Property Economics versus New Institutional Economics: Alternative Foundations of How to Trigger Economic Development

Article excerpt

The ex-communist [and developing] countries are advised to move to a market economy, and their leaders wish to do so, but without the appropriate institutions no market economy of any significance is possible. If we knew more about our own economy, we would be in a better position to advise them.

--Ronald Coase, "The Institutional Structure of Production"

What are the core economic principles to be implemented for protected transactions in developing and transitional countries to trigger economic development? In recent decades, two approaches have been developed which claim to answer this question: (i) the theory of property rights, or new institutional economics, originating from Armen Alchian (1977) and Harold Demsetz (1967; see also Alchian and Demsetz 1973) and developed by Nobel laureate Douglass C. North (1973, with Robert P. Thomas; see also North 1981 and 1990) (1) and (ii) the property-based theory of the economy, or property economics, developed by Gunnar Heinsohn and Otto Steiger (2004, 2003, 2006a, b, and d; see also Stadermann and Steiger 2001 and Steiger 2006a), with similar contributions by Hernando de Soto (1989 and 2000), Tom Bethell (1998), and Richard Pipes (1999). (2) The analysis of the institution of property forms the core of both schools. They maintain that property is the most important source of economic activity.

Although economic development is only one of the topics of their theoretical framework, both schools claim to answer Richard Easterlin's (1981) seminal question, "Why Isn't the Whole World Developed?" New institutional economics focuses on the traditional dichotomy of economics between private, or individual, and common, or state, property, both defined as the right to the physical use of resources, including the returns thereon, and the right to their exchange or alienation and that to their change. Challenging this dichotomy as being of secondary importance only, property economics differentiates between property, defined as the rights of burdening and encumbrance (or collateralization) and that of exchange (or alienation), rights that do not touch resources, and possession, defined as the only right to physically use resources and the returns thereon, including the right to change their form and substance. As a right, possession is bound to property. (3)

The term possession is unknown to economic scholars of past and present (see, however, Epstein 1998 discussed in the subsection on "The Fundamental Flaw in New Institutional Economics: The Missing Distinction between Possession and Property"), and burdening and encumbrance have never been discussed in their analyses of property--not even in the new institutional economics' theory of property rights.

The paper is organized as follows: the first section presents the fundamentals of property economics, and the second presents those of new institutional economics as alternative explanations of economic activity in the underdeveloped world, whereby institutional economics is analyzed from the viewpoint of the core of property economics--the distinction between property and possession. On the basis of the different approaches to economic development made by the two schools, the third section evaluates reform and development programs of multilateral institutions with a view to their suitability to trigger economic activity.

The Property Theory of the Economy, or Property Economics

Unlike new institutional economics, the school of property economics does not neglect the distinction between property and possession. It rather makes this distinction the basis of its theory, which intends to answer what Heinsohn and Steiger regard as economic theory's core question and, thereby, is fundamental in explaining business or economic activity: which is the loss that has to be compensated by interest? The property theory of the economy accepts neither a temporary loss of goods, as in neoclassical, nor a temporary loss of money, as in Keynesian economics, as being the cause of interest. …