How Are Capitalism and Private Property Related?

Private property rights are central to a capitalist economy, its execution, and its legal defenses. Capitalism is built on the free exchange of goods and services between different parties, and nobody can rightfully trade property they do not own.

Conversely, property rights provide a legal framework for prosecuting aggression against non-voluntary means of acquiring resources; there is no need for capitalist trade in a society where people could simply take from others what they want by force or the threat of force.

Key Takeaways

• Private property is one of the cornerstones of capitalism, allowing for the free and voluntary exchange of goods and services.
• John Locke’s homesteading theory states that ownership incentives encourage people to maximize a resource’s value through labor or trade.
• Private property improves economic efficiency by allowing competition, creating supply and demand, and avoiding certain issues, such as the Tragedy of the Commons.
• Legal protections for private property facilitate fairness, allowing for the exchange of mutually valuable services that benefit everyone.

Private Property, Ownership, and Homesteading

Contemporary notions of private property stem from 17th-century philosopher John Locke‘s theory of homesteading. In this theory, human beings gain ownership of a natural resource through an act of original cultivation or appropriation. Locke used the expression “mixed his labour.”

For example, if a man discovers an unknown island and begins to clear the land and build a shelter, he is considered the rightful owner of that land. Since most resources have already been claimed at some point in history, the modern acquisition of property takes place through voluntary trade, inheritance, gifts, or as collateral on a loan or a gambling wager.

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.

The more valuable a resource, the more trading power it provides the owner of the resource. This is because, in a capitalist system, someone who owns property is entitled to any value associated with the property.

When property is not privately owned, but rather shared by the public, a market failure emerges known as the Tragedy of the Commons. The fruit of any labor performed with a public asset does not belong to the laborer but is diffused among many people.

Note

Private property rights are so critical to capitalism that many economists and historians believe it facilitated the change from feudalism to capitalism.

There is a disconnect between labor and value, creating a disincentive to increase value or production. People are incentivized to wait for someone else to do the hard work and then swoop in to reap the benefits without many personal expenses.

The owners of private property have the right to transfer ownership as they see fit. This naturally cultivates trade between those with different resources and different wants.

Since most people want to maximize the value of their trade, competitive bids are accepted to receive the highest exchange value. Owners of a similar kind of resource compete with each other for exchange value. This system of competition creates supply and demand.

Consider this simplistic example. Someone owns a goat and would rather have chickens. They decide to sell their goat to purchase poultry. All of the sellers of chickens compete for this person’s money, which drives prices lower. The person must similarly compete with all other goat sellers when trading their goat.

Private Property and Law

The reason humans are willing to compete with each other in voluntary trade is because laws exist that protect private property. For a person to receive property they believe is valuable, they must provide a service that someone else believes is valuable. Everyone gains, in the ex-ante sense.

What Did Marx Mean by Private Property?

Marx discussed private property as referring to the means of production, such as factories, land, or tools, used to produce goods and create wealth. He believed that private property allowed capitalists to control production and exploit workers, who only had labor to sell. Marx envisioned the abolishment of private property, which he believed would end exploitation and create a more equitable society.

What Are Private Property Rights in Economics?

In economics, private property rights refer to the legal ownership and control individuals and entities have over resources, goods, or assets. These rights allow the owner to decide how to use, restrict, or transfer access to their property within the law. Private property rights facilitate investment, innovation, and efficient resource management.

What Is an Example of a Private Property Right?

An example of a private property right is owning land. If you legally own the land, you have the right to decide how it’s used, within legal boundaries. For example, you could choose to build a house and live in it, you could choose to grow crops and sell those crops for money, or you could sell your land. These rights are protected by law, allowing you to maximize the value of your land as you see fit.

The Bottom Line

Private property is considered to be the backbone of capitalism. It enables voluntary trade, economic efficiency, and legal protection. Private ownership incentivizes individuals to maximize the value of their resources, facilitating competition and supply and demand.

While public ownership risks inefficiency, private property enables productivity and fair exchange, upheld by laws that are intended to be mutually beneficial to all market participants.