Property Rights and Prosperity

THERE HAS BEEN a strong connection between private property rights and prosperity throughout history. As a nation obtains more private property rights, it also obtains higher degrees of prosperity. There are three fundamental reasons for this relationship. Private property rights:

  • Lower the cost of self-defense
  • Reduce uncertainty
  • Allow individuals to reveal their preferences through trade.

The first key benefit to a system of private property rights is that it reduces the cost of self-defense. In most cases, a central authority places high costs on those who violate property law. For example, if someone steals your car, a central authority will send police to conduct an investigation. If the criminal is caught, he/she will be brought to court. If proven guilty, the criminal will be forced to pay a fine or serve jail time. This system of private property rights allows you to spend less time protecting your car and more time being productive.

In the absence of a system of private property rights, self-defense is much more costly. Suppose you lived in a place with no private property rights enforcement. You would have to protect all your property yourself, and constantly waste time keeping that property safe. A robber could easily hit you over the head and take everything, leaving you with no way to recover the stolen property.

Under such circumstances, individuals would not produce more than they could defend by themselves. Additionally, there would be limited trust amongst individuals, which prohibits productive and cooperative behavior such as specialization and the division of labor. Entrepreneurs would not be able to trust others in production or trade, as workers could easily steal goods with little or no consequence.

The second key benefit of a system of private property rights is that it reduces uncertainty. This concept ties into the first and helps increase the productive capacity of each individual. Uncertainty is reduced because individuals know that their property will be stolen less on average, and that there is a higher probability of receiving compensation for lost property. Under these circumstances, individuals are willing to own more things, which enhances trade opportunities and offers incentives for entrepreneurs to begin organizing resources.

The third key benefit to a system of private property rights is that it allows for individuals to reveal their preferences through trade. If you are not allowed to own anything, it would be impossible to trade. If individuals are not trading, it would be difficult to know what those particular individuals desire.

For example, under a system of private property rights, you are allowed to voluntarily trade your labor for a wage. Once you begin earning a wage, you are free to spend the earnings on whatever you desire. If you were not allowed to own property, on the other hand, you would not be able to go to a market and trade things you value less for things you value more. Under these circumstances, it would be difficult for anyone to know what to produce for you or anyone else, since preferences would not be expressed through trade.

Eventually, the preferences of every individual in society evolve into prices that naturally emerge in a market. Prices offer valuable information to all those trading in the market. A high price signals to producers to produce more and consumers to consume less, which prevents a shortage. A high price also signals to producers to search for cheaper substitutes, which guides producers to use each resource to its most valued use. When prices fall, producers produce less, and consumers consume more to prevent a surplus. Additionally, a low price attracts producers to use the good as a substitute to any material they are currently using.

Private property rights are essential to the development of a prosperous economy. The system allows individuals to pursue their own goals with minimal interference from external factors. As private property rights are eroded, the individual becomes more restricted, which makes it harder for individuals to achieve their respective goals. The state of Michigan is a showcase example, as additional regulations and taxes restrict individuals from using their property in ways they see best.

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