Edited by William F. Shughart II and Laura Razzolini
Chapter 2: Property rights: private and political institutions
Louis De Alessi* 1 Introduction Economic theory postulates that individuals seek a multitude of goals in a world of unrelieved scarcity. Because individuals must compete with each other for the right to use the resources available, the fundamental economic problem within any society is to evolve a set of rules for controlling competition, that is, for organizing cooperation. These rules, which are embedded in a society’s formal and informal institutions, sanction the range of permissible behavior by specifying the rights that individuals may hold to the use of scarce resources, including their own persons. The resulting system of property rights constrains the choices available to individuals acting on their own behalf or as agents for others, determining how the beneﬁts and harms ﬂowing from a decision are allocated between the individual making it and other members of society (Alchian 1965b). The central insight of economics, ﬁrst clearly articulated by Adam Smith ( 1976), is that individuals respond predictably to opportunities for gain. Because the property rights embedded in different institutions confront decision makers with different costs and rewards, offering different opportunities for gain, they affect choices systematically and predictably (De Alessi 1980; Eggertsson 1990; Rutherford 1994; Furubotn and Richter 1997). Given scarcity, individuals can increase their welfare through specialization and exchange. Specialization in production steers rights to the use of inputs to those activities in which they are more productive, while specialization in consumption steers rights to the use of outputs to those individuals who value them more; exchange...
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