Concept of Property Rights

By Anonymous

Introduction

It deals with the element of public policy, meaning that it is an intervention of the state in the otherwise state of chaos[i]. The element of public policy comes in whenever the work in question is one which can harm the efficiency of the market or the disturb the equilibrium of the market[ii], these are known as negative externalities (congestion, pollution and negative) and well Defined Property Rights are a means to tackle this problem by way of coercing parties to internalize costs previously unpaid for via patents, permits etc.

It’s not as if the market fails just because there are no rights and boundaries given, it also fails in the presence of the property rights, it fails when these rights are present but they are not enforced in all their capacities. This is one scenario that most commentators on this topic look at, that just having laws and rights in the statute is not enough if they aren’t imposed as stringently as embossed[iii]

The object of this paper is to focus on the ill-defined property rights and their implications and tie-ins with economics. The topic must be broken down into 3 parts – “ill-defined”; “property” and “property rights”.

Each of these parts carries matter that needs individual explanation and cannot be left to interpretation. To understand what “property rights” mean, we must first have a cohesive idea as to what “property” is, where this notion came from and what does it mean. So, the pattern of flow that the paper will have is –

  1. Define “Property”. Trace the origin of private property and the concepts of land that existed prior to the concept of private property.
  2. Define “Property Rights”. The advent of property rights and the effects of the same.
  3. What does it mean to have “ill-defined” property rights?
  4. Two offshoots of ill-defined property rights: the tragedies of commons and anticommons.

To understand the density of the topic at hand and to comprehend the impact of property rights on economics, one needs to be acquainted with the theories of private property and state of nature by John Locke and the concept of collective ownership or public property or simply put, the notion of property put forth by Karl Marx.

The notion of property and property rights

Now, to get on with the body of the paper, we need to trace the historical roots of the concept of property. Therefore, the concept of “State of Nature” is an inevitable theory that we need to acknowledge here. The concept has two versions and for our comprehension, we must look at the scene given by one of the greatest English Thinkers/Theorist – Thomas Hobbes.

Hobbes’ classic “Leviathan” depicts the reason for the development of the concept of property and the state that man was in before he became, “civilized”. The state was that of state of nature, where no one owned anything and it was mere possession of property that existed, not ownership. This meant that nobody could ever claim that something is their own because they cultivated it or captured it, they could only hang onto it till someone more powerful came along and just took it away. In this sort of a situation, the amount of chaos and effort and energy put in to preserve the possessions of one, any form of development was impossible. This is what inspired the creation of the much-hyped society headed by a sovereign or a head. The head was responsible for the protection of the property of all people and in doing so, he was the safeguard and guardian of all. The fact that the head was chosen either by way of his superior and supreme powers and prowess (physical or otherwise) or by mass consensus meant that he was responsible for anything that happened in the society under his reign, this would lead to him creating and generating proper laws and legislation. However, there was a problem with this theory; it meant that the ownership still depended on the previous actions of nabbing and grabbing.

This is where we will speak about Locke, John Locke, another English thinker, came up with another idea of the state of nature, he spoke of a state wherein everyone was in harmony with each other and nobody hit anybody on the head to take away their property. He said that it was a condition wherein God’s grace and will there was plenty for all and one could own as much as they could keep without letting anything rot. If anything would rot or go bad before it came to be of use, then it would mean that someone’s property has been encroached. Locke says that this is morally wrong and hence shouldn’t done, one should possess only as much as he can harness and once someone harnesses something by employing his own labor into it.

Therefore, this logic opened the floodgates of transference of someone else’s property into and as your own simply on grounds of you being able to utilize it better and more efficiently. This was the logic used by the European colonizers when they sought to usurp the land and property of other countries and later on, Africa. Now, once that the property has been fused with one’s labor and being utilized to its maximum efficiency, it is his private property, it belongs to him alone and cannot be impeached by anyone else unless the efficiency started to die out[iv].

An example of Adam Smith had famously said that there exists something called “An Invisible Hand[v]” in the market. He said that when the producers are fully exploiting all resources and avenues available to them, they do so in order to form a good that is of a nature that appeals to the prospective buyers and the market in general. In doing this, his intention is to create a good that is of saleable quality. If the good is sale-worthy, then the consumers will return to the producer for the same.

He gave the example of a bread maker, who bakes a great cake. His intention here is to bake a cake that the people like and hence are willing to pay a price for. HE could use the best flour and fruits in the market and sell his cake. However, the one thing that he doesn’t consider is the level of satisfaction that the consumer might get. The consumer here is a person who is benefitting out of the good that the seller or producer is making. He is getting happy after consuming the cake. This unintended happiness is the result of something called the “invisible hand” of the market.

This happiness that the consumer receives is something that the baker never envisaged and never took into consideration while creating the good piece and slice of cake. As said earlier, his logic of better utilization is central to the functioning of economical markets because the markets run on efficiency.

It is quite interesting to note the change in the notion of property. From Hobbes’ portrayal of the human race as virtually hopeless and perpetually at war with each other for basic amenities among which one was property, to Locke, who attached the term efficiency with the use of property. In other words, only those who were more efficient in their use of this resource would get rights over it. The use of property and the services executed on that property as key elements in maintaining the chain of the economy when viewed in terms of benefits to parties- a concept given by “Adam Smith” shows us how the notion of property has theoretically increased the beneficial value of property over years[vi]. But before we move on, we need to know what Karl Marx had to say about property and property rights. Many ideas of Marx were similar to Locke in terms of the government and how it had to be chosen by the people and for the people. One major difference was that Marx did not believe in the inherent “good” of the state because of the “bourgeoisie” who formed the state in the first place[vii].

This was because the bourgeoisie were the ones who decided what was supposed to be “efficient use of land” and who had rights over a piece of land. They ended up usurping huge patches of property and making it perpetually theirs. By doing this they exploited the poor class or the “proletariats”. Marx, as clear from his theory of private property, was against governments formed by the rich class which essentially snatch property from the poor class and then use it for their own benefit. They were the ones who defined property rights and who fully owned that property. This property made private by the bourgeoisie was the root of all ill-doing in the society according to Marx. He believed that such distorted property rights had to end and an equitable government could only be the birth child of a revolution.[viii]

Today however, the most accepted notion of the origin of property is the origin in possession[ix]. in order for the reader to appreciate this term, I will use a landmark case, Pierson v. Post.[x] in this classic wild-animal case from the early nineteenth century, post was chasing a wild fox and had the beast in his sight when an interloper suddenly shot the fox and took it away. Post argued that he had possession over the fox by way of chasing it, having it in his sight and preparing to kill it. The judgement disagreed and stated that the possession will be of that person who via his efforts mortally wounded or killed the fox and not merely by pursuing it. It is important to note here that the court did not agree with the labor theory of possession, but went with possession as a clear and unequivocal statement to the world. This has more or less been the accepted standard for proving ownership and possession since then and is the most objective when considering the role of the common law in property dynamics.

Now that the reader is acquainted with the theories given by Hobbes, Smith and Marx and their views on property rights, we need to appreciate the link between property rights and economics.

Property and economics

Irrespective of what Marx would say, why do the rich handle their property in a much better manner as compared to the poor? This is because they are aware of the different property rights that they have and can hence use the property more efficiently. Now, efficient use of property leads to more revenue which leads to a better foundation of the societies economy. It also leads to soft benefits like general human progress and reaffirmation of the right to liberal use of ones resources. The economy of the land, among many other things, depends on how accessible, equitable and just the property rights are. It is possible to trace the evolution of property rights and see how they became better over the centuries.

Take for example, property rights of the citizens of the united states of america in the 1800’s. the federal government had rights over mineral and other earthly resources irrespective of the ownership of the property. This effectively changed for the good by the 1900’s where vide new amendments in law, the private ownership of property encompassed both ownership of the surface and subsurface. By the 2000’s, we observe that more of the property rights came about to mimic the universal concepts of greater good. Case in point, property rights today, which are heavily restricted by zoning laws, land use planning programmes, tax laws and environment laws[xi].

Now, you cannot kill and endangered species on your land irrespective of whether you own it. These restrictions however were not at the detriment of the public. Case in point, the town of celebration, built and conceptualised by disney[xii]. All houses in this town are required to have only one kind of architecture, paint scheme et cetera. Now, prima facie, the people will feel that their rights are being curtailed due to their inability to modify what they own. But, it has been shown that the level of satisfaction in these towns is immense due to what is called “gaining in terms of negative rights”-i am happy with my restrictions because even my neighbour is subjected to the same. As a result, intelligently defined property rights tend to shift the concerned demand curves towards the right.

Ill-defined Property Rights: A Perspective

Elsewhere, there may be more crime, and lack of both awareness and knowledge leading to crippled execution and transparency of the property rights. This is clearly visible in our daily lives. Road side vendors encroach upon the space which is privately owned by either the state or the citizens. But cheap dispute resolution and force lead to these vendors being exactly where they are. This leads to lesser efficiency and compromise between individuals. Amplify these compromises and what you get is a crippled economy. This brings us to the reality of ill defined property rights. This leads to major problems like over and under utilisation of property- the tragedy of commons[xiii] and anti commons[xiv].

The Tragedy of the Commons

The Tragedy of the Commons was first framed by Garrett Hardin, as a phenomenon that affects us to this very day.  He pointed out that there occurs a ‘tragedy of commons’ stemming not even from the expected cause, that is, depleting resources but because of the exponentially growing population. He says the problem is furthered as no scientific solution has been found so far.

Hardin states that, “freedom in the commons brings ruin to all.”[xv] To avoid this, he suggested that the commons could be privatised or kept as public property to which rights to entry and use could be allocated and mentioned that resource degradation was inevitable unless the common property was converted to private property, or government regulation of uses and users. The tragedy of the commons basically shows how, when a resource is left in the hands of the general public, allocated property rights are abused and all of the population will try to utilise it, but without privatisation, none of the users will have enough incentive to invest in the property to develop it, or even sustain it.

Common property resources have two important characteristics. The first is lack of excludability (or control of access). That is, the physical nature of the resource is such that controlling access by potential users may be costly and, in the extreme, virtually impossible. Since air and water cannot be fenced there is no way in which private property can tackle this problem.

The second basic characteristic of common-property resources is subtractability (further explained in the tragedy of anti commons), that is, each user is capable of subtracting from the welfare of other users; the nature of the resource is such that the level of exploitation by one user adversely affects the ability of another user to exploit the resource.

In order to facilitate analysis, we define the four categories of property rights within which common property resources are held: open access, private property, communal property, and state property. Open access is the absence of well-defined property rights. Access to the resource is unregulated and is free and open to everyone.

Under private property, the rights to exclude others from using the resource and to regulate the use of the resource are vested in an individual. Under communal property, an identifiable community of interdependent users holds the resource. These users exclude outsiders while regulating use by members of the local community. Finally, under state property, or state governance, rights to the resource are vested exclusively in government, which in turn makes decisions concerning access to the resource and the level and nature of exploitation. Examples include forests and rangelands.

In order to test Hardin’s hypothesis, we need to examine to broad challenges in the management of common property resources, which are as follows:

  1. The exclusion of other potential users
  2. The regulation of use and users to ameliorate the problems associated with sub-tractability.

Evidence on Exclusion

1. Open Access: The tragedy of degradation and over-exploitation occurred only after open-access conditions were created, often as a consequence of the destruction of existing communal land-tenure and marine-tenure systems.

2. Private Property: Establishment of private property rights has solved this problem and helped in successful exclusion to a great extent. However, private-property rights may not be sufficiently precise for solving the exclusion problem. There is an enforcement problem with all types of property rights, including private property. For common-property resources, which by definition pose exclusion problems, such enforcement can be costly. The extent to which the community regards private property rights as legitimate affects the cost of enforcement[xvi].

3. Communal property: Hardin did not consider the possibility of exclusion under communal-property regimes. By exclusion, we mean the power to exclude people other than members of a defined community. Evidence suggests that successful exclusion under communal property is the rule rather than the exception. Communal property is not confined to remote and sparsely populated areas. Cooperative-based coastal fisheries in Japan provide many successful examples of communal-property systems.[xvii]

4. State Property: Exclusive state governance of the resources is sufficient to provide for adequate exclusion in many cases. However, difficulties in exclusion are not necessarily overcome by declaring the resource to be state property. The logic of the argument of ‘The Tragedy of the Commons’ is that we should not observe sustainable management of common-property resources and the exclusion of some uses or users, under regimes other than private or state property. But as we have illustrated, exclusion is feasible, if not always successful, under private, state, and communal-property regimes. Furthermore, private or state ownership is not always sufficient to provide for exclusion[xviii].

Evidence on Regulations of Use and Users

1. Open Access for everyone to Resources – What happens when demand exceeds the ability of the resource to sustain itself? Depletion Occurs. What normally works against depletion? Changing cultural values and Countervailing Institutional Measures. When these aren’t implemented fast enough, depletion takes the lead, and the resource is extinguished.

2. Private Property –Take the example of a redwood tree – it is planted for $1. At maturity, it is worth $14,000. But maturity is 2000 years later. So, it does not have a high rate of return. Therefore, while it makes ecological sense, with respect to regulations, it does not make economic sense.

3. Communal Property – Hardin predicted it would be impossible, but the current scenario shows that it is indeed possible for social groups to design, utilize and adapt mechanisms to allocate rights to property amongst its members. An example is stinting – limiting the number of heads of cattle that each owner could graze on a particular commons. Hence, it is seen that people can indeed organize and monitor resource use by members, allocate rights, and adjust aggregate usage levels, so as to maintain sustainable use of the resource. Voluntary collective action is feasible and effective.

4. State Property – Government ownership permits the formulation of appropriate regulations for resource use and provides for the expression of public interest and for accountability. But state governance does not necessarily ensure sustainable use. The downside of this is when it comes under state control there may be a large number of applicable restrictions, which leads to none of them being followed. It leads to de-facto open access, which leads critiques to say that privatization of property is a better option.

As shown, we have seen both success and failure stories with both private and state property regimes. This leads us to recognize that Hardin relies on certain assumptions:

  1. Pure open access
  2. Lack of constraints on individual behavior
  3. Conditions in which demand exceeds supply
  4. Resource users who are incapable of altering the rules.

One big downfall is that actual common-property situations often do not conform to all four of these assumptions. As such, a base, direct relationship between property rights and the given outcome cannot exist. It overlooks the development of the State, enough to impose regulations of use. It negates cultural changes and differences stemming from changes in human taste. For a holistic picture of the outcome, the nature of the resource, all the factors behind decision-making, and the relationship between all the users and regulators need to be taken into account – all of which, Hardin’s postulate fails to take into account.

The tragedy of the anti-commons

Michael A. Heller, in his paper named on the term ‘anti-commons’, brought and discussed this idea of anti-commons. Heller discusses an opposite effect, the tragedy of the anti-commons, on the EconTalk podcast. The tragedy of the commons describes the over-use of a resource nobody owns. The tragedy of the anti-commons describes the under-use of resources with many owners. For example, suppose an acre of land belongs to 43,560 individuals who each own one square foot. The land will never be used for anything as long as thousands of people have to agree on what to do.[xix]

The commons leads to overuse and destruction; the anti-commons lead to underuse and waste. In the cultural sphere, ever tighter restrictions on copyright and fair use limit artists’ abilities to sample and build on older works of art. In biotechnology, the explosion of patenting over the past twenty-five years—particularly efforts to patent things like gene fragments—may be retarding drug development, by making it hard to create a new drug without licensing myriad previous patents.

Even divided land ownership can have unforeseen consequences. Wind power, for instance, could reliably supply up to twenty per cent of America’s energy needs—but only if new transmission lines were built, allowing the efficient movement of power from the places where it’s generated to the places where it’s consumed. Don’t count on that happening anytime soon. Most of the land that the grid would pass through is owned by individuals, and nobody wants power lines running through his back yard.[xx]

Heller suggested that it has become impossible to create high-tech devices these days without infringing the patent rights of some other person. A new product involves thousands of patented products which are needed for its useful formation. Not only is it impractical to discover all the patented technologies used in that product, but also it is impossible to contact and negotiate with those many patent holders individually. Small firms easily get away even after such infringements because the patent holders are generally of the view that it will not be worth suing them, but deep pockets of companies such as Microsoft and apple are enough for suing for such infringements.

Conclusion

Many economists have tried to argue, rather criticise the concept of ill-defined property rights vis-à-vis their consequences on the economic development. Peruvian economist Hernando De Soto was one such person. De Soto in his book ‘The Mystery of Capital,’ brought this idea discussing the importance of well-defined property rights and its role in economic development.

De Soto argued that the problem of many developing countries is not that they have insufficient capital to invest. In fact, the poor in those countries hold immense amounts of capital in the form of land, dwellings, and other possessions. But as long as their property rights are not properly documented and institutions that make them meaningful remain weak, this informally held property remains “dead capital” that cannot be used to propel inclusive growth.[xxi] The tragedy of ‘commons’ and ‘anti-commons’ are the some of the concepts which arise from these kinds of problems. This problem has a direct and harmful impact on the democratic governance of a country.

Talking in terms of a layman

No easy access to secure property rights in a society forces an ordinary person to opt for the informal sector, where it is very difficult for such people to realize their full potential. Widespread informality, further leads on to weak rule of law and corruption which acts a negative incentive for the people of that society, as them being the subjects of arbitrarily enforces rules, abused thrives and as a result of which, the society is unable to flourish. This whole acts a cycle in which each stage is in a way connected to all others, ill-defined property rights being the kickoff point of this.

A contemporary twist

In light of the recent allegations on Robert vadra, the son in law of Indian national congress party leader Sonia Gandhi, its not too tough to imagine multi million property deals being fetched for a fraction of the lump-sum to be the end result of political favours. This shows how property rights allocated on the mango man and the man from the first family can be very different indeed.

Thinking via a feminist perspective of ill defined property rights, patriarchy could very well, as a narrative be a major driving force in considering women as property and means of keeping the flow of property perpetual in a family. This seeps into the Indian penal code as well, where adultery is a property offence of one many against another persons property i.e. his wife.

[i] perspective: coase theorem: now, according to nobel laureate Ronald coase, parties who use their property rights more efficiently end up having more incentive to stay with that property and hence, with this incentive in mind, they end up being the ultimate owners of that property. Disputes with other parties can be settled via mutually advantageous deals.

The author, on the other hand, is argues that public policy is vastly necessary for regulating the use of property and it is not always naturally created incentive which benefits all parties.

[ii] explanation: one such harmful factor is that of perpetual use of property. By alienating property from the rest of the world, what capitalism and the bourgeoisie class aim at doing is to exploit that piece of property till it becomes waste. This is not efficient use of land and mars the basic function of public policy.

[iii] James Bessen, Imperfect Property Rights, Boston University School of Law

[iv] Locke, John. Second Treatise on Government. New York; Dover, 1965.

[v] Adam Smith, Wealth of Nations, 1776

[vi] Locke, John. Second Treatise on Government. New York; Dover, 1965.

[vii] Smith, nicole, (dec 7, 2007) http://www.articlemyriad.com/comparison-marx-locke-views-government-property-labor/

[viii] Marx, Karl and Fredrich Engels. Communist Manifesto. New York; Signet Classics, 1999.

[ix] Rose, Carol M., “Possession as the Origin of Property” (1985). Faculty Scholarship Series. Paper 1830.

[x] 3 Cai. R. 175 (N.Y. Sup. Ct. 1805).

[xi] Morriss, Andrew, “The economics of property rights”, (march 2007), http://www.thefreemanonline.org/features/the-economics-of-property-rights/

[xii] Morriss, Andrew, “The economics of property rights”, (march 2007), http://www.thefreemanonline.org/features/the-economics-of-property-rights/

[xiii]  first defined by ecologist Garett Hardin in 1988.

[xiv] Heller, michael (1988), “tragedy of the anti commons”, harvard law review.

[xv] The Tragedy of the Commons: Twenty-Two Years Later

David Feeny, Fikret Berkes, Bonnie J. McCay and James M. Acheson

Human Ecology , Vol. 18, No. 1 (Mar., 1990), pp. 2

[xvi] Ibid., p. 6

[xvii] Ibid., p. 6-7

[xviii] Ibid., p. 8

[xix] Cook john, “The tragedy of the anti commons”, (november 20, 2009), http://www.johndcook.com/blog/2009/11/20/tragedy-of-the-anti-commons/

[xx] Dixon, Chris, “The tragedy of anti commons”, (july 26 2011), http://cdixon.org/2011/07/26/the-tragedy-of-the-anti-commons/

[xxi] Nadgrodkiewicz, Anna, “Property Rights, Development, and Democratic Transitions: The Path Ahead”, (April 16 2012), http://www.cipe.org/sites/default/files/publication-docs/FS_04-16-2012_AN.pdf

Leave a Reply

Your email address will not be published. Required fields are marked *