Rentier is a class of people who derive their incomes from financial titles to property. Though the term makes an analogy with the old rent-earning class of great landowners, rentiers are characterized by their more distant relationship to the property they own. Rather than living in an estate in the midst of their property, they own a variety of anonymous income-earning assets, most typically shares and instruments of debt. From the rentiers, all vestiges of the paternalism, noblesse oblige, and personal dependence that once characterized the landowning aristocracy have vanished, leaving them as pure consumers of financial revenues.
While with industrialization a portion of the landowning class transformed itself into rentiers—particularly those, like the duke of Westminster, whose lands became urban—the existence of a rentier class can be seen as an inevitable consequence of the development of capitalist financial institutions. The term rentier came to prominence in the early twentieth century and remained influential in economic discourse during the 1920s and 1930s. In the early twenty-first century it is again attracting attention as the financial sector comes to be dominant in mature capitalist economies.
What causes the financial sector to replace manufacturing as the bedrock of the economy? Its supposed role is to fund investment. Savings are meant to be channeled through the banks, investment trusts, and the stock market into firms that want to carry out investment in new capital stock. This process obviously does occur, but in many capitalist countries the financial accounts show that industrial and commercial companies are net suppliers rather than users of funds. It is by no means obvious why, in the face of continuing improvements in information-processing technology, the sector that carries out this channeling of funds should over time absorb a larger and larger portion of national resources and appear to contribute an increasing share of national income.
Channeling funds is manipulation of information. The “funds” are records kept by the banking system, and their channeling is a sequence of transfers between records. The records long ago moved from paper to computer databases. The power of computers has improved by leaps and bounds. One would have thought that the labor required to manage this system would have declined. The mechanization of agriculture eliminated the peasantry, but computers have not laid waste to the City of London. Why?
The key to this paradox is to realize that, despite the modern jargon of a financial services “industry” that offers financial “products” to customers, the financial sector is not a productive industry in the normal sense. Its structural position in capitalistic information flows ensures its
continued command over resources despite changes in technology that would decimate any other industry.
Figure 1 shows in summary form the flows of funds into and out of the financial sector. Savings by individual capitalists, by firms, and from the pension schemes of employees enter the system. Funding flows out to firms carrying out capital investment and also typically to the state to fund the public debt. However, money also flows out as costs: the income of the financial sector itself. This comprises wages of its employees, the bonuses it pays, the distributed dividends of financial companies, and the costs of buildings and equipment that the sector uses. Let us denote savings by σ, bonuses and costs by β, and funding of investment by φ.
The residual, which we wll denote by δ, is made up by the change in the money balances of the financial sector itself: δ = σ – β – φ. We need to explain why β, the costs/income of the financial sector, rises as a share of national income over time.
It has been argued that the real rate of return on capital tends to decline over the course of capitalist development (Marx  1971; Lebowtz 1976; Moseley 1990; Michaelson, Cockshott, and Cottrell 1995; Duménil 2002; Edvinsson 2003, 2005). If the rate of interest does not fall at a corresponding rate, then the level of voluntary fundraising by firms will decline, because a diminishing portion of firms will be making enough profits to cover the rate of interest. However, the level of savings will not necessarily decline at a corresponding rate.
The distribution of income in capitalist societies will be highly uneven (Levy and Solomon 1997, 1998; Reed 2001, 2003). A large proportion of income goes to a small part of the population. People with high incomes tend to save most of it. A decline in the rate of profit on capital will not alter this. It just means that the book value of the assets of those with high incomes rises. So savings going into the financial system will not decline. The disproportion between share issues and savings tends to make share prices rise; this in turn will induce a rise in the costs of the financial sector β through bonuses and so on.
A feedback mechanism is at play here. The average price of shares rises until the extra bonuses earned by the financial sector absorbs any excess of savings over investment. The argument above takes certain things as given—in particular, the separation of the capitalist class into a set of rentiers and a set of firms engaged in direct production. While this is a realistic portrayal of mature capitalism, it is not capitalism’s aboriginal condition. In an earlier phase of capitalism, the rich did not save through financial intermediaries; they saved by investing in their own businesses. One has to ask what mechanism caused an initial population of capitalist masters to polarize into these two subgroups: functioning businesspeople and rentiers who invest only indirectly.
The transition process can be understood as a consequence of the dispersion of profit rates in an initial population of capitalists. Capitalists whose profit rates are above average find it beneficial to borrow funds to invest in their own business; those whose profit rates are below the interest rate gain more by depositing their profits with financial institutions than they would by reinvesting. Borrowing raises what is called the gearing ratio of borrowing firms and lowers that of lenders. Industrial capitalists initially earning a low rate of return in industry come, by lending, to acquire negative gearing ratios. In the process they transform themselves from entrepreneurs into rentiers.
The designation rentier was initially applied to individual people, but it applies equally well to any legal entity in the same situation. Limited companies, with respect to their fellow companies, have begun to function as rentiers: that is, they derive their income primarily from their financial rather than their industrial assets. As the demand for funds in the industrial and commercial sector dries up in the face of high interest rates, lending comes to be directed increasingly toward the funding of state debt and consumer credit. With a growing portion of capital depending on interest rather than industrial profit, there develops an increased political pressure to maintain high interest rates. This baneful effect of the rentier interest, which was already lambasted by J. A. Hobson (1902) and John Maynard Keynes (1925, 1936) for its role in consuming capital and hindering investment, looks set to grow. Early twentieth-century critics of the rentier class like Hobson, Keynes, Thorstein Veblen, and even V. I. Lenin identified another trait—its predatory character. To this trait they attributed the disaster of World War I and the deferred disaster of the Versailles treaty.
The rentier interest stood ultimately on moral grounds quite alien to those of natural right. Speaking of the absentee ownership of natural resources, Veblen remarked,“The owners own them not by virtue of having produced or earned them. … These owners own them because they own them, … title is traceable to an act of seizure, legalized by statue or confirmed by long undisturbed possession” (1923, p. 51). This trait is best exemplified today by Russian rentiers like Roman Abramovich, whose billions derive from the greatest undisguised seizure of natural resources within living memory.
SEE ALSO Capitalism, Managerial
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