Brothers Judd links to a story in The Economist about property rights in China:
Living up to one's name poses something of a problem for the Chinese Communist Party, which dictates the laws the NPC will pass, and whose name in Chinese literally means “the public-property party”.
To such a party it must be an ideological embarrassment that China has such a large and flourishing private sector, accounting for some two-thirds of GDP. So one law due to receive the NPC's rubber stamp this month, giving individuals the same legal protection for their property as the state, has proved unusually contentious. It was to be passed a year ago, but was delayed after howls of protest from leftists, who see it as among the final of many sell-outs of the ideas of Marx, Lenin and Mao Zedong, to which the party pretends fealty.
The party's decision to enact the law in spite of that resistance is a great symbolic victory for economic reform and the rule of law. Clearer, enforceable property rights are essential if China's fantastic 30-year boom is to continue and if the tensions it has generated are to be managed without widespread violence. Every month sees thousands of protests across China by poor farmers outraged at the expropriation of their land for piffling or no compensation...
While working for the Cato Institute a couple of years ago, one of the things that fascinated me was, that while the institution as a whole adores property rights, free-market economists and libertarian lawyers have very different views of what they are.
To free-market economists, property rights are rooted in the Coase theorem and Pareto-optimality. If that jargon is unfamiliar to you, Pareto-optimality is a situation where no one can be made better off without someone being else made worse off. The idea is that, under conditions of perfect competition and no externalities, the free market will, with no need for government intervention, tend towards Pareto-optimal outcomes, since people will trade with each other until there are no more mutual-welfare-improving trades left. But for this beneficent process to take place, there need to be secure property rights, since I can't trade what I don't clearly have. The Coase theorem extends the property rights method of welfare optimization to areas where there are externalities, e.g., if my loud music, or my pollution, irritates you, we should assign property rights to one party or the other-- I have the right to play loud music, or you have the right to peace and quiet; I have the right to pollute, or you have the right to clean air-- and then let the two of us arrange payment. This doesn't always work in practice, but it provides a theoretical basis for extending property rights to everything under the sun, and producing limitless Pareto-optimizing free-market solutions.
The key point here is that economists don't really care where property rights come from. Let the initial distribution be as unequal as you please; economists qua economists have no justice yardstick against which to measure it, and utility theory doesn't allow for objective inter-personal utility comparisons, so in a sense we cannot even be sure that the distribution is really unequal. Just get the property rights firmly established, and economic growth will lift all boats eventually.
Libertarian lawyers, on the other hand, root their view of property rights in Locke's belief that we gain property rights over something, in the first place, by "mixing our labor with it." Then, having acquired things, we can give or exchange what we have for what others have. One senses that for libertarian lawyers, property rights are, somehow, metaphysically real. This idea of property rights is rooted with justice and motivates continuing concerns for justice.
The irony, almost beautiful yet very paradoxical and strange, is that the Coasean and the Lockean notions of property rights are at once incompatible and symbiotic.
The weakness of Coasean property rights is that it is indifferent to the initial distribution of property, but real people tend not to be indifferent to the distribution of property. (I have tried to cultivate such an indifference in myself, thanks to my economist's training and a moral effort to regard the common good, rather than individual good, as my "objective function"; but I am eccentric in this, and in any case perhaps not wholly successful.) Of course, it may be that in the long run stable property rights will lead to economic growth that will make everyone richer than they can hope to be by playing tug-of-war over limited resources. We may suppose that people even know that. Still, the most advantageous course for the worst-off in society-- if they can pull it off-- is always to overthrow the property rights regime and redistribute to themselves, and then to establish a permanent, stable property rights regime so as to generate long-term economic growth. Maybe the poor can be convinced that once the precedent for redistribution is established, it will keep happening again and again, so that they're better off to accept the short straw at first, and let economic growth lift their fortunes later. But this situation becomes very sensitive to expectations. If something makes me think that the regime is less stable than I thought, and that a period of tug-of-war is inevitable, then it's in my interest to start looting rather than to keep earning by useful labor.
It would be very helpful to the Coaseans if the populace could be led to believe that property rights were not an arbitrary human construction, but were somehow entitled to more respect. That would give the poor a reason not to redistribute first and grow the economy later; redistribution/stealing would become wrong in itself. To Coaseans (I'm speaking abstractly here not of the attitudes of particular people-- though perhaps there are some people who really do think this way), Lockeans are a sort of useful idiots, preaching a doctrine to which the Coasean assents ironically, as to a "noble lie."
The Coasean is useful to the Lockean in the same way. For the Lockean belief that property rights are so metaphysically real that they would exist even in a state of nature is not likely to be convincing to everyone. Why do you own something by virtue of having "mixed your labor with it?" I would have mixed my labor with it if I'd gotten here first! And then, when great fortunes are accumulated by inheritance and exchange, one can't help but feel-- if labor is the basis for property-- that the justice of property rights has been gradually attenuated. How can you see the rich man wallowing in his unearned fortune while the beggar starves, and call that just? And don't forget that, what with all history's invasions and enslavements and plunderings, a lot of property rights are not based on labor even indirectly and ultimately, but rather on some forgotten or not-so-forgotten taking-by-force, through robbery or conquest. Can we trace property rights in everything back to their origins to make sure that they are just?
The Lockean notion of property rights is, in principle, indifferent to utility outcomes, as justice takes precedence over welfare. But if there were a general conviction-- there has been at certain moments in history, perhaps-- that property rights were a source of inefficiency and misery, then the Lockean-capitalist's position would seem absurd and perverse. Indeed, he would find his most fundamental idea-- that property rights are based in labor-- readily appropriated and turned against him by socialists and revolutionaries. So the Lockean needs the Coasean to rebut his utilitarian critics on their own turf.
So are the Lockean and the Coasean ideal allies? Yes and no. Yes, in that, when they agree, they solve each other's practical problems. Yet one cannot merge the Lockean and the Coasean arguments into a single coherent argument for property rights, because the two theories have incompatible premises. To the Lockean, justice must trump everything; the Coasean is at a loss to ascribe any meaning to the term.
Nor do they always agree as a practical matter. If, for example, property turns out to have been stolen long ago, the Coasean cares not a straw, unless it threatens the stability of his fine-tuned solution to a problem of coordinating expectations. If he could, he would prefer simply to conceal the old theft. The Lockean will, at best, concede uneasily that it is too late to right the wrong and the wrong must be treated as a right for the sake of peace; or he may feel that the theft must be reversed. In thriving economies with stable property rights regimes that are generally regarded as legitimate, where most income goes to labor and there is substantial social mobility-- the contemporary United States is the example of such a society par excellence-- the Coasean and the Lockean support each other in defending the property rights system against attacks that try to deligitimize it as a whole, and while there are some tensions on specific applications-- Lockeans are sympathetic in principle to the merits of wealth-destroying lawsuits against negligent companies, to the unease of the Coaseans, while Lockeans get nervous when Coaseans want to create new kinds of property rights out of thin air in order to deal with externalities issues-- these are generally manageable. But what about the case of a post-communist economy, where property rights need to be created from scratch to exist at all?
The approach to property rights creation in post-communist Russia was pure Coase. Most of what had belonged to the state now needed to be put in private hands, never mind whose. At one point, the Russian government distributed "vouchers" to the entire citizenry with which, in theory, they could "buy" shares in previously state-owned enterprises. When corrupt insiders ended up seizing most of the country's assets, the neoliberal response was to say "too bad so sad," but let's move on to more economic reforms. Above all, don't redistribute; that is one precedent that must not be set! The approach of the neoliberal economists who comprised Russia's economic advisers (but this is not to absolve the Russian leadership of blame; it was their responsibility to know the limitations of economists; this is part of an old Russian pattern of alternating between unwarranted adulation and unwarranted mistrust of the West-- it occurs to me that the same pattern characterized my Russian ex-wife's attitude to me) reflected their own Coasean indifference to the initial distribution of property. What they failed to understand was that for property rights to do their wonderful wealth-creating work, they need to be legitimate, and legitimacy can't be created by the fiat of a government, particularly that of a weak, novice regime like that of Yeltsin. Rather than leaping across the gulf from communism to capitalism, Russia fell into it. Property rights never became either legitimate or secure.
The Chinese approach to transitioning to the market economy did a better job of emulating, from the beginning, the strange mix of Locke and Coase that undergirds the property rights regime in the West. The approach has been called "gradualist," and Deng described it as "crossing a river by feeling the stones," yet gradualist is an odd way to describe a transition that has led to more than a quadrupling of per capita income within a generation, and has astounded the world by the speed with which China masters one industry after another. A better description, perhaps, is the "two-track model": the old command economy remained in place, while a new market economy grew up in the cracks. Property rights were neither created nor destroyed, at any rate not on the grand scale as in Russia, by government fiat. The government did not take away what people had come to feel entitled to-- the "iron rice bowl" for those employed in SOEs, for example-- but it opened the door to their creating new wealth, and let them have effective property rights over that. Today, China's nouveau riche are not regarded as thieves like the "new Russians," because they got their wealth in Lockean fashion, through work and enterprise. Now economic institutions have evolved to the point where property rights are not imposed from above by technocrats and usurpers and experienced by the population as a violation and a dispossession, but, rather, demanded from below.
Let the world take note.
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