When people join together in a society they form fundamental agreements among themselves to govern their behavior. These agreements detail how to handle the small minority of people who steal from others, or initiate physical force against others, and to facilitate transactions. If the agreements are sound and enforced, then economic action will produce a continuing rising standard of living for all.
This work concerns itself only with government as it relates to economic action. Economic actors are natural persons who have normal adult psychology and health, and the ability to make choices and change actions by exercising free will. Normal adult psychology and health is defined broadly and includes all natural persons who can sustain themselves at some level by performing some sort of labor or have assets that can be traded for medium of exchange.
Ownership is key to economic action. Without ownership economic action is limited or impossible because there will be constant bickering, conflict and war over who has the right to use land, labor and production functions. The most fundamental principle of ownership is that people own their labor and are not slaves. The next is the ownership of land classified as real property. This necessitates a minimal government that can record the boundaries of real property spatially and orderly transfer the property ownership to others when a trade is made. The enforcement of boundaries requires the police power of government.
Valid ownership rights to real property is a complex question that is well beyond the scope of this work. To simplify, we will use the concept of 'finders keepers' espoused by Israel Kirzner in his course Foundations of Capitalism given at New York University and preserved on audio tape. To trace from the start of ownership we will hypothesize that a natural person goes into an uninhabited area and stakes claim to a plot of real property and physically marks its boundaries. Since there are no other natural persons in the area, there are no conflicting claims for the plot of real property. The next natural person comes along, sees the boundary marks and places his/her boundary marks not overlapping the first marks. This continues until the area is filled. There is now no unclaimed land to use to access other properties. The owners of the property realize that their common good would be served if there were roads that could be used to access their property, and rules to govern the recording of boundaries and the use and maintenance of the roads. They also realize that there is the possibility of disputes among them or that some of them might initiate force against others. They form a government. This government sets up a method of resolving boundary disputes and providing for road maintenance. Police powers are set up that are used to enforce boundaries and prevent the initiation of force by members of the society against others.
Real property owners own enough land to support themselves and their families and own the results of their labor which, so far, is not exchanged with others. Since each land owner of real property is self supported (the products of their labor, land and production functions are kept within their real property boundaries), there is no issue of ownership.
The road is used to allow communication among the other property owners and is deeded to the government, or easements are provided that will allow peaceful traverse on the roads by the public. The remaining property still remains private. The rights of others to traverse property gives rights to the 'public' at large and derive from the fundamental of private ownership. Private owners gave up certain ownership rights to the government so that the government could fairly enforce these rights according to the joint agreements made by the property owners of the area. The government to enforce its powers is formed by agreement of property owners and has a method to apportion its costs among the owners and manage the administration of the roads.
When children are born to owners of property or people come to an area that is fully inhabited, they are there with the permission of the property owners. In exchange for medium of exchange or other compensation the original owners grant part of their property rights to them. For example in exchange for rent owners of real property give up by agreement some of their property rights to the renters for a specified period of time. By doing so the renters are allowed to vote and act according to the rules of the municipal corporation, condominium or cooperative that is responsible for the area in which they live. Similarly children derive their ownership rights from their parents. People who do not have permission of property owners to enter or dispose of unwanted material(polution) on their property are trespassers and would be dealt with according to the laws of the area they trespass.
Intellectual property, when transformed into a tangible form is owned initially by the creator and can be traded. The tangible form can be exchanged like any other item with restrictions if so desired by the owner. Violating those agreements would be treated the same as the violation of any other voluntary agreement. Trying to own ideas as opposed to the tangible expression of the ideas in plans, specification, production functions, books, pictures, films, videos, reports, etc., is overly restrictive to economic progress and is not enforceable. Ideas can be created independently making it impossible to show who created the idea first. Most if not all ideas build on the work of others and can not be proven to be the creation of a single natural or corporate person. The free flow of ideas is the source of economic and social progress.
The people having set up a government to protect their boundaries and maintain roads are aware that there are opportunities to exchange surpluses. They informally do so through voluntary barter. Over time they extend the government powers to the recording of agreements and their enforcement. The government also sets up rules on agreements to prevent fraud. The society evolves and exchanges become more frequent. Property owners become more specialized taking advantage of economies of scale. The use of money begins. Money and medium of exchange will be discussed in more detail in the section on Medium of Exchange.
Voluntary agreements that can be enforced are one of the fundamentals of a smoothly functioning economy. Contract law is a fundamental need of all societies that wish to advance their standard of living.
Writing everything down and recording it is time consuming and therefore expensive. An economy can function more smoothly if economic participants have integrity. Trusting that each person will do the 'right thing' speeds transactions and lowers all participants' costs. Also 'common law' precedents will evolve which will also make common transactions proceed smoothly as participants know what to expect from one another. Integrity is fundamental to a smoothly operating economy.
History has shown that not all people make voluntary agreements with their neighbors or manifest integrity as one of their behaviors. Some people will always have integrity and would never assault, steal or use fraud to obtain their wants. Others will lie, steal, cheat and assault others to get their ways. The latter group is a small minority as most people have an understanding of 'eye for an eye, tooth for a tooth' and would prefer to devote themselves to peaceful economic activity, not constant fighting to either protect or take property from others. Conflict lowers their standard of living and shortens their lives.
The majority of people take the easy way out and will do what, at the moment, is most likely to get them what they want. If they can get away with some stealing or cheating, they will. If it is hard to do, they won't. Laws which are accepted by the people and are enforced in a fair, consistent way make for the maximum amount of sound economic activity, and encourage people not to be tempted by the short term perceived benefit of stealing, cheating or assaulting others.
Societies which are seeing their productivity decline or which lag other groups in standard of living usually have serious flaws in their laws which allow for cheating and stealing. It is usually manifest as corruption and financial crises as promises are broken and people's work product is stolen and wasted. People will stop producing if the product of their labor is stolen. Sound enforced laws and enforced property rights encourage integrity in people and facilitate their dealings with each other. These basic functions of government are a prerequisite to economic activity and a high standard of living.
Government recognizes two types of persons who can act in an economy: natural and corporate. Natural persons are individual humans. When natural persons join together in a group to perform joint activities they form corporate persons recognized by law as a separate entity able to act in its own right. A natural person can join a corporate person as a owner or as labor hired by the corporation. Ownership can be shared with other natural persons. The corporate person, being separate from the natural persons that form and work for it has its own identity. The corporate entity can make agreements with other corporate entities or natural persons. Natural persons who are not owners exchange medium of exchange for ownership and are compensated from the earnings of the corporate person for the use of it. Natural persons who provide labor, exchange it for medium of exchange and have no ownership interest in the earnings of the corporation. In corporate persons control of the corporation rests with the owners who hire labor called management to run the corporate person. Management hires workers which include supervisors and individual contributors.
Owners are paid a dividend in medium of exchange for their investment of medium of exchange. It is a conflict of interest to be both an owner and provide labor including management labor. For labor to be given 'stock' either reduces their income if purchased without assurance of a dividend or is compensation if it is an option which translates into shares that pay a dividend. In any case, issuing more shares of stock dilutes the ownership of the corporate person, reducing the dividends and value of the stock issued to the initial owners and, from their point of view, is a labor cost.
Corporations can be formed for any legitimate purpose. Some are formed to manage specific geographical areas made up of real property. In this form the real property owners are owners of a municipal corporation and follow the rules that were set up when the municipal corporation was formed and may be modified over time as specified in the corporate formation documents. The municipal corporation hires labor such as administrators, police, fire, public works employees, teachers, etc., depending on the preferences of the owners.
Sound government is a necessary condition of a well functioning society. It needs to be based on:
Copyright 2014-2019 Richard A. Cornell, PE