1. Some misrepresentations

Allen (Reference Allen2015b) sometimes exaggerates opposition. When I propose that China ‘is an important test’ of my arguments, Allen construes this as a denial that ‘economists of property rights’ accept the role of legal rights in China. What I in fact conjectured is that the Allen–Barzel approach might see legal title as ‘secondary’ to possession (i.e. what they call ‘economic rights’) in China. The accusation that someone treats a matter as ‘secondary’ does not amount to the claim that it is being ‘overlooked’, as Allen put it.

In a footnote, Allen (Reference Allen2015b) wrote: ‘Hodgson often infers that the [economic analysis of property rights] assumes legal property is irrelevant’. I infer no such thing. In fact, I discuss the role of legal property in Barzel's (Reference Barzel1997) analysis.

In another footnote, Allen (Reference Allen2015b) made a related point: ‘Since economic rights depend on legal rights, individuals who maximise the value of their economic rights must consider the legal rights. In failing to recognise the functional relationship, Hodgson arrives at a false conclusion’. But I do not fail to recognise this functional relationship, either as formulated by economists of property rights, or in my own version.

For instance, in my article I wrote: ‘Barzel did not argue that the law does not matter. It may be a major factor in determining outcomes in terms of control and enjoyment of resources’ (Hodgson, Reference Hodgson2015a). Then, expressing my own view, I wrote: ‘Law involves processes of two-way feedback and amendment. Consequently, customary rules or rights often become law after state approval, and state legislation often gives rise to established customary rules. Both the state and custom are necessary for law to function’ (Hodgson, Reference Hodgson2015a). Hence, it is untrue that I fail to recognise, in my own analysis or in my reporting of the work by leading ‘economists of property rights’, a functional relationship between law and customary possession (i.e. so-called ‘economic property rights’).Footnote ²

Let me make it doubly clear. I do not accuse Allen, Barzel or anyone else, of ignoring legal institutions or of making them entirely irrelevant. Allen and Barzel clearly acknowledge an impact of ‘legal property rights’ on behaviour and possession. There is an enormous amount of work by institutional economists – including those that describe themselves as ‘new’ – on legal institutions. But I wish to add an additional motivational mechanism that makes law much more than an instrumental cost or constraint.

Also I depict some approaches in the ‘economics of property rights’ as devaluing the full and proper meanings of property and rights. I accept fully that Allen and Barzel have made a strong distinction between ‘legal property rights’ and ‘economic property rights’. But following others, I prefer to call the latter ‘possession’, and neither ‘property’ nor ‘rights’. Nevertheless, possession and non-legal rules are very important, in any society, and they can often affect legal rules. Allen and Barzel make a similar point, using a different terminology.

Barzel mischaracterises my position as follows: ‘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’. I do not say this. First, the enforcement of legal rights is not simply a matter for the state. Some laws – such as driving on one side of the road – are followed because it is convenient or expedient to do so. In regard to other cases, I pointed to the evidence of Tyler (Reference Tyler2006) and others, showing that people often obey the law for moral reasons, as well as for fear of punishment. As Tyler argues, this makes the perceived legitimacy of the state highly important, even if, as Barzel correctly observes, ‘legitimacy and corruption . . . are matters of degree’. Second, people differ in the degree to which they take such things into account. Psychopaths have no sense of morality. For these and other reasons, the enforcement level is never uniform.

Allen (Reference Allen2015b) also accuses me of wanting to drive ‘nails in the coffin’ of the ‘economics of property rights’ and of suggesting ‘this line of theorising has wrought more harm than good’. I say no such thing. Furthermore, Allen is mistaken in suggesting here that ‘the economics of property rights’ is one unitary ‘line of theorising’. There are several.

For example, in 1932 Mises (Reference Mises1981: 27), depicted property ‘purely a physical relationship of man to the goods, independent of social relations between men or of a legal order. . . . Economically . . . the natural having alone is relevant’.

In contrast, consider Ronald Coase. As far as I am aware he did not define property rights, but he repeatedly suggested that the (state) legal system was involved in their constitution (Coase, Reference Coase1959: 25, Reference Coase1988: 10).

Contrast again with Alchian (Reference Alchian1965, Reference Alchian and Brunner1977: 238), who defined ‘property rights’ in terms of assignments of the ability to choose the use of goods (without affecting the property of other persons), assessed in terms of ‘the probability that his decision about demarcated uses of the resource will determine the use’.

Although inspired by Alchian, the position of Barzel (Reference Barzel1997, Reference Barzel2002) is again different, because he formulated a distinction between ‘economic property rights’ and ‘legal property rights’. Allen follows Barzel in this regard.

Instead of affirming (or denying) an apostle's creed for a mythical unitary doctrine, I believe that there are gaps, problems and inconsistencies in all approaches to the analysis of property rights (including those of the original institutionalists). Furthermore, there are big differences of opinion among the pioneers of ‘newer’ versions. Instead of unalloyed celebrations of unitary achievement, we need careful and constructive criticism, recognition of what has been achieved, and fruitful theoretical innovation to deal with pressing analytical problems.Footnote ³

2. The standard meaning of rights

Dictionaries tell us that a right is a moral or legal entitlement to have or do something. A moral right is not necessarily a legal right, and a legal right is not necessarily a moral right, but claims to rights mostly refer to law, morality or both. Like many concepts requiring philosophical analysis, the concept of rights is complex and contested. But although modes of analysis or justification are divergent, philosophers are closer to one another when they define rights. Let us consider an example.

This definition is representative of a broad literature, and Wenar (Reference Wenar and Zalta2011) refers to other major accounts of rights made by other scholars. Note the possibility of both prohibitive and permissive rights, and the important reference to a notion of justice.

It is clear that the ‘economics of property rights’ uses the word ‘rights’ differently from these standard dictionary and philosophical usages. When von Mises and Alchian referred to property they reduced it simply to the fact of possession or control. Likewise, when Barzel and Allen refer to ‘economic rights’ they simply mean possession or control. My objection to these accounts is illustrated by the case of a thief who manages to steal an item and retain control of it. According to von Mises and Alchian, this would become the thief's ‘property’. According to Barzel and Allen, the thief would have established an ‘economic right’ to the stolen goods.

My argument is that this eviscerates the notion of rights (as defined above) and degrades the notion of property (by subduing its difference from possession). There is little reference to morality or justice in the usage of the term ‘rights’ in the mainstream ‘economics of property rights’. Barzel ‘(sort of)’ concedes this point, but he does not think a correction gets us anywhere. Allen regards it as ‘semantic’ and of little if any consequence.

Barzel correctly notes out that my concept of ‘rights’ is normative. I am in line with the standard philosophy of rights on this point. But some clarification is needed. Rights are normative in the sense that they involve normative claims by those who believe that they have them. They are not necessarily normative for the analyst or observer. Rights can be described and probed analytically, without the analyst making normative claims about rights. Normative rights can thus be analysed in a positive way. This is the domain of what is often called ‘descriptive ethics’ or ‘meta-ethics’.

Barzel does not find my understanding of rights to be useful. He suggests that I seem to ‘equate law with justice and morality’. This is not my position. Law, justice and morality are different things. There can be unjust or immoral laws, as in Nazi Germany. Many laws have little to do with morality, such as driving on the right-hand side of the road. If such laws were universal moral issues, then British drivers might be acting immorally by driving on the left. The general principle of obedience to the law may have moral salience, but not necessarily individual laws. But Barzel is absolutely right to say that I uphold ‘property rights’ as involving both legal and normative claims by those who have or want them.Footnote ⁴

The cases of Allen and Barzel are more complex, because they do make a distinction between ‘economic property rights’ and ‘legal property rights’, and this distinction here is similar (but not quite identical) to that between ‘possession’ and ‘property’ respectively, as widely termed by many lawyers and others. I accuse Allen and Barzel of debasing the terms ‘rights’ and ‘property’. In particular, an ‘economic property right’ refers to de facto possession and is not necessarily a right (although of course it may become one). I also argue that their depiction of behaviour as ‘economising’, conjoined with the terminology of ‘economic property rights’, wrongly leads to the suggestion that ‘legal property rights’ are instrumental means rather than ends in themselves, and they propose that people are never directly motivated to obey the law simply because they believe it is the right thing to do. They fully accept that law affects behaviour, but only instrumentally, as a cost or constraint.

Barzel (Reference Barzel2002: 16) is explicit in promoting this view: ‘What individuals maximise (subject to their personal safety) is the value of their economic rights’. As a result, semantic issues are involved, but they are not the whole story. But unless both advocates and critics carefully acknowledge that terms are being used in different ways, the non-semantic issues become lost behind a smokescreen. Consider some examples.

When I wrote: ‘It is impossible to understand capitalism . . . without an adequate conception of [legal] property’ (Hodgson, Reference Hodgson2015a), Allen (Reference Allen2015b) protested and wrote: ‘it is quite the opposite. Without an appreciation of the distinction between legal and economic rights it is unlikely that any real understanding of behaviour is possible’.

Remember that when Allen uses the term ‘economic rights’, others including myself use the term possession. The two different terms refer to the same phenomenon, of de facto control. Allen declares that ‘it is quite the opposite’ and accuses me of lacking ‘an appreciation of the distinction between legal and economic rights’. But that is precisely the distinction that I wish to make. We can see this when his words are translated into standard legal language. He and I are both making a distinction here, but using different terms to describe it. He shows with an example that creating different meanings for standard terms can indeed cause confusion.Footnote ⁵

I wish to show that these cannot simply be dismissed as ‘semantic’ issues. In section three I argue that it bears on the question of motivation and our understanding of human behaviour. In section four, I suggest that words are important, and ‘semantic’ errors cannot generally be ignored or brushed aside, because they often have major consequences, both for our understanding and for our practice.

3. From maximisation to moral motivation

Allen (Reference Allen2015b) wrote that Hodgson's ‘first problem is that he confuses “motivation” with “objectives”. Every economic argument assumes a motivation of maximisation; indeed, this is what makes it “economic”. However, that says nothing about what the objective is or what is contained within the objective’.

In response, the statement that ‘every economic argument assumes a motivation of maximisation’ involves a narrow view of what an ‘economic argument’ is. When Adam Smith considered motivation, he tempered gain by moral sentiments. Herbert Simon, Ronald Coase, Amartya Sen and Daniel Kahneman all got Nobel prizes in economics, after forcefully challenging the notion of maximisation. Allen is out-of-date: theoretical, empirical, experimental and other ‘behaviouralist’ challenges to maximisation can be found in several prestigious journals of economics nowadays.

Contrary to Allen, many leading exponents of utility maximisation say that it is about behavioural consequences, not motivation. In a classic defence of the mainstream approach, Posner (Reference Posner1980: 5, 53) saw the ‘rationality of “economic man”’ as ‘a matter of consequences, not states of mind’. He explained: ‘behaviour to an economist is a matter of consequences rather than intentions’.

A problem here is that utility maximisation, even if we grant that it may sometimes serve as a useful heuristic, does nothing to explain how a particular function came about. It is simply assumed. The particular (psychological or instinctive or cultural) dispositions or motivations that lie beneath behaviour are not considered.

Following mainstream practice, Allen puts everything into the utility function: ‘Moral sentiments are elements of a utility function and likely part of one's personal constraints’. That is part of the problem: by treating moral sentiments in this way, they are subsumed under the general instrumental calculus of utility. Their distinctive role is obscured. As Nussbaum (Reference Nussbaum1997: 1199) put it in her critical discussion of mainstream ‘law and economics’, this conflation amounts to a refusal to acknowledge ‘a plurality of distinct ends’.

Allen (Reference Allen2015b) also wrote: ‘For Hodgson, “moral sentiments” are considered a motivation, which is simply wrong’. For this reason, he claims that my whole argument about moral motivation is misconceived. Well, wrong or right, I am in good company. Smith (Reference Smith1790: 146) wrote: ‘Upon whatever we suppose that our moral faculties are founded . . . it cannot be doubted, that they were given us for the direction of our conduct in our life’. So, for Smith, moral dispositions direct our conduct and affect our behaviour.

The notion of moral motivation is also well established in modern philosophy. In her entry entitled ‘Moral Motivation’ in the prestigious Stanford Encyclopedia of Philosophy, Rosati (Reference Rosati and Zalta2014) wrote: ‘Morality is widely believed to conflict, frequently and sometimes severely, with what an agent most values or most prefers to do’. This is in line with my claim that morality is irreducible to matters of utility or expediency. Rosati (Reference Rosati and Zalta2014) then went on to define moral motivation as follows:

My arguments are also in line with this philosophical position. I connect them with Tyler's (Reference Tyler2006) evidence of why people obey the law.

Tyler's (Reference Tyler2006) evidence goes against Barzel's (Reference Barzel2002: 16) claim that people simply maximise ‘economic rights’ and that adherence to the law comes in solely as a possible means to that single end. Barzel (Reference Barzel2015) argues that the role of law is ‘enormous’ but ‘nuanced’. He usefully elaborates his view as follows: ‘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’.

This takes the importance of some beliefs into account. But attitudes to law – beyond the expected disutility of acting illegally – are also part of our beliefs. Barzel does not explain why beliefs in religion and vegetarianism are important when considering what motivates behaviour, while the belief (by many people) that the laws generally should be obeyed can (according to him) be ignored. Tyler and others give us plentiful evidence that many (but obviously not all) people are of the opinion that generally the law should be obeyed. Barzel gives no reason why we should ignore this important evidence.

Let me rephrase this point, as it seems that my article was not clear enough on the motivational significance of law. Imagine a religion whose adherents believe that any breach of any law will bring the wrath of God. Barzel rightly accepts that religion can affect our demand for pork, so in this case it could affect the propensity to obey the law. Now assume that a number of people hold a belief that they should obey the law simply because it is the morally right thing to do. God and religion are then removed from the account, but there is no reason to assume that a secularised morality would necessarily vanish as a motivational force. The empirical evidence of Tyler and others shows precisely that many people believe that they should obey the law because they think it is the morally right thing to do.Footnote ⁶

It may be responded that – as long as the consumption is legal – obedience to the law would not affect the demand for particular goods, such as pork. But economists since Lionel Robbins and Gary Becker have broadened their explanatory claims about their ‘economic’ approach to all behaviour, not simply the demand for goods. A problem with their approach is that it reduces everything to utility maximisation and wrongly subsumes the irreducible matter of moral motivation.

Barzel rightly raises the question of how my argument can be tested empirically. He wrote: ‘Hodgson, on the other hand, takes legal rights as fixed, and thus it is not possible to put his theory to a test’. First, I do not take legal rights as necessarily fixed. Second, fixed or not, Tyler's (Reference Tyler2006) work puts the role of legal rights precisely to the test, finding that they do have (non-instrumental) behavioural effects. Although it is often a useful strategy, one does not necessarily have to vary X to test the causal relationship that X may have on Y. Sometimes varying X is difficult. Photosynthesis in plants can be examined without varying the power of the sun at its source. Furthermore, the causal efficacy of legal rights on behaviour might be tested statistically by comparing instances within one country, where law has differing degrees of acceptance by different regional, linguistic, ethnic, gender, age or other groups or by comparing different countries with different degrees of efficacy of the rule of law, even if the overall degree of establishment were static in every country.Footnote ⁷

4. Mere semantics?

Allen (Reference Allen2015b) underlined our differences in terminology: ‘“possession” is essentially another term for “economic property rights”, and “property” is essentially another term for “legal property rights”. . . . In each case, a switch of “possession” with “economic property right” and “property” with “legal property right”, would lead to no change in meaning’. His view here is that the terms we all use are arbitrary and substitutable. In philosophy, this position is typically described as nominalism, and it has some important adherents. Allen then went on to reject my counter-argument:

Allen then adds a footnote, referring us to Barzel's (Reference Barzel1997) ‘chapters four and five, for example’ for a treatment of the collateralisation of property.

Let me deal with the first and third of these three responses. First, his use of the Fahrenheit example is weak. The use of measurement scales can mislead, but when I say ‘misleading’ I am not writing about quantitative measurement. I refer to the newly-fabricated use of words that previously had qualitatively different meanings for hundreds of years. For example, if a real estate agent offered dwellings for sale, advertising one as ‘a house with 100 square metres of floor space’ and a second as ‘a house with 1,000 square feet of floor space’ then I might be hoodwinked into believing that the second house was bigger. But I would have no case in court: the second is smaller and I should know how to convert one set of units into the other. Then, the real estate agent informs me that there is ‘another house available with 200 square metres of floor space’ and it is much cheaper than the others. I travel 100 miles to visit this house, only to find that it is a tent. I might then have a case in court. The word ‘house’ connotes things such as solid walls and foundations that are not signalled by the word ‘tent’. The right estate agent would not have a good defence if she said that the difference is merely semantic, and that she was being no more deceptive than declaring floor space in square feet rather than square metres.

Allen adds a footnote to his response suggesting that my terminology is ‘confusing’, because I insist that property (properly defined) involves a judicial and legislative institution such as the state. He gives examples of trade including Crusoe, Friday and the Bitcoin. It is not confusing to insist that Crusoe and Friday may have physically exchanged objects on their island, but that was not then a contract recognisable by a legal system, and that neither could obtain money collateral on their possessions from a third party. There was no legally enforceable title on property.

The Bitcoin may have been invented to supplement or circumvent conventional money that is issued by the state. But ownership and contracts in Bitcoins depend on a state for their enforcement, and a theft of Bitcoins would be a matter for investigation by the state.Footnote ⁸

Allen's ‘confusion’ arose here because he was in the habit of assuming that any theory – including of ‘property’ – must cover all possible cases in all of human history. So he wishes ‘property’ to apply to societies where there is not judiciary and a state. But in my view, property is a historically specific concept. While there are important generalities, there is no reason why all key concepts in social science have to cover all of human history.

Allen in his third response claims that Barzel has provided ‘explanations of collateral’. Note that Barzel (Reference Barzel2015) in his comment does not make this claim. And Allen is wrong here. The words ‘collateral’ or its derivatives do not appear in chapters four or five, or in the index, of Barzel (Reference Barzel1997).Footnote ⁹ The concept of a mortgage briefly appears in chapter four, where Barzel (Reference Barzel1997: 59) wrote: ‘If a building has been mortgaged, the mortgage-holding bank has most likely imposed restrictions on the building owner, thereby making itself the owner of a subset of rights’. In this sentence, Barzel does not make it clear whether (in his terminology) he means ‘economic property rights’ or ‘legal property rights’. In fact, they have to be legal property rights. Mere possession (so-called ‘economic property rights’) are insufficient for a mortgage and for the creation of a titleholder. Barzel (Reference Barzel1997, ch. 4–5) also develops a theory of the firm resting on the notion of equity capital as a guarantee for contracts. This guarantor function is not collateralisation. Like other alienable property, shares in a firm can be used as collateral. But they do not have to be. Collateral and equity are not equivalent.

Unlike the notion of ‘property’ in the writings of (say) Marx, von Mises and Alchian, the Allen–Barzel concept of ‘legal property rights’ may be able to sustain a notion of collateralisation. But perhaps it is no accident that they have so far failed an adequate discourse in this area. Their gaze is diverted from this important issue by their ahistorical, over-widening of the concept of property. And Barzel's (Reference Barzel2002: 16) explicit assumption that agents are always ultimately concerned with matters of possession and control (‘economic property rights’) diverts attention away from the important, historically-specific issue of collateralisation.

Adopted terms are not neutral: they guide thinking in particular directions. Unless they are constantly resisted – like a pilot in a strong side-wind, straining on the controls to land an airplane – misleading terms will throw us off-track. Consider a famous passage from Alice Through the Looking Glass:

In his well-known annotation of this passage, Martin Gardner noted that Humpty Dumpty was promoting a form of nominalism, claiming that words can be used to mean anything that is intended by their user (Carroll, Reference Carroll and Gardner1970: 268–70). This nominalist view was originally promoted by the great medieval philosopher William of Occam and was defended by Carroll himself in his philosophical writings. But Carroll wasn't perfect, and others differ.

Commenting on the same passage in Alice Through the Looking Glass, Holmes (Reference Holmes1959) argued that there are limits to how we use words, using the example of the challengeable self-description of Soviet-style totalitarian regimes as ‘democratic’. In the 1970s, while they were murdering about one quarter of the Cambodian population, the Khymer Rouge ghoulishly renamed their country ‘Democratic Kampuchea’. And President George W. Bush famously redefined the concept of ‘torture’ – but not without forceful objection. As Holmes put it: ‘In one sense words are our masters, or communication would be impossible’.Footnote ¹⁰

Maybe, in mathematics or logic, we have more scope to define things as we wish, but at least when we refer to real-world phenomena, we are part of a community engaged in social processes of establishing some evolving commonality of meaning and understanding. Consequently, in answer to Humpty Dumpty, words are often our masters.

Robinson (Reference Robinson1950: 19, 79, 80) made a useful distinction here: ‘I subdivide word-thing definition into lexical and stipulative definition. Here by “lexical definition” I mean reporting the customary or dictionary meaning of a word, and by “stipulative definition” I mean establishing or announcing one's own meaning for a word’. Robinson went on ‘to insist on the rightness of those who preserve customary meanings, in order to show the dangers of stipulation’. Robinson argued that we should minimise arbitrary or unusual designations of words. They should be avoided unless ‘we have a good reason to believe that the phrase which already covers our designation is too cumbrous for our purposes’. Many ‘economists of property rights’ have insisted – like Humpty Dumpty – that they have complete personal power over words. I am with Alice, Holmes and Robinson, warning of the dangers of arbitrarily or wilfully changing commonplace meanings.

5. Transaction costs

Allen (Reference Allen2015b) put the issue of transaction costs up front. He wrote: ‘there is a difference between rights specified in the law and rights that actually matter for behaviour. Therefore, since transaction costs are ubiquitous, considerations of only legal property rights will be inadequate for understanding behaviour’.

But contrary to Allen's suggestion, I do not consider legal property rights alone. Allen rebukes me for not considering the ‘cost of property’, which should be translated into the ‘cost of possession’. But in Hodgson (Reference Hodgson2015b) I do consider the cost of possession.

Also, in my article in this issue, and like Commons (Reference Commons1924), I repeatedly emphasise the role of customary arrangements, including those concerning possession, and the dependence of law upon them. For instance, I wrote: ‘While law often develops out of custom and depends on customary supports, in its fullest sense it is more than custom. . . . This does not mean that custom is unimportant, but that law is more than custom alone’. (Hodgson, Reference Hodgson2015a)

Barzel (Reference Barzel2015) wrote: ‘Most economists who discuss the [Coase] 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’. Allen (Reference Allen2015a: 382) has usefully developed this interpretation: ‘transaction costs are the costs of establishing and maintaining economic property rights. Following others, economic property rights are defined as the ability to freely exercise a choice. Property rights can be complete, meaning all attributes of the thing are owned and not in the public domain; and they can be perfect, meaning that the actual choice is fully manifested. Transaction costs are defined with respect to perfection’.

Relatedly, Williamson (Reference Williamson1985: 184) wrote: ‘Since the efficacy of court ordering is problematic, contract execution falls heavily on the institutions of private ordering . . . This is the world with which transaction cost economics is concerned’. For Williamson, transaction cost economics is beyond the scope of ‘legal property rights’. Unless I am mistaken, Allen and Barzel seem to agree with this claim.

I do not wish to undermine the legitimacy or heuristic value of an approach to transaction costs in terms of possession – ‘the ability to use assets’. But this raises familiar questions concerning how transaction costs are to be ascertained or measured. Some time ago, Demsetz (Reference Demsetz1968: 35) wrote: ‘Transaction cost may be defined as the cost of exchanging ownership titles. . . . Transaction cost is defined narrowly in this paper . . . Broader interpretations lead to extremely difficult empirical and conceptual problems’.

Instinctively I am with Demsetz here. But his definition of transaction costs is the road not taken. I do not know whether it would lead to more robust or interesting scientific outcomes. Surely there would be many problems on the way. But my claim that law is more than an instrumental cost or constraint would suggest that some should begin down this road. This is a possible route for research in the future.