Harold Demsetz, Emergent Order, Property Rights, and Poverty

In his 1967 AER article Toward a Theory of Property RightsHarold Demsetz discusses (among other things) the emergence of property rights among the Naskapi, a tribal group located on the Labrador Peninsula.  The whole paper is worth a read, but it is on this section, located on pages 350-353 in the AER, I want to focus this blog post.

The thesis of the referenced section of Demsetz’s article is:

It is my thesis in this part of the paper that the emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities. [Emphasis added].

He demonstrates this discussing the change in property rights regime the Naskapi experienced before fur-trading (communal hunting) vs during fur-trading (privatized hunting and barriered hunting grounds).  What’s interesting about this example is the change in the property rights were not imposed on the Naskapi by their European trading partners, nor the governments of the Naskapi.  Rather, the property rights regime emerged on its own in reaction to the new set of incentives facing the Naskapi: whereas before hunting was done for food and not for trade, the cost of enforcing any private property rights in the forest were prohibitively high.  Following the introduction of the fur trade, the cost of enforcement now fell relative to the benefits received from hunting and this new property rights scheme emerged.

While Demsetz is writing exclusively about property rights and externalities, his article also provides us with interesting insights into the emergence of other institutions beyond property rights.  The benefit-cost analysis performed by the Naskapi that ultimately lead for them to alter their property right institutions likely also shapes the development of other institutions: market and market enforcement mechanisms, social taboos, societal hierarchies, languages, laws, religion, and other institutions.  This provides us with a framework to explain why some institutions work well in some places but not others and why attempts to impose institutions from the top-down tend to end in disaster.

Furthermore, Demsetz’s insight could provide us with a useful framework for considering foreign aid and poverty alleviation (both domestically and in the US).  When aid is targeted (for example, providing all mosquito nets to villages in Africa or food stamps that can only be used for milk purchases), it tends to be an inefficient method of solving the problem the imposer is trying to fix.  The relative cost or preference of, say, milk may be low for the person receiving their stamps vs, say, a satellite dish.  They’ll sell their aid and use the funds to buy whatever they wanted anyway.  This will not change unless their relative price or preference situation changes.

This also suggests to us a problem with tying aid or other issues to institutional changes.  For example, if the US were to provide aid to North Korea on the condition they alter their property rights regime, it may lead to resistance or waste (or corruption: a nominal change in institutions without any real change).  Rather, it would be better to increase trade with the nation and increase the benefit to them to adopt new property rights and institutions.  This will lead to far less resistance in the nation.  Another interesting implication of this is embargos and sanctions will have the opposite effect from those intended: not trading with a nation because of human rights violations or because they’re communist is likely to entrench the regime, not weaken it.

One final point to make that Demsetz emphasizes as well is these institutional changes are not quick.  They take time to happen.  The Naskapi property rights change appears to have taken about a generation or two to fully materialize.  This is because institutions are, rightfully so, difficult to change even by the participants themselves.  Institutions exist by reason and tradition, and short-term fluctuations aren’t likely to change them.  The fact that these institutions take so long to change is a factor of the fact the variable that is the impetus of change needs to show that it is not a temporary fluctuation but rather a new norm (think of it like this: if your water bill rose one month due to an abnormal drought, you wouldn’t be running out to rip up your lawn and put in a rock garden, would you?  However, if the drought lasted many years (or you live in Arizona or California where such conditions are normal), you just might).*

A Theory Toward Property Rights is a very interesting paper, both for considering property rights but also exploring how we think about emergent order.

*I hasten to add that this is not meant to imply the changes in institutions are a conscience effort.  They slowly emerge through common law, through interaction, through individual decision-making.  Just as each person learns to walk, from a tipsy toddler to a confident adult, without any conscience efforts to change one’s gait, same with the institutions.

4 thoughts on “Harold Demsetz, Emergent Order, Property Rights, and Poverty

  1. Good article. Foreign aid fails with our money and goods being stolen by the socialist dictators running the country of the people we are trying to aid.

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