Property and Property Rights: A History

Based on Tom Bethell, The Noblest Triumph (St. Martin’s Press, 1998) and James Penner, The Idea of Property in Law (Oxford University Press, 2000)

The English jurist William Blackstone wrote:

There is nothing that so generally strikes the imagination, and engages the affections of mankind, as the right of property…And yet there are very few, that will give themselves the trouble to consider the original and foundation of this right.1

Two and a half centuries have passed since then, but the history of property rights is still not widely known, even among economists that consider property to be a pivotal institution. This history is set out below.

What are Rights?

Economists assume that people have preferences, and that these preferences are not to be questioned. (“De gustibus non disputandum est,” they liked to say, back in the days when they were more familiar with Latin than mathematics.) Jurists likewise assume that people have interests in outcomes, but they do not question the origins of these interests. The purpose of the law, they say, is to govern the human interactions that arise out of interests.

Some of these interests are deemed to be so compelling that they must be protected by rights. A person has a right when a duty to protect his interest is imposed on everyone else. For example, each person’s right to free speech requires that no person is penalized for expressing his opinions, that the press is not censored, that books are not banned. In short, each person’s right to free speech is upheld by imposing on others agents (especially the government) a duty not to interfere with speech. There is no right without a corresponding duty and the duty sustains the right.

A right does not exist simply because one can imagine it or wish for it. A right only exists if society is willing to bear the duty, and for that reason, rights vary from society to society. The Uighurs of China, for example, have no rights because China’s authoritarian government rejects the associated duties. The Uighurs’ forced incarceration is not a violation of their rights; it is a clear demonstration that they have no rights.

Rights have little value under an authoritarian government because the government can overturn them at will. In democratic societies, however, rights protect people from other people, acting either individually or collectively. Indeed, John Stuart Mill claimed that the need for rights only became apparent when authoritarian governments gave way to democratic ones.

It was now perceived that such phrases as “self-government,” and “the power of the people over themselves,” do not express the true state of the case. The “people” who exercise the power are not always the same people with those over whom it is exercised; and the “self-government” spoken of is not the government of each by himself, but of each by all the rest. The will of the people, moreover, practically means the will of the most numerous or the most active part of the people; the majority, or those who succeed in making themselves accepted as the majority. The people, consequently, may desire to oppress a part of their number; and precautions are as much needed against this as against any other abuse of power.2

People oppressed other people, not just through the “tyranny of the majority” inherent in democratic government, but also through peer pressure and public pressure. Their collective power had to be constrained for their own good.

All that makes existence valuable to any one, depends on the enforcement of restraints upon the actions of other people.3

This enforcement was accomplished by establishing rights, with freedom of religion being the first to appear.

What is Property?

We commonly think of property as a thing that we possess, something that we can look at and say, “That’s mine.” The legal viewpoint is somewhat different. Property cannot be a relationship between a person and a thing because the law only recognizes relationships between people. The human relationship in the case of property is that the property owner possesses rights and (as always) these rights impose duties on everyone else.

By the early twentieth century, the things themselves had almost disappeared from legal discussions of property. Property became a bundle of rights, including “the right to possess, the right to use, the right to consume, the right to destroy, the right to manage, the right to give, the right to lend, the right to sell.”4 This bundle is taken apart and reassembled as needed. For example, a lease is a contract under which the lessor temporarily cedes certain rights to the lessee in exchange for a money payment. When the lease is terminated, the ceded rights are restored to the lessor. The sale of a thing generally involves the exchange of the complete bundle of rights for a money payment.

The most widely recognized property right is the right to exclusive use. William Blackstone referred to property as “that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe.”5 This definition corresponds to the popular understanding of property, and the term “property rights” is generally understood to mean the right of exclusive use.

From the legal perspective, not everything can be property. There are essentially two classes of property. The first includes those things that we can possess physically but only on a contingent basis. Your car is property: you physically possess it, but you can also sell it or gift it or abandon it. Your good eyesight is not property: you “possess” it but it is not separable from yourself. The second category is essentially the first kind of property at one remove. It consists of legal claims that allow the possessor to receive money or physical property, and that can be assigned to someone else. Mortgages and loans, for example, are the property of the lender.

The economist’s idea of property differs from the jurist’s idea of property, in that the economist tends to consider anything of value to be property. This idea has a long history — it goes back to John Locke and James Madison at least — but fell away until the twentieth century, when it was resurrected by Richard Posner. He made property the central concept in law, or at least, in some abstraction of the law. James Penner explains:

What is so radically simple about the economist’s view is simply that all valuable entitlements are treated as property. The substantive private common law, Posner tells us, can be conceived in economic terms as having three parts:

1. the law of property, concerned with creating and defining property rights, which are rights to the exclusive use of valuable resources;

2. the law of contracts, concerned with facilitating the voluntary movement of property rights into the hands of those who value them most; and

3. the law of torts, concerned with protecting property rights, including the right to bodily integrity.

[But in reality] not all valuable rights are regarded by the law as property rights. The rights to one’s bodily security, to one’s labour, and to one’s life are not.6

Some economists do not make Posner’s leap into abstraction. Hernando de Soto, for example, takes a narrow but intensely practical view of property, arguing that property rights — in the form of legal title to land and buildings — play a pivotal role in economic development.7

Are Rights Absolute?

According to an old legal adage, “Your right to swing your fist ends where my nose begins.” No right is absolute, and the scope of most rights has evolved over time.

A right is sometimes limited because it conflicts with another right. In Canada a recent court case involved a woman who wished to wear her niqab while testifying against two men whom she had accused of sexual assault. She claimed that her right to religious freedom allowed her to do so. The accused argued that this act would infringe upon their right to provide “full answer and defence” to the charges, because the jury would be unable to properly assess the woman’s credibility. The case eventually reached the Supreme Court of Canada. The Court did not choose one right over the other. Instead, it ruled that a witness should sometimes but not always be allowed to wear a niqab, and outlined the steps that a judge should take in making this determination.

As well, a right can be limited to protect interests that are not protected by rights; for example, the right to free speech cannot be invoked to excuse fraud or slander.

Property rights are innately and intensely rivalrous. Your freedom to speak or to practice your religion does not impinge upon mine, but your exclusive use of a thing preempts my use of it. The rivalrous nature of property rights has caused them to be more narrowly defined than other rights. In the United States, for example, property is protected by the Fifth Amendment’s Takings Clause: “nor shall private property be taken for public use without just compensation.” The government can take away property, so long as it fairly compensates the owner. Property is not inviolable.

The original intent of the Takings Clause was to deal with the possibility that privately owned land might be much more valuable in the hands of the public. Suppose, for example, that the land lies on the proposed route of a highway or a canal. If the owner adopts a hold-out bargaining strategy, the public is better served if the land is simply expropriated. The Takings Clause is still used in this fashion today; but in the last few decades, state and local governments have begun to expropriate property in order to resell it to developers, on the grounds that the development of the land will benefit the community by increasing the tax base. This practice stretches the idea of “public use” to the limit.

Beginning in the first half of the twentieth century, American governments have more closely regulated the use of property. Some regulations, such as noise by-laws, simply ensure that everyone has peaceable use of their property. Other regulations are imposed for environmental reasons. Many actions, such as the draining of marsh land or the uncontrolled burning of refuse, have impacts that extend far beyond the boundaries of the land, and governments have introduced regulations to balance the interests of the property owners against the interests of the larger society. Finally, regulations such as rent controls serve to redistribute spending power. Richard Epstein has argued that all of these regulations reduce the value of property to its owners by narrowing their options, and therefore should be considered takings for which compensation must be paid. His argument is not that society should ignore environmental issues or income inequality, but rather that the burden of action should fall on society as a whole rather than simply on particular groups of property owners. Other legal scholars are more sanguine, arguing that rights mark the boundary between private and public power, and that the Supreme Court’s acquiescence to regulation is simply part of the continuing process of working out where the boundary should be.

John Locke and James Madison on Property

Western commentary on property goes back at least to Plato and Aristotle, but Locke’s commentary might be the first one to have had a lasting impact on Western law. It appeared in his Two Treatises of Government (1689), which was primarily concerned with establishing the limits of state power (here). Locke argued that people have certain natural rights, that they create government in order to police and enforce these rights, but that they do not and cannot cede their rights to the government. The Irish philosopher Francis Hutcheson would later describe such rights as “unalienable.”

For Locke, these rights were “life, liberty and estate.” Estate might seem less momentous than life and liberty, but in a world that was still primarily agriculture, one’s life and liberty often depended on the preservation of one’s estate. Certainly, the pamphleteer Robert Grove held this view when, in 1685, he asked his fellow Englishmen to acknowledge their government’s restraint:

Has he ever been illegally imprisoned? Has any part of his goods been violently wrested from him? Has his house been rifled? Have his barns been robbed? Have his cattle been driven off his grounds? Has he suffered anything under color of authority that could not be justified by the known laws?8

The issue that Locke sought to resolve was how men came to acquire estates that they could justly claim as their own.

According to Locke, God gave the earth and all of its resources to all people collectively, but God “commanded Man also to labour, and the penury of his Condition required it of him.” Their labour entitled men to appropriate some of the earth’s resources for their own exclusive use:

Though the Earth, and all inferior Creatures be common to all Men, yet every Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joined to it something that is his own, and thereby makes it his Property.9

Thus this Law of reason makes the Deer, that Indian’s who hath killed it; ’tis allowed to be his goods who hath bestowed his labour upon it, though before, it was the common right of every one.10

Despite these appropriations, human societies were equal and harmonious. Three factors maintained this happy state. The first was that resources were so abundant that judicious appropriations harmed no-one — there was always another deer in the forest. The second was that the absence of stores of value ensured that appropriations would always be judicious. There was simply no reason to labour more, and take more, than was necessary to meet one’s immediate needs.

God has given us all things richly…But how far has he given it us? To enjoy. As much as any one can make use of to any advantage of life before it spoils; so much he may by his labour fix a Property in. Whatever is beyond this, is more than his share, and belongs to others. Nothing was made by God for Man to spoil or destroy. And thus considering the plenty of natural Provisions there was a long time in the World, and the few spenders, and to how small a part of that provision the industry of one Man could extend it self, and ingross it to the prejudice of others; especially keeping within the bounds, set by reason of what might serve for his use; there could be then little room for Quarrels or Contentions about Property so establish’d.11

The third factor was that the duty of charity was recognized, so that the old and the infirm could be sustained.

As justice gives every man a title to the product of his honest industry, and the fair acquisitions of his ancestors descended to him; so charity gives every man a title to so much out of another’s plenty, as will keep him from extreme want, where he has no means to subsist otherwise.12

Men had a right to private property, but even then, the right was qualified.

The serpent in Locke’s Eden was “money,” meaning a store of value. Prior to its emergence, men were equal and at peace with one another. There was no law because there were no quarrels.

As a Man had a Right to all he could imploy his Labour upon, so he had no temptation to labour for more than he could make use of. This left no room for Controversie about the Title, nor for Incroachment on the Right of others.13

But desirable stores of value gave people an incentive to appropriate more resources than they required to meet their current needs. They greedily absorbed the remaining common resources, and then quarreled over the resources that had already been appropriated, so that property became insecure. Men then recognized a need for law, and for judges to apply the law, and for state power to enforce the law. They created governments to bring these things into existence.

In this way Locke explains the emergence of estates characterized by exclusive use, as well as the emergence of the institutions that sustain them. But these estates were only one aspect of property. For Locke, all rights were property.

If man in the state of Nature be so free as has been said, if he be absolute lord of his own person and possessions, equal to the greatest and subject to nobody, why will he part with his freedom, this empire, and subject himself to the dominion and control of any other power? To which it is obvious to answer, that though in the state of Nature he hath such a right, yet the enjoyment of it is very uncertain and constantly exposed to the invasion of others; for all being kings as much as he, every man his equal, and the greater part no strict observers of equity and justice, the enjoyment of the property he has in this state is very unsafe, very insecure. This makes him willing to quit this condition which, however free, is full of fears and continual dangers; and it is not without reason that he seeks out and is willing to join in society with others who are already united, or have a mind to unite for the mutual preservation of their lives, liberties and estates, which I call by the general name — property.14

This understanding of property was embraced by James Madison. In an essay written in 1792, he said of property,

This term in its particular application means “that dominion which one man claims and exercises over the external things of the world, in exclusion of every other individual.” In its larger and juster meaning, it embraces every thing to which a man may attach a value and have a right; and which leaves to every one else the like advantage. In the former sense, a man’s land, or merchandize, or money is called his property. In the latter sense, a man has a property in his opinions and the free communication of them. He has a property of peculiar value in his religious opinions, and in the profession and practice dictated by them. He has a property very dear to him in the safety and liberty of his person. He has an equal property in the free use of his faculties and free choice of the objects on which to employ them.15

Madison’s expectations of government followed from his broad interpretation of property.

Government is instituted to protect property of every sort…This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own.16

Such views were not controversial among the founders of the United States. They understood that government could protect property, but like Mill, they were also aware that property had to be protected from government. Property rights were a fundamental part of this protection.

Property and Human Nature

In the West, the word “property” is generally understood to mean private property. The qualifier “private” was uncommon before the middle of the nineteenth century because alternatives to exclusive use were rarely considered. It became uncommon again in the late twentieth century, as the alternatives developed in the late nineteenth century and early twentieth century proved to be almost always unworkable.

The principal advantage of private property has long been understood to be its incentive effects: those who possessed property were more willing to work and improve it, because they knew that they would receive the benefits of their own labour. The power of these incentives was sometimes starkly evident. Plymouth Colony, founded in 1620, was one such instance. The colonists came as indentured labourers who would work the colony for seven years; at the end of this term, the resources of the colony would be divided equally among the colonists and the colony’s financial backers. Under these conditions, the work done by each colonist would have a negligible impact on his or her pay-out. The colony was effectively a seven-year experiment in community ownership of property.

The experiment was cut short. The colonists malingered even as the colony skirted starvation. Necessity prompted William Bradford, the second governor of the colony, to agree to a radical change. Each family was given its own plot of land to grow food that would be theirs alone. Food was soon plentiful. The success of the shift from communal land to private plots induced further privatization: “The housing, and later the cattle, were assigned to separate families, and provision was made for the inheritance of wealth.”17

Bradford would later emphasize that the early struggles of the colony were not the fault of the colonists themselves, but of the system under which they laboured.

The experience that was had in this common course and condition [community property], tried sundry years amongst godly and sober men, may well evince the vanity of that conceit of Plato’s and other ancients applauded by some of later times; that the taking away of property and bringing in community…could make them happy and flourishing; as if they were wiser than God. For this community [of property]…was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. For the young men, that were most fit and able for labour and service, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. The strong, or man of parts, had no more in division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labours and victuals, clothes, etc., with the meaner and younger sort, thought it some indignity and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands well brook it…Let none object this is men’s corruption, and nothing to the course itself. I answer, seeing all men have this corruption in them, God in His wisdom saw another course [private property] fitter for them.18

Bradford’s conclusions became part of the general understanding of property. Dr. Johnson echoed them a century later.

Community of possession must include spontaneity of production [to be successful]; for what is obtained by labour will be of right the property of him by whose labour it is gained. And while a rightful claim to pleasure or to affluence must be procured either by slow industry or uncertain hazard, there will al­ways be multitudes…who strive to pluck the fruit with­out cultivating the tree, and to share the advantages of victory without partaking the danger of the battle.19

Smith, Malthus, and Ricardo were among private property’s advocates. Jean-Baptiste Say described the right to property as “the most powerful of all encouragements to the multiplication of wealth.”20 Jeremy Bentham concurred: “It is that right which has vanquished the natural aversion to labour, which has given to man the empire of the earth; which has brought to an end the migratory life of nations; which has produced the love of country and a regard for posterity.”21

But the lesson was soon to be unlearned, and the impetus, says Tom Bethell, was another of John Locke’s ideas. The Catholic church had proposed “natural law” as a way of understanding morality. Humans were imprinted with an outline of morality at birth; when this outline was expanded through reasoning, a complete moral system — remarkably like the church’s own — came into being. In his Essay Concerning Human Understanding (1689), Locke rejected not just natural law but the whole idea of innate knowledge. He argued that the mind at birth is a blank slate, that all human knowledge is acquired through the senses, and that human virtues are simply behavioural patterns acquired through self-interest (we repeat behaviours that our fellows applaud, and suppress behaviours that they condemn).22 Subsequently, philosophers such as Charles Helvetius came to believe that socially appropriate behavioural patterns could be implanted through education.23 This idea was central to the ideologies of nineteenth-century socialists such as William Godwin, Robert Owen, and Karl Marx. They believed that the incentives of private property might be necessary while men were greedy, but once reformed through education, men would no longer need them. The malleability of human nature was also embraced by the communist states of the twentieth century. After visiting the Soviet Union, George Bernard Shaw enthused,

Putty is exactly like human nature. You can twist it and pat it and model it into any shape you like; and when you have shaped it, it will set so hard that you would suppose that it could never take any other shape on earth.24

In fairness to Shaw, his visit was in 1931. It was not yet apparent that moulding human nature would require confinement in mental institutions, secret police with the power to imprison and torture, and banishment to Siberian labour camps.

John Stuart Mill on Property

Mill’s textbook Principles of Political Economy was first published in 1848. It was in its seventh edition in 1871, and was republished numerous times after Mill’s death in 1873. The book’s influence spanned a period of immense change. The first edition appeared at the end of the First Industrial Revolution, when socialism was just beginning its ascendancy. The 1920 printing appeared after the Second Industrial Revolution, during which the interplay of science and technology had transformed people’s material and social lives (here). The Soviet Union, the first example of socialism on a national scale, was already in existence.

Mill on Community Property

Mill believed that the distribution of income was primarily determined by the institution of private property, and that it was patently inequitable. The rewards to labour, he wrote, were

…almost in an inverse ratio to the labour — the largest portions to those who have never worked at all, the next largest to those whose work is almost nominal, and so in a descending scale, the remuneration dwindling as the work grows harder and more disagreeable, until the most fatiguing and exhausting bodily labour cannot count with certainty on being able to earn even the necessaries of life.25

Such a distribution did not surprise Mill. He believed private property to have begun as a pragmatic attempt to suppress violence.

Enough is known of rude ages, both from history and from analogous states of society in our own time, to show that tribunals (which always precede laws) were originally established, not to determine rights, but to repress violence and terminate quarrels. With this object chiefly in view, they naturally enough gave legal effect to first occupancy, by treating as the aggressor the person who first commenced violence, by turning, or attempting to turn, another out of possession.26

The unfairness of the distribution of income was simply a consequence of the institution’s harsh and peremptory beginnings.

Mill considered alternatives to private property; but it should be remembered that these alternatives, despite the familiarity of their names, were not the ones with which we are now familiar. Marx’s Das Kapital was published nineteen years after the first edition of Mill’s Principles, and even then, the idea of a communist state was a distant fantasy.

Mill identified two alternatives to private property. One was communism, which sought “absolute equality in the distribution of the physical means of life and enjoyment.” Mill identified the English reformer Robert Owen as a leading exponent. Another was socialism, a broader term that encompassed “any system which requires that the land and the instruments of production should be the property, not of individuals, but of communities or associations,” and which “admit inequality, but grounded on some principle, or supposed principle, of justice or general expediency.” Charles Fourier’s utopian socialism was the most prominent example of socialism. Both of these terms were associated with voluntary associations. An association could be a communally owned and operated workshop in a town, or a rural commune, but in either case, its membership would be limited. Mill argued that such schemes

…cannot be truly said to be impracticable. No reasonable person can doubt that a village community, composed of a few thousand inhabitants cultivating in joint ownership the same extent of land which at present feeds that number of people, and producing by combined labour and the most improved processes the manufactured articles which they required, could raise an amount of productions sufficient to maintain them in comfort; and would find the means of obtaining, and if need be, exacting, the quantity of labour necessary for this purpose, from every member of the association who was capable of work.27

Mill went on to argue that the incentive problems encountered by a commune were no greater than those encountered by a private firm. He assumed that the commune’s management structure would be similar to that of the private firm, perhaps with the managers being voted into their positions by the members. As for ensuring that the association’s workers diligently performed their assigned tasks, Mill argued that anyone employing wage labour had the same problem. He might not have been wrong, although much depends on whether the association can expel members, an issue that Mill did not address. If it cannot, the commune takes on the characteristics of the Plymouth colony: everyone knows that they will be fed and housed, so there is no penalty for negligent work. If it can, the situation is substantially different. Wage earners are often careful about their work because they fear losing their jobs and going for a time without a wage income. In a commune that had successfully shifted income toward the worker, the fear of losing one’s job (through expulsion from the commune) would have been even greater. An expelled worker would have eventually found another job, but if that job was with a private firm, their earnings would have been lower. They would have lost income in the long term as well as the short term. Mill’s claim is credible in this case.

The above observations led Mill to conclude,

If the choice were to be made between communism with all its chances and the present state of society with all its suffering and injustices,…all the difficulties, great or small, of communism, would be but as dust in the balance.28

Well, maybe not as dust. Attempts to put socialism into practice tended not to last long. In 1825, Robert Owen purchased the entire village of New Harmony, Indiana, and populated it with more than a thousand aspiring communards. The commune required continuous infusions of cash and was never well-organized. Owen ended the experiment in 1827. Fourierism was attempted in America in the mid-1840s and again in the mid-1850s, but failed both times.

Mill, in accord with the fashion of his time, attributed socialism’s failures to the still incomplete transformation of human nature.

The attempts which have been made in France to carry Socialism into practical effect, by associations of workmen manufacturing on their own account, mostly began by sharing the remuneration equally, without regard to the quantity of work done by the individual: but in almost every case this plan was after a short time abandoned, and recourse was had to working by the piece. The original principle appeals to a higher standard of justice, and is adapted to a much higher moral condition of human nature. The proportioning of remuneration to work done is really just only in so far as the more or less of the work is a matter of choice: when it depends on natural difference of strength or capacity, this principle of remuneration is in itself an injustice: it is giving to those who have; assigning most to those who are already most favoured by nature. Considered, however, as a compromise with the selfish type of character formed by the present standard of morality, and fostered by the existing social institutions, it is highly expedient.29

So, socialism would work when there were angels on earth. Alfred Marshall, who succeeded Mill atop the economics profession, did not expect to see any walking down his street.

Noble and eager schemers for the reorganization of society have painted beautiful pictures of life, as it might be under institutions which imagination constructs easily. But it is an irresponsible imagination, in that it proceeds on the suppressed assumption that human nature will, under new institutions, quickly undergo changes such as cannot reasonably be expected in the course of a century.30

Mill on Private Property

Despite his interest in socialism, Mill wrote persuasively about private property. He followed Locke in arguing that property is something that is gained through labour.

The institution of property, when limited to its essential elements, consists in the recognition, in each person, of a right to the exclusive disposal of what he or she have produced by their own exertions, or received either by gift or by fair agreement, without force or fraud, from those who produced it. The foundation of the whole is the right of producers to what they themselves have produced.31

A person is entitled to the goods produced by his own labour. These goods could be consumed immediately, but if the labourer abstains from consumption, he acquires property. Property — and in particular, capital — represents labour that took place in the past. This observation allowed Mill to rebut simple forms of the labour theory of value.

It may be objected…that it [the institution of private property] recognizes rights of property in individuals over things which they have not produced. For example (it may be said) the operatives in a manufactory create, by their labour and skill, the whole produce; yet, instead of its belonging to them, the law gives them only their stipulated hire, and transfers the produce to someone who has merely supplied the funds, without perhaps contributing anything to the work itself, even in the form of superintendence. The answer to this is, that the labour of manufacture is only one of the conditions which must combine for the production of the commodity. The labour cannot be carried on without materials and machinery, nor without a stock of necessaries provided in advance, to maintain the labourers during the production. All these things are the fruits of previous labour. If the labourers were possessed of them, they would not need to divide the produce with any one; but while they have them not, an equivalent must be given to those who have, both for the antecedent labour, and for the abstinence by which the produce of that labour, instead of being expended on indulgences, has been reserved for this use.32

He likewise rejected the notion that the workers’ need for employment automatically implies that they are exploited by property owners.

The terms of co-operation between present labour and the fruits of past labour and saving, are a subject for adjustment between the two parties. Each is necessary to the other. The capitalists can do nothing without labourers, nor the labourers without capital. If the labourers compete for employment, the capitalists on their part compete for labour, to the full extent of the circulating capital of the country.33

However, the idea that every person is entitled to the produce of his labour — and no more — led him to question whether people should have property rights in land. If land is naturally bountiful, no-one can claim its product by virtue of his labour, and therefore no-one can claim ownership of the land. Likewise, if the land’s product comes jointly from nature’s bounty and a farmer’s labour, the farmer is not entitled to the whole of the product, nor is he entitled to lay claim to the land itself. Locke had believed otherwise, claiming that the mere “mixing” of his labour should allow the farmer to appropriate the land. Although Mill rejected this solution, he did not offer any alternative that would not be burdened by bureaucracy or cronyism.

The situation becomes more complicated once it is acknowledged that most of the value of the land lies in improvements.

But though land is not the produce of industry, most of its valuable qualities are so. Labour is not only requisite for using, but almost equally so for fashioning, the instrument. Considerable labour is often required at the commencement, to clear the land for cultivation…Cultivation also requires buildings and fences, which are wholly the produce of labour. The fruits of this industry cannot be reaped in a short period. The labour and outlay are immediate, the benefit is spread over many years, perhaps over all future time. A holder will not incur this labour and outlay when strangers and not himself will be benefited by it. If he undertakes such improvements, he must have a sufficient period before him in which to profit by them: and he is in no way so sure of having always a sufficient period as when his tenure is perpetual.34

So perhaps the farmers should have ownership of land after all. But not the absentee landlords, and most especially, not the Irish ones: “Returning nothing to the soil, they consume its whole produce, minus the potatoes strictly necessary to keep the inhabitants from dying of famine.”

For Mill, land ownership was less a matter of economics but of morality.

No man made the land. It is the original inheritance of the whole species. Its appropriation is wholly a question of general expediency. When private property in land is not expedient, it is unjust. It is no hardship to any one to be excluded from what others have produced: they were not bound to produce it for his use, and he loses nothing by not sharing in what otherwise would not have existed at all. But it is some hardship to be born into the world and to find all nature’s gifts previously engrossed, and no place left for the newcomer.35

Private Property versus State Property

In the late nineteenth and early twentieth centuries, the West experienced a transformational period of rapid scientific and technological progress. Many people came to believe that science could solve any problem, and the scientists seemed unable to recognize their own limitations.36 The economy did not escape their attention. The scientists’ fields of study valued control and exactitude, so for them, a self-organizing system like the market economy was a mystery and a menace. What was needed, they argued, was someone to step in and bring order and rationality to economic matters. What was needed was a planner. This belief was reinforced by another, that the economy was becoming increasingly intricate, so that the creaky old market system was in danger of being overwhelmed. Furthermore, the belief that human nature itself was changing for the better implied that a system based on self-interest should yield to one emphasizing solidarity and self-sacrifice.

Keynes’s General Theory of Employment, Interest and Money (1936) was also influential. Keynes argued that there is no force in an economy that pushes it toward full employment. Severe and prolonged depressions like the Great Depression (1929-39) were to be expected. The solution, said Keynes, was for the government to manipulate taxes and its own spending in order to offset fluctuations in investment. Apparently, the economy required someone at the center, its own Wizard of Oz, to pull the levers and make the magic happen.

In the first half of the twentieth century, the idea of socialism was often ill-defined. According to George Orwell,

To the ordinary working man, the sort you would meet in any pub on Saturday night, socialism does not mean much more than better wages and shorter hours and nobody bossing you about.37

To others, it simply meant the pursuit of social justice and greater equality. But for committed socialists, it meant above all else the implementation of central planning. A pamphlet issued by Britain’s Labour Party in 1942 set out its vision of the post-war economy:

There must be no return to the unplanned competitive world of the inter-war years, in which a privileged few were maintained at the expense of the common good…

A planned society must replace the old competitive system…

The basis for our democracy must be planned production for community use…

Harold Laski, a prominent party member who would soon become the party’s chairman, argued in the same year for “nationalization of the essential instruments of production before the war ends, [and] the maintenance of control over production and distribution after the war.”38

These ideas were in part a reflection of Continental innovations. Germany had been the leader in socialist thought since the late nineteenth century, and at the end of World War I, it chose to maintain centralized control over large parts of its economy. Central planning had made its first appearance in Germany during the war, but Germany edged away from it at the war’s end, allowing the Soviet Union to become the first country to adopt central planning on a permanent basis. The apparent success of the Soviet Union during its early years influenced the thinking of British intellectuals such as George Bernard Shaw and Beatrice and Sidney Webb.

Socialism, through its advocacy of planning, called for a radical restructuring of the economy and the curtailment (if not elimination) of the price system.

Socialism means the abolition of private enterprise, of private ownership of the means of production, and the creation of a system of “planned economy” in which the entrepreneur working for profit is replaced by a central planning body.39

Lionel Robbins was worried that the British were being led toward a policy that they did not truly understand.

When the average citizen…warms to the statement that “What the world needs is planning,” what he really feels is that the world needs that which is satisfactory.40

Friedrich Hayek had more concrete concerns. He felt that the people, being unaware of what the price system accomplished, would too readily give it up. He explained what was at stake in an academic paper, “The Uses of Knowledge in Society,” in 1945.

Free markets and central planning are two ways to solve a problem of exceedingly high dimensionality, commonly called the allocation problem. Its solution determines which goods are produced and in what quantities, in which factories they are produced and by what method, and also who consumes the finished goods. The last issue is about the distribution of goods, and the rest are about their production. Production and distribution are inextricably related under free markets and are therefore simultaneously determined. A planner is imagined to be able to sequentially determine production and distribution.

A central planner might successfully solve the allocation problem if he had all of the requisite information at his disposal, if this information rarely changed, and if he had a room full of “computers,” each equipped with the very latest adding machine, at his disposal.

Computers at work in 1947
Computers at work in 1947

Hayek argued that the planner might well have a room full of computers, but the rest of the list is fantasy. Information is widely dispersed across the economy, and it is often so complex that it is difficult or impossible to communicate to another party. A substantial part of this information is “knowledge of time and place” — information about transient but nevertheless important options. Under these conditions a central planner might be able to produce a rudimentary plan, but the plan would lack detail, contain inconsistencies, and be out of date almost as soon as it was implemented. Certainly, this was the case in the Soviet Union, where people would join queues for consumer goods without knowing what was being offered for sale — anything was better than nothing.

The allocation problem is not like a jigsaw puzzle whose pieces are scrambled but laid out before us. It is something else entirely.

The knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources — if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality.41

In light of the dispersion of knowledge and its often transitory nature, the planning must be spread across many individuals — over the entire population, in fact — and this is what a market system does. Each person makes decisions based on information known only to him or only to a few. When a machine fails, he orders its repair. When a truck is empty, he finds it a cargo. When there are few customers for his product, he designs a better one. He needs information about the broader economy to complete these tasks, but all the information that he needs is contained in market prices. These prices tell him everything he needs to know about the actions of other people. And when he makes his own choices, he nudges a few prices up or down, so that those same prices tell everyone else everything that they need to know about his actions.

Market prices communicate relevant information across the economy, and in so doing, co-ordinate the actions of all of the disparate actors in the economy. They do effectively and automatically what the central planner would struggle to do badly. The increasing complexity of the economy is reason to retain the market system, not to abandon it. The more difficult the allocation problem, the greater the gain from having it handled automatically rather than through a planner’s labours.

What drives the individual actors in a market system is, of course, self-interest. And what underlies their self-interest is private property.

  1. Blackstone, Commentaries on the Laws of England (1765-70), Book 2, Chapter 1.
  2. John Stuart Mill, On Liberty (1859), ch. 1.
  3. John Stuart Mill, On Liberty (1859), ch. 1.
  4. Penner, The Idea of Property in Law, p. 1.
  5. Blackstone, Commentaries on the Laws of England (1765-70), Book 2, Chapter 1.
  6. Penner, The Idea of Property in Law, p. 64.
  7. de Soto, The Mystery of Capital (2000) and The Other Path (1989).
  8. Robert Grove, Seasonable Advice to the Citizens, Burgesses, and Free-Holders of England (1685). Quoted in Steve Pincus, 1688: The First Modern Revolution (Yale, 2009), p. 102.
  9. Locke, Second Treatise, 27.
  10. Locke, Second Treatise, 30.
  11. Locke, Second Treatise, 31.
  12. Locke, First Treatise, 42.
  13. Locke, Second Treatise, 51.
  14. Locke, Second Treatise, 123.
  15. James Madison, Property, 29 March 1792.
  16. James Madison, Property, 29 March 1792.
  17. Bethell, The Noblest Triumph, p. 43.
  18. William Bradford, Of Plymouth Plantation. Quoted by Bethell, The Noblest Triumph, p. 41.
  19. Samuel Johnson, Letter to The Rambler, 1751.
  20. Say, A Treatise on Political Economy (1803).
  21. Jeremy Bentham, Principles of the Civil Code (1843).
  22. There is no going back to the idea of innate morality, but the notion that the mind is a blank slate at birth is no longer credible. See Steven Pinker, The Blank Slate: the Modern Denial of Human Nature for a comprehensive survey.
  23. Helvetius, Essays on the Mind (1758).
  24. Quoted by Bethell, The Noblest Triumph, pp. 17-8.
  25. Mill, Principles of Political Economy (1848), book 2, ch. 1.
  26. Mill, Principles of Political Economy (1848), book 2, ch. 1.
  27. Mill, Principles of Political Economy (1848), book 2, ch. 1.
  28. Mill, Principles of Political Economy (1848), book 2, ch. 1.
  29. Mill, Principles of Political Economy (1848), book 2, ch. 1.
  30. Marshall, Principles of Economics (1890), book 6, ch. 8.
  31. Mill, Principles of Political Economy (1848), book 2, ch. 2.
  32. Mill, Principles of Political Economy (1848), book 2, ch. 2.
  33. Mill, Principles of Political Economy (1848), book 2, ch. 2.
  34. Mill, Principles of Political Economy (1848), book 2, ch. 2.
  35. Mill, Principles of Political Economy (1848), book 2, ch. 2.
  36. See Bruce Caldwell, “The Road to Serfdom after 75 Years,” Journal of Economic Literature (2020), section 3.
  37. Orwell, The Road to Wigan Pier (1937), ch. 11.
  38. All quotes are from pp. 12-3 of Bruce Caldwell, “Introduction” in The Road to Serfdom: Text and Documents (2007).
  39. Hayek, The Road to Serfdom (1944). Quote from p. 83 of the The Road to Serfdom: Text and Documents (2007), edited by Bruce Caldwell.
  40. Quoted by Bruce Caldwell, “Introduction” in The Road to Serfdom: Text and Documents (2007), p. 9.
  41. Hayek, “The Uses of Knowledge in Society” (1945), pp. 519-20.