This post is continuing a line of thought I explored the other day.
Well-defined property rights are crucial to exchange. Without them, exchange cannot occur. But what is interesting is that it doesn’t matter what the property right regime is, just that the property rights are well-defined.
Property rights tell us who is responsible for the property and whom entreaties are made to in order to acquire those rights. For example, let’s say we have a property rights regime where the monarch has rights to use property; all property belongs to him/her “by right.” S/he may grant usage rights to a vassal or subject at their whim. Further, no property right can be transferred between subjects upon death or some other agreement; all property rights, once no longer used by the subject, return to the monarch. In this little example, everyone knows who he needs to go to in order to facilitate exchange: the monarch. The property rights are clearly defined in the society.
Now, let’s say we have a similar monarchical society. However, in this society, property rights are far less clearly defined. There are roving bands of brigands that take property without compensation. The monarch arbitrarily seizes property of his/her subjects (and, likewise, subjects seize the property of their monarch). And so on. In this society, where property rights are not well-defined, the ability to exchange is virtually null (although that is not to say there isn’t an emergent order from this chaos, too: he who is strongest keeps his loot). After all, who owns what you want to exchange, and what can you exchange with?
The above two societies show that the type of government doesn’t matter for property rights to be well-defined and encourage trade, but rather the rule of law. Bob Higgs calls this lack of clarity in property rights “regime uncertainty.” As he shows, regime uncertainty can have severe consequences on economic growth.
As a brief aside, regime uncertainty is why I find the arguments, some put forth by very smart people, that war, natural disasters, or other “broken windows” can cause economic growth to be ridiculous. If your property is being destroyed, and not voluntarily by you, then that is a major source of regime uncertainty. It’s hard to plan, hard to exchange, when all you have is rubble.
None of the above is to say that the type of property rights regime doesn’t affect exchange. Rather, the point I wish to emphasize is that the definition of property rights determines exchange (or lack thereof). There are some property rights regimes that encourage trade more than others (but, as Demsetz points out and I discussed the other day, context matters a lot).
Beyond facilitating exchange, well-defined property rights are important in settling conflicts on the use of resources. As I discussed the other day, property rights are the right to use a resource, and those rights are usually in some way limited or conditional. These limitations are necessary to prevent or resolve conflict. For example, my right to move my fist (a “property right” use of my body) ends at your nose. I do not have an absolute, unconditional right to move my fist. This is done to prevent conflict. If, however, I do move my fist into your nose, everyone will know who was in the wrong: I violated my property right condition, and thus owe some kind of compensation to you. The property right is clearly defined.
When the property right is not clearly defined, conflicts more readily arise. I use my factory, which belches smoke (my “property right” use). The smoke ruins the view and use of your back yard (your “property right” use). Do I have the right to pollute (and thus you need to make adjustments or compensate me to reduce my use) or do you have the right to a pretty view and use of your back yard (and this I need to make adjustments or compensate you)? In this particular case, since the right isn’t clearly defined, conflict would arise; a conflict which would need to be solved (hopefully through some kind of arbitrator and not the use of violence). As Ronald Coase shows, it doesn’t matter how the property rights are defined, just that they are defined.
Well-defined property rights aren’t a matter of government, but rather consistency. It’s be wrong of us to insinuate, as we sometimes do, that well-defined property rights are a result of free markets, rather than a precursor to. Further, it’d be wrong to insinuate, as we sometimes do, that well-defined property rights can only exist in free markets. The fact property rights are well-defined, not the political system they rests under, are what matter for exchange.
- Robert Higgs: Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War. The Independent Review, Vol. I, No. 4 (1997)
- Ronald Coase: The Problem of Social Cost. The Journal of Law and Economics, Vol. III (1960).