Property & institutions

If rights are clearly defined and bargaining is costless, people bargain to the efficient outcome whoever holds the right; the law only changes who pays whom.

Coase never claimed transaction costs are zero. His point was the reverse: because they are positive in real life, how the law assigns rights does change what happens, so it should be judged by the outcome it produces.

Ronald Coase, The Problem of Social Cost (1960)

The costs of using markets: finding a trading partner, negotiating, writing a contract, checking it is kept and enforcing it.

They are the friction behind most of this chapter. They explain why firms exist, why some harms are never bargained away, and why institutions that make strangers trustworthy are worth so much.

Coase, The Nature of the Firm (1937); The Problem of Social Cost (1960)

A conflict of uses has two sides: stopping the factory harms the factory just as smoke harms the laundry.

The question is not 'who is to blame?' but 'which arrangement produces the most value?'. Sometimes the cheapest fix is on the victim's side (indoor dryers, moving away), and a rule that only restrains the 'polluter' can destroy value.

Coase, The Problem of Social Cost (1960)

A cost or benefit of an activity that falls on people who are not party to it, such as smoke from a chimney.

Arthur Pigou argued that markets over-produce activities with external costs. Coase reframed the problem as one of missing or unclear property rights plus the cost of bargaining over them.

A. C. Pigou, The Economics of Welfare (1920)

A tax on each unit of a harmful activity equal to the damage it does to others.

It needs no negotiation, which makes it attractive when the people harmed are many. Coase's objections: the regulator must know the damage, and a tax that ignores cheaper avoidance by the victims can reduce total value.

A. C. Pigou, The Economics of Welfare (1920)

Firms exist because directing work by command is sometimes cheaper than buying each piece on the market; a firm grows until organizing one more activity inside costs as much as buying it.

It explains why the economy is islands of planning in a sea of markets, and why firm boundaries move when communication and management technology change.

Ronald Coase, The Nature of the Firm (1937)

How much an investment is worth only within one particular relationship, such as a die made for one car model.

Oliver Williamson built on Coase: the more specific the asset, the more a contract partner can hold you up once you've invested, so such activities tend to be brought inside the firm.

Oliver Williamson, Markets and Hierarchies (1975)

When a resource is open to all, each user gets the full gain from taking more and bears only a fraction of the depletion, so the resource is over-used, sometimes to collapse.

Hardin's 1968 essay made it famous (the idea goes back to Aristotle and William Forster Lloyd). His remedies were private property or government control; Ostrom later showed a third way.

Garrett Hardin, The Tragedy of the Commons, Science (1968)

Open access means no one can be excluded; common property means a defined group owns a resource jointly and can exclude outsiders.

Hardin's tragedy is really a tragedy of open access. A community that owns and governs a commons can manage it well, as many have for centuries.

Ostrom, Governing the Commons (1990)

Property rights appear when the gains from internalizing a cost or benefit grow larger than the cost of defining and enforcing the right.

Demsetz's example: when the fur trade raised the value of beaver, the Montagnais of Labrador developed family hunting territories. Property is an evolving answer to scarcity, not a fixed legal fact.

Harold Demsetz, Toward a Theory of Property Rights (1967)

A total allowable catch split into shares that fishers own and can trade.

A share in a fixed total turns a race for fish into ownership of a future stream of catch, so fishers gain from a healthy stock and the least efficient boats sell out.

Eight features shared by long-lasting, self-governed commons: clear boundaries, rules fit to local conditions, users make the rules, monitoring, graduated sanctions, cheap conflict resolution, recognition by outside authorities, and nested layers.

They came from comparing real cases that lasted for centuries with ones that failed. They are not a blueprint but a checklist of what working arrangements tend to have.

Elinor Ostrom, Governing the Commons (1990)

Many overlapping centres of decision (local, regional, national) instead of one top-down authority.

Local users know the resource and can adapt the rules; higher levels handle what crosses boundaries. Ostrom shared the 2009 Nobel Prize for showing this works better than either pure market or pure state solutions in many settings.

Vincent & Elinor Ostrom; Ostrom, Nobel lecture (2009)

Assets the poor already own, mainly homes and land, that cannot be used as collateral, sold widely or invested because they lack formal legal title.

De Soto estimated it at about $9.3 trillion worldwide in 2000. The problem isn't a lack of savings but that the savings are held in a form the legal system can't see. Later studies (e.g. in Peru and Argentina) found titling raised investment and security, with smaller credit effects than he predicted.

Hernando de Soto, The Mystery of Capital (2000)

Living and working outside the formal legal system because getting into it costs too much.

De Soto's team spent 289 days, six hours a day, legally registering a one-worker garment workshop in Lima. When legality costs that much, informality is rational, and the cost is paid by the poor.

Hernando de Soto, The Other Path (1986)

Public records that describe who owns what in a standard way, so assets can be pledged, divided, sold and traced by strangers.

In de Soto's account, the paper representation is what turns a house into capital: it gives the owner an address, accountability and a way to borrow against it.

Hernando de Soto, The Mystery of Capital (2000)

Institutions are the humanly devised constraints that structure interaction: formal rules (laws, constitutions), informal norms, and how they are enforced.

North argued they are the main reason some societies grow and others don't: they set the payoff to producing versus predating, and they shape what organizations form and learn.

Douglass North, Institutions, Institutional Change and Economic Performance (1990)

Trade with strangers you may never meet again, as opposed to personal exchange among kin and neighbours kept honest by reputation.

Big gains from specialization need large markets, which means dealing with strangers. That requires third-party enforcement of contracts, which most societies in history never achieved.

North, Institutions, Institutional Change and Economic Performance (1990)

A state's ability to bind itself not to seize property or default on debts.

North and Weingast argued that after 1688, Parliament's control over taxes made the English crown's promises believable, and interest rates on government debt fell sharply. A state strong enough to protect property is also strong enough to take it.

North & Weingast, Constitutions and Commitment (1989)

Inclusive institutions protect property and open markets and politics to many; extractive ones concentrate power and income in a narrow elite.

Acemoglu and Robinson use paired cases (the two Nogales, the two Koreas) to argue that institutions, not geography or culture, mainly explain why nations fail. Critics question how far the categories can be measured.

Acemoglu & Robinson, Why Nations Fail (2012)