Homesteading: the Creation of Property

by Bill Walker
by Bill Walker

Hernando de Soto is one of the world’s great practical free-market economists. The Shining Path communists recognized this early in his career; they tried to kill him. Fortunately they missed.

In The Other Path, de Soto examines why some nations became rich while others (including his native Peru) remain poor. He concludes that the governments of poor nations do two things. First, they make it impossible to establish small businesses legally. De Soto’s researchers traveled the globe and performed practical experiments. They tried to file all the necessary forms to establish shops, get taxi licenses, building permits etc. In poor nations they found that such elementary business activities take years, if they can be done at all.

Second, he found that poor nations do not secure the property rights of the poor. His teams purchased homes (or tried to) in different nations; they found that to get an official house title in a Third World city was a task worthy of Hercules.

In writing his later The Mystery of Capital, he discovered that today’s rich nations have completely forgotten how they got rich. No academic or bureaucrat that he asked could tell him the origins of Western property-rights systems. So he set out to trace the history of capital himself.

What he found by studying the history of the early United States was that a lot of property was not created by government plan. Much of the now formally titled private land originated as the homes of more-or-less illegal squatters who simply went out and lived on it. They claimed land through "corn rights" (having grown crops on it), "cabin rights," even "tomahawk rights" (just having marked a few trees on it, showing that they at least knew where it was and what it looked like... often more than the "official" absentee owner could say). The state and federal government often tried to remove settlers, but couldn’t muster the political will or military muscle to evict most of the rifle-armed homesteaders.

There were official Homestead Acts, but they accounted for only a minority of the privatized acres. The Acts were also vastly inefficient, as the size of plots was arbitrary and uneconomic, and subject to many corrupt abuses. Of course they were better than nothing; any privatization is better than none.

The Wild Wild Third World

People in Latin America, ex-communist countries, and the rest of the Third World today live under conditions similar to those of the early United States. Large tracts of land theoretically belong to governments or oligarchs with political connections. In practice, they are occupied by millions of what de Soto calls "informals"; the same type of people that George Washington would have called "squatters."

De Soto claims that the main difference is that unlike the state and Federal governments of the early United States, Third World foreign-aid oligarchies have never recognized the squatters’ claims. This leaves most of the actual economic arrangements of these nations in legal limbo. People who do not have good legal title to their homes and businesses are cut off from the capital markets. They are forced to circumvent the "legal" system that is open only to the rich, taking roundabout routes and using lower-capital, riskier business methods.

De Soto’s team estimated that the value of property "owned" by poor Third Worlders without good title was over 9 trillion dollars. Critics of his methodology have quibbled that this figure should be revised downward to 4 trillion. Of course no one has an exact figure, but it’s a substantial part of the global economy. His point is that if these informal claims were made secure they could serve as what he calls "live capital," i.e. the basis for financing businesses and farms.

De Soto’s Cure (Worse Than The Disease?)

To summarize de Soto’s prescription for Third World ills, he thinks that Third World governments should emulate 1800s American legislatures and incorporate "informal" property regimes into the system of formal titles. He states that this would bring the many benefits enjoyed by "developed" nation property owners, such as taxation, access to public utility monopolies, zoning regulations, etc. At this point I think he should have paid a little more attention to the results of his own historical studies.

In the 1800s US, land was brought into formal private property by a patchwork of individuals and voluntary associations. But 1800s landholders were owners, not owned. Taxes and inflationary financing were minimal throughout the 1800s (except of course during the Tariff Re-Establishment War of 1860–65). Many utilities were private; even in the early 20^th century there were competing electric power plants who sold to customers who owned their own electric lines. The United States became rich not because of the smothering burden of taxation and crazy quilt of monopolies that exist today, but due to their absence. So could Peru, Egypt, or Myanmar.

It is true that some governments have been less obstructive than others. The post-WWII US occupation government in Japan, for instance, went to great lengths to establish secure land title for small landowners and fewer obstacles to small business. This is in interesting contrast to the US occupation government in Iraq, which has instituted a socialist price-control system so rigid that even gasoline is in chronic shortage.

Some ex-communist governments, e.g. the Czech Republic, have sold off their assets, successfully re-creating the private property systems that once placed them among the developed nations. Some of the Latin American governments, Peru among them, are trying hard to get the majority of their citizens into the formal land title system. Chinese farmers are using various unofficial systems to divide up and privatize the land of the former collective farms.

However, while former socialist and feudal countries are progressing toward capitalism, the formerly free countries are going in the opposite direction. The US Supreme Court recently said in Kelo v. New London that there is no right to private property. Only the various levels of government have the final say on who owns what.

Bringing Third World squatters into the world of present-day US property taxes, eminent domain, and regulatory fascism wouldn’t seem to be much of an improvement. De Soto’s longing for the poor of the world to come into the "formal" legal system ignores the fact that today’s formal system is not the same as that in 1800s England, the US, or even 1945 Japan. If Third Worlders paid taxes at the rate that the US middle class does, they’d probably starve to death.

The Anti-Homestead Acts

Far from passing new Homestead Acts to create more private property, today’s US government prints money and buys land out of the private sector. For private citizens to oppose this process is pretty futile; it’s a lot easier to print money than to produce real wealth. If the anti-privatization trend continues, eventually all the land in the US will belong to the Bureau of Land Management, Forest Service, et al.

Most of the government land is available for economic exploitation by the politically connected (only 10% of Federal land is in parks; even there, it is not safe from those with enough political power). However, since it cannot be privately owned, there is no incentive for those who politically control "government" land to preserve its soil or other environmental amenities, since they may lose control of it in the next election.

The last time I checked, the various levels of government in the US controlled about 42% of the US land area, all the rivers, lakes, and continental shelves. The US government also supports the no-private-property status quo everywhere else, through various UN treaties.

There has already been a large-scale test of government land ownership in modern times; it was called the Soviet Union. It led to ecological disaster on a grand scale. US environmental groups are notably silent about the Aral Sea, the Kazakhstan dust bowl, USSR state industry toxic dumping, etc. etc. Instead, they continue to support more transfer of US private land to bureaucratic control.

Absence of Property Is Theft

Proudhon was an idiot. There is no human progress without property. Any human society has to have a way to transfer new property into private hands. Minarchist, Anarcho-capitalist, or Absolute Monarchist, anyone claiming to have a workable political system has to explain how it will facilitate the transfer of property into private hands.

Most of the world’s land remains under arbitrary bureaucratic control, without secure private titles. As De Soto points out, land ownership in the Third World and ex-communist countries is largely determined by political influence. Even in Canada, only ten percent of the land is privately owned. None of the world’s seabeds, ocean fisheries, or major rivers (there are a few private trout streams in Scotland) are husbanded by private owners. While commercial access to space is routine, no one owns the asteroids… except for whoever is going to be lucky enough to be under the next multi-megaton impact. And maybe this guy. (No, probably not; I think he’s going to have to at least leave a few tomahawk marks on that asteroid before anyone takes him seriously).

The "perfect" solution to how to divide up the universe is unlikely to appear to mortals. But history teaches us that imperfect solutions work well enough. Once property is privatized and within a free market, it will find its way to the most efficient user. Any system for homesteading resources is better than none.

Some societies, even ex-communist societies, have learned that privatization is the key to creating wealth. The US government has not. A government that progressively transfers resources away from private hands has no future, and neither do its serfs.

February 6, 2006

Bill Walker [send him mail] works in HIV and gene therapy research in Rochester, Minnesota.

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