The use of the word “rentier” in economics has always rubbed me the wrong way. It’s often used in a pejorative sense and applied in vague terms to people who (supposedly) don’t contribute much to society. The implication is that these “rentiers” just leach off the system by taking in “rents” by guzzling up ownership in different assets and earning interest while they laugh at the rest of humanity. I bring this up mainly because there have been a number of items written on this topic in recent days (see Paul Krugman and Izabella Kaminska for instance). Paul Krugman writes:
“Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.”
But I wonder how balanced these views really are? And whether this term isn’t thrown around at times in a relatively unbalanced and intentionally political manner? And most importantly, does this view really reflect the monetary system in which we reside in an objective way? I’ll just point out a few thoughts and then throw it over to the much smarter people here in the comments to discuss:
- The implication that rentiers are benefiting from some “unproductive” ownership of financial instruments strikes me as a bit misleading in the first place. Financial instruments that pay interest (like corporate bonds) are issued by companies seeking capital for future production. These instruments are issued specifically for the purpose of future production and the provider of capital does so with the understanding that they are only willing to part with their capital if they earn a reasonable return on that capital. Issuing a corporate bond, is, by the mere existence of its outstanding issuance, a sign that something productive has ALREADY occurred or is GOING to occur. Whether the firm retires that bond or allows it to exist as they rollover debt is not a sign that the capitalist is merely raping and pillaging the firm. No, it is a sign that the capitalist has provided the firm with capital for the use of future production.
- Why does the capitalist deserve to earn interest on this capital? A smart capitalist knows that a credit based monetary system is likely to endure some positive rate of inflation in the future. He/she also knows that there’s no reason to part with his/her capital if he/she is not rewarded for the inherent level of risk involved in providing that capital. So the capitalist is concerned not only with the return of his/her capital but also the REAL return of his capital. This is not merely a function of rentier greed. It is a function of the inherent nature of a fiat monetary system and the elasticity of the money supply that is a function of any credit based monetary system.
- Is the rentier dying? Better yet, should we hope that the rentier dies? As I described in the second bullet point, the existence of economic rents is a function of a credit based monetary system. It is neither good nor bad. It just is. The fact that some people earn economic rents for supplying capital is a function of this system’s inherent nature. And when inflation is low and economic activity is weak the suppliers of this capital will not be able to demand (or require) such high rents. But we should not hope that the rentier is dying. In fact, we should hope that the rentier is thriving to some degree. We should hope that capital is readily available and that people are borrowing, spending and raising capital for the purpose of future production. That would be a sign of healthier times. When Dr. Krugman declares the death of the rentier, I think he’s making the same mistake that JM Keynes made during the Great Depression when interest rates were very low and it looked like the economy would never recovery. This suboptimal growth is not a sign that the rentier is dying or should die. It is merely a sign that economic growth is suboptimal. And as Keynes learned later, the rentier was anything but dead and the credit based monetary system continued to grow and thrive in the ensuing decades. I have a feeling that Dr. Krugman could be having his “JM Keynes” moment here….And in fact, we should hope he is because that would mean better times are ahead.
- Should we be concerned about economic “rents”? To me, this is not a debate about whether economic rents are good or bad. Rather, it is a discussion about whether incomes are distributed in such a manner that is conducive to economic prosperity. After all, the economy is not a poker game where one person gets to leave at the end of the night with all the chips and everyone else goes homeless and bankrupt. Capitalism requires a healthy middle and lower class so that the “big stacks” can sell more goods and services and earn a profit. And there could be times, when some of these “big stack” players accumulate so many chips that it actually becomes detrimental to the health of the economy. The fact is, someone will earn these “economic rents” as a matter of residing in a credit based monetary system (all securities issued are always held by someone). The real debate is about how these “economic rents” are distributed. And one could argue that today’s system is growing increasingly uneven. But that doesn’t mean the existence of “economic rents” is either good or bad. It does, however, raise the question of whether the distribution of these rents is conducive to an optimal economic environment and perhaps a sign of something structurally negative.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.