EXTERNAL APPENDICES TO CHAPTER 11. Appendix 11.1: CHANGES IN THE PATTERNS OF PRIVATE OWNERSHIP

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1 11-1 EXTERNAL APPENDICES TO CHAPTER 11 Appendix 11.1: CHANGES IN THE PATTERNS OF PRIVATE OWNERSHIP A. Mutations in e Meaning of Property and Contract What can people do wi e property ey own? One type of property consists of a bundle of specific rights defined in a deed, but property law can modify e degree to which such rights are absolute or constrained. This bundle of rights defines what we mean by ownership. Anoer type of property consists of valuable rights at are defined in contracts, but ese are constrained by contract law. The legal constraints on property and contract are part of e institutional structure of e economic system and have 1 an important impact on how e economy operates. In e field of property law in e second half of e 20 century, individual ownership rights appear to have strengened at e expense of e ability of e government to make public interest decisions about land use for zoning, environmental, recreational, or oer purposes. For instance, attempts to require compensation by e government for losses in private property value in zoning decision will lead to less governmental action in is sphere. In a parallel fashion, increasingly successful attempts to narrow e application of e commerce clause in e U.S. Constitution has began to reduce governmental actions to regulate various activities in e economy. To look at is change from anoer angle, e scales of justice balancing private property and public interest began to tilt more toward e former, which, in turn, has an impact on e way economic activities are carried out by bo e public and private sectors, not to mention on e distribution of income and weal, since much more property is held by ose on e upper part of 1 This brief discussion on property and contract law draws heavily on e analyses of Guner and Sullivan (1997), especially pp and Atiyah (1979).

2 11-2 e income distribution. In e field of contract law in e second half of e 20 century, somewhat different trends emerged. The golden age of freedom of contract was from 1770 to Thereafter, regulation and administrative laws began to limit free contracts in many areas of economic activity. Furer, to protect various parties to contracts, contract law began taking into account ird-party effects, imperfect information, market breakdowns, monopoly, and assymetries in power. As a result, U.S. courts increasingly recognized e importance of reasonable expectations over e literal terms of contract and e sanctity of unjust contracts was correspondingly weakened. This trend, combined wi changes in liability law, has had an important effect on transaction costs, at is, e costs of making and enforcing e agreements underlying an economic transaction. It also contributed to e rise of e adversarial legalism of e U.S. regulatory system, which is discussed in Chapter 11. The impacts of such changes on e operation of e entire economy are, however, often difficult to specify. 2 Unfortunately, in trying to foresee what will happen over e course of e coming decades, we run into e limits of responsible prediction. Much depends on e composition of e Supreme Court and on e political climate of e nation, matters at are notoriously difficulty to anticipate. 2 An example of e analytic difficulties in linking e legal structure to economic results can be seen in e labor market, where U.S. employer s have lost e right to fire at will, and certain employees rights to a particular job have been created (a trend analyzed by Olson, 1997). This legal development has gone much furer in Europe. Many argue at e restrictive labor laws on e continent have created labor market rigidities, which, in turn, have been important causes of eir high unemployment rates since e mid 1980s. This proposition is not, however, self-evident, and Stephen Nickell (1997) has provided some interesting data to refute it.

3 11-3 B. Trends in e Non-Profit Sector In addition to data on public ownership, Panel B in Table A11.2 also shows e share of GDP originating from e non-profit sector. Following e analysis of Chapter 7, I divide is sector into two parts: membership organizations, which include clubs, unions, trade organizations, and oer organizations serving primarily e purposes of eir members; and oer non-profit organizations, which include bo trust and social organizations. The share of GDP originating in e membership organizations did not greatly change over e period. The rising share of GDP originating in oer non-profits reflects e fact at heal, education, and welfare services increased faster an most oer sectors, and non-profit organizations played a major part in e production of ese sectors. As a share of e GDP, e U.S. appears to have e largest non-profit sector of any major industrial nation (Salamon and Anheier, 1996), primarily because in oer nations many of e same services supplied by ese organizations are carried out by e government. In e private sector, as shown in Table X-11.1, e share of fixed, reproducible, tangible weal held by non-profit organizations increased slightly, while e share held by cooperatives - at least ose at are tax exempt - was very small and declining. One last aspect of e non-profit sector deserves brief comment. In certain respects e operations of e non-profit sector resemble ose of e private sector. For example, executive compensation in ese charitable organizations, especially e largest, are roughly commensurate wi ose in e private sector: The president of e non-profit pension fund for teachers (TIAA) received over a million dollars a year. In oer respects e operations of non-profits resemble ose of government. For instance, ere are few major differences in e operations of non-profit, for-profit, and local governmental hospitals, just as ere

4 11-4 Table X-11.1: Trends in e Size of Non-Profit and Cooperative Sectors, Weal Indicators Private, Fixed, Reproducible, Tangible, Non-Residential Weal, Excluding Consumer Durables Held directly Held directly Held directly Held directly Total by corporations by persons, by non-profit by tax-exempt sole proprie- organizations cooperatives tors, and partnerships 1950s 76.2% 16.3% 6.7% 0.8% 100.0% 1960s s s Note: The data come from a CD of U.S. Department of Commerce, Bureau of Economic Analysis, April 1999: Fixed, Reproducible, Tangible Weal of e United States, Washington, D.C.: Table Tw4a.

5 11-5 is few major difference between e operations of private and public universities. Since a growing share of e revenues of e non-profit sector comes from e public sector, e non-profit sector increasingly appears to serve simply as an arm of government at is administratively more flexible. C. A Final Note As I argue at leng in Chapter 11, e really important change in ownership is e socialization of capital. The data on is phenomenon are presented in Table 11.4 in e text and furer discussion here is unnecessary. BIBLIOGRAPHY FOR EXTERNAL APPENDICES TO CHAPTER 11 Atiyah, P. S The Rise and Fall of Freedom of Contract. Oxford: Clarendon Press. Guner, Gerald, and Kaleen M. Sullivan Constitutional Law, 13 edition. Westbury, New York: The Foundation Press. Nickell, Stephen Unemployment, and Labor Market Rigidities: Europe versus Nor America. The Journal of Economic Perspectives, 11, no. 3 (Summer), Olson, Walter K The Excuse Factor: How Employment Law is Paralyzing e American Workplace. New York: Free Press. Salamon, Lester M., and Helmut K. Anheier The Emerging Non-Profit Sector: An Overview. New York: Manchester University Press.