Economics and Property Rights

By Walter E. Williams
Wednesday, September 5, 2007

Economic theory does not operate in a vacuum. Institutions, such as the property rights structure, determine how the theory manifests itself. Similarly, the law of gravity isn't repealed when a parachutist floats gently down to earth. The parachute simply affects how the law of gravity manifests itself.

Failure to recognize the effect of different property rights structures on outcomes leads to faulty analysis. Think about several questions. Which lake will yield larger, more mature fish -- a publicly owned or a privately owned lake? Why is it that herds of cows flourished and buffalos did not? Who will care for a house better -- a renter or owner?

The answer to each question has to do with the property rights structure. In a publicly owned lake, everyone has the right to the fish. In order to assert his right, the person has to catch the fish. This leads to overfishing because the person who tosses back an immature fish doesn't benefit himself. He benefits someone else who will keep the fish. It's a different story with a privately owned lake. The owner needn't catch a fish in order to assert his rights and can let the fish mature. It's the same principle with buffalo and other wildlife that's publicly owned. Through various rules and regulations, governments, though imperfectly, attempt to solve this property rights problem with licenses, fishing and hunting seasons and setting limits on catch and size.

Private property rights force the owner to take into account the effect of his current use of the property on its future value. A homeowner has a greater stake in what a house is worth 10 or 20 years from now than a renter. An owner would more likely make sacrifices and take the kind of care that lengthens the usable life of the house. But owners have methods to make renters share some of the interests of an owner through requiring security deposits against damage.

There's a completely ignored aspect of the effect of restrictions on private property rights and that's restrictions on profits. Pretend that you're an owner of a firm. There are two equally capable secretaries that you might hire. The pretty secretary demands $300 a week while the homely secretary is willing to work for $200. If you hired the homely secretary, your profits would be $100 greater. But what if there were a 50 percent profit tax? The profit tax reduces your rights to profit and reduces your cost of discriminating against the homely secretary. Instead of foregoing $100 without the profit tax, you'd forego only $50 by hiring the pretty secretary. The more the cost of doing something goes down, predictably, the more people will do of it. Wherever private property rights to profits are attenuated, we expect more choices to be made by noneconomic factors such as race and other physical attributes. That's especially the case in nonprofit entities like government and universities.

You say, "Hold it, Williams, government and universities have preferential hiring policies in favor of racial minorities; so you're wrong." No. When it was politically expedient, government and universities were the leaders in racial discrimination against racial minorities. Now that it's politically expedient to discriminate in favor of racial minorities, government and universities are in the forefront. For example, in 1936, there were only three black Ph.D. chemists employed by all of the white universities in the U.S., whereas 300 black chemists alone were employed by private industry. In government, blacks were only 1 percent of non-Postal Civil Service workers in 1930. By the way, where did blacks make their entry into white universities? If you said in sports, the moneymaking part of the university, go to the head of the class.

There are numerous issues and problems that are otherwise inexplicable unless we take into consideration the property rights structure.