Pareto's Republic and the New Science of Peace

by Filip Palda

  What these examples suggest is that there is no way to insulate ourselves from the violations of Pareto efficiency that result from chance. The examples also show that if we stick to protecting the first three dimensions of property rights, namely the rights to enjoy, cultivate, and especially transfer, then we can repair the upsets of adverse, unforeseen events and exploit the possibilities of chance inspirations and discoveries.

  The importance of transferability

  It is difficult to say which of the three dimensions of property are most important but we can affirm that the right of transfer is of primary importance to Pareto efficiency because it is by reshuffling the ownership of resources that they end up in the most productive hands. To better grasp these ideas, let us take a brief tour of the evolution of property rights over the past several hundred years. The story begins around three hundred years ago, in a period historian Julian Ruff calls “Early Modern Europe.”

  Early Modern Europe was plagued by arbitrary acts of violence and exploitation, but was also characterized by a broad and systematic attempt by governments to end lawlessness, largely for economic reasons. Acts of casual and random violence were so commonplace as to be hardly noticed. It was a time in which family honour was paramount. Without property to act as dependable collateral, honour was the best guarantee that a family would respect the terms of agreements with other families. Members who debased this ephemeral form of collateral, perhaps by marrying against family wishes, found themselves subject to internecine beatings and even “honour killings.”It was also a time when the idea of the individual, someone who could operate fruitfully outside the strictures of group censure, was not widely accepted. Groups protected their members, but any who strayed became prey to the depredations of other clans or gangs. In these environments simmering with conflict, the willingness of employers to invest in training an employee who the next week might be maimed in a brawl was limited, as was the willingness to invest in a factory that might be expropriated by corrupt officials, or “taxed” by organized crime. As Thomas Hobbes who lived at that time wrote in Chapter XIII of Leviathan:

  In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man: solitary, poor, nasty, brutish, and short.

  At the start of the Early Modern period some governments began to master the administrative skills necessary to curb arbitrary theft and the violation of human rights. By monopolizing violence and regularizing its application in the form of laws applied equally to all, government was starting to provide a service that is known today as the rule of law. The rule of law does not mean that courts make perfect judgments, but that the judgments do not arbitrarily favour one group or individual. This even application of law to resources is what began to give property rights their ability to balance social accounts in a Pareto-efficient manner. Under rule of law I can protect my property from being expropriated by individuals with a strong aptitude for violence and a lack of moral sense. The only way to make me part with my property is by convincing me peacefully to do so, through the offer of some acceptable form of compensation.

  This new protection from the arbitrary application of force allowed property to be transferred between individuals in way that it could find its most productive owner. The prosperity that came with this new flexibility was the peace dividend that resulted from moving closer to life in Pareto’s Republic.

  The movement towards Pareto’s Republic was progressive, depending on a web of positive feedback relations that in non-technical language people call a “virtuous circle.” Once the rule of law was established, entrepreneurs were emboldened to invest in machines and factories. These investments in physical “capital” meant that workers could accomplish more than before. One person operating a stamping machine could do the work of thirty blacksmiths pounding on anvils. Increasingly productive workers became increasingly precious to their employers and to the tax-hungry state. As ordinary folk grew in commercial value, states rapidly began to form police forces to protect them, and to hear complaints of violence against them in the courts. The move away from being an expert in personal violence, to becoming an expert in productive activities, enhanced the “productive human capital” of workers. Better trained workers in turn increased the productivity of physical capital. The increased productivity of capital encouraged states to further invest in defining human rights, and so on, within an expanding spiral of prosperity in which sensitive and talented people could separate themselves from the world of violence. Not only could they separate themselves from violence, but these people could also distance themselves from narrow social groups on which they had previously depended for protection. Freed from the pressure to conform, some people could express a range of creativity not possible in settings that had subjected the individual to strict conformity for reasons of group protection.

  Countries such as Britain, France, and the Netherlands, which managed to understand the link between property rights (especially their transferability), peace, and even prosperity, saw their economies grow and their tax revenues explode. They came to a new and gentler understanding of how to manage their subjects than in the past. Countries such as Spain and Portugal, who at that time got most of their money from plundering the treasures and riches of South America, remained politically and economically backward. Faraway Peruvian gold shone too brightly for Spanish emperors to notice that the industrial revolutions taking place on their borders went hand-in-hand with political revolutions. Spain limped into the 20th century almost as economically underdeveloped as it had been four hundred years before, caring little for the fate of its mainly illiterate people. Other countries in the 20th century that relied heavily on price controls, such as Argentina and Greece, also underwent protracted periods of stagnation.

  It is no accident that the notion of individual rights originated, or at least took flight, in the philosophical talking shops and salons of countries that began reaping the wealth dividend of the peace of Pareto. Philosophy and economic development reinforced each other to lay the basis for what today we consider to be human rights. Under the protection of the state, people were able to concentrate their efforts on educating and training themselves in manufacturing and science, rather than spending hours planning vendettas and mastering combat skills.

  It is doubtful, though, whether such rights would have continued to evolve had they not brought prosperity in their wake. This “instrumental” value of human and property rights explains the vehemence with which Karl Marx detested them. As economic philosopher Allen Buchanan notes in his landmark study, Ethics, Efficiency, and the Market, Marx saw the basic civil and political legal rights that individuals enjoy in a capitalist system as being valuable “only as ways of coping with those sorts of conflicts of interest that are themselves artifacts of the capitalist system” (page 48). To Marx, liberty was simply a necessary evil for coping with capitalist exploitation. Communism he wanted to prove, would reduce scarcity, selfishness, and class divisions to a degree that rights were no longer needed.

  I agree with Marx to an extent on this last point; throughout this book I argue that where people can get along without property rights in a way that balances social accounts in a manner acceptable to all, they should do so. The problem, though, is that such outcomes are only possible in small, close-knit societies. In large, fast-moving societies, it becomes impractical to implement the Marxian vision of a society without formal human and property rights, as the following section explains.

  Government planning and Pareto efficiency

  The alternative to reaching Pareto efficiency through property rights is to entrust government with the
management of resources. While we might believe that having great confidence in government’s abilities as a manager is an outmoded way of thinking, during the 20th century it held pride of place.

  So powerful was the belief at that time in central government planning that it gave rise to what was perhaps the most startling phenomenon of the 20th century: mass forced communes. Russia, China, and their smaller imitators tried with varying degrees of success to do away with the money economy and its substrate, private property. Communist leaders argued that property was an unjust mechanism on which to base the organization of society. To fill the organizational vacuum created by the disappearance of private property, Soviet ideologists proposed control by a central authority. It was an idea that went far beyond anything Marx had been able to imagine in the mid-19th century.

  The problem that vexed Soviet technocrats was that, unlike a small voluntary commune such as a kibbutz or a hippie farm where members share the same ideals, the Soviet Union was a vast commune imposed on what is perhaps the most diverse group of peoples in the world. The Soviet approach to the coordination problem had two thrusts: altering the mind and eliminating enemies of the state. To these ends, the state spent prodigiously on propaganda and gulags. The systematic brainwashing and abuse of human rights that ensued was not the by-product of having a mustachioed sociopath in power, what the Italians called il baffone, but was a well-reasoned means, and perhaps the only means, of determining how resources were going be used in the absence of private property rights.

  Soviet planners had to resort to crude social engineering to create some balance between needs and means because they lacked essential information. The lack of information about the human resources available to the regime was particularly acute. This was partly because people hid their true talents for fear of being exploited by factory bosses. If you felt you had a few more hours of work left in you at week’s end, this was the last thing you wanted to show. Your boss would push you to produce more for little or no extra pay and claim for him or herself the bragging rights for increased factory production. It was wiser to hide your personal “excess capacity” and divert it to working in your garden, or fixing your car, or simply getting drunk. In an economy where the individual is the master of his or her own time and can use it with the full protection of the law, the opposite is true. In free market economies people boast of their abilities, and these boasts are put to an immediate test in the workplace. In the Soviet system, you kept your mouth shut for your own good. Today, migrants from the Soviet to a free market system learn, with some resistance, that one must market oneself, and that trumpeting one’s qualifications puts one in no danger of being exploited.

  Soviet planners should be seen in retrospect as middlemen who acted as the liaison between workers and consumers. As such, they must be considered as arbiters who tried to balance social accounts. One may well ask why these arbiters did not give workers a fair reward. What stopped planners from encouraging workers with the necessary salary increases so that they would meet the needs of consumers? To act as bridges between workers and consumers, central planners needed accurate information, not just on the abilities of workers, but on what consumers were willing to give up, or pay, to satisfy their needs. We have seen that workers had reason to keep their mouths shut, thereby depriving planners of information on productive potential. Consumers, in contrast, had good reason to be vocal in their demands. In an economy based on private property rights, people reveal their wants by putting their money where their mouths are. The more you want of something, the more you will pay to have it. In a socialist economy, people cannot prove the intensity of their desires by showing their willingness to trade their private property, because there is no private property. All that a socialist government has to go on in deciding how to allocate resources is what people tell it, either through the political process, or through agitation and terrorism. People will inevitably exaggerate their needs. Even the most honest socialist planner was caught between the lies that workers told and the lies that consumers told, and had a very tough job balancing the social accounts.

  Yet the corruption of social accounts did not end there. Without the restraint of rules, and in the absence of credible signals from consumers and producers, socialist planners succumbed to further devastating compulsions. Either they planned the economy according to their ideological leanings, or simply used their absolute power to rob both workers and consumers. The endemic corruption that corroded the structure of socialist societies could not be stopped. The reason lay in the very logic of central planning. Socialist systems cannot cure corruption by instituting the rule of law because such systems are inherently lawless. Every rule the central planner writes to protect citizens from the arbitrary acts of those in power also strips the planner of a part of his or her ability to manipulate resources. That is because rules necessarily place part of those resources either under the control of the private individual or, at the very least, out of the control of the planner. The moment you protect me from eviction, or arbitrary search, or from having to leave my family to work in a mine, you give me some say, or at least a guarantee, over my physical and personal resources. In so doing, you gradually build for me something resembling property rights. This is why pure central planning depends on the absence of rules.

  The absence of rules corrupts socialist planners and makes nonsense of their aim of balancing social accounts. “Socialism with a human face,” a phrase Alexander Dubček used during the Prague Spring of 1968, takes on a sinister meaning when the socialism in question relies on coercion. The face may be human, but it is the face of Ozymandias, the despot from Shelley’s eponymous poem, with its “frown, and wrinkled lips, and sneer of cold command.”

  The challenge of incorrect information

  The tale of communist mismanagement is troubling, but it does not prove that central planning is necessarily inferior to decentralized decision making. Systems with and without property rights both face informational challenges in balancing social accounts. The sophisticated socialist thinker Oscar Lange stated that provided a centrally planned government knew all the needs and abilities of its citizens, what economists more formally call the equations of demand and supply, it could allocate resources in such a way as to mimic Pareto efficiency.

  In the next installment of what came to be known as the socialist calculation debate, Nobel Prize winning economist Friedrich Hayek argued that central planners could never collect information on the abilities and needs of their people because such information is only revealed through the private deal-making that takes place between people in settings such as markets.

  Only the private individual has the “knowledge of particular circumstances of time and place” and he or she will only reveal these in a gradual process of determining from others what is available and what their needs are. I know I need a bicycle to get to work, so I search among sellers for the best deal. My view on the worth of bicycles is set against that of others; the final price of bicycles that results from our demands upon producers is a public advertisement leading everyone interested to consider whether his or her willingness to pay exceeds that of others. During this process individuals specialize in collecting the sort of data that concerns them specifically. Hayek’s insight was that central planners simply cannot collect such information because it can only emerge from a process of individuals exchanging property rights. In this vein a central planner sitting in a remote office, solving hundreds of equations of demand and supply to arrive at a final list of who should produce what and who could consume it was an act of pretension, even self-delusion, mainly because the data for such an exercise could never be collected in a centrally planned economy.

  In Hayek’s view, the proof is not in devising a recipe for the pudding, but in the making of it. What Hayek did not add, but which would fit perfectly into his way of thinking, was that even if central planners did have access to all the information possible, they would likely abuse it because of their mon
opoly control over coercion. Abuse can take many shapes. Managers may simply ignore information about consumer needs and working conditions. Or they might barter for their own private advantage factory materials that do not belong to them. Human trafficking is amongst the most troubling of abuses of centrally controlled systems. Generals may force their soldiers to labour on their country homes, or rent out this labour on the black market. A look at the enormous problems that private companies have in controlling the abuse of inside information by employees who want to quickly enrich themselves on the stock market gives only a small hint of how great the abuse of information can be in a centrally managed economy. At least in a private economy, firms that abuse inside information see their stocks plummet and eventually disappear from the market. A centrally planned economy where managers abuse the information they control cannot disappear the way a private firm can.

  The high cost of property rights

  Societies based on Pareto efficiency and the property rights that support it enjoy significant benefits. Yet one should hesitate to advise property rights as the path to Pareto efficiency in all circumstances, in the same way that one would hesitate to advise all to drive a Bugatti. Property rights, like Bugattis, do not come free. The technology needed to measure property, the brain and muscle needed to rule over it in courts and from patrol cars, and the resources needed to ensure that the public custodians of property rights are behaving honestly, all cost society a small fortune.