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Journal of Political Economy Vol. 89, No. 4 (Aug., 1981) , pp. 615-641 (27 pages) Published By: The University of Chicago Press https://www.jstor.org/stable/1833028 Abstract The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined. Increased price is shown to be a means of assuring contractual performance. A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance. This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets. Advertising investments thereby become a positive indicator of likely performance. Journal Information Current issues are now on the Chicago Journals website. Read the latest issue.One of the oldest and most prestigious journals in economics, the Journal of Political Economy (JPE) presents significant and essential scholarship in economic theory and practice. The journal publishes highly selective and widely cited analytical, interpretive, and empirical studies in a number of areas, including monetary theory, fiscal policy, labor economics, development, microeconomic and macroeconomic theory, international trade and finance, industrial organization, and social economics. Publisher Information Since its origins in 1890 as one of the three main divisions of the University of Chicago, The University of Chicago Press has embraced as its mission the obligation to disseminate scholarship of the highest standard and to publish serious works that promote education, foster public understanding, and enrich cultural life. Today, the Journals Division publishes more than 70 journals and hardcover serials, in a wide range of academic disciplines, including the social sciences, the humanities, education, the biological and medical sciences, and the physical sciences. Rights & Usage This item is part of a JSTOR
Collection. Download Lesson 2 .doc file – includes all figures, source citations, and appendices Concepts:
National Voluntary Content Standards in EconomicsThe background materials and student activities in lesson 2 address parts of the following national voluntary content standards and benchmarks in economics. Students will learn that: Standard 4: People respond predictably to positive and negative incentives.
Standard 10: Institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and well enforced property rights, is essential to a market economy.
Standard 15: Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.
Standard 16: There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. . . .
Introduction and Lesson ThemeThroughout history, the road out of poverty has been built by economic growth, and the process continues today. In evaluating whether capitalism is good for the poor, therefore, the question to be answered is whether the institutions that characterize capitalist economies are effective in promoting economic growth. The evidence supplied by a survey of the world’s wealthy nations suggests that they do. The developed economies of the world promote economic growth by incorporating incentives that encourage production, exchange, and creativity. These economies operate through capitalist institutions: They establish reliable political systems that ensure the rule of law; they secure property rights; and they open markets to competition. As the National Content Standards in Economics remind us (see standard 15, above), the economic growth that raises standards of living results from investment, the foregoing of current consumption in anticipation of future benefit. Investment is risky, and the importance of clearly defined property rights, secured by the rule of law, in reducing risk and encouraging investment cannot be overstated. Of the capitalist institutions that offer opportunities for the poor to ascend the economic ladder, secure property rights is one of the most fundamental. Indeed, Hernando de Soto, Peruvian writer and statesman, contends that in developing countries, the lack of secure property rights condemns the world’s poor to a nightmare existence in which hard work brings only more of the same. He reminds us that commonplace features of ownership that we may even regard as trivial, are, in their absence, matters of overwhelming significance to the poor. Imagine a country where nobody can identify who owns what, addresses cannot be easily verified, people cannot be made to pay their debts, resources cannot conveniently be turned into money, ownership cannot be divided into shares, descriptions of assets are not standardized and cannot be easily compared, and the rules that govern property vary from neighborhood to neighborhood or even from street to street. You have just put yourself into the life of a developing country. . . . (De Soto 15) In such an atmosphere, investment shrivels, and the probability of increasing output dwindles. In this lesson, we begin our examination of capitalist institutions by focusing on how property rights affect the ability of the poor to allocate their labor and how they shape incentives for investment in human and physical capital. Case studies from India and Latin America illustrate how policies that target institutions may be more successful in reducing poverty than policies that target people. Key Points1. Overview:
2. Key Terms and Concepts:
3. Property rights are human rights.
Case 1: Without Enforcement, Property Rights for the Poor Are Meaningless
4. Secure property rights in market economies create incentives that promote growth and the accompanying improvements in material well-being. (Review Lesson 1 outline for the importance of economic growth as they key to reducing absolute poverty.)
5. Secure property rights can also increase the likelihood of investment by providing collateral for debt.
Case 2: What If You Couldn’t Go into Debt ?
6. Secure property rights contribute to economic growth by releasing resources from protective activities to productive activities.
7. The recent economic history of India offers an example of the importance of institutional changes in property rights and the rule of law in encouraging economic growth. The following description of the Indian economy serves as a background to Case Study 3, a description of how the Bhoomi project has successfully targeted archaic, corrupt, and costly titling practices.
Case 3: Land Title Reforms Part of India’s Successful Attack on Poverty
8. Summary:
ConclusionProperty rights and the rule of law are theessential foundation for economic progress and reductions in poverty. From the natural right of individuals to the fruits of their own labor to the mundane expectation that the security of people’s homes, businesses, and possessions will be enforced, the capitalist institution of private property creates conditions conducive to economic growth and generates incentives that make growth likely to occur. Throughout developing countries, lack of secure property rights founded on the rule of law denies the poor access to wealth-generating capital, robbing them of initiative and hope. The life-giving importance of this institution is summed up in Hernando de Soto’s description of Cairo, a description that researchers are finding applies to much of the impoverished world: When you step out the door of the Nile Hilton, what you are leaving behind . . . is the world of legally enforceable transactions on property rights. Mortgages and accountable addresses to generate additional wealth are unavailable even to those people in Cairo who would probably strike you as quite rich. Outside Cairo, some of the poorest of the poor live in a district of old tombs called “the city of the dead.” But almost all of Cairo is a city of the dead – of dead capital, of assets that cannot be used to their fullest. The institutions that give life to capital . . . do not exist here. (De Soto 16) (See .doc download linked at top of screen for full lesson outline, including figures, source list, Appendix 1: “Investigating the Relationship Between Property Rights and Economic Growth – Economists Study the the Amazonian Frontier of Brazil,” and Appendix 2: “Selected Readings on Property Rights and Poverty”.) What role to private property rights play in the working market system?Private Property Promotes Economic Efficiency
Most political theorists and nearly all economists argue that capitalism is the most efficient and productive system of exchange. Private property promotes efficiency by giving the owner of resources an incentive to maximize its value.
Which of the following is critical to the success of the market system?Why is private property, and the protection of property rights, so critical to the success of the market system? The ownership of private property and the protection of property rights encourages investment, innovation, and, therefore, economic growth.
What is necessary for the effective functioning of a market system quizlet?According to Adam Smith, what is necessary for the proper functioning of a market system? For markets to work, people must be free to pursue their self-interest.
In which markets are factors of production such as labor capital natural resources and entrepreneurial ability traded?Product markets are markets for goods and services, such as computers and medical treatment. Factor markets are markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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