Two cheers for property rights

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Yesterday's blog on copyright raised interesting questions about the very nature of property itself. Many convinced free-marketeers and libertarians seem to believe that 'property rights' are undeniable, permanent and immutable, and endow them with an almost mystical quality. I see the crucial importance of property rights as well: you can't expect people to work hard and build up capital if it can simply be stolen by others, including politicians. Property is one of the foundations of a liberal social order.

But as Milton Friedman (no leftie, he) pointed out in Capitalism and Freedom, defining what constitutes property is problematic, and often controversial. Should my ownership of a piece of land, he asks, deny others the right to fly over it in an aircraft? Precisely what rights should the shareholders of a company have? And, indeed, what should be the rules on patents or copyright? Terence Kealey, another robust liberal, argues that there should be no patents (most inventions are hard to replicate and the financial reward tends to come early), but that there should be copyright (since words are almost costless for others to replicate).

Plainly, these things are matters of judgement. They are decided in a social context. It might be a kind of natural evolution, as Hayek suggests, in which particular property rules come to be adopted, almost without thinking, because they work and support the smooth functioning of a society. It may be that the rules evolve through the common law process. (The most wonderful examples here are those regarding property disputes between neighbours, which have left us with rules such as, yes, you can cut down the branches of a neighbour's tree that spreads over your garden, but you have to offer them back the wood!). Sometimes the rights are defined in statute, as with shareholders' rights – thought that can be more hit and miss in terms of getting the balances just right.

Hume argued that it did not much matter what the property rights were, as long as they were known and certain. Indeed, that certainty, like the certainty that you are not going to be expropriated by some political majority, is important. Yet content is surely important too: different property rules could make large differences to the economic and social outcome. With such outcomes in mind, property rights fans can argue for particular arrangements, citing the evidence for their general benefit; but that does not put any such rule beyond dispute. We do need to be robust, though: the 'Red Tory' argument is that all market arrangements are the product of social bargaining, meaning there is no seam between politics and economics. That way lies the increasing politicisation and control of economic life.

Superinjunctions and the rule of law

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Britain’s furore over legal gagging orders – superinjunctions – raises some serious questions for rights and the rule of law in a free society.

Do people have a right to privacy? Well, I have certain information, such as my bank login codes, that I think should be protected from being made known to the public, so yes. But should that extend to, say, the illicit affair of a top footballer, whose wife and children could be damaged by the media circus surrounding its revelation? Are ‘pro-family’ politicians fair game if they cheat on their spouses? But should politicians who make no moral pronouncements be allowed privacy with respect to their private lives?

One thing that is certain is that the rule of law isn’t working. There is one law for the rich who can afford to take out gagging orders, and another for the poor who can be libelled but cannot afford the huge cost of defending themselves. Until we make the courts a lot cheaper – and that means denationalising them and opening the legal profession up to competition – such injustice will remain.

And how far can or should one country’s courts attempt to block information that is freely available elsewhere? The law can’t defend people against reality, and the reality is that the superinjunction names are all out there.

Press freedom is essential, though. Back in 1957, the editor of the Express, John Junor, was called to the Bar of the House of Commons and made to apologise for revealing the special petrol allowances that MPs granted themselves. We need our leaders to be held to account.

Our legal system should follow reality, not try to distort it. That means that politicians and celebrities will need to follow a new rule. Don’t do anything that you are not prepared to see reported in the News of the World. The amazing thing is (as the expenses scandal showed) how few of them actually follow this rule. But in the age of instant and cheap information, what other option is there?

Evidence-driven intellectual property laws

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The Digital Opportunity (PDF), the independent review of intellectual property (IP) published last week after being commissioned by the government in 2010, is one of the most important contributions to the IP debate in years. IP laws, it says, have become hostage to special interest groups – “lobbynomics”, in the report’s words – and do not serve the purpose that its advocates claim it does. The balance between protecting past innovators and promoting future ones has not been struck and, says the report, evidence should drive policy – not lobbying by rent-seekers.

IP is one of the toughest areas of policy to get right. The challenge is to protect innovators’ rewards, and thus promoting innovation, without stifling future innovation by making these protections too stringent and long-lasting. The problem is complicated even more by criticisms of the concept of intellectual property itself. Critics argue that IP laws are effective restrictions of private property rights: I should be allowed to arrange my own property in any pattern I like, and bits on a computer or words on a page should be no different. The idea that a non-scarce resource should not have property rights assigned to it is appealing, but if granted it removes much of the incentive for people to write books and create innovations.

I sympathise with the anti-IP argument, but I’m an agnostic. And, for the foreseeable future, it’s clear that only gradual change can take place. And even IP's critics should support reform that makes it less strict. There’s no need to make perfect the enemy of good.

What would evidence-driven copyright law look like? (I won't discuss patents here, although this argument should roughly apply to patents as well as copyright.) The length should be determined by looking at earnings distributions for things like music and books, and cut the copyright protection period to only include, say, the first nine-tenths of the average distribution. Most copyrighted productions follow a power law – the bulk of their earnings from a novel or movie will usually be earned in the first couple of years (see diagram above). It’s the initial high earnings that IP should be aiming to protect, not the “long tail” that comes afterwards. This would reduce the stifling effects that copyright has, without reducing much of the innovation incentive, since most profits would still be protected.

Drastically shortening the copyright coverage period would hardly be perfect – it wouldn’t solve the problem of piracy, and would create some unfortunate outcomes where the creator of a work that only becomes popular after the copyright period misses out. But a big reduction in IP coverage periods, based on the income distribution of copyrighted works, would be a step towards promoting innovation that doesn’t undermine the income incentive to innovate.

Can debt writeoffs help the eurozone avoid a default?

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Above is a stylized diagram showing the interconnectedness of the EU's web of debt. [Click for full-size images.] The domino-like situation is clear – if one country goes, it may take down others as well. Thus far, the "solution" within the eurozone has been successive bailouts, which appear unlikely to solve the problems facing the EU. Indeed, considering the fact that the bailouts will have to be paid off, they may be making the situation even worse for the countries forced to accept them.

A new report by two professors at the ESCB Europe Business School offers an alternative to this web: bilateral debt forgiveness. The Great EU Debt Writeoff, as they call it, would see countries that owe each other money excuse the debts, reducing interconnectedness. Their simulation results in the web above transforming into something far simpler:

According to the people behind the plan, the results would be revolutionary:

• The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
• Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
• Three countries - Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries
• Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
• France can virtually eliminate its debt – reducing it to just 0.06% of GDP

Whether or not this plan would work is uncertain. But, as with the banking crisis, the problem with the eurozone is not that states are "too big to fail", it is that they are too interconnected to fail. Reducing these interconnections, so that countries can either crawl their way back to fiscal stability or default in an orderly way that doesn't knock the rest of the European dominoes down in the process, would be a big step away from catastrophe. The full paper is available to read here.

Capitalists don't actually like capitalism

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Matthew Sinclair makes a political point:

I wrote about one way that the Conservatives might move forward on this issue before the election:  Attack crony capitalism.  Start to aggresively draw the distinction between people doing well by creating value and rent seekers.  With so many bailouts and the recent final report on the MG Rover fiasco there are plenty of opportunities around to elaborate on that theme.  Interventions in the economy from Regional Development Agencies to feed-in tariffs have produced plenty of opportunities for people to make a lot of money out of lobbying for grants and subsidies, instead of catering to consumer demand.

Independently Russ Roberts makes an economic one:

Capitalists tend not to like capitalism. Milton Friedman pointed this out long ago. Too much competition. Too much risk. Much better to have the government keep out competitors and subsidize losses.

And of course Adam Smith made it 235 years ago when he remarked upon businessmen seldom meeting together except to engage in a conspiracy against the public.

For it's true, capitalists don't like capitalism very much, or at least they don't like the free market (or even freeish market) version of it very much. Sure, it's great to play the big lasagne and wax fat off the sweat of the workers' brows. But not when anyone else is allowed to try doing the same. For that means the workers' wages get bid up, prices to consumers go down as competition rears its ugly head. The capitalist would prefer that only this one particular capitalist should be allowed to indulge in the practice: or at worst, a carefully selected and approved list of people who won't rock the boat too much. That crony capitalism, that rent seeking, which can only be done in a stable manner with the collusion and connivance of government.

Which is why we good little liberals need to keep banging on about the market part of the system: capitalism's all very well but it must be regulated and tempered by the fact that everyone's allowed to indulge in it, not just the favoured few.

It's an interesting point, which both Smith and Marx noted, that capitalism only works for both the consumers and the workers when it's red in tooth and claw. So, given that our concerns are and should be for the majority, those consumers and workers. This is why we should be arguing for more toothiness and clawiness in our capitalism: tear down the rent seeking barriers, the regulations and restrictions that keep the incumbent producers safe from competition.

Lots of people with loud voices won't like it but then why should we listen to them rather than the silent majority?

How to beat the national debt

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It's a commonplace that debt, even the national debt, is not a problem in and of itself. Nor is any specific or particular amount of debt a problem or not a problem. A €340 billion debt for the US's $14 trillion economy is a different beast from the €340 billion debt of Greece's very much smaller economy. What can be a problem is the amount of debt in relation to something else: that something else being the capacity to service it.

Our usual method of describing this is to mutter about the debt to GDP ratio. As reasonable rules of thumb, below 30% it's irrelevant, once it starts going over 60% we see future growth being constrained, above 100% something really must be done and over 150%, unless you're something very strange like Japan, you're bust.

So, in all our talk about how we're going to deal with the national debt yes, there's room for cutting spending so as to avoid adding to the debt and thus make everything more difficult. But there's also room to increase the size of the economy so as to reduce the ratio. No, not by simply borrowing more and splurging in some hope that the Keynesian Fairy will sprinkle growth dust. But a change in hte tax system.

Here's the growth, the extra growth, that could come from a simple change in the way we raise taxes:

Clean income tax is flat rate no allowances, standard flat is with an allowance, transition relief means don't do it all at once.

No, we're not raising any different amounts, we're raising the same amount of tax in a different way. This doesn't mean cutting anything, this is purely the extra growth we'd get by changing the method, not amount, of taxation. As you can see, simply changing the method of taxation could give us a lovely little bolus of growth, one that reduces the national debt as a percentage of GDP and thus reduces the overall problem we face.

We can still do all the other things, or not, as the mood takes us, but this is a free lunch, that rarity in economics. And free lunches, given their rarity, really should be eaten.

Why, yes, we at the ASI have been advocating a standard flat tax for a number of years. For, you know, it works.

The China syndrome: Danger areas, banking performance and China’s ability to respond

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According to Fitch Ratings, China faces a 60% chance of a systemic banking crisis by mid-2013, given credit growth estimated to exceed 15% annually over two years and real property prices estimated to rise more than 5%. In November 2010, Moody’s flagged concerns over the ‘intrinsic, stand-alone strength of China’s banking system’. Citigroup highlighted growing Chinese residential property investments, 6.1% of 2010 GDP, matching the US subprime bubble in 2005, and about 2% below Japan’s 1970s housing boom.

Despite intervention to dampen property inflation, prices in 10 cities out of 17 rose 10% or more, Haikou and Sanya reaching 21.6% and 19.1% respectively. Local governments are barred from borrowing directly, but US $300bn of loans involving local authority indirect guarantees are problematic. Official studies showed 26 % of the 7.66 trillion yuan lent to local authority finance vehicles by end June 2010 failed to meet regulations, faced "serious default risk", or were embezzled. Full payment was only being made on 24%, with the rest being serviced by local governments or with collateral.

Some key figures:

• Chinese reserves grew $469.6 billion in 2010 to $2.869 trillion (US$3.04 trillion in January 2011), just under triple Japanese reserves (second in the world behind Chinese), at $1.09 trillion in February 2011.

• China’s budget deficit is forecast at $137 billion (900 billion yuan) in 2011, 2.0% of GDP, falling from 2.5% in 2010 and 2.8% in 2009.

• In the prior China banking crisis in 1999/2000, bad loans reached $650 billion and an estimate has suggested this cycle could involve $400 billion.

Given China’s massive reserves, limited international indebtedness, low government debt and modest deficit, even sizeable banking problems are unlikely to swamp China’s economy overall, or come close to matching the problems faced in Europe and the US. If it needs to, China can defend itself by slowing capital outflows to elsewhere.

Brian Lawson is Special Consultant to Exclusive Analysis.

When the levee breaks

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Private citizens in Mississippi doing what their government couldn't – protecting their homes from the overflowing Mississippi River with individually-made levees. More photos here.

The pursuit of happiness

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Libertarians talk a good game about freedom and the state, but not about the deeper needs that people have. That’s a common criticism I hear, and not entirely unwarranted – it’s easy to mistake an argument that something should be allowed for an argument that that thing is morally good. This is incorrect: the law should be ethical – not necessarily moral – allowing people to act as they want inasmuch as it doesn’t impinge on other people’s ability to do so. (An example of the distinction here is adultery, which is usually immoral but should not be illegal since it doesn’t infringe on anybody else’s private property rights.)

Last night, the ASI hosted a lecture by Professor Tara Smith, who holds the BB&T professorship for the study of Objectivism at the University of Texas. Prof Smith argued that to lead a good life, selfishness (properly understood) was key. This doesn’t mean throwing everybody around you under a bus, but the realization that happiness isn’t transferable. You can’t make somebody else happy – according to Prof Smith, making yourself happy is the noblest goal that people can strive for.

The question of what happiness is is more difficult, to my mind. Smith talked a lot about the importance of “rationality” in finding true happiness. about the problems with hedonism being that it tends to sacrifice long-term happiness for short-term pleasure. I wonder how meaningful this dichotomy is: does a smoker sacrifice long-term happiness (given, say, an increased risk of disease) for the short-term pleasure of a cigarette? Probably not – the overall “short-term” pleasure may outweigh the “long-term” happiness. Hedonism can be a perfectly rational decision: a hangover doesn’t mean that the previous night’s drinking was irrational.

She argued that pride and productiveness are important in the pursuit of happiness. Aristotle said that pride “seems to be a sort of crown of the virtues; for it makes them greater, and it is not found without them”. Properly understood, she said, pride was the self-respect needed to think yourself worthy of happiness, and fundamental to its pursuit. Productiveness was another key point: seeing work not as a necessary evil, but as a good in and of itself. This attitude is in stark contrast to the old fashioned (and distinctly statist) idea that work is a gruelling evil to be suffered – a sort of penance for being alive – rather than a valuable part of one’s life. There's no need for a split between work and happiness, and the idea that both should be cherished as virtues is, to me, deeply appealing.

Rail subsidies must end, says minister preparing to spend £17bn on rail subsidies

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Philip Hammond, the Transport Secretary, says he wants to end the government subsidy for rail use:

"In the long term the taxpayer will not be prepared to just continually increase the level of subsidy that they give to the relatively small number of people who ever use trains – something like only 12% of the population. And of course those who use trains tend to be better off anyway," he said.

Wow – robust stuff, and great to hear from a senior government minister. But, sadly, other areas of transport policy don't reflect this. Consider this article by Hammond on the High Speed Rail 2 project:

The evidence from abroad is that high-speed rail is the only effective sustainable answer to our intercity transport challenges. Many of our competitors recognise the huge benefits of high-speed rail, and are pressing ahead with ambitious plans. Britain cannot afford to be left behind.

And this response to the businessmen who argued that HS2 was a white elephant:

Our railways are increasingly crowded, and more and more people are having to stand. We need to invest in new lines and new trains – sticking our heads in the sand, as these people seem to wish, is simply not an option.

No mention of cost anywhere – £17bn for the first leg, and up to £33bn for the whole project – or of why this portion of “the relatively small number of people who ever use trains” should enjoy a public subsidy. Hammond says he understands how silly it is to favour one mode of transport over others, but the HS2 project does exactly that. The government cannot pick winners, nor should it try to – the prestige of HS2 should not obscure the economic realities that make it a waste.