This is part two of a four-part series on private property rights.
“If history could teach us anything, it is that private property is inextricably linked with civilization,” said Ludwig von Mises.
People obtain property in four ways: 1) first possession, 2) exchange, 3) gift, or 4) theft. Our first blog post focused on how property rights first developed, including John Locke's idea of first possession. This post looks at how property rights can be transferred through exchange.
Establishing ownership is fundamental to the exchange and utilization of property. Without private property rights, the system of exchange would cease to operate. Property rights allow an owner to set terms for the price, time, and location in which trade can occur. Once ownership has been established, usage rights – the terms for selling or leasing property – can be negotiated.
The exchange system enriches people by transforming their labor into earnings and their earnings into physical goods or wealth. When a need or want is recognized, people have the ability to trade amongst themselves for the things they desire.
The exchange system facilitates mutually beneficial transactions. When a person buys a product or service, they are only doing so because they value said product or service more than the money (or labor) used to earn it. Likewise, a person will only sell a product or service if they value the money (or a money equivalent) more than the labor or cost of obtaining/producing the good or service.
In general, voluntary trade makes all participants better off. In this way, the system of exchange re-enforces civilized society.
Research shows the accumulation of property creates a strong incentive for human cooperation. As Ludwig von Mises said, “The attainment of the economic aims of man presupposes peace.” Because war threatens to jeopardize our property and security, we all have an incentive to preserve peace and stability.
Despite this incentive, the exchange system is not immune to disputes. When disagreements arise, property rights help settle disputes by clearly identifying the ownership, terms of use and exchange, and responsibility for property.
In addition to settling disputes, the responsibility that comes with private property rights also promotes conservation and good stewardship.
Property rights provide a solution to what economists call the tragedy of the commons. This phenomena occurs when there is an incentive for individuals to deplete a resource for gains in the present, even at the expense of preserving the resource for the common good in the future.
One example is public grazing lands. An individual rancher gains as the number and value of his cattle increase. Therefore, he has every reason to use as much land as possible. (If this rancher doesn’t use the land, another rancher will.) However, because all ranchers feel this way, grazing land is quickly depleted – leading to a shortage of food for cattle and, in turn, a shortage of food for people.
In contrast, a private land owner has every reason to preserve the land. A private owner can charge ranchers for cattle grazing, but in order to keep making money, he needs to have land available. In this system of exchange (the rancher exchanges money for the use of the private owner’s land), preservation becomes a necessity of business. Rather than experiencing a tragedy of the commons, the individual’s desire for self-enrichment translates into the societal benefit of the conservation of resources.
Similarly, property rights can address other societal problems. For example, economist Ronald Coase theorized that the issue of negative externalities – the cost of trade to people who aren’t engaged in the system of exchange – could be solved by assigning property rights.
Consider the case of pollution. A factory that pollutes the air is negatively affecting the surrounding community, even if its members do not directly engage in business with the factory. As clean up and mitigation costs mount, problems arise over who should pay for them. In this example, the issue of pollution could be settled by determining who owns the pollution and, therefore, who is responsible for it. If an entity is responsible for paying the costs of pollution, it will be incentivized to limit pollution.
While property rights can help settle disputes and assign responsibility, there are some problems that extend beyond property rights.
Asymmetric information, knowledge that one person has that another person does not, can erode trust and cause disputes. The best example of this is illustrated in economist George Akerlof’s famed article, The Market for Lemons: Quality Uncertainty and the Market Mechanism.
Akerlof explains that when selling a used car the owner has an incentive to hide or omit defective attributes in order to sell the car at a higher price. Because the current owner knows more about the condition of the car than any perspective customers, he or she can use this information to take advantage of potential buyers. To solve this dilemma, a person could argue that it is the buyer’s job to inspect the vehicle, but it could also be argued that it is the seller’s job to disclose all known defects. Even with private property rights in place, normative issues like this linger in the exchange system.
Despite these limitations, the role property rights play in preventing and settling market disputes is pivotal to the well-functioning of civilization. Establishing property ownership, as well as the terms for use and exchange, allows individuals and societies to flourish.