Theories of the origin and development of property rights
Property rights are relationships between people about limited resources. Imagine a world without property rights is impossible, if this is not the world of Robinson Crusoe. Therefore, we will proceed from the premise that some property rights exist, and trace the change in property rights in response to a change in economic conditions.
Three theories of the origin and development of property rights are singled out in the literature:
• naive theory of property rights;
• The theory of pressure groups;
• The theory of rent-seeking behavior.
The naive theory of property rights
This theory is sometimes referred to as the "optimistic", because it implies that market forces eliminate inefficient property rights, gradually destroying those property institutions that respond poorly to new economic opportunities. If the current regime of property rights restricts or creates obstacles to the reaction of economic agents to changes in relative foams or technology, the existence of these potential but unused benefits will force people to concentrate on establishing property rights that would enable them to take advantage of new economic opportunities.
Eggertsson called this theory naive because it explains the occurrence or, on the contrary, the absence of property rights by the ratio of the costs and benefits of excluding others from access to the resource, as well as the costs of internal management, if individuals jointly own property. In its explanation of the emergence of property rights, this theory does not take into account other social and political institutions. To the state, it assigns a passive role: it only reacts to the need of economic agents to establish formal property rights. This theory also clarifies what the mechanisms for the emergence of property rights were, does not take into account the problem of the free rider, which seriously complicates the adoption of collective decisions.
The foundations of this theory were laid by the article of one of the most prominent representatives of economic theory of rights
Property G. Demsetz "To the theory of property rights", published in 1967, which argued that if the value of a resource in public ownership is increasing, then people are likely to set exclusive personalities on it. Demets uses this idea in explaining the emergence of exclusive ownership of hunting grounds among the Labrador Indians (eastern Canada) at the beginning of the XVIII century.
Prior to the appearance of Europeans on Labrador, the value of beaver pelts was low, and beavers were considered a public property. This resource was not limited, since it completely satisfied the needs of the Indians in meat and fur. But with the advent of Europeans and the development of trade in furs, the intensity of hunting has increased dramatically. Indians began to hunt beavers only to meet their own needs for fur and meat, but also for the purpose of selling beaver skins. It was necessary to limit hunting and invest in the reproduction of the resource. There are exclusive rights to ownership of hunting grounds belonging to groups of hunters. On the trees, special signs were burned, indicating the boundaries of the territory belonging to a certain group of hunters. Hunt Indians attempted to stabilize the number of beavers, for example they left a spare lane on which hunting was banned. An economic incentive to introduce exclusive property rights was the increased value of beaver fur. Using this example, Demsetz showed that changes in relative prices lead to institutional shifts.
Demsets also shows in the article that among the Indians of the American Southwest the system of exclusive property rights did not arise. There was a different ratio of costs and benefits from the introduction of exclusive property rights. The main resource in the South-West of America was the bison. Benefits from the introduction of exclusive property rights to bison were insignificant, for their commercial value, they were not comparable to beavers. The establishment and protection of property rights for bison was associated with significant costs. The nomadic way of life of bison is a very important characteristic that influences the property and exploitation of these animals. Bison is not a migratory animal, whose seasonal movement can be predicted, and roaming grazing animals, and their location is difficult to determine, despite the large size of the herd (in the summer, there were herds of more than 100,000 animals). Even the Indians had difficulty finding bison. The costs of establishing ownership of a biological resource, such as a herd of large mammals, depend on the participant's ability to protect ownership of a large area of land where these animals live, as well as the ability to control the herd within this range. Some animals can not be caught alive, and ownership of them means controlling access to hunting. The costs of establishing property rights will be highest in the case of nomadic animals, lower in the case of migratory animals, since they have a well-defined habitat, and the lowest in the case of those animals that have a certain habitat (beavers)
During the XIX century. the value of bison increased, trade in meat and bison skins developed, however bison did not become private property. Moreover, the collective regime of ownership of this resource was replaced by an open access regime. If the costs of establishing private rights to a herd are prohibitive, and the costs of establishing individual rights for a particular bison are low, then the resource will be shared. Thus, the ratio of costs and benefits from the introduction of private property rights to bison made the exclusive regime of property rights economically unprofitable, and bison became a public resource.
Demets considers exclusive property rights as a way to internalize externalities (external effects), which are manifested in the depletion of beavers. When the Indians hunted for food, external effects also arose, but they were not significant, so they were not taken into account. But as the scale of trade expanded, so did the externalities, and the property rights system began to adapt to the new situation and take into account these externalities.
How effective was the internalization of externalities after the establishment of exclusive property rights?
From Demsetz's work, the conclusion was that the beaver population should have stabilized, however, it continued to decline. Why did not exclusive rights help protect the resource from exhaustion? Canadian scientist McManus examined in more detail the structure of property rights that has developed among the Labrador Indians. Hunted Indians were organized into small groups that could exclude other Indians from using fur for sale. But they could not exclude them from using beavers for personal consumption purposes. The starving Indian had the right to kill and eat another's beaver if he left his fur and tail on the shore. That is, the rights to use beavers for sale were exclusive, and the right to use beavers for personal consumption was common. This distribution of property rights performed insurance functions, as hunters lived in a world in which the threat of hunger was quite real. This form of insurance was accompanied by irresponsibility and laziness; was fraught with costs that manifested, ultimately, in the reduction of the beaver population.
MacManus called this form of insurance "the restriction of a good Samaritan" to exercise exclusive property rights. This restriction reduced the costs of securing exclusive rights. But this form of insurance was very expensive. Benefits from it were insurance and reduction of costs of protection of exclusive property rights, and costs - reduction of livestock of beavers. However, less expensive forms of insurance were not available to the Indians, and therefore this property rights scheme contributed to maximizing the well-being of Indians.
Demsetz's main contribution to the economic theory of property rights was that he argued that property rights can be viewed as an economic good and analyzed using tools of economic theory. He put forward an innovative idea that changing relative prices is the source of institutional changes leading to the emergence of exclusive property rights. However, the scientist did not propose a formal model for the emergence of property rights, did not analyze in detail the costs of establishing exclusive property rights and the mechanism for choosing property rights. The ideas of Demsetz were developed and formalized by other authors (American economists J. Ambek and D. Allen).
Let the pure value of property rights
where B are benefits, and C are the costs of establishing property rights.
The benefits of B are equal to the market value of the resource R (the market value of the beaver's fur), the cost of protecting property depends on the market value of the resource:
With zero transaction costs, the optimal benefit from the resource is achieved:
If the protection of property rights requires costs, then the net benefit from the resource will be below the optimum, we get a sub-optimal ( second - best ) net benefit value:
Property rights arise only in the case when R & gt; C ( R ), so assets whose value is low remain in the public domain. These formal reasoning accurately describe the ideas that were proposed by Demzets.
Let's imagine the arguments of Demsetz in a graphical form (Figure 3.6). On the horizontal axis - the market value of the resource, which does not depend on transaction costs and is determined by the conditions of supply and demand. On the vertical axis - the dollar costs and benefits of ownership of the resource. Assuming that the property is complete and perfect, i.e. the owner receives the entire value of this resource, then the benefit from the asset will be direct with a slope of 45 °. The cost function shows the costs of establishing and protecting the ownership of the resource: the costs of measurement, protection, etc. The vertical distance between the two lines is the net value of the resource. For example, if the market value of the resource is R ', then the net value is given by the distance AB.
Fig. 3.6. The benefits and costs of establishing exclusive property rights
The Demets implicitly assumes that the lines on the graph intersect, i.e. there is a critical level of market value of the resource R 1. at which R = C and which will determine whether property rights will be established or not. With a resource value of R & lt; R c - on the graph to the left of the point R c - the property rights to the resource will not be set. For example, the value of rubble along the edges of the road is low, and it remains in the public domain. With R & gt; R c, to the right of the point R c, there will be exclusive ownership rights to the resource. The net benefit from the ownership of the resource is AB - the distance between the benefit line V and the cost function C ( R ).
As the value of the resource increases, the incentive to steal it will also increase, accordingly, the costs of protection will also increase. If the costs of protection grow faster than the value of the resource, then the property rights will not be established, no matter how valuable the resource is. This means that if C ' ( R ) & gt; 1, then ownership rights will be established, because C ( R ) & gt; R for all values of R and the net value of the resource will be negative.
There are also cases when the costs of protecting rights increase as the value of resources increases and the cost function is not linear, as in Fig. 3.6, but convex, that is, C ' ( R ) & gt; O, C ( R ) & gt; 0. This means that at low values of the resource value, increasing its value will lead to the establishment of property rights, and at higher values of the value of the resource, its further appreciation leads to people giving up their property rights, because due to the sharply increased costs of protecting the rights to the resource, the net benefit from exclusive property rights becomes negative.
Why can the transaction costs of property rights protection be non-linear? American lawyer and expert in the field of law economics G. Smith draws attention to four conditions that must be met in order for a high-value resource to be shared.
1. A thief can value a resource higher than the owner. Every good is a whole complex of quality characteristics. Some characteristics that are not of particular value to the owner can be highly valued by the thief and the value of the resource can increase due to characteristics that are not important to the owner, but are attractive to the thief. The thief is ready to spend more in trying to steal a resource than the costs that the owner is willing to incur while protecting his property.
2. Exchange between the thief and the owner is impossible. If a person values the resource higher than the owner, then the resource will pass to this person as a result of a mutually beneficial transaction. However, the various characteristics of the good can be inseparable, so it is not possible to distinguish that characteristic of the good that the thief values, and conclude a mutually beneficial deal with it.
3. Protection by a third party is economically unprofitable for the same reason of indivisibility of the qualitative characteristics of the good.
4. The asset can not be divided into smaller parts, the protection of property on which is economically justified.
Fig. 3.7. Establishing Exclusive Rights with a Nonlinear Cost Function
So, low-value resources will increase from their common access to private property as their value increases. That is, at the point R L in Fig. 3.7 Demsenets predictions come true. For example, this model can correctly predict that with the discovery of the gold deposit and the beginning of the "gold rush" In California, private property rights will be established for the extraction of gold. It is also possible that the market value of the resource is so high that the transaction costs of asserting ownership rights to it will exceed benefits, and the resource will again go to the general access mode (to the right of the point R H in Figure 3.7). That is, no matter how paradoxical it may sound, in the mode of general access there can be both low-value and very valuable resources.
There is also some optimal net worth of the resource R *. As the value of the resource in the Demsets model increased, the net worth of the asset also increased (see Figure 3.6). But now it is not so. With an increase in the value of the resource, the costs of protecting property rights to it also increase, and they grow faster than the value of the asset. Therefore, having reached the optimal value R *, the net value of the resource begins to decrease.
Is it possible to reduce the transaction costs of protecting property rights? After all, in this case, it would be possible to establish the exclusive nature of ownership of the resource. When resources are shared because of too high costs to protect exclusive property rights, the following decisions are possible which will create conditions for establishing exclusive property rights.
The first decision is to reduce the costs of protecting property rights. They can be reduced through technological innovation. This way is quite common in practice and is described in sufficient detail in the economic literature. For example, American economists T. Anderson and P. Hill showed that the invention of barbed wire led to the fact that large areas of land in the West of America moved from general access to private property. The widespread use of barbed wire reduced the cost of building fences. Prior to the invention of barbed wire, as of 1872, the amount of capital spent on building fences in America was approximately equal to the value of all livestock, the size of national debt or the value of railways; The annual costs for repairing fences were greater than the aggregate tax revenues at all levels of management. The construction of fences was the most costly in the western territories, poor in the forest. The possibility of protecting crops from grazing animals that appeared with the invention of barbed wire contributed to the growth of agricultural production.
Transaction costs can be reduced not only through technological innovation, but also through institutional innovation. One such innovation is the Homestead Act of 1862. The Government of America first sold land on the frontier, and then distributed a quarter of all land for free. Economists criticized the law for leading to the dissipation of rents on the front as a result of the race for the right to obtain a resource in private property, but this law allowed to avoid serious bloodshed in the war with the Indians. A large number of settlers rushed to the West in the hope of gaining land, and they were able to protect themselves and their lands from the Indians.
The second solution, which will allow the transfer of a valuable resource from general access to exclusive property, is based on a decrease in the market value of the resource itself. Reducing the value of the resource makes it less attractive to the thief. Since the protection cost function is non-linear, the protection costs are reduced to a greater extent than the value of the resource. As a result, we will receive private ownership and a positive net worth of the resource. The value of the resource should be reduced to R * - the value at which the maximum net value of the resource is reached. This solution does not involve the installation of a lock or an anti-theft device, but a real reduction in the value of a resource by destroying some of its qualitative characteristics.
Consider two examples that will explain the above reasoning.
The horn of a rhinoceros. The value of a wild rhinoceros is determined by a variety of characteristics. One of them is his horn, which consists of keratin, a horny substance resembling a human nail. The horn constantly grows and acquires an appropriate shape from the constant sharpening. It is used to decorate the handle of ceremonial daggers in the Middle East, but the highest horn is valued in Asian medicine: a rhino horn is used as a cure for fever and cancer. The price of a horn can exceed 40 thousand pounds per kilogram, it is not without reason that it is called "white gold".
Governments of African countries treat rhinoceroses as a generally accessible resource, they live in special conservation areas and on public lands. In 1970, an international ban on horn rhinoceros was introduced, so keeping private ranches for rhino growing became too expensive, and a black market for this product arose, which creates incentives for poaching. For 20 years, from 1970 to 1990, the population of rhinoceroses decreased from 60-100 thousand heads to 3-4 thousand heads: hunting for horns, poachers kill animals. It is not possible to solve the problem by reducing the costs of protection through the use of new security technologies. These animals need a vast area for living, and they are difficult to place in some kind of safe place. However, we managed to find another solution - the rhinoceroses are euthanized and the horn is cut. This procedure resembles a haircut of nails and is painless for animals. The horn grows again, and after 18-24 months the procedure is repeated.
Of course, such a procedure reduces the value of animals. But the poacher appreciates the rhinoceroses for their horns, and the state values other characteristics - the variety of animal species, the attractiveness for tourists, etc. Therefore, the removal of the horn reduces the value of the animal for the owner to a lesser extent than for poachers, the transaction costs of protecting animals are reduced, since the characteristic that the poacher values most highly is destroyed. As a result, the net value of the resource increases.
Penal Colony. The practice of creating colonial powers of penal colonies was very common and persisted until the 20th century. Britain sent prisoners to Bermuda, to West Africa, Singapore, Malaysia and, of course, to Australia. Historians usually explain the creation of penal colonies by providing cheap labor, cheap prisons and cheap deterrence of crime in a metropolitan country. But historians are also united in the fact that the creation of penal colonies was a mistake, which, taking into account the costs of transporting prisoners, they were not at all cheap. An alternative explanation for the penal colonies is that they reduced the value of the overseas territory and made it less attractive to an aggressive foreign power. They, of course, restrained the immigration of free people, to an even greater degree they held back the aggression of other powers. Free people could still come, knowing that prisoners were kept in isolation in special places, but foreign powers knew that the capture of the colony would be accompanied by the release of prisoners. If the colony was far from the metropolis, protecting it by sending troops was too costly. Prisoners will not defend the territory, but they will significantly reduce its value for another power. Britain was interested in the east coast of Australia, but this area was far from Britain, and its protection was too costly. The presence of 60 thousand English prisoners reduced the value of the territory for France and other colonial powers.
The applicability of naive theory to explain changes in property rights is rather limited, since this theory does not take into account political processes. North and Thomas successfully applied it to explain the changes in the nature of property in prehistoric times. Anderson and Hill applied this theory to explaining the evolution of the exclusive rights to use land, water and livestock in the Great Plains of the American West in the second half of the 19th century. That is, this model is suitable for studying situations in which formal political processes do not play a serious role. So, the settlers on the American Great Plains partially bypassed the political decision-making apparatus that was located in the East. Property relations were regulated through local arrangements and other informal institutions.
The drawback of the naive theory is that it does not answer two fundamental questions.
1. How does the society manage to overcome obstacles that could impede the transition to a more effective regime of property rights? How do participants in this transition overcome the problem of collective action? Indeed, the introduction of a new regime of property rights requires time and effort from the person who will do it, but the new system itself will be a public good, the benefits of which will be enjoyed by all those who have not participated in organizational work. The result will most likely be that American jurist J. Cryer called the "tragedy of public property, part two" - the transition to a more efficient regime of property rights will not be implemented.
2. The theory of Demsetz does not consider the mechanism that leads to effective property rights, it only describes the initial and final states, but does not consider the path by which the transition between them occurred.
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