Property Rights Paradigm: A Simplified Version

[Disclaimer: This is an AI-generated simplified version of the seminal paper - Alchian, A. A., & Demsetz, H. (1973). The property right paradigm. The journal of economic history, 33(1), 16-27.]

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Introduction

When you play a board game, you have a set of rules that tell you how to play, right? What you can do, what you can't do, who goes first, and so on. Now, imagine our society is like a big board game. But instead of playing for fun, we're making important decisions about things like who gets to use certain resources like land, water, and money. These resources are limited, meaning there's not enough for everyone to use them as much as they want. So we need rules to help decide who gets to use what.

In some games, the rules are very clear and strict. In other games, the rules might be looser or change as you play. This is a lot like how different societies operate. Some societies have very strict rules about who gets to use resources, while others might let people negotiate and make their own rules.

In a system like capitalism, which is the economic system most commonly used in Western countries, we use a system of "property rights" to decide who gets to use what. Property rights are basically the rules of the game. They say who owns what, who can use what, and how they can use it.

Now, these rules don't just magically appear. They're created by people and can change over time. This is something that economists and historians are very interested in studying. They ask questions like: "What are the rules right now?", "What happens when we use these rules?", and "How did we come up with these rules?". By understanding these questions, we can get better at playing the game.

The Structure of Rights

You know how when you own something, like a bike, it means you can ride it, paint it, or even sell it if you want, but it doesn't mean you can throw it at someone? That's because ownership is more about the rights you have to use something than the thing itself. These rights aren't infinite and often have limits placed on them by society, and different people might have different rights to the same thing.

For instance, let's say your family owns a house. Your parents might have the right to decide to sell the house, but you have the right to live in it and use it. That's what we mean when we say that ownership is like a bundle of different rights.

Sometimes, the rights to a thing can be shared among many people. For example, imagine a public park. We all have the right to use it, but none of us can decide on our own to build a mall there. That decision would be made through a process involving many people, such as a city council vote.

The type of rights that exist and who owns them can change depending on the society and time period. For instance, some countries might allow people to sell certain items that are illegal in other countries.

When we talk about ownership, we often differentiate between private ownership (like your bike) and public ownership (like a park). But sometimes, the same resource might have both private and public ownership rights. For instance, you might own a piece of land (private ownership), but the government has the right to build a road through it (public ownership).

Finally, the type of ownership can affect how resources are used. For example, a privately owned factory might be run differently than a government-owned one. The goal of the owner (making profit vs. serving the public) could change how the resources are allocated.

So, when we talk about "property rights," we're really talking about who gets to do what with the stuff we have in our society, and how those decisions are made.

The Social Consequences of Structure of Rights

The first part talks about something called "communal rights." This means that a resource, like a park or a road, can be used by anyone, and nobody really has the power to stop others from using it unless they were using it first. It's like a line at a water fountain - if you're first, you get to drink, but you can't stop others from drinking once you're done.

However, this system has issues. It doesn't take into account the costs to everyone of overusing the resource. An example given is hunting. If everyone has a right to hunt, they might hunt too much, reducing the number of animals left for future hunting. Because anyone who doesn't hunt is only leaving more animals for others to hunt, everyone has an incentive to hunt as much as possible.

The article gives an example of seal hunting where hunters rush to kill as many seals as they can because they are competing with other hunters. The rules made it so that the first people to kill up to a certain number of seals could do so, but no more. This encouraged people to hunt as quickly and ruthlessly as possible, leading to inhumane practices.

Then it discusses pollution. Since bodies of water like lakes and rivers are treated as communal resources, they can become polluted because nobody has a specific right or responsibility to keep them clean.

The next part talks about how limiting the ability to buy or sell things at market prices can lead to resources being allocated in ways that might not be fair or efficient. For example, if a landlord can't charge the full market rent for an apartment because of rent control laws, they might decide who to rent to based on factors like whether they have children or whether the landlord likes them personally.

When the right to exclude people from using a resource is not given, it can cause problems like traffic jams on freeways. Even if some people are willing to pay others to use alternative routes, there will always be those who use the freeway anyway because they can't be stopped. This is called the free-rider problem.

The last part talks about how the identity of the owner of a resource can impact how it's used. For example, private owners might respond more to market incentives, whereas government owners might respond more to political ones. It also discusses how the cost of negotiating transactions can influence who ends up owning and using resources.

In a nutshell, how we define and assign property rights - who can use a resource, when they can use it, what they can do with it, and who can exclude others from using it - can have big effects on how that resource gets used and who benefits from it.

The Development of Property Rights Structures

This paper talks about the differences between communal rights and private rights, and what happens when a resource switches from one to the other.

Communal rights mean everyone shares a resource, like a public park. Private rights mean a resource is owned by a specific person, like a personal car.

Here's an example the paper uses: imagine a community that has a lot of wild animals. Before any of these animals are caught, they're considered communal - anyone can hunt them. Once an animal is hunted, it becomes the private property of the person who hunted it.

There's a problem with this setup: people might overhunt the animals to establish private ownership. They could address this by making the animals private property even before they're hunted, so people don't feel the need to hunt just for the sake of claiming ownership.

But if they go the other way and make everything communal, that might lead to another problem. Let's say that after an animal is killed, it belongs to the whole community, not just the person who killed it. Now people might not feel motivated to hunt, since they won't get to keep all of what they catch. They could start waiting for others to do the hunting, since they'd get to share in the results anyway.

The community would have to figure out how to deal with this. They might need to regulate hunting, forcing people to participate and setting rules about how the results are shared. Or they could try to instill a culture where people want to hunt for the good of the community.

These situations can get more complicated when technology changes, or when a resource suddenly becomes more valuable. People might start looking for ways to change the rules of ownership to adapt to these changes.

An example given in the paper is the fur trade in North America. Before it began, Native American tribes could afford to allow free hunting because there weren't many hunters. But when the fur trade began, the scale of hunting increased, leading to potential overhunting. As a response, some tribes introduced private rights to hunting lands. This gave families an incentive to maintain a balanced number of animals on their lands, preventing overhunting.

The paper also discusses how these ideas apply to things like public schools and radio signal relays between countries, illustrating that this kind of property rights dilemma is everywhere.

Finally, it touches on how this could apply to business. For example, a company might offer different types of ownership (like bonds or stocks) to appeal to different investors.

Does that help? It's a complex topic, but the basic idea is that how we define ownership can have a big impact on how resources are used and shared.