Liberty Matters

Unproductive Incentives


Bas van der Vossen’s initial essay offered a defense of Locke’s labor-mixing theory of property acquisition by arguing that it was at the intersection of the personal and productive. By mixing our labor with an unowned object, we create something that is personal to us, and also something that is productive for society. In my response, I pushed back against the latter claim. Mixing our labor with resources is not always productive. In fact, I argued that a system of property acquisition that allocates property rights according to labor mixing may incentivize persons to mix their labor in unproductive ways. Saying “whoever first mixes their labor with x is the owner of x” may encourage persons to occupy land before there is net positive value to doing so; it may also encourage persons to mix their labor with resources in unproductive ways. Some economists believe that this is what happened with the Homestead Act of 1862. The act allocated property through a system of labor mixing. Many believe this was economically inefficient. 
In his reply, Van der Vossen pushes back against my argument. His main concern is that “at the time of acquisition, we typically just don’t know what activities will end up having been the most productive. This depends on facts we don’t know, innovations and inventions, and things that happen in the future.” One way around this problem is to grant property rights after someone has acquired a resource and has done something with it. If they have done something sufficiently productive with the resource, then we grant them a right to it. If they have not done something sufficiently productive with the resource, then they do not get a property right. Van der Vossen rejects this approach, as “such a policy would create enormous uncertainty about our rights, it would discourage investment, labor, risk-taking, and more.”
I agree with Van der Vossen that property rights should not be granted after persons have acquired resources and done things with them. However, I want to push back against Van der Vossen’s claim that we cannot know, beforehand, which sorts of activities will be productive and which ones will not. Of course, we can never know, with 100 percent certainty, which activities will be productive. However, some may have a better guess than others. If so, then those with a better guess as to what sorts of activities will be productive should be the ones who set the rules of property acquisition. 
Let me propose a method for allocating property rights; after doing so, I will argue that it is superior to the Lockean system in terms of incentivizing productivity.[1]
In the early days of Westward expansion in the Americas, property rights were defined and enforced by claim clubs.[2] Claim clubs were informal organizations that specified, enforced, and adjudicated the property claims of their members, oftentimes using coercive means to do so, though they were entities that existed outside the formal contours of the state. What is interesting about claim clubs is that they deployed a diversity of methods for allocating property rights. For instance, three claim clubs in Iowa required persons to perform labor on the land in order to gain a property right; the rest of the Iowa claim clubs did not require labor mixing.[3] So, only some claim clubs adhered to the Lockean labor-mixing standard; the others did not. Among those clubs that did require labor mixing, there is still more diversity. In Webster County, claimants had to expend $10 worth of labor every month after the initial month, while in Poweshiek county claimants had to perform $30 worth of labor every six months.[4] In Cherry Creek Valley, Colorado, claimants had to perform $50 worth of improvements within the first 50 days, and another $25 worth of improvements during each successive quarter.[5]
Why so much diversity in terms of appropriation rules among claim clubs? The answer is that “clubs adapted regulations to local conditions.”[6] There is no general answer to the question: what is the optimal use of resource x? Answers to this question are highly contingent on time and place. In some times and places, the optimal use of resource x requires that the resource be labored on immediately. In other times and places, the optimal thing to do with x (for reasons given in my prior essay) may be to let persons hold x without laboring on it for the time being. Claim clubs could account for this variation, by specifying appropriation rules that could adapt to local conditions. 
Some economists believe that claim clubs produced more efficient appropriation rules than the labor-mixing standard set by Lockeans and by the Homestead Act. Why? Because the rules set by claim clubs were formed by residual claimants. To put it another way, those who formed appropriation rules had skin in the game. An appropriation rule adopted by a claim club that destroyed wealth would destroy their wealth, so the incentive was to form rules that discouraged unproductive resource use. As economists Terry L. Anderson and Peter J. Hill describe it: “because members of land-claims clubs had a direct stake in the outcome, they had an incentive to develop an orderly process that minimized the expenditure of resources in establishing property rights. Defining and enforcing property rights took some effort, but to the extent possible the effort was focused on productivity.”[7]
Let us now return to Van der Vossen’s main criticism of my essay. Van der Vossen argues that we cannot know which activities will be productive ex ante, so we might as well go with the labor-mixing standard, which is productive enough. I agree that we can never know, with 100 percent certainty, what activities will be productive. But the relevant question here is: who will have a better guess as to what will be productive, the Lockean theorist who sets an appropriation rule for all to follow, or those in local communities who have skin in the game? I believe it is the latter, which is why I think local appropriation rules set by local communities would produce a more efficient allocation of property rights, at least when compared to the Lockean labor-mixing standard applied indiscriminately to all persons in all contexts. 
[1] Here I draw on my essay “Lockeans against Labor Mixing,” Politics, Philosophy & Economics 20 (2021): 251-272. [2] For an excellent overview of claim clubs, see Ilia Murtazashvili, The Political Economy of the American Frontier (Cambridge: Cambridge University Press, 2013).
[3] Terry L. Anderson and Peter J. Hill, “Privatizing the Commons: An Improvement?” Southern Economic Journal 50 (1983): 444-445.
[4] Ibid., 445.
[5] Murtazashvili, The Political Economy of the American Frontier, 74.
[6] Ibid., 73.
[7] Terry L. Anderson and Peter J. Hill, The Not So Wild, Wild West (Palo Alto: Stanford University Press, 2004): 160.