An Essay into the Nature and Causes of Poverty — Part 4

Property

At a very abstract level, the formula for prosperity is to have a liberal market order and institutions that support that liberal market order, namely those that protect property rights, enforce contracts and settle disputes, and provide the rule of law.

Property rights does not imply the privileging of the rights of property over the rights of humans, although socialists mistakenly believe that that is what it means. The right to private property is the source of all human rights. Without the right to own property, one is hardly a human being; one becomes mere chattel or property.

All rights begin with the elementary idea that a person owns himself. Therefore whatever you produce through your own effort or whatever is gifted to you is your property. If a person does not own himself, then he’s a slave and whatever the slave produces is owned by the master. 

Slavery has been practiced across the world since antiquity and only relatively recently in human history has it been outlawed in the civilized part of the world. No society can be judged to be civilized that admits slavery. To the extent that some form of disguised slavery exists in a society, it is commensurately poor. One can argue that if a society is poor, in some form or the other that society has slavery.

Why do property rights matter? Because without property rights, there can be no trade or exchange. And without exchange, wealth creation is severely limited.

You cannot sell the red-colored bridge across the Golden Gate in the SF Bay area because you don’t own it. What you don’t own, you cannot trade. You can sell a car, if the title to the car is in your name. You can use the land you own to produce goods and services, thus generating income for you and therefore adding to the wealth that the economy produces.

Producing stuff requires effort. But if what you produce is not yours, then you would not put in the effort. But if your property can be stolen, you will have to spend effort in guarding your property, and if you cannot guard it, then too you would not put in the effort. So it is important that some mechanism exists that efficiently protects private property. Let’s call that institution “the police force.” 

Contracts

We know that trade is mutually beneficial. Jim gives Bob a sandwich in exchange for $5. Bob hands over the money, and Jim hands over the sandwich. It happens right then and there. 

But not all trades are of that kind. Some trades take extended time to occur. It takes time for Joe to replace Bob’s roof — several weeks at least. They have to enter into a “contract” which specifies what will be done, and how much will be paid to Joe at which stages of the job. The contract could be, for example, that Bob will pay Joe 25%  of the money in advance (to buy material), then half-way to completion, Bob will pay an additional 50%, and that the job will be finished by week 5, and remaining 25% paid upon passing inspection. 

So now having a contract is obviously good but without some agency that would enforce the contract, it’s just a piece of worthless paper. It’s in both Bob’s and Joe’s interest that the contract is enforceable. If Bob refuses pay, then Joe will have some recourse to make Bob pay; and vice versa, if Joe doesn’t do the job despite being paid, then Bob has some means to recover the money. That requires some agency that will settle the dispute (an arbitration agency or a judge) and the agency that will enforce the decision of the court (the police.)

Without enforceable contracts, both Bob and Joe would not get the gains they would have otherwise obtained: Bob would not have a new roof, and Joe would not have that income.

India

Poverty is the natural state of societies that lack the notion of private property, that don’t enforce private property rights, that are unable to resolve disputes effectively and efficiently, and the rules are whatever  suits the interests of the powers that be.

India, to some extent or the other, meets all those conditions. Indians don’t in fact have private property rights. Property rights are tentative, not fundamental. The constitution “grants” property rights, but then what the constitution grants, it can take away. And the constitution is whatever the government decrees it to be. So if, say, you build a nice factory through your hard work, the government could one fine day decide that it needs to own your property, then it just goes ahead and “nationalizes” it for some purported “public good.” 

Dispute resolution takes too long in India. There are tens of millions of cases pending in the courts in India, and it takes several decades to resolve them. Judges are the lords of the land (they are addressed as “my lord’) and they can’t be bothered. The police are corrupt and enforcement is arbitrary. 

The bottom line is that the people are not aware of the rights free people ought to have — the right to property being the most fundamental. The notion of freedom and what it entails is not very clear to them. The general attitude is that because they frequently vote in elections, they are free. This attitude is encouraged by the fact that there are state and municipal level elections happening somewhere or the other in India every month. 

Next Part 5. Previous parts: Part 1, Part 2, Part 3

{Image: Costco liquor store. Only whisky that is produced in Scotland can be called scotch. Bonus fact: the Irish spell the word with an ‘e’ — whiskey.}

Author: Atanu Dey

Economist.

6 thoughts on “An Essay into the Nature and Causes of Poverty — Part 4”

  1. Mr Atanu : I am a businessman myself & fully agree with you that prosperity needs liberal policies, with support from Government for protection of property rights, for enforcement of contracts and faster judgement to settle disputes.
    Under the regime of Late PM Rao, Dr Manmohan Singh truly open the lid of hidden Indian entrepreneurship. Thereafter, no good progress made till date, even when he was the PM himself, nor Mr Modi is realizing this hidden potential.
    Unless we re-write our hindering Constitution & engage our Bureaucracy for development (instead auditing), the true capacity will not expose & we will keep wasting our energy in fighting with useless problems.

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    1. Thanks for your comment. But I am afraid that Manmohan Singh is an inveterate liar and a crook. He had nothing to do with the little bit of liberalization that was done. PV Narasimha Rao forced Singh to do that. Singh is a statist and proved that he was one because he did no liberalization when he was the figure-head prime minister. Same on him. He is a despicably dishonest man.

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  2. Hi Atanu .. hope you are doing fine. I am unclear on one issue – if just existence of markets and process of exchange brings prosperity , why societies did not become prosperous soon after agriculture came to be practised and exchange markets came up to trade the surplus. Why is it that prosperity started coming in only around 18th century ?

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