Property Rights: An Elegant Solution

Whenever two or more people get together, there is bound to be conflict (and, of course, the greater the number of people, the greater the likelihood of the occurrence).  One of the ways of heading off conflict is through the establishment of clearly-defined property rights.

Allow me to tell a story:

A few months ago, I was in New Jersey visiting my friend, her boyfriend, and their two roommates.  4 people living in a house together.  And yet, there was surprisingly little conflict between them.  That was because of the regime of property rights they established among themselves.  Some items (like the TV, furniture, Xbox, etc) were available for common use, but others (like food) were marked with initials, meaning that no one could touch that but for the owner(s).  This had the joyous consequence of heading off any potential conflicts over consumption of goods like food; no one could be accused of slacking about and consuming the goods of others (likewise, no one could feel like s/he were doing all the work and not receiving anything for it).  And what’s more, the property rights were tradeable, too.  If Roommate 1 was making a salad and ran out of mushrooms, he could ask Roommate 2 if he could use some of her’s.  She could trade (or give them away).

The end result of all this, was a peaceful house with multiple people and little conflict.  (Of course, there could be conflict arising from other things, such as the negative externality of a roommate playing their radio too loud, but that did not arise while I was there so I don’t know how they would have addressed that issue.  Knowing them as I do, I’d suspect some kind of Coasian bargaining).

Property rights, when clearly-defined and enforceable, are key to a peaceful civilization.  If we look at the places with the most violence in the world, the key factor among them is a lack of property rights, either for all or for some marginalized group.

A Quick Update

Hello everyone-

Sorry for the long delay since my last post.  I am in the process of moving from NH to VA and preparing for grad school.  I will have some post forthcoming in the coming days

-Jon

The Goal of Economic Activity is to Maximize Net Benefits

Mark Perry points to an article at PBS Newshour written by Professor John Komlos, professor emeritus of economics at University of Munich.

Mark’s post does an excellent job discussing one of the many economic flaws, mistakes, and outright contradictions Mr Komlos’ column contains.  I won’t rehash his arguments here but I strongly recommend the read and some of the commentors are good, too.  Rather, I want to discuss a rather glaring Econ 101 mistake he makes.

Mr Komlos writes:

Or consider orange juice. I paid $2.35 for a quart the other day, but it was worth $4.00 to me. So in a sense I made a “profit” of $1.65. Thus, if the price were to increase to $3, I would still buy that orange juice, and I would still make $1 “profit.” See what I mean?

Any first semester Econ 101 student could point out why this is incorrect reasoning for his case of increasing minimum wage.  The reason is economics focuses on what occurs at the margin and that the goal of economic actors is to maximize their economic profit, not just to make profit.

Let’s examine Mr Komlos’ statement quoted above:

Mr Komlos writes that he values a quart of orange juice at $4, but only had to pay $2.35 for it, thus giving him an economic profit of $1.65.  However, if the cost were to rise to $3, he still gets an economic profit of $1.00, but he is made worse off because of the price rise.  His economic profit fell from $1.65 to $1.00.  That $0.65 is now gone.  Lost forever.  It is the unseen cost of the price rise.

Additionally, he fails to recognize that the marginal analysis has changed.  In economics, we demonstrate that benefit-maximization occurs when your marginal benefit (MB, or what you gain from the consumption of one extra item) is equal to the marginal cost (MC, or what you have to give up to consume one extra item).  In the example above, the MC rises but the MB doesn’t.  Therefore, the same amount of orange juice no longer maximizes benefits.  In order to have his net benefits maximized, he’d have to adjust his consumption.  And this is true whether it is with orange juice or labor.

Do people always act in a net benefit-maximizing fashion?  Of course not, but to imply, as Mr Komlos does, that people behavior do not change because their profit (that is, benefit) changes is categorically incorrect.

And Now Pitching for the Boston Red Sox…

Below is a slightly – edited comment I posted on this post at Cafe Hayek:

Another way to think about it:

Why are the Boston Red Sox paying David Price $20 million a year when they could have me do the same job for 1/1000 the price?

The Red Sox would be crazy to hire me to be their ace starting pitcher, even given they could pay me so much less than what Price makes because I simply don’t have the productive value he does.  My fastball tops out at 65 MPH; his is regularly in the mid-90’s.  My walk-to-strike ratio and WHIP (walks/hits per Innings Pitched) would be through the roof.  His are closer/below league average.  In short, the Sox would be getting a poor deal if they signed me.

This is a key matter to keep in mind when discussing trade and low-wage workers competition in competition with high-wage workers. The argument that economic individuals will substitute lower-cost inputs for higher-cost inputs holds only if the two are comparable.  The price of an input (in this particular case, labor) reflects the marginal value added and thus a lower-cost option (such as myself) is not necessarily a good, or even preferable, substitute to higher cost options (such as David Price).

It is for this reason that we’ve seen some manufacturing jobs go to China or Mexico over the years, but not many others.  The jobs that have gone are mostly labor-intensive assembly-line work.  In other words, something the foreign worker could do a comparable job for less cost.  Conversely, the manufacturing jobs that have stayed are more capital-intensive precision work.  In other words, something that the foreign workers could not do a comparable job for less cost. In fact, this is why (despite the ruinous predictions by anti-progress politicians like Sanders or Trump) globalization has made the world (including the developed world) far wealthier.