June 28, 2023
The best ideas seem obvious once someone points them out.
As an example, think about Harold Demsetz’s insights from his 1967 paper, “Toward a Theory of Property Rights.”
Endogenizing the emergence of private property rights to the cost-benefit framework, when economists had previously taken the property rights framework as exogenous? Obvious!
Except, it most certainly wasn’t obvious until Demsetz described property rights emergence among the Canadian Montaigne. When the value of furs rose due to international trade, it became cost-effective to establish private property rights over hunting grounds to prevent over-hunting. In a nutshell, when the benefits of having private property rights rise relative to the costs, people establish (or strengthen) private property rights.
Likewise, it might seem obvious to “run Demsetz in reverse,” that is to consider scenarios where the value of having private property rights is falling. It might seem obvious, but I hadn’t really heard anyone do it until Peter Leeson did in his comments on Barak Richman’s excellent study of self-governance in the diamond trade.
As with Demsetz’s original paper, the point here is simple. Maintaining private property rights is a costly activity. It makes sense to invest a lot of resources in that activity when the value of what’s being protected is high; less so, when it’s low.
Thus, while some people might wring their hands over the dissolution of self-governing mechanisms in the diamond trade, Leeson highlights the (obvious?) point that those resources are being released to serve other goals. This is running the Harold Demsetz logic in reverse.
To see this only requires thinking carefully about scarcity, but very few people do that. If it sometimes makes sense for private property rights to get stronger, then it sometimes makes sense for private property rights to get weaker.
Apply this logic to why self-governance emerges in some contexts, but not in others. Doing so consistently prevents hand-wringing when self-governance seems lacking from the perspective of a third party.
For instance, someone recently asked me why mechanisms for governance seem to arise in some tent cities of the homeless—but not in others. I don’t know for sure, but my intuition suggests that conflict on the streets is sometimes more costly, sometimes less. When the value of what’s being protected is high, governance mechanisms are more likely to arise.
Another economist chimed in with support: In his community, it’s easy for the homeless to replace possessions because there is an active community serving them. Those are the sorts of contexts where governance simply isn’t as important. I didn’t say non-existent—like anything when you’re using economic reasoning, it’s not all-or-nothing.
Another case I’m reminded of: During graduate school, while I was working on issues related to the economics of privacy, a friend encouraged me to consider why firms develop governance mechanisms to protect the flow of certain types of information, but not other types. Companies put mechanisms in place to govern the transfer of your credit card information. But information about your location or browsing patterns might be packaged and sold to third parties without even asking your permission! Well. The value of one is a lot higher than the value of the other, so one gets protected and the other doesn’t.
All this highlights the fact that whether to “encase” something in private property rights, whether to increase the strength of existing rights, or whether to let them lapse, is itself a choice variable. “More” is not always better. This is a theme that invites much more research.