According to Adam Smith[1], a rent is money paid for the use of a capital asset, whether land, a building, an office, a car, a bicycle, or whatever someone might want but cannot or does not want to own. The owner who rents out his assets need only worry about (illegal) damage like vandalism, theft, etc. and about (inevitable) depreciation, where the capital value of the asset declines in time through ordinary use. Loaning money is a kind of renting, where the asset may depreciate through inflation and where there is considerable risk that the borrower may default or go bankrupt. The element of risk introduces an element of profit, but a careful lender can see to it that borrowers have the assents to cover any defaults: and the legal right to recover capital distinguishes renting from a straight investment for profit (where the whole capital can be lost without legal, moral, or any other recourse). Like banks in that respect, most renting enterprises mix rents with profits: they invest for profit by running a business where they collect rents.
Since modern economists have generalized the concept of rent to include all factors of production, the supply of any factors may at times fall short of its demand at the current price, thus, selling at a price higher than its production cost – the excess of which is called economic rent. [2]
Rent seeking
The phenomenon of rent seeking was first identified in connection with monopolies by Gordon Tullock, in a 1967 paper [3], which became the genesis of the rent-seeking literature. The phrase “rent seeking” itself, however, was coined in 1974 by Anne Krueger in another influential paper [4], which refers to lose-lose activities in which real resources are expended in an effort to capture money from others. In the modern economy, it takes innumerable forms, such as extortion, civil law cases, manipulation of financial markets, lobbying of politicians etc.
In economics, rent seeking occurs when an individual, organization or firm seeks to make money by manipulating the economic and/or legal environment rather than by trade and production of wealth. Rent seeking is more often associated with government regulation and misuse of governmental authority than with land rents as defined by David Ricardo.[5] Rent seeking[6] generally implies the extraction of uncompensated value from others without making any contribution to productivity, such as by gaining control of land and other pre-existing natural resources, or by imposing burdensome regulations or other government decisions that may affect consumers or businesses. While there may be few people in modern industrialized countries who do not gain something, directly or indirectly, through some form or another of rent seeking, rent seeking in the aggregate may impose substantial losses on society.
Rent seeking from Islamic perspective
"Law is in Islam a process of discovery. Just as the physical scientist believes that the laws of physics exist as an absolute, waiting to be discovered rather than invented, so the Muslim legal scholar believes that the shariah has been created by God and his role is to discover and articulate it rather than invent it."
- Imad-ad-Dean Ahmad –
'Rents and rent-seeking are both ubiquitous and inevitable, and as long as there are rights there will be rent-seeking, both between private and public actors and between private actors themselves. There is no single correct definition of waste and the choice of any definition is selective. The real issue is not minimizing rent-seeking, but how to allocate rents.'
- Steven M. Medema -
For the purpose of this article, we will only discuss on the government’s involvement in rent seeking. Rent seeking often involves government because government transfers huge amounts of money for which people can compete. In addition, government can use force in ways that no private citizen or group of citizens can, and that use of force can be made to enrich some at the expense of others [7].
The Holy Quran explicitly favours productivity and free trade, but encourages moderation in all matters. Therefore, Islam believes that free markets need the rule of law to operate because they do not operate by commands, but by individual choices made under laws. During the Prophet’s and Abu Bakr’s time, there was protection of property. The few taxes that existed were specifically fixed and non-confiscatory. There was no government intervention into the economy except to expose fraud, punish theft, or nullify riba (the charging of interest). Despite the adoption of tax practices found in newly conquered lands (often at severely reduced rates) and the institution of some regulations made necessary by the administration of those vast territories, the same general pattern was practiced by all the righteous khalifahs.
In Islam, any government policies that create privileged groups are deemed undesirable and this is obvious from the following examples :
a) Prophet Muhammad (s.a.w.) took back land from his companion Abyad b. Hammal when he came to know that it contained a salt mine and its private ownership might cause hardship to the general public.
b) Prophet Muhammad (s.a.w.) donated land to some of his companions with the hope that they would develop it. Later, when it was learned that the donee did not develop the land, it was taken back from him.
Therefore, from the above two examples, we can observe the following principles that could be used to assist the government to regulate rent seeking activities in the society :
1) The Islamic concept of rights accompanies obligations indicates that there are no rights that do not entail obligations. Therefore, the government should not create any right that does not specify the obligations of the beneficiaries.
2) To protect the interest of the general public, government donations should not be for the purpose of creating monopolies.
3) Donations should not allow some individuals to reap vast profits without the investment of labour or capital. Based on the example above, the salt mine on the land given to Abyad b. Hammal was on the surface and would not have required any development effort to extract salt from it.
4) In Islam, the discretion to donate property to individuals should be decided by the society collectively on the principle of Shura (consultation). This is because government officials (including the president or prime minister), are only trustees of public resources.
5) Governments may create some rents as an incentive for a higher social objective like industrialization or technology development. However, rent seeking becomes objectionable when the vast profits generated in this process are not deployed productively for the benefit of the Ummah.
6) The government must enforce a code of conduct on public servants, politicians, and businessmen, restraining them from seeking to influence the government for their own personal benefits.
Conclusion
It would be too simplistic to presume that there is no special interest groups in today’s Islamic society as there will always be one. However, it is not necessary that these groups act against social interests in each case. In some cases, they may play a positive role by providing information on specific problems. The government should accommodate them on the basis of the general principle of maslahah (welfare).
The Islamic government cannot remain passive to the ethical conditions of the people since, to a large extent, it depends on the voluntary ethical behaviour of its people. In fact, the Holy Quran obliges an Islamic government to enforce proper behaviour and to restrain people from improper behaviour. An Islamic society is responsible for creating institutions that inculcate each citizen with Islamic norms. People should learn and strive to sacrifice their short term personal interests for the greater good of the society. The belief in the hereafter should be embedded in the minds of all so that everyone abides by the rules of social conduct.
In essence, while there may be few people in modern industrialized countries who do not gain something either directly or indirectly through some form or another of rent seeking, rent seeking in the aggregate may impose substantial losses on society, thus the need to have government’s intervention to regulate such activities.
Notes :
1. Kelley L. Ross. "Rent-Seeking, Public Choice, and The Prisoner's Dilemma. Retrieved on November 25, 2008 from http://www.friesian.com/rent.htm
2. Economic rent is defined as the price paid for the use of land including all natural resources that God has provided to mankind as a whole, free of charge (Hasan, 2007, p. 303)
Economic rent is defined in conventional neoclassical theory as the return in excess of opportunity cost. Since opportunity cost is subjective and profits are created through entrepreneurial activity, there is no way for an outside observer to objectively identify economic rent which, in practice, is taken to mean "excessive profits" or "unearned returns." As in the case of the distinction between profits and profiteering, the identification of economic rent depends on judgments of value (von Mises, 1974, p. 129).
3. Gordon Tullock: (1967) The Welfare Costs of Tariffs, Monopolies and Theft, Western Economic Journal (Issue 5) pp.224-232
4. Anne Kreuger: (1974) The Political Economy of the Rent-Seeking Society, American Economic Review (Issue 64) pp.291-303
5. David Ricardo defined rent as the payment made to the landlord for the original and indestructible qualities of land. He argued that rent arises because land is of different quality.
6. Definitions of rent seeking :
· Rent-seeking is the expenditure of resources and effort in creating, maintaining, or transferring rents. These expenditures can be legal, as with most forms of lobbying, queuing, or contributions to political parties. However, they can also be illegal, as in the case of bribes, illegal political contributions, expenditures on private mafias, and so on (Khan)
· Rent seeking consists of legitimate, non-voting actions that are intended to change laws or administration of laws such that one individual and/or group gains at the same or greater expense to another individual or group. He further distinguishes between two kinds of rent seeking, i.e., market privilege rent seeking and redistribution rent seeking. The first type grants special market privileges to some people while taking privileges away from others. By interfering with free enterprise, the granting of such privileges reduce the market economy’s wealth generating capacity and economic efficiency. The second type of rent seeking does not interfere with free enterprise, although it affects incentives to produce wealth (Gunning, 2004)
7. Other interesting examples are theft and civil suits in the legal system (which does involve the government to some extent). The concept of rent seeking has also been applied to corruption by bureaucrats who solicit and extract ‘bribe’ or ‘rent’ for applying their legal but discretionary authority for awarding legitimate or illegitimate benefits to clients - for example, many tax officials take bribes for lessening the tax burden of the tax payers
