Sunday, April 15, 2007

Three Unproductive Drains of Value: Part 4

What to do about theft.

I have shown that theft is something that is done both by people we traditionally recognize as criminals, as well as by government. The question at hand is: what can be done about theft, both by your regular pickpockets, burglers, muggers, and such, as well as by the grand extortion ring we call "government?"

The simplest one to solve logically is also the most difficult politically. Let us make the assumption, for the moment (an assumption I will attempt to flesh out in part 6) that there is a source of sufficient revenue other than arbitrary taxation which can be used to support government. Assuming that is true, ending institutionalized theft is simply a matter of ending that arbitrary taxation, and switching over to that untapped source of public revenue. (Again, I will discuss that in detail in part 6.) We'll take the "magic wand" approach to government theft for now, and move on to noninstitutional theft.

I think the best way to reduce regular theft, vandalism, and other crimes of property is to reverse it wherever it is found. In other words, restitution should be our primary model in dealing with crimes of property. Did a kid spraypaint your wall? I say give him a chance to fix it himself, whether that be by acquring the paint and painting it personally, or paying someone else to do it, or paying the equivalent money directly to the owner of the wall. Wallet get stolen? Make the thief give back an equal amount. Something taken from the house? The thief should have to give it, or its monetary equivalent, back. Murray Rothbard wrote an excellent article on how, and why, restitution would work, but here is my stab at explaining my take on it.

However, just that amount is not enough. Money in the thief's hands is money you can't spend just yet. It's a kind of "forced interest-free loan" if he only has to pay back what he took. I am inclined to use the Book of Exodus as a model as to what must be paid back in addition to the base amount. For things that are replaceable on a one-to-one basis, such as "silver or goods for safekeeping," televisions, jewelry, and anything still in the thief's posession and intact, the thief should have to pay back double what he took. However, for things which have irreplacable qualities which were either sold or damaged beyond recovery before the thief was found, the thief should have to pay back four or five times as much. Biblial examples include oxen and sheep. I might include such things as personal computers, since at times, the value of such a thing includes data. Folks should be paid back not only for the machine itself, but also for their digital photo albums, personal writings, and other things which can be lost if such a machine is lost. I'm not certain about that, but any living thing which is stolen and/or killed should be replaced double.

In the event that the thief is unable to pay, the thief should be required to work to pay it back. The system I prefer is a system of indentured servitude. The victim would be permitted to work the thief, keeping all the proceeds but providing room and board to the thief, for a period of time not to exceed six years. After the term is served, the servent would be given a statuatorily determined amount of money and supplies and sent on his way. (Once again, I model it after the system given in the Bible--Deuteronomy 12 in this case.) Because not everybody is likely to desire--or even be comfortable with--the responsibility of overseeing the indentured servitude of one who previously victimized them, the servant's term would be transferralbe; he could sell the term to someone else. This system would have numerous advantages.

First off, I think the requirement for the thief to pay back twice as much is much more just than the way we currently do things. These days, if a thief is caught, he is incarcerated. The victim, who has already lost money to the thief, is now among the many who will lose yet more providing the thief room and board in exchange for nothing. Double restitution, I think, would be a sufficient deterrant, and it would restore the victim's fortunes, rather than hurting it further.

For those who are unable to pay the required restitution, indentured servitude would ensure that the victim still got something back. As for the thief, he would spend the next few years not only paying the victim back, but also accumulating job skills, a work history, and finally capital to get him started once he regains his freedom. I can imagine companies arising whose business is purchasing indentured terms, and then maximizing the return on their investment by attempting to get maximum value out of their servents, which means discovering their talents, developing them, utilizing them. In the end, not only is the former victim better off than he started, so is the former thief! The best part: no tax dollars need go toward incarceration.

Then there is battery (which is separate from assault, here in California). I think that the accused should be given a choice between two options: suffering injury equivalent to what was suffered by the victim, or paying for medical care sufficient to restore the victim to full health, and paying it twice over (to compensate the victim for lost time). In other words, an eye for an eye, a tooth for a tooth... unless they can pay the doctor for a new eye or a new tooth. Servitude would not be an option for someone who was unable to pay doctors fees. (Note that the flat doubling of medical expenses, rather than evaluating for "lost time" ensures that all victims are compensated equally--a CEO is owed nothing more than a minimum-wage burger flipper.)

This would extend to murder: I am a firm believer that if a life is taken, a life is owed. The victim himself should have first claim on what is to be done with his murder--if his will specifies that anyone who kills him shall also be killed, then the murderer should be killed. If nothing specific is in the will, then the life of the murderer falls into the hands of the next of kin.

Now, all that said, I do believe that the victim should be in control of what punishment is exacted--not the state (other than ensuring punishment does not exceed a maximum limit). While restitution would be the right of the victim, so would forgiveness. If the victim does not wish to punish the perpetrator, then the perpetrator should not be punished. Someone who did not want to throw some twelve year old shoplifter into six years of servitude could waive that penalty. Someone who does not believe in the death penalty could waive the death penalty. If two men fight, each causing the other injury, they would have the right to call it quits, rather than having both of them suffer yet more injuries under the "eye for an eye" clause.

Thus, the demand for double resitution would reduce theft both by refersing previous thefts (we can count them as "not commited" for the purposes of analyzing how much thefts go on), and would act as a deterrant. For those who could not pay it back, the period of indentured servitude would provide not only a reversal and a deterrant, but also a certain amount of rehabilitation. The complete lack of prisons for crimes of property (other than jails where the accused can be held for trial), reduces the necessary amount of government revenue greatly, which has the potential to significantly reduce governmental theft levels, even without the ideas I will introduce later.

Sunday, April 08, 2007

Three Unproductive Drains of Value: Part 3


Le us imagine a few businesses, in which one party supplies the labor, another the capital, and a third access to land.

Imagine a farmer on someone else's land (a historically common enough phenomenon). He supplies the labor, both his own, and those of his laborers. The owner of the land supplies access to his land. The bank loans to the farmer every spring for capital expenses throughout the year (seed, tools, parts, wages for his laborers, etc). At the end of the year, the harvest occurs, is sold at market (or, in more primative economies, divided directly), and the proceeds are divided between the farmer, the banker, and the landowner.

Or imagine a shop run on someone else's lot (also a common enough phenomenon). The shopkeeper provides the labor. The bank supplies money for stocking, building repairs, advance wages, etc. The landowner supplies access to his land. The shopkeeper hopefully manages to make enough of a profit on his goods that he can afford to pay back the bank, pay the rent on the land, and hopefully still has enough left over to make it worth his while.

In both of these examples, I have clearly delineated the three components of an economy defined by classical economics: land, labor, and capital. The interaction of the three is how wealth is created. The posession of the three determines how wealth is distributed. To the landowner goes the rent. To the banker goes interest on any capital loans. Whatever is leftover is what goes into wages. If it isn't enough. the business fails.

Of course, each of those businesses could be configured differently, by combining roles. The farmer, for example, could have in past years saved enough that he now acts as his own banker, getting to keep that which would have otherwise gone into interest on loans (and possibly making interest on the money while it waits in the bank). Or, he could be the owner of the land, getting to keep that which would otherwise be paid in rent to another landowner. Or, the farmer could theoretically "own" the land, on the condition that he pays his mortgage--principal and interest; thus the bank can be thought of as the landowner (becoming such literally should the business fail). Or, we could be talking about a subsistance-farming agrarian society, in which all roles are contained in a single individual or family. If you (the reader) can think of any other combinations that introduce a fourth economic component (other than land, labor, and capital), please tell me about it.

The thing to examine is that the wealth resulting from economic activity can be thought of as being divided into three discrete streams: rent (for landowners), wages (for laborers), and interest (for bankers). The question I examine here is: do all three of these compensate individuals for productive activity, thus providing an incentive for productive activity? For the worker, the answer is obvious: yes, it does. The worker earns his wages, whether he be a blue-collar grunt on the factory floor, or the boss making all the hard decisions (and dying of a heart-attack by fifty-years of age?). What about the other two?

The thing to recognize about the banker (at least, the honest banker--today's government "banking system" is not honest) is that he, too, is a sort of laborer. People save money at his institution rather than under their floorboard (for example), and he can make that money available for others while the owner doesn't need it. He has to keep accurate accounts. He has to gather the information necessary to make decisions as to whom should be lent money, what rate to charge (to compensate him for his efforts, as well as to compensate his account holders for making their stored wages--and rent--available to others). He has to correctly discern the level of risk a borrower presents. All of this requires time and effort. Of course, his account holders profit from the labor of others (to a degree directly proportional to the size of their account), but by making funds available, production that would otherwise not occur does occur.

Thus, I conclude that interest does provide an incentive to behavior that increases productivity. In addition, as savings rise relative to productivity, the price of access to savings--the interest rate--drops. It's a simple matter of supply and demand: the greater the supply of money for borrowing, the lower the price of access is going to be. A high interest rate stimulates a greater rate of savings, which ultimately lowers the interest rate, which decreases the savings rate, increasing the rate of consumption, which creates new opporunities for investment (demand for products), which raises the interest rate...

Land is another matter. Leaving aside the matter of how the land was obtained (assuming, for example, it was inherited), the landowner contributes absolutely nothing to economic activities. If the farmer did not exist, obviously farming would not get done. The farmer could certainly survive without the banker (the one that provides capital only, and not land by mortgage), but access to capital enables him not only to survive, but to thrive. (Note that the plight of the farmer who spends his life in the pocket of the banker is the result either of bad decision-making on the part of the farmer (got greedy, took out an unwise loan, and thus deserves to fall), or the result of the banker also acting the part of landowner.) But not only would the farmer do just fine without the landowner (either he or the community owns the land), the farmer would do far better in that he could reinvest more of his proceeds, or just enjoy a higher standard of living.

The same goes for the shopkeeper--though capital is certainly more vital for him than for the farmer (his stock IS capital). If the shopkeeper did not have to pay rent, either he could keep more of his profits, or he could lower his prices--thus the customer is also better off without the landowner.

In fact, the only reason rent expenses even exist is because access to land, like everything else, is scarce, but necessary: everybody needs it, since no economic activity can occur without it. And unlike the market for capital, in which the price goes down as productivity rises, the price of land rises with productivity. For while capital increases with quantity as people save, land is a fixed quantity. As the number of people and dollars chasing land goes up (demand for land), the supply remains constant, and can never be increased. Technological developments can open up new frontiers, but this only opens land resources previously unexploited, or underexploited relative to the new technology. It does not create new land for new people to own; instead, barring conquest, the old owners own both the old potential and the new potential.

So what is land? Take a look at any wealth generating system. Separate first out the day-to-day efforts of the people involved: that is labor. Separate out anything created with human hands (or machines): that is capital. What is left is land: the uncreated, natural potential of the earth (and beyond). It includes the right of the farmer to plant and harvest where another cannot; it does not include the crops, fences, tractor, barn, etc. It includes the city lot a store or a house exists where another cannot; it does not include the building itself, the landscaping, the electrical system, the plumbing, or anything else of that nature. It includes the right-of-way where a road, a cable, or a track exists and another cannot; it does not include the asphault or the necessary maintenance, the cable, the tracks, the ties, or anything like that. It includes bandwidth in the electromagnetic spectrum in a given area where one can broadcast, but another cannot; it does not include the broadcast equipment or the content of the broadcast. It includes the potential of an aquatic system where one can fish but another cannot (the waters having already been fished); it does not include the boats or the actual fish. It includes the limited orbital space where one sattelite can exist and another cannot (to try would result in a collision); it does not include the satellite or the costs of launching it.

Another thing about land, unlike labor and capital, is that unlike the other two, exclusive personal ownership of land, always and everywhere, originates in conquest. Men are always and everywhere recognized as free agents where their own labor is concerned--slavery is required to make man into a commodity. A laborer who saves his wages (creating a store of capital) is naturally the owner of such, whether he be a hunter-gatherer who took the time to pick a rock off the ground and chip it into an arrowhead, a merchant who purchased something one place and took the time to transport it somewhere it was needed more, or an industrial laborer saving a nest egg he hopes to invest into a business of his own. However, land, always and everywhere, is owned either by nobody, or by the community, until such time as it is seized by force. Individual land ownership in Europe began with Roman conquests--land was seized from communities, and distributed individually among the victors. Individual land rights in Amerca was a Roman tradition brought across the sea, and established by conquest, as well.

Consider your dinner. Someone took the time to transform raw food into dinner. They bought that food from a grocery store, who had it shipped there and stored it until you needed it. The bought it from someone else, ultimately leading back to the farmer, who sowed, watered, weeded, and reaped.

However, your lot is different. You bought it from someone, who bought it from someone else, who bought it from someone else. Trace it back far enough, and if you be an American, the original owner probably bought it from the government. The government acquired it by declaration: "This land belongs to us, and anyone who disagrees will die." Things are a little more complicated in Europe, I'd imagine, though it all probably goes back either to some Roman senator who stole it from the original inhabitants, or some Germanic raider who settled down and worked out territorial arrangements with some other Germanic raiders (though it was many, many years--generations--before even that arrangement went from being a public defense committment under a king, to being a personal domain devoid of public responsibility).

Thus, rent is a nonproductive drain of wealth (where wages and interest are productive drains), that results from a dishonest practice. It is a drain that takes a larger slice of production the more economically developed a place is. And unlike theft and fraud, it is not something that could theoretically be done away with if everybody suddenly became honest: rent is the natural result of the simple fact that, to maximize productivity, you need some way to distribute land intelligently among people, and rent is the result. However, where the land is owned (and the rent collected) by the community, it is spent on public works in times of peace, on public defense in times of war. Where it is owned (and the rent collected) by individuals, it subsidizes a parasitic aristocracy, who typically spend it distorting the economy to their advantage, weakening society, until it either breaks from within (as the enslaved masses revolt) or from without (as enemies prey upon the weakened nation).

All of this might seem rather remote to the average person. After all, we no longer have highly visible landowners in our society (at least in America). The modern innovation that hides the phenomenon of Rent is the joint stock corporation. With the exception of homeowners who have finally paid off their mortgages, and the few sole proprietors who are lucky enough to own the land their business stand on, nobody owns land directly any more. People own stocks, or own mutual funds through which they own stocks, in corporations. It is the corporations that own the majority of the land. So instead of a clearly delineated set of classes defined by their ownership of land or the lack therof, we have a spectrum, with people who own enormous amounts of stock at the top, moving somewhat gradually down the line through people who own only that which is in their 401k, down to those who own no stock, whatsoever.

However, it is no less the case today than in the past that the rich get richer while the poor get poorer, and through the exact same phenomenon: rent. The businesses are bigger and more complex, but their revenue streams can still be conceptually categorized in terms of wages, interest, and rent. The corporation (particularly the bigger, older ones) typically owns its land. If it does not, it still has to pay rent to someone that does (typically, another corporation). If it does not have to pay rent, that money is pure profit, to be reinvested (increasing the value of the stock) or paid out as profits. It certainly is not paid out as wages, since the market value of labor takes into account the rent costs all businesses must take into account. A company that diverted rent costs to their workers rather than their investors would be vulnerable to a competitor that did pay to their investors.

And that is Part 3. The next part will discuss the way I think these drains could be dealt with, and even a method by which we could get to there from here!

Monday, April 02, 2007

Broken Window Fallacy Fallacy

In an indirect fashion, I'll be discussing the third unproductive drain in today's entry. I will discuss the Parable of the Broken Window, which economists of the Austrian School refer to as the "Broken Window Fallacy." In considering the school of thought named for Henry George, I have come to the conclusion that labeling the Parable of the Broken Window a "fallacy" may well be a fallacy, as well.

A brief description of the parable: When something is broken (such as a window), the automatic assumption is that this is a bad thing. Upon further reflection, however, one can observe that the broken window provides employment for others: the one that make the glass, the one that forms it into a pane, and the one that fits it in place. They can, in turn, spend the money they made on the broken window elsewhere, including, of course, the place where the window was broken in the first place. This, goes the parable, everybody benefits. Destruction is an economic benefactor, extending all the way from acts of petty vandalism to war itself. War is good for the economy!

Austrian economists rightly point out that, had the owner of the window not spent that money on the window, he would have spent it on something else. He might have eaten out a few more times than otherwise, providing employment to cooks and waiters. He might buy a new piece of furniture, providing employment in the furniture trade. Nobody loses anything because of intact windows; money that is not spent there will be spent elsewhere. Certainly, money not spent on bombs and bullets by one side, and on a total rebuilding by the other, could be better spent!

However, there is something the Austrians overlook. While the man of unbroken windows can spend it on nice dinners, new cars, furniture, improvements to his house, better food than he could otherwise afford, or what have you, there are a few other things he could spend it on. He could buy stock in a bank, buying his way up the monetary pyrimid as described in Unproductive Drains Part 2. He can also buy land, whether in the form of a rental property, a vacation home, or indirectly by purchasing stock. The stock is probably the least offensive of purchases, since at least some of that money goes toward capital improvements, and therefore jobs, whether in the creation or the utilization (though some of it also goes to bid up the price of land, as well...). The other two, however, do little more than bid up the price of land--the price of access to both living space and work. If you've been reading this blog for a while, you know what I'm trying to say here. If not, look forward to Unproductive Drains Part 3.

With the broken window (or the exploded bomb), there is no question: the money spent is going to be spent in a manner that profits a tradesmen of some sort in some way. With the unbroken window (and the peace economy), that money could be spent in a manner that profits someone else. However, it also could be spent in a manner that raises the individual's position on the pyramid of "legitimate" dishonest gain.

Thus, the Fallacy of the Broken Window is only half fallacy. It shouldn't be economically beneficial, but because of all the institutional distortions our half-free economy has, it is. It not only diverts money that would otherwise be spent on something that would benefit the community around them (as well as the individual spending it); it also diverts money that would otherwise be "invested" into the unjust distortions to bend them to the individual's favor.