Private Rights to Property: Private Property Rights and Prosperity

Private Rights to Property
by John W. Allen

We study man as God has made him. We observe that he cannot live without providing for his wants, that he cannot provide for his wants without labor, and that he will not provide any labor if he is mot sure of applying the fruit of his labor to the satisfaction of his wants.

Frederic Bastiat, 1848 (See end note #1.)

Call it what you will, incentives are what get people to work harder.

Nikita S. Khrushchev

It is not clear whether early immigrants to America sought liberty and independence more than material well-being or vice versa. Doubtless most sought both. But for those who primarily sought freedom, the happy (and probably unsuspected) side effect of their newfound freedom was substantial, continued growth of their wealth and prosperity. The genius of a private property system is that it takes people as they are and transforms the pursuit of individual self-interests into a wealth-generating machine fueled by creativity, ingenuity, inventiveness, competition and cooperation.

How does the institution of private property contribute to the creation of wealth? Wealth is created only by combining and transforming natural and human resources into goods and services that satisfy human desires. If we want economic growth, we want an economic system that inspires productive activities, one that provides an incentive for people to use resources efficiently, to produce those goods and services people value most highly.

The incentive system must be well known and consistent. Business owners and employees must be confident that if their behavior is productive they will earn profits, wages, rank or status. Similarly, if they are non-productive, owners must realize that they will incur losses and perhaps failure while workers will suffer lower incomes and possibly unemployment. If a person perceives a connection between economic behavior and economic well-being, productive behavior is assured. That is not to say that people will not enter into unsuccessful ventures. There will always be mistakes and failures,

small and large. Because we cannot know the future with certainty, “Edsels” will occur again and again. But penalties ensure that people will act to minimize their personal losses. Without such incentives more non-productive ventures will be experienced and resources will continue to be used inefficiently rather than diverted to more valuable uses.

Private property rights make this system work efficiently without a centralized arbiter of what is and is not productive. Private property rights connect behavior with wealth and directs the human drive into efficient and productive activities. If private property rights are absent, or if persons are not allowed to capture the fruits of their labor, the connection between behavior and wealth is gone, and we must then depend on other incentives to encourage productive behavior. Unfortunately, other incentives result in a more centrally regulated or indoctrinated society, and experience reveals that such societies are not only less free, they also are less productive and prosperous.

Natural Resources, Culture, Government and Economic Growth

Why are some societies poor and others richer? Why has post World War II Western Europe prospered while Eastern Europe has stagnated? Why does the Soviet standard of living remain far below that of Western Europe? What explains these contrasting states of economic well-being? Are economic freedom and private rights to property solely responsible? What about other factors such as natural resource endowments and culture? Are not these also important?

Discussions of the determinants of economic growth often emphasize the importance of possessing great natural resources (minerals, fertile soil, climate, harbors). However, some of the nations most richly endowed with raw materials also are some of the poorest. By contrast some of the nations that have meager natural physical resources are, in fact, quite advanced. Compare the standards of living of many African nations with Japan, Hong Kong and Taiwan for example. Except for people and harbors, none of these Asian countries has an abundance of natural resources, yet each is a highly developed economy. On the other hand, Guinea and Zaire are examples of abject poverty in lands rich in resources.

What about cultural differences? Growth experiences often are said to be correlated with such things as traditions and attitudes toward work and industry. These would seem to be relevant, yet they contribute little to explaining the vast differences in living standards among nations that have the same culture and heritage of West and East Germany, mainland China and Taiwan, and India and Indian enclaves in Africa, Malaya and Panama (See end note 2)

Resources and culture are not irrelevant to the development process, but the evidence of history speaks loudly and clearly that the economic order in which these other factors of development reside is particularly important. Where the economic order preserves and expands human freedom, where the institution of private property is enforced rather than displaced by government, economic progress occurs. If this economic order also coincides with a richness of resources and a thrifty, enterprising and hard-working people, economic progress will be even greater. But even if abundant resources exist in a centrally direct economy, economic progress is certain to be retarded if not entirely absent. Lord P. T. Bauer, noted development economist at the London School of Economics, argues persuasively that economic development depends “primarily on people’s abilities and attitudes and also on their social and political institutions…. Natural resources have been of only secondary importance.” (See end note 3) And Nobel economist Milton Friedman concludes, “We know of no society that has ever achieved prosperity and freedom unless voluntary exchange has been its dominant principle of organizations.” (See end note 4) A private property system is not a sufficient condition for prosperity and freedom, but it is a necessary condition.

What of government? Does it not make any contribution to the growth process? Of course it does, but its role is that of creating a stable and predictable economic environment in which people can direct their energies into productive activities. It was a “wise and frugal government,” as Jefferson said, “which . . . restrain(s) men from injuring one another, (but) which . . . leave(s) them otherwise to regulate their own pursuits of industry and improvement.” (See end note 5)

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