Four Keys to Modern Prosperity: Property Rights

RECAP

We've now examined the five elements of the cycle of prosperity: technology, food supply, human capital, economic growth and wealth, and trade. We've noted that this cycle exists within two important societal environments. First is a physical environment, with its specific set of resources, challenges, and proximity to other societies. Second, a cultural environment shapes attitudes from notions of providence or fate to ideas about human relationships with the physical environment, values about human relationships, and perceptions of the ultimate purpose behind our existence. Regarding the European cultural environment, we've seen that those societies that would play a leading role in modern prosperity were deeply influenced by uniquely Judeo-Christian ideas of respecting individuals (and their property), linear time and progress, order and reason, and decentralization.

Before turning to the question of prosperity and the poorest people in the world today, I want to summarize what one scholar identifies as the four most critical factors that lead to prosperity in the modern world. Scholar William J. Bernstein identifies the following key issues in his book The Birth of Plenty: How the Prosperity of the Modern World Was Created.

• Property Rights
• Scientific Rationalism
• Capital Markets
• Technology and Infrastructure

(The next few posts are excerpts from essays I've previously written on this topic.)

PROPERTY RIGHTS

Without property rights and civil rights, little motivates the inventor or businessman to create and produce beyond his immediate need. (1)

Ancient World

Property rights refer to the ability of individuals to buy, sell and utilize goods with minimal or no interference from other players in society. It is not so much about the relationship between people and things as it is about the relationship between people concerning things. The one, truly significant example of property rights budding in the ancient world, was Greek Civilization during the middle portion of the first century B.C.E. Land was divided into small plots, decisions were made through democratic processes, and there was a highly egalitarian spirit among Greek citizens. Property rights were respected and institutionalized, but property primarily consisted of land. The population eventually grew to a point where the number of people exceeded the land to support them. The only option was to annex more land, but the Greek culture did not have conscription and could not form conquering armies without utterly transforming the very nature of their culture, and that is precisely what happened.

No other civilization, including Rome, ever approximated the kind of respect for property and civil rights the Greeks shared during those few centuries. William Bernstein notes that populist movements emerged in places here and there but never really took root. He points to the sabbath and Jubilee codes of the Old Testament as an exceptional vision of an egalitarian society in terms of individual and civil rights but rightly notes that there is no evidence that Israel ever abided by these codes.

European Middle Ages

With the collapse of the Roman Empire in the mid-first century, Europe dissolved into a myriad of feudal estates. Life became violent and dangerous. People gathered in communities and gave their allegiance to a lord in return for protection. The only unifying institution across Europe was the Church. The Church technically owned the land, and the feudal lord ruled a region on behalf of the Church. These lords eventually formed alliances with other lords installing regional rulers or kings.

Two factors acted as a check on the power of Kings and Queens. One was competition. If a King or Queen became too oppressive for the aristocracy, the aristocracy might unite in opposition or form alliances with their monarch's enemies. Second was the Church. The Church was the de facto bank of the time. Oppose the Church, and you might find yourself high and dry in a time of financial need. This is not to mention the power of the Church to excommunicate and inflict other punishments on rulers. Of course, the Church could also employ these measures against barons who rebelled against a ruler the Church favored. (2)

Magna Carta

Monarchs were required to pay an annual fee to the Church for the privilege of ruling. King John of England (1166-1216) rebelled against this idea but finally acceded after being excommunicated by the Pope. Shortly after, he embarked on a disastrous military campaign to take Normandy and ran out of funds. John engaged in a wide variety of injustices to collect the funds he needed from his subjects. The barons united against him, and John quickly faced a dilemma. He was hardly in the good graces of the Pope, and his barons were united against him. He was forced to make a deal.

The barons drew up a list of demands called the Magna Carta. They forced the King to acquiesce. The Magna Carta, signed in 1215, introduced such ideas as due process, trial by a jury, and taxation only with representation. Most notably, it made the King and the government subject not only to civil law (legislated law) but common law or being governed by time-honored traditions for ordering human affairs. This placed significant limitations on the King's ability to change laws arbitrarily. (3)

The Magna Carta did not come to full flower for at least another five hundred years. Kings resisted and challenged it at every turn, but over time, the Great Charter prevailed. Possibly contributing to its victory was the Plague in the middle of the fourteenth century. Approximately a third of Europe died in the Plague. The effect in England was that many aristocrats were left without sufficient labor to maintain their estates. The price of labor soared. Attempts to freeze wages and bind peasants to the estates failed. Many peasants prospered, and some assumed control over estates abandoned by the wealthy either because of death or bankruptcy. The Plague increased the number of people with an economic stake in society across Europe but especially in England. A more widely shared economic stake also meant a more widely shared determination to protect that stake.

Renaissance to Enlightenment

The progress of property rights was slow from the time of the Magna Carta to the seventeenth century. Over the centuries, the Magna Carta came to be taken for granted as the basis for the English government. The next significant leap came in the late sixteenth and early seventeenth centuries with Sir Edward Coke. Coke had been made a justice of the King's bench and eventually established an independent judiciary, grounding his case firmly in the Magna Carta. Everyone was subject to the law, from peasants to the King, for the first time. (4)

As the Reformation and the Counter-Reformation radically altered intellectual life in Europe, new thinkers arose, providing a more thoroughly developed rationale for property rights and liberal democracy. John Locke (1632-1704), Adam Smith (1723-1790), and Thomas Jefferson (1743-1826) are among some of the more notable contributors.

Another important innovation, evolving first in Italy and later in Holland and England, was the idea of the corporation. Corporations allowed for the amassing and investment of large sums of capital. The more important feature was the corporation's limited liability to individual investors. Investors were only liable for the amount they invested in a given enterprise. Creditors were prohibited from coming after personal assets when corporate enterprises failed. Similarly, debtor's prison was eventually abolished, removing a major obstacle to entrepreneurs taking business risks. It is one thing to lose your possessions in a business venture but quite another to lose your freedom. (5)

Another important innovation was the emergence of intellectual property rights like patents and copyrights. William Bernstein claims the first patent law was issued in Florence in 1474. (6) Evolving over time, intellectual property rights spurred innovation by ensuring inventors and other creative entrepreneurs that their often-arduous efforts would be financially rewarded. Without such rights, an inventor could spend years developing and perfecting a technology, only to have someone steal it and profit from it. Intellectual property rights guaranteed inventors the control and distribution of the technology they created for a fixed period. They could retain the use of patents for themselves or lease their use. This set off a wave of some of the most creative endeavors in the history of humanity and was one of the key ingredients of the Industrial Revolution.

Industrial Revolution and Beyond

William Bernstein points out that up until 1800, property was virtually synonymous with land. (13) Most commerce was primarily done by raising crops and livestock for consumption and trade—this required land. Certainly, there were other occupations, but they made up a small part of the total economy. The amassing of capital and its productive employment since the Eighteenth Century has changed all that. Land is now only a small part of the economy. Over the past two centuries, we have witnessed ever greater elaborations of property rights as the nature of property has radically changed.

Bernstein notes that there were three liberal democracies with the attendant respect for property rights in 1790: England, the United States of America, and Switzerland. By 1900 there were thirteen. Sixty years later, there were thirty-six. He estimated sixty-one in 1990. Despite occasional setbacks, the valuing and protection of property rights continue to expand across the globe. (14)

Why Property Rights Are Important

No economic system where property has been held in common has led to widespread, sustained prosperity. Within any human community, some will be more gifted at, or more willing to do, productive labor. Those who are less efficient and productive have no incentive to improve. They benefit at the expense of the more productive. More productive people receive no additional benefit for their better-than-average production and have no reason to be so productive. Productivity sinks to the level of the least productive members.

Private property rights make it much more probable that someone will receive just compensation for their work compared to others who do similar work. Risk takers are motivated to take greater risks because they can be assured they will reap the rewards of their efforts. Thieves or government entities will not deprive them of the new wealth they create. This seems so "ho-hum" to many of us today. Yet it is only within the last couple of centuries that entire societies could take such thinking for granted if they can now. Property rights have been at the core of the unprecedented prosperity of recent centuries.

(1) William J. Bernstein, The Birth of Plenty: How the Prosperity of the Modern World was Created, (New York: McGraw-Hill, 2004).

(2) Bernstein, 56.

(3) Bernstein, 71-73.

(4) Bernstein, 74-78.

(5) Bernstein, 149-156.

(6) Bernstein, 83.

(7) Bernstein, 90.

(8) Bernstein, 71.

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