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This basic idea, that private property rights are valuable and have to be protected, is an old one – but it’s one that has stuck around for a reason. We just saw how profoundly its absence affected the Soviet Union specifically – and we’ll return to that subject in a moment – but before we do, I just want to take a quick digression to examine the general logic behind private property rights and how it applies more broadly. Stephen Holmes and Cass R. Sunstein break it down this way:

Aristotle objected to Plato’s enthusiasm for collective child-rearing on the grounds that if everyone is responsible for every child, and if particular individuals are not denominated “parents,” children will not receive decent care. The very same logic justifies the right to private property. If everyone owns everything then, in a sense, no one owns anything. One of the problems with this sad state of affairs is that in a system of collective ownership, the costs of dilapidation are spread thinly, and thus catastrophically, across society. Each individual in a position to maintain and repair property loses little by decay and gains next to nothing by maintenance. In a system without private ownership or coercive organization, the costs of maintenance are borne by each person, while the benefits of maintenance are widely shared. Hence individuals have scant incentive to engage in timely and arduous repairs. If rewards for upkeep and improvement cannot be captured by owners, houses and farms and factories are very unlikely to be kept up and improved. Acting with an eye to tomorrow, individuals deprived of enforceable property rights are likely to engage in uncoordinated inaction, or acts of negligence that produce massive collective harms. As Aristotle objected to Plato, private rights can be a spur to action that is socially beneficial and, from society’s point of view, highly responsible.

Any farmer toiling to repay a bank loan can explain that the right to private property is both an onerous burden and an incitement to effort. Not only do property rights compel owners to pay the costs of their own property’s dilapidation, but well-defined and unambiguously assigned property rights nourish responsibility by allowing individuals to capture the returns on their investments. They also help lengthen the time horizon of owners, who can thereby hope to benefit tomorrow from exertions made today.

These are pretty intuitive, easy-to-understand reasons for having well-defined private property rights. But unfortunately, this is a lesson that we as a species are forced to re-learn again and again; it seems the example of the Soviet Union wasn’t enough to permanently ingrain it in our collective consciousness. I started this post by talking about how many of the poorest countries in the world have been unable to achieve economic success due to their lack of market institutions; well, this issue of property rights is a big part of what I was talking about. In a lot of these countries, even the most basic protections for property rights are absent, leaving the citizenry with little to no reason to invest in improving their own condition. With the constant threat of having their property rights overridden by a capricious government, such an arrangement “undermines the incentive people have to hold off from consuming and invest in their futures instead, because they will be unsure about whether they’ll actually get to enjoy the returns of that investment,” as Sam Bowman writes. “In the developing world […] weak or nonexistent property rights preclude capital accumulation and growth.” And the natural consequence of this, predictably, is that those populations end up perpetually stuck in poverty. Here in the developed world, you’ll often hear leftists decry the commoditization of everything under capitalism – but for these people in the developing world, the problem is just the opposite; for them, there’s not enough commoditization going on. Hernando de Soto explains further:

Most of the poor already possess the assets they need to make a success of capitalism. Even in the poorest countries, the poor save. The value of savings among the poor is, in fact, immense—forty times all the foreign aid received throughout the world since 1945. In Egypt, for instance, the wealth that the poor have accumulated is worth fifty-five times as much as the sum of all direct foreign investment ever recorded there, including the Suez Canal and the Aswan Dam. In Haiti, the poorest nation in Latin America, the total assets of the poor are more than one hundred fifty times greater than all the foreign investment received since Haiti’s independence from France in 1804. If the United States were to hike its foreign-aid budget to the level recommended by the United Nations—0.7 percent of national income—it would take the richest country on earth more than 150 years to transfer to the world’s poor resources equal to those they already possess.

But they hold these resources in defective forms: houses built on land whose ownership rights are not adequately recorded, unincorporated businesses with undefined liability, industries located where financiers and investors cannot see them. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.

In the West, by contrast, every parcel of land, every building, every piece of equipment, or store of inventories is represented in a property document that is the visible sign of a vast hidden process that connects all these assets to the rest of the economy. Thanks to this representational process, assets can lead an invisible, parallel life alongside their material existence. They can be used as collateral for credit. The single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur’s house. These assets can also provide a link to the owner’s credit history, an accountable address for the collection of debts and taxes, the basis for the creation of reliable and universal public utilities, and a foundation for the creation of securities (like mortgage-backed bonds) that can then be rediscounted and sold in secondary markets. By this process the West injects life into assets and makes them generate capital.

Third World and former communist nations do not have this representational process. As a result, most of them are undercapitalized, in the same way that a firm is undercapitalized when it issues fewer securities than its income and assets would justify. The enterprises of the poor are very much like corporations that cannot issue shares or bonds to obtain new investment and finance. Without representations, their assets are dead capital.

The poor inhabitants of these nations—five-sixths of humanity—do have things, but they lack the process to represent their property and create capital. They have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work.

Reiterating de Soto’s point, Wheelan describes one example of this phenomenon in Malawi that exemplifies the general issue:

Private property may seem like a province of the rich; in fact, it can have a crucial impact on the poor. The developed world is full of examples of informal property rights—homes or businesses built on land that is communal or owned by the government and ignored (such as the shantytowns on the outskirts of many large cities). Families and entrepreneurs make significant investments in their “properties.” But there is a crucial difference between those assets and their counterparts in the developed world: The owners have no legal title to the property. They cannot legally rent it, subdivide it, sell it, or pass it on to family. Perhaps most important, they cannot use it as collateral to raise capital.

Peruvian economist Hernando de Soto has argued convincingly that these kinds of informal property arrangements should not be ignored. He reckons that the total value of property held but not legally owned by poor people in the developing world is worth more than $9 trillion. That is a lot of collateral gone to waste, or “dead capital” as he calls it. To put that number in perspective, it is 93 times the amount of development assistance that the rich countries provided to the developing world over the past three decades.

The Economist tells a story of a Malawian couple who make a living slaughtering goats. Since business is good, they would like to expand. To do so, however, would require an investment of $250—or $50 more than the average annual income in Malawi. This couple “owns” a home worth more than that. Might they borrow against the value of their land and the bungalow they have built on it? No. The home is built on “customary” land that has no formal title. The couple has a contract signed by the local village chief, but it is not enforceable in a court of law. The Economist goes on to note:

About two-thirds of the land in Malawi is owned this way. People usually till the land their parents tilled. If there is a dispute about boundaries, the village chief adjudicates. If a family offends gravely against the rules of the tribe, the chief can take their land away and give it to someone else.

Those informal property rights are like barter—they work fine in a simple agrarian society, but are woefully inadequate for a more complex economy. It is bad enough that poor countries are poor; it is all the worse that their most valuable assets are rendered less productive than they might be.

Property rights have another less obvious benefit: They enable people to spend less time defending their possessions, which frees them up to do more productive things. Between 1996 and 2003, the Peruvian government issued property rights to 1.2 million urban squatter households, giving them formal ownership to what they had previously informally claimed as their own. Harvard Economist Erica Field determined that property rights enabled residents to work more hours in the formal labor market. She surmises that property rights give more flexibility to people who previously had to stay home, or had to operate improvised businesses out of their home, in order to protect their property. She also makes another important point: Most programs designed to help the poor reduce their work effort. (This is the Samaritan’s dilemma; if I ease your hardship, you have less incentive to help yourself.) Providing formal property rights does the opposite: It encourages work.

Again, we come back to the same lesson that we learned with the USSR – if you want people to be able to flourish in your economy, you have to actually let them have some foundation of private property upon which they can build wealth for themselves. Without that foundation, they not only lack the ability to improve their circumstances, they don’t even have any incentive to try. This has apparently been a hard lesson for many governments to internalize; but it’s a perfectly straightforward one – and its results speak for themselves.

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