Abstract
This research focuses on a substantial gap between theories of institutions and property rights: institutions are accepted as complex social structures, but property rights are generally considered as simple, that is, either private or public. Although usually unacknowledged, this simplified understanding of property rights is actually based on Samuelson’s theory developed six decades ago. According to Samuelson, the inherent characteristics of goods determine whether they are privately or collectively consumed commodities. Although Samuelson does not propose a mandatory unambiguous link between types of consumption and types of ownership, his theory implies that in principle, private goods are consumed and owned privately and public goods are consumed and owned publicly. Thus, in Samuelson’s theory, institutions are redundant. This article maintains that people need institutions and organisations because resources are scarce, and most resources are too expensive for individual use/consumption. To access such resources, people form groups and create organisations and institutions, thereby reducing the individual costs of use and consumption. As complex systems, institutions generate complex property rights – common/collective to the members of an organisation, but private to that organisation (the union of members). Furthermore, institutions determine the patterns of interaction between planning and the market (as the two main mechanisms of exercising property rights) at all levels of the multilevel structure of organisations and society. The article argues that Buchanan’s theory of clubs offers a more accurate explanation of the nature of property rights as relevant to institutions.
Introduction
The theories of property rights and institutions are two areas of social science that made great progress in the 20th century. The close link between these developments is determined by the connection between property rights and institutions as social structures. Since property rights are social rules defining how individuals can dispose of resources, they are institutions. Institutions, in turn, are structures of property rights: sets of rules determining individuals’ roles in a social system and individuals’ entitlements to use and manage the resources available to the system and its members. However, this article explores one essential gap between the widely accepted approaches of the two theories. Researchers highlight the complexity of institutions (Hodgson, 1998, 2006; North, 1990; Ostrom, 1990, 1999). Institutions transform groups and communities of individuals into complex and multi-layered social structures – organisations. However, despite the connection between institutions and property rights, the latter are generally seen as simple and unilateral. Although some researchers examine property rights in more complex structures (e.g. Chiodelli and Moroni, 2014; Davy, 2014), most studies consider only simple and pure forms of ownership, that is, either private or common/public. Perhaps one of the main reasons for the spread of such a simplified understanding is the difficulty in understanding how complex property rights work. If private property rights are governed by market mechanisms, and public property rights are managed by the government, then how are complex property rights managed? If they are managed simultaneously by market mechanisms and central planning, how do these two mechanisms interact?
This research helps us understand how the complexity of property rights affects the development of institutions and organisations, and the implications of this complexity for planning theory. The study explores three interrelated research issues: first, the nature of common property rights; second, the relationship between common rights and the nature of institutions and organisations; and third, the relationship between institutions, central planning, and the market as two alternative but mutually dependent and complementary property rights management mechanisms. To highlight the limitations of understanding property rights as simple or pure, the article discusses the meaning of common entitlements and compares the theories of Samuelson (1954) and Buchanan (1965). Samuelson does not explicitly define a mandatory unambiguous link between the form of consumption and the form of ownership, but his theory implies that common ownership exists only because the inherent characteristics of some goods/resources 1 determine that they can be used or consumed only collectively. As the article shows, institutions have no role in this concept. Buchanan, in contrast, explores club entitlements, by which he means shared/collective or common property rights. Yet, Buchanan offers an alternative explanation of common ownership: he presents the problem of the optimal number of co-owners, which depends on the form of the organisation. Thus, the difference in how the two theories explain common property rights implies a fundamentally different relationship with institutional theory. Buchanan’s theory allows for ownership-consumption possibilities with varying degrees of privateness/publicness or mixtures of private and common entitlements. It, therefore, acknowledges the complexity of property rights, which corresponds to the complex nature of organisations and institutions.
A key assertion of this article is that people need institutions and organisations because resources are scarce, and many are too expensive for individual consumption. To gain access to these resources, people form groups and create organisations and institutions. The key contribution of this research is that it rejects the simplified understanding of ownership and emphasises that the dichotomy between private and common entitlements does not hold in real life, as organisations and institutions are necessarily based on complex property rights that are simultaneously common/collective and private. In this article, complex entitlements are called private-common, because their private and collective characteristics are so closely integrated that the common rights of the members of a social structure (a group or community) cannot exist unless they are private to the structure. Furthermore, an understanding of organisations’ and institutions’ property rights as necessarily complex helps us explore institutional governance and the principles of coordination among individual members and sub-structures of organisations. Insofar as common/collective entitlements are managed by central planning and private entitlements are the basis of the market’s action, the multilevel structures of institutions and organisations determine the multilevel interactions between markets and planning.
Although the article seeks to draw conclusions relevant to planning theory in general, it refers mainly to urban planning and land and property development. This is because relationships pertinent to planning theory in general are usually easiest to observe in spatial processes.
To explore the nature of complex property rights, this article explores primarily common (collective/group) entitlements. Common property is the property owned by a group of individuals (Lueck and Miceli, 2007). Just like private/individual entitlements, property rights in groups/communities ultimately belong to the individual members of the group; however, within the group, entitlements are divided between its members. Thus, the principle difference is that an individual can exercise her individual property rights on her own, whereas she can exercise common/shared/divided entitlements only collectively based on the rules adopted by all members of the group – that is, the co-owners of the entitlements.
The next section of this article briefly reviews the literature on the relationships among property rights, institutions, organisations, and planning. The third section examines Samuelson’s theory, its weaknesses and its inconsistency with institutional theory. The fourth section concludes that Buchanan’s theory offers a proper explanation of the meaning and the significance of common property and that this theory corresponds to modern institutional theory. The fifth section discusses the implications of complex property rights for the classification of ownership regimes, institutional theory, planning theory and the relationship between markets and planning.
Links between property rights, institutions, organisations and planning
The following literature review first emphasises the intrinsic connections between property rights, institutions and organisations, and then examines the important meaning of property rights and institutions for planning theory. It then concludes that people form groups and establish common entitlements to gain access to resources that are too expensive for individual consumption, and that the purpose of institutions and organisations is to enhance the benefits, reduce the costs, and overcome the drawbacks of co-operation and shared use of resources.
Linking property rights, institutions and organisations: property rights as institutions and institutions as structures of entitlements
The relationship between property rights and institutions is discussed in the classics of the ‘old’ institutionalism. Veblen (1899, 1914) considers property rights as one of the key factors shaping the interests and characteristics of social groups, the structure of society and societal institutions. According to J. R. Commons (1950: 21), an institution is a regime or body of working rules that govern the behaviour of individuals and entities. Institutionalism itself is an interdisciplinary theory that includes other branches of social science such as organisational theory and institutional economics. The new institutionalism clarifies the role of institutions in forming organisations and critically reassesses the role of rationality in building social structures (DiMaggio and Powell, 1983; Meyer and Rowan, 1977; Zucker, 1977); thus, the problem of the role of property rights appears to be of secondary importance. But the new institutional economics grows out of the contribution of Coase (1960), who emphasises the crucial importance of establishing property rights and the significance of institutions to this end.
North (1990) defines institutions as ‘humanly devised constraints that structure political, economic and social interaction’, or ‘rules of the game’ (p. 97). Organisations are the teams that play the game. They are groups of individuals whose common activities are arranged by institutions – the systems/sets of roles and rules laid out to structure the means–ends relationships aimed at achieving the group’s objectives (Scott, 2005). The close and multifaceted connection between institutions and organisations is essential to the new institutional theory. According to Zucker (1977), institutions are established (i.e. credible and institutionalised) organisational forms, while Meyer and Rowan (1977) find that structures of organisations are based on institutional norms and beliefs. Scott (2005) notes that institutional forces shape organisational arrangements.
Property rights and planning rights: planning as an institution determining the exercise of property rights and associated transaction costs
Despite the contributions of a number of outstanding theorists, the importance of property rights in planning theory is insufficiently appreciated. Planning is the link between knowledge and action (Friedmann, 1987); it is a purposeful activity (‘thinking before acting’, Kaza and Knaap, 2011) that defines the path to a desired destination (Intriligator and Sheshinski, 1986). It defines how we can achieve our goals. But clearly, in a pluralistic society, various social groups have different goals because they have different interests and entitlements. Thus, the key problem of planning in a democratic market society is how to choose the proper objectives (i.e. properly define the public interest), which should reflect the various and often conflicting interests of different social groups that constitute society. To this end, consent between social groups is essential. This is precisely what property rights are about: an agreement regarding who has the right to use resources and for what purpose. Unfortunately, planners often overlook the fact that planning rights (Alexander, 2007) are one type of management and control rights; therefore, they are property rights. As Slaev et al. (2019) note, the variety of the interests and the entitlements of different social groups is the source of all difficulties in defining the proper goals of planning. It is also the reason planners have developed methods such as advocacy, collaborative, deliberative and communicative planning.
Authors such as Webster and Lai (2003), Lai (2005), Moroni (2010) and Salet (2018) have also intensively studied the role of institutions in planning, but in the bulk of planning literature, this role is even less appreciated than the role of property rights. However, planning itself is an institution, as is the market; they are alternative mechanisms of coordinating and organising social activities. According to Webster and Lai (2003) and Lai et al. (2016), property rights are institutions that determine transaction costs.
Below are some findings of the theories of property rights, institutions, organisations and planning. They are important for this research because they illuminate the complex nature of property rights and the purpose of institutions and organisations.
Types of property rights: pure entitlements and the continuum of complex property rights
Samuelson’s classical paper defines only two types of goods (private and public) and therefore suggests the existence of only two types of ownership. Most taxonomies, however, define three types of property rights: private, public and an intermediate type – communal or shared by the members of a group (e.g. Demsetz, 1967; McNutt, 2000). Libecap (1986) observes that ‘[p]roperty rights may be held by individuals (private property rights), groups (collective rights), or the state (an extended form of collective rights)’ (p. 235). He also notes that ‘[p]roperty rights exist as a continuum’, which suggests that groups can hold many different types of entitlements, which are usually termed ‘bundles of rights’ (Hohfeld, 1913). Davy (2014) and Chiodelli and Moroni (2014) analyse various forms of entitlements; like Libecap, they thus emphasise the complex nature of the various forms of ownership.
Institutions and organisations enhance the benefits and reduce the drawbacks of collective work and common entitlements
A key point in Commons’ (1950) theory is that people need institutions to reap the benefits of cooperation by neutralising the negatives of collective work (e.g. distrust, opportunism and fraud). Commons (1950) defines an institution as ‘collective action in control, liberation, and expansion of individual action’ (p. 21). Furthermore, institutions establish property rights, so that individuals gain control over scarce resources. According to Mahoney (2010), institutions are ‘distributional instruments that allocate resources unevenly and thereby help constitute asymmetrical collective actors’ (p. 15). Webster and Lai (2003) find that ‘[i]nstitutions have the purpose and effect of reducing the costs of co-operation by creating and protecting exclusive ownership rights (property rights)’ (p. 214). Thus, like Commons’ statement on institutions, Webster and Lai stress that the purpose of organisations is to avoid the shortcomings of collective actions while facilitating their benefits.
Drawing on the preceding institutional and planning theories, this article accepts the premise that groups, organisations and institutions exist to enable people to use scarce resources collectively; that is, they enable people to exercise collective property rights. The purpose of collective entitlements is to help people economise on the cost of resources by sharing these costs, whereas the purpose of organisations and institutions is to help people solve (at least some of) the difficulties of managing collective ownership. Indeed, as outlined in ‘Benefits and costs of individual and common property rights’ section, numerous scholars have explained the substantial drawbacks of collective management, which is associated with principal-agent and public choice issues; problems of free-riding, shirking, and corruption; and the deficiencies of central planning. Since market theory emphasises the efficiency of the market mechanism, which is based on private ownership, substituting private entitlements for common/collective entitlements would appear to be an effective way to improve a system of resource management. Indeed, this article posits that institutions and organisations structure the exercise of entitlements and improve their performance by converting collective property rights that are common to the members of a group into property rights that are private to the organisation of co-owners.
Analysing the meaning of common property rights and their relation to private ownership is essential to properly understanding how institutions structure the exercise of private and common entitlements, as well as how they affect the interaction between central planning and the market (Slaev 2017a). The next two sections work towards this end by discussing two theories developed more than half a century ago – those of Samuelson and Buchanan.
Samuelson’s theory of private and public goods
This section argues that Samuelson’s theory is irrelevant to institutional theory, because it suggests the existence of only two simple and pure types of ownership. In ‘The Pure Theory of Public Expenditure’, Samuelson (1954: 387) discusses private consumption and collective consumption goods. The latter are actually public goods, because these are goods ‘which all enjoy in common’, that is, goods that are non-excludable to anyone. Samuelson explains non-excludable goods as follows: ‘each individual’s consumption of such a good leads to no subtraction from any other [emphasis added] individual’s consumption of that good’. Another explanation is that private goods ‘can be parcelled out among different individuals’, but this is not possible for public goods. Hence, characteristics of goods such as indivisibility, non-subtractability, non-rivalry and non-excludability are intrinsically linked and define the way goods are consumed. In his paper, Samuelson does not define a direct and compulsory connection between the form of consumption and the form of ownership. Still, the fact that he interchangeably uses the terms ‘private consumption goods’ and ‘private goods’, as well as the terms ‘collective consumption goods’ and ‘collective goods’, implies that the form of consumption predetermines or at least is a critical factor in establishing the form of ownership over the goods. Furthermore, there is no hint in Samuelson’s theory that the goods’ characteristics may eventually change. If air is indivisible and non-subtractable at moment A, why should we expect it to become divisible and subtractable at moment B? Samuelson’s concept thus implies that the characteristics of goods are inherent and static/permanent.
The inconsistency between Samuelson’s classification of goods and institutional theory
Institutions are social constructs. According to Hodgson (2006), institutions are social rule-systems, that is, ‘systems of established and embedded social rules that structure social interactions’ (p. 18). Hodgson’s definition of organisations is also pertinent here because it illuminates the characteristics of institutions in real-world social interactions. In his words, ‘[o]rganizations are special institutions that involve (a) criteria to establish their boundaries and to distinguish their members from nonmembers, (b) principles of sovereignty concerning who is in charge, and (c) chains of command delineating responsibilities within the organisation’.
Researchers have emphasised the complexity of property rights structures within institutions and organisations (Hodgson, 1998, 2006; Moroni, 2018; North, 1990; Ostrom, 1990, 1999). Whether produced by self-organisation or externally imposed, for example, by the state (Hodgson, 2006), institutional rules serve to coordinate social interactions. Thus, they are common or public in nature. When institutional rules are implemented to constitute an organisation, a set of boundaries is established ‘to distinguish members from nonmembers’, that is, to exclude the latter. Thus, organisations and institutions are excludable, that is, private structures. This intricate interweaving of private and common property rights is described by Ostrom and Hess (2008: 30). Collective and stock companies, partnerships and joint tenancies, clubs, corporations, cooperatives, condominiums and local communities are simultaneously common to their members and private to the members’ union. Moreover, even a ‘purely’ private company with a single owner in the course of production turns into a node of social interactions generating shared/collective entitlements (Ostrom, 1990, 1999). As Barzel (1997) explains, shared/collective entitlements are produced by private companies as a result of any form of co-production, including contracting and sub-contracting, labour hiring, service provision, equipment sharing or renting. Thus, organisations and institutions are structures of complex – simultaneously private and common/public – property rights.
The connection between ownership and use/consumption should be emphasised once again here. The right of use/consumption is a key element (often called a ‘stick’) in a bundle of property rights. But the form of use/consumption is determined by the institutional structure of organisations, which is complex. This illuminates the first problem with Samuelson’s concept as it relates to institutional theory: the outline of only two simple, isolated, and static consumption possibilities. Such an overly simplified classification does not reflect the complex real-world social structures developed for complex and sophisticated use of goods/resources. However, while Samuelson’s definition implies that a good is inherently either private or public, researchers suggest that this basic condition can be subject to change. For example, Kaul (2001) indicates that a rivalrous good may become non-rivalrous, or vice versa. One might argue that this contradicts Samuelson’s concept of inherent (non)rivalry and (non)excludability, but even if we ignore this contradiction, Samuelsonian goods absolutely cannot be simultaneously private and common or public, as institutions in fact are.
Another problem with Samuelson’s theory as it relates to institutional theory arises from the multilevel nature of institutions (Hodgson, 1998; Ostrom, 1990). As explained in ‘The relevance of Buchanan’s concept to institutional theory and the pervasiveness of private and common-private ownership’ section, the property rights structure of institutions is simultaneously private and common precisely because of their multilevel nature: a property structure that is common/collective at one level is simultaneously private at the next or a higher level. However, in Samuelson’s concept, multilevel structures are not possible because a good is either excludable or non-excludable.
Next, institutions and individuals are interdependent. ‘Individuals interact to form institutions’ (Hodgson, 1998: 177) by developing systems of social rules. Forming institutions and developing rules is a largely intentional (although not always conscious) process. That is, individuals have some (although limited) choice as to whether to form an institution, what type of institution to form and what type of property rights to establish. People can choose different forms of organisations with varying degrees of publicness even when they employ almost identical resources under similar conditions. Consider the housing forms in a given urban area. Although the conditions and the resources available in a specific area do not vary substantially (e.g. ecological conditions, greenery, beautiful views, infrastructure, utilities and urban services), housing patterns and forms vary greatly. In most European cities, for instance, residents can choose from a variety of different housing forms, such as row housing, low- or high-rise apartment blocks on separate lots or gated developments of apartment buildings. The ability to choose between housing structures (organisations) with varying degrees of privateness/collectiveness actually contradicts Samuelson’s concept that individuals have no choice between private and common forms of consumption. According to Samuelson, individuals have to consume excludable resources only privately and non-excludable resources only collectively; in this view, property rights do not depend on institutional development.
A fourth contradiction between Samuelson’s concept and institutional theory refers to the perception of non-excludability as an irrevocable characteristic of public goods and public consumption. Non-excludability actually means open access (see ‘The problem with the meaning of public goods and public property’ section), and open access means no rules, that is, no institutions to regulate the consumption of public goods.
Thus far, the article has discussed contradictions between Samuelson’s concept and institutional theory. The next subsections examine some internal inconsistencies.
Problems with Samuelson’s taxonomy
In his article, Samuelson defines only two types of goods – private and public – and his theory cannot explain the incidence of intermediate property rights. To address this, Musgrave and Musgrave (1973) suggest that (non)rivalry and (non)excludability are not necessarily positively connected, and there are excludable but non-rivalrous and non-excludable but rivalrous goods. However, even if we ignore the fact that the two intermediate types of goods contradict Samuelson’s definitions (that rivalry is intrinsically linked to excludability, and non-rivalry is linked to non-excludability), we face problems when we examine their nature more closely. Frequently cited examples of excludable but non-rivalrous goods/services include cinemas, private parks and cable television. But compare these to a private bus service. For example, if we agree that the transport service per seat in a 40-seat bus is excludable and rivalrous, because a private company owns the bus and the service, then why should we consider the selling of 200 seats in a private cinema for 2 h as non-rivalrous? Without a doubt, the last ticket sold is rivalrous between the two individuals willing to buy it.
Consider next rivalrous but non-excludable goods. The usual examples of such goods are common pool resources (CPRs) (Ostrom, 1990), for example, fishing grounds, pastures and irrigation systems. By definition, CPRs are common to the community of local users. However, CPRs can be excludable to outsiders. For instance, an irrigation system is excludable to those who have no access to its channels. Fishing grounds can also be excludable to outsiders (Ostrom, 1990). CPR users have to invest effort and other resources to sustain the CPR stock; CPR communities tend to establish barriers to prevent consumption by free-riders, thereby ‘transforming’ a resource from non-excludable to excludable. This contradicts Samuelson’s concept of inherent excludability or non-excludability.
The problem with the meaning of public goods and public property
The assumption that public goods are non-rivalrous and non-excludable is central to Samuelson’s theory. Non-excludability is precisely what open access means. But as Ciriacy-Wantrup and Bishop (1975) argue, any form of property that is subject to institutional arrangements and regulations imposed by groups, communities or society is not open access – the established control is a form of property rights, even if those rights are weak or imperfect. Any form of (institutional) control limits open access and is a form of exclusion. According to the authors, this applies not only to group/collective property but also to property that is under society’s or government’s control, that is, public property. Therefore, are public goods open access, as Samuelson suggests, or is the access to these goods and their use controlled by society, as Ciriacy-Wantrup and Bishop assert?
The problem with Samuelson’s understanding of public goods as non-rivalrous and non-excludable is important to this research because it is directly connected to the role of institutions. If a resource is non-rivalrous and non-excludable, that resource is abundant. However, people do not need rules and institutions (or property rights) to manage and use abundant resources; institutions actually serve to manage scarce resources. In fact, no good or resource in the world can meet Samuelson’s criteria of non-rivalry and non-excludability to all. The beginning of this section emphasised the relationship between indivisibility, non-subtractability, non-rivalry and non-excludability. We should also consider congestibility. Obviously, if a good is non-rivalrous and an individual’s consumption of it does not diminish the amount of the resource available to others, then the good is non-congestible. In contrast, if a good is congestible, it means that it is subtractable and excludable, because congestion means that an individual’s consumption subtracts from the available amount; thus, the good is rivalrous and excludable.
Let us consider popular examples of public goods such as national infrastructure, public education, public healthcare, national defence, air, the radio spectrum, sunlight, information and a national legal system – all classical examples of non-rivalrous and non-subtractable goods. If all these goods/resources prove to be congestible, it means that they do not satisfy Samuelson’s criterion of being inherently non-rivalrous and non-excludable. As all drivers know, public infrastructure (e.g. a national road network), which is a classical example of a public good, is congestible. Yet, the same is true of public education and healthcare systems. Such systems are always planned and designed for a certain number of people, so when the number of students or patients is larger than the number the system is designed for, congestion will occur. Contrary to popular belief, national defence is congestible, too. The purpose of national defence is to protect national territory and population. If a nation of 10 or 50 million increases by one new citizen, this will lead to only a negligible change in the amount of protection needed, so researchers assume that no change has occurred. But if the population of this nation doubles, this will lead to a substantial increase in all developed (residential and industrial) territories and infrastructure. Protecting a doubled population, more developed territory and larger infrastructure networks will require a substantial increase in funding, or national defence will be congested and compromised. Furthermore, as Coase (1959) shows, the radio spectrum is also congestible, and this implies that any form of electromagnetic radiation, including sunlight, is also congestible. In fact, the catalyst for the first zoning regulations in the United States was the construction of the Equitable Building, which ‘towered over its neighbors, blocking their sunlight’ (Holcombe, 2013). That is, zoning regulations were established in response to sunlight congestion. Another reason to impose zoning regulations is to protect the environment, including air, from pollution. The need to protect clean air obviously indicates that air, too, is congestible. Information-based resources, such as knowledge, experience and science, as well as social customs, administrative regulations and legal systems, are probably the least obviously congestible and subtractable resources. The information and knowledge one receives from another person do not subtract from the information and knowledge of the providing person. However, to acquire or produce the knowledge, the knowledge provider must spent time and effort that could have been used to acquire other knowledge. Indeed, the knowledge one receives from another person has an opportunity cost, which is the value of other knowledge that could have been acquired instead of the knowledge actually generated and transferred. Thus, the knowledge available for transfer has subtracted from other kinds of knowledge. Furthermore, in a material world, information and knowledge need material carriers to be transferred and stored, and these material carriers are congestible. Consider, for instance, a hacker’s attack on a server with millions of requests for information per second – clearly, this server is congested. Despite its immense resources, the Internet is congestible too. Finally, even administrative regulations and legal systems are congestible, because taxpayers pay their representatives to create legislation and their judges and police officers to implement it. If the numbers of judges, police officers or other resources are insufficient, the legislation will not be properly implemented, and the system will underperform – that is, it will become congested just like the education and healthcare systems.
Hence, the assumption that public goods are non-subtractable, incongestible, non-rivalrous and non-excludable is incorrect. In this respect, two mistakes are widespread. First, when the costs of providing a good/resource are negligible, researchers tend to ignore them. We ignore the costs of using Internet resources and the costs of listening to the orchestra in the city park. But we do pay charges to access the Internet and local taxes to pay the salaries of the city musicians. If someone pays costs to provide a resource, the resource may not be inherently abundant. Second, researchers neglect the difference between non-excludability to all and non-excludability only to a group or community of individuals. As this section has shown, no goods are non-excludable to all, whereas the goods that are non-excludable only to the members of a community are simultaneously excludable to all outsiders. Both mistakes can be avoided only if we acknowledge the role of institutions. In fact, no resource is abundant (non-subtractable, non-rivalrous and/or non-excludable), and precisely because resources are scarce, people need institutions.
Understanding common ownership in light of Buchanan’s theory of clubs
While the foregoing section has shown that Samuelson’s theory cannot convincingly explain the existence of common ownership and is irrelevant to institutional theory, this section demonstrates that Buchanan’s theory elucidates the nature of common/collective entitlements and helps clarify the purpose of institutions and organisations.
A ‘small’ difference of major importance
The problem with Samuelson’s theory is due to a small detail in the definition of non-excludability. Samuelson considers public goods as inherently non-excludable, while many researchers who formally adopt his definition explain non-excludability by pointing to the high costs of excluding others. This small difference in the definition is in fact of crucial importance. If non-excludability depends on costs, then it is not an inherent feature of goods. Significantly, the cost of establishing property rights is explicitly connected to the role of institutions (Coase, 1960). Costs depend on institutions and technology, but the impact of technology is exercised through institutions. With changes in technology or factors determining social interactions, institutions may change and the costs of exclusion may decline, which could change the form of ownership (Lai et al., 2016). Thus, it may be beneficial (less costly) to include a certain number of members, while excluding all others. The costs and benefits of inclusion/exclusion depend on institutions; therefore, because the concept Buchanan (1965) developed in ‘An Economic Theory of Clubs’ accounts for the costs and benefits of inclusion/exclusion, it is relevant to institutional theory. Defining the optimal membership (or establishing the boundary of membership) is essential for organisations. These relationships are explored in the following subsections.
The source of common ownership in light of Buchanan’s theory
Subtractable, rivalrous and excludable goods/resources cannot be common to everyone, but they can be common to a group/community of people. Buchanan (1965) provides a relevant explanation of common ownership. Unlike Samuelson, who focuses on the two polar, extreme and ‘pure’ types of goods, Buchanan’s (1965) theory covers a wide ‘spectrum’ of goods (and their respective ‘ownership-consumption possibilities’). These goods have varying degrees of publicness between purely private and purely public, including goods owned by groups and communities, or club goods.
Scarce, subtractable, rivalrous and excludable goods/resources can be common to a group/community of people because of the pervasive mismatch between the quantities of resources available or provided and the quantities needed by individuals. The optimal quantity needed by individuals is determined by the Pareto optimality requirement (Buchanan, 1965: 4; Lai, 2005). However, resources rarely come in the precise quantities required by individuals. When resources are provided and acquired in quantities smaller or larger than needed, then losses are incurred. Such situations are common, but individuals can avoid large losses and minimise the costs of resource provision by joining with other individuals. By sharing resources, an individual can acquire them at lower cost per unit and then use/consume the resources according to his needs. Consider a village located far from the nearest river, so that water can be provided only if an irrigation system is built. But such an irrigation system would provide large quantities of water. A single villager does not need such quantities of water, nor could he alone afford the effort and expense necessary to construct a dam and a channel. To solve the problem, the villagers form ‘a club’; this reduces the cost borne by each villager, and each villager will use only the amount of water he needs. A club, however, is an organisation. It is the number of co-owners (the club size) that helps to correlate the amount of resource provision and the needed amount of resource consumption.
Excess amount
Resources cannot be non-excludable and non-rivalrous to all (to anyone on Earth), but resources common to a group or a community are indeed non-excludable and non-rivalrous to everyone within the group/community, that is, to its members alone. The factor that makes a resource non-rivalrous within the group is the existence of an excess amount of that resource. Clearly, although individuals form a community to solve the mismatch between the quantities of a resource provided and the quantities needed by each individual, they only rarely achieve a perfect match. Often, there will be a shortage, but most often, there will be an excess/surplus. In fact, if the group/community faces a shortage, it will not survive for long; hence, surplus is a critical condition for the group/community’s existence.
When Buchanan examines what he defines as the central question of the theory of clubs, that is, the optimal club size, he actually focuses on the rare situation in which a perfect match is achieved. However, the availability of excess – rather than a perfect match – is the normal situation of clubs. Regarding the availability of excess, three options are possible. The excess value will be zero when the number of co-owners is optimal, it will be positive when the number of co-owners is smaller than optimal and it will be negative (i.e. there will be a shortage) when the number of co-owners is larger than optimal. Thus, although a perfect match between the quantity of a resource provided and the quantity needed rarely occurs, it plays a key role in changes in the forms of ownership. In short, it acts as a threshold. Below the threshold, the resource is abundant within the group, and the individual members can consume it for free. When each individual can consume the resource for free, no one is willing to expend extra effort or costs to establish private property rights. Thus, the resource is non-rivalrous, non-excludable and common to all members of the group/community. However, if the number of co-owners is larger than optimal, congestion will occur. If no new quantities of the resource are provided and the shortage persists, the co-owners will have to establish strict rules to limit individual consumption, or they will compete for the resource in an attempt to allocate private entitlements among themselves. Obviously, this threshold plays a key role in establishing common or private property rights, although the establishment of entitlements also depends on the associated costs (Coase, 1960).
Benefits and costs of individual and common property rights
The role of the excess amount is important, but it is only a criterion: it does not explain why individuals would choose private or collective entitlements, that is, what the associated benefits and costs are. The key benefit of private/individual entitlements is their high performance and efficiency (Slaev, 2016a; Slaev and Collier, 2018). Private/individual management of resources is efficient because all interests and all efforts and capabilities used to manage resources belong to one and the same individual or entity. Yet, there is a second key factor in the efficiency of private/individual ownership, and this is the action of the market. Because private ownership of resources allows the market to act, market competition is a crucial force that guarantees the high performance of private management, as only those entities who manage resources efficiently can survive in a competitive market environment.
In contrast, the key advantage of common ownership is that, through sharing, individuals economise on the costs of resources and pay only a fraction of the cost of supply. As explained above, collective entitlements help people save on costs incurred by the mismatch between economically efficient amounts of resources provided and the amounts needed for consumption or use by individual members. The benefits of common ownership should not be underestimated. Because of these benefits, people actually choose to use/consume most resources collectively. If that assertion seems questionable, note that families (just like collective and stock companies, clubs and associations) are institutions (partnerships) with shared entitlements. In other words, to acquire the benefits of common ownership, people need institutions.
On the contrary, when it comes to resource management, common/collective entitlements are associated with substantial drawbacks, because there is no inherent connection between providing resources and obtaining benefits. Even in partnerships with just two or three partners, a partner who has provided a major contribution may be severely disadvantaged. In large groups, such problems are pervasive. To solve them at least partially, institutions are needed and rules should be enforced, but that incurs organisational costs (Buchanan and Tullock, 1962). To organise and manage larger groups, regular members have to delegate some of their control rights to a ‘small management group’ of ‘de facto owners’ (Demsetz, 1967: 335). As a result, principal-agent problems emerge, incurring monitoring and bonding costs and residual loss (Jensen and Meckling, 1976). Other types of costs and losses are due to public choice issues (Buchanan and Tullock, 1962), difficulties with defining the public interest (Moroni, 2004), problems of collective action (Olson, 1971 [1965]), free-riding (Ostrom, 1990) and corruption (Chiodelli and Moroni, 2016; Slaev, 2016b). Hence, the existence of common property rights is determined by the balance between the benefits of reducing individual costs of resource provision by sharing within a group/community and the costs due to the deficiencies of collective management. The need to balance the benefits and costs of common ownership once again emphasises the important role of institutions.
Discussion: types of property rights and their meaning for institutional theory in light of Buchanan’s theory
The following two subsections discuss how Buchanan’s theory is helpful in understanding the interweaving of private and common entitlements with respect to the multilevel structures of property rights and institutions and organisations. The third subsection proposes an explanation of how complex multileveled property rights are managed through the interplay between planning and the market at the different levels of the institutional structure of social entities and society.
The relevance of Buchanan’s concept to institutional theory and the pervasiveness of private and common-private ownership
Buchanan’s concept of common entitlements has been overlooked for decades, yet this concept is valuable because it explains the characteristics of common/collective entitlements as they pertain to institutions. In Buchanan’s concept, common property rights are complex, are excludable (i.e. private) and have a multilevel structure. Obviously, Buchanan has this complexity in mind when he calls these entitlements ‘club’ entitlements; that is, they are simultaneously common to the club members and private to the club. In this article, they are also termed private-common entitlements. This term denotes the traditional meaning of common/shared entitlements; however, it emphasises that at the higher institutional (or organisational) level, the entitlements are private to the union of co-owners. Common property rights are in fact divided (Barzel, 1997; Shavell, 2002): they are established by dividing the private property rights of the union (the organisation) among its members.
As this article shows, common ownership is not the opposite of private ownership; moreover, common ownership cannot exist unless it is private to a social structure. Acknowledging that common and even public entitlements are simultaneously private implies that any form of ownership is private. In fact, at the highest level of ownership, only two property regimes exist: private ownership (ownership by individuals or groups/institutions) and open access. Yet, private ownership is rarely purely private (individual); much more often, it is private-common because any economic or social interaction generates common property rights. Common entitlements are actually the most pervasive form of property rights (ownership regime), especially when we consider that even families, as mentioned in ‘Benefits and costs of individual and common property rights’ section, are collective institutions – in other words, partnerships. In fact, an individual owns individually only a few goods such as his or her clothes, toothbrush and laptop. The individual shares all other goods/resources with the members of her or his family and members/co-owners of collective and stock companies, partnerships, clubs, cooperatives, condominiums, corporations, associations, local communities and societies. Common ownership can be avoided only if one lives alone on an island. In contrast, in urban areas, one unavoidably shares with one’s neighbours and local residents resources such as the environment, open spaces, public greenery, calmness (or urban noises), sunlight, air, road infrastructure and utility networks (Slaev, 2017b). Even private home ownership is not purely private. To manage the multitude of common resources, co-owners need to establish rules (e.g. zoning regulations and other restrictions), and by enforcing rules, developing institutions (e.g. urban planning and regulations), and defining membership (the boundary of the action of the rules), they actually define the boundaries of organisations and exclude nonmembers. Thus, private-common entitlements, as defined following Buchanan’s concept, are the basis of all social structures – that is, organisations and institutions.
Furthermore, Buchanan’s concept helps explain the multilevel structure of institutions. In any social structure, organisation or institution, there are two basic levels: the individual level and the institutional (or organisational) level. The two-level structure turns into a multilevel structure if a member is a collective entity that, in turn, is also made up of at least two internal layers of entitlements.
Private, private-common and public ownership
The observations made so far have other significant implications for the types of property rights and their importance for the functioning of institutions, especially the institutions involved in exercising property rights – central planning and the market. First, we conclude that each form of ownership is private: private-individual or private-common. Property rights are held by individuals or groups (Libecap, 1986), so they are always exclusive to nonmembers. We should note that the state is just the central body of a national society, and society is just a very large group of nationals; therefore, state property is a form of group property. Indeed, private-common entitlements can be of a very high degree of privateness (as in families) or of a very high degree of publicness (as in national societies). Still, even the group with the highest degree of publicness is private at its highest institutional level, as illustrated in the following paragraph regarding state/public ownership. Despite the institutional complexity of property rights, we can distinguish between private and group/public rights, but only in a specific situation when we clearly define the level of the institutional structure that we refer to.
Following this logic, we can draw a link to the popular/traditional meanings of private and public ownership. In fact, the traditional meanings are relevant to the classification based on Buchanan’s concept, but at the level of the national market. The distinction at this level is between two types of entitlements – those that are common to all national citizens and those that include only some of the nationals, but exclude all others. Public resources are not open access but are resources that are co-owned by all national citizens. Thus, they are not tradable at the national market but rather are controlled by the government. Still, these resources, like any other form of private-common property, are private to the group/community, that is, to the nation, and are excludable to outsiders, that is, to foreigners. National defence and road infrastructure are meant to serve only nationals – foreigners can benefit too, but only as guests, and to access national public goods, foreigners need visas (Slaev, 2016a; Slaev and Collier, 2018). Visas are a good example that nations can exercise private property rights and exclude foreigners from access to national public goods. In contrast, resources that are not common to all national citizens are tradable on the national market. Thus, they are called private, although most of them are owned collectively by members of groups/communities. Therefore, the distinction between private and public is useful and important, but it makes sense only insofar as we refer to the national institutional level and differentiate between (1) resources under the government’s control and (2) all other resources – no less and no more.
Institutions and the exercise of private, private-common and public entitlements: the interaction between central planning and the market
Buchanan’s concept explains why people form groups/communities. To match the quantities of resources needed by individuals to the economically efficient quantities of resource provision, people form clubs and regulate the ‘club size’; that is, they develop organisations and institutions. Institutional structures can reduce two types of costs: the costs of collective management and the costs of institutional change (Coase, 1960). More generally, institutions and organisations define the interaction between central planning and the market. This means that univalent relationships between purely private entitlements and the market and between purely common/collective entitlements and central planning exist only in theory. The complex private-common property rights existing in real-world institutions define complex and often difficult-to-decode relations between organisations, central planning and markets. This complexity is evident in the sophisticated structure of modern corporations, which intrinsically combines elements of both alternative principles of economic organisation. On the contrary, researchers like Bromley (2008) and Toulmin (2009) have found that, due to the established traditions (traditional institutions), the allocation of formal private ownership of land in Sub-Saharan Africa rarely stimulates the development of market relations. In contrast, customary (tribal or lineage) forms of tenure are considered predominantly ‘communal’. But as Chimhowu and Woodhouse (2006) have convincingly argued, customary forms of tenure have long served as the basis for informal market relations, even though the tribal and lineage leaders in reality exercise central government.
The explanation of this complex intertwining between markets and central planning, just like the explanation of the simultaneously private and common/collective nature of property rights, is related to the multilevel structure of institutions and organisations. As this structure consists of at least two levels – individual and institutional – the transformation of property rights from common at the level of the individual members of organisations to private at the level of the organisation has a critical effect on improving the performance of collective resource management. The deficiencies of collective resource management can be ameliorated (although never fully solved) by improving the systems of rules that govern the relationships between the members of the group (Ostrom, 1990). The central body has a crucial role in this improvement of the rule system, but the members of the central body, whom Demsetz (1967) calls ‘de facto owners’, often have different personal interests. Fortunately, property rights at the institutional level are private to organisations, so organisations participate in the market, and market competition is a key factor in stimulating the improvement of the rule system that governs the collective resource management. Thus, if a collective body survives market competition, it has performed better than all the other individuals and largely private companies that eventually failed.
The preceding explanation does not apply to public ownership. Although public ownership is defined here as private-common, national public goods and resources cannot be traded on the national market, because they are co-owned by all national citizens. Just as the owner of an apartment in a condominium cannot sell her share of the staircase to another owner in the condominium or to an outsider, a national citizen cannot sell her public property rights to another national citizen or to a foreigner (Alchian, 1965). Hence, the market cannot guarantee the efficiency of public ownership. Nevertheless, despite all its deficiencies, this type of ownership is essential to all social activities. It is the only form of entitlement that can provide resources that are crucially important for the functioning of the market and society – above all, the national legal and policing systems.
Conclusion
The findings of this article can be summarised as follows. In order to meet their needs and achieve their goals, people carry out activities and use scarce resources. To this end, people need to coordinate their actions. Coordination involves the establishment of consent among all actors in the activity regarding their rights and obligations in the use of resources, that is, the establishment of property rights. Individuals can effectively provide and use some resources on their own (under individual ownership). For most resources, however, individual provision and use are disadvantageous, so individuals provide and consume these resources collectively (under common/collective ownership). Yet, exercising collective ownership incurs extra costs and losses. The balance between the benefits of collective use and the costs and losses of collective organisation determines the optimum number of co-owners. The very concept of an optimal number of co-owners of a resource implies that this number is limited and excludes all outsiders; therefore, such ownership is private-common: common to all co-owners and private to their union. Providing the theoretical basis of the concept outlined here is an important contribution of Buchanan’s theory.
To use resources collectively (when it is beneficial), individuals form groups, communities and societies; that is, they establish organisations. Organisations are based on institutions. In other words, institutions exist so that people can organise themselves to share resources. In fact, institutions would not exist if there were no joint/collective/common ownership; thus, private-common ownership is at the core of institutions. If all resources were individual property, then people would need only one institution – the market. The market is the institution that ensures the coordination of individuals’ actions when the resources are privately owned. It is the institution with the minimum possible structure and the lowest possible degree of centralization. In contrast, the management of all collectively owned resources (i.e. the bulk of all resources) requires more or less centralised institutions and organisations based on central management and central planning.
Since the structure of the organisations is collective, each organisation has at least two levels: the low (internal) level of individual participants and the high (common) level of the union. This clarifies the relationship between institutions/organisations, central planning, and the market. Within a given group or community, relations between participants cannot be regulated by the market mechanism. At the institutional level, however, property rights are merged (consolidated), ownership is converted to private and thus organisations as private owners participate at the relevant market level. Therefore, the relationship between planning and the market is based on the transformation of collective planning at the internal level into market relations at the level of organisations. The relationship between ‘internal’ central planning and the market ensures that the collective entity will survive only if its internal institutional organisation is good enough to provide sufficient competitive advantages at the higher level. Furthermore, since it is possible for an organisation (that has at least two levels) to be a participant in another organisation (that also has at least two levels), the structure of organisations and institutions is, in principle, multi-layered. Thus, Buchanan’s theory helps explain the complex nature of ownership, which depends on the complex nature of the institutions, and it illuminates the multi-layered interaction between planning and market in the multi-layered structure of institutions and society.
