Ruminations on Property Rights

Property rights are an extremely important institution in economics.  As discussed in yesterday’s Quote of the Day, property right regimes are one of the ways society attempts to answer the economic question. What follows below the fold are some of my thoughts, ramblings, and discussions on the matter.

Allow me to begin with a discussion of exactly what I mean by “property rights” or a “property rights regime.”  I am not referring to just private property rights (where individuals can own property).  That is a property rights regime, but it is only one.  Communal property ownership is also property rights.  Slavery is also a form of property rights.  These (and many others) are all different forms the institution of property rights can take.

Additionally, property rights are not ownership of the property per se but, as Alchian and Demsetz explain: “[w]hat is owned are rights to use resources, including one’s body and mind, and these rights are always circumscribed, often by the prohibition of certain actions.” I can use my body to earn a living, so long as I do not intentionally harm another person, for example.  What’s also interesting about this is that, as Richard Schlatter discusses in his book Property Rights: The History of an Idea, even absolute monarchs, who had claim to all property in their lands, faced limitations on what they could or could not do.

This leads us into another important point of discussion.  Property rights, like other institutions, are not merely defined by legal bounds (although legislation does play a role).  Institutions are ruled by both legislation and law, that would be “techniques, rules, and customs” (Alchian & Demsetz) that develop in the context of the society.  Legislation tends to be codified, whereas law is often informal (but that’s not to say there can’t be any overlap between the two).  For example, in marriage both parties give away their property rights to have sex with other partners in favor of exclusivity with each other.  While adultery (the violation of this property right) is not illegal, it is certainly taboo in America.  Violation of the exclusivity agreement won’t land anyone in jail, but it can lead to other social penalties (this is also true for exclusive dating relationships).

Given institutions like property rights are ruled by both law and legislation, this means context is extremely important in understanding the nature of the property rights regime.  In certain situations, a communal property rights regime may be preferable given the enforcement and divisional costs of private property rights.  There may be certain situations where state-owned property rights maybe preferable (such as military).  There may be exceptions to absolute property rights that are preferable (for example, pollution abatement).  These limitations can be enforced and are perfectly consistent with rule-of-law and property rights in general; No property right allows its owner to use his property indiscriminately (for further discussion, see Cole & Grossman).

Given the contextual nature of property rights, the institution must be both rigid enough to allow for enforcement and the resistance of fads, but be malleable in the event changes need to occur.  In his books The Reason of Rules (co-authored with Geoffrey Brennan) and The Limits of Liberty, Jim Buchanan thoroughly expands upon this matter.  If property rights are too flexible, too susceptible to the winds of change, then the definition of property rights becomes all but meaningless.  Likewise, if the regime is inflexible, then it runs the risk of becoming oppressive.

Harold Demsetz has an example of the flexible/inflexible nature in his paper Toward a Theory of Property Rights.  He discusses the change in property rights regime between pre-fur trade Labrador Peninsula Native Americans and post-fur trade Native Americans and compared to their Southwest brethren.  Before the fur trade, hunting was primarily carried out by the Labradorians for food purposes only.  Further, since the forest limited the range where the animals could go, there wasn’t much need for private property rights sincethe Tragedy of the Commons did not emerge; the forest was held in commune.  However, once the demand for fur rose, private property rights became relatively cheaper than communal rights, and the Labordorians developed an intricate system of private, and enforceable, property rights.  However, the Southwesterners faced a different context: their animals were not as commercially important as the fur trade and were nomadic creatures.  Establishing private property rights were significantly more expensive than in Labrador, and thus the Southwest Native Americans held communal property rights longer than the Labradorians did.  If communal property rights were forced upon the Labradorians, it would have lead to a Commons Tragedy and made them worse off.  Similarly: if the Southwesterners were forced to adopt a private property rights regime, the enforcement costs would outweigh the benefits, making them worse off.

Given that the institution of property rights shouldn’t be so changeable as to be meaningless, nor so inflexible as to become burdensome, this leads to the question “how can institutions be enforced and yet flexible?”  An answer to this question is government.  Demsetz, in his paper Some Aspects of Property Rights says:

The role of the body politic in this system is twofold.  Firstly, the government or courts must help decide which individuals possess what property rights and, therefore, who has power to claim that his rights are affected by others.  Secondly, property rights so assigned must be protected by the police power of the state or the owners must be allowed to protect property rights themselves. Presumably, the best mix of public and private protection will depend on ethical and other considerations.

Government’s role is to administer and enforce property rights, but not to design them.  Government can be a bulwark against the winds of change, but also allow for changing ethical and other considerations to take hold.  Of course, the big question is how to prevent government from moving beyond this umpire role and into becoming an active player (to borrow the metaphor from Milton Friedman).  I will refrain from addressing that question at this time.

One of the major implications of the above discussion is that there is no one best property rights regime.  Context and law will determine what are the best regimes.  This would suggest that tying international economic activity to certain socio-economic conditions may actually be counter-productive.  Imagine if the Europeans refused to trade with the Southwest Native Americans until they adopted private property rights.  No trade would occur: the Native Americans wouldn’t adopt the private property rights regime because it’d be too costly for them, and thus the Europeans would miss out on mutually beneficial trade.

The context-driven nature of property rights could also explain why “exporting capitalism” doesn’t seem to work, and likewise immigration appears to have no major effects on the institutions of a nation.  Since property right regimes are context-driven, attempts to impose private property rights (for example, by war, embargo, or treaty) are doomed to fail.  Likewise, immigrants cannot simply flood a nation and alter their institutions, and in fact, end up adopting the host-nations regimes.

The above are just a few thoughts of mine, mixed in with a lot of writings by far smarter people than I.  Property rights are a very interesting topic, and below is a list of the readings I referenced in this post.  I hope I have encouraged further reading.

• Armen A Alchian and Harold Demsetz: The Property Rights Paradigm. The Journal of Economic History, Vol. 33, No. 1 (1973)
• Daniel H Cole and Peter Grossman: The Meaning of Property Rights: Law versus Economics? Land Economics, Vol.78, No.3 (2002)
• James Buchanan and Geoffrey Brennan: The Reason of Rules.  Liberty Fund ed., 2000
• James Buchanan: The Limits of Liberty.  Liberty Fund ed., 1999
• Harold Demsetz: Toward a Theory of Property Rights. The American Economic Review, Vol. 57, No 2 (1967)
• Harold Demsetz: Some Aspects of Property Rights.  The Journal of Law & Economics, Vol. 9 (1966)
• Richard Schlatter: Property Rights: The History of an Idea (1973 reissue.  Orig. published 1951 by Russell&Russel, NY