Harold Demsetz on Why and When Property Rights Develop
In the early 1960s, the parents of one of the authors left him [David R. Henderson, for those who are wondering], his brother, and his sister a lot. Such situations, with one pre-teen (the author) and two teenag- ers, can lead to a lot of conflict. On one issue, the three siblings figured out how to reduce conflict to zero by defining property rights. The family had a corn popper and all three liked popcorn. But there was a problem. Even when the three agreed on who was to pop the corn and who was to wash the resulting dishes (leaving no unwashed dishes was a strict household rule), each of the three had an incentive to eat quickly out of the common popcorn bowl so that he or she would get the popcorn ahead of his or her siblings. After only a few times in which all three ate popcorn more quickly than they ideally wanted to, they devised a solution. They poured the popcorn from the corn popper in equal amounts into three bowls. Then each had a bowl that was his or hers and each could take his/her sweet time eating. Problem solved. Tragedy of the commons averted. Harold Demsetz would have been proud.
When and why do property rights come about? It’s an important ques- tion but it was relatively unstudied by economists before the UCLA School got its hands on the issue. A pathbreaking article that gave an answer was Harold Demsetz’s 1967 “Toward a Theory of Property Rights” published in the American Economic Review.
Although economists are known to make unjustified fun of anthro- pologists, Demsetz took them seriously and read their literature. The specific area Demsetz studied was the development of property rights, or the lack of their development, among Aboriginal Canadians and native Americans. Anthropologist Frank G. Speck, wrote Demsetz, had “discovered that the Indians of the Labrador Peninsula had a long-established tradition of property in land.” The Speck article that Demsetz cited had been published way back in 1915. His finding was at odds with what anthropologists knew about Indians in the American Southwest. Anthropologist Eleanor Leacock, noting that dif- ference, inquired further into the situation of the Labrador Indians and wrote up her findings in 1954. According to Demsetz, “Leacock clearly established the fact that a close relationship existed, both historically and geographically, between the development of private rights in land and the development of the commercial fur trade” (1967: 351).
Reading Leacock’s article gave Demsetz his “aha” moment. He noted that although the factual basis of the correlation was solid, no theory that he knew of had related private property in land to the fact of the fur trade. But to Demsetz it seemed obvious. And in laying out his insight, Demsetz made a further contribution: he analyzed the tragedy of commons a full year and a half before the famous Science article, “The Tragedy of the Commons,” by biologist Garrett Hardin. The Hardin article had introduced the concept of the tragedy of the commons. The core idea is that if a commons, that is, an area that no one owns, is unmanaged, people will overuse it. If, for example, no one owns land on which cattle graze, and no one manages the land, cattle owners will overgraze the land and reduce its value. The Hardin article is one of the most-cited Science articles ever.
The pic above is of Harold Demsetz. Here is his bio in David R. Henderson, ed., The Concise Encyclopedia of Economics.