How heavy is a kilogram? That may seem an odd question: most of us know what it feels like to pick up something weighing a kilo, or for that matter a pound or stone. However, there is only one object in the world that officially weighs precisely one kilogram, and it sits in a guarded vault just outside Paris, France. The International Prototype Kilogram, a small cylinder of platinum and iridium made in 1889, is the object against which all scales in the world are calibrated.
The lump of metal is heavily guarded since many fear that if it were damaged or went missing, business around the globe would grind to a halt. A company buying a ton of steel from factories on the other side of the world could no longer be certain it was receiving the correct amount and not being short-changed through the use of inaccurately calibrated scales.
Setting standards The economy cannot function to the best of its capability without official standards, set down in law both nationally and around the world. Moreover, even the most ardent free marketers—who believe that just about every business out there, from central banks to power companies and road planners, should be privatized—accept that we still need governments to enforce legal and property rights. Without such laws the free market could not properly function and we would be left instead with anarchy—a danger that Adam Smith, the father of economics, pointed out back in the 18th century.
We need governments to enforce contracts between people and businesses and to set down standards that citizens should follow. People need to be secure in the knowledge that if they own something it will not be arbitrarily confiscated, and that cheating and stealing will not go unpunished.
Capitalism is highly reliant on trust. When a bank lends money to someone, its judgment over whether to hand out the cash is partly based on whether they trust that individual will be able to pay it back. Similarly, a country can afford to run up large amounts of debt provided international investors believe it will not default in the future.
One party in a transaction not only needs to trust the other party; it also needs to trust the structure that frames the transaction. Thus, a government’s paramount role is not providing social welfare, determining interest rates or redistributing wealth—it is enshrining a stable and fair system of property and other legal rights through which it can hold accountable those who break their laws.
One of the prime reasons Britain thrived throughout the years of the Industrial Revolution was because its legal system was regarded as highly dependable. This was in stark contrast to many of its European counterparts, where wars and disputes often threw property rights into question—to the extent that landowners could never be sure whether they really had full ownership of their property, and could not rely on the state to back them should they be wronged.
Intellectual property rights It is not just the rights to solid, visible property that need to be protected; ownership of invisible property such as ideas and artistic creations also requires protection. An inventor has little incentive to innovate if he knows that his invention will be seized from him—depriving him of any reward for his work—as soon as it is finished.
So, for an economy to function properly, governments have to ensure it has a stable system of patents and other intellectual property rights. Copyright, for example, protects writers for a set period of time against plagiarism.
Intellectual property rights have come under great scrutiny in recent years thanks to the rise of emerging economies such as China and India. In such countries, regulations and laws on intellectual property and common standards have proven hard to uphold. As a result, companies have been able to produce, for example, cheap and unlicensed versions of drugs based on the research and development of Western pharmacological companies. Although consumers initially welcomed such projects, there have subsequently been several scares over whether goods produced in these countries can be trusted. For instance, some counterfeit drugs produced in China have turned out to have no effect, or to be actually harmful.
File sharing The intellectual property debate has reached fever pitch in recent years, since modern technology has made it easy to spread intangible ideas very quickly. Within minutes of switching on your computer you can illicitly download an mp3 of a chart song or a recently released movie. The singer or cast get no cash, and you get your entertainment for free—so, bearing in mind the economic rule that there is no such thing as a free lunch, who actually pays for this?
The answer is that we all do—albeit indirectly. As artists receive less income, they have less incentive to produce further material; fewer people are drawn toward the industry, and eventually the quality of music and films in the marketplace deteriorates. Conventional economics would argue strongly that governments have a duty to ensure that such piracy happens as little as possible, though others claim that many artists are sufficiently well paid to stomach a little less in royalties.
Shantytown property rights
Are the poor really as poor as we think they are? Peruvian economist Hernando de Soto has argued that many of the world’s poorest families are so merely because they do not have legal rights to their property. A family may have lived in the same small shack in the favelas near Rio for years, but because only informal property and legal rights have been developed among the poor they are at the mercy of local criminals and vigilantes (who may attempt to steal or destroy their home) or the government (which may attempt to drive the shantytown dwellers elsewhere).
The solution, de Soto has argued, is to give these people legal rights to their properties. That way they will not only have an incentive to take more care of them, but will also be able to borrow cash by using their homes as a guarantee. He argues that the total value of homes owned by the poor in the developing world is more than 90 times the total foreign aid given to these countries in the past 30 years.
The tragedy of the commons Poor or insufficient property rights can greatly damage an economy. Granting people legal ownership rights frees them to invest more in their property, in the hope of adding to its value. You are far more likely to spend some cash and time painting your apartment if you own it, as opposed to merely squatting in it. The alternative scenario is the “tragedy of the commons”—a situation where people abuse a resource because they do not own it (see The invisible hand).
When Western economists visited the Soviet Union during communism they discovered that despite the country suffering major food crises, farmers would allow their fertile land to lie fallow, and crops to waste in the fields or warehouses. The problem was that under a communist system they had no direct property rights over their crops, and so far less incentive to work the fields harder and produce more food. Part of the reason that vast stretches of northern Africa are deserts is not merely because of climate or soil conditions—with some hard work and investment such areas could be returned to grassland. It is because the land is used by nomads and their herds, who have little incentive to look after the land as after a while they will move on. The result is often overgrazing.
Governments, then, must ensure not only that people respect their laws and contracts, but also that they put in place the right laws to ensure people contribute to a thriving economy. At the same time, they must ensure that certain inalienable standards—of weights, lengths and other measures—remain in place.
the condensed idea
The irreplaceable foundations of society
| timeline | |
|---|---|
| AD 529 | Byzantine Emperor Justinian lays down the foundations of modern civil law in his Corpus Juris Civilis |
| 1100–1200 | Common law system originates in medieval England |
| 1700–1800 | Commercial law starts to be written into national law systems |
| late 1900s | Creation of the European Union establishes new layer of law in Europe |