The Online Library of Liberty

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• Editorial Staff
• Associate Editors
• Editorial
• Bibliographical Essay: Pamela J. Brown, Constitution Or Competition? Alternative Views On Monetary Reform
• I: Economics & Political Economy
• Mises On Money & Inflation
• British Free Banking & Monetary Theory
• Smith As a Monetary Economist
• Monetarism & Economic Ideology
• Political Economy & Economic Science
• Political Economy, Politics, & Paradigm Shifts
• Schumpeter and Papal Social Theory
• Political Economy & Geology
• The Economic Theory of Property Rights
• II: Law & Philosophy
• Individual Rights Vs. Utilitarian Consequences
• Shifts In the Meaning of Property
• Balzac On Natural Law Vs. Corrupt Law
• Aquinas and Natural Rights
• Man's End, Society & State In Aquinas
• Natural Law & Professor Finnis' Book
• Professor Finnis Replies
• 19th-century Tort Law & Industry
• The Letter and the Spirit of Contract Law
• The Limited Liability Corporation
• Corporations & Transaction Costs
• Corporation Law & the Progressive Era
• The Bureau of Investigation: Political Spying
• The First Amendment: 1918–1928
• III: Social Theory
• Locke, ‘property’ & Natural Rights
• Harrington Vs. Hobbes On Politics
• Jeffersonian Optimism Vs. Country Pessimism
• Rival Notions of Republicanism
• Charles A. Beard: Power Vs. Authority
• Marxist Historiography & the French Revolution
• Mill On Class and Ideology
• Mill On a Principled Political Party
• Tocqueville: On Prisons & Modern Despotism
• Harriet Martineau's Social Thought

The Economic Theory of Property Rights

Pedro Schwartz

“The Market and the Meta-market: A Review of the Contributions of the Economic Theory of Property Rights.” Documento de Trabajo 1980–1981. Working Paper from the Instituto de Economia de Mercado (Nunez de Balboa, 39; Madrid, Spain), 29 pages.

The author's object is to summarize a new and fruitful development in economic thought, the economic theory of property rights. Although economists have been concerned with property rights and the legal organization of society since the 18th century, it is only recently that they have begun to try to define with precision the relationship between the institutional meta-market and the economic market. It was only after 1960 that there was a rebirth of interest on the part of economists in the economics of property rights and the reciprocal influence exerted between the market and society's legal institutions. A recent development in this trend has been the spread of this kind of analysis to all aspects of Law, so that we now see the emergence of an “economic theory of law.” The author wishes to show the importance of such developments to economists, sociologists, anthropologists, and students of the law.

The author traces the starting point of the new analysis of the economics of property rights to Ronald Coase's “Coase's Theorem” (originally formulated in 1960 as a solution to the problem of externalities). Coase defined three conditions under which it was a matter of indifference to whom property rights were attributed: whatever the attribution the market would reach an optimum if: (a) the property rights were clearly defined; (b) transaction costs were zero; and (c) payments originating in the transactions through which the optimum was reached did not alter the pattern of demand.

Certain practical conclusions can be drawn from the first two of these three conclusions: for example, that it is convenient that the system of property rights should be universal; and that it is advantageous constantly to introduce improvements into the functioning of the market process so that transaction costs be reduced. It is better, therefore, that all things belong to someone, and that deals with owners should be facilitated. This conclusion suggests a research program into the defects of communal property, which is of special interest to economic historians.

Given that conditions (a) and (b) may not fully obtain in reality, even in such efficient markets as the great stock exchanges, society is confronted with the need, not of directly intervening to correct market failure, but rather of improving its functioning indirectly by a correction of meta-market or institutional framework. Posner's Hypothesis provides us, argues the author, with the analytical instrument for this task. According to this hypothesis legal institutions can be economically analyzed in order to determine to what extent they further economic productivity. The meta-market shows a tendency continually to redefine property rights, as technological conditions in supply, or tastes in demand, change; also, when transaction costs are high, it tends to grant property rights to those who will use them most productively.

This analysis offers a critique of the growing government intervention in the economic market which has taken place in our century. This analysis indicates that the market works well enough if left alone and that a spontaneous evolution of the non-political institutions of the meta-market favors a growing efficiency and ‘economism’ of life in society.

This critique of government intervention is reinforced when Coase's third condition is examined. This condition demanded that payments made to transact with property owners should not affect the pattern of demand. Hence, the use of resources by pressure groups to obtain concessions from the government implied that society would reach a suboptimal state.

In sum, perhaps the social problems we face are not the alleged defects in the economic market but rather the result of the malfunctioning of the political meta-market with its intervention into property rights.

II

Law & Philosophy

Because of its practical and theoretical significance, the theme of Law and Philosophy has repeatedly found expression in sets of summaries within the pages of Literature of Liberty (see, most recently, in the Spring 1982 issue, “Legal Philosophy & Norms,” pp. 43–50, and in the Summer 1982 issue, “Law, Politics, and Freedom.”)

Legal doctrines and legal philosophy crucially determine the possibility of a decent and humane society. Thus, Rosenfeld's opening summary dramatizes the contrasting effects of a legal code implementing individual rights or utilitarian, “social good” consequentialism. Likewise Vandevelde's following summary underlines how evolving legal definitions of property can lead to either peace and prosperity or controversy and economic decline.

Other themes surveyed are the meaning of natural law in terms of legal standards (see Carbonneau together with Donnelly, Scully, Veatch, and Finnis), the economic ramifications of tort law history (Schwartz), the debate in common law over strict or broad interpretation of contracts (Trakman), the legal and economic significance of corporate legislation (Amsler-Bartlett-Bolton, Williamson, and Urofsky). Finally, David Williams' article surveys the history and problematic legal status of political surveillance, and Robert M. Cover deals with the parallel issue of illegal government attacks on the First Amendment right of political dissent and civil liberties in America during the “Red Scare.”