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{{DES | des = Part 5 of [[David Ellerman]]'s review of [[John Tomasi]]’s [[Free Market Fairness]].  The property invisible hand mechanism. | show=}}
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Summary to this point
This is the fifth and last part in a five part review of John Tomasi’s new book, Free Market Fairness [2012], a book that has been well-received as “one of the very best philosophical treatments of libertarian thought, ever” (Tyler Cowen) and as a “long and friendly conversation between Friedrich Hayek and John Rawls—a conversation which, astonishingly, reaches agreement” (Deirdre McCloskey). The book does present an authoritative state-of-the-debate (such as it is) across the spectrum from right-libertarianism and classical liberalism on the one side, and high liberalism (that shares some shades of opinion with democratic socialism) on the other side. My point was not to argue about where Tomasi comes down with his own remix version of “market democracy” more on the side of Hayek than Rawls. My point in this five part review has been to use his sympathetic restatements of views across the liberal spectrum to show the basic misframings and common misunderstandings that cut across the liberal viewpoints surveyed in the book.

In Part I of this series, we saw how Tomasi used the standard consent-versus-coercion misframing of the basic issues. In Part II, we considered the misframing involved in his treatment of the Lockean theory of property.  In Part III, we considered the conceptual misunderstanding of what Tomasi calls “productive property” which allows the basic capitalism-versus-socialism misframing of the debate about the so-called “capitalist” system. In Part IV, we considered the rather fake “inalienable rights” theory that does not even rule out a civilized form of the self-sale contract, a nondemocratic constitution (see the libertarian-sponsored charter or free cities idea), or even the coverture marriage contract—all of which are now outlawed in the advanced democracies.

In this fifth and concluding part, we look at the invisible hand mechanism of the property system (in contrast to the usual price system) which seems to be invisible to liberal scholars and social scientists since it does not give a satisfactory “account” of the current economic system based on the renting of human beings. The book has also been the focus of a symposium on the Bleeding Heart Libertarians blog that features commentary from the whole liberal spectrum of political thinkers who accept these misframings and then make intelligent and morally sensitive comments within the bogus framework.

The property invisible hand mechanism
One of the strengths of Tomasi’s Hayekian tilt in his Hayek-Rawls remix is his emphasis on spontaneous orders and invisible hand mechanisms as exemplified in a market economy. But, here again, the debate is largely based on a misframing of the question.

To understand the misframing, suppose the slavery debate in the Antebellum South was based on an assumption shared by both sides that slavery, involuntary and voluntary, was an inherent part of a private property market economy. Then the liberal scholars and social scientists of the day would defend the system on the basis of private property and the freedom of contract, and abolitionists would be seen as anti-market enemies of consent-based spontaneous orders.

Yet today we would, I hope, see this as a misframing of the slavery debate. Slavery, in either its involuntary or voluntary consent-based versions, would be seen as an abuse of private property, and self-sale contracts would be seen as an abuse of the idea of free market contracts. Thus the abolitionists would not today be seen as being necessarily anti-property or anti-market.

Now transpose the misframing over to the current debate about the human rental[1] system (mis-specified as “capitalism”). Consider the income distribution that results from, say, the 1% being able, in effect, to rent the 99% and appropriate the positive and negative fruits of their labor. Both sides of the misframed debate within the liberal spectrum agree that this is the consequence of free markets and private property. Hence those high liberals and liberal social democrats who oppose these consequences look to the visible hand of the state and non-market income redistribution to mitigate these effects, and thus they might be seen as anti-market and anti-private productive property. This allows our liberal scholars and social scientists to strike the pose of defending the human rental system in the name of contractual liberty (rather than an abuse, like a self-sale contract, of free market contracts) , and to defend the employer’s appropriation of the fruits of the labor of all who work in the enterprise as being a core part, rather than an abuse, of the private property system.

In the debate about the current system, which is distorted by the serial misframings, the biggest irony is perhaps that the right-libertarians and classical liberals (never mind the high liberals) do not even see the more fundamental invisible hand mechanism of all.

Before the invisible hand of the price mechanism can even get traction in the exchange of commodities, there must be some mechanism for private property rights to be initiated and terminated in all the production and consumption activities. This was the fundamental insight of the Coasian tradition [1960]; property rights (positive and negative) need to be assigned in order for markets to work. The price mechanism presupposes a property mechanism.

Hence one would think that the liberal scholars and social scientists of our day would place great emphasis on analyzing just how the private property system works—rather than being satisfied with the misconstrued notion of “ownership of the means of production” or “productive property” that can be defeated in a matter of seconds with a conceptual suppose-capital-is-rented-out argument (see Part III). Never mind the rather silly attempt to base an account of the private property system on the idea of “self-ownership” in a mythical Lockean original position. But these misconstrued and simplistic ideas do have one great virtue; they give an “account” for the current system based on the renting of human beings and thus they fulfill the task of the “social science” embedded in that system. “Unfortunately” a serious analysis of the private property system does not give a satisfactory “account” of the human rental system.

The imputation of the legal responsibility for the destruction of property is done explicitly by the visible hand of the legal system in trials for property damages. But property is used-up, consumed, or destroyed in all production and consumption activities, so what is the legal mechanism to impute those liabilities where no trial is held? And when new property is created, what is the mechanism for that legal responsibility (i.e., the property right rather than property liability) to be assigned?

There is such an invisible hand mechanism at the foundation of any private property system. Like the price mechanism, the property mechanism is a laissez-faire mechanism that requires no intervention by the legal system as long as certain conditions are met. If we use the metaphor of an invisible judge holding a trial, then the invisible judge always issues the laissez-faire ruling: “Let it be.” Thus, for instance, the imputation of the liability for used-up piece of property is automatically assigned to the last buyer of the property. But if the property had in fact been stolen or converted from the last owner without consent or contract, then that constitutes grounds to set aside the imputation of the invisible judge, and to bring in the legal system and a visible judge in a damage suit or other legal proceedings. A successful suit and the resulting material damages would correct the laissez-faire imputation by reassigning the property liability to the de facto and now de jure responsible defendant.

In a production activity, there is both the using-up of inputs and the production of the output-assets so both property liabilities and property assets need to be assigned. Again, the laissez-faire mechanism is the natural one of letting the input-liabilities lie where they have fallen (i.e., in the hands of the last buyer of the inputs), which then gives that legal party the legally defensible claim as the first owner of the produced outputs. The role of being the last buyer of the inputs and first owner of the outputs is the legal role usually described as being the “residual claimant.” This is also why residual claimancy is a contractual role, not a property right (as explained in Part III). One party contracts to buy all the inputs to be used up (some inputs might be already owned), bears those costs, and thus claims the product to be sold and receives in net money terms, the residual. That party may or may not be the owner of the productive property such as the buildings or machinery whose services were paid for by the residual claimant.

As in the case of the invisible hand of the price system, certain basic conditions must be met for the invisible judge of the property system to function properly, i.e., to make the imputations that would be made by a visible judge. What are the conditions so that the laissez-faire imputations, like the imputations of a visible judge, will satisfy the responsibility principle?

The fount and source of the idea of invisible hand mechanisms was the Scottish Enlightenment, and the necessary conditions on the property mechanism were clearly stated by Adam Smith’s good friend, David Hume. In addition to the meta-condition of the stability of property, Hume’s two conditions were: “transference by consent, and of the performance of promises.“  [Hume 1978 (1739), Book III, Part II, Section VI, 526] That is, all transfers of property between people needed to be covered by consent (or, more formally, by contract), and all contracts need to be fulfilled by the actual transference or delivery of the conveyed property.

If either of these conditions failed, e.g., theft or breach, then that presumably constitutes grounds for a visible judge of the legal system to intervene and to overrule the imputations of the invisible judge. If, on the other hand, the two conditions are fulfilled, then the possession and de facto responsibility for using up or creating the property is automatically correlated with the last-buyer/first-seller role. That is, when Hume’s conditions are satisfied, then the laissez-faire imputation to last-buyer/first-seller automatically satisfies the responsibility principle of imputing legal responsibility in accordance with de facto responsibility [Ellerman 2004a, or for a mathematical version, 2004b]. This fundamental theorem about the private property system shows that Hume’s conditions imply that (the non-Pickwickian) Locke’s fruits-of-your-labor principle is satisfied (“Hume implies Locke”).

This is the most fundamental invisible hand mechanism at the foundation of any private property market economy; the price mechanism affecting the terms of exchange cannot come into play without the assignment of property rights and liabilities in production and consumption. But right-libertarians and classical liberal economists, who otherwise constantly praise spontaneous orders and invisible hand mechanisms, are distinctly incurious about the invisible judge mechanism involved in all production and consumption.

They are incurious for good reasons. Firstly, the mechanism addresses the question of initiating and terminating property rights, and the whole idea of the fundamental myth about the “ownership of the means of production” is to subsume the product rights into that prior ownership (as analyzed in Part III). Hence the role of the contracts in the invisible judge mechanism is well hidden. Secondly, the question of the imputation of legal responsibility for the initiation and termination of property rights raises the whole matter of responsibility that is well hidden behind the other stories, such as the “self-ownership” story or the Pickwickian version of the “fruits of one’s labor” principle (in either Locke’s version or Friedman’s version considered below).

When the “science of economics” thought it could give a satisfactory “account” of these property questions using marginal productivity theory at the end of the 19th century, then it was briefly willing to raise these otherwise invisible and unmentionable topics.

For instance, when the legally-trained Austrian economist, Friedrich von Wieser, wanted to use marginal productivity theory to address the question of imputation (i.e., assigning legal responsibility), then he parenthetically mentioned that according to the usual notion of legal or moral responsibility, then only the human users of tools could be responsible, never the tools themselves.

The judge … who, in his narrowly-defined task, is only concerned with the legal imputation, confines himself to the discovery of the legally responsible factor, —that person, in fact, who is threatened with the legal punishment.  On him will rightly be laid the whole burden of the consequences, although he could never by himself alone—without  instruments and all the other conditions—have  committed the crime.  The imputation takes for granted physical causality….

If it is the moral imputation that is in question, then certainly no one but the labourer could be named.  Land and capital have no merit that they bring forth fruit; they are dead tools in the hand of man; and the man is responsible for the use he makes of them. [Wieser 1889, 76-79]

Therefore he concluded that the usual legal or moral responsibility was inappropriate for the science of economics to account for the usual mode of production, so he postulated a special notion of “economic responsibility” that was identified with marginal productivity.

At about the same time in America, John Bates Clark thought he could treat the question of property appropriation using marginal productivity theory, so he was willing to enunciate the principle of people getting what they produce as “the principle on which property is supposed to rest” (and thereby detaching the product rights from the ownership of the means of production).

When a workman leaves the mill, carrying his pay in his pocket, the civil law guarantees to him what he thus takes away;  but before he leaves the mill he is the rightful owner of a part of the wealth that the day’s industry has brought forth.  Does the economic law which, in some way that he does not understand, determines what his pay shall be, make it to correspond with the amount of his portion of the day’s product, or does it force him to leave some of his rightful share behind him?  A plan of living that should force men to leave in their employer’s hands anything that by right of creation is theirs, would be an institutional robbery – a legally established violation of the principle on which property is supposed to rest. [Clark 1899, 8-9]

But on closer examination, marginal productivity theory was only a theory of input demand (i.e., part of price determination) and did not even address the actual structure of the appropriation of assets and liabilities in production. The ownership of the product is not shared or distributed among the input suppliers (as pictured in the distributive shares metaphor[2]) just as the input liabilities are not assigned to the output demanders (in spite of the marginal cost pricing of outputs dual to the marginal productivity pricing of inputs). One legal party (the residual claimant) appropriates 100% of the input liabilities and 100% of the produced outputs, and thus received their net value, the residual.

Being equally, however, the owner of the labour, so purchased, as the owner of the slave is of that of the slave, the produce, which is the result of this labour, combined with his capital, is all equally his own.  In the state of society, in which we at present exist, it is in these circumstances that almost all production is effected:  the capitalist is the owner of both instruments of production: and the whole of the produce is his.  [Mill 1826, Chapter I, section II]

Hence marginal productivity theory fell flat as a theory to “account” for the actual imputations of property assets and liabilities in production in the system to rent (not to mention own) the people working in an enterprise.  Thus, as the science of economics developed in the 20th century, it developed a certain incuriosity about the legal or moral imputation described by Wieser and about “the principle on which property is supposed to rest” as described by Clark.

Some economic scientists still tried to use the theory as a Pickwickian “capitalist ethic” to account for each input supplier’s fictitious “share of the product” using a fictitious notion of responsibility: “To each according to what he and the instruments he owns produces.” [Friedman 1962, 161-162] But “the instruments he owns” do not produce anything (just as guns do not commit crimes) since as Wieser pointed out: “Land and capital have no merit that they bring forth fruit; they are dead tools in the hand of man; and the man is responsible for the use he makes of them.” Wieser, perhaps inadvertently, showed the metaphorical, fictitious, and Pickwickian nature of “economic responsibility” in marginal productivity theory packaged as the “capitalist ethic.” Wieser’s admission did not jive with the “capitalist ethic,” and thus the admission was not repeated (to the author’s knowledge) in any economics textbook, Austrian or neoclassical, throughout the entire 20th century (and beyond). It is “better” to leave those facts about legal or moral imputation unmentioned, to exhibit a distinct incuriosity about just how the property system assigns legal responsibility, and to tell an altogether different story based on the serial misframings that are accepted across the spectrum of liberal thought and are even validated by the “official” opposition of the socialist left.

Returning to the laissez-faire mechanism of appropriation, we previously noted that people do not suddenly become non-responsible tools or robots when their actions at the behest of their employer are legal. They are still inexorably de facto co-responsible for using up the inputs and producing the outputs along with any working employer. Yet the laissez-faire mechanism imputes 0% of the input liabilities and 0% of the output assets to the employees.

Since the satisfaction of Hume’s two conditions implies that the invisible judge will correctly impute legal responsibility according to de facto responsibility, one of Hume’s conditions must be systematically violated by the renting of human beings. And so it is. The hired criminal example shows that responsible human action cannot in fact be alienated from one person to another. In the employment contract, the commodity bought and sold cannot actually be transferred from seller to buyer so the “labor contract” is inherently breached. Hence as long as no crime is committed, the key fact or “trick” in this human rental system is that the legal system passively accepts the employees obeying the employer as “fulfilling” the contract for the transfer and delivery of labor services. Then since all the contracts are “in order,” the invisible judge will automatically impute all the input liabilities, and thus all the output assets, to the last buyer of all the inputs, the employer.

But when a crime is committed, the de facto responsibility of the involved human agents does not suddenly change. What changes is that the legal authorities have cause to intervene, to set aside the contract (the basis for the invisible judge’s imputation), and to look at the actual facts. The actual facts are what they were all along; co-responsible co-operation between employees and working employers. “A master and servant who so participate in a crime are liable criminally, not because they are master and servant, but because they jointly carried out a criminal venture and are both criminous.” [Batt 1967, 612] The servant in work becomes a partner in crime.

This is where the inalienable rights theory that descends from the Reformation and Enlightenment [Ellerman 1992, 2010] ties up with an appreciation of the laissez-faire property mechanism at the foundation of any private property system. The flaw is not in the property mechanism but in the invalid human rental contract that causes the mechanism to misimpute. The flaw is in the contract that pretends to alienate that which is de facto inalienable (i.e., a person’s responsibility for their deliberate actions) and in the legal system’s institutionalized fraud (“institutional robbery” in Clark’s bold phrase) of recognizing that alienation contract as valid and counting the co-responsible co-operation of the employees as “fulfilling” the contract so “the capitalist is the owner of both instruments of production: and the whole of the produce is his.”

Thus there are several reasons why the most fundamental of all invisible hand mechanisms is “invisible” to our rather incurious liberal scholars and social scientists who otherwise are quite keen to study such mechanisms.

Concluding remarks
Tomasi’s book is valuable as a sympathetic restatement of the full range of liberal thought. Thus the book provides an excellent opportunity to analyze the misframings shared by all the shades of liberal scholarship that he surveys. There are many smaller judgments, opinions, and associations in the book that might be challenged, but their importance pales in comparison with the basic conceptual misframings of the issues that pervade libertarian and classical liberal thought as well as the “social sciences” of the Austrian and neoclassical variety that need to “account” for the current economic system based on the voluntary renting of human beings.

References
Batt, Francis 1967. The Law of Master and Servant. London: Pitman.

Clark, John Bates 1899. The Distribution of Wealth. New York: Macmillan.

Coase, Ronald 1960. The Problem of Social Cost. Journal of Law and Economics. 3: 1-44.

Ellerman, David 1992. Property & Contract in Economics: The Case for Economic Democracy. Cambridge MA: Blackwell. All my references downloadable at: www.ellerman.org .

Ellerman, David 2004a. The Market Mechanism of Appropriation. Journal des Economistes et des Etudes Humaines. XIV (2 December): 35-53.

Ellerman, David 2004b, Introduction to Property Theory (May 2004). Available at SSRN: http://ssrn.com/abstract=548142 or http://dx.doi.org/10.2139/ssrn.548142.

Ellerman, David 2010. Inalienable Rights: A Litmus Test for Liberal Theories of Justice. Law and Philosophy. 29 (5 September): 571-599.

Friedman, Milton 1962. Capitalism and Freedom. Chicago: University  of  Chicago Press.

Hume, David 1978 (1739). A Treatise of Human Nature. Oxford: Oxford University Press.

Locke, John 1960 (1690). Two Treatises of Government. New York: New American Library.

Samuelson, Paul 1976. Economics. New York: McGraw-Hill.

Tomasi, John 2012. Free Market Fairness. Princeton: Princeton University Press.

Wieser, Friedrich von 1930 (1889). Natural Value. Trans. C.A. Malloch, New York: G.E. Stechert and Company.

 

[1] “One can even say that wages are the rentals paid for the use of a man’s personal services for a day or a week or a year.  This may seem a strange use of terms, but on second thought, one recognizes that every agreement to hire labor is really for some limited period of time.  By outright purchase, you might avoid ever renting any kind of land.  But in our society, labor is one of the few productive factors that cannot legally be bought outright.  Labor can only be rented, and the wage rate is really a rental.”  [Samuelson 1976,  569]

[2] We could have done a separate part of this review on the misframing of the “distributive shares metaphor” since in fact one party holds 100% of the input liabilities and owns 100% of the produced outputs. The distributive shares metaphor ignores the whole question of who that party should be, and instead focuses on the size of the liability to an input supplier and treats the liability (e.g., the human rental or wage-salary payment) “as if” it represented a “portion of the day’s product.” Arguing about “distributive shares” in the human rental system is a misframing akin to arguing about the distribution of real income (e.g., food, clothing, and shelter) in the previous system of involuntarily or voluntarily owned workers.

Published June 21, 2012
Filed in Economic theory,Fatal Flaws,Intellectual history,Legal theory,Political economy,Political theory and tagged Friedrich von Wieser, Hume, invisible hand mechanisms, invisible judge, John Bates Clark, Locke, spontaneous orders

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