The case of rent seeking?

B. Venkatesh

AN acquaintance of mine, a civil engineer, wants to shift his profession to software development.

He, therefore, spends most of his time these days in preparing his resume, couching his skills in a flowery language to attract the recruiters' attention. Economists may draw similarity between my acquaintance's effort to catch the recruiters' attention to the way businessmen seek to obtain government licenses.

Businessmen typically try convincing the government in giving them the license. Take petrol stations, that appear to be profitable business. By profitable business, we mean the businessmen will be able to make economic profits and not just accounting profits. The difference? Accounting profits are just sales minus the total costs whereas economic profits take into account the opportunity costs as well. Suppose the businessman has used his land to built the petrol station, depriving him of leasing it for commercial purposes. We need to consider the income lost on the land (opportunity cost) as part of the cost for setting up the petrol station.

Normally, it is difficult for businesses to earn economic profits because competition drives down product prices so that firms earn only accounting profits. Limited competition or government regulation, however, allows businesses to earn economic profits. And since running a petrol station appears one such business, people compete to obtain government licenses.

This involves spending lot of money. When all businessmen indulge in such spending, the aggregate money spent to convince the government will be much more than the economic profit that one of them will enjoy from the license obtained. This, indeed, is a wasteful exercise. Economists call such an activity rent seeking.

Now back to my acquaintance. How is his spending time on his resume to attract the recruiters' attention similar to rent seeking? Because he is not alone in trying to attract the recruiters' attention; every one else seeking employment will be doing the same. The cost to the economy is, thus, the time spent by all of them on such wasteful exercises than for productive purposes.