NABE presidential address: property rights in a global economy - National Association of Business Economists

Business Economics, Jan, 1989 by W. Lee Hoskins

As business economists, we recognize the ability of free markets to raise living standards and limit the scope of government intrusion into economic affairs, but we have given less recognition to the source of that power - privately owned and transferable property rights. Private property rights and the pursuit of self-interest in integrated global markets are powerful and pervasive forces that increase the efficiency of resource use and limit the scope, or impose an explicit cost, on government policy actions. Intrusion that weakens property rights will have serious implications for freedom, voluntary choice, and efficiency.

A PRINCIPAL BENEFIT of being a NABE President is the opportunity to subject the members to views that the President regards as crucial and the membership sees as irrelevant.[1] My pleasure is doubled today because my new role as a central banker adds to my latitude to make unfounded assertions | unencumbered by theoretical rigor or supporting evidence.

At the risk of provoking an argument with Jerry Jordan, I would like to begin where I think he left off last year.[2] I believe that the crucial element in improving the wealth of nations has more to do with the strengthening of the rights of individuals world-wide to use their property in their own-self-interest than with trade imbalances and fiscal deficits.

My argument, simply stated, is that economists, in focusing as we do on the benefits of the pursuit of self-interest by individuals, all too often lose sight of the importance of the legal and institutional structure within which self-interest is pursued. The pursuit of self-interest is widespread and fundamental across societies, but some societies are much more effective than others in creating wealth and improving the human condition. My contention is that the difference lies in the presence or absence of private property rights and well-developed institutions to define and protect those rights. Indeed, a casual look around the world today suggests that the progress of economies that ignore this fundamental aspect of economics has creaked to a halt, while the progress of those that prized it has soared. As business economist we recognize the ability of worldwide free markets to raise living standards and limit the scope of government intrusion into economic affairs, but we have given less recognition to the source of the power: privately owned and transferable rights to resources. This oversight is important and one that should be corrected if we are to understand the evolution underway in the world today.

THE STRENGTHENING OF PRIVATE

PROPERTY RIGHTS - A GLOBAL THEME

As we look around the world today, we see country after country, in response to dissatisfaction with their own economies, attempting to emulate the success of others. Economists, politicians and the general public are recognizing that the centrally planned, government-managed economies waste resources, concentrate wealth and power in the hands of the few, and fail to raise living standards for the majority. As a result, an intensified search is underway for those institutional arrangements that are conductive to progress.

A Common Link

Changes in public policies, priorities and institutional arrangements are being made to improve economic performance and, in some countries, greater personal freedom. The common link affecting economic performance is open markets and private ownership. Are these changes simple a reflection of the ebb and flow of popular ideas and intellectual fashions? I think not. Several seemingly unrelated examples will illustrate my point.

The pressures for deregulation are rooted in the realization that it is a way to strengthen the bundle of private property rights associated with resource use. Regulation, as I use the term, simply refers to attempts to modify, supplant, or replace market outcomes with those mandated by government. Regulation does this by attenuating private property rights. Banking regulation, for example, keeps resources from flowing to their most valuable uses by restricting products, lines of business, geographic location and, until recently, prices on financial services. In addition, bank managers are required to collect data for numerous government agencies and provide services to others without adequate compensation. These governmental actions represent a "taking" by government and an erosion of private property rights. To the extent that these costs are significant, resources use will not be consistent with an efficient tradeoff between risk and return, an outcome which will be reflected in the market value of banks stocks.

Minimum wage laws also represent a weakening of private property rights. These laws restrict an individual's right to sell his property - labor services - to an employer for a mutually agreed price and the costs are explicit lost wages for the individual and lost output for society.

Privatization of many economic activities in the United Kingdom, the Soviet Union, China, and elsewhere is explicit recognition that privately owned resources produce more efficient outcomes than state-owned resources. The development and expansion of new financial markets and instruments expand the opportunity for trading bundles of private property rights among individuals (or their surrogates, managers of firms).