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 commercial thoroughfare in the period) had a habit of hanging iron chains across the width of the waterway and extorting a fee from anyone who wanted passage. The nobles grew very rich from their tolling activities – building fancy castles overlooking the Rhine with their ill-gotten proceeds.
Rent extraction or ‘rent-seeking’ as it is also often known has evolved and broadened as an economic concept. It now covers a whole range of activities in a modern economy. A famous example used in economic textbooks is licensed taxis. Black cab drivers pressure city authorities to clamp down on the activities of unlicensed minicabs. More recently they’ve also tried to get new entrants to the taxi market like those who work for the Uber web app service banned. To the extent they are successful in these rent-seeking activities they boost the value of their own licences. It is their customers who end up paying in the form of higher fares.
But cabbies are small fry in the rent-extraction ocean. A more lucrative practice is found in the law firms that mildly tweak and re-file patents as a means of squeezing more money out of clients’ old intellectual property or who aggressively sue other firms over minor and often spurious infringements. None of this incentivises more research or innovation. And it is the public who pay for this ‘patent trolling’ in higher prices for products.
But easily the biggest source of wealth extraction in modern economies is the wholesale financial sector. Much of the activity of Wall Street and City of London traders in investment bankers constitute a form of rent-extraction. Their phenomenally lucrative market-making activities in interest rates and foreign exchange don’t actually create new wealth – they merely shift money from the pockets of companies and pension funds into their own.