Here’s another draft extract from my book-in-progress, Economics in Two Lessons, looking at income distribution. The entire draft section on this topic is available here. And the introduction, describing the general approach of the book is here.
Praise is welcome, and useful criticism even more so. As a reminder, this is an extract. If you think a crucial point has been missed, point it out, but bear in mind that it may be addressed elsewhere in the book.
If we are going to consider changes in the distribution of income and wealth, what should we take as our starting point? There are various possibilities, many of which are of theoretical interest, but not of much practical use.
Hazlitt doesn’t spell out the starting point for his analysis. However, his analysis is based on the implicit claim (spelt out in more detail by Bastiat) that there is a natural distribution of private property rights, that exists prior to any government activity such as taxation and the payment of welfare benefits.
This is nonsense. It is impossible to disentangle some subset of property rights and entitlements from the social and economic framework in which they are created and enforced.
The ordinary meaning of “property” refers to a specific kind of control over resources, most completely realised in freehold ownership of land. Freehold land can, with limited exceptions, be used as the owner sees fit, and freely sold, rented out or otherwise disposed of. In the idealised model which forms the basis of much thinking about property, all property is of this kind.
Most of the time, we take the existing allocation of property rights for granted. This is, however, an example of exactly the fallacy pointed out by Bastiat, that of focusing on what is seen and ignoring the unseen alternatives. All property rights began with a social decision to create and enforce someone’s right to use a particular good, asset or idea, and to regulate the way in which that right might, or might not, be transferred to others. [In societies without a formal state structure or legal system, these decisions may be made through custom or consensus. In modern societies they are made by governments and courts].
In some of the cases discussed in Section 2, such as those of telecommunications spectrum and fishing quotas, the rights were created relatively recently, and the process by which they were created is well documented. In somewhat older cases, such as that of the 19th century innovations which created limited liability corporations, the history has been forgotten by all but a few specialists. Going even further back, property rights in land and in ordinary goods (chattels, in legal parlance) are mostly taken for granted, even though they are all derived, in the final analysis, from a socially-created legal framework.
In any society, people have views about what property rights are legitimate and, in particular, what they themselves are entitled to. These views may or may not match the property rights that actually prevail in that society. For example, workers commonly regard of their job as belonging to them, in some sense. In some places, this perception is supported by laws prohibiting unfair dismissal. In the US, by contrast, the doctrine of employment at will means that the job is the property of the employer.
Propertarians like Hazlitt want to pare back government to the minimum necessary to protect the property rights of which they approve. These include rights over land and houses, private sector financial assets and personal possessions. Other rights, currently enforced by government, should, in their view, be abolished.
There are two main difficulties with this.
First, propertarians disagree among themselves as to which government functions should be retained, and which property rights should be maintained. For example, some support core government functions like police and fire services while others want these to provided, on a market basis, to those willing to pay for them. Similarly, some propertarians, support the idea that the creators of ideas should have unlimited ‘intellectual property’ in those ideas, while others believe that ‘information ought to be free’.
Moreover, while propertarians almost invariably oppose ‘welfare’ benefits paid out of tax revenue, such as social security, there is no clear dividing line between these benefits and contractually obligatory payments such as pensions for public and private workers.
The fine distinctions between Austrians, minarchists, objectivists, and anarcho-capitalists are too complex and tedious to be detailed here. The point is that any attempt to define, on the basis of logical first principles, a ‘natural’ set of property rights, independent of government, runs rapidly into quicksand.
The second problem is that any attempt to strip all rights and entitlements back to a minimal set corresponding to a naive notion of ‘private property’ would not produce anything like the existing distribution of private property rights. Some kinds of private property would become much more valuable, and others much less so. An example can be seen in the mass privatisations that followed the end of Communism in Russia and other countries in the former Soviet bloc., These processes greatly enriched a handful of oligarchs and greatly impoverished everyone else, leading to the loss of the little .
It is impossible to describe a proposed starting point based on such a radical change with any accuracy. So, we can’t really say what the opportunity cost of shifting property rights from one person to another might be in such a situation.
It makes sense, therefore, to start thinking about the initial allocation with reference to our actual position rather than to some or other theoretical ideal.
In most modern societies, governments collect a substantial proportion of national income in taxation revenue. Some of this revenue is spent on the provision of public services, and some on ‘transfer payments’ such as social security, unemployment and disability insurance, and assistance to poor families.
The starting point therefore includes both the existing set of property rights of workers, the employment position of worker and the rights and obligations of members of the community to receive government services and benefits and to pay the taxes necessary to finance those services and benefits.
1.1.3 The opportunity costs of redistribution
There are many policy changes that will improve the starting position for some members of the community. Examples include
(A) Reducing marginal rates of income tax above some income level, which will benefit those with taxable incomes above that level.
(B) Increasing the duration of intellectual property rights such as copyrights and patents, which will benefit the owners of those rights
(C) Increasing the number of publicly funded places in colleges and universities, which will benefit the young people who are enable to attend
(D) Increasing social security payments and unemployment insurance, which will benefit those who are unable to work because of age or inability to find a job
(E) Increasing the minimum wage
Over the past 40 years, we have seen substantial changes of types (A) and (B) in the United States and elsewhere around the world. The top marginal rate of income tax has been reduced from … to … . The maximum term of copyright protection has been extended from … Other measures, such as the use of ISDS provisions in trade agreements, have created a variety of new and expanded property rights for corporations.
By contrast, there have been few changes of types (C), (D) and (E). On the contrary, public funding of universities has been reduced, eligibility for social security has been tightened and the real value of the minimum wage has been reduced.
This outcome reflects the logic of opportunity cost. To finance increased expenditure on some goal or to reduce the taxes paid by one group, the government must find offsetting cuts in expenditure or increased taxes elsewhere, or else accept a larger deficit, incurring a debt that will have to be serviced in the future. The least unattractive of these options, as evidenced by the choices of policymakers, will constitute the opportunity cost of providing the benefit.
Creating new property rights or extending old ones provides the owner with control over resources, including ideas, that were previously accessible to all. Users other than the owner will either be excluded from the resource or will have to negotiate terms with the owner; the associated costs represent the opportunity cost.