John Menadue. Rent-seekers and the hollowing out of democracy (Repost 12/2015)

‘Rent-seeking’ is a term understood by most economists. It refers to the ability of powerful groups to extract special concessions and favours at the expense of the wider community.  

I noted a good illustration of rent-seeking by bloggist Ben Chu in the Independent in London on 25 August this year. He said

Ferrying goods along the Rhine in medieval times was an expensive business. Feudal lords who controlled land along the banks of the river, which was also the main European thoroughfare in the period, had a habit of hanging iron chains across the width of the waterway and extolling a fee from everyone who wanted passage. The nobles grew very rich from their tolling activities, building fancy castles overlooking the Rhine with their ill-gotten proceeds. This was a classic example of what is now known by economists as ‘rent extraction’. The operators of these tolls weren’t creating any wealth through their activities. They weren’t facilitating trade by maintaining the waterway or making it any safer for the merchants. They were merely using their privileged location to extract wealth from others. …

But how do we extinguish rent extraction from high profits due to legitimate business success. A good indicator is the extent to which their profits are dependent on political and official connections.’

These political and official connections are critical for rent-seekers. In Australia today there are many examples of how rent-seekers use their political and official connections to extract benefits for themselves at the expense of the community.

Democracy becomes a hollowed out shell when neoliberal ideology and deregulation are stalking horses to wind back the boundaries meant to contain the excesses of capitalism.

Ross Gittins in the SMH referred to four industries that ‘rule Australia – superannuation funds, miners, bankers and gambling industries’. They are the classic rent seekers although I would add major parts of the health sector.

In 2013 three of the world’s most profitable mining companies under cover of the Business Council of Australia defeated the original Resources Super Profits Tax and got it replaced by a badly-designed Mineral Resources Rent Tax. For a few million dollars of money spent on advertising and lobbying, the mining industry saved itself tens of billions of dollars. As an inveterate rent seeker the BCA now wants to increase tax on food to pay for a cut in company tax.

In opposing an Emissions Trading Scheme and a Carbon Tax, our major polluters successfully delayed for years action to combat climate change. The rent-seeking miners have also been successful in defending a fossil fuel subsidy scheme that will cost Australian taxpayers $26 b. over the next four years. While motorists in Australia pay 38c. on every litre of fuel they buy, the world’s biggest miners like BHP Billiton, Rio Tinto, Glencorp, Xstrata, Peabody and Anglo American don’t pay a cent for the fuel they use in mining, including fossil fuel mining. It is expected that in the Paris talks, countries like Australia will be asked to phase out these fuel subsidies. But in the face of rent-seekers, we now learn that Malcolm Turnbull has run for cover after a meeting of a back bench policy committee attended by, surprise surprise, the Chief Executive of the Minerals Council of Australia, Brendan Pearson. The rent-seekers have won again.

The financial services lobby has won handsomely in limiting reforms of superannuation, particularly the conflict of interest by financial planners employed by the major banks. The slews of tax breaks in superannuation for the benefit of the wealthy have been effectively defended by the rent-seekers in the superannuation sector. Fortunately the Senate seems likely to respond the government’s proposals to open up boards so industrial superannuation funds by the appointment of board members as ‘independents this reform was never about independence or improved governance. It was about ideology and giving more leverage to rent seekers in the superannuation industry.

In my blog of 30 September 2015 ‘Developers, white shoe brigade, Ferraris and yachts’ I drew attention to research by Paul Fritjers and Cameron Murray of the University of Queensland concerning rent-seeking by developers in Queensland. They said

‘Our main finding is that well-connected land-owners own 75% of the rezoned land, but only 12% of comparable land immediately outside the rezoning boundaries, indicating that [zoning] decisions were primarily driven by the relationship networks of the land-owners, rather than technical assessments of the efficiency of urban expansion locations. … We … estimate that these rezoning decisions increase the value of the rezoned land by $710 m., with well-connected land-owners capturing $410 m. of these gains at the expense of the public at large. … Connected property-developers bought land unsuitable for redevelopment on the urban fringe then lobbied state politicians and bureaucrats through their relationship networks to rezone areas where they own properties, wrong-footing both councils and other property developers.’

It was a clear example of profits being made as a result of political and official connections, just like the feudal lords along the Rhine.

In the health field the ‘stake-holders’ that governments listen to are not consumers or patients, but the AMA, Medicines Australia, the Australian Pharmacy Guild and the private health insurance companies. Through lobbying and official connections these rent-seekers easily brush aside the public interest and good policy.

The hotel and alcohol lobby work hand in hand with state governments and the political parties. Advertising on television of cricket matches is saturated with alcohol and fast-food advertising and no action is taken. The Australian captain thinks so little about the problem that he suggests that the VB advertising is about ‘branding’ and not alcohol consumption. As a public intellectual he is a very good batsman.

The gambling lobby effectively torpedoed plans by the Gillard government to curb problem gambling. Clubs Australia was too powerful.

There are over 1,000 lobbyists in Canberra who advance the interests of rent-seekers through their political and official connections. Many of these lobbyists are former ministers, officials or party employees. As governments change, these lobby firms go up and down in business success. With a Labor government in Canberra, Hawker Britton was the top of the pile. Now with its close personal connections to the Liberal Party, Barton Deakin is top of the pile.

The power of the lobbyists acting on behalf of the rent-seekers or the rent-seekers lobbying directly are corrupting and debasing our democracy. They have made it much more difficult for governments to pursue good policy of the type we saw in the Hawke-Keating and early Howard periods. Self-interest is killing off reform and with the media often embracing or not exposing these self-interested rent seekers. So much of our ‘news’ is recycled hand-outs from these rent-seekers.

It is not surprising that Australians have lost confidence in parliament and governments. And the rent seekers prosper when that happens. That is why every opportunity is taken to disparage government and our political institutions. That lies behind the unceasing campaign about incompetent government, bureaucracy and ‘red tape. It is designed to weaken the role of government in defence of the public interest.

Our democratic institutions are in serious need of reform and renewal. They are being hollowed out from within. When democracy is weekend rent seekers can prosper. Democracy must limit markets and not the other way around.

We have our modern versions of the feudal lords who use their privileged positions to extract wealth from others.

I do not make a case for big government but effective government as a key player in our democracy.


John Laurence Menadue is the publisher of Pearls & Irritations. He has had a distinguished career both in the private sector and in the Public Service.

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4 Responses to John Menadue. Rent-seekers and the hollowing out of democracy (Repost 12/2015)

  1. Avatar Colin Cook says:

    I expect that most readers of P&amd I know that Paul Fritjers and Cameron Murray research has resulted in their book,’Game of Mates’; visit the website and buy the book if you have not already done so.
    And, thank you John for re-posting; I did use your estimate of the number of lobbyist we have ‘on the payroll’ in a piece published by Independent Australia, originally titled, ‘This democracy thing; is it something ‘we’ have and ‘they’ don’t…..’ See,10456
    The comparison with China is not important but the state of our democracy is.

  2. Avatar Paul Frijters says:

    Hi John,

    agreed, obviously. Apart from pointing out what else could be done, the solution will also require a political revival, including a moral narrative and a narrative about the current era. We in broad lines share the analysis of the problem, so let’s think about the narrative needed with regards to the current political situation and the moral dimension.

    The weakest point of the rent-seeking industry is the top of the political machinery. That top has allowed it all to happen and that is part of it via the revolving door you talk about. It is the weakest point because it is invested with the trust of the population, and their positions are contestible via elections. So the top of the political machinery is where the blame is most usefully put and where the strongest moralizing needs to be done (‘with great power…’).

    I am veering to the opinion that we should talk of the current era as one wherein the leadership of both main parties have betrayed and are betraying the Australian public interest. They are the ones with the information and the power to make a difference, but they have chosen to become deniers and facilitators.

    Relevant to this, what are our former prime ministers doing about it? They have more responsibility than anyone else as they are supposed to dedicate themselves to the public interest. Are they now lobbyists and hence part of the problem, or are they warning the general public about what has happened, being honest about what their own role has been?

    Paul Frijters

    btw, my take on the supposed great Hawke/Keating years differs from yours. I see it as a period in which many of the worst mistakes were made and the politicization of the civil service increased with leaps. Like Nicholas Gruen, I see a large role of those years in the problems we have now. Nostalgia for that period is unhelpful because it makes one beholden to parts of the problem.

  3. Avatar Bolt says:

    The South Australian Government has finalised a $1.6 billion deal to privatise the state’s Lands Titles Office. The Lands Titles Office holds the registry of the state’s property titles, including information about who owns property, when it was purchased and its valuation. A commercial consortium known as Land Services SA has won the right to manage the state’s system of land titles and registry for the next 40 years – including the right to commercialise related data, subject to government approval. Land Services SA is comprised of two investors – Macquarie Infrastructure and Real Assets, and the Public Sector Pension Investment Board.

    More rent seekers. You have to wonder who these pollies work for.

  4. Avatar Dog's breakfast says:

    Rings even more true today than it did 2 years ago John.

    Rent seeking continues to be the main game in the big corporate world. You can now add the energy markets and telecommunications as key rent-seekers in the economy.

    It’s hard to imagine the mainstream media exposing much of this, even less so today. Most media business models are under stress (read ‘unsustainable’) and they are now among the top of the rent seeking pile.

    I wonder what we are going to get for $30M granted to Foxtel to cover sports that aren’t currently covered, and why that didn’t go to the ABC, which was set up specifically to provide coverage to those areas.

    I’d be interested in anyone willing to pen an article, someone with sufficient expertise, on the rent-seeking embedded within copyright protection. While a reasonable argument can be made for copyright, we tend to follow the USA’s stance and if we had signed the TPP we would have been bound to follow their lead. They have a regime where politicians are not only lobbied, but actually funded, by the biggest corporations who have shown a stern will to protect and extend copyright into areas that should never have been allowed.

    We have hitched our wagon to a dead horse there. Granting patents to old drugs because some new application has been found is a prime example. It lead NAssim Nicholas Taleb to quip that “Pharmaceutical companies are better at inventing diseases that match existing drugs, rather than inventing drugs to match existing diseases.”

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