Chapters:
- Introduction
- Price System and Voluntary Exchange
- Property Rights, the Rule of Law, and Contracts
- Helping Others and the Profit Motive
- Conclusion
- Glossary
Property Rights, the Rule of Law, and Contracts
Imagine you composed a song, recorded it, and posted it to your website. You send the link to family and friends to share what you accomplished. A few months later, one of your friends sends you a link to a trending YouTube video. As you watch and listen to it, something seems familiar. Then, it hits you! It's your song!
A song is one type of property (intellectual property), but there are others, as well. James Madison and Alexander Hamilton, authors of the Federalist papers, significantly influenced the U.S. Constitution by emphasizing the protection of property. Property can be classified three ways: real property, chattel, and intellectual. Real property includes things attached to land, such as a house. Chattel is sometimes called personal property and since it is not attached to land, it can be moved. You may wish to think of this as anything that is not real property. This may include your smartphone or even a sandwich. Intellectual property is the third type. You can think of this as property you cannot touch or define by physical boundaries. An example is the song noted in the prior paragraph.
With title or ownership of property, you're entitled to use your property as you wish. Some laws may restrict use, of course. For example, zoning laws may restrict your ability to erect a circus tent in your backyard and entertain others with dangerous live animals. You also have the law to prevent others from attempting to or actually using your property without your permission. Finally, the ownership of you property allows you to transfer the title to, or sell, your property to someone else.
There are limits to what you can claim as property. For example, it is illegal to convert uranium oxide into fissile material, even if you mined the uranium from your property. In other words, you are prohibited from using the basic material to create a new form that can be used in nuclear weapons. If you create U-235 using your mined material and knowledge, both of which you own, the material will be seized by the government.
It is the value described in the prior chapter that determines the market value of your property. This value also includes the opportunity cost addressed in chapter one.
A legal system that emphasizes property rights and contract law exists to protect the rights to your property, such as a song. It also assures others you have the right to transfer ownership, such as through a sale, or buy someone else's property. The assurance means when you sell something to another person, he or she knows that the title to the property is legally transferred. The same holds when you buy something from someone; you want to be sure you can do what you want with your new property.
Sometimes, though, the legal system allows an exception, as noted in this brief video:
Think about the car sale example earlier in this book, where you accidentally bought a stolen car. (Whoops! That's never good.) You couldn't do anything with the car because the police seized it, and you were out the money. That's one example of why legal title matters.
In order for a contract to be valid, it must first meet key requirements. There must be a valid offer from the person who wants to obtain a good or service. For example, someone offers to buy a Roger Clemens rookie baseball card for $499. Next, the owner of the card must agree to accept the offer, which can be oral or in writing. There are legal requirements for the type of contracts that have to be in writing. The third requirement is consideration. Consideration is something offered in exchange for the item being discussed. In the baseball card example, this is the $499 offered for the Roger Clemens baseball card. The form of consideration can include money, services offered, or even refraining from doing something. The buyer and seller each agree on the value of the baseball card and the type of consideration. The parties to the contract must intend to perform according to their agreement. For example, the seller gives the card to the buyer in exchange for the consideration. Each of the parties must be legally able to enter into a contract. These requirements may include that they be at least 18 years of age and of a sound mind. Finally, the contract must be for something legal. For example, you cannot enter into a contract to commit fraud. (Or for a stolen car!)
Contract enforcement is an important part of the assurances buyers and sellers look for when they look to trade. Without the rule of law that supports contract formation and enforcement, needs will go unmet. An absence of adequate contract law enforcement means buyers could not be sure they will be able to use property they acquire without interference. They may miss the opportunity to gain the value of incentives that encourage efficient use of the property.
Without property rights, the right incentives may not be in place to ensure it is properly used and cared for by society. The Tragedy of the Commons Professor Jay referenced is what results when people, acting in their own self-interest, use the common property in a manner that diminishes the value to society. The examples of lumber companies planting trees on land they harvest and placing elephants in Kenya on private property are solutions to the problem of common property.
The incentives property owners have to care for property include the value of the production possibilities of property, which can be sold to others who value them, and the preservation of the sentimental value attached to it if retained. Responsible use of the property means the maximum value of it may be obtained and/or extracted by the owner. Keep in mind, people can choose to be unproductive with their property because of what property ownership conveys to them. If the owner does not properly care for it, he or she bears the cost. (With rights come responsibility!)
Property rights support expectations you have when voluntarily entering into agreements with others. In the following, Beth considers selling the Beanie Babies she collected when she was younger. Her goal is to sell title to someone who values the Beanie babies. In exchange, she can obtain money to buy the new iPhone she wants. Part of the price Beth will look for includes the sentimental value she has for the Beanie Babies, but she should know that most buyers will not want to pay for that part of the value in the price, unless they also have a sentimental reason for wanting to buy them.