I'd like to introduce and discuss a few concepts that don't get a lot of mainstream consideration:

Once these were modes of income for people, now they are better understood as components of commercial transactions.

What Do You Mean?

Why Is This Observation Important?

It's important because it challenges a number of fundamental precepts about our relationship to work, where we focus our attention and enterprise, and who is entitled to what. It also muddies the clear historical distinction between the leisure, merchant/investor and working classes, because there is now a little bit of each in all of us.

Rents

An economic rent is unearned income a person collects as a result of some circumstance, such as owning a piece of property or controlling certain information. The meaning of the word that we're used to is a derivative of this original meaning.

Rent always occurs at somebody else's expense without returning to them any additional value. It is what naturally happens when a person gets between people and what they want. Once it was the aristocracy collecting rents on agricultural land, now there are new groups collecting rent on infrastructures like finance and communication, as well as specialist knowledge. A rent is not limited to money—you could even say that an especially attractive person collects a rent in the form of a disproportionate amount of attention due to his or her looks.

There occasionally comes a point when it is easier for a person, organization or institution to focus effort on collecting rent rather than creating value. The world can only tolerate so much of that before it finds a way to get around them. A rentier is a ripe target for disintermediation, otherwise known as cutting out the middleman.

If you enjoy a rent of any kind, perhaps the most hazardous thing you can do is act like you deserve it. For one, it makes you a more conspicuous target. It also makes you blind to those who would disrupt you, and leaves you prone when they inevitably do.

An effective strategy here is to murder your darlings: disintermediate yourself before somebody does it for you. Use your insider knowledge to parlay the rents that come naturally to you into value-creating enterprises, then move on to something else.

When you unpack it, to rest on the laurels of a lone innovation is a puzzling objective, especially if you haven't solved the corresponding problem yet. If it's worth anything it will rapidly diffuse into society, if by no other means than your own use of it. Even the most jealous policing will net just a tiny fraction of your innovation's total social value, and the cost of doing so will do little more than eat into your wealth and the wealth of others. To put it another way: if you figure out how to turn lead into gold, in short order there will be a lot more gold around, whether you protect the process or not. It's a parochial strategy for a dubious outcome.

Learn to spot rents. Use the ones you enjoy wisely but don't count on them, and think carefully about which ones you tolerate in others.

Wages

The historical reason why anybody labours for wages is because they have no rent to collect and no capital to invest. If you have ever fantasized about winning the lottery so you can quit your job, you know what I'm talking about.

We can split labour into two kinds: the kind an employer could do but either doesn't want to or doesn't have the time, and the kind an employer can't do and needs somebody else to do the job for them. A wage will also typically be the lowest that will keep a person subsisting and not fleeing to a competitor, since it cuts into the profits of the entrepreneur. Anything on your paycheque above this subsistence is rent. The difference between the income of a Wal-Mart greeter and a so-called high-technology professional—a vocation I'm very familiar with—is rent.

Possibly more disturbing is that a large chunk of the population in the developed world at least partially belongs to the investor class and who don't appear to behave like it. I'm talking about the portion of peoples' paycheques that is used as investment capital to finance their retirement. Since they don't recognize themselves as investors, that money gets robotically dumped into a fund whose manager uses it to robotically purchase what is ultimately the debt of most of the very same people, repackaged and robotically rubber-stamped as clean by a rating agency. And we all know how well that performed. The only way a circuitous folly of such massive proportion could happen is an enormous blind spot in our cultural narrative.

There is an additional irony to this story: Retirement is an invention of the late 19th-century German government of Otto von Bismarck, introduced as a social program to account for the small percentage of factory workers who were spent but had failed to work themselves to death. I have a doubt that our present understanding of retirement is especially aligned with that of its origin.

Profit

Profit tends to be a dirty word, associated with greed and corruption. This is likely because mixed into the income statements of businesses, along with genuine profit, are the proceeds from arbitrage, plunder, and of course, rent.

Profit is an extremely useful tool, however. It is an essential signal that the world appreciates your efforts, albeit only in a certain context. If you make a capital investment into some kind of productive activity and can connect that investment directly to its return, you can be confident that return is genuine profit. If you can't do that, you can't be sure about the true origin of your income. Moreover, that you profit is the thing to pay attention to, how much is cause for a different sort of scrutiny.

Look at the industries that have been in business forever, namely the resource extraction, logistics and materials industries. Their profit margins are in the single digit percent, and that's even taking into account the endless government lobbying and sweetheart deals their gargantuan size affords them. These are about as close as we can get to a living example of what Adam Smith called the ordinary profits of stock.

These profits can be considered ordinary because all the competitors involved are essentially selling the same thing as one another, which means price is the only differentiator. They lower their prices in an effort to compete which ultimately drives down their profits. If a firm posts a profit (or rather, net income) that is much higher than this ordinary rate, then something has to be up.

It has come to my attention that I should be looking at return on capital employed rather than profit margin to observe the true profitability of these firms. For Exxon in 2010, that number is 22%, rather than the posted profit margin of 8%. But I'm interested in the rate of profit associated with each transaction rather than the overall profitability of the firm, so perhaps I should be looking at gross profit, which is 28%. But then the apparatus doesn't run without costs and the organization lives in an ecosystem where it has to pay taxes, which would put the rate of profit at 13% before tax or the original 8% after. It's also viable to argue that the profit can't be used until it's in the hands of investors, which happens in the form of dividends, which constitute more like 2% of Exxon's 2010 revenue. The bottom line is that I'm trying to illustrate that companies that sell commodities can't charge outsized premia over the cost of production because their competitors will undersell them, but they can charge such premia if there is no competing product. I am open to suggestions for a better way to illustrate this point.

Of course that something need not be sinister. It could simply be that you have a unique style or a technique that nobody else has yet mastered. It could be that you saw an opportunity that others didn't and availed yourself of it. It could be that your customers just really like you. It could be that you just were in the right place at the right time.

There are other entities, though, that make a career out of this kind of information disparity, or exploit the very systems put in place to keep things fair. Either way, an abnormally high profit margin is an unambiguous indicator that somebody is either very adept, very lucky or very conniving. A firm that posts too high profits for doing the same thing for too long is almost certainly rent-seeking, whether its officers are aware of it or not.

Consider It This Way

I keep underscoring rent because its mirror image is patronage (in the modern, commercial sense). The former is a form of excise, the latter is a gift. It equates to people donating their surplus to you because they want you to have it—because they're confident you'll put it to good use. You can use that surplus to do interesting and valuable things. Push too hard, however, and they'll take the first opportunity to abandon you.

If you earn your living as a specialist, you get paid a premium to do things other people can't do. The question here is: do they pay that premium because they have to or because they want to? Could you use this premium to produce something you wanted that other people also wanted and were willing to pay you for it, along with this premium so that you can do more of it?

The rules that govern enterprise have long since evolved past the allocation of scarce resources. The more unique, complex, novel or refined the offering, the more trade around it becomes politicized. Basic utility has given way to authenticity, shared values, style and quality of experience. The capital requirements for many kinds of modern value-creating venture are minuscule. The transaction costs that constrained commercial activity into centrally-planned economic microcosms known as firms have nearly disappeared. At the same time, the transaction cost of negotiating a new job has grown enormous. Moreover, individuals understand how to direct themselves more effectively than their employers. The infrastructure to market, buy, sell and invest with each other is firmly in place. Our respective uniquenesses and our passions are our biggest strengths. We just aren't used to it yet.