Property rights and economic organisation and performance
By Peter Winsley. 2011.
This paper argues that property rights are fundamental for economic performance, civil society and human rights. It relates them to stages of development, and to recent challenges international economies are facing in a time of globalisation of product and financial markets and the risks associated with them.
The paper defines property rights and argues for their importance in the economy and society. . The characteristics of optimal property rights are then discussed.
What are property rights?
“Property” constitutes a bundle of rights people have over goods, services or ‘objects’, whether they be land, personal, financial or intellectual.
Property rights relate to the sanctioned behavioural relations that arise from the existence of objects which (being scarce and valued) become assets or resources, and to the governance or use or those assets or resources. The scarcity of resources and competing claims to them means that property rights systems govern relationships between people and scarce resources.
The scope of property rights as they relate to economic behaviour is vast and so this paper focuses largely on real property. “New property rights” (Reich, 1964), such as the rights people have in their jobs and in social welfare entitlements are not addressed. Money is not seen as property for the purposes of this paper but rather as a representation of property. Consistent with this, tax and income transfer social policy issues are outside this paper’s scope.
Different property right forms include private, common, public and open access property, all of which have different ownership characteristics relating to access, rights of withdrawal, management and excludability (see Guerin, 2003), as illustrated in Table 1 below:
Table 1: Property right forms and ownership characteristics.
|Private||Private||Fee simple title||Controlled by owner||By owner||By owner||By owner|
|Common||Group||Common land||Controlled by joint owners||By joint owners||By joint owners||By joint owners|
|Public||State||National Park||Controlled by State||None||By state||By state|
|Open access||No one||Ocean fishery||Uncontrolled||Uncontrolled||None||None|
Different forms of property rights have different duties corresponding to ownership, illustrated in Table 2 below:
Table 2: Types of property rights regimes with owners, rights and duties
|Regime type||Owner||Owner rights||Owner duties|
|Private||Individual||Socially acceptable uses; control of access||Avoidance of socially unacceptable uses|
|Common||Collective||Exclusion of non-owners||Maintenance; constrain rates of use|
|Public||State, on behalf of citizens||Determine rules||Maintain social objectives|
Further discussion of different property rights forms is required:
Private property is exclusive and tradable. It provides incentives for investment and innovation because benefits can be captured. It allows the accumulation of capital over time and is integral to labour specialisation. Private property minimises conflict by removing incentives for free-riders or non-owners to contest ownership. Private property improves allocative efficiency and the sustainability of resource use by preventing over consumption, especially by those who have not invested and bear no cost of owning and managing a resource.
A common or communal property is an indivisible collective property owned by a group, or by the individuals in that group, who can then exclude others. Common or communal property rights are likely to develop for land where there is:
- low value of output per unit
- highly variable resources
- low returns from intensive investment
- large economies of scale in use and in infrastructure
These conditions historically coincided with low levels of technology, accumulation and specialisation, and with tribal and other forms of social organisation associated with these conditions.
Communal property should not be confused with open access resources which involve no excludability and therefore no incentives for careful stewardship. Communal property can often be exclusive and co-exist with private individual or family rights within a wider collective framework. De Soto (2000, p. 162) noted he could tell the private boundaries within “communal property” in Bali because a different owner’s dog barked at each boundary.
Medieval commons were not open access resources. The English commons were “owned” by the manor lord but only on condition that the rights of the commoners were not disturbed. There were rights of common in pasturage, estovers, turbary, pannage, piscary, and common in the soil – translated as the rights to graze, cut wood, dig turf, turn out pigs to eat acorns, catch fish, or take gravel and stone (Ridley, 1996). These rights were privately owned by individuals within the wider communal system; as the manorial system broke down the commons came, in effect, to be owned jointly by those who possessed these rights in common, rights that were later extinguished by enclosure.
Weaker forms of communal property can be fraught where ownership is ill-defined and weak exclusion makes it difficult to define or enforce rationing rules. However communal property resources can be managed sustainably. In Japan and Switzerland some forests have been carefully managed on a communal basis for centuries and there are examples of communally-managed fisheries in Turkey, Spain and the US.
Open access property
Hardin (1968) coined the term “tragedy of the commons” for what in fact is a tragedy of open access resources. Open access property involves no exclusion and therefore no ability to ration a resource. This is because open access resources are consumed by individuals who make their consumption decisions independently of each other and yet an individual’s consumption affects and is affected by others’ consumption. The resulting resource depletion explains, for example, the mass extinction of fauna in Australia, the Americas and New Zealand in pre-recorded historical times, the collapse of North Sea fisheries, and the devastation of natural forest resources in third world countries and in Russia.
The evidence is people only sustainably manage things that they own (either privately or communally). Furthermore, fixed resources such as shellfish beds and tree crops are more tightly owned and defended sustainably than open access mobile resources such as birds, migratory animals and pelagic fish.
Public property is owned by the state acting on behalf of the community. Public ownership is appropriate for formerly open access resources of low rivalry and excludability, and for resources that are of environmental, aesthetic or non-market value such as national parks. Public ownership may also be appropriate where sovereign rights are at issue and where governments need to meet international obligations.
Public ownership does not necessarily achieve good outcomes. Ridley (1996) cites examples of public ownership causing resource depletion, environmental disaster and social conflict ranging from forests in India and Kenya and irrigation systems in Nepal to big game reserves in Africa. The Soviet Union caused environmental devastation by depleting lake and river systems and through unsustainable forestry practices.
Political processes invite overstatement of preferences and lobbying which aims to get others to bear costs, or to diffuse those costs over so many taxpayers that they become invisible. Governments are not subject to market disciplines and may be ruled by private interests who, when in control of government, must be constrained from inappropriate exercise of self-interest. This constraint may be constitutional and may include imposing a price system on government through compensation for regulatory takings.
Multi-level bundles of property rights
Multi-level bundles of property rights exist, for example a housing cooperative or a private dwelling sits within a set of local government limits around property rights which in turn falls within a national title system of property rights recognition.
Bundles of different property rights may apply to the same resource base. In the marine environment there is open access for the purposes of navigation and recreation co-existing with highly structured tradable property rights governing quota-managed fisheries and aquaculture space, common property mataitai, and marine reserves that ban any harvesting and restrict recreational use rights.
The multi-level nature of some property rights, the multi-functionality of some property resources, and non-rivalry of some property has implications for harmonisation of individual incentives and social outcomes.
The role of property rights in the economy and in society
Property rights contribute to several key societal outcomes – economic performance, human and democratic rights, social cohesion, and sustainability of the functionality of resource use over time.
Economic functions of property rights
The critical importance of property rights for economic prosperity is one of the most consistent themes in economic literature. Property rights create an incentive to invest because they create confidence that those who prepare the ground and plant will reap the harvest and not have it stolen. Property rights and supporting institutions far outweigh government policies and geography as explanatory factors in economic growth (Easterly & Levine, 2002).
Alchian (1967) defined economics as “…the study of property rights over scarce resources…the question of economics or of how prices should be determined is the question of how property rights should be defined and exchanged and on what terms.” Property rights systems therefore mediate competing claims for scarce resources, shape incentives, govern the use to which assets can be put and the benefit streams arising from this. Changes in property rights affect incentives, asset utilisation and resource allocation, an asset’s value to its owner, and they impact on the terms of trade and of business transactions.
Property rights allow the accumulation of wealth above a basic subsistence level. Accumulation means that resources and time are freed up from subsistence so things can be done better and over longer time horizons. Accumulation allows specialisation of labour and new combinations of inputs to generate higher productivity, which in turn increases accumulation and further specialisation in a mutually reinforcing cycle. Specialisation in turn underpins gains from trade.
Human and democratic rights and property rights
From classical times there was recognition of the relationship between property rights, political power, human rights and democracy. Property rights created a base of wealth those in power could tax, and also created a base from which property owners could demand representation in return for taxes. Those in power needed to respect property rights as a basis for taxation in coin or kind, while those with property had a base from which they could demand representation in return. Ultimately, property became the basis for political representation and for democracy, first for the land-owning nobility, then through the extension of the suffrage to those owning property, and then universally.
The profound importance of property in underpinning human rights and democracy is deeply rooted in the historical and illustrative experience of:
The English nobility acquired property and because of this demanded the political power to protect it by limiting the Crown’s despotic power. The Magna Carta was an agreement to protect property rights by limiting the Crown’s powers, and it set in place a dynamic inter-relationship between property rights and political power that led to modern British democracy. It also created the basis for human rights by linking property to those rights, as reflected in the saying “an Englishman’s home is his castle.”
As William Pitt the elder said in 1763:
“The poorest man may in his cottage bid defiance to all the forces of the Crown. It may be frail – its roof may shake – the wind may blow through it – the storm may enter – the rain may enter – but the King of England cannot enter.”
Such sentiments underpin the strong commitment in modern developed countries to home ownership, the harsh penalties against home invasion, and the conflict between economically rational instruments such as taxation of imputed rents and the visceral aversion many people have to such instruments.
The American revolution was in part a challenge to a despotic Crown that taxed without representation, and the revolutionaries sought political rights that reflected their emerging property rights. The US Constitution authorises Congress to remove barriers to trade imposed by the states, prevents states from impairing contract enforcement, and it guards against predatory behaviour by government through the takings clause which dissuades government from expropriating private property without compensation.
The psychological witches’ brew that gave rise to Nazism had a strong predisposition to state power and to the subjugation of private property rights to it. The National Socialists suspended constitutional guarantees of the inviolability of private property within a month of gaining power (Pipes, 1999 p. 221). Hitler’s despotic control over the German economy was to some extent countered by strongly entrenched property-owning interests such as the land-owning Junkers class in East Prussia, and German resistance was led among others by aristocrats such as Claus von Stauffenberg. There is also some evidence that at the end of the war German business interests were speculating in steel as a hedge against a predicted currency collapse on Germany’s defeat, correctly surmising that private property rights would survive the Third Reich’s demise.
The importance of property rights to the economy and to human and democratic rights is perhaps best illustrated through Russia’s troubled history.
The failure of Russia to develop strong private property rights has its origins in the liquidation of landed property in the Grand Duchy of Moscow and the fusion of sovereignty and ownership, meaning there was no class of private property owners to challenge despotism. Ivan the Terrible’s destruction of the boyar (noble) class stopped them “leading the charge” for private property as the English nobility had done through Magna Carta, and therefore to allow its eventual wider application to all citizens. This was a key factor in Russian backwardness. Serfs were only freed in 1861 and high land availability delayed the emergence of property law and institutions that allocated and protected rights over scarce land resources.
Probably the worst single recorded disaster in human history triggered by human act (other than war) was the death from starvation and associated conflicts of around twenty million people in the Soviet Union as a result of its disastrous collectivisation of agriculture in 1929-33. In 1928 about 99% of Russian land was communal, however the land was farmed by families in individualised plots within the communal area. Stalin effectively nationalised this land and placed it under state ownership in the course of which a class war was waged against kulaks (“rich peasants”). Kulaks were peasants who had enough property to give them some economic independence from the state and therefore the potential to challenge it politically from the security of the land they stood on and owned – their turangawaewae. The communists were also very hostile to the Cossack community. Cossacks were independent-minded and had moved from a soldier class to become settled farmers with expanding property rights interests they were willing to defend. Their philosophy was exemplified in their saying “pay with silver, save with gold, defend yourself with steel…”
The Soviet regime understood it could be challenged when people had property and personal identity – at one stage it not only abolished private property but also tried to abolish individual identity by proposing to replace the proper names of citizens with ciphers or numbers (Pipes, 1999, p. 73).
Where Russian people were able to establish property rights the benefits have been substantial, as much in a social cohesion as an economic sense. In the post-war Soviet era Russian families were given the opportunity to acquire land of about 0.1 ha to build a simple dacha on and grow vegetables and fruit for their own consumption. Within the kolhoz state farms small private household plots were permitted. By 1979, 33 million household plots averaging 0.6 acres and constituting 1.5% of the country’s cultivated area produced one third of the Soviet Union’s foodstuffs (Pipes, 1999, p. 215.)
During the 1990s economic reforms families were given title to their apartments and this for the first time in Russian history created a broad-based property rights culture and stakeholder society. However, the privatisation of state owned assets, including lucrative oil and gas reserves, saw those assets usurped by vested political and criminal interests. There are also weaknesses in the Russian system of land and other property titling, registration, and in the identification of associated transactions, third party interests and hereditary entitlements to property.
Russia’s post-reform economic difficulties primarily resulted from the corrupt and unprincipled creation of property rights that were vested in those who were politically positioned to appropriate them. This violates a key principle that goes back at least to Locke – that property rights must be earned so the link between behaviour and rights is sustained. Property that arises from gambling wins, inheritance, rent seeking or corruption rest on infirm grounds because the link between individual endeavour and property ownership is broken, did not exist, or is not allowed to emerge because oligarchies and dynasties are created. A ‘Mathew Effect’ (“he who hath shall be given even more”) then occurs which entrenches privilege and inequality over time. This, at least obliquely, gives rise to policies in modern economies governing inheritance taxes which prevent excessive accumulation over time by family dynasties.
Russia and other ‘transition economies’ have also suffered from a ‘tragedy of the anti-commons’ where fragmented rights were distributed to multiple stakeholders, including individuals, private businesses, workers’ collectives, local, regional and federal governments, so that no one individual or business had a bundle of rights that represented full ownership (Heller & Eisenberg, 1998).
Israel experimented with kibbutzim where private property was abolished and attempts were made to eliminate gender distinctions. Despite heavy state support the proportion of the population living in kibbutzim has rapidly declined and private property has re-emerged strongly, beginning with the reestablishment of the family unit and its property holdings, and then extending more widely.
China’s recent economic growth has not been associated with strong private property rights in a western sense but with a dual system where the private entrepreneurial sector is encouraged in parallel with a large state and local government sector. Much of this economic growth was driven by Town and Village Enterprises (TVEs), essentially joint ventures between local government and the private sector. The local government shareholding in TVEs emboldens private sector investment because it incentivises government protection of property rights, since the government’s own interests are at stake. In contrast, in Russia full privatisation of much of the economy occurred, but without the legal system and institutions needed to uphold property rights and without the state retaining a cornerstone shareholding in private enterprises that would have encouraged it to use state powers to protect the property rights of all involved.
Zimbabwe was reduced to near-famine conditions due to its government’s seizure of privately-owned farmland and failure to secure property rights for the new owners. The land confiscations in Zimbabwe caused the collapse of much of Zimbabwe’s agricultural productivity by destroying property rights and therefore the incentive to produce. However, there is no question the past concentration of land in the hands of a few reflected colonial injustices. This gives rise to questions about the relationship between property rights and their initial point of vesting and the inter-generational transmission of property rights over time.
To a great extent New Zealand’s history has been one of conflict over property rights, from pre-colonial times between and within iwi or contemporary debates over the Resource Management Act (RMA). Major conflicts in New Zealand between the Government and Maori have been over property rights – the 19th century New Zealand Wars, Bastion Point, the Raglan Golf Course, the 1975 land march and the 2004 seabed and foreshore issue.
New Zealand’s agribusiness, forestry and seafood industries are underpinned by property rights and their commercial performance is affected by them. Many farming leaders have at times contended that threats to property rights are the single biggest issue they face.
Property rights and social cohesion
Well-conceived property rights will over time reduce income inequality and enhance social cohesion, while also optimising economic growth and upholding individual rights.
Innate in human psychology is a dislike of both free-riding and excessive wealth accumulation. Property rights, legal and political systems typically give expression to and balance these apparently contrasting human traits. The evolutionary psychology underlying these traits helps explain the innate concern of democratic societies for social justice and cohesion that depends on avoiding extremes of wealth and poverty. An “instinct” for social equity (balanced by dislike of free-riding) is therefore part of human nature and exists anterior to its expression in social and economic policy.
Prosperous and socially cohesive societies are those where property rights are secure, the rule of law prevails, private incentives are aligned with positive social outcomes, concentration of an individual’s risk is diluted by social security, insurance and other risk management devices, and citizens elect governments and sack them when they fail to perform.
There are complex relationships between individualism, voluntary co-operation, the rights of individuals and of groups and the end social outcomes arising from this. The traditional “right versus left wing” approach to such issues reflects an archaic model of policy thinking whose intellectual warrant has now expired. Much more insight can come from understanding the role property rights play in harmonising individual incentives and behaviour with the outcome of social cohesion, and an ecumenical approach is needed to the policy instruments to achieve this.
In any competitive society where there are differential abilities some become wealthier than others. The problem with competitions is that someone wins them, and others lose, and the losers covet the possessions of the winners, who then design and enforce property rights to protect them. They may mystify property rights and build religions and philosophies around them.
There are two main ways to get something you want from other people: steal it or trade for it. The first involves the psychology of dominance; the second, the psychology of reciprocal altruism. As Pinker (2002 pp. 296-7) argues, “the goal of a peaceful and prosperous society is to minimise the use of dominance, which leads to violence and waste, and to maximise the use of reciprocity, which leads to gains in trade that make everyone better off.” People may also politically lobby government to use its coercive power to change the rules to obtain use rights, access or outright ownership of someone else’s property, or to limit their use of it. This is one of the arguments in favour of limiting the government’s powers.
The cumulative “Mathew Effect” and happenstance means that wealth and accumulation can create privilege over time that is decoupled from individual endeavour. This in turn creates an uneven playing field (inequality of opportunity) and sufficient wealth differences to create social tension. Resolving this tension can involve the transfer of income through for example progressive tax systems, or can involve a property rights-based solution, or some combination of the two. Redistribution of land and other property in less developed countries such as ex-colonies often does aim to reduce inequalities in society and address past inequities. On the other hand it sharpens conflict over existing resources and assets rather than creating new ones and may break the link between individual endeavour and the ownership of wealth and associated benefit streams.
An income transfer model of social cohesion effectively taxes “the rich” to achieve adequate incomes for “the poor”. It does not however empower “the poor” to invest in their skills or in property, nor does it enhance incentives to participate more actively in politics. The impersonal nature of tax and welfare transfer systems make redundant personal gratitude and therefore reciprocal altruism, creates “new property rights” without corresponding duties, and breaks the link between an individual’s actions and the results of those actions. Inheritance and the creation of wealthy family dynasties has a similar effect and it is therefore contended that property rights policies that enhance social cohesion must place limits on both redistributional welfare policies and multi-generational inheritance.
In modern times, strongly cohesive societies depend on property rights and ownership. There are very strong relationships between home ownership and the extent to which people look after the property in which they live, are motivated to vote in local government elections, feel a stake in stability, the cohesion of society, in the rule of law and in the institutions that support it.
Where property rights are lacking or unevenly distributed social problems arise, for example in communities dominated by rental properties where people have little or no incentive to maintain those properties and the environment in which they exist. Margaret Thatcher’s approach to such problems was the privatisation of state housing aimed at creating an “ownership society” where people have a stake in their communities, policies which were also implemented in Russia after the break-up of the Soviet Union.
A credible property rights system that contributes to social equity and cohesion should not have a limited focus on protecting existing wealth but implies more active policies to foster home and other property ownership and to discourage the accumulation or retention of unearned property, such as through inheritance. However, inheritance rights must be upheld sufficiently to encourage parents to build up assets for their children, and because such rights are resonant with human psychology.
Property rights and sustainability of resource use
Property rights create the incentive to manage resources efficiently and to do so sustainably, so a well-managed farm is passed on to children rather than one with exhausted soil. As discussed above, open access resources (such as moa, dodos and the cedars of Lebanon) are inherently unsustainable, while for example fisheries managed through tradable quotas are.
Origins of property rights
People have an innate sense of individuality, of the relationship between themselves and objects, of the self and others, and of the boundaries between them and the rules that mediate differences between individuals and their relationship to property. Territoriality and control over resources have deep biological origins. Edward Wilson (1975 pp. 256-7) argues that nearly all vertebrates and most of the advanced invertebrates “conduct their lives according to precise rules of land tenure, spacing and dominance”, observing characteristic and precise distances from each other. A sense of ownership is innate in children and may be associated with the development of an independent identity by allowing a child to recognise and manipulate things external to him/herself.
There is a strong relationship between the ownership of property and a sense of personal identity. Ownership of property helps define identity because the test is whether an object responds to one’s command. The innate nature of the relationship between individual identity or “the self” and property ownership has deep roots in the psychological literature. William James wrote:
…it is clear that between what a man calls me and what he simply calls mine the line is difficult to draw. We feel and act about certain things that are ours very much as we feel and act about ourselves…An… instinctive impulse drives us to collect property; and the collections thus made become, with different degrees of intimacy, parts of our empirical selves…[I]n every case [of the loss of possessions] there remains…a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness…” (James, 1890, pp. 291, 293).
Evolutionary psychology and property rights
Nothing in biology makes sense without evolution. Cognitive processes are biological, and therefore consciousness and ultimately behavioural psychology arise from biologically-based processes. It follows that psychological attitudes and behaviours towards property have roots in how psychology has evolved.
Evolutionary psychology is the bridge between the human behaviour we observe around us (including economic behaviour and attitudes to property) and its biological origins. To understand the connections we must begin at the start of the bridge – the genetic, genotypical and phenotypical nature of life, and ultimately of identity, awareness and behaviour, including economic behaviour, the rules we have designed for ourselves, and what that tells us, among other things, about property rights.
Life evolves because variations in populations exist, can be replicated and passed on, and some variations are more likely to survive than others. It is an algorithmic certainty that genes which contribute to behaviour that enhances their survival will survive at the expense of those that don’t.
Evolution occurs at the level of genes rather than individuals or groups, however genes can only be passed on through individuals and/or groups. Selection will favour loss of individual reproductive success if that enhances the reproduction of kin through whom genes can be transmitted, hence the relationship between altruistic behaviour in species and the extent of genetic relatedness. Kin selection has been developed into sophisticated models of inclusive fitness (see Hamilton, 1964) that defines reproductive success as a combination of an individual’s own reproductive success plus the effects on the reproductive success of relatives, each weighted by the appropriate co-efficient of relatedness. Inclusive fitness explains ‘altruism’ and cooperation in many species and nepotism in humans.
Humans and other species engage in reciprocal altruism (favours that are given in the expectation of reciprocal favours being repaid at a later date) with non-relatives. Reciprocal altruism reflects the need social species have for cooperation if they are to survive. However, cooperation is always vulnerable to free-riding and the avoidance of free-riding behaviour means that humans have to recognise each other, and so be able to remember who shared past surplus resources or conferred past favours.
Demonstrating a capacity for altruism helps generate trust. It also gives rise to emotions that guide behaviour such as gratitude to another as a function of how much the other has sacrificed, anger at free-riding, and admiration for self-sacrificial behaviour on behalf of non-relatives.
Our evolutionary history has selected for traits that determine psychological architecture of relevance to property rights and the behaviours that flow from it, including “Smithian self-interest” and cooperation. Humans are a social primate species. Humans and their consciousness evolved in a savannah environment where self-interest needed to be complemented by cooperation for purposes such as hunting and defence from predators, including conspecifics (members of the same species). Meat generally comes in large but unreliable parcels and the only way to ensure reliability was to share kills and thereby smooth out supply and prevent spoilage. Hunting by males was complemented by females gathering plant foods of lower nutritional value but greater reliability, and this was very likely the earliest origins of specialisation of labour.
As we have seen, there are relationships between individual identity and property rights, and relationships between group identity and property rights. People have a deeply engrained tendency to identify with groups, and in opposition to other groups.
In social animals including primates a new entry to a group typically involves a probationary period of hostility reflecting the sense of ‘us and otherness’ that distinguishes group boundaries and typically coincides with a sense of territory and property. The group size formed often bears a defined mathematical relationship to optimum size as a ratio of the available resources. The hostility reflects the sense of otherness and inclusive fitness (kinship selection) imperatives and the external representation of this in symbolic boundaries of the group, its territory, and the property of it and its members.
Consciousness, genes, cooperation, reciprocal altruism, and protection against free-riding therefore form the basis for human groups to evolve property rights regimes.
Relationships between different forms of social organisation and property rights
What are the relationships between different forms of social organisation and property rights. “Social organisation” encompasses the progression from the simplest known social form of the hunter-gatherer band through to international institutions. These gradations of social organisation are associated with particular types of economic organisation.
As a social species human social organisation reflects evolutionary psychology, relationships with the environment, technological and productive capabilities, and specialisation of labour and social roles. These social organisational forms in turn shape, and are shaped by, different concepts of and relations to property.
Earliest recorded origins of property rights
Property ownership, and behaviours such as trade that are related to it, go back further than recorded human history to what can be inferred from archaeological evidence. The economics of trade and property rights far preceded the laws clustered around them. Trade may go back as far as Homo erectus making and trading of stone tools (Ridley, 1996 p. 199). Property rights are at the heart of the early Greek classics – in the first book of the Odyssey, the Telemachy, the Goddess Athena appears to Telemachos in the guise of a shipmaster coming to trade iron for bronze.
The Pax Romana survived so long partly because Justinian codified the principles of private property and voluntary contract, and Roman law evolved to deal with conflict over property rights and the provisions needed to address the stability of title where transactions were disputed, defective, or where forcible takings of land had occurred. In Roman times, the relationship between property, human rights and social harmony was well established. Virgil’s Eclogues 1 and 9 reflect the anguish of land confiscations that followed from the war between contending Roman factions after the murder of Julius Caesar in March, 44 B.C.; anguish that is echoed in the history of Scotland, Ireland, New Zealand and many other countries:
“…that a stranger (something we never faced) should seize our little farm and say “this property is mine; old tenants out.” (Virgil, Eclogues 9).
Families, bands and hunter-gatherers
The most basic form of human organisation is the family, or small band, living a hunting and gathering existence from earliest known human times. In its simplest form a band would have no permanent dwelling, though it may have huts, caves or other temporary shelter. All adults would forage for food and there would be little or no specialisation of labour beyond males hunting while women gathered plant food and looked after children. Hunter-gatherer bands had little social stratification except as a result of age and gender. Hunter-gatherer bands are typically equalitarian, with limits on accumulation and mechanisms for the suppression of competition and the redistribution of accumulated resources. The band was the primary social unit with kinship links existing with related bands and with families being a social unit within the band.
The relationship of bands to property is influenced by the large territory typically available for the size of a band, that is the ratio of population to land and other resources, and to notions of territorial exclusivity, in some cases only for temporary or seasonal periods associated with gathering activities. The size of a band is also limited by the number of people it is possible to have a close relationship with.
Tribes have greater ability to accumulate than bands and this allows for greater specialisation of labour. Tribes form when bands expand or group together, largely because adoption of agriculture allows accumulation, the development of specialisation of labour and the creation of permanent settlements. Not surprisingly, the emergence of tribes in the Fertile Crescent around 13,000 years ago coincided with the development of agriculture.
The relationship of tribal societies to property reflected factors such as the relationship between land area and productive potential, the domesticated plant and animal varieties available, and therefore the ability to accumulate and specialise while maintaining kinship relationships. Tribes typically develop male-dominated hierarchies based on accumulation, with hierarchies concentrating wealth and power. Tribes are typically resistant to social mobility and to gender equity.
Tribes seek to preserve internal harmony through religion, custom, rule by respected elders and retribution for transgressors. Harmony is preserved with out-groups through gift-giving which creates a sense of obligation and subsequent reciprocity, and by inter-marriage to create kinship links. The closer the kinship relationship the less gift-giving to induce mutual obligation and reciprocity is required. Genealogy preserves records of past marriages and therefore ongoing kinship links. Often, members of different tribes on meeting spend time reciting their genealogy, actively seeking to identify past kinship links and therefore to find reasons to avoid conflict.
Tribes face problems in maintaining social cohesion when they grow beyond the point where all members know each other and kinship relationships weaken. A tribe with limited accumulation of resources, diminishing kinship links and lack of centralised authority faces serious problems in maintaining harmony internally, and dealing with external threats. Pastoral tribes face additional problems in maintaining harmony because their mobility breaks down relatedness, assets are dispersed, mobile and easy to steal, the ratio of population to territory is low, and protection of property is therefore weaker.
Accumulation and labour specialisation allows hierarchies to emerge and exacerbates problems of free-riding, opportunism and theft. This drives the need for codified rules that govern behaviour, whether embodied in religious texts and stone tablets, superstition, custom, statute or common law. Retribution or the threat of it is needed to enforce these rules.
Tribes typically have low rates of technological progress. Tribal respect for elders reflects the survival value of the knowledge they have, especially knowledge that takes time to accumulate. For example an elder may remember the wild foods the tribe fell back on after a storm had destroyed its traditional crops in a bad year perhaps twenty years ago, and that knowledge may prove crucial if the event recurs. Power and property right relationships are associated with the knowledge elders have. In times of rapid technological change tensions arise between younger and older people, essentially because of the rapid depreciation of the “knowledge capital” owned by elders.
In effect, respect for the knowledge of elders on matters of functionality and technical knowledge (as opposed to more universal human values) reflects a relationship between the rate of technological change and the extent to which this outdates old knowledge and belief. A high level of respect for the knowledge of elders in a society coincides with nil or low rates of technological change, contrasting with the low rates of respect for the knowledge elders might have of archaic vacuum tube technology in today’s Silicon Valley.
Limits to total tribal size are set by the ratio of people to resources and territory and the feasibility of maintaining close relationships in larger human groups. Beyond tribalism is organisation into “chiefdoms”.
Chiefdoms are social groups that involve centralised authority that unites or overarches tribes and which can make and enforce rules and laws. They typically involve far higher population numbers than tribes, sophisticated permanent settlements with agricultural and often industrial accumulation, and high labour specialization. Chiefdoms arose around 7500 years ago in the Fertile Crescent and around 3000 years ago in MesoAmerica and the Andes. They arose to deal with the conflicts inherent in the breakdown of kinship relationships in larger tribes and the need for centralised authority to create a monopoly over the use of force.
Chiefdoms typically form through actual or threatened war or other coercion and often form when tribes have become so big that kin relationships have eroded. Problems of conflict and lack of cohesion within a tribe become insurmountable because of weak span of control by chiefs whose influence may be limited to those who can fit within earshot of the speaker on a meeting place. Chiefdoms solve these problems by centralised law, rules or despotism, often reinforced by a shared religion or philosophy shaped to support the chiefdom’s goals. The limits of chiefdoms are set by the abilities and span of control of their leaders and the incentives they are subject to.
Feudalism was a productive system where land ownership was neither absolute nor duty free – the king was the repository of all property rights who assigned land to favoured nobles who in turn could assign it to sub-tenants or serfs. In effect, property rights were not seen as arising from individuals but were rather granted by the Crown or some intermediary lord. The modern term ‘freehold’ does not mean free from obligations but rather originates from the feudal system where tenants held land from a superior lord in return for services.
At the production level ownership meant the right to use in return for the performance of duties, although this right often became hereditary. Serfdom broke down as serfs accumulated surpluses and were able to “buy” their freedom, rent land from lords rather than pay for it in labour, and then in time to acquire property rights. This in turn led to further division of labour and specialisation.
Nation states are based on high levels of agricultural and industrial productivity and accumulation that allows specialisation to occur. Specialisation is at the heart of economic performance and depends on appropriate property rights regimes. Specialisation also leads to different levels of control over resources, social stratification, and higher forms of social organisation.
Division of labour between specialists allows integration into higher social units and as this occurs an individual loses some element of his/her self-regulation and becomes more dependent on society as a whole. As less developed countries move to higher forms of social organisation rural people move to cities and sacrifice “self-sufficiency” in favour of specialisation and interdependence.
Nation states emerge to maintain harmony in larger populations where specialisation allows differential incomes, private property becomes dispersed, and demands grow for protection from free-riders and for political representation that protects against predatory chiefs and governments. The evolution of nation states and their institutions addresses the tension between the rights of individuals versus the group and the need to ensure that individuals’ incentives coincide with that of the nation. Nation states effectively concentrate power and the making and enforcement of law at the centre, with such safeguards as the separation of the executive and the judiciary, freedom of information, and democratic accountability.
Even in modern nations the state must intervene to challenge power relationships, perverse incentives, free-riding and predatory tendencies that have deep evolutionary roots, such as nepotism and kinship selection. Modern nations also guard against the opportunism of their leaders by paying them modestly compared even to tribal leaders, and placing limits on their tenure in office.
International law and jurisdiction
Some resources such as open ocean pelagic fisheries, the global atmosphere and the ozone layer are open access resources vulnerable to degradation, free-riding, or the effects of negative externalities such as pollution. The mutual benefits of international trade require science-based rules and a quasi-judicial enforcement regime that overrides nation state sovereign rights. International law therefore emerges to control free-riding, opportunism, negative externalities and the pillaging of global resources.
International law, treaties and declarations can also protect individual rights, including those relating to property. The Universal Declaration of Human Rights 1948 protects the right to property. The International Convention of the Hague 1899 forbade invading armies from plundering private property, thus supposedly protecting private property rights more than sovereign rights (de Soto, 2000 p. 165).
Are there cultural forms of property rights?
We have seen that property rights differ in accord with different levels of social organisation, and that governance rules and belief systems also codify or give guidance to property rights. There are strong relationships between the form of social organisation (such as tribal or national) of a group and its property rights system at different historical times. This raises the question of whether there are cultural forms of property rights that are distinctive from those shaped by factors such as technological levels and stages of social organization.
The universality of human nature across ‘racial’ and ‘ethnic’ groups is indisputable, and established in hundreds of studies. In 1945 George Murdock listed 67 universals that traversed different cultures based on data from the Human Relations Area Files, while Brown (1991; 2000) extensively documented human universals and their implications. Pinker (2002, pp. 435-439) summarises several hundred human universals ranging from body adornment and age status to the use of proverbs.
Cultural differences between people are superficial phenomena that emerge due to social, historical and psychological (including “memetic”) factors and are deepened by assortative mating as people choose partners with views they share, and by innate tendencies to form groups that seek internal harmony partly by generating hostility to outside groups.
Duch (2003) studied cross-cultural attitudes to property rights and concluded from his empirical results that:
“…popular notions of property rights are reflexes that resemble hardwired cognitions – they seem to be universal and not confined to any particular segment of the population…notions that there are cultural barriers to the appreciation of the importance of enforcing property rights simply have no empirical basis.”
Cultural identity has no innate or fundamental grounding in evolutionary psychology or ‘hard-wired’ human nature and cannot by itself (and independent from technological and social organization factors) form a basis for distinct forms of property right. The emergence of lex mercatoria, governing trade between different jurisdictions and cultural groups, shows that people from diverse cultures commonly agree on property rights and the design and enforcement of rules governing business transactions even where these are not upheld in statute law. Much common law is international and cross-cultural in nature.
Cultural group identity can be partly explained by “memes” and “memeplexes” (see Blackmore 1999) or as artefacts of hard-wired tendencies to form groupings for defence and cooperative hunting purposes. However more importantly cultural attitudes to property rights tend to simply reflect stages of economic (and associated technological) organization.
Philosophical and legal perspectives on property rights
Key philosophical and legal perspectives on property rights include:
Philosophical perspectives on property rights
Key philosophical perspectives on property rights in New Zealand arise from classical philosophy and law, Magna Carta, the works of leading thinkers from Hobbes to Rawls, and Maori property rights perspectives. These philosophical and legal property rights perspectives interact with forms of social organisation, with governance rules, and with cultural and other belief systems.
Aristotle advanced three arguments for private over communal property – economic efficiency, promotion of social peace, and the promotion of individual personal character development. Greek-Scholastic natural law doctrines held that natural law reflected “the mind of the creator” as inferred by human reason. Natural law in later times came to be based on the personal property each individual has in him or herself and an associated individual body of rights existing anterior to and if need be in opposition to the state.
Magna Carta resulted from the English barons seeking to protect their property from despotism and includes a fundamental principle that:
“No freeman shall be…stripped of his rights or possessions…except by the lawful judgement of his equals or the law of the land.” (modern translation).
Magna Carta in effect placed limits on the Crown and over time has contributed to the constitutional conventions that the law binds the Crown and the Crown should pay compensation for the takings of land or other property.
Thomas Hobbes (1588-1679) believed that humans were a species whose natural state was conflict. Therefore they could not be trusted to govern themselves but needed a powerful and authoritarian government (a ‘leviathan’) to impose the rule of law and thereby enforce harmony.
Hobbes considered that giving power to individuals would create conflict and make life ‘solitary, poor, nasty, brutish and short’. However during his lifetime he also observed the growing power of business interests over government and believed that individuals should authorise representatives to speak on their behalf to counter this – the ‘voice of the people’ that “leviathan” must at least hear, even while retaining ultimate power.
Hobbes’ thinking influenced the emergence of doctrines such as eminent domain and parliamentary sovereignty. Eminent domain refers to the control of the sovereign, Crown or state of all property with the right of expropriation. It effectively means that, while the indefeasibility of title means it cannot be made void or done away with, the government has a better right, or a title that may be allodial or underlying. Over time, eminent domain in its most absolute form has come in English law to be subject to constitutional limits, democratic will, and to such disciplines as compensation for takings.
John Locke (1632-1704) developed three basic philosophical pillars for market economies: secular government, the rule of law, and secure property rights exercised freely in markets. He contended that people have natural rights they can exercise freely. Governments are created by people, rather than people being subject to an unmandated government. Locke considered that the law derived from free people and that it bound governments and monarchs as well as anyone else. This underpinned a principle of non-discrimination – a king and a pauper are equal under the law and the law binds the Crown. In effect, people owned property (including their own labour and skills) and should be free to use it as long as no-one else is harmed. Rights over property are absolute and their protection is a key function of government. Locke opposed governments using legislation to take private property away, other than through democratic processes that authorise taxation.
Locke’s writings are influential in modern developed countries and were reflected in the US Declaration of Independence and in the US Constitution, including the division in the powers of government, the freedom of conscience and the separation of church and state. Locke’s thinking was influential in the Eastern European economies, and in other countries that have emerged from despotic regimes of the ‘left’ or ‘right’.
Adam Smith (1723-1790) considered self-interest, the development of property rights and specialisation of labour as being key economic growth drivers. However Smith also elucidated the relationship between individual self-interest and social cohesion. Smith’s Theory of Moral Sentiments (1759) conceived of man as a creature of self-interest who was nevertheless capable of making moral judgements that sacrificed self-interest. This involved placing oneself in the position of a third-person impartial observer. This morality was mediated through sympathy or empathy and transcended selfishness. The Theory of Moral Sentiments is a system of natural theology – in effect a Scottish-influenced natural law doctrine that in modern times is resonant with John Rawl’s thinking.
John Stuart Mill
John Stuart Mill (1806-73), together with Jeremy Bentham and others, was part of the utilitarian movement that focused on maximising total well-being in aggregate, and as a later development, minimising suffering. Mill supported private property and accepted inequality but said “I see nothing objectionable in fixing a limit to what any one may acquire by the mere favour of others, without any exercise of his faculties.” (Mill, 1848). Mill therefore supported limits on inheritance because it decoupled wealth from individual endeavour.
John Rawls (1921-2002) developed a theory of justice that in a simplistic form imagined people, from behind a veil of ignorance, designing the rules of the society in which they will be born, without knowing what place in society they will be born into. The veil of ignorance conceals from people their gender, age, physical, intellectual and other attributes, the foreknowledge of which they might otherwise use to tailor the rules to privilege themselves.
Rawls considered that the first and overarching principle was liberty, based on the proposition that each person possesses an inviolability founded on justice that even society’s welfare cannot override. Therefore in a just society the rights secured by justice are not subject to political bargaining or the calculus of social interests. Rawls also advanced a second principle, of wealth, where social and economic inequalities are arranged so they are to the greatest benefit of the least advantaged, consistent with a just savings principle, and they are attached to offices and positions open to all under conditions of fair equality of opportunity.
Rawls contended that no system can be efficient if there is an alternative arrangement that can improve the situation of some without worsening the situation of others – resonating with the Pareto criterion. Conceptually, John Locke’s views on the centrality of individual rights and property ownership can be integrated with John Rawls’ views on social justice. Otsuka (2003) links libertarianism to social equity. The Rawlsian view holds that property rights and personal liberty are central to designing rules for society through a “thought experiment” in which those unborn would design rules for society through a veil of ignorance about the future place in the society in which they will be born.
Legal perspectives on property rights
Law codifies and enforces rules governing relations between people. Property law is not so much about assets but about the rules and processes that allow society to create value from them. Property law must fix the economic potential of assets as a value separate from that of the material assets themselves, and allow people to discover and realise that potential.
The law in modern democracies such as New Zealand is made up of statute law, created by Parliament or other legislatures, and common law created by the courts themselves through their legal interpretations and their creation of case histories and precedents.
Statute law and parliamentary sovereignty
The doctrine of Parliamentary sovereignty (and comparable doctrines in other democratic societies) is that a democratic government can act through Parliament or other legislative assemblies to pass and enforce whatever laws it wishes. This can lead to a tyranny of the majority where the rights of a minority are overridden, though constitutional protections and proportional representation voting systems such as MMP typically uphold minority rights. There are of course circumstances where proportional representation can create a tyranny of the minority.
Safeguards against a tyranny of the majority include principles such as the law binding the state, procedural justice, and compensation when the state takes from individuals. There are also democratic sanctions against takings by Parliament – politicians may be vilified if they attack private property rights in home ownership, or “new property rights” in superannuation. Judicial independence from the executive allows the courts to uphold common law as well as interpret and apply statute law, and also has a role in upholding constitutional protections against despotism and the majority’s usurpation of minority rights.
Common law is based on three pillars: tort law that keeps strangers at bay and secures people and property from trespassers, property law, and contract law. Key features of common law are that:
- the plaintiff rather than the court determines the question
- plaintiffs must prove standing and must prove a common law harm to themselves
- plaintiffs must prove the defendant caused the harm
- defendants may have defences of non-negligence or contributory negligence
- awards of costs discipline vexatious litigants and non-meritorious parties
- court decisions are specific to the details of the case and the question put to court
- judges take account of precedents, and these may traverse national boundaries
- the judiciary is independent and governments cannot determine which judge will hear a case, nor can judges be sacked
Over time common law has given rise to enduring assertions relating to property rights issues. These include that the law must treat all equally, that exclusive possession and use of property rights are protected from interference or requisition except in times of war or extraordinary exigency, and that the courts must enforce contracts freely entered into.
Customary rights are a creation of common law and may or may not be recognised in statute. Customary rights are distinguished from customary title – the former recognises and protects use rights, the latter goes further and may confer exclusivity and tradability. Key features of customary rights (see Graham, 2001) in the New Zealand context include:
- they are protected by common law
- common law protects customary rights still in existence at the time asserted
- customary rights are normally communally held
- customary rights can only be surrendered to or extinguished by the Crown
- they survive the transfer of sovereignty
- a customary right cannot be asserted if it is inconsistent with Crown sovereignty
- to be successful, an assertion of a customary right against the Crown cannot conflict with statute law
- if a customary right asserted is not to customary title but to a lesser right such as food gathering it can be severed from claims to customary title
- a customary right is not lost by the use of modern equipment, for example metal fish hooks replacing bone ones
- customary rights can be extinguished by explicit Crown action, and compensation may be expected to be paid
- a justified modification of a customary right (for example to protect biodiversity) is unlikely to require compensation but total extinguishment may do so, especially if the right is taken over and used commercially by the state
- once extinguished a right cannot be revived
Customary rights and title are recognised in British, New Zealand, American and other jurisdictions. In tribal societies customary rights (though not necessarily title) are recognised on broadly similar lines. Customary titles (as opposed to rights) are very difficult to establish and uphold. Customary title does not permit the use of land inconsistently with the holders’ customs.
Principle of first possession
The principle of first possession is grounded in Roman law and in British common law and holds that the first to possess a property has an underlying claim from which defensible property rights arise. First possession establishes the root claim from which is derived the pedigree of subsequent property right titles. It allows a train of transactions between parties over time to be validated. The first possession principle does not imply inalienability of title but rather secures the starting point of an historical chain of entitlement that proceeds through legitimate transfer to an incumbent owner.
The principle of first possession confers rights on, effectively, the first discoverers of land or the first settlers and invalidates any title that was acquired by force over an earlier group. As such the first possession principle can only rarely if ever be upheld because throughout human history people have taken possession of land and other properties by force.
Principle of prior occupancy
The law regards prior in time as prior in right. While first possession rights are conferred where people have taken possession without disturbing previous occupants, the principle of prior occupancy focuses on upholding previously-established arrangements and ensuring stability, security and certainty. The law can in fact challenge unjust acquisition of land or other property at one point in time but in a later time period validate this by respecting settled arrangements and preventing disturbance to them. In effect, the principle of prior occupancy condemns historical injustice without requiring disruptive relitigation of modern property rights arrangements.
Adverse possession and statute of limitations
Given that society depends on stability and certainty over property rights, the principle of adverse possession effectively creates a statute of limitations where the objecting party must raise a claim within a certain period of time or forfeit it forever.
In tribal societies without written law the closest we get to a statute of limitations may be the number of generations over which a tribe needs possession of land in order to have an ancestral link over it. For example, the Maori ahi ka principle of several generations of continuous tenure might be a basis on which we could infer something akin to a Maori “statute of limitations”. On the face of it neither British law or Maori custom would validate the relitigation of property right issues that occurred more than a few generations ago, and probably not even for shorter time periods. However, if an innocent party is unable to bring suit when wrongful dispossession occurred then a statute of limitations can be suspended (or “tolled”) while the facts are established and possible redress is considered. This is effectively what was done in the case of Treaty of Waitangi claims back to 1840.
Characteristics of optimal property rights
It is contended that optimal economic property rights should:
Arise with individuals
While human nature is universal, individuals are unique and it is contended that property rights should first be conceived as arising with an individual and what he/she owns, and from this base extend to wider forms of property rights for families and then to more complex forms of social organisation. This primacy of the individual has its basis in genetics, evolutionary psychology, Lockean and Rawlsian philosophy, and in the cross-cultural recognition of individual autonomy and human rights. From the beginning point of their personal rights, individuals may then choose to vest rights or governance over them in groups to achieve collectively what they cannot achieve individually.
Property rights fulfill an important role in protecting individuals from predatory behaviour whether by thieves, free-riders or governments. Private property, especially real property such as land and housing, creates individual independence and leads to people demanding political representation, protection of their property and transactions relating to it, and influence over how property and income streams arising from it are taxed and how those taxes are spent. It gives people a stake in society, its harmony, the rule of law, and the protection of property and human rights that are inextricably bound.
Property should also make individuals accountable. Integral to titled property is a name and address that anchors the ability to levy rates, collect debts, identify individuals for commercial, judicial and civic purposes, and as a liable terminal for receiving such utility services as telecommunications and electricity (see De Soto, 2000).
Reflect reciprocal altruism, social cooperation and social contracts
Property rights arise from society’s need to balance individual rights with those of a group, and they emerge from reciprocal altruism, social cooperation and the implicit or explicit contracts that arise from this.
All property rights need social recognition of a claim’s legitimacy. Social contracts that begin extra-legally can be a legitimate source of law and law needs to adapt to new forms of entrepreneurial endeavour. Law in developed countries has tended to result from the integration of rule making at a top level (statute law) and at a grassroots level, for example through common law recognising and validating new forms of social contract.
Property rights law often develops from the “ground up”, beginning as social contracts that precede or are at least parallel to government. Modern commercial arbitration arose in Liverpool among merchants with claims associated with the disruption of the American Civil War to the cotton trade. The lex mercatoria evolved in 11th century Europe to allow international trade to occur without sovereigns in other countries defending property rights and transactions relating to them. The lex mercatoria was voluntarily produced, adjudicated and enforced, and was akin to the customs of a club. Its ultimate sanction was ostracism. The lex mercatoria evolved to become a set of customs about how bills should be settled, interest paid and disputes resolved and by the 12th century had led to credit. Bankers emerged together with mortgages, contracts, promissory notes and bills of exchange and governments finally codified and nationalised these laws.
Connect individuals to the wider society
Social cooperation principles suggest that an individual’s property rights should be connected to the wider society and be mandated by it. An effective property right aims to mobilise property as a form of capital that can be leveraged in a way that connects the property asset to the rest of the economy. Formal property rights connect individuals to a vast web of public and private sector services and interactions. In developed countries the integration of property rights into one large system taps into a vast network of people, institutions and market instruments – a system which also captures the past contributions of thousands of years of institutional, property right and legal developments.
Achieve excludability over rival (but not non-rival) resources
Optimal economic outcomes generally result from well-defined and strong property rights where others can be excluded from access. Excludability provides incentives for investment and sustainable management because the benefits of this can be captured. Excludability is not appropriate for some common pool resources such as the global atmosphere. Excludability does not always preclude multiple use, for example some multifunctional land and marine environments may be capable of use by multiple parties without serious conflict between users or detriments to owners. However even in these cases there needs to be well-defined and tightly-protected excludability over those resources that are subject to market transactions. For example, there are public rights of access to coastal waters but tight ownership rights and excludability over aquaculture farms and commercial fishing quota.
Tightly prescribed and enduring excludability is a necessary condition of effective property rights over real, physical and financial property. However optimal economic outcomes may not result where strongly restrictive and enduring rights apply to properties of high non-rivalry in use, for example some intellectual property. Persistence of some forms of property right beyond the timeframe needed to incentivise individuals is not supportable, for example copyrights that exist for very long periods after a writer’s passing. Intellectual property rights constitute an exchange in which society grants an individual inventor or innovator a property right that allows premiums to be earned in return for the invention or innovation being made available to the public. In effect society allows rents to be earned but only in return for society being able to benefit from the invention. This is an exchange of property rights in return for access – intellectual property rights are not granted for inventions or knowledge that is kept confidential.
Excludability over intellectual property rights is therefore deliberately limited or ‘leaky’ to ensure that society benefits from the wider spill-over benefits.
Where excludability is combined with fragmentation in property rights a ‘tragedy of the anti-commons’ can occur. While a tragedy of the commons (or rather of open access resources) occurs due to over-use of an open access resource that no-one can be excluded from, a tragedy of the anti-commons occurs when multiple owners each own part of a property and then exclude others from it, and yet the value of the property would be maximised with integrated ownership and use. An anti-commons tragedy occurs for example where public research agencies seek patent or other intellectual property rights on basic discoveries and downstream commercialisers seek to do the same. This can slow the adoption of basic scientific knowledge and make commercialisation difficult because there are too many owners of a disparate property rights bundle.
High transaction costs and conflicting business strategies and behaviours impede solutions to tragedies of the anti-commons. The tragedy of the anti-commons is also compounded by cognitive biases where those trained in deterministic rather than probabilistic disciplines overestimate the likelihood that very low probability events of high salience will occur, for example scientists grossly overvaluing their intellectual property and its potential for successful commercialisation, and underestimating what can go wrong (Heller & Eisenberg, 1998).
Effective property rights systems fix the economic potential of assets, integrate dispersed information into one unified system, make people accountable, make assets fungible and network people and yet all this fails unless property and transactions related to it are protected. This requires protection both from criminals and from unwarranted and uncompensated government regulatory takings. Government uncompensated regulatory takings may be justified where the benefits offset the costs or where compensation is impractical. However uncompensated takings can mask the real hidden costs that individuals may bear as government transfers costs from itself to others. Lack of compensation creates a political dynamic in which takings substitute for private transactions. A principle of just compensation for regulatory takings can impose greater discipline and transparency on regulatory design.
Align individual incentives and social outcomes
Individuals should be encouraged to reach their full potential, and this should align with society’s wider interests. Property rights often arise from “bottom up” social behaviours that become accepted enough to become first social norms and then social contracts. This means alignment between individual self-interest, willingness to invest and to sacrifice the short-term in return for long-term benefits, social cooperation and avoidance of free-riding. It also means a clear causative link should be created between individual action and the benefits, including property rights that flow from this.
This suggests property rights should be earned rather than inherited or acquired without individual effort. Linking individual incentives to rights, benefits and social outcomes means for example that intellectual property rights should be awarded for active invention not for the laws of nature, be vested in inventors not their descendants, and be awarded in return for society having access to the invention in return for a property right over it.
Accumulation is needed for innovation and specialisation which depends on surpluses and disequilibrium. However, excessive accumulation can trigger redistribution to maintain social cohesion. Property rights that are unearned (for example as a result of inheritance) do not incentivise individuals and can result in wealth inequalities that create social tension. Possession of oil, mineral and other resources in less developed countries can reduce incentives for human capital investment and new wealth creation and lead to conflicts over existing resources. Likewise, passive (“entitlement based”) social spending can be deleterious compared to active social investment that creates human capital and aligns individuals’ incentives to those of society.
One implication of this is that social policy should focus on human capital investment and incentives for acquisition of property through active work and endeavour rather than passive income transfers. Such policies could range from increased educational and training investment, fiscal and other incentives for home ownership, tax, regulatory and other interventions to make housing more affordable, through to compulsory savings and other schemes to build financial assets.
Optimal property rights should also align individual incentives and societal outcomes such as the sustainability of the functionality of resource use over time. They must also address adverse externalities on the environment as well as and/or as part of aligning individual behaviour with social cooperation and wider social outcomes.
Be codified in publicly-available record systems
Effective property rights require clear identification of who owns what assets, other interests in and transactions related to them, and a publicly-available documentation system recording this.
All major forms of assets need to be documented in a publicly transparent way if they are to be leveraged, used for creation of credit and so on. Credit is made up of documents that establish rights over the assets that in turn underwrite credit. Only when property rights are properly established and documented do markets get the information needed to connect assets to finance. This is also needed for regulatory authorities and central agencies such as reserve banks and treasuries to ensure that credit and other financial devices are well-connected and soundly underpinned by real assets.
A property rights system must account for externalities such as how financial transactions affect outside interested parties – this reflects the erga omnes “toward all” principle developed under property law to protect third parties from the bad consequences of secret deals carried out by aristocracies accountable to no-one but themselves.
Closed societies such as tribal regimes, chiefdoms and feudal societies had internal knowledge of who owned what, however this knowledge was not easily accessible to outsiders. In the late 19th century trade began to create demands for a public memory system that would record and clarify in rule-bound, certified ways both tangible and intangible property rights.
Financial assets evolved as intangible representations of physical assets such as land, buildings, machines and commodities. Over time these assets became more remote from those physical assets, to encompass speculative futures trading and complex financial derivatives. Unfortunately, from the late 20th century on companies began to engage in opaque and misleading off-balance sheet accounting. Governments distorted their national accounts to make their financial position appear better than it actually was.
The global financial crisis that began in 2007 and continues to play out in the aftermath of the 2011 Euro crisis is associated with the decay of effective information systems.
In the lead-up to the crisis mortgages that could be linked to a property were turned into securities, these securities were in turn bundled together and repackaged in ways that supposedly spread and therefore diluted risk. Bursting of property bubbles was a proximate rather than fundamental cause of the financial crisis. The more deep-seated problem was that securitisation and complex financial derivatives meant there was no longer an accurate and publicly accessible record of who owned what assets, what transactions related to them and so on.
As the economist Hernando de Soto observed, the crisis was triggered by default of around 7% of the value of subprime mortgages, an event associated with the discovery of trillions of dollars of “toxic assets” on financial institution balance sheets. This arose because of the debasement of the legal financial documents that represent value. One of the results of this is it proved impossible to link mortgages to specific assets and therefore to even define who had claims over such simple real property as houses. US courts subsequently over-ruled some foreclosures because of inadequate mortgage documentation.
Property right claims and documentation need to be legally authenticated by a global system of rules, procedures and standards. Every financial deal must be linked to the real performance of the originating asset. If the value of deals becomes decoupled from the real assets underlying performance then the preconditions of a bubble, of its bursting and of subsequent recession are in place.
An important lesson from the global financial crisis is that financial and asset-related facts remain hidden unless there is systematic effort put into their documentation into a publicly accessible record system. In the same way that property rights must be protected so too must be the underlying documentation that creates a public memory of them. The key components of these public memory systems include standard classification and documentation requirements, universal and low cost access to this information, linkages with other record systems, provisions to address externalities for other parties and incentives for compliance with relevant recording and reporting obligations.
Tradability of property and the laws and institutions to support it is needed to realise value and to ensure resources can move to their highest valued use. Without tradability property managers and trustees lack incentives to manage their assets efficiently. Tradability also allows flexibility of resource allocation over time rather than locking up property into ownership and governance regimes that become rapidly outdated. Institutional and other limits on the tradability of large corporate farm holdings in Latin America and Africa have been associated with extreme inequities in wealth and associated social tension while at the same time locking in hereditary privilege and decoupling individual incentives and the benefits that should flow from them.
The Coasean theorem suggests that a quite arbitrary or inequitable initial point of vesting of property can still be economically efficient, but only if there is efficient tradability and ‘churning’ of asset ownership – tradability is therefore associated with the turnover of assets and with social mobility. This implies that tax or other rules are in place to prevent the development of entrenched dynasties that transfer wealth over time unrelated to individual effort, and the absence of entail, mortmain or other institutional or legal impediments to low cost property tradability.
Corporate mortmain is the locking up of land and resources in “corporate ownership” and then throwing away the key. This mortmain related to churches, universities, certain feudal privileges. Entail was the 18th century restriction on the alienability of inherited estates. Entail prevented the commerce in land that enhanced resource allocation. Entail sacrificed use and productivity for permanence of tenure, and tended to create dynasties that were privileged but also often impoverished because they were based on dead rather than economically productive capital stocks.
Cognitive ability is more evenly distributed in a population than wealth, which suggests, given the Coasean theory, that ownership of property will become more equitable over time provided property is tradable, transaction costs are low and there is reasonable access to education to make innate ability productive. So, tradable property rights are over time likely to reduce rather than exacerbate social inequality even where property ownership may be highly skewed and inequitable in earlier time periods.
References and bibliography
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