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Is the real interest rate component of interest (excluding default risk premium, etc) inherently rent seeking?

The real interest rate is typically considered to repay the opportunity cost of lending money, however, note that there is some degree of circularity in this definition: if charging of interest were prohibited on grounds of being rent-seeking, then the opportunity cost of lending would be less. So the question remains.

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No. Interest is the portion of economic surplus that goes to Capital, whereas Rent is the portion going to Land (with Wages going to Labor.) These are the classical Factors of Production going back to Adam Smith, David Ricardo, and the very beginnings of modern economic theory.

The neoclassical redefinition of economic rent is the source of the confusion here. Historically, that redefinition happened primarily to discredit the views of economist and politician Henry George (in the late 1800s) but we've been stuck with the terribly confusing definition ever since.

Here is an excellent paper by Mason Gaffney that details the historical motivations: Neo-classical Economics as a Stratagem against Henry George

There is a more recent notion that "rent" is defined in terms of its properties: being unearned, being the result of a lack of competition, etc. All of these are derivative, secondary aspects. Rent comes from exclusive control — typically granted by government — over some resource. Historically, land was the canonical example of such exclusive control. But nowadays, we have not just real property but "intellectual property" and monopoly rights granted in the form of exclusive use of portions of the electromagnetic spectrum, rights of way granted for the laying of utility cables, exclusive rights to operate (e.g.) taxi service within a specific area, etc. These are all forms of "land" in a more general sense, and all of them generate economic rent in virtue of those monopoly rights. Clearly such exclusive control also results in a lack of competition, unearned income, etc. But again, those are merely consequences of the monopoly rights; they do not define rent. A lack of competition may simply be due to market inefficiency, in which case it is not rent. It's just inefficiency. Rent only arises when one party is granted monopoly rights over a resource.

Once you recognize that all rent comes from control of a resource granted through monopoly rights, distinguishing between rent, interest, and wages becomes very simple. It is only the confused definitions that make it difficult.

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  • $\begingroup$ I like that this answer clears up confusion but on what grounds are you claiming correctness for one of these definitions over the others? $\endgroup$ – Sideshow Bob May 30 '19 at 10:01
  • $\begingroup$ I'm probably overstating things by terming one "correct" when really I just mean that I find it to be a more useful definition. Using the "rent comes from land/monopoly rights" definition, it's possible to derive the others. With a monopoly, competition will be restricted and land owners will be able to charge a higher price than is economically/socially necessary. The opposite is not true -- market inefficiencies can (hopefully only temporarily) result in a higher price, but there is no rent involved. $\endgroup$ – Bill Clark May 30 '19 at 13:29
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I don't think this is the case. In principle, the party lending the money could instead use it to make a productive project herself with some expected return, so that expected return is the opportunity cost of those funds. Alternatively, the resources could be used for consumption today, which (due to impatience) is more valuable than consumption tomorrow.

These are some examples of the real opportunity cost of the money lent. As with any price, of course, if the market is not competitive, then you should expect some markup or "rent-seeking" behavior. My argument is that even if the market was perfectly competitive, you should still expect the real interest rate to be positive.

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  • $\begingroup$ I'm not sure either of those examples stands up. The latter example of future discounting falls under my "etc" above - my bad for an incompletely specified question. In the former case, whatever value the entrepreneur derives from her own capital arises from owning the capital rather than actually working: for sure she will be working also, but she could have obtained the capital via a loan which (if the real interest rate were zero, and she agreed with the lender on the default risk) would have the same cost to her. $\endgroup$ – Sideshow Bob May 30 '19 at 9:21
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    $\begingroup$ Think about it in the simplest case of there being two people in the economy. The question you are posing is: If markets are competitive, there exists an equilibrium where the interest rate is zero. My two examples are cases where every equilibrium has a positive real interest rate. (This fact does not depend on there being only two people in the economy, rather on preferences over time (impatience) and the fact that resources are limited and can have many uses. $\endgroup$ – Regio May 30 '19 at 16:31
  • $\begingroup$ Also, I don't agree with your statement "whatever value the entrepreneur derives from her own capital arises from owning the capital rather than actually working". How can you conclude this? $\endgroup$ – Regio May 30 '19 at 16:34
  • $\begingroup$ It's practically a null statement. The value she derives from capital derives from capital, and the value she derives from her own labour derives from her own labour? $\endgroup$ – Sideshow Bob May 31 '19 at 8:36
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rent is about uncompetitive markets. In very competitive banking sector, interest will still exist. So it's not rent seeking. If laws forbide charging real interests, no private bank would be on business.

If you look at Investopedia for "Economic rent", you find:

"Economic rent" is a term that defines an amount of money earned that exceeds that which is economically or socially necessary. This can occur, for example, when a buyer working to attain a good or service that is considered exclusive makes an offer prior to hearing what a seller considers an acceptable price. Market imperfections thus lead to the rise of economic rents; it would not exist if markets were perfect since competitive pressures would drive down prices. Economic rents should not be confused with normal profits or surpluses that arise in the course of competitive capitalist production. This term also differs from the traditional use of the word "rent," which applies to payments received in exchange for temporary use of a particular good or property, such as land or housing.

Notice: "Market imperfections thus lead to the rise of economic rents; it would not exist if markets were perfect since competitive pressures would drive down prices. "

Bill's definition is the "old version", which is not what you mean by "rent".

https://www.investopedia.com/terms/e/economicrent.asp

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  • $\begingroup$ To take an example from another thread (economics.stackexchange.com/a/29420/13720) a competitive rental property market could still be [economic] rent seeking - does that mean the definition of rent seeking is broader than competition? $\endgroup$ – Sideshow Bob May 29 '19 at 11:55
  • $\begingroup$ to me rent emerges from lack of competition. but maybe you are thinking of a different definition. maybe you should add it to the question? $\endgroup$ – indigo_luc May 29 '19 at 12:45
  • $\begingroup$ The original, pre-neoclassical redefinition of rent was simply the portion of economic surplus going to the owners of Land. I agree that at its core this is related to monopoly rights (i.e. "lack of competition") but this is not the original definition. $\endgroup$ – Bill Clark May 29 '19 at 14:44
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    $\begingroup$ Here is a paper that explains why "rent" was redefined. Henry George was so popular in his time that his opponents felt it necessary to completely redefine basic concepts in economics, in an attempt to undermine his views (and popularity.) Despite the fact that he's no longer a political threat (being dead for quite some time) we are nonetheless stuck with these awful, confusing definitions that try to minimize the role of land as a factor of production. masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf $\endgroup$ – Bill Clark May 30 '19 at 0:56
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    $\begingroup$ Semantics and history of concepts is interesting, but it doesnt help Bob if the answer is "your questions is invalide because your terminology is wrong. Go home.". $\endgroup$ – indigo_luc May 30 '19 at 7:49

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