Journal File A. Allan Schmid 9/10/98

Subsidy vs. payment for goods

When is income the result of a subsidy rather than a payment for goods which are someone's property?

Depends on the property rights. If one has no right, then one has nothing which is a cost to others. Therefore, any income is a transfer.

Consider the income of a slave. Since slaves do not own their labor power, any income is a transfer or subsidy. But the income becomes a payment for a good when the former slave is given ownership of his labor. A subsidy is not an independent fact, but a derivative of rights.

Consider another case. A farmer receives income for reducing soil erosion and thus downstream siltation. If the farmer has a right to silt up downstream rivers, then the income is a payment for the resource which the farmer owns. The downstream people are just paying for something they want, but do not own. On the other hand, if the downstream people own the right to be free of siltation, then any income to the farmer is a transfer or gift.

Be careful in labeling income as a subsidy so that you do not presume who owns. You will often hear people say that a particular payment is a subsidy and distortion of true market values usually reflecting unmerited political power. The term "Rent seeking" is often applied. But when interests conflict there is a power issue, and the only real question is who has the opportunity and who the exposure to the exercise of that opportunity. The real questions above are who owns labor and who owns stream beds. To call one person's income a subsidy is to say that you do not approve of the underlying rights. You are saying that political power has been used to channel income to a non-rightful owner. But, of course, who is the rightful owner is the question. And it is inescapably a political and power question. If I have the power to make a rule giving me the power of an owner, I do not need power to support a subsidy outside of the market.