Mises Daily

Home | Library | Experimental Economics, Indeed

Experimental Economics, Indeed

January 7, 2004

In the December 27thWall Street Journal online, Economics Nobel laureate Vernon L. Smith lays out a program to jumpstart the Iraqi economy and give Iraq a set of institutions fitted to the needs of a free and prosperous commonwealth. He spies "a historic opportunity" for W "to craft a new geopolitical-economic paradigm that could—and should—become a world model for the movement of assets from governments to citizens."

Smith's piece is full of ambiguities and unexplained assumptions. The proposals put forward raise many more questions than they solve; they involve international social engineering, albeit in an allegedly "free market" direction; the social engineering raises in turn the matter of by what right US authorities rearrange other nations' institutions and economies.

There are precedents for US "reform" of other people's property systems, but the record is rather mixed. US rearrangement of Cuban property titles following the Spanish-American War comes to mind.[1] Long before that, US authorities introduced American Indians to a version of the free market, a version that may not have been the only possible one.

In Johnson and Graham's Lessee v. William M'Intosh (1823), the luminous John Marshall theorized the whole thing for posterity. He steadfastly overlooked any facts-on-the-ground regarding property in North America in order to sustain the proposition—derived from the European state system—that property arises only by title from the king or state.[2] This corresponds, of course, to the Hobbesian-Chicagoite assumption that property is ultimately the creation of the state, is not natural, and does not by prior right belong to specific human beings. If Blackstone's dicta did not agree with the facts, so much the worse for the facts.

To avoid the pitfalls of previous privatizations, Smith calls for "embracing the revolutionary principle that public assets belong directly to the public – and can be managed to further individual benefit and free choice, without intermediate government ownership in the public name."

He continues: "In Iraq, the rights in question are to the former government's producing properties, transportation, terminal facilities, waterways, land and subsurface rights. These assets should first be declared transferred to the account of the citizens, recognizing the birthright of each citizen to a personal, empowering property right in the land and assets of the country of their birth. All citizens should have an equal share in this fund and be issued the same number of share claims to the fund."

Seen in the light of the obvious analogy between the case of Iraq and desocialization in the former Soviet bloc some ten years ago, Smith's model may already be in a good deal of conceptual trouble. First, why do the Iraqi people have to own anything as a nation? The whole point of private property is that it is private. If Iraqis own various properties, well and good, but what is it to them to be told they now share in the fictitious ownership of former state assets?

Smith has answers for this last problem, however. He envisions "several decades" in which "all Iraqi assets should be auctioned to the highest bidders in an individual, national and international business competition" so that these assets will be put to their most productive use. Over time, the monies thus raked in "would be deposited in a giant mutual fund for investment in index securities of the world's stock markets and monitored—but not managed—by the U.N. . . . The Iraqi Fund should be a closed-end fund whose shares are tradable and listed on world stock exchanges… Redemptions at market value would go to any Iraqi citizen who elects at any time to cash out any portion of his shares."

This all sounds vaguely plausible, but threatens to land us somewhere between the late-sixties Kelso plan for making every American a corporate stockholder by legislative fiat, and President Clinton's idea that stock market gambling by federal bureaucrats was a good use for the rather fictitious social security "surplus." 

In Smith's first step, the hapless Iraqi holds a theoretical claim to his "share" of public property. In the next step, he has a claim to a bunch of money flowing from the sale of that property. Down the road, he is said to be able to cash in his claims for actual money from a fund, which a gaggle of international speculators has put together for him through wise and prudent investment.

Murray Rothbard and Hans-Hermann Hoppe have addressed much the same sort of question with regard to the East bloc's march out of communism. Let us see how Smith's plan fares under their spotlight:

Now as to Smith's first step, Rothbard had no use for the fictions of public property. As he put it, "Any member of the 'public' who thinks he owns the property may test this theory by trying to appropriate for his own individual use his aliquot part of government property."[3] Government bureaucrats had effective control of the property and, therefore, practical ownership. Merely saying the "people" own something does not make them owners.

The next step fares even less well. Here, someone—the US authorities, a US-appointed Iraqi "government," somebody—auctions off the property of the late regime. But this presupposes a right to so dispose of the property and, therefore, assumes ownership, whatever the pleasant fictions about the people. But ownership is precisely the thing to be established.

As Rothbard wrote in 1992, "one of the main reasons for desocialization is that the government does not deserve to own the productive assets of the country. But if it does not deserve to own the assets, why in the world does it deserve to own their monetary value? And we do not even consider the question: What is the government supposed to do with the funds after they have been received?"[4]

Smith believes he has solved this last problem with his proposed Iraqi fund, but let us first consider some other difficulties of step two, before addressing step three. Recall that Smith wants an egalitarian distribution of claims to the former government's properties. Writing in 1991 on East German desocialization, Hans-Hermann Hoppe already spotted a great flaw: "in order for such countrywide distributed shares to become tradeable property titles, they must specify to which particular resource they refer. Hence, to implement this proposal, first a complete inventory of all of the country's assets would be required, or at least an inventory of all its distinctively separable production units."[5]

Otherwise, Iraqis would be in the odd position of saying, "Ill trade you four shares of Everything for five of your shares of Everything." Still, one doubts seriously that the US authorities or their puppet Iraqi state will undertake such a survey.

Hoppe noted, further, that "the reprivatization of East Germany would not include any of the state's command posts—police, courts, traffic, communications, and education"[6]—and we may safely assume that, in the end, the Iraqi privatization will show similar limitations. In fact, the selection of Iraqi properties to be auctioned off seems quite arbitrary and strategic and will, one guesses, have a lot to do with oil. In truth, the whole business of privatization remains quite muddled, and often comes to nothing more than ruthlessly trimming the state sector from 70% of all properties and resources down to a piddling 50%. 

As Rothbard put it: "The degree of government ownership in the economy may vary from one country to another, but in all countries the State has made sure that it owns and monopolizes the vital nerve centers, the command posts of the society" including "defense, money (the mint and, nowadays, note issue), rivers and coastal seas, streets and highways, land generally (the 'public domain' and the power of 'eminent domain'), and the post office."[7]

Don't hold your breath waiting for the US-imposed Iraqi reform government to sell off, much less give away, its hold on any of those.

In any case, pretending that former communist regimes or clunky dictatorships are uniquely troubled by state control of the economy misses another point made by Rothbard, namely that, "the extent of socialism in the present-day world is at the same time underestimated in countries such as the United States and overestimated in Soviet Russia. It is underestimated because the expansion of government lending to private enterprise in the United States has been generally neglected…. The extent of socialism is overestimated because most writers ignore the fact that Russia, socialist as she is, cannot have full socialism as long as she can still refer to the relatively free markets existing in other parts of the world."(MES, pp. 830-31)

Perhaps the implementation of a system resting on genuine protection of private property rights ought to be put on the domestic agenda of the liberal democratic welfare-warfare states. There is plenty to be done—without looking abroad for more pleasant fields to till.

And as Hoppe wrote of East Germany, "[t]he new government, even if freely elected, cannot be considered the owner of any property, for a criminal's heir, even if himself innocent of any crimes, does not become the legitimate owner of illegitimately acquired assets." It was not within the rights of a new government, however democratic or loveable, to sell, raffle off, or pass around properties previously expropriated by its predecessor. Of course, in the end, the West German state—"West Germany's biggest real-estate owner, capitalist, and employer" in control of "[e]ducation, traffic, communication, schools, universities, streets, rivers, lakes, railroads, airlines, mail, telephone, radio, and television" as well as banking, housing, and agriculture—simply extended the West German welfare-warfare state into the East. The German Establishment broke up some inefficient communist firms and alienated some former East German properties, but a privatization of the holdings of the bloated Federal Republic was hardly in the offing.[8]

One may expect even less from US-driven Iraqi reformists. As an example, consider that the US still blesses price controls on gas at the pump.

So what about Smith's third step in which our hapless Iraqi "owner" of public property finally gets some dinars out of the fund created in his name by speculators in properties whose ownership was never established? Well, if the public properties held by the previous regime actually "belong" to the Iraqis, collectively or individually, as we are told they do, is there not a simpler—and quicker—way to hand these assets over, without setting up what looks like an involved international public-private boondoggle, on which the (politically) well-connected speculating classes make a buck, as all those decades roll by?

Maybe our hapless Iraqi Everyman is better off getting a tangible physical asset now—a lathe, an old dump truck, a tugboat—rather than waiting for manna from the US or the UN, with or without the national inventory mentioned by Hoppe.

As far as land is concerned, Rothbard and Hoppe held that in the post-communist countries, property should be restored to prior legitimate owners or their descendants, at least where records existed to establish title. In the case of capital goods created by the communist states out of confiscated resources, the quickest and least bad solution was the "syndicalist" one of handing over the oil refineries to, say, the oil refinery workers and managers, since in a rough analogy with the homesteading of unowned resources, those workers and managers had mixed their labor with the goods in question.

It wasn't perfect, but it beat funny auctions, that amounted to new expropriations by domestic and foreign investors and, even worse, rested on an assumption of ultimate state title, which pushed aside the whole question of just ownership.[9]

Proposals to auction off Iraqi properties, with the state acting as effective owner, would likely lead, if implemented, to a massive alienation of resources into the hands of select foreign interests. The problem is not that the fictitious "national collective property" of the Iraqis is to be alienated, nor is it not that foreign interests are bad merely for being foreign. Least of all is it the case that outside investment per se is bad. The real point is the legitimacy of the operation in the first place, and the violation of the rights of existing Iraqi owners.

Some Objectivist writers take the view that a proper tracing of title to Iraqi oil assets will lead straight back to a number of western oil companies, who should become the new owners.[10] This does not seem utterly impossible, but I will note in passing that the Objectivist notion of historical title search is under severe time restraints. One wonders, after all, how the British, for example, acquired their assets, and whether or not there were any legitimate owners expropriated by them.

Rothbard also adduced some general points of relevance to proposals to transform Iraq into a utopian Coasian-Chicago School model society: "Here then is a crucial point: you cannot plan markets" and "you cannot have markets in titles to capital if there are still virtually no private owners of capital." He adds, "there is also another vital point: the fact that you cannot plan markets applies also to planning for phasing them in." In the Soviet case, Rothbard's advice was to "legalize" so-called black markets, lower taxes, establish hard money with no fractional-reserve central banking, and so on.[11] This program was an application of Ludwig von Mises's short summary of liberalism: private property.

The key difference between Rothbard and Hoppe, on the one hand, and Vernon Smith et al., on the other, has to do with whether property exists as a naturally occurring phenomenon based on right, or whether it exists purely as an artifact of the state. I think the discussion so far reveals who holds which view.

Other Cans, Other Worms

There are of course further questions clouding Professor Smith's proposed reforms. At least in the cases of Poland, Czechoslovakia, Russia, and so on, people directly having some right in the matter sought to address questions of ownership. A new system to be imposed by conquerors, who went to war merely because they could and they wanted to—in an "elective war," as one journalist puts it—may be another thing altogether.

According to Article 15 of the 1990 Iraqi Constitution, "Public ownership is and the properties of the Public Sector are inviolable. The State and all People are responsible for safeguarding, securing, and protecting it."[12] Whether pre-existing Iraqi law still applies in the absence of a new, improved Iraqi state, or whether the mere fact of US occupation has swept everything aside and left a legal vacuum, are interesting questions. A more interesting question is whether or not an occupying power can do any old thing it wishes with the assets of a defeated state.

According to legal writer and attorney Daoud Khairallah there is room for doubt.   Khairallah observes that, "the occupying power does not acquire sovereignty over the occupied territory (Art. 47 of Geneva Convention IV)" and that the "scope of the occupant authority is administrative and generally limited to ensuring 'public order and safety, while respecting, unless absolutely prevented, the laws in force in the country' (Art. 43 of the Hague Regulations)." Noting that, like many developing nations, Iraq has a broad public sector, he nevertheless writes that, "Article 55 of the Hague Regulations confines the authority of the occupying power to that of an 'administrator and usufructuary of public buildings, real estate, forests, and agricultural estates belonging to the hostile state, and situated in the occupied country.' As such, the occupying power has the right to use the income or fruits of the Iraqi public property but not the right of ownership or disposal of title of such property."[13]

This doesn't seem to leave much of a basis in international law for ambitiously imposing an effective western-style bureaucratic welfare state on Iraq, even under idle slogans about free markets.

However that may be, the US authorities will probably do as they please, emboldened by their firm belief that the whims and fancies of US policymakers are, in our times, the only possible source of international law. Certainly, they seem to have left themselves an opening, for as Saad Kiryakos writes, "US forces have not only unleashed the destruction of Iraq's national identity as a country (its history and cultural heritage), they are also responsible for destroying Iraq's public records. Why did US forces, entering Baghdad provide no protection to the public building with the exception of Iraq's Ministry of Oil headquarters?"

His answer: "The destruction of public records also creates a lucrative business environment for US corporations, because the registry of ownership titles no longer exists. Ownership claims by Iraqi citizens can be disregarded because the records have been obliterated. Foreign capital can take over land and assets. Iraq's extensive public sector dominated most key areas of economic activity. Burning and destroying the public records makes the reconstruction of the public sector a 'mission impossible.' So, what is the alternative? The nation's wealth will be handed over to American corporations on a silver platter, in the context of US-World Bank sponsored privatisation programme."[14]

That may seem a bit harsh and cynical, but must we really believe that the Last Remaining Super Power—a state which hardly affords us a free market at home—is bent on setting up a quasi-libertarian free-market utopia in Iraq, and that only out of the goodness of its functionaries' hearts? Not likely. Whatever Smith believes possible—and we may assume his motives are entirely above board—what we shall in all likelihood see, is yet another imperial-mercantilist asset grab by friends of the US administration.

It might seem odd that anyone who opposed the recent, fiction-based attack on Iraq, should spend any time on schemes for the reconstruction of that country, instead of calling for immediate withdrawal, but any "plan" is subject to criticism on its own terms. This is especially true, if the plan is held forth as a possible model for future outings of the same sort. (In this connection, it is strange, that Neo-Conservatives, who back such invasions, can’t seem to recall that useful term, "adventurism.")

In any case, as a blueprint for ongoing global improvement, a plan like that of Vernon Smith, granting once again his entire good faith, must be opposed as a false model, morally and practically.

Joseph R. Stromberg holds the JoAnn B. Rothbard chair in history at the Ludwig von Mises Institute in Auburn, Alabama. Send him  MAIL and see his Mises.org  Daily Articles Archive.

[1] See Louis A. Pérez, "Insurrection, Intervention, and the Transformation of Land Tenure Systems in Cuba, 1895-1902," Hispanic American Historical Review, 65 (2) (May 1985), pp. 229–54.

[3] Murray N. Rothbard, Man, Economy and State, II (Auburn, AL: Ludwig von Mises Institute, 1993 [1962]), p. 828.

[4] Murray N. Rothbard, "How and How Not to Desocialize," Review of Austrian Economics, 6 (1) (1992), p. 75.

[5] Hans-Hermann Hoppe, "De-Socialization in a United Germany,"Review of Austrian Economics, 5 (2) (1991), p. 101.

[6] Hoppe, "De-Socialization," p. 93.

[7] Rothbard, Man, Economy and State, II, p. 827.

[8] Hoppe, pp. 97, 87–88.

[9] Rothbard, "How and How Not to Desocialize," pp. 73–74, and Hoppe, "De-Socialization," pp. 98–101.

[10] Cf. Richard Salsman, "Turning Iraq Into Another Iran," Capitalism Magazine, April 23, 2003.

[11] Rothbard, "How and How Not to Desocialize," pp. 66.

[14] Saad Kiryakos, "Destroying Iraq's Public Records," Global Outlook, 5 (Summer-Fall 2003.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Follow Mises Institute