EXCERPTS

Reprinted with permission of John Wiley & Sons, 2007

Private Property

Private property is essential for both a market economy and prosperity. There cannot be a market economy without private property, and a society without private property cannot have prosperity. To ensure ongoing innovation in satisfying people’s needs, there must be a robust and evolving system of private property rights.

Without a market system based on private property, no one can know how to effectively allocate resources. This is because they lack the information that comes from market prices. Those prices depend on voluntary exchanges by owners of private property. Prices and the resulting profit and loss guide entrepreneurs toward satisfying the needs of consumers. Through this system, consumers are able to direct entrepreneurs in efficiently allocating resources through knowledge and incentives in a way no central authority can.

Countries that clearly define and protect individual private property rights stimulate investment and grow. Those that threaten and confiscate private property lose capital and decline. They also lose the capability and efforts of the individuals who would be the greatest contributors to economic growth.

Problems also arise when property rights are unclear or ill-defined. In such cases, owners don’t benefit from all the value they create and don’t bear the full cost from whatever value they destroy. Their use of the property will not be optimally focused on creating value in society. In the past, when owners were not liable for injury to person or property caused by pollution, noise or accidents, they made less effort to prevent them. When rent controls have prevented landlords from charging market prices, buildings have been allowed to deteriorate.

The biggest problems in society have occurred in those areas thought to be best controlled in common: the atmosphere, bodies of water, air, streets, the body politic and human virtue. They all reflect aspects of the “tragedy of the commons” and function much better when methods are devised to give them characteristics of private property.