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The Importance of Property Rights

Written by Paul Boyce Posted in Microeconomics > >Economic Systems
Last Updated February 7, 2023

Property Rights Definition

Property rights provide the owner with the legal ownership of a resource. This is backed and enforced by the legal system as well as the protections government provides through law and order. It allows owners to freely use their resources however they see fit – with the comfort that their assets will be legally protected. For businesses, this means that they have the right to use their capital to produce goods without fear of loss.

Key Points

Property rights refer to the legal ownership of a resource which is protected through the legal system and the law and order of the government.
Property rights allow disputes over resources be resolved in an amicable way through the courts.
As there are property rights, businesses and consumers are more willing to invest and spend time developing economic resources as the gains will be granted to them individually.

For consumers, it means they have the sole ownership of the land and property they purchased. That means they have the legal entitlement to prevent individuals from trespassing and using their land for personal gain. This is protected by the legal system and law and enforcement provided by the government.

These property rights allow for a free and efficient market. In fact, a free market relies on strong property rights as a fish is to water. By employing property rights, any disputes over economic resources are resolved in a peaceful and amicable way through the courts.

The importance of property rights cannot be understated. It is one of the key cornerstones of a stable and prosperous economy. Let’s look at how below:

The Role of the Legal System in Property Rights

Rather than disputes leading to violence, the legal system resolves them. Without such a system, there is no right to an asset or retail estate. For example, let’s say Mr Jones builds a house for himself. He may leave it vacant for a time, only to find someone else has moved in.

Without property rights and a legal system, he has no ownership, therefore, he has no authority to remove the other party. This defeats the point of ownership – highlighting the importance of property rights. With property rights, Mr Jones is able to use the legal system to evict and reclaim the property that is his. The culprit will be brought to court and will be forced to pass back the property to the rightful owner.

If Mr Jones has no right to the car he just exchanged a year’s salary for why would he bother purchasing it? The incentive to purchase a product diminishes.

If the consumer has no right over the good they purchase, then anybody can freely take it. As a result, trade halts and production is almost non-existent. Imagine a society where there is no consequence of theft – which would be the state the economy without property rights.

Importance of Property Rights

1. Property Rights Guarantee Freedom

Property rights guarantee freedom because control of production is spread among many acting bodies; nobody has complete power of resources. Whether ‘society’ or central government controls the means of production; both have complete control.

When governments own resources, a few people decide what to produce, how much to produce and for how much. Instead, millions of individuals own their own resources which they can use for whatever they see fit. This allows for the right and freedom for individuals to pursue their own interests. At the same time, it provides an incentive for people to live, work, and save.

2. Economic Progress And Incentive To Work

Without private property, what incentive is there to work? If the house you live in is not yours, then why make improvements? You may not own the house, but who does… the government? What would be the incentive to build the house in the first place?

When there is no private property, there is no incentive other than subsistence. Private property gives individuals an incentive to earn, invest, and accumulate wealth. It incentivizes people to earn as wealth can accumulate. That accumulation can be used for future consumption.

Human wants are inherently infinite and private property allows humans to accumulate wealth and satisfy future wants. This can be for the purpose of our own consumption, but also the purpose of providing for our children.

3. Protection of Ecosystem

The importance of property rights can be extended to the ecosystem. What such rights do, is assign the right to a specific piece of land. Without such, it is a common resource that can be used and exploited by everyone. For example, fishing is a known area that can potentially lead to overuse without property rights.

If a fisher owns rights to a specific part of the sea, it is in their interest to ensure there will be sufficient fish in the long term. This results in limited resource extraction. A fisher will want to ensure they can make an earning tomorrow.

What these property rights do is allow for the long-term allocation of resources to be considered. Without such, individuals will rush to catch all of the fish in the sea before others are able to benefit.

4. Intellectual Property Rights

Private property rights extend beyond the realms of physical property. There are also intellectual property rights to consider such as patents, copyrights, trademarks, and trade secrets. These protect ideas and business secrets, but how do these help the economy and society? Well, they provide the foundations for ideas to grow and develop.

Are businesses going to spend years and millions on developing a new product or idea, only for it to be copied at a fraction of the cost? It allows businesses to protect their trade secrets like Coca-Cola does with its recipe. Without protections like patents, investors are unwilling and unlikely to invest. For example, within the pharmaceutical sector, millions of dollars are spent on research & development, which requires patent approval.

IP rights incentivizes entrepreneurs to keep innovating and pushing for new developments and technology in the knowledge that they will be protected in the end.

5. Protection From Confiscation and Government Control

The ease at which the government can take back property is a serious concern; so many systems try to prevent this through the allocation of property rights. Some countries employ restrictions on government’s power, but they do not prevent government over-reach. For example, the US government has a power called ’eminent domain’. This allows the confiscation of private property for public use – as long as a fair price is paid. The courts then judge what a fair price is. However, this price is frequently below the owner’s value.

Whilst the US has strong property rights, they are by no means encompassing. When we look at countries with strong property rights, we see a direct correlation with prosperity.

Countries such as Singapore and Hong Kong rank highly on property rights. The likes of Venezuela and Haiti are among the weakest. It only goes to show the importance of property rights. Without such strong property rights, nothing will protect the average citizen from government dictatorship and control.

6. Absence of property rights can lead to violence

In some countries such as India, residents are easily evicted without warning or compensation. Thousands are displaced due to infrastructural projects which force residents to resettle elsewhere. This can lead to resentment, anger, and violence.

When individuals believe that the home they built is theirs, but others come and destroy it, violence can result. It might be a government or privately led project that claims the land for re-development – at the price of peoples livelihoods. Without private property rights, those residents have no recourse to fight other than through physical means. They cannot go to court, and they have no legal right to that land due to the absence of property rights.

7. Economic Prosperity

When individuals have a claim on a land, home, or other type of property, they are able to benefit economically. For example, that asset can be sold on to another individual, with the associated rights also being passed on. In addition, that asset can be used as collateral to borrow money. Homes are frequently used as collateral in order to allow consumers to obtain a mortgage – something that would be impossible without property rights.

Mortgage lenders own the official property rights until that debt has been paid off, whereby the title deeds are then transferred over to the owner. Only once the mortgage is paid, are the property rights transferred, but it is through this agreement which makes lending thousands of dollars a secure transaction for lenders. Without property rights, there would be no mortgage business.

The same applies to businesses and shareholders. Investors would not invest billions of dollars into businesses if they did not have a stake in that company. Once shares are purchased, they have a formal and legally recognized stake in that company. Without property rights, it could own a share, but would have no legal basis if the company said that it did not issue those shares.

Conclusion

Property rights set the foundation for a successful economy. It incentivises investment and leads to greater levels of productivity. We only need to look at countries such as Venezuela or South Sudan to realise its importance.

Even when we compare European countries, there is a direct correlation between economic prosperity and the strength of property rights. For example, the UK, and the Scandinavian region score very highly on property rights, whilst the likes of Greece and Poland score lowly.

The benefits are clear to see. For example, land certification in Ethiopia led to land productivity increases of 40 to 45 percent in the Tigray Region. Investment in Rwanda doubled in farmers’ soil conservation, whilst in rural Benin; communities that participated in a process to map and recognize land rights, were 39 to 43 percent more likely to shift their crop investments from subsistence to long-term and perennial cash crops, and tree planting.

Property rights not only bring about economic growth and investment, but also guarantee the freedom of the individual. If government is unable to confiscate property from an individual, it secures their freedom. However, property rights are still not perfect and in many countries, government is still able to confiscate land, albeit at a market price.

The importance of property rights is un-disputable. Without such, we would most likely still be living in some feudal system.

About Paul

Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.