private property

Beirut, August 14, 2003

The Peruvian economist Hernando de Soto has recently attracted attention by proposing for the third world a form of popular capitalism based on granting full property to the many forms of de facto property, such as extra-legal small businesses and property owned by the poor in shanty towns. In many third world countries, private property is a well known legal and economic category, protected by law, and has been so for probably centuries. But what gives private property, however, an edge in the western industrialized countries, is that its implementation—or its practice—is fully protected by the state institutions (the judiciary and police in particular), which in itself comes with a financial cost, and hand-in-hand with an individualistic philosophy that takes for granted that private property is a precondition of good citizenship. The point here is that in western societies private property is not simply a legal category that exists for the sake of protecting family and individual assets, but a means for individuals to invest into property based on individual choices of their own. The whole point is therefore that ability to make individual choices, which means that the legalization of private property and its protection, even though beneficial, are not enough to render property a truly economic engine of investment and capital circulation in modern capitalism. Historians have thus typically laid out arguments for the existence of private property in many non-western and non-capitalist societies, and have also argued for its distribution among the upper and lower classes of society, not to mention a fairly equitable gender, ethnic, and regional distribution. But all such factors prove insufficient if the process of decision making in acquiring, leasing and selling property is in the hands of few individuals who typically “represent” family interests and the like, and if the distribution of assets remains very uneven among classes, ethnicities, and regions.

Take for example the case of Arab and Islamic societies. The category of private property is historically well documented and is known as milk. In the early middle ages grew a parallel form of quasi-private property known as waqf, or public and private endowments whose properties were, at the request of the benefactor, blocked from circulation for perpetuity, which de facto transformed them into mortmain properties that were nontransferable and nonsalable. If milk as private property still persists, and has flourished since the demise of the Ottomans, private waqfs have been abolished in the 1940s and 1950s (the 1920s for Turkey) by the majority of the postcolonial states. Historians have typically, if not blindly, endorsed the view that private property did and does exist in Islamic societies, and that in conjunction with the waqfs it helped in consolidating family assets and in their devolution across generational lines. The problem, however, is that such views are pretty much conservative, and remain blind to the fact that in such situations decision making remains in the hands of the benefactors, and that the beneficiaries and heirs seldom have the opportunity to make their own investments (even though nothing prevents them from doing so legally), and hence to benefit individually from the properties that they legally own, but which in practice have not much control of. Such a handicap comes in parallel to another major one, which the Peruvian economist addressed so well in his plea to routinize private property: namely, that the bulk property ownership is de facto rather than de jure, and that most people “own” or “possess” something, but do not possess the legal means to dispose of those properties, i.e. to lease or sell them legally.

The de facto ownership of property notwithstanding, it does not, however, constitute all by itself the major handicap to the full promulgation of private property rights (hence capitalism) in the third world. In other words, it is not enough to provide full property rights to de facto possessors of agrarian lands and poor inhabitants of slums in large cities, as the problem goes much deeper than that. In my view, the main hindrance to individualized and privatized property in most of the third world is precisely the lack of individual decision making. In effect, even if private property does exist as a legal category, and its distribution seems fairly widespread along generational and gender lines, decision making remains in the hands of few family members. The real problem consists in having all kinds of individuals who have properties registered under their own name—and thus legally “own” those properties—while in reality they seldom share in any decision-making process. What is paradoxical is that many individuals in third world countries from middle class families have properties under their names from an early age, yet they rarely consider that such properties are effectively their “own.” Such individuals, besides having properties that they own at an early age (sometimes prior to the age of maturity), might not be even aware of what they precisely “own,” or that they are plaintiffs or defendants in court cases (their “representatives” take the freedom to initiate lawsuits on their behalf). This might seem strange, but once we understand that in such circumstances decision making remains centralized within the family, the marginalized role of individuals becomes more obvious. The real secret is therefore this: ownership is indeed divided among family members, whether equally or unequally, but the effective ownership is to the family at large, which de facto centralizes all decision making in the hands of one or few persons who “represent” the whole.

We are therefore faced with at least two interrelated problems. First, how properties are divided, and also when are they divided: Do most distributions take place at the moment of the inheritance, or do they precede the death of the benefactor? Second, whether the distribution of the assets takes place before or after the inheritance, do the beneficiaries-proprietors have full control over their properties? Finally, are there investment opportunities that would allow the beneficiaries-proprietors to invest in assets other than landed properties and the like?

Let us consider once more Islamic societies. The great divide, which was very visible in Ottoman times, between public state-owned property (miri), private property (milk), and mortmain endowments (waqfs), vanishes as soon as we begin an examination of the sharia court records. Once we examine such documents in light of the fiqh’s furu‘ (the various branches of the law, often referred to as “positive law”) and the legal subterfuges (hiyal) that were either implicitly or explicitly permitted, it becomes fairly obvious that individuals and families did not solely rely on waqfs to insure the “integrity” of the family’s assets. In effect, procedural fictions were quite widespread until the end of the empire, and “disputants” used a variety of such procedures in order to redistribute their properties in ways that befitted them best. Because procedural fictions were not limited to waqfs, disputants used both miri and milk properties for their own benefits. Hence all land categories were equally manipulated while establishing a pattern of devolution of familial property along generational lines. In sum, whether the property was milk, waqf, or miri, one should look at how such properties were distributed and devolved, rather than simply emphasize differences among the three types of properties.

There were—and still are—several reasons as to why benefactors opted for legal procedures in their midlife to begin a distribution of their assets among beneficiaries (or potential ones). Limitations imposed both by Islamic law and fear of having large properties confiscated by the state, pushed benefactors towards a distribution of their assets rather early in their careers. Those benefactors, however, kept decision making in their own hands, and in case they delegated any authority, it was usually to a son or daughter that they saw as perfectly mature (rashid) for such a task. The point that is of interest for our purposes can be summarized as follows: Historical evidence shows that in Islamic societies beneficiaries had their share of their benefactors’ assets early on in their lifetime (at times even before the age of maturity); there is no evidence, however, that those beneficiaries had any share in the decision-making process. In sum, the properties were owned by many, but only a person or two decided.

The shortcomings of such a situation are pretty obvious—and they’re even more obvious today in an era when civil law has dominated in most Islamic societies, while the laws of contracts and obligations have little resemblance to their Islamic and Ottoman counterparts. The long standing practice, still common today, of leaving beneficiaries out of the decision-making process, as if their properties are de facto “owned” by the family has several disadvantages, and, I shall argue, weakens considerably economic prosperity and the freedom in the investment cycle. In effect, beneficiaries typically end up in one or more of the following situations: (i) they are ignorant of the estate’s problems and property distribution; (ii) they often have no knowledge of what they exactly own; (iii) they have no experience in managing assets on their own, to lease and sell properties, with all the legal procedures that might be necessary; (iv) they at times find themselves in a business very different from the one of the family, and hence do not find it worth their time and effort to track down the familial assets in order to figure out what they own; (v) the status of some properties is so complicated, and their management was left in such a bad shape, that most of the beneficiaries simply prefer to shun away—the survival of the fittest; (vi) there is a common situation when the beneficiaries are numerous: one or two among them tend to dominate and force the others (in particular the women married from outside the family) into settlements that are not very beneficial; they nonetheless willy-nilly opt for such mediocre settlements either for familial reasons, or else because they have no experience trading on their own, outside the traditional family circles; (vii) in sum, beneficiaries are so much used to being protected by their family networks, that they have little experience in managing properties on their own and without the consent of their family. The implication here is that such societies have inherited a culture that leaves little to individual incentives. When family waqfs were banned in the 1940s and 1950s, they were sold as private property by the waqf authorities, but few beneficiaries benefited directly from such sales for the simple reason that they had no knowledge of their share, what they exactly owned, the legal procedures, etc. As a result, the beneficiaries had few of their properties recuperated, and the bulk was incorporated into the assets of the awqaf ministries.

It is not true, however, that the family provides a better protective environment for property management. Besides the fact that the centralization of decisions and lack of personal incentive among family members, considerably damage a smooth management of property, internal family feuds and rivalries add to a deteriorating mismanagement. Families have a harder time than individuals in adapting to new economic conditions and techniques, and in making gradual or sudden managerial turns. In consequence, properties get “lost” to “outsiders” or confiscated by governmental agencies, as their beneficiaries were too tired to take legal action and recuperate their properties. The number of beneficiaries could grow to such a point, and, helped by migration and poor communication, their geographic locations become so dispersed, that a legal action to maintain a property would be exorbitant.

In sum, the problem boils down to this. Under civil law, which assumes at its best a liberal policy of exchange based on an individualistic ethos, the long-standing familial practices create more damage than good both for the individuals and families that own such properties and the economic situation at large. Family properties, even if grouped under several beneficiaries, are like dead capital. Their circulation is slow, and are kept for decades in a row without much change in their status. Perceived as a main source of investment in societies that lack safe assets, landed properties, in particular familial estates, circulate very little, while their proprietors, whose individual opinions seldom make an impact on their benefactors, shy from better investments. The value of the land is thus both symbolic and real. It is symbolic because the aura of the family is attached to it. But it’s also real because the value of the land is perceived to soar with time. It is therefore no accident to find familial estates that have been left out in their initial status and without much change for over half a century. If the low circulation of property implies a low circulation of capital, it mainly signals low investment opportunities, and a preference for low-risk situations.

Such situations are in fact not that new. Historians have long pointed out, albeit in a camouflaged way, that the nature of Islamic contracts only favors low-risk situations through quasi-simultaneous exchange; that partnership (mudaraba) is limited to an association between two or more partners, eluding the Roman notion of societas that looked upon partnership as a “society” bypassing individual interests; that the notion of “juristic person” did not develop, hence collective enterprises, including waqfs, trusts, and corporations, never fully matured in Islamic societies in a way that would have rendered the (abstract) institution more prominent than individual interests. In short, the shortcomings in the Islamic law of contracts are fairly obvious, and could be summed up in one word: abstraction. Beginning with the notion of property as a tangible object (‘ayn), the abstraction of property into other related functions (e.g. intellectual property) that could not be materialized never fully (or even partially) developed. Hence—and that’s the main point—the management of properties did not reach an abstract enough and institutional level that would have bypassed a benefactor’s (or administrator’s) individual interests (which are usually perceived in tandem with those of his beneficiaries). It also explains why stocks and equities are not a favored medium of investment to Muslim middle classes and the bourgeoisie.

The Arab and Islamic world presents us therefore with a case history where the deepening of private property would take more than what de Soto initially proposed for the third world at large, namely the official acknowledgment of de facto owned properties, such as extra-legal small businesses and property owned by the poor in shanty towns (or rural property “possessed” by peasants). The problem goes deeper at least two interrelated levels: (i) the predominance of the family as an institutional framework which under civil law does not favor a proper individualistic and efficient management; (ii) the lack of proper investments outside landed properties and the like. The existence of paternalistic bureaucratic types does not also favor investment, nor does it encourage a competitive spirit at the margins of family and bureaucracy.

If the third world at large seems full of opportunities regarding possibilities for expanding the uses of property, the industrial west does not share so many hidden assets of this kind. Property ownership for most people takes the form of home ownership and/or pension rights, whether in state or private schemes. The problem with both, however, is that they are not highly tradable, as people tend to keep their homes and need their pension plans for their retirements. The question for the core capitalist countries is therefore whether the benefits of property ownership could be spread to all their inhabitants rather than to rely on inheritance or the luck of draw alone. (Friedrich von Hayek believed that the advantages of unearned income were so great that if no other method existed, one in 100 people should be given substantial sums by lot.) In effect, property ownership tends to be far more concentrated than earned income, and unless all individuals are provided property ownership form birth on an equal basis, it is impossible to devise other methods that would simply redistribute property only through taxation or welfare policies. The western welfare states have in effect been primarily concerned in the last two centuries with a more equitable distribution of basic resources (education, health, and retirement) than with a fair distribution of property. The latter has been mainly addressed in Europe and north America through various taxation schemes (mainly an inheritance tax), but that’s obviously not enough. One should therefore imagine the possibility of an “asset-based welfare,” or the distribution of capital to all citizens from childhood rather than welfare in kind or social security payments (see Samuel Brittan, “Assets for all,” Prospects, August 2003).

It has been recently proposed that Iraq’s provisional council, or the first government to emerge, should opt for a policy of creating dividends for all from the oil production. Imagine for instance a situation where every Iraqi above the age of 18 would automatically receive $100 a month from the oil assets. In addition, children below 18 would have their dividends accumulated in bank accounts, and once they’ve reached the age of maturity they would be able to draw form them. Such policies would undeniably create a better wealth distribution, teach people to trade with assets at an early age, and provide more progressive incentives to accumulate assets. It is possible to plan something along similar lines for societies with fairly advanced capitalist cultures, and which by and large lack natural resources such as oil. A similar system of asset distribution could be devised form taxpayers money. For instance, every 18 year old could be allotted $10,000 worth of assets, etc.

Karl Marx foresaw the importance of private property under capitalism, but he was wrong in attributing to it the source of all kinds of dangers, hence his desire to abolish property altogether. It’s a better allocation of assets within a competitive ethos that is the future of a prosperous capitalism.

http://www.luc.edu/depts/history/ghazzal/ghazzal.htm