DRI-306 for week of 3-23-14: Property Rights

An Access Advertising EconBrief:

Property Rights

This space endlessly bemoans the depredations of the economics profession, often laments the teaching of economics and occasionally points out shortcomings of economics textbooks. The biggest error of omission made by economists in and out of the classroom concerns property rights. Nothing is more important to the successful function of society. Judging by the attacks launched against them by enemies of free markets, we might expect lively discussions of property rights inside every economics text. Yet they are virtually ignored by mainstream economics.

The great exponent of property rights was the late Armen Alchian, who may have been the greatest economist ever spurned by the Nobel Prize selection committee. Alchian wrote comparatively little, but his few papers are still among the most cited of any economist. They have been fixtures on the reading lists of graduate students for decades – except for his great work on the economics of property rights, which has been pointedly ignored by academia.

Property Rights and Human Rights

As Alchian observed, social critics have long maintained that the system of property rights maintained in capitalist societies conflicts with “human rights.” Ostensibly, this conflict hurts the poor by allowing those with property to exploit those without it. Only a society without private ownership of property can stop this exploitation.

Alchian insisted that property rights – indeed, all rights – must be human rights. The call for abolition of private property is really a call for government ownership or control of property. This has certain unavoidable implications for people of all income levels.

Alchian stated that the very concept of property is best understood as a system of rights governing the care and use of property. That system operates under the logic of economics.

The Three Elements of Property Rights

Alchian’s key writings on property rights are summarized in entries in the Fortune Encyclopedia of Economics and its successor, the Concise Library of Economics. Here Alchian identified the three key elements of a system of property rights.

First among these is control. A right to property entails control over its care and use. This applies particularly, but not exclusively, to physical or tangible property. We are accustomed to this proposition in its positive form; i.e., in the right of people to enjoy and preserve things they own. Its negative form is less familiar. Children enjoy fewer rights than adults because they lack the capability to properly exercise them. Property rights are a good example of this; since tangible property usually demands care and maintenance, children are less able to exercise a right to its ownership.

Second is the right of exclusion. A property right gives the owner the right to exclude others from the possession and enjoyment of the property. Perhaps the most common example of this is the price charged by sellers, which excludes non-payers from the enjoyment of goods for sale. One of the key requisites for a public good – one that must be produced by government because private producers cannot produce it – is “non-exclusivity,” the inability to exclude non-payers. National defense is a public good because once it is provided for one, it is available to all.

Finally comes the right of salability. A true property right gives the owner the right to sell, rent, assign or delegate all or part of the ownership interest in the property at discretion. This is a key distinction between so-called government ownership and private ownership. Although government ownership is frequently referred to as “public ownership,” this is a misnomer. The government, not “the public,” controls the use of the property. In principle, according to the Rule of Law, the government should not exclude the public, but it often does. The public lacks the right to sell, rent or bequeath all or part of its property interest. Thus, no individual owns the property when “the government” owns it.

Both history and theory are replete with examples that sharpen each of these distinctions. We offer a few of these below.

Case Study in Property Rights: The American Indian and European Settlement

North America was settled by Europeans – Spanish, French, English, Germans and Dutch – beginning in the 16th century. Prior to European settlement, the continent was inhabited by aboriginal peoples who came to be called by the mistaken appellation of “Indians.” Over a period of roughly 300 years, the Indians were displaced – that is, removed from their original habitations and resettled.

The continent was populated by a mixture of Europeans, dominated by the English but also including large numbers of French to the north and Spanish to the south. Beginning in the 17th century, the English established numerous colonies in the central section that later gained their independence and became the United States of America. The English and French coexisted more or less peacefully in the English colony of Canada, which later became part of the British Commonwealth. The Spanish colony of Mexico to the south eventually rebelled and gained its independence from Spain.

In Canada and the United States, the displacement of Indians was accomplished through treaty, land purchase and resettlement. This was historically significant, since conquered peoples were generally treated much more harshly. Indeed, for thousands of years, the principal method for mass acquisition of wealth was conquest and plunder – that is, redistribution rather than economic growth. In the U.S., the process was still violent, though, as treaties and resettlement were accompanied by Indian wars lasting from the early 17th centuries until the end of the 19th century.

Much academic and popular history has condemned the acquisition of land from Indians by Europeans and, later, Americans. “We stole the land from the Indians” is a common phrase used to describe the process. This seems an odd way to characterize a process of negotiation and purchase, the historical successor to conquest, eradication or subjugation. More important is the implication that the proper course events would have been for Indians to have retained title to “their property.” This premise deserves careful study.

The social organization of American Indians was tribal. For most, though not all, their lifestyle was nomadic. In what later became the eastern U.S., the land was heavily forested in both the north and south. Most tribes subsisted by hunting deer. Historian Stanley Lebergott quoted one tribal chief: “[W]e must have a great deal of ground to live upon. A deer will serve us but a couple days, and a single deer must have a great deal of ground to put him in good condition. If we kill two or three hundred a year, ’tis the same as to eat all the wood and grass of the land they live on, and this is a great deal.”

This explains why Indians claimed such large quantities of land as “theirs.” They hunted deer. Deer were voracious consumers of forest grassland. (Today, deer thrive in urban American settings; a recent Wall Street Journal letter writer complained that deer are “urban locusts.”) Indians, in turn, consumed large numbers of deer. Deer would ravage a section of land, then migrate in search of fresh forage. Rather than build fixed settlements, Indians would follow the deer.

Prior to the Industrial Revolution, America – like the world – was overwhelmingly rural and agrarian. The overwhelming preoccupation was producing enough food to sustain life. Lebergott estimated that, by the early 1800s, the eastern Indian lifestyle demanded roughly two thousand acres, or three square miles, to produce enough calories to feed one Indian. This is consistent with contemporary accounts like the quoted passage above. In contrast, the American settlers who cleared land and build farms needed only two acres per person. In other words, the descendants of the European invaders had become one thousand times more economically productive than the Indians. The incentive for settlers to displace Indians on the land was enormous.

Even more to the point, the Indians’ claim to property rights was very weak. They could not control the use of the land they claimed as theirs, nor could they exclude non-users. Their only resort was sporadic violence against encroachments, which was by no means synonymous with enforcement of property rights since was violent, punished the innocent along with the guilty and affected only a small minority of the “violators.” Given their inability to command the first two elements of property rights, they could hardly execute the third. Thus, the basis for denying most Indian tribes a property-right claim to most of the North American continent rested on the same logic as that by which we deny most property rights to children. In both cases, the claimant lacks the competence and capability of exercising the claim.

Rather than grant Indians a dubious de jure property right they were sure to lose de facto anyway to white settlers, American governments in the early 1800s – particularly the administration of President Andrew Jackson – paid Indian tribes off and resettled them on federally owned land outside the boundaries of the United States. (Jackson maintained that it was unconstitutional to execute treaties with Indian tribes as if they were foreign nations, then force state governments to accept resettlement within their borders. He insisted that sovereign states were not bound by the terms of a treaty between the federal government and a foreign nation.)

There was much to regret about the execution of this approach, but the property-rights logic that underlay it was sound. It is quite clear now that salvation for Indians lay in assimilation with modern civilization rather than adherence to tribalism and outmoded economic organization. By treating Indians as wards of the state and preserving the reservation system and a separatist way of life for Indians, the federal government was guilty of the same false paternalism that has condemned much of the American underclass to inferiority today.

What about the western Indians, who occupied the plains and deserts of the Midwest and west? Once again, the predominant lifestyle was nomadic. In this case, subsistence derived from the buffalo or (more properly) bison, who roamed the plains in profusion during the 17th and 18th centuries. Once again, Indians followed the bison, which followed a seasonal pattern of migration throughout the plains. They hunted buffalo with bow and arrow – Plains Indians were amazingly proficient at driving arrows through the hides and deep into the muscular bodies of bison – and by stampeding the animals over cliffs. Although legend says that Indians were thrifty in their use of each part of the bison carcass, the truth is that carcasses were often left to rot.

As with the eastern Indians, the Plains Indians were highly unproductive compared with American settlers. Cattle fed upon grass proved to be vastly more profitable than bison – they dressed out better, their meat was in better demand, cattle could be domesticated whereas bison could not.  Despite the fact that the subjugation of warring Indians predated the near-extermination of the bison by about a decade, no serious attempt was made to establish the bison as a domestic meat animal on the western prairie.

The property-rights claims of Plains Indians were just as weak as those of eastern Indians, for similar reasons. The Plains Indians could not control use of the vast prairies, nor could they exclude interlopers. For many decades, a staple plot of Hollywood movies was the eviction of Plains Indians by greedy, unscrupulous whites hoping to profit thereby. Usually the motivation is gold, newly discovered by treaty violators in some place such as the Dakota Black Hills. In reality, gold discoveries were few and far between. The real motive behind the displacement of Plains Indians was cattle, not gold. White ranchers were vastly more productive on the plains than were Indians.

To be sure, the forest Indians of the east and the Plains Indians of the west do not encompass all Indians. Some Indians, like the Pueblo and Navaho in the west, did establish viable settlements and agricultural lifestyles. They did have valid property claims. Thus, their property rights should have been respected for the same reasons that the questionable claims of most Indians were rejected.

Pure Theory of Excludability: Alchian and Allen Offer a Proof By Negation

The most legendary of all economics textbooks may be University Economics (later reissued as Exchange and Production), by Armen Alchian and William Allen (AA). Blissfully sparse in its use of mathematics but lively and witty, it offers perhaps the most complete exposition of economic logic in any general textbook. Among its many famous applications is the authors’ imaginative defense of property rights, which takes the form of a “proof by negation.”

AA ask us to envision the following world: Automobiles exist, but are not privately owned. Instead, they exist as a common resource. Each is equipped with an auto-start that vitiates the need for an ignition key. Individuals are invited to make use of any car they find on the street, use it as long as required – purchasing their own gasoline – then leave it for someone else to use.

What would such a world be like?

A little thought suggests that the most salient automotive characteristic of that world would be that we would be driving a fleet of clunkers and junkers. Why? Because nobody would have an incentive to invest in either maintenance or repairs, at least beyond the point it took to get them to their immediate destination. From any one individual’s viewpoint, what would be the point of investing any substantial amount of money in an automobile that you would probably never see again once you reached your destination and left the car to go inside a building? Remember that everybody is not only entitled but expected to appropriate any unoccupied car for his own use. If you bought a new radiator for a car you picked up on the street, you might as well kiss that investment goodbye after leaving the repair shop and reaching your house.

With nobody wanting to repair cars to any significant degree or invest in preventive maintenance, their condition would deteriorate rapidly. People would carry their own motor oil, since they would likely have to add it to any vehicle to prevent the engine from blowing a gasket. Long trips would be a risky venture.

Another feature of this brave new world of socialized car ownership would be that everybody would drive off the bottom of their gas tank. Who would bother topping off the tank – unless undertaking a long trip – only to have somebody else drive off to enjoy most of the gas they purchased? For those who have not been subjected to this form of restraint, it can be a nerve-wracking experience calling for continual mental discipline.

AA suggest their example as an intellectual corrective for people who continue to regard property rights as a form of exploitation. Once absorbed, it can be applied to other forms of property to derive some idea what life without private property would be like. Alternatively, we can refer to the closest approximations provided by history. Visitors to socialist countries like Soviet Russia and Communist China often remarked upon the poor condition of the infrastructure and capital stock, usually without realizing that the lack of stock ownership and capital markets had killed off most of the incentive to maintain those capital goods.

Case Study in Salability: Property Rights and Species Preservation

The loss of species to extinction has been a chief selling point for the environmental movement ever since Rachel Carson published Silent Spring in 1962. Schoolchildren are taught the harrowing lesson of the passenger pigeon and the buffalo and told that only placing species on government’s “endangered species list” can save them. Typically, the grant of endangered status entails special protections and stern injunctions against harm.

A country whose wildlife has faced chronic preservation problems is Africa. Its exotic wildlife has always occupied a special place, if only because of its magnetic attraction for tourists. The elephant has been especially threatened because the unique properties of the ivory in its tusks have made it tremendously valuable. Poachers have reduced the elephant to the point of extinction in parts of its natural habitat.

The reflexive response throughout Africa has been twofold: ban elephant hunting and ban trade in elephant by-products like ivory. In Kenya, the government banned the hunting of elephants, but poachers decimated the elephant population from 140,000 to 16,000. In Tanzania, the government likewise banned hunting in 1970, but the elephant population was reduced from 250,000 to 61,000 in little more than a decade. In neighboring Uganda, the situation was even worse; its elephant population dropped from 20,000 to only 1,600.

To an economist well-versed in property rights, the reason for these failures was that the ban on hunting or harvesting elephants for commercial use was born of good intentions but was bound to produce bad results. In fact, it had the effect of killing thousands of elephants!

How could this possibly be true? How could people so sensitive to the welfare of these noble creatures do something so brutal, so insensitive, so utterly contrary to their intention? Alas, reason and emotion are completely different expressions of human thought. A surplus of the latter does nothing to promote the former; if anything, emotion tends to hinder the exercise of reason.

The laws against killing elephants had no effect on poachers because poachers are criminals by definition. They would have deterred ordinary people from killing elephants, but they actually encouraged poachers by killing off the legal market for elephants and elephant by-products, thereby making all things elephantine much more valuable in the black market. Being criminals, poachers were delighted to violate the law and sell their kill in the black market. In effect, the government was operating a price-support mechanism for the benefit of poachers.

One way to protect elephants as a species is by preventing the killing of existing elephants. The elephant-protection laws failed utterly in this respect. An even better means of species protection is by encouraging the breeding of more elephants. And the elephant-protection laws failed even more dreadfully here by destroying the legal incentive to breed elephants by destroying the legal market for them.

What a travesty of logic! Is it any wonder the results were so counterproductive? Well, it is one thing to sneer at failure, but another to actually succeed where good intentions alone have failed. Does ivory-tower economics have anything to show in the way of actual results?

In 1979, the African countries of Zimbabwe and Botswana created private property rights in elephants and allowed harvesting of elephants for commercial purposes. In a little less than 15 years, Zimbabwe’s elephant population rose from 30,000 to about 70,000. Botswana’s rose from 20,000 to 68,000.

The really amazing thing about this case study is that people are amazed by it. After all, we butcher many millions of cattle, chickens, hogs and sheep every year, but these species are not endangered because the legal market for them provides a continual incentive for their preservation and maintenance in good health and sufficient numbers to ensure viability. It seems as though people switch off their reasoning faculties when environmental subjects like species preservation arise.

Property Rights and Economic Development

In South America, economic development has been frustratingly elusive. A country such as Brazil possesses vast supplies of people and natural resources and seems on the verge of breaking through to developed-nation status. A country like Argentina was once among the world leaders in industrial production and economic growth, but now lags far behind. Venezuela has gone from being a continent leader in economic growth to Third-World status and near-chaos.

The insecurity of property rights throughout the continent has been identified as a leading culprit in this lack of enduring progress. It is difficult for investment to flourish in a climate where bribery is commonplace and cronyism runs rampant, where expropriation is a continual threat and financial-market transparency cannot be assumed.

Alchian’s Ghost

Today regulation looms larger in the lives of business and consumers than ever before. The ghost of Armen Alchian hovers over our shoulders. He does not haunt us. He is friendly, but admonitory and stern.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s