Property, Power, And Public Choice
Copyright c 1987 A. Allan Schmid. This book may not be reproduced or sold without the express written permission of the author. (New material added after 1987 is entered in small capitals.) New material is copyrighted, c 1997.
by A. Allan Schmid
Little can happen in economic life which does not have distributional impact. Whose interests then count in the economy and in politics? This book addresses that question and explores the factors and forces that determine whose interests count. We are interested here in what governs institutional and systemic performance and how we may, objectively and nonpresumptively, analyze and understand the variables governing performance. The underlying motivation is twofold: First, to enable us better to know what is going on in the economy and the polity; and second, to enable us better to choose and effectuate meaningful and consequential institutional changes. The focus is on human interdependence and how alternative property rights affect its outcome.
The western painter, Charles Russell, has portrayed a dramatic interaction between cowboy and Indian during a mid-1800s trail drive through Indian territory (see frontispiece). The cowboys are bringing cattle from the western ranches to the rail heads for shipment to the population centers of the East. The Indian is seen signaling to the trail boss as other Indians are cutting from the herd a cow that will be taken back to the tribe for food. But what is going on in the minds of the participants? Is it theft? A prize of battle? Or is it a gift or act of charity? Does the cow represent the payment of a tax to a sovereign with the Indian as tax collector? Or has a trade been consummated where the Indian has agreed to allow passage and use of his land in return for a negotiated rental payment? The physical movement alone tells nothing about the intangible relationships between the parties or their thoughts. Yet these relationships and perceptions have tangible consequences. They may effect the production of the beef, grazing practices, and of course, the relative distribution of wealth.
This relationship between human agreements on property rights, formalized in institutions, and the performance of the economy is the subject of this book. This is an inquiry into law and economics. What are the legal foundations of any economy? What determines whether a consequence of action is considered in a private or governmental choice to produce or consume, invest or save? Where interests conflict, what determines who has power over whom? If these questions can be answered, we shall understand how law (formal and informal) influences the production and distribution of wealth.
How will a change in the rules affect behavior with respect to today's problems, such as dirty air, inflation, poverty, unemployment, or noisy neighbors? A range of institutional alternatives comes to mind. A common pair of alternatives is represented by market versus nonmarket decision systems. If markets are present in the problem area being considered, we could ask why they have failed to get the desired results. Can we change the rules and get more competition? Would more competition make a difference? Can we do something to lower the cost of obtaining information and finding interested buyers (or sellers)? Are people perhaps confused over who owns the resource in question? Do we have to redistribute ownership among different individuals?
Maybe there is no way to alter the market value to yield the performance desired by some. Shall we consider a nonmarket decision system where group choices are explicitly made rather than being a composite of individual choices? What are the voting rules for group choice? What are the political boundaries and levels of government involved? If the good or service is provided by a government agency, what is its jurisdiction and does more than one agency operate in a given field (that is, is there competition)? How will the good be financed and the cost shared among taxpayers? Maybe regulation is the solution. Can we use the threat of punishment to deter undesirable behavior? These are just a few of the wide range of institutional alternatives available to shape the performance of an economy.
Can we predict the result of any of these rule changes? Are there some desired results for which no institutional solutions exist? lt is ironical that we seem to go in cycles on many issues of public policy. If we do not like the results in a given area and markets are being used, it is common to hear recommendations that we turn to government enterprises or regulation. If government is already directly involved, reformers will suggest that markets be tried. If we do not like the performance of our government officials and they have been appointed, someone will suggest that the positions be filled by civil service professionals. and, if they are already civil servants but seem unresponsive to change, we say power is too dispersed and more managerial posts should be appointed by elected officials. If we note that the garbage does not get picked up and bus lines are poor, we may advocate that all of the individual political subdivisions be consolidated into a single metropolitan government; if we already have a large centralized government, we may advocate neighborhood school boards, more power to precinct police captains, and mini-city halls to bring government closer to the people.
With respect to institutional choice, we seem to be acting in ignorance. We go through cycles of reform with great promise of new results only to find failure and some new round of reformers advocating return to where we started. This situation could be the result of a change in the balance of power. Different groups who benefit from different rules may come to power and change the rules to their benefit, and when they are defeated, the rules are changed back. But even those who control choice cannot always find the institution that really serves their interests. They can choose any rule they want, but they are not sure what the result will be. How many times have we watched a group spend their political capital, obtain a new rule, and then receive no change in performance? Economics and the other social sciences have historically played only a minor role in predicting consequences of institutional change. Trial and error have played a large role. Economic theory has served to reinforce current ideologies more than to advance predictive capacity (Gerschenkron 1969).
This book's purpose is to present a theory to guide empirical study of the link between the rules of the game and the performance of the economy--amount, kind, and distribution of welfare. The emphasis is not primarily to explain the present or predict what rules will be chosen in the future but to define instrumental variables that are capable of being manipulated to produce a given impact.1 In other words, what institutions will yield what results? What rules will enable the cowboys of our Russell painting to get more beef to market? Conversely, what rule or institution would put more beef in the Indian cooking pots? Who decides and how?
Is it a zero-sum game where the cowboys' loss is the Indians' gain and vice versa, or is there a way for both to gain? The purpose is not to argue for the interests of either cowboy or Indian. It is to inform their choices by predicting the substantive consequences of institutional alternatives. The book is not a resounding prediction of universal beneficence if only the supply of money were reduced (expanded) or the antitrust laws could be enforced (business controls relaxed), or if only welfare payments could be increased (decreased), or if taxes and government spending could be increased (decreased), or if the revolution of the proletariat could be achieved. The reader wanting new support for these traditional remedies will not find it here.
It will be suggested that performance is in part a function of many cumulative rights governing a host of varieties of human interdependence. If situations of interdependence have many sources, the power of a person or group to participate in resource-use decisions and the ability to achieve control of (or, better, harmony with) nature are influenced by many different kinds of rights. Such a suggestion will not appeal to politicians. Ideas for reform must be condensed into a slogan to fit a headline. It will not be news to lobbyists for special interest groups who are on hand when the detailed rules relating to their areas are being decided with little public scrutiny or understanding. There is an uneven contest between the interests of small groups whose welfare is largely determined by the details of a few key rules and those of larger groups such as consumers whose welfare is a function of a wide variety of rules, no one of which makes a lot of difference by itself.
If this suggestion of performance (especially income distribution) as a function of the aggregation and interaction of many different kinds of rights is supported by further research, it is a problem for reformers and a source of relief for supporters of the status quo. Transaction (especially information) costs mitigate against change of enough different rights to make much difference to our lives. Change is even harder if the value judgments of conventional theory remain hidden from public debate or if we look in the wrong place and limit policy debate to the rights highlighted by the models of pure competition, of Keynes, or of Marx for that matter. This is not to say that policy variables suggested by these models are to be ignored. The theme suggested is one of supplementation. Those who seek significant change in performance must escape the simplistic institutional dichotomies of the past.
Chapter 1 outlines the components of a model or paradigm relating alternative institutions to performance. It integrates concepts from welfare economics, institutional economics, political economy, industrial organization, law, and public choice theory among others. Characteristics of goods are seen as central to predicting institutional impact on who gets what, rather than the usual welfare economics categories of barriers to maximization. Rights and opportunity sets are seen in a reciprocal sense where one person's freedom to act is another's limitation. Major attention is given to power and fundamental distributions which underlie subsequent calculations of efficiency. Chapter 2 which explores property in a social context is a diversion from the primary concern with impact analysis. It is included to remind analysts that without some sense of community, there is no willing participation and no public to make public choices.
Part II containing Chapters 3 through 7 identifies the key goods characteristics of incompatibility, exclusion cost, economies of scale, joint-impact, transaction costs, and surpluses. Hypotheses are formed relating the impact of institutional alternatives interacting with these goods characteristics in a variety of policy applications ranging from natural resources and the environment, consumer protection, cities, farm, public utilities, industrial policy, developing countries, public services, constitutions and civil rights, business organization, education and voluntary organizations to name a few.
The chapters, however, are organized by functional goods characteristics and not by application or type of institution. Readers who specialize in only one applied area are nevertheless urged to study the various chapters to see if the problem interdependencies have more than one source. The theory also reminds the applied specialist, that they can learn from the experience of rights alternatives implemented with goods functionally similar to the one of interest. For example, the reader interested in natural resources may have little institutional variation to observe and can only improve prediction of yet untried rights by using theory to observe outcomes in functionally similar areas.
The basic theory is elaborated, further applied and restated in Part III. Chapter 8 uses the theory to explore some fundamental issues in capitalism, firm and government boundaries, and politics. Some scholars limit the term "public choice" to denote issues of constitutions and voting rules. These issues are explored in this chapter but the term is used more broadly throughout the book to refer to not only the rules for making rules but also to the impact of the rights chosen by government. In the light of the previous analysis and application, the paradigm is restated in Chapter 9. Chapter 10 focuses on psychology as it affects the impact of alternative property rights. In common with conventional economics, the theory has been developed primarily as a theory of advantage rather than a theory of behavior. However, it does not insist on simplistic behavioral assumptions of narrow rationality and maximization, but recognizes information bounds to rationality, interdependent utilities and opportunism.
Part IV and Chapter 11 represents a diversion from the book's emphasis on the non-value-presumptive impact of institutions. It explores the possibilities of a normative analysis and constitutes a critique of modern welfare economics. Welfare economics tries to avoid arguing for the interests of one person over another but nevertheless does so implicitly.
Finally, Part V and Chapter 12 test the institutional theory of the book by a review of empirical studies. Most of the studies did not explicitly use the theory as herein formulated, but the theory is used in interpreting empirical experience, suggesting other variables that should have been controlled, and formulating alternative hypothesis.
The following discussion will develop theory to help search for institutions that can serve widely shared interests but will not assume that all is harmony. Where interests do conflict, intelligent choice requires an understanding of how the rules affect the question of whose interests count.
1. Institutional economics can be divided into institutional change theories and institutional impact theories (Pryor 1973, p. 28). This book focuses on impact theories. In a theory of change, the situation including technology and preferences evolve to modify the character of conflict and interdependence and perception of opportunity can change performance in the long run. Impact theory focuses on given legal change in the structure of opportunities.
A GENERAL PARADIGM OF INSTITUTIONS AND PERFORMANCE
COMPONENTS OF THE PARADlGM
Empirical investigation of the impact of alternative institutions and property rights requires a conceptualization of potentially observable and measurable variables and testable hypotheses. The components of a paradigm for relating institutional alternatives to performance will first be stated briefly and then developed in the sections to follow.
Vilfredo Pareto aggregated the dimensions of policy into three major categories--knowledge, psychology, and power (Samuels 1974b). The model of the role of institutional structure developed here emphasizes the variables of power that give form and direction to costs and benefits. Choice of emphasis does not mean that the other dimensions are not important. The rationale for this choice is partially related to remedying the balance of variables emphasized in the literature of economics as well as a pragmatic judgment of where practical levers of change lie in the span of a lifetime. Neoclassical economics has been very selective in the variables it considers. It emphasizes knowledge of the production function and largely takes it as exogenously determined. This narrow emphasis has drawn criticism from Thorstein Veblen and scholars in that tradition such as Clarence Ayres (1962), who gave much attention to technological change as a driving force for changed performance.
Neoclassical theory has focused narrowly on that part of psychology that can be captured in its concepts of utility and preferences reflected in effective, revealed demand. How these preferences came to be what they are and how they might be related to the prevailing mode of production and institutions remain the province of Marxist scholars, Veblen, and a few economists who have some background in the behavioral sciences (Shaffer 1969 and Solo 1967). Preferences including that of interdependent utilities are surely learned and in time can be changed. Psychology is important for some institutional analysis as it affects perceptions of institutional structure and opportunities, but it will not be a major focus of this book.
Orthodox economics misses many issues of power (Rothschild 1971 and Perroux 1969). K. William Kapp (1968, p. 17) notes that a common theme in institutionalist thought is concern "with such unorthodox issues as the role of conflict, coercion, and power in economic life." Don Kanel (1974, p. 832) suggests that orthrodox economics focuses on "consumers and asks whether the economic system delivers efficiently what consumers want, given available resources, technology and consumer wants." The only power variable that arises from this is controlled by budget constraints and competitive markets. It will be argued that resource ownership and competition address only a portion of human interdependence and thus only a portion of the sources of power that affect the question of whose interests count both as consumers and producers. The ability to participate in an economy depends on much more than competitive markets and ownership of factors of production and money income as conventionally defined.
Welfare economics provides a number of useful concepts applicable to a broad political economy and policy analysis. However, it is most commonly devoted to specifying changes which can improve welfare in a restricted domain (Mishan 1981). It explores change which is consistent with individualism and real or potential Pareto-improvements. The Marshall-Pigou approach also accepted diminishing marginal returns and its implied justification for movements toward equality. But, modern welfare theorists make no explicit argument for the interests of person A over B. It avoids the question of power by accepting some distribution of factor ownership and then testing subsequent allocative changes for welfare improvement. It can get significant assent on its explicit ethics of individualism and Pareto-improvement by raising no questions about fundamental distribution. This book does not employ this escape route and in fact narrows it. Welfare economists have identified a number of product characteristics which create problems in identifying efficient welfare improving allocative changes. These will be utilized and added to, but not for the purpose of defining barriers to optimization. Rather than asking what causes the market to fail to reach the optimum, institutional economics asks how rights interact with these characteristics to determine whose preference will count when the components of the optimum are selected out of many possible optima. It is the public resolution of power conflicts that determine what is efficient. Welfare economics explores possible gains from trade, but the institutional economics of this book explores who has what to trade.
To summarize, institutional economics must include knowledge, psychology, and power variables. It is the judgment of this author that emphasis on further development of the power variable is most useful at this juncture in the evolution of neoclassical and neo-institutional economics and is the most amenable to modification in the short run as a public policy variable.1 The emphasis is always one of degree, and the interaction of all three variables must be kept in mind. (This remains a tentative position as the author is mindful that any change in institutions requires a willingness to change power variables, and this willingness is heavily circumscribed by current knowledge and psychology.)
The system of analysis used here begins with the facts of human interdependence. It is the public choice of property rights (institutions) that control and direct this interdependence and shape the opportunity sets of the interacting parties. The relative opportunities of people can be further described in terms of costs, externalities, and power. There are several ways to classify rights alternatives, but initially this will be done in terms of the type of transaction created. These elements are then combined to describe the structure of human relationships, and this can be used to hypothesize expected performance. Finally, the possible measures of performance are discussed.
HUMAN INTERDEPENDENCE AND PROPERTY RIGHTS
Scarcity is a learned social phenomenon and can be observed as people try to occupy incompatible positions. People manage to get in each other's hair. One person's striving to meet perceived needs gets in the way of someone else trying to do the same thing--for example, both may be trying to occupy the same land, or one person's use of one aspect of land affects the use by others.
Interdependence is the occasion for both cooperation and conflict. The relationships of physics and biology may suggest a production possibility. For example, a beam can only be raised by the joint action of two people. The physical advantage of cooperation, however, does not mean that joint effort will be forthcoming. Often a dispute over the division of the fruits of joint effort keeps the beam from being raised at all. Technology and knowledge affect the character of the output of interdependent effort, but the images of rights that people carry in their heads affect what is realized.
Property rights describe the relationship of one person to another with respect to a resource or any line of action.2 This person-to-person focus differs from some definitions that describe person-to-thing relationships. Rights are the instrumentality by which society controls and orders human interdependence and resolves the question of who gets what. Alternative rights are of interest because of their effect on economic performance and outcomes. The conventional study of rights emphasizes their role ln motivating production effort. A person will not plant if it is expected that someone else will take the harvest. This is important, but, as will be outlined below, it is only one variety of human interdependence.
The term "property right" includes both real and personal property. It includes both tort and contract law, common and statutory (public) law, civil and criminal law, vested and nonvested rights, judicial procedure and civil rights. It includes informal practices and traditions embedded in the culture as well as formal legal institutions. These shape the content of people's opportunities. Perhaps a better term would be property rights and rights equivalencies or, simply, rights.
The terms institutions, rights, and rules of the game are used here more or less interchangeably, though there are slight differences in the degree of aggregation and abstractness implied. The term institution can really only be adequately described by the subject matter of the book as a whole, but if a simple definition is necessary, institutions are sets of ordered relationships among people that define their rights (opportunities), exposure to the rights of others, privileges, and responsibilities. Or, as John R. Commons (1950, p. 21) said, "an institution is collective action in control, liberation, and expansion of individual action"--or, in the words of Kenneth Parsons (1942), "Property is a set of social relationships which ties the future to the present through expectations of stabilized behavior regarding other persons and things."
The term institution implies a broad aggregation of particular rights that are often grouped in sets. A market institution refers to a set of rights/rules of a particular variety (which can vary somewhat and still be regarded as a market). Rights and rules are essentially synonymous. When we speak in the abstract, the term rights is used, while a rule is a specific statement (written or informal) that notes what A may do or expect B to do--for example, the rules of tenure give a faculty member the opportunity to be free of arbitrary dismissal and to obtain a hearing, and so on. Rules can also be expressed as power--for example, the power to force a hearing even if the employer does not want it. A rule describes the extent of potential effective participation in decision making. In other words, rights/rules govern access to and use of power.
In an interdependent world, the opportunities of one person are shaped by the opportunities of others (Samuels 1972). Rights define potential opportunities. An opportunity set is defined as the available lines of action open to an individual. The individual's choice of these lines of action is conditioned by the expected and actual choices of others from within their opportunity sets. At any given time, a person has certain lines of action open-- that is, not prohibited by criminal law or violating the private or communal rights of others--so that she may act without seeking the formal consent of anyone. Actual execution is affected by personal taste, skill, knowledge, and so on. To own some option for acting is to be able to act without the formal consent of others and without others getting in the way to the extent defined by the right. Ownership cannot be defined without at least implied reference to all parties affected by and affecting an action. Ownership means the owner has the opportunity to create costs for others who are affected by the owner's acts and to create benefits for the owner through use or exchange.
While a property right implies that A does not need the formal consent of others to act, others are not powerless if they do not like the action. They may possess legal countermoves that could discourage the act. This constitutes as mutual coercion. For example, A may have the right to raise hogs. Neighbor B is not in a position to go to court and claim theft when offended by A's hogs, but B may exercise certain options within her own opportunity set--for example, threaten not only to raise hogs (on B's land) but also to play loud music at 3:00 A. M. --or B may offer to pay A to cease. When B acts to create cost for A (as opposed to making a market bid), A's opportunity set is reduced. A's opportunity set at any moment is a nominal one that depends on the actual future choices of others acting within their own opportunity sets. Person A often benefits from the forbearance (perhaps love) of B, or B's lack of skill, knowledge, and so on. Opportunity sets can never be described in a static sense or in individual isolation.
When trade is allowed, B can escape from some effects of A's resource use by offering payment to A. This power of A to deny access to B unless payment is agreed upon is limited by the number of alternative places where B may secure the wanted product--that is, the degree of competition. In this case, the size of B's bid depends on the availability of materials to screen out the smell, sight, and noise of hogs as well as any rights to create costs for A.
An opportunity set of an individual is composed of physical and emotional capacities plus legal or customary understandings of potential options that are conditioned by the actual choice of others. Power is a function of rights and personal characteristics as well as the choices of others. Thus the opportunity set of an individual is composed of alternative lines of action that are open because of the relative structure of rights as well as the relative capacity of the person to make use of the rights. For example, the slaves freed after the U.S. Civil War did not have the means to make use of their freedom and thus the distribution of welfare did not change for some time. Also the value of a right is limited by available knowledge and technology. Interacting opportunity sets (which can also be described in terms of property rights) are what is meant by the institutional structure and can be distinguished from nature, technology, knowledge, tastes, and other aspects of personality. The opportunity sets of individuals interact and condition the outcome of human transactions. The components of institutional structure are one of the points of leverage in changing outcomes.
COST, EXTERNALITY, AND POWER
The model of human interaction outlined above emphasizes interdependence. This interdependence can be further described in terms of cost, externality, and power. One person's right to act really means that others are limited in avoiding the consequences of that act. John R. Commons suggested that the rights, liberties, immunity, or freedom of A can be seen as the lack of freedom or exposure of B to A's acts. This interacting conceptualization was developed from W. N. Hohfeld (1913.) The right of A is a duty in B to allow what A claims under that right. One person's freedom is another's limitation, if interests conflict in the face of scarcity. Scarcity is a function of nature and human tastes, while property rights constitute the disaggregation of that scarcity into individual terms.
What do we mean when we say something is scarce? Something must be given up to obtain it and some people do without. The fundamental choice behind this allocation can be masked by emphasizing natural phenomena (much water and few diamonds). This is relevant, but its impact is conditioned by social choices of who has rights which become inputs and costs to the production of a product, and who has enough rights to sell so that income is available to buy a given product. These rights decisions range from the trivial to "tragic choices" because they fundamentally decide who counts, who is fat or hungry, etc. These choices ultimately rest on moral judgments of the shares and entitlements of different people and the meaning and degree of equality (Calabresi and Bobbitt, 1978). Scarcity is partly a matter of physical constraints (resources and technology), but also a matter of fundamental public choice.
The institutional meaning of cost as seen by a given actor is quite different from effects forgone. It is the difference between human purpose and physics. Institutionalized cost is a chosen structure. Those physical opportunities (effects) that a decision maker can or must consider are a matter of specified property rights. Cost is a matter of shares obtained by others.
When is an opportunity that is foreclosed by a resource use also a cost as seen by the user?3 The maximizing owner will consider some effects that are seen as costs and ignore others. The owner will consider his alternative use values. For example, if forest land is used for corn, the opportunity lost (cost) is the forgone utility of lumber and firewood. Second, in an exchange economy, the owner will consider the bids of others. A neighbor may wish to preserve a sylvan view and loses this opportunity if the landowner chooses to grow corn. This effect will be a cost to the landowner to the extent that the neighbor can make an effective bid. The bid is a cost to be considered along with the owner's own alternative use values. If the bid is rejected, the neighbor's lost view or hunger need not be further considered. The neighbor's participation in the land-use decision can be increased by giving the neighbor more rights in other things so that the bid can be enlarged or by making the neighbor a "part-owner" so that his permission to alter resource use must be directly obtained. If the latter is done, the new part-owner may have to be bought out if the other owner wants to cut the trees. Rights determine who has to make a bid to whom (and even if bids are allowed at all).
It is confusing to regard some inputs as bads rather than goods. Any input which you have to buy is a bad in the sense that it is a cost and this cost is externally set by its owners reservation price and not your own internal opportunity cost in use. Calling something a bad prejudges ownership.
The number of people who would like to participate in a resource-use decision is often great. Generally, the more people who have the right to participate, the more the costs to any person who wants to act. At some point, it becomes too costly for A to act to meet his objectives and tastes. The obverse is that some other interests fulfill their objectives. To have a right is to have the potential power to be represented in resource-use decisions and to create costs for other would-be decision makers. (The cost takes the form of either a bid from B that A can consider or the necessity for A to obtain B's permission for a certain action. The latter may require A to make a bid to B.) Power can be described (measured) in terms of the ability or degree of participation in decisions. One person's right is another's cost. One person's property right is the ability to coerce another by withholding what the other wants. There can be consent to the current distribution of the opportunity sets. Then within these sets, the parties may mutually coerce and finally consent to a transaction. ) The latter then only has the option of trying to pay off the right's holder to avoid the greater injury. This coercion is limited by the rights of others in a process of mutual coercion (Samuels 1972). To own is to have the right to coerce. It is not just government regulations that coerce.
A poor person is one who has no or few rights and cannot create costs for others, and therefore income for himself. No persons need get his consent for anything they want to do. In the economics of national income accounting, we learn that one person's income is another person's cost, and therefore we are warned not to count both expenditure and income in the sum of national wealth. In the economics of institutions, we are concerned with the disaggregation of this national income or expenditures and ask why it is that some people never seem to be a cost for anyone else and therefore have little income. To understand income distribution then, rights institutions must be understood.
Some have said, "I seek no power, I only want to be left alone." If tastes differ, however, this statement is not possible to implement. Power is inevitable if interests conflict. If everyone cannot have what they want simultaneously, the choice is not power or no power, but who has the power. Power is the ability to implement one's interests when they conflict with those of others. With respect to a single issue or resource, equal power is impossible. Over a variety of issues, it is possible for A to win some and B others and thus to speak of equality.
The above approach can be contrasted to conventional theory, which has been very selective and value presumptive in its classification of the varieties of human interdependence. Out of all of the ways that the acts of A impinge on B, Mishan (1981, Ch. 52) labels some as being "externalities" which is an incidential and unintended effect caused by A, but external to A's accounting. It is an easy step to say that some effects on B are properly accounted for or may be ignored while others are improper, and it is implied that public policy should correct them. This is the thrust of many distinctions between so-called social and private cost. The very term "social cost" already suggests that the effect so named has to be altered. This has set up a struggle between conservative and reform economists. The latter see the cause of externality as a technical failure of the market and a justification for collective, governmental action. The common illustration of an externality is that of pollution. The reformists say there are many other such external effects not properly accounted for by the market, and the conservatives and classical liberals say that there are few, and even the commonly cited examples could often be corrected by market improvements and extensions (Coase, 1974b and Rowley and Peacock, 1975).
The position taken here is that externalities are not only many but ubiquitous if defined without any presumptive value judgments. If interests conflict, one or more of the interests are inevitably external and must go unmet. This is just as true when two people want to eat the corn from the same acre of land as it is when the use of land affects a neighbor's view or sense of smell. The one is no more or less intentional than the other. Various sources of human interdependence can be distinguished, and these will be discussed in Part II. Some of the confusion in the literature with respect to the term "externalities" will be clarified in Chapter 11. Here it is sufficient only to note that externalities are the substance of the exercise of rights--that is, the interplay of mutual coercion.
One reason a person seeks a right is to create an external effect and have his or her taste, rather than a conflicting one, count. Property rights determine which effects of A's actions on B must be considered by A and which can be ignored. Rights determine which effects are costs and which are external to the decision maker in question. If one party has expanded opportunities, that party has fewer costs and more ability to affect others (create costs for others). One party's opportunities create external effects (or simply costs) for others. To reduce the external effects on B of A's acts is to increase the external effects on A of B's acts. So there is no suggestion here that externalities must be eliminated or internalized. It will be argued that public choice of rights directs externalities and influences who gets to make a choice when it means a forgone opportunity for another. Mutual interaction can also produce external benefits, and alternative rights affect their realization and distribution.
TYPES OF TRANSACTIONS
If the impact of alternative rights on peoples' relative opportunities is to be systematically studied, a taxonomy of rights is needed. Care must be taken with any classification that attempts to be all-inclusive and make sharp distinctions between classes. Nevertheless, some groupings are analytically useful to specify a type of institutional structure (set of rules) to achieve a given performance. They are also useful in specifying the institutional variables in empirical tests, such as is done in Chapter 12. The outline of the model developed so far suggests that an important issue is the definition of opportunity sets. How shall people be related in making decisions on the production of a good or service ? For example, how do people get blood for transfusions? The persons with need can bargain and offer to pay a supplier. Or the needy person can assert a claim on some other person's blood and if the request is not honored, the person can turn to an administrator who orders the transferral. Or the person's need is met by others without a bid, request, or order simply because of the status of the parties (such as in a charitable grant). Each of these implies a different sort of right and will be distinguished as relationships of bargaining, administration, and status-grant transactions. Some general hypotheses contrasting the performance that might be expected from each type of transaction will be noted here, and more specific hypotheses in the context of different situations of interdependence will be developed later.
(Various writers on institutional economics have developed a taxonomy of organizational alternatives. While there are differences in emphasis and purpose, there are striking similarities. For example, John R. Commons (1950, chap. 3) distinguishes bargaining, managerial, and rationing transactions. Robert A. Solo (1967, chap. 19) distinguishes four types of economies: the enterprise, political, household, and institutional ( not-for-profit) . Robert L. Heilbroner (1962, chap. 1) distinguishes institutional approaches of tradition, command, and market. Karl Polanyi (1957, p. 250) distinguishes three forms of economic integration: reciprocity, redistribution, and exchange. Dahl and Lindblom (1953), market, democracy, hierarchy, and bargaining; and Bruno Frey (1978) speaks of exchange, love and threat as alternative decision making procedures.
The parties to a transaction may be individuals or groups of individuals. One's opportunity to participate in a transaction is a matter of rights held individually (can act without the permission of others) or mutually. The right itself can create interdependence by requiring group action according to some decision rules.
In a bargained exchange system, rights are transferable upon mutual consent of the parties. The parties involved are considered legal equals with respect to the given transactions. Each party is acknowledged to have certain rights that are antecedent to the transaction and imply a degree of mutual consent. Each party has an opportunity set with some content (not necessarily equal), and each is free within that limit to join or abstain from further transactions. Each party may deny access to another party who may have need but does not own the resource in question--that is, there is mutual coercion. Through a process of negotiation, the parties agree to transfer something they own in exchange for what the other owns. Thus, a bargained transaction implicitly involves both coercion and consent.
The bargained transaction implicitly involves four parties, the actual buyer and seller and alternatives thereto. If one has no alternatives, the buyer and seller are not legal equals, and one party really has no choice. This rule is relative, and the difference in alternatives facing each party affects their relative bargaining power. This rule is the basis of the economists' traditional interest in competition.
The outcome of a bargaining transaction is an agreement to transfer rights, and this agreement can be described in terms of price, which is the ratio of income to outgo for each of the parties. The result is a function of many things, but all are structured by the content of the interacting opportunity sets.
Bargaining may involve the offer of both goods and bads. The good is the right to act with reference to something valuable. In addition, the opportunity set may contain the right to create certain injuries to others, which may involve things not directly related to the items under consideration for transfer. For example, a threat to compete and enter into production of X may help get the agreement of the other party to accept a favorable price for Y.
Bargained transactions may involve exit or voice (Hirschman 1970). On the one hand, parties may never actually speak to each other. The decision is to buy or not. The price is marked, and the buyer either takes the product or exits to seek another elsewhere. This is often the situation in pure competition where buyers are "price takers." The exiting buyer may have no further concern with that seller. Yet, if numerous buyers exit, the seller will get a message that price or quality needs changing (Adam Smith's famous "unseen hand"). The ability to exit means no one person can affect price and also serves to maintain performance. On the other hand, in small-number situations the parties may communicate specifically by voice. Offers and counter-offers are made in person. Other market forms include cost-plus contracts, auctions, sealed bids, spot and futures. Bargaining is usually associated with the market, but public agencies can also be related to each other by bargaining.
Knowledge of the nominal opportunity sets of the parties is not sufficient to predict the content of a particular trade, which is influenced by the perceptions of the parties, past history, the degrees of benevolence and malevolence, and so on; yet, in many cases the analyst can estimate these perceptions by empathy or formal investigation (see Ch. 10).
The parties to administrative transactions are not legal equals but are related as superior to inferior. The party in the position of superior issues a voiced command to be carried out by the inferior. Administrative transactions involve a position of authority whose occupant has some range of discretion as determined by the opportunity sets of the parties. The position of authority can be a legislature, police, public or private administrator, or simply a private owner. Administration seems the stuff of politics but is also the base of private action and the material of bargained transactions, including contracts.
For example, a legislature may make a law enforced by police; a person is ordered to cease using the pesticide DDT. This is clearly an administrative transaction, but the same effect might be implemented by private rights. A private person or group who owns the right to be free of the effects of DDT has the authority to order people to stop using the chemical. If the chemical continues to be used, the owner of the chemical-free environment can claim theft and turn to the courts for enforcement. An owner is an administrator as surely as any governmental bureaucrat. Owner-administrators may or may not have the further right to transfer their options. Frequently, in the case of public administration, the affected party is prohibited from subsequent bargaining. For example, bids to receive government permission to use DDT are prohibited and would be regarded as a bribe. Such a situation could also arise with private owners who have a use right, but no right of exchange. Where exchange is permitted, it is the right to administer that is the material of bargained transactions. The right to relinquish command over the use of a resource is the ability to obtain income from its sale.
The options to command may be owned by an individual or shared by many. In the case of joint ownership (as with corporate stockholders and citizens of a state), there are rules for the aggregation of individual preferences, which may or may not involve bargaining. Where representatives of owners, such as corporate managers or political representatives, are involved, the owners are often faced with costs in effectively combining their commands--a situation exemplifying the issues of separation of ownership and control in private corporations and of accountability of politicians to voters. The representatives may administer with little control by the owners who are nominally at the top of the hierarchy.
The category of administrative transactions is potentially confusing because it can change rights but is itself subject to rights (rules for making new rights--that is, civil and political rights). Its root may be in previous private contract or some public agreement reflected in constitutions and law. At first glance, the administrative transaction appears to be based wholly on force, but it is a transfer of rights rather than an implicit warfare because while new control is created without unanimous consent, this new control is in turn limited by other rights rather than simply superior physical force. Thus, administration is regarded as a transfer of right and not just a goods movement of war, though this distinction is a matter of degree.
While the administrative transaction involves two parties (an administrator and the inferior), the order (or command) is often for the benefit of some third party. Care must be taken so that the transaction between administrator and inferior does not obscure the transaction between inferior and the beneficiary of the administrative action.
Empirically, it is often hard to distinguish an order from a persuasion. An administrator may not have the formal authority to order a given action, but his suggestion may carry a lot of weight if the administrator has other discretionary choices affecting the subordinate's pay and working conditions; or the administrator's prestige may simply set an attractive example to follow.
The individual administrative transaction involves a limited oneway movement of rights. The inferior delivers a right and receives nothing in return. At the moment, the delivery may be quite involuntary. The avoidance of the harm that the administrator may be able to inflict (possible imprisonment) is not the same as a two-way flow of rights in a negotiated bargain. It may appear to be a contradiction in terms to speak of transfer of ownership in response to an order. If ownership is subject to forced transfer, then was it really ownership in the first place? The fact is that so-called private ownership is always a residual. To be subject to an administrative act is not to own fully. Some authors speak of "rights attenuation" when an owner does not have exclusive control and the right of exchange. But, in the sense noted here, all rights are attenuated. One seldom owns fully and wholly independently of others' actions. This applies to all transactions since opportunity sets interact whether related by bargaining or administration. Nevertheless, one holds part of the bundle of rights until it is ordered to be delivered up under specified conditions and limits. A right that can be exercised until it is overridden by an administrative action can be seen as part of the traditional concept of a bundle of rights. The inferior loses some utility formerly enjoyed, but that was always subject to withdrawal. The former utility was the result of administrative forbearance.
The source of positions of authority may be private contract or some political process. An earlier bargain may create the right to execute future orders. The labor bargain and private contract may precede the right of the manager to give specific orders to employees once they occupy his premises. If each of these specific orders had to be negotiated in the market, transaction costs would be high. When a firm buys out a supplier or subsequent processor of its product (vertical integration), it is substituting a future administrative transaction for a formerly bargained one, i.e. hierarchy for market (Williamson 1975).
The political process often substitutes administration for former market relationships to change the former balance of mutual coercion. Administration is the method for making nonunanimous changes in opportunity sets, including those upon which bargained transactions take place. The rules of political representation and process set limits on how far government can go in changing access to economic goods and the rules for private bargaining transactions. Changes are limited by constitutional rights. In private organizations, there are also positions of authority that allocate opportunities within the organization without unanimous consent of the members. The establishment of a budget by a corporate board of directors is an example. These orders are limited by the charter and perhaps ultimately by the ability of members to exit the organization. In other words, there is always an element of bargaining attached to an administrative transaction. While the administrator may have the power to imprison a citizen or fire an employee, there are usually some costs associated with such action that the inferior can affect. The person in the inferior position thus has some bargaining power when dealing with an administrative superior.
The distribution of administrative rights can be dispersed or concentrated. It may be lodged in national or local government. It may be centralized in the executive or decentralized into executive, legislative, and judicial branches. These dimensions of centralization apply to both government and private forms.4 Various splits are possible such as along functional, product, or geographical lines. To conclude, while bargaining and administration represent alternative systems of rights, there are important structural differences within as well as between each that might be expected to affect performance.
Status and Grant Transactions
In these two types of transaction, there is neither bid nor command. It involves a one-way movement of rights rooted in the learned habits or benevolence of the giver. In a status transaction, transfers are governed primarily through the prescribed roles associated with a person's social position. The amount and kind of good is prescribed and fixed by custom. The transfer is necessary to discharge a social obligation. There is little calculation of advantage in the face of changing relative scarcities. One does what one is expected to do. The behavior is learned and internalized into one's personality, little thought is given to alternatives, and there is no bargaining. There may be two way flows of goods, but the exchange rates are customary rather than negotiated, or the return flow is non-specified and left open. There may or may not be direct, voiced communication between the parties, though direct personal contact is most common.
Anthropologists have described a number of societies that transfer goods via a complex set of interconnected but indirect transactions. Person A may have an obligation to provide a good or service for B (often related by kinship), and B in turn has an obligation to C, and perhaps C then gives something back to A, thus closing the circle. People's needs as defined in the learned custom of the group are thus cared for. Anthropologists call such a system "reciprocity" though it is not the direct quid pro quo that economists usually have in mind (Polanyi 1957).
The internal transfer of goods and services of most families is carried out by this method. The practice of mutual aid among farmers who might be injured during the critical harvest period is another example. The transfers at the moment are one-way and predictable as a result of learned habits, so that people in the role of neighbor know what is expected relative to the role of incapacitated farmer. If a person never occupies the status of need in the future, he is owed nothing by those aided in the past.
If access to goods is by status, objective skills may be less important than position or whom you know. For example, a rich and a poor person may have equal management skills and ideas for new production, but the former can obtain bank credit and the latter cannot. The same distinction often applies with respect to government favors.
A closely related transaction is the grant. Kenneth Boulding (1973) uses the term grant much more inclusively than it is used here. For Boulding, everything that is not a two-way transfer of commodities is a grant: all government orders including taxation as well as all habitual, learned social obligations such as those involved in the family, and all acts of charity. Therefore his grants economy includes all of what here is subdivided into administration and status-grant transactions. He also distinguishes an explicit grant such as charity from an implicit grant such as a political change in property rights. The grant is also a one-way transfer of rights but is distinguished from status in that the grant is less systematized and reflects more individual discretion and calculation. A good example of a grant is an act of charity. (For a review of the literature, see McCanley and Berkowitz, 1970 and Phelps, 1975.) Charity is not something necessarily attached as an obligation of a certain identifiable position running to another socially defined position. The butcher may feel kindly toward a poor baker as a result of a quite private reasoning and set of experiences. This relationship can be contrasted to the rather fixed set of expectations that tie a husband to his wife's uncle--expectations that are embedded perhaps in ritual and shared by all in the community. A donor of charity does not incur the displeasure of the community if he changes his gift from one person to another, but a father does if his gift is changed from his son to someone out- side the family.
The essence of a grant is that the grantor receives no right in return, which is a matter of degree and selective perception. An example of a pure grant is the transfer of wealth between present and unborn generations; the latter cannot do anything in return, not even give the donor honor while he lives. However, the living can give honor to the giver for his act, and the giver may gain self-respect even if not acknowledged by others.
The existence of a two-way movement is a matter of perception, and it changes over time. One person may make a gift and expect nothing in return, while another may give and expect deference. Whether this latter is regarded as grant or bargain is a matter of perception. The certainty of getting a return good when the initial transfer is made is also a matter of degree. The recipient of a grant makes no specific agreement with the grantor and in fact could be ignorant of the gift's source. If any good is returned in the future, the amount and kind are matters again of status and not of present or future negotiation.
A one-way status-grant transfer involves a degree of bond between the donor and recipient that is not usually present in the bargained or administrative transaction. Somehow the utility of A is interdependent with that of B, and A feels better knowing that B's welfare is enhanced, even if A has fewer goods as a result. This topic is important in understanding the social foundation for any system of rights to exist (Taylor 1966).
Since the substance of the status-grant transaction is relatively more internalized in the minds of people and is learned over a lifetime, it is not subject to quick change. If A has been bringing two coconuts to his wife's uncle everyday for ten years, this habit is hard to change even if technology makes cassava roots relatively much easier to acquire or even if the uncle develops a new taste for cassava. To repudiate the gift would be to repudiate the person. Simple exit by the consumer is frowned on. Change would require common learning of new expectations.
Some grantors may be reluctant to initiate or continue a grant, and some grantees may be reluctant to see a grant cease when the grantor's sense of bond declines. Where the grant is supported by community expectations, it has the character of a right held by the grantee. If not, the right is ultimately held by the grantor subject to his individual preference. This is the difference between a status system and private charity. Status rights are non-transferable (Montias 1976, p.118). The individual preference is the same as what others expect the position holder to do.
What are the reinforcers available to restore deviant status transactions to some prior level of performance? One of the common reinforcers is that of voiced, social disapproval and the utility of conformism (Jones 1984). The person expecting the transfer (or third parties in the community) may voice disapproval to the obligated party. Disapproval could be as subtle as a frown or as forceful as social ostracism or, ultimately, removal from the community. To prevent theft, rights subject to exchange have sanctions of jail, but status rights are maintained by social pressure. The fact that all transactions have sanctions doesn't make all types of transactions the same. Social disapproval can accompany violation of bargained and administrative transactions as well. Its effectiveness as a sanction depends on the degree to which the actor has learned to be sensitive to it. Something is done because it is right and customary -- not because of a forward looking calculation of possible sanctions.
When one has no administrative or bargaining power, then the voice of disapproval is the only recourse. One hopes that an expression of disapproval carries enough mental pain for the receiver to modify his behavior. For example, a consumer who writes a letter to a seller of a faulty product may not be in a position to command or bargain. Even a threat to stop buying the product would have little effect as an individual event. The writer hopes that the seller will respond to avoid the voice of social disapproval. Where there is no internalized sense of community, disapproval is ineffective. This is considered further in Chapter 2.
Alternative Transactions Structures Summarized
To summarize, bargaining involves two-way rights transfer, while both administration and status-grant transactions are one-way. Bargaining involves mutual coercion, and administration involves one-way coercion; status-grant transactions involve no overt coercion to initiate the goods flow. Administrative and status-grant transactions generally involve more voiced, direct communication than do bargained transactions.
One aspect of contrasting alternative transactions is the character of goods movements. But, these goods movements also exist in nature (mutualism, parasitism and commensalism). What makes biology or physics different from social transactions is the mental imaging, eg. a grant and administration both involve a one-way physical goods movement, but differ in attitude and resultant utility.
While many aspects of performance can be related to the type of transaction, there is no necessary connection between the type of transaction used and the distribution of wealth and power. The partners to bargained transactions may differ greatly in their assets. The bargaining may be between individuals or involve concentrated wealth in corporate groups. Administrative transactions can be used to disperse wealth widely or narrowly. The power represented by the administrator may be based on contract, democratic election, or military domination. The administration can be highly centralized or widely dispersed in many agencies and levels of government. Status-grant transactions are similar and can disperse or concentrate wealth.
Further, there is no necessary connection between the type of transaction used and the existence of a rationalized plan to achieve certain objectives. A bargained transaction proceeds from an initial distribution and definition of rights. These rights do not specify specific acts that must transpire, but they do influence the direction of what happens. It is true that those who choose from within their opportunity sets may discover that the aggregate result of their choosing was unanticipated. In this sense, market results are unplanned. But it is unlikely that no one was aware of how private rights and rules of contract would influence market results. In this sense, no market economy is unplanned.
It is an important issue for public choice to decide whether human interdependence with reference to a given resource shall be organized via rights of a bargained, administrative, or status-grant character. However, useful as this trichotomy may be for suggesting connections between institutional structure and performance, other categories of rights will be developed later. The above discussion makes clear that there are as many important differences in rights alternatives within each of the three as between.
SUPPLEMENTING THE COMPETITIVE MODEL AND
NEO-CLASSICAL WELFARE ECONOMICS
If a model of the economy is to be useful for public policy, it must contain a full
conceptualization of how one person can affect the welfare of another. In a self-sufficient, nonmarket economy, this interdependence was unidimensional. One person affected another by physical intrusion. Thus, the law of trespass was created. The rem- edy for unlawful intrusion was to sue in a court of law, claiming theft of the use of your property or to have the state act for you in criminal proceedings. One person's opportunity set was framed by the limits that the law placed on the ability of others to remove or destroy physical commodities.
As market exchange developed, the law of physical trespass no longer spoke to all of the ways one party could affect another and incorporeal, intangible property became important. Value in exchange could be affected without any physical intrusion. Attention shifted to the distribution of market power by which one party could affect price. A critical ingredient to bargaining power is the existence of alternatives. The ability of one party to drive a hard bargain is limited by alternative sellers (or buyers as the case may be). Thus, the concept of the purely competitive market was formulated. In a competitive market no one person could affect price because the other party always had the option of exit. Power was limited by rights in competition.
From this perspective, many economists argued that all government needed to do was to define factor ownership, and thus the law of trespass and theft, and to enforce pure competition be such means as antitrust laws.5 The individual who does not like what is happening has two options: court action or exit. This is essentially the position taken by Milton Friedman, who states, "If a consumer finds he's being sold rotten meat at the grocery store, he has the very best protection agency available: the market. He simply stops trading at that store and moves to another. Eventually, the first seller gets the message and offers good meat or he goes out of business." As to faulty, harmful products, "You sue" (Friedman 1975, p. 10).
This view leads easily to the ideological position that the only appropriate role of government is to maintain competition. If no one person could affect price, it appears to follow that people are rich or poor according to their preferences, genes, and human capital. In a word, the poor are lazy! This is a bit of an oversimplification since it has always been clear that some people start with ownership of more factors than others. An old topic in political debate is the law of inheritance. Inheritance taxes reduce the inequality of resource ownership as a result of inter-generational transfer. But the theory of competition does not pay much attention to differences in income distribution. As long as there are many buyers and sellers, it makes no difference whether you are rich or poor; no one can influence price. But income distribution (wealth effect) does make a difference for whether you eat or not and for product demand curves. The conventional theory also tends to ignore how new re- sources get to be owned. There is often an implicit assumption that all valuable things were owned by someone or another since year one and that any currently contested ownership can be deduced from prior rights. The most limited version of this ideology has it that legislatures should not make new property rights and courts should not make law but merely deduce and clarify existing law (Buchanan 1972). To do otherwise is theft. However, it is the ability to get access to newly valuable aspects of resources and knowledge that constitutes a major explanation of differences in the distribution of wealth.
Are there ways that one person can affect another that are not controlled by the laws of trespass and enforcement of competition? Is there more to the structure of rights than is addressed in antitrust laws enforcing competition? To understand the character of the paradigm of this book, it is necessary to review briefly the history of economic thought.
There have been several challenges to the exclusive focus on market competition as the ultimate public policy. One was the Marxist challenge, which predicted the demise of capitalism and noted that it produced an alienated personality whether the person was rich or poor. While the demise has not happened yet, the problems of mental health and cyclical unemployment are very real. Since the Keynesian revolution, mainstream economics has accepted some stabilization, or offset function, by government. However, there are those such as Friedman who would have the money supply grow by a predetermined annual rate and deny any role for periodic government change in mone- tary policy. In any case, the Keynesian perspective saved the competitive market as the primary institutional focus.
Schumpeter (1942) argued that achievement of competitive equilibria was less important for economic growth than the disequilibria created by innovative technologies and products in a process of creative destruction. These two types of competition require different institutions and are often incompatible (Langlois 1986, p. 11).
Veblen challenged the pecuniary mind set of market participants and advocated the abolition of ceremonial institutions to let the natural and assertedly superior order of the instinct of workmanship and engineering values to emerge. Both Veblen and Marx emphasized class conflict of owners vs. producers and developed themes defining exploitation. The Veblenians, Marxists and neo-classic mainstream all have a welfare economics founded in a natural order which a putatively rational person would use to choose the best institutions. All will be critiqued here.
Another challenge came out of the understanding of the role of inelastic supply of some commodities, particularly land. The lucky owners of these resources were in a position to extract large rents and skew income distribution in their favor. This situation led to suggestions for government ownership or taxation from such reformers as John Stuart Mill and Henry George. While the importance of land in the distribution of income has declined, some people still seem able to take advantage of short-term supply inelasticities, and natural resources are the source of many large fortunes.
Still another challenge, from such writers as Pigou and Samuelson, has led to what is now called the basis for "market failure." Certain characteristics of goods prevent market bids to be organized even where it can be imagined that people with income want the product (exclusion-cost and free-rider features). Other characteristics such as marginal cost being zero or less than average cost were thought to lead to inefficient pricing practices if the goods were provided by competitive private market firms. Public utilities have always been thought to need special treatment by government, but the Pigou-Samuelson thrust extended the definition of public utilities considerably. This thrust has been resisted by conservatives. James Buchanan and Gordon Tullock have argued that government can't get any closer to the optimum in the context of market failure because of government failure. Bureaucrats pursue their own self interests and not the public interest or efficiency. The point will be argued here that the basic problem is that there are many public and many optima and there can be no presumption of what constitutes failure.
An empirical question is raised about how competitive the economy is. "How much competition is enough?" Theoretical work from J. M. Clark to William Baumol has led some to the idea of effective competition, which says that even where there are not large numbers of competitors, there may still be enough (potentially) so that no one has undue bargaining power. Economists are divided on this empirical question as well as the meaning of "undue."
Another challenge comes from the economic planners. Galbraith, for example, argues that the character of industrial technology and production is such that many alternative suppliers are not desirable because of scale economies. The perfectly competitive market assumes perfect information. The efficient use of modern technology requires a predictability of the future, which cannot be secured by contract among many market participants. This predictability requires some type of planning. Such planning could and is being done by private corporations, but some type of public participation and overview seems necessary for accountability. Simple right of exit is not enough.
Various subdisciplinary fields in economics reflect the classical focus on competitive markets as well as the challenges thereto. The inheritors of the conventional focus are the field of international trade with its traditional emphasis on free trade and the field of industrial organization with its emphasis on antitrust policy. The challengers are monetary policy and public finance with planning, development, and public utility economics in the wings. This book does not fit neatly into any one of these fields but encompasses them all and perhaps adds a few concepts that have not yet been made the focus of a subdiscipline. In doing so it makes no general argument for or against government, market, Keynesian policies, rent collection, competitive practices, planning, or whatever. It does argue that all of these involve fundamental distributive questions requiring public choice of rights not dictated by technical economics. And more importantly, it provides a theory to better relate policy instruments of all kinds to specific measures of who gets what (rather than whether abstract optima are nearer or further away).
Part II contains a conceptualization of a wide range of human interdependencies which will be referred to as the "situation." It includes those where the degree of competition and the right of exit are relevant plus many where competition is irrelevant and noncontrolling. The categories of situational interdependence are grouped under incompatible uses and users, exclusion costs, economies of scale, joint-impact goods, transaction costs (contractual and information), and consumer and producer surplus (including inelastic supply and rents). In some of these instances of interdependence, it is difficult to establish an effective right of exit, and, in other cases, even if established, the right is not decisive. In some cases, there are interests that depend on rights other than those of exit and protection from trespass. There are interests not served no matter how finely tuned an economy is with reference to the Keynesian variables. Some of the gaps in the traditional fields of economics need to be filled.
The paradigm to be developed is important for two purposes. One is for empirical prediction, and the other is for raising the level of public debate over ethical choices and competing ideologies. If we are going to predict performance under alternative institutions and property rights, we need to know much more than the degree of competition and the nominal opportunity for exit and suit for fraud and theft. Also when testing the effects of the degree of competition, we must be aware of what other institutional factors need to be controlled, if we are to interpret our findings.
The conventional focus on competition also has ideological consequences. Some interests are not served whether or not there is competition. Those who gain from policies and rights unrelated to the degree of competition are benefited when public discourse ignores the wide-ranging sources of their differential wealth and focuses on such questions as whether or not to enforce antitrust laws or even whether a particular product should be provided by public or private firm, regulated or unregulated, or whether welfare subsidies should be changed.
The reader will note that the title of this section is "supplementing" the competitive model, not replacing it. Many heterodox writers concentrate on finding real-world exceptions to the assumptions of pure competition that vitiate its efficiency conclusions. Here the purpose of detailing the several categories of interdependence is rather that they represent situations and interests that are not affected, directed, and controlled by the degree of competition and the exit option. Therefore, if the analyst would prescribe something to help one interest vis-a-vis another, some structural variables in addition to the degree of competition must be sought. For example, it is not sufficient to argue over the degree to which perfect information assumptions are met, but rather the analyst must investigate how the rules alternatives shape the size and distribution of information cost.
MEASURES OF PERFORMANCE
After an initial conceptualization of alternative institutional structures, there
remains the choice of performance variables in empirical studies. Institutional performance will be measured here in terms of who gets what and whose costs get considered. Specific groups of people will be identified as to their level of living, security, quality of the environment, and general quality of life. While the distribution of money income is an important measure, we will see that it is inadequate as a description of the full range of relative opportunities of people. A better performance term might be the distribution of wealth and opportunities.
The approach to be used here contrasts to that of many studies that utilize freedom, growth, and efficiency in a global or societal sense to describe institutional performance. Theory can be used to specify certain institutional structures that by definition produce efficiency and optimum resource allocation in the abstract without any reference to who is a gourmand and who is hungry. Some studies can label the institutions of one country as being more efficient than those of another without ever comparing actual GNP or other measures of level of living. The categories of efficiency, freedom, and growth are often vague and value presumptive. They are discussed in Chapter 11. By contrast, the focus here is on how a particular institution or set of rights affects whose freedom and whose view of efficiency and output will dominate when interests conflict. This is what is meant by substantive performance.
1. The placement of emphasis differs among institutional economists. Some emphasize the institutional fine timing in the context of private negotiation after the primary ownership conflicts have been settled by public choice of legislatures and courts. Oliver Williamson (1985, p. 17) says "The inordinate weight that I assign to transaction cost economizing is a device by which to redress a condition of previous neglect and undervaluation." The emphasis here on the consequences of alternative distributions of power does not deny the role of economizing within structured power and the essential two way interdependence of the two levels.
2. Richard T. Ely says, "The essence of property is in the relations among men arising out of their relations to things" (1914, p. 96). "Property is the right, and not the object over which the right extends" (p. 108). Marx (capital, p. 45, vol. 1) says value is "a relation between persons expressed as a relation between things."
3. Orthodox economics contrasts economic, market determinants of prices and costs with political determinants. But, as Charles Bettelheim (1975, pp. 16-17) points out, this is an illusion "because the market does not determine anything. It is simply the imaginary place where the exigencies of. . .the material and social conditions of production are imposed."
4. See Pryor (1973, pp.279-88).
5. The Chicago School goes one step further and argues that competition is a natural state of affairs that occurs if government does not interfere. Thus, anti-trust law is seldom needed.
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