What’s in a Name? Property Rights, Legal Rights, and Economic Rights

9 September 2006 at 12:32 pm 10 comments

| Nicolai Foss |

I tend to find the property rights approach associated with such economists as Coase, Demsetz, Alchian, and perhaps particularly Yoram Barzel extremely useful, informative, and insightful. (I also find their approaches more generally useful than the more recent property rights approach associated with Oliver Hart and his colleagues and students; on the differences between the “old” and the “new” property rights approaches, see this paper). It spans multiple level of analysis, and its explanatory reach seems to me to be huge. Most of my papers over the last few years utilize property rights notions in one way or another.

However, I have found that there are some basic difficulties of communicating property rights economics. It is not so much a matter of too many people (still) arguing that the Coase theorem “doesn’t hold” (usually the same types who argue that PD games are “wrong”).The basic difficulty relates to the fundamental construct itself. When confronted with talk of “property rights,” most people, students and colleagues alike, immediately associate it to intellectual property rights.

That is one difficulty. Another one is that many seem to have difficulties separating an economic property right (or “economic right” ) from a legal property right. This is perhaps not surprising, first, because of many of the older property rights texts in economics actually made use of concepts from Roman law (usus, usus fructus, and abusus rights), and, second, because of the very notion of “right” itself with its legalistic overtones.

In principle, however, the legal and the economic notions of property right relate only to the extent that economic property rights can be backed up by legal means. In Barzel’s work an economic (property) right is really an ability to get utility from an (attribute of the) asset (see, e.g., this classic book). The stronger the legal protection of the asset, the better ability, of course. Still, economic property rights can exist in lawless societies. In fact, even Robinson Crusoe can have a property rights on Barzel’s definition. However, it is seems clear that talking of “right” in the case of Crusoe’s ability to consume the vegetables he grow is far-fetched. A “right” would seem to be something conceptually distinct from an “ability.” A possible conclusion: We need new and improved terminology here. Any suggestions?

Entry filed under: - Foss -, Institutions, New Institutional Economics.

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10 Comments Add your own

  • 1. Jung-Chin Shen  |  9 September 2006 at 12:52 pm

    I do not have any particular opinion on the name of rose but one minor point: I do not think that talking Crusoe’s ability to consume the vegetables he grows is far-fetched. He must spend resources and efforts to protect his vegetables from birds or other animals. This is how the old property rights school links the unconventional Coasian approach to the traditional economic choice model, so scholars can use the more traditional tools to deal with the property rights issues.

  • 2. Nicolai Foss  |  9 September 2006 at 1:03 pm

    Jung-Chin, You may have misunderstood me here: It is calling Crusoe’s ability a right that is farfetched. E.g., Demsetz insists that property rights relate to social relations (i.e., relations to other humans and not “birds and other animals”). For this reason, it seems strange to apply the notion of right to Crusoe.

  • 3. Jung-Chin Shen  |  9 September 2006 at 1:27 pm

    Nicolai, Perhaps you are right. Your reply also reminds me that Demsetz once uses “one-person firm” to illustrate his definition of the firm. Perhaps the use of these extreme examples is just to highlight certain aspect of a complex phenomenon.

  • 4. Gary Shiu  |  10 September 2006 at 8:34 pm

    How about using the definition of economic rights found in Steve N.S. Cheung’s article “A Theory of Price Theory” in Journal of Law and Economics back in 1974.

    Nicholas, Steven Cheung was a colleague of Barzel back in the early 1970s and early 1980s before Steve moved back to HK.

    Not only is the branch of property rights approach to economics advocated by Cheung and Barzel quite different from the one offered by Hart and his colleagues, actually the type of transaction costs economics contained in their analysis is quite different from that one offered by O E Williamson and his colleagues…

    Steve has repeatedly attacked the notion of opportunism arguing that it is double counting (since one has already assumed individuals are after they self-interests)…his emphasis on measurement of the different attributes of goods and services….

    So in my opinion there exists a Washingtonian Approach to Transaction Costs Economics quire distinct from the Williamsonian approach….Starting with Steve, Barzel and Barzel’s students (like Doug Allen and Dean Leuck)

  • 5. Nicolai Foss  |  11 September 2006 at 1:37 am

    Gary, I couldn’t agree more: there is definitely a distinct Washington approach to prop rights theory. I also strongly agree that it is different from Hart’s. Kirsten Foss and I developed this point in the paper I cite above. ! I an am admirer of Cheung and should have mentioned him. But I wonder whether his definition is really different from the earlier writers? Cheung seems very close to Alchian intellectually.

  • 6. Gary Shiu  |  11 September 2006 at 4:09 am

    It is no surprise that Cheung is close to Alchian in their approach to property rights because he was Alchain’ student…

    I will suggest two observations that separate Cheung from his teacher though;

    1) Cheung’s stress of product attributes and their measurements does not recieve the same emphasis in Alchain’s work…

    2) Alchain does not operationalize the notion of property rights/transaction costs economics the way Cheung does, especially in his 1974 piece (his emphasis on specifying constraints for instance)

    So while there is no denying the importance of Alchain’s contribution to the field, Cheung definitely is not simply reinterating his master’s thesis….

  • 7. Nicolai Foss  |  11 September 2006 at 4:21 am

    You are absolutely right! I forgot that C. was Alchian’s student. You are also right that he goes much beyond Alchian. Barzel greatly admires Cheung’s intellectual innovations, and I suspect that Barzel’s emphasis on the attributes of assets, rather than assets themselves, may come from Cheung.

  • 8. Gary Shiu  |  11 September 2006 at 8:36 pm

    Indeed Barzel’s emphasis on product attribute does come from Cheung when they were colleagues at UW back in the 1970s…Barzel admitted as much in his introductory essay in his 1995 collected works published in 1995 by EE.

    Product attributes play an important role in the Washingtonian approach to TCE as they are the source of the measurement problem. They drive behavior, both sellers and buyers, in the direction of measurement costs minimization…

    About two years ago, Cheung has completed a three volume set on his approach to economics…too bad that the set is only available in Chinese…

    The importance of using the choosing the attribute for pricing, the importance of contract, and the reinterpretation of traditional cost analysis to turn it into a forward-looking concept all get discussed in the set.

    Also important, but few people tend to stress (and I think extremely important for ANY work of internal organization) is Cheung’s concept of pricing by proxy (like monthly wage is a way of pricing labor contribution which invokes a proxy) first espoused in 1983 piece on the contractual nature of the firm and get further development in his three volume set.

  • 9. Gary Shiu  |  12 September 2006 at 12:17 am

    I would also add that Cheung made significant contribution on the notion of rent dissipation…His idea is that under the postulate of constrained maximization, any dissipation of rent has to be a constrained minimum otherwise it would violate that postulate….This has of course has significant implication on the rent-seeking literature…If my memory served me right, Barzel in his “Economics of Property Rights” does argue that he does not think the notion of rent-seeking very informative..

  • 10. Gary Shiu  |  13 September 2006 at 8:00 pm

    I am always puzzled by why we need opportunism when we have individuals pursuing their self-interests as a postulate.

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