Stumbling and Mumbling

Pricing rhinos

Louis Theroux reports on the market in big-game hunting in South Africa:  you can pay up to $100,000 for the right to kill a rhino.
Commonsense economics says this is the way to conserve wildlife. If a farmer is given ownership rights over the rhinos on his land and the right to charge hunters to kill rhino, he'll take care to breed rhinos and protect them from other hunters. The result will be more rhinos than if rhinos are unowned - because then the tragedy of the commons will ensure they are hunted to extinction.
Sure enough, some economists have indeed found that private ownership is a great way of conserving wildlife.
Sounds simple. But there's a problem. Property rights have to be enforced. As Theroux points out, that means fencing farms in. And that can be expensive. As this paper (pdf) describes, property rights don't arise from nothing - they only exist if the (private) benefits of establishing them outweigh the costs.
Worse, migratory animals can't be enclosed. And as they migrate, they'll be killed. This paper (pdf) describes how this is a problem for wildebeest in the Serengeti. And it was probably the reason why American bison were hunted almost to extinction in the 1880s; it was just impossible to create private property rights in them.
So, property rights are great in theory. But the practice of creating and maintaining them is a little trickier.

Coase comes to Ambridge

Ronald Coase has come to Ambridge. In last night's Archers, Adam Macy was talking to Brian about plans to install an anaerobic digester on Home Farm. Adam said:

You seem to have this idea of the AD as an entirely separate project...That's not how it's going to be. We're in this for the long-run, and for all that time the farm will supply most of our feedstock and be the major customer for our heat energy. So if anything Debbie and I need to be more involved in the farm management, not sidelined as a separate entity.

This is a great example of the economics of property rights. Complementary assets (the farm and the AD) need to be run by the same management, to minimize transactions costs , the haggling involved in setting prices of energy and feedstock.
Equally, though, this episode reveals the problem with enacting this idea in practice. The politics involved in deciding who the single manager should be - the farm owner/manager (Brian) or AD manager (Adam and Debbie) - can cause wasted resources as both parties fight for position.
Herein, though, lies my fear. I suspect transactions costs economics might be better understood at Home Farm than they are in larger businesses. Are there really such big complementarities between, say, RBS and ABN Amro as there are between the AD and Home Farm, for example? Could it be that one benefit of the credit crunch will be that it'll stop value-destroying mergers, ones between non-complementary assets?

Post-capitalism

Timothy Garton Ash asks: can capitalism survive? And he omits an important point - property rights.
Put it this way. Feudalism in western Europe did not collapse because people didn't like it, or because it blew up catastrophically. It gave way to capitalism, over centuries, because capitalistic property rights were more effective at creating wealth than were feudal ones; on this point, Marxists and neoclassical economists like Douglass North roughly agree; see, for example this book and this pdf.
This suggests that, if capitalism is to die, it could do so because its property rights prove to be inefficient.
And here's a coincidence. One distinctive feature of capitalism - the company owned by many external passive shareholders - is increasingly thought to be an inefficient way of owning property. Private equity is buying such companies precisely because it realizes that such ownership is sub-optimal. As Robert Peston says:

Ask almost any manager why private equity has been so successful and what you’ll hear is that “it better aligns the interests of owners and managers”...In a way, the rise of private equity can be seen as a rejection of the shareholder-capitalism that has underpinned the US and UK economies for 150 years.

Of course, the shift from publicly quoted to privately owned firms is not the overthrow of  capitalism.
But it hints at at intriguing possibility. Could it be that publicly-quoted firms are (in some cases?) inferior not only to privately owned ones, but also to worker-owned ones? Could it be that the latter aren't more widespread not because they are inefficient, but because workers lack the access to finance that private equity houses have? Could it be that capitalism - like feudalism - will die a slow death as thousands of capitalistically-owned firms gradually mutate into ones owned in more efficient - and egalitarian - ways? So, maybe Norm's hope is right.

Property rights, instability and FDI

If a country wants to attract foreign investment it must have political stability and good property rights. So goes the neo-liberal orthodoxy.
But it seems to be flatly  contradicted by Shell and Repsol's deal to develop an Iranian gas field.
The thing is, Iranian law forbids foreign companies from owning mineral rights or taking equity stakes in joint ventures. Shell and Repsol will merely get a cost-plus return on the project. This return is likely to be a little over 12% - which seems small given the risks  surrounding the project, one of which is the threat of US sanctions*.  Oil companies have for years been critical of such arrangements.
Which raises the question: why is Shell doing such a deal? There are three possibilities:
1. It's hungry for growth. Though this deal won't raise their reserves, it will boost production after 2011. For a firm that's made a habit of missing production targets, this is a relief.
2. The opportunity cost of the deal is low. Property rights may be bad in Iran, but they're no better in Bolivia or Russia.
3. Shell is buying a call option on policy change. By being in Iran, it's well placed to benefit if the government  relaxes its limits on foreign ownership. The more unstable the Iranian regime is, the greater is the value of this option, as the greater are the chances of such change.
And this raises a nice possibility - that political instability can be good for investment. This paper (pdf) gives more evidence for this counter-intuitive notion.
* The threat of a US attack on Iran - which has a roughly 25% probability this year - is less of a problem; think what it would do to oil prices.

Camilla, meet Ronald

If there are any economists working at the Times, Camilla Cavendish hasn’t bothered talking to them. She says:

We desperately need to find a way to value landscape. Delegating that task to “the market” is like asking Pete Doherty to be a Nobel prize judge. The market has no morality. It is good at maximising the return on square footage. But it cannot judge whether generations of delinquent teenagers would benefit from the solitude and wildness of a wide open space or from somewhere to play football, more than from a multiplex cinema. It cannot put a price on a permanent loss of countryside that will affect every generation to come.

But perhaps the market can do this.  The key thing is to allocate property rights properly.
Imagine the residents of a village were given (partial) ownership of the open spaces around their villages. Anyone wanting to build on this space would then have to buy the right to do so off them. The building would then go ahead only if value of the shopping mall exceeded the value of the solitude and quiet of the open space.
The market, then, can put a price on the permanent loss of countryside – as long as property rights are properly specified. This is the insight in Ronald Coase’s paper, The problem of social cost (pdf), discussed here; every economist knows this.
Of course, there’ll be problems defining property rights properly.
And there’s a question: would villagers properly value the effect on generations to come, or would they under-price the land? I suspect this problem would be small. The strength of the green movement, the size of inheritances and the opposition to inheritance taxes all suggest people do care a lot about future generations. Plus, of course, the endowment effect leads people to overvalue what they have – which would create a bias to conserving open spaces.
However, Camilla has not even considered these issues.
I mention this not to criticize her – she’s one of our better columnists (faint praise, admittedly). I do so because her ignorance of Coase reflects badly upon all of us.
It reflects a misunderstanding of what economics is about. Today’s dead trees are full of economists prognosticating on the macroeconomics of the Pre-Budget Report (I can’t be bothered to read or link). But that’s not the proper purpose of economics – it’s just what economists do to get money off idiots.
The proper purpose of economics is to consider how resources can be better allocated. And Camilla’s piece shows that economists are failing to bring these considerations to the public’s attention.

 

Who should own footballers?

Who should own footballers? This is the question raised by West Ham's purchase of Javier Mascherano and Carlos Tevez.
The odd thing is that the Irons have not bought the pair. Their registrations are owned by a couple of media companies. West Ham have only bought a lease on the two.
Is this efficient?
Start with the basic economic principle - that assets should be owned by the person most able to maximize their value.
Ordinarily, this argues for an individual to own his own human capital, as this maximizes his incentive to develop his talents. However, three things argue for football clubs to partially own players, by holding their registration and thus limiting their ability to move:
1. The value of a player is maximized by a team playing to his strengths. Thierry Henry's abilities, for example, are maximized if Arsenal play through balls to his feet and have players running off him, rather than if they hoof it long to his head a l'Anglais. There are asset complementarities between team and player. And where assets are complements, they should be jointly owned*.
2. The value of a team - and hence its players - is maximized if the players play together for a long time, and so can gel. For example, the success of the Manyoo team of the late 90s was based in large part upon the fact that many of its players had been together since the youth team. And the fact that the England team has for years been worse than the sum of its parts is partly due to the fact that they don't play together long enough.
Allowing teams to own players' registrations helps them hold onto players and so grow together to be a better team.
3. If clubs can get a transfer fee for a player, it increases their incentive to discover and develop talent. That raises the attractiveness of the game, and so increases players' earnings.
Now, the question raised by the Hammers Two is: why (if at all) are these arguments fading? Here are three possibilities.
1. Clubs' control over top players is weakening. When Ashley Cole wanted to leave Arsenal, there was little the club could do to keep him. Arsenal's ownership "right" had little practical value**.
2. Short-term time horizons. West Ham believe the benefits of a few months of uncertain  ownership of the players - maybe the possibility of getting into Europe next season - outweigh the costs, of being less able to build a team for the long-run. It's common for managers to complain that they don't get the time to build a team in the modern game. Alan Pardew seems to be acting on this principle.
3. The value of top players depends more and more upon their image rights. These are better maximized by media companies, which have expertise in the field, than by football clubs. Maybe the rise of celebrity culture means that football teams are more and more regarded as collections of individuals than as collective units.
In cultural terms, I deeply lament point 3. But is it sufficiently powerful to make it efficient for media companies rather than clubs to own players? I'm not sure, especially in this case: Tevez in particular is so ugly he could be mistaken for a West Ham fan***.
* This raises the question of why players don't own clubs. I guess it's partly because they don't want the risk.
** If you believe Chelsea, a similar thing happened with William Gallas. But no-one believes the word of money-launderers.
*** Yes. I did write 600 words solely to mention this.

Racism, rationality and property rights

Anthony raises a question: is it racist to say Africans have a lack of respect for property rights?
Here's a possible answer - not only is it not racist to say so, it's traditionally been rational for many Africans not to have private property rights.
Put it this way. Africa has a high land-labour ratio. Land has therefore been very cheap. The gains to any individual to appropriate it for himself  have therefore been small relative to the costs of fencing it and policing it. And if you're herding animals, it might just be more efficient to let them roam wherever, rather than keep them on a privately-appropriated plot.
Indeed, where land is abundant, an efficient solution to the tragedy of the commons might not be private ownership or stinting, but just moving on, as nomadic tribes do.
In this book, Douglass C. North writes:

Because land commands little value in sub-Saharan Africa, private property rights in land have not become well established and therefore social stratification in rural communities based on land ownership has not evolved as it has in population-abundant land-scarce Asia (p75-76).

This illuminating short paper (word doc) says:

For much of history – and for much of the world today – individual ownership is not the only type of property right one encounters.  Often groups of individuals – a village, an extended family, a serf and a lord – may share rights to use a piece of property, as with common grazing land.  Such group rights tend to prevail in a variety of situations: where agriculture makes extensive use of land, as with herding; where the cost of fencing or of registering title to land is high; where low land values reduce the benefits from establishing individual rights; and where groups maintain rights to property.  They are particularly common in current day Africa.

Perhaps, therefore, the norm of respecting private property is weak in Africa because, for many Africans, private property has been inefficient.
This gives us westerners a dilemma. If we say "Africans are just like us - they respond rationally to incentives" we are accused of intellectual imperialism, of imputing economic rationality to everyone. But if we say "some cultures are different - some don't respect private property" we are accused of racism.

Levi-Leleu's case: a Humean view

Who is the rightful owner of Pierre Levi-Leleu's suitcase? It's easy to mistake the issue here, as one of utilitarianism versus natural rights.
The Auschwitz museum's case for owning the case is a utilitarian one. The most valuable use to which the battered case can be put is as a public, historical artefact, rather than a piece of mouldering private property. Here's Norm:

If the Auschwitz museum also has a claim on the suitcase, as I think it does, it's simply that the suitcase has become a sort of public document - a historical relic that has educational value.

Danny Finkelstein objects that this over-rides the rights of Mr Levi-Leleu's son, Michel:

The authorities are saying that Michel’s individual feelings, his personal rights, his claim to this last scrap, don’t matter. They are saying that they know better, that their rights to the stolen property of a murdered man are greater than those of his son. It is a monumental piece of arrogance and a terrible intimation that even the guardians of that awful memorial site haven’t learnt all the lessons it should be teaching us.

If we interpret the issue as one of utilitarianism versus natural right, I side with the Auschwitz authorities.
This is because Michel doesn't have a right to the case. Put it this way. Imagine Pierre had lived his natural lifespan. He could have thrown the case out or given it away, and his son would have had no right to stop him. Why, then, should we assume Michel has a natural right of inheritance? Such a right might not exist at all, as Stewart Braun argues here (pdf).
If M. Levi-Leleu has no right to the case, it's easy to believe it should go where it can do most good - the museum.
However, there's another way of looking at this issue, which supports Mr Finkelstein's argument. David Hume made it in his Treatise of Human Nature:

A single act of justice is frequently contrary to public interest; and were it to stand alone, without being follow'd by other acts, may, in itself, be very prejudicial to society...But however single acts of justice may be contrary, either to public or private interest, `tis certain, that the whole plan or scheme is highly conducive, or indeed absolutely requisite, both to the support of society, and the well-being of every individual. Tis impossible to separate the good from the ill. Property must be stable, and must be fix'd by general rules.

Justice requires that we have big sanctions against theft. One of these sanctions is that the general public must not benefit from theft. So, the Auschwitz museum must give the case to M. Levi-Leleu, even though it is "prejudicial to society" to do so. This is because it's more important to uphold the principle that theft is wrong, as this principle benefits society most in the long-run. Returning the case to M. Levi-Leleu is, on this view, a rule-utilitarian move, not an act-utilitarian one.
We don't, therefore, need suspect arguments about natural rights to property to side with M. Levi-Leleu.

Unionization vs revolution

Shalom Lappin calls for "the development of strong democratic labour unions in the emerging low-wage industries of the developing world as a way of responding to the exploitation of workers in these countries."
This seems sensible and humane. Or does it?
Put it this way. Capital flows to low-wage countries are small, despite their cost advantage. One reason for this is that companies are scared to invest in poor countries because they regard property rights as insecure. They fear profits will be low or negative, despite low wages, because they'll lose money to higher taxes, riots disrupting production, the need to pay bribes, or even outright revolution.
The danger is that the emergence of strong trades unions could add to these fears. Companies might regard a strong union movement as a precursor to redistributive politics. It might, therefore, deter them from investing and so reduce growth and jobs.
There's some evidence for this. An early paper* by Guido Tabellini and Torsten Persson showed that inequality is bad for economic growth precisely because it deterred investment by increasing capitalists' fears of  expropriation.
This raises an awkward point. Could it be that "moderate" leftish policies are worse than useless? Could it be instead that extreme redistibutive policies are necessary, because anything less will always leave capitalists fearing further redistribution?
* It's not webbed, but I can email the paper if you ask nicely.

Folk music and property rights

Russell Roberts asks the musical question:

Where is the song that captures some inspiring aspect of economics from a Hayekian perspective?

There are plenty of them, Russell. One aspect of Hayekian economics is the emphasis upon the importance of property rights. And lots of folk songs express this view, by lamenting the violation of such rights.

For example, there’s Johnny Cash’s Ballad of Ira Hayes (all proper country music is folk music):

Down the ditches for a thousand years

The water grew Ira's peoples' crops

'Till the white man stole the water rights

And the sparklin' water stopped…

Then Ira started drinkin' hard

Jail was often his home

This is perfectly Hayekian; the destruction of property rights has bad but unforeseeable consequences.

Similarly, in English folk music there are songs supporting property owners against theft, in the form of Enclosure Acts. Here’s Gerrard Winstanley’s Digger Song:

The gentrye are all round, on each side they are found,

Theire wisdom's so profound, to cheat us of our ground

Stand up now, stand up now.

Water and land are not the only property rights defended by folk music; there’s also the right to one’s free labour. In English folk, many songs support this principle against the depredations of navy pressgangs. Kate Rusby’s Cruel is probably the best known of these. One of my favourites is The Victory, as recorded The Halliard:

Thirteen of that cursed gang did my true love surround

And one of the pressing crew lay bleeding on the ground.

My love was overpower’d though he fought most manfully

Til he was obliged to yield and go on the Victory…

In the battle of Trafalgar, the Victory cleared the way,

And my love was slain with Nelson upon that day.

I’m only scratching the surface here. But the point’s made. Many folk songs do celebrate a key aspect of Hayekian economics.

Why don’t Hayekians appreciate this? Here’s my theory. Many so-called Hayekians – and I exclude Russell here – aren’t really interested in free markets and property rights at all. They just use these as ideological figleafs with which to defend existing privileges. They don’t want to be reminded that those privileges rest upon the theft and violence of primitive accumulation.

And I haven’t mentioned slavery…