Thursday, July 7, 2011

Marginalism, inequality, and security costs

An article from Anna Morgenstern, cited by a comment on Reddit, claims that massive capital accumulation in anarchy is impossible because:

  1. States subsidize police protection of private property, making possible absentee ownership of property over large geographical areas. Without state-subsidized police protection, absentee ownership would be impossible.
  2. A self-interested militia raised in anarchy for national defense, comprised of the middle class, defending from an aggressor state, would not protect the property of billionaires.
  3. The state creates fractional reserve banking, which enriches the wealthy at the expense of the public.
  4. Central banking enriches the wealthy at the expense of the public.
  5. Intellectual property is a state-imposed rent.
Claim 1 almost sounds plausible at first blush, but it's actually glaringly wrong, because it denies marginalism. As people grow their wealth, they are constantly bargaining with others for command of resources. Employees benefit from a business owner's investment capital, on the margin. An employee benefits from each additional unit of labor and skill they sell on a free market. We should expect that their salaries and wages will be competed up to how much value they create in the firm. The antagonism between employees and owners in leftist and syndicalist thought is overstated, because employment decisions incorporate opportunity cost.

Employees aren't always on the brink of seizing business assets from an owner, and a state police force isn't the driving deterrent. Employees benefit on the margin from their own employment. If employees really sought to seize business assets, why wouldn't they simply open shop with their own investment capital? Entrepreneurs serve their employees by taking on risk and offering up their own investment capital so that more risk-averse employees don't need to.

Police forces, whether state-run or private, exist to take advantage of the division of labor, and as such, coordinate economic activity far beyond any one economic agent's scope. A spontaneous order coordinates more activity than a planned order, and a public police force doesn't provide the Pareto-efficient amount of protection, but it does offer gains above and beyond autarkic production. It's the division of labor in protection provision that allows for absentee ownership, not distortions from the state, and absentee ownership is desirable because it allows capitalists to generate more wealth.

Claim 2 is trivially false. National defense is not a coherent concept for a stateless region. There cannot be national defense for a nonexistent nation. To introduce an aggressor state into the thought experiment is theorizing outside the scope of anarchy, but the same denial of marginalism from Claim 1 also underlies Claim 2. Free economic agents allocate the efficient amount of protection of private property, on the margin, whether to defend against jealous employees or external aggressor states. If a militia can form at all, and members of the militia are motivated by the protection of private property, the militia would protect the assets that people find valuable on the margin, which includes assets owned by billionaires.

The falsity is the idea that the wealthy just hoard their wealth. In reality, wealth isn't so liquid. Wealth is used by people other than the owners to profit through investment.

Claim 3 is a bizarre old Rothbardian myth, which Selgin has thoroughly debunked.

Claim 4 is almost true. Central banking is a way for the politically connected, not the wealthy per se, to extract rents from the public.

Claim 5 is plausible.