Fun Online Polls: Adam Boulton & The Subject Matter Of The Contract

My personal preference Adam Boulton came a disappointing second in this week's Fun Online Poll, which asked Who was the real winner of the 'Prime Minister's Debates'?, with 30 per cent of the votes. In first place was "One of the cardboard cutouts on stage with a brightly coloured tie" with 45 per cent. So now we know. Thanks to everybody who took part.
------------------------------------
I have now reinstated the poll which asks Is landownership possible in the absence of a 'state'?. "No, of course not..." is currently ahead on 62 per cent. Some of the more lucid comments submitted by those who voted "Yes" seem to centre around 'freedom of contract', such as Steves who stated "Land ownership is just a standard contract, if you have a private body to enforce contract then you do not need a state"

Perhaps I ought to point out that the 'contract' merely refers to the arrangement between the parties at the time of the exchange and not to the subject matter of the contract. It is the subject matter which is important, and not the contract itself.

1. On any given day people will exchange goods and services (usually using money as a medium of exchange, but that is largely for convenience) dozens of times. For example, you get up, your other half makes you a cup of coffee and in exchange you take the kids to school; you exchange some money for a newspaper on the way to work; in exchange for having bought a season ticket the train company takes you to work; maybe you give up your seat to somebody 'less able to stand' in return for a friendly smile; you then provide your labour and skills to your employer in return for money and training opportunities; and so on and so forth.

2. The subject matter of all these contracts is created by the two parties (OK, the train company needs to occupy a given area of land, different topic); one makes an offer which the other accepts. Sure, in legal terms, some of these contracts are binding, some not, some verbal, some written, some arise merely by custom, many have statutory terms imposed on them; some give rise to taxable income, others don't, but out of billions of such 'contracts' entered into every year, how many are 'breached' every year (i.e. where one party does not receive what he was 'promised')?

3. I have no idea, and out of those tens of millions of breaches, how many end up in court? A fraction of one per cent of one per cent? And how many breaches are dealt with by 'private enforcement' (to use Steves' expression) i.e. you simply stop visiting the restaurant that served a lousy meal; you warn your friends not to use a certain builder who bodged a repair job, etc? Nearly all of them, I would guess.

4. To sum up, the involvement of 'the state' or 'society in general' or 'third parties' in creating the subject matter of any of these exchanges is negligible; the role of 'the state' in enforcing them is negligible and the burdens (or benefits) that these exchanges impose (or bestow) on third parties is negligible.

5. On the other hand, there are contracts, where the subject matter itself can only exist because of the existence of 'a state' or because of rules whereby the benefits and burdens are enjoyed by or borne by third parties to the contract and which are backed up by [the threat of] coercion by third parties (however minimal that may be), and of course, once third parties are exercising coercion, they are, de facto 'the state'.

(At this stage, we can go back to Steves' bald statement that "if you have a private body to enforce contract then you do not need a state". Well, duh. Sure, there are many private arrangements where the parties appoint their own arbitrator or judge, such as the rules on being expelled from a golf club or something, or various industry-wide agreements that certain disputes will be settled by the trade body, or between the employers' organisation and the trade union and so on, this is all well and good, fine by me.

The point about land-ownership is the fact that the value of land to the owner depends on being able to enforce the right to exclusive occupation against third parties, i.e. against people who were not party to, and in no ways beneficiaries of, the contract of exchange or any rights arising thereunder. And once people take it upon themselves to enforce rights against third parties then either they are vigilantes; they are thieves or trespassers (in the traditional sense) and if they do not fall into those categories, then they are 'the state').

6. Clear examples of such subject matter are the exclusive right to broadcast at a certain radio frequency; airport landing and take off slots; cherished number plates; taxi drivers' permits; oil and gas extraction rights, and of course land ownership.

7. Radio frequencies are easy to understand. 'The state' could, if it wanted, simply allow everybody to broadcast whatever he liked on any frequency he liked, in which case nobody would ever try listening to the radio as it would all be jumbled and garbled and nobody would be willing to pay for advertising. Or, 'the state' might operate a permit system, which is to the benefit of those with a permit; to the benefit of people who like clear reception; to businesses that want to advertise.

8. Now, the clearest financial gain is made by the permit holder himself, of course, as the advertising revenue he can collect is usually far in excess of the costs of actually running the radio station ('super profits'). So the final stage of the tender process is usually an auction, where competing bidders work out their likely 'super profits' and offer to pay 'the state' a large chunk of it. In exchange, 'the state' will do its best to prevent pirate radio stations broadcasting on that (or any other) frequency.

9. Now, there are some who see 'the state' as an unmitigated evil (yes, of course most of what UK governments do is pointless and damaging, but do not confuse 'the government' with 'the state') and would regard this entirely voluntary payment for the value of a state granted monopoly as a tax; but seeing as running a state costs money and they've got to get it from somewhere, it is surely better to collect voluntary payments in exchange for something of value to the payer, than it is to collect random amounts of wealth created from the purely private exchange of goods and services (income tax, VAT) or indeed transferred voluntarily (inheritance tax).

10. OK, continuing the radio frequency analogy, we have established that permits only existence because of 'the state' and that without the involvement of 'the state' the broadcasting industry would hardly be able to exist. The next question is, who or what creates or determines the (relative) values of these permits? The answer is simple - it is the number of people in that area who are potential listeners and the number of businesses in that area who are potential advertisers. I'd guess that a permit for London (pop. 7 million) is worth seven times as much as a permit for Birmingham (pop. 1 million); and that a permit for Birmingham is in turn worth ten times as much as a permit for Basildon (pop. 100,000).

11. Exactly the same principles apply to land ownership and land values:

a) Nobody created the radio frequencies and nobody created the land. Even if you reclaim land from the sea, your new dry land is merely resting on the sea bed, which is also land.

b) The fact that radio broadcasters or land and buildings can be bought and sold by private contract merely clouds the issue; the underlying subject matter (the radio permit or the land itself) in either case only exists because of state protection - and 'state protection' extends to and overlaps with traditions and customs respected by 'society in general', of course - 'the state' only steps in if there is a clear breach.

c) The right to 'exclusive possession' of radio frequencies, enforced by the state, creates overall benefits for society but the vast bulk of the benefits end up accruing to the winning bidder; the right of private individuals and businesses to 'exclusive possession' of land, enforced by the state, also creates overall benefits for society (the alternative is anarchy, civil war, or reverting to a hunter-gatherer lifestyle) but the vast bulk of the benefits accrue to the current occupant - and if the current occupant is a tenant or has a large mortgage, he has to pass on the value of those benefits to 'the landowner' or to 'the bank'.

d) The value of a radio permit or the location value of a plot of land is not determined by what the current owner does but where it happens to be, how big it is and most importantly, what sort of planning permission there is. Farmers obviously try to improve the physical value of 'the soil', but there is nothing they can do about the location value - the best way of making a quick buck is to persuade the local council, acting on behalf of 'society in general' to re-zone it as residential land. A radio permit is worth more in an area with lots of people and businesses; a plot of land is worth more if it is near a town centre (i.e. a shop there has lots of potential customers; a business lots of potential employees and people in the area have a wider choice of earning and spending opportunities), a place of natural beauty, if the local police do a good job keeping crime levels down etc.

12. No doubt somebody will say 'but the state protects all private property', which is true in theory but not true in practice. Most private property is intangible; and most of the subject matter of the private contracts mentioned in 1 is purely personal or consumed at point of sale. The reason your iPod doesn't get stolen is because you keep it in your pocket.

There are bigger items like cars, where if your car is stolen and the police happen to catch the thieves they might well be punished, but very few stolen cars are returned to their owners - most owners just claim on the insurance and that is the end of that. The main reason why so few cars are stolen is because people keep the doors locked, park them somewhere 'safe' like a privately supervised car park or have an immobiliser fitted. It is the same with burglary; very few stolen goods are recovered and most victims of burglary just claim on the insurance.

But it is quite different with squatters; they might cause terrible physical damage to the building (which is not land in the narrow sense), but they cannot deprive the owner of the right to exclusive possession of the land for very long, because the police will sooner or later evict them. If a tenant tries to 'steal' from his landlord by not paying the rent, then similarly, the state will either evict him or simply step in and pay the rent on his behalf (Housing Benefit).

Here endeth today's lesson.