Friday, December 12, 2008

How to build an efficient economy - Part II

Part I in this series laid out 5 basic premises that a given economic policy must take into account if it hopes to succesfully generate a healthy economy (ie - an economy that efficiently distributes resources). These premises (just like the laws of physics) will come into play whether or not policy makers acknowledge them or not. However, failure to do so will invite disaster just as readily as failure to take gravity into account will bring harm to someone jumping from a building.

One of the issues policy makers need to address is that of "Private Property" - which ultimately boils down to the question of who controls a nations resources. Those resources can be in the form of raw materials or an individuals labor and ideas - most often they are a combination of the two.

In some economies (notably in many African states), there are no safeguards to private property. Individuals have control over their property until someone stronger comes along and takes it by force.

In communist and socialist states, resources (in varying degrees) belong to the state. Even if the state does not officially own the resources, they exert significant control over how individuals (or corporations - really just a large group of individuals) may use the resources they own - even to the point of dictating the use of one's own career choices.

In a free society, private property is protected - individuals have the final say over the use of the resources within their possession. The owner of a piece of real-estate decides whether he is to farm the piece, build a home on it or sell it to someone else. An individual decides what career is best for them. Owners of a resource - whether it be their own labor, ideas or physical goods - determine what they are willing to accept in exchange for giving up that resource.

Respect for private property is critical for a number of reasons:

1) From a conservative standpoint, it is important to always err on the side of liberty. Absent knowledge of the impacts of any given decision, it is best to defer to an individuals rights to their own possesions.
2) Even the Bible acknowledges property rights - the 8th commandment prohibits stealing and the 10th commandment prohibits lusting after the possesions of others. From a secular standpoint, you would be hard pressed to find even the irreligious to favor stealing.
3) Finally, property rights are critical to economic growth. Many resources are difficult to acquire. Medications to combat disease come after years of expensive research. Fuels for energy require difficult (and often dangerous) digging, drilling and exploration - as do metals used in construction of (among many other things) batteries for hybrid and electric vehicles. Even clean energy is built upon research and discovery that is most certainly not free.

Without protection of ones intellectual or physical property, there would be little or no incentive to explore or recover resources and there would be no incentive to spend money and time in research.

Likewise, from a consumer standpoint, without property protection, the incentive to purchase is lessened. If an individual is not permitted to use his property as he sees fit, the value of that property is lessened.


  1. So what place does property tax have in a society? Here in Jersey, property taxes are becoming so burdensomely high that it is easy to see one's self as renting from the government instead of a landlord. So the temptation is either to rent and not own property at all, or to move out of state entirely. And unless I am mistaken, this is part of the reason we are seeing folks leaving the state in droves. Why rent property from NJ when you can actually own property in, say . . . Virginia? However, I know that taxes are sort of a necessary evil in any society. So where do you draw the line?

    I guess another point of interest under this topic is the issue of eminent domain. Should a government have the right to take property from one for the sake of the whole? If so, when?

  2. All taxes are forcible confiscation of private property - not just taxes on real estate. You are correct that they are a necessary evil - every government requires funding to operate.

    Even the founders acknowledged the necessity of taxes - their main concern was taxation without having a voice in their own governance.

    One of the advantages to property tax is that it is difficult to escape - unlike income tax (which rely on individuals properly reporting their income) or sales tax (which can be circumvented by purchasing out of state). All residents of the state will be charged either directly or indirectly (via rent).

    It also has the advantage (in theory) of being a progressive tax in that the wealthy generally have property that is valued more. In reality, this does not always work out. Individuals that have owned their homes for many years, often see their homes value increase, but not their incomes (especially in the case of the elderly). The method of setting tax rates on real estate can end up with individuals having to give up their homes - obviously this is not desirable.

    As far as eminent domain goes, the main outcry over the Kelo decision was that the property was not taken for purposes generally considered as public benefit (roads, utility lines, military bases, etc), but because the municipality wanted to give it to another private citizen from whom they would be able to collect more taxes from.

    The other issue (as time has passed) is that event though the constitution requires just compensation for a taking to occur, what often happens is that word is put out that a take is coming down the road - which naturally decreases the value of the property (after all, who is going to purchase something that the government is going to seize in a few years) - or they outright condemn peoples homes to decrease their market. Methods such as this would seem to violate the clear intention of just compensation.