In a market economy, capital typically is privately owned, and the income from capital goes to individuals. Every patch of land has a deed, or title of ownership; almost every machine and building belongs to an individual or corporation. Property rights bestow on their owners the ability to use, exchange, paint, dig, drill, or exploit their capital goods. These capital goods also have market values, and people can buy and sell the capital goods for whatever price the goods will fetch. The ability of individuals to own and profit from capital is what gives capitalism its name.
However, while our society is one built on private property, property rights are limited. Society determines how much of "your" property you may bequeath to your heirs and how much must go in inheritance and estate taxes to the government. Society determines how much your factory can pollute and where you can park your car. Even your home is not your castle: you must obey zoning laws and, if necessary, make way for a road.
Interestingly enough, the most valuable economic resource, labor, cannot be turned into a commodity that is bought and sold as private property. Since the abolition of slavery, it has been against the law to treat human earning power like other capital assets. You are not free to sell yourself; you must rent yourself at a wage.
Property rights define the ability of individuals or firms to own, buy, sell, and use the capital goods and other property in a market economy. These rights are enforced through the legal framework, which constitutes the set of laws within which an economy operates. An efficient and acceptable legal framework for a market economy includes the definition of property rights, the laws of contract, and a system for adjudicating disputes.
As the ex-communist countries are discovering, it is very difficult to have a market economy when there are no laws enforcing contracts or guaranteeing that a company can keep its own profits. And when the legal framework breaks down, as in the former Yugoslavia or in drug-producing countries like Colombia, people begin to fear for their lives and have little time or inclination to make long-term investments for the future. Production falls and the quality of life deteriorates. Indeed, many of the most horrifying African famines were caused by civil war and the breakdown in the legal order, not by bad weather.
The environment is another example where poorly designed property rights harm the economy. Water and air are generally open-access resources, meaning that no one owns and controls them. As the saying goes, "Everyone's business is nobody's business." As a result, people do not weigh all the costs of their actions. Someone might throw trash into the water or emit smoke into the air because the costs of dirty water or foul air are borne by other people. By contrast, people are less likely to throw trash on their own lawn or burn coal in their own living room because they themselves will bear the costs.
In recent years, economists have proposed extending property rights to environmental commodities by selling or auctioning permits to pollute and allowing them to be traded on markets. Preliminary evidence suggests that this extension of property rights has given much more powerful incentives to reduce pollution efficiently.
Specialization, trade, money, and capital form the key to the productiveness of an advanced economy. But note as well that they are closely interrelated. Specialization creates enormous efficiencies, while increased production makes trade possible. Use of money allows trade to take place quickly and efficiently. Without the facility for trade and exchange that money provides, an elaborate division of labor would not be possible. Money and capital are related because the funds for buying capital goods are funneled through financial markets, where people's savings can be transformed into other people's capital.
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