This head of 37 companies with combined sales in the billions of dollars—someone capable of creating many much-needed jobs in India—ended up producing fiber in Thailand, which was converted to yarn in his factory in Indonesia, after which this yarn was sent to Belgium, where it was woven into carpets—which were then exported to Canada.{628} All the jobs, incomes, auxiliary business opportunities, and taxes from which India could have benefitted were lost because of the country’s own bureaucracies.
India is not unique, either in government-created business delays or in their negative economic consequences. A survey by the World Bank found that the number of days required to start a new business ranged from less than ten in prosperous Singapore to 155 days in poverty-stricken Congo.{629}
The Framework of Laws
For fostering economic activities and the prosperity resulting from them, laws must be reliable, above all. If the application of the law varies with the whims of kings or dictators, with changes in democratically elected governments, or with the caprices or corruption of appointed officials, then the risks surrounding investments rise, and consequently the amount of investing is likely to be much less than purely economic considerations would produce in a market economy under a reliable framework of laws.
One of the major advantages that enabled nineteenth-century Britain to become the first industrialized nation was the dependability of its laws. Not only could Britons feel confident when investing in their country’s economy, without fear that their earnings would be confiscated, or dissipated in bribes, or that the contracts they made would be changed or voided for political reasons, so could foreigners doing business in Britain or making investments there.
For centuries, the reputation of British law for dependability and impartiality attracted investments and entrepreneurs from continental Europe, as well as skilled immigrants and refugees, who helped create whole new industries in Britain. In short, both the physical capital and the human capital of foreigners contributed to the development of the British economy from the medieval era, when it was one of the more backward economies in Western Europe, to a later era, when it became the most advanced economy in the world, setting the stage for Britain’s industrial revolution that led the rest of the world into the industrial age.
In other parts of the world as well, a framework of dependable laws has encouraged both domestic and foreign investment, as well as attracting immigrants with skills lacking locally. In Southeast Asia, for example, the imposition of European laws under the colonial regimes of the eighteenth and nineteenth centuries replaced the powers of local rulers and tribes. Under these new frameworks of laws—often uniform across larger geographical areas than before, as well as being more dependable at a given place—a massive immigration from China and a substantial immigration from India brought in people whose skills and entrepreneurship created whole new industries and transformed the economies of countries throughout the region.
European investors also sent capital to Southeast Asia, financing many of the giant ventures in mining and shipping that were often beyond the resources of the Chinese and Indian immigrants, as well as beyond the resources of the indigenous peoples. In colonial Malaya, for example, the tin mines and rubber plantations which provided much of that country’s export earnings were financed by European capital and worked by laborers from China and India, while most local commerce and industry were in the hands of the Chinese, leaving the indigenous Malays largely spectators at the modernization of their own economy.
While impartiality is a desirable quality in laws, even laws which are discriminatory can still promote economic development, if the nature of the discrimination is spelled out in advance, rather than taking the form of unpredictably biased and corrupt decisions by judges, juries, and officials. The Chinese and Indians who settled in the European colonial empires of Southeast Asia never had the same legal rights as Europeans there, nor the same rights as the indigenous population. Yet whatever rights they did have could be relied upon, and therefore served as a foundation for the creation of Chinese and Indian businesses throughout the region.
Similarly in the Ottoman Empire, Christians and Jews did not have the same rights as Muslims. Yet, during the flourishing centuries of that empire, the rights which Christians and Jews did have were sufficiently dependable to enable them to prosper in commerce, industry, and banking to a greater extent than the Muslim majority. Moreover, their economic activities contributed to the prosperity of the Ottoman Empire as a whole. Similar stories could be told of the Lebanese minority in colonial West Africa or Indians in colonial Fiji, as well as other minority groups in other countries who prospered under laws that were dependable, even if not impartial.
Dependability is not simply a matter of the government’s own treatment of people. It must also prevent some people from interfering with other people, so that criminals and mobs do not make economic life risky and thereby stifle the economic development required for prosperity.
Governments differ in the effectiveness with which they can enforce their laws in general, and even a given government may be able to enforce its laws more effectively in some places than in others. For centuries during the Middle Ages, the borderlands between English and Scottish kingdoms were not effectively controlled by either country and so remained lawless and economically backward. Mountainous regions have often been difficult to police, whether in the Balkans, the Appalachian region of the United States, or elsewhere. Such places have likewise tended to lag in economic development and to attract few outsiders and little outside capital.
Today, high-crime neighborhoods and neighborhoods subject to higher than normal rates of vandalism or riots similarly suffer economically from a lack of law and order. Some businesses simply will not locate there. Those that do may be less efficient or less pleasant than businesses in other neighborhoods, where such substandard businesses would be unable to compete. The costs of additional security devices inside and outside of stores, as well as security guards in some places, all add to the costs of doing business and are reflected in the higher prices of goods and services purchased by people in high-crime areas, even though most people in such areas are not criminals and can ill-afford the extra costs created by those who are.
Property Rights
Among the most misunderstood aspects of law and order are property rights. While these rights are cherished as personal benefits by those fortunate enough to own a substantial amount of property, what matters from the standpoint of economics is how property rights affect the allocation of scarce resources which have alternative uses. What property rights mean to property owners is far less important than what they mean to the economy as a whole. In other words, property rights need to be assessed in terms of their economic effects on the well-being of the population at large. These effects are ultimately an empirical question which cannot be settled on the basis of assumptions or rhetoric.
What is different with and without property rights? One small but telling example was the experience of a delegation of American farmers who visited the Soviet Union. They were appalled at the way various agricultural produce was shipped, carelessly packed and with spoiled fruit or vegetables left to spread the spoilage to other fruits and vegetables in the same sacks or boxes. Coming from a country where individuals owned agricultural produce as their private property, American farmers had no experience with such gross carelessness and waste, which would have caused somebody to lose much money needlessly in the United States, and perhaps go bankrupt. In the Soviet Union, the loss was even more painful, since the country often had trouble feeding itself, but there were no property rights to convey these losses directly to the people handling and shipping produce.
In a country without property rights, or with the food being owned “by the people,” there was no given individual with sufficient incentives to ensure that this food did not spoil needlessly before it reached the consumers. Those who handled the food in transit were paid salaries, which were fixe
d independently of how well they did or did not safeguard the food.
In theory at least, closer monitoring of produce handlers could have reduced the spoilage. But monitoring is not free. The human resources which go into monitoring are themselves among the scarce resources which have alternative uses. Moreover, monitoring raises the further question: Who will monitor the monitors? The Soviets tried to deal with this problem by having Communist Party members honeycombed throughout the society to report on derelictions of duty and violations of law. However, the widespread corruption and inefficiency found even under Stalinist totalitarianism suggest the limitations of official monitoring, as compared to automatic self-monitoring by property owners.
No monitor has to stand over an American farmer and tell him to take the rotten peaches out of a basket before they spoil the others, because those peaches are his private property and he is not about to lose money if he doesn’t have to. Property rights create self-monitoring, which tends to be both more effective and less costly than third-party monitoring.
Most Americans do not own any agricultural land or crops, but they have more and better food available at more affordable prices than in countries where there are no property rights in agricultural land or its produce, and where much food can spoil needlessly as a result. Since the prices paid for the food that is sold have to cover the costs of all the food produced—including the food that was spoiled and discarded—food prices will be higher where there is more spoilage, even if the cost of producing the food in the first place is the same.
The only animals threatened with extinction are animals not owned by anybody. Colonel Sanders was not about to let chickens become extinct. Nor will McDonald’s stand idly by and let cows become extinct. Likewise with inanimate things, it is those things not owned by anybody—air and water, for example—which are polluted. In centuries past, sheep were allowed to graze on unowned land—“the commons,” as it was called—with the net result that land on the commons was so heavily grazed that it had little left but patchy ground and the shepherds had hungry and scrawny sheep. But privately owned land adjacent to the commons was usually in far better condition. Similar neglect of unowned land occurred in the Soviet Union. According to Soviet economists, “forested areas that are cut down are not reseeded,”{630} though it would be financial suicide for a lumbering company to let that happen on their own property in a capitalist economy.
All these things illustrate, in different ways, the value of private property rights to the society as a whole, including people who own virtually no private property, but who benefit from the greater economic efficiency that property rights create, which translates into a higher standard of living for the population at large.
Despite a tendency to think of property rights as special privileges for the rich, many property rights are actually more valuable to people who are not rich—and such property rights have often been infringed or violated for the benefit of the rich.
Although the average rich person, by definition, has more money than the average person who is not rich, in the aggregate the non-rich population often has far more money. This means, among other things, that many properties owned by the rich would be bid away from them by the greater purchasing power of the non-rich, if unrestricted property rights prevailed in a free market. Thus land occupied by mansions located on huge estates can pass through the market to entrepreneurs who build smaller and more numerous homes or apartment buildings on these sites—all for the use of people with more modest incomes, but with more money in the aggregate.
Someone once said, “It doesn’t matter whether you are rich or poor, so long as you have money.” This was meant as a joke but it has very serious implications. In a free market, the money of ordinary people is just as good as the money of the rich—and in the aggregate, there is often more of it. The individually less affluent need not directly bid against the more affluent. Entrepreneurs or their companies, using their own money or money borrowed from banks and other financial institutions, can acquire mansions and estates, and replace them with middle-class homes and apartment buildings for people of moderate incomes. This would of course change these communities in ways the rich might not like, however much others might like to live in the resulting newly developed communities.
Wealthy people have often forestalled such transfers of property by getting laws passed to restrict property rights in a variety of ways.{631} For example, various affluent communities in California, Virginia, and other places have required land to be sold only in lots of one acre or more per house, thereby pricing such land and homes beyond the reach of most people and thus neutralizing the greater aggregate purchasing power of less affluent people.
Zoning boards, “open space” laws, historical preservation commissions and other organizations and devices have also been used to severely limit the sale of private property for use in ways not approved by those who wish to keep things the way they are in the communities where they live—often described as “our community,” though no one owns the whole community and each individual owns only that individual’s private property. Yet such verbal collectivization is more than just a figure of speech. Often it is a prelude to legal and political actions to negate private property rights and treat the whole community as if it were in fact collectively owned.
By infringing or negating property rights, affluent and wealthy property owners are thus able to keep out people of average or low incomes and, at the same time, increase the value of their own property by ensuring its growing scarcity as population increases in the area.
While strict adherence to property rights would allow landlords to evict tenants from their apartments at will, the economic incentives are for landlords to do just the opposite—that is, to try to keep their apartments as fully rented and as continuously occupied as possible, so long as the tenants pay their rent and create no problems. Only when rent control or other restrictions on their property rights are enacted are landlords likely to do otherwise. Under rent control and tenants’ rights laws, landlords have been known to try to harass tenants into leaving, whether in New York or in Hong Kong.
Under stringent rent control and tenants’ rights laws in Hong Kong, landlords were known to sneak into their own buildings late at night to vandalize the premises, in order to make them less attractive or even unlivable, so that tenants would move out and the empty building could then be torn down legally, to be replaced by something more lucrative as commercial or industrial property, not subject to rent control laws. This of course was by no means the purpose or intention of those who had passed rent control laws in Hong Kong. But it illustrates again the importance of making a distinction between intentions and effects—and not just as regards property rights laws. In short, incentives matter and property rights need to be assessed economically in terms of the incentives created by their existence, their modifications, or their elimination.
The powerful incentives created by a profit-and-loss economy depend on the profits being private property. When government-owned enterprises in the Soviet Union made profits, those profits were not their private property but belonged to “the people”—or, in more mundane terms, could be taken by the government for whatever purposes higher officials chose to spend them on. Soviet economists Shmelev and Popov pointed out and lamented the adverse effects of this on incentives:
But what justifies confiscating the larger part—sometimes 90–95 percent—of enterprises’ profits, as is being done in many sectors of the economy today? What political or economic right—ultimately what human right—do ministries have to do that? Once again we are taking away from those who work well in order to keep afloat those who do nothing. How can we possibly talk about independence, initiative, rewards for efficiency, quality, and technical progress? {632}
Of course, the country’s leaders could continue to talk about such things, but destroying the incentives which exist under property rights meant that there was a reduced chance of achieving these goals. Bec
ause of an absence of property rights, those who ran enterprises that made profits “can’t buy or build anything with the money they have” which represent “just figures in a bank account with no real value whatever without permission from above”{633} to use that money. In other words, success did not automatically lead to expansions of successful enterprises nor failure to the contraction of unsuccessful ones, as it does in a market economy.
Social Order
Order includes more than laws and the government apparatus that administers laws. It also includes the honesty, reliability and cooperativeness of the people themselves. “Morality plays a functional role in the operation of the economic system,” as Nobel Prize winning economist Kenneth Arrow put it.{634}
Honesty and reliability can vary greatly between one country and another. As a knowledgeable observer put it: “While it is unimaginable to do business in China without paying bribes, to offer one in Japan is the greatest of faux pas.”{635} Losses from shoplifting and employee theft, as a percentage of sales, have been more than twice as high in India as in Germany or Taiwan.{636}
When wallets with money in them were deliberately left in public places as an experiment, the percentage of those wallets returned with the money untouched varied greatly from place to place: in Denmark, for example, nearly all of these wallets were returned with the money still in them.{637} Among United Nations representatives who have diplomatic immunity from local laws in New York City, diplomats from various Middle East countries let numerous parking tickets go unpaid—246 by Kuwaiti diplomats—while not one diplomat from Denmark, Japan, or Israel had any unpaid parking tickets.{638}
Honesty and reliability can also vary widely among particular groups within a given country, and that also has economic repercussions. Some insular groups rely upon their own internal social controls for doing business with fellow group members whom they can trust. The Marwaris of India are one such group, whose business networks were established in the nineteenth century and extended beyond India to China and Central Asia, and who “transacted vast sums merely on the merchant’s word.”{639} But, for India as a whole, that is definitely not the case.
Basic Economics Page 46
