Wednesday, 24 September 2014

Capitalism and Private Property

The acceptance and protection of private property is fundamental for capitalism. By private property we mean not only the individual or joint ownership of produced and natural assets but also the respective property rights in relation to its use and disposal.

The distinction between property rights and property ownership as well as its use for personal or commercial purposes is essential to discuss any acceptable limitations to such rights.

Obviously, personal private property is indispensable even in the most utopian of the communal organizations. For instance, in a hippie commune one could share the food in the fridge but not the toothbrush, and sooner or later, if someone likes only a specific kind of yogurt, he or she would like to be sure that such brand would be left untouched for his private use. However, when discussing capitalism we are not talking about such minutiae in relation to personal objects but rather on what Marxists call productive capital or means of productions.

The means of production may be divided in at least four categories: 1) land and other natural resources, 2) materials, tools and equipment, 3) labor, and 4) know how. Likewise the various forms of ownership must be split into individual, joint, and communal (state) or international. The first two types we call private and the rest we call collective property.

All types of property and ownership coexist in every economic system, but the various economic systems differ on the relative importance and role taken by private property. For instance, in primitive hunting and gathering societies land was the main mean of production and was mostly used for pastures and game and owned collectively. Other natural means of production inseparable from land like water, wind, minerals, air waves or landscape were not perceived as scarce and valuable. Likewise, intellectual property was not important then.

So, collective ownership of natural resources was as important in primitive societies as intellectual property is in modern capitalism. Yet, any limits on the property rights of specific types of property are critical not because of the nature of such property but because of their impact in the of accumulation capital and its efficient use. In this regard joint ownership as opposed to collective ownership became an important lever for competition and capital accumulation despite the obvious drawbacks introduced by large corporations.

Since the late XIX century, a rise in the size of corporations and its share of total assets were inevitably associated with the prevalence of joint-ownership over individual or family ownership. Yet, joint-ownership through joint stock companies and similar organizations does not invalidates the need for private ownership. If anything, increases its scope by facilitating capital accumulation through diversification and risk mitigation. But, it introduces a new reality – the separation of ownership and control and the associated problematic of the relationship between principals and theirs agents.

This separation, inevitably questioned the old stereotype of the capitalist as embodying simultaneously the financier, the entrepreneur and the manager. And, in the early XX century, some economists began replacing the traditional view of capitalism by a system of managerial capitalism. In their classic “The Modern Corporation and Private Property” Berle and Means (1932) described this process and its consequences in terms of corporate law and governance. They claimed that the owners no longer were served by a profit seeking controlling group. The realization that many industries had become oligopolistic and big businesses were run by a new class of professional managers rather than shareholders led some to question whether we still needed capitalists, private property and competitive markets.

For instance, Keynes (1936) in his “General Theory”, although refuting a system of State Socialism, conceived that to achieve an optimum rate of investment “a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment”. Likewise Schumpeter’s (1942) theory on the demise of capitalism claimed that the success of capitalism would lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals, that would replace entrepreneurship with “laborism”.

Since then the separation between ownership and control has deepened by the rise of another layer of intermediaries between the ultimate owners and their investments. That is, capitalists progressively lost control not only over how to run their assets but also over the allocation of capital, and are now often reduced to choosing professional fund managers.

Still, regardless of how removed ownership is from control, the preservation of this last domain of private property power and rights is indispensable to preserve the profit motive and the role of markets in a capitalist economic system. Otherwise, wealth owners would lose the freedom to dispose of their property, including the right to bequest it as they like, and lose any incentive to venture and to accumulate the capital indispensable for economic growth.

The fact that nowadays most people own a substantial share of their wealth through pension funds owned or regulated by governments and that prudence recommends that they should not be able to withdraw their funds as they please does not invalidates the previous assertion. That is, private property continues to be an essential foundation of capitalism.

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