5/23/23
It’s a crying shame, but as Nicolai and Kirsten Foss note in a great, new survey: “very few young
modern economists probably self-identify as property rights economists.”
Of course, there are exceptions, but it’s a missed opportunity because the approach is fruitful and underexplored, as Foss and Foss demonstrate in their new book. Don’t be mislead by the title. Anyone interested in the property rights approach to economic thinking will benefit tremendously from this volume.
Two areas of discussion struck me as unique to this collection of essays. The first has to do with the social (or not) nature of the “property right,” something Foss has touched on before.
Quoting from Foss and Foss:
“Essentially, property rights in such definitions refer to an individual’s expected opportunity set. This has some perhaps counter-intuitive implications. In contrast to definitions, such as that of Demsetz (1967), which stress that property rights are fundamentally social relations and imply that “i]n the world of Robinson Crusoe property rights play no role” (Demsetz, 1967: 347), on the Alchian-Allen-Barzel definition of property rights, Robinson Crusoe does in fact hold property rights. Relatedly, the Alchian-Allen-Barzel definition also completely separates definition of a property right from any legal consideration; to the extent that he holds effective control over an asset, a thief holds property rights to that asset (Barzel, 1997).
Even if we grant the point that conceptually, property rights may exist in the absence of (formal) law, in reality they have legal counterparts and the value of property rights is influenced by legal sanction and enforcement. Not surprisingly, many property rights scholars have strongly stressed the fundamentally social nature of property rights.”
It seems that Crusoe’s Island of Despair being prone to hurricanes would reduce the value of his assets, ceteris paribus. Does it make sense to speak of his property rights being more incomplete in such contexts? We might start by asking which questions we can ask/answer with the (more comprehensive) Barzel approach.
From the perspective of Crusoe’s own ability to control the elements of his physical environment, his (economic) property rights are weaker on a hurricane-pummeled island relative to a placid island. But since economics examines questions of social interaction, I’m not yet sure what stripping property rights of their “social” context adds. Perhaps someone could show me the sorts of questions this approach answers that the Demsetz approach doesn’t.
Another area this volume illuminates is the difference between what the Fosses call “Mark I” and “Mark II” property rights traditions. Foss and Foss argue that there are important substantive differences between the two approaches, and summarize as follows:
“In Mark I PRE, ownership was never pinned down with much precision, and interpretations of what exactly ownership entails fluctuated somewhat over the course of development of the older approach. Most understandings highlighted exclusivity and alienability of property rights as central to the definition of ownership. This makes effective ownership dependent on private and legal enforcement of claims to ownership, establishing a broader link to institutions. Mark I property rights economics also stressed how assets have multiple attributes to which rights may be held by many different individuals (Alchian, 1965; Barzel, 1997). Some of these rights may be contested and captured. Individuals may rationally decide not to protect certain rights. This all makes ownership a more contingent phenomenon, depending on the social institutions, private enforcement, and public policy existing at any given point of time. This was, however, never seen as a problem by Mark I property rights economists. On the contrary, the complex and contingent nature of real ownership arrangements points to the many margins on which individual can exercise capture of rights, how they seek to protect their rights, the resources consumed in this process, and the role of institutions in facilitating and constraining such processes (cf. Alessi, 1990). This institutional research program, outlined in its essence by Coase (1960), is considerably richer than the one implied by Mark II property rights economics.”
One takeaway is that it’d be nice to see more work exploring innovations in the protection of property rights. Barbed wire is a classic example. Indeed, as Foss and Foss put it elsewhere:
“Arguably, barbed wire was the crucial factor underlying the transformation from ranching to farming, as the new fencing protected crops from livestock and meant that fields could be used as pasture after the harvest. Barbed wire ended the great cattle drives and the need for branding. Cattle could be kept at a limited area, which greatly increased the value to agricultural firms (farms) of this resource (Webb, 1931). It prompted experimentation with new more valuable resources, notably the Shorthorn, Angus, and the Hereford, as substitutes for the tougher, but less valuable Longhorn, as well as with the uses of land.”
Lowering the costs of protection is certainly one way to improve the security of property rights. But recognizing and seizing that opportunity requires an act of entrepreneurship, something the economics literature has downplayed, but which the Fosses highlight.
What’s more, technological innovation in protection is not the only means of making property rights more complete. As Doug Allen and Pete Leeson have both argued, lowering the gross value of an asset can enhance its net value.
It’s unlikely that these two options exhaust the universe of available means for improving property rights protection. Here’s one possibility: changing the attributes mix that comprises a good might be a way to secure rights to those attributes. For instance, it might be worthwhile to add “opacity” to a bundle of attributes so that would-be thieves cannot easily assess the value of the remaining characteristics.
I wish these sorts of questions represented the cutting edge of applied theoretical research in economics. But I won’t hold my breath. It’s more likely that literatures in entrepreneurship and/or strategic management will tackle these issues.
At least for now, the volume can be downloaded for free through your institutional affiliation—highly recommended!
Edit 6/22/23: Here is a call for papers from the Journal of Management Studies on PRE.