Property Rights

It is axiomatic in the economics literature that secure property rights are necessary for economic development. The basic idea is that people with savings will not invest in wealth-generating enterprises if they fear their investments will be expropriated. And yet things cannot be quite that simple. We know that business people enter into contractual relationships all the time that carry with them some risk of expropriation. Moreover, it is easy to think of examples of investment flooding into places where property rights are anything but secure.

I had been musing about these matters for some time when Henry Yu, then a colleague of mine in the History Department at UCLA, gave me a copy of the January 2003 issue of Wired. The magazine featured an article by Julian Dibbell called the “The Unreal Estate Boom” that described the substantial investments that players of online fantasy games were making in imaginary societies. Economist Edward Castronova had studied these games and estimated that the fantasy world associated with Sony’s “Everquest” game had a gross domestic product at least as high as Bulgaria’s and that players had accumulated imaginary assets worth on average between $1,800 and $3,000 at a time when the median wealth holding of a family in the United States was about $9,000. Not only were the assets in such games unreal, but their value could be (and sometimes was) altered unilaterally by the games’ owners. Yet the money flowed in.

This work on online games provided me with a new perspective from which to understand the willingness of late-nineteenth-century investors to buy minority stakes in corporations, despite the very real possibility that controlling shareholders would expropriate a significant share of their returns. In “Did Insecure Property Rights Slow Economic Development? Some Lessons from U.S. History” (Journal of Policy History 18 [2006]: 146-64), I reminded readers that the risk of expropriation had to be weighed against the potential for gain. In the United States, the pro-development policies of the state and federal governments created opportunities for profit that helped induce small investors to buy shares in corporations regardless of the lack of protection. The lesson I drew from this history for economic development was that it was as important for policy makers to pursue policies that generated profitable opportunities for investors as it was to offer secure property rights. The latter were more likely to follow endogenously from the former than the reverse.

Another problem with the conventional literature is that property rights that are too secure can hamper economic development. Economic growth may be stifled, for example, if property rights cannot be reallocated to take advantage of new technological developments. In my presidential address to the Economic History Association, I argued that the US’s enviable record of sustained economic growth owed in large measure to the ease with which governments at all levels were able, often contrary to the wishes of owners, to reallocate property rights to take advantage of new economic opportunities. Published as “The Mystery of Property Rights: A U.S. Perspective” (Journal of Economic History 71 [June 2011]: 275-306), this address made the case that it was the democratic nature of the political system in combination with widespread land ownership that enabled Americans to have their cake and eat it too—that is, have faith that their property rights were secure at the same time as they delegated powers to government (such as eminent domain) that made the reallocation of these rights possible.

Related Publications:

Naomi R. Lamoreaux, “The Mystery of Property Rights: A U.S. Perspective,” Journal of Economic History 71 (June 2011): 275-306.

Naomi R. Lamoreaux, “Scylla or Charybdis? Some Historical Reflections on the Two Basic Problems of Corporate Governance,” Business History Review 83 (Spring 2009): 9-34.

Naomi R. Lamoreaux, “Did Insecure Property Rights Slow Economic Development? Some Lessons from U.S. History,” Journal of Policy History 18:1 (2006): 146-64.

Naomi R. Lamoreaux and Jean-Laurent Rosenthal, “Corporate Governance and the Plight of Minority Shareholders in the United States before the Great Depression,” in Corruption and Reform: Lessons from America’s Economic History, eds. Edward L. Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006), 125-52.