Capitalism, Socialism and Property Rights

Why Market Socialism Cannot Substitute the Market

Mateusz Machaj

• Publisher: Agenda Publishing
• Year: 2018
• ISBN:
  9781788211307
• Topic: Politics & International Relations
• Subtopic: Political Ideologies
• Index: Politics & International Relations

The comparative analysis of socialist and capitalist economic systems has given rise to a voluminous literature in the history of economic thought, yet detailed analysis of the "market socialism" model, which seeks to imitate the functional efficiency of capitalism by simulating a competitive economy, has been relatively neglected. In this work, Mateusz Machaj seeks to redress this imbalance by providing an in-depth examination of one of the defining issues that separates capitalism from socialism – the system of ownership, or property rights – which, when explored, highlight fundamental problems in the market socialism model.

Taking a broadly Austrian perspective, he shows that the mechanism of efficiency in market socialism is unable to play the part ascribed to it by its theoreticians, because it disregards the fact that property rights are fundamental to the shaping of prices and thus the abolition of ownership in market socialism makes its mechanism of efficiency a fiction. Indeed, the author argues, the economic terms used in the model of market capitalism only mirror the names of the real economic variables that cause capitalism to be efficient, not their functions.

The books offers new and original insights into the theory of competition, theories of pricing, property laws, the relation between law and economics, as well as the economics of the market socialism model. It will be of interest to a wide range of heterodox economists.

CHAPTER 1

LEGAL FUNDAMENTALS OF ECONOMIC SYSTEMS

1.1 ECONOMIC ANALYSIS AND THE CONCEPT OF PROPERTY

Economic analysis illustrates the influence of prices on allocation of various resources used in production. Before we show how the economic system shapes social existence, we should first examine the primary assignments of resources, prior to any exchanges made. Modern analysis of economic policy often ignores this necessity, focusing instead on equilibrium, pre-determined competitive costs and prices, or economic policies that are “best” for society.¹

One of the first theorems economic students learn states that human needs are unlimited, whereas the resources that can satisfy those needs are not. Scarcity of means of production forces people to choose one course of action and to judge it as more important than the alternatives (Robbins 1937: 12 ff.). The theory relates to knowledge of the context in which market participants choose between scarce resources. The context which decides who controls a given good according to the law. Without it allocation of resources would not be possible.

The 1870s marginal revolution is considered to be among the most important events in the history of economic thought (Landreth & Colander 1998: 320). The revolutionaries were three great economists, who made consumer choices one of the main pillars of economics.² Classical economics studied production, exchange and distribution, but it placed little emphasis on the consumer and the way the economy allocates resources on a microeconomic level. In other words, it did not dwell in detail upon which needs are satisfied and how they are satisfied according to a given theory of production.

Carl Menger gave four prerequisites for anything to be a good: that there is a human need to be satisfied; the thing has qualities that allow for the need to be satisfied; people have knowledge about these qualities; people are able to control the thing so that it can satisfy the need (Menger 1994: 52).

It is interesting to note that economics has concentrated chiefly on the first three prerequisites. Human needs are given a lot of attention; refined theories of utility are constructed to describe them (for example Samuelson 1956), and economics of information and knowledge in management is increasing in importance (since at least Akerlof 1970). The last element, control over a resource, did not interest economists as much.

For Menger, control over anything was a natural prerequisite for it to be a good. It is, after all, one of the basic consequences of scarcity. Scarcity means a good appears in a quantity allowing for satisfaction of only a limited amount of needs. Air, from the point of view of economics, is not a scarce good. It is available in very large amounts, so we do not have to ponder its allocation for various uses. It constitutes one of the basic conditions of human life. The problem of scarcity appears when there is not enough resource to satisfy all intended needs. Only then do we have to choose, to decide between alternative uses (Menger 1994: 94–101). The choice implies control over a resource. If human control would not exist (as in the case of the sun), there could be no allocation, because the use would not depend on human action and choice.

Necessity for control over a resource to define a good is an important conclusion, though often omitted for purposes of scientific analysis. The omission is justified when analyzing actions of an isolated person, an “economics of Robinson Crusoe”, when a theoretician considers only singular actions, ignoring social context. But when we begin to analyze interpersonal relations and the fact that people cooperate, the subject of investigation changes considerably. It ceases to be only isolated action, and becomes cooperation instead.

In the light of this inference Menger’s fourth prerequisite for a good, control, takes on a new meaning. Control now means not only the possibility to allocate units of a good into various uses, but also a related ability to exclude people from using them. When we talk about a one-person economy model, Robinson Crusoe chooses to eat food, store it, or not to acquire it at all. If other people come to the island, various other scenarios have to be considered, which include other people having food. The fourth prerequisite, control over a resource, indicates we should know who the owner is.

Scarcity means that a good has to be economized, i.e. a decision must be made about which of its uses has the most value. In a model of many people scarcity implies that conflicts between the people may arise. If a resource were not scarce, it would not have to be economized, because there would always be enough to satisfy all needs. The problem of economization would not occur. Legally the issue looks the same: if a good were not scarce, its use by a person would not exclude anyone else from the use, because another unit of the resource would always be available. As Hans Hermann Hoppe writes:

The recognition of scarcity is not only the starting point for political economy; it is the starting point of political philosophy as well. Obviously, if there were a superabundance of goods, no economic problem whatsoever would exist. With a superabundance of goods such that my present use of them would neither reduce my own future supply nor the present or future supply of them for any other person, ethical problems of right or wrong, just or unjust would not emerge either since no conflict over the use of such goods could possibly arise.

(Hoppe 2006: 333)

Air, which is not economically scarce, is a good example. People do not have to allocate it, because there is always enough of it to satisfy needs. Therefore there are no conflicts between people about air (the problem of clean air, which can be a scarce resource, is omitted for convenience). If anyone breathes air, he does not exclude others from its use, because air is not scarce relative to our needs; there is always another portion to take.

And so a good’s scarcity gives rise to the question of economizing, but also legalizing. As some resources come in limited quantities, we cannot use them to satisfy all needs and anyone possessing a given resource is forced to exclude others from using it. Scarcity gives rise to conflicts about who should administer available supply. Scarcity, however, is not enough to create a legal system, because under scarcity conflicts can be resolved by force. In that case the stronger becomes the final keeper of a good.

Scarcity can lead to conflicts not only among humans, but also between animals. Yet no one would call relations between animals a legal system, as we do regarding humans. The existence of a legal system arises from a crucial difference between humans and animals: people are rational beings, using reason, and are not completely led by stimuli and instinct like animals. And reason can be communicated to others (Schnädelbach 2001: 3–4). This is related to Habermas’s rationality of communication (Habermas 1999). Because people use reason, the societies they create are based on norms formulated, collected, and defended by reason. Therefore legal systems exist not only because of the possibility of conflicts, but also because there is more than one rational party, and each is capable of argumentation (Herbut 1997: 117–20).³

Whenever an economist analyses scarcity of goods, he is typically interested in their management. He does not care how a person came into possession of a consumer or production good, or whether it happened according to positive or “natural” law. Economic analysis, as stated in Menger’s fourth prerequisite, takes into account all control, regardless of whether it is just or not.

Legal analysis sees things differently. It is concerned precisely with discerning just and unjust ownership, and with describing them. The law of marginal utility of apples affects the apples’ holder in the same way irrespectively of whether he stole the basket of fruit or not. Then a lawyer concludes that a person has justifiable exclusivity of control over a given resource, the person can be said to have ownership, which is implicitly just. If a resource was not acquired in a just manner, but was taken by force from someone else, it is called expropriation or theft (Rothbard 2002: 45–50).

And so the prevalent view is that economics tells us about the implications of control over resources and its statements are therefore strictly descriptive. Whereas ethics and law are disciplines concerned with just or unjust control over resources. Economics speaks objectively about how the world functions. Ethics and law give a normative description of how the world should function.

This book does not aim to completely separate the positive science of economics and the normative discipline of ethics, because I plan to use positive science to describe normative projects. This, however, does not mean that I reject David Hume’s famous dictum. To the contrary, I presuppose that there is a definite difference between statements of what is and statements of what should be (Hume 1952: 183). I do not make arguments for or against various solutions or actions. Rather, I aim to distinguish property developed by the market process from property that is not, and the consequences of both.⁴

It is possible to defend a thesis that all kinds of social conflicts are ultimately resolved by communication and property rights. Even the apparently ideological problem of freedom of speech can be resolved with praxeology of property rights. And so the fundamental task before the social sciences is to analyse various systems of property and law, and their inevitable social consequences.⁵

The way conflicts are resolved in a society is defined by how individuals “possess” various resources. A coherent and consistent legal system will decide the ownership of all resources, including the inalienable (the human body), the stationary but negotiable (land), and the fully mobile (cars, oil, etc.) and the purpose of a legal system is to “justly” assign ownership of all scarce resources (Simpson 1980: 499).⁶

A “just” legal system provides rules for who, from a normative standpoint, should possess given resources, in effect who should be considered their legal owner. After resources are justly distributed, the owners can, as the spirit of Roman law implies, control the resources they possess. This includes possessing, using, disposing, reaping benefits, and also destroying or not using the resource at all (Kolańczyk 2000: 292–3). The most important point in our inquiries is the following: property laws essentially define relations between the owner and other people, not relations between people and things.⁷

Ownership applies in social circumstances, and defines relations between people (Robinson Crusoe would find the concept of ownership superfluous).⁸ To state that a person is an owner of a stone does not mean that he is currently holding it. Ownership means that the person ultimately decides about allocations for the stone, can dictate what other people are allowed do with it and on what conditions.⁹

Whenever we speak of ownership of a given resource, we are not speaking of current control, but rather a legal ability to exclude other people from the use of the resource. It is quite clear in the extreme case of ownership of people’s bodies. Body ownership is not just current control, but a justified ability to exclude others from the use of one’s body supported by the legal system. A person has the right to prohibit the touching of his/her body in any way, which in itself forms an expression of a specific property right. In essence ownership as a relation between people means excluding other people from using a resource. The case with bodies is quite clear in illustrating such sovereignty and the necessity for consent in order to create peaceful social relations.

The situation is similar with resources unrelated to our bodies, such as land or capital goods. Although they differ from less traversable goods (the human body is an extreme example), the essence of their legal ownership is the same. If there is an owner, there is also a silent implication, that all others are excluded from using the goods, unless he or she gives consent. Further chapters of this book will explain the influence and economic consequences of such property exclusions. All actions in an economy take place in the context of ownership constraints, which I shall discuss later.¹⁰

Exclusion is not irrevocable and can be ended by an exercise of property rights. Whenever an owner wishes to make anything he owns available for someone else, he can do so by the statement of will (Radwański 1977: 37 ff.). It means giving consent for others to use an owned thing. Consent is a fundamental notion for the concept of property rights, because it means an ability to fully utilize given rights. Under social rules use or co-use of a good without the owner’s consent is impossible. When two people arrange an expedition together, it presents a mutual consent. When one of them coerces the other with a threat of force, it is kidnapping. Similarly: forced labour is slavery, and coerced sex is rape.

Numerous economists have dealt with comparative analysis of market versus state intervention (Hülsmann 2004: 57). “Market” is a crucial word, which ought to represent ownership relations between concerned parties (although the literature does not always reflect this). In a market context everyone can control their properties provided they do not attack the properties of others. The exclusivity does not mean autarky, however, because people are not self-sufficient. They have to use the resources of others. Property rights stand in the way of simply claiming them, and owner’s consent must be obtained. Moreover, the owner while consenting can request meeting certain conditions, often an exchange. Thus emerges an agreement between parties,¹¹ implicit in the concept of property.

In other words, each owner can, in accordance with property rights, exclude others from using any of their goods, while he or she is excluded from the use of goods which belong to other people. One can nevertheless gain access to the goods, but only via an agreement, which in turn is an act of will. This seemingly obvious fact is crucial to our analysis. Any time a person wishes to gain access to a resource, a person must seek permission from the owner to gain consent for his actions. The person must defer to the owner’s judgement and agree to his terms (Hoppe 1989: 11).

A state works differently. A lawyer may define a state as a legal monopoly operating in an area, which has an exclusive right to collect relevant monetary payments (Weber 2002: 40). This means that a state is an institution built on positive law, which does not rely on property rights, but rather on un...

Table of contents

• Front Cover
• Austrian Economics
• Title Page
• Copyright Page
• Dedication
• Contents
• Acknowledgements
• Introduction
• Chapter 1 Legal fundamentals of economic systems
• Chapter 2 Evolution of the socialist calculation challenge
• Chapter 3 Neoclassical cruising around the Misesian challenge
• Chapter 4 Property and the market process
• Chapter 5 Property in the dynamics of the market process
• Chapter 6 On the path to socialism: imperialism, bureaucracy and monopolization
• Chapter 7 The nature of socialism
• Conclusion
• Notes
• Bibliography