Rent-seeking is a key concept in public choice theory for which James Buchanan Jr. won the Nobel Prize in Economics in 1986. Originally defined by Gordon Tullock, the term refers to the extraction of unearned wealth, which facilitates the consumption of real goods and services by individuals or entities that do not contribute to the production of these goods and services (or wealth). This behavior is akin to vermin consuming grain in a warehouse without contributing to its production. It is seen as unproductive because it does not create new wealth; rather, it redistributes existing wealth, often through manipulation of the political or economic environment to secure advantages such as subsidies, tariffs, or monopolistic rights.
In summary, rent-seeking is the pursuit of wealth by economic parasites, without any corresponding contribution to productivity, often achieved through non-productive means like lobbying or regulatory capture. The question then becomes: is there a real-world proxy measure that we can use to approximate the amount of wealth captured by rent-seeking behavior in an economy? The obvious answer is, of course, real GDP consumption by the government. This directly logically follows from the first welfare theorem of mathematical economics, a foundational component of the Arrow-Debreu equilibrium model that underpins all mainstream economic theory, including equilibrium models used by the Federal Reserve to set real-world interest rates.
The first welfare theorem is based on the foundational assumption of rational utility maximization by individual representative agents in an economy who act in dual capacities as consumers and producers. Any trade between such rational utility-maximizing consumer-producer individuals, assuming this trade is not only unfettered but also symmetrically informed, is guaranteed to be mutually beneficial—not only in theory but also in fact under these conditions. The reason is obvious: no rational individual, in either capacity as a consumer or as a producer, would voluntarily engage in an arm's-length transaction unless they perceived a benefit ex-ante, thereby guaranteeing that any unfettered trade is mutually beneficial ex-ante, before the exchange takes place. However, what guarantees that unfettered trade does not turn out to be non-mutually beneficial ex-post (as exemplified by a gullible person buying a lemon car) is symmetric information about the goods and services being exchanged. When the assumption of unfettered and symmetrically informed exchange is violated, economic efficiency always suffers, as exemplified by the difference in per capita GDP between Haiti and the Dominican Republic.
The key point is that of course there are well known market failures, such as monopolies and negative externalities, like pollution. But the real world impact of such externalities on economic efficiency is dwarfed by the negative economic impact of asymmetrically informed and especially involuntary exchange. Violations of conditions of unfettered, symmetrically informed trade result in market failures such as robbery, theft, and fraud — wealth transfer facilitated by asymmetrical information, as exemplified by economic rents—wealth consumed by economic parasites. Barring asymmetrically informed, or involuntary exchange extracting unearned wealth—a market failure—becomes non feasible.
The First, One Truth Postulate of Applied Mathematics
The first, one truth postulate of applied mathematics posits as “God’s law,” “the law,” “thieves' law,” or “the first, one truth underlying this objective reality” the following: any set of non-contradictory claims, also referred to as theorems in mathematics, that logically follow (are deduced) from a set of axioms, are guaranteed to hold true in reality, as long as the underlying axioms from which these claims are deduced are in fact ultimately true. This is because mathematical proof merely shows logical equivalence between the two sets of claims, axioms and theorems, allowing anyone to independently verify their logical equivalence. In other words, logical deduction is guaranteed to hold true in reality—always. This is the first, one truth postulate of applied mathematics. Whenever anything logically deduced fails to hold true in reality, we know with absolute certainty that one of the axioms is in fact false.
The confusion about mathematics arises from the fact that, specifically in the context of mathematics, the words axiom, theorem, theory, hypothesis, and assumption have meanings that are completely different from their meanings in ordinary, everyday English. This discrepancy is why most people don’t understand mathematics.
In mathematics, axioms are assumptions about how the world operates, also referred to as hypotheses. Inevitably, in mathematics, axioms are merely educated guesses, accepted as true on account of being ‘self-evidently true’ to whoever is doing the educated guessing. For example, Euclid incorrectly assumed over 2000 years ago that the shortest distance between two points is always a straight line—an educated guess that turns out to be wrong, as evidenced by the fact that the GPS in your phone works.
So, in mathematics, axiom, educated guess, assumption, and hypothesis are absolutely equivalent in terms of their meaning. Of course, a theorem is a logical claim deduced from the underlying axioms, like the Pythagorean theorem or the fact that in Euclidean geometry, the sum of the angles in a triangle always adds up to 180 degrees. A theory refers to a set of axioms and the theorems that logically follow, such as ZF set theory. Thus, a set of axioms and a logically equivalent set of theorems arrived at using deduction are referred to in mathematics as a theory.
And what this means in reality is that under the rational utility maximization assumption, unless one of the dual conditions of unfettered and symmetrically informed exchange is violated, rent seeking, being a type of non-mutually beneficial exchange, becomes non feasible.