Stumbling and Mumbling

Property rights and environmentalism

Tim rightly attacks the economic illiteracy of Squit the Younger; why the heck does he want to "find ways to increase...the quantity of money"? He's also right to point out that  market mechanisms are the way to protect the environment.
I suspect, though, that it would be unwise for the Stupid Party to explore this idea, good as it is.
If market forces are to protect the environment, clear property rights must exist. In the classic problem of the tragedy of the commons, common land gets over-grazed and destroyed precisely because no-one owns it, and so no-one has an incentive to protect it. If someone owned the commons, they could charge people for using it, thus protecting the land.
Free-market environmentalism, then, requires the assignment and definition of property rights: to preotect the environment, someone must own it.
But to whom do we give ownership? The Coase theorem says it doesn't matter, from the point of view of efficiency. As long as there are no transactions costs and free capital markets, the same economic activity will occur. So, for example, if environmentalists owned the Arctic National Wildlife Refuge, oil companies could pay them for the right to extract oil. Or if oil companies owned it, environmentalists could pay them not to drill.
Sadly, though, this is too simple. Even when the Coase theorem is right, the allocation of proerty rights affects the distribution of wealth. And the assumptions underpinning the Coase theorem rarely apply. In particular, there's the problem of the endowment effect; once people own something, they value it more highly than if they don't. That means ownership matters for efficiency, as well as equality.
So, when we ask: how can we use markets to protect the environment?, we must ask: how should property rights be assigned?
And herein lies the danger for the Stupid Party.  If we start asking about how we can use property rights to protect the environment, we might start asking some really embarrassing questions, like: are there other ways in which a  (re-)assignment of property rights might be good for us? How do property rights emerge anyway? Is the current distribution of them consistent with philosophic accounts of what legitimate ownership means?
This opens a really nasty can of worms for the Stupid party. If I were them, I'd heed the advice of William Blackstone, to keep quiet about the subject:

There are very few that will give themselves the trouble to consider the origin and foundation of this right [to property.] Pleased as we are with the possession, we seem afraid to look back to the means by which it was acquired, as if fearful of some defect in our title; or at best we are satisfied with the decision of the laws in our favour, without examining the reason or authority upon which these laws have been built.

More stuff: Here's Garret Hardin's original essay, The tragedy of the commons. And here's a great analysis (pdf) of the issues involved in assigning property rights over the environment.
Another thing: Tim says: "Zac Goldsmith...wouldn’t know a decent economic argument if you slapped him in the face with it." I'd like to see this hypothesis tested, frequently.

A right to property?

One of the recent delights of the blogosphere has been Chris Brooke's quotations from Thomas Rutherforth's critique of Locke's account of the emergence of private property.
This is not just intellectual history, important as that is. It raises an important contemporary question: what is the basis for property rights?
It's clear, I think, that Locke's attempt to establish a "natural right" to property fails. So too, I suspect, does Robert Nozick's amendment to Locke's theory. (Check out this discussion too).
However, there's a strong tradition - which began with David Hume and continued with the Austrian economists von Mises and Hayek - which says there's nothing natural about property rights at all. Instead, they are a social convention used to secure peace and prosperity. Hume said in Treatise of Human Nature (section II here):

Our property is nothing but those goods, whose constant possession is establish'd by the laws of society; that is, by the laws of justice. Those, therefore, who make use of the words property, or right, or obligation, before they have explain'd the origin of justice, or even make use of them in that explication, are guilty of a very gross fallacy, and can never reason upon any solid foundation. A man's property is some object related to him. This relation is not natural, but moral, and founded on justice. Tis very preposterous, therefore, to imagine, that we can have any idea of property, without fully comprehending the nature of justice, and shewing its origin in the artifice and contrivance of man.

David Friedman shows here how this artifice and contrivance can occur.
The problem is, though, that, as Friedman says, our existing set of property rights is just one of many possible Schelling points.  If an alternative set - a more egalitarian one - can be shown to benefit the majority, how can the rich minority argue in defence of their property? The right to property then becomes a mere empirical issue: do the gains from current property rights outweigh the possible gains from any changes in them?
Could it be that property rights are less well-founded than generally supposed? Isn't this a huge weakness in Conservative thinking?

Who should own firms?

There’s one aspect of the collapse of Rover that hasn’t gotten anything like the attention it deserves – it undermines the traditional case for capitalist ownership and control of firms.

This case, associated with Armen Alchian and Harold Demsetz, starts from the premise that capital is specific to the firm – because it has few alternative uses – whilst labour is a general resource, which can be employed in many places.

If this premise is correct, then providers of capital should own the firm. This is because they stand to lose most if the firm fails, whereas workers can walk away to similar jobs. Capital owners therefore have the strongest incentive to maximize the value of the firm. As Armen Alchian said in The New Palgrave: A Dictionary of Economics:

A firm…is a group of firm-specific and some general inputs bound by constraining contracts, producing a non-decomposable end-product value. As a result, the activities and operation of the team will be most intensively controlled and monitored by the firm-specific input owners, who gain or lose the most from the success or failure of the firm…In a corporation the resources owned by the stock-holders are those the values of which are specific to the firm.

In Rover’s case, this story was just false. What the Phoenix four brought to Rover was a £427 million interest-free loan from BMW. Money is the archetype of a general input.

By contrast, it is Rover workers who put up the firm-specific input – because many of them will find it hard to transfer their skills to other jobs. And Rover workers have lost much more from the collapse than the Phoenix four.

By Alchian and Demsetz’s logic, therefore, Rover workers should have owned Rover – because they, not the Phoenix four, “lose the most from the…failure of the firm.”

Now, my question is: how far does this lesson extend outside Rover, to other firms? Two things suggest the answer is: very far.

First, in most publicly quoted firms, workers stand to lose more from failure than shareholders. This is because it’s easy to diversify shareholdings, but difficult to diversify human capital investments. Most of us have to put all our human capital eggs into one basket – one employer - but we can spread our equity risks easily.

Second, car firms are stereotypical old-economy firms in which physical capital matters than human capital. Most of us have therefore had a presumption that these should be owned by capitalists whereas it’s human capital-intensive firms (like law practices) that are, and should be, worker-owned. Perhaps we should revise this presumption.

If so, we face a troubling possibility. Maybe billions – trillions – of pounds of assets in capitalist economies are owned and controlled by people who are not the most efficient controllers.

Please, prove me wrong…

Buying Zimbabwe

Today is the 138^th anniversary of the US Senate’s approval of the Alaska purchase. This raises the question: why don’t countries sell territories to each other any more?

In theory, one would expect to have seen more such purchases since 1867, because income inequality between countries has risen, meaning that rich countries would sacrifice less to buy out poorer countries.

Indeed, it would be surprisingly cheap to buy a whole country. Take Zimbabwe. In 1999 the Zimbabwean government bought 90,000 hectares of farmland at a price of Z$200 million. If we assume all Zimbabwe’s land is as valuable as this farmland, this valued the country's 39.05 million hectares at Z$86,777 million. Of course, some urban land is more valuable than farmland. But scrubland and mountains are worth less.

Now, let’s assume land prices have kept price with Zimbabwe’s enormous inflation rate since 1999. The value of Zimbabwe now is therefore Z$18644 billion.

With an exchange rate of Z$11417 to the pound, this values Zimbabwe at £1.6bn. This follows from the Mugabe government's own estimates.

Now, you can quibble with the calculations. But if I’m anywhere near the ball-park, this is nothing. It’s the cost of administering immigration policy for a year. And it’s about half of one percent of the £327bn cost of the wars in Iraq and Afghanistan.

This suggests it would be easily feasible, in financial terms at least, for the west to buy out Zimbabwe - and, by extension, other sub-Saharan countries.

All I’m doing here is extending a point made by Keith Hartley (pdf) at the recent Royal Economic Society conference, when he said it would have been Pareto-superior to have bribed Saddam Hussein to leave Iraq, rather than go to war.

And consider the benefits of western ownership of Zimbabwe. We’d bring freedom, good government and (though this would require a little effort) well-defined property rights. All these are essential for economic development. And unlike in Iraq, we’d meet less resistance because we’d have bought off our potential enemies.

Of course, there are tons of details to be worked out. Not least is whether we need to buy whole countries or just parts of them, which could act as beacons for the rest of the region, showing what good government can do.

What could be wrong in principle with this plan? Sure, it violates national sovereignty – though why this (as distinct from democracy) is a value eludes me. And there’s something unpleasant about handing money to dictators. But might it be that the benefits of doing so outweigh the costs?

Put it another way. If you think the war in Iraq was a good thing, how can you oppose this plan, given that it brings freedom and good government to people at a far lower cost?

Property rights in everything

This passage from the Millennium Ecosystem Assessment hints at a solution to the problems of environmental degradation:

The degradation of ecosystem services represents loss of a capital asset. Both renewable resources such as ecosystem services and nonrenewable resources such as mineral deposits, some soil nutrients, and fossil fuels are capital assets…Moreover, many ecosystem services (such as fresh water in aquifers and the use of the atmosphere as a sink for pollutants) are available freely to those who use them, and so again their degradation is not reflected in standard economic measures. When estimates of the economic losses associated with the depletion of natural assets are factored into measurements of the total wealth of nations, they significantly change the balance sheet of countries with economies significantly dependent on natural resources.

This raises the question: why don’t we treat ecosystems as capital assets – as tradable things that appear on private individuals’ balance sheets? If we did, many of the problems environmentalists complain about would disappear.