A Note on Property Rights

There is a lively discussion taking place on this site regarding my favorite subject: property rights, so I just had to weigh in.

In economics we find it useful to differentiate between legal property rights and economic property rights.  In reality it must be true that 100% of property rights are derived from physical force.  In the absence of a powerful government someone only “owns” that which they can defend from everyone else.  Since this is not a very desireable situation for anyone involved, people try to create legal property rights as a proxy so that they can specialize in more productive activities than capturing/defending their property.

These rights don’t stand alone however, they have to be defended by force.  That force is wielded by the government that to be effective must remain strong  enough to overpower the individuals over which it reigns, at least individually (though not necessarily all of them combined).  What we see in Argentina is a case where the legal right of the owners is not sufficiently protected by the government in some cases (note here that in some cases these rights were enforced).  And in these cases the workers managed to gain economic property rights at the point of the proverbial sword.

There are serious implications that go along with this however.  For one thing, if these workers were actually producing more value worth of goods than they were using up by depreciating the capital of their employers it seems as though they could have come to a peacful agreement to keep working.  The inability to do this seems to indicate that the capital could have been better used for some other purpose.  If this is true the individual owner has an incentive to reallocate it to capture the rents which would be associated with using said capital in its most productive capacity.  However when those individual property rights are dissolved nobody owns the rents from the property and so there is no incentive to reallocate it to its most productive use.  See tradgedy of the commons.

The second and probably more serious implication of a situation like this is that it has potential to destroy the incentive to invest in productive assets because an invester cannot be sure that those assets or their derived products will be defended.  This would not be a very happy situation for anyone in the long run.