Money, Greed, and God--Part IV

Personal Property, Free Trade and Win-Win

This is the fourth post in a series working through a recent book by Jay Richards, entitled Money, Greed and God, in which he presents a biblical framework for economics, capitalism, free trade, and private property.  In his third chapter, Jay Richards deals with the Myth of the Zero Sum Game. This myth says that in every trade or exchange of goods there must be a winner and a loser. It is a very common fallacy. His analysis and rejection of this myth is one of the most important chapters of the book.

He begins by describing a game he played in school. The teacher divided the class into groups of five students apiece. Then arbitrarily the teacher gave each pupil a gift—all from the Two Dollar Shop. Then, without consultation, each pupil had to write down on a scale of one to ten how much they liked their particular gift. For each group the total of scores was added up.

Next, each group was allowed to trade their gifts within the group. No-one had to trade. But, lots of exchanges took place. Then when all the trading had stopped, everyone had to score again how much they liked their (new) gift. In each case, for every group, the total score went up.

Finally, group barriers were broken down and everyone was free to exchange and trade with anyone else in the class. Once again, when the trading had ceased, everyone was asked to grade on the same one to ten scale how much they liked their gift. This time the total number had gone way up. No-one had a score that had gone down. This game, says Richards, teaches one of the most important truths in economics and how human societies based on personal property function freely.

There are key lessons that emerge from this simple game. The first is that when trade and exchange is freely undertaken, aggregate value can rise substantially even though the goods traded remain physically unchanged. The second is that normally the more trading partners there are, the higher the value outcomes for everyone.

Third, free exchange is a win-win game. Everybody benefits. Now to be sure some players may be better off than others, but everyone ends up better off than at the beginning, unless someone decides not to trade. Then, at least, they are not worse off.

Fourth, economic value is in the eye of the beholder. In other words, value is subjective. This is probably the biggest mistake made when people think about property—yet it is self-evident and obvious if one bothers to reflect for a nano-second. A neighbour might spend hundreds of thousands of dollars buying and meticulously restoring a classic Ford Mustang, whilst for you it is of little consequence.

Confusions start to arise when the neighbour comes to the point where he wants to sell his Mustang and no-one is prepared to pay him what he thinks it is worth. He ends up getting mad, thinking that everyone is exploiting him, ripping him off, simply because they don't agree with his particular abacus of value. “It's not fair,” he tells himself. But fairness has got nothing to do with it. It's just that others do not perceive the same value in the Mustang that he does.

Or consider the young couple wanting to buy their first home. House prices are so high there is no way they can scrape together an adequate deposit, let alone service the mortgage they will need. They conclude that they are being unfairly oppressed because others do not agree with their particular calculus of value when it comes to houses. They join a movement calling on the government to build houses that they can afford—that is, a house that is worth what they think it ought to be.

A constant refrain of the idea of “objective” value as opposed to subjective value is found in disputes over labour and wages. My labour is worth so much; I deserve to be paid accordingly. Worth to whom? Is the question that is begged. Usually when people make this kind of claim they look at whether the company is making a profit; if it is they feel emboldened to demand more money in wages working for the company. It reinforces the idea that their labour must be worth more.

But the amount of profit a company is making is not the measure of value. The real measure of value is whether there is another company looking for employees which values your contribution more than your current employer. The more companies there are and the more competitive the labour market, the more likely it is that you will find an employer who agrees with your assessment of the value of your work.

Richards is careful to qualify that economic value is not ultimate value.

We are talking about economic value, not ultimate value. My ultimate value in the eyes of God is not the same as my economic value. Our true value is not found in our intelligence, skin color, good grooming, strength, or stock-market prowess. No one has the authority to make one person more valuable than another. “All men are created equal”--equal in value and dignity—because all of us are created in God's image. Our equality does not vary with the wants and needs of consumers in the marketplace. So ultimately, the small handicapped child in rural India is worth just as much as Bill Gates who has created millions of jobs. Gates's wife, Melinda Gates, gets this: “One life on the planet is no more valuable than the next. (p.68)

The heart of the matter is that when it comes to personal property, whether in the form of labour or goods or services, free trade makes it possible for people to play a win-win game—to the betterment of everyone. But, and here is the nub of the issue, free trade that is win-win can only flourish when personal property rights exist and are enforced.

Let's return to the schoolroom game again. If someone came into the room claiming that some of the pupils had to withdraw from the game because they did not really own the Two-Dollar items, the game would have completely broken down. This leads us to title of property as a necessary condition for trade to take place. Cultures and societies which fail to recognise title (that is, legal ownership) of property languish in poverty and under-development. This observation is probably one of the most important parts of Richards's book.

Property titling, argues Richards, derives from the Bible as necessary extensions of the eighth and tenth commandments. Consequently, historically strong titling of property is found predominantly, but not exclusively, in the West.

If you live in the United States, Europe, Japan, or a former British colony, you probably take such procedures for granted. In the United States every square inch of dirt from San Diego, California to Caribou, Maine belongs to somebody. And it's easy to verify. But many parts of the world today still lack rules for buying and titling land as formal as those recorded in Genesis 23. Most people in those parts of the world are dirt-poor for the same reason.

Peruvian economist, Hernando de Soto has argued that a formal property system is the key that unlocks the mystery of capital. . . . In much of the developing world people may cultivate and live on land they don't clearly own, or own only “extralegally”. They don't have titles representing their ownership, documents that the legal authorities will protect and accept as binding. As a result, a farmer may toil over the same plot of land for decades but never get beyond hand-to-mouth subsistence farming, producing just enough to survive. The land serves only it immediate physical purposes, and doesn't become a real asset. The farmer can't exploit its untold potential. He acts for the short term, not the long term. Since it is held informally, or “extralegally”, de Soto calls such land “dead capital”. (p.73)

Consider the case of poverty and degradation in Haiti—since it has been much in the news in recent months. Property titling in Haiti is (not atypical) but virtually impossible.

In Haiti, you have to jump through 65 bureaucratic hoops just to lease land from the government. Buying the land? Another 111 hoops. It would take a diligent Haitian nineteen years to pull this off, assuming he could get the time off from work, if he has work. And the fact that he's acquired property legally doesn't necessarily mean that his situation won't change tomorrow, since the country itself frequently changes owners. (p.74)

In societies where titling is not done, and where the state does not defend and enforce personal property rights, property (in particular, land and housing) cannot be traded; it cannot be used as an asset. It does not become capital, which can be used as collateral for debt finance or equity finance. It cannot be sold to release capital. Where titling over land and buildings in particular is non-existent or weak, people are consigned to living as serfs.

Personal property rights and a free trade market are two vital conditions for economic advance and wealth, together all the welfare and protection that is derived from being better off. The free market enables the production of a vast array of ever-expanding goods and services in a manner so complex that no-one creature (human or angelic) could ever plan or organise it. The free market is a most wonderful providence in action.

In 1958, a man named Leonard Read wrote a little essay called, “I, Pencil”. He wrote it from the viewpoint of an “ordinary wooden pencil” that was explaining its origins. We think a pencil is simple. And yet a single pencil requires what Read calls “innumerable antecedents”, involving millions of people from Albania to Zimbabwe, performing all sorts of different tasks. First, there's the cedar tree harvested from northern California. Then there are the saws and trucks and ropes and other equipment, all built in different places; the mill in San Leandro, California; the trains to transport the wood; the processing plant with kiln and tinting; the electricity from the dam to power the plant; the millions of dollars in equipment used to build the pencils; the graphite from Sri Lanka, mixed with clay from Mississippi and chemicals from who knows where; the wax from Mexico and beyond; the yellow lacquer with caster oil; the brass to hold the eraser, forged with metals from mines from around the world; the eraser made with factice from Indonesia and pumice from Italy. Finally, there re the trucks that deliver the pencils and the stores that sell pencils to the public for about ten cents each. All of this and much more is needed to make one yellow pencil.

There are at least three marvels here. First, few who contributed to the pencil meant to make a pencil. . . . Second, as the pencil in Read's tale explains, “not one single person on the face of this earth knows how to make me”. That knowledge isn't stored in any one place but is dispersed among millions of people. . . . Third, no (human) mastermind oversees the process. It's all co-ordinated by people working freely in specialized jobs following the price of countless goods and services. This is one of the greatest wonders of the universe, but it's gotten the worse press. (p. 78,79)

The bad press given the free market has to do with people competing with each other. Competition, it is said introduces a win-fail component into free trade. Two competitors are trying to trade; the buyer selects one, but not the other. At least one loses. He does not get to trade. But—and here is the valid objection that most critics of the free trade market simply shut their ears to—the one who lost out because his trade did not clear, is not down and out. He or she can turn around and find someone else to trade with. He has the opportunity to regroup, regather, and reapply to consumers.

Moreover—and this is the second caveat most anti free-trade-market folk miss—the “logic of competition in a market is not about destroying [commercial] enemies. It's about serving consumers better than your competitors.” (Richard, p. 81) You can only trade successfully and in a sustainable way if you continue to put the needs of your customers ahead of your own. And if you stray from the path, your competitors are there to keep you honest or take over. Personal property rights being exchanged in a free trade market under the discipline of competition is nothing other than the heart of Christian social ethics.

Chapter Three is one of the most important in Richards's book. It gets to the heart of what's good about personal property rights and the very positive unintended consequences of being allowed to trade one's God-given property freely.