WEBVTT

NOTE XXIII. The Data of the Market (continued)

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6. The Limits of Property Rights and the Problems of External Costs and External Economies

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Property rights, as they are circumscribed by laws and protected by courts and the police,

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are the outgrowth of an age-long evolution. The history of these ages is the record of

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struggles aiming at the abolition of private property. Again and again despots and popular

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Their movements have tried to restrict the rights of private property or to abolish it altogether.

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These endeavors, it is true, failed.

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But they have left traces in the ideas determining the legal form and definition of property.

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The legal concepts of property do not fully take account of the social function of private

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property.

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There are certain inadequacies and incongruities which are reflected in the determination of

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of the Market Phenomena.

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Carried through consistently, the right of property would entitle the proprietor to claim

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all the advantages which the goods employment may generate on the one hand, and would burden

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him with all the disadvantages resulting from its employment on the other hand.

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Then the proprietor alone would be fully responsible for the outcome.

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In dealing with his property he would take into account all the expected results of his

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action, those considered favorable as well as those considered unfavorable.

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But if some of the consequences of his action are outside the sphere of the benefits he

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is entitled to reap and of the drawbacks that are put to his debit, he will not bother in

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his planning about all the effects of his action.

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He will disregard those benefits which do not increase his own satisfaction and those costs

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which do not burden him.

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His conduct will deviate from the line which it would have followed if the laws were better

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adjusted to the economic objectives of private ownership.

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He will embark upon certain projects only because the laws release him from responsibility

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for some of the costs incurred.

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He will abstain from other projects merely because the laws prevent him from harvesting

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all the advantages derivable.

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The laws concerning liability and indemnification for damages caused were and still are in some

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respects deficient.

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By and large the principle is accepted that everybody is liable to damages which his actions

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have inflicted upon other people.

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But there were loopholes left, which the legislators were slow to fill.

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In some cases this tardiness was intentional, because the imperfections agreed with the

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plans of the authorities.

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When in the past, in many countries, the owners of factories and railroads were not held liable

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for the damages which the conduct of their enterprises inflicted on the property and

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and Health of Neighbors, Patrons, Employees and Other People Through Smoke, Soot, Noise,

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Water Pollution and Accidents Caused by Defective or Inappropriate Equipment.

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The idea was that one should not undermine the progress of industrialization and the

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development of transportation facilities.

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The same doctrines which prompted and still are prompting many governments to encourage

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Large investment in factories and railroads through subsidies, tax exemption, tariffs

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and cheap credit were at work in the emergence of a legal state of affairs in which the liability

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of such enterprises was either formally or practically abated.

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Later again, the opposite tendency began to prevail in many countries and the liability

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of Manufacturers and Railroads was increased as against that of other citizens and firms.

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Here again, definite political objectives were operative.

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Legislators wished to protect the poor, the wage earners and the peasants against the

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wealthy entrepreneurs and capitalists.

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Whether the proprietor's relief from responsibility for some of the disadvantages resulting from

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From his conductive affairs is the outcome of a deliberate policy on the part of governments

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and legislators, or whether it is an unintentional effect of the traditional wording of laws,

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it is at any rate a datum which the actors must take into account.

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They are faced with the problem of external costs.

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Then, some people choose certain modes of want satisfaction merely on account of the

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and the fact that a part of the costs incurred are debited not to them but to other people.

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The extreme instance is provided by the case of no man's property referred to above.

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If land is not owned by anybody, although legal formalism may call it public property,

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it is utilized without any regard to the disadvantages resulting.

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Those who are in a position to appropriate to themselves the returns, lumber and game

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of the forests, fish of the water areas and mineral deposits of the subsoil, do not bother

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about the later effects of their mode of exploitation.

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For them, the erosion of the soil, the depletion of the exhaustible resources and other impairments

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of the future utilization are external costs, not entering into their calculation of input

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and Output.

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They cut down the trees without any regard for fresh shoots or reforestation.

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In hunting and fishing they do not shrink from methods preventing the repopulation of

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the hunting and fishing grounds.

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In the early days of human civilization, when soil of a quality not inferior to that of

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the utilized pieces was still abundant, people did not find any fault with such predatory

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methods.

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When their effects appeared in a decrease in the net returns, the plowmen abandoned

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his farm and moved to another place.

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It was only when a country was more densely settled and unoccupied first-class land was

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no longer available for appropriation that people began to consider such predatory methods

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wasteful.

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At that time, they consolidated the institution of private property in land.

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They started with arable land, and then, step by step, included pastures, forests, and fisheries.

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The newly settled colonial countries overseas, especially the vast spaces of the United States,

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whose marvelous agricultural potentialities were almost untouched when the first colonists

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from Europe arrived, passed through the same stages. Until the last decades of the 19th

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In the century, there was always a geographic zone open to newcomers, the frontier.

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Neither the existence of the frontier nor its passing was peculiar to America.

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What characterizes American conditions is the fact that at the time the frontier disappeared,

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ideological and institutional factors impeded the adjustment of the methods of land utilization to the change in the data.

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In the central and western areas of continental Europe, where the institution of private property had been rigidly established for many centuries, things were different.

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There was no question of soil erosion of formerly cultivated land.

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There was no problem of forest devastation, in spite of the fact that the domestic forests had been, for ages, the only source of lumber for construction and mining,

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and of fuel for heating and for the foundries and furnaces, the potteries and the glass factories.

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The owners of the forests were impelled to conservation by their own selfish interests.

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In the most densely inhabited and industrialized areas up to a few years ago,

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between a fifth and a third of the surface was still covered by first-class forests,

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managed according to the methods of scientific forestry.

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Late in the 18th century, European governments began to enact laws aiming at forest conservation.

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However, it would be a serious blunder to ascribe to these laws any role in the conservation of the forests.

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Before the middle of the 19th century, there was no administrative apparatus available for their enforcement.

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Besides, the governments of Austria and Prussia, to say nothing of those of the smaller German states,

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virtually lacked the power to enforce such laws against the aristocratic lords.

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No civil servant before 1914 would have been bold enough to rouse the anger of a Bohemian or Silesian magnet,

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or a German-mediatized Standeshair.

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These princes and counts were spontaneously committed to forest conservation

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Because they felt perfectly safe in the possession of their property and were eager to preserve unabated the source of their revenues and the market price of their estates.

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It is not the task of catalactic theory to elaborate an account of the complex factors that produced modern American land ownership conditions.

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Whatever these factors were, they brought about a state of affairs under which a great

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many farmers and the majority of the lumbering enterprises had reason to consider the disadvantages

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resulting from the neglect of soil and forest conservation as external costs.

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It is true that where a considerable part of the costs incurred are external costs from

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From the point of view of the acting individuals or firms, the economic calculation established

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by them is manifestly defective and their results deceptive.

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But this is not the outcome of alleged deficiencies inherent in the system of private ownership

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of the means of production.

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It is, on the contrary, a consequence of loopholes left in this system.

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could be removed by a reform of the laws concerning liability for damages inflicted, and by rescinding

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the institutional barriers preventing the full operation of private ownership.

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The case of external economies is not simply the inversion of the case of external costs.

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It has its own domain and character.

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If the results of an actor's action benefit not only himself but also other people, two

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alternatives are possible.

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1.

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The planning actor considers the advantages which he expects for himself so important

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that he is prepared to defray all the costs required.

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The fact that his project also benefits other people will not prevent him from accomplishing

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what promotes his own well-being.

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When a railroad company erects dikes to protect its tracks against snow slides and avalanches,

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it also protects the houses on adjacent grounds.

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But the benefits which its neighbors will derive will not hinder the company from embarking

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upon an expenditure that it deems expedient.

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2.

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The costs incurred by a project are so great that none of those whom it will benefit is

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ready to expend them in full.

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The project can be realized only if a sufficient number of those interested in it share in

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the costs.

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It would hardly be necessary to say more about external economies if it were not for the

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fact that this phenomenon is entirely misinterpreted in current pseudo-economic literature.

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A project P is unprofitable when and because consumers prefer the satisfaction expected

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from the realization of some other projects to the satisfaction expected from the realization

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of P. The realization of P would withdraw capital and labor from the realization of

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some other projects for which the demand of the consumers is more urgent.

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The layman and the pseudo-economist fail to recognize this fact.

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They stubbornly refuse to notice the scarcity of the factors of production.

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As they see it, P could be realized without any cost at all, that is, without forgoing

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any other satisfaction.

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It is merely the wantonness of the profit system that prevents the nation from enjoying

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gratuitously the pleasures expected from P.

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Now, these short-sighted critics go on to say, the absurdity of the profit system becomes

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are especially outrageous if the unprofitability of P is merely due to the fact that the entrepreneur's

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calculations neglect those advantages of P which for them are external economies.

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From the point of view of the whole of society, such advantages are not external.

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They benefit at least some members of society and would increase total welfare.

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The non-realization of P is therefore a loss for society.

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As profit-seeking business, entirely committed to selfishness, declines to embark upon such

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unprofitable projects, it is the duty of government to fill the gap.

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Government should either run them as public enterprises, or it should subsidize them in

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order to make them attractive for the private entrepreneur and investor.

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The subsidies may be granted either directly by money grants from public funds or indirectly

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by means of tariffs, the incidence of which falls upon the buyers of the products.

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However, the means which a government needs in order to run a plant at a loss or to subsidize

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an unprofitable project must be withdrawn either from the taxpayers' spending and investing

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power or from the loan market.

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The government has no more ability than individuals to create something out of nothing.

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What the government spends more, the public spends less.

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Public works are not accomplished by the miraculous power of a magic wand.

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They are paid for by funds taken away from the citizens.

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If the government had not interfered, the citizens would have employed them for the

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The Realization of Profit Promising Projects, the realization of which they must omit because

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their means have been curtailed by the government.

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For every unprofitable project that is realized by the aid of the government, there is a corresponding

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project, the realization of which is neglected, merely on account of the government's intervention.

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But this non-realized project would have been profitable, that is, it would have employed

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the scarce means of production in accordance with the most urgent needs of the consumers.

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From the point of view of the consumers, the employment of these means of production for

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the realization of an unprofitable project is wasteful.

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It deprives them of satisfactions which they prefer to those which the government-sponsored

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Project can furnish them.

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The gullible masses who cannot see beyond the immediate range of their physical eyes

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are enraptured by the marvelous accomplishments of their rulers.

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They fail to see that they themselves foot the bill, and must consequently renounce many

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satisfactions which they would have enjoyed if the government had spent less for unprofitable

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projects.

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They have not the imagination to think of the possibilities that the government has

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not allowed to come into existence.

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These enthusiasts are still more bewildered if the government's interference enables

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sub-marginal producers to continue producing and to stand the competition of more efficient

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plants, shops or farms.

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Here, they say, it is obvious that total production is increased and something is added to the

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The Wealth that would not have been produced without the assistance of the authorities.

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What happens, in fact, is just the opposite.

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The magnitude of total production and of total wealth is curtailed.

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Outfits producing at higher costs are brought into existence or preserved, while other outfits

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producing at lower costs are forced to curtail or to discontinue their production.

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The consumers are not getting more, but less.

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There is, for instance, the very popular idea that it is a good thing for the government

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to promote the agricultural development of those parts of the country which nature has

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poorly endowed.

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Costs of production are higher in these districts than in other areas.

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It is precisely this fact that qualifies a large part of their soil as sub-marginal.

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When unaided by public funds, the farmers tilling these sub-marginal lands could not

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stand the competition of the more fertile farms.

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Agriculture would shrink or fail to develop, and the whole area would become a backward

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part of the country.

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In full cognizance of this state of affairs, profit-seeking business avoids investing in

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the construction of railroads connecting such inauspicious areas with the centers of consumption.

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The plight of the farmers is not caused by the fact that they lack transportation facilities.

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The causation is the other way round.

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Because business realizes that the prospects for these farmers are not propitious, it abstains

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from investing in railroads which are likely to become unprofitable for lack of a sufficient

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amount of goods to be shipped.

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If the government, yielding to the demands of the interested pressure groups, builds

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It certainly benefits the owners of farmland in those poor districts of the country.

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As a part of the costs that the shipping of their products requires is borne by the Treasury,

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they find it easier to compete with those tilling more fertile land to whom such aid

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is denied.

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But the boon of these privileged farmers is paid for by the taxpayers, who must provide

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the funds required to defray the deficit.

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It affects neither the market price nor the total available supply of agricultural products.

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It merely makes profitable the operation of farms which hitherto were sub-marginal, and

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makes other farms, the operation of which was hitherto profitable, sub-marginal.

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It shifts production from land requiring lower costs to land requiring higher costs.

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It does not increase total supply and wealth, it curtails them, as the additional amounts

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of capital and labor required for the cultivation of high-cost fields instead of low-cost fields

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are withheld from employments in which they would have made possible the production of

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some other consumer's goods.

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The government attains its end of benefiting some parts of the country with what they would

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have missed, but it produces somewhere else costs which exceed these gains of a privileged

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group.

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The External Economies of Intellectual Creation

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The extreme case of external economies is shown in the production of the intellectual

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are all groundwork of every kind of processing and constructing.

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The characteristic mark of recipes, that is, the mental devices directing the technological

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procedures, is the inexhaustibility of the services they render.

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These services are consequently not scarce, and there is no need to economize their employment.

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Those considerations that resulted in the establishment of the institution of private

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Ownership of Economic Goods did not refer to them. They remained outside the sphere

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of private property not because they are immaterial, intangible and impalpable, but because their

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serviceableness cannot be exhausted. People began to realize only later that this state

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of affairs has its drawbacks too. It places the producers of such recipes, especially

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the inventors of technological procedures and authors and composers in a peculiar position.

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They are burdened with the costs of production while the services of the product they have

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created can be gratuitously enjoyed by everybody.

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What they produce is for them either entirely or almost entirely external economies.

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If there are neither copyrights nor patents, the inventors and authors are in the position

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of an Entrepreneur.

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They have a temporary advantage as against other people.

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As they start sooner in utilizing their invention or their manuscript themselves, or in making

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it available for use to other people, manufacturers or publishers, they have the chance to earn

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profits in the time interval until everybody can likewise utilize it.

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As soon as the invention or the content of the book are publicly known, they become free

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Three Goods, and the inventor or author has only his glory.

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The problem involved has nothing to do with the activities of the creative genius.

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These pioneers and originators of things unheard of do not produce and work in the sense in

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which these terms are employed in dealing with the affairs of other people.

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They do not let themselves be influenced by the response their work meets on the part

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of their contemporaries.

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I do not wait for encouragement.

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It is different with the broad class of professional intellectuals whose services society cannot

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do without.

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We may disregard the problem of second-rate authors of poems, fiction and plays, and second-rate

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composers, and need not inquire whether it would be a serious disadvantage for mankind

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to lack the products of their efforts.

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But it is obvious that handing down knowledge to the rising generation and familiarizing

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the acting individuals with the amount of knowledge they need for the realization of

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their plans requires textbooks, manuals, handbooks and other non-fiction works.

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It is unlikely that people would undertake the laborious task of writing such publications

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if everyone were free to reproduce them.

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This is still more manifest in the field of technological invention and discovery.

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The extensive experimentation necessary for such achievements is often very expensive.

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It is very probable that technological progress would be seriously retarded if, for the inventor

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and for those who defray the expenses incurred by his experimentation, the results obtained

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were nothing but external economies.

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Rights and copyrights are results of the legal evolution of the last centuries.

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Their place in the traditional body of property rights is still controversial.

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People look askance at them and deem them irregular.

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They are considered privileges, a vestige of the rudimentary period of their evolution

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when legal protection was accorded to authors and inventors only by virtue of an exceptional

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privilege granted by the authorities.

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They are suspect, as they are lucrative only if they make it possible to sell at monopoly

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prices.

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Moreover, the fairness of patent laws is contested on the ground that they reward only those

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who put the finishing touch leading to practical utilization of achievements of many predecessors.

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These precursors go empty-handed, although their contribution to the final result was

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is often much more weighty than that of the patentee.

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It is beyond the scope of catallactics to enter into an examination of the arguments

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brought forward for and against the institution of copyrights and patents.

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It has merely to stress the point that this is a problem of the delimitation of property

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rights and that with the abolition of patents and copyrights, authors and inventors would,

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Privileges and Quasi-Privileges

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The restrictions which laws and institutions impose upon the discretion to choose and to

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act are not always so insurmountable that they could not be overcome under certain conditions.

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To some favorites, exemption from the obligation binding the rest of the people may be granted

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are considered as an explicit privilege, either by the laws themselves or by an administrative act of the authorities entrusted with the law's enforcement.

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Some may be ruthless enough to defy the laws in spite of the vigilance of the authorities.

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Their daring insolence secures them a quasi-privilege.

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A law that nobody observes is ineffectual.

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A law that is not valid for all or which not all obey may grant to those who are exempt,

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whether by virtue of the law itself or by virtue of their own audacity, the opportunity

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to reap either differential rent or monopoly gains.

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With regard to the determination of the market phenomena, it does not matter whether the

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exemption is legally valid as a privilege or illegal as a quasi-privilege.

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Neither does it matter whether the costs, if any, incurred by the favored individual

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or firm for the acquisition of the privilege or quasi-privilege are legal, for example,

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a tax levied on licenses, or illegal, for example, bribes paid to corrupt officers.

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If an importation embargo is mitigated by the importation of a certain quantity, the

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The prices are affected by the quantity imported and the specific costs incurred by the acquisition

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and the utilization of the privilege or quasi-privilege.

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But whether the importation was legal, for example, a license granted under the system

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of quantitative trade control to some privileged people, or illegal contraband, does not affect

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the price structure.