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Property Rights and the Rule of Law:
An Economist's Perspective
by W. Lee Hoskins
President, Federal Reserve Bank of Cleve
at Case Western Reserve University
School of Law
ApriI 3, 1990

The opinions expressed in this paper are entirely
those of the author, except where noted, and do not
necessarily reflect the views of the Federal Reserve
Bank of Cleveland or of the Board of Governors of the
Federal Reserve System.




Property Rights and the Rule of Law:
An Economist's Perspective

Contents

Importance of property rights in a free-market economy
II.

How economists today think about property rights

III.

Various definitions and the origins of property rights
A.
B.
C.

IV.




Anglo-Saxon
Central European
United States Constitution

Importance of the establishment
Union and recent developments

of

property

rights

for

the

Soviet

-2-

I.

Importance of property rights in a free-market economy

Lawyers generally
school,

that

constitute a
Over

the

the

law

of

property

and

the

conservation

of

property

large part of the subject matter of the American

last

property

learn, by the end of their first or second year of

two centuries,

rights

of

all

it

types

is

fair

have

to state

received

a

that,

greater

degree of protection than under any other competing

and

rights

legal

albeit

law

system.

imperfectly,

more

persistent

legal or economic system,

probably more than under any other legal or economic system that ever existed.
Economists

often

fail

achieved

under

American

have
legal

system,

against

Mark

Carter's
twentieth

to appreciate
law.

the

All

too often,

economists have concluded
Hanna

"special

and

the

credit

century

has

trusts

at

restraint"

brought

importance

that,
the

a

property

looking

at

rights

the American

from Teddy Roosevelt's battles

turn

program

forth

that

of

in

the

the

virtually

century
spring

until

of

unrelieved

Jimmy

1980,

the

assault

on

classical property rights, with relief finally appearing on the horizon in the
form of Reagan Administration taxation,
we shall
that

new

see,

that

forms

labor law, and antitrust policies.

is a bit of an exaggerated notion.

of

or

emphases

on

certain

property

It

As

is fair to state

rights

have

influence during this century, while others arguably have declined,

risen
but

in
that

an aggregate bundle of property rights remains more or less where we found it
nearly a century ago,

in much better condition than 150 or 200 years ago, and

ready for the challenges of the twenty-first century —

if we but know how to

preserve or improve that bundle of rights.
Similarly,
short

shrift




twentieth-century
to

economists'

American

concern

for

lawyers
the

often

have

protection

and

tended

to give

promotion

of

-3-

property rights, especially since great
existing body of American property

inroads were made

into the previously

law by the reforms of the New Deal era and

by the World War II- era controls that were long in expiring.
The

reality,

and

the

synthesis

complementary) points of view,
Smith,

whose

writings

were

competing

(but

is that each cannot do without the other.

Adam

familiar

between

to

these

Jefferson,

two

Madison,

Hamilton,

and

others among our founding fathers, expressed this notion best, as follows:

Commerce and manufactures can seldom flourish
long in any state which does not enjoy a regular
administration of justice, in which the people do
not feel themselves secure in the possession of
their property, in which the faith of contracts
is not supported by
law, and
in which
the
authority of the state is not supposed to be
regularly employed in enforcing the payment of
debts
from all
those who are able to pay.
Commerce and manufactures, in short, can seldom
flourish in any state in which there is not a
certain degree of confidence in the justice of
government.

(Adam Smith, The Wealth of N a t i o n s . Book V, chapter 3, "Of Public Debts," 441,
445, Edwin Cannan, ed. (Chicago:
not be

forgotten

that Smith,

University of Chicago Press, 1976)).

held

to be the

profession, also held a university chair

father of

to any business

lawyer.

to be concerned about property
cannot
have

be guaranteed without
called

here

affecting property




the

"rule

Anyway,

rights:

rights have

law,"

lectures

issues that ought

to be

both

lawyers and economists have

property

rights normally are not and

an effective administration
of

economics

in "moral philosophy," gave

on jurisprudence, and wrote, most of the time, about
of concern

the modern

Let it

and

judges

to be concerned with

ruling

of
on

justice,
legal

what

I

actions

the economic effects of

those decisions.

Laws that reflect no respect for property rights are as vain

as some misguided theoretical attempts, such as those that occur
states,

to

align

the

most

powerful

elements

of

society

in fascistic

together

with

a

suprematist assertion of property rights (to be enjoyed only by those powerful
elements,

to

be

sure),

in

virtually

complete

derogation

of

the

common

understanding of the rule of law.
We

are

still

relearning

some

of

the

classic

economic

lessons

about

property rights that have been illustrated most vividly recently by events
Eastern Europe and China:
creation

and

economy.

maintenance

to

understand

transferable

right

of

effects

the

entry),
of

land,

international

or

vaguely

resembling

use

rights

a

the

—

use
or

one
of

elements of human material

in

Economists

those

three

in constructing what

characterized

price

oligopoly,

internal

trade

by

competition
and

to the

free-market

open

things

we often

had

call

free markets

barriers,

like

be

today a
liberal

the

pernicious

of

artificial

(avoidance
quotas

to

(unrestricted

to alleviate

trade

and

following Smith

but what would have been called a classically

1930s

monopoly

even

rights are essential

labor, and capital.

property

to be of much

until

anything

the three essential

that

capitalistic society,
society

of

Smith held that

spiritual progress were
came

transferable property

in

or

tariffs).

My

personal preference is for such a view of the world, but for me to be able to
maintain

it,

processes
involves

the

but,

law must

rather,

by

cooperate,

not

refraining

from

the shifting of either property

so much

by

intervening

intervention.

rights or costs

Most

remains to be proven that

outcomes,

fairer

market-determined




time,

are

either

outcomes.

Also,

in

the

or

more

absence

interventionist

efficient
of

intervention

from one sector of

the economy to another, and it still
over

in market

than

purely

transferability

of

-5-

property rights, social systems and economies tend to stagnate.
noble class owns all

landed property,

third parties, and binds all
form

of

organization

existing.

in

which

others

France.

modern

The presence of a transferable

capitalism, much

Similar

still

capitalism

land to

has

great

difficulty

labor supply, combined with a modest

can give

their

contemporaries

levels of social

rise

to a rudimentary

Union,

and other

entirely

by

in

eighteenth-century

development exist

parts of

tends to be nontransferable and still
is owned

the

form of

like that described by the writings of Adam Smith, Voltaire,

among

the Soviet

transfers

labor to the land, society tends toward a feudal

amount of accumulated capital,

and

rarely or never

Thus, where a

the state.

and

in modern Latin America,

the developing world,
is held in more or

But modern,

Britain

efficient

seem capable of evolving fully only where property rights

even while

less feudal
forms of

land

form, or

capitalism

in land also become

transferable, as generally is the case in North America and Western Europe.
Before continuing this discussion,
mean

to clarify

our definitions

in order to clarify our terms a bit,

by stating

that

the

term

means such concepts as ownership,

possession, or

legal

thing,

of

things,

including

receive

payments

essential:
he sees

(1)

fit

certain
of

classes

money.

Two

intangible

elements

the exclusive rights of an

(as

of

rights"

title to an object or

pr ivate

individual

"property

I

like

the

property

to use his

long as he does not violate someone else's

right

rights

to
are

resources as

rights);

and (2)

the ability of individuals to transfer or exchange these rights on a voluntary
basis.

The weakness of modern economic analysis, and

enough to overcome this weakness,
voluntarv

exchange

economists

merely




as
assume

the

I am strong

is to overlook or ignore the essentiality of

basis

that,

I hope that

an

of

effective

exchange

of

a

property

rights:

often,

bundle

property

rights

of

-6-

renders a person
even

if

it was

direction
make

better

it

of

involuntary.

central

quite

economists

off materially,
Such

planning,

difficult

to remember

then

lines

that

of

exchange

thinking

tend

Benthanite utilitarianism,

for

typical

academic,

is a valid one,
to

and

business,

that exchanges of property

point
the

or

rights are

in

the

like,

and

governmental

legitimate only

if they are voluntary.
Purchases and sales of property,
of

bundles

bundle

of

of

rights

rights,

transaction costs

in

that

or

its

goods and services are merely exchanges

property

or

those

transferability,

goods

is

and

services.

restricted

or

If a

weakened,

increase, and all exchanges of that bundle of rights become

less efficient than they otherwise would be.
By the term "rule of law," I mean that "regular administration of justice"
to which Adam Smith referred (supra). and by "regularity of administration,"
mean

the concept

Holmes

held

to

adjudicated.

By

of

predictability

be

the

hallmark

the term "justice,"

of outcomes
virtue

that

Justice

the

common

of

Oliver
law,

I mean the administration of

I

Wendell
properly

law in the

same sense in which Aristotle meant the term (The Nichomachaen Ethics, chapter
5,

"Justice,"

1986));

that

171-202,

is, a just outcome

plain meaning of
less

than

trans. __________

the

is one's

is one

law) and fair
just due).

(London:
that

Penguin,

is both

lawful

(appropriating to oneself no more and no

In deciding what

Wolfe portrayed

"masters of

is a just

the universe"

in Bonfire of the Vanities.

Even

type of

appropriation

to

to overcome the

thinking

if I think

everyone else thinks he deserves more, too, after all.




reissued

(approved by the

oneself of the world's goods, one has to struggle, of course,
kind of Sherman McCoy,

1953,

that Tom

I deserve more,

-7-

A good

summing

up of

the

interrelation

between

property

rights and

the

rule of law once was transmitted to one of my colleagues by the Islamic legal
scholar and moral philosopher, Khalid
possible

for an honest man

rule

law

of

Karachi,

cannot

Pakistan,

Ishaque, as follows:

to earn his

exist."

living honestly —

(Ishaque,

is described

"You must make it

the

in V.S.

leading

Naipaul,

without

this,

rights

lawyer

civil

Among

the

the

Believers:

in
An

Islamic Journey 110-117 (London: Penguin, 1982)).

11 • How economists today think about property rights.

The

prevalent

scholars

view

most

economists,

to

the

use

of

members of society.

individuals

maximize

the

resources,"
creates

particular

resources

[are

will

value
thus

of

endeavor
land.

by

...

illustrating

others

[This]

that

incentives

to

from access

cultivation

principle

"legal

use

or

to voluntary

economic
Serfdom

analyses

literature
(1944);

Journal




of

of

the

importance

inidividual

economic

of

in, among other places,

Ludwig von Mises,
Political

Economy

other
applies

among

the

if there is

of

improvements
to

all

to

valuable

property

rights

(Richard

A.

Little, Brown, 1986)).

assigning
appear

transferable
in

property

twentieth-century

Friedrich A. Hayek's The Road to

Human Action
—

the efficient

out]

efficiently."

actors

legal

to any given area —

protection

resources

among

if "mutually exclusive

If every piece of land is owned by someone —

[economic]

Comparable

is that

parcelled

Posner, Economic Analysis of Law 30, 3d ed. (Boston:

rights

reflected

resources can be maximized only

always someone who can exclude all
then

also

influenced by the Law and Economics movement,

use of scarce societal
rights

among

(1960?);

confirm!:

Frank Knight,

Armen

Alcian

[1924

and ____

University

Ec o n o m i c s .

2d

ed.

__________ [confirm].

Costs,"

economists

has

been

(___________ );

I have

influenced

learned

profoundly

and

Ronald

that

in the

a

articles

can

stimulate

your

thoughts

more

generation

same

Milton and Rose Friedman, Free to Choose (1986?).

Coase,

general

"Social

of

younger

direction

by

Any one of these books or

profitably,

I

think

than

the

opinions of any Supreme Court Justice in the last 20 years.
A few illustrations of the thinking of economists about various
property
the

rights might serve

NABE

speech.)

[Buffaloes,

cornfields, uninusred vs.

of

war

whales,

federally

multinational corporations;
prisoners

to illustrate

the points
steam

I want

engines

insured financial

types of

to make.
plowing

institutions,

[Raid
through

"homeless"

the dirty underbelly of propoerty rights: slavery,

(Alcian

et

al.

in

recent

Law

&

Economics

J o urnal),

conscription, and totalitarianism (Arendt & Orwell).]

III.

Various definitions and the origins of property rights

A.

Anglo-Saxon
[Cite Jefferson's 1824 letter to Major Cartwright on the Whig theory
of

history

and

Anglo-Saxon

law,

whence

our

law

is derived.

Cite

Buterfield and Burke, c o n t r a . on the Whig theory of history.]

B.

Central European




[Napoleonic,

Roman,

and

Canon

Law

concepts

of

propoerty

rights

ignored any right of the common man in common law, minimized property
rights (except

for the few,

the church, or the state), and minimized




both

voluntary

planning,

exchange

state
and

Unfortunately,

many

the

of

like

ignore individual

embrace

in

of

land

giant

grew

economists

this is the tradition,
to

transfers

subsidies

corporations),

Austrians!)

and

up

from

titles.

corporations

under

this

this

(indeed,

legal

tradition

concept.

(but

not

liberties and voluntary exchange.

including universal banking,

reforming

Central

U.S.

financial

the
Yet,

that we are about

structure.

Do

we

fully

understand the legal and economic rationales for what we are about to
do?]

United States Constitution as noted above, the main economic thinkers
among

our

founding

fathers,

plus

albert

Gallertin,

understood

Smith, Voltaire, and Enlightenment economics generally.
the

Constitution

largely

for

economic

motives

and

Adam

They created

assumed

that

a

certain amount of tension, checks-and-balances, was necessary to make
both our
made

legal and economic systems work.

to modify Adam Smith's

bailouts of state debts,
banks),

and

protective

Constitution was
sphere of
these

etc.)?

laisser-faire model

in favor of

federal chartering of corporations (national
tariffs;

later

the

commerce

influence of certain classes of property

things voluntary exchanges?

beings

as

federal

clause

of

the

interpreted creatively and expansively to expand the

adversely affected
human

Early on, decisions were

be heard?
property

Should

Should law or economics govern?

But were

the complaints of parties

And what about

(slavery,

rights.

transactions

conscription,

involving

totalitarianism,

-10-

IV.

V.

Property rights in USSR and recent developments

A.

Describe Polish, (Mexican, & Brazilian reforms)

B.

Describe Lenin's NEP

C.

Describe current USSR and Chinese reforms

D.

What should USSR be trying to do re property rights?

Conclusion