Why Politicians so Often Fail to Protect the Property Rights of the Poor

Peruvian economist Hernando de Soto has devoted his life to alleviating poverty in the developing world. His research, well-received by those on the left as well as the right, documents the bureaucratic hurdles that prevent ordinary citizens in states like Egypt, Colombia, and Indonesia from obtaining business licenses. In many nations, it can take hundreds of days of waiting around in government offices to acquire permission to open a bakery or a laundromat. This prevents all but the rich and well-connected from accessing the ‘formal sector’ of legally sanctioned activity. As a result, the poor are pushed into the informal sector, which often comprises over 70% of the economy.

Years of research led de Soto to the conclusion that privatization in Latin America, Africa, and much of the post-Soviet world has not done enough to help the poor, precisely because it has been limited to the formal sector. Since the poor work within the informal economy, they don’t reap the benefits or the protections of private property. Their land is seized without warning, their homes are bulldozed for development projects, and they regularly face pressure from corrupt police. In The Mystery of Capital, de Soto explains that this is why it often appears that “Capitalism triumphs in the West and fails everywhere else.” The work traces the development of private property in the common-law system of the West, and juxtaposes this development to the stagnation of statutory law systems in the rest of the world.

The implications for the developing world are clear — without the proper legal structure, the market is not free at all. Privatization must come hand-in-hand with laws that recognize the property rights of the poor. Yet what about the developed world, which de Soto mines for insight into the hidden architecture of capitalism? Is the institution of private property in its ‘final’ stage of development in a country like the United States?

The answer, of course, is no — there is no final stage in the development of any social institution. Private property developed over time, and is still in development. And that may be a good thing, because the institution is not appropriately calibrated to accommodate the pressing needs of post-industrial societies.

Indeed, throughout US history, courts have often discarded ‘pure’ property rights in favor of development. Mises addresses this head-on in Human Action:

The laws concerning liability and indemnification for damages caused were and still are in some respects deficient. By and large the principle is accepted that everybody is liable to damages which his actions have inflicted upon other people. But there were loopholes left which the legislators were slow to fill. In some cases this tardiness was intentional because the imperfections agreed with the plans of the authorities. When in the past in many countries the owners of factories and railroads were not held liable for the damages which the conduct of their enterprises inflicted on the property and health of neighbors, patrons, employees, and other people through smoke, soot, noise, water pollution, and accidents caused by defective or inappropriate equipment, the idea was that one should not undermine the progress of industrialization and the development of transportation facilities. The same doctrines which prompted and still are prompting many governments to encourage investment in factories and railroads through subsidies, tax exemption, tariffs, and cheap credit were at work in the emergence of a legal state of affairs in which the liability of such enterprises was either formally or practically abated.

As Mises notes, the delimitation of private property is the result of a political, not an economic, process. Legislatures and judges decide which activities count as nuisances to be prohibited, and which do not. Corporations then base their actions on these guidelines. The implication is that environmentalists have incorrectly identified capitalism as the culprit of a crime that was in fact committed by agents of the State.

In other words, the government has done a terrible job of defining and protecting our property rights. In court case after court case, the air and water rights of individuals have been overridden in favor of industrial and transportation projects conceived to be in the ‘public interest.’ Consequent environmental degradation the result of a perversion of the free-market system. In a properly functioning market, tort law would be a much more effective way of dealing with environmental issues (Coase established this in the 1950s). Instead, massive increases in federally administered public lands are hailed by activists as victories for the common person and the environment.

This ignores the fact that ‘public’ property, including America’s air and waterways, tends to be the most polluted. The ramifications of these policies — of ignoring private rights in favor of the ‘public good’ — have been counterproductive. They have resulted in extensive environmental damage that indeed harms the ‘public good.’ As in the developing world, the only way forward is the further delimitation of private property rights. The ideology of public interests has failed.

Citizens of the Western world have good reason to apply de Soto’s insights to problems in their own societies. ‘Developed’ nations are, after all, still developing both technology and legal structures in the 21st century. If that development brings further delimitation of private property rights, it will simultaneously lower the incentive for the heavy-handed regulation that acts as an unwieldy band-aid on the loopholes that pockmark the institution of private property.

Adam De Gree is a freelance writer and homeschool history & economics teacher based in Prague, Czech Republic.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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