Monday, January 9, 2012

Why Your Dog Doesn’t Own Your Entire House, and the Government Doesn’t, Either

I wrote recently about some views expressed by Elizabeth Warren and certain politicos of a previous era to the effect that the government has every right to take at least a big chunk of your earnings and, in some expressions, even your entire earnings for purposes the rulers stipulate.
Nearly ten years ago, the great political philosopher Anthony de Jasay wrote a charming little essay related to this matter called “Your Dog Owns Your House.”  There, he spells out some of the ways in which such sweeping claims—by your dog or the rulers—are incoherent, absurd, and indefensible, and he sketches how to think more sensibly about the issue.
One sees upon even a small amount of reflection that the kind of reasoning advanced by Warren and her predecessors proves too much. Yes, if your dog did not ward off burglars, you might have lost all your household possessions; hence your dog’s diligence in some sense accounts for everything you have. Likewise, à la Warren and her ilk, if the fire department did not keep your town from burning to the ground, you would have earned nothing; hence your (government) fire department in some sense accounts for everything you have. And so forth for the police force, the army, the water department, the public health department, and all the others who provide an input without which your earnings would be zero—in the worst case, because you’d be dead. Because each such provider is essential to everything you produce, each has a claim to everything you produce. So the reasoning goes, at least.
Set aside for the moment the not-inconsiderable difficulty that if each has a just claim on everything you earn, all together they have a claim on a large multiple of everything you earn. For present purposes, however, let’s forget about Fido and lump all of the others together, again à la Warren and Co., as the “government,” whose contribution to your earnings is essential and therefore warrants a claim on everything you earn.
Even with this generous concession, a major difficulty remains: absent your effort, your earnings would also have been zero, notwithstanding the government’s contribution of all the infrastructure and protective services emphasized by Warren and others. No work, no product, no earnings. And you did, after all, do the work.
The error here is an old one in economics. It once plagued economists in their attempts to explain the distribution of the social product between suppliers of the various factors of production—land, labor, capital, and so forth, depending on the precise specification of factors. The puzzle was finally solved, more or less, by something known as the marginal productivity theory of distribution.
The operative word is marginal. Here, as in so many other places where erroneous economic reasoning crops up, the mistake comes from all-or-nothing thinking. In our case, no dog, no house; no fire department, no earnings; no police force, no earnings; and so forth, including, please recall, no work, no earnings. To make headway one must recognize that many inputs of services contribute jointly to the production of a good or service. But it is absurd to suppose that because each of them is essential—in the sense that if it were completely withdrawn, no product would be produced—each of them has a valid claim to the entire output.
The marginal productivity theory of distribution maintains that if each factor supplier is paid the value of the marginal product of the factor service provided, each will be rewarded in accordance with a coherent concept of the extent to which his factor supply accounts for the output, and together the rewards received by all factor suppliers will add up to exactly the amount of the output  produced by the joint efforts of all. (This theory work perfectly only under the assumption of a particular production technology, known as constant returns to scale, but that difficulty does not invalidate completely the basic idea the theory expresses, especially in regard to marginal productivity as the key concept.)
This sort of explanation is known in economics as imputation theory. Among other things, it explains why factor values depend on (are “imputed” from) consumer valuations of final outputs, not vice versa, as the classical labor theory of value and other theories maintain.
In any event, an understanding of marginal productivity and imputation theory undermines the sort of facile claims made by Elizabeth Warren, leading politicos associated with the New Deal, and all too many others, both inside and outside the political apparatus. Of course, if the rulers can’t claim that they deserve everything you’ve earned by using this sort of bogus reasoning, they’ll surely come up with another equally bogus reason for doing what all rulers and their stooges seek to do—to plunder you to the fullest feasible extent.

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