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FALL FROM GRACE
Over one hundred years ago, the institution of private property fell into intellectual disrepute. That is the great historical fact that we must face at the outset. No doubt some of the skeptics among my World Bank audience were quietly thinking that eighteenth-century ideas are a little passe at the end of the twentieth century. Property's fall from grace was gradual, beginning early in the nineteenth century. But with the Communist Manifesto the war on property became overt, and finally it became respectable. Property in the abstract was then viewed disparagingly by Western intellectuals for many decades. The form that this most commonly took was neglect.
In the 1950s, when Encyclopaedia Britannica Inc. published its Great Books of the Western World, property was not among the 102 topics in its index of "great ideas." Arnold Toynbee overlooked property in his 12-volume Study of History. Elsewhere, his comments showed that he saw no important difference between public and private property. William H. McNeill's Rise of the West and Oswald Spengler's Decline of the West alike found property dispensable. Fernand Braudel's three-volume Civilization and Capitalism, Fifteenth to Eighteenth Century, paid scant attention to property or law; as did A History of Civilizations, by the same author. Noting that the cause of Europe's rise has long intrigued scholars, Paul Kennedy, in his Rise and Fall of the Great Powers, attributed it not to political institutions but, more materialistically, to geography. Europe had escaped central domination largely because there are "no enormous plains over which an empire of horsemen could impose its swift dominion."
In academic circles in recent decades, John Locke's justification of private property--that people deserve to own what they labor to create--has been scrutinized with a degree of suspicion that would have impressed the apologists of the Stuart tyranny, with whom Locke was in contention. Although they extend over hundreds of pages, the arguments of the modern-day anti-Lockeans are vain, for the case for private property would be just as strong if he had never lived. That case is borne of human nature, not seventeenth-century philosophy.
In the all-important realm of constitutional law, 50 years ago "the U.S. Supreme Court interred property rights in the constitutional graveyard," the political scientist Dennis J. Coyle has written. By the mid-1930s, economic rights were no longer thought deserving of constitutional protection. Between 1928 and 1974, the Court refused to hear a single zoning case. In the area of psychology, Professor Richard Pipes of Harvard reports, a child-psychology researcher "expressed surprise that as of 1980 `there has been almost no empirical work, and no systematic theoretical work, on the psychology of possession--on the origins and development of individual possessiveness.'" This, Pipes added, a century after William James had suggested that the psychological implications of ownership were potentially considerable.
In economics, best-selling textbooks by Paul Samuelson and others either skirted questions of ownership or relegated them to a paragraph under the rubric of "capitalist ideology." Since World War II, almost all such texts have argued that a more rapid growth could be attained with state ownership than with private property. The University of California at Los Angeles economist Armen Alchian found that the fields of economics, as listed in the Directory of the American Economic Association in the mid-1970s, included no field "on Property, Entitlements, or Rights." Government, nonprofit and communal property were treated as if they were "no different in their effects than stereotyped private property rights." In graduate studies, property rights were for a long time an "untouchable area" for doctoral theses, according to the economist Steven Cheung. In his graduate studies in the 1970s, the Harvard economist Robert Barro heard nothing at all about property rights. Robert Solow of the Massachusetts Institute of Technology, winner of the Nobel Prize in economics in 1987, said: "I still believe the institution of private property has to keep proving itself." He referred to Proudhon's "insight" that "property is theft."
The economists' neglect is noteworthy. Starting with Adam Smith, the most influential treatises on political economy, as economics was then called, were written at a time when property was so highly regarded that defending it seemedsuperfluous. Private property was deemed "sacred." The English economists of the classical period did not analyze the legal institutions upon which their reasoning was predicated. It is hardly an exaggeration to say that by the time property came under attack, in the mid-nineteenth century, economists had written very little in its defense. Private property "was assumed and taken for granted, without investigation, by the nineteenth-century economists," wrote John R. Commons in The Legal Foundations of Capitalism. It has also been taken for granted much more recently--and by those for whom economic development is a professional concern.
THE BLESSINGS OF PRIVATE PROPERTY
The many blessings of a private-property system have never been properly analyzed, probably because of this peculiar history. It is a vast subject, and an introduction of this nature can only outline those benefits. But there are four great blessings that cannot easily be realized in a society that lacks the secure, decentralized, private ownership of goods. These are: liberty, justice, peace and prosperity. The argument of this book is that private property is a necessary (but not a sufficient) condition for these highly desirable social outcomes.
Of these, the relationship between liberty and property is by now fairly well understood. Leon Trotsky long ago pointed out that where there is no private ownership, individuals can be bent to the will of the state, under threat of starvation. The Nobel Prize-winning economist Milton Friedman has said that "you cannot have a free society without private property." Yet this elementary truth was not understood a hundred years ago, when intellectuals began to think of private property as a dispensable institution. It was the practical experience of Communism that made all the difference. Those who lived under its tyranny soon understood that without property rights, all other rights mean little or nothing. Angels and spirits surely do not need property, but human beings have not yet attained that incorporeal state.
Private property is a compromise between our desire for unrestricted liberty and the recognition that others have similar desires and rights. It is a way to be free, "and yet secure from the freedom of others," as the American University law professor James Boyle has written. Privacy these days is a much admired good, and American courts have discovered a right to it in the penumbras and emanations of the Constitution. Yet it is obvious that privacy cannot be attained without an anterior respect for private property.
Rights are held against the state, and property is an important bulwark against state power. Ownership in a society that protects and respects property will tend to be unequal, to be sure, and for over a hundred years property has been represented as an expression of power; but like all genuine rights, property rights protect the weak against the strong. Some early arrivals in the United States marveled that smallholders were as secure in their possession as the rich were in theirs. ("The law of the land is so constituted, that every man is secure in the enjoyment of his property," a group of German settlers in Maryland said in 1763. "[T]he meanest person is out of reach of oppression from the most powerful.") Recent immigrants have been delighted to find that you can buy property in the United States without paying bribes. The call for secure property rights in Third World countries today is not an attempt to help the rich. It is not the property of those who have access to Swiss bank accounts that needs to be protected. It is the small and insecure possessions of the poor. This key point was well understood in the first and best of the social encyclicals of the Catholic Church. In Rerum Novarum (On the Condition of the Working Classes), published in 1891, Pope Leo XIII wrote that the "fundamental principle of Socialism, which would make all possessions public property, is to be utterly rejected because it injures the very ones whom it seeks to help."
The institution of private property also plays a key role in establishing justice in a society. This is one of the most important arguments in its favor, yet the connection between private property and social justice has rarely been made, mainly because social justice has been equated with the distribution of already existing goods. Inequality is equated with injustice. Nonetheless, a private property regime makes people responsible for their own actions in the realm of material goods. Such a system therefore ensures that people experience the consequences of their own acts. Property sets up fences, but it also surrounds us with mirrors, reflecting back upon us the consequences of our own behavior. Both the prudent and the profligate will tend to experience their deserts. Therefore, a society of private property goes some way toward institutionalizing justice. As Professor James Q. Wilson has said, property is a "powerful antidote to unfettered selfishness."
Property is also the most peaceable of institutions. In a society of private property, goods must be either voluntarily exchanged or laboriously created. As long as such ownership is protected by the state, goods cannot easily be taken by force. Furthermore, a society with legal institutions that encourage the creation of wealth poses a diminished threat to the wealth of neighbors. In contrast, mutual raiding parties will flourish in adjacent societies with communal ownership. Private property also allows a country to become rich enough to defend itself against aggressive neighbors, thereby reducing the likelihood of conflict.
Private property both disperses power and shields us from the coercion of others. It enables us to formulate our own plans and to use the information that is uniquely in our heads. It leaves us free to act without interference, within our own autonomous spheres. People are not only permitted to make their own plans, but to a considerable degree are obliged to do so. Nonetheless, in most countries the trend for much of the twentieth century has until recently been in the reverse direction. Power has been centralized almost everywhere, and property frequently nationalized. Where this was carried to an extreme--in the centrally planned economies of the Communist countries--a few "master brains" at the center were supposed to plan for everyone. Most people were thereby reduced to servile status. That is why all such countries turned out to be tyrannical. The state was at war with the natural inclinations of the people.
Prosperity and property are intimately connected. Exchange is the basic market activity, and when goods are not individually owned, they cannot easily be exchanged. Free-market economies, therefore, can only be built on a private property base. Property rights are "the fundament of a market economy," as Daniel Yergin and Joseph Stanislaw note in The Commanding Heights. By the same token, a knowledge of existing property rules in a society is a prerequisite of economic analysis, and the effects of such rules ought to be made explicit in economic theory. Private ownership permits people to "evaluate" what they own and (in both the everyday and the financial sense) to "realize" that value. It enables them to decide how much to ask, or to bid, for the good in question.
This connection, between prosperity and private property, has only been recently accepted. For a long time, many people thought that centrally directed and planned economies could improve upon the free-market system. But it turned out that non-owners employed by the state could not successfully substitute their own commands for the vast multiplicity of market judgments and exchanges. The belief that planners could do this, thereby achieving the same outcome as that produced by private ownership (or a better outcome, because supposedly more just), was the key economic delusion of socialism.
THE LENS OF PROPERTY
Seen through the lens of property, the continued and unanticipated preeminence of the West in the half century since World War II becomes understandable. Those countries that enjoyed well-developed private property before disenchantment set in have continued to enjoy real economic growth. But the new nations of the postcolonial period, experimenting with untried methods, have experienced failure. After the Soviets came to power, misleading economic statistics obscured the real (and dismal) results of Communism. This error continued for decades. For a long time, therefore, it seemed that the Marxian criticism of private property (that it was little more than an expression of class interest) had been validated. The central-planning system seemed to be working well without it. Property's true role in economic life was thereby masked. For if, as America's best-selling economics textbook claimed as recently as 1987, "the Soviet growth rate has generally exceeded that of the United States in the post-World War II period as a whole," how could anyone claim that private property was indispensable to economic growth?
Today, it seems probable that the gross domestic product (GDP) of the Soviet Union and its satellites were exaggerated by as much as a factor of ten. One example should suffice. The Statistical Abstract of the United States, published by the Department of Commerce, includes a table comparing GDP per capita in different countries. In 1989, the year the Berlin Wall fell, per capita income was said to be higher in East Germany ($10,330) than in West Germany ($10,320). The same table also alleged that East Germany's GDP per capita in 1980 was higher than Japan's. No one even tries to defend these figures today.
The problem was not just statistical credulity. Development economists and elites had failed to grasp the true institutional requirements of economic growth. To some extent these requirements are still not understood. For example, the repeated call for "democracy" abroad suggests that Western political institutions have not been analyzed much beyond the obligation to hold elections periodically. But democracy, like economy, must have its foundations. It is not something that can be set down, naked and exposed, on the unprepared terrain of anarchy or tyranny. That is not the foundation upon which democracy developed in the Western world itself, and there is no reason to expect that it will suffice for the Third World either.
In 1996, the Economist called attention on its cover to the "mystery of economic growth." Its persistently lopsided nature had for years been a considerable embarrassment to the "models" of economists. Something had been forgotten along the way. We can now see that it was private property and the rule of law. We are only just beginning to realize that the institutional structure of capitalism is not as "natural" as some have thought. It has proven much more difficult to replicate than was anticipated. Its consequences--the material outcome that we see around us--we take for granted. Few understand the antecedent legal substratum or its evolution. The Peruvian writer Hernando de Soto tells an amusing story of his inability to find someone (anyone) who could explain to him the legal foundations of Western economies. Eventually he concluded that no such person existed.
The welfare states of the Western world were built on the premise that property, particularly in its income form, was no longer sacred. It could be taken from some and given to others--to the advantage of all. The latter would enjoy it more than the former would miss it. This rearrangement was assumed to be both virtuous and efficient. The rich would be relieved of the temptation to excess and the poor would be relieved of their poverty. Meanwhile the "laws" of economics would ensure that the poor countries would catch up with the rich ones. The factors of production, capital in particular, would be more efficacious in the former than in the latter. Therefore the wealth of nations would converge. But it hasn't worked out that way.
The use of legal and political institutions as an explanatory device can be pursued only so far however. I argue, for example, that Britain was the first country in Europe to develop the correct (prosperity-encouraging) system outlined above. In this fashion Britain's great success and influence beginning in the eighteenth century can be explained. It is much harder to explain why this happened in Britain and not elsewhere. (Actually, Holland seems to have beaten Britain, but soon made a fatal error: taxes were set too high and the country became uncompetitive. But why the Dutch made this mistake and the British did not remains a mystery.) Again, why did the British surrender their lead in the twentieth century? One can point to statutory changes that increased regulation and decreased competition. But one cannot easily answer the question: Why did the governing class forget what it once knew? We are seeing a comparable amnesia in the United States today.
Vital to the prosperity-encouraging system was the great discovery of equality before the law. This is what the Romans did not have and what the British were rapidly moving towards. It is the most important single discovery of Western law, enshrined in the American Declaration of Independence. By the same token, discarding the presumption that people are sufficiently equal to be treated as such by the law, as is beginning to happen in the United States, is a grave error of policy. If not corrected it will give rise to great tensions and conflict and will be highly destructive.
Underlying everything said here is an assumption of approximate individual equality around the globe. Economic development in the world has of course been very unequal, but so have the relevant legal systems. All those countries that have advanced far ahead of others have enjoyed free, competitive markets, in which the appropriate incentives were established by law. Therefore the "theory" here is that, were all nations to enjoy the same legal and political infrastructure, they would also, eventually, enjoy comparable levels of economic development, irrespective of race. This theory might ultimately be falsified. Ethnic differences may be shown to have a noticeable, or even a considerable, effect. But the egalitarian theory should at least be given a heating. It is suggestive that residents of legally oppressive countries do become much more productive when they move abroad. The Indians, classified by caste and relatively unproductive in India but not elsewhere, are a striking example. Clearly, they have been oppressed by their laws, not by their genes. The same applies to the Irish.
Intriguingly, a new field called law and economics, introduced in the 1970s, has become influential in legal circles. The most tireless exponent, Richard A. Posner, almost single-handedly contrived to turn it into a movement. He had many interesting things to say, and by a roundabout method the new field did in the end help to restore property to economics departments. Still, there was something odd about the whole exercise. Even though Posner himself is a lawyer--he was appointed a federal appeals court judge in 1981 and he remains on that court today--law and economics was an imperialist exercise by economists, who were making claims about the impact of economics upon the law; more specifically, about the underlying rationale for the common law. Posner's startling claim was that economic efficiency was a surrogate for justice. The more fundamental claim, that economic life is itself dependent on the legal regime, was not entirely neglected, but it was given little emphasis.
Posner relished the idea that there was an objective and measurable thing called efficiency, and that it could be used to resolve the moral perplexities of the law. Old debates could be settled at last without recourse to the subjective claim that my "ought" is worthier than your "ought." This was all very intriguing, and controversial, and it stimulated a vast literature. Bruce Ackerman of Yale University Law School called law and economics "the most important thing that has happened in legal thought since the New Deal," even the most important development in legal education "since the birth of Harvard Law School." The subject is addressed in chapter 20.
PROPERTY AND PROGRESS
Property's eclipse coincided with the reign of the idea of progress. There was an important connection between the two: throughout history, most people have realistically been resigned to living in what might be called the Present Imperfect. As a result of the Fall, it was widely accepted, human nature was flawed. For this reason property was regarded as a necessary, although perhaps not an ideal, institution. The particular division of goods was neither ordained of God nor a necessary reflection of natural justice. But some division had to be accepted, if peace and harmony were to be preserved. That was the view of Saint Thomas Aquinas among others. It would be nice if we were perfect beings who could get along without the rules, boundaries and sanctions of ownership. But until that time came, property would be indispensable.
Before Edward Gibbon published The Decline and Fall of the Roman Empire, a better condition of society was usually visualized as a restoration of a Golden Age. Philosophers and poets looked back wistfully to an Eden before the Fall. Goods were held in common, yet people somehow still lived in peace. There was harmony without property. Jean-Jacques Rousseau, so modern in so many ways, was one of the last to propose such an age of primal innocence. Earlier, Seneca had described a time when "it was impossible for any man to have more or less than another; all things were divided among them without discord ... Not yet had the miser, by hiding his wealth away unused, deprived others of the very necessities of life." He quoted Virgil's description of a time when
No ploughman tilled the ground,
No fence dividing field from field was found;
When to the common store all gains were brought,
And earth gave freely goods which none had sought.
At the time of the French Revolution, or shortly before it, something new arose. What might be called the Future Perfect began to replace nostalgia for the past. The imperfection of human nature was conceded, but now was thought to be only temporary. A greater human perfection was to be expected in the future. This lay at the heart of the idea of progress--a new idea in the world, and a dangerous one. At exactly the same time, a number of thinkers began to harbor serious doubts about property. We begin to see in print such phrases as "the existing institution" or the "present system" of property. Because something better could be imagined, the existing system suddenly seemed defective. Therefore it should be changed--perhaps even abolished. Still others believed that, whether we liked it or not, change was on its way. And of course it was.
Until that time, anyone who suggested that the existing system of property should be changed had to contend with this objection: alternative rules of ownership, although perhaps desirable, were not feasible because incentives would be undermined. Private property, apparently, was the only arrangement that encouraged people to work hard. Communal living had been tried, but did not seem to work. Communards would start out amicably enough, happy to share and share alike, but within a year or two would end in bitter arguments. Then they would divide up or "privatize" the commune and go their separate ways. (In chapter 9, we see that this happened to Robert Owen's commune in Indiana.)
Now there was a hopeful rejoinder: Progress. Man had been selfish in the past, to be sure, and still was (in the Present Imperfect). But the future would be different--the Future Perfect. Human nature could not be changed? Don't be too sure. One day, man's moral evolution would triumph over original sin. And at that point private property would no longer be necessary. The new vision, in which society was to be built anew on different foundations, bringing forth a New Man, was for intellectuals greatly energizing. A real hope for the future replaced a merely poetic wistfulness about the past. Optimism replaced nostalgia.
What was the origin of this belief that human nature could be reformed? Richard Pipes of Harvard has made the interesting suggestion that an important role was played by John Locke. This is paradoxical, for he was also the great defender of property rights. Arguably, nonetheless, he both laid the groundwork for the modern defense of property and for the later attack on it. His Essay Concerning Human Understanding (1689) pointed the way toward the belief that human nature could be remade. Contradicting the doctrine of "innate ideas," Locke argued that all our knowledge and understanding was derived from sensory experience. The initial state of the mind was simply "white paper, void of all characters, without any ideas," he thought.
Locke here opened the door to a number of very modern ideas, among them a thoroughgoing materialism. (He was himself agnostic on that point, believing that "we shall never be able to know whether any mere material being thinks or no.") But there was something else: by controlling the inflooding sense data, he hinted, the content of our minds could be manipulated. "If it were worth while," he wrote, "no doubt a child might be so ordered as to have but a very few, even of the ordinary ideas, till he were grown up to a man."
Locke's Essay was published in France in 1700, where it had its greatest influence. Its possibilities were soon recognized by the philosophes of the Enlightenment. Among them was Claude Helvetius, whose De l'esprit (translated as Essays on the Mind) was published in 1758. "Locke has opened the road to truth," wrote Helvetius, who immediately saw the implications. If what we think is a function of the impressions we receive, then by legislation we can control what people learn and know. And so people can be improved. Not by religion, he added. For "it is not on religion, nor on what is called morality,... but on legislation alone, that the vices, the virtues, the power and the felicity of a people depend." By manipulating what we today would call the "learning environment," people could be molded this way or that. In fact, he proclaimed, education could do anything. ("L'education peut tout!") In indoctrination, and in reeducation camps, these ideas were carried to their logical conclusion in the twentieth century.
The founder of Russian Marxism, G. V. Plekhanov, included an admiring essay on Helvetius in his Essays in the History of Materialism. "In applying the principle of `physical sensation' he showed himself to be the most consistent and logical of the eighteenth-century materialists," Plekhanov wrote. As it happened, his essay was written in 1895, in Geneva. In that same year and city he met and befriended a like-minded revolutionary--Vladimir Ilyich Lenin.
Helvetius's belief that human nature could be reformed by legislation was "one of the most revolutionary ideas in the history of political thought," wrote Richard Pipes, who seems to have been the first to take note of Helevetius's role as intermediary between Locke and Lenin. "By extrapolation from an esoteric theory of knowledge, a new political theory is born with the most momentous practical implications." The new task of politics, then, was to make men virtuous.
For over a thousand years, in the Western world, the institution of property had been upheld by the doctrine of the Fall of Man, which was thought to have embedded a flaw deep within human nature. The new belief that mere legislation could make all the difference to this natural imperfection would have seemed absurd and childish, not to say impious and heretical, to the old thinkers. But once these revolutionary new ideas began to spread, as they did after the French Revolution, property came under attack. If human nature could be changed so easily, after all, then the old argument--that it was futile to try to reform something that had been put there by God--began to look merely reactionary.
Private property had been criticized before, and it had been defended at least since the time of Aristotle. But the onslaught of the nineteenth-century socialists--Godwin, Owen, Marx and others--was unprecedented in its intensity. The result was that property came under attack before it had been properly analyzed or defended. Cicero and others had put in a few good words for it in their day. Locke himself had defended the division of goods originally intended for all: individual labor justified removing it "out of that common state Nature left it in." David Hume had defended the existing distribution of property--an argument that naturally appealed to those who had inherited large estates. Sir William Blackstone set forth a mass of property-related legal rules a generation later. But when the Marxian attack came, there was no one ready to warn of the disastrous consequences that would flow from the abolition of private property.
The socialist claim that production would actually increase without private property in the means of production admittedly seemed outlandish, yet more and more people began to say just that. Because human nature had given rise to property, the strange idea took hold that the abolition of property would stimulate the reform of human nature. This fallacy helped legitimize the harsh changes soon implemented by the Bolsheviks. Now began their 70-year attempt to organize life without private property. Something close to a taboo against discussing the institution of property took hold and retained its power in this period. The hopeful experiment had been launched, with the Soviet Union as its laboratory.
Enthusiasts would go over to "the future" and bring back optimistic reports. "Putty is exactly like human nature," George Bernard Shaw wrote on his return in 1931. "You can twist it and pat it and model it into any shape you like; and when you have shaped it, it will set so hard that you would suppose that it could never take any other shape on earth." He added that the Soviet government "has shaped the Russian putty very carefully ... and it has set hard and produced quite a different sort of animal." At the end, in 1991, Boris Yeltsin spoke of the Soviet experience precisely as an experiment. He wished only that it had first been tried on a smaller scale.
In the years ahead, the growth of world population will only increase the importance of private property. If population doubles in the next century, privatization will be inescapable for all. When population was small in relation to territory, as it once was in North America, it did not matter that land was used communally and therefore wastefully. There was enough left over to prevent what Garrett Hardin called the tragedy of the commons. The same was true in Africa until recently. But if population growth continues, and if living standards are to be sustained, let alone improved, the whole world will have to be privatized before too long.
Normally it is said that if population trends continue, starvation will result, resources will be depleted, and the environment ravaged. But private property solves all these problems. It is in the thinly populated countries, where property is communal by custom or controlled by the state--Somalia, Ethiopia and Sudan, for example--that we have seen the worst of famine and environmental destruction. Countries that do not enjoy secure and transferable private property will certainly remain backward, however. That is because human nature is everywhere the same.
The great error of Enlightenment thinkers and of more recent philosophers was to imagine that human transformation would be a straightforward business. But human nature proved to be more intractable, and property less dispensable, than was imagined. This has given rise to a good deal of disappointment. In its more radical manifestations, the environmental movement today is probably an expression of disenchantment with the intractability of human nature. If mankind will not improve, then nature must at least be spared the depredations of so disappointing a creature. In Earth in the Balance, Vice President Al Gore was still hoping for a "wrenching transformation of society." But all that belongs to the past. No one talks seriously about "progress" any more, or believes that a "new man" can be conjured into existence by mere legislation.
Most Helpful Customer Reviews
Though sometimes a bit plodding, Bethell provides a wonderful recitation of the origins and development of property and its essential role in the creation and maintenance of free societies. Property is an institution that is under assault world-wide, particularly in this nation where, ironically, it became more refined than anywhere else and produced a degree of freedom and prosperity unequalled in the history of the world. The book should be required reading for Congress today.