Much of the ‘economics of property rights’ devalues property and legal rights

Abstract

Legal theorists and other commentators have long established a distinction between property and possession. According to this usage adopted here, possession refers to control of a resource, but property involves legally sanctioned rights. Strikingly, prominent foundational accounts of the ‘economics of property rights’ concentrate on possession, downplaying the issue of legitimate legal rights (Alchian, 1965, 1977; Barzel, 1994, 1997, 2002; von Mises, 1981). Some authors in this genre make a distinction between ‘economic rights’ and ‘legal rights’ where the former are more to do with possession or the capacity to control. They argue that ‘economic rights’ are primary and more relevant for understanding behaviour. But it is argued here that legal factors – involving recognition of authority and perceived justice or morality – have also to be brought into the picture to understand human motivation in modern societies, even in the economic sphere. As other authors including Hernando De Soto (2000) have pointed out, the neglect of the legal infrastructure that buttresses property has deleterious implications, including a failure to understand the role of property in supporting collateralized loans for innovation and economic development.

But not all economic interests are ‘property rights’; only those economic advantages are ‘rights’ which have the law back of them, and only when they are so recognized may courts compel others to forbear from interfering with them or to compensate for their invasion. . . . We cannot start the process of decision by calling such a claim as we have here a ‘property right’; whether it is a property right is really the question to be answered. Such economic uses are rights only when they are legally protected interests.

Justice Robert H. Jackson, US v. Willow River Power Co., 324 US 499 (1945)

A people to whom ownership was unknown, or who accorded it a minor place in their arrangements, who meant by meum and tuum no more than ‘what I (or you) presently hold’ would live in a world that is not our world.

Antony M. Honoré (1961)

Property is a crucial economic institution.¹ Institutionalist writers on economic development stress the importance of secure property rights (Acemoglu and Johnson, 2005; Barro, 1997; North, 1981, 1990; Torstensson, 1994). But it is argued here that the concept of property is often inadequately defined in economics. In particular, property is often conflated with possession, meaning control of a resource.

There is abundant evidence that infants have notions of possession.² As McCloskey (2010: 332) put it: ‘Feelings of private property are hardwired into humans, or so anyone who has raised a two-year-old will attest’. Property, it is alleged, is part of our natural condition. Without doubt, feelings of possession are deep-rooted (and I have helped raise two-year-olds). But McCloskey conflated property with possession. The failure to distinguish between them is widespread, and this mistake is committed by both Marxists (who wish to abolish private property) and some free-market libertarians (who wish to secure it).

Gintis (2007) outlined a mechanism to explain the evolution of ‘property’, citing evidence such as the recognition of territorial incumbency. Theory and evidence point to the likely evolution under some conditions of possessive instincts. But the claim that possession has an instinctive and evolutionary basis (Stake, 2004) should not lead us to the false conclusion that property and possession are the same. The term ‘property’ should be reserved for cases of institutionalized possession with legal mechanisms of adjudication and enforcement. Property involves acknowledged rights granted by legitimate legal authority.³

Other writers have pointed to the significance of the distinction between property and possession for the functioning of an economy based on private ownership (Cole and Grossman, 2002; De Soto, 2000; Heinsohn and Steiger, 2013; Hoffman, 2013; Pipes, 1999; Steiger, 2008). This article adds to this literature by examining some definitions found in the economics of property rights more closely and in particular by targeting some of its key assumptions concerning human motivation.

The importance and major contribution of the economics of property rights is fully acknowledged. It is beyond the scope of this article to examine all the possible impacts of the amendments suggested, but some indications are mooted briefly near the end.

The standard economics of property rights adopts a methodology redolent of Carl Menger ([1883] 1985). He located the essence of an institution (notably money) in the spontaneous arrangements that engender or sustain it, rather than in acts of decree by a state or other public authority. Similarly, the standard economics of property rights strives to understand property as a spontaneous institution, which does not necessarily involve the state. Important insights are gained from this approach, particularly concerning how norms and rules of possession are generated and sustained in societies where the state is absent, weak, corrupt or dysfunctional. This indeed covers most of human history and much of the world even today.

But despite the major insights thus provided, the Mengerian approach in the standard economics of property rights is insufficient to acknowledge the modes of operation and additional impact of historically specific institutions including the state and law. Faced with this question, their importance is typically diminished by Mengerian claims of the need to retain a universal framework, consigning a secondary or epiphenomenal role to state law. By contrast, it is argued here that while some universal framework can be useful, it should not be used to diminish the powerful additional role of historically specific institutions such as the state. To put it in Weberian terms, property rights partly sustained by state law must be understood as an ideal type, alongside another ideal type that covers norms of possession in the absence of a state.⁴

Gary D. Libecap (1989: 1) wrote: ‘Property rights institutions range from formal arrangements, including constitutional provisions, statutes and judicial rulings, to informal conventions and customs regarding the allocations and use of property’. He thus extended the concept of ‘property right’ to cover both customary (‘informal’) rights in the absence of developed legal institutions and legal (‘formal’) rights. He subsequently downplayed the specific features of property in legal systems and the additional mechanisms that help to motivate legal obedience and to sustain property rights: his very broad definition of property rights diverted attention from historically specific institutions of property in developed (state) legal systems. By contrast, ‘property rights’ that are not ‘formal’ (or legal), are not property rights, by the definition adopted here.

The present article concurs with the view of other legal scholars that the roles of spontaneity and private ordering concerning law and property have been over-stated (Arruñada, 2012a; Aviram, 2004). It also points to the cultural and evolved significance of legal institutions and systems of moral authority for human motivation. These motivations help explain the enforcement of laws concerning property in a modern economy. This undermines claims that the distinction between property and possession is unnecessary for economic analysis because de facto possession is sufficient to understand or predict behaviour.

This argument depends on a particular definition of law and legal institutions, with a distinction between law and custom. While law often develops out of custom and depends on customary supports, in its fullest sense it more than custom.⁵ But influential authors – including Hayek (1973: 72–5) – have argued that law is essentially reducible to custom. In part this is a matter of definition. But there are good reasons for regarding law as a characteristic of systems with a fully institutionalized judiciary and legislature (Commons, 1924; Hasnas, 2005). First, law emerged historically when customs were breached or in conflict, requiring judicial resolution by a powerful authority (Farnsworth, 1969; Redfield, 1950; Seagle, 1941). Second, the enforcement of customary rules relies upon shared understandings and habits in smaller communities that cannot be sufficient when applied to extensive systems of codified law in large-scale, complex societies (Sened, 1997). Third, given the complexity and proliferation of legal rules, dispositions to recognize legitimate and moral authority become more important than mere habit or custom in obtaining legal compliance (Hodgson, 2009, 2015). We return to this crucial question of motivation later. At this point, it is established that there are good reasons to confine the definition of law to circumstances where there is a state with an institutionalized judiciary and legislature. This does not mean that custom is unimportant, but that law is more than custom alone.

In Plato's dialogue Euthyphro, Socrates asks Euthyphro: ‘Is the pious loved by the gods because it is pious, or is it pious because it is loved by the gods?’ This theological dilemma means that either God is subject to moral norms that are independent of God's will or existence, or that moral norms have no independent justification save being arbitrarily willed by God. This dilemma can be converted into matters of state and law: ‘Does a state make a law because it is a customary rule, or does law become a customary rule because it is approved by the state?’ Many legal theorists answer by choosing either one or the other. These are sometimes characterised, respectively, as Lockean versus Hobbesian views of law. But, unlike the theological dilemma, it is possible to embrace both. Law involves processes of two-way feedback and amendment. Consequently, customary rules or rights often become law after state approval, and state legislation often gives rise to established customary rules. Both the state and custom are necessary for law to function; and unlike God the state mutates and evolves.

One possible response to part of the argument in this essay is that essentially it is about chosen definitions and uses of words. In particular, property rights economists might simply say that what I call ‘possession’ they call ‘economic property rights’ and what I call ‘property rights’ they call ‘legal property rights’. Consequently, we can go through and edit the relevant economics of property rights literature, making the appropriate terminological substitutions, and everything else would remain valid. I disagree. While the foundational economics of property rights literature brings important and valid insights, it would still be impaired after these terminological substitutions. First, using the word ‘right’ to describe something that is not a right but a matter of de facto control is misleading: it obscures the adopted legal meaning of rights in modern legal and economic systems (Cole and Grossman, 2002). As Merrill and Smith (2001: 358) wrote: ‘all this property-talk among legal economists is not about any distinctive type of right’.

Second, in particular, attention is diverted from the roles of moral sentiments and dispositions to obey authority: they are important parts of human motivation, alongside greed and self-interest. Third, even with the terminological substitutions, the foundational property rights literature would have an inadequate treatment of (legal) property rights as collateral to obtain loans, and of the historically specific legal institutions that make collateralisation possible (Arruñada, 2012b; De Soto, 2000; Heinsohn and Steiger, 2013; Hoffman, 2013; Steiger, 2008).

This essay has six further sections. The first discusses the distinction between possession and property and its implications. The second section demonstrates that typically ‘the economics of property rights’ is about possession, rather than property or legal rights. The third section considers views of individual motivation in ‘the economics of property rights’ and shows that they are dominated by both instrumental and pecuniary considerations. The fourth section uses evidence and arguments from psychology and elsewhere to show that obedience to the law can also flow from notions of morality or the perceived legitimacy of authority, rather than instrumental calculations of cost and benefit alone. The fifth section considers some of the implications of the foregoing arguments for the economics of developing countries. The sixth section draws the threads together.

1. The distinction between possession and property

Here, in accord with major authors, the term possession is used to refer to control or possible use of an asset or resource, irrespective of any assumed or decreed right to do so. Legal language is not uniform, and sometimes lawyers use the term possession to refer to particular (typically usus or usus fructus) rights. Also, in many legal systems, longstanding use can be grounds for establishing some kind of right. But by possession here we refer to use or control, without reference to, and imputation of, any kind of legal or moral right.⁶

Possession is foremost a relation between a person and a thing. It does not amount to legal ownership. As the historian Pipes (1999: xv) put it: ‘Possession refers to the physical control of assets, material or incorporeal, without formal title to them’. Property often implies but does not necessitate possession, and some laws recognize possession as separate right in rem (regarding things). But the two are not the same: ‘Property refers to the right of the owner or owners, formally acknowledged by public authority, both to exploit assets . . . and to dispose of them by sale or otherwise’ (ibid.). The crucial difference concerns the granting of formal rights by public authority. Hence property in its truest sense has another prerequisite – the political authority of the state. ‘Before the state there is only possession’ (Pipes, 1999: 117).⁷

Property is more than possession, and not simply a relationship between owner and object. It is a relationship between people involving rights with regard to tangible or intangible assets. The exchange of property involves a minimum of not two parties but three, where the third is the state or a ‘superior authority’ (Commons, 1924: 87). These social relations involve rights, benefits and duties (Cole and Grossman, 2002; Hallowell, 1943). The basis of a right of ownership of a resource is an acknowledgement of that right by others, through mechanisms of institutional accreditation and legitimation. Property is ‘a creature of . . . the legal system’ (Penner, 1997: 3).

Property involves legitimate and enforceable rights. As Honoré (1961: 115) wrote: ‘To have worked out the notion of ‘having a right to’ as distinct from merely ‘having’ . . . was a major intellectual achievement. Without it society would have been impossible’. As Honoré (1961: 134) argued: ‘It is not enough for a legal system to recognize the possibility of people owning things. There must be rules laying down how ownership is acquired and lost and how claims to a thing are to rank inter se’. A legal title to an object of property entails conditions that must be fulfilled for a person to have a claim to an asset.

The term property signifies multiple different types of possible right.⁸ Owing their codified origin in Roman law, different types of property right include the right to use a tangible or intangible asset (usus), the right to appropriate the returns from the asset (usus fructus), the right to change a good in substance or location (abusus), the right to the capital derived from the use of the good as collateral, the right to sell a good (alienation), and several other rights or limitations (Hohfeld, 1919; Honoré, 1961). For example, hiring or leasing something may confer a restricted right of use, but not necessarily other rights, such as the right to sell it to others.⁹

Crucially for the functioning of capitalism, durable and alienable property can be used by its owner as collateral and can involve legal encumbrances (Arner et al., 2007; Heinsohn and Steiger, 2013; Stadermann, 2002; Steiger, 2008). Consequently, as noted below, the registration of much property – particularly land and buildings – with recorded means to identify both property and owners, are crucial institutional mechanisms for economic development: they enable the use of such property as collateral for loans. But this is not straightforward, precisely because property requires an effective legal system and state administration.

The distinction between property and possession is not one between de jure and de facto property. According to widespread usage, when something is in effect in reality without a law mandating it, then it is de facto rather than de jure. But legal rights cannot exist without law, so any notion of de facto property is problematic. Purely ‘de facto property’ is no longer property: any property by definition entails legal rights. Key distinguishing attributes of property, including legal rights, potential legal enforceability and collateralizability, cannot exist without legal mandation.

Some social scientists treat property principally as a relation between an individual and a good, thus downplaying the institution of property, social relations between individuals, and between individuals and the state. The institutions that sustain and legitimate property are given inadequate attention. Consider the Austrian school economist Ludwig von Mises, who was an ardent defender of the institution of private property. When von Mises (1981: 27) discussed the nature of ownership, he considered the legal aspect as merely a normative (‘ought to have’) justification of de facto ‘having’ something:

From the sociological and economic point of view, ownership is the having of the goods . . . This having may be called the natural or original ownership, as it is purely a physical relationship of man to the goods, independent of social relations between men or of a legal order. . . . Economically . . . the natural having alone is relevant, and the economic significance of the legal should have lies only in the support it lends to the acquisition, the maintenance, and the regaining of the natural having.

Hence, for von Mises, ownership was natural and ahistorical rather than legal or institutional. A physical rather than a social relationship, it was deemed independent of law or any other social institution. He downgraded the institutions required for the legitimation, protection and enforcement of the capacity to have, and neglected social aspects of ownership that may signal power or status. Contrary to von Mises, the law does not simply add a normative justification for having something: through social interactions involving authority and expectations it also reinforces the de facto ability to use and hold onto the asset.

The resemblance to Marx's relegation of law is uncanny: both Marx and von Mises concentrated on raw physical power over objects, rather than legal rights. Marx's numerous discussions of ‘property’ had little to say about legal rights, and he too conflated property with possession. Hence, Marx (1975: 351) in 1844 addressed ‘private property’ and argued that ‘an object is only ours when we have it – . . . when we directly possess, eat, drink, wear, inhabit it, etc., – in short, when we use it’. With both Marx and von Mises, effective power over something, is conflated with a de facto right. Legal and moral aspects of property are overshadowed.

The distinction between property and possession was central to Pierre-Joseph Proudhon's 1840 book What is Property? Proudhon quoted the prominent French lawyers Charles Toullier and Alexandre Duranton. They both had insisted that property is a right and a legal power, whereas possession is a matter of fact, not of right. Marx stridently criticized Proudhon's work. But he paid little heed to its central distinction between possession and property. Marx and Engels also claimed that tribal and hunter-gatherer societies owned ‘property’ in common. This was ‘primitive communism’. In response, Veblen (1898: 358) argued convincingly that ownership and property were later institutional developments: ‘no concept of ownership, either communal or individual, applies in the primitive community. The idea of communal ownership is of a relatively later growth’.

While the distinction between possession and property is ignored by Marxists and most modern economists, it is of supreme analytical and practical significance. It is impossible to understand capitalism in terms of mere possession, without an adequate conception of property.

Classic accounts by economists Demsetz (1967) and Posner (1980) discussed the origin of ‘laws’ of ‘property’ in primitive societies. These are not so much wrong as mislabelled. Both writers conflated law with custom. Demsetz's discussion of ‘property rights’ was about customary rather than legal rights. He concentrated not so much on the origin of such rights but how they become valuable. Posner addressed primitive ‘laws’ concerning property, contract and marriage. His main claim was that various forms of these institutions were ‘rational’ in the context of prevailing information costs and other factors. But his arguments concerned custom rather than law. And instead of property he described possession.¹⁰

2. The ‘economics of property rights’

We now examine prominent definitions of ‘property rights’ in the ‘economics of property’ rights’. The ‘economics of property rights’ is part of the modern ‘law and economics’ movement, which was hugely stimulated by the classic work of Coase (1960) and his guiding editorship of the Journal of Law and Economics. Coase defined neither ‘property’ nor ‘property right’ in his 1960 article, and I have not come across any clear definition of these terms anywhere else in his writing. But importantly Coase (1959: 25) wrote: ‘One of the purposes of the legal system is to establish that clear delimitation of rights on the basis of which the transfer and recombination of rights can take place through the market’. Coase never suggested that property in a modern market economy could exist or be understood without a state legal system. Coase (1988: 10) wrote:

When the physical facilities are scattered and owned by a vast number of people with very different interests. .. the establishment and administration of a private legal system would be very difficult. Those operating in these markets have to depend, therefore, on the legal system of the State.

Subsequent writers on ‘the economics of property rights’ departed from this maxim, enabling them to tackle the definition of ‘property right’ in a very general way, ignoring its dependence on ‘the legal system of the state’.

Hence, Alchian (1965) defined private property rights in terms of assignments of the ability to choose the use of goods (without affecting the property of other persons). While he referred to this as ‘exclusive authority’ and mentioned the possible role of law alongside a greater stress on custom and convention, his definition was largely in terms of de facto powers of control rather than legal or moral rights. The Oxford English Dictionary defines ‘right’ (as a noun) as ‘that which is morally correct, just, or honourable’ or ‘a moral or legal entitlement to have or do something’. Holland (1917: 86) wrote in his definitive work on jurisprudence: ‘Every right, whether moral or legal, implies the active or passive furtherance by others of the wishes of the party having the right’. Such rights involve appeal to a ‘moral duty’ or a ‘legal duty’. Alchian and subsequent scholars have removed morality from the picture and downgraded the role of law, from being the source of legitimate authority concerning rights, to one means among others for enforcing possession and control. When we refer to moral or legal rights, we do not simply mean de facto ability to control resources.

Later Alchian (1977: 238) defined the ‘property rights’ of a person in universal and institution-free terms including ‘the probability that his decision about demarcated uses of the resource will determine the use’. Alchian's definitions of property neglect the essential concept of legitimated, rightful ownership. This concept is important, even if what is rightful is contestable or difficult to identify. His definitions denote possession rather than property. Similarly, the highly influential property-rights economist Barzel (1994: 394) defined property as

an individual's net valuation, in expected terms, of the ability to directly consume the services of the asset, or to consume it indirectly through exchange. A key word is ability: the definition is concerned not with what people are legally entitled to do but with what they believe they can do.

This explicitly removed the question of legal title from the definition of property. The upshot of this is that if a thief manages to keep stolen goods then he acquires a substantial property right in them, even if, on the contrary, legal or moral considerations would suggest that they remain the rightful property of their original owner. Elsewhere Barzel (1997: 3) argued:

The term ‘property rights’ carries two distinct meanings in the economic literature. One . . . is essentially the ability to enjoy a piece of property. The other, much more prevalent and much older, is essentially what the state assigns to a person. I designate the first ‘economic property rights’ and the second ‘legal (property) rights’. Economic rights are the end (that is, what people ultimately seek), whereas legal rights are the means to achieve the end. Legal rights play a primarily supporting role . . .

Barzel made it clear that his version of ‘the economics of property rights’ is not about legalities. But it is misleading to describe ‘the ability to enjoy’ something as a ‘right’. Enjoyment can exist without rights, and rights without enjoyment. Rights result from institutionalized rules involving assignments of benefit. They always involve relations between people as well as relations with things. The ‘ability to enjoy’ may not involve more than an individual's relationship with an object.

Holcombe (2014: 471) outlined a ‘positive’ theory of rights in general, where a right is what ‘people actually can exercise’ while making ‘no attempt to determine what rights people should have’. But there is an omitted third possibility here, which is the analysis or description of claimed or decreed legal rights or entitlements. It would be a mistake to assume that any discussion of such entitlements is ‘normative’ and beyond the scope of any ‘positive’ analysis. We should not confuse the description or analysis of a normative claim with the normative claim itself. If a legal system lays out specific rights or entitlements, and we describe or analyse that system, then we are not necessarily being normative: we are not necessarily advocating those laws. Emphatically, a positive analysis of rights must describe normative entitlements; otherwise it is not a theory of rights.¹¹

Allen (2014: 4) put it more simply: ‘Following others, economic property rights are defined as the ability to freely exercise a choice’. His formulation removed the matter of enjoyment and simply takes the reason for choice as given. This again does not necessarily imply any relation with others, let alone any matter of rights. Allen (1991, 2014) ignored specifically human concerns with rights, duties, or morality. His definition entails no more than possession. It would apply to robots or any living species, including animals that are non-social.¹² It fails to acknowledge specifically human motivations that have evolved over millions of years, and the much more recent human institutions that, in specific ways, exploit and mould our sense of justice and respect for authority. Such definitions of property rights by institutional economists are strangely free of institutions. Property is a historically specific institution. If we make our categories universal, then we fail to capture property.

To these and other pioneering property rights economists (Bush and Mayer, 1974; Furubotn and Pejovich, 1972, 1974; Umbeck, 1981), the ‘structure of property rights’ refers primarily to a set of constraints upon, and incentives and disincentives for, specific individual behaviours. The widespread misconception in economics, that a ‘property right’ is about the probability of control or the ability to enjoy, would be strangely indifferent to whether property were publicly or privately owned, or owned by an individual, a cooperative or a corporation, as long as the denoted probabilities or abilities were unaltered. Arruñada (2012b: 24) regretted that much economic analysis treats property as a relatively unproblematic distribution of entitlements and quickly moves analytical attention toward contracting difficulties and transaction costs.¹³

3. Law and human motivation: instrumental and other valuations

Some writers suggest that ‘the economics of property rights’ abstracts from other considerations to focus simply on the ‘economic aspect’ of property. Barzel's (1997: 3) challengeable claim that the ‘economic’ is just about the end of enjoyment, and not the means, is relevant here. If economics must focus on the enjoyment of things or experiences, to the neglect of legally instituted rights, then we must consider that economics on its own cannot adequately appreciate the modern world order. To use the words of Honoré (1961: 107), such economists seem to ‘live in a world that is not our world’.

By contrast, Adam Smith (1759, 1776) emphasized moral as well as selfish motivations, and the importance of justice in matters of commerce and property. For him, it was about perceptions of justice as well as personal enjoyment. While individuals were largely self-interested, they also exhibited ‘moral sentiments’ that were vital for social cohesion, the protection of private property and the production of wealth. But Smith's sophisticated vision of human motivation and the scope of economics has got lost (Coase, 1976; Evensky, 2005a, 2005b; Heilbroner, 1982). Bringing it back has fundamental implications for the whole of economics (Hodgson, 2013a; Sen, 2010; Smith, 2013), but we confine ourselves here to implications concerning law and property.

Some might attempt to justify the neglect of legally-sanctioned rights in ‘the economics of property rights’ on the grounds that it is simply about the prediction of behaviour, rather than the detailed mechanisms of motivation. Similar arguments are often raised by economists to justify standard assumptions of utility-maximization (Posner, 1980). But better understandings or predictions of behaviour would spring from a more in-depth knowledge of individual motivations, alongside other influences or constraints. Hence, the analysis of human motivation was a major part of Smith's project to understand individual interactions and the functioning of economic systems.

Coase made concordant observations. Regarding utility analysis as ‘largely sterile’, Coase (1977: 488) explained: ‘To say that people maximize utility tells us nothing about the purposes for which they engage in economic activity and leaves us without any insight into why people do what they do’. Although he did not develop a richer account of human motivation, he certainly saw the need for one.

Many economists may have sidestepped the question of motivations because they have adopted a narrow model of wholly self-interested behaviour. This has led to particular version of utility maximization involving self-regarding satisfaction. Often it is also assumed that individual utility is monotonically related to the monetary value of consumption or wealth.

But this narrow view of self-regarding motivation is now fractured, even within the citadel of economics. Behavioural economists have pointed to evidence of systematic errors or biases that contradict some standard models of rationality (Camerer et al., 2004). While it is still possible that agents are maximising their utility, there is an enormous amount of experimental evidence to undermine the idea that individuals are generally maximizers of monetary payoffs.¹⁴ The notion of other-regarding, ‘social preferences’ has become respectable (Bowles and Gintis, 2011; Charness and Rabin, 2002; Fehr and Fischbacher, 2002).¹⁵

Claims concerning utility maximization are strictly unfalsifiable, because utility cannot be independently measured or observed. This point has been noted by several authors and it is elaborated elsewhere (Boland, 1981; Hodgson, 2013a). The problem with the assumption of utility maximisation is not that it is falsified, but that it is overly-accommodating and unfalsifiable. It summarises behavioural outcomes rather than explaining them.

This brings us to the question of the intrinsic role of law in human motivation, apart from the sanctions or rewards of the legal system. In the ‘economics of property rights’ it is often assumed that law has little or no distinctive impact on utility or motivation, and it impinges on behaviour principally as a cost or constraint. Obeying the law is simply a matter of expected costs and expected benefits, where no benefit is assumed from legal compliance itself. Hence, having made his distinction between two kinds of ‘rights’, Barzel (2002: 16, 157) claimed that: ‘What individuals maximize (subject to their personal safety) is the value of their economic rights’. These exclude ‘legal rights’, which are defined as ‘claims over assets delineated by the state’. In other words, individuals are indifferent to ‘legal rights’ and act solely to maximize their enjoyment of assets under their control, whether these assets are obtained legally or illegally. This assumes a particular form of maximizing behaviour where law itself has no direct input as an argument in the preference function.

Barzel did not argue that the law does not matter. It may be a major factor in determining outcomes in terms of control and enjoyment of resources. But Barzel (1997: 3) argued that law matters only insofar as it leads to ‘what people ultimately seek’, namely the enjoyment of resources. Legal obedience has no intrinsic value, and it is simply treated as an instrumental ‘means’ to that ‘end’. Legal obedience would not appear as an argument in any presumed preference function. Law is simply instrumental.

But Becker's (1968) theory of crime admits the possibility of gaining some utility simply from legal compliance. In that respect his approach is more accommodating than much of ‘the economics of property rights’, which confines itself ‘to comparisons of the value of production, as measured by the market’ (Coase, 1960: 43).¹⁶ While Becker highlighted the maximization of utility, much of ‘the economics of property rights’ considered the maximization of net market value. Becker's formulation can accommodate the possibility that people gain utility simply from obeying the law, irrespective of other costs or benefits.

But Becker and Coase both treated law as instrumental, for the maximization of utility and of net market value, respectively. Unlike Coase (1960), Becker's approach can deal with gains accruing from obedience to the law alone.¹⁷ But their shared instrumental character overlooks the possibility that law may be sometimes followed for non-instrumental reasons, simply because it is a legitimate, just or moral course of action. The law may be obeyed for reasons other than utility or pleasure. It may sometimes be followed – even at personal cost – because it is believed to be the right thing to do.

Turning to propositions that are falsifiable, there is a great deal of evidence to counter the standard ‘economics of property rights’ views (i) that what mostly matters is market value, or (ii) that people (within an instrumental interpretation) do not gain ‘enjoyment’ from obeying the law per se. Contrary to Barzel and others, the evidence shows that many people do not maximize ‘economic rights’ or the ‘ability to enjoy a piece of property’ alone. Multiple studies – discussed in the following section – suggest that many people are not, other things being equal, indifferent between legal compliance and non-compliance, and they often value obedience to the law per se.

4. Law and human motivation: some evidence and explanations

The subfield of psychological jurisprudence has gathered considerable survey data to establish that people place some normative value on obeying the law, in addition to any instrumental consideration of expected personal costs or benefits. Tyler is the leading authority in this area. Tyler (1990: 3) contrasted the ‘instrumental perspective’ where ‘people are viewed as shaping their behaviour to respond to changes in the tangible, immediate incentives and penalties associated with following the law’ with the ‘normative perspective’ concerned with ‘what people regard as just and moral as opposed to what is in their self-interest’.

Supported by evidence gained from a survey of several hundred citizens in Chicago, Tyler (1990) argued that citizen may be inclined to obey the law for different reasons. The estimated costs (involving estimates of the chances of being caught and likely punishments) and benefits of breaking the law are weighed against the costs and benefits of compliance. But the evidence of Tyler and others suggests that such instrumental calculations have relatively little effect on compliance. More important is internalized obligation, stemming from other considerations.

First, citizens often comply with the law because they regard the legal authority as having a legitimate right to lay down rules that people must obey. This warrant can have several possible bases, but in modern democracies it mainly derives from the belief that the popular election of a government makes such state authority legitimate. Weber (1968: 215) saw legal authority and legitimation as ‘resting on a belief in the legality of enacted rules and the right of those elevated to authority under such rules to issue commands’.¹⁸

Second, citizens sometimes comply with a particular law because it is believed to be moral. This is particularly the case with laws against murder or rape, but may not be so with other laws, such as those governing traffic on roads. Tyler argues that moral believes sometimes help to sustain laws, but they can also lead to legal non-compliance when people believe that a particular law lacks sufficient moral force.¹⁹

Instrumentalists in general, and proponents of utility maximisation in particular, argue that the issues of legitimacy and morality can be incorporated in the calculus of costs, benefits or utility. Hence, advocates of utility-maximisation claim that when someone acts according to their perceptions of legitimacy or morality they gain extra utility from a ‘warm glow’ of self-satisfaction. A problem with this argument is that it undermines the very meaning of legitimacy and morality. The whole point of actions in accord with perceived legitimacy or morality is that they do not necessarily serve self-interest (Hodgson, 2013a, 2014; Joyce, 2006; Mackie, 1977). Acting morally means ‘doing the right thing’, even if it is costly to the actor. People obey legitimate legal authority saying ‘because it's the law’. These deontic motivations cannot be reduced to convenience, convention, or cost-benefit calculation, in accord with a uni-dimensional calculus of utility or desire (Searle, 2001).

Both adults and children feel strong obligations to obey the law. Sarat (1975) found that 70% of adults in his US sample agreed that a law ‘must always be obeyed’. In Engstrom's (1970) sample of US school children only 4% of whites and 8% of blacks said that they might disobey a policeman if he were ‘wrong in what he tells you to do’. A survey of US high school students found that 77% of whites and 72% of blacks agreed that ‘people should always obey the law’ (Rodgers and Lewis, 1974). Tylor (1990: 178) summarized a major implication of his survey of Chicago citizens:

People obey the law because they believe that it is proper to do so, they react to their experiences by evaluating their justice or injustice, and in evaluating the justice of their experiences they consider factors unrelated to outcome, such as whether they have had a chance to state their case and been treated with dignity and respect. . . . The image of the person resulting from these findings is one of a person whose attitudes and behavior are influenced to an important degree by social values about what is right and proper. This image differs strikingly from that of the self-interest models which dominate current thinking . . .

Our inclinations to respect those in authority were dramatized by the experiments of Milgram (1974), who invited members of the public to help in a laboratory study ostensibly about learning. A ‘scientist’ asked these recruits to administer electric shocks to a subject, to punish wrong answers to questions. Milgram found that a majority of adults would administer shocks that were apparently painful, dangerous or even fatal, if ordered to do so by the person in authority. In fact, there were no shocks and the subject was an actor, feigning agony or even death. This experiment shows that people can willingly accept the orders of perceived authority figures, even when their own moral feelings are violated.

Milgram (1974: 124–5, 131) argued that our dispositions to respect authority emanate from the evolutionary survival advantages of cohesive social groups. While socialization and learning are clearly important in developing propensities to obey authority and the law (Engel, 2008), Milgram also proposed that the human species has evolved an inherited, instinctive, propensity for obedience that is triggered by specific social circumstances. In accord with the later work of Haidt and Joseph (2004, 2008), Milgram suggested that dispositions to respect authority have both genetic and cultural foundations. This is in accord with Darwin (1871), who proposed that human tribes that developed systems of social obedience and cooperation, and a moral code to buttress these attributes, would survive in competition with other human tribes and in dealing with their environment. This evolutionary argument is supported by evidence from primates (De Waal, 1996, 2006) and modern evolutionary theory with a careful rehabilitation of the concept of group selection (Henrich, 2004, Hodgson, 2013a, 2014; Hodgson and Knudsen, 2010; Sober and Wilson, 1998).

These arguments undermine the view of Barzel and others that respect for the law – based on its perceived legitimacy or moral concordance – plays little or no part in attitudes towards property.²⁰ The insistence that property is a legal right does not imply that people never break the law, or that law alone somehow predicts behaviour. But the establishment of legal rights, through perceptions of moral legitimacy and the use of state power, can affect intentions or behaviour. An economy involving mere possession is very different in nature and outcomes from one that has institutionalized rights of property.

The mistaken removal of legal rights from the definition of property cannot be justified on the ground that they are unnecessary to explain or predict behaviour. Any explanation of dispositions, choices or preferences must take such factors into account. If economists are interested in predicting behaviour on the basis of some scientific understanding of what causes it, then they must take matters of motivation, including the instrumental and the normative into account.²¹

5. Property rights and economic development

Arguments emphasising the perceived legitimacy of the legal system have implications for establishing the rule of (state) law, and particularly installing just and secure property rights to help promote economic development.

China is an important test case for these arguments. China began its market reforms in 1978 and its systems of property, commercial and corporate law are still relatively underdeveloped compared to Europe or North America. This fact, alongside its highly impressive economic growth since 1978 has led some prominent economists to conclude that legally-enforced property rights are of lesser significance (Stiglitz, 1994: 12).

But, despite superficial appearances to the contrary, there is evidence that legal systems and legal property rights matter. China's explosive growth started when land-use (usus fructus) rights were widely conceded to the peasants after 1978 (Coase and Wang, 2012; Zhou, 1996). Relevant legislation concerning land leasing followed rather than preceded this concession. But this does not mean that legal land-use rights were unimportant. Local power from below tentatively established de facto powers, which spread widely and became de jure when it was legally ratified by the state. This endorsement, along with the institutional arrangements established from below, was vital to safeguard these rights.²²

Legalities matter and evidence suggests that they matter still more as capitalism develops. Further economic development in East Asia may depend in part on the installation of superior state legal and political systems governing and protecting property and contracts. Private ordering is vital but insufficient. The cross-country evidence of Barro (1997), Torstensson (1994) and others suggests that economic growth is correlated with the rule of law, among other factors (Acemoglu and Johnson, 2005).

By contrast, the Alchian–Barzel approach might see it as sufficient that Chinese entrepreneurs can control resources sufficiently to enable prosperity and rapid growth. Matters of legal infrastructure and enforcement would be secondary. Instead, the alternative perspective outlined here would point to the priority of developing legal institutions, their separation from political authority, and the related reform of the political system.

As De Soto (2000) and others have pointed out, the registration and enforcement of property rights (particularly in land and buildings) is a crucial condition for economic development.²³ The exclusive focus on control in ‘the economics of property rights’ overlooks the use of property as collateral for loans. The possibility of collateralization – which relies on legal and financial institutions – cannot be predicted from possession alone. It involves institutions: relations between individuals as well as relations between individuals and things. While emphasizing the importance of ‘property rights’, much of this discourse side-lines the vital institutions that are required to sustain them and make them fully operational in a developed economy.

Attempts to make ‘property rights’ analysis universal, so that it applies to societies without effective (state) legal authority draw our attention away from the importance of property rights, properly defined. Of course it is important to understand extra-legal enforcement mechanisms, such as with pirates and mafias, but we should not pretend that might and right are the same. Of course, studies of worlds without (state) legal enforcement can help us devise policies that apply to developing countries where the state is weak or dysfunctional. But – following Coase (1988) among others – we should not assume that such spontaneous mechanisms are sufficit, or can apply to large-scale, complex economies. The reinstatement of a more genuine concept of ‘property rights’ in development economics would lead to greater emphasis on the importance of an effective legal system that enjoys some autonomy from political or sectional power with some perceived justice in its proceedings.²⁴

6. Concluding remarks

The focus on possession, rather than property and rights, has further deleterious consequences. For example, the notion of contractual exchange becomes mainly a reciprocal transfer of powers over assets, ignoring the transfers of legal property rights. Crusoe-like ‘exchanges’ become possible, between one person and his or her material environment. Hence, von Mises (1949: 97) saw all action, even by an isolated individual, as ‘exchange’ – as an attempt to swap inferior for superior circumstances. By contrast, Commons (1924), MacLeod (1878) and Rau (1835) all insisted that commodity exchanges are contractual interchanges of legal rights, along with any transferred goods or money. Unless a transfer of rights is involved, it is neither exchange nor contract. Such rights can be backed by legal sanctions. Exchange, like property, has to be understood in terms of the key social institutions that are required to sustain it.

The success of capitalism depends on systems of law enforcement. But these took a long time to establish. Even today, in much of the world, systems of law enforcement are weak, expensive, corrupt or inaccessible. In their absence, people fall back on other means of establishing obligations and ensuring compliance. Commerce then works through clan or family ties, shared religion or ethnicity, bureaucratic co-option and corruption, or threats of violence to person or property. Systems of spontaneous enforcement show how commercial agreements can be maintained in the absence of adequate state systems of law (Clay, 1997; Greif, 1989, 1993, 2006; Landa, 1994; Leeson, 2009). Such systems existed in history and persist today in some contexts. Hence, they are important objects of analysis. But this should not mislead us into believing that fully-developed modern capitalist systems can rest on purely spontaneous or customary foundations. Leading theorists such as Commons (1924) and Coase (1988) argued otherwise.

While in mainstream economics the focus is on the individual making choices over the allocation of objects or activities, in Marxism agents coagulate as social classes, but also with differential control over physical objects and forces. These approaches cannot accommodate a concept of property that is anything more than possession; it lacks the key element of institutionally legitimated legal rights. We cannot understand property simple in terms of an agent-object relationship.

A crucial argument here is that legal institutions have to be taken into account in ‘economic’ analysis. Law is much more than a constraint: it matters too for an adequate understanding of human motivation and the financial dynamics of capitalism. As odd bedfellows, both Marxists and ‘property rights’ economists have overlooked these issues. Elsewhere an alternative approach – which takes the impact of legal institutions more seriously – is described as legal institutionalism (Deakin et al., forthcoming).

Finally, an appreciation of non-instrumental motivations for legal compliance, which are part and parcel of the arguments here concerning the nature of property rights, challenges the use of utility-maximization as sufficient model of human behaviour. If ‘economics’ is confined to utility-maximizing agents, then ‘economics’ cannot adequately deal with the reality of property rights. But if ‘economics’ is rendered closer to Adam Smith, Ronald Coase, Amartya Sen and several others, with more complex views of human motivation involving moral sentiments, then any ‘economics of property rights’ is greatly enhanced.