Why Have Property Rights?

The purpose of this essay is to flesh out some aspects and properties of property rights.  For many readers, this is probably redundant.  Nothing I will write here is original or particularly new.  However, following recent conversations I have had, I feel it is worth it to rehash some of these ideas.

Property rights, defined as the right to use resources*, exist to help resolve conflicts.  In a world of scarce resources with more than one person in it, conflicts will inevitably rise.  The prototypical Robinson Crusoe, who finds himself alone on a desert island, need not worry about conflicting uses of resources.  He can choose to eat the berries or plant them, and there will be no other objections to their use.

However, once Friday comes ashore, now there is the risk of conflict.  If Robinson wants to eat berries and Friday wants to plant them, then there is a conflict; doing one necessarily means the other cannot happen.  The clear delineation of property rights, who owns the berries, in this case, helps solve/prevent the conflict.  If Robinson and Friday agree that Robinson owns the berry bushes and Friday owns the fruit trees, then Friday can use the fruit trees and Robinson can use the berry bushes to their hearts’ content.  Indeed, they could even trade with one another!

But, what about if there are conflicts with the use of the resources?  Does Robinson have any right to object to Friday’s use?  In other words, are property rights absolute?  Let me be absolutely clear by what I mean by “absolute,” and here a very little mathematical formalism would be helpful: By “absolute,” I mean that the use of the resource will be determined by the resource owner with a probability of 1.  If Joe owns a resource, and its use is determined by Joe and Joe alone 100% of the time, then his ownership is absolute.  If the probability is less than 1 at any time, then the property right is not absolute.

Going back to Robinson and Friday, let’s say that one of Friday’s trees is a coconut tree.  I have already said above that Friday has the property right to the trees.  He can use the trees for his purposes.  But does Friday and only Friday determine how those resources are to be used?  Can we think of an example where his right might be restricted, that is its use would not be determined by Friday?  Yes: Friday may not use his coconuts to bash in Robinson’s skull.  One can think of many other examples.  Therefore, Friday’s property right is not absolute.

Another example: I own a crowbar.  I can use that crowbar for many things, but I cannot use that crowbar to pry open my neighbor’s door without his consent.  Therefore, the use of my crowbar is not 100% determined by me.  For a very select few set of cases, the use is determined by my neighbor.  The property right is not absolute.

The discussion of using property to harm another (whether intentionally or not) is of major importance in law and economics.  As Ronald Coase pointed out when property rights are ill-defined, that is to what extent their use is defined, then conflicts arise.  If rights are absolute, then conflicts are inevitable and cannot have a just resolution.

To be clear, just because property rights are not absolute does not mean they are arbitrary.  They cannot be revoked, renegotiated, or reneged without due cause.  But the glorious thing about common law is that it allows for the flexibility needed to address conflicts which are at the present unseen but may arise down the road without sacrificing the right itself.

This blog post is a little over 600 words.  I will not pretend to have done justice to the issue of property rights here.  For a more detailed discussion, I’d recommend the following readings:

The Property Right Paradigm, by Armen Alchian and Harold Demsetz

Toward a Theory of Property Rights, Part I and Part II by Harold Demsetz

The Problem of Social Costs, by Ronald Coase

*Source

Institutions Matter

While cruising around Facebook this morning, I came across this argument against immigration by one Jasen Tenney:

Illegal immigration is down over 50% with Trump and now to get legal immigration way down. Glad to see them go. Since these people are so good for an economy they can make their own crappy home country a better place to live.

Jasen’s argument is somewhat typical of many man-in-the-street arguments against illegal immigration (and immigration in general).  If immigration is good for the US, if specifically, these people are really a net benefit to the country) and not, as President Trump said infamously, criminals, rapists, and drug dealers, why don’t they stay in their own country and make it a better place?

The economist’s response to this question is simple: institutions matter.  Institutions like rule of law, secure property rights, impartial judiciary, individual rights, etc (in other words, classically liberal institutions) go a long way in producing economic growth.

A person is more likely to flourish, and help others flourish, in an area with institutions that encourage economic growth than s/he is in an area that discourages or predates upon economic growth.  Why produce in an area where property rights are insecure (eg, roving bandits can just steal your stuff, or government can appropriate anything at will)?  Even the best producer may not produce anything under such circumstances.  But, under a different institutional structure, s/he may thrive.

To return to Jasen’s question that motivated this post: why can’t these immigrants simply return to their “crappy” home country and make it a better place?  Quite possibly, because the institutional arrangements necessary to make the country a better place do not exist (or are sufficiently weaker compared to the country the immigrant was headed to)!

Coase, Transaction Costs, and Environmental Entreprenureship

Today’s Quote of the Day comes from pages 7-8 of Ronald Coase’s 1988 book The Firm, the Market, and the Law [emphasis added]:

Markets are institutions that exist to facilitate exchange, that is, they exist in order to reduce the cost of carrying out exchange transactions.  In an economic theory that assumes transaction costs are nonexistant, markets have no function to perform and it seems perfectly reasonable to develop the theory of exchange by an elaborate analysis of individuals exchanging nuts for apples on the edge of a forest or some similar fanciful example.

Many readers of Coase (including economists!) misunderstand him.  This is evident in the improperly named Coase Theorem (it’s improper in that it’s not a theorem).  In fact, Coase is so often misunderstood, he felt compelled to write the book this quote is from to clarify his point!  Coase is often understood to say that, absent transaction costs (or sufficiently low transaction costs), externality issues (eg pollution, noise, etc) can be solved by an allocation of property rights and, regardless of their initial allocation, will result in a Pareto-efficient outcome.  This is correct, but only a partial understanding of Coase.

Much of Coase’s work (and work that spun off from him, such as with Armin Alchian, Harold Demsetz, Gordon Tullock, and many others including my own) focus on the role of the market in addressing externality issues.  Detractors from Coase argue that his insights, that markets for externalities can exist only if there are no/low transaction costs, are not applicable to the “real world,” since transaction costs abound and, therefore, government intervention is necessary.  But this argument represents a misreading of Coase.  In a purely ideal world, there would be no transaction costs, but then no market would be necessary.  As Coase says in the above quote, it is in the world of transaction costs that the market is most useful!  The existence of transaction costs gives rise to firms and other means of human collaboration, which in turn reduce transaction costs, and increase the market exchange of individuals (see The Nature of the Firm (1937) for a more in-depth conversation on this point).

Expanding the idea of markets, firms, and transaction costs to environmental issues, we see the rise of “enviropreneurs” (to use the phrasing of PERC), that is people who seek out and find ways to mitigate these transaction costs in order to achieve desired environmental ends; in short, a market process of environmental concerns (for a detailed look at many different kinds of enviropreneurs, see Free Market Environmentalism for the Next Generation, especially Chapter 9).  The fact transaction costs exist is not a detriment to free market environmentalism, like the detractors of Coase argue, but rather what allows it to come about!

Like Coase (and Buchanan and many others) before me, I realize the market is not a panacea.  There may be conditions for government to get involved (namely where involvement by the firm or an individual are too costly).  But the work of Coase (and Alchian and Demsetz and Buchanan and Tullock and Anderson and many others) show us that the mere existence of an externality and transaction costs is not enough to justify intervention.

Today’s Quote of the Day…

…is from Page 10 of Ludwig von Mises’ 1949 treatise Human Action (emphasis added):

It is true that economics is a theoretical science and as such abstains from any judgement of value.  It is not its task to tell people what ends they should aim at.  It is a science of the means to be applied for the attainment of ends chosen, not, to be sure, a science of the choosing of ends.  Ultimate decisions, the valuations and the choosing of ends, are beyond the scope of any science.  Science never tells a man how he should act; it merely shows how a man must act if he wants to attain definite ends.

Far too many economists, both in Mises’ day and today, make the very mistake Mises warns against: treating economics as a science of the choosing of ends.  They consider themselves enlightened for building models that can maximize this or minimize that, and then call for said models to influence policy.  But building models like such, as Jim Buchanan said in his 1964 paper What Should Economist Do?, is the purview not of economics, but of applied mathematics.  Indeed, anyone with even an elementary level of calculus would find such a task trivially easy.

But economics is not this; it is not merely optimizing some constrained function with some universally desired “social goal.”  Economics is the study of exchange; Of competing interests for scarce resources and the institutions that arise to deal with these issues.  In short, the study of human action.

Economics as a Positive Science

Following a natural disaster, one can count on two things in the opinion pages and blogosphere: economists of all stripes decrying price-gouging legislation in a disaster and proponents calling economists immoral for questioning such legislation.

The conversation/disagreement between these two is a microcosm of a much larger discussion: the difference between the normative (subjective) and the positive (objective).

Economics is a positive science.  It deals with what is, not what ought to be.  When economists argue that price ceilings (like price-gouging legislation) cause shortages, that is a positive claim: it is a claim of what is.  This claim can be empirically tested, but it does not reflect the moral positions or suppositions of the economist.  In fact, the claim carries with it no moral implications whatsoever.  The claim price-gouging legislation causes shortages carries with it no more or less moral weight than the claim the sky is blue.

Conversely, morality is a normative science.  It deals with what ought to be, not what is.  When moralists argue that raising prices during a disaster is immoral, that is a normative claim: it is a claim of what ought (not) to be.  This claim cannot be empirically tested (although it can be tested to see if it falls into various moral criteria).  It reflects the belief structure of the person making the claim.  The claim raising prices during a disaster is bad carries with it no more or less empirical weight than the claim the sky is blue is good.

Allow me to elaborate, lest I give the mistaken impression that normative and positive sciences are opposed.  Normative and positive are not opposed; in fact, they compliment each other quite well.  Normative can prevent positive from becoming abusive (think, for example, our modern sensibilities against eugenic human breeding [normative] despite knowing certain traits are genetic [positive]).  But positive can also keep normative from being “pie in the sky,” by explaining how the world is.  For example, normative claims like “one should not kill his neighbor,” are all well and good, but the positive claim that “murder happens,” is important to know, too.  Knowing the two together brings us to the conclusion that police are needed for the few who do break the law.

To apply this reasoning to disasters, knowing price-gouging legislation makes the logistical system worse is important to know, as it can help inform better forms of aid and legislation.

In short, answering a positive claim with a normative claim will get us nowhere, but the two must be given, and understood, concurrently.

Models, Monopsony, and Minimum Wage

At Cafe Hayek, Don Boudreaux has an excellent post on models and their usefulness in economics.  Don’s gist is as follows:

Anyone can devise a model to show almost anything.  And economics is filled with widely referenced models that are useless (or worse than useless).  The Keynesian Cross comes to mind.  So, too, the textbook model of so-called “perfect competition” (which, in addition to being a model in which almost everything resembling real-world competition is either squeezed out or appears as a monopolizing (!) tactic, isn’t even logically coherent – for in the model no room exists for any agent actually to change prices).

The value of an economic model is found in its ability to make the world more understandable.  Devising a model is no evidence that the named concepts in the model have anything in reality to correspond to them, or that the model is a useful analytical tool.

I have made similar points in the past, noting that the results from models are, well, model-dependent.

In short, the mere fact that a model can show that some preferred policy will increase/decrease economic efficiency doesn’t mean said model is of any analytical use.  Sure, the minimum wage in a monopsony may improve the situation, but that information does us no good if the market is not a monopsony.

But let’s build upon this idea.  Let’s assume, for the sake of argument, that a given market where a minimum wage is considered is indeed a monopsony.  As such, it is theoretically possible that minimum wage would be beneficial, that we would not see, over a given price range, a decline in employment.  The poor economist stops here.  He might even advocate for minimum wage at this point.  But, as Bastiat reminds us, the economist looks for not just the seen effects (ie, what the model says), but the unseen effects, too.  The good economist is prompted now to ask “is minimum wage the most cost-effective solution to the problem we are trying to address (in this case, low wages for workers)?”  Minimum wage may be an option here, but it may not be the most beneficial option!  There may be other options, other institutional arrangements, other agreements that can be reached that will create a better outcome!

Gordon Tullock and James Buchanan drive this point home in their 1962 book The Calculus of Consent.  The following is from page 61 of the Liberty Fund Edition of the book (original emphasis):

The most important implication that emerges from the [analytical] approach taken here [in this chapter] is the following: The existance of external effects of private behavior is neither a necessary nor a sufficient condition for an activity to be placed in the realm of collective choice.

While Tullock and Buchanan are discussing externalities here, we can easily generalize their comment to any form of collective action including minimum wage or other methods used to “improve” monopsonies:  The existence of a monopsony market resulting from private behavior is neither a necessary nor sufficient condition for a minimum wage to be imposed.  The burden of proof requires the good economist to demonstrate that any proposed solution is the best of all available options.  Otherwise, the result of the market process, even if less-than-ideal, may be the best choice.

It is easy to play around with models, and any given model may have any number of policy implications.  But the mere fact the model suggests Policy A would work doesn’t necessarily mean that Policy A is the best choice.  If the costs of imposing A are high, then it may likely end up being a net loss!

 

Immigration and Institutions: A Response to Jonny Anomaly

Writing at Quillette, Dr. Jonny Anomaly (yes, that’s his real name) discusses immigration, institutions, and why some immigration restrictions may be necessary.  It’s an interesting article, although I find his rationale for immigration restrictions rather weak.

Dr. Anomaly writes:

For one thing, the social norms and political institutions that promote prosperity are often quite fragile, as evidenced by recent events in Turkey, and the failure of constitutional democracy to take hold in Iraq after American attempts to replace dictatorship and tribalism with a secular liberal order.

I disagree with his interpretation of the evidence here.  The two examples he provides are where a liberal order was forced upon the area, rather than developed naturally.  Institutions, when imposed, do tend to be fragile.  This is seen in the work of many great developmental economists work (for example, see Doing Bad by Doing Good by Chris Coyne or The Tyranny of Experts by William Easterly).  However, where liberal institutions develop naturally, they tend to be highly robust.  The United States is an excellent example where despite many shocks to the system over the approximately 250 years of our existence, we remain a highly liberal country.  Shocks have included invasion, mass immigration (by both intelligent and less intelligent people), famine, drought, civil war, terrorism, etc.  The US is not ideally liberal, and there have been missteps, but the whole thing hasn’t collapsed the way it would have if institutions were inherently fragile.

He goes on to say:

Many supporters of open borders fail to distinguish between different qualities of immigrants. They assume that if a high level of immigration has benefitted some countries in particular eras, such as the United States, Canada, and Australia in the 19th and 20th centuries, then it is simply the quantity of migrants, rather than the composition of migrants, that caused prosperity in these nations. But this is a fallacious inference that depends on the assumption that all people are just as likely to promote the welfare of a country regardless of their values, skills, or traits.

In his recent book, Garrett Jones argues that a nation’s wealth and welfare depend crucially on the qualities of its citizens, including IQ, conscientiousness, and the ability to delay gratification. These personality traits are heritable, are (according to Jones) positively correlated with prosperity, and (according to criminologists) negatively correlated with crime.

The problem with this argument is that it doesn’t appear, at least prima facie, to be correct.  The mass immigration of the 19th and 20th Centuries was not of high-skilled immigrants.  Rather the opposite, really: they tended to be the dregs of European society.  And yet, America prospered.  Those who attempted to turn America toward Socialist institutions were not uneducated immigrants, but rather highly educated native WASPs.

This is not to discount the importance of intelligence in economic activity; quite the opposite.  But rather, an economy is made up of all kinds of goods: high quality, low quality and everything in between.  A dynamic economy allows all resources to find a niche, including labor.

There’s more I could say on this article, and maybe I will down the line, but I want to finish off with this: the evidence on immigration’s impact on the economy is far from crystal clear.  There are copious amounts of evidence pointing in both directions.  Given this ambiguity, I argue a liberal society demands that freedom is preserved and that the action which would restrict freedom (in this case, restricting freedom of commerce of the citizens of the society) must be shunned until evidence beyond a reasonable doubt is presented.

 

Reexamining the Case for Trade

My latest working paper reexamines the case for international trade.  Here is the abstract:

Since the time of Adam Smith, high tariffs have been decried by economists as counterproductive to a country’s economic growth. However, in recent years, this consensus has come under scrutiny, not just from the political sector but also the academic sector. Using GDP per Capita as a measure of economic well-being and the Economic Freedom of the World Index to measure freedom to trade, I find a distinct positive effect lower mean tariff rates have on GDP per capita. The size of the effect varies on the income of the country, with the strongest effect on the poorest nations and the weakest effect on the wealthiest nations.

As this is a working paper, any and all constructive comments are welcome!

Everyday Economics: Bioshock Edition

On my recent trek between Virginia and Massachusetts (and back), I listened to an audio version of the book Bioshock: Rapture by John Shirley (If you’re looking for something light to take your mind off of things, this is a good book).  The book details the rise and fall of Rapture, a massive underwater city built by Andrew Ryan (a not so subtle jab at Ayn Rand) to escape the “parasitic” governments of the world and build a society dedicated to freedom and free markets.  While the initial goal of Rapture may have been freedom and free markets, as the novel (and the video game that the novel is based on) details, Rapture becomes a totalitarian police state with an extremely wealthy (and often sadistic) upper class, and extremely poor low class, and no one in between.  Some see Bioshock as a refutation of Randian philosophy, however, I will not address that here as I am no expert in Ayn Rand (for an excellent discussion, see The Value of Art in Bioshock: Ayn Rand, Emotion, and Choice by Jason Rose).  I’ll leave that to people far smarter than I.  Rather, I want to address the economic situation of Rapture and discuss, briefly, how that contributed to the downfall.

A few quick disclaimers before I begin:

  1. As far as I know, Bioshock: Rapture is not canonical.  However, it is the only detailed source I can find thus far on the days of Rapture that take place before the video game (which is canon) so I will operate on the assumption that my source material is canonical knowing full well everything I write here could become completely worthless insofar as discussing canonical information (the lessons gleaned from this book are still important, however).
  2. Nothing in this essay should be taken as implying the rise or fall of Rapture is purely economic.  There are many other factors involved (social, political, medical, psychological, etc).  I skip or gloss over these not because I think they are unimportant (quite the opposite, really), but because I simply lack the expertise to discuss them with any confidence.
  3. I will be avoiding using direct quotes in this version of this essay.  The reason for this is simple: I have the audio book, not the book itself.  I can’t easily do verbatim quotes and attribute them to proper pages for citations.  Therefore, the reader should be aware that I am doing this partly out of memory (although I did scribble some notes) and further the reader should assume that whenever I describe what’s happening in Rapture, that is a reference to the work of Mr. Shirley.  The only original material will be my analysis.  Any inaccuracies, either to details or analysis, belong to me and me alone.

The short version of what follows: Rapture cannot be classified in any meaningful sense as a “free market.” It suffers from several deficiencies that prevent us from labeling Rapture as a free market: lack of property rights, lack of free trade (autarky), lack of labor mobility (autarky in the labor market), rejection of altruism, widespread and institutionalized fraud (this issue is speculative based off of interviews with characters within the book but not substantiated by details), and censorship (indirect at first, but more direct later).  In Andrew Ryan’s Rapture, “free market” and “laissez-faire” were not much more than dishonored buzzwords.  It can best be described, in the words of James Buchanan, as “moral anarchy,” (see Moral Science and Moral Order, especially page 190 and Limits of Liberty, especially Chapter 7).  These factors, coupled with other psychological, social, and other factors, lead to the decline, civil war, and eventual fall of Rapture.  Continue reading

Institutional Magic

Don Boudreaux and Bryan Caplan have an interesting exchange regarding Caplan’s question on why no libertarian/Progressive alliance has formed on key issues of agreement.  Caplan’s original post is here.  Don’s comment is here.  Caplan’s reply to Don is here.

Both Don and Bryan are people who, when I disagree with them, I think long and hard about why.  Bryan never hesitates to put his money where his mouth is and Don’s reputation of being a careful thinker is well-earned.

That said, I wonder if there isn’t an explanation that is compatible with both their arguments as I understand them.  That explanation comes from magic.

Gordon Tullock explains:

Most traditional institutions are surrounded with what anthropologists call “magic.”  They are thought of in unrealistic terms, the lack of realism having the effect of making us more satisfied with our environment by convincing us that it is better than it really is.  the courts are no exception.  The view that an outcome of the judicial process is “true” is widely held.

The above quote comes from The Logic of the Law as reprinted in Volume 9 of the Liberty Fund’s Collected Works of Gordon Tullock, page 39.

I wonder if it is possible both Don is right that Progressives don’t necessarily see/believe in spontaneous order and that Bryan is right that Progressives see the value, but don’t like the corruption and whatnot that spawns.

Using Tullock’s language from the above quote, I wonder if Progressives are more susceptible to the “magic” of government, seeing it as better than it truly is and are less susceptible to the “magic” of markets, seeing it as worse than it truly is.  And the same is true of libertarians: they see markets as “magic” but government as less so*.  As such, Progressives may be more likely to oversell the benefits of government and the flaws of markets and undersell the value of spontaneous order, even if they know it is there.  Conversely, libertarians may oversell the benefits of markets and flaws of government and undersell the value of government, even if they know it’s there.

I wonder if, at the extremes, Don is right (extreme Progressives, being completely absorbed with the “magic” and seeing spontaneous order as the antithesis of government, completely reject the notion of spontaneous order (and vice versa for libertarians)), but the more moderate/intellectual in both camps see the benefits of each but are still under a “magical spell”.

Perhaps the issue here isn’t that Progressives are simply anti-market or that they simply do not see the benefits of spontaneous order.  Perhaps the issue is the two groups simply have different kinds of magical attunement.

*For the record, I don’t think either Don or Bryan are under such magical spells.