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Tuesday, November 15, 2011

Property Rights and Entrepreneurship

Without strong property rights protections, entrepreneurship, and economic development and growth will, at best, lag or stagnate, or at worst, risk taking and an economy will decline. And this goes for protecting both tangible or physical property, and intangible or intellectual property.

This has been the case throughout economic history.

In a February 2006 SBE Council report ("Innovation and Intellectual Property: The Economics and the History), I highlighted the following regarding the work of Nobel Prize-winning economist Douglass North: "In his Structure and Change in Economic History, Douglass C. North made the case that ‘the Industrial Revolution was an acceleration in the rate of innovation' due to ‘better specified property rights,' which raised ‘the rate of return on innovating.' He later went on to show and explain that "throughout man's past he has continually developed new techniques, but the pace has been slow and intermittent. The primary reason has been that the incentives for developing new techniques have occurred only sporadically. Typically, innovations could be copied at no cost by others and without any reward to the inventor or innovator. The failure to develop systematic property rights in innovation up until fairly modern times was a major source of the slow pace of technological change.' North added that ‘a systematic set of incentives to encourage technological change and raise the private rate of return on innovation closer to the social rate of return was established only with the patent system... More important than patent law per se is the development and enforcement of a body of impersonal law protecting and enforcing contracts in which property rights are specified.'"

The laws of economics have not changed in today's dynamic, digital, knowledge-driven economy. Therefore, the critical role of property rights has not been diminished in any sense. Indeed, it can be argued that they are even more important today. Indeed, when focused on the critical role of the entrepreneur in the twenty-first-century economy, the importance of property rights cannot be overstated.

Therefore, it is not surprising that the "Index of Economic Freedom," published annually by The Wall Street Journal and the Heritage Foundation, which ranks 183 nations based on ten areas, includes property rights as a key measure.

As explained in the study: "The ability to accumulate private property and wealth is understood to be a central motivating force for workers and investors in a market economy. The recognition of private property rights, with sufficient rule of law to protect them, is a vital feature of a fully functioning market economy. Secure property rights give citizens the confidence to undertake entrepreneurial activity, save their income, and make long-term plans because they know that their income, savings, and property (both real and intellectual) are safe from unfair expropriation or theft."

While the U.S. ranked ninth overall, it came in 17th among the 183 nations ranked on the 2011 index. On property rights, it's pointed out: "Property rights are guaranteed. Contracts are secure, and the judiciary is independent. A well-developed licensing system protects patents, trademarks, and copyrights. Government interventions in financial markets and the auto- motive sector have raised concerns about expropriation and violation of the contractual rights of shareholders and bondholders. The individual health insurance mandate passed by Congress in 2010 raised serious constitutional questions regarding whether government could require the spending of private funds."

Some room exists for improvement. That includes the rolling back of ObamaCare, and with it, the insurance mandate noted above. For good measure, the U.S., like most other nations, faces the challenge of protecting intellectual property in this era of online piracy.

But in the end, the U.S. has a solid system for protecting property rights - especially when compared to most other nations - and that keeps us as a global leader in terms of innovation and entrepreneurship.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.His new book is “Chuck” vs. the Business World: Business Tips on TV.

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