И.З.И

What are property rights? What makes them stronger or weaker? How do stronger property rights affect the lives of ordinary people? Why are they so important to the welfare and prosperity of citizens? What happens if property rights are missing or weakened?

This introductory lecture will address those questions and will look ahead to future topics in the series.

A property right is a socially enforced right to select uses of an economic good. A private property right is one assigned to a specific person and is alienable in exchange for similar rights over other goods.

We live in a world of scarcity, and scarcity guarantees that individuals will compete for scarce goods and resources. Thus it is imperative that the rules of competition favor mutually beneficial cooperation–gaining by trading for example, and competing with better, more productive offers of exchange–rather than destructive competition—fighting, for example. The rules of competition are determined in large part by property rights. Private property rights, when properly defined and protected, limit both the owners and the potential users of resources, goods and services to cooperative forms of competition. They enable mutually beneficial trade, encourage both conservation and production for trade; and they outlaw violence and other destructive means of competition. To understand property rights, then, is to understand how a society can put itself on the road to internal peace, economic prosperity and a protected environment as well. As we will see, nations with strong property rights are doing just that, while those without them do far less for their citizens.

The above definition by Alchian captures the essence of how economists use the two terms, property rights and private property rights. A society establishes property rights and can help an owner enforce them in a number of ways. Government agencies, such as courts, are often important in specifying rights in specific situations and settling disputes about them, and the police force helps to enforce them,. But government does not act alone. Informal actions, as when citizens shun a thief who has violated a property owner’s rights, or refuse to deal with businesses believed to have violated customers’ rights, often play a role also. A society’s prevailing ethical and moral norms are a powerful influence on both the law and the informal actions in that society. Property rights are an expression of those norms. Private property rights imply a recognition of the worth and the independence of individuals, and ultimately those rights allow and protect their individual freedom.

A strong private property right to a home, a bicycle, a piece of land--or to one’s own “human capital,” (one’s labor and the fruits of trading it to others) provides three things to the owner: (1) the right to exclusive use, (2) legal protection against invaders—those who would seek to use or harm the property without the owner’s permission, and (3) the right to transfer to (exchange rights with) others on any terms that are mutually agreed upon by the owners and buyers. Private owners can use their property as they wish, so long as they do not infringe on the rights of others. An owner is not allowed to use property in a manner that invades or infringes on the property of another. I am not allowed to throw the hammer that I own through the window that you own. That would violate your property right to the window. The same is true if I operate a factory that harms you or your land by spewing harmful air pollution. Because an owner has the right to control the use of property, the owner also must accept responsibility for the outcomes of that control. Policies that reduce any of these rights are said to weaken the owner’s property right.

In national economies where private property rights are stronger and better protected, prosperity and growth are stronger also. The evidence on this has been growing in the economics literature. Since the collapse of socialist economies in the former Soviet Union and allied nations, most economists recognize that economic growth and prosperity are furthered in an important way by secure and tradeable private property rights. Higher economic growth means that people live longer and have better access to the necessities of life, such as clean water, for example.

A study (Norton, 1998a) using international ratings on property rights and health-related data from more than 100 nations by Wheaton college economist Seth Norton finds that in nations with more strongly protected property rights, 93 percent of the population has access to safe drinking water, while in nations with weak property rights, only 60 percent of the population has that kind of access. Similarly, in the nations with stronger property rights, 93 percent have access to sewage treatment, while only 48 percent do, in countries with weak rights. Longevity is affected in a similar way. Life expectancy is 70 years in nation with strong protection of property rights, while it is only 50 years in nations without that level of protection.

Some people attribute these differences to the fact that economically free nations are generally wealthier, saying that it is this wealth, rather than property rights, that brings the good results. However, the same benefits from stronger property rights can be seen when we focus solely on poor nations. Among poor nations (Norton, 1998a, b), those with relatively stronger property rights protection see 95 percent of their population live to age 40, while in the nations with relatively weaker protection of rights, only 74 percent of the people live to age 40. Even more important, among poorer nations, those with stronger private property rights have greater rates of economic growth and development. In rich nations or poor, property rights provide a better, more healthy environment for citizens. These findings suggest that in protecting water supplies and providing access to clean water, as in the provision of other goods and services, a system that protects individuals with private property rights is superior to one relying on direct government control.

Clearly defined and enforced private property rights are a key to economic progress and the welfare of individual citizens because they provide powerful incentives. The following four factors are particularly important in affecting the behavior of property owners.

1. Private owners can gain by employing their resources in ways that are beneficial to others and they bear the cost of ignoring the wishes of others. Consider the following example. The owner of a private apartment has a right to use unusual paint colors and exotic designs when decorating the interiors of his or her apartment, but most apartment owners use neutral colors such as white and beige. Why? Because, as owners, they will benefit by renting or selling their apartments, and neutral colors are likely to please more people and thus improve the value of the apartment. A private owner bears the cost in terms of a lower selling price of ignoring the wishes of others who might be potential buyers or renters. On the other hand, fixing up a house or apartment and doing things to it which others find beneficial will give to the owner the benefit of a higher selling price. The value of an asset, and therefore the size of the owner’s wealth, depends on the value that others place on the asset–the property that is owned.

In the market economies, land itself is generally privately owned. Consider the private owner of a plot of undeveloped land near a university. The owner has many options. The land could be left undeveloped, made into a metered parking lot (where owners of automobiles pay for the right to park their cars), or be sold as a site for a restaurant, office building or rental housing. Will the wishes and desires of the nearby students and staff, who do not own the land, be reflected in the owner’s choice? Probably so. The reason is that if the owner selects the use that is most highly valued by potential customers, the owner will earn more money. If housing is hard to find but there are plenty of restaurants, the profitability of using the land for housing will be higher than the profitability of using it for a restaurant. Private ownership provides a strong incentive to cater to the wishes of others as to the use of the owner’s property. If the property is left totally undeveloped, withholding it from these potential uses that would benefit the nearby students and other residents, the owner will lose the potential income from the property.

Finally, consider Mary, the private owner of an apartment building near the same campus. She may not personally appreciate swimming pools, workout facilities, study desks, or green areas. Nonetheless, private ownership gives her a strong incentive to provide these items if potential customers value them enough to cover their cost. Why? She will be able to lease the apartment units for more money if they include amenities that are highly valued by others. Owners of investment property have a strong incentive to consider the desires of others.

2. The private owner has a strong incentive to care for and properly manage what he or she owns. Ed owns a car. Will he change the oil in his car when it is time to do so? Will he take care to see that the seats do not get torn? Probably so, since being careless about these things would reduce the car’s value, both to him and to any future owner. The car and its value—the sale price if he sells it—belong just to Ed, so he would bear the burden of a decline in the car’s value if the oil ran low and ruined the engine, or if the seats were torn. Similarly, he would capture the value of an expenditure that improves the car, such as providing a new paint job. As the owner, Ed has both the authority and the incentive to protect the car against harm or neglect, and even to enhance its value. Similarly, in apartment buildings in the former Soviet Union, it is common to see apartments that are well cared-for, while common areas – such as entryways and hallways – are unclean and in disrepair. People have a stronger incentive to care for property that is theirs. Private property rights concentrate the owner’s interest and attention, providing a strong incentive for good stewardship.

The incentive for good care and management by the individual extends also to private investments that yield income. The owner of a private hotel does not want to neglect electrical or plumbing problems. Taking care of them now will often avoid large repair costs due to electrical fires or water leaks, as well as avoiding liability costs if hotel customers are harmed. In addition, more customers will come to a hotel that is well kept, and the value of the hotel will be high if the owner wants to sell it in the future. The wealth of the owner, in the form of the value of hotel ownership, is a hostage to the owner’s good management. That is, fear of losing wealth due to a decline in the value of an asset like a hotel keeps pressure on owners to be good managers. Poor management will reduce the hotel’s value, and thus the owner’s personal wealth. The drop in value occurs as soon as a property appraiser can see the problems that will increase costs or decrease revenues in the future. Even the ability of the owner to borrow against the hotel’s value is compromised immediately. Again, ownership concentrates the owner’s interest and attention on good management of the asset owned. This principle applies to all forms of enterprises. The experience of the transition economies highlights this. In general, people take better care of privately owned enterprises than state owned enterprises. Under private ownership, owners and workers alike have stronger incentive to see the firm prosper, because they benefit directly when the firm is successful.

3. The private owner has an incentive to conserve for the future if the property’s value is expected to rise. Suppose our man Ed owns a case of very good red wine, which is only two years old. Age will improve the wine substantially if he stores it properly in his cellar for another five years. Will he do so? Well, if he does not, he will personally bear the consequences. He (and presumably his friends) will drink wine sooner, but they will sacrifice quality. Also, drinking it now would cause Ed to lose the chance to sell the wine later for much more than its current worth. The opportunity cost of–the benefits given up by--drinking the wine now is its unavailability later, for drinking or for sale. The owner, Ed, bears that cost. Private property rights assure that Ed has the authority to preserve the wine, and that he both gains the benefits and pays the cost if he does so. If the greater quality is expected to be worth the wait, then Ed can capture the benefits of not drinking the wine “before its time.”

Contrast this with wine and food available at a party. While privately owned, the food and drink are available for anyone attending the party to consume, that is, they are characterized by “open access.” If one individual decides to try to conserve some of the wine and food by forgoing consumption, any other person can thwart his attempt at conservation by consuming the wine himself. This example may seem trivial, but the same principle can be observed operating in other cases. When timber resources, agricultural land, water resources, and the like are privately owned, the owners have the incentive and ability to conserve them, when the costs of doing so warrant this. On the other hand, when private property rights to these resources do not exist and access is open, it is common for the resources to be overused.

In a similar way, if Ed owns land, or a house, or a factory, he has a strong incentive to bear costs now, if necessary, to preserve the asset’s value. His wealth is tied up in its value, which reflects nothing more than the net benefits that will be available to the owner in the future. So Ed’s wealth depends on his willingness and ability to look ahead, maintain, and conserve those things that will be highly valued in the future.

4. With private property rights, the property owner is accountable for damage to others through misuse of the property. Private ownership links responsibility with the right of control. Ed, the car owner, has a right to drive his car, but not in a drunken or reckless way that injures Alice. A privately-owned chemical company has control over its products while it owns them, but, exactly for that reason, it also is legally liable for damages if it mishandles the chemicals, in a market economy. On the other hand, a state enterprise in the Soviet system (and in many post-Soviet economies) typically was exempt from such liability. In a working system of private property rights, courts of law recognize and enforce the authority granted by ownership, but they also enforce the responsibility that goes with that authority.Once again, property rights hold accountable the person (owner) with authority over property, concentrating the owner’s attention on avoiding the cost of liability for damage done.

Property rights, when they are enforced and tradeable, provide for owners both security and the freedom to choose and to act. Furthermore, private property rights are a prerequisite for free markets and market trading. As will be seen in a subsequent lecture, market trades, which can only occur if there are property rights, provide price information that constantly flows to all who are interested, telling them about relative resource scarcity and the relative value buyers place on different goods and services. The market prices enabled by the free exchange of property rights thus provide guidance to all participants.

Freedom in a property rights system is matched with responsibility. A property right holds the owner accountable for the results, good and bad, of the chosen actions. The owner is rewarded –by the market– for actions that provide benefits for others and punished by the market for actions that do not serve others. Additionally, in a system of private property rights an owner can bear legal liability (responsibility) for harmful actions, and punished by courts, if necessary.

Using resources–land, physical capital and human capital–in ways that provide large benefits for others can allow owners of the resources, and the entrepreneurs who work with them, to create great wealth using mutually beneficial trades to use resources in ways that move them from lower to higher valued uses in production and trade. They can then move forward by creating still more value and wealth so long as they continue to be guided by price information and to succeed in providing value to others at a relatively low cost. In contrast, owners who fail to provide such value for others will fail to reap the potential benefits from doing so. And owners who use their property in a way that violates the rights of others will be penalized and will pay for doing so. In summary, property rights, together with the market trading they promote, work to inform, coordinate, and motivate citizens as owners and as market participants. The cooperation occurs without coercion, apart from enforcement of rights, and promotes social peace. These factors play out in many ways in a society, as the succeeding lectures will illustrate.

What happens in societies where private property rights do not prevail, or are weak? Consider each of the three components of a strong private property right in turn: 1) exclusive use of the property, 2) rights defended against invasion and harm, and 3) transferability to others, at mutually acceptable terms.

First, suppose there is no owner with the exclusive right to use of a particular resource. Competition for its use will not take the form of mutually beneficial offers made to a resource owner, but instead may result in fighting, of one sort or another, to gain control of it. In an otherwise peaceful nation, the fighting might take the form of each competitor working to convince the government that he, and not another competitor, should be awarded use of the resource. This form of competition is called “rent seeking” by economists. The term doesn’t refer to rents as we normally think of them, but instead refers to actions intended to change the rules of the game in favor of personal benefits at the expense of others. Other examples of this, relevant to the transition countries, include asset-stripping from state enterprises, corruption by officials seeking bribes, barter deals designed to hide theft of assets from enterprises, and the like. Competition in rent seeking, and defensive actions by others to prevent costs being placed on themselves, is costly. And if the result of the rent seeking is not a strong property right awarded by the government, the fight may have to be repeated each time a new government takes control–after each election, perhaps.

Think now about the second component of a strong property right: the owner’s ability to defend the property and the owner’s control of it, at low cost. The weaker property right is worth less than a strong one, reducing the incentive to invest in the property to increase its value, or even to conserve and protect it from natural or human-caused harms. From the viewpoint of the non-owner who wants to use the property, even destructively, the cost may be low without an owner monitoring and protecting the resource. The property may be wasted–not put to good use or put to a low-valued use–as often happens with stolen goods. The third component of a strong property right is the ability to transfer the property to others at mutually agreeable terms. This right is weakened by price controls, taxes, license requirements, tariffs and quotas on trade, and the like.

As we know from basic market economics, prices are signals of relative scarcity and value of goods and services, and serve to coordinate individuals’ behavior, minimizing waste and ensuring the production of high valued goods and services. Well-functioning markets and market prices exist only to the extent that there are well-defined private rights to property. Price controls and taxes limit individuals’ property rights, and distort the price signals sent by offers to buy and to sell. It is illegal to sell the property right at any price that would violate the control price, or to make a transfer without paying the government for the right to do so. If an apartment is worth more to a worker with a nearby job, than to the retired worker living in it, price controls that prevent the price of an apartment from rising above a certain level (price ceilings) may prevent the worker from gaining access by outbidding the retired worker, who is likely to be better able to move to a lower-cost (less scarce) type of location. The retiree, however, is getting the signal that the apartment is only worth the controlled price rather than the higher price that the current worker would be willing to pay. So long as the retiree is willing to pay the control price but not the higher price that would be offered by the current worker, the apartment will probably not be used for its best use. The worker will have a longer commute to work. Similarly, price ceilings on consumer goods mean that other methods of allocation will be used. In the Soviet Union, price ceilings, coupled with low production levels for consumer goods, resulted in queuing as a means of allocation. The value of time spent by individuals waiting in line was enormous, and constituted a waste, in that it could have been devoted to more productive uses under a different system.

Taxes distort prices also, since they add to what the buyer pays and subtract from what the seller receives. Units for which the buyer is not willing to pay both the full cost to the seller and the tax will not be sold even if they are worth more to the potential buyer than they cost. Again, the property does not necessarily go to the highest-value use or user, as it normally would in a free market.

License requirements, tariffs and quotas all keep some people out of the market who would otherwise have mutually beneficial trades to offer. When sellers are protected from competition, it is likely that some property is not allocated to it highest and best use. When a tariff (a tax on imported steel) protects the local steel industry, as in the U.S., for example, resources are used to produce steel that could be purchased more cheaply from another nation. Without the tariff, the resources would be freed up to produce greater value in non-steel production. With a tariff, however, steel will be more costly. If a union has negotiated a high wage and is successful in keeping non-union workers out, then steel workers themselves will be paid more with the tariff than without it. Steel will again be more costly. The local auto industry and other steel users will be forced to operate at higher cost with lower sales and employment. Well-organized industrialists, unions and others can often use government power to weaken the property rights of competitors and thus seize advantage for themselves, even though society as a whole is the loser when property rights and the economic competition those rights encourage are weakened.

It is important to note that a key property right is ownership of the fruits of one’s own labor. In a market economy, much of the total income goes to labor of all sorts, including wages, salaries, royalties for writing or performing music, and so on. In the United States, for example, over the past century more than 80 percent of national income has generally gone to pay individuals for their human labor, rather than to owners of stocks, bonds, and physical capital. Ownership of one’s labor is a property right to what economists call the worker’s “human capital.” In a market economy, human capital is by far the most important property, in terms of economic valuation. Therefore workers have a larger stake than do owners of land and physical capital, in getting and maintaining a working regime of private property rights, including their right to buy and sell on all markets. In a functioning market economy with relatively strong property rights, workers have property rights to about 80% of all the capital in the economy. It is no accident that even the poorer nations with weaker property rights than rich nations, poor people in poor nations having relatively stronger property rights prosper more than poor people in poor nations having relatively weaker property rights.

When property rights are well defined and secure, and when owners are free to trade them in markets, suppliers of goods and services must pay resource owners the value of each resource employed. No one is permitted to seize and use scarce resources without permission of the owners—that is, without bidding the resources away from other users who also value the resources–but less strongly. Neither will they be permitted to use violence (for example, to attack, invade or harm the property of another) as a means to achieve an economic objective.

The incentives provided by the private ownership of property encourage constructive action and discourage waste of scarce resources. Thus they provide the foundation for cooperative behavior among individuals. Private property rights and markets provide each individual, however selfish or narrow?minded, with both the incentive to engage in productive activities and cooperate with others, and the information necessary to gain from cooperation. When private property rights are protected and enforced, permission of the owner is required for the use of a resource. The user of a good or resource must either buy or lease it from the owner. An owner whose actions are directed by market price signals will have both a strong incentive and the information needed to consider the desires of others and to use and develop their resources in ways that are valued highly by others. The resulting market exchanges generate what F. A. Hayek, the 1974 Nobel laureate in economics, called the “extended order.” Hayek used this expression to describe the tendency of markets to direct individuals from throughout the world to cooperate with each other in mutually beneficial ways despite the fact that they do not know each other and that they often have vastly different backgrounds, lifestyles, and cultural values.

Innovation, which typically is the successful introduction and adoption of a new product, process, management regime or marketing strategy, is encouraged in a regime of property rights. That is because those who innovate are generally accountable in a direct way for the success or failure of their innovations. When the rest of the community knows that it is the wealth of the innovator and voluntary financial backers, and not their own tax dollars that are being risked, the innovator is allowed much more freedom of action. It is not necessary for the innovator to get the community’s approval before proceeding; he will reap what he sows, and cannot pass the burden on to unwilling citizens. Similarly, when an innovation succeeds, the primary benefit (profit) goes to the innovator and voluntary partners in the venture, whether stockholders or more direct partners in the venture.

In contrast, in a community that does not recognize private ownership rights, whoever has the power or the political authority can simply take command of an item, ignoring the wishes of both the person in possession and other potential users. Without private property rights, other methods must be found to provide the incentives for good stewardship of property, and for proper concern for others by the users of property. Unfortunately, in practice this means that without private property rights there will be a lack of good stewardship and proper concern, because the alternative methods tend not to work very well.

Without strong private property rights, owners of, say, a factory are not held responsible for the damages they cause to others’ property (including damage to their health). So the government intervenes. However, these interventions often lead to undesirable outcomes, including waste of resources, failure to correct the problem, and expansion of the government’s power at the expense of the rights and well-being of the citizens. The experience of socialist nations in the 20th century, in which central governments had full control, demonstrated that government control can seldom match the effectiveness of private property rights in producing benefits for all citizens. The socialist nations lagged in prosperity, progress and environmental quality, relative to otherwise similar nations that relied to a much larger degree on private property rights and market exchange. The greater economic freedom, with responsibility, that characterized the nations with stronger property rights enabled their nations to perform better on all three dimensions.

Property rights are not simply given to a society. If a society is to have such rights, it must develop them, either by conscious decision or by unintentional process. How these rights work is crucial, but they are costly to define, establish and enforce. When private property rights are allowed to evolve, it is usually a long process. Governments can be reluctant to grant such rights to individual owners. Our next lecture will discuss the forces that shape the development of property rights. The specific forces differ among cultures and among nations, and the history is an interesting and important one.

A key problem in any large economy is the knowledge problem. We have already mentioned that market prices convey information about scarcity and relative values. They do so at relatively low cost. One need not understand why unroasted coffee beans have become more scarce to know and appreciate that greater conservation of coffee beans will save them more money now, for other things they want. Knowing the price change is sufficient. But even the condensed information of market prices cannot automatically be known to all. Only in a few markets, such as those for commonly traded stocks, bonds, and commodities such as oil and grains, are prices of resources and goods easily observed by nearly everyone, (electronically for example). How can I learn the value of my used car, in my town, right now? And who stands ready to pay for it? How can a potential buyer learn which potential sellers are out there, and what sort of cars they own? These are the sorts of questions that matter everywhere but are not easily answered at any specific time and place. Welcome to the world of “transactions costs”–the costs of locating exchanges that will be beneficial, arranging the trades, and enforcing the agreements made. How do private property rights work to help buyers and sellers reduce transactions costs? These and other related questions will form the basis for a third lecture.

Why do we have firms with owners, employers and employees in the real world, rather than simply contracting–making arrangements--with each of those needed to provide what we want? The answer to this question helps determine the forms the various kinds of firms take. How are they organized? Why are stockholders, the owners of firms that are corporations, so often not directly in control of the firm? Instead, managers appear to control the firms. That is, why are ownership and control so often separated? Specialization, transactions costs, and the spreading of risk all play a part, as we will see in a fourth lecture.

Governments play a very important role in setting and enforcing the rules in most societies, including the rules that define property rights. Many government actions can strengthen or weaken property rights. Regulation, for example, can operate in either direction. Taxation is necessary to have an active government. Its effect on property rights has been briefly discussed already, but much more can be said. What is the effect on property rights of policies that redistribute wealth and income? How do restrictions on the right to contract freely affect property rights? Why does government not consistently act in the public interest on these issues, even in a democracy? These are primary questions to be addressed in the fifth lecture of this series.

Government itself is often the owner of property. Socialism can be defined as government ownership and control of the means of production. How is government ownership different from private ownership? What happens in the market for capital goods or investments? Does information flow in the same way? Is peaceful cooperation enhanced when, for example, a government (even a democratic one) owns resources rather than private owners? How is the political process itself affected? These and other, related questions will be addressed in the sixth lecture of the series.

Property ownership can be shared mutually among several individuals. This can cause predictable and easily understood problems, but it is often done. What are the advantages of mutual ownership of private property rights? What is there about clubs and cooperative organizations that encourage this form of ownership? What can these organizations do to minimize the problems of mutual ownership?

Entrepreneurship, or control of assets and production by innovators who may or may not own the assets, is a large factor in any market economy with strong private property rights. Why is that the case? Why are entrepreneurs, people who see opportunities for gain by innovation, more common with private ownership of property rights? Why are there always some who oppose change? What factors involving property rights tend to encourage the dynamic change that entrepreneurs foster, and which ones allow the enemies of change to have more influence? When will government enter these questions and tilt the playing field toward or against innovation and change? These important topics are the basis for the eighth lecture.

Environment and the conservation vs. production of natural resources are contentious issues around the world today. Property rights have a very large influence on both environmental quality and resource conservation. Pollution, forest management, protection of endangered species, global climate change and other environmental and resource issues will be discussed in the context of property rights in the ninth lecture.

Property rights institutions and issues involving them will be discussed in the context of Bulgaria and Eastern Europe in the tenth lecture, the last in this series.

Alchian, Armen (1994) “Property Rights” in John Eatwell (Editor), The New Palgrave: a Dictionary of Economics, p. 1031.

Herbert G. Grubel, “Economic Freedom and Human Welfare: Some Empirical Findings,”Cato Journal (Fall, 1998, pp. 287-304)

Gwartney, James D., 2003, Richard L. Stroup, Russel Sobel, and David McPherson, Economics: Private and Public Choice, 10e, (Cincinnati, OH, Thompson Learning: South-Western, 2003), p.623.

Norton, Seth W., 1998a, A Property Rights, the Environment, and Economic Well-Being,@ In Peter J. Hill and Roger E. Meiners (eds.), Who Owns the Environment (Rowman & Littlefield, 1998): 37-54.

Norton, Seth W., 1998b, APoverty, Property Rights, and Human Well-being: A Cross-national Study,@ Cato Journal 18 (2) (Fall 1998): 233-45.