The primacy of property in a liberal constitutional order: lessons for China.

• Author: Dorn, James A.

China's march toward a market economy, which began in 1978, has been slow but steady. In 1980, China rated very low on the Economic Freedom of the World (EFW) index, achieving a score of only a 3.7 out of 10, in contrast to Hong Kong, which scored 8.7 and was ranked number one in the world. Hong Kong has continued to be ranked the freest economy in the world, with a score of 8.8 in 2000 (the last year for which data are available), whereas China's score has increased to 5.3 (Gwartney and Lawson 2002, 83, ii0). China, however, is a huge country, and its dynamic, market-oriented coastal areas, when scored separately, reflect greater economic freedom than for the country as a whole (Fan, Wang, and Zhang 2001).

The liberalization of foreign trade has helped to transform Chinese industry and has exposed China to new ideas and new markets. China's recent entry into the World Trade Organization (WTO) will deepen economic reform and strengthen civil society.

Economic freedom is multidimensional. Its basic features, as measured by the EFW index, are "personal choice, voluntary exchange, freedom to compete, and protection of person and property" (Gwartney and Lawson 2002, 5). That China ranks 101st out of 123 countries in terms of overall economic freedom reflects the lack of secure private-property rights and the strong government presence in the economy.

In the future, China will need to develop its constitutional and institutional infrastructure to protect property fights better and to limit government intervention if it is to achieve the credibility needed to comply with WTO rules and to create real capital markets. China can learn much from Hong Kong's success. If the constitutional order of freedom characteristic of Hong Kong can spread to China, then China's future will be bright.

In this article, I focus on the primacy of property fights for a free society. As Milton Friedman notes, "Property rights are not only a source of economic freedom. They are also a source of political freedom" (2002, xvii). I begin by defining property rights and showing their moral and practical significance for a liberal constitutional order. The legitimate function of government is to protect property and thereby to ensure justice. Once government safeguards persons and property under a rule of law, a spontaneous market-liberal order can emerge to coordinate economic activity and to create new wealth. I show how the idea of spontaneous order, which lies at the heart of a liberal constitutional order, is fully compatible with China's ancient culture, as seen in the writings of Lao Tzu. China must move from market socialism to "market Taoism"--from constitutional fiat to constitutional freedom. That is why property rights and limited government are so important for its future.

Property, Freedom, and Justice

Property is often thought of only in physical terms, but that conception of it is misleading. A more accurate portrayal of property is as a bundle of rights and correlative obligations that are consistent with individual freedom. Indeed, according to James Madison, the main architect of the U. S. Constitution, "In its larger and juster meaning, it [property] 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" ([1792] 1906, 101, emphasis in original).

Under the rubric of property, Madison included "a man's land, or merchandize, or money," as well as the property a person has in "his opinions and the free communication of them" and especially the property a person has "in his religious opinions, and in the profession and practice dictated by them." An individual also "has property very dear to him in the safety and liberty of his person" and "an equal property in the free use of his faculties and free choice of the objects on which to employ them." In brief, "as a man is said to have a right to his property, he may be equally said to have a property in his rights" ([1792] 1906, 101).

Madison followed in the footsteps of the great classical liberal thinker John Locke. In 1690 in his Second Treatise of Government, Locke defined property as "lives, liberties, and estates" ([section] 123). He questioned the so-called divine right of kings and argued that property is a fundamental human right--a moral or "natural right"--that exists prior to government. All individuals have the right to protect their property from aggressors and the correlative obligation to restrain from harming others, except in exercising the legitimate right to self-defense. Thus, everyone is equally free to pursue his or her happiness, provided everyone adheres to the basic principle of noninterference. (1)

According to Madison, the primary function of government is "to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own" ([1792] 1906, 102, emphasis in original). Hence, just as freedom depends on the moral right to property, broadly conceived, justice depends on limiting the use of force--whether individual or collective--to the safeguarding of life, liberty, and estate. Justice does not refer to outcomes but to rules: to be just, rules must be applied equally and not violate our basic right to noninterference.

Justice is simple to understand in the liberal constitutional order: it is merely the absence of injustice, which is defined as the wrongful taking of life, liberty, or property. As the brilliant French liberal Frederic Bastiat wrote in 1850,

When law and force confine a man within the bounds of justice, they do not impose anything on him but a mere negation. They impose on him only the obligation to refrain from injuring others. They do not infringe on his personality or his liberty or his property. They merely safeguard the personality, the liberty, and the property of others. They stand on the defensive; they defend the equal right of all. They fulfill a mission whose harmlessness is evident, whose utility is palpable, and whose legitimacy is uncontested. (1964, 65) In sum, property, freedom, and justice are inseparable in the liberal constitutional order: when private-property rights are violated, individual freedom and justice suffer.

Private-Property Rights, Economic Freedom, and Prosperity

Economic freedom depends crucially on the enforcement of private-property rights, which include the exclusive right to use one's justly (freely) acquired property and the right to sell property or to partition the bundle of rights. Free markets depend on well-defined private-property rights, which means the legal system must be based on the rule of law and on limited government (Niskanen 2002).

There can be no real competitive markets--no "marketization" or capitalization--without privatization (that is, freely transferable private-property rights). (2) As Armen Alchian, a pioneer in law and economics, emphasizes, "Marketability implies capitalization of future effects on to present values. Thus, long-range effects are thrust back on to the current owner of the marketable value of the goods. He will heed the long-run effects of current decisions more carefully than if the rights were not transferable" (1967, 12).

The salability or transferability of private property (for example, land, shares of corporate stock, and other capital assets) means that owners can discover the present (capital) value of future expected net-income streams. It is possible to calculate those values because market interest rates can be used to discount future expected profits into their present values, as reflected in asset prices. Without competitive markets based on secure private-property rights, no one can know how to allocate capital efficiently to alternative uses based on consumer preferences. In the absence of real capital markets, investment decisions naturally will be politicized, as they are in China.

The attenuation of private-property rights lowers the market value of those rights and reduces individual freedom (Alchian 1977; Jensen and Meckling 1985). If the end and criterion of economic development is greater individual freedom, in the sense of an expansion of one's range of alternatives or choices, then any weakening of private-property rights reduces economic freedom and slows human development. Peter Bauer, in line with classical liberals going back to Adam Smith, has made a strong case for freedom of choice as the primary criterion of development: "I regard the extension of the range of choice, that is, an increase in the range of effective alternatives open to the people, as the principle objective and criterion of economic development; and I judge a measure principally by its probable effects on the range of alternatives open to individuals' (1957, 113-14).

Bastiat had that conception of development in mind when he wrote, "The best chance of progress lies in justice and liberty" (1964, 137). In his famous essay "The Law," he recognized the importance of secure private-property rights, limited government, and economic freedom for personal and economic development: "It is under the law of justice, under the rule of right, under the influence of liberty, security, stability, and responsibility, that every man will attain to the full worth and dignity of his being, and that mankind will achieve, in a calm and orderly way--slowly, no doubt, but surely--the progress to which it is destined" (1964, 94).

Bastiat saw progress as an evolutionary process in which individuals learn by trial and error. That process is enhanced by a free-market system resting on private-property rights...