Private property requires radical reform

(Anthony Easton, CC BY)

Reforming the obsolete understanding of private property would combat inequality without harming economic growth, says Professor Eric Posner.

CE Financial Observer: What is so wrong with private property that we have to get rid of it?

Professor Eric Posner: I’m not suggesting that!

How is that? In “Radical markets” you are proposing “a public auction of private property for the public benefit”.

This is a radical solution, but it is not an attack on private property in itself, but on its anachronistic and ineffective form that we are still attached to.

It has been this way for centuries. Doesn’t that mean that this form works after all?

This is becoming less and less true. Let’s take a look at the history of capitalism. In the 19th century, based on the traditional institution of private property, the free market developed very quickly, generating wealth. At the same time, however, it produced monopolies that were threatening competition, inflating prices and lowering wages, as a result of which at the turn of the 19th and 20th centuries, after the establishment of the Sherman Antitrust Act and later, we were faced with anti-monopoly suits which broke them up. It was necessary to design new rules of the game, which meant state intervention in the market as a response to its imperfections.

Such as the breakup of Rockefeller’s Standard Oil, which resulted in higher oil prices? Competitors were celebrating – that’s a fact, but consumers, and therefore the society, suffered as a result of this “intervention” and “new rules”.

Each case of a monopoly is a different story, there are unsuccessful interventions, but economists have investigated the issue of monopoly quite thoroughly and situations in which someone abuses their market power occur frequently and are really dangerous.

How do you understand the concept of “market power”? Does it make any sense? After all, private companies cannot use coercion, and only compete for the customers with their offer. We’re talking about voluntary actions here, not force. In fact, if we were to talk about market power or market strength, then it’s the consumers as a group who are a force capable of depriving a company of its profits overnight, simply by turning against it.

This is the case in the classical liberal narrative, and I share this view in principle. I prefer Smith to Marx. However, we are dealing with certain important nuances, shades of grey. Market power is a situation in which you can dictate product prices above the marginal cost, or the workers’ wages below their marginal productivity, with full “impunity”. How does this happen? It is not about the size of the company measured by its turnover, but about its share of a specific market. After all, monopoly power can be obtained even by a tiny gas station located near a desert highway.

In most cases, monopolization begins with an entity obtaining a dominant market share, which in the short term may be beneficial for the consumers, but ends up with the representatives of the given monopoly going to Washington in order to secure legislation that will be beneficial for them, that will consolidate their domination and will enable rent-seeking – ultimately hurting society.

So let’s fight against lobbying, against bad legislation.

Of course, and that should be done, but it’s not enough. In spite of the introduction of anti-monopoly laws, too much power on the market has often been concentrated in a single company, as a result of which in recent decades ordinary people haven’t felt the positive effects of economic growth as much as they could have in an optimal scenario. It is precisely the concentration of market forces that is, for example, one of the sources of increasing inequality, and it is currently a serious phenomenon. Let’s take the internet market, which due to network effects is dominated by companies such as Google or Facebook that are able to “devour” any competitor. But “traditional” markets are also highly concentrated. Look at the non-alcoholic beverage market – a few large producers and the remaining “plankton”.

In recent decades, the phenomenon of monopolization has also gained a new face with the emergence of so-called “institutional investors”, such as BlackRock or Vanguard. They invest in the shares of the largest companies – from banks to airlines – which in itself would not be bad, if they didn’t turn out to be significant shareholders in companies that compete with each other. As a result, the presidents of bank X and Y – aware that in reality they belong to the same fund – may not be willing to compete with each other as much as in a situation in which these ownership connections do not exist. This is a huge threat to competition and to markets which we, after all, want to expand and grow. We don’t want to let them be taken over by…

Small groups of interest?

Exactly.

Please explain what this “public auction” of private property is all about.

Let’s start with the fact that the market, as a whole, is a kind of an auction. On this market we sell products at the highest price that we can “squeeze out” from the buyer. What we’re talking about is making this auction more efficient, because its current form distorts the allocation of market goods and reduces productivity in the economy. A good illustration of how things are and what we are proposing is the real estate market. Currently, when you want to sell a house, you post a listing and wait for potential buyers willing to pay the offered price. The fact that you are a monopolist when it comes to the ownership of this particular house allows you to inflate this price in relation to the amount that you would accept in the conditions of, let’s say, a perfect market. As a result, you may spend a few months waiting for a client, and maybe even a year. During this time, the auctioned good, i.e. the house, is used in a non-optimal manner.

What does that mean?

That it remains in the hands of a person who wants to get rid of it, but does not want to sell it to a person who values it more, because they are waiting for a person who values it even more.

For a dupe?

We could say that. In other words, a good in the form of the home doesn’t flow smoothly from a person who values it less to a person who values it more, because its valuation is inflated. The way to make the valuation more realistic would be to introduce a real estate tax based on “self-valuation”. The tax is currently paid from the value estimated by an official, and in the model that I propose it would be estimated by the owner. Let’s assume that the tax is 2 percent, and you evaluate your home at USD200,000 – you then pay USD4,000 of tax per year. The need to pay the tax will force you to approach the valuation realistically and to show how much that property is really worth to you.

But this would lead to people underreporting the value of their houses in order to pay lower taxes.

Not if we introduced a second regulation. Namely, if you value your apartment at USD200,000, it means that you would be willing to sell it at this price. If that’s the case, the law would allow any willing clients to purchase your property. In this situation, you would not want to under-report the value of your home, fearing that you could lose it, and you would value it in such a way that you wouldn’t regret it in the event a buyer was found. Similar mechanisms could be applied to the market giants. In many dimensions the market would then become freer because it would be demonopolized and efficient.

The compulsory sale of one’s property doesn’t really sound like liberty to me, but let’s assume that this is an ideological reservation. Not everyone has to share it. However, the practical implementation of such approach to ownership seems impossible. Let’s stick to the example of a house. Today I file a tax return, valuing my home at USD200,000, and tomorrow John Smith comes in and buys my house to which I have to consent and what then. I’m thrown out on the street? Sounds wonderful.

Wait a minute. The valuation that you would determine under this new property rights system would include a purchase scenario, that is, it would be equivalent to the statement: “For USD200,000 I am willing to sell this house here and now”. What’s more, no one would force you to leave the property immediately, the tenant would have a month or maybe a few months for that. This is a matter of preparing detailed regulations and determining the appropriate level of taxation.

Of course, such system could not be introduced overnight and fully. We would first need a stage of experiments, and this would probably apply to companies rather than individuals. Such experiment would be useful in the United States, for example, on the market of ownership of radio signal transmission frequencies.

As we know, radio waves interfere with each other, so in order for broadcasters to enjoy a clear signal it was necessary at some stage to grant them monopolies, i.e. property rights for specific frequency bands. It worked until the time when traditional television started losing popularity. However, instead of reselling them to companies such as mobile network operators or internet providers, the companies owning TV channels and the broadcasting bands keep them, offering astronomical amounts to potential buyers. If they had to pay a tax on the value of the frequency bands that they themselves estimated, they would have an incentive to provide a real valuation and, ultimately, to resell them to those entities who would use them more effectively. The attempts to persuade traditional broadcasters to resell their frequencies under the traditional property system have proved ineffective.

Perhaps there is some underlying market logic behind this inclination to wait for a dupe who will pay dearly for our property, and we just don’t understand it yet?

This is possible, but let’s look at the facts. Traditional private property has worked, but it has always caused such problems. Do you think that when capitalism began to emerge, the landowners and the aristocrats willingly sold their land to the manufacturers for the construction of new plants? They didn’t, even in the case of wastelands. They wanted to squeeze as much as possible out of the entrepreneurs, which reduced economic growth.

Another aspect of traditional property is the already obsolete system of its codification. It requires the involvement of the government, its officials and notaries, it requires legal deeds and handwritten signatures. Regardless of the possible abuses that can take place here – after all, no government is free of dishonest people – these are time-consuming processes. In a system of property put up at a continuous auction, computer records alone would be enough to change the owner. The new technologies would guarantee not only acceleration, but also greater security and certainty of such transactions compared to the tools that we currently use.

Alright. I understand that you don’t want to “socialize property”, but to adapt the law to technological changes.

Correct. They make it possible to look at property from a different angle, to make the use of property more efficient. I’m proposing a modification of the free market, and not its abolition and the introduction of central planning. I will admit, however, that this proposition falls within such a soft understanding of “socialism”, where preserving competition is more important than preserving property.

In “Radical Markets” you refer directly to digital monopolies such as Facebook, suggesting that they should be weakened through the creation of a “trade union of digital workers”. Could you elaborate on this topic?

This refers to the free work that billions of people perform every day for Facebook, Google, or Apple, and which consists uploading a content such as photos. This content has a great commercial value for these companies, and is also used, for example, to develop technologies that enable machines to interpret photos. A computer will know not only if a photograph depicts a cat or a man, but also whether the man is happy or sad, what clothes he is wearing, etc. This is an invaluable source of knowledge about consumers and a source of profits for companies.

The users of websites are aware that by using them, they lose some of their privacy, but they have no idea about the real value of the data that they provide as part of what is essentially entertainment. Internet companies use this informational asymmetry and build their position in part by exploiting it. It would be better if they paid for this data.

For uploading a photo of a cat?

Not necessarily. If Facebook or Twitter paid users for content, there would be much more content, and it would be of higher quality. In order for them to pay, it would be necessary to create a “trade union” of internet users whose representatives could negotiate the rates. And, of course, the development of a technology enabling such payments, which currently does not exist. Right now internet users are a bit like housewives just a few decades ago, when everyone believed that they didn’t perform any productive work, and that the compensation for their efforts was simply the salary of the husband who supported the family. Now there is growing awareness that work performed at home is also work with a financial value, especially since we increasingly outsource it to outsiders, and ideas such as “paternity leave” are becoming more popular, etc.

But for Facebook or Google to pay users for pictures would mean to give up enormous profits. Can you imagine corporations ever agreeing to this?

Their profits would surely fall, but they would still be gargantuan. Besides, this argument resembles the statement that since the abolition of slavery will hurt cotton growers, then it is not worth doing. Meanwhile, everyone on the market should receive compensation for their work.

But nobody is forcing us to use social media. We do it because we want to.

Alright. Let’s then take advantage of this fact that everyone wants to do it and let us create a better functioning market on this basis. I would like to emphasize once more: I do not propose a communist revolution, but merely modernizing the law and designing better rules for the market and for property. I remain a supporter of individual freedom and control over one’s own assets, but I also view the world realistically and do not believe that the division into free market and socialism explains it well enough.

Eric Posner is a professor of law at the University of Chicago Law School, specialist in law and economics, international law, commercial and bankruptcy law.

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