Cafe Hayek

Property Rights and Eminent Domain

Those persons benighted by the myth that only the rich have an interest in the strong, principled protection of private property rights should watch the movie Begging for Billionaires (from which this clip is extracted).

(HT Paul Jacob)

On a very similar theme is the great 1997 Australian movie The Castle.

Quote of the day

Here is David Harsanyi on the AIG bonus story:

Here's an idea: If you stop nationalizing banks, there will be no need to engage in phony-baloney indignation over bonus payments anymore.

This cockamamie populism in Washington really hit its stride when Iowa Republican Sen. Charles Grassley suggested that AIG execs who earned bonuses should "follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide."

C'mon. If suicide were a proper penalty for piddling away taxpayer dollars, the National Mall would look just like Jonestown after refreshments.

Read the whole thing. He gets it exactly right. Superb.

Keep Banks Private

In today's USA Today, I argue against nationalizing banks.

The Rules of the Game

Bob Higgs claims that "regime uncertainty," the uncertainty about the rules of the game, is what made the New Deal so ineffective. Because business didn't know what the government was going to do next, people were hesitant to invest and take risk in the 1930s. It's possible but it's very hard to measure. Maybe investors were discouraged by the lack of opportunities in the economy or some other reason.

At the end of last week, the government announced that insurance companies were next to be bailed out. It became clear that firms were lining up making the claim that they too deserved government help. The effect that Higgs had written about feels palpable right now. When you know the government can save your company and your bottom line, you start spending an increasing amount of time on that possibility rather than trying to actually turn things around or look for private suitors. When you're not sure about the rules of the game, risk-taking and investing becomes much more uncertain than usual.

In today's WSJ, I argue that government policy appears to be making things worse and that doing nothing, at least for a time, is probably better. Of course, government has a problem with credible commitment. Doing nothing cannot be guaranteed to last for very long. And unfortunately, neither  presidential candidate has a commitment even to the principle that doing nothing might be the best policy. Such a principle might make a commitment to inaction somewhat credible. But even though the commitment to do nothing might be only temporary, I think it still would be useful for alternative strategies to the current one (so something, anything) to emerge and generate a consensus as to whether such alternatives might be preferable to the current scattershot approach of doing one thing today and something else tomorrow. Such uncertainty has to affect the calculus of risk-taking.

The "Mysterious" Great Depression?

This insightful op-ed by West Virginia University banking theorist and historian George Selgin (dispensing the myth of the alleged 'mysteries' of the Great Depression), although written more than a year ago, is especially relevant today.  Here's a key paragraph:

Paradoxically, perhaps, the fact that orthodox economics has a good deal to say about how the Great Depression happened itself suggests that there is after all something puzzling about the Great Depression. What's puzzling is not that the depression happened, given policies that were resorted to, but that such destructive policies secured wide support despite their often readily-predictable, adverse consequences. But to call even such perversity a "mystery" is to be guilty of hyperbole. After all, politicians are rewarded for appearing to "do something," and not for their command of "abstract" theories.

Incentives matter (to fishermen and other living creatures)

The Economist reports on a new study from Science magazine by two economists and a marine biologist (Christopher Costello and Steven Gaines (the biologist) of the University of California and John Lynham of the University of Hawaii) finding that fisheries managed with ITQs (Individual Transferable Quotas), creating property rights in fish, do better than those using just a season or other restrictions to avoid the tragedy of the commons:

Encouraging as the results are, ITQ fisheries are in the minority. Most fisheries have an annual quota of what can be caught and other restrictions, such as the length of the season or the type of nets. But this can result in a “race to fish” the quota. Fishermen have an incentive to work harder and travel farther, which can lead to overfishing: a classic tragedy of the commons.

The use of ITQs changes this by dividing the quota up and giving shares to fishermen as a long-term right. Fishermen therefore have an interest in good management and conservation because both increase the value of their fishery and of their share in it. And because shares can be traded, fishermen who want to catch more can buy additional rights rather than resorting to brutal fishing tactics.

The Alaskan halibut and king crab fisheries illustrate how ITQs can change behaviour. Fishing in these waters had turned into a race so intense that the season had shrunk to just two to three frantic days. Overfishing was common. And when the catch was landed, prices plummeted because the market was flooded. Serious injury and death became so frequent in the king crab fishery that it turned into one of America’s most dangerous professions (and spawned its own television series, “The Deadliest Catch”).

After a decade of using ITQs in the halibut fishery, the average fishing season now lasts for eight months. The number of search-and-rescue missions that are launched is down by more than 70% and deaths by 15%. And fish can be sold at the most lucrative time of year—and fresh, so that they fetch a better price.

In a report on this fishery, Dan Flavey, a fisherman himself, says some of his colleagues have even pushed for the quota to be reduced by 40%. “Most fishermen will now support cuts in quota because they feel guaranteed that in the future, when the stocks recover, they would be the ones to benefit,” he says.

Coming on Monday at EconTalk, Karol Boudreaux will talk about community-based wildlife management as a way of preserving wildlife.

My Mellifluous Voice

Here's Norm Leahy's 30-minute-long radio interview with me, taped earlier today.

No End of Oil

We'll never run out of oil.  Never.  I explain why (inspired by an insight that I learned from Russ years ago) in today's edition of Canada's National Post.

Rebecca Rules!

Lots of people retain the notion that our self-interest is not hard-wired into us in the same way that our physical attributes are hard-wired into us; many people suppose that with just the right upbringing or education, or with enough self-discipline, a human being can be made non-self-interested.

This notion is bunk.  It has no more validity than the belief that, say, a man can run as fast as a cheetah if he trains with sufficient diligence, or that a woman can grow an extra set of arms if only she tries hard enough to do so.  Nurture plays a role in conditioning who we are, physically and mentally, but our fundamental phenotype and mental attributes are hard-wired into us.

The depth and the naturalness of self-interest is illustrated by Rebecca Stern, the adorable seven-year-old daughter of my colleague Dan Klein and his lovely wife Lotta Stern.  A few weeks ago, Dan and Lotta found these 'Ruls' taped to Rebecca's bedroom door.  These rules clearly indicate a child's sense of mine vs. thine -- of a person's desire to have protected personal dominion over space and things.

(Note that Rebecca's mother, Lotta, is Swedish and so Rebecca spends much of her time in Sweden with her mother.  The 'Swenglish' is interesting, too!)

What's Truly Sick

Here's a letter that I sent today to the Wall Street Journal:

Louise Benson says that allowing people to sell their transplantable body organs would result in poor people being "enticed by the money" to become suppliers; she thinks this outcome would be "sick" (Letters, May 31).  Ignore Dr. Benson's questionable presumption that her personal cultural aesthete should trump the freedom of other adults to make such choices.  Focus instead on the economics.  If organ sales were liberalized, the availability of organs would rise and their prices would fall. Transplant surgery would become more affordable and, thus, more lives - not only of the rich but of all classes - would be improved and saved.

What's truly sick is government's continued prohibition of organ sales.

Sincerely,
Donald J. Boudreaux

By the way, my GMU colleague Lloyd Cohen (who teaches in the law school) writes insightfully about organ donations.  Many of his papers can be found here at his website.

Freedom and the Ultimate Resource

The Wall Street Journal's Mary Anastasia O'Grady summarizes the findings of the latest - the 14th - Heritage Foundation / The Wall Street Journal Index of Economic Freedom.  Here are the opening paragraphs of Ms. O'Grady's summary:

Are the world's impoverished masses destined to live lives of permanent misery unless rich countries transfer wealth for spending on education and infrastructure?

You might think so if your gurus on development economics earn their bread and butter "lending" at the World Bank. Education and infrastructure "investment" are two of the Bank's favorite development themes.

Yet the evidence is piling up that neither government nor multilateral spending on education and infrastructure are key to development. To move out of poverty, countries instead need fast growth; and to get that they need to unleash the animal spirits of entrepreneurs.

....

The Index also reports that the freest 20% of the world's economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.

As Julian Simon taught us, the ultimate resource is the free human mind.  A land rich in petroleum, arable land, and iron ore and other minerals is useless to a society of humans incapable of rational thought and intolerant of change.  Nor would such a land of potential plenty realize its potential if its inhabitants are restrained by tyranny or by widely shared misconceptions that individual enterprise, innovation, profit, and the pursuit of worldly pleasures are degrading or sinful.

But unleash people from the countless foolish and rent-seeking constraints imposed by government and from constraints imposed by their own superstitions and they will create resources.  They will flourish and prosper, not only materially but also culturally and intellectually.  A free people can and will build a dynamically prosperous society in even relatively barren and inhospitable places such as New England, Arizona, and Hong Kong.  An unfree people will languish in poverty even in lush paradises such as much of Central and South America and in lands teeming with 'natural' resources such as Congo and Russia.

Rampaging Regulators

Quoting from an e-mail sent out by the good people at Free Market Environmentalism Roundtable (a project of PERC):

As some of you may already know, the California Energy Commission has proposed amendments to its standards for building energy efficiency. These standards include a requirement that any new or modified heating or air conditioning system will have to include a thermostat whose set point can be remotely controlled by government authorities who would be empowered to lower (in winter) or raise (in summer) your thermostat's temperature set point during "emergency events." The comment period closes on January 30th for those of you (especially California residents) who would like to register your ire and opposition.

Here's the document: CEC-400-2007-017-45DAY.PDF .  Check out pages 63-64 of this document for the offensive section.  (HT Roger Meiners)

I understand that any clever economist or philosopher can build models or offer coherent arguments "proving" that giving government power to control the thermostats in private buildings will improve "social welfare."  But no one can explain how such power does not diminish human freedom -- and is not a huge leap down the road to serfdom.

I quote again the final lines of Thomas Sowell's greatest book: Knowledge and Decisions:

[Freedom] is, above all, the right of ordinary people to find elbow rooms for themselves and a refuge from the rampaging presumptions of their "betters."

Paths to Property

Karol and her Mercatus Center colleague Paul Dragos Aligica have just had their important new monograph -- Paths to Property -- published by the prestigious Institute of Economic Affairs.  (And my colleague Pete Boettke supplies the Foreword.)

Karol and Paul challenge the conventional wisdom (made popular today by certain Irish rock stars) that Africa's poverty can be solved with more foreign aid.  But nor will prosperity emerge from simple cookie-cutter "market solutions."  Property rights and markets are utterly essential for prosperity, but these must emerge from the bottom up.  Top-down imposition tends to produce sorry results.  Empirical examples abound, drawn from Karol's extensive fieldwork in sub-Saharan Africa.

Property rights in Africa

The latest episode of EconTalk is Karol Boudreaux talking about the effects of letting people own things--giving coffee bean growers in Rwanda more freedom to do what they want with their beans and letting people in South Africa own their own houses. Karol does a superb job laying out the background and the reforms along what what they achieved and failed to achieve.

Taking the Long View

Here's a letter that I sent a few days ago to the Washington Times:

Carl Henn asserts that "Congress can . . . react in ways that protect our long-term interest, while marketplaces can't, due to the tyranny of short-term monetary pressures" (Letters, November 27).  Mr. Henn mistakes imagination for reality.

Although imperfect, markets routinely take the long-run view.  The reason is that assets and firms designed for long, productive lives generally have higher values today than do assets designed only with tomorrow in mind.  If, for example, Southwest Airlines were tyrannized by short-term monetary pressures, it would never spend hundreds of millions of dollars buying or leasing a fleet of 737 jets.

Where short-term pressures truly reign tyrannically is in politics.  An elected official's time horizon extends no further than the next election.  If spending money today will buy votes, experience shows that such spending will occur regardless of its long-term wisdom.  I challenge Mr. Henn to defend the federal budget as being a shining example of long-term planning for the greater good.

Sincerely,
Donald J. Boudreaux

Romer transcript

An edited transcript of my podcast with Paul Romer is now up at the Library of Economics and Liberty. Paul has a lot of fascinating things to say. Check it out. One of my favorite parts is where he explains the benefits of multinationals in poor countries:

Russ Roberts: What's the mechanism?  Does Nike improve the life of that worker out of kindness or does competition force them to? 

Paul Romer: Oh, I think it's overwhelmingly competition. There's sometimes a little bit of pressure which makes them do what is basically charitable giving. But look at China right now or India right now. Why are foreign firms that are operating in China and India or Vietnam—why are they paying workers more than they used to?

What happened was that it wasn't just Nike that came in. The government let in a lot of other firms. All of those firms started to compete for the best talent there in the nation, and that process of competition started to drive up wages. You don't want to use the Indian strategy of saying, "Okay, we'll let in one big firm and then we're pulling up the drawbridges and, you know, you can do whatever you want." What you want to do is open it up and say, "Hey, any firm that wants to come in, go for it. Compete as hard as you can to get our best workers."

And that'll reward the workers who have the best skills. It'll give incentives for those other workers to acquire skills and it'll give them opportunities to do things with their skills that they couldn't have otherwise done.

Russ Roberts: In what sense are those workers using the knowledge that that multinational has?  I love that idea. What do you mean exactly? 

Paul Romer: Nike's discovered a recipe for taking rubber and cloth and a few other things and then creating something that people value in the United States for a price of, say, $100. They can take raw materials worth probably pennies and create something that I might go to the store and pay $100 for.

To create that additional value, they have to go out and find somebody who does the rearranging according to their recipe. If they could get somebody at an extremely low wage to do that rearranging, then they'd pay that low wage. But over time what they find is they're competing with other employers. They have to pay higher and higher wages to get people to do that rearranging.

Now if there are lots of people like Nike trying to find workers to do high-value rearranging tasks, they'll be willing to pay quite a bit as they compete with each other. But imagine that Nike only had ideas that could produce things that were worth, say, $10. Nike could never afford to pay—and its competitors could never afford to pay—very high wages to get people to rearrange something to make something worth $10.

But when they're making something that's worth $100, they'll compete and ultimately start to pay higher and higher wages. So the fact that they've got an idea, a recipe, that can create quite a bit of value means that they'll pay quite a bit to have somebody follow that recipe.

There's lots of people out there with good recipes competing for workers. They'll bid up those wages and, in a sense, part of the value that Nike creates will in some sense be taken away by those workers, and taken in a way that we feel is good for the world as a whole. It's good that workers throughout the world will have higher wages in the future than they have now.

Tragedy of the commons

Here is Bruce Yandle talking about the tragedy of the commons and the evolution of regulation of the environment. Particularly interesting is the role that common law played in preventing environmental damage. Most people seem to think that before 1970 you could dump garbage into the air and water. Not so. as Bruce points out, judicial decisions at the state level played a crucial role in improving the environment before the federal regulation of the 1970s. This is a wonderful introduction to the economics of the environment.

Fishing

University of Illinois law professor Andy Morriss (who co-blogs with me at Market Correction) sent this excellent letter yesterday to the Financial Times.

Sirs,

Your story on the overfishing problem in the EU (“Report tears into Brussels fishing policy”, Sept. 27) quotes the author of a report critical of current regulatory efforts as attributing the problem to politicians’ and bureaucrats’ lack of will in standing up to fishing interests.  Fisheries are the classic tragedies of the commons and fishermen are behaving rationally when they overfish, for all of the benefits of each fish caught accrue to them while the costs are borne by the population as a whole. Fishermen are also behaving rationally when they “fish” for politicians in Brussels or national capitals, for if French fishermen do not, they will suffer when Italian fishermen do and vice versa.

Since the problem is a tragedy of the commons, the solution lies in an infusion of property rights rather than one of political will. Garrett Hardin, author of the original 1968 article describing  the tragedy, concluded that it was solved by “private property or something formally like it.”  Since then Iceland and New Zealand’s respective successes with “individualized tradable quotas” (ITQs) have demonstrated that property rights can solve the tragedy of the commons in fisheries in fact as well as theory. Rather than devolving power to regional councils, as the fishing commissioner suggests, the solution is to devolve power to individuals by creating property rights via ITQs. If the EU does so, the incentive to fish in Brussels will evaporate, while the fishermen will have incentives to protect the health of the fisheries.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois

Destruction and eminent domain

Lior Strahilevitz has an interesting comment on the recent Epstein podcast. I quote Strahilevitz in the Epstein podcast saying that when someone  buys a Frank Lloyd Wright house to destroy it, the state is justified in taking it from him to preserve its benefits for others. In the comment he says:

"The natural follow-up question, I think, is 'once you have conceded the appropriateness of taking land from someone who wants to destroy it (rendering it valueless) and transferring it to a preservationist who will use it to maintain aesthetic amenities worth $50, is there a logical constraint on transferring land from someone who is generating $50 from it to someone else who can generate $100 from it?' I think the answer is no, but I also think there are institutional considerations that Richard identifies that ought to make us skeptical about the state’s abilities in this regard, as opposed to the market’s.

Do you agree with the underlying logic? If you want to comment, head over to the comment section of the Epstein podcast at EconTalk and join the argument there. (And while you're there, feel free to listen to the podcast, too.)

Epstein on zoning and Kelo

The latest EconTalk is Richard Epstein talking about zoning and Kelo. He argues that zoning can be a "taking" that deserves compensation. He also has some interesting points on how zoning leads developers to pay more attention to politicians. Not the healthiest set of incentives.

Resource Conservation in Namibia

Karol's latest paper in her Enterprise Africa! project is now available.  In it, she explains how community-based natural-resource management is working in Namibia -- and how it might be used successfully elsewhere.

Out of Africa

The smarter, wiser, and more-talented half of the Boudreaux team has this very nice essay in yesterday's edition of Nairobi's The Nation.  In it, Karol encourages Kenya's government to increase that country's elephant population by lifting its ban on trophy hunting and by decentralizing control over natural resources.

By the way, because of Karol's leadership of Enterprise Africa! -- and her work that grew out of that effort -- she has been appointed to the Working Group on Property Rights of the U.N.'s Commission on Legal Empowerment of the Poor.  This news is good for Karol; it's wonderful for millions of poor people in Africa.

Private Property, Personality, and Humanity

This article by Maureen Martin, published recently at Tech Central Station, gives an example of the dangerous naivete that allegedly intelligent people often are guilty of.  Some elementary-school "teachers" in Seattle are attempting to instruct their students on the selfishness and injustice of private property.  Here's an excerpt:

[T]he students had been building an elaborate "Legotown," but it was accidentally demolished. The teachers decided its destruction was an opportunity to explore "the inequities of private ownership." According to the teachers, "Our intention was to promote a contrasting set of values: collectivity, collaboration, resource-sharing, and full democratic participation."

The children were allegedly incorporating into Legotown "their assumptions about ownership and the social power it conveys." These assumptions "mirrored those of a class-based, capitalist society -- a society that we teachers believe to be unjust and oppressive."

They claimed as their role shaping the children's "social and political understandings of ownership and economic equity ... from a perspective of social justice."

[HT: Candace Smith]

Reading about these "teachers" called to mind this passage from Richard Pipes's marvelous 1999 book Property and Freedom:

Bruno Bettelheim learned to his surprise that while it was possible, over time, to inculcate in kibbutz children indifference to private belongings, this exacted a heavy price.  Israelis brought up in such a Spartan environment showed exceptional group loyalty and grew up to become excellent soldiers, but they experienced great difficulty making an emotional commitment to any one individual, whether by forming a friendship or falling in love:

Emotion shared with only one other person is a sign of selfishness no less than other private possessions.  Nowhere more than in the kibbutz did I realize the degree to which private property, in the deep layers of the mind, relates to private emotion.  If one is absent, the other tends to be absent as well.

Kibbutz youths admitted to being inhibited about writing poetry or painting, because such activities were considered "selfish" and brought the opprobrium of the group.

[From page 75 of Pipes's book; the Bettelheim quotation is from Bruno Bettelheim's The Children of the Dream (1969), page 261.]

So what's the take-away?  Brainwashing people into feeling shame about their private possessions risks causing them also to feel shame about personal achievement and personal relationships.  Such persons become, in a very real way, inhuman.  They become fine soldiers but lousy individuals.

Snow Job

Here’s a letter to the Wall Street Journal by my friend (and co-blogger at Market Correction) Andy Morriss:

Sirs,

I began reading your story on snowmobilers’ conflicts with railroads over trail access with a measure of sympathy for the snowmobilers. (“Cold Case: Keeping Snowmobilers Off Straight and Narrow,” Feb. 22). After all, snowmobiles are the target of a well-funded campaign by environmentalists aiming to get them off public land.  And the group featured in the story, the “Sno-Rascals” has a cute raccoon emblem on their snowmobiles, enhancing the charm of the hobby.  But when I read that the president of the club calls the Norfolk Southern railroad “the biggest pain” because it refuses to allow trespassing on its property, the snowmobilers lost much of my sympathy.  Property rights are fundamentally about the right to exclude others and the Norfolk Southern has the property rights.  If the Sno-Rascals want access to the Norfolk Southern property, they need only pay the railroad for access to change the issue from trespass to contract.   But it was when the story noted that the Sno-Rascals receive state funds to maintain trails on the property of others that they lost my sympathy entirely.  Raccoons are often portrayed in literature as thieves; a club with a raccoon emblem that takes taxpayers’ money to subsidize their hobby may have unconsciously made an appropriate choice of symbol.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law
University of Illinois, College of Law

End of an era

The first Israeli kibbutz, established in 1910, is going private. (HT: Jerry Ellig)

Epstein on property rights and patents

The latest episode of EconTalk is Richard Epstein on property rights and patents. Richard Epstein is always interesting but the first nine minutes or so are quite a tour de force, an elegantly crafted overview of property rights in complete sentences and beautifully organized. There are some interesting discussions of the FDA and the political economy of regulation.

Next week: Viviana Zelizer, Princeton University sociologist talking about money and intimacy and ideas in her latest book, The Purchase of Intimacy.

Two weeks from now, Gregg Easterbrook on his latest book, The Progress Paradox.

And It'll Reduce Honduras's Trade Deficit

I seriously doubt that the Honduras government's "temporary" confiscation of oil-storage terminals owned by private oil companies will lead to long-run reductions in the price of fuel oil for ordinary Hondurans.  But, hey, there's a silver lining around this confiscation: by making investment in Honduras less attractive, it will lower Honduras's trade deficit!

More On the Full, Reality-Based Science of Global-Warming Regulation

Reason just launched a new on-line feature called Reason Roundtable.  I'm honored to have an essay in the inaugural issue, which deals with global warming.  In this essay I make a more extensive case (than I do here) that the best reality-based government policy might well be one that ignores global warming.

The other two essays in this edition -- one by Shikha Dalmia and the other by Julian Morrris -- are very much worth reading (even if you find my essay to be simply hot air).

Tierney on Estonia, the Baltic Tiger

John Tierney explains how Estonia's Mart Laar -- winner of this year's Milton Friedman Prize -- helped free Estonians to create prosperity:

[Estonia] transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated. He was 32 years old and had read just one book on economics: “Free to Choose,” by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.

Laar was politically naïve enough to put the theories into practice. Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs. He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba). He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

These reforms were barely approved by the legislature amid warnings of disaster: huge budget deficits, legions of factory workers and farmers who would lose out to foreign competition. But today the chief concerns are what to do with the budget surplus and how to deal with a labor shortage.

Wages have soared thanks to jobs created by foreign companies like Elcoteq of Finland, which bought a failing electronics factory and now employs more than 3,000 people making phones for Nokia and Ericsson. Foreign investors worked with local software engineers to create Skype, the Internet telephone service, and the country has become so Web-savvy that it’s known as E-stonia.

“The spirit is so different here,” Benoit du Rey says. “If you come to the government here and want to start a company, they’ll tell you, ‘Good, do it right now.’ Then you can work free without being bothered by stupid things. Here I talk to my accountant once a month. In France, for every seven or eight workers, you need one full-time worker just to fill out the forms for taxes and other rules.”

Roaring Applause for this Proposal

Barun Mitra, the vastly talented head of India's Liberty Institute, has this splendid op-ed in today's New York Times.  In it, Barun proposes that the best way to keep tigers from going extinct is to allow them to be owned and traded -- that is, objects of commerce.

Here's the gist:

But like forests, animals are renewable resources. If you think of tigers as products, it becomes clear that demand provides opportunity, rather than posing a threat. For instance, there are perhaps 1.5 billion head of cattle and buffalo and 2 billion goats and sheep in the world today. These are among the most exploited of animals, yet they are not in danger of dying out; there is incentive, in these instances, for humans to conserve.

So it can be for the tiger. In pragmatic terms, this is an extremely valuable animal. Given the growing popularity of traditional Chinese medicines, which make use of everything from tiger claws (to treat insomnia) to tiger fat (leprosy and rheumatism), and the prices this kind of harvesting can bring (as much as $20 for claws, and $20,000 for a skin), the tiger can in effect pay for its own survival. A single farmed specimen might fetch as much as $40,000; the retail value of all the tiger products might be three to five times that amount.

Yet for the last 30 or so years, the tiger has been priced at zero, while millions of dollars have been spent to protect it and prohibit trade that might in fact help save the species. Despite the growing environmental bureaucracy and budgets, and despite the proliferation of conservationists and conferences, the tiger is as close to extinction as it has been since Project Tiger, a conservation project backed in part by the World Wildlife Fund, was launched in 1972 and adopted by the government of India a year later.

If we truly value the tiger, this crisis presents an opportunity to help it buy its way out of the extinction it now faces. The tiger breeds easily, even in captivity; zoos in India are constantly told by the Central Zoo Authority not to breed tigers because they are expensive to maintain. In China, which has about 4,000 tigers in captivity, breeding has been perfected. According to senior officials I met in China, given a free hand, the country could produce 100,000 tigers in the next 10 to 15 years.

........

Wildlife farming and ranching could potentially break the poverty trap that most forest villagers find themselves in. In Zimbabwe, before the current spiral into chaos, villagers had property rights on the wildlife in the forests around them, and they earned revenue by selling a limited number of hunting licenses. They had a stake.

At present there is no incentive for forest dwellers to protect tigers, and so poachers, traffickers and unscrupulous traders prevail. The temptation of high profits, in turn, attracts organized crime; this is what happens when government regulations subvert the law of supply and demand.

But tiger-breeding facilities will ensure a supply of wildlife at an affordable price, and so eliminate the incentive for poachers and, consequently, the danger for those tigers left in the wild. With selective breeding and the development of reintroduction techniques, it might be possible to return the tiger to some of its remaining natural habitats. And by recognizing the rights of the local villagers to earn legitimate revenue from wildlife sources, the tiger could stage a comeback.

Market economics greatly favor the tiger. If China decides to unleash the tiger’s commercial potential, the king of the forest might be more secure in his kingdom.

Kelo Turns One

This past Friday, June 23, was the first anniversary of the U.S. Supreme Court's Kelo decision.  I commemorate that somber event in this op-ed that ran in Wednesday's issue of Investor's Business Daily.

De Soto and Karol Boudreaux

Hernando de Soto's important work reveals the power residing in secure, transferable property rights.  But to secure these rights, to make them sufficiently transferable, and to make them assignable so that they can serve as security for loans requires more than a mere formal legislative declaration that henceforth property will be titled and secure.

My wife's, Karol's, research in sub-Saharan Africa brings this point home.  Here's her latest; it's a study of land-titling in South Africa's Langa Township.  These passages from the executive summary are central:

To better understand the effects of land titling and property reform the researchers—Eustace Davie, Temba Nolutshungu, Jasson Urbach of FMF and Karol Boudreaux and Susan Anderson of the Mercatus Center interviewed homeowners, business owners, and public officials to learn first hand whether or not homeownership is promoting economic growth in the community.

The team found that having a secure title to property does create incentives to improve property and build communities. Secure titles also provide home owners with space for business activities—renting shacks in backyards, opening restaurants, or starting other home-based businesses.  However, the study suggests that is unrealistic to assume that homeowners in the developing world will take that next crucial step and use their titles as collateral for commercial loans that are the key to promoting economic growth.

Home and business owners pointed to the difficulty of repaying loans, the expense and complexity of formal transfers of property, and regulatory burdens that make it costly to grow and expand small businesses as primary reasons why they viewed using home titles as collateral too risky.

Renaissance (Congress)Man

Rep. Sherwood Boehlert (R-NY) believes that government must force automakers to increase the fuel-efficiency of the vehicles they sell.  Here's part of a letter that he has in Saturday's Wall Street Journal, explaining:

Your editorial opposing fuel economy standards ("Not So Grande CAFE," May 8) that the standards amount "to the government dictating the kind of cars Americans will be able drive, even if those cars aren't safe on the road." This is wrong.

First, the goal of fuel economy standards is to enable Americans to drive the cars they want -- but that the automakers aren't producing. And what Americans want is the full range of vehicles available now, including SUVs, but with greater gas mileage. The technology exists to create those vehicles affordably, car buyers want them, and the nation needs them. The fact that they are not on sale is a classic market failure.

.....

Rep. Sherwood Boehlert (R., N.Y.)
Chairman
House Committee on Science
Washington

Rep. Boehlert whips the term "market failure" about too cavalierly.  The believable existence of genuine market failure requires an institutional setting in which a significant number of individual decision-makers each bears too few of the consequences of his or her choices -- such as when, for example, an owner of a factory upstream pollutes a river in ways that harm downstream owners of riverside land because downstream owners have no effective way to enforce their property rights to an unpolluted river.

But the situation decried by Rep. Boehlert has none of the institutional prerequisites for "classic market failure."  If a sufficient number of consumers truly are willing to pay for more-fuel-efficient cars (as Rep. Boehlert asserts), surely at least one of the 20-plus automakers now supplying new cars to the U.S. market would discern this fact -- and, out of pure self-interest, act to satisfy this consumer demand.  After all, if increasing a car's fuel-efficiency would cost an automaker $X and if consumers are willing to pay $X+Y for such a car, then profits are to be had satisfying this consumer demand.  Importantly, consumers who don't pay for more-fuel-efficient cars don't get more-fuel-efficient cars, and all consumers who do pay for such cars will get them -- ensuring no free-riding on the provision of fuel-efficient cars.

Rep. Boehlert doesn't divulge in this letter his source of information about this alleged consumer demand, but surely now that he's unearthed this valuable information, automakers will act on it voluntarily -- assuming, of course, that the information's source is credible.

Alas, I suspect that Rep. Boehlert's source of information on this point is not credible -- for, again, if Rep. Boehlert's claim were credible, automakers wouldn't have to be forced by government to satisfy their customers' demands.

The arrogance and conceits of Rep. Boehlert and his ilk make me want to vomit.

Property Rights Protect Trees

John Reader writes the following in his 1997 book Africa:

Trees are another important source of fodder for the cattle and it is remarkable that while firewood demands have stripped rural areas bare of trees throughout Africa, Ukara [an island in Lake Victoria] remains notably wooded.  Indeed, a visitor would be struck by the contrast.  Mature trees up to fifteen and twenty meters high line the trackways (there are no made roads on Ukara) and offer refuges of deep shade beside streams and in the folds of the uplands; saplings flank cultivated plots; each homestead is surrounded by trees -- and all this living wood on a tiny, densely populated island where trees are a source of cattle fodder, building materials and firewood.  What is the explanation?

The fact that every tree is privately owned ensures that the use of this indispensable resource is sustainable.  Every tree is protected by vested interest.  Indeed, the ownership of some trees is shared among as many as three individuals.  Trees are rented for their leaf harvest.  Building poles, timber, and firewood are bartered and sold [pp. 250-251; original emphasis].

Hat tip to Karol.

Enterprise Africa!

Since September 12, my wife, Karol, has been in South Africa.  She and GMU graduate student Susan Anderson are there until October 19th, leading the research effort for the Mercatus Center's Enterprise Africa! project.

(During this time, I'm lone parent to our eight-year-old son, Thomas.  It's quite an experience -- for Thomas and for me!)

Here's a link describing Enterprise Africa!

This soup's too cold. No, too hot.

First, the government wasn't doing enough.  Well, they'll show us  From the New York Times (rr):

After days of pleading with resident to leave this partly destroyed city, local officials said today that they would begin forced evacuations of all residents, including people living in dry and undamaged homes.

Get them all out.  Every one of them.  Then I guess they'll clean up the city and invite people to come back to some or all of it, depending on how it turns out.  No half-measures, now.  No, we're in charge, says the mayor, the governor, the President.  Action, that's what counts.

As many as 10,000 people remain in the city, and some residents said they would not comply with official orders to leave their homes - which could produce ugly confrontations with police officers or soldiers, who have been called in to bolster security.

But city officials said the risk of fire and disease had left them with no choice but to use force, if necessary, to evacuate anyone who resisted leaving. Police officials did not give a timetable for the forced evacuations, but said Louisiana law gives Mayor C. Ray Nagin the authority to declare martial law and order the evacuation.

Fire and disease?  Perhaps.  But clearly after the fiasco of inaction, the government wants to make sure that no one gets hurt or dies in New Orleans.  The sure way to achieve that is to make it people-free.  Should people have a right to stay in their homes?  Should the word "their" be put in quotes in the previous sentence or in the first sentence of this next paragraph?

"It's a very tough decision to force an American out of their home," the chief of disaster relief for the Louisiana Office of Homeland Security and Emergency Preparedness, Arthur G. Jones, said. "We're there to help them, not hurt them."

Phew.  Or maybe it's just a ruse:

"We may have to force people out to save their lives, if we get to that point," Mr. Compass, the police superintendent, said. "I'm using this as a tactic to scare people into leaving."

At least he's honest.  The last word goes to one Victor Mejia:

At Lee Circle, Victor Mejia, 58, a janitor, stood in the shade on Tuesday and said that he had no intention of leaving. "I live here," he said. "Where am I going to go?"

Kelo and Just Compensation

Here's the Boston Globe's outstanding columnist, Jeff Jacoby, on the odious Kelo ruling.

....

Speaking of Kelo, what compensation is "just" for the homeowners in New London, Connecticut, whose property is being stolen by the government? The market value of these properties before Pfizer and other private companies set their sights on them? Nope. That figure is far too low.

The government is very sure that its theft of private property will generate ample economic benefits to citizens at large, as well as increase the City’s own tax revenues. (As Justice Stevens put the matter in his opinion for the Court majority: "The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community, including – but by no means limited to – new jobs and increased tax revenue.") So why not base the calculation of the just compensation (owed by the thief-politicians of New London to their victims) on the City’s own estimate of the dollar value of these "appreciable benefits" that its thievery is expected to yield?

That is, if the City expects that its thievery will yield $X million in economic benefits, just compensation (given that the theft now enjoys the Supreme Court’s approval) is approximately .95 ($XM). Let the City keep about five percent of the additional value it expects to be created. Given current low interest rates and the fact that the City (ostensibly) is a not-for-profit outfit, the City should be quite content to keep a full five percent of this booty.

I thank my neighbor, the insightful attorney Ed Grass, for this suggestion about the proper magnitude of "just compensation" in Kelo.

Hosannas to the Force-Specialists

Trying to identify the one thing – the one sentiment – the one perception – the one belief – the one value – that separates libertarians (and classical liberals) from others is risky. The world’s not that simple.

But I’ve become convinced that a major difference separating libertarians from non-libertarians is libertarians’ hostility to secular superstitions.

I’m not talking here about belief in spiritual deities. Many libertarians (like myself) are atheists; many others (like my co-blogger Russ Roberts) are deeply religious. But almost by definition, all libertarians reject the notion that the state is something other than a human institution deserving more credence, respect, deference, and trust than is commonly given to other human institutions such as supermarkets and bowling leagues.

Libertarians understand in their guts that flags, anthems, marble domes and columns, fancy titles, embassies, and majoritarian-voting procedures do not transform human beings and human institutions into something higher than human beings and human institutions.

There’s nothing special about the policemen who protect my house from burglars, my son from kidnappers, and my wife from rapists. There’s nothing special about the troops who protect us from foreign armies and terrorists. These activities are important and valuable when done properly. But there’s nothing special about them. Nothing about these activities gives the people who carry them out any exceptional claims upon our affections or wallets.

If the policeman or soldier agrees to render unto me a certain degree of protection in exchange for $100 of my money, neither of us owes anything more to the other as long as I pay him $100 and he performs his contractual duty accordingly. I owe him no special allegiance just because he specializes in using force to counteract force. Nor does he gain superhuman knowledge or wisdom just because he is a force-specialist.

And nor should the fact that we today choose our force-specialists collectively – mostly by voting – give force-specialists dispensation from the normal rules of decency that we expect to be followed by our friends, neighbors, and others who specialize in something other than force.

And yet secular superstitions routinely elevate force-specialists into a priestly class. Force-specialists do get special privileges; they are treated as if they are inherently more trustworthy and more important than non-force-specialists.

Consider the lamentable U.S. Supreme Court decision handed down today in the case of Kelo v. City of New London. In it, the Supreme Court (well, five of its members) ruled that local governments can seize property from private citizen A and give it to private citizen B if it, the government – the gaggle of force-specialists – declares publicly a belief that such seizures will create jobs and increase the amount of money the force-specialists will succeed in forcibly extracting from non-force-specialists.

Suppose that a majority of this very same group of nine black-robed worthies were to declare that I, a private citizen, can poke a gun in my neighbor’s nose and demand that he sell his house to me so that I can give or sell it to someone else. The only condition demanded of this ‘court’ is that I proclaim with as much sincerity as I can muster that my seizure of this house will ‘improve the neighborhood’ and generate more income for me -- more income that I promise, cross-my-heart-and-hope-to-die, to spend wisely on further efforts to improve the neighborhood.

Would you – would anyone – respect such a ruling of this ‘court’?

The only reason the City of New London and other governments have the audacity to seize the property of others, the only reason a ‘court’ of seemingly adult and learned citizens upholds such seizures, and the only reason such a ruling and the seizures it permits will be widely respected is because We the People believe, without warrant or reason, that force-specialists possess supernatural powers and dignity.

We worship and raise hosannas to force-specialists. Why?

Killer CAFTA?

According to an op-ed in the Boston Globe (rr), CAFTA, the Central American Free Trade Agreement is a killer:

If Congress wants to get serious about promoting a culture of life, its members might start by saving 275,000 lives in Central America.

That's the number of people infected with HIV in the countries party to the Central American Free Trade Agreement, or CAFTA. The agreement, which may be ratified by the end of the month, will force its signatories to strengthen protections on patents owned by multinational pharmaceutical companies, thus preventing the manufacture and importation of many cheap generic drugs.

What is at issue is ownership of clinical trial data.  Currently, that data allows generic drug manufacturers to create generic competition with brand-name drugs without additional clinical trials using the generic drug.  The generic drug manufacturer can simply use the data from the brand-name drug.  CAFTA keeps the clinical trial data private for five years.

(BTW, this claim that CAFTA will kill poor people by limiting access to generic drugs is all over the Internet.  Just google "CAFTA pharmaceuticals.")

That will delay the introduction of generic competition and according to the author, hurt poor people:

In Guatemala, some AIDS drugs are as much as 98 percent cheaper than their name-brand alternatives. The antiretroviral cocktail that costs $4,818 per year when marketed by GlaxoSmithKline as Combivir can be purchased by Guatemalans for $216 in generic form.

Given the financial strain many Americans experience when purchasing drugs like Combivir, it's not difficult to imagine how devastating similarly elevated prices would be for the farmers and impoverished city dwellers who make up the bulk of AIDS cases in Central America.

In addition to increases in patent protection, CAFTA mandates that these governments protect regulatory data on medicines -- an unprecedented step that could effectively extend patents by a decade without any form of reprieve, even in a public health emergency.

One problem with this analysis is that it's not a decade, it's five years.  The author has confused pharmaceuticals with farm chemicals.  From Chapter 15 of the CAFTA text:

Article 15.10:  Measures Related to Certain Regulated Products  1.  (a)  If a Party requires, as a condition of approving the marketing of a new  pharmaceutical or agricultural chemical product, the submission of undisclosed  data concerning safety or efficacy, the Party shall not permit third persons,  without the consent of the person who provided the information, to market a  product on the basis of (1) the information, or (2) the approval granted to the  person who submitted the information for at least five years for pharmaceutical  products and ten years for agricultural chemical products from the date of  approval in the Party. 15   

The Boston Globe author goes on to suggest that CAFTA circumvents WTO provisions:

Without cheap access to the fruits of innovation, many poor patients will die unnecessarily.

The nations of the World Trade Organization recognized this dilemma, when, as part of the 2001 Doha Declaration, they unanimously resolved that public health emergencies like HIV/AIDS may require circumventing patent rules. CAFTA flouts this global consensus and is widely understood to be part of the Bush administration's larger systematic effort to undermine the WTO process -- that is, to use bilateral trade agreements to bully small developing countries into waiving their rights under the WTO's intellectual property rules. The WTO's rules allow developing countries to implement patent laws that meet their individual needs.

Unfortunately, this is wrong as well.  From the CAFTA text:

The obligations of Chapter Fifteen do not affect a Party’s ability to take necessary  measures to protect public health by promoting access to medicines for all, in particular  concerning cases such as HIV/AIDS, tuberculosis, malaria, and other epidemics as well  as circumstances of extreme urgency or national emergency.    In recognition of the commitment to access to medicines that are supplied in accordance  with the Decision of the General Council of 30 August 2003 on the Implementation of  Paragraph Six of the Doha Declaration on the TRIPS Agreement and public health  (WT/L/540) and the WTO General Council Chairman’s statement accompanying the  Decision (JOB(03)/177, WT/GC/M/82) (collectively the “TRIPS/health solution”),  Chapter Fifteen does not prevent the effective utilization of the TRIPS/health solution.    With respect to the aforementioned matters, if an amendment of a pertinent provision of  the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (1994)  enters into force with respect to the Parties and that amendment is incompatible with  Chapter Fifteen, our Governments shall immediately consult in order to adapt Chapter  Fifteen as appropriate in the light of the amendment.

But even besides these factual errors, there's another problem with the analysis.  The claim is that drug companies are trying to use CAFTA to increase their profits.  But how will drug companies benefit by imposing these restrictions on poor people?  If poor people can't afford these expensive drugs as the author suggests, then how will pharmaceutical companies benefit?  Presumably, they will try and price discriminate, charging poor people in Central America less than they charge people in America.  So the claims about harm to poor people are at least exaggerated.

But there is a deeper economic effect that is being missed.  Why would a drug company want to sell its drugs in the current environment in poor countries where generic competition comes immediately?  I wonder if when governments in poor countries make clinical trial data public immediately, it has effects outside of that country.  Are those generics exported?  If yes, then under the current world of immediate generic competition, drug companies would limit access to profitable drugs in poor countries.

According to the US Trade Representative's Office, after the US signed a similar provision with Jordan, more new drugs were available to Jordanians:

o  The U.S.-Jordan FTA, signed in 2000, contained an intellectual property chapter that covered  data protection.
      
o  Since 2000, there have been 32 new innovative product launches in Jordan, a substantial  increase in the rate of approval of innovative drugs, helping facilitate Jordanian consumers’  access to medicines.    

o  Since enactment of the FTA, the Jordanian drug industry has begun to develop its own  innovative medicines.  This is an example of how strong intellectual property protection can  bring substantial benefits to developing countries.

I don't know if these claims about Jordan are true, but it's worth looking into.

I suspect CAFTA isn't such a killer after all.  And by increasing the standard of living of poor countries in Central America, it is likely to lead to better health through other channels of nutrition and general access to medicine.

(Hat tip to Tamara Kupfer for the Globe article.)

UPDATE:  The author of the Globe article, Rahul Rajkumar, disputes my claims.  He argues that there really is a ten year wait on the clinical data, that the ability to deal with a health crisis is only in a side letter and not in the actual text, and that the Jordanian innovation can't be real but is likely to be a case of pharmaceutical companies gaming the Jordanian patent system.  His response is below, but my reaction to his reaction is that he seems to be right on point one (though I don't understand the distinction he makes about "territory", he is right on point two—it is in a side letter, but neither of us knows the signficance of it not being in the document itself and he is incorrect on the third point—the Jordanian innovation.  I assume that "innovation" in Jordan is simply availability, the willingness of the pharmaceutical companies to sell products there now that property rights are more secure.  This would seem to be crucially important if indeed the facts are accurate.  Now that CAFTA has passed in the US, it will be important to see if the dire effects predicted by its critics are accurate.  Here is Rajkumar's full response.  His quotes from my original post are in italics:

Your response to my piece in the Boston Globe contains at least three factual errors.  Since they are relevant to your argument, I will discuss each of them in turn.

One problem with this analysis is that it's not a decade, it's five years.  The author has confused pharmaceuticals with farm chemicals.

No.  You have to read all of Article 15.10's provisions.

Article 15.10.1(b) allows an originator to defer seeking marketing approval in a CAFTA country for up to five years after seeking marketing approval in another territory.  Because 15.10.1(b) protects undisclosed data while the original drug is registered in any other country and 15.10.1(a) provides for a fresh 5 year period of protection once the originator secures marketing approval in the country in question, pharmaceutical companies could conceivably use these two provisions to secure 10 years of monopoly protection over undisclosed data.

The Boston Globe author goes on to suggest that CAFTA circumvents WTO provisions...Unfortunately, this is wrong as well.  From <http://ustr.gov/assets/Trade_Agreements/Bilateral/CAFTA/CAFTA-DR_Final_Texts/asset_upload_file697_3975.pdf>the CAFTA text (quotation)

The text you quote doesn't come from the text of CAFTA.  It comes from a separate "understanding" (a side letter.)  This document only provides an interpretive suggestion.  It's not enforceable, and it does not override any of the provisions found in the text of CAFTA.

Even if it were enforceable, this understanding is still limited in a number of respects.  Here's a more detailed explanation from the Center for Policy Analysis on Trade and Health http://www.cpath.org/updates0505/side_letter_public_health.htm.

[According to the USTR,] since 2000, there have been 32 new innovative product launches in Jordan, a substantial  increase in the rate of approval of innovative drugs, helping facilitate Jordanian consumers'  access to medicines.

This number is highly suspect.  There haven't been 32 new innovative pharmaceutical products launched in the U.S. in the same period.  This number probably means that pharmaceutical companies are learning how to game Jordan's patent system by filing applications for slight variations on known medicines, new formulations and new dosages.  I would be curious to take a look at a list of these 32 products, if you have this information.

***

I don't want to launch into a lengthy exchange on your substantive points, but here are a few short responses.

If poor people can't afford these expensive drugs as the author suggests, then how will pharmaceutical companies benefit?  Presumably, they will try and price discriminate, charging poor people in Central America less than they charge people in America.

This really isn't the relevant comparison.  Drug companies do price discriminate, but they still price many medicines out of the market for poor people.  Drug companies stand to benefit by marketing to rich people in poor countries.  That's why the brand-name version of AZT/3TC was pitched at over $4,000 per person per year in Guatemala before generic competition.  It's also why the lowest price for generic antiretroviral therapy is ~$140 per person per year (the price negotiated by the Clinton Foundation.)  There is no brand name equivalent that comes even close to this price.

But there is a deeper economic effect that is being missed.  Why would a drug company want to sell its drugs in the current environment in poor countries where generic competition comes immediately?  I wonder if when governments in poor countries make clinical trial data public immediately, it has effects outside of that country.  Are those generics exported?  If yes, then under the current world of immediate generic competition, drug companies would limit access to profitable drugs in poor countries.

Few countries protect regulatory data in the manner required by CAFTA.  The U.S. doesn't under most circumstances - and WTO rules only requires countries to protect regulatory data against "unfair use."  Most countries - and even the WTO itself - have rejected the CAFTA interpretation of data protection.  So, you can answer your own question by examining the status quo.

I'm not exactly clear on what you mean when you say "under the current world of immediate generic competition, drug companies would limit access to profitable drugs in poor countries."  In markets that permit generic competition, drug companies aren't able to limit access to profitable drugs because access to these drugs doesn't depend on whether drug companies decide to enter the market.

Under the WTOs rules, if a company doesn't patent its product in a particular poor country, then it's fair game for generic manufacturers - that's why Indian generic drugs are available all over the developing world.  If country uses the compulsory licensing provision of TRIPS then it may permit generic manufacturers to produce the drug (for domestic use or for export under the WTO's August 30th Agreement.)

Are Eminent Domain Powers Just?

Here's my debate, at the Wall Street Journal's Econoblog, with Harvard Law Professor David Barron.  The topic is eminent domain, especially in the context of the case now being considered by the U.S. Supreme Court, Kelo v. City of New London.

Property Rights as an Institution

My far-better half, Karol, wrote this superb primer on The Role of Property Rights as an Institution.  It's a great read!

Karol's essay is one in an important series of "Policy Primers" published by The Mercatus Center at George Mason University, and edited by Frederic Sautet.

Boaz on Ownership

The Cato Institute’s David Boaz does an outstanding job defending ownership, choice, and responsibility. Jacob Hacker, in opposition, is less enthusiastic about ownership – and misleadingly refers to Social Security as a ‘safety net.’

Listen here.

Is Land Overused or Underused?

Many environmentalists dislike private property because they think it is overused, too prone to development for narrow economic purposes. At least some prominent Latin American revolutionaries think differently.  Venezuelan president Hugo Chavez is a case in point.  He believes that private property is too prone to under-use.

The Chavez government recently created a National Agricultural Commission charged with ending the scourge of under-use of land. According to this report:

This Commission will have a "constitutional mandate" to incorporate the land it considers "idle, abandoned or underused" into "the productive process of the country," according to the Decree on the Reorganization of the Ownership and Use of Land Suitable for Agricultural Use. The land so considered will be handed over to groups of the population and organized communities for its productive, sustainable use.

Perhaps on average both groups, environmentalists and tinpot dictators, are right and private property generally is neither overused nor underused.

Diamond in Rough

In this New York Times op-ed, Jared Diamond summarizes the thesis of his new book, Collapse. A favorable review of this book is this one, in The New Yorker, by Malcolm Gladwell. (Thanks to Arnold Kling for this reference, and for bringing my attention to Matt Yglesias’s rebuttal of one of Diamond’s important empirical claims.)

I’ve not read Diamond’s book, so I can’t comment on it. But I did read his lengthy op-ed, and find it to be surprisingly weak.

Diamond’s thesis (judging from his op-ed) seems to be built on the tragedy of the commons. But it’s not. And the reason that it’s not stems from the larger problem I have with his thesis.

First, though, I register my smaller complaint: Diamond glibly treats too many of his suppositions as undisputed facts. In particular, he supposes that population growth is necessarily a problem, and that humankind is running out of resources.

These suppositions aren’t ridiculous, and probably most folks believe them to be true (which is why Diamond can simply suppose them to be true). But nor are these suppositions unchallenged – with data – by serious scholars. Diamond (again, in his op-ed; I don’t know about his book) simply ignores these challenges.

The collections of data by Julian Simon, here and here, and by Bjorn Lomborg, here, are the most relevant challenges to the supposition that population growth is usually a curse and that resources are becoming more and more scarce. While I find these data to be compelling, it’s possible that they – or their interpretations by Simon and Lomborg (and me) – are wrong or misleading. But Diamond writes as if Simon’s and Lomborg’s research doesn’t exist. In his op-ed of nearly 2,500 words, Diamond doesn’t even acknowledge the existence of serious empirical research that challenges his key suppositions about the condition of today’s world.

The larger problem with Diamond’s thesis is revealed in his book’s subtitle: How Societies Choose or Fail to Succeed. He anthropomorphizes human collectives. He talks as if we – or some variant of "we" – have a collective mind that makes decisions for us as a whole. Consider:

There are many reasons why past societies made bad decisions, and thereby failed to solve or even to perceive the problems that would eventually destroy them. One reason involves conflicts of interest, whereby one group within a society (for instance, the pig farmers who caused the worst erosion in medieval Greenland and Iceland) can profit by engaging in practices that damage the rest of society. Another is the pursuit of short-term gains at the expense of long-term survival, as when fishermen overfish the stocks on which their livelihoods ultimately depend.

This passage cries out for good tragedy-of-the-commons analysis. But it never gets such analysis. Instead, while sensing that something like what economists call negative externalities are in play – that is, while sensing that some institutional processes might insulate decision-makers from the consequences of their decisions – Diamond resorts to the simplistic notion of physical or social isolation. He says:

A society contains a built-in blueprint for failure if the elite insulates itself from the consequences of its actions. That's why Maya kings, Norse Greenlanders and Easter Island chiefs made choices that eventually undermined their societies. They themselves did not begin to feel deprived until they had irreversibly destroyed their landscape.

In short, for Diamond, externalities exist principally when kings and sultans are isolated from their subjects; when rulers don't share the current fates of their subjects. If only the sovereign – or his noble liegemen – knows of a problem and has sufficient incentive and good-will to solve it, things stand a good chance of turning out alright.

Is Diamond unaware that well-defined and divisible and exchangeable property rights tend to internalize on each decision-maker the larger value-consequences of his decisions on countless others – and, hence, prompt each decision-maker to act in ways that benefit not only himself today and tomorrow, but others as well? Does he not know that in the absence of such property rights, individuals can and do act in ways that are individually rational but harmful to many others?

Why the puerile "oh-my!-unless-our-leaders-know-of-potential-problems-and-act-to-save-us-by-giving-us-specific-instructions-on-how-to-behave,-we’re-doomed!" motif?

Diamond’s analysis is adolescent.

Econ Journal Watch

One of the really exciting recent developments in economics is the on-line journal Econ Journal Watch ("EJW"). (Truth in Advertising: I’m an Editorial Advisor to the site.) It’s the brainchild of Professor Dan Klein, of Santa Clara University.

This article by Dan Johansson is an especially nice example of the service provided by EJW. In it, he reports the results of his survey of all graduate microeconomic, macroeconomic, and industrial-organization textbooks assigned in PhD-economics programs in Sweden. Because these are pretty much the same books that are used in U.S. programs – almost all authors are on the faculties of universities in the U.S. – his findings speak volumes not only about the state of modern Swedish training in economics but of modern economics training in the U.S. as well.

Johansson finds that these textbooks are devoted to equilibrium models in which genuine change (and, hence, genuine economic growth) is excluded by assumption. Not by conscious assumption, but excluded nevertheless. The reason is that models in which equilibria are determinate are models that, of course, inherently reject indeterminateness – true change, true uncertainty, true creativity. These models are analytically closed.

And any model that rejects change, uncertainty, and creativity also, necessarily, rejects entrepreneurship. That’s pretty obvious. But any such model rejects also property rights – or, rather, rejects the rich role that property rights play in reality. Here’s Johansson:

Analytically, all options are fully specified within a closed system, and the whole terminology of property rights is out of place. Entrepreneur-rich and institutional-rich traditions allow for actors to come up with creative action, interpretational breakthroughs. In this context, it is important to be able to speak of kinds of rules that constrain behavior (rules against stealing, for example) yet leave the door open for creative developments. Market entrepreneurship is transcendent action within a social framework of property rights.

Indeed so. But the analytically closed, formal, axiomatic equilibrium modeling that prevails in modern economics misses these vital insights. It misses the role of institutions – including that most important institution of all: property rights.

Johansson finds that, with rare (and questionable) exceptions, none of the textbooks mentions institutions, entrepreneurship, property rights, and other concepts that, in fact, are indispensable for a genuine understanding of economic growth and market processes.

If I may brag a bit in conclusion, we at George Mason Economics are unquestionably the only major PhD-granting Department that recognizes this problem with mainstream economics, and who work to do economics differently, more relevantly, more wisely – much more wisely.

A Proposal for Nigeria

My (far-) better half, Karol, has a superb essay today at TechCentralStation on a pratical means of helping to cure Nigeria of the curse it suffers from being rich in oil and desperately poor in everything else -- including the institutions necessary to create a civil society.

Higgs and De Soto

Economic historian Robert Higgs was a guest at my and Karol’s Virginia home this past week. Bob lives in Covington, Louisiana, which is on the north shore of Lake Ponchartrain, 25 miles north of my hometown of New Orleans.

Bob, Karol, and I were discussing economic development, along with Hernando de Soto’s work on the importance of formalizing property rights (especially rights in real estate). Bob observed that both Covington and New Orleans have the very same system of land titling and ownership registration. It’s a very formal system that -- in a way to elicit de Soto's admiration -- makes clear who owns which piece of property.

And yet, as Bob points out, the economic conditions in Covington differ dramatically from those of New Orleans. New Orleans suffers even more than the typical American inner city from violent crime, and New Orleans is much more economically stagnant than is the typical American inner city. Indeed, one significant reason that the north shore of Lake Ponchartrain has become such a desired location is that New Orleanians are increasingly seeking a refuge from crime -- which is to say, a refuge from distressingly insecure property rights.

My parents recently moved from New Orleans’s close-in suburbs to the north shore. I easily witness the economic dynamism that is now transforming the north shore from a sleepy, rural outpost into a vibrant, culturally interesting, and wealthy community – while New Orleans proper is stagnating.

De Soto’s point is important. But it must not be oversold; it’s no magic bullet. Perhaps formal, impartial, and explicit property registration is a necessary condition for economic growth. It is not a sufficient condition. If it were sufficient, inner-city New Orleans would be just as economically dynamic and robust as is the north shore of Lake Ponchartrain – a place just 25 miles from the French Quarter and with the very same system of formal, impartial, and explicit property registration.

Culture and Coase

Earlier this week, my co-blogger Don Boudreaux discussed the application of Coase's insights to property rights issues in Idaho. Reader Dave Meleney writes in with the following observation:

I am often trimming trees at expensive homes where people think nothing of spending an extra $50,000 for a lot with a fine view of the mountains... but are quite reluctant to offer a neighbor a grand or so to gain permission to trim trees that block such a wonderful view ... even when the height of the trees in question seem to give the owner no benefit whatsoever.

It just doesn't seem cool to ask. Perhaps some post-Coasian wordsmith could suggest the proper wording for such a request?

Dave raises a very interesting question. In this example, it appears obvious that there are gains from trade yet they go unexploited. Coase provides the tautological answer that the transaction costs of making this trade evidently outweigh the benefits. But why would that be? The gains seem very large and the costs seem pretty small—a few minutes of negotiation to agree on a price. The next level of explanation, also somewhat tautological is that there are cultural barriers to that negotiation that make such negotiations unseemly somehow. A similar question arises when you go to the grocery, you're in an enormous hurry and you're buying one item. You go to the 10 items or less line and there are four people in front of you. It's pretty hard to say, excuse me, I'm in a big hurry. May I cut in line? And just to prove I'm not scamming you, here's a dollar for each of you. OK?

I've never seen that kind of thing happen except in airplanes where someone has to make a connecting flight. People will step aside to let someone through and people don't feel foolish asking. But no one offers money. In fact, Julian Simon's innovation of people giving up their seat on an airline in exchange for a free ticket is an institutionalized example of this kind of beneficial exchange. Now we're accustomed to it. But can you imagine someone showing up at a flight and announcing to the waiting room, I'm really eager to get on this flight. Who will sell me their ticket? People would look at such a person with alarm, just as they would if you offered money to move up in the grocery line. Our culture doesn't smile on that kind of thing in that setting. Yet at sporting events and sometimes theaters, scalping is widespread.

Why do we allow money to be used eagerly in some of the above situations but not others? Why are there cultural or emotional barriers to using money in some settings but not in others? Why in some settings are we uncomfortable even asking for something, with or without money?