Thursday, February 04, 2010

Property rights and the law

One of the important strands of economic theory has been the "law and economics" movement. It has two strands - one that comes from economics as part of institutional economics, the other comes from the law and rationalises the development of common law as an economic process.

The first of these is especially associated with the work of Douglas North and finds it greatest expression in strands of development economics that says you can't get development until you get processes in place to define and protect property rights.

The second is most associated with Richard Posner who argues the common law reflects a process of choice to support economic efficiency. It is a case partially well made in analysing the development of the common law of trespass (or tort) and contract.

But it all falls apart a bit in the real world, and especially in relation to the role of the state. In particular the state takes on the role of the enforcer in relation to actual property possession, but only provides the arena for the enforcement of the property rights inherent in contract.

The new world of a Digital Economy has placed some constraints on this model. The decision today in Roadshow v iiNet highlights one of these. The law has created a concept of copyright but it is largely up to the holder to enforce their rights. In the action the court found that there had been infringement, but that iiNet had not, as claimed, authorised it.

The question left for the rights holders is very much one of what use is the (property) right if I have no means to enforce it. It is really, really hard for them to do so. In physical property we don't leave it to the individual to enforce their own right, we have a police force and public prosecutor. Without them there would not be effective enforcement of the property right in physical property.

On the flip side one issue that plagues e-commerce is fraud. Fraud is a crime, and hence does fall into the purview of police and public prosecutors. But it is difficult to investigate and prosecute, and many firms find the enforcement inadequate.

Our system has only two models, private enforcement or public enforcement through government agents. Is there a case for a different model, of a "club" good in enforcement?

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