Property Rights: Necessary but Not Sufficient for Prosperity

At e3ne.org, I have posted some reflections on my last discussion with the Ethics & Economics Challenge students, on the topic of private property rights. The work of Acemoglu, Johnson, and Robinson on how property rights support high levels of development plays a prominent role. Here’s a scatter plot from their famous 2001 paper:

property rights and development
Source: Acemoglu, Johnson, and Robinson (2001)

Economies with greater protection from expropriation have higher per capita incomes. There are plausible reasons to think the relationship is causal. As I note in the post,

If I have a stock of lumber in a warehouse in Oregon, and I hear that a hurricane in New Jersey is causing prices to spike there, I have an incentive to ship lumber there only if I can enjoy the profits of doing so. If the government taxes my profits at 100%, I have no incentive to ship the lumber where it’s needed most. Even if the tax is only 70% or 60%, it reduces my incentives enough that I’m not going to incur a lot of time, effort, and cost to ship the lumber. Similarly, if the government owns the lumber, or no one does, then no one earns the profit from shipping the lumber where it’s needed, and so no one wants to ship the lumber where it’s needed.

Still, private property rights are not sufficient for development:

If private property rights are so great for the economy, why didn’t the economy grow tremendously during the age of classic feudalism, when aristocrats held absolute property rights in their land, and serfs had to work on their estates for low pay? It should be clear that just as prices without property rights do little good, so do property rights without real markets. When a small group of people own vast quantities of land and use their ownership of land to oppress everyone else, you won’t get economic progress. We need private property rights, but they need to be dispersed enough to prevent the biggest property owners from converting their wealth into effectively absolute political power.

For that reason, I’m willing to consider comprehensive redistribution of land in former conquistador states, where owners of the great latifundias work the land inefficiently with hired laborers and convert their market power in the rental market into political power.

The other benefit of private property rights I talked about with the students was environmental. Private property rights can solve the “tragedy of the commons,” whereby people tend to overuse and deplete open-access resources. In that vein, I shared with them this very interesting article on different property regimes in the Maine lobster fishery. Where (communal) property rights are strictly defined and enforced, lobster are not overfished: lobster caught are larger and more mature, and lobstermen earn higher wages.

2 thoughts on “Property Rights: Necessary but Not Sufficient for Prosperity

  1. Hah! I have just been listening to a lecture on “Dark Age Economics” at http://www.thebritishhistorypodcast.com/archives/589.

    I find the that podcast excellent, but the guy makes tedious soft-left assumptions about economics such as equating wealth with political power. Sure wealthy landlords buy power. But the causal arrow in the other direction is at least as important: the screwed up political system allows them the mighty twist the laws in their favour.

    This is why I am not impressed by land redistribution even “conquistador economies”. Such reform might be OK, or not in particular cases. Either way, the more important thing is make sure the law and its administration is equal.

    1. In general, I agree with you. The path from political power to wealth is far more important than the other way. And I don’t think earned income generally yields much political power, because campaign contributions don’t seem to buy much in terms of policy. I do worry about the latifundia problem in weak Latin American states, where landlords can force tenants to vote as they wish, because they enjoy a near-monopoly in land.

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