Private ownership and competitive markets provide the foundation for cooperative behavior among individuals. When private-property rights are protected and enforced, the permission of the owner must be sought before anyone else can use the property. Put another way, if you want to use a good or resource, you must either buy or lease it from the owner. This means that each of us must face the cost of using scarce resources. Furthermore, market prices give private owners a strong incentive to consider the desires of others and use their resources in ways others value.
F. A. Hayek, the winner of the 1974 Nobel Prize in economics, used the expression “the extended order” to refer to the tendency for markets to lead perfect strangers from different backgrounds around the world to cooperate with one another. Let’s go back to the example of the property owner who has the choice of leaving her land idle or building housing to benefit students. The landowner might not know any students in her town nor particularly care about providing them housing. However, because she is motivated by market prices, she might build an apartment complex and eventually do business with a lot of students she never intended to get to know. In the process, she will purchase materials, goods, and services produced by other strangers.
Things are different in countries that don’t recognize private-ownership rights or enforce them. In these countries, whoever has the political power or authority can simply seize property from whomever might have it without compensating them. In his book The Mystery of Capital, economist Hernando DeSoto argues that the lack of well-defined and enforced property rights explains why some underdeveloped countries (despite being market based) have made little economic progress. DeSoto points out that in many of these nations, generations of people have squatted on the land without any legal deed giving them formal ownership. The problem is these squatters cannot borrow against the land to generate capital because they don’t have a deed to it, nor can they prevent someone else from arbitrarily taking the land away from them.
Private ownership and markets can also play an important role in environmental protection and natural-resource conservation. Ocean fishing rights, tradable rights to pollute, and private ownership of endangered species are just some examples. The accompanying Applications in Economics feature, “Protecting Endangered Species and the Environment with Private-Property Rights,” explores some of these issues.