Rents

A surprising new explanation for the radical growth of income inequality—and a new strategy for stopping it.

Income inequality has risen dramatically since the 1970s. But why, exactly? Most experts point toward increased productivity differences, globalization, the diminished power of unions, or the stronger grip of money on politics. In Rents, Gerrit De Geest offers a different explanation: income inequality has increased because markets have become less competitive. Modern markets are more distorted now than was the case in 1970.

The driving force behind this evolution? More sophisticated marketing! Although marketing is meant to improve markets by bringing products to the right customers, De Geest explains how it often does the opposite—creating “value” to businesses by making prices less transparent, splitting informed and noninformed consumers, making products incomparable, locking in consumers, exploiting psychological biases, creating network externality effects, or preventing price wars. Over the time span 1970–2015, the impact of marketing on the economy has steadily increased. Today, there are few markets left that have not been turned into less competitive ones by marketers, trained at modern business schools. This has increased the amount of artificial profits in the economy—called “rents” in economic jargon.

The result? Using a novel method, De Geest estimates that rents now amount to 35 percent of the economy. This means that out of every $100 you spend, on average $35 goes to profits that could not have been made in perfectly competitive markets. That was only $20 in 1970. Rents shows how getting wealthy has become less a matter of working hard than of capturing artificial profits in distorted markets.

A book that will explain both why your boss makes many times your salary and why the prices you pay for groceries keep changing.

Gerrit De Geest is the Charles F. Nagel Professor of International and Comparative Law at Washington University School of Law, where he teaches contracts, antitrust law, law and economics, and consumer contracts, and served as the director of the Center on Law, Innovation & Economic Growth. Before moving to St. Louis with his family, he was a chaired professor at the Utrecht School of Economics and president of the European Association of Law and Economics.