Are US Property Rights Contributing to the Trade Deficit?

The United States has relatively strong property rights protections compared to other nations.  According to the Economic Freedom of the World Index, the US remains in the top quartile when it comes to property rights protection (although the absolute score has fallen in recent years).  Could this ranking be contributing to the US’ global trade deficit, and especially that with China?

When looking at international trade accounts, what is typically reported on is the trade balance or current account.  This is, generally, the amount of goods/services imported and exported between two countries.*  However, there is an opposite side to the coin here that is less discussed: the capital account or the importation/exportation of asset ownership between countries.  Asset ownership includes things like real estate, ownership of firms, etc.  By definition, the current account and the capital account must sum to zero.  In other words, foreigners sell to us in order to buy either US made goods/services or US assets.  If the US has a trade deficit (more imports being sold to US buyers coming in then exports being sold to foreign buyers going out), then the US must necessarily have a capital account surplus (more assets being bought in the US by foreigners then US citizens buying foreign assets).

So, where do property rights play in?  Property has long been a good vehicle for saving as it literally provides shelter and typically has some value.  As with any nation that gets wealthier, the wealthy people in China are looking for safe yet productive ways to invest and save.  Property does not play that role in China.  Much of Chinese property is, at best, leased from the government; it cannot be outright owned.  What can be owned, however, is always at risk from nationalization or appropriation from the Chinese government, especially if one becomes a political target.

In the US, property rights are much more secure.  Except under few conditions, and with compensation, the US government cannot just appropriate property to itself.  Property is easily transferable, either by sale or by inheritance or gift, in the US.  The US has a strong rental market, meaning they can earn rents, and the police generally enforce property rights from burglary and fraud.  In short, property is generally safe in the US.**

If a Chinese person wanted to put money in property as a means of saving, putting money in his own country would not necessarily make sense given their instability when it comes to property rights.  S/he may be more interested in investing in the US.  In order to do this, however, they would need US dollars.  US dollars are acquired by selling goods in the US.  The Chinese person then, instead of using those dollars to buy American-made goods/services, invest in the American economy by buying real estate and turning them into investment properties, an option not easily available to them in China.

Trade deficits are not, prima facie, a reason for worry.  they do not mean that the economy is weak or weakening.  Indeed, just the opposite: in the above discussion, the trade deficits exist precisely because the US economy is strong!

*It’s slightly more complicated than this, but for our purposes here that does not matter.

**Of course, a glaring exception to this is the abomination known as civil asset forfeiture, but even that is restricted in the US and, God willing, on its way out

Cooperation, Coordination, and the Law

Markets, by definition, rely on cooperation and coordination.  Buyers must cooperate with sellers in order to exchange; the seller must offer something the buyer wants and the buyer must offer something the seller wants.  Only through this cooperation can a trade occur.

Likewise, buyers and sellers must coordinate.  The buyer must be in the same place as the seller*.  A coordinating agent (ie a middleman) may sometimes be used to bring buyers and sellers together (think, for example, a realtor that brings home buyers to the home seller).  Similar to cooperation, buyers and sellers must coordinate on what to exchange and what their expectations are.

Cooperation and coordination are vital to the market process.

Economic texts tend to focus primarily on the coordinating and cooperation aspects of the market process, as they rightfully should, but a key factor is left out of the equation; that factor is the law.

Law here refers to the “rules of the game.”  Law is both written and unwritten; it is the set of rules, customs, norms, etc that develop through people’s interactions with one another.  Law, while shaped by peoples’ interactions, also shapes those interactions.

Law provides a useful form of coordination: who can sell what, what/how promises should be kept, what remedies exist for lawbreaking, that sort of thing.  Without law, and especially property rights, the coordination necessary for the market process would break down.

Consider, for example, property rights.  Property rights are a form of law; they may be formal (in the case of a deed registered at a local governmental authority) or it may be informal.  Property rights allow the market process to occur by defining who can trade what.  In other words, who owns the right to the use of a piece of property.  Ultimately what is being traded in any situation is a bundle of property rights.  If these are not clearly defined, then folks cannot know how to trade.  There cannot be coordination nor cooperation in this case.

Clearly-defined property rights are important to market transactions, but no property right will always and everywhere be perfectly clear.  We live in a world of “incomplete contracts.”  Not all possible situations can be anticipated and to write and understand property rights that take into account all possible conflicts is both physically impossible and economically wasteful (marginal cost exceeds marginal benefit).  In these ambiguities is where law also helps the market process.  Law, preferably by drawing on established rules of adjudication and precedent, can resolve these conflicts and allow the market process to function better (this was one of the great insights of Ronald Coase).

Law, of course, can have its own problems.  Just like any institution (including the market), it can be abused.  But it is vital to the coordination and cooperation functions of the market process.  Without law, trade cannot exist.  Only war.

*This place need not be physical

The Logical Impossibility of Absolute Rights

There is an important implication of my post from yesterday (or, perhaps more accurately, I should say this post as important implications that lead to yesterday’s post): universally absolute rights are logically impossible.

We tend to hear arguments by libertarians and anarcho-capitalists that certain rights, namely property rights, are absolute (for example, see Murray Rothbard’s article here).  No one can prevent us from doing what we want with our property (including our bodies) or enjoying our property as we see fit.  While on the surface, this seems reasonable, it is a logically impossible thing to enforce.

Let’s consider an example, similar to the one I gave yesterday.  Two neighbors have an abutting piece of land.  One neighbor, Joe, has a pool and a nice backyard he enjoys lounging in.  However, one thing he does not like is the smell of smoke and the sound of loud noises.  These things reduce the enjoyment of his property.  The other neighbor, Bob, has a backyard as well, but he likes to sometimes hold barbeques, bonfires, and parties.  When he does this, he generates noise and smoke that inevitably flow over to Joe’s yard.  In other words, Joe’s “stuff” is being messed with.

If both parties have absolute property rights, how can this situation be resolved?  If Joe cannot request, require, or negotiate some end to Bob’s activities, his ability to enjoy his property as he sees fit is diminished by Bob’s actions.  Likewise, if Joe’s ability to enjoy his property is maintained, then Bob’s enjoyment of his property must necessarily be reduced by reducing or eliminating his barbeques, bonfires, and parties.  Either way, someone‘s property right is not absolute.  Something has to give.

It is important to note there is no necessary need for state intervention here.  Joe and Bob can (and likely will, absent major costs) find some mutually beneficial arrangement.  But that arrangement must result is someone’s rights being attenuated.  If one of them has an absolute right, the other cannot.

The question should not be whether some rights are absolute or not.  Absolute rights are a logical impossibility.  Rather, the question should be how to resolve conflicts that inevitably arise when rights collide.  If libertarians cannot address these conflicts, then we necessarily secede the argument of conflict resolution to the statists.  By insisting on absolute rights, a logical impossibility, we state outright libertarianism has no place in the real world as it cannot resolve conflicts.  This has to end.

Today’s Quote of the Day…

…comes from page 111-112 Adam Smith’s 1776 masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations:

But perhaps no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects or despises foreign commerce, and which admits the vessels of foreign nations into one or two of its ports only, cannot transact the same quantity of business which it might do with different lawsand institutions. In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarines, the quantity of stock employed in all the different branches of business transacted within it, can never be equal to what the nature and extent of that business might admit. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits.

JMM:  The nature of the institutions and the legislation that is enforced in a given country has a lot to do with the potential growth of the economy.  Institutions and legislation that protect and expand the scope of markets, in other words, institutions and legislation that allow human cooperation to flourish, will bring opulence.  Conversely, those that reduce the scope of markets will bring stagnation.

Today’s Quote of the Day…

…is from Page 31 of the Liberty Fund edition of James Buchanan’s 1975 book The Limits of Liberty: Between Anarchy and Leviathan:

In a world without interpersonal conflict, potential or actual, there would, of course, be no need to delineate, to define, to enforce, any set of individual (family) rights, either in the ownership and use of physical things or in terms of behavior with respect to other persons.  I use “conflict” rather than “scarcity” here, because even if all “goods” that might be “economic” should be avaliable in superabundence, conflicts among persons might still arise.  Social strife might still arise in paradise.  Total absense of conflict would seem to be possible only in a setting where individuals are wholly isolated from one another, or in a social setting where no goods are scarce and where all persons agree on the precise set of behavior norms to be adopted and followed by everyone.  In any world that we can imagine, potential interpersonal conflict will be present, and, hence, the need to define and enforce individual rights will exist.

 

Why Have Property Rights?

The purpose of this essay is to flesh out some aspects and properties of property rights.  For many readers, this is probably redundant.  Nothing I will write here is original or particularly new.  However, following recent conversations I have had, I feel it is worth it to rehash some of these ideas.

Property rights, defined as the right to use resources*, exist to help resolve conflicts.  In a world of scarce resources with more than one person in it, conflicts will inevitably rise.  The prototypical Robinson Crusoe, who finds himself alone on a desert island, need not worry about conflicting uses of resources.  He can choose to eat the berries or plant them, and there will be no other objections to their use.

However, once Friday comes ashore, now there is the risk of conflict.  If Robinson wants to eat berries and Friday wants to plant them, then there is a conflict; doing one necessarily means the other cannot happen.  The clear delineation of property rights, who owns the berries, in this case, helps solve/prevent the conflict.  If Robinson and Friday agree that Robinson owns the berry bushes and Friday owns the fruit trees, then Friday can use the fruit trees and Robinson can use the berry bushes to their hearts’ content.  Indeed, they could even trade with one another!

But, what about if there are conflicts with the use of the resources?  Does Robinson have any right to object to Friday’s use?  In other words, are property rights absolute?  Let me be absolutely clear by what I mean by “absolute,” and here a very little mathematical formalism would be helpful: By “absolute,” I mean that the use of the resource will be determined by the resource owner with a probability of 1.  If Joe owns a resource, and its use is determined by Joe and Joe alone 100% of the time, then his ownership is absolute.  If the probability is less than 1 at any time, then the property right is not absolute.

Going back to Robinson and Friday, let’s say that one of Friday’s trees is a coconut tree.  I have already said above that Friday has the property right to the trees.  He can use the trees for his purposes.  But does Friday and only Friday determine how those resources are to be used?  Can we think of an example where his right might be restricted, that is its use would not be determined by Friday?  Yes: Friday may not use his coconuts to bash in Robinson’s skull.  One can think of many other examples.  Therefore, Friday’s property right is not absolute.

Another example: I own a crowbar.  I can use that crowbar for many things, but I cannot use that crowbar to pry open my neighbor’s door without his consent.  Therefore, the use of my crowbar is not 100% determined by me.  For a very select few set of cases, the use is determined by my neighbor.  The property right is not absolute.

The discussion of using property to harm another (whether intentionally or not) is of major importance in law and economics.  As Ronald Coase pointed out when property rights are ill-defined, that is to what extent their use is defined, then conflicts arise.  If rights are absolute, then conflicts are inevitable and cannot have a just resolution.

To be clear, just because property rights are not absolute does not mean they are arbitrary.  They cannot be revoked, renegotiated, or reneged without due cause.  But the glorious thing about common law is that it allows for the flexibility needed to address conflicts which are at the present unseen but may arise down the road without sacrificing the right itself.

This blog post is a little over 600 words.  I will not pretend to have done justice to the issue of property rights here.  For a more detailed discussion, I’d recommend the following readings:

The Property Right Paradigm, by Armen Alchian and Harold Demsetz

Toward a Theory of Property Rights, Part I and Part II by Harold Demsetz

The Problem of Social Costs, by Ronald Coase

*Source

Institutions Matter

While cruising around Facebook this morning, I came across this argument against immigration by one Jasen Tenney:

Illegal immigration is down over 50% with Trump and now to get legal immigration way down. Glad to see them go. Since these people are so good for an economy they can make their own crappy home country a better place to live.

Jasen’s argument is somewhat typical of many man-in-the-street arguments against illegal immigration (and immigration in general).  If immigration is good for the US, if specifically, these people are really a net benefit to the country) and not, as President Trump said infamously, criminals, rapists, and drug dealers, why don’t they stay in their own country and make it a better place?

The economist’s response to this question is simple: institutions matter.  Institutions like rule of law, secure property rights, impartial judiciary, individual rights, etc (in other words, classically liberal institutions) go a long way in producing economic growth.

A person is more likely to flourish, and help others flourish, in an area with institutions that encourage economic growth than s/he is in an area that discourages or predates upon economic growth.  Why produce in an area where property rights are insecure (eg, roving bandits can just steal your stuff, or government can appropriate anything at will)?  Even the best producer may not produce anything under such circumstances.  But, under a different institutional structure, s/he may thrive.

To return to Jasen’s question that motivated this post: why can’t these immigrants simply return to their “crappy” home country and make it a better place?  Quite possibly, because the institutional arrangements necessary to make the country a better place do not exist (or are sufficiently weaker compared to the country the immigrant was headed to)!