И.З.И

In all existing societies, some property is owned by the government. This government ownership creates some important problems, a few of which we will examine in this lecture. An important implication of our investigation is that if a society is to function well, government ownership of property must be strictly limited.

This lecture examines four basic problems that may arise when property is owned by government. These are 1) the absence of a functioning capital market, 2) political conflict, 3) the increased incentive for rent-seeking behavior, and 4) a free rider problem. It will be seen that these problems are closely related, and that they are caused by substituting political control for market control. Political control, with its attenuation of property rights, reduces the signals and incentives, found in markets, that foster accountability. When government acts as the owner of property, property rights are not well-defined, defensible, and divestible. Decision makers in the government have less freedom to act and are held less accountable for the costs and the benefits of their decisions than are those outside the government.

The presence or absence of well-defined rights to property affects the way the property is used. In centrally planned economies, the lack of private property rights results in poor economic performance and waste, as discussed in Lecture 3. Labor and capital that could be highly valued are used in situations where they add less to value. There are two major reasons: First, their true value is not known without market prices bid and asked. Second, when resources are owned by government, those using them are not required to pay the cost from their project budgets. In large part, this is the result of the absence of capital markets.

A capital market channels resources (human labor, natural resources, land, productive machinery, buildings, etc.) into wealth-creating investments. This occurs primarily through financial institutions such as stock exchanges, banks, and insurance companies. Through bids and offers, the capital market provides information to decision makers about the value of inputs (human labor, natural resources and land, productive machinery and buildings, etc.) so that they can be directed into uses that will result in highly valued goods and services. In a capital market, private investors put their own resources at risk as they attempt to make wise investments that potential customers will be willing to pay for. If these investors succeed, they will be rewarded through the market. On the other hand, if their investments are mistaken, they will bear the burden of losses and business failures. This combination of rewards and weeding-out directs resources to the most valued outputs.

In centrally planned economies, capital markets are lacking (along with markets for labor and for raw materials). Factors other than the potential value resulting from the investments influence decision-making, and decision making tends to give poor results. Even in market economies, whenever property is owned by government the capital market does not operate as it does in a market system, and problems of directing resources to their highest-valued uses occur. A successful economic system is one that keeps government ownership, and its harmful effects strictly limited. This lecture focuses on some of the alternative decision-making processes that can improve these situations by reducing government ownership when private ownership can perform well.

In a free-market system, where private individuals have well-defined, protected, and transferable rights to productive property, capital markets tend to function well. Users must pay for what they use or, if they own their own resources, they must reject offers by others to buy these resources in order to continue to use the resources. These markets encourage owners to identify the value to consumers of alternative uses of the property. The amount that a firm is willing to pay for the use of productive resources depends on what that resource add to the value of the output, measured by what consumers are willing to pay. Firms in the market will purchase resources only when they anticipate that the added value of the output due to the resources is greater than the purchase price.

The existence of capital markets means that a property owner can capture the value of his property in alternative uses by selling it. If the value of the property when in an alternative use is higher, potential buyers will be willing to pay a higher price for it. These higher offers will give the property owner the ability and incentive to take consumers' interests into account. When the owner of a particular piece of property decides how to use it, the prices generated by capital markets will guide his decision. And anyone who desires to put a particular piece of property to some use, but who does not own it already, will need either to purchase it, or to rent or lease its services. In both cases, resources (property) will tend to be used in the ways that consumers find most valuable.

However, when property is owned by government, property is typically not traded in capital markets. This means that alternative processes, not market values, will be used to decide how resources are allocated. And these processes are unlikely to push resources into more valuable uses. Let's examine some of the reasons for this.

In most modern economies, when resources are not allocated by market processes, they are allocated by government decision. Allocation decisions may be made by an elected body (e.g., a national parliament) or an administrative body selected by the elected officials. In either case, anyone wishing to utilize the resource in some particular way will need to influence the decision process. Since there are competing alternative uses for resources, this means that with government ownership of property, political competitions arise to control property. These political competitions are closely related to rent-seeking, which is discussed in the next section.

In a democracy, political competition typically involves expending resources on lobbying (attempting to persuade politicians and administrators to support one's position), public campaigns to generate popular support, campaigns for political office, and the like. In non-democratic regimes, such as the former Soviet Union, political competition tends to take the form of power struggles between groups, individuals, enterprises, and government ministries. The information and incentives generated by this process are unlikely to push resources to the uses more highly valued by consumers as a group. Instead, winners are those who have better skills (and sometimes luck) at manipulating the political system. There are several negative consequences associated with this.

First, social harmony may be disrupted. Political competition tends to divide society into groups with hostile interests, and the outcome of political competition divides society into winners and losers. This is a fertile ground for the development of political operatives who prosper by fostering hatred and resentment of “the other side.” The extent to which this occurs depends on the nature of the political system, but also on the degree to which property is owned by government. The more property that is in the hands of government, the greater the payoffs will be to rallying resentment and envy among voters. This is because voters who use their votes this way are seldom made personally to pay for doing so, unlike buyers and sellers making choices in a market. More rallying of resentment and envy brings more severe potential social tensions. In this situation, an individual citizen often finds it easier to follow the emotions generated by the manipulators than to study more closely the issues that one ordinary citizen cannot influence.

Second, when resources are allocated according to the outcome of political competition, there is little likelihood that resources will be devoted to the uses that generate the most value. Instead, resources tend to be used to support the purposes of those most adept at political competition. As a result, economic output is reduced from what it might have been, and the society is less wealthy than it might have been. (More implications of this issue are addressed in the discussion of rent-seeking.)

Third, political competition itself uses valuable resources that could have been used to produce wealth. Each group competing in the political process expends resources in order to win the prize (control over government property). These resources are expended in ways that do not, in themselves, contribute to creating wealth; and again, the result is that society is less wealthy than it might have been. We will return to this issue in the discussion of rent-seeking.

Consider the following example, taken from the experience of the United States. In the western United States, a great deal of the forested land is owned by the federal government. Much of this land has various possible uses, including recreational activities, environmental conservation, harvesting of timber, mining, and grazing of cattle. The official doctrine of one of the administering agencies, the U.S. Forest Service, is “multiple use”; that is, all of these uses are to be accommodated. In practice, this means that various groups compete politically for the rights to use the land – environmental groups, logging companies, mining companies, ranchers, recreational groups. Heated political battles are fought, and every decision – to cut trees or to not cut trees on a particular piece of land, for example – becomes a political controversy. These controversies are divisive, and generally are decided on the basis of who can win the political game, rather than what would be the most valuable use of the land. But unlike a normal bidding war, losers in these battles pay, even when their expenditures brought them nothing. They pay by constantly having to lobby for their position. Lobbying is costly in donations and in that highly able people spend much of their working lives not producing, but rather in trying to manipulate the political process to advantage their employers. In contrast, in a market “bidding war,” the bidder who loses does not normally have to pay. Real resources are wasted in the political battles. Public ownership tends to make all battles political.

Conversely, there is private forest land in the western United States as well. Owners with secure titles to their land use it for all of the above purposes – conservation, public recreation, logging, grazing, mining – without the political controversy that surrounds public lands. For example, a private environmental organization, the Nature Conservancy, has purchased lands in the front range of the Rocky Mountains in Montana. Its goal is to provide habitat for wild animals such as grizzly bears, and as a result it keeps these lands largely undeveloped. Many of these lands are open to the public for recreational purposes. By owning the land, the Nature Conservancy is able to prevent mining, cattle grazing, and logging without generating political controversy. Interestingly, however, when the Nature Conservancy acquires land that has high value for activities such as logging or mining, the organization takes this into account, and sometimes chooses to sell, rent, or lease the land to a firm that will develop it (temporarily at least, with techniques approved by the owner). The earnings from the sale are then used to improve management practices or acquire other lands. Either way, the proceeds of sharing the potential benefits with others will have value for conservation purposes. Nature Conservancy has more resources to use for their mission, while their trading partners get more of value to them also.

When most property is owned by government, as in a Soviet-style economic system, these benefits are missing and the resulting problems are exacerbated. Allocation of resources in the Soviet Union was officially done by a central planning agency that followed the orders of the authorities at center. In practice, numerous factions at all levels of the economy – from the enterprise level to the highest levels of the ministry – engaged in political struggles to influence the plan. The plan's assignment of resources was not followed. Instead, resources were allocated based on political pull, connections, and the use of tolkachi, or expediters, who were able to “work the system” in favor of their clients. There was, in a sense, a market, but trades in this market depended on political influence. Again, the result was poor economic performance compared to what private property and a real market would have provided.

These examples illustrate the difference in the allocation processes between government-owned and privately owned resources. In general, the political allocation processes associated with government ownership create more political discord and generate less wealth than do market processes.

When groups in society expend resources to influence government policy in their favor, the activity is termed “rent-seeking.” Rent-seeking behavior is more likely in a system in which substantial property is owned by government and subject to political competition. Let's look at rent-seeking more closely.

Rent-seeking, as the term is used here, refers to utilizing government policy to redistribute income and property rights in one's own favor – that is, to help one's own mission, whether that mission is selfish or altruistic. Rent-seeking activities may range from large-scale lobbying in a national parliament for particular legislation (in a democracy) to a low-level government official who abuses his or her position for personal or family-connected gain (e.g., a fire inspector who invents charges of safety violations against a small enterprise in order to extract bribes). The common feature of rent-seeking activities is the expenditure of resources to try to use government power to transfer wealth from one party to another. These expenditures are countered by expenditures of other parties attempting to prevent the taking of their wealth. Both sets of expenditures represent real costs, and also represent a form of conflict.

For example, in post-Soviet Ukraine, firms that processed domestic sunflower seeds for oil campaigned for legislation to restrict the rights of Ukrainian sunflower growers to sell their seeds in foreign markets. Such legislation, in the form of an export tariff, would keep the seed producers from reaching a larger market and would keep down the domestic price of seeds to the processors. Farmers and exporters, in turn, expended resources to oppose the tariff. These expenditures did nothing to increase the total wealth or overall well-being of the people of Ukraine. (Ultimately the tariff passed, and further efforts by opponents caused it to later be removed.) Given that these expenditures could instead have been devoted to creating additional wealth, rather than fighting over existing wealth, their use in a negative-sum contest represented a loss, compared to a system in which rent-seeking does not occur. Some of the expenditures occurred in dimensions not captured by anyone, and constituted a deadweight loss. Some lost, but no value was created in the process.

Of course, rent-seeking behavior is found in any system, including one in which property is largely privately owned. However, the stronger the protection of private property rights, and the stronger the limits on government's power to reassign or attenuate them, the less rent-seeking we should expect. Conversely, where private property rights are weaker, and limits on the power of the state to grant favors are fewer, rent-seeking and its costs will be greater. In a system in which property is largely owned by government, rent-seeking is likely to be endemic. The problem is that the right to control a government-owned resource is often poorly defined and easily open to redistribution, either by influencing government policy officially, or by acting “under the table,” i.e., surreptitiously abusing power and position.

Consider the Soviet economic system. Officially, the economy was run according to a central plan, carefully designed and handed down from the center. In practice, the planning reflected the results of political infighting and negotiations, with different ministries, enterprises, factions, and individuals struggling to obtain resources and power to further their own interests. Similarly, the resulting economic activity did not strictly follow the plan, but instead reflected struggles over poorly-defined rights to resources. The costs of such struggles were one of the reasons the economy performed poorly.

Any system plagued by substantial rent-seeking is a system in which property rights are weak or poorly defined. The solution is to establish strong 3D property rights. Of course, this in fact is easier said than done, since the entity that typically enforces property rights is government, and political action can negate the very property rights that could preserve the productive system. The very entity that potentially could institute and enforce reform is the entity most responsible for the problem. The tricky problems of institutional change and reform of property rights regimes will be addressed in Lectures 8 and 10, but for now it is simply sufficient to note that while we can identify the causes and costs of rent-seeking, there is no easy solution to curbing it.

The example of the Ukrainian sunflower industry highlights another problem associated with rent-seeking. Rent-seeking behavior not only redistributes wealth and generates deadweight losses: it may in the process reduce productive wealth-creating behavior. In the sunflower example, exporting the sunflower seed generated substantially more income than keeping it at home for domestic production. By preventing these exports with a prohibitive tariff, the Verkhovna Rada (Supreme Legislature) reduced the total wealth created in the Ukrainian economy. In this case, rent-seeking by one group of politically-connected enterprise owners reduced the national product by preventing productive activity outright.

Other forms of rent-seeking behavior can reduce productivity by causing producers to take actions to protect themselves, actions that divert resources from uses that would increase the creation of wealth. Studies of the behavior of small and medium enterprises in former Soviet countries with weaker property rights suggest that one reason that firms operate in the shadow economy is to avoid abuse by government tax collectors, inspectors, and the like. Operating in the shadows, without official protection from violation of their property rights, these firms are often less productive than they would be were they to operate openly. Of course, shadow activity is a matter of degree; many firms that operate in the official economy also engage in shadow activity. And some firms operate in the shadows for nefarious reasons that are not intended primarily to escape predation by rent-seekers. Shadow activity requires firms to bear additional costs, and thus when firms move to the shadows to protect themselves from rent-seeking, these costs are attributable to rent-seeking behavior.

Also, firms in ex-Soviet countries tend to invest less in improving their productive capacity than do firms in Eastern and Central European countries, where property rights are stronger. One study of new Russian and Ukrainian enterprises finds that the primary reason for this is that investments are less secure in countries with weaker property rights (Johnston et al., 1999). These firms invest less because they fear the loss of their investment at the hands of government. The result is less production and less economic growth than would be observed with stronger rights and less threat of rent-seeking.

In sum, rent seeking behavior is a symptom of weak, poorly defined property rights, often due to a relative lack of restriction on state power to redistribute property rights. It represents a struggle for control of property. Such struggles are socially divisive, have real costs in terms of resources, generate deadweight losses, and reduce productive, wealth creating activity.

One related problem arises: Work by economists such as Gordon Tullock (1971) and Richard Stroup (2000) has demonstrated that government decisions themselves are public goods. When decisions are made by government bureaucrats or by elected officials, the effects of the decision are felt by everyone, yet the costs of making the decision in a way that favors the public good are borne by the decision makers. Therefore, government officials and those who influence them do not capture the full benefits to society that result from decisions that allocate resources correctly (however that might be defined). Therefore, when property is owned by government, the incentives of decision makers to discover better ways to allocate resources and to act on these are weaker than those of a private owner who has well-defined, freely transferable rights.

Even in a well-functioning political system – one in which rules keep rent-seeking and abuse under control – government ownership of property raises incentive problems that do not occur with privately owned property. If government decisions are made by democratic voting, the individual voter will have little effect on the outcome. While he bears the full cost of acquiring information (becoming well-informed), his single vote rarely decides an election. Thus, even if the person acquires information and votes wisely, the costs and benefits he receives depend on the votes of many others. An individual's vote rarely decides an election. Thus, as voters, individuals have less incentive to be well-informed and make good decisions than they do in their roles as consumers, producers, and investors. In those roles, they have strong private property rights in the outcomes of their decisions. They bear the costs and reap the rewards of their decisions. Thus their attention will be more focused on making good decisions in their private lives than it will be when they are voting.

This suggests that in countries that limit the ownership of property by government, and keep most decision making about the allocation of resources in the private, market sector will create stronger incentives for good decisions. These decisions will both reflect the interests of members of the public and respect their individual rights.

Recognizing the problem that individuals as voters have different incentives than they do as consumers, producers, or investors, some economists have developed a “mechanism design” literature. This attempts to find methods, such as voting mechanisms that will elicit honest responses from citizens concerning their demands for public goods. Unfortunately, these methods largely are purely theoretical with no ability for usefulness in practical application, and the generally assume that agents are fully informed as to the issues and their preferences. Thus they fail to address the public-good nature of public decision making. Once again, the problem is reduced in systems characterized by extensive private property rights (3D rights). As a system, this is typically a practical, workable solution to the problems of decision making and resource allocation. Empirical studies repeatedly find that economies characterized by such rights outperform economies with less well defined property rights regimes. The difficult question is how citizens in a system with poorly defined rights might create a system based on strong, well-functioning property rights.

Stroup, Richard L. 2000. “Free Riders and Collective Action Revisited.” The Independent Review IV(4), Spring, pp. 485-500.