Bates' Gedanken on Property Rights

I've recently found myself a copy of Adrienne Buller's and Mathew Lawrence's Owning the Future , which is subtitled "a radical manifesto for the transformation of post-pandemic politics." In it, the authors reveal the range of inequities that materialize from our conceptions of property rights.

A foundation that nearly all of society rests on, systems of property have been swirling around my head for the better part of the last few years. I'm not quite sure where I land, but it's somewhere between a Proudhonian stance, viewing property as theft , and a utilitarian recognition of its usefulness as a tool, illustrated by political scientists and economists like Robert Bates and Ronald Coase .

This piece focuses on the latter, highlighting a chunk from the introduction of Bates' 1989 Beyond the Miracle of the Market . Within the introduction to his analysis of development in Kenya I found a compelling thought experiment (for which Bates uses the German term, Gedanken) revealing the critical locus that systems of property rights occupy within our economies.

The state's approach to property determines whether economic flows concentrate at their center, or disperse themselves across their peripheries.

Bates illustrates this by recreating an example from "one of the canonical texts in contemporary social science:" Ronald Coase's 1960 article on " The Problem of Social Cost ."

Coase bases his argument on an example in which a railway runs through a valley populated by farmers. The allocational issue is the number of trains that should operate each day. Transportation is valuable and operative trains produces profits for the railway; but transportation is also costly, for soot and sparks from the passing trains damage the crops of farmers. Acting purely out of a regard for corporate profits, the railway is likely to run too many trains. The costs inflicted upon the farmers by the last several trains may exceed the profits earned by the railway, and society could be made better off by running fewer trains.

Coase argues that a system of property rights could yield the socially efficient outcome: the number of trains that maximizes the sum of the returns to the railway and to the farmers.

The technical term here is externalities , which tend to be ignored by market actors unless their inclusion becomes required by law. For the railway, the pollution delivered to the farmers is simply an externality to their decision of running trains. It is a cost, but not one they ever have to pay for directly. In order to produce the "socially efficient outcome," that externality must be internalized into this transaction, usually via state-enforced fees.

Coase emphasizes that, to reach this optimal outcome, a system of property rights is required, but that which system is economically irrelevant - at least, to the transaction at hand. There are multiple configurations that enable our desired outcomes, and Bates lays out two possibilities.

One system of property rights would hold that corporations possess an inherent right to make profits. Under this system the farmers would have to compensate the railway for the loss of profits incurred by scheduling fewer trains; and because the value to the farmers, in terms of the reduction of damages to their crops, exceeds the value of the profits that would be forgone by the railway, the farmers could, in effect, bribe the railway to operate fewer trains. The flow of payments would continue, assuming normal production functions, until the number of trains that pass through the valley is reduced to the socially optimal level, i.e., until the damages inflicted by the next train fail to equal the profits it generates, making further bribes inadequate to reduce rail traffic.

Another possible system of property rights would favor the farmers; it would hold that farmers possess an inherent right to clean air and a safe environment. Under this system, the railway would have to compensate the farmers for damage to their crops. And because the magnitude of the payments necessary to compensate for the damages to the farmers' crops exceeds the magnitude of the profits earned when too many trains are run, this system of property rights would provide an incentive for the railways to run fewer trains. Once again, the payment of compensation would continue until the profits earned from the last train run equaled the losses to the farmers, or until the social optimal number of trains passed through the valley.

Two property regimes, based on nearly opposite underlying value sets, result in what appears to be identical outcomes. However, Bates clarifies a few paragraphs later that this is not the case:

Politics also matter in Coase's argument because they influence the distribution of economic benefits. Under the system of corporate rights, efficiency requires a flow of payments from the multitude of farmers to the owners of the railway. Historically, the ownership of the railways has been tightly held, and the result of this system would therefore be the creation of a wealthy minority. Under the system of farmers' rights, efficiency requires the flow of payments from the railway to the farmer. As assumed in Coase's argument and as commonly seen in the developing areas, farming tends to be a broad-based industry, with a multitude of small-scale practitioners. This system of property rights is therefore likely to yield a more egalitarian income distribution. The distribution of income is therefore significantly shaped by whether it is the railways or the farmers who dominate the political system and who thereby achieve the power legally to privilege their interests.

Of course, anyone familiar with the collective action problem will recognize it here in the task of achieving that power; the smaller group with more concentrated wealth and power is more likely able to mobilize to further entrench their wealth. That scenario is the one we see replicated across all facets of our economy. The effects are far-reaching, and the images Bates provides are particularly illuminating:

In response to the contrasting distributions of income, it is reasonable to anticipate that investors will behave differently. In response to a concentrated distribution of income, they would be likely to create firms producing a small number of very expensive items: luxury cars, opulent furnishings, and costly services, as desired by the small minority with large incomes. By contrast, the result of the more egalitarian distribution would be likely to be investment in firms capable of producing goods in a large volume but of low unit value: clothing, food, and household goods that are affordable by the masses.

Not only would the industrial composition of the two societies diverge. So too would the occupational structure. The pattern of development that supports a demand for luxury goods is likely to lead to the creation of a smaller number of manufacturing jobs, a greater number of service occupations, and a smaller cadre of skilled artisans. By contrast, broad-based industrial development that caters to the mass consumer is likely to produce a larger number of manufacturing jobs, fewer service occupations, and a broad stratum of less skilled craftsmen: tailors, bicycle repairment, etc.

The two systems of property rights may thus both produce efficient outcomes. But they will yield different distributions of income, and ones that would result in major differences in the structure of demand, the composition of industries, and the kinds of jobs and skills that are socially rewarded. While equivalent in terms of the degrees of economic efficiency, the two institutional bases thus yield radically different developmental outcomes. Which group organizes politically and thereby seizes the power to define the system of property rights thus matters.

I appreciate Bates' use of the term radical here; literally a fundamental, core difference. Property rights exist at the root of the many issues that are continuously bubbling up. And while our current scenario more closely resembles one of the two outcomes illustrated here, Bates demonstrates that a parallel configuration exists almost within reach.

With that, I'll return to the radical manifesto that brought to mind this tangent. There are many threads I'd like to pull, but I'll leave that exercise for future pieces.

References

Bates, R. H. (1989). Beyond the miracle of the market: The political economy of agrarian development in Kenya. Cambridge University Press.

Olson, M. (1965). The logic of collective action: Public goods and the theory of groups. Harvard University Press.

Buller, A., & Lawrence, M. (2022). Owning the future: Power and property in an age of crisis. Verso.