Property Rights Are Already Virtual

The first kind of rights are the prerequisites for true consent. The inalienable rights of the Declarationof Independence—life, liberty, and the pursuit of happiness—fit into this category. They are the necessary starting points for a moral society in which voluntary exchange and associations can occur. Borrowing from contract law, we can see that without these basic rights, a person cannot be said to freely consent to further obligations. For instance, life and liberty are essential, because contracts agreed to under duress, such as at the point of a gun, are morally unacceptable (Fried 1981). Likewise, a contract offer in which all other alternatives have been coercively eliminated would not be fair to the recipient. An offer in which the recipient is prevented from accessing outside information wouldn’t be fully consensual, as the recipient would likely be missing important information about the deal. (It’s not an accident that authoritarian governments often violate these basic rights—if citizens are able to make a free, informed decision, they might choose to leave.) Because these basic rights are discoveries of moral philosophy and not dictates of authority figures, they can be used to evaluate (and possibly reject) authority figures and governments. ¹

The second kind of rights are unfortunately often confused with the first, but they are quite different. Without society, “in the world of Robinson Crusoe”, these rights would have no purpose (Demsetz 1967). Whereas the first kind of rights are the necessary conditions for true consent, these other types of rights are ideally the product of the consensual agreements themselves. ² Their power to bind is solely based on the power originally granted to them by the individual. These rights are the product of “club rules” that must be agreed to in order to join a community, and we can imagine many different kinds of rules and organizational structures that would be morally unobjectionable, even if they are functionally different.

Property rights are a primary example of these societally-​defined rights. According to Demsetz’ classic paper, “Property rights are an instrument of society and derive their significance from the fact that they help a man form those expectations which he can reasonably hold in his dealings with others. These expectations find expression in the laws, customs, and mores of a society. An owner of property rights possesses the consent of fellowmen to allow him to act in particular ways. An owner expects the community to prevent others from interfering with his actions, provided that these actions are not prohibited in the specifications of his rights” (1967). In other words, a property right obligates the other members of a society to respect certain rules.

The assignment of property rights at the outset is largely morally arbitrary. Take, for instance, the allocation of property rights between cattle ranchers and farmers. Should the cattle rancher be able to let his cattle roam free and the farmers be required to fence their land, or should the cattle ranchers be required to corral their cattle? Either rule would work, but it is important that the rules are clear enough to allow individuals to form expectations for how their neighbors will act, and what the community will enforce. Furthermore, once individuals have relied on the rules, such as buying land for a specific purpose, sudden changes to the rules are akin to a breach of contract, and the individuals should be compensated.

Socially-​defined rights such as property rights are virtual by nature. As Jeremy Bentham stated, “there is no image, no picture, no visible lineament, which can portray the relation that constitutes ‘property.’ It belongs not to physics, but to metaphysics; it is altogether a conception of the mind” (1914). Peruvian economist Hernando de Soto echoes this sentiment in his book The Mystery of Capital, saying that “property is pure concept.”

“The proof that property is pure concept,” says de Soto, “comes when a house changes hands; nothing physically changes. Looking at a house will not tell you who owns it. A house that is yours today looks exactly as it did yesterday when it was mine. It looks the same whether I own it, rent it, or sell it to you. Property is not the house itself but an economic concept about the house, embodied in a legal representation. This means that a formal property representation is something separate from the asset it represents” (2000, 48).

If property only exists in “the conceptual universe where capital lives” (de Soto 2000, 48), then how do we know who actually owns what? We have a number of different mechanisms: for many everyday items, such as books, possessing an object is the only indication of ownership—there’s no national book registry that tracks book ownership and transfer. For other items, we might use deeds—formal documents that can be used as evidence of ownership. Or ownership might be recorded by an authority in a centralized database, such as in a land registry.

Property rights are about much more than ownership of an object; they are rules about usage and access. For instance, an owner of a parcel might sell off the mineral rights (the right to access and remove certain resources, such as oil) while still maintaining ownership of the land. An apartment owner might rent out their apartment and give up their right to enter and use the apartment for a period of time. Therefore, property rights are not just about recording titles; they require us to record who has been granted access or usage and in what ways. New socially-​defined rights can be split off from other rights as new usages and demands are discovered. Additionally, rights can be recombined into new bundles, such as when a developer assembles multiple pieces of land in order to build a shopping center. “When a transaction is concluded in the marketplace,” says Demetz, “two bundles of property rights are exchanged. A bundle of rights often attaches to a physical commodity or service, but it is the value of the rights that determines the value of what is exchanged” (1967).

At least three things are necessary for creating a usable system of property rights: 1) some way of creating socially-​defined rules that are clear enough for everyone to understand and consistent enough for everyone to depend on, 2) some way to record those rules and who owns which rights, so that we can check to see if they are being used as promised, and 3) some way of enforcing the rules.

The rules that make up the property rights must match the actions taken in real life. It makes no sense to have a formal set of rules if they are ignored by the people in the community. As de Soto put it, “the law must be compatible with how people actually arrange their lives. The way that the law stays alive is by keeping in touch with social contracts pieced together among real people on the ground” (de Soto 112). However, there is a natural tension between local customs and formal standards: a environment with pockets of wildly different rule sets will be hard to understand and navigate, whereas formal standards that can be easily understood might not capture the nuances of the community rules.

In practice, the legal system often fails to capture local customs, and so billions of people live outside the law. De Soto estimates that there are “five billion or so global citizens who are not tied to [a] traditional property reporting system.” In The Mystery of Capital, he argues that the lack of formal property representation is responsible for limiting the growth of the developing world. The citizens of developing countries have access to significant resources (worth an estimated $9.3 trillion according to de Soto) but because they lack the title to their assets, the assets cannot be used as capital. For instance, a family may own a house according to their local community, but because the family lacks the legal title to their land, they cannot use their house as collateral to obtain a loan. This makes it difficult to perform many of the actions that we take for granted, such as making “profitable contracts with strangers,” and getting “credit, insurance, or utilities services” (2000, 55).

How can we extend the availability of property rights to the rest of the world? Can technology help? De Soto makes it clear that computerized mapping systems, while helpful, are not the key requirement. “Property creation programs will continue to fail,” he says, “as long as governments think that creating property requires only getting acquainted with physical things—that once they have photographed, surveyed, measured, and computerized the inventories of their physical assets, they have all the information required to issue property titles. They do not. Photographs and inventories only inform authorities of the physical state of the assets; they say nothing about who really owns those assets or how people have organized the rights that govern them. All the photographs and computer inventories in the world cannot tell anyone what local rules enforce these rights or what network of relationships sustains them. As important as maps and inventories are to measure and location the physical assets to which property is anchored, they do not tell governments how to build the national social contract that will enable them to create widespread legal property” (2000, 214).

It’s interesting then, that de Soto’s current project is to record property title using blockchain technology. He recently joined forces with Overstock founder Patrick Byrne, in an effort to “enable the poor to safely unlock the value of their land; help to mollify disputes by clearly stating who claims what property; and empower local land ownership.” The details are currently unavailable, but this raises an important question—what makes using a blockchain different than just using a government database? After all, de Soto had clearly stated that computerization alone wasn’t going to solve the problem. Is there something more to blockchain technology than simply digitizing records?

There is. Blockchains can allow for the secure transfer of title without the use of a central authority. Imagine the process of selling property normally—various intermediaries may be used, such as title companies, to take on the project of ensuring that the property is legitimate and the asserted owner is the actual owner. On a blockchain, however, the transfer of property title can occur without an intermediary, in a completely decentralized fashion, with the use of simple smart contracts. No government employee needs to store and update the data, and ownership of the digitally represented title can be easily verified with digital signatures. ³

In part two, I’ll explore the idea of using smart contracts for the transfer of property title, as well as whether we can use code to enforce property rights themselves. I’ll rely heavily on a paper by Mark S. Miller and Marc Stiegler: “Digital Path: Smart Contracts and the Third World.” Writing in 2004, well before Bitcoin, Miller and Stiegler explain that code running on a trusted machine could provide secure transfers of digitally-​issued money and digitally-​issued assets. To be sure, this path will not be easy or obvious—as Miller and Stiegler put it, “The digital path is untrod and mostly unknown, and subject to the blind spots of wishful thinking.”