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The Difference between Rent and Profit

All businesses exist to make profit. There is therefore a tendency to view all money-making enterprises "as if they were equally productive and socially useful". In the same token, there is seldom differentiation between wealth accumulated through passive means like rent collection or through active and riskier productive efforts for profit generation.[1]

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In reality, not all money-making enterprises are socially useful. Similarly, not all money-making activities are economically productive.

In his 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nation (‘The Wealth of Nation’ in short 关于国家财富的性质和原因的探讨，简称‘国富论’), Adam Smith (亚当·史密斯) broached the concept of unearned income with his observations that productions of all goods required 3 things: Land, Capital, and Labour.  Any money from selling a product would then go to three groups: the rentiers (i.e. landowners), the capitalists, and the workers as rent, profit and wage respectively.

Of these, Smith noted that only two of the three groups made any real contribution to the production process. The workers contributed their time and efforts. The capitalists contributed their capital and assumed the risk of losing it. The rentiers contributed their land but once the manufacturing of the product is done, they get back their land with no deterioration in value.  The rent for the land was therefore unearned income rentiers made without doing any work or assuming any risk to their assets.[2]

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In other words, rentiers are not economically productive because their incomes are made passively from rental collection without creating new value.

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In today’s context, the term “rents” refers not just narrowly to payments for the use of land or apartment. Rather, it refers broadly to passive incomes (被动收入) people or enterprises receive from assets that they possess or services that they render. Usually, these assets and services are unique or in short supply, be they natural products of geography and geology (real estate, energy and mineral deposits) or artificial (chartered banks, professional licensing associations, patents and copyrights). In general, the more unique and scarce the assets and services are, the higher are the rents the rentiers can charge.

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Rents can thus come in many kinds. Rents for land or apartment flow to landlords. Royalty payments for energy or mineral extraction flow to owners of the resources. Interest payments on loans flow to bankers and other lenders. Licensing fees on patents and copyrights flow to inventors.  Tolls are rents paid to the owners of transportation infrastructure. Collectively, these people are called rentiers because they live on rental incomes.

Since payments of rents tend to recurrent, rentiers can enjoy a perpetual stream of rental income even if they are completely passive. In contrast, profits come from generating new sales to masses of consumers faced with abundant of choices. Productive capitalists or “industrialists” need to be work hard to keep ahead of the competition so as to generate a profit. In that sense, rentiers are “takers” while productive capitalists must be “makers” in order to survive.[3]

Rents extracted from various kinds of assets should thus be distinguished and treated differently from profits derived from the sale of goods or services in a free market.  

Rentierism Generates Inefficiency & Drives Inequality

To be fair, it is reasonable to pay rents in return for using exclusive assets or services own by rentiers. As monetarist economist Milton Friedman once said in defence of rentierism: “There is no such thing as a free lunch”.

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The problem really is when rents are driven above the market value by rentiers through rent-seeking activities that seek to drive up rental without creating additional real value for the assets. This often happens when the assets are so scarce that they are monopolized by a single or a few large rentiers.

Economists use the phrase “economic rents” (经济租金) to describe extraordinary profits that arise from distorted, uncompetitive markets. The excessive rents benefit the rentiers but create economic inefficiency to the detriments of the economy and the society at large.[4]

Businesses, for example, cannot thrive if too much rent is paid to landlords or if credit is too expensive. Innovation also cannot flourish if excessive copyright protections stifle the diffusion of technology.

Moreover, economic growth requires distribution of income to the workers, empowering them to consume such goods and services made by the productive industries setting in motion a virtuous cycle of consumption-driven growth. The excessive rents will come at the expense of wages for the workers and limit their ability to consume and to take care of their basic needs. In the end, by channeling income and wealth disproportionately to a minority of asset-owning class, rent-seeking activities are also driving the widening social disparity.

Many are therefore arguing that today’s capitalism is increasingly shaped or even hijacked by rentiers.[5] Instead of focusing on innovating, creating, making, investing, and building, the rising rentier capitalism (食利资本主义) today revolves around activities that are distorting, protecting, and skimming to disproportionately benefit the rentiers.[6]

Currently, rent seeking activities in many market-driven economies are not illegal, regardless of harm they may do to the economy or to societal development. Rent-seeking becomes illegal only when illicit activities such as collusion or bribery are involved to cause competition to become unfair. To encourage the growth of a highly productive economy and to foster a socially inclusive society, rent-seeking activities should be systematically curtailed.[7]

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Finally, the line between 'makers' and 'takers' are also becoming increasingly fizzy these days. Even genuine wealth creators often are dissatisfied with the wealth that they reap from their innovation or entrepreneurship. Some have turned to abusive practices like monopoly pricing or other forms of rent extraction to garner even more riches.

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The Long History of Rentierism

Rentierism, or rentier profiteering, is not a modern invention. In fact, the concept predates and is not specific to capitalism. Rent-seeking are equally, if not more, rampant in communist countries. As long as unequal power relationship exists, rentierism is likely to take place as the party in a stronger power position takes unethical but legal advantage of those in the weaker position. As ancient Greek historian Thucydides famously said, "the strong do what they can and the weak suffer what they must". Rentierism is therefore a human behaviour that is borne out of selfishness and greed. By controlling or attaining the power to influence the political system, those at the top also seek to shape the rules of the game in their favour. Over time, if left unchecked, rentierism can only accelerate, not abate. And because rentierism leads to unequal distribution of income and wealth, inequality also rises with rentierism.

As can be seen from the table, rentierism rose consistently almost throughout the long history of medieval and modern Europe under feudalism/serfdom (封建主义/农奴制), mercantilism (重商主义) and economic liberalism (经济自由主义). It moderated only after the Second World War under embedded liberalism (嵌入式自由主义) as a result of purposeful state interventions. The abatement of rentierism however was short-lived, lasting only three decades. Since the 1980s, rentierism again resumed its rising trend as a result of neoliberalism (新自由主义).

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