Property Rights and Modularity

24 June 2010 at 8:20 am Dick Langlois 7 comments

| Dick Langlois |

The Schumpeter Society conference in Aalborg has just ended, and I’m on the train to Copenhagen before heading home tomorrow. Like Peter, I was also at the ISNIE conference in Stirling. Of the three conferences I attended on this trip, ISNIE gets the award for best substance, something I judge by whether I learned something interesting that I hadn’t known. Great plenaries with Ostrom and Williamson, as well as Bruno Frey on the economics of happiness and Pablo Spiller on regulation. I hadn’t been familiar with Spiller’s concept of third-party opportunism in government contracting. Some of the parallel sessions were also good, including sessions involving always-reliable people like Lee Alston and Gary Libecap. But perhaps the most interesting papers I heard were by Henry Smith of Harvard Law School, whom I had never met before.

Smith has a modularity theory of property rights, one very much in line with my own thinking on the issue. As Smith writes in one of his papers given at the conference,

property sets up modular structures that manage the complexity of the interactions of actors with respect to resources. A starting point for property is to use an exclusion strategy to define the “thing” and then to delineate rights wholesale as a first cut through the interface between the bubble defined by the exclusion strategy and the rest of the world. Thus, . . . the interface between the basic package of rights to a car and the rest of the world is a simple one behind which much information is hidden. In this way, the structure of rights is modular. As a method of managing complexity modularity relies on a system’s being nearly decomposable, that is, one in which there are clusters of elements that interact relatively intensely with each other but which interact more sparsely with elements of other clusters.

This is a version of what lawyers call the in rem view. What I learned that I hadn’t known is that this is the polar opposite of Coase’s theory of property rights. It turns out that Coase is an extreme legal realist. That is, like legal realists, Coase thinks of property as a bundle of rights to do specific things — emit sparks, make noise, etc. The trouble with this view is that it is non-modular (more technically: non-decomposable) and creates a spaghetti-tangle of interactions among rights holders that raises transaction costs. The in rem view is perfectly consistent with Coasean bargaining, of course, since it is just a starting point from which people can slice off specific pieces if they choose. (Side note: I had been wanting to post something about a paper by Tom Hazlett and Vernon Smith that credits Coase with $17 billion in welfare losses foregone because of his influence on how spectrum now gets allocated.)

At the same session, Gillian Hadfield of USC had a paper arguing that the market for legal services has not kept pace with the needs of the new economy. I saw this a paradigmatic dynamic-transaction-costs story. Google is internalizing legal services for the same reason Chandlerian corporations in the nineteenth century internalized complementary production processes the market was not yet well enough developed to provide. As Hadfield pointed out, the inability of market institutions to supply these new kinds of legal services has a lot to do with the tight regulation the government exercises over the supply of such services.

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7 Comments Add your own

1. konservativkrabask | 24 June 2010 at 9:16 am

If I understand this correctly, Smith is really talking about ownership rights, whereas Coase is talking about property rights proper. On this distinction and why it is “usually” ownership rights rather than property rights that are traded, and why this is a transaction cost issue (as Dick implies in the post), check out this old paper: http://www.informaworld.com/smpp/content~db=all~content=a713670817
2. Dick Langlois | 24 June 2010 at 9:57 am

I should know this paper, since it’s on my reading list. I’m not sure I understand the distinction between ownership rights and property rights. But on the in rem modularity point we (and Smith) seem to agree. To quote from Foss and Foss (2001, p. 24), “the legal system and jurisprudence distinguishes between the law relating to contract and the law relating to ownership of assets. Moreover, the law relating to ownership is more than simply part of a low-cost enforcement institution; it is also a `standard contract’ that reduces information and communication costs and has allocative consequences for this reason. Moreover, legal ownership may also be perceived of as a property rights system in the sense that it is a low-cost way of allocating hitherto undiscovered uses of assets. For example, giving somebody legal ownership implies that he holds the legal right to future (as yet undiscovered) attributes of the asset, in the sense that the courts will not interfere with the use of the asset by the party identified as the owner.”
3. Aidan Walsh | 24 June 2010 at 11:12 am

I would have thought that Google internalises legal services because it wants to obtain legal advice from lawyers who are intimately familiar with the google culture, the way things are done about here. What is possible and impossible is culturally dependent; as you have pointed out elsewhere. A lawyer who knows what is possible in google and what is possible in the law is a useful employee. The fact that the legal market supplies such potential employees is a sign of its flexibility.

I don’t see any failure in the market for legal services there. And I suspect that the proof of this is that google will still seek legal advice from external firms and I suspect that this external advice is usually sought in the most thorny legal areas.

There is a rule-knowledge argument for integration, just as there is a Chandlerian/market failure argument.
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5. Gregory Rader | 5 July 2010 at 6:30 pm

Hi Dick,
The linked paper on Coase and property rights inspired some questions:

The perspective taken throughout the paper and much other work in this area of economics is that property rights as we commonly conceive of them are an emergent property shaped by the practical characteristics of the “property” in question and the ways in which that item of property interacts with the outside world and broader market. This is quite in contrast with the popular public perspective of property rights as some sort of inherent feature derived from moral justification.

An important implication of the common public perspective, though not the practical economic perspective, is that property rights should be permanent and unchanging. If a right is derived from a moral truth then specific circumstances should not affect its validity. However, despite not being implied by the economist perspective, I have yet to see an economic analysis that examines the possibility that property rights should evolve over time as the character of the market changes.

To take a controversial issue as an example, a practical analysis would seem to suggest that music copyrights emerged in a certain form due to the technology and associated character of the market at the time. Such an analysis would then lead to the conclusion that as technology evolves and the character of the market changes the appropriate rights associated with music copyright might also change. It seems to me that lost in all the rhetoric about “musicians have to make a living” is the implication that anything less than their current earnings, achieved through the conventional means, is somehow not “a living”. Similar claims could be made for many other types of property rights that have become increasingly anachronistic as technology and the market have evolved (obvious corollaries to the Hadfield paper).

I wonder if are aware of any work that analyses property rights as a dynamic and evolving feature of the market?

Thanks
6. Dick Langlois | 6 July 2010 at 11:06 am

Aidan:

Of course Google wants lawyers intimately familiar with its activities, and most firms of any size have their own in-house attorneys for routine matters and to “interface” with outside firms. But you forget that there is an offsetting cost: loss of the benefits of specialization. People who specialize in providing legal services can do it better than people who provide legal services and Internet services at the same time. (See George Richardson on the limits of knowledge and Williamson on the impossibility of “selective intervention.”) Microsoft hired Sullivan and Cromwell to defend them in their antitrust suit. The DOJ also contracted out some aspects of the case, though in general government agencies like state attorneys general, who face no market test, almost always produce in-house, which arguably puts them at a disadvantage against clients who can afford specialists. My (Coasean) claim is that ceteris paribus the margin between what is in-house and what is contracted shifts toward in-house when the services needed are new, ill-defined, and changing rapidly, and when there are (legal) impediments to contracting with specialists.

Gregory:

Excellent comment. I haven’t thought much about the moral-justification angle, but it would seem to me that the realist view lends itself more to moral justification than the modular view. Don’t most moral claims since Locke have to do with “homesteading,” that is, acquiring a specific use right because one has historically engaged in that specific use? By contrast, a modular conception would ask how the system should be decomposed in the abstract to make most effective use of the resources. My favorite example is the medieval open-field system, which was a tangle of specific historic use rights. That system was neither adapted to nor flexible in the face of changing relative prices and lower transportation and communication costs. The enclosure movement was essentially an unbundling of these homesteaded rights into a simpler (indeed, fee simple) structure in which the owner possessed a non-specified “module” of rights to land. Notice that this is not about changing to a new set of specific use rights when technology and markets change but of switching to a different way of thinking about rights.
7. Gregory Rader | 9 July 2010 at 3:46 pm

The moral justifications I run into most often are along the lines of:

“…the justification for first ownership is not based on the owner’s labor, or on the pain and sacrifice associated with his labor. The justification for first ownership is based on the creation brought forth by the first owner.”
(http://www.thefreemanonline.org/columns/the-moral-foundations-of-property-rights/#)

This seems coherent at first but clearly it is not what occurs in practice, and I think for good reason. Using IP as an example again (simply because it is easy to pick on), if this form of ownership were in some sense morally correct, then why do we place time horizons on IP claims, and why do we require that new patents must be in some way unique, novel, or progressive rather than simply differentiated? These practical considerations seem to be recognitions that there is some truth to the cliche “information wants to be free”.

I want to claim that the modular view is actually the more “realist” in that it takes into account practical realities rather than dealing in absolutes. It seems meaningless to assert some specific right once technology has made the enforcement or protection of that right impossible. At that point it is time, as you say, to switch to a different way of thinking about rights…