To Understand Economics, First Understand Private Property

by nyljaouadi1
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In Man, Economy, and State, Murray Rothbard expounds the principles of economics by reconstructing an economy from the ground up. Following the practice of classical economists, he opens the book by imagining Robinson Crusoe alone on an island. After identifying the operative laws that apply even to isolated individuals, Rothbard’s second chapter considers Crusoe on an island with one other person, introducing the concept of direct exchange, or the barter economy. In the third and fourth chapters, Rothbard considers the origins of money and prices in an economy of indirect exchange.

For a treatise on price theory, Rothbard recognizes the need to explain the origins of money prices, as Carl Menger and Ludwig von Mises did before him. In The Theory of Money and Credit, Mises built on Menger’s original explanation for the origin of money by formulating the regression theorem. When considering price changes back through time, Mises theorized, we must naturally come to points of origin and departure. Paper dollars today have no commodity foundation, but we can easily identify the point at which they were disconnected from specie. Going further back, we may not be able to identify empirically the moment at which specie, or any other commodity, was first used as a medium of indirect exchange, but we can logically deduce that such a moment must have occurred as primitive economies grew increasingly complex.

Mises’s theorem offered a number of important insights for price theorists. Perhaps the chief insight is that even though modern money may have no commodity base, the origins of any money could only have been a commodity with some original value in use. No new media of exchange can undermine this history. Even cryptocurrencies, such as bitcoin, can be traced back to a point at which they were first exchanged for dollars. Dollar prices then trace back to a point of disconnect from a commodity foundation, and those prices trace further to a point of original indirect exchange. Another insight derived from the regression theorem is that money prices depend on exchange. This may seem like an obvious truism, but in the early twentieth-century debates over socialism, the necessity of market exchange highlighted the crucial distinction between technical calculation (What do we need to build a given item?) and economic calculation (What should we build given the resources available?).

In chapter 2 of Man, Economy, and State, before Rothbard summarizes Mises’s insights about the origins of money prices, he considers the origins of property rights. With a citation of John Locke, Rothbard asserts the principle of self-ownership and argues that the original appropriation of property comes from mixing labor with yet-unowned resources, such as clearing land for cultivation. Only after establishing a basis for property rights, does Rothbard turn to considerations of exchange and money prices.

Even friendly scholars, happy to acknowledge the value of Rothbard’s treatise, often consider this passage an unwarranted deviation from value-free economic analysis. Rothbard, they claim, is importing libertarian ethical theory into his economic analysis. John Egger, for example, accuses Rothbard of putting on his “political scientist hat,” arguing that “the ethics adopted by . . . Rothbard cannot be derived from Austrian-school principles and are not necessary to Austrian economic analysis.”

Even sympathetic Austrians rarely pay much attention to Rothbard’s explanation for the origin of property rights except to occasionally dismiss it as a libertarian deviation from scientific analysis, but I believe Rothbard is offering underappreciated economic insights. Mises recognized that money prices depended on exchange, and he saw the need to explain the origins of monetary exchange. Rothbard took Mises’s idea a step further, recognizing that the prerequisite for market exchange is private property and the origin of property norms is therefore just as relevant to economic analysis as the origins of money and monetary exchange. “Before we examine the exchange process,” Rothbard writes in no unclear terms, “it must be considered that, in order for a person to exchange anything, he must first possess it, or own it.”

Critical readers might object that we cannot take it for granted that property rights originate in the way that Rothbard describes. Governments, of course, can establish property rights, even if in violation of Lockean ethics, that suffice to provide the conditions for market exchange. But such considerations would be inappropriate for Rothbard’s second chapter, as he is considering an unhampered market economy—one in which governments, as yet, play no role. For markets to exist sans government, then, private property norms must emerge spontaneously.

To this last point, Rothbard never asserts that the Lockean rule of first appropriation is the proper means of establishing property rights (though he certainly believed that and made genuinely ethical arguments along those lines in other works, such as The Ethics of Liberty). In Man, Economy, and State, he simply considers the way property norms could logically emerge in an unhampered market.

Man in a “free, unhampered market … may exchange any type of factor … for any type of factor,” Rothbard writes, but “it is clear that gifts and exchanges as a source of property must eventually be resolved into: self-ownership, appropriation of unused nature-given factors, and production of capital and consumers’ goods, as the ultimate sources of acquiring property in a free economic system” (emphasis in original).

Rothbard’s argument follows a similar logical structure to Mises’s regression theorem, and in fact even extends the continuum of exchange that Mises outlines. When constructing his theorem, Mises views the end point of his analysis as modern monetary prices, and his point of origin is that moment when a commodity was first used as a medium for indirect exchange. Rothbard has the same end point in mind, but realizing that property rights are (1) necessary for exchange and (2) not a given for any society and therefore warrant explaining, he finds the origins of money prices in the original emergence of private property norms.

Of course, people can provide alternative theories for the origin of private property, but the mere fact that Rothbard recognizes the need to explain property norms is itself a valuable contribution to economics that continues to go unappreciated. The most obvious objection people might offer to counter Rothbard’s theory is no different than the alternative explanation to Mises’s and Menger’s theories for the origins of money: the state must construct property rights and introduce money, thus creating markets.

But as historians and anthropologists learn more about prehistory (the history of man prior to documentary evidence), the statist theories for both property rights and money crumble. Yale political scientist James C. Scott, for example, notes that evidence for the domestication of plants precedes the formation of the earliest states, arguing that states could not exist without a taxable base (grain, most commonly), and the domestication of plants and primitive commerce preceded state formation. Although he doesn’t address property rights directly, Scott notes that the formation of early states “required a host of products that originated in other ecological zones: timber, firewood, leather, obsidian, copper, tin, gold and silver, and honey,” which they obtained through long-distance trade of “pottery, cloth, grain, and artisanal products.”

Recognizing that economic exchange preceded the state, both Rothbard and Mises raised valid considerations for the origins of money, exchange, and property norms. In offering their theories, they were in fact engaging in a common exercise among classical economists known as “conjectural history.” In the absence of empirical historical evidence, classical thinkers such as Adam Smith and Turgot speculated on the origins of observable, modern institutions based on assumptions about human nature. Although speculative, this method of history was not unscientific. The test of a good theory was that it explained more of what we can observe (both in terms of present society and extant evidence) and omitted less. Historians today who deal with areas of history that have scant documentary evidence, such as Africanists, still engage in conjectural history (even if they may not be aware of its roots in classical political economy).

In this light, Rothbard’s explication for the origins of property norms is not a value-laden prescription for how societies should establish private property rights. Instead, Rothbard is recognizing that early societies must have established some system of private property rights, which individuals recognized reciprocally with respect to each other, and he provides a theory for how this system most likely emerged. It is not an uncontestable idea (no scientific theory is), but scholars dismissing it as a libertarian sidestep from proper economic analysis fail to understand the important economic contribution Rothbard was actually making.



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