One of the distinguishing features of a market economy is said to be its reliance on private property or – equivalently – on exclusive property rights. An older term for private property is several property, which was used by Enlightenment thinkers and again in the twentieth century by Friedrich Hayek. In Law, Legislation, and Liberty, Hayek writes that
[t]he effectiveness of the market order and of the institution of several property rests on the fact that in most instances the producers of particular goods and services will be able to determine who will benefit from them and who pay for their costs (Hayek, 1979: 43, italics added).
Although often used interchangeably with “private property,” the term “several property” is advantageous in that it alludes to the importance of the decentralization of property rights. The legal scholar Randy Barnett notes that
the term several property makes it clearer that jurisdiction to use resources is dispersed among the ’several’ – meaning ‘diverse, many, numerous, distinct, particular, or separate’ – persons and associations that comprise a society, rather than being reposed in a monolithic, centralized institution (Barnett, 1992: 840).
While Hayek focused on the knowledge-generating potential of several property as compared with central planning, his discussions about what institutions are compatible with the ”great society” are nuanced and moderate (cf. Hayek, 1960, 1979). This is in marked contrast to Ludwig von Mises and, especially, Murray Rothbard, who in effect argued that a system of well-defined and exhaustive private property rights is the only policy implication of economic theory. The argument of this paper is that this is a consequence of an epistemological difference between Hayek and Mises (as well as other Misesian “praxeologists”). First, Mises’s aim was to develop a theory of absolute deductive truths and categorical statements (Mises 1949), while Hayek endorsed a complementary role for empirical analyses and differences in degree rather than kind (Hayek, 1937). Second, their complementary critiques of central planning reflect this difference, in that Mises aimed to show the impossibility of socialist calculation, whereas Hayek was content to demonstrate the practical shortcomings of central planning in a world of imperfect knowledge.
Mises (1935, 1949) and Hayek (1935, 1945) offered persuasive arguments against two aspects of socialist central planning – the impossibility of calculation and inferior knowledge dissemination – that had been neglected by earlier critics of socialism, who instead focused on the lack of incentives for efficiency gains. But devastating as their respective critiques are individually, only the Hayekian approach amounts to a “progressive research program” in its Lakatosian sense. The Hayekian knowledge problem, as it is sometimes called, has far-reaching implications beyond the discrete choice between a market and a centrally planned economy. Although Hayek himself never drew attention to the relationship between gradations of ”several-ness” (i.e. decentralization) in the distribution of property rights and the knowledge-generating potential of the market order, the underlying argument does indeed imply such a relationship unless one imposes an unrealistic assumption of asset-neutral entrepreneurship. The impossibility of calculation under socialism, on the other hand, has no implications other than the necessity of markets for factors and commodities at all stages of the structure of production.
Private property and economic calculation
The fundamental reason that a central planning board cannot calculate how to allocate resources among alternative uses is the unavoidable non-existence of entrepreneurial ”appraisement” of production factors. The entrepreneurial comparison of expected revenues and costs creates money prices for production factors and makes economic calculation as well as rational (though imperfect) resource allocation possible. Consumer valuations are not useful substitutes for this, according to Mises, since consumers engage in ordinal comparisons of non-measurable utilities rather than entrepreneurial cardinal comparisons of expected (unequal) money values. Mises writes that his socialist critics
failed to see the very first challenge: How can economic calculation that always consists of preferring and setting aside, that is, of making unequal valuations, be transformed into equal valuations, by the use of equations? Thus the advocates of socialism came up with the absurd recommendation of substituting equations of mathematical catallactics, depicting an image from which human action is eliminated, for the monetary calculation in the market economy (Mises, [1940] 1978: 112).
Mises’s critique rests on his Austrian theory of market processes rather than market equilibrium: capital is heterogeneous and of different vintages, production takes time, entrepreneurs are the driving force of the market, and equilibrium is never attained.
The essence of Mises’s argument against central planning is that rational economic calculation is possible only if there are exclusive and tradable property rights in product and factor markets. Factor prices cannot be imputed from consumer goods prices – should such a market exist – since production decisions precede consumption decisions and reflect entrepreneurial profit-seeking judgment about future conditions rather than any automatic assumption that the future resembles the recent past. This necessity of entrepreneurial appraisement becomes especially critical for investments in durable capital goods (cf. Lachmann, [1956] 1978).
The incompatibility of Mises’ theoretical system and the Walrasian economics of his critics explains why the opposing sides (Ludwig von Mises and Friedrich Hayek on the one side and Oskar Lange and Abba Lerner on the other) of the socialist calculation debate largely talked past each other. Walrasians assume equilibrium, which implies that entrepreneurship has no role whatsoever in economic theory. According to Mises (1949), the market socialists (Lange and Lerner) therefore treated the market economy as a managerial rather than an entrepreneurial system, an approach which they shared with non-socialist Walrasians. Consequently,
they look at the economic problem from the perspective of the subaltern clerk whose intellectual horizon does not extend beyond subordinate tasks. They consider the structure of industrial production and the allocation of capital to the various branches and production aggregates as rigid, and do not take into account the necessity of altering this structure in order to adjust it to changes in conditions. … The market of the capitalist society also performs those operations which allocate the capital goods to the various branches of industry. The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce their size, dissolve them or merge them with other enterprises; they buy and sell the bonds of already existing and of new corporations; they grant, withdraw, and recover credits; in short they perform all those acts the totality of which is called the capital and money market (Mises, 1949, 703-704).
The distribution of private property rights does not matter for economic calculation, provided that there is a small but sufficient number of participants in each individual market. On the other hand, the domain of calculability is increased if property rights are well-defined, exclusive, and exhaustive. Mises does not offer a comprehensive analysis of how property rights are arranged in a market economy, but his insights on calculability are nevertheless suggestive for what happens when exclusive property rights are diluted through state regulation, as happens when certain property uses are compulsory or prohibited.
In property rights theory, property rights are seen as a bundle of rights to attributes of objective resources such as land, various capital goods or individual human capital (see Demsetz, 1967; Alchian and Demsetz, 1973; Barzel, 1989). The property rights of an individual over a resource refer to her effective control over its use and the scope of time-limited or perpetual contractual opportunities with potential exchange partners. Property rights may be alienated, subdivided, retained or combined as individuals search for profits or utility gains. From this perspective, it becomes obvious that all government regulations that reduce the domain of market exchanges amount to activity-specific central planning with calculational impossibility as its unavoidable result.
As an example, consider what happens when a government mandates the installation of elevators for all buildings that have more than three stories (as in Sweden) or when it requires two doors between a restaurant and a restroom (as in the United Kingdom). The result is that it becomes impossible to estimate consumers’ present and past evaluation of these resources, which means that the entrepreneur has no historical money price data on which to base her subjective judgment of future willingness to pay. Moreover, the compulsory nature of some consumption attributes implies that there is an attenuation of resource costs and individual consumer preferences. If sales prices are absent and resource costs are distorted to the extent of the severity of the regulations, this implies that “islands of calculational chaos” (to use one of Rothbard’s expressions) emerges as soon as regulatory prohibitions and mandates are imposed. To what extent do consumers value elevators in Swedish buildings or two-door restrooms in British restaurants? This is impossible to know, because market prices for those real estate attributes have been abolished by the central planners of the national need for elevators and doors.
Calculation would however become possible if the government officials doing the regulating transferred all the property rights of the previous owners to themselves. The Swedish planning authority in charge of elevator planning or the corresponding British door-planning committee only claimed conditional and inflexible regulation (a sort of use right) of elevators and doors. They did not claim any income or transfer rights over the regulations themselves, nor did they claim such rights to individual elevators or doors. If they had instead accomplished transfers of exhaustive sets of use, income, and transfer rights over the imposed regulations, elevators and doors to one or more individual committee members, no calculational chaos would have been created. They would have redistributed opportunity sets, but “entrepreneurial appraisement” would simply have been transferred to a new set of owners of alienable property.
The compatibility of a regulation with economic calculation depends on whether the regulation is under the exclusive control of an individual or an organization that has exhaustive use, income, and transfer rights to the regulation. If it is, we are dealing with a functional private property owner, no matter what the official designation of such an individual might be. Profit-seeking market exchanges are possible as soon as this private property owner has at least one other person or organization with which to engage in price-creating market exchange. The implication is that absolute dictators are not akin to central planners if they fulfill two conditions. First, they must not seek to represent or act in the interests of their “subjects,” but rather approach them as if they were cattle. Second, there must be external property owners with which to trade, for example by selling their subjects or renting out a portion of their land to the highest bidders. Economic calculation would then be preserved.
The calculational chaos of the Soviet Union was therefore not a problem of totalitarianism, but a problem of a socialist ideology that denigrated profit-seeking and which had to keep up the pretense of the rulers to act in the interests of the people. If Stalin had sold his domestic enemies as slaves instead of killed them, and rented out Siberia to the highest bidders instead of using it for defense installations and gulags, there would still have been incentive and knowledge problems, but calculability would have been restored.
Particularly interesting in this context is Mises’s assertion that ends – that is, pure consumption attributes – do not require calculation:
What touches a man’s heart only and does not induce other people to make sacrifices for its attainment remains outside the pale of economic calculation. However, all this does not in the least impair the usefulness of economic calculation. Those things that do not enter into the items of accountancy or calculation are either ends or goods of the first order. No allowance is required to acknowledge them fully and make due allowance to them. All that acting man needs in order to make his choice is to contrast them with the total amount of costs their acquisition or preservation requires. Let us assume that a town council has to decide between two water supply projects. One of them implies the demolition of a historical landmark, while the other at the cost of an increase in money expenditures spares this landmark. The fact that the feelings that recommend the conservation of the monument cannot be estimated in a sum of money does not in any way impede the councilmen’s decision. The values that are not reflected in any monetary exchange ratio are, on the contrary, by this very fact lifted into a particular position which makes the decision rather easier (Mises 1949: 216).
In other words, it would not constitute an economic problem for dictators with exhaustive and tradable property rights whether they should spare or sacrifice some church or palace. It goes without saying that from a praxeological perspective, Mises is right. Consumption attributes are chosen if their expected utility more than offsets their opportunity costs in terms of money, time, or other subjective sacrifices. But this also shows that Mises approaches the economy in very absolute and categorical terms.
In 2001, the holders of economic property rights regarding the use of the Buddhas of Bamyan were the Taliban of Afghanistan under the leadership of Mullah Mohammed Omar. The leader did in fact have exclusive property rights, since, according to a government spokesman, ”Mullah Omar will be the highest authority, and the government will not be able to implement any decision to which he does not agree” (Al-Majallah, 1996). He decided to dynamite and destroy the Buddhas, which implies that he expected their absence to produce a utility gain that more than offset the cost of demolition. From the point of view of economic rationality, there is nothing absurd or “inefficient” about a decision such as this, as long as there is a holder of exclusive property rights over the Buddhas. In fact, Mullah Mohammed Omar was offered money to preserve the monuments, but deemed the destruction of the Buddhas as more than offsetting the sum of the demolition costs and the payment for preservation.
While Mises’s calculation argument offers no insights about how to deal with a popular landmark under the ownership of individuals with views that are both obstinate and contrarian, Hayek’s discussion of the knowledge problem under socialism does. As we shall see, concentrated exclusive property rights engender problems of knowledge creation and dissemination that are quite unrelated to the possibility of economic calculation.
Several property and knowledge dissemination
Mises was a rationalist, who aimed to develop the entirety of economic theory from his version of the pure logic of choice – praxeology – which he based on the “action axiom”: the fact that individuals act to pursue self-selected ends. Friedrich Hayek was not a strict rationalist in the Misesian sense. In an interview from 1984, Hayek states that
[Mises] never made what to me has been the decisive step away from rationalism. He remained to his end a convinced rationalist and ethical utilitarian, and did not see what David Hume already said – that our high morals are not the conclusion of our reason. They are the result of another process: a kind of group selection and evolution which led to those communities that had adopted, unintentionally, the most appropriate rules of conduct prevailing. So part of our capacity to maintain moral society is a tradition of moral rules which we still do not fully understand. And there, rationalism becomes insufficient. I would even go so far as to say that pure rationalism leads directly to socialism (Hayek, quoted in Blanchard, 1984).
Hayek’s deviation from the Misesian version of Austrian economics is already apparent in his 1937 article, Economics and Knowledge, where he explains what he considers to be the domain of economics. Hayek admits a much greater range of theories than the “absolute truths” of Mises’s pure logic of choice. The following of Hayek’s statements – which emphasize the importance of the division of knowledge – clarify the extent to which he expanded the domain of the Misesian version of Austrian economics:
[A]ny assumption about the actual acquisition of knowledge in the course of this process [of learning] will also be of a hypothetical character. But this does not mean that all such assumptions are equally justified. We have to deal here with assumptions about causation, so that what we assume must not only be regarded as possible (which is certainly not the case if we just regard people as omniscient) but must also be regarded as likely to be true; and it must be possible, at least in principle, to demonstrate that it is true in particular cases.
First, the assumptions from which the Pure Logic of Choice starts are facts which we know are common to all human thought. They may be regarded as axioms which define or delimit the field within which we are able to understand or mentally to reconstruct the processes of thought of other people. They are therefore universally applicable to the field in which we are interested – although, of course, where in concreto the limits of this field are is an empirical question. They refer to a type of human action … rather than to the particular conditions under which this action is undertaken. But the assumptions or hypotheses, which we have to introduce when we want to explain the social processes, concern the relation of the thought of an individual to the outside world, the question to what extent and how his knowledge corresponds to the external facts. And the hypotheses must necessarily run in terms of assertions about causal connections, about how experience creates knowledge.
Second, while in the field of the Pure Logic of Choice our analysis can be made exhaustive, that is, while we can here develop a formal apparatus which covers all conceivable situations, the supplementary hypotheses must of necessity be selective, that is we must select from the infinite variety of possible situations such ideal types as for some reason we regard as specifically relevant to conditions in the real world. (Hayek, 1937, n. a., italics added).
Particularly interesting in the above quotation is the introduction of the Schutzian notion of “ideal types.” Ideal types are usually classified in accordance with their degree of anonymity, which means that the “acting man” of Mises represents the most extreme type with maximum anonymity (i.e. it applies to all rational human action). The least anonymous “ideal type” corresponds to a single individual, or in the context of hypothesis generation, an empirical hypothesis seeking to represent the behavioral regularities of a single individual. What Hayek in effect does is to prescribe a larger domain for economic theory, with Misesian praxeology as the subset that deals with maximally anonymous human action. But this is indeed a necessary step for Hayek’s later preoccupation with human knowledge and cognition, since there is no guarantee that all individuals react to a specific external knowledge stimulus, let alone that they exhibit uniform responses to the stimulus. On the other hand, institutions such as money and market prices may under reasonable assumptions be expected to stabilize interpretation and expectation.
Eight years later, in a seminal article entitled The Use of Knowledge in Society (Hayek, 1945), Hayek presents his “empirical theory” about how market prices affect the dissemination of knowledge. According to Hayek, neoclassical models that assume perfect knowledge of all relevant economic facts assume away the most central problem in economics: the division and coordination of knowledge, where each individual carries a unique set of (articulated and tacit) knowledge that reflects personal cognition, inter-personal networks, and personal spatiotemporal location trajectories. Because of the limits to human cognition, Hayek asserts that it is impossible to communicate the entire content of such individual knowledge to any central planning committee.
In an economy with indirect exchange, the process of parallel and sequential exchanges involving production or consumption goods and money create exchange ratios, that is to say, market prices. Such prices disseminate signals about relative resource scarcities to other individuals and firms participating in the same markets, which economizes on the knowledge they need for allocation that takes the opportunity costs of other market participants into account. There is simply no need to know that the demand for oil has increased in the United States, while it has decreased in France. Prices supply distilled knowledge about overall scarcity, which in the case of globally integrated markets encompasses the entire world.
In the 1950s, Hayek became interested in cognitive psychology, which resulted in the publication of The Sensory Order (Hayek, 1952). There, he explains the cognitive cause of the inferiority of central production planning as compared with decentralized market exchanges. He asserts that the human brain makes it impossible for any central planner to collect all the relevant economic data. This is due to the limits of individual information-processing to structures that are less complex than an individual human mind: “the capacity of any explaining agent must be limited to objects possessing a degree of complexity lower than its own” (Hayek, 1952: 185). Even if production planners desire to allocate resources in a way that mirrors consumer preferences in their jurisdiction (a big if), there is no way for the planners to know when resources should be reallocated to new production processes or new consumer goods or services, since that would subject the planner to excessive cognitive requirements. Harnessing the innovative potential of their population would imply that they have access to the preferences, ideas, skills, and whims of every individual in the population that the planners represent. They would also need to be able to judge how all these new bits of individual knowledge will be received (and ultimately demanded) by the rest of the population.
In the Hayekian view of the market process, the most important of its functions is its role as a communication network that transmits distilled information (market prices) about the perceived marginal opportunity costs of various resources. Any government interference with the price system therefore dilutes and distorts this signaling system. There can never be any guarantee that so-called “administered prices” – that is, prices that are imposed by central planners – correspond to market prices. Price determination at the center is unable to take most local individual knowledge into account. Even if planners freeze market prices at current levels, the price will eventually be too high or too low, as a result of changing consumer preferences, technology, innovation, resource availability, or market-influencing institutions. Queuing and shortages should therefore always be expected for goods with government-set prices and unchanging product quality, or else the quality of the product will improve or deteriorate to reflect changing market conditions (this latter example will either imply a distortion of market processes from price to non-price competition, or – alternatively – that the regulation has no effect, which usually implies an unnecessary transaction cost associated with the creation and enforcement of the superfluous regulation).
The popular version of modern Austrian economics combines Hayekian knowledge dissemination processes with the arbitrage theory of entrepreneurship associated with Israel Kirzner (1973). This is unfortunate, since the Kirznerian theory is less realistic than Hayek’s depiction of the market. The popularity of Kirzner’s theory seems to be due to the fact that it complements neoclassical general equilibrium theory rather nicely: entrepreneurship is costless, and entrepreneurs simply have to be alert to revenue-cost differences to bring about market integration and a movement in the direction of market equilibrium. Mises’s student Murray Rothbard (1991) offers a persuasive repudiation of the Kirznerian theory, although he falsely accuses Hayek of subscribing to the same view (Hayek was mysteriously silent on the question of entrepreneurship; Kirzner, however, argues that his view of the entrepreneur is compatible with the views of Schumpeter, Mises, and Hayek (!):
[T]he market is a “discovery procedure,” that is, an unfolding of knowledge. There is, in this view of the market and the world, no genuine recognition of the entrepreneur, not as a dynamic “discoverer,” but as a dynamic risk-taker, risking losses if his appraisal and forecast go awry. Kirzner’s commitment to the “discovery process” fits all too well with his original concept of the entrepreneurial function of being that of “alertness,” and of different entrepreneurs as being variously alert to the opportunities that they see and discover. But this outlook totally misconceives the role of the entrepreneur. The entrepreneur is not simply “alert;” he forecasts; he appraises; he meets and bears risk and uncertainty by questing for profits and risking losses…[Kirzner’s] entrepreneur is curiously bloodless and passive, receiving and passively imbibing knowledge imparted to him by the market. (Rothbard, 1991: 67)
Since the practice of future-oriented entrepreneurship – speculation and innovation – can result in losses as well as profits, Kirzner’s assumption that the “pure entrepreneur” has no need for resources seems to be at substantial variance with real-world markets. It seems to have arisen from Kirzner’s desire to use the assumption of asset neutrality, in order to achieve a perfect fit with contemporaneous general equilibrium theory; indeed, it is then possible to divide economic theory into attained equilibrium conditions and entrepreneurial equilibration processes. Brian Loasby (1989: 161) notes that Kirzner does not “recognize that speculation and innovation, unlike arbitrage, need resources: judgments have to be backed with money … and entrepreneurship is not open to everyone on equal terms.” Theodore Burczak (2002) notes that credit rationing is common in real-world markets: this reflects a rational response of lenders and investors to moral hazard and adverse selection among entrepreneurs with insufficient assets to cover potential losses.
The practical ability of individuals to disseminate their spatiotemporally specific knowledge depends on whether they have access to resources that enable them to create or discover new production or consumption attributes – that is, on their access to resources that can be transformed into innovative or speculative ventures. Such access reflects a combination of the potential entrepreneur’s savings, access to loans, and the ability to persuade others to combine their property rights with those of the entrepreneur.
We can now revisit the case of a dictator who functions as a capitalist with exclusive property rights over all land, labor, and capital within a spatially delimited territory, and with access to market exchange relationships with external property owners. Can he calculate? Yes, he most definitely can. But it should at the same time be obvious that it is difficult for the dictator to take advantage of the local knowledge and entrepreneurial creativity of his enslaved subjects. He may in fact be better off in material terms if he emancipates the slaves, endows them with land leases, and collects taxes from whatever economic growth they generate (note that one should expect a negative correlation between tax rates and entrepreneurial propensities, ceteris paribus). Thus, the distribution of property rights matters from the point of view of Hayekian knowledge dissemination, but it does not matter (given that some minimal level of dispersion is achieved) for Misesian calculability. David Andersson (2008a) proposes the following two-fold pattern prediction under the assumption of asset non-neutrality:
1 At any point in time we can expect more local knowledge to be disseminated through market prices if we can make market participants start with relative resource access that is closer to equality, given a fixed set of resources.
2 After that point, we can expect more local knowledge to be disseminated if all market participants receive profit-and-loss signals through prices that are set in decentralized market exchanges. (Andersson, 2008a: 77)
Since Hayekian economics includes but goes beyond Misesian praxeology (“the pure logic of choice”), it should be evident that all Misesian conclusions regarding the impossibility of calculation in a society that has socialized the means of production should be included as “Hayekian theory.” While Hayek did not focus on the Misesian theory, we should remember that he did not criticize it either, but instead included two articles by Mises in a book he edited in 1935; Collectivist Economic Planning. Thus, the conclusion should be that Hayekian arguments against central planning are more comprehensive (the impossibility of economic calculation and inferior knowledge) than those deriving from the Misesian logic of choice (only the impossibility of calculation). In addition, the Hayekian version of Austrian economics goes beyond Mises in implying that the degree of decentralization of property rights matters, given that the economy in question is a market economy with stock exchanges, labor markets, land markets and so forth.
Policy-relevant pattern predictions regarding dissemination of local knowledge
A careful analysis of the implications of the Hayekian knowledge problem shows that it implies and anticipates – albeit sometimes not explicitly – many of the results of later theoretical contributions:
1. All property rights are imperfectly delineated, due to the existence of transaction costs. However, such transaction costs are especially cumbersome in jurisdictions with vague or contested institutions. If it is not clear who owns what, we should expect market prices to be less reliable guides of relative scarcities and property to be less useful as collateral for entrepreneurial loans. Thus, a knowledge dissemination argument directly anticipates Hernando De Soto’s ideas (De Soto, 1990; 2000) concerning the importance of better-defined property rights for third world development.
2. Exclusive, exhaustive, and alienable property rights promote knowledge dissemination. Regulations that outlaw certain uses of property rights and prescribe others imply that local knowledge regarding superior uses cannot be experimented with or disseminated to other parts of the economic system. This result directly anticipates the “subsidiarity rule” of property rights theory (Barzel, 1989), which states that the individual or combination of individuals (i.e. a firm) that is most able to influence the value of a resource will tend to become the residual claimant in a free market (to the extent that capital is sufficiently accessible).
3. Stable property rights institutions promote better knowledge dissemination than changeable institutions, especially if the changes are unexpected. Roger Koppl (2002) argues that the presence of “Big Players” with substantial power to influence market conditions in a discretionary way (e.g. a central banker) has a systematic tendency to make expectations regarding the Big Player’s future decisions more important than underlying market conditions. Consequently, market prices become less reliable as indicators of relative scarcities and their knowledge-disseminating role is diluted.
4. Taxes on labor and capital gains imply reduced incentives for entrepreneurship, leading to less local knowledge being disseminated through the price system (this is an example of how knowledge dissemination considerations reinforces well-known incentive effects). It should also be noted that the subsidiarity rule of property rights theory implies exclusive individual property rights over individual labor (this does however not imply that workers should not engage in wage labor, since the employer may be better able to direct combinations of labor, land, and capital, and should thus be the residual claimant. However, the choice whether to engage in entrepreneurship or to rent out one’s labor should belong to each individual).
5. Redistribution of property rights may increase the knowledge-disseminating capacity of the system (Andersson, 2008a), but only if the gains from greater decentralization offsets the distortion of profit-and-loss signals. This gives rise to the following contingent pattern predictions:
· Purpose-specific redistribution (e.g. public schools) implies decentralized but inflexible use rights as well as centralized abolition of income and transfer right (students are not allowed to rent out or sell their educational service claims). Compulsory attendance in prescribed public schools implies a net loss of the knowledge-disseminating capacity of the market both because it amounts to centralized allocation of resources and because taxation dilutes market prices (note that school vouchers imply a decentralization of use rights, but not of income or transfer rights).
· Recurrent pure income transfers (i.e. a mixture of positive and negative taxes) imply decentralization of use, income, and transfer rights but dilution of the “local knowledge content” of market prices.
· One-off land reforms that result in more dispersed land ownership than previously imply decentralization of use, income, and transfer rights without dilution of the subsequent knowledge dissemination property of prices. Such a land reform implies the creation of a new market with new relative scarcities, new prices, and new market supply and demand conditions. It will however increase the role of expectations concerning Big Player behavior if later land reforms are deemed possible but uncertain by market participants.
· Institutions that promote winners-take-all phenomena in market rewards reduce the knowledge-disseminating capacity of markets (Andersson, 2008b). A contemporary example that is likely to have this effect is the gradual expansion of intellectual property rights to include derivative products as well as the tendency to increase the duration of IPR protections (Lessig, 2005).
We should note that the above pattern predictions – especially No. 2, 4, and 5 – are substantially enriched by applying a knowledge dissemination approach as compared with an exclusive focus on the possibility of economic calculation. Only the knowledge dissemination approach, which addresses property “several-ness” in addition to the existence of exclusive and exhaustive property rights, implies pattern prediction five.
Hayek thus goes beyond Mises in his analysis of the problems associated with a centrally planned, socialist economy. But Hayek’s formulation also has implications for a comparative analysis of different market economies: it implies that redistributive policies may under certain quite restrictive circumstances imply greater knowledge dissemination (if the policy implies a net decentralization of property rights and if the knowledge gains from decentralization offset the knowledge, calculation, and incentive losses associated with the dilution of market prices).
Final remarks
Not only economic freedom as conventionally defined (i.e. exclusive and exhaustive private property rights) promotes entrepreneurship; the degree of decentralization of those same property rights over labor, land, and capital can also be expected to be positively correlated with entrepreneurial action. This should be especially relevant to societies with highly concentrated ownership of land. Indeed, the relative economic performance of societies with dispersed land ownership such as Japan and Taiwan as compared with societies with concentrated land ownership (for example Brazil and Mexico) is suggestive (although not conclusive, since we are dealing with multi-causal processes).
Hayek himself never articulated the potential systemic knowledge gains that may arise from market-supportive redistributive policies in societies with highly unequal access to credit. However, he was more willing than Mises or Rothbard to view government functions beyond the minimal night-watchman state as legitimate. For example, Hayek (1960) considers a guaranteed minimum income as compatible with a well-functioning market as long as it’s not excessive. But Hayek’s acceptance of small-government classical liberalism rather than minimal-government or anarchist libertarianism was never articulated as promoting better systemic performance, with the exception of externality abatement and the provision of traditional public goods. Instead, it was a concession to the widespread human desire for an extra-market safety net. The purpose of this paper has been to show that Hayek’s own arguments regarding the importance of several property for the creation and dissemination of knowledge crucially depends on economic property rights being sufficiently decentralized: other things being equal, greater decentralization implies greater entrepreneurial dissemination of the local knowledge than derives from the experiential and cognitive heterogeneity within human populations.
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Rothbard, MN (1991). “The End of Socialism and the Calculation Debate Revisited.” Review of Austrian Economics, 5: 51-76.
Note: This is the first draft of a new paper.
This is not a photo blog, so this post is a rare exception. This is a picture of me and my wife (Lahu Isbabanal), taken on Saturday, December 27, 2008 inside the StayAt Mazetti in Malmo, Sweden. It was a nostalgic visit for us, since we lived in Malmo for nine months in 2002. The picture was taken by my son, Orlando. This was just before we went to have dinner at the Brogatan Restaurant to celebrate my mother’s birthday (her name is Ethel, and she approved of the restaurant, as did the rest of us). We returned to Taiwan the following day.