Over the weekend, I was at home writing …

Over the weekend, I was at home writing a paper on economics of the Great Depression disguised as a paper for American Military History–about the intersection of the two, the wartime economic “recovery” of WWII– and got in to a discussion about the concept of economic rent, and what it means for public policy.

Of course, this required me to define economic rent, and I came up with an extemporaneous definition, inspired by a recent episode of the EconTalk podcast: economic rent is an artificial incentive created to promote an ideological goal.

What kinds of things am I talking about? Cash for Clunkers, which was an artificial incentive ostensibly promoting newer, more fuel efficient cars. But also things like the Ansari X Prize that led to the first civilian astronaut getting his wings, an artifical incentive to further civilian spaceflight.

Economists usually contrast rent with profit, where profit is an organic benefit that arises from the spontaneous (i.e. decentralized) organization of businesses.

I bring this all up because this excellent letter by Don Boudreaux over at Cafe Hayek neatly outlines the difference between profit and rent:

When materials are worth recycling, markets for their reuse naturally arise. For materials with no natural markets for their reuse, the benefits of recycling are less than its costs – and, therefore, government efforts to promote such recycling waste resources.

The government may pay you to recycle plastic bottles, but no business would. However, they’ll gladly buy aluminum cans off of you, because getting aluminum from consumers who think empty cans to be worthless is a lot easier than digging it out of the ground.

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