Property

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PROPERTY

Property is defined as that which is owned, including both tangible things and the right to engage in certain actions. In the physical and social sciences one can speak of a property of a thing or an object in describing a characteristic of that thing. Here property is restricted to the right or authority to determine how a resource is used. Society designates who holds a resource and how it is used through governmental enforcement of laws or through social custom and tradition. Property rights determine not only who is allowed to use a resource but how exclusive the use is, who has the ability to preclude use, and how property may or may not be acquired and exchanged. Property therefore helps define the relationship between individuals and between groups of individuals.

Property and property rights depend on the answers to two fundamental questions: In a just society, what criteria should be used to distribute resources? and What types of property rights structures should be recognized? The philosopher John Locke's (1632–1704) concept of natural rights provides a starting point: Individuals have property rights to themselves and their labor a priori. In other words, independent of institutional, legal, cultural, or social constraints imposed by others, persons have rights to themselves and the products of their labor as long as they do not impede others from exercising the same rights. The idea of natural rights is both intuitive and morally appealing yet is insufficient because in the course of human interactions people tend to impede others from realizing their natural rights.


Property, Technology, and Science

Technology plays a central role in the use and protection of property, and in many instances property rights depend on access to and control of technology. In the extreme case wilderness real estate may be accessed only with a helicopter, but even a computer cannot be used without electricity. Not only the effectiveness but also the security and transferability of property rest on the ability to monitor and enforce property rights. Technologies for monitoring and securing physical property can take the form of locks, fences, security cameras, tamper-proof devices, and alarms. In the absence of monitoring

TABLE 1
Property: Compatibility and Exclusivity
 Exclusive Non-exclusive
SOURCE: Adapted from Perloff (2001), p. 628.
IncompatiblePure private goods: apples, TVs, automobilesCommon property resources: fisheries, roads, groundwater
CompatiblePublic goods: concerts, internet accessPure public goods: national defense, clean air

or enforcement technologies even well-defined property rights lack meaning.

The control of technology not only determines who has access to property but also may influence capital flows to support research and development. A communications network may facilitate connections between some inventors and venture capitalists and exclude others. At the same time, when research and development are funded primarily by private interests, this can create a risk of subordinating scientific inquiry to profit making. Similarly, easy technological access to venture capital or other types of investments can distort scientific interests.

Scientific research and technological development themselves depend on secure property rights. Without secure intellectual property rights incentives to engage in research and development are lowered because the rewards may not accrue to those who produce those goods.

Characteristics of Property

Property has two main characteristics that determine how well it functions, that is, how easily it can be transferred and how well related rights can be monitored or enforced. The two characteristics are incompatibility and exclusiveness. A good or service is incompatible if consumption by one person precludes consumption by another person. If one person eats an apple, another person cannot eat it. Exclusivity means that the owner of a good should receive all of the benefits and costs of ownership including the ability to exclude consumption of the good for those who do not pay. Owners of a movie theater can exclude customers who do not pay. Owners of a drive-in are less able to exclude non-paying customers. The degree to which something is incompatible and exclusive determines the degree to which a good is private or public. The matrix (Table 1), which is adapted from the work of Jeffrey Perloff (2001, p. 628), summarizes the possible combinations of incompatibility and exclusiveness.

A pure private good is one that is both incompatible and exclusive, such as many consumer goods. With pure private goods there are no restrictions on the property right to use or exchange the good. The value of the good is determined by the ability to exchange the good with others on mutually agreeable terms. With private goods the market price reflects the value of the property right to the good or service in its best use. However, the table does not convey the extent to which most goods and services are hybrids somewhere in the middle. Most goods have degrees of compatibility (that is, they are nonrival) or exclusivity.

Private Goods

The basis of neoclassical economics is private property. In fact, the economic historian Donald McCloskey (1985) defines modern economics as the science of property such that property itself is defined not merely as a thing but as a social relation. If everything owned and exchanged is costless, the property right to the thing being exchanged belongs to the person who values it the most. If the thing has no value, no one will bother with it, and hence there is no need to define the relationship between the thing and anyone who would possess it. The value of property depends on its scarcity. If more than one person desires a thing, property rights to that thing define the relation not only of the owner to the thing but of the owner to anyone else who may value the thing and of nonowners to the thing. The effectiveness of property as a social relation therefore depends on the definition of this social relation and its transferability. For economists well-functioning markets for pure private goods depend on clearly defined property rights.

In regard to the question of how property historically has been defined or how it can be clearly defined economists resort to the tautological argument that rights become well defined when it is in someone's interest to do so. This answer leads to inequitable income distributions. To understand this one can use Allan Schmid's argument about capitalization and the role of property (Schmid 1987). Schmid contends that the property right to exchange facilitates capitalization, or the conversion of future values into present values. In other words one person can consume today by trading his or her future production for someone else's current consumption. The ability to exchange the present for the future provides incentives to innovate and to invest in scientific research and technological development. If property is not transferable over time, the individual producer will have to wait until production is finished in order to consume. In this case there is neither borrowing nor lending.

The problem here is that the way property rights are defined affects the rewards given to innovators. If markets are competitive, the benefits of transferable property rights and their concomitant technological advances will be shared by everyone in society over time. However, perfectly competitive markets rarely exist outside economic theory textbooks. Market power in imperfect markets, which are the norm, means that some individuals have easier access to credit and capital. This typically results in capital markets that provide instant wealth to innovators and an astounding degree of income inequality. The stock market magnifies this inequality and has not always produced capital for new investment; instead it often provides power, both political and economic, that strengthens property holders' interests at the expense of those who do not have access to capital.

Public Goods

At the other end of the spectrum a pure public good such as clean air is both compatible (nonrival) and nonexclusive. The less exclusive a good is, the more difficult it is to monitor and enforce property rights to that good. In the case of a pure public good property belongs to everyone. Because the benefits of ownership accrue to everyone but the costs accrue to no one in particular, the provision of a pure public good depends on someone bearing the cost of production. In many cases with high costs of provision, such as national defense, the government must step in and pay by collecting tax dollars from those who benefit. The share of benefits may not reflect the proportional tax share borne by each taxpayer accurately.

When property is publicly owned or when the acquisition and exchange of property is not well defined, determining a just distribution of resources and deciding who controls access become an ethical minefield. The decision about who gets to decide and how questions of allocation and distribution are decided is complex. Locke's idea of natural rights to oneself and one's labor is difficult if not impossible to extend to communal property. The political philosopher Karl Marx's (1818–1883) version of socialism was an attempt to make collective decisions about the production and distribution of both common and private property. For Marx property could not be appropriated (literally "made one's own"). If profits were realized from collective production, they would be shared equally among all people according to each person's needs. However, Kenneth Arrow's impossibility theorem challenges the possibility of a common social choice.

Between Pure Public and Pure Private Goods

Between pure public goods and pure private goods lies the murky continuum of fuzzy property rights. Some resources are rival but nonexclusive. Groundwater can be accessed by anyone with a pump, but once removed from the ground, it is typically the property of the person who owns the pump. The classic example of a common property resource is the commons, or town pasture, where individuals were allowed to graze their animals without cost. In this case each individual can graze additional animals on the commons without any additional cost to the individual but with a cumulative detrimental cost to the commons. The net effect of each individual's rational actions when property rights are absent and individuals are free to use the resource without cost or at a cost that does not reflect the true value of use is complete degradation of the resource, or what Garrett Hardin (1968) called the tragedy of the commons.

Intellectual property, or ideas, innovations, and inventions, also lies between pure private and pure public goods. Intellectual property rights such as patents and copyrights are some of the most difficult rights to qualify. Intellectual property is both intangible and compatible (nonrival). Once intellectual property is produced, anyone can enjoy it at zero or very low additional cost. Thus, the cost of developing the first unit is often great and the incentive to produce it does not exist unless the producer can charge more than one person for use of the property and recoup the cost of research, development, and normal operating costs. Without the incentive to innovate, new ideas and consequently new technology are slow to develop, especially if other individuals can duplicate the intellectual property easily.

The response of societies to this quandary is to grant patents or copyrights, which are property rights and as such allow individuals to earn an economic profit. Without property rights innovators and entrepreneurs are not willing or able to invest in research and development because they do not have the requisite capital for the endeavor or because they will not reap rewards commensurate with their efforts.

This raises the question of whether science itself is a public or a private good. By granting patents the government essentially places science in the private realm and grants corporations monopoly power over goods that may have a public nature. With scientific research an alternative to patents would be to make all scientific research and development publicly funded. That might allow science to remain independent of corporate power and better serve the public interest. Detractors of this idea believe that without incentives individuals will not develop new ideas. They also believe that without property rights ideas will not be secure. However, less cynical thinkers maintain that the pursuit of science is not necessarily motivated by financial reward. Creativity does not follow a schedule and does not answer to the auditor.

The way property is defined, appropriated, and exchanged is one of the most frequently discussed topics in economic and political philosophy. The challenge to society is to define property rights clearly and in a manner that allows transparent monitoring and enforcement of those rights and to recognize that property rights to some types of entities can lead to gross inequality. Meeting this challenge may lead to greater investment in technology and better-informed choices for individuals and society. Sometimes, however, the nature of the way people interact interferes with clear and effective property rights.


WILLARD DELAVAN

SEE ALSO Intellectual Property.

BIBLIOGRAPHY

Christman, John. (1994). The Myth of Property. New York: Oxford University Press. A contrarian view of the capitalist idea of property.

Demsetz, Harold. (1967). "Toward a Theory of Property Rights." American Economic Review 57(2): 347–359. A classic early article with a formal neoclassical approach to property.

Hardin, Garrett. (1968). "The Tragedy of the Commons." Science 162: 1243–1248. The defining article on common property resources.

McCloskey, Donald. (1985). The Applied Theory of Price. New York: Macmillan. One of the best-written and most provocative intermediate microeconomic theory textbooks; by a prolific, enigmatic economic historian.

Perloff, Jeffrey M. (2001). Microeconomics, 2nd edition. Boston: Addison Wesley Longman.

Schmid, Allan A. (1987). Property, Power, and Public Choice, 2nd edition. Westport, CT: Praeger. A profound look at the institution of property.