Without such model, we are left debating with ideological arguments like "private property is a natural right" or the anecdotal argument that "communism never worked well enough". The opposing side would naturally reply with some other anecdotal evidence about the shortcomings of capitalism and the possibility that "communism failed because it was not correctly implemented".
I will argue here that we can actually model the way private property positively impact the creation of overall welfare. On the other hand, we can also identify cases when private property can negatively impact the overall welfare.
I use "common welfare" in the common, intuitive sense: the subjective appreciation of a country's welfare. While most formal definitions (like GDP/capita) will work the same for this argument, you can find my definition at the end.
Previous arguments
Many people attempted to explain why capitalism works better. A good argument is that, by aiming to redistribute based on need and less on merit, communism reduces the people's motivation to create more/better products. Still, we can imagine a communism that rewards people based on merit. Would it work?
Why is private property necessary for creating more welfare? Could we just keep the capital in state's property and use the free market and meritocratic reward to foster a high level of welfare?
In "Tragedy of the commons", William Forster Lloyd showed how using a resource in common could generate over-use and less than optimal overall welfare. However, the metaphor of cattle grazing on a piece of land does not speak much to the 21'st century. Also, in theory, a communist state should have all the means to well regulate the rational usage of such piece of land.
Who watches the watchers?
The fundamental flaw in any system without private property is the human nature. Enough people (if not all) tend to be selfish or lazy at times. When people are selfish or lazy, capital gets destroyed or not efficiently used.This happens both in communism and capitalist systems. The difference is that communism seems less able to control it.
In communist countries, stealing from the place of work becomes an acceptable de-facto practice, even if it is severely punished by law. I only know well one ex-communist country, but I would bet it was the same in all of them. You just don't have enough people that would resist temptation to be bribed by the ones that are stealing.
You need watchers for the watchers, and at the end of the chain you need a motivational force to keep the system efficient. Only few people are so intrinsically motivated to make what is right for the common good at the expense of their own potential welfare.
If you think about it, property of everybody also created a psychological effect: if everything is own by everybody, then "stealing from the common property is not really stealing, because it is actually my property". On the long run, capital gets poorly used so it decreases the level of welfare for most people. The moral hazard lies in the fact that, on the short term, most people can increase their welfare by cheating, and there is not much incentive to keep others from cheating and affect country's future.
How can capitalism solve the human nature?
OK, maybe common property is flawed, but how can capitalism solve the human nature? We can expect that in capitalism people are even more selfish. At least in communism the official ideology despises selfishness. Capitalism officially accepts the desire to have more than the other as natural.
Still, in capitalism, somehow people tend to do their duty in welfare creating more thoroughly, both on actual producing of welfare and on watching that people doesn't cheat.
The difference must be related to the private property. In capitalism, at the end of the chain of watchers that are watching the watchers, that are watching the workers is... the owner. The one who owns that capital has an intrinsic desire to have that piece of capital efficiently used to make him profit. This creates the energy that keeps the chain of watchers to not lose their focus. Without such intrinsic motivation, sooner or later the chain of watchers would lose it's integrity like an organism that is not fed.
People will still try to cheat in capitalism, and many times they will succeed. The difference is only gradual, capitalism seems to be way more able to keep the level of cheating low enough to not affect the welfare creation so much.
Capital and welfare
It must worth noted that inequality in capital ownership tends to be way higher than the actual welfare consumption. If one owns a shoes company, he will not wear millions of shoes in a year. In order for him to be wealthy, he must make profit. In order to make profit, he must equip millions of others with the shoes he produce, that increases their welfare. Of course he will have a lot of money from profit, so he can consume more than average from the welfare produced by others.
However, the welfare consumed by a factory owner will only be a tiny fraction of the attributed value of the owned factory. So even if his factory worth on paper thousands of times more than a simple worker owns, the factory owner would not consume thousands of times more welfare than its average worker.
As long as the factory owner is not selling the company for money, he is just like the director of a company owned by someone else or by the state - just having a huge salary (his dividends). The difference is that his "salary" directly depends on how much people will benefit from its shoes and that he can produce them with reasonable resource consumption.
For more about this you can read: On jobs and welfare
The factory
Let's take a more complex example. A good part of welfare that goes to people is created in companies with thousands of people, organized on multiple levels of management. Very big companies rarely have only one major owner, because they grow from multiple investments. This makes the control chain more delicate.
At limit, you can imagine a company that is equally owned by thousands of people. The owners can be the actual company workers or outsiders, it does not matter. The problem with this setup is that no owner has enough power to efficiently control the efficient use of that property. It's hard to convince enough others to vote the resolutions that would result in employing an efficient manager for that company. Voters have the power to sanction very poor company results, however it's prohibitive for each of them to assess problems preemptively.
When the biggest company share is so small, it is more likely that owners would try to benefit from the company by other means than the dividends of their shares. With no concentrated power, few owners can employ a corrupted management that would extract rents from the company by other means. Vicious contracts can silently estrange a good part of company's capital - money or equity - to the hands of a few owners. The part that can be extracted can be way bigger than their small share in company, so this creates a high moral hazard that often materialize.
Even if the owners are interested in company's prosperity, without proper control some others might try to benefit from the company, even the appointed CEO. Macro-economically there is something more important than having other shareholder cheated. The bigger issue is that the company will not produce welfare for the people at its potential. Multiply this with many companies and you have a country that is less wealthy than its potential.
What is the minimum capital concentration to proper control?
For sure, having more than 50% of the company assures a comfortable control on its management. Most companies value much more than the sum of their parts, so there is no incentive for a 50% owner to destroy the company for a side benefit - usually.
The exact percent for being interested in the good of the company depends on how big is the expected revenue of the company if well managed and the possible value that can be extracted by vicious actions. Sometimes even couple of percents from a big company can be motivating enough to not worth to make side arrangements that would damage the company.
In rare cases, inefficient companies can value more when sold piece by piece, and sometimes they are dismantled. However, as long a the other shareholders are not deprived of their right share of property, they might still get a fair share of the profit. The danger here is sometimes the artificial dilution of other shareholders participation by re-capitalization. While this might results in a highly unfair welfare distribution, for the overall welfare it is only important if the capital is used to produce something valuable.
On the short term, any company that stops producing/selling products has a net negative impact on overall welfare, even if it was loosing money. Arguably, on medium therm it might be better to re-distribute the capital for creating more welfare elsewhere. Loosing money might be a sign that the capital is not used for something valuable enough for the consumers, while there might be exceptions.
Quantity, Diversity and Quality
Using free market, capitalism is very good to adjust to consumer demands. Most of the time, capitalism produces desired products in enough quantity and diversity - as long as the products are economically viable. Free marker also urges the producers to increase the verifiable qualities of the products. Still, the race to higher profit can be sometimes an incentive to cheat on less obvious properties of the products.
If the food does not make you sick immediately, but has a long term toxicity, this is not easily visible for the consumer, so it cannot be easily corrected by consumer feedback. Making people sick is obvious a negative impact on welfare, however the free market will not always prevent this.
For controlling quality of the products, a society should have trusting authorities that can regulate, control and punish any abuse of the producer that would not be obvious at the selling time. Another example are low quality products that gets easily defective. With so many brands it's hard to punish the producer by not buying next time from that company. Such cases require regulations to assure a mandatory warranty period and other protections for the consumer against product misrepresentation by the producer.
Monopoly
Capitalism can only be efficient when free marker is able to move the capital from the less to more efficient welfare production. When one company has a monopoly on a certain market, the consumers don't have a lot of choices, especially on inelastic products like energy. Sometimes couple of companies act as a monopoly. In these cases, the overall welfare can be increased by regulating these cases.
On one hand, a monopoly is a redistribution issue, as such companies can ask for bigger prices without adding value (welfare). This does not reduce the overall welfare in itself. However, such companies tend to be less innovative so they will reduce the future created value. Going back to capital, such companies will tend to use capital inefficiently - as they have money to overspend, so that capital is taken from the potential production of other goods.
Overall welfare - my definition
What makes a country to have a higher welfare level than another?
Is is the GDP per capita? Such average might hide many people that are starving and few rich people. Is it the level of welfare of the bottom 1% of the people? Sometimes you cannot control much how the bottom 1% of people chose to live. Depending on de definition, the hierarchy sometimes changes.
For the sake of definition, I would go with the average welfare of the bottom 20% of the people. We don't want plain equality among people. Still, we don't want to rate too high a state where 20% are oppressed to create the proverbial 80%, while that created welfare is mainly consumed by the others.
On a practical level, it does not matter much. Most of the time, a significantly bigger GDP/capita would increase the absolute welfare of the lowest 20% of the people. Even someone that is eating from garbage might have a better life when the people that are producing garbage are rich. If the inequality of welfare is high, the people at the bottom might have a higher relative frustration, while they might be actually living better than the people of a more egalitarian country.
For me, it is more important the actual level of welfare of the people, even if some might be more invidious on the richer people - compared with a more egalitarian country. I think envy is actually overrated. I believe that people are more outraged by unfairness than by inequality. This explains why a professor will envy another professor that makes more money for doing a similar job, but it will not envy so much a banker that makes way more money than both together. This is not my example, but I don't remember the exact source.
To take the bottom 20% is somewhat arbitrary, we can use 10% or 30%. Compared to an average, taking the bottom assures that any inequality that capitalism might create would still benefit the people that happens to live a the bottom of the chart. We cannot guaranty that all will benefit (even the lazy or very unlucky). However, I have the belief that higher inequality can be a fair price as long as it brings higher welfare even on the bottom 20% of the population.
Bottom line
We've seen that private ownership of the capital is extremely important to assure efficient usage of capital, to produce more rather than less welfare for the people in a country. While measuring welfare exactly can lead to debates, there are clear lines between poor countries and more wealthy countries.
I proposed as measuring the overall welfare to look to the bottom 20% of the people in that country. I believe that a higher inequality is often the price to pay to be able the increase the welfare for the bottom 20%. A too egalitarian society might produce lower welfare even for the bottom 20%
Welfare distribution must not be confused with the distribution of capital value. Actual welfare consumption is more egalitarian than capital distribution. Maybe it's good to let people that can manage capital to own the capital. However, the state must motivate them to use that capital for creating welfare for others, for example by taxing the capital.
If one wants to imagine an alternative to capitalism that is at least that efficient in producing welfare, one must solve the "who watches the watchers problem". Private property manages to transform the human selfishness in a motivation to assure that the capital is used to create the highest conceivable welfare - depending on the owner's vision.
Capitalism is not perfect. We need to better understand where capitalism works and where it has shortcomings that affects the welfare of many individuals. Blindly believing one political ideology or another does not help. We can only improve the system by carefully analyzing what policies are contributing to general welfare and what policies can be improved.
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Comments
Pure communism results in failure, but unbridled capitalism doesn't fare any better. Taxes exist in every country in order to spread welfare from those who have more to those who have less. Private ownership is limited by anti-monopoly laws. These examples go against a pure capitalist philosophy.
The insidiousnes of these systems is that some of the harmful effects are long term and subtle. So subtle that they are very hard to counter. One example is the inequality fostered by capitalism. The more capital I have, the easier it is to generate more. Long term, the accumulation of capital in the hands of very few actors enables them to counter some of the mechanisms in place to prevent abuses (ex bribing judges/investigators/politicians/media in an anti-monopoly decision).
Capitalism is not perfect. We need to better understand it, very well said!