What is Property Worth?

Property gains are fairly easy to incorporate in a Just Deserts economic theory, but loss scenarios require some deeper thought.

Advertisements

The Just Deserts economic theory, which is what is being set upon its head here, says that the rewards received by contributors to the well-being of society should be proportional to the benefits provided by them. Initially, a person was compared with other instruments that provide benefits to society, specifically to individual members or to large subsets of the membership, and it seemed likely that there could not be much of a difference in the amount of contribution. Everyone contributes within a factor of five or so from the median on the upside, and of course down to zero on the downside. It was found that the rewards to someone in a more wild west type of remuneration scheme could be hugely different from that, but it was all based on some secret that one person obtained and another person did not, or perhaps on luck.

The effort to obtain the secret could be tiny or large, depending on the method used, and could be moral or immoral, besides being legal or illegal according to whatever system of laws were in place. The idea that huge returns result from perhaps a miniscule but illegal effort are in direct contradiction to the Just Deserts core idea, that rewards are proportional to contribution, and contribution is within a small factor from effort expended, if the core idea is pursued.

So how is it possible that large rewards are obtained from property transfer, movement, and distribution? Some examples may assist in his determination.

Consider someone who buys a piece of property a distance from a city. The city grows, and after some years, the city has expanded to the vicinity of our example property. It has grown in value, greatly, and if the owner can sell it and keep the increase in valuation, he will be well-off. To clarify the example, suppose that the owner did absolutely nothing to increase the value of his property. He maintained it at some minimal level, paid taxes upon it, but nothing else. Just Rewards would imply that he has not earned the increase in property valuation that occurred, and instead, that increase belongs to the citizens of the city, who invested their time, effort, and expense on expanding the city. These citizens also supported the government with taxes, and these taxes went to expanding the radius of city services out to the example property. They did all the work necessary to increase the value of that property. The owner did nothing. But aside from some increase in taxes, if the laws allow for that, all the citizens who did the increase get nothing. They may have profited from their efforts some other way, but this example concentrates on one particular piece of property and the changes in valuation that it displays.

It seems fairly clear that a Just Deserts economic theory would have the increase in valuation go largely to the city, as a stand-in for the citizens, and little if any to the owner. This is just the opposite of the wild west rewards system. The Just Deserts theory seems to imply that within it, ownership is not total, but partial, in that someone who improves their own property through their effort, time and expense would benefit from that improvement, but someone who contributes nothing but happens to be the owner in name of a property which is improved by the efforts of others does not benefit from that windfall. In the case, probably typical in real life, where both owner improvement and city-wide expansion or improvement both are going on, some assessment is necessary of what portion of the increased value would go to the owner and what remainder would go to the city or other governmental entity which was responsible for this area. The details of this assessment might be complicated, but they do not play a great role in differentiating between a Just Deserts economic theory and other economic theories. However, there does not seem to be any other economic theory which divides the increase in value of property between a nominal owner and the regional governing entity. In a communist system, property value, increased or static, belongs to the governing entity who are representatives of the residents of that entity. In a libertarian system, property value, increased or static, belongs to the nominal owner. In contrast, in a Just Deserts economic system, the owner has the value that he paid for the property plus any amount that he contributed to the increase in value, the governing entity has the rest.

As noted before, risk is an important element in any economic theory, and there certainly is risk present in the ownership of property. If the valuation of the property goes down, is the owner the only responsible person? This would be in direct opposition to the limitation of gain that the owner faces. It is necessary to expand this question to address several scenarios. Suppose the owner did not maintain the property, and it fell into disrepair. The valuation goes down. It would appear that the owner is the only one responsible for the loss of value, and therefore the recipient of the consequent loss. Suppose instead that the city builds a nuisance next to the property, and the value goes down accordingly. In this case the governing entity has the responsibility and the loss. Suppose as a third scenario, the city for some reason starts to economically struggle, and is unable to perform the maintenance of the city infrastructure in the area near the owner’s property. It subsequently loses value. Is the city itself responsible? The owner did nothing to cause the loss. However, suppose in this third example, the entire city loses value, say for simplicity, all by the same percentage. How can the city, as the representative of all the residents, be responsible for the losses of all those who own property within the city’s jurisdiction?

If the city was to take responsibility for all these losses, what alternatives does it have? Taxing everyone to compensate all the owners does not seem reasonable; consider the case where everyone is an owner and all properties are identical and all lose identical amounts of value. There is simply no solution within the framework of the city as a whole.

Just Deserts tries to assess rewards based on contributory effort, but obviously there are many situations where this scheme does not provide any results, as in scenario three or if the gain or loss was caused by some natural event. A hurricane damages the entire city, so how is loss to be apportioned by any Just Deserts theory?

It might be better to go back to the guiding concept behind a Just Deserts economic theory, which is not based on justice or fairness, but on motivation and removing some of the ease by which corruption can occur. If there is no benefit under some variant of Just Deserts theory, there is no motivation. In a wide-spread loss situation, a good Just Deserts theory should provide some benefit, or equivalently less loss, to people who took steps to reduce their exposure to this type of loss. Thus, in any loss, there is an element of preparation through effort, time or expense, as well as a random component. What role should the random component play? Should Just Deserts act like some cooperative insurance program and seek to equalize the losses according to some metric? And then on top of this should it incentivize the non-random component, the loss-avoidance activities, by rewarding the effort?

To avoid citizens gaming the rules used for rewards during disasters, or actually during other situations as well, there must be some reward related to the actual contribution made, rather than for the effort expended in attempting to make a contribution. These are vastly different things. In a disaster loss situation, each property suffers some loss, which has a large random component. If the property owners were compensated by a fraction of their loss, less than 100%, then there would be an incentive to reduce such losses by taking preventive measures. If the loss were, instead of being relative, were absolute in value, then preventive measures would not produce any result. So it is clear that losses as well as positive benefits should be proportionate to results, but not equal to them.

Proportional is not the proper word, but proportionate in the sense of being quantitatively reasonable. There must be diminishing returns on situations like the gold prospector, where a big find produces more reward than a smaller one, but rewards do not go to the moon. Instead, they could approach an asymptote. A monstrous find would produce X amount of reward, but something one tenth as large might produce half of X. This provides incentive to seek larger finds first, but does not greatly diminish the motivation for seeking smaller ones. It also serves as a reduction of the opportunities for corruption, as huge rewards can fund corrupt mechanisms much more easily than scaled ones, which may involve rewards only a few times that of the average person rewards for the same duration of effort.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s