Economics and Property Rights

Article excerpt

Economic theory does not operate in a vacuum. Institutions, such as the property-rights structure, do not change economic theory but influence how the theory manifests itself. Sinnlarly, the law of gravity is not repealed when a parachutist floats gently down to earth.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 buffalo were? Who will care for a house better-a renter or an 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 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 does not exist. In general, the key difference between privately and communaly 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. 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. However imperfectly, governments attempt to solve this property-rights problem with hcenses, fishing and hunting seasons, and limits on catch and size. The difference in outcomes, based on the property-rights structure, is a no-brainer. As 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 force 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 induce the homeowner 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 ten or 20 years later. An owner would more likely make sacrifices and take the kind of care that lengthens the usable life of the house. He reaps the reward from doing so, or pays the penalty for not doing so. Owners require security deposits against damage to make renters share some of their interests in the property. …