Without Private Property,

There Can Be No Rational Economic Calculation

Scott A. Beaulier
Assistant Professor of Economics
Department of Economics
Beloit College
700 College St.
Beloit, WI 535
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0It /oul+ !ar+l1 )e un2ust to sa1 t!at t!e rationalistic approac! is !ere
oppose+ to almost all t!at is t!e +istinct pro+uct of li)ert1 an+ t!at gi3es
li)ert1 its 3alue. 4!ose /!o )elie3e t!at all useful institutions are +eli)erate
contri3ances an+ /!o cannot concei3e of an1t!ing ser3ing a !uman purpose
t!at !as not )een consciousl1 +esigne+ are almost of necessit1 enemies of
free+om. 5or t!em free+om means c!aos.6
5.A. 7a1e8, Constitution of Liberty #9$0, p. $&
I. Introduction
Economists generall1 focus on t!e positi3e incenti3es t!at propert1 rig!ts create.
Per!aps t!e most /i+el1 recogni:e+ positi3e result of clearl1 +efine+ propert1 rig!ts is a
pre3ention of t!e 0trage+1 of t!e commons6 #7ar+in 9$%&. W!en people are left alone
to pursue t!eir o/n self'interests in an en3ironment lac8ing propert1 rig!ts, un+esira)le
social outcomes;also 8no/n as t!e trage+1 of t!e commons;often result. 5or
e<ample, /!en t!ere /ere no regulations on )uffalo !unting in t!e %00=s, o3er!ar3esting
occurre+, +ri3ing )uffalo in t!e ,nite+ States to near e<tinction.
>n t!e ot!er !an+, /e 8no/ t!at /!en propert1 rig!ts are /ell'+efine+ an+
protecte+, people !a3e a strong incenti3e to )e goo+ ste/ar+s of resources. In fact, if
resources are 3alua)le enoug! an+ propert1 rig!ts are /ell'+efine+, people /ill engage in
or encourage t!e pro+uction of goo+s t!at mig!t !a3e at one time )een t!oug!t of as
en+angere+ or 3anis!ing. 5or e<ample, )uffalo populations !a3e increase+ in t!e West
no/ t!at propert1 rig!ts in )uffalo !a3e )een create+, meaning t!at )uffalo can )e
pri3atel1 o/ne+ an+ sol+ at a profit.

?i3ing people t!e proper incenti3es to care for resources is onl1 one )eneficial
aspect of propert1 rig!ts, !o/e3er. An e@uall1 important, )ut less tangi)le, )enefit of
clearl1 +efine+ propert1 rig!ts is t!at suc! rig!ts ena)le t!e communication of mar8et
3alues an+ t!e relati3e scarcit1 of particular pro+ucts. 5or e<ample, /!en /ater rig!ts
are in+i3i+uall1 o/ne+, an+ in+i3i+uals must )u1 t!eir /ater from pri3ate o/ners, t!e
price of t!e /ater reflects t!e true scarcit1 an+ 3alue of t!e resource. B1 contrast, t!is
information is often o)scure+ )1 go3ernment su)si+ies an+ price controls, meaning t!at
t!e mar8et is una)le to accuratel1 con3e1 t!e 3alue of /ater.
Economists !a3e long focuse+ on t!e role propert1 rig!ts pla1 in ma8ing mar8ets
/or8, largel1 +ue to t!e information create+ an+ communicate+ /!en in+i3i+uals an+
firms freel1 e<c!ange t!eir pri3atel1 o/ne+ goo+s an+ ser3ices. A+am Smit!
emp!asi:e+ t!e importance of pri3ate propert1 rig!ts /!en !e /rote"
Commerce an+ manufactures can sel+om flouris! long in an1 state /!ic! +oes not
en2o1 a regular a+ministration of 2ustice, in /!ic! t!e people +o not feel
t!emsel3es secure in t!e possession of t!eir propert1, in /!ic! t!e fait! of
contracts is not supporte+ )1 la/, an+ in /!ic! t!e aut!orit1 of t!e state is not
suppose+ to )e regularl1 emplo1e+ in enforcing t!e pa1ment of +e)ts from all
t!ose /!o are a)le to pa1. #9% A77$B, p. 90&
.u+/ig 3on Cises, 5.A. 7a1e8, an+ ot!er Austrian economists )uilt on Smit!=s
/or8 in t!is area. 5or Austrian economists, mar8ets can onl1 sen+ proper signals a)out
relati3e scarcit1 /!en a certain set of institutions, namel1 pri3ate propert1 an+ t!e rule of
la/, are in place. Cises #99$ A9(7B, p. %D& /as @uit e<plicit a)out t!e importance of
pri3ate propert1 /!en !e argue+ t!at 0inter3entionism,6 /!ic! aims at regulating an+
restricting propert1 rig!ts, 0cannot attain t!e en+s t!at its a+3ocates inten+ it to attain.6
Accor+ing to Cises #9% A93(B, p. 0(E emp!asis a++e+&,
(
4o suppose t!at a socialist communit1 coul+ su)stitute calculations in 8in+ for
calculations in terms of mone1 is an illusion. In a communit1 t!at +oes not
practice e<c!ange, calculations in 8in+ can ne3er co3er more t!an consumption
goo+s. 4!e1 )rea8 +o/n completel1 /!ere goo+s of !ig!er or+er are concerne+.
>nce societ1 a)an+ons free pricing of pro+uction goo+s rational pro+uction
)ecomes impossible. E3er1 step t!at lea+s a/a1 from pri3ate o/ners!ip of t!e
means of pro+uction an+ t!e use of mone1 is a step a/a1 from rational economic
acti3it1.
5or Cises, inter3entions into t!e mar8etplace are self'+efeating, an+ t!e1 +istort t!e
information create+ )1 propert1 rig!ts. In t!e limit, t!e complete a)olition of propert1
rig!ts /oul+ ma8e rational economic calculation impossi)le.
4!e Austrian 0impossi)ilit16 argument is /ell 8no/n an+ nicel1 summari:e+ )1
Peter Boett8e #(00 A99%B, p. 3&"
. Wit!out pri3ate propert1 in t!e means of pro+uction, t!ere /ill )e no mar8et for
t!e means of pro+uctionE
(. Wit!out a mar8et for t!e means of pro+uction, t!ere /ill )e no monetar1 prices
esta)lis!e+ for t!e means of pro+uctionE
3. Wit!out monetar1 prices, reflecting t!e relati3e scarcit1 of capital goo+s,
economic +ecision ma8ers /ill )e una)le to rationall1 calculate t!e alternati3e use
of capital goo+s.
In ot!er /or+s, /!en t!e capitalist institution of pri3ate propert1 is a)olis!e+, rational
economic calculation is no longer possi)le.
Austrians often +iscuss propert1 rig!ts as t!e1 /oul+ e<ist in a purel1 capitalist or
purel1 socialist societ1. 7o/e3er, propert1 rig!ts in t!e real /orl+ are comple< an+ often
poorl1 +efine+. Since propert1 rig!ts are crucial for t!e coor+ination of economic
acti3ities, t!e central @uestion for economists an+ polic1ma8ers )ecomes t!e @uestion of
!o/ to gat!er accurate information a)out t!e scarcit1 of resources in a /orl+ /it!
imperfect propert1 rig!ts. 4!e collection of information is greatl1 complicate+ )1 t!e
fact t!at t!e mar8et is a large, comple<, an+ rapi+l1 c!anging social institutionE no
3
in+i3i+ual coul+ possi)l1 !ope to ac@uire t!e information necessar1 to control or e<ploit
t!e mar8et. As 7a1e8 #9%0 A9D5B, p. 7%& notes"
A4!e 8no/le+ge pro)lemB is rat!er a pro)lem of !o/ to secure t!e )est use of
resources 8no/n to an1 of t!e mem)ers of societ1, for en+s /!ose relati3e
importance onl1 t!ese in+i3i+uals 8no/. >r, to put it )riefl1, it is a pro)lem of t!e
utili:ation of 8no/le+ge /!ic! is not gi3en to an1one in its totalit1.
4!e 8no/le+ge of 0t!e particular circumstances of time an+ place6 in t!e mar8et
#7a1e8 9%0 A9D5B, p. %0& is ine<trica)l1 lin8e+ to propert1 rig!ts. 4!erefore, c!anges
in propert1 rig!ts, suc! as pri3ati:ation programs, can affect t!e +ispersal of 8no/le+ge
/it!in an econom1, /!ic! ultimatel1 affects in+i3i+ual )e!a3ior an+ o3erall economic
performance.
II. Neoclassical Privatization
In stan+ar+ economic t!eor1, propert1 rig!ts are sai+ to re+uce uncertaint1,
internali:e e<ternalities, an+ pro3i+e people /it! t!e muc! nee+e+ incenti3e to ta8e care
of t!e t!ings t!e1 o/n. 4!us, it /oul+ seem li8e t!e )est /a1 to +eal /it! an1 pro)lems
resulting from common'pool resource o/ners!ip /oul+ )e to 0pri3ati:e, pri3ati:e,
pri3ati:e6 #5rie+man 99&. Fe3ert!eless, state'le+ pri3ati:ation efforts in practice !a3e
pro+uce+ une3en +istri)utional conse@uences an+ sometimes ma8e )a+ situations e3en
/orse.
4!e reason man1 efforts to pri3ati:e resources !a3e faile+ is )ecause t!e
polic1ma8ers in c!arge of t!e pri3ati:ation misun+erstan+ t!e role propert1 rig!ts pla1 in
communicating mar8et information. 4!e polic1ma8ers in c!arge of pri3ati:ation efforts,
/!o are usuall1 traine+ in neoclassical economics, act as A+am Smit!=s #9%( A759B, pp.
(33'3D& 0man of s1stem6E t!e1 tr1 to stan+ outsi+e of t!e economic s1stem an+ act as
D
t!oug! t!e1 !a3e full information a)out all rele3ant prices, costs, an+ conse@uences of
t!eir reform proposals. In an i+eal /orl+, t!ese planners /oul+ )e fortunate enoug! to
!a3e full an+ complete information, an+ t!us t!e neoclassical approac! to economic
reform coul+ )e +efen+e+ )ecause it /oul+ engineer a uni@ue solution in /!ic! societ1=s
o3erall /ell')eing is ma<imi:e+.
-eal'/orl+ economic planning, !o/e3er, ta8es place in an en3ironment of
uncertaint1 in /!ic! cultures an+ e<pectations 3ar1. In suc! an en3ironment, our
8no/le+ge a)out t!e economic s1stem is not e3en pro)a)ilistic. 4o )e a)le to form a
useful pro)a)ilistic mo+el, t!ere nee+s to )e some general i+ea of possi)le outcomes an+
a confi+ence t!at t!e possi)le outcomes are e<!austi3e. In comple< economic s1stems,
!o/e3er, 8no/le+ge is fragmente+ an+ +isperse+. As a result, t!e most planners can
!ope for is to form !ig!l1 imprecise, imperfect estimates of possi)le outcomes.
Per!aps t!e easiest /a1 to un+erstan+ t!e economic pro)lems in3ol3e+ in
centrali:e+ reform efforts is to loo8 at recent e<periments /it! pri3ati:ation. 4!roug!out
Eastern Europe an+ t!e former So3iet ,nion, e<tremel1 intelligent economists, suc! as
An+ers Aslun+, Geffre1 Sac!s, an+ An+rei S!leifer, /ere put in c!arge of post'communist
reform an+ pri3ati:ation programs. W!en t!e e<perts came onto t!e scene, a num)er of
8e1 in+ustries, /!ic! /ere pre3iousl1 nationali:e+, /ere rea+1 to )e pri3ati:e+. 4!e1
trie+ to come up /it! compre!ensi3e reform plans in /!ic! 0/a3es6 of pri3ati:ation
/ere intro+uce+. 4!e initial 3alues of in+ustries un+ergoing pri3ati:ation /ere )ase+ on
cost'plus estimates of asset 3alues. >nce esta)lis!e+, t!e pri3ati:ations /ere carrie+ out
t!roug! auctions, management'emplo1ee )u1outs #CEB>s&, an+ 3ouc!er pri3ati:ation
sc!emes.
5
W!ile t!e i+ea of pri3ati:ing state'o/ne+ in+ustries /as a no)le one, t!e actual
outcomes of post'communist pri3ati:ations !a3e )een generall1 3ie/e+ as +isappointing.
4!e pre+icte+ post'pri3ati:ation 0ta8e'offs6 in economic gro/t! +i+ not occur. Can1
Eastern European countries are struggling to fin+ t!eir /a1 in t!e post'communist perio+.
4!e -ussian econom1, /!ere reforms /ere !ea3il1 influence+ )1 Aslun+, Sac!s, an+
S!leifer, !as en2o1e+ an o3erall rate of gro/t! near :ero since t!e collapse of
communism #.eeson an+ 4rum)ull (00$&.
Corruption pro)lems surface+ in man1 of t!e pri3ati:ation sc!emes. 4!e )enefits
of man1 pri3ati:ation programs flo/e+ primaril1 to political insi+ers an+ people lo1al to
t!e ne/ go3ernments. Can1 of t!e pre3ious +e facto o/ners 3ie/e+ t!e pri3ati:ation
programs as illegitimate an+ engage+ in +estructi3e )e!a3iors against t!e ne/ class of
propert1 o/ners, suc! as rioting an+ stealing capital )efore t!e ne/ propert1 o/ners too8
o3erE suc! )e!a3iors increase+ t!e enforcement costs of pri3ati:ation an+ lo/ere+ o3erall
/elfare for t!e reforming economies.
4!e ne/ go3ernments= +esires to create e@uit1 among t!eir citi:ens often
o3erro+e concerns /it! economic efficienc1. Since t!e main o)2ecti3es of pri3ati:ation
programs /ere to +isperse t!e )enefits of pri3ati:ation to all citi:ens, create a mi++le
class, an+ 0)u16 t!e pu)lic=s support for pri3ati:ation, man1 go3ernments attempte+ to
0+emocrati:e6 o/ners!ip )1 gi3ing all citi:ens sta8es in t!e ol+ state'o/ne+ resources.
Pri3ati:ation in practice, !o/e3er, +i+ not usuall1 pro+uce t!e i+eal results for /!ic! t!e
reformers !ope+E t!e programs pro3e+ cum)ersome, an+ t!e resources /ere +ifficult to
3alue initiall1. As a result, 3ouc!er programs /it! /ell'intentione+ aims en+e+ up
)enefiting a small minorit1 of influential s!are!ol+ers.
$
4!ese une<pecte+l1 poor outcomes /ere often +ue to t!e fact t!at man1 of t!e
assets )eing pri3ati:e+ /ere not /ort! nearl1 as muc! as t!e reformers t!oug!t t!e1 /ere
/ort!. 5or e<ample, some state'run firms !a+ little positi3e 3alue an+ s!oul+ !a3e )een
s!ut +o/n instea+ of pri3ati:e+. 4!e mi<e+ trac8 recor+ of post'communist pri3ati:ation
is largel1 a result of economists )asing policies on a fla/e+ neoclassical mo+el of
economic )e!a3ior. 4!e reformers lac8e+ t!e necessar1 information to properl1 3alue
an+ sell off propert1 t!at /as formerl1 controlle+ )1 t!e state, so t!eir pri3ati:ation
sc!emes faile+ to attain t!e le3el of success for /!ic! t!e reformers !ope+. Peter Boett8e
#(00 A99DB, p. 9(& e<plains t!e pro)lem as follo/s"
4!e pro)lem /it! t!e con3entional pri3ati:ation pac8age, !o/e3er, is t!at one
cannot 3alue assets /it!out a mar8et, )ut a relia)le mar8et cannot e<ist /it!out
pri3ate propert1. 4!e /!ole point of t!e pri3ati:ation sc!emes of 3ouc!ers or
pu)lic auction is to create pri3ate o/ners!ip. But !o/ is t!e 3alue of assets to )e
+etermine+ /it!out a mar8et in t!e first placeH In ot!er /or+s, a 3ouc!er
program is pre+icate+ on t!e a)ilit1 to 3alue assets, e3en t!oug! t!e /!ole point
of t!e e<ercise is to create mar8ets t!at /ill ena)le participants to assess t!e 3alue
of assets. If 3aluation coul+ ta8e place in+epen+ent of t!e pri3ate propert1
conte<t, t!en pri3ati:ation /oul+ )e re+un+ant an+ unnecessar1.
III. Spontaneous Privatization
4!e Austrian approac! to pri3ati:ation, in contrast to t!e neoclassical mo+el,
emp!asi:es t!e su)2ecti3e an+ conte<tual nature of propert1 rig!ts. Austrian economists
/ant t!e go3ernment remo3e+ from t!e reform process. W!en t!e go3ernment ta8es a
laissez faire approac! to pri3ati:ation, eac! in+ustr1 can fin+ its o/n /a1 to/ar+s t!e
mar8et, free from central +irection. In man1 in+ustries, t!e de facto o/ners )ecome t!e
ne/ sta8e!ol+ers. W!ile spontaneous pri3ati:ation mig!t create in!erent )iases, it +oes a
)etter 2o) of putting local 8no/le+ge to /or8 )ecause t!e de facto o/ners !a3e a firm
7
un+erstan+ing of rele3ant resource 3alues an+ e<isting propert1 rig!ts. W!en
spontaneous pri3ati:ations occur, a go3ernment=s role in economic reforms is limite+E
t!is mo+e of pri3ati:ation is prefera)le to go3ernment'controlle+ pri3ati:ation )ecause
t!e 8no/le+ge necessar1 for reform can onl1 emerge from +ecentrali:e+ mar8ets.
4!e neoclassical, top'+o/n approac! an+ t!e spontaneous approac! to
pri3ati:ation +iffer in man1 ot!er important /a1s. A centrali:e+ approac! to pri3ati:ation
in3ol3es an attempt to coor+inate t!e actions of +ifferent people /it!in a set of clearl1
+efine+ instructions, /!ic! /ill i+eall1 pro+uce efficient economic results. Laissez faire
or spontaneous pri3ati:ation, )1 contrast, ma8es no assumptions a)out t!e rules
necessar1 for efficient results. Instea+, a)stract, general rules /ill emerge from t!e
+ecentrali:e+ mar8et. Successful pri3ati:ation an+ coor+ination /ill come a)out as
people ta8e account of ot!er people=s )e!a3ior. If, for e<ample, man1 +ifferent people
are )argaining o3er rig!ts to one resource, spontaneous pri3ati:ation /ill allo/ suc!
rig!ts to increase in 3alue, /!ic! /ill cause some potential o/ners to lose interest in t!e
e<pensi3e rig!t an+ loo8 else/!ere for opportunities. B1 8eeping asset 3alues fi<e+, t!e
neoclassical approac! to pri3ati:ation, )1 contrast, sen+s a false signal to potential
o/ners a)out t!e relati3e scarcit1 of rig!ts.
Clearl1, t!e neoclassical an+ Austrian approac!es to pri3ati:ation +iffer in t!e
/a1s in /!ic! t!e1 ma8e use of 8no/le+ge. In t!e neoclassical approac!, t!e parameters
t!at gui+e pri3ati:ation are not fle<i)le. 4!e fee+)ac8 recei3e+ )1 planners in control of
pri3ati:ation must )e consoli+ate+, so c!anges to t!e pri3ati:ation programs are ma+e
onl1 gra+uall1. Spontaneous pri3ati:ation, )1 contrast, incorporates e3er1 piece of
rele3ant information. 4!e 3alue of resources can a+2ust imme+iatel1 to c!anges in
%
opinion, an+ t!e nature of rig!ts can e3ol3e /it!out an1 comman+s from a central
aut!orit1.
,ltimatel1, neoclassical pri3ati:ation programs are pro)lematic )ecause t!e1
represent an attempt to centrall1 +esign economic institutions. 4!e reformers specif1
certain o)2ecti3es, suc! as increase+ economic efficienc1 or greater e@ualit1 among a
nation=s citi:ens, an+ t!e1 !ope pri3ati:ation programs can !elp ac!ie3e some of t!e
state+ goals. >nce t!e goals are clearl1 +efine+, resources are t!en allocate+ accor+ing to
some centrali:e+ 3ie/ of o)2ecti3es an+ opportunities. W!en a t!oroug! +ose of real, or
0ro)ust,6 political econom1 is intro+uce+ into t!eir pri3ati:ation sc!emes, !o/e3er, t!e
reforming countries= gro/t! prospects )ecome )lea8er.
Austrian economists generall1 re2ect t!e tra+itional, or neoclassical, approac! to
pri3ati:ation )ecause it /or8s on t!e assumption t!at t!e pri3ati:ation pro)lem is simpl1
an engineering pro)lem. As Austrian economists recogni:e, t!e +esign of a propert1
rig!ts s1stems cannot )e re+uce+ to a formulaic pro)lem /it! a rea+il1 a3aila)le solution.
4!e more appropriate attitu+e for polic1ma8ers /!o /ant to a3oi+ t!e errors of rational
constructi3ism is to 3ie/ t!emsel3es as gar+eners, not engineers. Iernon Smit! #(003, p.
50(&, among ot!ers, ma8es a +istinction )et/een e3ol3e+ rules an+ constructi3ist rules
/!en !e /rites,
-ules emerge as a spontaneous or+er;t!e1 are foun+;not +eli)eratel1 +esigne+
)1 one calculating min+. Initiall1 constructi3ist institutions un+ergo e3olutionar1
c!ange a+apting )e1on+ t!e circumstances t!at ga3e t!em )irt!. W!at emerges is
a 0social min+6 t!at sol3es comple< organi:ation pro)lems /it!out conscious
cognition.
5or Smit! an+ Austrian economists, polic1ma8ers face an insurmounta)le epistemic
constraint if t!e1 tr1 to control t!e pri3ati:ation process. -at!er t!an tr1 to control t!e
9
process, t!e act of pri3ati:ation itself s!oul+ )e turne+ o3er to t!e mar8et so t!at local
8no/le+ge is a)le to surface.
E3en t!oug! neoclassical pri3ati:ation mig!t )e fla/e+ in )ot! t!eor1 an+
practice, t!e alternati3e is not a s1stem of central planning in /!ic! propert1 rig!ts are
a)olis!e+ )ut, rat!er, laissez faire or spontaneous pri3ati:ation. Spontaneous
pri3ati:ation can )e un+erstoo+ as 0all pri3ati:ation efforts t!at occur outsi+e t!e
initiati3e an+ central +irection of t!e state6 #7ill an+ Jarner 99$, p. %&. In ot!er /or+s,
spontaneous pri3ati:ation comes from t!e )ottom up. Spontaneous propert1 rig!ts
emerge slo/l1, an+ t!e +efinition an+ enforcement of t!e emerging rig!ts +o not come all
at once )ut, rat!er, +e3elop as t!e rig!ts )ecome more legitimate an+ 3alua)le. 7ernan+o
+e Soto #(000, pp. $D'7& offers a nice summar1 of e<tralegal rig!ts an+ spontaneous
pri3ati:ation. Accor+ing to +e Soto #p. $5&, 0t!e rig!t of uni3ersal access to propert1 is
no/ recogni:e+ )1 nearl1 e3er1 constitution an+ t!e /orl+ an+ )1 man1 international
con3entions.6 7o/e3er, as +e Soto notes, t!oug! propert1 rig!ts are nee+e+ for
economic +e3elopment an+ po3ert1 alle3iation, pri3ati:ations !a3e often faile+ )ecause
Kmost legal proce+ures to create formal propert1 are not geare+ to process
e<tralegal proofs of o/ners!ip t!at lac8 an1 3isi)le c!ain of titleK
W!at t!e go3ernment !a+ not ta8en into account /as t!at /!en people finall1
ac@uire propert1, t!e1 !a3e t!eir o/n i+eas a)out !o/ to use an+ e<c!ange it. If
t!e legal s1stem +oes not facilitate t!e nee+s an+ am)itions, t!e1 /ill mo3e out of
t!e s1stem in +ro3es. #+e Soto (000, pp. $$'$7&
Accor+ing to some legal sc!olars, suc! as 7olmes an+ Sunstein #999&, t!e
e<tralegal rig!ts /e are +iscussing are meaningless )ecause propert1 rig!ts cannot e<ist
/it!out t!e state. 7o/e3er, t!oug! legal sc!olars ma1 +ispute t!e status of e<tralegal
rig!ts, t!e1 are meaningful an+ must )e e<amine+ )ecause people gi3e meaning to
0
e<tralegal rig!ts. 4!e )asic pro)lem /it! state'le+ pri3ati:ation, an+ t!e main reason
Austrian economists 3ie/ spontaneous pri3ati:ation fa3ora)l1, is t!at officials gui+ing
state'le+ pri3ati:ation lac8 t!e incenti3es an+ information to correctl1 pri3ati:e scarce
resources. W!en top'+o/n, formal pri3ati:ation efforts are initiate+, t!ese reforms often
fail to ac8no/le+ge t!e rig!ts of t!e de facto o/ners in control of t!e resources. As a
result, t!e de facto o/ners face per3erse incenti3es to resist reform, +eplete a resource=s
3alue, or +o )ot!.
Critics of t!e argument for spontaneous pri3ati:ation often interpret t!e argument
as a +efense of anarc!1 an+ c!aos, instea+ of or+er an+ rationalit1. 4!ese critics point to
t!e !ierarc!ical, an+ often successful, +ecision'ma8ing of entrepreneurs /it!in firms as
e<amples of !o/ gra+ual an+ rational approac!es to a mu++le+ )usiness /orl+ can
pro+uce +esira)le results. 5urt!er, critics of spontaneous pri3ati:ation argue t!at, in an
en3ironment in /!ic! transaction costs are !ig!, centrali:ation an+ planning are often
superior to +ecentrali:ation #Coase 937&E since !ig! transaction costs seem to )e
s1mptomatic of reforming an+ transition economies, a more centrali:e+ approac! to
reform mig!t )e 2ustifie+.
Laissez faire pri3ati:ation is not an argument against planning or rationalit1,
!o/e3er. 4!e argument for spontaneous pri3ati:ation is one in /!ic! t!e rationalit1 of
in+i3i+uals in control of resources is em)race+. Defen+ers of spontaneous pri3ati:ation
/ant to allo/ t!e de facto o/ners of resources to ta8e a+3antage of local 8no/le+ge,
arguing t!at t!is approac! is more effecti3e t!an !ig!l1 centrali:e+, )ureaucratic
pri3ati:ation programs. De facto o/ners !a3e a )etter i+ea a)out /!ic! assets are
3alua)le enoug! to pri3ati:e an+ /!ic! are not. Coreo3er, de facto o/ners !a3e a )etter

sense of !o/ pro)lems of simultaneit1 an+ se@uencing of pri3ati:ation s!oul+ )e +ealt

/it!E /!en one resource is pri3ati:e+, it sometimes creates a pressing nee+ for ot!ers to
)e pri3ati:e+.
4!oug! Austrian economists generall1 fa3or spontaneous pri3ati:ation /!en
compare+ to top'+o/n pri3ati:ation, spontaneous pri3ati:ation is not free from pro)lems.
5irst, spontaneous pri3ati:ation cannot occur in a societ1 t!at +oes not 3alue or respect
pri3ate propert1 rig!ts. 4!e pre3ailing cultural norms in a gi3en countr1 act as a !ar+
constraint on pri3ati:ation efforts. Wit!out t!e rig!t cultural en3ironment, propert1 rig!ts
s1stems /ill not )e ro)ust. As Peter Boett8e #(00 A99$B, p.(57& puts it, 0-ules are onl1
-,.ES if customar1 practice +ictates.6 But, cultural pro)lems are not uni@ue to
spontaneous pri3ati:ation programsE in fact, t!e1 act as a constraint against an1 8in+ of
reform, /!et!er it )e top'+o/n or spontaneous. Coreo3er, it is unclear to /!at e<tent
culture is mallea)le an+ !o/ @uic8l1 it can )e c!ange+.
W!en /e tal8 seriousl1 a)out spontaneous pri3ati:ation, enforcement pro)lems
are also an o)3ious cause for concern. Since spontaneous pri3ati:ation is e<tralegal,
/!at are t!e mec!anisms for resol3ing +isputesH 5ormal sources of aut!orit1, suc! as
courts an+ regulators, are ina+e@uate for +ealing /it! suc! +isputes )ecause t!ese sources
of aut!orit1 run contrar1 to t!e nature of e<tralegal rig!ts. Wit!out formal enforcement,
titling an+ transferring of rig!ts is more costl1. >n t!e ot!er !an+, informal rig!ts e3ol3e
an+ )ecome sop!isticate+ +uring t!e course of spontaneous pri3ati:ation. >3er time,
some of t!e rig!ts t!at emerge from t!e informal sector gain recognition an+ acceptance
)1 formal legal s1stems, ma8ing it possi)le for t!e formal s1stems to enforce t!e propert1
rig!ts t!at !a3e emerge+ t!roug! an organic an+ legitimate process.
(
5inall1, capital flo/s an+ foreign +irect in3estment opportunities ma1 not )e
reali:e+ /!en propert1 rig!ts are +ecentrali:e+. 4!e 0+ea+ capital6 pro)lem +escri)e+ )1
+e Soto #(000& arises )ecause )an8s re@uire clear, formal propert1 rig!ts s1stems for
len+ing. Because of t!eir e<tralegal status, informal rig!ts ma1 not )e effecti3e in
promoting capital in3estment an+ /i+esprea+ economic gro/t!. 4!oug! it ma1 )e more
+ifficult for entrepreneurs operating outsi+e of t!e formal propert1 rig!ts s1stem to o)tain
capital, it is not impossi)le. Cicrofinance programs an+ collecti3e efforts t!at pool
sa3ings toget!er are )ottom'up approac!es t!at !a3e surface+ to +eal /it! t!is c!allenge.
IV. Conclusion
Propert1 rig!ts pla1 a central role in +isseminating 8no/le+ge an+ information
t!roug!out an economic s1stem. Austrian economists fa3or laissez faire, or spontaneous,
pri3ati:ation )ecause t!is approac! to pri3ati:ation recogni:es t!e important an+ sensiti3e
information a3aila)le to de facto o/ners. De facto o/ners !a3e a strong incenti3e to get
t!e institutions 0rig!t6 /!en pri3ati:ingE )1 contrast, /!en economic e<perts ma8e
mista8es /!ile pri3ati:ing, t!e1 are not resi+ual claimants. De facto o/ners lose /ealt!
/!en t!ings go /rongE polic1ma8ers, suc! as Geffre1 Sac!s, /!o are in c!arge of
pri3ati:ations occasionall1 lose consulting contracts /!en t!ings go )a+l1 )ut are, for t!e
most part, unaffecte+. 4!us, spontaneous pri3ati:ation encourages efficient pri3ati:ation
)1 minimi:ing t!e role of t!e state an+ its central planners.
4op'+o/n pri3ati:ations persist nonet!eless. 4!is t1pe of reform continues to )e
supporte+ )1 polic1ma8ers /!o t!in8 a certain amount of control an+ !ierarc!1 is
necessar1. Despite t!e popularit1 of top'+o/n pri3ati:ation, t!e 3alue of spontaneous
3
pri3ati:ations ma1 soon )e reali:e+ in parts of t!e /orl+ +esperatel1 in nee+ of )ottom'up
pri3ati:ation, suc! as su)'Sa!aran Africa, since t!e mi<e+ results of neoclassical
pri3ati:ation !a3e cause+ man1 to ret!in8 t!eir con3entional un+erstan+ing of propert1
rig!ts. As frustrations /it! t!e neoclassical approac! to pri3ati:ation continue to mount,
Austrian economists ma1 !a3e an important role to pla1 in ma8ing t!e case for
spontaneous pri3ati:ation.
D
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