Geoffrey M. Hodgson
Property is a key concept. It is central to major ideological debates in politics and to much analysis in the social sciences.
Libertarians such as Nobel Laureate Milton Friedman, Nobel Laureate Friedrich Hayek and the leading Austrian economist Ludwig von Mises argued that the protection of private property is a vital condition for economic prosperity and individual liberty.
By contrast, socialists such as Robert Owen and Karl Marx called for the abolition of private property. They favoured the common ownership of the means of production, distribution and exchange.
But, despite their diametrically-opposed political views, key protagonists such as von Mises and Marx shared a similar, but deeply-flawed, understanding of the nature of property. Later economists have compounded this error, even in the so-called “economics of property rights”, as developed by Armen Alchian, Yoram Barzel and others.
This misunderstanding of the nature of property has major adverse consequences. Historical debates about the role of property rights in the development of capitalism have been impaired. Defective advice continues to be given to governments in developing countries, neglecting the way that property enmeshes with financial and state institutions.
Property as natural versus property as a historically-specific institution
Writers defending private property often argue that ownership is ubiquitous, not simply among early humans but also in other species. Animals compete, as either individuals or groups, over territory. Psychologists provide evidence of deeply rooted feelings concerning possession among human infants. So it is claimed that notions of property are enduring and hard-wired into the neuro-systems of humans and other animals.
But feelings of possession are not the same thing as rights to property. The psychologist Lawrence Kohlberg pioneered the study of how individual humans develop an understanding of justice and morality from birth to adulthood.
He and his colleagues demonstrated that it takes young humans a long time to distinguish between “I want X” or “X is mine”, on the one hand, and “I have a moral right to X”, on the other.
Similarly, the leading legal theorist Antony Honoré wrote in a classic article on ownership:
“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.”
Brute possession differs from moral or legitimate rights. But as Kohlberg lamented, some people grow up and never understand the difference.
If Marx or von Mises did grow up to learn the difference, then they made very little use of it in their writings.
Take von Mises first. He wanted to develop a theory of human action that would apply to the entire lifetime of our species. So, for example, von Mises’s concept of “exchange” is not limited to trade or contract over property, but applies to any form of human interaction, including the activities of Robinson Crusoe alone on his island.
Similarly, von Mises turned property into a concept that applies to all human history. When he considered property in his critical book on Socialism he put the brute fact of de facto control first:
“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.”
So does law have any place in our understanding of property? Von Mises continued:
“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, asocial and ahistorical rather than legal or institutional. It was about “having” or possession. 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.
Marx’s concept of property
Marx differed from von Mises, and not simply because he wanted to abolish private property. Marx also insisted that capitalist phenomena, including commodity exchange and markets, were historically specific and had not existed for all time.
But Marx’s concept of property was almost as broad as that of von Mises. Both 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.
Karl Marx as a Young Man
Hence Marx 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.”
The distinction between property and possession was central to Pierre Joseph Proudhon’s famous 1840 book What is Property? Marx stridently criticized Proudhon’s work. But he paid little heed to its central distinction between possession and property.
With both Marx and von Mises, effective power over something, took priority over any legal or moral right. Legal and moral aspects of property were overshadowed.
While von Mises emphasized ownership by individuals, Marx defined social classes in terms of “property relations”, referring to what class controlled, and what class did not control, the means of production. Where von Mises stressed individuals, Marx stressed social classes. But for both of them it was a matter of control or possession.
Marx also claimed that tribal and hunter-gatherer societies owned “property” in common. This was “primitive communism”.
In response, the American institutional economist Thorstein Veblen argued convincingly in an 1898 essay 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.”
This rightly implies that property means more than mere possession. Property requires historically specific institutions that did not exist in tribal societies. Property requires law and a state.
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.
Property: taking the law into account
Both Marx and von Mises put law on the surface of a more fundamental reality beneath: law was part of the “superstructure”, as Marx put it. More fundamental for both of them were brute powers of possession or control. For Marx, law simply “mirrored” those basic powers. For von Mises, law was relevant only insofar as it strengthened that physical control. For both of them, everything concerning property boiled down to control.
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.
Note first that the legal right to control or use (usus) is only one of several legal types of right relating to property. By focusing on control, Marx and von Mises missed other important aspects of property.
Why is this important? Crucially for the functioning of capitalism, durable and alienable property can be used by its owner as collateral. Everyone who has a mortgage uses their property to obtain a loan. Entrepreneurs use their property to raise money to invest in their business.
Hernando de Soto
Consequently, as Hernando De Soto has argued, 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 a satisfactory legal system and an effective state administration.
Another problem with the views of Marx and von Mises on property is their implicit understanding of human motivation. Both neglect our propensities to obey the law – as long as we regard it as legitimate – even if it does no otherwise align with our other goals.
Consequently, as Adam Smith pointed out long ago, the administration and perception of justice is vital for a properly-functioning market economy. Without a perception of legitimacy in the legal arrangements, the institutional order of commercial life would break down. This theme is present in both his Theory of Moral Sentiments and his Wealth of Nations.
In modern, complex societies, law helps to constitute many social structures and to configure relations of power. Law is not simply super-structural or reflective. Along with others, I have described this approach as legal institutionalism. It builds on the works of earlier writers, including the American institutional economist John R. Commons.
Property rights and Chinese economic development
Arguments emphasising the perceived legitimacy of the legal system have implications for establishing the rule of (state) law, and particularly for 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 grew rapidly thereafter. But 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 – including Nobel Laureate Joseph Stiglitz – to conclude that legally-enforced property rights are of lesser significance.
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. Local power from below tentatively established de facto powers, which spread widely and became de jure when they were legally ratified by the state.
But this does not mean that the legal ratification of land-use rights was unimportant. This endorsement, along with the institutional arrangements established from below, was vital to safeguard these rights. In addition, it was part of the development of a legal system which was necessary for any modern private enterprise economy.
Legalities matter, and evidence suggests that they matter still more as capitalism develops. There is strong evidence that economic growth is correlated with the rule of law, among other factors. As Francis Fukuyama put it: “The absence of the rule of law is indeed one of the principal reasons why poor countries can’t achieve high rates of growth.”
If China is to grow still further – into the ranks of middle-income countries – then it must pay attention to the reform and development of its legal system.
The exclusive focus on control overlooks the use of property as collateral for loans. The possibility of collateralization – which relies on legal and financial institutions – cannot be derived from possession alone. Further property rights involve institutions – relations between individuals as well as relations between individuals and things. They involve the state and law – not simply relations of control between social classes.
1688 and all that
These points are significant for an important ongoing debate on the causes of the rise of capitalism in Britain in the eighteenth century.
William of Orange 1688
In a famous 1989 paper, Nobel Laureate Douglass North and Barry Weingast argued that the key event was the Glorious Revolution of 1688, when William of Orange invaded and became king in the place of James II.
North and Weingast argued that the consequent settlement between king and parliament made property more secure and prompted the development of commerce, leading to the start of the Industrial Revolution in roughly about 1760.
The first major problem with this argument is that property rights in land in England were relatively secure from the thirteenth century. There was no major change in these circumstances in the years immediately following 1688. The foremost problem was not the security of this property but the feudal nature of property rights in land, which severely restricted its possible sale and use as collateral.
Douglass C. North
A second major problem is that over seventy years elapsed from 1688 to the beginning of the Industrial Revolution. If institutional changes relating to property after 1688 were so important, then why did they take so long to take effect? Economic growth in the 25 years after 1688 was no greater than in the preceding 25 years. Why was the take-off delayed for so long?
In my paper “1688 and all that” I offer a solution to this problem, based on a richer concept of property. The immediate effect of 1688 was to change England’s European alliances and to plunge the country into a series of wide-ranging wars, particularly against France and Spain.
The 1689 accord between King and Parliament made possible major changes in state administration and financial institutions, so that money could be raised to fund these wars. Guided by a more powerful Parliament, this new financial system stimulated reforms to landed property rights, the growth of collateralizable property and saleable debt, and thus enabled the Industrial Revolution.
Data on reforms of property rights show that key changes accelerated in the 1750s, making more land usable as collateral, which could be used to finance industrial ventures. Institutional changes immediately following 1688 were less to do with property: instead there is clear evidence of an immediate growth in state administration and increasing tax revenues to finance wars. This process included the formation of the Bank of England in 1694 and the growth of financial markets. Statutory legislation in 1704 helped the development of markets for debt.
Conclusion: a different perspective
This analysis suggests that the building of a state administration, which can sustain a modern monetary system and secure the use of private property as collateral, is an important precondition of rapid economic growth. Hence a stress on the “security of property rights” would be insufficient in developing countries. For more effective policies for economic development, the nature of property, and its connection with finance and politics, have to be better understood.
Neither Marx nor von Mises were particularly helpful in this regard.
Why did von Mises downplay the role of the state in his conception of property? He did so because he believed that markets and contractual exchange could function with little or no help from the state.
Why did Marx downplay the role of the state in his conception of property? He did so because he understood the state as the means by which one dominant social class exercises power over another. Marx, like von Mises, did not appreciate that under capitalism state law is necessary to constitute basic institutions such as property and contract.
Von Mises wanted a market economy with a minimal state. Marx thought that after the proletariat gained power and socialism was established, then the state would eventually “wither away”. Despite their other big differences, in theory and practice, they both thought that a large-scale complex economy could function with a minimal state. To understand property as a core institution of capitalism we need to transcend both of them.
With an improved understanding of the nature of property, we need to analyse data on its functioning in the developing world. In economic history we need more empirical studies of the role of lending, collateral and finance, in the growth of business and innovation.
Researchers should arise from slumbering in the Marx-Mises bed and set to work.
4 November 2016
Minor edits – 5-7 November, 7 December 2016
This book by G. M. Hodgson elaborates on some of the political issues raised in this blog:
Wrong Turnings: How the Left Got Lost
Published by University of Chicago Press in January 2018
Commons, John R. (1924) Legal Foundations of Capitalism (New York: Macmillan).
De Soto, Hernando (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books).
Deakin, Simon, Gindis, David, Hodgson, Geoffrey M., Huang, Kainan and Pistor, Katharina (forthcoming) ‘Legal Institutionalism: Capitalism and the Constitutive Role of Law’, Journal of Comparative Economics, print forthcoming, published online.
Fukuyama, Francis (2011) The Origins of Political Order: From Prehuman Times to the French Revolution (London and New York: Profile Books and Farrar, Straus and Giroux).
Heinsohn, Gunnar and Steiger, Otto (2013) Ownership Economics: On the Foundations of Interest, Money, Markets, Business Cycles and Economic Development (London and New York: Routledge).
Hodgson, Geoffrey M. (2015) Conceptualizing Capitalism: Institutions, Evolution, Future (Chicago: University of Chicago Press).
Hodgson, Geoffrey M. (2015) ‘Much of the “Economics of Property Rights” Devalues Property and Legal Rights’, Journal of Institutional Economics, 11(4), December, pp. 683-709.
Hodgson, Geoffrey M. (2017) ‘1688 and All That: Property Rights, the Glorious Revoution and the Rise of British Capitalism’, Journal of Institutional Economics, 13(1), March, print forthcoming, available free (open access) online.
Hodgson, Geoffrey M. (2017) Wrong Turnings: How the Left Got Lost (Chicago: University of Chicago Press).
Honoré, Antony M. (1961) ‘Ownership’, in Guest, Anthony G. (ed.) (1961) Oxford Essays in Jurisprudence (Oxford: Oxford University Press), pp. 107-47. Reprinted in the Journal of Institutional Economics, 9(2), June 2013, pp. 227-55.
Kohlberg, Lawrence (1969) ‘Stage and Sequence – the Cognitive-Developmental Approach to Socialization’, in D. A. Goslin (ed.) (1969) Handbook of Socialization Theory and Research (Chicago: Rand McNally).
Marx, Karl (1975) Early Writings (Harmondsworth: Penguin).
Mises, Ludwig von (1981) Socialism: An Economic and Sociological Analysis, translated from the second (1932) German edition of von Mises’s Die Gemeinwirtschaft (Indianapolis: Liberty Classics).
Mises, Ludwig von (1949) Human Action: A Treatise on Economics (London and New Haven: William Hodge and Yale University Press).
North, Douglass C. and Weingast, Barry R. (1989) ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’, Journal of Economic History, 49(4), December, pp. 803-32.
Proudhon, Pierre Joseph. (1890) What is Property? An Inquiry into the Principle of Right and Government, translated from the French edition of 1840 (New York: Humbold).
Smith, Adam (1759) The Theory of Moral Sentiments; or, An Essay Towards an Analysis of the Principles by which Men Naturally Judge Concerning the Conduct and Character, First of their Neighbours, and Afterwards of Themselves (London and Edinburgh: Millar, and Kincaid and Bell).
Smith, Adam (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, 2 vols, (London: Strahan and Cadell).
Stiglitz, Joseph E. (1994) Whither Socialism? (Cambridge, MA: MIT Press).
Tyler, Tom R. (1990) Why People Obey the Law (New Haven: Yale University Press).
Veblen, Thorstein B. (1898) ‘The Beginnings of Ownership’, American Journal of Sociology, 4(3), November, pp. 352-65.