To whom does wealth belong? An Economic Perspective

 
 

[1] The question of to whom does wealth belong is not one that most economists would be comfortable answering except in the most trivial sense. Trivially we would answer that wealth belongs - well - to those who own it. Aside from being rather circular in its logic, this reply does not get at the real issue implied by the question: To whom should wealth belong? This question is inherently normative in nature and economists qua economists are generally reluctant to take normative positions about how society should operate. We might be willing to describe the likely consequences of particular economic systems or policies, but questions of which systems or policies we should implement are, according to most economists, best left to philosophers and other moral leaders (Friedman, (1953) 1970).

 Theories of Property and Value
[2] Nevertheless, most economists appear to accept implicitly the notion that ownership of wealth is acquired based on a person's contribution to its creation. A farmer owns his corn because he produced it; an artist owns his painting because he created it; a laborer owns his wages because he helped make the good or service to be sold. This view would be consistent with Locke's view that when people mix their labor (which Locke asserts they naturally own) with the earth's resources the resulting products by extension are also theirs. 

[3] It is a short leap from Locke's labor theory of property to the concept in economics of the labor theory of value made most famous by Marx but also reflected in nearly all the early economic writers including Adam Smith. Here the simple idea is that all value is created (and one assumes is thus owned) by laborers. 

[4] But what of the landlord of a farm who hires workers to do the work?   Does he create nothing? And if not, why is he entitled to any of the returns from the farm? For Marx, the labor theory of value led to his conclusion that private property results in the unjust exploitation of the value-creating workers by the non-value-creating owners of land and capital. For other economists, however, the inability of the labor theory of value to explain why land capital owners are (and should be?) compensated merely suggested the need for a new theory.[1]

[5] Modern economic theory recognizes that by forgoing current consumption, the owner of land and capital is making a sacrifice for the production of a good. The landlord could elect to turn his land into a big playpen for his own amusement (say fox hunting). But by allowing his land to be farmed the landlord is making a sacrifice of his own enjoyment for the production of the food that is no less significant in principle than that of the workers on the farm. Thus the landlord does contribute to the creation of the product and is, following Locke, entitled to a portion of the resulting value.

Private versus Common Property
[6] Of course, even the discussion above assumes that someone will own wealth, even if determining exactly who or how that ownership is determined or how the returns from that wealth are distributed is up for some debate. So what should we make of the notion that wealth should be owned by no one in particular, or perfectly equivalently, by everyone in common? Real world examples of both private and common property exist. Land is typically held privately while the oceans beyond the territorial borders of nations are considered common. In England common grazing lands that could be shared among the town's shepherds existed in the past in addition to traditional privately owned pastures.[2]

[7] There are those who believe that 'property is theft' and society would be better served if we simply shared all resources. The lyrics from two popular songs both coincidentally released in 1970 illustrate this view. The group The Guess Who (1970) envisions a happy world if only we would share more:
 

Shake your hand, share the land
Shake your hand, share the land
You know I'll be standing by
To help you if you worry....

No more sadness, no more sorrow, no more bad times
every day coming sunshine, everyday everybody laughing
walking together by the river, walking together and
laughing, everybody singing together, everybody singing and
laughing, good times good times, everybody walking by the
river now, walking singing talking smiling laughing loving
each other.

 

Likewise the Five Man Electrical Band (1970) goes so far as to suggest that private property is sinful:

And the sign said anybody caught trespassing would be shot on sight
So I jumped on the fence and yelled at the house,
Hey! what gives you the right
To put up a fence to keep me out or to keep mother nature in
If God was here, he'd tell you to your face, man you're some kinda sinner

 

[8] Again, economists generally would demur on questions of whether private property is sinful or not. But economists have spent considerable amounts of time thinking about the real-world consequences of private property ownership versus common ownership. To the extent that our views on the morality of certain institutions are influenced by the consequences of those institutions, economic analysis may be useful for those looking to judge the morality of private ownership of wealth.

[9] Fundamentally, economists believe that the choices people make are influenced by incentives.[3] The economic approach suggests that owners of private property face certain incentives that differ from those facing common property users. First, owners of private property can gain from the productive use of their property in ways that common property users may not. A key element of private property is the right to sell the fruits of your property to others. Owners of property are therefore interested in the desires of others when making decisions about the use of property. The landlord who selfishly decides to use his land to hunt fox is ignoring the desires of those who would enjoy the food that could have been grown on the land. This does not mean the landlord would never act selfishly with his property, but it does mean he faces an incentive to grow food instead of hunt foxes. With common property, where no owner can exclusively use and benefit from the land, there is no incentive for farming it since the resulting food could be taken by anyone. The conclusion is that selfish use of common property is encouraged, while private property encourages owners to think about how their property can benefit others.

[10] Consider one example from today's world: death taxes. Many people object to the idea that private wealth should be allowed to be passed on to heirs, who in their eyes have done nothing to earn it. Effectively, they want to turn private wealth into to common wealth to be shared by everyone.[4] It is reasonable to think that wealthy people facing a death tax will spend down their wealth by consuming fancy vacations, wine, and other selfish types of consumption before death. It seems to us that estate taxes would encourage the kind of conspicuous consumption that egalitarian critics of the rich normally decry.[5]

[11] Second, owners of private property have strong incentives to maintain and care for their property because they personally gain from doing so. In contrast common property is often poorly cared for and maintained. Think of the litter on highways, which are for all intents and purposes treated as common property, compared with litter, or rather the lack thereof, normally found on the lawns of private residences. 

[12] Related to this is the idea that private owners have greater incentives to conserve resources for the future. Indeed many of the worst environmental problems are the result of common ownership. Wild animals, that is, animals owned by no one, such as 19th Century bison, bald eagles, whales, elephants, and fish are often hunted to near extinction (and occasionally to full extinction). Meanwhile privately owned animals like cats, dogs, cattle, pigs, and chickens flourish because their owners have an interest in their long term survival. Similarly pollution is a much bigger problem in the air and water than on land precisely because private owners tend to protect their land from the waste of others while the air and sea have no owners available to do the protecting.[6]

[13] Third, private owners are responsible for any damage that others sustain from their property. If a rancher's cow gets loose and tramples the neighboring farmer's crops, the rancher is held liable for those damages. As a result the rancher has an incentive to take steps to limit this from happening, by building a fence, for example. In contrast, if a wild elephant tramples a farmer's crops, a very real problem in those parts of the world with elephants, no one is liable for the damages and therefore no one has any particular incentive to deal with the problem.

Income Taxation and Equity
[14] Despite these apparently desirable (and ethical?) incentives associated with private property, many people oppose private property in the name of fairness or equity. They say highly progressive income taxation, which violates the principles of private property, is needed to assure a greater degree of income equality.[7]  In fact, the static data on the distribution of income in the United States indicate that the after-tax distribution of income is more equal than the pre-tax distribution of income. This is consistent with the view that the U.S. has a progressive tax code that acts to equalize the distribution of income.

[15] However, even if progressive taxation increases equality, it may do so by making everyone poorer; so we must evaluate the trade-off between material wealth and equality. Indeed, Scully (2002) found that countries with greater private property regimes had much faster economic growth and a "positive but relatively small trade-off between growth and income equality." Gwartney and Lawson (2006) similarly highlight this trade-off.  It should also be mentioned that governments engage in a wide range of policies besides taxation. Clark and Lawson (forthcoming) find progressive taxation, as measured by high top marginal tax rates, does in fact appear to work in the direction of increased income equality. However, equalitarian advocates of economic intervention should heed another lesson from this study. Measures of private property rights, sound money, trade openness and government size correlate very strongly with increased income equality. While some degree of progressive income taxation may be a useful strategy for those who desire increased income equality, broader economic interventionism is not consistent with their desired goal.

 

           

World 1

World 2

World 3

Person A

$50,000

$75,000

$30,000

Person B

$50,000

$50,000

$30,000

Person C

$50,000

$25,000

$30,000









[16] It is worthwhile to ask how much poorer we are willing to make people in order to achieve additional income equality. Consider the three hypothetical worlds described in this table illustrating the income levels of three people. We can assume egalitarians would favor World 1 over World 2 since both have the same levels of aggregate income but World 1 has more income equality.  Also, we can safely assume that everyone would favor World 1 over World 3 as well since both states have the same amount of income equality but World 1 has more income for everyone, which is surely a good thing. But what if the real world presents a choice between World 2 and World 3? Is the income equality in World 3 worth the sacrifice of so much aggregate income? Put another way, is the small increase in the well-being of Person C worth the large sacrifices made by Persons A and B? 

[17] We don't pretend to offer any answers to these questions here but serious ethical thinking requires we consider such issues. Too often, egalitarians simplistically call for more progressive taxation to improve income equality without considering the potential costs. Furthermore those who highlight these potential tradeoffs are often unjustly dismissed as being mere apologists for greed.

Conclusion
[18] The bottom line is that private property owners face strong incentives to consider others in the choices they make. In contrast, and despite a certain cultural romanticism associated with sharing, common property actually encourages selfishness and rapid resource depletion. 

[19] A society based on private ownership will be wealthier, but it may also be more unequal.   Such trade-offs exist in the real world and ethically evaluating these trade-offs is not easy. Simplistic slogans like "property is theft," however, achieve very little in this debate.

[20] We should be clear about one final point. Private property owners need not be altruistic (though they may be). Indeed, the prime motivation among private property owners may be solely to get rich; the point is that the way they help themselves is by using their property to serve others. In markets we pay farmers to grow our food; doctors to mend our bones; teachers to teach our children; and, yes, even pastors to tend to our immortal souls. As Adam Smith ((1776) 1991: 20) noted "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."  The reality is that in markets, private property owners, even the most greedy among them, must serve others if they are to get ahead in life.

[21] To be sure, those who judge morality based on intentions as opposed to results are still apt to condemn private ownership on these grounds. However, those who consider the consequences of our choices to be paramount in evaluating morality should find the institution of private property highly praiseworthy.

References

Anderson, Terry and Donald Leal. 1991. Free Market Environmentalism. New York: Palgrave.

 Clark, J.R. and Robert Lawson. Forthcoming. "The Impact of Economic Growth, Tax Policy and Economic Freedom on Income Inequality" Journal of Private Enterprise.

 Five Man Electrical Band. 1970. Signs. Lyrics accessed June 7, 2007, www.fivemanelectricalband.ca/signslyrics.html.

 Friedman, Milton. (1953) 1970. "The Methodology of Positive Economics" in Essays in Positive Economics. Chicago: University of Chicago Press, 3-43.

 Furman, Jason, Lawrence H. Summers and Jason Burdoff. 2007. Achieving Progressive Tax Reform in an Increasingly Global Economy. Washington, DC: Brookings Institution.

 The Guess Who. 1970. Share the Land. Lyrics accessed Jun 7, 2007, www.ocap.ca/songs/sharland.html.

Gwartney, James and Robert Lawson. 2006. "The Impact of Tax Policy on Economic Growth, Income Distribution, and Allocation of Taxes." Social Philosophy and Policy 23(2), 28-52. 

Gwartney, James and James Long. 1985. "Is the Flat Tax a Radical Idea?" Cato Journal, 5, 407-32.

Scully, Gerald W. 2002. "Economic Freedom, Government Policy, and the Trade-off Between Equity and Economic Growth," Public Choice, 113, 77-96. 

Smith, Adam. (1776) 1991. Wealth of Nations. New York: Prometheus Books.

 

End Notes

[1]

The labor theory of value also struggled to explain how workers would be compensated when working in team settings. It is one thing to say that all value is created by workers and quite another to determine each worker's contribution, and how the total value should be distributed among them. Marx's "to each according to his needs" dictum was his attempt to deal with this issue, but his formulation only invites more questions such as "how much do people really need?" Modern value theory has largely settled this question with the realization that the market returns to all factors of production, labor and capital alike, are based on the contributions of the marginal factor, what economist call "marginal revenue product."

 

[2]

Property ownership often lies somewhere in between purely private and purely common. Government owned property such as the Grand Canyon is often nominally private but is in fact closer to being common property. Likewise easement requirements effectively turn private property into common property. On the other hand, customary rules may develop giving fishermen or hunters exclusive rights to fish or farm a particular area of the commons, thus effectively privatizing the commons.

 

[3]

Economists are sometimes criticized for thinking people are always rational. But actually economists think people are rational only in the sense that all advanced animals are. Rats in a maze will generally look for the shortest, i.e., least costly, way to the cheese, just as people typically look for low-cost ways to achieve their objectives.

 

[4]

In practice the method for distributing such wealth is via government spending. It is an open question who would benefit most from this process.

 

[5]

For more on this argument, see "Remarks by Dr. N. Gregory Mankiw Chairman Council of Economic Advisers at the National Bureau of Economic Research Tax Policy and the Economy Meeting, National Press Club, November 4, 2003," post.economics.harvard.edu/faculty/mankiw/columns/npc.pdf.

 

[6]

The phenomenon of the abuse and overuse of common property resources is often referred to as the Tragedy of the Commons. Privatizing common property is a way to avoid the tragedy in some cases, though privatization is not always feasible.  Nevertheless, the return of the bison in the American west, elephants in parts of southern Africa, and fish in some fishing grounds is the direct result of using private ownership to provide incentives for the conservation of the species. For more information about the role of private property in protecting the environment see Anderson and Leal (1991).

 

[7]

For a representative sample of such views among economists, see Furman, Summers and Bordoff (2007)

 
 


© September 2007
Journal of Lutheran Ethics
Volume 7, Issue 9