A rad­i­cal so­lu­tion to land own­er­ship

Finweek English Edition - - Opinion - By Jo­han Fourie Jo­han Fourie

wA new book pro­poses a dras­tic pol­icy re­gard­ing prop­erty – abol­ish­ing pri­vate land own­er­ship al­to­gether. It’s bold, but the cre­ative think­ing be­hind this idea is ex­actly what we need to start tack­ling the im­mense so­cial chal­lenges we face.

hat if I could of­fer you the fol­low­ing three out­comes: 1) an in­crease in gov­ern­ment rev­enue to the ex­tent that a Ba­sic In­come Grant (BIG) can be af­forded; 2) a sub­stan­tial de­cline in wealth in­equal­ity; and 3) a sus­tain­able so­lu­tion to the land cri­sis. All of this with just one pol­icy in­ter­ven­tion. Fan­tas­tic, you would say, but naïve and, frankly, ab­surd. There is no pol­icy that we know of that can tackle these im­mense so­ci­etal chal­lenges all in one go.

I’d add that this pol­icy would make it much eas­ier to build in­fras­truc­ture, get rid of derelict build­ings, would ramp up GDP per capita sig­nif­i­cantly, and foster so­cial co­he­sion. Don’t be ridicu­lous, you would re­spond. To do this, I’d con­tinue, we’d need to do two things that seem al­most di­rectly op­posed to one an­other. We need to ex­pand mar­kets. Some­thing sen­si­ble for the first time, you might nod. Oh, and we must abol­ish pri­vate prop­erty al­to­gether.

This, in short, is the rec­om­men­da­tion by two economists, Erik Pos­ner and Glen Weyl, in their new book Rad­i­cal Mar­kets. Crit­ics seem to think that it’s worth dis­cussing; Ken­neth Ro­goff calls it “per­haps the most am­bi­tious at­tempt to re­think democ­racy and mar­kets since Mil­ton Fried­man”.

Their ideas have huge im­pli­ca­tions for democ­racy and im­mi­gra­tion, but I’ll fo­cus on their first and prob­a­bly most rel­e­vant chap­ter to South Africa cur­rently: prop­erty.

They pro­pose a Com­mon Own­er­ship Self-As­sessed Tax (COST) on wealth. Prop­erty, they ar­gue (like many economists be­fore them), is in­evitably mo­nop­o­lis­tic, and mo­nop­o­lies cre­ate in­ef­fi­cien­cies in the mar­ket. COST aims to re­move these al­loca­tive and in­vest­ment in­ef­fi­cien­cies by in­tro­duc­ing a live auc­tion for ev­ery as­set in so­ci­ety.

How does it work? Let’s take Khulekani, who wants to buy a new house. He’d go to a web­site – let’s call it Umh­labaWethu.co.za – and open a map that will al­low him to see ev­ery prop­erty in SA, val­ued by the owner of the prop­erty. He can buy any prop­erty, by just click­ing on the prop­erty, at the price the owner has listed. The right to ex­clude, a cen­tral tenet of pri­vate own­er­ship, is waived in this new sys­tem. Ev­ery prop­erty owned by a company or in­di­vid­ual (or gov­ern­ment) must be val­ued and listed.

What pre­vents own­ers from mak­ing ex­ces­sively high val­u­a­tions? Tax. In this sys­tem, each owner pays an an­nual tax on the self-as­sessed value of their prop­erty, thereby waiv­ing the right to use, the sec­ond cen­tral tenet of pri­vate own­er­ship.

The au­thors ex­plain: “In the pop­u­lar im­age of pri­vate prop­erty, all ben­e­fits from use ac­crue to the owner. Un­der a COST, on the other hand, a frac­tion of this use value is re­vealed and trans­ferred to the pub­lic through the tax; the higher the tax, the greater the frac­tion of use value trans­ferred.”

There­fore, all prop­erty would be on a per­ma­nent auc­tion, where the cur­rent user of the prop­erty de­ter­mines the price (but pays for that price in tax).

Imag­ine a pri­vate in­vestor wants to build a high-speed mono­rail in Cape Town. At present this would be al­most im­pos­si­ble, as own­ers of prop­er­ties on the in­tended route would hold out for a high price, know­ing they have monopoly bar­gain­ing power. A COST would al­low an in­vestor to go on­line and buy up all the prop­er­ties at the listed price, com­bine them, and start build­ing the mono­rail. (Of course, they must also value that prop­erty, and pay tax. If an­other in­vestor be­lieves they can build a more prof­itable mono­rail, they might just buy out the orig­i­nal in­vestor’s right of use.)

Imag­ine that the prop­erty tax is re­turned to cit­i­zens as a BIG. By the au­thors’ rough cal­cu­la­tions, ev­ery US cit­i­zen from a sim­i­lar sys­tem could re­ceive $20 000 an­nu­ally. By their es­ti­mates, it would only be the rich­est 1% of prop­erty own­ers that would be pay­ing more tax than they re­ceive – of­ten a lot more. This not only re­duces in­equal­ity (by 4 Gini points, ac­cord­ing to their es­ti­mates), but also acts as a sub­sidy for the poor­est.

In SA, COST tied to a BIG could do far more to al­le­vi­ate poverty and ad­dress in­equal­ity than a pol­icy like ex­pro­pri­a­tion. Un­pro­duc­tive land would be a di­rect cost to all of so­ci­ety: higher prop­erty val­ues pay­ing more tax means that more can be re­dis­tributed to ev­ery­one. As the au­thors note, “a world in which ev­ery­one ben­e­fits from the pros­per­ity of oth­ers would likely foster higher so­cial trust, a fac­tor es­sen­tial to the smooth op­er­a­tion of the mar­ket econ­omy.

“The shar­ing of wealth would be in ac­cord with many commonsense no­tions of jus­tice. Wealth is rarely cre­ated solely by the ac­tions of the peo­ple who are paid for it un­der cap­i­tal­ism. They nor­mally ben­e­fit from the help of friends, col­leagues, neigh­bours, teach­ers, and many other peo­ple who are not fully com­pen­sated for their con­tri­bu­tions. A COST would bet­ter pro­por­tion the dis­tri­bu­tion of wealth or the labour that cre­ated it.”

This pro­posal is rad­i­cal and might have un­in­tended con­se­quences that we can­not cur­rently imag­ine. That’s why the au­thors pro­pose a piece­meal adop­tion of these poli­cies. That is sen­si­ble. Ex­per­i­men­ta­tion will be needed, per­haps within one mu­nic­i­pal­ity first.

But the rad­i­cal eco­nomic trans­for­ma­tion that COST can ac­com­plish is a les­son in how cre­ative think­ing – and per­haps a will­ing­ness to put away our ide­o­log­i­cal dif­fer­ences – can help find so­lu­tions to a prob­lem that we think to be in­sur­mount­able. ■ ed­i­to­rial@fin­week.co.za

is as­so­ci­ate pro­fes­sor in eco­nom­ics at Stel­len­bosch Univer­sity. Pro­fes­sor of law at the Univer­sity of Chicago

“A world in which ev­ery­one ben­e­fits from the pros­per­ity of oth­ers would likely foster higher so­cial trust, a fac­tor es­sen­tial to the smooth op­er­a­tion of the mar­ket econ­omy.”

Prin­ci­pal re­searcher at Mi­crosoft Re­search

Glen Weyl

Erik Pos­ner

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