Here’s a great quote, which will probably make steam come out the ears of the Samizdata types:
The crucial point to understand is that property is not a physical thing that can be photographed or mapped. Property is not a primary quality of assets but the legal expression of an economically meaningful consensus about assets. Law is the instrument that fixes and realized capital. In the West, the law is less concerned with representing the physical realities of buildings or real estate than with providing a process or rules that will allow society to extract potential surplus value from those assets. Property is not the assets themselves, but the consensus between people as to how these assets should be held, used, or exchanged. The challenge today in most non-Western countries is not to put all the nation’s land and buildings on the same map (which has probably already been done) but to integrate the formal legal conventions inside the bell jar with the extralegal ones outside it.
Just finished reading De Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. For the four people who read blogs and haven’t heard of this book, Hernando De Soto is a Peruvian economist who is very concerned with issues of development in the Third World, and who points out that there is substantial wealth in the underground economies, and that if there was a way to bring those econonomies into the mainstream, very good things would happen.
Read this book!
Now, why would a Samizdatista, one of which I am, have a problem with that?
I think, A.L., you might be reading more into De Soto’s capsule than is actually there. Of course property is a consensus attribute. No one could reasonably dispute that. But it’s also indisputable that certain consensuses about property work far better than others — predictably so, whenever and wherever they’re tried. Just because the consensus is a matter of people’s aggregate opinion doesn’t insulate it from the verdict of reality.
I’m sorry; I meant to be wry, and on reading it this morning, can see that it didn’t come across…
A.L.
This discussion is very applicable to Iraq. Some seem to be preoccupied with hastily establishing a democracy. What the primary concern should be is establishing the rule of law and an enforceable private property rights system.
It makes sense. Who would want to live in a shantytown, in shacks that will blow over in the first stiff wind? Who would not improve their own living conditions, their own house? Lay down proper sewage lines and roads? It’s not hard to do, why don’t they do it?
Because it makes sense for them — because they have either a weak government that doesn’t or won’t issue deeds and/or protect rights — or a strong government that will nationalize anything built well enough to stay standing.
This, too, is the door to proving the existence of a social contract, which will really irritate the Samizdaten.
In actuality, there are few people more in favor of bringing the underground economy into the mainstream than libertarians. All libertarians I know recognize the importance of government in establishing law in order to protect contracts and property rights that allow the economic system to function. All the libertarians I know are big fans of De Soto.
We wouldn’t want to confuse libertarians with anarchists, now would we? But I’m sure you knew that already and weren’t being serious. 🙂
“The social contract isn’t worth the paper it’s not written on.” — John Seymour
Whereas simple majorities can sustain certain kinds of consensuses, some agreements, such as those about rights, can be destabilized by tiny minorities. Look at any highway where even a handful of the drivers have decided that the law does not apply to them, and you’ll see what would happen if a comparable fraction of a society were to abrogate the consensus of private property.
A stable, property-respecting society is not a social contract. It’s the result of a multigenerational winnowing procedure, over the course of which dissenters from the propertarian ethic were gradually expunged from participation in the system. New dissenters, so long as they remain below a certain threshold, will not destabilize the ethic. However, according to studies done by Robert Axelrod, Douglas Hofstadter and others, it only takes about a 2% dissent fraction to destroy a propertarian system.
Mathematician Martin Gardner called the study of such effects renormalized rationality, a term by which he hoped to capture the progressive nature of the processes involved. The mechanisms bear a strong resemblance to the properties of distributed cybernetic systems.
The propertarian ethic is easily destabilized. Riots, with their accompanying looting, are a good demonstration.
If our consensus on property rights were a contractual matter, then a sufficiently powerful enforcement agency could put down the dissenters and restore the ethic. But surprise! This agency, which we usually call “the State,” is overwhelmingly more likely than not to have been intimately involved in the destabilization, through taxation and similar property seizures that exceed *the value of the overhead-cum-externality goods which private actors would not make for themselves.*
So the “social contract,” of which the State is normally held to be the primary expression, fails to possess one of the requisite properties of a contract: enforceability of a predictable kind. More: once the State gets beyond the citizenry’s ability to restrain it, which usually happens rather quickly, it’s not social but anti-social, as it impedes the economic progress and self-organization of society with its excisions, while simultaneously robbing private individuals of the means of self-defense…for obvious reasons.
The late Don LaVoie once argued that the error that usually collapses the propertarian ethic is the unchallenged assertion that the State is the proper representative and conservator of “society’s interests.” This is not so. The State is, at any moment, a discrete entity with hegemonic privileges over everyone else; society is amorphous and anonymous, and its relationships are continually changing. Society’s interests are better represented and conserved by a comparably amorphous and anonymous entity, such as the free market — a venue in which truly contractarian behavior takes place, in contrast to the hegemonic behavior that characterizes the State.
Conservatives of course are less likely to want to integrate portions of the underground economy. However, they’re also very likely to respect De Soto’s claim that the most important part of making capitalism work is to change attitudes.
John, the “underground economy” De Soto refers to is primarily the impossibility of owning legal property in many Third World countires. Since people have to live somewhere and settle these issues somehow, underground arrangements spring up instead.
In many countries, the amount of capital that can be released by such efforts is tens of times larger than the TOTAL amount of foreign aid they have EVER received.
The first sentence is true, but it is not as important as its author makes it out to be – but we can overlook this as we have bigger fish to fry. The second and third sentences are true, but each in its own way omits a fundamental point about property. By the fourth and fifth sentences, this ommission leads to a somewhat ugly conclusions about theory. In turn, that ugly theoretical conclusion leads to an equally ugly practical conclusion in the sixth and last sentence.
Quoth Francis:
“Of course property is a consensus attribute. No one could reasonably dispute that.”
Care to wager on that??
The fundamental point that the de Soto quote fails to recognise is the importance of the *moral* status of ownership. I recognise that the quote is from a wider piece of writing and may be at least partly out of context, but even despite this there is no excuse for the failure to mention morality in the middle of the block so provided.
Property is a MORAL issue long before it becomes a political or economic point. The closest that the quote comes to it is the implication that property is something that is merely tolerated in order that society may prosper. That is, the quote is saying that society is an end in itself and that individuals and the relationships among them are merely means to that end. THAT IS NOT CAPITALISM – that is nothing more than a species of socialism that just happens to embrace outsourcing on the largest scale possible. If THAT kind of attitude is what underlies a push for private property, then the pushers hand moral victory over to the socialists free of charge. The result will be a partial boost given to the economy, which will then be used to fuel the incremental imposition of socialism. Economic collapse is inevitable, but the pseudo-free-market system present will be turned into a beast of burden and allow socialism to last longer than it would on its own feet. And, without a proper *individual-morality-based defense of property*, the amorality of capitalism will get the blame. The theoretical musings of Smith, Mills, and de Soto, will be ignored because the moral disdain for capitalism will lead to bastards like Keynes and Krugman getting the benefit of the doubt.
Quoth Undertoad:
“This, too, is the door to proving the existence of a social contract, which will really irritate the Samizdaten.”
Precisely.
Therefore, the challenge is NOT to institute the politics of property, but to institute the MORALITY of property in the people themselves. That means secularism, reason, primacy-of-individuals, and upholding the propriety of rational self-interest, rather than pragmaticism, primacy-of-society, and outsourced-socialism theories such as utilitarianism. Politics is a derivative, not a primary. Take care of the morality and the politics & economics will take care of themselves. The priority of morality over politics is one major reason why Objectivists are NOT libertarians, incidentally. The particular policies might be similar, but the reasons behind them are WAY different.
Unfortunately, I don’t see the advocacy of the requisite morality happening widespread any time soon. As I wrote in a samizdata comment, since altruism is still taken seriously the borg nanites are still in the bloodstream, which is why socialism is the demon that will not die a well-deserved death. Result: socialism is still upheld – by leftists and conservatives alike – as the moral ideal with dissent merely about whether it is practical. This in turn leads to incrementalism and hence disaster after disaster, where capitalism and free markets and property get the blame time and time again. The words of the likes of the author of that quote will not do a damn thing to stop it as they are part of the *cause* because they STILL give moral credence to socialism, whether directly or indirectly through primacy-of-society undertones.
JJM
I think De Soto’s point is very valid, which might be why many economists are hailing him as the greatest thinker in the last 1000 years. The people in third world countries have property arrangements, but they aren’t enforceable. If assets aren’t seizable they can’t be used as capital. Without a system of legal ownership, as opposed to defacto “my neighbors all know this is mine” an outside entity can’t seize property, which means that property can’t be used as collateral.
My house is capital, but a third world house is just a dwelling, because if a loan officer went to foreclose on it because the owner was in default, it would turn out to be somebody else’s cousin’s house. There is a saying in Arab countries that you can never take a man’s camel, because it is never his.
DeSoto also talks a great deal about business law, and why third world businesses are so inefficient. To run a legal business in many countries requires literally years of jumping through hoops at a wide array of ministries.
You have to hire employees, but not enough to draw attention to yourself. You can’t put much money into capital, because the bank account would draw attention to your illegal business. You can’t often go legal, because the cost of all the bribes and beaurocracy will drive you bankrupt. The best you can do is stay small, and avoid attention.
Basically, the institutions in these countries don’t work, and harken back to mercantilism from the 1600’s. All the rules are based on “managing” the resources, instead of growing the pie. A legal business is viewed as a fiefdom, to be passed on to heirs, and lawyers are hired to make sure the various ministries don’t allow another competing business to start up. Instead of the king letting you own an estate, the government gives you legal rights to run the city’s soap monopoly.
These countries go through a bewildering sequence of left wing and right wing governments, but the basic flaws in the system never change. As De Soto says, the fox and the wolf are very different, but to a chicken it’s only the teeth that matter. The people in these countries are trapped in a system filled with institutions that work against them. In Egypt it would take about 20 years to gain legal title to your house, after which you’d be sent to jail for having been living in a house that you didn’t legally own.
Much, if not most, of the economic activity in these countries takes place in the black market.
From DeSoto, you might argue that the reason America doesn’t have a black market is that America is a black market. We just made the rules in common use in our black market the legal law of the land. For a sound and functioning economy, you don’t really need any fancy theories or institutions which weren’t already common in the early U.S. His book “The Other Path” goes into more depth about the black markets.