Sand Castles and Property Rights

To understand property rights, we need only imagine children at a public beach, what they do, and how they might interact with each other. If a child were to simply scratch a line in the sand around an acre of beach, and claim that it is his, the other children would probably ignore his claim - and rightfully so. A person doesn't gain the right to something just by drawing a line around it, despite the fact that this is how some countries have been created or expanded in the past.

On the other hand, what if a child spends an hour carefully constructing an intricate sand castle? If we were to observe this, we would naturally feel that the creation was his, at least for the afternoon. In fact, it would seem unfair if other children were to destroy it or try to claim it as their own. The indignation we would feel at seeing others attack the child's sand castle comes from our most basic sense of property. We gain ownership in something by working to create value using materials available to us. The sand is there for all the children to play with, but once something creative is done with some of it the creator has a right to enjoy his creation.

The limitations of property rights is also shown in this example. After all, it is a public beach that is there for all to enjoy, and the sand castle is only a temporary creation. We might argue about exactly how long the child can rightfully claim his castle, but we would probably all agree that it is wrong for others to take control of it while he was working on it, and also wrong for the builder to keep others off of the remaining pile of sand that might be there a week later.

Homesteading, Radio Frequencies, and Patents

Property rights have to be understood in the context of how and why they exist. Early in the history of this country, the U.S. government had laws allowing people to "homestead" 40 or 80 acres of land that was otherwise unused (for now we'll pass over the issue of the use of some of the land by nomadic tribes). The law stipulated, though, that something had to be done with the land. No drawing of lines made a person the owner. Fencing it and grazing cattle, or farming it, or mining it - creating something of value - is what created the property right. If a person did not improve the land within a specified period of time, they no longer had title to it.

Property rights in other areas are more subtle, but the basis is the same. The first station to pioneer the use of 99.7 on the FM radio spectrum - in a given area - gained a right to control that frequency. Government then defended that right against any other people who tried to broadcast on the same frequency in order to steal the market of listeners that the original developer had created.

Notice how this example demonstrates the potential complexity of property rights. Radio waves pass through airspace that we all use, for example, and over the land that others own. But this is not a problem when we understand that ownership is a function of use, and landowners are generally not using the airspace above their land for broadcasting radio signals. Their rights have to do with how the land is used. In fact, in many areas that means land owners don't even own the oil or minerals beneath their land, since this is another property right that can be separated and sold off - if it was even included in the original purchase.

Patents give a person a property right in an expression of an idea. You can't patent an idea, but only the expression of that idea in physical form. Thus, anyone can dream up ideas for radios, boats that fly, and new cleaning solvents, but those who actually design such things and create prototypes have the right to keep others from copying their designs for a certain number of years. This kind of property right is unique in that, unlike with a piece of land or other specific physical things, this right is limited in time.

This is an important area of property rights to understand, because it demonstrates one of the fundamental bases for property rights - that of social utility. We don't want patents to be forever, because that would limit the usefulness of a new idea/product. A limited-time exclusive right allows incentive for an inventor, who can profit greatly from this temporary protection. This incentive stimulates creative production of things that are of real value.

For example, what drug company could invest 50 million dollars to develop a new drug if after all their research expenses, every other drug company could replicate it and undercut their price, having spent nothing to develop it? As a society we usually want to encourage invention and creativity in general, because it ultimately benefits us all. That new drug might save a hundred thousand lives. It would be a shame if nobody made the effort to do the research and create it, simply because they were not allowed to recover the costs - and make a profit - by way of their temporary monopoly.

Of course, we also can see that only so much "monopoly time" is needed to provide that motivation. To extend it too far - or forever - eliminates the ability of others to copy the drug and sell it at a lower price. Eventual competition clearly benefits the majority of us - at least those of us who do not own the company which created the drug in the first place.

The time constraint also prevents a company from not actually producing something. Once their time is up, others can use their ideas. Imagine if this were not true. Imagine if a drug company discovered/created a drug that could cure cancer, but because it would destroy the market for their current drugs that treat cancer (and are very profitable), they withhold the new drug. With the current limitations on patent rights this problem is automatically resolved in time.

The laws in many countries also require the patent holder to actually market the product within a certain amount of time. This makes sense. If there is no intention to use the patented product or process, others should be allowed to do so.

This general approach to patent law - limiting the time of exclusive right and requiring development - makes for very creative societies. A person is assured that if she invents something new and useful, she can profit from it for a while before everyone is free to take the design and use it. At the same time, it assures the public that more good than harm is done.

Imagine again if there was no requirement to produce and market the product. Suppose another drug company invented the same drug to cure cancer a year later than the first. Under the current system, we get the cure, because the first company will not likely risk losing its exclusive right by withholding the drug. Without this provision, and without the limited time granted, they could withhold what might have cured all the cancers of the world, and do so forever, simply because they thought of the idea first.

If the idea of a useful or even life-saving new product being withheld from the public seems offensive to us, then we must accept the idea of social utility being one of the bases for the way we define property rights.

The indignation we feel when seeing a child's sand castle destroyed suggests a sense of ownership through work and creation that we all share, and so is one basis for property rights. The indignation we would feel if wonderful and even life-saving inventions were locked unused because the "owner" doesn't want the world to have them suggests that social utility is another basis for property rights, or at least for how we apply them.

Note: This discussion is continued here... A Definition of Property Rights.