Foreword.

• Author: Kades, Eric A.
• Position: Property Rights and Economic Development

The macroeconomic problems facing nations have changed little over the last century. Undeveloped nations continue to look for tools to increase the growth rate of their economies. Developed nations, content with or perhaps resigned to modest long-term growth rates, focus more on business cycles, with their inevitable downturns (recessions and depressions). Law and economics scholarship, with a few minor exceptions, has little to offer business cycle theorists. (1) This is not surprising. Law and economics generally applies the tools of microeconomics, not macroeconomics, and even relatively recent scholarship on the microeconomic foundations of business cycles does not involve issues commonly addressed by law and economics scholars.

Until fairly recently, the same could have been said about growth theory. Its traditional focus on accumulation of capital, stages of development, and creation of key infrastructure--for example, roads and railroads--did not require the application of expertise in micro-level, legal relations. (2) Over the last decade or two, however, economists have begun to focus on microeconomic legal foundations that may be catalysts of growth for undeveloped economies. In particular, they have devoted considerable attention to the role that property rights play in economic developments. (3)

Given that economists have been gearing up on the role that property rights play in economic growth, it would seem natural for legal scholars of property, and especially those with a law and economics bent, to follow this lead. Property, after all, is essentially a legal construct. Moreover, it permeates the foundations of developed legal systems: contracts is about the consensual transfer of property rights; torts is about the protection of property rights from nonconsensual harm.

Yet it seems clear that property law scholars, the author included, generally have not followed their economist colleagues into the breach. Here is one piece of anecdotal evidence: over the last five years, ten leading law journals have published ten articles, summing to 714 pages, on the finer points of the Constitution's Takings Clause. (4) Over the same period, these journals have published only two articles, summing to 105 pages, on the role of property rights in economic development. (5)

This is not to say that the Takings Clause (on which the author has published more than his fair share) is an unworthy subject; indeed, later in this introductory essay we will highlight the importance of the principles for which it stands. Moreover, in America and other developed economies, at least outside of the ghettos discussed at the end of this essay, the Takings Clause is more relevant to everyday life than economic development in the Third World. To the extent that taxpayers directly or indirectly fund legal research at public law schools (such as my employer), our focus on the finer points of doctrines of interest to the domestic citizenry may make some sense. Yet it seems that, if we were to attach equal weight to the welfare of every person planet-wide, property scholars might well maximize their marginal product by devoting less time to the Takings Clause and other fine points of domestic property law, and more time to the role that property rights may play in bringing affluence to impoverished nations. At any rate, it is this thought that motivated me to organize a conference that would enlighten property scholars about economists' work on property rights in developing economies, and vice versa.

For legal scholars who choose to study the role of property rights in economic development, an initial question presents itself: What is their comparative advantage? In what way can they draw on their special skills and experience to maximize their contribution? Economists are better equipped to address many questions. For example, they are trained to develop theoretical models that capture the essence of costs, benefits, and trade-offs. They are also better equipped to conduct the statistical research necessary to put such theories to the test, and to uncover mechanisms that theorists may have overlooked. Erica Field's contribution to the symposium, for example, used data gathered in Peru to make a strong case that establishing property rights may free up labor used to protect possession in economies without such rights. (6) Jenny Lanjouw, in her contribution co-authored with Philip Levy, finds that titled owners are twice as likely to rent out their properties; presumably, lack of title makes even a temporary transfer of possession too risky. (7)

Having ceded theoretical and statistical work to the economists, is there anything left for legal scholars? Contributions to the symposium suggest two affirmative answers that draw on intimate knowledge of the institutions behind property rights. First, at a level of high generality, one of the staples of legal scholarship is the definition of property rights, and the division of such rights in analytically helpful categories. Perhaps most famously, property law scholars speak incessantly of the "bundle of sticks" that constitute property: various combinations of the rights to exclude, to use, and to alienate as the three sticks that, tied together, make up the bundle of rights we commonly associate with the word "property." (8) A more recent example is the division of remedies for violations of property rights into two categories: "property rights" providing as much protection as the legal system can offer, and lesser "liability rights" that limit remedies to fair market compensation, permitting others to force a transaction on an unwilling owner. (9) Brett McDonnell's contribution to this symposium focuses on the role that institutions play in defining the contours of property rights. (10)

Second, legal scholars have extensive knowledge of the nuts and bolts of everyday property relations, across a wide range of times and economies, from feudal times to the present. This idiosyncratic collection of knowledge can be viewed as a source of suggestive, imprecise empirical data. (11) Perhaps of greater importance, legal researchers are experts on key institutions, often unfamiliar to economists, that are essential to well-functioning markets. There is perhaps no better example than title insurance, a private ordering solution to the problem of uncertainty over the state of legal ownership of land discussed in Joyce Palomar's contribution to the symposium. (12) Economists, and others without some experience in real property law, would be shocked at the disarray of the public land records in most jurisdictions. (13) yet title insurance, along with subsidiary institutions, permits relatively easy alienability of real property despite these systemic defects in land recorders' offices across the nation. (14)

As intimated in the preceding paragraphs, we can define property rights functionally in terms of the institutions that create and protect them. Organizing our discussion in terms of the sticks in the bundle of property rights--exclusion, use, and alienation--the first essential institution is some sort of police force to protect possession, that is, to enforce exclusionary rights. Upper- and middle-class property owners in developed nations may take the presence of a well-organized police force for granted. One need only look to areas lacking an effective police force to see the high costs of self-protection imposed on property owners. (15) Again, Erica Field's Article on this issue shows that lack of legal title forces some family members to forgo gainful employment so they can protect possession of their homes. (16)

The judiciary is the institution responsible for facilitating alienability of property, and for deterring interference with use. The only justification for the enormous body of contract law is that it greases the wheels of commerce; combined with the division of labor, easy trading lies at the root of the wealth of developed economies. It is easy to forget the importance of simple exchange, though economists are unlikely to suffer such an oversight; all of the considerable analytic machinery of competitive market models boils down to exhausting all opportunities for mutually advantageous trades. The judiciary also serves as a backstop to the police in deterring nonconsensual interference with exclusion and use--i.e., torts.

The police and the judiciary are the central institutions in maintaining property rights. Earlier portions of this introduction referred to other such institutions: the public land records, and title insurance. The word "institution," especially in a discussion that began with the police and judiciary, may carry with it an implicit suggestion that we are talking about public institutions; we should avoid any such notion. For economically minded policymakers, the relevant normative question is whether the market can provide something, or the identification of some market failure that requires state intervention.

For example, there is widespread, though not universal, agreement that the police and judiciary are public goods: any attempt at private provision of these services would run into problems due to the difficulty of excluding nonpurchasers from many of their benefits. (17)

Land records, on the other hand, do not suffer from non-excludability; indeed, title insurance companies frequently establish their own, better-organized private versions of the public records and, of course, exclude their competitors (or anyone else) from using this valuable informational capital. (18) Use of land records, however, is nonrivalrous, so they have at least one of the attributes of a public good. (19) In addition, it is possible that the provision of land records is a natural monopoly: high fixed costs for each producer may mean that a single provider can minimize total cost per unit. (20)

Undeveloped economies surely could benefit significantly from greater...