Friday, February 3, 2017

To the Fairest...

Mount Olympus could have been wealthier by one golden apple if only it had clearly-defined property rights. Instead it destroyed a civilization. 

In the story of the Apple of Discord, the goddess Eris throws a golden apple into the middle of a feast of the gods. Inscribed on the apple were the words “To the Fairest,” implying that it belonged to the most beautiful. This predictably triggered a big fight over who was, in fact, the fairest. The conflict ultimately resulted in the Trojan War.

Supposedly this is a parable about how a small conflict can escalate into a much larger one. I think it actually has a different moral: strict property rights can nip a much bigger conflict in the bud. If ownership of the apple had simply been assigned to someone, even at random or for reasons that don’t seem “fair”, the whole conflict could have been avoided. “Finders keepers” would have avoided the conflict. “Show of hands for who is the fairest” would have done it. Granted it’s a new piece of property and ownership of it was brought into question the moment it was found, the means of assigning ownership should be as clear as possible so that conflict is minimized. And once ownership is established, even if that assignment is initially somewhat capricious, it should be very difficult to call that ownership into question. Allowing open-ended appeals and endlessly revisiting the "justice" of the initial assignment is a recipe for eternal conflict. The occasional injustice of a misjudged beauty contest (or unjust assignment of property to the "wrong" party, in someone's estimation) needs to be traded off against the very high cost of seeking perfect justice, given that we can only approach but never quite reach that Platonic ideal.

This is relevant because today many people endorse stamping “to the fairest” on everything and opening up discussion of who should rightfully own what. I’m thinking of Obama’s “you didn’t build that” remark and Elizabeth Warren and others’ echoing of it. The idea of reparations for centuries-old misdeeds also come to mind. While it certainly makes sense to correct an injustice where one party obviously robbed another, it is less clear that we should “correct” for these social injustices in which there is no clear perpetrator and no obvious victim. A rich person probably got rich by selling an in-demand service to customers who paid willingly. It isn’t at all clear that such a person “took” more than “his fair share.” For the sake of predictability, each voluntary transaction should be seen as inherently legitimate. The transactors should not fear that their exchanges will be later reversed or called into question by third parties looking at statistical aggregates. While it’s sometimes necessary to call the ownership of something into question and adjudicate that dispute, it is very expensive. The resources wasted fighting over who owns what can easily exceed the value of the things in dispute. Property rights should be strong enough to deter theft but still avoid unnecessary conflicts over who owns what.

How costly is it to resolve a property dispute? Think about the proportion of a settlement or jury award that a lawyer takes when his client sues someone for damages. I don’t have good numbers, but it’s often half or more of the settlement. And that’s an *under*estimate of the total cost; you have to consider the lawyers of the losing team and the judge’s time and the wasted time of various witnesses if you are trying to tally up the true social cost. Or think about insurance, where the rules for approving a claim are pretty straightforward and stated clearly in policy language. Auto and Property loss ratios (the percent of premiums paid out when insurance customers make a claim) are around 60% on average, meaning roughly 40% of your premium is the expense of processing the money (the incoming premiums and the outgoing claims dollars), handling the claims, pricing the insurance, investigating fraud, and other expensive, labor-intensive things that insurance companies do. For another example, the deadweight loss of taxation in the United States is thought to be something like 30% of revenue (citation needed, but this 30% figure is what I find from some casual Googling); collect a trillion dollars and you destroy $300 billion in value. It’s expensive to live in an environment where ownership is constantly called into question and reassigned from one party to another. 

I'm sure some of you think I'm being obtuse and are saying, "Of course the gods are going to fight over who is most beautiful! They are vain. Downright narcissistic. Obviously the apple was going to trigger a status fight. It was never about the stupid golden apple anyway. Why would a god care about a chunk of gold?" And of course that's another lesson: avoid status fights. Especially when they are motivated by crass materialism. Petty squabbles about who has the most stuff are the crassest and most materialistic of all status fights. I'm sure the inequality-mongers imagine themselves on the side of the angels, but I see them as fomenting illegitimate class resentments, instigating conflict where none needs to occur, and positing mistaken (easily refutable!) causal explanations of social phenomena. 

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