Enter the Rentiers

If economic models are 99% accurate, rentiers are the 1%, but their impact is massive.

When one first begins a study of economics, it typically starts with microeconomics, using a model that primarily consists of Producers and Consumers. Topics include price elasticity, supply and demand, and marginal utility. As the field of study expands into macroeconomics, the Government entity is added to the models. One is now looking at aggregate numbers and policies at the level of countries.

For centuries, these players (Consumers, Producers, and Government) were the only major actors considered in classical economic study. Along came ecological economics, which insisted that the natural world could not be considered external to economic models. Natural resources, energy, services provided by Nature, and waste products dumped back into the environment were all critical elements of any economic equation. Nature must be included in the models.

This inclusion (and the profound principle that Nature does not exist outside economies, but rather economies exist within Nature) is only now becoming recognized as a non-negotiable—and economic policy still has a lot of catching up to do. We still don’t properly attribute ‘ownership’ of Nature, and the true costs of natural resources and services, waste management, and pollution still don’t appear on the balance sheets.

While this revision of the overall picture of economics is still asserting itself in the world of industry and commerce, it is not particularly new to today’s economists. Now, I’m going to suggest that it’s long past time that we added a fifth player to the mix: Rentiers. (No, not “renters”, but they are related.)

Chances are, the term “rentiers” is new to you—and that, in itself, should tell you something after you find out who they are. A rentier is a person who makes money based on what they own versus what they do. This group includes landlords, stockholders, investors, lenders, patent holders, and (in my books) even inheritors.

These categories of human action in Nature (Consumers, Producers, Rentiers, and Government) are more transactional roles than specific individuals, but they are not all interchangeable. We might consider them as concentric subsets. At some point, they are all Consumers; Rentiers can also sometimes be considered special case Producers, as can Governments; while Governments have the ability to be the ultimate Rentier—owning the power to legislate income.

The concentric roles in transactions within a national economy.

Since rentiers are frequently just lumped in as a special case of producers—landlords might be considered as ‘producing’ a service, or patent holders ‘produce’ an innovation—their unique impact on economics and society are all too often overlooked. My objective is to change that, by applying a value crisis lens.

Owning the Problem

To begin with, ownership is an entirely arbitrary concept. We are the only species on Earth that claims ownership of anything. Land or resource ownership begins with a declaration, nothing more. Other animals might claim territories or a carcass, but that fuzzy concept only applies when the claim is being used or consumed; such ‘possessions’ cannot be rented or sold.

The math of earning wealth from ownership is remarkably favourable. The value of land and intellectual property are not diminished by renting out their use, so the Laws of Thermodynamics do not apply—a declaration of ownership can generate limitless income from nothing beyond the initial possession. Of course, the ability to make that initial acquisition is what creates the opportunity to become a rentier—and one of the elite. That investment is also known as capital.

A very important distinguishing attribute of the rentier class is that once that capital is invested, there need be no further injection of significant energy, labour, or money into the economy from the rentier. Instead, all income can essentially be retained as profit indefinitely. This is what makes the rentier class unique.

So, rentier profit is not usually limited by the costs of material inputs or labour, since they are not significant factors. And, when it comes to ‘commodities’ such as intellectual property, that ownership can be bought and sold. One need not be the original innovator in order to hold the patent (as exemplified a lot in the pharmaceutical industry, where patents are regularly bought and sold, or those who attempted to patent genetic information found in nature).

Applying additional math (and that’s all it takes in a number-based value system), it can quickly be shown that rentier wealth maximization applies positive feedback loops. The most important of these is that the more money you have, the faster you can make more. Several factors contribute to this: compound interest, better advice, better education, better connections, same cost of basic needs resulting in more disposable income, etc. etc. Rentier wealth can easily be grown exponentially.

This is not to say that rentiers can’t make errors in wealth management or take risks that produce significant losses. Investor portfolio values go up and down all the time. However, for the super wealthy, such risks can be mitigated. Banks, which actually create the money that they lend out (true story - perhaps a future essay), should never lose money unless a serious proportion of borrowers default.

One other thing distinguishes rentiers from the rest of us: wealth immortality. Corporations can theoretically ‘live’ forever, meaning that successful rentier corporations will just get bigger and bigger. Even for wealthy humans with their limited lifespans, massive fortunes can be passed on to the next generation. In 2016, the wealthiest 1% of the U.S. population inherited an average of $4.8 million.

Of all categories of rentier, perhaps the most prevalent are the landowners. Real estate is of a fixed quantity on a finite planet. It is also a physiological necessity—we all take up space. So consider this North American conundrum:

• Global populations are increasing

• There’s a global refugee crisis – many refugees come to North America

• North America already has a pretty serious homelessness crisis

• Family sizes are shrinking

• Housing costs are staggeringly high

And the impact on our residential footprints? We now build houses TWICE as big as 50 years ago. Why?

The cynic in me says that even though residential rent is a classic rentier operating procedure, managing rental units still requires ongoing work and dealing with tenants who default, etc. The real money for the top 1% is now selling ever larger properties to the top 20%—the only ones who can afford them. Of course, the new variation on rental income is from purchasing AirBnB properties—higher incomes, less work, fewer regulations, and the resulting housing scarcity elevates the value of every other property.

While it might be argued that developing land and building structures on them makes developers Producers, the simple fact that developers have always been able to purchase land and then wait for the value to go up makes them unquestionably Rentiers—profiting just be owning.

Still, the ultimate rentiers in today’s economy are the ones who operate at the pinnacle number-based values. I’m referring to currency traders and other high-volume/low-risk investors who shuffle ‘value’ on paper, flipping ownership back and forth in order to generate trillions of dollars in wealth by mathematics alone.

There’s no doubt in my mind that any lasting solution to the value crisis must include the elimination of the concept of Rentiers.

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My circle diagram above shows Government as the central subset of all the others. That inclusion is necessary, given the significant roles that taxes, subsidies, and social assistance play in the economic landscape—tools not used by any of the other categories. For decades, the wealthiest of Rentiers and Producers have been subject to regulation by their respective Governments, while exerting increasing influence on that legislation through lobbying and sheer financial weight. What we see now in the United States is the Rentiers have finally got near-absolute control of the Government, and have thus acquired the ability to steal unimaginable wealth, while contributing nothing to society. (Indeed, their destruction of society could be apocalyptic.)

The bottom line is this: I believe all future economic models should specifically acknowledge the Rentier class of individuals and corporations—entities that possess the capability to acquire and grow phenomenal wealth based on what they own, not what they do. Theoretically, they need not produce any value for society, other than providing limited (often temporary) access to that which they have claimed ownership of.

Essentially, money for nothing. And that money does not have to do anything either! It is not needed to maintain the income stream. It can just sit there, hoarded and useless.