Monday, November 1, 2010

are property and contract efficient?

Anastasia writes in the comments of this post:
Isn't that sort of contradictory that the same neoliberal or libertarian thought-path would lead to a legal structure that hinders its own model to efficiently operate? Is this an example of the inefficiency of the legal system itself, as you explained, especially in that it is a "passive" institution in this case. Maybe I read into this wrong?
[By the way, the point about "passive institutions" is something of my own invention. I tend to see two competing views of institutions which either treat property rights and other parts of the law as passive (in the sense that the economic agents involved simply respond to, say, carrots or sticks on the playing field) or active (in the sense that economic agents can actually be "pushed" by an institution in some way or another toward a path which they would not otherwise have gone in the absence of a change in that institution).]

At any rate, yes, I would agree that it is contradictory to the neoliberal model of, say, development which emphasizes the establishment of, e.g., secure private property rights and sound financial infrastructure as key elements to successful growth paths. I don't really know what to say to that, except that I agree. Does anyone else have any thoughts?

As I see it, one can go about developing a critique to the neoliberal worldview as contradicatory through two ways.

1. You adopt the trend which Horwitz does for the U.S. case, which is to show how states were necessary to capitalism's success everywhere and at every time. People should check out the work of Ha Joon Chang as an accessible introduction to this idea in support of the late developers such as S. Korea. Another good book here is Alice Amsden's Asia's Next Giant.

2. You adopt a more theoretical route, which is the path taken by people like Duncan Kennedy. On this route, you demonstrate the inconsistency of common neoliberal assertions, either by pointing out theoretical cases which are not covered by the model or you introduce some empirical inconsistencies with the theory. Kennedy has a great paper with Frank Michelman which addresses the theoretical problems with libertarian views titled "Are Property and Contract Efficient?" It's a really interesting critique of the law and economics movement from the perspective of CLS. Here is a link to the paper.

It's a tough paper so if anyone wants to see my notes on it feel free to email me. Here is a small summary that gives a flavor of their approach:

The authors use a unique methodology for analyzing the efficiency of systems of private property and enforceable contract. They identify the system, say private property (hereafter denoted PP, to stay consistent with the article). They then introduce two alternative systems: state of nature (SON) and forced sharing for needs (FSN). The former is simply a system with no enforceable private property, while the latter is characterized by rules similar to PP (i.e., enforceable private property in most dimensions except for one) but where ownership takes on an additional qualification: if someone “needs” something someone else owns (in order to stay alive), there can be state-enforced taking. The authors’ goal is to compare the variable “hours of work” across systems and see which systems maximize this variable under five different arguments popularly used in support of the PP regime.

The authors identify five arguments for PP: 1. security increases production; 2. theft is inefficient; 3. PP reduces uncertainty; 4. Coordinational Failure; 5. Distribution of the tradeoff between work and leisure. We will briefly sketch a one of these arguments in how they study the variable “hours of work” in the regime of PP vs. the alternative system of SON.

On (1), that security of property increases production. The standard argument is that the security which enforcement of property affords leads to greater incentives to work, increasing the maximal number of work hours. However, the authors argue that this is merely an empirical assertion: people may work more hours under the SON since the chance of theft is higher here, so they have to take account of this risk when supplying effort. However, one in support of PP may then argue that (5) this alters the distribution of the tradeoff between work and leisure, since people would work more but at the expense of less leisure and therefore efficiency is reduced in the SON. However, the authors argue that these same issues of efficiency over distortion of the tradeoff between work and leisure hold in PP. For example, consider a Crusoe economy where an individual chooses the optimal amount of work time given his preferences. Now, expand this model to imagine a multiple-Crusoe economy where each owns his own island. If one island is wiped out by a storm, the Crusoe on that island must work for another Crusoe in a kind of employer-worker relationship. Thus, for a specific amount of time each day, the unfortunate Crusoe is forced to work for another Crusoe just to be able to reproduce himself. This is time out of the unfortunate Crusoe’s day which cannot be devoted to a labor-leisure tradeoff on his own island and so the distribution of time between labor and leisure is distorted under PP as well.


  1. I haven't followed the discussion, so apologies if I write something irrelevant or already covered.

    My first thought is that your discussion is related to the Poulantzas-Milliband debate, about the role of the state in capitalism. Is it an instrument in the hands of the bourgeoisie, as articulated by Lenin and others? Or, as Poulantzas argues, does it employ longer time horizons that the individual capitalists, who focus on short-term profits, and in many ways (e.g. through concessions to labor), it mediates inter-capitalist competition by focusing on the longer-term stability of the system?

    The second comment would be on neoliberalism and capitalism - I think we have to keep those separate. Again my understanding is that neoliberalism, with its focus on free-markets etc, is a specific form of capitalism. If you look at Adam Smith, you will see that he explicitly argues in favor of protection for nascent industries. The reason that this argument is not heard any more by neoliberal economists is that, after having done this with their own industries, the industrialized countries attempt to pre-empt such a behavior by the rest of the world (as you mention with respect to late developers). Marx also talks in the chapter on the working day about Belgium, as the country which refused to put any regulations on the length of the working day, on the grounds of liberal arguments. I might be wrong, but I think British capitalism was more efficient than Belgian (it would be interesting to look at the impact of unregulated capitalism on the Belgian labor force, anecdotal evidence aside).

  2. Thanks for your comments Harry ... I agree with both of your points so I just want to focus on some specifics.

    My issue with the Miliband thesis is that it is very difficult to prove empirically. It is relatively easy, on the other hand, to show how law serves to reproduce the social order without necessarily holding the hand of either side. Do you know of other (i.e. Outside Britain, contemporary or historical) studies which follow the Miliband model? As I said in my previous post, Horwitz's implicit model of the law is very similar to what the relative autonomy thesis posits, but I don't know of more instrumentalist theses in other countries.

    I totally agree that neoliberalism and capitalism need to be separated. One could argue (as the person currently staying in your room does) that shifting the focus from capitalism to neoliberalism is a current weakspot of many leftists.

    If British capitalism was more efficient than Belgian capitalism because of social controls then you would have to argue that French and German capitalism was more efficient than British capitalism. I suppose you could be right, if by "efficient" you also mean more stable, which is probably what a relative autonomy person would say.