- [Instructor] In this video we're going to
talk about an idea that's crucial
to the proper functioning of an economy
under a market-based system.
And that's the idea of property rights,
and it's just the idea that everyone agrees on
who owns what and what can they do
with that property?
And for many of us who live in a part
of the world with strong property rights,
we take all of that for granted.
We know who owns that house
and what they have the right to do with that house
and if they were to sell that house,
how that would occur,
but in some parts of the world
or in some parts of history,
that wasn't so clear.
Someone might say they own the house,
but then another person might live in that house
and they say well I've been living here for 10 years,
it's my house now, deal with it.
Or they might go hire some thugs to say hey owner
sell me the house for less than the market value
otherwise we're going to hurt you in some way
and so in some ways they're infringing
on those property rights
or the government might just come in and say
we're gonna take that property from you because we want it
and in those situations property rights would be weakened,
and what we're going to do
is a little bit of a thought experiment
to see why it's so crucial
for the proper functioning of a market economy.
And so let's stick with the house analogy.
So let's say that we have some blue houses
in our economy that look like that.
Let's say it's owned by this person right over here.
Let's say we have some pink houses
that look like that.
Let's say it's owned by that person right over there
and let's say that we have some orange houses
that look something like that.
They have some kind of arch on the top
and let's say it's owned by something like this,
and let's say these people are all interested
in selling their house.
Maybe they're downsizing or they're retiring
or they're moving someplace else.
And so there's a market of potential buyers.
So let me draw the buyers right over here
and so there might be some people
and if we have properly functioning property rights,
there might be some people
who are really interested in the blue house
and so whoever is willing
to pay the most for that blue house will get it
and so let's say that this person
is willing to pay I would say one dollar sign
for the house and so the ownership
of the house will go to that person.
Same thing for the pink houses.
Maybe this person right over here
is the person who really likes the pink houses.
They pay a different price, maybe a little bit more.
I'll do two dollar signs to represent that,
and then they will get title to the house
and maybe a ton of people are really interested
in these arched houses
and maybe they bid for it and the bidding keeps going
higher and higher and higher
and this person wins at the end
and they have to pay up a lot
for that orange house that they get title for,
and let's just assume that for whatever reason,
that they're all about the same cost to build.
Well what would happen in this market then?
Well home builders or even people in other types
of houses will say wow,
I can get a lot more for the orange house.
The market is giving us a price signal.
So this right over here, this is a price signal.
In fact, they're all price signals,
and when you take 'em together,
you're saying, hey, I get more
for an orange house than a blue house
and so maybe if they all cost the same to build
we'll start producing more of these orange houses.
So builders will produce more of these orange houses
and maybe some people might remodel their blue houses
to have these orange arches on 'em,
and so you could imagine that might happen
from the price signal
because it's clear that that's where users preferences are.
That's where the demand is,
but now let's imagine a slightly more dystopian world
and this actually is what much of human history was
and even some significant parts of the world today
where there aren't clear property rights.
When this person says that they have this house for sale,
these people are like is it really your house?
And then this person comes along and says no it's my house
and I have this proof that my grandfather owned it
and he never sold it to your grandfather
and then this person says I have a lot of guns
and I don't care what y'all say
and what paperwork you have, but I'm taking the house.
Well how much would this person be willing to pay
this person right over here in that circumstance?
And so this person is much less likely
to get these three dollar signs
This person said hey, this is kind of a risky investment.
I don't really know if I take title from this person
whether it's still my house.
So they're not willing to give three dollar signs,
they're only willing to give one dollar sign
or maybe no dollar signs.
Maybe this house doesn't even sell.
Well then the price signals have broken down,
and so then in this market people will tell me
maybe we'll build more of the arched orange houses
because that's what the market demands
and so you can quickly see
that when property rights break down,
the market system breaks down
'cause the market system is all about people using
price to figure out how
much they're willing to pay for things
but that assumes that when you get something
that it's really yours,
that it's not going to be disputed
and the person you're buying from really has ownership
and this break down would often
be characterized as a market failure.
Now you could say okay there's other types
of systems that we've talked about in other videos.
We talk about command economies
and in the extreme in a command economy,
you have no private ownership of things
and so you might say maybe that is a solution
to this property rights problem,
but command economies have
significant problems of their own.
In fact, very few of them or really none of them in history
have proven to really work
because they have a major incentive problem
because if you're just being told
what to build by the government,
you're told how to build it by the government,
you're told who that gets it by the government.
There's very little incentive
to try to innovate, to try to build more,
to invest, or whatever else,
and we talk about that in other videos.
So I will let you go there.
This is just an introduction to think about
this idea of property rights
and ask your parents or talk around or if you are a parent,
look at the world of how much infrastructure we have
in a society like the United States
or in much of the world today
to enforce property rights.