Front Page Titles (by Subject) PART 1: Rights, Property, and Markets - Political Economy, Concisely
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PART 1: Rights, Property, and Markets - Anthony de Jasay, Political Economy, Concisely 
Political Economy, Concisely: Essays on Policy that does not work and Markets that do. Edited and with an Introduction by Hartmut Kliemt (Indianapolis: Liberty Fund, 2009).
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Rights, Property, and Markets
PROPERTY OR “PROPERTY RIGHTS”?*
Economists who own their home or have other assets will regard them as their “property.” When speaking in their professional capacity, however, they change their vocabulary and will invoke “property rights.” Do these terms mean the same thing?—and does it matter which term is used? This essay argues that “property” and “property rights” mean different things and muddling them up presents an insidious but quite serious threat to the kind of social order wherein economic efficiency and individual freedom have the best chance to survive.
“A BUNDLE OF RIGHTS”?
Ironically, the author who has done the most to impose the term “property rights” on scholarly usage was Armen Alchian, an economist of irreproachable credentials both as a fine theorist and as a defender of the free society. In a seminal essay1 that has become a foundation stone of “property rights economics,” he explained that when you owned, say, a piece of land, what you had was the right to leave it fallow, to plough it, to grow wheat on it for your own use or for sale, to walk across it, to fly over it, to build a house on it, to grant an easement on it, to lease it to another party, to bequeath or to sell it. Property was such a “bundle of rights.” It is tempting to hold that if you removed one stick from the bundle, it remained a bundle; if you removed two, it still remained a bundle. How many sticks can one remove without the remainder ceasing to represent property, and are some sticks more essential than others?
This concept of property opens the door to a kind of gradualist argument. If “society” or the government purportedly acting on its behalf removes from the bundle a stick here and a stick there, if it forbids the owner to build on his land, or subjects the growing of some crop to an acreage quota, imposes an easement or a public preemption privilege, the “bundle” that is left is still property of a sort. How many rights may the government remove from it for the bundle still to pass for property and the government to pass for its protector?
FREEDOMS AND RIGHTS DIFFER FUNDAMENTALLY
The “bundle of rights” concept gives rise to a dangerously weak theory of property. To find the root cause of the weakness, one must go “back to basics” and firmly grasp the difference between a freedom and a right.2
A freedom is a relation between one person and a set of acts. The person is presumed to be free to perform any act in the set that does not breach the rules against torts (offenses against person and property) and (a less stringent requirement) the rules of civility. A substantial obstruction of freedom (e.g., gagging or threatening to hit a person to stop him from speaking freely) is a tort or an incivility. As such, it is wrong. To say that a person has a “right to a freedom” is tantamount to saying that he has a right not to be wronged—a redundant and silly proposition. It also implies that he would not have this freedom if he had not somehow obtained a right to it—an implication that is at the source of much false theorizing. You do not need a right to move if your moves stay within the rules—this indeed is what it means to have rules.
In contrast to a freedom, a right is a relation between two persons, the rightholder and the obligor, and an act the obligor must perform at the rightholder’s bidding. A right may be created by contract in which the obligor, in exchange for a consideration, surrenders his freedom to perform (or forbear from performing) some set of acts as he pleases, and agrees to perform (or forbear from performing) it as required by the rightholder. Here, both parties enter voluntarily into the right/obligation relation. However, a right may also be created by some authority, such as the government acting on behalf of “society,” conferring it upon rightholders and imposing the corresponding obligation on obligors of its own choosing. The conferring of welfare rights on some and the imposition of the corresponding taxes on others is a mundane example. The granting of civil rights to some minority and the imposition of the appropriate conduct on the rest is a perhaps less mundane one. The notion of “property rights,” as used in current economic theory, conjures up the fiction that property is conferred by “society” upon the proprietors and the corresponding obligation to respect it is imposed by “society” on everybody. (It is worth noting that respect for property is part of the rules against torts. Violating property is a wrong that must simply not be done; and this interdiction is enforced by various private or public ways and means of enforcement ranging from reciprocity and retaliation to law courts and a police force. A separate obligation to respect or protect property, a corollary of the supposed “right to private property,” is double-counting. Like any other double-counting, it obscures the view of what is owned and what is owed.)
PROPERTY RIGHTS, TRUE AND FALSE
There are, in fact, genuine property rights in the sense of two-person relations involving a right and a matching obligation. Leases, loan agreements, a shareholder’s equity in net corporate assets, options and other equity and credit derivatives, insurance policies, and, in a broader sense, all outstanding contracts with the exception of contracts of employment, are property rights proper.
When you lease your house, we know where the tenant’s right(s) come from. They arise from the surrender, for a given period, of your freedom to use your own house and your assumption of an obligation to let the tenant use it subject to certain conditions and in exchange for value received or to be received.
But where does your putative “right” to own the house come from? The standard answer is that it comes from your purchase agreement with the previous owner, or a bequest or gift he made to you. The previous owner’s right to do this, in turn, came from an agreement with, or bequest or gift from, the owner previous to that owner, and so on. Such a regress, however, can only shift the problem ever further backward and does not resolve it.
The literature offers us two solutions, the Lockean and the socialist. In the Lockean solution, the chain of legitimate transfers of ownership goes on backward until it ends with the original owner who took possession. He had a “right” to do so if two notorious provisos were satisfied: he must have “mixed his labor” with what he appropriated, and he must have “left enough and as good” for those who came after him. These pious provisos have come in for much and deserved criticism on grounds of their contestable logic, and in this essay I will simply leave the reader to judge the Lockean solution for himself.
The socialist solution is to intimate that property is privately held only by the grace of society that could choose to change its distribution, or take it into public ownership, if it did not create a right to it and if it did not confer this right upon individual proprietors. The latter hold their property subject to any conditions by which society circumscribes the right to it. It may withdraw the right altogether if it deems it in the public interest to do so. Constitutional obstacles to this can always be got round, for society is not going to stop itself from doing what it wishes to do. In any event, if the right to property is in society’s gift, it can always take back the right it has conferred and with that extinguish its own obligation to protect it.
THE PRESUMPTION OF GOOD TITLE
The contradictions and outlandish fictions of both the Lockean and the socialist solution disappear in thin air the instant we cease to maintain the arbitrary supposition that one needs a right to own valuable resources. This supposition originates in an atavistic belief that everything should belong to everybody or be shared equally, and any departure from this norm requires a justification, an excuse of some kind.
Not everyone believes this, and those who do believe it only in certain contexts. It is not a universal human trait, but only one of various extravagant ones. In no way does it place it beyond dispute that owning property is morally reprehensible and unjust unless it can be shown that a right to it exists.
Ownership is a fact of life whose origins are veiled by the mists of prehistory. By the elementary rules of debate, the burden of proof lies with those who claim that a right is needed to justify it. This claim must be made good either as regards the institution of ownership in general or, failing that, the ownership of a particular asset by a particular owner. As to the former, making it good is impossible, for a metaphysical proposition cannot be verified. As to the latter, the claimant must show that the owner does not have good title to the asset.
It is blatant nonsense to try and switch the burden of proof to the owner, and ask him to prove that his title is good; for he can never prove the negative assertion that there is no flaw hidden in it somewhere out of sight. It is he who wants us to believe that there is one, who must spot the hidden flaw.
Putting it concisely, challenges to property require to be verified by the challenger, for they cannot be falsified by the defender. It is this asymmetry that generates the presumption in favor of title (“possession is three parts of the law”). Property being analytically a freedom, it is no surprise to find the same logic yielding the presumption of title that yields the vaster and more inclusive presumption of freedom.
“DESIGN FAULTS” IN LOCKE’S THEORY OF PROPERTY TAINT OWNERSHIP WITH GUILT*
Ownership is a relation between an owner and a scarce resource, such that the owner is at liberty to use and alienate it, exclude all others from access to it except by his consent, and thus also at liberty to grant various kinds of prior claims and use rights in it for those toward whom it assumes contractual obligations. It is doubtful whether ownership, even ownership by a collective entity, has any meaning without some element of exclusion that separates owners from nonowners of the resource in question. When everybody owns a thing, nobody owns it.
The crux of moral and political aspects in property theory is how an unowned object first becomes legitimately owned. Once the legitimacy of first acquisition is settled, all subsequent acquisitions by the saving of income, exchange, gift, or bequest of assets can be defended on the ground of mutual consent. If that test is met, the distribution of property cannot be condemned as unjust unless the voluntary transactions that gave rise to it are also condemned as either unjust or irrelevant to just ownership.
Some enemies of property ownership choose to attack initial acquisition, others the relevance for valid title of subsequent voluntary transactions. This article will treat the first of these two targets. Luck plays a large role in the history of ideas, and as bad luck would have it, the most influential theory of property to this day is that of John Locke.1 His starting point is ambiguous. Arguably, a clear and straightforward theory of how an unowned resource comes legitimately to be owned had to wait till Hume’s Treatise of Human Nature.2 In Locke, everything is, albeit in a vague way, already owned at the outset: God “has given the earth to the children of men,” “given it to mankind in common” (chap. v, §25), “yet there must of necessity be a means to appropriate [the fruits]” to “a private dominion exclusive of the rest of mankind” (chap. v, §26). This suggests a passage from “common” to “private” ownership, though Robert Nozick3 interprets it as dealing with establishing rights “in an unowned object.” Locke’s text tells otherwise, but one might take it that his “common ownership” of everything by everybody can be dismissed as a mere verbal flourish that cannot have any force. However, the fatal fault line in Locke’s design runs elsewhere.
For Locke contends that the passage of an object into exclusive (“private”) ownership will not harm anyone provided “enough and as good is left for others,” and—more problematically—he seems convinced that this condition is satisfied with the greatest of ease. He has two scenarios in mind. One is the English enclosures, where village commons of rough, swampy pasture were converted into well-drained, well-tilled arable fields, yielding (as he put it) ten times the produce. The other was the clearing of the virgin forest by the American colonists of New England and Virginia. In both cases, a wide margin of abundance appeared to leave enough and as good for others. For the next three centuries, many theorists have taken it that Locke has established the legitimacy of private property and the state’s duty to protect it.
However, a closer look reveals that the “enough and as good” proviso is in fact a sharp-edged weapon in the hands of the enemies of property. The “others” who are excluded by an act of first appropriation can suffer prejudice on two possible counts. One is loss of use, the other is loss of opportunity. Loss of use occurs when others, who used to hunt or graze animals on the land, or otherwise profited from free access to the resource in question without ever incurring exclusion costs to appropriate it for their private use, now find themselves excluded from it by the first appropriator. Two views could be held about this. The hard-nosed one is that since these free users had done nothing to ensure the perennity of their own access to the resource, they have no claim against the appropriator who excludes them. The other, less rigorous view is that the appropriator owes them some compensation. The question is whether he can possibly compensate them adequately for their lost way of life. Did the periodic free issue of beef cattle to reservation Indians compensate them for losing the buffalo hunts? Almost any answer to such questions is as contestable as any other.
Compensating for loss of use is awkward, but much, much more awkward is the problem of loss of opportunity in case “enough and as good” is not left for others to appropriate. The quandary bifurcates: one of its branches leads to known resources, the other to unknown ones to be discovered.
Known resources have all been appropriated long ago. None is left for the taking by today’s propertyless “huddled masses.” It is easy to see, and Nozick has nicely proved by backward induction (p. 176) that if there is not “enough and as good left” today, the most recent appropriation must have violated the proviso, and so have all the preceding ones including the very first. In vain do many defenders of the capitalist order argue that its prodigious capacity to create wealth allows today’s propertyless to be as well off as if they had (some) property, so they have not really lost potential welfare. The fact remains that others who passed before them have preempted the opportunity to get property simply by taking possession of it. Becoming a well-paid employee of some owner may be no consolation for failing to become an owner. In a book of labored and often twisted arguments, the far-left philosopher Gerald Cohen4 validly makes this point along with countless invalid ones. If the Lockean proviso is worthy of the respect accorded to it, all title is illegitimate and every owner is guilty of crowding nonowners out of the opportunities Locke said they ought to enjoy.
However, perhaps there is “enough and as good” opportunity left hidden in the as yet unknown world, to be discovered? Nobody knows what the as yet undiscovered part of the world conceals, but it is likely to contain valuable resources nobody owns.
Alas, the proviso will not let go. If a prospector finds a new gold mine or the wildcatter brings in a rich oil well, the probability of other prospectors and wildcatters making equally valuable finds diminishes, however slightly. If Edison discovers electricity, every other inventor has lost the opportunity to discover it. Exceptional strokes of genius, unexpected technological breakthroughs, and lucky strikes remain possible. But on the average, every new discovery will raise the probable finding cost of the next comparable discovery. This trend is manifest in petroleum and minerals, as well as in most branches of applied scientific research. The burden of rising finding costs is aggravated by the fact that what is eventually found—subsurface resources or “intellectual” property—is as a rule not accorded fully owned status by the legislator as would be the case if the “finders, keepers” principle were respected.
The long and short of it is that “enough and as good” is never left for everybody who might wish to get it. Over time and over large numbers, known resources all pass into someone’s ownership, and the finding cost of unknown ones must continue to rise as it has risen, irregularly but inexorably, through history. Locke’s proviso, far from asserting that first appropriation is just, in fact tells us that ownership begins with an original sin. In a somewhat perverse way, he unwittingly lays the foundations for doctrines that profess that “property is theft.”
There is a simple means of releasing Locke’s stranglehold on property theory. It is politely to decline his opening gambit. Why does a person who takes an opportunity owe anything to others who might have taken it but did not?—and why is this debt forgiven if, but only if, there are “enough and as good” opportunities left for these others so they get a second chance? It would obviously be a nice and friendly physical world where one person could take his opportunity and there was in fact always another and as good left for another person. But if the physical world is not quite as nice as this, why ought the first person to abstain from taking his opportunity, and why is his resulting ownership illegitimate? Must society choose between “private” ownership and justice? The requirement is arbitrary and one should not allow oneself to be browbeaten by arbitrary demands.5
IS OWNERSHIP A MYTH?*
Economists should take more interest in the theoretical defense of property than they presently do. The relevance of a sound defense of the freedom of ownership, to my mind, does not just spring from property being necessary for viable markets (though this is of course true). It is rather that if property is in some sense inviolable, it constitutes a barrier to redistribution, or at least makes redistribution look dubious from a moral point of view. Redistribution is at the heart of welfare economics and politics. The concept of politics as something that comes from some other source than the state’s grace is nowadays vigorously attacked precisely in order to make redistribution look compatible with justice, the respect of “rights.” As I argued in my previous article, Locke, without of course wanting to, has paved a royal road for these attacks upon the freedom to own. Some seriously taken academic work now treats our idea of “mine” and “thine” as a myth.1 Why does it, and is it right?
Locke’s theory of property, even in the weakened form proposed by Robert Nozick,2 fatally condemns ownership to illegitimacy. If enough and as good must be left for others, no one must keep property exclusively to himself or herself.
The obvious way to avoid this trap is not to fall for the arbitrary judgment, bordering on the intellectual bluff, that in finding an object of value, the finder deprives others of the opportunity of finding it. This judgment would grant to everybody some claim upon every undiscovered resource and put the eventual owner into everybody’s debt. The “finders, keepers” principle, in sharp contrast, implies no judgment, but a statement of fact, namely that though others might have found the object, they did not, and the owner who did owes no debt to them. This is the underlying logic of David Hume’s theory of property,3 which begins with what he calls “first occupation” and to which he adds “long occupation” (p. 507). All viable theories of property down to our day fall into the Humean pattern, though most seem to be unaware of the fact.
Hume dismisses in a footnote (p. 505) Locke’s attempt to justify ownership by the “mixing” of one’s labor with an external resource, and pays no attention to the “enough left for others” clause. He creates his theory in two moves. The first establishes legitimacy. Society is formed by the “first assignment” of property to the “present possessor” (p. 505). This moment is decisive; the rest is all a matter of voluntary transactions. For “fitness and suitableness ought never to enter . . . the distributing of the properties of mankind” (p. 514). Judges of morals and efficiency are offered no role to play. Of course, the “stability of possession” is not inconsistent with its “transference by consent,” i.e., by the classic means of sale, gift, and bequest. The distribution of property resulting from such exercises of the owners’ liberty corresponds to the ideal of justice. This is all familiar and amounts to a reasoned explication of our ingrained sense of mine and thine.
His second move, however, is far from familiar; in fact, it quite astonishingly anticipates the last word in social theory, the convention as a coordination equilibrium by which benign rules of behavior are formed in a wholly uncoerced manner. Nearly everyone will voluntarily observe a rule of mutually agreeable conduct because nearly everybody else is doing so. He remarks that social disturbance mainly arises from the “looseness and easy transition” of goods (p. 489). Insecurity of property would be the result, were it not for the recognition by nearly all that mutual respect for property leads to prosperity while violation of this rule leads to misery in “solitary and forlorn condition” (p. 489). In modern language we would now say that a convention to respect property emerges as a superior equilibrium solution of an indefinitely repeated noncooperative coordination “game.” Unilateral expropriation of the property of others cannot perdure, while reciprocal violence is an inferior equilibrium, impoverishing all.
Hume’s discovery of the convention as a self-enforcing means of safeguarding an orderly distribution of property molded by voluntary transactions is a master stroke. It establishes that order and wealth do not depend on government, for rules can emerge and regulate behavior without a rule-maker and enforcer. In his words that can never be quoted too often, “the stability of possession, its translation by consent, and the performance of promises. These are, therefore, antecedent to government” (p. 541).
The “ownership is a myth” school brushes aside as naive the notion that the wealth and income you acquire in voluntary transactions is yours. A recent, radical, often clever and occasionally too clever work of this school by Murphy and Nagel finds it quite natural to ask: “What is the moral basis for a right to hold on to one’s earnings?” (p. 7). This is, of course, a “when did you stop beating your wife” kind of question. It would as a matter of course put the burden of proof on you to show why you should be allowed to “hold on” to your property. The authors call it a delusion that the burden ought to be on whoever seeks to deprive you of part of it, that there is good cause for doing so. The alleged delusion is the myth of property. The book sets out to dispel it.
Property “rights” for Murphy and Nagel are just one part of a “legal convention” and must be evaluated by “society” together with the other parts, notably with the fiscal requirements of order and “social” justice, upon which property is asserted to depend. It is not clear what is meant by a “legal convention,” nor why this odd term is used in preference to plain language. In plain language, there are laws that require government to protect property from all except from itself, and other laws that allow it to take property (by means of income and other taxes) so as to pay for expenditure that yet other laws direct it to incur. All these laws are decided, directly or by proxy, by “social choice” which is inherently redistributive, favoring some at the expense of others in the raising of revenue, the allocation of spending, or both.
It is trivially true that as a matter of empirical fact, property in the hands of owners and income-earners is what is left to them after the levying of these taxes. Talking instead, somewhat nebulously, of a “legal convention” makes it seem that Murphy and Nagel are saying something more than this.
In reality, they do not. More precisely, what they do say beyond the trite fact that generally you are not allowed to hold on to all you earn, and particularly their copious references to how this squares with justice and freedom, is largely smoke-and-mirrors work. It relies on the tacit fiction that the tax treatment of income and wealth is the outcome of judging and evaluation done by a single mind, the mind of “society.” The result is necessarily consensual and nonconflictual. Everybody wants property to be subjected to the same constraints, so as to create an agreed “framework . . . all find morally comfortable” (p. 42).
Post-tax property “rights,” then, are either a matter of the will of a single imaginary actor, society, or a matter of an equally imaginary new convention that has supplanted the old one Hume was the first to identify.
It is unthinkable that the authors would use the word “convention” in bad faith, trying to put one over the reader. Their free and easy reference to it can only be due to ignorance, a lack of understanding of the concept of a convention. The latter is a strictly spontaneous outcome of autonomous individual acts of mutual adjustment. Legislation, choices imposed by political winners upon losers who are obliged by the constitutional rule of submission to comply, are alien to it.
Such inconsistencies and downright fudges are forced upon the “myth of property” school by the impossible posture it is trying to maintain. It wants redistribution. It also wants to affirm that justice commands it. If your property, the product of free transactions, is yours, then it is unjust to take some of it away. Therefore property, as seen in your deluded old-fashioned view, is affirmed to be a myth; the reality is a “legal convention” by which society judges what part of it you may morally keep. Thus is justice saved.
True to form, Little4 cuts cleanly through this wall of fudge: “taking property away from some to give to others is an infringement of the former’s freedom. . . . If every infringement of rights is an injustice, it follows that the state ought to be unjust for the purpose of some redistribution. This is an uncomfortable statement, but it is not a contradiction. It is what I believe myself.”
There may well be overriding reasons for redistribution, though I have not found one and do not believe in them. However, if there are any, they are not reasons of justice. Rather, they override it. It would be healthier and intellectually more honest to face this and say so, than to try and emasculate the theory of property so as to make right the violations of ownership that “society” chooses to make legal.
HOW TO GET A FREE LUNCH?
One of the great theorems of economics tells us that, in a competitive equilibrium and with constant returns to scale, income distribution is a function of the marginal productivity of the factors of production and their ownership. Buyers pay and sellers get the marginal product, benefits equal contributions, and “there is no free lunch.” Much the same equality between factor rewards and products is explained by the exclusive nature of ownership. Exclusion bars access to resources except by the owners’ consent. Productive resources are exchanged at the values of their marginal products. Once again, there is no free lunch; everything is fully paid for. Moreover, since all exchanges are voluntary between willing buyer and willing seller, the distribution of benefits and contributions is just if the initial appropriation of resources was just. One might say, alternatively, that the question of justice cannot arise.
The first breach in this clean-cut system is taxation. Under it, contributions are exacted, rather than voluntarily exchanged against benefits. However, it could be, and always has been, argued that taxes buy public goods and services, defense, civil order, the protection of property, and so forth, so that the contributor does get a benefit, even if not in proportion to his contribution, i.e., even if taxation is redistributive, which of course it cannot fail to be. Nevertheless, some element of exchange is present, albeit progressively weaker as the financing of the welfare state takes a larger share of tax revenues.
The “enemies of property” contend, by denying the reality of a pre-political and therefore pretax concept of property, that taxation is not really a breach of ownership, for the latter does not begin until after “society” has collected the taxes it chose to impose. While this truism correctly describes the accomplished facts, it does nothing to square them with justice.
The second breach, if it were eventually driven through, would be potentially far more radical. It would give an avowedly free lunch, a guaranteed basic income to every adult resident “with no strings attached, no questions asked.”1 The scheme would be introduced gradually to adjust to political realities, but the objective would be to give every adult an unconditional grant high enough to ensure subsistence. One of its most active promoters, Philippe Van Parijs, believes the scheme would resolve the dilemma between what he sees as the European economic “model”—high unemployment but little poverty—and the American one—little unemployment but much poverty. This is as it may be, and the present article will not pursue this point. Partisans of the proposal are unanimous that the main argument for it is not economic expediency, but justice.
The authors of the volume cited here all agree that the proposal is at least feasible, and the decline in statistically measurable GDP that it would probably cause would be bearable. The likely reduction in labor force participation might be offset by greater willingness to venture into self-employment if basic income were assured. Feasibility, then, is reduced to taxability. As Emma Rothschild puts it with engaging serenity, where the average income is higher than subsistence, the project can be realized.2 All it takes is to tax everyone at a rate that need not even reach 100 percent of their earnings.
Even the most eminent contributors to the volume, such as Robert Solow who takes a fairly cautious view of the fiscal implications, show little doubt that the fiscal burden of a universal basic income for all at or near subsistence level would be peacefully borne by taxpayers and lead to no major perverse effects. Significantly, the very Milton Friedman who coined the dictum about there being no free lunch has advocated a negative income tax, which is an unmistakable free lunch and a first cousin of the universal basic income.3
While feasibility is merely the absence of a certain “argument against,” the “argument for” on everybody’s lips is freedom and justice. Van Parijs claims that society must ensure both formal and real freedom. Formal freedom implies the protection of property and personal liberty, while real freedom requires resources to let everyone use his or her formal freedom. Since resources cannot be redistributed without violating property “rights,” it is clear that Van Parijs must regard these as a “myth” and must have some new kind of “rights” in mind. Others, too, call into question the distribution of property and income that results from voluntary transactions. Edmund Phelps4 simply dismisses it as arbitrary, apparently on the ground that there is no such thing as a free market—a ground that is made to bear a weight that looks a little excessive.
However, by far the most ambitious argument for the justice of taking resources from existing owners and distributing them evenly is by an appeal to the Giant Externality. It is a perennial that keeps cropping up in a variety of guises in the antiproperty literature. In the Free Lunch collection of essays, Herbert Simon5 asserts that at least 90 percent of the GDP of wealthy nations is due to this externality and less than 10 percent is genuine factor product and factor reward. By rights, the 90 percent should be “returned to the real owners” (p. 36). If all incomes were taxed at a flat 70 percent rate, the original recipients would still be retaining three times their due, and there would be ample revenue both for basic income for all and ordinary government expenditure.
Simon is of course right that accumulated knowledge, sensible institutions, and “social capital,” taken together, represent a large positive externality, though it is guesswork to put a number on the difference it makes to GDP. For all we know, Simon’s guess may be as good as anybody’s. However, in reasoning from this starting point, he seems twice to take a wrong turning.
First, the Giant Externality is not owed to “society,” but to countless specific actions of its members, each of whom acted the way he did for sufficient reasons. An externality is a passing or lasting consequence of a human action that benefits or harms third parties and that was not part of the actor’s reason(s) calling forth that action. Each individual who added his bit to the store of knowledge, who took up a trade and enhanced the division of labor, who fought against the curse of bad government that is the chief cause of poverty and waste, who taught her children a sense of duty and honor, helping to build “social capital,” was doing so for good reasons of his or her own, no matter whether egoistic or altruistic ones. His or her actions had already earned the reward that it took to call them forth. Praise may be given, but no second reward must be exacted. None is due; all accounts have been squared. The Giant Externality is the sum of a myriad of small externalities, byproducts of a myriad of individual actions that have all been “paid for” in some way. It does enhance factor productivity, no doubt by a great deal. But it is not, for all that, itself a factor of production.
The second wrong turning is to use the Giant Externality as the reason for an egalitarian distribution of property. Simon believes, perhaps rightly, that due to social networks and privileges, access to the Giant Externality is unequal. As a result, some factors are more productive and their owners get higher rewards than their due, and a high flat-rate tax whose proceeds are handed back in equal grants to everyone, would correct this.
However, privileged access to positive externalities is merely a roundabout way of saying that opportunities are unequal. The standard argument for remedying or compensating for inequalities, for what it is worth, is a moral one. It stands or falls with the intrinsic badness of inequality. If this argument fails, the purported unequal access to externalities is not a wrong and needs no remedy. If it succeeds, some remedy is required, and it makes no odds at all whether or not the externality “belongs to society.” It is not its supposed “real ownership,” as Simon puts it, that justifies the redistributive measures. In fact, it is not property and belongs to nobody.
It is perhaps incongruous, after contending with the attacks on property of some very distinguished theorists, to take note of what Robert Goodin6 has to say. However, he offers tactical advice on using the “social” impulses of conservative political regimes for luring them step by step into granting universal basic income. Unwittingly, he tells us much about our times and about his own constituency. Conservative regimes are already prepared to pay people for socially useful activity, such as looking after other people’s children and infirm or elderly parents. The next step could be to pay them for looking after their own children and their own parents, cooking their meals and making their beds. The step after that, though Mr. Goodin stops short of it, is to pay them for making their own beds rather than leaving them unmade, a mess that one could deem socially undesirable. State salaries could be paid for more and more kinds of socially useful work. We are then well on our way to universal basic income. “All we then have to do”—concludes the streetwise Mr. Goodin—“is persuade people to apply for it” (p. 97). Just put in for it! This simple battle plan is probably as effective against property as sophisticated arguments showing why it is not legitimate.
THE PROBLEM OF CONTRACT ENFORCEMENT*
Received wisdom advances two broad reasons why government is entitled to impose its will on its subjects, and why the subjects owe it obedience, provided its will is exercised according to certain (constitutional) rules. One reason is rooted in production, the other in distribution—the two aspects of social cooperation. Ordinary market mechanisms produce and distribute the national income, but this distribution is disliked by the majority of the subjects (notably because it is “too unequal”) and it is for government to redistribute it (making it more equal or bending it in other ways, a function that its partisans prefer to call “doing social justice”). However, the market is said to be deficient even at the task of producing the national income in the first place. Government is needed to overcome market failure. A society of rational individuals would grasp this and readily mandate the government to do what was needful (e.g., by taxation, regulation, and policing) to put this right.
I claim that at least some, if not the whole, of the market failure argument fails to prove its case. There have been other writings using related arguments to the same effect, but one more such will not be too many.
ONE-OFF CONTRACT EXECUTION
The division of labor implies exchange and exchange is the execution of a tacit or overt contract. In standard theory, if one party to a contract executes his part by delivering as agreed, the other party’s optimal course of action is to take the delivery and walk away without delivering his part. The first party knows this and correctly concludes that his best course of action is not to deliver. The second party knows that this is the case. Therefore the parties will not contract and the mutually advantageous exchange of deliveries will not take place. (The well-rehearsed model of this interaction is, of course, the notorious prisoners’ dilemma which has been a cornerstone of arguments for political authority from the 1950s to the 1980s, though it has since been somewhat eroded by the widening understanding of game theory.)
If circumstances permit the two parties to execute simultaneously, the problem disappears, since each delivery is contingent on the other, so that both parties are best off if each delivers. Plainly, however, it is not always convenient or efficient to insist on cash-on-the-barrelhead dealings. A modern economy is inconceivable without the bulk of exchanges being nonsimultaneous. Do contracts involving credit or other nonsimultaneous execution require a third party, such as the state, to see to it that both parties fulfil their commitments?
It used to be thought that in a small-scale, “face-to-face” society, say the village cattle market, no third-party enforcer is necessary, because no party to an exchange could risk to default and face loss of reputation and even retaliation in some unpleasant form. In large groups of “faceless” contracting parties, on the other hand, each could default with impunity. Hayek, for one, strongly argues that in the “great society” where anonymous dealings prevail, a firm legal framework was needed to underpin the free market, which could not function at all without it. His “spontaneous order” emerged inside this (nonspontaneous) framework.
This type of “market failure” argument, that comes strangely from a Hayek who is widely venerated as a champion of classical liberalism, fails mainly by getting the facts wrong. The most obvious one is the unworldly idea of contracts between anonymous parties who can walk away from the contract without delivering their side without anyone knowing who they were. There are no anonymous contracts. Where thousands of faceless customers stream through the checkout counters of a supermarket, they have a contract with the bank who issued their credit card, and the card company has a contract with the supermarket, each party to each contract being duly named and identified. In wholesale trading dealers in the same trade know a good deal about their counterparties half a world away and if they do not, their bankers and brokers do. Default risk is shifted, often to specialized intermediaries, to whoever will assume it at the least cost because best able to minimize it. For relevant purposes, the wide world is a face-to-face society, or at any rate functions much like one.
The other fact of life that standard market failure theory does not get right is that while many market exchanges are done in the form of one-off contracts that are fully executed once each party has made one delivery, many more—probably the greater part of aggregate market exchanges—are not. They are run on continuing contracts providing for repeated executions, often an indefinite number of times.
The example that first springs to mind is the labor contract, where the employee agrees to render some service week by week, month by month, and the employer agrees to pay him at regular intervals, for a period or until either party terminates the contract by giving due notice. Similar contracts with repeated delivery often govern the supply of parts and materials to manufacturers and the supply of finished goods to commerce. They typically run for an indefinite yet uncertain duration.
Unlike the one-off kind, such contracts do not obey the logic of the prisoners’ dilemma where “take the money and run,” i.e., deliberate default, is the best strategy. Defaulting on any given delivery at any link of the chain of deliveries breaks the chain and normally wrecks the contract. Therefore it pays only if the gain made by defaulting on a single delivery outweighs the present value of all future gains that would accrue if the contract went on to its indefinite term.
The balance in favor of continuing to deliver as agreed (or pay as agreed) will be vastly strengthened if the potential defaulter loses, not only the anticipated gains from the contract he would break, but also the potential gains from other contracts that third parties would decline to conclude with him after they learned that he was a defaulter. The forgone gains from potential contracts, added to the forgone gains from the contract the defaulter has actually broken, create a strong conjecture that carrying out commitments under the system of repeated contracts is a self-enforcing convention.
This conclusion parallels the deduction, made by numerous theorists and therefore known as the Folk Theorem, that mutual cooperation through a series of indefinitely repeated games, each of which has the structure of a prisoners’ dilemma, is a possible equilibrium.
Little is left, then, of the market failure argument which holds that the market cannot spontaneously generate the contract enforcement required for its own functioning. If this argument were valid, a really free market would be a logical impossibility. “Real existing” markets would all depend for their very existence on the scaffolding of an enforcing apparatus.
It so happens that most “real existing” markets do make some use of the enforcement service provided by the legislature, the courts, and the police. Why is this the case if the market failure argument is invalid and there are adequate incentives for rational economic agents to adhere to a self-enforcing convention of contract fulfilment?
The short answer is that punishing and hence deterring default is rarely costless. Even passively boycotting the defaulter involves some cost in inconvenience, even though incurring the cost may be the means of preventing a greater loss. If much the same result can be got without incurring any cost, that method will be preferred.
Once legislatures, courts, and police—in one word, the government—are in place, maintained by the taxes it has the power to exact, firms and individuals will rationally prefer to entrust the task of enforcement to it and enjoy the illusion of getting something for nothing, instead of making the effort themselves. They perceive this as a chance to free-ride on the taxes paid by everybody else, and do not perceive that ultimately their own taxes must increase to cover the cost of all the free-riding others will also prefer to do. The tendency fits nicely into an important objective of every government, namely the goal of discouraging private enforcement and vesting in the state the monopoly of all rule enforcement.
THE ENFORCEMENT AGENCY
It is a long way from putative market failure to the risks of overwhelming political power, but that long way must nonetheless be travelled. Textbook theory rather blithely teaches that since contracts are inherently default-prone, their binding force must be assured by the services of a specialized enforcement agency (such as the state). However, if the agency is to be bound by tacit or overt contract (such as a constitution) to a best-effort service in the interest of all bona fide economic agents, that contract itself needs enforcement, for why else should the agency not go slack or biased or otherwise abusive? Plainly, however, the enforcement agency cannot be entrusted with enforcing such a contract against itself. The supposed remedy could well be much worse than the disease. Perhaps herein lies the ultimate failure of the market failure thesis.
THE PUBLIC GOODS DILEMMA*
Public goods are freely accessible to all members of a given public, each being able to benefit from it without paying for it. The reason standard theory puts forward for this anomaly is that public goods are by their technical character nonexcludable. There is no way to exclude a person from access to such a good if it is produced at all. Examples cited include the defense of the realm, the rule of law, clean air, or traffic control. If all can have it without contributing to its cost, nobody will contribute and the good will not be produced. This, in a nutshell, is the public goods dilemma, a form of market failure which requires taxation to overcome it. Its solution lies outside the economic calculus; it belongs to politics.
Access to a private good is controlled by its producer or owner by a variety of devices ranging from shop counters, safes, walls, and fences to measures against theft, robbery, fraud, illicit copying, and breach of contract. The cost of these devices and measures is the exclusion cost of the good. Every good is private or public according to whether exclusion cost is or is not incurred in making it available. A public good is distributed freely to all comers from a given public, avoiding the exclusion cost that would keep it private. This saving is the “productivity of publicness.”
Given sufficient imagination and clever technology, every good can be excluded at some cost. Arguably, some would be very awkward to exclude, but none is intrinsically “nonexcludable,” i.e., doomed to be a public good. By the same token, every good, whether private or public, has many more or less imperfect substitutes that may also be private or public. Thus, contrary to received theory, a more general view tells us that while no good is intrinsically public, the higher is its exclusion cost and the more imperfect are its substitutes, the more efficient it is to provide it publicly.
SOCIAL PREFERENCE FOR NONEXCLUSION
There is one type of exclusion cost that is more important by far than all the rest in putting a good in the public category: it is social preference. It is intangible and is only revealed by the choices it inspires. A pure example is a children’s playground. Access to it is excludable at low cost by a fence and a ticket collector at the gate. However, society would suffer deep moral embarrassment if rich children could use the playground but poor ones could only watch them from the outside. Therefore real exclusion cost would be unbearably high, and children’s playgrounds are provided as public goods.
There are other, less pure but quantitatively far more important examples. One is free universal education. Most countries provide it to age sixteen, some to university degree level. In this case, technical-logistical exclusion cost would be quite low (indeed, in a broad sense negative as exclusion would permit student selection, and that would in turn lower production cost), but social ethics would not tolerate the exclusion of poor, dumb, and subscholarship standard pupils. With education becoming a public good affording free access, the share of public goods in the national product expands vastly. Organizing health care in the form of a free-access public good on the pattern of the British National Health Service expands the domain of public goods even further and multiplies the gravity of the public goods dilemma.
However, it is perverse to argue that this is a true case of market failure. The dilemma presents itself, not because the market cannot cope, but because society does not choose to entrust the matter to it. It may have quite worthy moral reasons for doing so. But it must not be overlooked that since public goods can be consumed at zero marginal cost, a tendency is created to their chronic overconsumption. This, in turn, involves an encroachment of the public upon the private sector and a cascade of adverse indirect consequences.
FREE-RIDER OR SUCKER
Received “market failure” theory has a false perspective not only in characterizing some goods as intrinsically public rather than made public by social choice reacting to intangible exclusion costs. It also mistakes the public goods dilemma for a version of the prisoners’ dilemma. It then finds that like the prisoners’ dilemma, the public goods dilemma has only a noncooperative equilibrium solution.
Individuals, unless forced to pay taxes, have two choices with regard to a public good: to contribute or not to contribute to its cost while enjoying its benefit. The noncontributor gets a free ride, the contributor is a sucker. For the standard theory, the conclusion is easy: there will be few or no contributors. The market will fail to produce the public good, particularly if it is indivisible or “lumpy,” so that a minimum number of contributors is needed to produce even a single “lump” of it (e.g., if the public good “education” comes in “lumps” no smaller in size than a schoolhouse and teacher).
Consider, however, the would-be free-rider who must weigh the attraction of a free ride against the risk that by withholding his contribution, he will cause the total of contributions to fall short of the minimum outlay needed to render the good really “public” freely accessible to all and satisfying the accepted criterion of publicness, namely “non-rivalry in consumption.” This criterion means that consumption of it by one person does not reduce the amount available to any other person.
Consider likewise the hesitant sucker who must weigh the opportunity cost of contributing against the chance that his contribution will be the one needed to raise total contributions over the threshold of the minimum required for the “lump” of public good needed to permit access to it by the marginal consumer.
In the face of these two pairs of possible outcomes, neither is the free-rider strategy unquestionably the best, nor the sucker strategy unquestionably the worst. Which of the two is the rational choice depends on the subjective probability each potential contributor attaches to others going for the free-rider or the sucker choice, as well as the value he attaches to having the public good instead of resorting to private substitutes.
The critical values of these variables depend on a complicated set of factors that cannot be detailed in a brief essay. However, it is intuitively fairly clear that there is nothing foredoomed about public goods in general. Whether a good can be “made public” by voluntary contributions depends on how rational calculation and anticipation of the behavior of others leads to a division within a group between free-riders and suckers. Each of the two possible social roles, the free-rider and the sucker, leads to a pair of uncertain alternatives. For the free-rider they are the free ride (the best) or failure of the public good (the worst). For the sucker, it is that he contributes like everyone else (the second-best) or that he contributes when some others do not (the third-best). In the standard theories of market failure, the free-rider strategy is “dominant”—it is always the best whatever anyone else may do. In effect, however, the pair “best or worst” is intrinsically neither superior nor inferior to the pair “second-best or third-best.” Rationally, one pair is chosen depending on the probability that one member of the pair rather than the other member will in fact turn out to be the case. The problem becomes simply a case in the theory of risky choices.
Public goods can thus be brought back under the calculus that guides homo oeconomicus. The provision of public goods does not presuppose collective choice that overrules individual ones by the brute force of politics. Those who instinctively mistrust collective choices and trust that reasonable solutions emerge from free individual choices need not feel browbeaten by the “market failure” argument.
TRYING THE FREE MARKET*
Introducing her recent book1 devoted mostly to contesting certain ethical defenses of the free market, the young Cambridge philosopher Serena Olsaretti (a little resignedly, it would seem) remarks that the market in its diverse variants is now accepted across the whole political spectrum. For the foreseeable future, the question “should we have a market?” will not seriously arise. Is not this all the more reason to question the morality of what she calls the “unbridled” form of the market?
Anyone challenged to justify his conduct has very nearly lost the battle if he starts to demonstrate his rectitude. “When did you stop beating your wife?” is the schoolbook example of the question best met with silence by both the innocent and the guilty.
The arguments about the justice of the free market, like other adversarial arguments, have a definite logical order. Initially, the free market enjoys the benefit of the doubt. It is presumed innocent of violating justice. The burden of proof that it does violate it lies with the accuser. Until at least some solid evidence is brought, the defense has no case to answer. “Evidence” in a trial of morality cannot, however, very well come in the form of ascertainable fact. If it comes at all, it does so in the form of support built on a strong moral theory.
Related to the presumption of innocence, though resting on somewhat different grounds, is the presumption for the status quo. It is up to those who think it should be changed to marshal sufficient reasons why the change would be a change for the better. The market, in a debate about the just or the good society, figures as the status quo or at least closer to it than the proposed reform. It is for the reformers to press home the charge that it ought to be changed.
Neither the case that the free market is unjust (though perhaps still worth preserving—a claim that is independent of whether it is just), nor the case that it should be transformed or abolished altogether, has ever been successfully established. The last significant attempt to establish the charge of injustice, that of Rawls, was at best inconclusive and has since subsided. The second, drawing mostly on socialist inspiration, did get actual occasions to change or abolish the market, and these occasions have, if anything, vindicated the status quo. So far there is still no case of either kind to answer.
The apparent failure by foes, but even more so by friends, of the free market to grasp the role of the burden of proof, and what it takes to shift it from the challenger to the defender, is one of the puzzles in recent intellectual history. There is a widely shared commonsense perception that the free market generates inequalities of income and wealth. Since the market is not an agent and does not generate anything, it would be more illuminating to say that the world being what it is, and people’s luck, resources, talents and characters being distributed the way they are, the effects of exchanges among people will be reflected in their wealth and incomes being unequal. It is the facts of life that cause the inequality, not the market. Either way, however, the very word “inequality” suffices to set off a knee-jerk reaction in the defenders, making them feel that a substantial case against the market has therewith been made. It is now presumed guilty and defenses need to be deployed.
The reaction, however, is gratuitous. Creating inequality is not a charge that needs any answer unless inequality is a wrong of some kind—such as injustice. If the market or, more narrowly, its morality is really to need defending, it must at the very least be made plausible that inequality is unjust.
Instead of waiting for this to be shown, the defenders of the free market have rushed to argue that, regardless of inequalities, it was indeed just. Like most social theorists who would rather write about what other social theorists have said of a thing than about the thing itself, Olsaretti seems more concerned with the coherence of these defenses than with the thing they defend. She divides them into desert-based and rights-based ones. Much of her critique is worth serious consideration, despite her firm habit of making her points by what George Stigler called the surest method of academic persuasion, namely relentless repetition. Her positive contribution, as distinct from her analysis of the mistakes of others, is slim and brief by comparison.
Of the two main lines of defense, she seems more combative when tackling the rights-based one. In fact, there is not a great deal to discuss in the desert-based one because (though Olsaretti does not make this point) the relevant arguments are so thoroughly subjective that at the end of a short chain of just a few links, the reasoning rapidly reaches the dead end where it is “my say-so against your say-so” and debate is a waste of time. Olsaretti confines the desert argument to personal labor and effort, leaving the reward accruing to capital out of consideration. Even so, she reaches the obvious conclusion that rewards cannot all be imputed to compensation for pains or contribution to product, for “brute” luck enters into rewards and must be “neutralized.” Someone (“we”) must tell what adjustments will achieve neutrality, i.e., purge the system of rewards of the influence of luck. However, the sole means of separately identifying the parts due to pure compensation, to contribution, and to brute luck is subjective judgment, leaving us with your say-so against my say-so. If it were the case that luck makes market outcomes unjust—a proposition that would be important if it were compelling, rather than an unsupported assertion that can be countered by other similarly unsupported assertions—then we might still be unable to say by what adjustments we could make them just. In other words, even if the desert theory of market justice appealed to one moral intuition (among others), it would still be little more than a useless form of words.
The “rights-based” defense of the free market has a startling element in its very foundation which most academic opinion, including Olsaretti’s sharply critical one, seems never to question, let alone reproach. In its starkest form, it appears in the famous first sentence of the preface of Robert Nozick’s much-quoted vindication2 of libertarian ideals: “Individuals have rights, and [etc.].” Alternatives might have read “Individuals ought to have rights, and . . .” or perhaps “If individuals had rights, and . . .” and would have been unobjectionable, though they might not have conveyed the same message. As it is, this starting point devalues much that follows it and makes Nozick’s defense of the free market wide open to a flank attack. The fault is important because Nozick is probably the most influential libertarian defender of feasible freedom, and Olsaretti takes his book as the representative text her critique targets above all others.
We do not in fact know that “individuals have rights” and nothing entitles us to pretend that we do. Characteristically, authors now frequently refer to rights “we have assigned,” from which one could infer that rights are created by somebody somewhere and are then conferred upon individuals (while the correlative obligations are imposed in some unspecified distribution). Nozick tells us that the rights he asserts individuals to have are boundaries that segregate their person, property, and contracts. Once again, we wonder how he knows. However, if these particular rights have somehow been “assigned” to them, what is to stop an anti-Nozick, moved by moral concern for the well-being of individuals and for what is due to them in respect of their dignity and autonomy, from assigning additional rights to them—rights that are rights-of-way, easements cutting through the Nozickian boundaries? Is this not the rights-based model of “social market economy” or some other hybrid?
Nonlibertarian believers in rightsism, notably Rawls and Scanlon, are less bold than Nozick and seek to find consent-based explanations of why they believe that individuals have certain rights rather than simply alleging that they do. Either way, however, the introduction of putative rights, not arising from contracts individuals conclude with one another, offers great facility for sculpting the just, i.e., rights-respecting, order in the desired form.
Defending the “unbridled” market by asserting Nozickian rights repeats the same strategic mistake as defending it as if it were presumed guilty. This defense relies on the outlandish Lockean fantasy of self-ownership to derive the proposition that people are entitled to the wages of their labor and the product of their endeavors. Though it is perhaps a side issue, it is worth pointing out that self-ownership is a category mistake: ownership is a relation between owner and thing owned such that the owner is free to dispose of what he owns. It is nonsense to talk of a relation between you and yourself. Nor can you dispose of your own self, exchanging it for another’s as you could exchange a thing you owned for another thing. In any event, reliance on this misfit idea is not necessary. The whole “entitlements” theory of justice is going about it the wrong way round. The point to prove is not that each individual is entitled to the fruits of his efforts (or to what he has exchanged them for), but that somebody else is entitled to take such fruits away from him. This and the implicit presumption of good title unless it is proved to be vitiated, is the proper logical order for conducting a trial of the market.
When they defend the free market that is presumed to bring about unjust outcomes, libertarians contend that transfers of rightfully acquired “holdings” preserve rights provided they are not coercive. In seeking to refute this defense, Serena Olsaretti is largely unconcerned with the justice of first acquisitions (often taken to be the more controversial half of the defense) and constructs a case for the prosecution in which the trickle of coercion as the sole source of rights-violation is swallowed up by the broad river of “forcings.” Voluntariness, rather than freedom, is the criterion of legitimate transactions, and forcings exclude voluntariness. Voluntariness presupposes the acceptability of option(s), though the author’s exact position on this is so involved as to defy a simple summary (including her own that she provides in her Conclusions). We shall look at it presently.
In dealing with coercion and forcing, she is not interested in the different nature of these acts. (In fact, forcing in her scheme takes place without anyone having to do any forcing, while for coercion someone must coerce.) What matters is the effect on the victim: “What makes choices carried out under coercion non-voluntary is exactly what also makes other types of limited choices non-voluntary. The alternative faced by the man who hands over the money when threatened with a gun is to be killed; the alternative of a worker who sells his labor power at whatever price is to remain unemployed and suffer severe hardship. The relevant condition (in both cases) is the absence of an acceptable alternative” (p. 151, my italics). Note that the choice is “limited” not only in these types of cases, but in literally every choice, but let that pass.
At this stage the argument runs into a conundrum. “Unacceptable” defines an option that cannot be accepted. A person in any given position has accepted the option of taking that position. It was an acceptable option. It appears that it could have been taken voluntarily, even though there were no acceptable alternative to it.
The author explicitly states that “although no choice among several alternatives is involved, the individual nonetheless does the thing he does voluntarily” (p. 140). If the option actually taken was indeed the sole one on offer, all other acceptable options must have been accepted by the other participants in the market, and none is left. Supply equals demand and the market is cleared. It has stood its moral trial if all these acceptable options, despite each being de facto the only one available to the person who took it, were taken voluntarily. Where everyone finds his own position at least acceptable and where there are no available options left is a situation where there are no unacceptable ones either, i.e., where the free market is just in the way the author conceives justice.
She very decidedly contradicts her own idea of voluntariness without alternatives, however, by laying down in several places that voluntariness hinges on the availability of acceptable alternatives; in her Conclusion she goes a little further and stipulates that everyone must “face a sufficient range of options” (p. 164, my italics) for their choices to be voluntary. This seems to be her last word.
Can one infer anything further about the “sufficient range”? It turns out that an offer may be too good to refuse and thus is tantamount to “forcing” (p. 147); it does not fit into the range that guarantees voluntariness of choice. Offers that are not good enough may pass for unacceptable. What can one say, though, about options that are all acceptable but not equally good? It could reasonably be argued that choosing any but the best is counterpreferential and could only be motivated by a fit of mental disorder. The best must be chosen despite the availability of acceptable but inferior others. Is the best then chosen really voluntarily? The case differs only in degree from the offer that one cannot refuse.
If a given gap between the best option and the next-worse one is too large for the choice of the best to qualify as voluntary rather than a “forcing,” should one try little by little to narrow the gap—and if so, how narrow must it get for truly voluntary choice between the topmost pair of options? Rigorous reasoning would seem to allow only one conclusion: the gap must be infinitesimal, with preference being replaced by indifference. The free market would satisfy the requirements of justice if everyone faced at least a pair of equally good options and there was not a better one topping them. It would take only a couple of further refinements for the free and just market to resemble an egalitarian Nirvana.
This, to be fair, is not what Olsaretti is driving at and she would hardly concede that this is the way her own argument is drifting. She is, however, content to stop at the condition where acceptable options for everybody are guaranteed by some nonmarket redistributive mechanism. She is well aware of the twistability of the word “acceptable.” Average opinion may consider a certain minimum income just acceptable in a rich Western country and a tiny fraction of it acceptable in a poor sub-Saharan one. A person may honestly judge an option open to him as unacceptable because he did not like it or found it too steep a step down from his actual position. Fear, pride, and mistaken expectations of the future might weigh as much in judgments of acceptability as material welfare. Above all, acceptability, like such other sensations as liking, satisfaction, or deprivation, cannot properly be represented in absolute, yes-or-no terms, but only in relative ones. Acceptability is, for all we know, a continuous variable. Graphically, it is a scale along which options are ranged between the very sweet ones at the top and the very bitter ones at the bottom. Beneath the bottom, there is nothing but unfeasibility that is simply outside the choice set. Nothing is really unacceptable if it can be chosen.
Perhaps made uncomfortable by some subconscious awareness of this logic, the author can do little more than protest her good intention to steer clear of the more obvious of the threats that using this concept poses to her thesis. She wants to “avoid complete subjectivity” (p. 153, my italics) and believes that she attains objectivity by declaring an option acceptable if it suffices to satisfy “basic” human needs.
However, we are no nearer to objectivity if we qualify the quintessentially subjective term “need” by adding that it must be “basic.” She seems a little uncertain herself about the adequacy of the idea of basic needs, and with a curtsey to A. K. Sen, tentatively attaches to it the designer labels of “functioning” and “capability,” making her groping for an objective threshold of acceptability a good deal more uncertain and her predicament a good deal worse.
She would be better off by postulating an arbitrarily fixed minimum income for all and a corresponding “bridling” of market outcomes on the well-trodden and equally arbitrary ground that things would be more equal and therefore nicer that way. Such a less ambitious project would have spared her a number of difficulties. One she grapples with is the distinction between freedom and voluntariness and whether the first is a necessary condition of the second. Another has to do with the responsibility for “forcings” where nobody is doing any forcing. We must, it seems, accept that injustice can arise spontaneously (but there is no hint whether justice, too, can do so). There is a lack of awareness that in looking for justice, we want the facts of the case to be ascertainable. Olsaretti, one is forced reluctantly to find, seems to feel that where the facts are not really ascertainable, judgments will do as well.
Her honest and conscientious try at finding an original reason for morally condemning the free market, developed from a critique of its libertarian defense, was, it seems to me, self-defeating. She sought to derive a criterion for the market’s justice from voluntariness, and for voluntariness from acceptability. But she had to fit the continuum “acceptable” to the binary “just-unjust” and that was bound to upset her design. She needed the binary pair “acceptable-unacceptable” to get a proper fit with “just-unjust,” but that pair was just not there.
THE STATIST LEGACY*
One of our many lazy mental habits is glibly to take it as read that economic activity is, and indeed must be, carried out “within a legal framework” which largely conditions how people behave. The law says that they must respect each other’s person and property, fulfil their obligations, pay their taxes, and care for their dependents. They will by and large do these things if the law is enforced. The state is there to enforce it. As rivalry in enforcement would lead to a shambles, society entrusts to the state the monopoly of law enforcement and willingly shoulders its cost. Despite occasional causes for grumbling, it is broadly agreed to be money well spent, for where would we be without the law?
The double trouble with this line of soothing tale, which nearly everybody accepts and recites, is that it is not altogether true, and that even if it were, it would fall far short of an explanation of why broadly comparable legal systems are consistent with vastly different economic behavior in different societies. To begin with, it is not even certain that the “legal framework” really acts the way imagined in standard economic and social theory. The state guards its lawmaking and enforcing monopoly with ferocious jealousy. The fact that it is an effective monopoly should lead us to expect that it will maximize some kind of net result, achieving some high degree of compliance with the law, and do so economically. In reality, because it is a monopoly subject to a popular mandate and must not arouse dread, fear, and hatred, it is restricted in what it may and what it must not do. It must produce compliance and serve up justice in white gloves on a silver platter—a demand it is most of the time quite unable to meet. It must be sensitive to shifts in public opinion between novel shades of political correctness and human-rightsism, as well as to pressures from single-issue groups and special interests. As a result, it must become a law factory, pouring out an ever broader stream of new and complex legislation. Perhaps more important, it is financed from taxes imposed on people according to criteria that have little to do with what these taxpayers, taken individually, obtain from the state by way of law enforcement services. Like any other tax-financed service where contributions are divorced from benefits, the “legal framework” is an open invitation to free-riding. Individuals will unload (or at least have a good try at unloading) onto the state responsibilities that in a well-ordered society they could and would themselves carry on their own behalf or for neighbors, partners, and peers.
Here we reach the nub of the problem of why people in some societies behave mostly well, while in others they so often misbehave. Law even at its best controls only a small part of human behavior. At its worst, it aspires to control a great part, but largely fails. Vastly more important than the legal system is the much older and more deeply rooted set of unwritten rules (technically, spontaneous conventions) barring and sanctioning torts, nuisances, and incivilities that together define what each of us is free to do and by the same token what no one is free to do to us. If these rules are kept, everyone is free, property is safe, and every two-person transaction is mutually beneficial (though third persons may be exposed to negative externalities—for the rules are no bar to competition or the general rough-and-tumble of ordinary life).
How well these rules are kept depends on how well children are brought up, on war or peace, and on other ultimate causes that are not hard to divine. The proximate cause, however, is the effectiveness of sanctions. To mete out punishment for misbehavior always involves some cost to the well behaved who take it upon themselves to administer it. He and those he cares for benefit if misbehavior is punished and hence deterred, but he would benefit even more if the punishing were done and the cost borne by someone else. Rational calculus may tell him that given the likelihood of others undertaking what he would not, his best course is to undertake it himself.
If all or most calculate the same way, all or most will contribute to discouraging misbehavior and the cost to each will be correspondingly lower. Punishing the breach of the rules by individual or joint action, particularly within peer groups, will also have become a convention, one of the basic rules whose breach, in turn, will itself tend to be sanctioned by punishments that may range from reproach and the cold shoulder to ostracism and business boycott.
There are a number of ways in which the peoples of the northern half of Europe seem to be better behaved than their southern counterparts. Dependability, punctuality, respect for the given word, steadiness of effort, greater discipline at work, and lesser need for close supervision seem to be some of them, though this is but an impressionistic judgment that it is hard to document by statistical evidence. These are not traits that make life in northern societies necessarily more fun, more cheerful, or less boring, but they do make for efficiency and prosperity despite the handicaps of climate. A brute fact that seems to bear this out is that most manufactured goods and some services originating in Northern Europe are more expensive than their close substitutes made farther south, but sell just as well.
North and South have contrasting mentalities with regard to punishment for certain types of misbehavior. In the North, self-dealing, conflict of interest, and corner-cutting are punished by serious social sanctions if they are not outright crimes punished by the state. In addition to the punishment, the perpetrator is considered dishonorable, covered with shame. In the South, though perpetrators may well be detected, they are in puzzling ways quite often allowed to get away with impunity and are not even ostracized, but rather regarded with envy and reluctant admiration. Even stealing from the public purse may be regarded as a bit of a joke. Elected officials jailed for corruption are often triumphantly reelected when they are released. It is not too rash a generalization to say that while northern society may be priggish, the southern one is amiably and cynically indulgent. Needless to say, the prevailing impunity further encourages corrupt practices, which in turn act as significant handicaps to efficient resource allocation.
One aspect of behavior whose economic significance towers above all else is the attitude to property. It is distinctly different in Southern from Northern Europe. Beginning with land, the monarch in Spain, Portugal, France, and the Papal States had greater latitude to dispose of the property of his subjects and in terms of security of tenure, there was little equivalent in these countries of the freeholder so widespread in Northern Europe. Moreover, Southern European society was deeply (and it would seem lastingly) influenced by the egalitarian streak in the New Testament, the severity of Jesus toward the rich and the money changers in the Temple, and, nearer modern times, the teachings of the Catholic Church regarding what has come to be called “social justice.” Property, especially moneyed property, let alone “finance capitalism,” is distinctly unpopular in Catholic culture but is a fairly well tolerated fact of life in the Protestant one. We could see the reasons why even if we had never heard of Max Weber.
Unpopularity of property, shading into hatred and moral condemnation, immensely strengthens the hand of the state, for it is the sole seat of redistributive power that can legislate property and income away from some and to the benefit of others. The stronger the state, the greater the role assigned to the “legal framework” whose dynamics push it to encompass and regulate more and more aspects of personal and social behavior. As a corollary, the raison d’être of the unwritten, conventional rules is undermined, the private punishment on which they depend is discouraged by the monopolist state, and the practice of civil society to look after its own interests and concerns withers away in some places though it persists in others, and its roots can probably never be quite eradicated.
[* ]First published by Liberty Fund, Inc., at www.econlib.org on December 4, 2006. Reprinted by permission.
[1. ]Armen A. Alchian, “Some Economics of Property Rights,” Il Politico 30 (1965): 816-29.
[2. ]See Anthony de Jasay, “Freedoms, ‘Rights,’ and Rights,” Il Politico 66 (2001): 369-97.
[* ]First published as part 1 of “Property and Its Enemies,” by Liberty Fund, Inc., at www.econlib.org on August 4, 2003. Reprinted by permission.
[1. ]See John Locke, The Second Treatise of Civil Government (1690); there have been many editions, but especially significant are John Locke, Two Treatises of Government: A Critical Edition with an Introduction and Apparatus Criticus by Peter Laslett, rev. ed. (Cambridge, UK: Cambridge University Press, 1963), reissued with a new introduction by Cambridge University Press in 1988; and Political Writings of John Locke, ed. David Wootton (New York: Mentor, 1993).
[2. ]David Hume, A Treatise of Human Nature, ed. David Fate Norton and Mary J. Norton (Oxford, UK: Oxford University Press, 2000).
[3. ]Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974), 174.
[4. ]Gerald Cohen, Self-Ownership, Freedom, and Equality (Cambridge, UK: Cambridge University Press, 1995).
[5. ]Another such arbitrary demand is made by Cohen (ibid., 83-84), who advances the moral postulate that all property is jointly owned, no one can unilaterally take out “his” share from the joint holding, and the latter should be managed by democratic consensus. We may note that the late lamented Soviet Union has come close to fulfilling these moral requirements. Their realization, however, was regrettably discontinued.
[* ]First published as part 2 of “Property and Its Enemies,” by Liberty Fund, Inc., at www.econlib.org on August 4, 2003. Reprinted by permission.
[1. ]E.g., John Christman, The Myth of Property: Toward an Egalitarian Theory of Ownership (Oxford University Press, UK: 1995); Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (New York: Oxford University Press, 2002); and (under a less bellicose title) Jeremy Waldron, The Right to Private Property (Oxford, UK: Clarendon Press, 1988).
[2. ]Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974).
[3. ]David Hume, A Treatise of Human Nature, 2nd ed. (1739; reprint, New York: Oxford University Press, 1978), Book III.
[4. ]I. M. D. Little, Ethics, Economics, and Politics (Oxford, UK: Oxford University Press, 2002), 38.
[* ]First published as part 3 of “Property and Its Enemies,” by Liberty Fund, Inc., at www.econlib.org on September 1, 2003. Reprinted by permission.
[1. ]Philippe Van Parijs, “A Basic Income for All,” in What’s Wrong with a Free Lunch? ed. Joshua Cohen and Joel Rogers (Boston: Beacon Press, 2001), 14.
[2. ]Emma Rothschild, “Security and Laissez-Faire,” in Cohen and Rogers.
[3. ]Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962). See chap. 12, “The Alleviation of Poverty,” 192-93, where Friedman advocates “an arrangement that recommends itself on purely mechanical grounds.”
[4. ]Edmund S. Phelps, “Subsidize Wages,” in Cohen and Rogers.
[5. ]Herbert A. Simon, “UBI and the Flat Tax,” in Cohen and Rogers.
[6. ]Robert Goodin, “Something for Nothing,” in Cohen and Rogers.
[* ]First published as part 1 of “The Failure of Market Failure,” by Liberty Fund, Inc., at www.econlib.org on October 2, 2006. Reprinted by permission.
[* ]First published as part 2 of “The Failure of Market Failure,” by Liberty Fund, Inc., at www.econlib.org on November 6, 2006. Reprinted by permission.
[* ]First published as part 1, “Presumed Guilty,” and part 2, “Unacceptable,” of “Trying the Free Market,” by Liberty Fund, Inc., at www.econlib.org on April 4, 2005, and May 2, 2005. Reprinted by permission.
[1. ]Serena Olsaretti, Liberty, Desert and the Market (Cambridge, UK: Cambridge University Press, 2004). Originally an Oxford doctoral dissertation prepared under the aegis of G. A. Cohen.
[2. ]Robert Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974).
[* ]First published as “Misbehavior, Punishment, Prosperity: The Statist Legacy,” by Liberty Fund, Inc., at www.econlib.org on August 6, 2007. Reprinted by permission.