Sunday, 7 April 2013

In defence of private property

“It is not the commoners that are tragic, but the commoners who continue to uphold such as inefficient means of allocating precious resources” Discuss

The debate on how resources should be allocated is not just one that lingers among economists, but lawyers too. This is because lawyers are constantly faced with problems of how property rights should be allocated and so questioning the validity of the private property regime our capitalist economy is founded on is absolutely crucial. Land in particular is especially important as it indestructible, immovable and necessity for human survival. In this essay, I will be looking at the debate between communal and private property and concluding that ultimately both ownership systems are infested with problems but private property provides an arguably smaller problem and thus it is tragic that commoners in communal systems refuse to move from an inefficient means of allocating precious resources.

Communal property ownership can be defined as an ownership shared by more than one legal entity, they do not have the right to exclude as would exist in a private regime, they have the right not to be excluded. Infamously, the economist Hardin proposed the “Tragedy of the Commons” within which he aimed to demonstrate why communal ownership is inefficient and should be transformed into a private regime. He argued that open unowned properties will be overused and exploited as no person bares the direct cost of their use/actions on the land but they will directly benefit. He gives two examples: one of a pasture land that is open to all and ends up overgrazed and useless as farmers keep bringing more cattle on the land. And the second is pollution, he says people will not be careful about how much pollution and external cost they are adding to the land as they bare no cost of polluting. He suggests that there are two ways we can solve this and that is by moving to either a private property regime or a state owned property regime. However, again with state property, the problem is that the decision makers do not directly benefit or become disadvantaged on the basis of their decisions and so their decision will not be the most efficient ones. That leaves a straightforward argument for why we should move to such a regime. 

However, the theory itself is infected with substantial problems. For example, the example given only works on the basis that the cattle is privately owned, and it is private property that drives profit maximisation and makes each farmer to ignore the communal cost and focus on individual benefits. Furthermore, had the cattle also be communally owned then perhaps the land would not become overgrazed as farmers would not be able to keep adding to the herd.   I would question this criticism, however. This is because, profit maximisation incentive also exists in communal ownership. If all the cattle was part of the land then the farmers would still seek ways in which they can maximise their benefit from the land, the only difference is that costs would be higher because there are larger negotiation costs when you have more than one person. If the farmers were able to and could see the profit coming in from herding sheep on the land, they would find ways to bring in more cows. Ultimately, it is human nature to strive for something better. It also important to note, that as lawyers we can forget that economics is built on mathematical models which includes a number of assumptions, one common one being that individuals are rational i.e. they strive to maximise utility whether it is through consumption or profit maximisation. On these grounds I would uphold the statement that it is tragic that the commoners still wish to hold onto the communal method of ownership. 

Nevertheless, critics are quick to point out that overgrazing and long-term detrimental effects are not limited to communal or state ownerships, they do happen in private property systems too. This is also true, most of the Western world exists on the foundations of private property and yet most of the pollution also comes from the Western world. However, it seems that the more subtle point about allocation of resources is being missed. Such impacts happen on a much smaller scale were private property is in practise and this is because costs are much lower e.g. third party negotiation and transaction. This means that any addition cost such as pollution or exploitation makes a much bigger impact than situations where already costs are quite high. Furthermore, as a private owner you are incentives to find ways to improve the quality of your land and cost minimise as you are aware that if you do not care for your land, no one else is, you are the sole responsible owner. In communal systems not only do the costs impact you less, giving less incentives to improve the land, you will always be relying on the next person to create a cost-minimising way and say you do there will be large negotiation costs before it will be accepted and implemented as you can’t exclude others of their rights to use the land which may not be compatible with you own mechanism. 

Furthermore, Barzel provides a great real case study of how successful and efficient the private property system can be at allocating resources. In 1958, the North Sea was divided and separately owned by private companies and it resulted in a large amount of development and availability of oil that we did not have previously,  It is for this reason that today when the world is seeing environmental troubles, we are turning to Private property solution such as tradeable carbon rights to find an answer. 

An interesting type of property which also exists within the realms of communal property is anti-commons. Thus far we have discussed property, whereby everyone has the right not to be excluded and so they can use the land. However, in anti-commons, here everybody has a right to exclude but no personal right themselves to use the land. It was first identified by Michealman but later reformulated by Heller who uses the example of a communal garden to explain this. He says that imagine there is a communal garden given to handful of households to share, similar to the pasture land shared by farmers in tradegy of the commons. They might exclude others from the garden by inserting locks on the entrance but the problem is then they themselves cannot use the land as unlocking would infringe someone else’s rights. This means that land doesn’t get used and thus is inefficient. At first this seems theoretical, but Heller uses it to explain the situation in post-soviet Moscow. After the state ownership of shops ceased, shops in Moscow still remained virtually empty of consumer goods. Kiosks tended to operate illegally outside on the street. This was because property rights in shops were distributed among a number of different bodies in an attempt to placate or compensate socialist-era stakeholders, shops thus had become anticommons property: no single individual was given full ownership rights. 

Anticommons is another crucial demonstration of how difficult, impractical and inefficient communal systems can be and thus it is tragic that commoners continue to uphold such an archaic and inefficient system. It is only in the last few centuries we have seen radical growth and technology, private ownership of not just land but intellectual property, water and goods and services has a lot to do with this. In conclusion, I would argue that private property is way forward.

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