What are ‘property rights’, and why do they matter? The economic literature confounds two distinct concepts under the term ‘property rights’. One is what the law prescribes, the other is what one may do with possession. Economists who use the term seldom clarify which of the two is intended. As I use the concept, property rights consist of legal rights (de jure) and economic rights (de facto).

Legal rights are neither necessary nor sufficient for economic rights. For the sufficiency, suppose Congress grants me ownership over an accurately delineated chunk of the Pacific Ocean. This secures my legal rights, but what good are these rights without (costly) naval protection? As for necessity, suppose two neighbors fully recognize and respect the border separating their properties even though its legal delineation is fuzzy. Nevertheless, these neighbors will use their border resources efficiently.

The confusion does not escape the Coase Theorem. What are the rights the Theorem implies? Coase himself is moot regarding what precisely (well-delineated) rights are, though this matters only when transaction costs are positive. Most economists who discuss the theorem seem to have legal rights in mind. But upon careful examination, it becomes clear that the theorem is strictly about the ability to use assets, not about who holds which legal titles.

Consider the distinction between economic rights and legal rights as applied to Kleenex. Kimberly-Clark is the legal owner of that brand name. In practice, however, the public expropriated the term Kleenex, using it generically to mean ‘tissue’, essentially depriving Kimberly-Clark of the brand name's value. Although the state recognizes the brand name, it did not protect it from the public using it generically. Kimberly-Clark's legal ownership over the name is of little value; essentially, it has no economic rights over it.

In ‘Economic Analysis of Property Rights’ (Barzel, Reference Barzel1997) and elsewhere I have tried to disentangle the two concepts by using the two distinct terms as above. ‘Legal rights’ regards assets the state recognizes as belonging to particular individuals. ‘Economic rights’, the less familiar of the two, indicate what one can do with properties. When legal rights are granted and enforced, it enhances the corresponding economic rights. Whoever actually drives the car over which I have legal rights has economic rights over it, be it myself, a person I authorized to use it, or a thief, though if it is a thief, the state will help me recover it. A Jewish Hassid diamond trader has the economic rights over the value of expensive diamonds he just passes to another Hassid with a promise to pay guaranteed by a handshake. Indeed, in case of dispute they are likely to resolve it not by the state court, but via their rabbi. Note that both terms are used without normative connotation, but rather as concepts useful in analyzing behavior.

In his encompassing paper ‘Much of the “economics of property rights” devalues property and legal rights’, Hodgson (Reference Hodgson2015) honors me by the close attention he pays to my work, though he disagrees with my view on rights. For him the term ‘rights’ is normative, and he objects to my non-normative use of it. In addition, he disputes the usefulness of the concept of economic rights. I will (sort of) concede the terminological disagreement, but will point out why what I consider economic rights (by whatever name) as useful, whereas I do not view as useful Hodgson's understanding of what either kind of rights is.

Hodgson wins the semantic dispute, but his is a pyric victory. The term ‘rights’ in what I call ‘economic rights’ indeed fails to meet (at least one of) the dictionary definitions of rights. However, as the economic literature constantly and hopelessly confounds the two concepts of rights, as actually used, the term ‘property rights’ deprives its legal connotation from the exclusivity Hodgson endows it. In any case, it is too late to adhere to Hodgson's exhortation and to convert the economic profession, or at least me, in the use of the terms.

Spending one more instant with terminology, ‘rights’ have an ownership notion as well as moral one; the latter as in ‘rights and wrongs’. Hodgson comes close to equating the two. Indeed, he seems to equate law with justice and morality. Surely, neither morally nor in practice should legal property rights be placed on such a high pedestal.

The disagreement between us about terminology quickly drifts toward substance. Implicitly disapproving of ‘might makes right’, Hodgson views economic rights rather negatively. Seemingly, his is an ideal law, sort of Platonic one. In reality, neither legal rights nor economic rights are ever absolute. We live in a messy world replete with trade-offs, and that is what we must cope with. In any case, note as I will illustrate, that although might makes (economic) rights, not all economic rights are created by might.

The substantive disagreement I have with Hodgson is fundamental. It might appear that we are in agreement about what legal rights are, but such is not the case. The state is in charge of enforcing legal rights, and seemingly by Hodgson (and many others), the enforcement level is uniform, and by some accounts, complete. It is actually complete, however, only in a zero transaction cost world. In my view, legal rights and their enforcement are never complete, far from uniform, and often at a rather low level. Moreover, the notion that anyone's economic rights devalue rights is just incorrect.

The level of enforcement that the state chooses to apply to a particular asset such as my house, over which I have legal title, is imperfect, the probability that something will be stolen from it is positive, and for that reason, my economic rights over it are stunted. Economic rights give me utility, and I attempt to maximize them. I do not expect the state's protection to be absolute, and I engage in activities such installing theft alarms. State protection is not fixed; it seems to engage in a (perhaps implicit) benefit cost analysis to determine its level and nature of protection. Recognizing my cost advantage in installing a lock for my front door, the state (implicitly) expects me to take care of that. The installation of the lock and the alarm are part of the maximization of my economic rights. Moreover, whereas the legal rights I have over my house did not change since I acquired it, my economic rights have been significantly enhanced with the creation of Airb&b. Airb&b has made it easy for me to further benefit from my house, as I am able to rent it for even a short time when I am away from Seattle.

To further clarify the distinction between the two forms of rights and bring up their operational character, consider single-price movie theaters compared to multi-price opera theaters. The purchase of a movie theater ticket is a contract between an owner and a customer entitling the latter to a seat in the theater. A ticket holder who does not find an empty seat is deprived of the right the ticket promises, and she is entitled to sue the owner for breach of contract. The ticket, however, is not a contract for a particular seat, and seats differ in value. To secure a more desirable seat, the ticket holder has to arrive early to appropriate one of the better available seats. The individual, then, acquires two things of value: one is the legal right protection for a seat for which she pays cash, and the other is the economic right to a preferred location for which she pays time. Customers, then, acquire economic rights and legal rights protection side by side.

Compare now the movie theater to the opera. The value of opera seats is much higher than of seats in the movie theater, and the opera owners enhance their economic rights to the value of individual seats by segregating them according to their value and by spending more resources, such as for ushers, to protect buyers’ rights to their seats. Thus, a ticket to the opera conveys the legal rights to a particular seat.

Another right is to a place in the line to acquire better seats. In an unruly world, the state may participate in protecting rights to positions in the queue by sending policemen to enforce them. Where the norm ‘don't jump the line’ is well observed (in England), norms replace the law and take part in securing economic rights. As another illustration, long-term neighbors seldom have to protect themselves from theft by each other as they do when they get a new neighbor with whom they are more likely to interact via legal contract. The formation of long-term relations is another way of creating economic rights. Whereas the term ‘economic rights’ may be ill chosen, the substance behind it – its role in affecting behavior – is basic. Such a role is largely absent from rights as viewed by Hodgson (though he vacillates about this).

Generalizing, a person in possession of an asset will maximize its value to him by choosing the appropriate form of protection. One form of protection, of course, is establishing legal rights. In the case of inventions, inventors may seek patents, may keep their inventions secret, or may simply use their inventions privately; the last constitutes an economic right not supported by legal rights.

The available choice of the form of protection is part of what makes the approach emphasizing economic rights so appealing; it draws attention, among others, to the fact that as conditions change, individuals will switch away from, or into legal protection, indicating that securing legal protection is often a matter of choice. Legal rights are not in general superior to other forms; each is (second) best under different circumstances. Economic rights are created not only by theft, but also in many other, less nefarious ways. Where there is choice we can apply economic theory, using operational concepts, we can work with to make predictions to test the theory. Hodgson, on the other hand, takes legal rights as fixed, and thus it is not possible to put his theory to a test.

Considering the law itself enhances the view here. Hodgson requires the state to be legitimate and not corrupt. But legitimacy and corruption too are matters of degree. It is easy to think about the Soviet Union as not being ‘legitimate’. But how about Turkey, or Argentina, or Indonesia? What makes a state a ‘modern democracy’? It is more productive to view legitimacy too as a matter of degree. And so is the respect for the law. Even in the most democratic countries some laws are passed to benefit interest groups rather than benefit the general public. Are these respected, and should they be? Indeed, some laws are not of a very high moral standing. In addition, even the law does not always take itself seriously; otherwise, dead laws would not be left on the books. This does not imply that the law does not play an important role; actually, its role is enormous, but more nuanced than Hodgson makes it to be.

Hodgson emphasizes individuals’ valuation of the laws, and disagrees with me for not bringing it up myself. It is true that this is not at the center of my story. But neither are sceneries, love of children, and numerous other factors. This does not mean that these factors have no place in my world. However, we need to economize not only in the production of commodities, but also be parsimonious in forming models, which are made to accommodate the issues the models deal with. When studying the demand for meat, one should account for vegetarianism, but not the law, and account for religion, but not the law, when studying the demand for pork. One should consider charitable behavior when discussing giving blood, but not in the market for tomatoes. In my work, I bring up only factors that would make significant difference to the question at hand, and leave others out especially if they remain stable within the domain of the problem. Had I investigated regulations or theft or alcoholic beverages, I should (and probably would) account for respect for the law. But even here we have a problem in that respect too is not uniform. Indeed, one should account for the disrespect for the law during the prohibition and on college campuses.

Hodgson claims that the ‘economics of property rights’ devalues property rights. But consider an economic right that enhances my well-being, and that I have learned to expect given my age – having doors held for me. Though of little importance, it is one of my economic rights. The law does not require anybody to hold doors for me. Yet consider the norm ‘respect the elderly’. I easily qualify as ‘elderly’. Many people conform to the norm, holding the door for me, thus creating a valued economic right for me (and a better society for all).