The right to capture rents: the economic and legal background

• Author: Grady Miller
• Position: Visiting Professor of International Trade Law, University of Kent, Canterbury, England, June 1992
• Pages: 429-447

THE RIGHT TO CAPTURE RENTS:

THE ECONOMIC AND LEGAL BACKGROUND

GRADY MILLER"

In this note, some of the legal and economic implications of a

particular type of foreign trade protection will be investigated. It is

necessary to look at this relationship because it is sometimes assumed

that international trade law does not sufficiently articulate the

interconnection between the state, legal theory, the state's commercial

intermediaries and the laws of economics.

The state, as protector of and intervener in international markets and

thus the international economy, has a mixed history of

sometimes

good

and sometimes indifferent performance. Such interventions, whether

made on the basis of claimed prerogative right or otherwise on the

grounds of securing national welfare, have produced economic

distortions as a consequence of the interference. Because, as a

historical matter, economic theory was not very refined until recently,

the state's measurable role was not easily gauged as to what could and

what could not be easily accommodated. Adam Smith's writings were

first taken seriously by politicians in the early 18th century. Both

before and after the appearance of his important work, history gives us

much evidence that the fiscal and financial powers of the state were

partisanly invoked, applied with disastrous results, and, at times,

capriciously changed with insufficient forethought.1

It follows, then, that as economic analysis improved so did economic

theory upon which working assumptions of the economy could be

manipulated and tested, often

by

politicians rather than economists. For

a historical and purposeful antecedent, it was the postulation of a

perfectly competitive international trading market which emerged and

held until quite recently. Before that the study of markets was quite

unsystematic. This theory provided that there was one monopoly

producer and consumer for each product, market and country.2 This

model followed from the classical economics of price theory.

Visiting Professor of International Trade Law, University of Kent,

Canterbury, England, June 1992.

1 12 George 3, c.7, Act forbidding food forestalling.

2 Price taker context-pure competition; price marker context-monopolist: see

Friedman, D., below.

More recently, a more refined and behaviourally realistic model,

which implies that perfectly competitive conditions do not actually

obtain, has begun to receive attention. While models of perfect

competition go some way in explaining how markets might work,

casual observation, even in the 18th century, could show markets

having a dynamic nature which was not captured by static models or

theories.3 This later theory allows a new set of assumptions to be

tested which can more realistically account for government intervention

in international markets.

For instance, in classical theory, one producer and one consumer

find their own contract point along a curve of indifference.4 They need

never buy or sell as their power

is

just equal. Each has a monopoly of

his own resources. In order to trade, each will need to discover an

advantage in the other, which he lacks. This advantage is called the

comparative advantage and historically it accounts for the motive to

engage in trade, international or otherwise. Refinement of this theory

suggests a model of imperfect competitive conditions because, in actual

fact, most trade takes place between factors, cartels and monopoly

institutions, who can set uncompetitive terms of

trade.

In this scenario,

the state's intervention is justified because the market has no

maintainable equilibrium, is already not competitive; the state can now

intervene to correct a perceived distortion, and prevent a monopoly

price being demanded.5

The state's historically favourite mechanism used to achieve

corrective intervention has been in the form of a tariff (tax) or a

quantity restriction (quota). The intervention, euphemistically referred

to as protection, itself causes further economic distortions. Research

has shown that quotas produce different distortions from those of tariffs

and the use of either is often related to the various sector goals of the

economy and the interest of commercial factors.6

3 Brander, Jas., & Barbara Spender, "Tariffs and Extraction of Foreign

Monopoly Rents under Potential Entry", American Economic Review,

p.

10.

4 Friedman, D., Price Theory, Southwestern Publ., 2nd edn., Cinnc, OH,

1990 and Ryan W., Price Theory, McMillan, Dublin, 1990,

p.353.

5 S. Richard Just, Andrew Schmitz and Zilberman, "Price Controls and

Optical Export Policies Under Alternative Market Structures", American

Economic Review, p.706.

6 Krueger, Anne, "The Political Economy of the Rent Seeking Society",

p.301,

American Economic Review.