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Corruption, Rent Seeking and Multiple Equilibria - YouTube
Channel: Marginal Revolution University
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welcome everyone Alex Tabarrok here
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today we're going to be looking at rent
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seeking and why it's so bad for the
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economy just a note on terminology rent
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seeking like corruption is a
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non-productive activity which takes from
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the productive side of the economy rent
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seeking doesn't have to be illegal
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however we can think about creating a
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cartel or a monopoly or a tariff or a
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tax these could all be types of rent
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seeking which take from the productive
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side of the economy and are themselves
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unproductive rent seeking would also
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include theft and other corrupt
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activities but is not necessarily itself
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corrupt okay let's take a look at a
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model so our model is based on one
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created by Kevin Murphy
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Andrew Slifer and Robert Vishnu three
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famous economists in a paper called why
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is rent seeking so costly to growth and
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the very basic idea is going to be the
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rent seeking can drive out productive
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activities in a way that is self
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fulfilling they'll be a kind of snowball
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effect so there'll be a good equilibrium
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which is stable but if you hit a tipping
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point we're going to show that you can
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be driven way down here to the bad
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equilibrium and the bad equilibrium is
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very bad and once you're down here it's
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hard to climb your way back out it's
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gonna be hard to climb your way back out
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that's gonna be the basic idea of the
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model let's take a closer look so we're
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gonna have a model of a developing
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economy in which there are three
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activities things you can do
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first you can produce a cash crop then
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is produce a crop for market sale this
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is where you're going to get money for
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your crop we might think for example
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about producing coffee this is a
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productive thing to do you're going to
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make lots of money you're going to be
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giving cash you're not going to consume
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the coffee yourself perhaps just even
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for export the second thing you can do
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is to go into subsistence production as
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you can produce for your own family or
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produce a crop that will feed you but
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has negligible market value so you can
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produce potatoes for example there's no
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real market for the potatoes you're just
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going to consume them yourself it's
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enough to keep you going keep you in
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subsistence but you're not going to sell
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these potatoes on the market you're not
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going to get cash
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for them the third thing you can do is
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you can go to the capital and you can
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rent seek you can tax you can steal you
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can create cartels and so forth which
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enable you to take from the producers of
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the cash crop
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notice you can take cash but you cannot
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rent seek from the subsistence farmers
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and this is because it's easier to steal
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the cash and it is to steal the potatoes
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the rent seekers they don't even want
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the potatoes you know they want cash
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they want money you can't really take
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very much from these subsistence farmers
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but you can take from the people
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producing the coffee the cash crop you
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can take their money it's much easier so
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it's much easier to rent seek from the
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cash crop and the key idea is going to
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be the rent seeking pushes the returns
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to the cash crop down and in particular
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the more people who enter the rent
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seeking sector the lower the returns to
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producing the cash crop ok let n be the
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number of rent seekers and then let's
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take a look at what can happen in this
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model so our first case is going to be
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the simplest case the property rights
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are well protected case this will help
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us to understand the basic mechanics of
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the model notice on the horizontal axis
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down here we have the number of rent
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seekers on the vertical axis we have the
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returns or the rewards to the different
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types of activities to being a producer
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to going into subsistence farming or to
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being a rent seeker here in red now
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notice that if if there are zero rent
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seekers then the return to production is
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very high up here forget that it says
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good equilibrium for the moment just
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notice that was your rent seekers the
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return to production was very high and
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because property rights are well
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protected the return to rent seeking is
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low so it costs a lot in this in this
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case to steal money from the productive
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sector of the economy now imagine that
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the number of rent seekers increases so
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as the number of rent seekers increases
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the returns to the productive side of
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the economy fall
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and they continue to fall until they are
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equal to the subsistence return at this
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stage people say okay I'm going to leave
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the cash crop so much is being stolen
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from me it's just not worth it anymore
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I'm gonna go into producing potatoes
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instead subsistence farming for the rent
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seekers their returns stay constant as
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the number of rent seekers increase
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until you hit the subsistence for me
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this is because as you get more rent
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seekers they can continue to take from
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the cash crop side of the economy each
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one of them gets a chunk of that cash
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crop side of the economy but once you
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have people anting entering subsistence
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farming that return to rent seekers
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false ok now the equilibrium in this
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model is pretty simple because the
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returns to being a producer the rewards
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to being a producer exceed the rewards
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to rent-seeking
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there's no reason to be a rent seeker so
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everybody ends up being a producer and
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you end up here in the good equilibrium
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this is the good case the great case
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everyone is working in the most
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productive sector of the economy the
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cash crop sector we don't have any rent
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seekers because it pays more to be a
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coffee grower than it does to be a
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coffee stealer ok what else can happen
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case 2 in in a way is the diametrically
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opposite case this is the case where
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property rights are very weakly
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protected so in this case it's so easy
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to be a rent seeker that the returns to
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rent seeking exceed the returns to being
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a producer as a result the number of
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rent seekers increases and it continues
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increasing until we reach the bad
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equilibrium so what happens here is you
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get more and more rent seekers the
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returns to the productive side of the
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economy fall until you reach the
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subsistence return then you still get
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more and more people entering the
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subsistence economy until the returns to
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rent seeking equal the returns to
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subsistence which equal the returns in
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the cash sector of the economy so here
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we may have all three sectors operating
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the rent seekers are taking from the
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kache sector of the economy leaving the
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people in the cash sector with just a
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subsistence return there's no incentive
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for people in the cash sector any longer
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to switch to subsistence farming because
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assistance farming is paying the same
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return also there's no incentive to go
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from potatoes to coffee because again
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you get the same return there's also no
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more incentive to enter the rent-seeking
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sector because they have driven the
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economy to such a low level that
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everyone is making the bad return
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nobody whether they're in the cash crop
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sector of the economy the rent-seeking
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sector or the subsistence sector nobody
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is making a good return everyone's
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making the potato return the subsistence
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returned this is the bad equilibrium and
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here we have the third case which is
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perhaps the most interesting in this
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case if you don't have very many rent
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seekers then everything is ok because
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they returns to being a producer exceed
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the returns to being a rent seeker and
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you end up in a good equilibrium however
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suppose that for random reasons perhaps
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there's a war perhaps there's some kind
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of shock we get an increase in rent
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seeking if we get an increase in rent
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seek enough which pushes us over this
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tipping point then all hell breaks loose
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because if we push over the tipping
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point the returns to rent-seeking will
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exceed the returns to being a producer
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and very quickly we're going to be
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driven down here to the bad equilibrium
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also notice that if you get into the bad
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equilibrium it can be really hard to get
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back out again you've really got to
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reduce rent-seeking a lot get rid of a
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lot of rent seekers transfer all of
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these rent seekers back into the
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productive side of the economy that's
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going to be difficult it may require
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very strict changes in the laws or a
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tough changes in the laws because if you
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make just small changes okay you reduce
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ease of being a run seeker just a little
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bit well then you're still going to have
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the rent seeking returns are going to be
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bigger than the returned in the
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productive sector of the economy and
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you're going to be driven back to this
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bad equal every we've got so many people
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in that sector of the economy it's hard
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to get them all out
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to swish them switch them in a big push
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to get you back into the good
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equilibrium I also think about this part
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of the model as being a little bit like
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the Atlas Shrugged model so a nine
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Rand's novel Atlas Shrugged the rent
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seekers are getting more powerful over
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time the looters and the moochers
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designer n would have put it are getting
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more powerful you're getting all these
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laws so the kind of this curve is
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shifting up like this putting you closer
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and closer to the tipping point getting
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that tipping point closer and closer
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until finally you tip over and you end
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up in the bad equilibrium where all the
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good guys now all the entrepreneurs the
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people who were creating all of the
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wealth the end of going to Galt's Gulch
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the end of believing the economy so you
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can also think about the subsistence
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return as not being a potato sector but
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you can think about the productive
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sector being the innovative sector the
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high-tech innovative advanced sector the
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new sector of new ideas sector and the
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subsistence return as being the less
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entrepreneurial the non entrepreneurial
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sector and as the rent-seeking goes up
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if you get more and more rent-seeking
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you may hit that tipping point and then
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people leave the entrepreneurial sector
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they leave entrepreneurship they go to
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gelts culture they become ordinary
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workers and you get into the bad
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equilibrium this model has another
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interesting interesting aspect suppose
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that the returns to being a producer go
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up
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so perhaps coffee prices go up or
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perhaps there is a greater technological
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change as more innovation and that
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increases the returns in the productive
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sector of the economy well notice that
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that pushes the tipping point way far to
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the right okay it pushes you beyond
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perhaps where you're going to get for
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random reasons so this says that an
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increase in economic growth or an
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increase in the productivity of your
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export sector your coffee sector your
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cash sector this actually has two good
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things to it first of all just because
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it means higher returns that's better
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but also good times means it's easier to
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keep the rents
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at bay simply by raising the return in a
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productive side of the economy you
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reduce the return from being a rent
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seeker so it's kind of a double benefit
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there's a political benefit as well as
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an economic benefit this is why you
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typically notice that when things are
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good they're very good so when the
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economy is booming you often have good
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politics on the other hand when the
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economy falters when the returns to
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being a producer fall so we have a
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situation more like this those returns
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to being a producer fall then you even
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get the worse you get the worst of all
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words the economy Falls at the same time
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you get more people into rent-seeking so
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the bad times are really bad the good
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times however are really good another
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way of putting that is you want to make
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sure that your rent-seeking returns are
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always low because you don't want to
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fall into that tipping point because it
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could be really hard to get bad back and
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if the good times get a little bit worse
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get do get worse for some random reason
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you want to make sure you don't fall
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over that tipping point so you got to
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keep those rent-seeking returns low at
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all times
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okay let's sum up so here are three
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cases the strong property rights case
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the weak property rights case and really
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the one which we're in the multiple
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equilibria case and as we saw there's
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lots of good lessons here about staying
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in that good equilibrium keeping those
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runs seeking returns low how good times
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reinforce good politics how bad times
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reinforce bad politics and the
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importance of keeping out of that bad
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equilibrium Thanks
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