Tuesday, August 18, 2009

Property is always with us

Some pictures from 1984 North Korea. One the great lies of Leninism was that it abolished private property in the means of production: it just turned the state and all it controlled into the property of the ruling group. In North Korea, the Kim dynasty effectively owns the people too.

No system abolishes property rights, they merely re-assign them or otherwise define them more or less precisely. Moreover, in terms of analysis of behaviour, it is economic property rights (who controls use of an attribute) that matters, rather than legal property rights (who is said to own the attribute).

If you do not think that is an important distinction, try and explain theft and black markets without it. Or slaves buying their freedom. Or property rights existing in hunter-gatherer societies.

So “government” does not have property rights, they adhere in the officials making the decisions (and, if you doubt that, try and write a cheque against “your” money held by government). Hence Leninism turns things into the property of the ruling elite, and Stalinism into the property of the autocrat.
The various revolutions in transport technology since the second half of the C19th have led to reconceptions of urban property rights. Rail, trams and cars had encouraged the growth of residential-only neighbourhoods. From 1910s, buses and trucks made industry, commerce and apartments more unpredictably mobile, which led to the creation of zoning (pdf) to protect the amenity of the residential neighbourhood, upheld in a key 1926 US Supreme Court decision. The growth of freeways in the 1950s and 1960s led to another wave of zoning. (Restrictions on property rights can actually increase the value of particular attributes).

There is a key distinction here. Zoning to protect the amenity of existing residential neighbourhoods is one thing, zoning to control the creation of new residential neighbourhoods quite another. If one takes the attribute suitable for housing and shares it between the landowner and officials, it is not hard to see that land-for-housing will be underprovided (i.e. supplied less than there is demand for). Particularly as increasing housing land scarcity drives up the value of housing land, leading to more revenue for officials to use (through rates, land taxes, stamp duty, etc), more value for the houses of existing homeowners (who vote and like their house values to rise) and more political donations (from developers who need political access to get development approvals). So one has both increased transaction costs (which will mean less such transactions) and given decision-power to folk who do not get the full benefit of use of individual land blocks but who get lots of benefits from restricting land use.

Welcome to the real world of regulation.

If one restricts entry to a market, particularly a basic market like land, it is not the rich and privileged who suffer. Consider one of the nastier cases of cultural imperialism in Oz, the Equal Pay Case of 1965-66 which imposed on the indigenous workers in the pastoral industry a mode of employment—permanent full-time work—that indigenous Australians had had no role in developing and which did not reflect their work habits or levels of productivity. (Those who are very big on endorsing cultural difference are likely to be outraged at the suggestion here that culture made a difference.) After this sudden, imposed, immediate assimilation, indigenous employment in the pastoral industry collapsed, massively increasing welfare dependence with consequences that still affect (pdf) outback indigenous communities.

Similarly, restricting access to land screws over renters and people trying to enter the home-owning market: basically, the poorer folk in society.

But, never mind the consequences, feel the good intentions.

One does see a certain amount of commentary—generally based on David Ricardo’s analysis of rents and Henry George’s analysis of land taxes—that land is some special case, usually based on some lazy notion of land being “fixed”. Land has alternative uses whose value can shift depending on rules and technology. For example, the development of canning and refrigerated transport depressed the value of farming land in Britain because meat could now be supplied to British tables from North America, Argentina and Australasia. Whatever the sense in taxing the unimproved value of land a la Henry George, there is no sense in treating property rights in land as some analytical or moral special case.

Since 1973 (pdf), the cost of building a house in Oz’s major cities has gone up at or less than the rate of inflation (that is seven-to-eightfold depending on the city: the CPI went up 8.4 fold from 1973 to 2003). That is because house building is a highly competitive and efficient industry.

From 1973 to 2003, the price of housing land in Melbourne went up 16fold, in Perth 18fold, in Brisbane 19fold, in Sydney 51fold and in Adelaide 70fold.

Pick which of the two components is most controlled by government. But remember, those metro planners are from the government and they’re here to help you.

We can see how much land-for-housing is not a special case from looking at licensing of taxi cabs. There, regulatory control over the number of taxis has exactly the same effect in raising the price of taxi plates that regulatory control of land use has on house prices. Indeed, a taxi plate in Melbourne has about the same value as a median house. A similar effect can be seen in New York. In the words of one recent article:
New York City's medallion system, established in 1937 during the Great Depression in response to a ballooning number of unregulated taxis, artificially capped the number of cabs on the road, to what is now about 13,000. … The May 2009 price for an individual medallion, those held by owner-operators, was $568,000. The cost of a corporate medallion was $744,000.
Restrict access to a basic resource like land, and one creates a more unfair, unequal and conflict-ridden society.

A point that has very wide applicability. Consider the work of Hernando de Soto (whose work is hated by the usual suspects, who wilfully miss his point, though it is possible the doesn’t quite understand the full implications himself: or maybe he does). The burden of his work is that the greater the level of official discretion, the higher the transaction costs, the poorer the society. Consider the difference between Latin America and North America. Latin American cities are typically a century or more older than North American cities as European foundings, but Latin America is a lot poorer.

Pause for joke:
American: why do you Mexicans hate us gringoes so much?
Mexican: because you stole half our country. And, what’s more, you stole the half with all the paved roads.
North America got British institutions, which have low official discretions and low transaction costs (including well-defined and protected general property rights). Latin American got Iberian institutions, which have high official discretions, high transaction costs (where it can take 300 days adjusted by bribes to get the needed official approvals to start a business: the same process in Miami might take a day) and poorly defined and protected property rights (unless you are currently well-connected politically).

So North America got the paved roads.

And it is a continuing problem across the developing world—for example, problems in the Indian Dept of Motor Vehicles. That’s without considering the disaster that is the interaction between foreign aid and African government.

Pause for joke:
An African Minister for Infrastructure visits an Asian colleague. Who lives in a magnificent riverside mansion.
“How can you afford this magnificent house on your salary?” the African Minister asks.
The Asian minister takes him to the front window and points to the large bridge across the river.
“See that bridge? Half of it mine,” says the Asian Minister.
A couple of years later, the Asian Minister for Infrastructure visits his African colleague. Who lives in a magnificent new riverside palace. It is huge.
“How can you afford this magnificent resident on your salary?” asks the Asian Minister asks.
The African minister takes him to the front window and points across the river.
“See that bridge?” he asks
The Asian Minister looks along the river, completely puzzled.
“I don’t see any bridge” he says.
“Yes,” says the African Minister, “all of it mine”.
(Which is the difference between Africa and Asia. In Asia, you actually get the bridge.)

Making the regulator also a producer is a recipe for bad outcomes. Thus command economies had much worse environments than market economies because production and regulation were controlled by the same decision-makers. So regulators had much less interest in controlling the wasting of the public domain in air and water by producers (i.e. controlling the attribute “tends to cause pollution”) because the folk making the final decisions for each were the same folk.

The problems were made worse by the decision-makers being answerable to no one else, but the conflict of interest involved in being both regulator and producer is clear enough. Thus that Ministers of Education are both the largest providers of schooling services and the regulators of the same is the biggest single source of failure in school policy (corrupting both the public and private school sectors, the point folk often don’t get). Though it is remarkable the number of folk who would agree that Collingwood taking over the AFL or Manly the ARL is patently silly yet for whom government schooling is entirely unproblematic. (The Ministers-are-magical theory of education—because being voted into office solves all such problems: just like with metropolitan planning.)

Often the denial of property rights is just a cover for their exertion (real or attempted). Thus public broadcasters such as the ABC are really owned by their staff who gain wider support by ensuring that it has a loyal audience precisely because it does not reflect the range of views of the national community who notionally own it (via their agent the government) and who certainly pay for it.

Similarly, one sees the attempt to appropriate public debate by defining acceptable and unacceptable opinion (the rednecks have no speech rights theory of public debate). An attempt to own the terminology, in Yoram Barzel's terms. In particular, racism is used as a term of differentiation and disenfranchisement. For 30 years, it was used to deny the wider voting public here in Oz any say over migration policy via bipartisanship. More recently, we will decide who comes here has been the slogan of re-enfranchising the public (so is, of course, branded as racism by those who have lost control over migration policy).

Well-defined property rights mean richer societies. They also mean less violence. Hunter-gatherer societies have much higher rates of violence than agrarian societies, because ownership of farms (and the reduced mobility associated with farming life) increases what is potentially at risk for perpetrators of violence. Agrarian societies have much higher rates of violence than industrial societies partly because the web of property extends even further, but also because wealthier societies have more effective enforcement. (Though the seven century decline in rates of violence in England has reversed since around 1950, probably at least in part because of the reduction in consequences due to public housing and related trends).

The hunter-gatherer to agrarian shift is mainly about fixed property as such. A farm fixes a person in place and means that he or she has to get along with folk on a repeated basis. There is more at stake for them and more invested in continuing relationships. There are also other reasons for the dramatic long-term decline in levels of violence and cruelty, as Stephen Pinker discusses.

More generally, on the basis of patterns in existing societies, I would argue that societies tend to be less violent where property rights are better defined. (How one can get statistical data suitable for regressions etc on the latter is a bit difficult to see.) But it is obviously true that (1) property rights are more secure and better defined in developed democracies compared to developing countries and (2) developed democracies have much lower crime rates than developing countries. Bangalore is a classic case of violence from poorly defined and adjudicated property rights.

Organized crime exists on the difference between legal and economic property rights. If the state refuses to enforce ownership (by declaring it illegal) does not bother (as in Latin American slums) or does so sufficiently incompetently (due lack of clarity or poor adjudication of rights as in the Bangalore case) then the way is open for private enforcement of property rights. Hence the violence associated with black markets—markets where economic property rights exist without legal support.

It is also obviously true that property rights are not even close to the sole determinative factor in rates of violence—since crime rates vary from decade to decade and from country to country without any notable change in property rights as such. Such differences are about changes in the balance of benefits and costs, with how well property rights are defined being a major background factor in that.

The reason being that better defined property rights (1) mean less resources are "up for grabs" (the good fences make good neighbours point) and (2) the likely negative consequences of violence increase for the perpetrator.

Property rights can be reassigned, they can be more or less clearly delineated, they can be more or less secure. What they can’t be is completely abolished. Property will always be with us. It is just a matter of who whom?

No comments:

Post a Comment