C2000 Daniel h. Cole and peter z gros Draft April 19 The meaning of Property "Rights: Law vs. Economics? Daniel H. cole M. Dale palmer professor of law Indiana University School of Law at Indianapolis and Peter Z. grossman Efroymson Associate Professor of Economics Butler University Introduction There are few, if any, concepts in economics more fundamental than"property rights. " Most elementary economics texts make the point, often early in the book, that a system of property rights "forms the basis for all market exchange" and that the allocation of property rights in society affects the efficiency of resource use. More generally, assumptions of well-defined property rights underlie all theoretical and empirical research about functioning markets. The literature further assumes that when rights are not clearly defined market failures result. The meaning of property rights is, thus, fundamental to the language of economics Given the importance of property "rights"in economics, it might be expected that there would The authors are grateful to Nick Georgakopoulos and richard ross for their helpful comments and suggestions on a draft of this article This quote is from Tregarthen and Rittenberg(2000, p 133), but similar statements on the central role of property rights are found in most introductory texts
* The authors are grateful to Nick Georgakopoulos and Richard Ross for their helpful comments and suggestions on a draft of this article. 1 This quote is from Tregarthen and Rittenberg (2000, p.133), but similar statements on the central role of property rights are found in most introductory texts. 1 ©2000 Daniel H. Cole and Peter Z. Grossman Draft April 19, 2000 The Meaning of Property “Rights:” Law vs. Economics? Daniel H. Cole M. Dale Palmer Professor of Law Indiana University School of Law at Indianapolis and Peter Z. Grossman* Efroymson Associate Professor of Economics Butler University I. Introduction There are few, if any, concepts in economics more fundamental than “property rights.” Most elementary economics texts make the point, often early in the book, that a system of property rights “forms the basis for all market exchange”1 and that the allocation of property rights in society affects the efficiency of resource use. More generally, assumptions of well-defined property rights underlie all theoretical and empirical research about functioning markets. The literature further assumes that when rights are not clearly defined market failures result. The meaning of property rights is, thus, fundamental to the language of economics. Given the importance of property “rights” in economics, it might be expected that there would
be some consensus in economic theory about what property "rights" are. But no such consensus appears to exist. In fact, property "rights"are defined variously and inconsistently in the economIcs literature. Moreover, the definitions offered by economists sometimes are distinctly at odds with the conventional understandings of legal scholars and the legal profession. Beyond semantics, different conceptions of property "rights " can lead to differences in analysis and to confusions in cross- disciplinary scholarship. Loose talk about property " rights"in the economics literature may even contribute to a belief, held by some legal scholars, that economic analysis of the law is irrelevant because it is based on unrealistic premises or, at least, premises very different from those upon which legal analysis is based(see, e.g., Leff 1974 White 1987) In this paper, we attempt to demonstrate how economists sometimes define property"Tights" in ways that diverge significantly from standard legal conceptions, and how those divergent definitions can bias economic analyses and create the potential for misunderstanding Section II provides a brief introduction to the theory of property rights that has predominated in legal theory and practice throughout the twentieth century. Section Ill then demonstrates, with a few examples-one from an elementary economics textbook, a second from a classic work of economic theory, and a third from a prominent property-rights economist- how economists sometimes define property rights in ways that diverge significantly from the conventional legal paradigm. Section IV discusses how these divergent definitions of property "rights" can create confusion and, if used to guide policy, lead to suboptimal economic outcomes. Section V concludes
2 be some consensus in economic theory about what property “rights” are. But no such consensus appears to exist. In fact, property “rights” are defined variously and inconsistently in the economics literature. Moreover, the definitions offered by economists sometimes are distinctly at odds with the conventional understandings of legal scholars and the legal profession. Beyond semantics, different conceptions of property “rights” can lead to differences in analysis and to confusions in crossdisciplinary scholarship. Loose talk about property “rights” in the economics literature may even contribute to a belief, held by some legal scholars, that economic analysis of the law is irrelevant because it is based on unrealistic premises or, at least, premises very different from those upon which legal analysis is based (see, e.g., Leff 1974; White 1987). In this paper, we attempt to demonstrate how economists sometimes define property “rights” in ways that diverge significantly from standard legal conceptions, and how those divergent definitions can bias economic analyses and create the potential for misunderstanding. Section II provides a brief introduction to the theory of property rights that has predominated in legal theory and practice throughout the twentieth century. Section III then demonstrates, with a few examples – one from an elementary economics textbook, a second from a classic work of economic theory, and a third from a prominent property-rights economist – how economists sometimes define property rights in ways that diverge significantly from the conventional legal paradigm. Section IV discusses how these divergent definitions of property “rights” can create confusion and, if used to guide policy, lead to suboptimal economic outcomes. Section V concludes
I. The hohfeldian paradigm of legal rights and duties First-year law students are taught that property rights are relations between people respecting things(see, e.g., Hohfeld 1913, 1917; Cohen, 1954, p. 373). Defining these property relations between owners and non-owners, and between claimants to disputed title- has been a basic task of both property theorists and common- law judges throughout American history. According to the predominant view, if person X holds a"right to something, at least one other must have a corresponding duty not to interfere with Xs possession and use. If X claims a"right, but cannot point to a corresponding" duty that is enforceable against at least one other person, then what X possesses may not be a"right at all but some lesser entitlement such as a privilege, liberty, or mere use This dominant approach to property rights and duties has a long history in American urisprudence and judicial practice. In the late nineteenth century, Holmes and Hodgson both argued that"It]o take rights and not the corresponding duties as the ultimate phenomena of law, is to stop short of a complete analysis"(Hodgson 1870, Vol. IL, pp. 169-70, quoted in Holmes 1872, p. 46). In the second decade of the twentieth century, Hohfeld (1913, 1917)elaborated on their relational approach to rights and duties in what has become one of the most influential and enduring works of American analytical jurisprudence Hohfeld(1913, p. 30)was concerned about precisely the kind of loose"rights" talk that still infests the economics literature today. IT]he term rights, he wrote, tends to be used indiscriminately to cover what in a given case may be a privilege, a power, or an immunity, rather than a right in the strictest sense. To resolve this problem, Hohfeld constructed an elaborate scheme of jural relations''(set out in Table 1), in which "right and duty are jural correlatives, Table 1. Hohfeld's
3 II. The Hohfeldian Paradigm of Legal Rights and Duties First-year law students are taught that property rights are relations between people respecting things (see, e.g., Hohfeld 1913, 1917; Cohen, 1954, p. 373). Defining these property relations – between owners and non-owners, and between claimants to disputed title – has been a basic task of both property theorists and common-law judges throughout American history. According to the predominant view, if person X holds a “right” to something, at least one other must have a corresponding duty not to interfere with X’s possession and use. If X claims a “right,” but cannot point to a corresponding “duty” that is enforceable against at least one other person, then what X possesses may not be a “right” at all but some lesser entitlement such as a privilege, liberty, or mere use. This dominant approach to property rights and duties has a long history in American jurisprudence and judicial practice. In the late nineteenth century, Holmes and Hodgson both argued that “[t]o take rights and not the corresponding duties as the ultimate phenomena of law, is to stop short of a complete analysis” (Hodgson 1870, Vol. II, pp. 169-70, quoted in Holmes 1872, p. 46). In the second decade of the twentieth century, Hohfeld (1913, 1917) elaborated on their relational approach to rights and duties in what has become one of the most influential and enduring works of American analytical jurisprudence. Hohfeld (1913, p. 30) was concerned about precisely the kind of loose “rights” talk that still infests the economics literature today. “[T]he term ‘rights,’” he wrote, “tends to be used indiscriminately to cover what in a given case may be a privilege, a power, or an immunity, rather than a right in the strictest sense.” To resolve this problem, Hohfeld constructed an elaborate scheme of “jural relations” (set out in Table 1), in which “right” and duty” are jural correlatives, Table 1. Hohfeld’s
System of Jural relations Elements Correlatives Opposites R duty No right Privilege or Liberty No Right Duty Disability Disability Liability so that in order to establish a"right (as opposed to some other, lesser, interest )one must be able to identify some corresponding duty that someone else possesses. In Hohfeld's system, to claim that industrial facility has a right to emit noxious substances into the air would necessarily be to claim that others have an enforceable duty not to interfere with their polluting activity. a legally enforceable right presumes a corresponding legally enforceable duty By contrast, to claim a freedom, liberty, or"privilege" with respect to some activity is not necessarily to argue that anyone or everyone else has some duty to refrain from interference; indeed everyone else may possess the same freedom, liberty, or privilege. Similarly, in the Hohfeldian scheme, a claim that you have no"duty" not to refrain from doing something is not the same as a claim of a right to do something rather, it is merely to claim that no one else has the"right to prevent you from doing it. This Hohfeldian conception of jural relations is, of course, contestable; and it has not gone unchallenged. Penner(1997a, p. 25), for example, argues that to understand property rights"we must not only discard Hohfeld's dogma that rights are al ways relations between two persons, but also the
4 System of Jural Relations Elements Correlatives Opposites Right Duty No Right Privilege or Liberty No Right Duty Power Liability Disability Immunity Disability Liability so that in order to establish a “right” (as opposed to some other, lesser, interest) one must be able to identify some corresponding duty that someone else possesses. In Hohfeld’s system, to claim that an industrial facility has a right to emit noxious substances into the air would necessarily be to claim that others have an enforceable duty not to interfere with their polluting activity. A legally enforceable “right” presumes a corresponding legally enforceable duty. By contrast, to claim a “freedom,” “liberty,” or “privilege” with respect to some activity is not necessarily to argue that anyone or everyone else has some “duty” to refrain from interference; indeed, everyone else may possess the same “freedom,” “liberty,” or “privilege.” Similarly, in the Hohfeldian scheme, a claim that you have no “duty” not to refrain from doing something is not the same as a claim of a right to do something; rather, it is merely to claim that no one else has the “right” to prevent you from doing it. This Hohfeldian conception of jural relations is, of course, contestable; and it has not gone unchallenged. Penner (1997a, p. 25), for example, argues that to understand property rights “we must not only discard Hohfeld’s dogma that rights are always relations between two persons, but also the
idea that a right in rem is a simple relation between one person and a set of indefinitely many others Penner does not, however, dispute the importance Hohfeld attached to property duties. On the contrary, he expressly notes(139)that"the law of property in a sense depends on the law of wrongs It does so in two important ways. It defines the contours of the right to property, and it determines, in part, who has property rights. By recognizing that the determination of property rights depends on the enforcement of duties of noninterference Penner is in substantial agreement with one of the most important aspects of the Hohfeldian"dogma"(see also Penner 1997b, p. 167) Despite the criticism of penner and others hohfeld's theory of jural relations remains dominant in legal theory(see, e.g., Munzer 1990, pp. 17-27; Perry 1977; Perry 1980: Singer 1982, Schmidtz 1994) and throughout the social sciences. Anthropologists have usefully applied Hohfeld's analytical system to primitive legal and social systems(Hoebel 1942; Hunt 1998). Hallowell (1955, pp. 236-49 notes the value of Hohfeld's system for empirical social science research. As Munzer(1990, p. 19) concludes, Hohfeld's analytical system for distinguishing rights from other interests has no serious rival of its kind in intellectual clarity, rigor, and power Moving from the realm of theory to practice, state and federal case law are replete with references to Hohfeld's jural relations. For example, Justice Potter Stewart, in a 1978 Supreme Court concurrence, cited Hohfeld in suggesting that the"right to marry is really a mere"privilege"under federal law. Zablocki, Milwaukee County Clerk v. Redhail, 434 U.S. 374, 391(1978)(Stewart J concurring). In Yu v Paperchase Partnership, 1 N.M. 635, 640-1(1992), the New Mexico 2 To gain some idea of the currency that Hohfeld's theory of jural relations still enjoys, a curse Westlaw search revealed citations to his 1913 and 1917 articles in 482 law review articles publishedSory during the 1990s
2 To gain some idea of the currency that Hohfeld’s theory of jural relations still enjoys, a cursory Westlaw search revealed citations to his 1913 and 1917 articles in 482 law review articles published during the 1990s. 5 idea that a right in rem is a simple relation between one person and a set of indefinitely many others.” Penner does not, however, dispute the importance Hohfeld attached to property duties. On the contrary, he expressly notes (139) that “the law of property in a sense depends on the law of wrongs. It does so in two important ways. It defines the contours of the right to property, and it determines, in part, who has property rights.” By recognizing that the determination of property rights depends on the enforcement of duties of noninterference, Penner is in substantial agreement with one of the most important aspects of the Hohfeldian “dogma” (see also Penner 1997b, p. 167). Despite the criticism of Penner and others, Hohfeld’s theory of jural relations remains dominant in legal theory (see, e.g., Munzer 1990, pp. 17-27; Perry 1977; Perry 1980; Singer 1982; Schmidtz 1994)2 and throughout the social sciences. Anthropologists have usefully applied Hohfeld’s analytical system to primitive legal and social systems (Hoebel 1942; Hunt 1998). Hallowell (1955, pp. 236-49) notes the value of Hohfeld’s system for empirical social science research. As Munzer (1990, p. 19) concludes, Hohfeld’s analytical system for distinguishing rights from other interests “has no serious rival of its kind in intellectual clarity, rigor, and power.” Moving from the realm of theory to practice, state and federal case law are replete with references to Hohfeld’s jural relations. For example, Justice Potter Stewart, in a 1978 Supreme Court concurrence, cited Hohfeld in suggesting that the “right” to marry is really a mere “privilege” under federal law. Zablocki, Milwaukee County Clerk v. Redhail, 434 U.S. 374, 391 (1978) (Stewart J., concurring). In Yu v. Paperchase Partnership, 114 N.M. 635, 640-1 (1992), the New Mexico