Friday, February 04, 2005

So, Hernando de Soto has noticed that impoverished people have no economic power. It's a real problem.

And he has a solution: give them property rights, and let the magic of the market sort it out. Unfortunately, it's not a real solution. It's been tried, and it doesn't work.

In slightly more detail: de Soto's idea is that if you give peasants and slum dwellers title to their fields and shacks, they'll then be able to borrow on credit, and participate in their economies. And he's well-connected and persuasive enough to have gotten governments to try it. With the result that the teeming masses almost immediately give up their property rights, selling out to the local rich for a fraction of what they are actually worth.

Has de Soto missed something? I think so, and it's worth remarking because so many other economists miss it as well. He's missed human nature.

The people in economic models aren't quite Homo Sapiens. They're Homo Economicus -- a subspecies with some unusual properties. First off, they not only know their own utility function -- that is, they know exactly how much they'll like a given state of affairs, in quantitative terms. Second, they are also very good at calculating how their choices will affect it. Smart economists know this is bogus, and some recent Nobel Prizes have been awarded for more realistic behavior models. But de Soto seems to be making the assumption hard and raw. In several ways.

First off, the plan is that once you give illiterate slum dwellers property rights, they'll immediately go out and mortgage their property to finance improvements on their handcarts, or whatever they use to make a living. There are two key assumptions here: first, that they know what a mortgage is, and second, that they can find someone to provide one. Neither turns out to be true.

What does turn out to happen is that where the shacks and fields have any real value at all (and they often don't), the peasants almost immediately wind up selling out at pennies on the dollar to local speculators with the financial savvy to know what to do with an asset -- and the money to hire muscle to use against poor folks with other ideas.

John Gravois actually managed to confront de Soto with this, and here was his reply:

He told me wealthy land-grabbers should know that it's in their best interests to have the productive power of the poor brought into the economy. When I replied that those elites don't seem to be aware of that, de Soto simply offered: "I can make them aware."

And then they'll do the right thing, because they are Homo Economicus -- far-seeing maximizers of a numeric utility function which is almost directly equivalent to the balance in their bank accounts. Except that they're not. And not just because they don't see far enough.

Expropriating the poor is an old, old pattern in human societies. Including ours. Alexander Hamilton's buddies screwed thousands of Revolutionary War vets out of their back pay by buying up their scrip on the cheap, and then arranged with Hamilton to get the scrip redeemed to them at full face value. Before that, there's the English enclosure movement. Before that, there's, well... most of ancient history.

Some of that may have been that the elites involved lacked the wisdom that might be imparted to them by de Soto. But there's something else going on here. There's a type that you see throughout history that really doesn't care how good or bad their standard of living is in absolute terms, so long as it's dramatically better than what people around them have. They don't want cash, they want domination. And that leads to behavior which will frustrate any economic modeler, because Homo Economicus has no will to power.

via Matthew Yglesias.


Blogger Alex said...

Something like this is probably pretty widespread among economic elites. After all, why do Bill Gates and Larry Ellison continue to work at making money, when they already have immensely more than they can ever spend? They almost certainly work harder than you do, which isn't rational behavior: if you made more money, it would actually have some effect on your life, while it has none at all for them. But Ellison will continue to work like a dog as long as Gates (or anyone else) is ahead of him, and Gates will work about as hard to stay there.

5:27 AM  

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