WorldSys: Austrian Home Study Course, Week 11

READINGS: Selections from Lew Rockwell’s The Economics of Liberty

1 How does common property lead to a free rider problem?

Common ownership of property disincentives hard work because the fruits of one’s labors are added to a common pool for general consumption. While it may be the case that sufficiently motivated people will expend a certain amount of effort for the “common good”, there simply isn’t any reason to put in extra hours for weeks on end if there is no guarantee that at least some of whatever is produced can be claimed as recompense. And under most circumstances some fraction of the community will eventually realize they don’t actually have to produce anything in order to consume.

They become free riders.

2 Is this the same “free rider” problem of mainstream economics?

No; in economics textbooks free rider problems are almost always discussed in the context of market failures, rarely in the context of communal failures.

3 What was Gorbachev’s diagnosis of the Soviet Union’s economic woes?

The Associated Press quoted him as saying that “[m]any people have forgotten how to work. They got used to being paid…just for coming to work.” In other words, free riders eventually poisoned the Soviet system.

4 Why are externalities not merely a problem for markets?

As has been pointed out by e.g. Walter Block, there are very few actions anyone can take which don’t have some positive or negative externality involved. If you wear deodorant I get the positive externality of not having to smell you; if you don’t wear deodorant I suffer the negative externality of having to smell you.

It’s true that externalities are a problem for markets, but they’re a problem for all economic arrangements, for it is precisely the positive externality of not needing to work to consume that generates such appalling free-rider scenarios wherever property is communally owned.

5 Why might common ownership lead to overhunting in forests?

Because the benefits are concentrated on the hunters who take more than the sustainable amount while the costs are born by the entire community. Any time this is the case it’s a safe bet something screwy is going to happen with the incentive structure involved.

6 What is the supply-side argument for cutting marginal tax rates?

It satisfies both those that want more money for government projects and those that want to keep more of their individual earnings. The readings don’t exactly go into detail on the mechanics of this is supposed to work.

7 What may have been a strategic error on the part of supply-siders?

They were attempting to twiddle the tax-rate knobs and get reductions at the margin, instead of denouncing the entire thing as theft.

8 What is the “income effect” that Paul Samuelson discussed in his textbook?

In a 1967 edition of his famous textbook on economics Samuelson claimed that higher taxes can sometimes incentive people to work harder for their fortunes. He evidently never justified this claim.

9 What does Bethel think is even more important than tax rates in the explanation of Third World poverty?

First, it should be noted that the question is phrased this way because supply-side thinkers have put a lot of weight on the claim that Third World poverty is caused by high tax rates in Third World countries.

Bethel (the author of this week’s essay) thinks that the issue of taxes is but a special case of a more general phenomenon: property rights. He believes that there will be a strong correlation between the protection of property rights and economic prosperity. I have only given this matter a perfunctory examination, but I do think there have been studies demonstrating such a correlation.

10 How does the progressive tax code promote a class system?

There is a competitive advantage created by the way in which the tax system is set up. “Income property” (which I take to just mean ‘income’ — it isn’t defined) is subject to enormous confiscation through myriad taxes while “real property” — (which as far as I know is something like actual real estate) is harder to confiscate. So “old money” sorts able to buy real property when taxes are low are at an advantage compared to “new money” sorts who are constantly struggling to rise under a crushing tax burden.

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