All Commentary
Thursday, August 1, 2002

The Transfer Society

Americans Waste Considerable Resources on Wealth Transfer

The story of Robinson Crusoe has been used to illustrate many economic points. So let’s try this question. What if, instead of working and cooperating to produce as much food, shelter, clothing, and other goods as they could, Crusoe and Friday instead spent most of their time fighting over the division of what nature readily provided. Rather than learning to fish, suppose that Crusoe spent hours each day practicing tae kwon do so as to be able to batter Friday and compel him to relinquish any coconuts he might have found. And suppose Friday spent much time looking for places to hide coconuts so that he could secretly consume them. How would that arrangement affect their standard of living?

The answer is obvious. Their standard of living would be much reduced. Energy and resources devoted to aggression and defense would produce nothing, necessarily leaving Crusoe and Friday significantly poorer than if they allocated their resources efficiently to maximize their output of goods.

Americans act like Crusoe and Friday in my example, devoting considerable resources to efforts to (a) seize (both legally and illegally) wealth that belongs to others and (b) block others from seizing their wealth. Economists have long understood that the thrust and parry of fighting over wealth is a waste of resources that reduces our productivity. In this small but significant book, Professor David Laband of Auburn University and George McClintock, a financial consultant who learned his economics at Auburn, endeavor to quantify the costs of our national game of pickpocket. They conclude that “in 1997, a conservatively estimated $424 billion was spent by individuals and the state to effect or prevent involuntary direct transfers of wealth and that an additional minimum of $125 billion was spent on efforts to effect or prevent governmentally arranged (indirect) transfers of wealth.” That comes to over $2,000 per person–a huge waste.

Okay, but how did the authors arrive at their figures? First, they drew a line between the use of resources to define property rights and the use of resources to attack or protect property rights: “We make a general distinction between actions taken initially to define and enforce property rights (or to voluntarily redefine those rights) and those designed to redistribute existing rights involuntarily. Expenditure of economic resources on activities that influence the forced redistribution of property rights that already are well-defined . . . is socially wasteful.” Then they proceed to identify all expenditures made to effect or prevent direct wealth transfers (individual actions such as burglary) and all expenditures made to effect or prevent indirect wealth transfers (that is, use of the power of government to expropriate wealth). In the former category Laband and McClintock include everything from spending on police forces to spending on locks; in the latter, they include everything from payments to lobbyists and trade associations to government costs in the enforcement of anticompetitive laws. Many of their numbers are admittedly estimates, but they are conservative and seem reasonable. Add it up and you get the size of the drag on the economy due to the refusal by many people to respect the property rights of others.

Just as the offensive and defensive maneuvers of Crusoe and Friday lowered their standard of living, so does the use of more than $500 billion annually for such purposes lower the standard of living in the United States. The authors write, “The numbers that we report make it abundantly clear that the production possibilities frontier for the United States would shift out considerably if individuals (and the state) were not in the transfer business.” That is to say, we could be investing hundreds of billions of dollars more toward the production of goods and services people desire if we weren’t spending the money on redistributive offense and defense.

Along the way, Laband and McClintock offer some important insights about the transfer game. For example, readers might assume that the demand for transfers originates with greedy interest groups that buy the allegiance of legislators with campaign contributions. The authors don’t deny that, but observe that the game is often played the other way, with legislators in essence demanding tribute from interest groups in exchange for their inaction. They recount how members of Congress have several times threatened the funeral industry with price controls, only to withdraw the legislation after the industry made sizable campaign donations to senators and representatives with seats on the relevant committees. Now there’s an important civics lesson.

Having documented the magnitude of the transfer-activity loss, the authors spend just a few paragraphs discussing ways of reducing that loss. One sound suggestion is to rein in class-action lawsuits where the “victims” haven’t been hurt at all. And they write that “A revitalized social ethic that elevates productive work above stealing would, without question, create added value for Americans.”

Hear, hear!

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.

  • A native Virginian, David N. Laband received his Ph.D. in economics from Virginia Tech in 1981. He is the author of 9 books and over 130 articles in peer-reviewed journals. His research and teaching interests cover a wide range of topics related to economics and policy.