“Economic Calculation,” “Strong Property Rights,” and Other Lies Koch-Funded Libertarian Commentators Told Me

A common cliche among conservatives and those on the libertarian Right is that “strong property rights” are an incentive to create wealth and are necessary for progress. Closely related is Ludwig von Mises’ critique of the Oskar Lange model of market socialism, namely that it would result in irrationality because factor input pricing by non-market means would be arbitrary and not convey necessary information regarding what to economize on. 

But — to take the second point first — if Mises’ critique proves anything it proves too much. The allocation of the most fundamental factor inputs is not set by a market mechanism in virtually any economic system. Markets presuppose, as a meta-principle logically prior to their functioning, the choice of a particular set of property rules out of many possible sets. The formation of market clearing prices for factor inputs, under the laws of supply and demand, takes place only within the framework of this prior set of property allocation and governance rules. 

And even if it were theoretically possible to establish such property rules in factors of production entirely by market means, the model of capitalism we’ve had for the past 500 years would be the last thing to hold up as an example. Under historic capitalism, land and natural resources are artificially cheap to the heirs and assigns of those who enclosed them, and artificially scarce and expensive to those who must pay rents to the enclosers. Information and technique are artificially expensive because of intellectual property. The result is that capitalism operates in an environment of massive calculational chaos, with incentives distorted by artificial scarcity or artificial abundance at virtually every turn.

Given a different foundational property rights regime — for example, commons governance of information, land, and resources — the resulting market-clearing prices would likely be far different. Likewise, the parties to which returns on inputs accrued — and hence incentives — would also be far different. In every system, the property allocation and governance rules themselves result from social or political choices that are prior to the market, and market pricing of inputs depends on those rules.  

As for the claim that “strong private property rights” are necessary for wealth creation and progress, this is a lazy cliche worthy of a column by John Stossel or Thomas Sowell… or Ira Stoll (“Are Billionaires Immoral? Democrats Are Staking Out Aggressive Anti-Wealth Platforms Ahead of 2020,” Reason, Jan. 28). Not only is the homage to the wonders wrought by “private property rights” present here, but pretty much every other standard talking point is too, including “rich people would say ‘why bother working hard?’” and the Thatcher quote about “other people’s money.” Even, God help us, “how much value an entrepreneur creates for customers and shareholders and society as a result of the entrepreneur’s hard work, genius, and risk-raking?” 

But we already saw above in our discussion of capitalism’s dependence on the artificial abundance of stolen land and natural resources that, as some wag put it, “the problem with capitalism is that you run out of commons to enclose.” And as we’ll see below, it’s billionaire capitalism that depends on “other people’s money” and “punishes hard work.”

As a generalization, the claim that “strong private property rights” as such are good is just plain dumb. Whether “strong property rights” facilitate or impede economic progress depends on the specifics of how they’re drawn up and who they’re assigned to. We already saw above, in our discussion of the calculation problem, that there’s no self-evident, neutral or immaculate set of “property rights” that emerges spontaneously from a “free market” without prior socially determined rules. There is a wide range of possible property rights, with varying effects. Some forms of property rights are conducive to economic progress, and some forms are a drain or impediment. The optimal design of property rights is the subject of a whole field of institutional economics, perhaps best exemplified by Oliver Williamson.

If property rights are well-designed — if they’re assigned to stakeholders who create the bulk of value, and/or whose contractual performance is hardest to verify and control under the terms of an incomplete contract — they will facilitate progress.

If they’re badly designed, they will siphon productive resources into high-cost management surveillance, guard labor, economic rents, and waste production. Badly designed property rights benefit rentiers at the expense of producers, and disincentivize productive activity by the latter. And economic rents — that is, returns greater than needed to bring services to market — will, by definition, not incentivize additional output.

As Thomas Hodgskin pointed out, absentee landlordism vests in owners the ability to speculatively hold land out of use that could be used productively, unless it’s sufficiently productive to support an idle rentier in addition to benefiting actual producers and consumers.

Vesting firm ownership in absentee owners (or, de facto, in self-dealing senior management who have every incentive to hollow out productive capacity so as to boost short-term earnings and thereby goose their own compensation), rather than those whose skills, situational knowledge, and social relationships are the main source of added value, results in workers doing the bare minimum. Under incomplete contracting, they have no incentive to do any more.

Absentee ownership results in enormously increased overhead supervision costs because of the perverse incentives entailed in expropriating productivity gains from those who create them, and disincentivizing the direct value creators who possess the situational knowledge needed to increase productivity and whose performance is hardest to monitor. 

And the overall practice of enabling the holders of artificial property rights to extract rents and pile up wealth causes a major portion of economic output to be diverted into guard labor. It also leads to crises of oversaving and underconsumption: enormous stocks of savings accumulate with no profitable outlet, because demand is insufficient to fully utilize even existing productive capacity.

All these things taken together show why norms like land rent and intellectual property are a drain on social productivity, while those like stakeholder cooperative ownership of firms and commons-based natural resource ownership vested in users are the most rational alternatives. 

As for the idea that “strong private property rights” — any “strong private property rights” — conduce to something called “economic growth”… well, that’s a tautology. Under the rules of both Donaldson Brown’s enterprise management accounting and GDP accounting, things like economic rent, waste production, and guard labor are by definition “economic growth” because they add to the total value of goods and services produced — even if they’re things that Bastiat would call “broken windows.” And according to J.B. Clark’s marginal productivity theory, any “factor” that contributes to the final price of a good or service has a “marginal productivity” equal to what it adds to the price. So the more social property that is enclosed for private rent, the more social activities are forced into the cash nexus, and the more people are forced from direct production for use into the wage system, the greater — by definition — will be the GDP. 

Along the same lines, let’s take a look at the popular meme (consisting of a graph by Max Roser), widely circulated in right-libertarian circles, ostensibly demonstrating that capitalism has lifted billions out of “absolute poverty.” Given GDP metrics in use, it is impossible to distinguish GDP increases as such from increases in the total share of pre-existing unmonetized activity which has become monetized because of land enclosure and the driving of subsistence farmers into wage labor and the cash nexus. Jason Hickel makes this point at The Guardian

What Roser’s numbers actually reveal is that the world went from a situation where most of humanity had no need of money at all to one where today most of humanity struggles to survive on extremely small amounts of money. The graph casts this as a decline in poverty, but in reality what was going on was a process of dispossession that bulldozed people into the capitalist labour system, during the enclosure movements in Europe and the colonisation of the global south.

Prior to colonisation, most people lived in subsistence economies where they enjoyed access to abundant commons – land, water, forests, livestock and robust systems of sharing and reciprocity. They had little if any money, but then they didn’t need it in order to live well – so it makes little sense to claim that they were poor. This way of life was violently destroyed by colonisers who forced people off the land and into European-owned mines, factories and plantations, where they were paid paltry wages for work they never wanted to do in the first place.

In other words, Roser’s graph illustrates a story of coerced proletarianisation. 

In short, most of what passes for neoliberal apologetics these days is just a collection of intellectually lazy Just-So Stories.

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