Why property rights matter – and could matter more

May 2nd, 2017 by Brian Kantor

I recently asked a class of senior law students what they thought the purpose was of all the laws that protect property (wealth or assets or capital by other names) against theft, fraud or seizure, including by the state, and the purpose of the many laws that facilitate the exchange of assets.

The students did have a sense of the fairness of such laws protecting owners. They did not recognise the importance of the economic incentives at work: that unless rights to property were exercised, there would be little incentive to create wealth; to save, to build and to sacrifice immediate consumption for later benefits for society at large.

Who would wish to save up to build a house or a business or improve a tract of land, providing goods, services and incomes to others, if someone more powerful could move in and take over? But I also pointed out that the value of assets owned can be severely damaged by regulations of their use (perhaps of net benefit to society at large) for which compensation is seldom allowed by the courts. I spoke of the proverbial little old lady and her children whose only meaningful asset is a house, whose value is much diminished by declaring it of historical interest – for which compensation could be offered but in practice is never offered or awarded.

I made the point that property rights or their absence (or the dangers of regulation of the use of assets) would be reflected in the market value attached to such always vulnerable assets. Threaten for example a wealth tax or a mining tax and the value of assets and the incentive to create wealth will be undermined in ways that are very likely to harm the poor.

But the state not only has the power to take wealth, it also exercises the power to take from wealth or income from some and give it to others. South Africa has supplied very large numbers of houses to essentially lucky recipients – lucky because the waiting lists for gifts of this value are very long and will never be exhausted. The numbers of such interventions in the housing or accommodation space are not known with certainty, nor is it fully known what happens to the houses once handed over.

The important question is how should the value of these gifts of housing or land or low rentals be best protected by law? Protected surely best by full rights of ownership attached to them, as is the wealth protected when created through the sacrifice of consumption or the sweat of a brow. Living in a potentially valuable home without food on the table has little logic to it. Effectively exchanging the house for more food and cheaper informal shelter may be a sensible choice to make. Leasing out and combining small parcels of farming land can provide a better standard of living for its new owners than subsistence farming on it.

Our laws that most unfortunately restrict property rights – for example that only allow the transfer of RDP homes after eight years of occupancy or prevent formal rental contracts – accordingly leads to widespread losses and waste. To houses that exchange hands at far less than their cost or potential and that can never form part of any inheritance or tax base. To potentially valuable farms that become wastelands.

We should make all transfers of government assets to private ownership immediately come with full rights of ownership. And we should be making every effort to convert currently fallow government owned and tribally managed land to private ownership with full rights, whoever are the initial beneficiaries. This will then allow the market place take over to make the best use of these assets. The impact on the economy will be as favourable for the creation and preservation of wealth and the generation of extra incomes in SA, as secure property rights always prove to be. 28 April 2017