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You down with OPP?

You down with OPP?

With socialism on the ascendancy, now seems like a good time to remind ourselves why widespread ownership and property rights are so critical and one of the great innovations of modern man.

Shared resources create perverse incentives in the use of resources. They encourage overuse and under-investment. This leads to inefficiency, slow growth, and poverty. We will explore some examples of these challenges as well as discuss the great many benefits of robust and comprehensive private property rights.

What does a lack of property rights look like?

In science, there is the concept of the natural experiment. This is defined as:

an empirical study in which individuals (or clusters of individuals) are exposed to the experimental and control conditions that are determined by nature or by other factors outside the control of the investigators. The process governing the exposures arguably resembles random assignment. — Wikipedia

These are particularly useful for testing ideas that involve large numbers of people or would be too unethical to test for yourself. The two Koreas are a fine example of a natural experiment. In the photograph above, we see how the two Koreas look very different today. It looks like South Korea is an island floating, resplendent, in the Sea of Japan rather than being part of a peninsula extending out from China. That mostly black stripe is, of course, North Korea. There is a little blip of lights around Pyongyang, but otherwise the place is dark. This is not a metaphor. It is really dark there. There was a divergence in 1947 that led this peninsula down two separate paths and ultimately cleaved it in twain. Kim Il-Sung was the leader of a communist, anti-Japanese militia. By 1947 he had asserted control of the northern portion of the peninsula. With support of the Soviet Union he instituted the Stalinist playbook of total centralized control. Kim’s Juche system could be described as having gone even farther than Stalin, in fact. Under the Juche system, history is wrought from the mind and actions of the one Great Leader. He planned and controlled everything. Stalin, at least, paid lip service to the central committee and the various soviets. Kim needed no outside help. Knowing what was best for all, he banned private property and free markets. He decided everything. None of us are as smart as all of us, however. The few cannot think for the many and do better over the long term.

In the south, Syngman Rhee, a western educated and rabidly anti-communist man, was elected President in 1948. I do not want to give the impression that he was a great liberal leader, he was not. But, he did understand the value of markets and private property. Property rights were guaranteed and credit was made available to businesses with growth prospects. He invested in education and infrastructure. These things led to a virtuous cycle of wealth creation, community investment, and entrepreneurship. This explains, in large part, the differences we see in that photograph. Remember, this was done under an authoritarian regime. Liberalism is not actually the critical piece of the puzzle. It allows the property rights to be secured over the long term but a benevolent dictator can work in a pinch. South Korea is far more liberal than it was then and the property rights have endured as a result.

During the 1990s, while South Korea was flooding the American automobile market with Hyundai compacts, North Korea was suffering a decade long famine in which around 500,000 people starved to death each year.

What our generation has forgotten is that the system of private property is the most important guarantee of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves. — Friedrich von Hayek, Road to Serfdom

What are some downsides of community ownership?

There are other utopian ideas surrounding property rights that are often tossed around these days as though they are profoundly important secrets lost to time. The idea of community ownership of critical infrastructure, for example. In some cases this is a necessary thing and has shown itself to have some merit. Many people would describe the Interstate Highway System as President Eisenhower’s greatest accomplishment. And, to be fair, it was great. It was done as a community project though, because it was too complex a project to organize in the middle of the 20th century any other way. In the middle of the 19th century many such projects (trans-continental railroads) were accomplished by the private sector with little more than government subsidies to provide sufficient incentive to accept the risk. By the 20th century, regulation and other impediments made this roughly impossible to accomplish without direct government involvement.

Secure property rights, the law, public services, and the freedom to contract and exchange all rely on the state, the institution with the coercive capacity to impose order, prevent theft and fraud, and enforce contracts between private parties. To function well, society also needs other public services: roads and a transport network so that goods can be transported; a public infrastructure so that economic activity can flourish; and some type of basic regulation to prevent fraud and malfeasance. Though many of these public services can be provided by markets and private citizens, the degree of coordination necessary to do so on a large scale often eludes all but a central authority. The state is thus inexorably intertwined with economic institutions, as the enforcer of law and order, private property, and contracts, and often as a key provider of public services. Inclusive economic institutions need and use the state. — Daron Acemoglu, Why Nations Fail

Community ownership is a case where size matters however. If we consider the local use of public lands we can see some instructive stories of what I am talking about. In both Iceland and Greenland for example, a lack of private property led to massive deforestation and soil and turf damage. Absent private property, Icelanders and Greenlanders felt no responsibility to moderate their wood consumption. In fact, in Iceland there is archaeological evidence of mass burnings of forests to open land for grazing. Without the risk of destroying their own investment, people rushed to get, while the getting was good. The subsequent grazing and rooting prevented new trees from growing. The lack of personal motivation to maintain the wood resource over the long term, created perverse incentives for residents to destroy this critical resource. It got so bad in fact that there was no wood to build boats, no wood to make iron (for nails), no wood to sterilize the milk, no wood to build homes. In Greenland’s case, this led to total societal collapse. Everyone is assumed to have perished.

In both Iceland and Norway we know that saeters (seasonal dairy farms) had to be closed down when local firewood became exhausted, and the same presumably held for Greenland as well. Just as was true for scarce lumber, the Norse substituted other materials for scarce firewood, by burning animal bones, manure, and turf. But those solutions too had disadvantages: the bones and manure could otherwise have been used to fertilize fields for increased hay production, and burning turf was tantamount to destroying pasture. — Jared Diamond, Collapse

Haitian border w/ DR

This tragedy of the commons plays out again and again throughout history. Examples can be readily seen even today. Haiti, for example, has relatively little forest coverage compared to the Dominican Republic with which it shares a border. Presumably this is caused by poor institutions that fail to protect lands by putting them in the hands of private owners who have great incentive to see them maintained in perpetuity. This creates secondary problems like flooding and soil erosion which have their own compounding negative effects.

How do property rights actually improve things?

It is not always easy to point to ways that free markets and property rights make things better. This is because the general nature of these liberal institutions are emergent. You cannot typically predict how thousands of uncoordinated people will behave. In fact, it is precisely this lack of ability to know what the optimal decisions of all the market participants are that makes centrally planned economies so ineffective (relative to their disorganized brethren).

Our nation’s first principles were influenced in part by John Locke. He believed

everyman has a property in his person; this nobody has a right to but himself. The labor of his body and the work of his hand, we may say, are properly his — John Locke, Second Treatise of Government

That each of us has a right to our own labor then meant that we had a right to that which we acquired with the fruits of our labor and so it went. These inalienable rights were discussed at length in the Constitution and the Federalist papers.

The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. — James Madison, Federalist 10

With the protection of faculties of man to acquire property the first object of government, the protection of those acquired properties likewise became of critical import. The courts were created, in part, for the purposes of enforcing contracts. Other government institutions were created as well.

Property Loans Market Size

Let’s discuss an interesting expression of private property rights that continues to have a massive and largely positive impact on the lives of Amercans. It begins with what we call the Recorder’s Office. With few exceptions, each county in the United States has its own Recorder’s Office. It’s role, among other things, is to maintain a record or all real property transactions. From this record, uncoordinated market participants invented research organizations and insurance policies whose purpose is to protect buyers from the risk of purchasing property from sellers who do not actually own it. Once lenders could be absolutely confident about who owns the property, they became willing to lend money secured by these assets. This seemingly small innovation is the foundation of the mortgage industry (annually worth north of $1/3$ trillion dollars). Without it, credit would be expensive and rare. Property values would be low. The great avenue to prosperity and the engine of the middle class would be gone.

Why is this creeping socialism bad?

As I said earlier, market economies and the private property rights they depend on are the wellspring from which wealth and prosperity flow. No one living in North Korea today could possibly imagine the value of the alternative path they failed to take without direct observation of it today. The limousine socialist types, residing in their ivory towers, presume to understand and believe they can predict all the value these emergent phenomena create. The technocrat class honestly believe that if they were just given the reins, they could squeeze out an extra 1% of prosperity from the situation as it is right now. They might even be right. What their utter lack of humility blinds them to is the opportunity cost of losing all the compounding efficiency and prosperity the free market creates by people trying to optimize their own lives. I believe that North Korea very likely got exactly the growth its technocrats imagined they could. They would, no doubt, be bragging about the amazing progress they made compared to the 1947, recently denuded by the Japanese, Korea they started with. What they would be missing is what none of us could have projected but all of us can manifest absent a central organizing authority.

Prices Never Change

The pad lock photographed here is an instructive example. Soviet manufacturers permanently applied the price to products because there would never be a reason for it to change. This lock will forever cost 5 rubles. Iron or brass becomes more rare? 5 rubles. Manufacturing improvements make locks much cheaper to make? 5 rubles. There is no future for which these technocrats have a lack of certainty.

Market participants transmit signals to each other, often without explicit intention. These signal vary from purchases of, interest in, or calumny for the various good and services in the market. These signals sum together in each of our minds. From which, the right prices emerge. If more profit is available elsewhere, the market responds to these signals by reducing one product and increasing another. No intervention from above is necessary.

Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. — Adam Smith, The Theory of Moral Sentiments

No system has yet been produced that bests the market consistently at producing the right products, for the right price, in the right place, at the right time. Efforts to undermine this thing, we cannot control, and few understand, are done at all our peril.

What might we expect if property rights are eroded significantly?

The largest problem I foresee in a world with fewer property rights would be drop in productivity, efficiency, and an increase in malinvestment. Absent the rapacity and avarice, from which the haters of private property promise to protect us, the economy will calcify. Factories will cease to seek to maximize their profits because their owners will not get to keep the upside. The honest signals we rely on to make decisions will be substituted with the cantankerous whims of faction. Government will become the source of the jobs and as such they will seek to succor their allies at the expense of those factions they oppose. These factions would be made up of other Americans, of course, and the game becomes zero sum. Insofar as there are still private businesses competing with the government they will find it difficult to succeed in the face of subsidized factories that are too big to fail. This also leads to malinvestment as factions within government will push investment toward industries they control for their own gain without regard to the overall need. We have seen this happen many times in many places. There is a reason why the switch to socialism is so often followed by famine. More people died in the 20th century from socialism caused famines than the world wars.

Malthus tells us that animals will procreate to the limits of their capacity to feed themselves. Socialism lowers that capacity. People die. While simplified a bit, that is the story to take home with you.

Your obedient servant,