Exchange as a basis in choice

This is the last lap of filling in the basics of the basic choice model, in which choicemaker selects from a set of possible actions in pursuit of some goal or goals.

I talked briefly about prodction and endowments of productive resources as part of what makes a possibility set. I've talked extensively about the wide variety of property rights and property rights systems throughout human time and space- these also underlie the set of options a choicemaker enjoys.

Another element that enters the possibilities behind many choices is exchange.

I want to spend a little time talking about the nature of exchange, in part because there is a widespread notion in the United States that exchange is in some way supremely competitive,and that it inherently involves a winner and a loser.

Both these notions are false. I'll start with the first. Exchange does not work without cooperation.

A starting historical image: Vikings traveled with weapons and with trade goods. Encountering a village they didn't want to compete with, they traded. There was a difference.

Facebook posts incorporated:
Exchange: not competitive, not win/lose

Private property rights: Unfree labor

Yesterday in talking about the right to transfer property to heirs, I alluded to the general restriction on women owning any but personal property, in Great Britain and the United States. (Okay, I just filled that out a little.) To my mind that provides a graceful segue to the last common property rights institution I wanted to mention as something once taken for granted-- the ownership of human beings and their productive powers.

Unfree labor has been common around the world and has taken many different forms. Race slavery, which USians tend to think of, strikes me as the most horrible of these, as that system incorporated the right to sell ownership claims on a human being and to claim ownership of their offspring by right of claiming ownership of a parent, and did not incorporate any regularized path toward manumission or enforceable legal rights for the enslaved.

In a grotesque debate economic historians have argues over whether those claiming the right to own humans didn't "treat them well," anyway, to preserve the value of their property. However, human social relations are not much like the relationship between a human and a plot of land. Even apart from any individual taste for sadism, destruction, or proof of one's power, individual accounts make it clear, to my mind, that many claimants to own humans wanted to feel good about it. More than a few of them went about this by subjecting the humans they claimed to degrading behavior, and then feeling superior to such degraded people. And they all could, and so could their heirs.

But I want to be very emphatic that these systems were once taken as casually as most of us take the right to bequeath property. And defended as some sort of obvious or even God-given institutions.
Remember, a right to a property is not a simple thing, but a bundle of rights that may or may not include rights to exclude others from use, to transfer ownership, and a possibly-limited right to use the property.

Race slavery included a very broad bouquet of ownership rights, which was a part of what made it such a horrendously destructive institution.

Serfdom, helotry, and the Roman system of coloni didn't include the right to transfer ownership of the human labor. In fact, these people belonged to specific tracts of land more than to individual owners of the land.

The inability to transfer ownership meant that land owners lacked the interest in serf (etc.) well-being that comes with the ability to cash in the value of investments in their health and skills. It also meant that threats of sale couldn't be used to extract effort from the serfs.

Yet at the same time, serfs in a sense held the owners' land hostage. In the long centuries of labor scarcity, owners of large tracts of land depended on serfs to use it to create the income of animal and vegetable produce. They also depended on serfs to maintain the fertility of the land. Both of these gave landholders incentives to treat land-based unfree labor well. Interestingly, it ony occurred to me this minute that I think management of the landowner's herds and flocks was handed on other contractual grounds. That makes sense given their mobility and quick vulnerability. (But don't trust me on this-- I am so not an expert.)

Another form of unfree labor that has been very common and that still exists is unfree labor acquired through war-- which has indeed been a motivation to go to war. (Through most of human history labor has been scarce, sought after, and not generally regarded as mendicants to employers.) Unlike with race slavery and serfdom, those who claim ownership of captives of war could and can easily imagine being similar captives themselves.

Penal servitude is another form of unfree labor that has been and is common-- unpaid or very low-paid labor of those imprisoned for violation of laws. Nowadays in the US this wor is voluntary within a system with few choices. In the US past, it has often been involuntary and has involved unnecessary hardship on the grounds that that would improve the moral character of those imprisoned.

I mention these forms of unfree labor mostly for completeness-- of a sort, since I'm not going to discuss unfree labor within households.

Debt servitude was common in the ancient world. It was at least formally finite in duration, and seems generally to have ben so in fact. It did not include property rights over the debtor's offspring, for the creditor. I don't know whether there was any general rule about transferability over the contract of the debtor.

As with the unfree labor of prisoners of war, most creditors could likely envision themselves as possible debt servitors. And strict laws governed the treatment of debt servants.

The ability to sell a fuller command over one's productive powers than employment contracts involve clearly gives scope for acquiring a lump sum that might not otherwise be available, and it doesn't seem to have worked ot too terribly, historically*. So why is it illegal in the United States and many other countries? Isn't this a monstrous imposition of regulation on exchange and on individual rights?

I think a substantial reason for its illegality is that, once in servitude, the debtor is not in much position to enforce the terms of the contract.

* Indenture, such as that paying for passage from Europe to the then-American-colonies, is not an instance. It turns out-- research by economic historian David Galen-- that few actually signed such contracts. Most supposed indentured servants in colonial North America were kidnaped by contractors in Europe. And the mortality rate among nominal indentured servants was dreadful, particularly as the end of the customary seven year term approached.

Facebook posts incorporated:
Claims to own humans: Race slavery
Claims to own humans: Land-based slavery
Claims to own humans: prisoners of war and justice systems
Debt servitude: Contracts, enforcibility, regulation

The right to bequeath

Yesterday I mentioned that laws and systems making property inheritable, along with private ownership of productive resources, can lead to more environmentally responsible results than commons.

Of course the invention of property inheritance has more effects than that. When English philosopher John Locke considered the institution, he concentrated on the balance between its encouragement of the lifelong industriousness of talented fathers, and its discouragement of industriousness to inheriting sons.

He did not consider women parents and offspring because the law of couverture prevented nearly all women from owning private property. So far as I know women's industriousness was not considered in this light.

Inheritable property has other effects, as well. It makes intergenerational accumulation possible, solidifying class structures based on wealth. It also furnishes motives for patricide that are absent when property cannot be bequeathed.

The English habit and common law of primogeniture consolidated property, while the French tendency to bequeath property to all (male) children tended to the dissipation of estates.

So many effects from a property rights institution we seldom think of as anything but-- wrongly-- A Law of Nature.

Facebook posts incorporated:
Inheritance and incentives

Private property rights as a solution to the tragedy of the commons

Now, suppose that a plot of land used for pasturing by a community is owned by one person who, unlike the classic medieval lord, charges rent* for use of the land. That lord has an individual incentive to maintain the herbage of the land and thus keep up its productive usefulness-- at least, the lord has that incentive until s/he is dying. So the lord is likely to practice good conservation techniques out of sheer greed.

Individual property rights, particularly of an infinitely-lived individual, tend to result in environmentally desirable results-- where those rights can be assigned. (Remember air?) When East and West Germany were reunited, East Germany was relatively speaking a toxic mess, and economists nodded wisely to themselves and said, "Ah, communism**."

Ethical systems*** and formal regulatory systems can and sometimes must substitute for the powers of greed and individual property rights to produce environmentally desirable results in situations where productive resources are scarce. Let me know if this is or isn't a topic of much interest to you, to guide the direction of this series once I've finished with the foundations of opportunity. Thanks.

Today's iteration will contain a little theology as well.

Yesterday I was talking about private property rights as a remedy to the tragedy of the commons, in some cases. That with a stake in preserving the value of a productive resource they own, owners tend to restore renewable resources and to extract nonrenewable resources at a less breakneck pace than competing extractors on a common.

That incentive holds up only as long as the owner and their ownership persist, of course.

And here's the theological point, for those in Jewish, Christian, and Islamic traditions-- in those traditions we have faith in an eternal deity who created the universe and cherishes it. And some of us talk about being stewards on behalf of that Divine, though we are small, selfish, and finitely-lived. Quite the challenge-- it requires us to think and work sustainably. And in my view, to set up systems that tilt us toward thinking and working sustainably.

More on that in the future.

But one system we invented that helps us to behave more sustainably is the inheritability of property, which was explored on other grounds by the thinkers John Locke and Eugen Bohm-Bawerk. I'll talk about that tomorrow.

* In economist-speak, rent is payment made by users of a productive resource to its owner. The owner needn't put forth any effort at all in exchange for the rent-- it is a benefit of ownership.
** By "communism" I mean public/state ownership of the material means of production.
*** You might think of the widespread American Indian seven generations rule.

Facebook posts incorporated:
Private property rights and conservation of productive resources
The lifespan of the private property owner

Commons and the tragedy thereof

Continuing the talk of property rights and property rights regimes that found so much im/possibility in the realm of choices.

When a resource used for production or consumptiom is very plentiful relative to the humans who use it, there are often no individual or even community property rights assigned to it. That was widely if not universally the case with land in North America, before Euros arrived.* It was the case with English streams until pollution from their use as waste disposal intensified to impact downstream neighbors, and water property rights were developed. It is the case with air.

You don't need individual property rights for something you can access at any time without interfering with or being interfered with by neighbors.

Under the European medieval system of feudalism, the lord of a demesne often furnished a common for his (rarely her) tenants-- a plot of land open for tenants to graze their animals on.

As long as the common was large relative to usage, its herbage had time to recover from being grazed, and the system worked fine. More or more prospering tenants with more animals led to a problem called The Tragedy of the Commons.

"Oh, no, Willum! Thatcher's got *another* cow. Grass is already thinnish on the common."

"Well, then, Madge, I'll get our cattle out earlier and hungrier. Can't be beat by that Thatcher-- he'd leave none for us and ours!"

And thus under common property rights, once the property becomes congested, there is a self-interested tendency for everyone to run grab theirs, and run the property right into the ground.

This is part of why commons largely disappeared. It is part of why there are international treaties concerning fishing. And it is a cause for the assignation of private property rights.

* There were pre-Columbian Indian cities with populations enormous by world standards at the time, and it's difficult to tell what property rights systems may have obtained in them.

Property rights regimes vary

For decades I've noticed how often people talk as if some set of proper property rights laws were innate in nature. It seems to me pretty clear that this is incorrect, though clearly a common human habit of thought.

Among animals, some are territorial and some are not. Some animals live communally and some largely as solitaries. Some engage more than others in cooperation.

Among humans, there have been and are many different property rights regimes. For several days I'll talk about different property rights systems and individual property rights-- because I'm hoping that anyone reading this can think more flexibly about property rights and property rights systems rather than going into shock all the time.

In the Incan empire, for instance, there was next to no private property: all property and production was adminsitered by the Inca, who assessed taxes in labor time (corvee labor). That labor not only wove cloth and planted for the Inca's household, and formed his army. Corvee labor built roads that were traveled by corvee messengers and corvee labor taking fish and guano from coast to mountains, meat and produce from one area to another. Nearly all transfer of product was at the Inca's command, though surely there were some village markets for local exchange.

A curiosity of Incan society that was surely an outgrowth of this property rights system is that it lacked money-- that is, a trade token. Such exchange as occurred must have been barter.

For centuries, agricultural land and livestock were what people thought about when they thought about wealth. There were crops and animal husbandry for the production of new value, and for storing it as a form of wealth, or warfare to take property, and those were by far the most important professions.

Under feudalism, the monarch owned all land, and permitted others to hold and cultivate them and maintain workforces on them, in exchange for shares of agricultural and animal production, monarchical rights to use that land for hunting and such, and the lesser lord's obligation to supply military labor at request. (Higher lords also pledged defense of tenants should attack against them occur.) Those lesser lords permitted other more minor lords to use portions of the land on similar bases. Monarch and lords also tended to take administrative responsibility for legal disputes among tenants, and to take some resonsibiity for maintaining tenants in hard times.

Fundamentally, not owning the and one works can tend to lead to degradation of the soil. If you don't own it, you're not going to get the benefits of improved soil through selling the land or even necessarily by improved future crops- and manure could be sold instead, so there's an opportunity cost to fertilizing. And fertilizing is an investment-- a costly addition to enduring productive resources.

Feudal lords did not face much problem from soil-mining tenants, though, because tenancies could be expected to last for generations. They did't have to, but they usually did. Actual lords might be attainted and lose the land they used, though that wasn't common-- but peasants were very, very seldom evicted.

A common was a common part of a feudal estate. I'll talk about commons next time.

Facebook posts incorporated:
Animals and Incans
Feudalism and incentive to invest

Property rights, an introduction

When we are talking about choicemakers making a selection from a possibility set in pursuit of an objective, we're usually talking about a choicemaker operating within a technological, social, and legal framework. Robinson Crusoe opersted for some time in isolation, with the freedom to make use of of anything he could get at, and without trading or production partners. Most of us don't.

Without a property rights framework of sone sort trade cannot occur.

Property rights frameworks can arise from some combination of social custom and its defense, and government definition and defense-- or a property right can be privately and individually asserted and defended by violence and threat of violence.

The systems of custom, law, and/or violence that found a property rights system are directly unproductive activity , but clearly having a well-understood and reasonably dependable system of property rights facilitates many productive interactions.

When economists think about property rights, which few do often enough, they think of them as consisting of a bouquet of abilities/rights:
- the ability/right to use the property
- the ability/right to restrict others' use of the property
- the latter two leading to the ability/right to garner an income stream from use of then property or to charge rent for its use by others

Each of these abilities/rights can be present in a constrained form.

For example, owning a car is legal for anyone in the US who has no court-ordered ban on it, but it is not legal to drive without a driver's license, and driving is subect to traffic laws. Landowners and homeowners are sometimes startled to learn that the government retains rights to minerals beneath and airspace above their property.

Where theft and pollution are defined it sets legal limits on others' ability to use property that is not theirs, but obviously actual exclusion of others from use of the property may be quite costly. Safes and armed guards and pollution-monitoring devices and staffing are all uses of resources that could be otherwise employed.

Note: "Rent" is the word used by economists for streams of payment one receives for productive use of one's property. It is distinct from income from one's labor, which pays for use of one's time, effort, and expertise.

Facebook posts incorporated:
Starting out: origins and support of property rights
Property rights as bouquets of limitable rights

Directly unproductive activity

Directly unproductive activity: Costly* activity that diverts resources from the production of goods and services humans enoy consuming (final goods and services), and from the production of plant and equipment and skills to produce those final goods and services.

Directly unproductive activities notably include trading assets**, litigation, law enforcement and national defense, and competing for contracts. Some level of these activities is socially useful. Wasteful devotion of resources arrives rather quickly.

Diverting government resources from the production of tangible and intangible infrastructure to directly unproductve activities facilitates complaints about government waste.

* We're talking opportunity cost - forgone alternative production.
** Trade in stocks and bonds and pre-existing housing, lending and borrowing.

Facebook posts incorporated
Defining directly unproductive activity

Basic choice summarized; property rights, exchange and markets to come

So far we’ve been talking about how economists think about choice, broadly speaking.. This involves choicemakers with some objective, which may be known or unknown to them, let alone other people. Choicemakers have some set of perceived possibilities to choose from in pursuit of their objectives, which may involve future as well as present. An observer may disagree with the choicemaker about what those options are. The choicemaker compares options as ways to satisfy the objective. Where the choicemaker is not using all available resources to achieve the objective, no selected bundle has any opportunity cost, because the choicemaker could better satisfy the objective—waste is occurring. (But you don’t know what waste is unless you know the objective and the resources.) Where all resources are being expended on a choice to optimize the objective, the choicemaker would have to give up some of something to get a bit more of something else. That is an opportunity cost originating in prices or productive technology. The choicemaker’s objective gives the choicemaker another sort of tradeoff, base in the effectiveness of items in a selected bundle, in achieving the objective. Where that internal tradeoff equals the opportunity cost of each item in te selected bundle, the choicemaker can’t do any better using current resources.

Clearly, in many cases the opportunities a choicemaker has depend not only on the choicemaker’s efficiency in producing different options, but on what the choicemaker owns and what trading opportunities are open to the choicemaker. That is, most choicemakers have and choose the opportunity to achieve goals through interaction with others— because it works better.

Both the mutable nature of property rights and the fundamentals of trading possibilities and markets tend to be forgotten and taken to be given by nature, by both (most) economists (most of the time) and non-economists. So I’m going to spend a while talking about the nature of property rights and various forms of exchange.

#2017econ #choice #possibilityset #propertyrights #exchange #interaction

Taxes, incentives, and opportunity cost

Recall that the opportunity cost of a selected good, service, or action is the value of the net-best alternative forgone for the last unit. So if you're choosing a combination of gym time and cigarettes to optimize your goal (whatever that is), and an hour at the gym costs $10 while a pack of cigarettes costs $6, the opportunity cost of your hour at the gym is 1 and 2/3 packs of cigarettes.

Taxes are sometimes used to discourage behavior that's viewed as undesirable, at the levels it's being chosen. You can see how it works by considering opportunity cost.

Suppose taxes on cigarettes were increased by $1.50 a pack, so that cigarettes now cost $7.50 a pack*. At the new price of cigarettes, the opportunity cost of an hour at the gym has now decreased to 1 and 1/3 packs of cigarettes.

The external tradeoff offered to our smoking jock now favors more gym time, and the sacrifice of some cigarettes to pay for it.

But notice something. The increased tax on cigarette purchases doesn't just make cigarettes more expensive relative to gym time. It decreases the purchasing power of the income of everyone who buys cigarettes.

Taxes of this sort are also imposed on firms for production that uses (more) polluting technologies**, to increase the opportunity cost of producing using that technology. The effect is to lower the production and thus the pollution-- and sometimes motivates a switch to a cleaner technology.

The income effects this has on companies are often mentioned and are sometimes argued to be reasons not to implement such taxes.

I have almost never seen the income effects of cigarette or alcohol or allied taxes on consumers mentioned and considered. There's a lot of talk about choice, but little about possibilities.

A price change, whether by tax or for other reasons, has substitution effects via opportunity cost-- the relative price of the good or service taxed-- and also income effects that change the size of the feasible set or possibility set.

* Actually, the price should go to something less than $7.50 a pack unless demand conditions are weird. But we won't get around to discussing that for quite a while.
** Much, much more on the economics of pollution and allied production types is to come.

Facebook posts incorporated:
Tax, opportunity cost and consumption incentives.
Tax, opportunity cost, production incentives, and public discourse