Economics and Property Rights

Economic theory does not operate in a vacuum. Institutions, such as the property rights structure, do not change economic theory but influences how the theory manifests itself. Similarly, the law of gravity is not repealed when a parachutist floats gently down to earth. The parachute simply determines how the law of gravity manifests itself. Failure to recognize the effect and role that different property rights structures play in the outcomes we observe leads to faulty analysis. Think about several questions. Which oyster bed will yield larger, more mature oysters - a publicly owned or privately owned bed? Why is it that herds of cows are not threatened with extinction while buffalos were? Who will care for a house better - a renter or owner? Finally, why are some societies richer than others?

The answer to each question has to do with the property rights structure, whether property rights are held privately or communally. When property rights are held privately, the person who is deemed the owner has certain rights that he expects will be enforced. Among those rights are: the right to keep, acquire, use, exclude from use and dispose of property as he deems appropriate in a manner that does not infringe on similar rights held by others. The owner also has the right to transfer title to the property and otherwise benefit from its use. When rights to property are held communally, such a bundle of rights do not exist. In general, the key difference between privately and communally held property rights is that Individuals do not have the right to exclude others from use and they do not have the right to transfer title.

Let us turn to our questions. In a publicly or communally owned oyster bed, everyone has a claim. In order for a person to assert his claim, he has to capture the oysters. This leads to overfishing because the person who tosses back an immature oyster does not benefit himself. He benefits someone else who will keep the oyster. It's a different story with a privately owned oyster bed. The owner need not capture the oysters in order to assert his claim and can allow the oysters to mature. It's the same principle with buffalo and other wildlife that's publicly owned. Through various rules and regulations, governments, though imperfectly, attempt to solve this property rights problem with licenses, fishing and hunting seasons and setting limits on catch and size. The difference in outcomes, based on the property rights structure is a no-brainer. As Professor Thomas Sowell writes in Knowledge and Decisions, “It is precisely those things which belong to “the people” which have historically been despoiled—wild creatures, the air, and waterways being notable examples. This goes to the heart of why property rights are socially important in the first place. Property rights mean self-interested monitors. No owned creatures are in danger of extinction. No owned forests are in danger of being leveled. No one kills the goose that lays the golden egg when it is his goose.”

Aristotle said, “What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others.” What he is saying is that private property rights forces people to internalize externalities, which is just a fancy way of saying that a person’s wealth is held hostage to his doing the “socially responsible” thing – wisely using the planet’s scarce resources. Private property rights give the homeowner inducement to take into account the effect of his current use of the property on its future value. That is why we expect a homeowner to give better care to a house than a renter. A homeowner has a greater stake in what a house is worth 10 or 20 years later than a renter. An owner would more likely make sacrifices and take the kind of care that lenghtens the usable life of the house. He reaps the reward from doing so, or pays the penalty for not doing so. Owner methods to make renters share some of the interests of an owner is through requiring security depsits against damage.

There is a completely ignored aspect of the effect of restrictions on private property rights and that's restrictions on rights to profits. Pretend that you are an owner of a firm. There are two equally capable secretaries that you might hire. The pretty secretary demands $300 a week while the homely secretary is willing to work for $200. If you hired the homely secretary, instead of the pretty secretary, your profits would be $100 greater. But what if there were a 50 percent profit tax? The profit tax reduces your rights to profit thereby reducing your cost of discriminating against the homely secretary. Before the profit tax, the cost of discriminating against the homely secretary would force you to forego $100 worth of profits. After the profit tax, by discriminating against the homely secretary, you forego only $50. That behavior is consistent with the predictions of law of demand: The lower is the cost of doing something, the more people will do of it. Profits are simply being taken in a non-money and hence non-taxable form. Wherever private property rights to profits are attenuated, we expect more choices to be made by noneconomic factors such as race and other physical attributes. That's especially the case where there are no profit motives at all such as nonprofit entities like government and universities.

One might find the previous statement puzzling knowing that government and universities that have preferential hiring policies in favor of racial minorities. There is no puzzle at all. When it was politically expedient, government and universities were the leaders in racial discrimination against racial minorities. Now that it's politically expedient to discriminate in favor of racial minorities, government and universities are in the forefront. For example, in 1936, there were only three black Ph.D. chemists employed by all of the white universities in the U.S., whereas 300 black chemists were employed by private industry. In government, blacks were only 1 percent of non-Postal Civil Service workers in 1930. Interestingly, when blacks finally made their entry into white universities, much of it was in the moneymaking part of the university - sports.

Economic growth is affected by the property rights structure. Several annual studies, such as The Economic Freedom of the World, measure variables such as constitutional enforcement, freedom for contracting and the protection of property rights, in order to compare the level of freedom across countries and over time and estimate the relationship between freedom and economic prosperity. They unequivocally conclude that economic growth is positively related to the security of property rights. The 2007 edition of The Economic Freedom of the World found that nations in the top quartile of economic freedom have an average per-capita GDP of $26,013, compared to $3,305 for those nations in the bottom quartile. The top quartile has an average per-capita economic growth rate of 2.25%, compared to 0.35% for the bottom quartile, for countries in the bottom quartile. In some years, some countries in the bottom quartile experienced negative growth.

Even if private property rights did not produce greater wealth, prosperity, and efficient resource allocation, it would be morally superior because it recognizes the sanctity of the individual. As John Adams put it, "Property is surely a right of mankind as real as liberty." Adding, that "The moment the idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence.”

Ideas on Liberty
Fee 36
For January/February 2008