Saturday, October 5, 2013

Can There Be a Property Right in Value?


There must be a property right in the market value of things, because otherwise a legal system is impossible.

All legal rights are property rights, all legal wrongs are property violations. Legal remedies aim to restore property ("make the victim whole"). Restoring the physical integrity of damaged property is often impossible, thus the need for awarding money damages. The reduction in market value to the damaged property is the only rational measurement for money damages.  Since damages awarded must be based on a property right, there must therefore be a property right in the market value of things. Absent a property right in value, a legal system can impose only barter damages, not money damages. A legal system with only barter damages will fail for the same reason that a barter economy fails.


Can a person assert a valid property right over the value of something? Or is a property claim limited to the thing's "physical integrity"? This question ends up being crucial to the issue of intellectual property, for two reasons:

First, if sound economic theory finds that a property right can only pertain to physical things, then obviously intellectual works, like songs, movies, novels and computer games cannot be property.

Second, showing that intellectual goods are rightful property depends on showing that they are, by their very nature, scarce and rivalrous goods. The rivalrous nature of an intellectual work comes from the creator's desire to exploit the work commercially, by selling copies of it on the market. A competitor who makes and sells unauthorized copies interferes with the creator's use, which is measurable by the reduction in market value of the creator's original work. If there can be no property right in value, then the unauthorized copier's actions cannot be construed as trespass.

Hans-Hermann Hoppe's "The Idea of Law in a Private Society"

In  "The Idea of a Private Law Society" (quoted below), Austrian economist Hans-Hermann Hoppe has explained why, in his view, there cannot be a property right in value. I will show that Hoppe's finding must be incorrect, and that it must be possible to hold a property interest in the value of something.

To understand why there must be a property right in value, we must assume that a correct theory of economics will allow for a viable legal system. Conversely, we must also assume that any conclusion reached by economic reasoning which makes a legal system impossible must be erroneous. If you are not willing to assume the necessity of a viable legal system in society, then read no further.

The Rationale for Property

Begin by imagining a state of nature. Humans are much like wild animals, with no sense of right and wrong, and no concept of property. We could call this a state of total freedom.  A man takes what he wants, with nary a thought of who it might "belong" to. Because there are many people, who all want things, conflict ensues.

In such a world, one of the things that people come to want is the elimination of conflict. And thus is born the concept of property. Property is the idea that we can decide who has the right to use a given thing, and the concurrent right to exclude everyone else from using it.

Property represents a step away from total freedom, because it naturally imposes restrictions on allowed behavior. The reasonable person is willing to impose such restrictions on himself because he understands, through reason, that a society with property rights will be one of peace and prosperity, while a society without property rights will be one of conflict and poverty. Hoppe has given a beautiful exposition of the rationale in his "The Ethics and Economics of Private Property".

It is important to scrutinize this chain of reasoning. We start with a theory of "total freedom". Working forwards, we deduce that total freedom leads to an undesirable outcome, and conclude that there must be an error in that theory, because it does not produce our intended result (a peaceful, prosperous society). We then work backwards, modify "total freedom" to include property, work forward again and get a much better result. I wish to underscore that in social theory "working backwards" from a desired conclusion is, to a certain extent, inevitable.

We first assume that avoiding conflict is a desired outcome, then invent property rights to solve the problem. Similarly, we must assume that a viable legal system is a desired outcome. Let us now discover what problems arise in the implementation of law in a libertarian world, and what we must invent as a solution.

The Rationale for Money Damages

The purpose of law is to provide a set of rules governing the conduct of people, and a mechanism by which people who have been harmed by the wrongdoing of others may be compensated. Correctly understood, all rights are property rights, beginning first and foremost with the right of each person to own his or her own physical body. All laws flow from the protection of property rights. All legal wrongs should be understood as a violation of the property rights of another.

The most fundamental concept in compensating victims is "damages". It is not enough to merely note that a victim has been harmed by the wrongdoing of another. We must be able to measure the magnitude of harm. Then, we must have a viable method of transferring the compensation from the wrongdoer to the victim.

In most cases, the simplest and best method to "make the victim whole" is to determine the reduction in market value caused by the offense, then make the wrongdoer pay that amount of money to the victim. There are many different types of legal situations that requires remedy, and the Common Law has devised others sorts of remedies besides money damages (e.g. "replevin", which is forcing a thief to give back the stolen goods). But money damages is, by far, the type of remedy that applies to the greatest number of cases.

Clearly, a viable legal system must have the ability to award money damages. I hope it is plain to the reader that a legal system attempting to impose compensation by barter is not viable for the same reasons that an overall barter economy is not viable.

What Does Hoppe's Conclusion Imply About Damages?

Suppose then that we accept Hoppe's conclusion that there is no property right in the value of a thing. Rather, a property right exists only in its "physical integrity". Suppose you own a car, and a trespasser comes along and smashes the car up with a baseball bat, because he is angry that his former girlfriend fell in love with you. In Hoppe's world, you have a property right only in the physical integrity of the car. The legal system could catch the wrongdoer, and find him liable to you. But what are the damages?

In Hoppe's world, the damages in the car smashing example are a broken windshield, dented hood, slashed tires, etc. We can order the wrongdoer to restore the physical integrity of your car. Technically, this is impossible, under the physical laws of entropy. We cannot reverse time, and magically put your car back in the state it was before.

Lacking magic, repairing your car is the next best thing, but what does that really mean? It doesn't mean restoring the physical integrity of your car, rather it means restoring the value of your car, as best as possible. Let's temporarily ignore the fact that, here in Hoppe's world, you don't have a property right in the value of your car. Unless the wrongdoer is himself a skilled mechanic, he will need to purchase materials and the labor services of a mechanic, to fix the car. This is kind of possible, but we'll run into all sorts of problems regarding which substitute materials are acceptable. 

But suppose the car is smashed up so badly that it is literally impossible to repair. What then? Do we order the wrongdoer to buy you a new car? What if your car was not new at the time of the smashing? Must we obtain a new car, and then attempt to inflict whatever wear-and-tear had occurred to your car? Are you beginning to see the problem?

Students of Austrian economics will recognize these clumsy transactions to be quite similar to the types of problems experienced in socialist economies, which lack meaningful prices. The lack of market prices makes rational economic calculation impossible, as proven theoretically by Mises, and empirically confirmed by history.

A Viable Legal System is Impossible Without Money Damages

A viable legal system is impossible without market prices on damages for the same reason that a viable economic system is impossible without market prices in general - rational economic calculation positively requires it. Without accepting the idea that one may have a rightful property interest in the value of a thing, then there is simply no basis whatsoever to consider market value in assessing damages.

Therefore, there must be a valid property right in value, and there must be some error in Hoppe's logic, which I will explore below. If you wish to dispute this finding, it is incumbent upon you to demonstrate why a legal system is unnecessary, or how a barter system of damages might work, or how money damages might otherwise be measured.

I've shown that that there can be valid property rights in the market value of things, because otherwise a legal system is not viable. Of course, this does not mean that one automatically obtains a valid property right in something simply because it has value. The difference between those two propositions lies in the distinction between individual valuation vs. market valuation.

Individual Value is Subjective

One of the more important and insightful findings of Austrian economics is that value is subjective. Two people encounter the exact same object, and come to completely different opinions about what it is worth. As the old saying goes, "one man's trash is another man's treasure."

Not only might it be the case that two people value the same thing differently, it is almost always so. Far from troubling, this is one of the most amazingly beautiful facts about humans, because this subjective valuation is what makes trade possible. When two people make a voluntarily exchange, they demonstrate that they value the things being traded in reverse order. I value what I get from you more than what I give up, while you value what you get from me more than what you give up.

Market Value is Objective

Individual valuation is indeed wholly subjective. It cannot be measured, except in order of preference. I might say that I like apples more than grapefruit, but it makes no sense to say I like it 3 more, or 7 more. However, market valuation is different than individual valuation. In a monetary economy, through the interaction of many people, each with subjective preferences, objective market prices emerge. While it makes no sense to contemplate how much an individual values something, it makes perfect sense to contemplate how the market values something.

Analyzing Hoppe on Property Rights in Value

With this in mind, let me turn now to Hoppe's piece on property rights in value. Note that Hoppe assumes in his definitions here that property must be physical, an assumption obviously I do not share. However, for the purpose of discovering the error in Hoppe's reasoning, I shall allow the assumption that property must be physical, and show that even with that assumption, Hoppe does not disprove the validity of a property right in value.
Hoppe:  [P]roperty ownership means the exclusive control of a particular person over specific physical objects and spaces. Conversely, property rights invasion means the uninvited physical damage or diminution of things and territories owned by other persons. In contrast, a widely held view holds that the damage or diminution of the value (or price) of someone’s property also constitutes a punishable offense.
Hoppe is quite correct that it is a "widely held view" that there is a property right in value. The majority can be wrong, of course, but Hoppe would do well to confront the possibility that at least some in that majority have hit upon the idea that a legal system is theoretically impossible without a property right in value, as I've explained above.
Hoppe: As far as the (in)compatibility of both positions is concerned, it is easy to recognize that nearly every action of an individual can alter the value (price) of someone else’s property. For example, when person A enters the labor or the marriage market, this may change the value of B in these markets. 
Stop. Did you see what Hoppe did right there? First, he frames the debate as asking whether damage to the value of property can be a punishable offense. But then, he uses entry into a labor market as his example. Did Hoppe establish that some person rightly held a property interest in the labor market? No he did not. Of course it is wrong to think that entering the labor market is a punishable offense, even though it lowers somebody else's value on that market. But the reason it is wrong is because nobody owns a property interest in the "labor market", not because it is categorically impossible to hold a property right in the value of something.
Hoppe: And when A changes his relative valuations of beer and bread, or if A himself decides to become a brewer or baker, this changes the value of the property of other brewers and bakers. According to the view that value damage constitutes a rights violation, A would be committing a punishable offense vis–vis brewers or bakers.
In the above hypothetical, A is asserting a bogus claim to property, because A has done nothing to constitute an act of homesteading that would confer a property right allowing his control over that market.  But just because Hoppe cites one example in which there is no property right in value, does not mean there can never be a property right in value. One could just as easily construct a hypothetical in which A asserts a bogus claim to physical property.

Hoppe proceeds to discuss remedies, and finally drops the bombshell:
Hoppe: If A is guilty, then B and the brewers and bakers must have the right to defend themselves against A’s actions, and their defensive actions can only consist of physical invasions of A and his property. (emphasis added)
And there you have it. In Hoppe's world, money damages are impossible. And he admits it, right there. I strongly encourage Hans-Hermann Hoppe to continue forward from this point, exploring the praxeological implications of a legal system that forbids the assessment of damages based on market value. I believe he will collide headlong with the calculation problem, and quickly determine that such a system is completely non-viable.


Hoppe's fundamental error ought to be clear by now. His reasoning is that because some  property claims in value are bogus, that all property claims in value are bogus. That's a fallacy. And it is a fallacy even assuming that property rights must only apply to physical things. Even in a world without IP, a theory finding no property right in value is fatally flawed.

That said, the argument that property must be physical is also wrong. The doctrine of Intellectual Space provides the framework to understand and apply strict libertarian principles to intangible objects. Doing so demonstrates that, like all forms of intellectual property, a property right in value is valid when it is created by an act of homesteading.