murder of Vlad Listyev, Russia’s most successful TV producer, who was killed four years earlier. Listyev supported the privatisation of TV 1 and its sale to Berezovsky, but he advocated fair pricing for advertising time, which clashed with Berezovsky’s interests.
- 47.
Without a body or a murder weapon, one would have expected a somewhat longer trial. She confessed, but the usual sentence for murder in China is capital punishment.
- 48.
This metaphor was used at a semi-closed gathering of Fidesz party leaders, as reported in the Hungarian daily Népszabadság on 8 September 2014.
- 49.
See Solow (2015), who bluntly acknowledges this.
- 50.
Our recent paper Mihályi and Szelényi (2017) is devoted entirely to the role of rents in the transition process from pre-1989 socialism to the present-day capitalist system.
- 51.
The list was compiled using responses to a questionnaire which asked people to choose the income distribution diagram with the Gini coefficient closest to the correct one for their country in 2009. At the top, 61 per cent of the Norwegian respondents correctly chose the diagram which represented the distribution of their post-tax-and-transfer incomes, while only 5 (!) per cent of the Ukrainian respondents did so.
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Mihályi, P., Szelényi, I. (2019). The Place of Rent-Seeking and Corruption in Varieties of Capitalism Models. In: Gerőcs, T., Szanyi, M. (eds) Market Liberalism and Economic Patriotism in the Capitalist World-System. International Political Economy Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05186-0_5
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