Home > Politics > It’s Property Rights, Stupid!

It’s Property Rights, Stupid!

Freedom is the greatest economic innovation in history.  It’s not a coincidence that the greatest period of scientific, economic, and philosophical progress in the ancient world (at least in the west) coincided with the rise of democracy in Greece and continued through the years of the roman republic.  Then once the republic descended into totalitarianism and collapsed, Europe was stuck in a “dark age” for nearly a thousand years ruled by kings and queens.  When the renaissance finally came to Europe it began in the merchant republics of Italy.  Marco Polo didn’t go to China on the orders of the King of France, or some German warlord, he set out from the Venetian Republic, in an attempt to get rich, and the did.  In 1215, England imposed the Magna Carta upon King John and then spent over four centuries in a back and forth struggle between kings and subjects which culminated in the civil wars of the mid 17th century and the establishment of the Commonwealth of England.  Following this, England quickly became the world’s economic and military super power.  Finally, the ultimate realization of individual liberty occurred in the formation of the United States.  The industrial revolution and the greatest era of prosperity the west has ever known soon followed.

If we want to continue to reap the benefits of freedom we have to rediscover the connection between freedom and prosperity.  John Locke said that “no one ought to harm another in his life, health, liberty, or possessions.”  The last area, possessions, seems to be commonly overlooked these days and it is quite possibly the most important part.  Indeed, it was even changed to happiness by Jefferson in the declaration of independence.  But the pursuit of happiness must be viewed as inclusive of the pursuit of property as well as other pursuits an individual may desire.  To say that this applies to any pursuit from which a person may derive happiness except property makes no sense.  If  the policy of the government is that you are free to do whatever you want but if your actions lead to the accumulation of any physical property we may or may not take it at any time, are you really free?  “Freedom” without property rights is a misnomer.  More importantly, it is the property rights that are responsible for the marvelous economic implications of freedom.

The motivation for people to produce in a free society is (at least primarily) the anticipation of enjoying the fruits of their labor.  The motivation of a slave to produce is to avoid the lash.  But the second motivation can only induce some minimum level of effort.  It cannot drive men to great achievement.  If you are the king of a nation with a million subjects, maybe one of them is capable of inventing the lightbulb after a lifetime of careful specialized study.  Are you going to point a gun at every subject and order them to invent something you’ve never heard of and don’t know is possible or else you will shoot them?  The lash can make a man work, but it can’t make him think.

If you want a man to think, you must do two things.  First leave him alone and let him decide the best way to apply his ability.  He is the one who knows his ability best.  But this is not enough, if you let him decide what to do but tell him you will take whatever he produces, you will no doubt get a lot of philosophers and video game testers.  The most important part of the equation is to make them confident that they will get to keep the benefits of their creative activities.  This is so obvious, that it is taken entirely for granted by economists when analyzing markets in “developed” nations.  The same people who go around claiming that classical models are useless because transaction costs aren’t zero, never notice that everything they do carries the implicit assumption that property rights are well-defined and stable.  So let’s examine the validity of this assumption.

When people invest in some economic activity, they do so because they anticipate that the revenues will be greater than the costs in the long run.  Coming to this conclusion often requires them to be able to anticipate revenues and costs years in advance.  In order to do this you must have some idea of what the marketplace will look like in the future.  Some aspects of this are determined by nature and are beyond the control of men.  Such risks have always existed and always will and their existence gives rise to the potential profits of speculation and investment.  These things do not amount to a deficiency in property rights.  If you are a farmer and the demand for your product falls, it is not a failing of you property rights.  You own the rights to your produce and along with it you own the risk associated with price changes.  When a volcano goes off in Iceland, and you are stuck in Europe, it is not a deficiency of property rights it is the realization of an adverse event that was foreseeable, although unlikely, and you accepted the risk when you went to Europe.  These risks will never bring economic progress to a halt.

The real danger to an economy is when people lose confidence in their ability to predict revenues and costs in the future.  This occurs when the power to seize their property is put in the hands of men (in other words the government).  A volcano going off is an event which is harmful but it is harmful in a predictable way with a predictable probability.  A government that is not constrained by the rule of law could do anything at any time.  Here are some of the main ways they assault your property rights in difficult to predict ways.

Taxes: If you started a tanning salon last year, sorry, you go screwed.  Bet you wish you had done nothing instead.  Same if you started a smoke shop, or a bar in my home state of Washington.  Taxes are the most direct way that the government seizes your property.  They can decide to come after any particular industry, class, or group at any time.  Rush Limbaugh famously fled New York to escape high taxes.  If you are a millionaire industrialist looking to build a factory and you look at our debt and our promises to not raise taxes on the middle class, do you want to be stuck in this country in five years, or would you feel more comfortable building that factory in Singapore?  Is there going to be a VAT tax?  Seems like that would have a big impact on your calculation of revenues and expenses in the future.  There’s gotta be some tax sometime to pay for all this stuff.  Who’s gonna pay for it?  Nobody knows, it depends who is in power and who they like.  The only way to be sure it won’t be you is to not produce, or move out of the country.

Regulation: If you finished medical school last year, sorry, you’re screwed.  Unless you start refusing medicare patients.  But wait, if you do that, the government could just pass a law forcing you to take them.  Or pass a law preventing other insurers from paying more than medicare does.  Don’t you wish you had just joined a construction workers union instead?  If you started a health insurance company you’re also screwed, unless they decide to save you by screwing someone else.  If you started any other kind of company and hired employees you are probably still trying to figure out whether or not you’re screwed.  Somehow that 2000 page bill is going to interact with the millions of pages of existing regulations and the complex laws of economics to have some effect on the economy.  And when it does, they will do something else.  Who knows what the effect will be or what they will do about it?  If you looked at the airline industry and realized it would be more efficient to offer a lower price and charge for carry-on bags, the thing to do in a free market is to go start an airline and cash in on this realization.  But if you do that now, is Chuck Schumer going to pass a law making it illegal?  If you start a supermarket, are they going to force you to unionize?  If you think you can produce a good cheaper than the competition and you do it, will the government come in and put a price floor in place?  If you start a business to make energy-efficient windows, will the government give a grant to your competitor?  Maybe it’s better to just do nothing.

Money: In a free market with real money, the value of money would be determined by natural forces.  You would be able to predict inflation, and you could sign contracts for payments in the future and have a good idea of their value, and at least if it turned out to be wrong, the variation would be beyond the control of the contracting parties.  Because of this, after America abandoned the gold standard people wrote gold clauses into contracts to guard against inflation.  That is, until FDR made this practice illegal.  If you borrow money to start a business or buy a home and deflation happens you get screwed.  If you lend money to start a business or buy a home and inflation happens, you get screwed.  Which is going to happen?  The politicians like to claim that the Fed stabilizes inflation but does that seem to be the case?  Prices and interest rates are determined by expectations about the future.  If the money supply was determined by natural forces, this wouldn’t be much of a problem.  We can get a fairly good idea of how much gold will be mined over the next ten years.  But we gave control of it to a group of men.  Now we have to guess what they are going to do over the next ten years.  And their future actions depend on the way we react to our guesses about those actions.  And if this weren’t enough, the government has a huge stake in the game.  They are the biggest debtor in the world, they stand to gain a lot by unexpected inflation.  And the fed is a bunch of bankers, they are the biggest creditors in the world, they stand to gain by unexpected deflation (although this is somewhat complicated and as such is often overlooked).  You can borrow at a low interest rate but so can everyone else.  If you take current prices and imagine 2% inflation and calculate that the revenues in five years from building a widget factory will be greater than the cost, should you build it?  You don’t know because the interest rate that you factor into the cost isn’t determined by the market it is chosen arbitrarily by men.  So is the inflation rate they tell you to expect.  But if you look at these and it makes building the factory look profitable, you have to take into account that a whole bunch of other people may look at it and come to the same conclusion.  If you all do this, then in five years the market will be flooded with widgets and you will all get screwed.  So are we in an asset bubble?  Is the government going to print money to pay off the debt?  Will the dollar collapse?  Could these things have a potentially large effect on your estimation of revenues and costs in the future?  Maybe it’s better to just fill up your basement with food and gold, and take it easy.

This is the economic environment you create when you let the government do whatever they want whenever they want.  There is no way to predict what they are going to do at any given time.  This is a climate of very weak property rights.  When property rights are weak, it becomes very difficult to predict costs and revenues in the future and this makes economic investment very unattractive.  We don’t need government to do more to fix the economy we need them to promise (in a credible way) to stop doing things.  It’s really not that complicated. But then again, that may be this theory’s major flaw.  It doesn’t give economists an opportunity to show off their mathematical ability, and it doesn’t give politicians a way to justify their existence.  These people both want to believe in a world where the economy is a machine that they control by turning dials.  They are incorrect.

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  1. April 26, 2010 at 11:00 pm

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