Private Property: The Real Key to Prosperity

As I have mentioned in previous blog posts (here, here, and here), economic theory identifies three sources of prosperity: the market division of labor, capital accumulation, and entrepreneurship. There is no single factor that generates economic expansion and development, however, because all three must work together in order for economic progress to occur.

The real key to unlocking economic expansion is to identify the institutions that allow the sources of prosperity to function. We need social institutions that foster the development of the division of labor, the accumulation of capital, and successful entrepreneurship. The common condition necessary for all three to function is the institution of private property. In order for the market division of labor to function, people must be able to exchange what they produce, which requires private property. For people to have an incentive to save and invest, they must be relatively certain that they will be able to keep any positive return in that investment. In order for entrepreneurs to calculate profit and loss, money must be in use and money prices used in economic calculation must be manifestations of voluntary exchange motivated by subjective preferences, which again requires private property.

Private property, therefore, is the institutional bedrock upon which any true free market economy is constructed. That is why we should be every vigilant against politicians and technocrats championing “markets,” all the while finding reasons to curtail private property in their efforts to regulate the economy. Political leaders will praise freedom and then expand the welfare state, socialize health care, embark on massive increases in government spending, and create $600 billion in additional commercial bank reserves, with many economists cheering them on. As Wilhelm Röpke in his A Humane Economy,

certain contemporary economists who, while not open partisans of socialism and sometimes speaking in the name of the market economy, work out the most elaborate projects for regulating the movements of the circular flow of the economy…All of these protagonists of social rationalism—socialists and circular-flow technicians alike—have a common tendency to become so bemused by aggregate money and income flows that they overlook the fundamental significance of ownership. The market economy rests not on one pillar but on two. It presupposes not only the principle of free prices and competition but also the institution of private ownership, in the true sense of legally safeguarded freedom to dispose of one’s own property, including freedom of testation.”

Playing the role of the hypocrite by praising the efficiency of markets and then curtailing the very right to private property that sustains capitalism will always hamper the market and result in less economic expansion than a society could achieve with real freedom.