The Bad Rentier

Max Liebermann 1847-1935 'Self Portrait'


The rentier is not a loveable person. ‘Honorable Idlers’ (ehrsame Mussiggiinger) was the official name given in some medieval cities of the Upper Rhine to members of aristocratic chambers of commerce who were rentiers and occasional entrepreneurs. I see this as an early example of the mixed emotions ‘rentier’ men and women arouse amongst us all. 

Définition - A rentier could be anyone of independent means, typically an owner of capital who participates indirectly or not at all in the process of production, who draws income from rents on capital assets in the form of interest payments or dividends as opposed to wages or salaries. A rentier will not be an ‘idler’ if the category includes crafts of providing capital, money lending, self-funded entrepreneurial dabbling, Sunday-morning stockbroking, even philanthropy, all of which require labour time and can be inputs in production. 

The painter Max Liebermann entirely fits the definition of a rentier. He inherited a stock of capital from his father, a manufacturer who had become a banker. He studied philosophy. (Some of the most famous philosophers were rentiers.) Liebermann’s devilish self-portrait --above -- might suggest he was a bad rentier. In fact he was a good rentier. He invested his excess capital stock by patronising French impressionist painters (consumption philanthropy), and kept himself alive to a ripe old age while adding, in incalculably valuable ways, to the cultural stock of western civilisation. 

Still, it is easy to see why colourful impressions persist of a rentier who is a parasite on society. We all have our favourite bête noire. Mine (sorry FT) is a recreational Keynesian and FT-reader purchasing government bonds during debt crises whose root cause is political abuse of public budgets, whilst being in full knowledge, like every punter, that government contracted the new debt in order to postpone structural reform and bailout banks before the next looming election.

Divertissement - This post is prompted by the surprising (“rapturous”) attention given to a new book on wealth inequality in which the rentier reappears as the bugaboo of capitalist civilisation. Thomas Piketty’s Capital in the Twenty-First Century is, as Robert Solow says, a serious book that demands serious attention. But Piketty does not deserve l'adulation indiscret or comparison à bout de souffle with Adam Smith, Keynes, and Marx. 

The big name that came into my mind as I (idly) perused Piketty's Capital was Joseph Schumpeter. He is THE best gladiator to smite the folly of Piketty Policy with grace and a wide grin. I’ll write the script to that movie. Another gladiator for the job, sans smile, is Max Weber. These two combatants fight in the arena of economic sociology, a discipline I chose to exercise today in far-from-idle fashion at the cutting edge of Rentier Studies. 

In France, but not in England

Piketty attacks the lack of control that gives rise to “excess” capital income and inequality in the system, but he does so politely. He is not nasty about the individual rentier, noting correctly that no market system can or ever will be without the rentier. It is relevant to mention in this context that Piketty is a French economist, and France has historically suffered from an acute overdetermination of political economy by the rentier economy. 

The absolutist tendency in early modern French politics was manifested economically in state dirigisme that encouraged monopolistic commercial and manufacturing privileges, venal office holding, punitive taxation, usury and appropriation of agricultural rents as the seigniorial form of surplus extraction. Whatever 17th and 18th century entrepreneurial activity did arise in France tended to drift ineluctably into rentier activity coupled with purchase of public office. In France, the interest paid on the rentes sold by the crown to rentiers was often arbitrary and political (the rente was a credit instrument approved by the Pope, the borrower signed over rights to an income stream from property). Even so, the symbiosis of political and economic classes in France led -- in the words of an English Marxist historian -- to “constant movement of entrepreneurial capital into rentier capital”.

Connaissance - In pre-revolutionary France the attraction of rents over business profits was not inevitable or natural. It was artificially constructed by political forces and active regulation. The same may the case today. Piketty identifies a modern global tendency for entrepreneurial capital to convert into rentier capital, as in France of old, but he explains it differently. 

The rentier does not seem so problematic from an English perspective. 17th century rentier landlords in England also pursued political careers, some absented themselves from production or profited from financing public works on highly privileged terms. But they did so partly in an attempt to offset the paucity of crown patronage. There was also the notorious English 18th century association of managerial landed aristocracy with rentier Whig investment in government debt, which Hume and Bolingbroke so abhorred.

Yet in myriad ways the English state and its fortified legal system did much more to encourage sustained entrepreneurialism, and to channel rentier capital into ventures which deepened market economy and spread trade across the world. Compared with France the burden of English taxes and regulations was minuscule. State administration in England was applied with light touch. The English rentier still invested in commercial production and efficient technology, and the English peasant successfully resisted ancient feudal practices. Important is the fact that rentiers in England (barons, noblemen) willingly undertook local government and judicial functions without expecting payment for their service, as means to increase status and power (to be self-reliant financially). 

Connaissance - Institutional incentives for productive investment and positive politics outweighed negative and economically conservative effects of rentier activity. The same may the case today. In Piketty’s 700-page book the word ‘incentive’ appears only 19 times, and usually in relation to non-rentier business executive salaries. 

In Economic Theory

The mixed feelings that the rentier provokes in the delicate conscience of a critical observer -- the need to criticise on one hand, and praise on the other -- are well illustrated in Max Weber’s writing. Before examining Weber’s analyses of the rentier, I urge the reader to spend a moment appreciating Weber’s cool-headed distinction between ‘revolutionary’ and ‘conservative’ income (this appears in Weber's Economy and Society).

"Of all types of incomes, it is particularly those from business profits and the contracted piece rate or free labor incomes which have a dynamic, revolutionary significance for economic life. Next to these stand incomes derived from free exchange and, in quite different ways, under certain circumstances, the predatory incomes. 
Those having a static, conservative influence on economic activity are above all incomes drawn in accordance with a predetermined scale, namely salaries, wages reckoned per unit of working time, gains from the exploitation of office powers, and normally all kinds of fixed interest and rents."

If nothing else this passage helps focus the mind on the fact that the rentier is no more conservative than the salary earner. In reality, the main functional difference is between a rentier who lives from predetermined income as compared with the entrepreneur whose insecurity is similar in type to that of the worker on a temporary contract. 

On the other hand, and this is a significant consideration, “in a market economy striving for income is necessarily the ultimate driving force of all economic activity”. The striving of the rentier for fixed interest is less intense or risky but no less legitimate or functional than the striving for entrepreneurial profit. That is why Weber also carefully mentions that although rentier interest in income is not primarily oriented to the long-run profitability of enterprises, the rentier might be far more easily reconciled with the long run interest than the speculative profit-seeker who looks only at the short-run. 

Connaissance - If similar conditions prevail today, and if such distinctions do apply, the rentier’s position may need to be positively reevaluated. The average rentier -- very likely also an occasional entrepreneur -- might be more compatible with the general enterprise of deep capital investment than the average speculator... if the incentives are right.

Now here is the rub. Weber categorically insists that neither revolutionary nor conservative income can be reconciled with the political (or moral) objective of income redistribution. “In a regulated economy the aim of the regulations is generally to affect in some manner the distribution of income”. In that case, regulation of income distribution poses a greater hindrance to the functioning of a modern market economy than the rentier's activity. Piketty wants to tax rather to regulate the rentier. However, a tax designed primarily to engineer a socioeconomic distribution rather a revenue efficiency is, in reality, just a regulation. 

In Germany, 1917

Turning now to his political and historical writings, Weber had two somewhat irreconcilable things to say [the first is summarised below, the second follows in next week’s post]. 

The rentier -- even though he or she is entirely committed to the capitalist system which provides the sources of all their income -- is typically hopeless at the hard and creative work required to run an enterprise. In an angry critique of easy-going German middle class “philistines” who snobbishly despise law and order and the ethics of hard work, Weber likens the mentality of rentiers to state-employed prebendary and idealistic literati or academics “who judge the hard daily struggle of their fellow citizens who are engaged in physical and mental work against standards dreamed up at their writing desks”.

Weber makes all these points in a 1917 brochure called ‘Suffrage and Democracy in Germany’. Unlike the trade unionists and entrepreneurs “who are made acutely aware of the structure of the state every day through their participation in the free fight for economic life”, the “swollen stratum” of subsidised prebendaries and parasitic rentiers cannot fathom why Germany must compete with the whole world for market shares. The paper fortunes represented by the share-dividend coupons they idly have snipped at their banks only prove that men of equally capable intellect, whose jobs and bread depend on satisfying a demand for goods and services, “have fought and won a battle for a share of the market”

Germany, Weber raged, should instead consider emulating the English state’s model of “entrepreneurial capitalism”. Germany simply cannot afford any further expansion of the coupon-clipping investor class, which is more typical of France. This, he said, explains the rumours circulating about the dominance of finance capital over France’s parliament. 

“France is a nation of rentiers, [and] the credit-worthiness of whatever government is in power, as expressed in the stock-market value of government bonds, is the single most important question for the millions of small and medium-sized investors in assessing the worth of ministers, [thus] this is the reason why the banks are so often involved in, or are even consulted about, the selection of ministers.” [Max Weber 1917]

In General

In Economy and Society Weber offered two additional broad observations. First, the rentier’s life, and the life of the banker and shareholder, is made easier because he or she does not directly confront workers in conflicts over wages. The tough responsibility for facing those fights falls to business executives and manufacturers. 

A second argument is that bondholders who are the rentiers and ultimate state creditors during wars that create new demand for sovereign debt to pay for military expenditure may be joining an unholy alliance with “economic forces interested in the emergence of military conflagrations per se, no matter what be the outcome for their  own community”

Connaissance - I shall mention just one contemporary parallel. In the 21st century advanced welfare state, coalitions emerge with a definite interest in sovereign debt, whose volume rises in response to political demand for social spending and -- during financial crises that reveal the vulnerability -- demand for bondholder and bank bailouts. The presence of such a coalition radically outweighs wealth redistribution as a justifiable reason for controlling the rentier, especially if modes of redistribution were the original justification for the social spending. 

In Conclusion

We have seen that Max Weber, in pamphleteer mode, was under no illusions whatsoever about the contra-capitalist incentives which might spread in an economy that hosts a swollen stratum of parasitic rentiers. Weber also plainly saw the potential for financiers to undermine democratic politics in a rentier economy. Piketty depicts the rentier as the “enemy of democracy”. Are they singing from the same hymn sheet? Absolutely not.


Michael G. Heller ©2014

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