Professor Coffman teaches in the Department of Economics, University of ldaho.
William Faulkner’s comic novel, The Reivers, contains an amusing episode that raises interesting questions about entrepreneurs and exploitation. The story is set in the rural South in the early days of the century, when roads were primitive dirt tracks and automobiles still a novelty. During an epic cross-country car trip, Faulkner’s heroes run afoul of a “mud farmer.” By night he plows up a muddy stretch of road. By day he waits at the roadside with his mules to tow cars through the mud for an exorbitant fee. Faulkner’s heroes make a valiant effort to push and shove their car through the mud hole, but in the end it defeats them, and they escape only by hiring the mud farmer to tow them out.
From a social point of view, mud farming is clearly an undesirable line of business. The mud farmer uses up valuable resources (mule time and his own time) to manufacture a road hazard, and then uses up more of the same resources to tow cars through the mud. This is a very wasteful activity. It is also highly profitable.
This seems to contradict the “invisible hand” argument of Adam Smith, Back in 1776, Smith argued that the invisible hand of competition would force private profit-seekers to work for the general interest. Firms would survive under market competition only if they made products consumers wanted, and made them cheaply and efficiently. But consumers certainly don’t want mud holes. Is it realistic of Faulkner to contend that the profit motive encourages their production? Which is the better model: Smith’s theory of the entrepreneur as unwitting benefactor of the public, or Faulkner’s theory of the entrepreneur as exploiter?
Upon closer analysis, Faulkner’s mud farmer is not a typical entrepreneur, but is an oddity who survives and profits only because of a very unusual set of property rights.
Consider how the story would change if the rights to the road were owned by a government that used the full police powers of the state to enforce its rights and protect its property. Clearly, plowing up the public roads would be illegal. If someone tried mud farming, both he and the road would be placed under surveillance, and he’d be prosecuted if apprehended. There would be very little mud farming. This, of course, is the usual case in the United States, where governments own and protect the public roads.
Now consider the opposite, where the farmer owns the road as private property. He would find mud farming a very expensive way to force travelers to pay for using his road. A toll gate would be a cheaper way to collect revenue. And rather than creating road hazards, the owner probably would find it in his interest to improve the road so more people would use it. That is what happened in the early United States, when toll roads were common.
Faulkner’s mud farmer operates in a situation where property rights are vague and poorly enforced. The road in the story appears to be a public right-of-way, which means anyone has a right to travel on it. But it really belongs to no one, and government isn’t vigilant about protecting travelers’ rights.
Of course, if a farmer tried to treat the road as his private property and set up a toll gate, he soon would be stopped by the police. Plowing the right-of-way is also illegal, but if the farmer sneaks out at night and plows the road, he isn’t likely to get caught. Thus mud farming arises as a means for an entrepreneur to charge travelers for using property he doesn’t own, but can partly appropriate for his own benefit.
The Importance of Property Rights
The lesson to be drawn from Faulkner’s story is that clear, well-defined, enforceable property rights are important. The “invisible hand” fumbles when property rights are vague or unenforceable. Poorly designed property rights can encourage entrepreneurs to undertake wasteful economic activities. For example, entrepreneurs in the old West wastefully hunted the buffalo almost to extinction because it was a common property resource, belonging to everyone and to no one. On the other hand, cattle that today graze the same range are private property and thus are carefully managed by ranchers.
Some “entrepreneurs” will find crime an attractive economic activity when property rights are costly to enforce and protect. Protection rackets are similar to Faulkner’s mud farming. A criminal puts together a team of toughs whose manner and appearance advertise their capacity for violence. The team burns out a few small businesses or roughs up some owners. Having established a credible threat, the gang leader then sells “protection” to those who know they might be the next victims.
Protection rackets are most successful in poor, urban areas where business owners cannot count on the police to protect and enforce their property rights. In contrast, anyone trying to set up a protection racket in a wealthy suburb would probably find the law coming down on him like a ton of bricks. Secure property rights in the wealthy suburb discourage people from entering the socially wasteful business of protection.
Activities similar to protection rackets also occur in political systems. Ideally a nation’s constitution would protect property rights. In practice, though, modern governments have tremendous power to violate private property by imposing regulations and taxes. Unscrupulous politicians can use this power to extort money from groups and individuals by threatening to tax or regulate them.
Emory University law professor Fred S. McChesney says such extortion has become a regular feature of the American political landscape.* In California the practice is so entrenched that it has its own vocabulary. The terms “milker bills” and “juice bills” are used to describe bills introduced for the hidden purpose of milking or squeezing private parties for payments.Professor McChesney says the practice is also common at the federal level. For example, beer brewers worry about Congressional power to raise federal beer taxes, so they routinely invite key members of tax committees to make paid appearances at trade association meetings. Brewers feel this “protection” money has helped keep the beer tax at the same level since the Korean War.
Of course, politicians sometimes have to show their muscle to make their threats credible. Several years ago, Congress ordered the Federal Trade Commission to impose costly warranty regulations on used-car dealers. After the dealers raised their campaign contributions to hundreds of members of Congress, Congress ordered the FTC to rescind the regulations.
Tax reform time is bonus time for members of Congressional tax committees. Campaign contributions more than double when tax reform is in the air. Everyone knows that they can be hit with new taxes when the whole system is on the table. Those who have not bought friends on the tax committees may feel especially vulnerable. Politicians aren’t shy about bringing the facts of life to the attention of private parties. They aggressively solicit contributions as soon as tax reform is on the horizon. During the tax reform of 1985-86, lobbyists reported that politicians made the greatest demands ever seen in a nonelection year.
Just like mud farming, political extortion wastes resources. Politicians use up time and energy creating legislative hazards and threats, much as mud farmers waste resources creating road hazards. In addition, and probably more important, political extortion wastes resources by distorting private economic decisions. Entrepreneurs take risks, make investments, and invent new goods and new production techniques, all to make money. These useful activities create new wealth and income and raise the standard of living. But, McChesney points out, the threat of political extortion reduces incentives to create new wealth and income. The entrepreneur will take fewer risks and undertake fewer investments and new projects if sly politicians are lurking nearby, ready to expropriate his gains. The result is a large hidden cost of political extortion—the cost of wasted economic opportunities.
* Fred S. McChesney, “Regulation, Taxes, and Political Extortion,” in Roger E. Meiners and Bruce Yandle, editors, Regulation and the Reagan Era (New York: Holmes & Meier, 1989), pp. 223-41.