Photo Economics: The Power of Property

July 31, 2010

For release noon July 27 and thereafter (735 words)

I suggested in an earlier article that aerial photography of the border between barren Haiti and the heavily forested Dominican Republic was a predictor of the recent Haitian earthquake devastation. Not the earthquake, mind you, but the devastation that followed.

The property-rights vacuum that encouraged Haitians to cut trees down without replanting also motivated them to skimp on construction durability. When the “big one” came, buildings collapsed and tens of thousands died. Incentives mattered, big time.

A satellite photo of the Korean peninsula provides a similar border-economics lesson. Taken at night, the photo shows South Korea lit up like a Christmas tree but North Korea has just one isolated dot of light. The message: In a vibrant region, North Korea is a failure, especially compared with its brethren just over the DMZ.

Economic statistics confirm the message. South Korea is the world’s 15th largest economy. North Korea is an economic coffin, at or near the bottom of all national economic rankings except misery. Things were not always this way, however. Some 60 years ago living standards were actually higher in the north.

What happened? The short answer is that the South Koreans accepted private-property rights as an organizing principle for economic activity. The North Koreans shunned such rights, opting for the seeming sureness of top-down economic decision-making. Institutional choices trumped Koreans’ common cultural heritage and language to produce a disparity in living standards surely unimaginable to those who made the choices.

A note of caution is in order right here: South Korea has long pursued “crony capitalism,” where a number of chaebol (large industrial conglomerates, usually controlled by a single family) enjoy preferential status with the government. Samsung, Hyundai and LG are three of the better-known chaebol. Statist-types assert that its government officials must have “picked the winners.”

This, however, does not explain how normally myopic, risk-averse bureaucrats, largely immune from the consequences of their decisions, could have such insight in this single case.

The more important point here is that the notion market closure somehow promotes economic advancement is fatuous and at odds with all economic logic and evidence. The adage about correlation not implying causation certainly applies here. Market closure, with or without a miraculous ability to “pick winners,” stunts advance, reducing living standards below what they otherwise would be.

At the same time, the fact that the two Koreas are so far apart in economic institutions and economic outcomes is a useful reminder that living standards don’t just happen. The goods and services responsible for our survival and enjoyment of life must be produced. They don’t spontaneously appear like Old Testament manna or multiply like New Testament loaves and fishes.

And to think that top-down, czar-like government directives could even remotely approximate the market’s assignments of production tasks and consumption benefits is just as wrongheaded. There is no way so-called economic czars could ever command the millions upon millions upon millions of bits of information about buyer valuations and producer opportunity costs for countless numbers of goods and services. It simply cannot be done. And if a society tries? Lights out! Look again at North Korea in that satellite photo.

Individual sellers and buyers in free markets have no need for information on such a cosmic scale. Readily observed prices provide each, individually, with the economic equivalent of green lights and red lights to guide their activities in wealth-creating directions. The lights flash green when selling prices rise relative to costs; they flash red when costs rise relative to selling prices.

Moreover, and this is key, each seller only needs to know the price of what he sells and his costs, just as each buyer only needs to know the price of what she buys relative to the value she places on the item. Do sellers have to know why prices are what they are, or why their costs are what they are? No. Do buyers have to know why prices are what they are, or why their consumption valuations are what they are? No.

Sellers and buyers responding individually to the green and red lights embodied in prices permit these millions of bits of information about potential sellers and buyers to get processed into market outcomes. Production assignments for a vast array of goods and services go to their lower-cost producers and the corresponding consumption benefits go to their higher-valued users. No one knows a lot, but lots of lights go on.

Look at that photo again.

T. Norman Van Cott, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is a professor of economics at Ball State University. A longer version of this article first appeared in the July/August 2010 issue of The Freeman.



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