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Redefining Property Rights through Value Creation (and an Attempt at Grounding Claims to Natural Resources by “First Comers”)

Any theory of ownership must always answer the challenge of how initially unowned things can come to be justly owned. Intuitively, the world-ownership hypothesis—that a person may appropriate any number of un-owned resources in the world as long as some conditions are met—faces the objection (among others) that it seems like an arbitrary deviation from an equal-share hypothesis, which would entitle one to an nth of those un-owned resources. This, however, is merely an intuitive claim, reflecting more of an intellectual discomfort rather than a clear picture of the origins of entitlements.

While we have yet to settle on any such picture, other intuitions can present us with a different picture. Israel Kirzner’s article, “Entrepreneurship, Entitlement, and Economic Justice” (1978) provides us with an excellent intuition as to how else these entitlements could come about, through appeal to the idea of value: the chief reason why we gain our entitlements to property is because we have created an economic value in it.

A theory based on this intuition is, at least, superficially consistent with some libertarian theories or at least some of their parts. In examining the views of those called “libertarians” (even those with an egalitarian bent), we could (albeit crudely) characterize two kinds of entitlements in those views: what we will call “directly earned” entitlements and “unearned” entitlements. The former refers to those entitlements dealing with the class of thing that the individual brings about through his own freely chosen actions, and, from the point he acquires it until the end of his life, may keep without others ever possibly holding a right to it against him (such as the product of his labor). The latter refers to entitlements dealing with everything else—those things which may justifiably be redistributed from the individual, whether it is the value of their natural talents, their natural resource holdings, etc.

The question, then, is what kinds of consequences accepting the intuition that value creation generates entitlements will have on these different kinds of entitlements. In the conclusion of Kirzner’s piece, we get a sense of his goal, which in some way will be similar to mine:

[There] does seem to be a certain plausibility in the notion of ownership through creativity. It is this plausibility which may help explain how so many observers of the market appear to find it consistent with economic justice in the face of the denunciations of the moralist critics of capitalism. This paper has explored the sources of this apparent plausibility, and has scrutinized its ability to serve as possible support for the morality of the market.[1]

My goal here is to demonstrate how value creation (or “creativity” as Kirzner calls it) can form a basis for destroying the distinction in entitlements to which I alluded, presumably in favor of the “directly earned” kind, or, at the very least, for forcing a commitment to one kind of entitlement in its fullness over the other. Failing that, creativity can at least form a stronger basis for whatever “directly earned” entitlements may exist at all in a given theory (such as a Steinerian one). For a variety of reasons, including Kirzner’s revised acceptance of the Nozickean proviso which introduces a host of new complexities, I will not attempt to “repair” Kirzner’s theory where it fails. Instead, I will only show how some of the intuitions he offers ought to be seriously considered and integrated into any theory of acquisition that prizes self-ownership (e.g., in the form of ownership of the products of one’s labor). Whether we accept some sort of “equal share” hypothesis or not should not, ultimately, affect whether the considerations about value creation put forth in this paper make a difference. On one hand, the considerations might provide some intuition in favor of “world ownership—that persons literally hold exclusive right over a part of the world—a position which is too difficult to defend here; on the other, they simply help clarify the extent of certain entitlements, in as much as we believe that those certain entitlements are of the “directly earned.”

Value Creation

The basic principle behind value creation could be that for some given thing of economic value, the person who actualized that value has full property rights over that thing; it would not have “existed” save for that person’s actions that led to its actualization. But this is too strong, for we can only say that something might not have existed save for the actualizer. This naturally should prompt us to find an account for why the temporally first creator is so entitled. In other words, we must find and justify some “first-come, first-served” principle, a challenge which we will address later. Here, we will investigate Kirzner’s interpretation of value creation, regarding exactly what it is that we ‘own’:

In the conventional view (apparently shared by Nozick), once a unit of resource has been acquired, ownership has been established in it with respect to all its properties and powers, whether these have been known or imagined or not. In the view being now considered, on the other hand, those aspects of a thing which are unknown remain, so-to-speak, non-existent. Their discovery constitutes the discovery of a hitherto unknown, ‘non-existent,’ and hence un-owned dimension of the thing. An owner owns only those aspects of ‘his’ property of which he is aware.[2]

This will have some important implications when it comes to what we are justified in spatially controlling (where to spatially control something means to own something with respect to all its properties and powers, known and unknown). Nonetheless, the complexities of dealing with spatial control issues are the task of a separate odyssey. At least for now, we will accept this definition of ownership put forward here, with the intention of clarifying it.

A simple case of value creation is Kirzner’s example of an entrepreneur discovering a willingness of consumers to pay a price for oranges converted into juice ($12, with a $4 manufacturing cost) over the price of oranges alone ($5). From this, he draws the following intuition:

Up to the moment when the entrepreneur’s vision ‘saw’ the juice and marmalade which the oranges represent, oranges had value only for eating – a value which the market set at $5. The entrepreneur has discovered $3 additional value in the oranges. He may, then, be held to have ‘created’ this additional value in these oranges. It is as if the entrepreneur found orange juice and marmalade in nature, where no one had perceived their existence; he has ‘created’ the orange-resource that can provide juice and marmalade.[3]

This is fairly self-explanatory. A set of actions leads to the creation of a consumption opportunity which some consumers prefer to some of their old consumption habits, for which they are willing to pay extra. Of course, Kirzner does far more here than simply give us part of the case for why the entrepreneur is entitled to profit here; he also hints at an argument for the likeness of natural resources to the orange juice scenario.

Before turning to the more complex issue of natural resources, however, it would do us well to finish framing the importance of value creation in exchange. On one hand, if we argue successfully for original appropriation of, say, oranges, then perhaps any questions beyond it are moot, notwithstanding any complexities raised by Kirzner’s definition of ownership. This is because just original appropriation of something entails full property rights over it, which entails free disposal of it, and we are not bound by any sort of Lockean “no-waste” condition. With full property rights over oranges, we could just as easily turn them into juice and exchange them freely for a net benefit to ourselves as we could throw them off of a cliff in nihilistic spite while slowly dying of scurvy.

Nonetheless, some theories would posit that even from a starting point of full property rights, some (non-coercive, non-fraudulent) processes can occur that unjustly result in profit. A theory of value creation-based entitlements can show how no such processes are possible. Thus, even if we fail to properly demonstrate our case regarding natural resources, an understanding of value creation is both applicable and useful to the previously-mentioned “right-libertarian” components of libertarian theories—especially Steinerian ones—which still entail a level of free and voluntary exchange (and hence the potential for mutual gain in exchange, and thus profit). This ground has been well covered by Kirzner, so we need not pursue it further here.[4]

It is necessary to clarify how value creation generates entitlements, or perhaps more importantly, what value is. Our definition of value can only be manifested through human action: we gauge the value of something by how someone will act to attain it. An entrepreneur, through some process of discovery and/or innovation, comes to control some object. Someone else desires this object. The “value” to which the entrepreneur is entitled is only going to be what is voluntarily offered to him and accepted by him in order to relinquish his control over the object.

So clearly, we are not simply saying that having special knowledge of some potentially added economic value entitles one to that value, of course. That knowledge only justifies whatever profit might be had when entrepreneur A buys oranges from entrepreneur B, turns them into juice, and gains a profit over the cost of the oranges. Better said, we are only advancing the case that one is entitled to any rewards reaped from discovering and executing a means of further contributing to the satisfaction of their own and others’ preferences (whether it is by selling information to someone else or by using that information to sell oranges at a higher price). Entrepreneur B is not entitled to any more than is offered and he agrees he will accept in exchange for his oranges. Of course, this could include his partial (or even full) knowledge of the value of juicing and hence his price discrimination toward Entrepreneur A, to which he is just as entitled.

To further specify the nature of our claim, we exclude any considerations of division of labor, specialization, and so forth from this discussion altogether. In a world of perfect and symmetric information, these conditions, quite trivially, imply that the juicer (entrepreneur A) and the orange harvester (B) are entitled to their respective contributions of value. It is where there is an information asymmetry that we are still claiming that entrepreneur B is entitled to profits from juice, even where entrepreneur A, if he also possessed the same knowledge of juice, would profit similarly from it. The attainment of information is as much a feature of the world that bears a human cost as is anything else under consideration, labor included. This fact is the primary reason why someone is justified in profiting to any degree from asymmetric intellectual information.

Overall, given a framework of already existing property entitlements and voluntary exchange, we have good reasons to believe that additional entitlements generated from those exchanges is just. It is how we get to those “already-existing property entitlements” which will be the task of the next section.

Natural Resources

We are now led to the more serious possible implication: if we accept the intuition of value creation when it comes to things like the natural properties of oranges and consumer preferences, why distinguish between those things and other things that are more affixed parts of the world, like land, water, or coal? We credit the entrepreneur with discovering, and thus bringing into existence, the value of juice. Putting aside issues of whether someone else could have brought about the value of the juice, we give the entrepreneur some level of equity based on how he in particular brought about this particular juice at this particular time. Prior to the entrepreneur’s intervention, the “juice value” was inaccessible.

Taking a parallel case of an entrepreneur drilling into a mountainside and finding gold, we can easily see that a similar statement can be made about the gold: prior to the entrepreneur’s intervention, the value brought about by the gold was also inaccessible. So we at least see no distinction between kinds of value-creating activities—in both cases, some sacrifice was required on the part of the entrepreneur to bring about access to something valuable that was previously inaccessible. Note that this is a fact independent of whatever independently-established conclusions we have about natural resources and people’s entitlements to them. At the very least, we have established that there is a common element between creations of value through what label “natural resources” and creations of value elsewhere.

The issue here is, as always, why the first-comer to a pile of uranium or some other resource can lay absolute claim to it. If it were the case that if not for the entrepreneur, the resource would not have existed, then our answer is clearly that he is entitled. But for most things, we can only say that if not for the entrepreneur, the resource might not have existed. We can likewise read this issue “backwards” into natural resources, scientific discoveries, inventions, etc. If we have this problem with land, why don’t we have this problem with everything else? Our definition of value creation here certainly fights against the separation of land and natural resources from other possessions. Nonetheless, no matter how we treat the distinction, even by eliminating it, priority for first-comers to any possession must be justified. In the next section, I will advance the rights of first-comers by putting forward some considerations that must be addressed by any theory which prizes self-ownership.

The Rights of First Comers

Having begun to argue for why value creation makes us responsible for—and thus entitled to—the effective existence of certain things, we still must answer why one’s temporal location never confers some unjustifiable advantage in appropriation. Indeed, we can hold that an appropriation is just, even if someone at a later date could have come along and created an inferior, equal, or larger value which he no longer could do as a result of the first appropriation. Kirzner offers the following example in favor of a “first-come, first-served” (FCFS) principle or what he calls a “finders, keepers”[5] ethic:

Consider then the case (referred to only by implication, in Nozick’s discussion) of the un-held sole water hole in the desert (which everyone in a group of travelers knows about), which one of the travelers, by racing ahead of the others, succeeds in appropriating. For Nozick this case, involving as it does no discovery at all, clearly and unjustly violates the Lockean proviso: the other travelers who n the absence of appropriation by their fellow, would have all enjoyed some water without cost, are now forced to pay a price (even a ‘monopoly price’) for that same water. For us, however, this view is by no means the only one possible. We notice that the energetic traveler who appropriated all the water was not doing anything which (always ignoring of course, prohibitions resting on the Lockean proviso itself) [would have prevented the other travelers from racing ahead]. Assuming (for simplicity) that [if] all the travelers were of equal strength and speed there would have ensued a ‘gold-rush’ in which each would have, let us say, captured some water. As it happened, the other travelers did not bother to race for the water. May it not be that they were less alert, entrepreneurially, to the possibility that someone else might indeed appropriate all of the water than the energetic traveler? Should we not, then, say that the latter was the first to ‘discover’ the true market value of the unheld water? For the others the water was indeed known, but the worthwhileness of its appropriation was not known. (Perhaps they mistakenly thought there was more water available than could possibly be drunk; perhaps they mistakenly thought that no one would or could race across the desert at a faster speed than that at which they were traveling, or perhaps they gave the water no thought at all.) It does not seem obvious that these other travelers can claim that they were hurt by an action which they could themselves have easily taken, had they been as alert as the successful appropriator. What, one must ask, even under conditions involving the appropriation of known substances is so obviously acceptable about the Lockean proviso, as interpreted by Nozick?[6]

While it is certainly a useful and intuitive way to show how we might falsely identify some appropriation scenarios as being a product of mere arbitrary temporal advantage, this example fails to fully address the issue. On the face of it, there are two potential routes we can take here to vindicate a FCFS principle. To preserve the validity of this example as an answer, we must show that every single appropriation will always contain an element of some value creation of the sort shown in the given scenario, no matter how small. On the other hand, to keep the example as only a useful insight, but still advance the case for a FCFS principle overall, we must show that even an appropriation characterized by mere temporal advantage is still justified.

In large part, the full resolution of this discussion depends on whether we accept that an individual’s gains from unchosen natural circumstances are “undeserved”; or, at least, that someone’s luck-based disadvantage makes an appropriation made possible by that disadvantage unjustified. Rejecting this notion would constitute an answer of the second kind provided in the paragraph above. Here, I will move toward an answer of the first kind instead, in the same vein as Kirzner’s water-hole example. In as much as any theory takes “brute luck” into consideration, it also allows for the mutually exclusive category of the “earned.” The following considerations should help to further define the boundary between the consequences of brute luck and choice.

The Value Creation of Being First

Before concluding anything about permanent appropriation of a resource, we must examine what non-arbitrary differences always exist between a first-comer and those who come later. The insufficient counterfactual that drew us to investigate whether a FCFS principle could be justified—that if not for the appropriator, something only might not have existed—ignored a crucial element of that something: specifically, when that something would have existed. Indeed, time is not irrelevant to value; other things equal, a rational agent prefers some fixed payment now to the same fixed payment later (likely for reasons of certainty and maximization of choice sets). This implies that there is a component of value that first-comers provide, and provide uniquely. We can refine the counterfactual to then say, “if not for the appropriator, something would not have existed at the time it did.”

Being a first-comer does more than add a time-value to an appropriation, however. It also actualizes unknown elements of the resource in question, the brunt of which is borne by the first-comer. First-comers bear the burdens of their appropriations as well as the benefits. There is the simple example of risking direct personal harm, such as exploring a cave only to find an angry bear.  There is the broader possibility that the effort the first-comer spent to make an appropriation was not worthwhile. Furthermore, those who are not first in any process of discovery often have the option of learning from the mistakes and failures of those who were first, making their own forays more productive. What makes these revelations possible is an actualization of one outcome of many possible outcomes.

This point stands, whether we believe that everyone owns natural resources or not. Even someone exploring on behalf of humankind would be creating value that humankind would otherwise not have, but at his own expense. Even if he was first only by some arbitrary temporal circumstances, it does not change the fact that he is the one who has borne the costs of the appropriation. Thus, in at least enough cases worth considering, an individual’s temporal advantage is an individual’s value creation, and one that any for which any theory of appropriation must account.

The Endogeneity of “Starting Points”

Any notion of “temporal advantage” in its construction relies on the broader concept of a “starting point.” An arbitrary temporal advantage is going to be the product of some distribution of starting points, in which one person was, for example, closer to a resource and hence arrived at it sooner. If A starts 1 mile closer to some resource than B does but they are otherwise equal, and they both move toward it, A will be able to appropriate the resource and exclude B from it, a result which can be credited to A’s better starting point. One might argue that this represents some unearned advantage of A over B that can be justifiably adjusted or redistributed.

But we have failed to ask how A and B got to their respective “starting” locations. If A had decided to take a well-trodden path to a resource, but B decided to take a mountain pass in hopes that it would be faster, then we would not consider the 1 mile difference to be some sort of arbitrary advantage. It would seem that the goal of the above argument is to show that starting points are simply given, that is, exogenous, and hence morally arbitrary. At the core of this is that no decision on the agents’ part put them there. Indeed, a central component of libertarianism is ownership of one’s self and thus responsibility for one’s actions.

We can’t really say, though, that those “starting points” were unchosen (in one sense). In reality, any number of different actions on the part of the agents could have resulted in a significant difference of those starting points. As Kirzner argues in his water-hole example, perhaps the other parties were not as entrepreneurially alert to the resource as the appropriator, who situated himself more opportunely. Unless we have no qualms with making one person responsible for the erroneous or non-optimal actions of another (outside of a guardian-type relationship), then we can not consider the first-comer in an appropriation scenario unjustified in appropriating a resource.

By this logic, any cases of an agent’s “starting point” being determined by a choice among alternatives can not be validly considered a “starting point” with any moral weight. So what cases could be? It is safe to say that people do not appear independently of choice-making; that is, they are not exogenously given. This creates an ever-important moral relationship between parents and children. At best, we can define a starting point as a point exogenous to the decision-maker in question. For example, an agent’s birthplace is not chosen by the agent. However, it is not simply a brute fact of nature; it is the product of someone’s choices. So, it would make sense to explore the following avenue: if there are any qualms as to the harms to an agent caused by a particular starting point, any burden should be upon those who made the decisions to put that agent in that situation.

If we accept that having children is not something to which people are unconditionally entitled, but which they may do, and that having children also generates obligations for the parents, then complaints about a starting point like birthplace should always be directed toward parents. A poor family with five children can not validly claim circumstantial hardship (not, at least, without bending the boundaries of responsibility for one’s actions). It was their decision to take an action that would result in their having of five children.

Perhaps they were young and reckless, and made mistakes. Or, even, they made reasonable attempts at averting the situation by using birth control. But neither of these is a good reason as to why anyone outside this parent-child relationship, who made no decisions to create this situation, should have his freedom limited. Mistakes and unfortunate consequences of typically successful behavior still bear a clear relationship to one’s choices by definition. At the very least, if one says that children under some circumstances can be treated as exogenous and thus a basis for an entitlement, then he must also accept a variety of other unintentionally caused hardships as the basis for entitlements too.

The outsider, clearly, does not gain a duty from the choices of others. There certainly remains the question of “brute luck”: that, after tracing back history to the point before there were any moral decisions, some circumstances led to agent A’s relative situation being worse than agent B’s, though choices could alter the final outcomes. Still, it is seemingly impossible separate any circumstantial hardships from agent choice, and the power of those choices must be reflected before drawing a conclusion about luck. Even for seeming “acts of nature,” like natural disasters, one’s risk of being affected by them changes with a variety of decisions.

It seems that the axiom underlying the notion of arbitrary advantages is something like as follows: for some sort of situational disadvantage in appropriating something to make the advantaged appropriator unjustified in appropriation, it must be a factor independent of agent choice. So, then, the task of any “brute luck” entitlement framework is to find this exact handicap placed upon someone by circumstances, entirely separated from their choices. It must consider the range of possibilities across many different possible choices in sum, and determine whether one agent’s exogenous choice set’s “expected value” (for lack of a better concept) surpasses another.

Ultimately, a central point of the discussion here will remain unresolved: is person A justified in reaping the benefits of his unchosen advantage? If yes, then considerations of what is “directly earned” are a mere afterthought; if no, then we can not afford to ignore any advantages of his which are chosen.

[1] Kirzner, Israel. “Entrepreneurship, Entitlement, and Economic Justice”, Eastern Economic Journal, 4 (1978), pp. 23 in Vallentyne, Peter. Steiner, Hillel. Left-Libertarianism and Its Critics: The Contemporary Debate. Palgrave Macmillan, 2001.

[2] Ibid, pp. 202

[3] Ibid., pp. 202

[4] The first half of “Entrepreneurship, Entitlement, and Economic Justice” demonstrates how profit, even when there is error or asymmetric information (besides in cases of fraud), is always the result of just transfers in a voluntary exchange setting.

6 When describing the “finders, keepers” ethic, Kirzner makes it a point in a footnote to distinguish it from another ethic labeled “first-come, first-served” condemned by economist William Vickrey for being “of dubious equity.” I, too, would like to make such a distinction.

[6] Ibid. 1, pp. 208-209. Note that the bracketed clause in the center was meant to repair a grammatical anomaly in the original text.

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