The Theories of Institutional Design and the Political Institution of Private Property Study Notes

Theories of Institutional Design: Context and Scope

• General Series Overview: The series, edited by Robert E. Goodin of the Research School of Social Sciences, Australian National University, focuses on the rediscovery of institutions by social scientists. It explores how institutions shape individual interaction patterns and produce social phenomena, while also examining how institutions emerge from these interactions.
• Normative and Pragmatic Focus: The series asks what makes one set of institutions better than another and how society can pragmatically transition from less desirable to more desirable (revitalized) institutional structures.
• Interdisciplinary Methodology: The approach is explicitly multidisciplinary, involving sociological questions regarding legal institutions, legal questions regarding economic institutions, and socio-economic-legal perspectives on political institutions.
• Advisory Editors: The series includes contributions from Brian Barry, Russell Hardin, Carole Pateman, Barry Weingast, Stephen Elkin, Claus Offe, and Susan Rose-Ackerman.

The Political Institution of Private Property: Core Thesis

• Subject Matter: The focus is the political institution of private property and related individual rights, as authored by Itai Sened (Tel Aviv University and Washington University in St. Louis).
• Fundamental Claims:
  1. Political Origin: Property rights and individual rights originate in political institutions that grant and enforce them, rather than in nature or moral principles.
  2. Political Process: Property rights are instituted through political processes and struggles, not hidden market forces.
• Definition of the Institution: Property rights result from the political struggle of individuals seeking to improve their well-being. They emerge from complex interactions between government officials (who hold a monopoly on force and legislative control) and free agents seeking to adapt institutional structures to their needs.
• The Evolutionary Path: The book explains how the strategic choices of rational actors yield structures that define, grant, and protect property and other rights.

Analytical Framework: Rational Choice Theory

• Methodological Individualism: Institutions protecting property and individual rights are political outcomes resulting from the choices made by rational individual agents within society.
• Purposeful Action: Rational agents possess specific goals and act to achieve them based on their physical environment and their expectations of how other agents will behave given the circumstances.
• Ontology vs. Positive Theory: The book challenges traditional liberal theories that rely on unwarranted ontological and behavioral claims about human nature. It distinguishes between a positive theory (how rights emerge and evolve) and a normative evaluation (judging the outcomes of that process).

Definitions and Categorizations of Individual Rights

• Individual Rights: Defined as whatever is necessary to provide a right-holder with an effective level of control over the content of a right. Control is deemed effective to the extent that duty-bearers tend to respect the claims of right-holders within a social system.
• Directional Relations (Hohfeld-Sumner Framework):
  • First-Order Relations: These require duty-bearers to respect the claims of right-holders over the content (e.g., property, freedom).
  • Second-Order Relations: These relate to power and immunity.
    • Power: The ability of an agent to change first-order relations (e.g., a legislature changing the law).
    • Immunity: Protection from having first-order relations altered (e.g., US citizens possess immunity regarding freedom of speech via the First Amendment).
• Distinction from Institutions: Rights are distinct from the institutions that protect them. Rights depend on central enforcement agencies with a monopoly over force (tribal leaders or magicians in primitive societies; central governments in modern ones) to survive.

Critique of Traditional Social Contract Theories

• The Positive Question: Traditional philosophy focuses on why rights should exist (normative); Sened focus is on why they do exist (positive).
• John Locke and Natural Rights:
  • Premise: Locke identifies rights as "natural" entities that governments are instituted to guard objectively. Scarcity causes bias, necessitating a government to provide unbiased judgment.
  • Critique: Sened argues that rights exist only if respected by duty-bearers, which typically requires law enforcement. Bentham famously criticized the concept of "natural rights" as a contradiction in terms.
  • Ontological Failure: Locke uses divine authority or "self-evident" claims to define rights, which Sened argues is meaningless by modern analytical standards.
• Thomas Hobbes and Rational Safety:
  • The State of Nature: Characterized by a "war of all against all" where humans, in their search for material gain and safety, pose a threat to one another.
  • The Leviathan: Rational agents realize they are in a state of misery and form a social contract, trusting an absolute sovereign for defense.
  • Critique: Hobbes assumes a benevolent sovereign but fails to explain the motivation for the sovereign to protect rights given their monopoly on force. Furthermore, the emergence from nature into a contract is not an equilibrium behavior in the Prisoners' Dilemma.

David Hume and the Role of Conventions

• Artifice over Nature: Hume argues rights are derived from artifice (convention) rather than nature. He views the instability of possession and scarcity as the primary impediments to society.
• Convention as Resolution: Order arises when common interest is mutually expressed and known, becoming a rule. Experience of the "inconveniences of transgressing" the rule gives it force.
• Fragility of Cooperation: Hume recognized that in large societies, voluntary cooperation fails because humans are selfish and prefer "present values" to "remote rewards." This necessitates governments.
• The Magistrate Puzzle: Hume correctly notes that most governments are founded on usurpation or conquest, yet concludes that civil magistrates will execute justice because they are "satisfied with their present condition." Sened identifies this as a failure to explain why magistrates become faithful guardians of rights.

Jean-Jacques Rousseau and the Decline of Liberalism

• The State of Nature: Unlike Hobbes, Rousseau viewed the natural state as one of grace and freedom. Violence is not natural; it results from culture, passions, and the unequal division of possessions.
• Social Evolution: Society formed through natural catastrophes that forced humans to unite. The first stage of inequality arose from men protecting women and children in harsh environments.
• The General Will: Rousseau proposed total submission to the "General Will," which he distinguished from the "Will of All" (selfish interests). Sened argues this sacrifice of individual autonomy led toward totalitarian democracy as characterized by Talmon ($1955$).

English Utilitarianism and J.S. Mill

• The Principle of Utility: Originating from Bentham and Mill, suggesting performative acts that bring the most happiness to the greatest number.
• The Demarcation Principle: Found in Mill's On Liberty, stating coercion is only justified to prevent violation of obligations to others. This focuses on what governments must not do.
• The Theoretical Gap: Mill and later American liberals (Thoreau, Dewey) defended individual autonomy but failed to incorporate this into a comprehensive theory of government, leaving a void in the design of institutions.

A Positive Origin of Social Contracts

• Government as Rational Entrepreneur: Government officials do not protect rights out of duty; they protect them to gain political and economic support necessary to stay in power. They are rational entrepreneurs trading law and order for tax revenue and support.
• Bargained Agreements: Social contracts are bargained agreements. Citizens petition for rights, and governments grant them if the price (support/productivity) is right.
• Case Example: The US Constitution ($1787$):
  • Fifty-five individuals, not "the people," wrote the document.
  • The Bill of Rights was not a priority; it was rejected by a vote of $10$ to $0$ ($1$ state absent).
  • It was eventually added as a "tactic" by Federalists to secure support from state conventions (e.g., Massachusetts, Virginia, New York). Only $3$ of the $9$ promised rights (the $1\text{st}$, $6\text{th}$, and probably $8\text{th}$) were actually included.

Critique of Neo-Classical Economic Theories

• Coase Theorem ($1960$): Demonstrates that if property rights are well-defined and there are no transaction costs, production efficiency is unaffected by the initial distribution of rights.
• Common Economic Flaws:
  1. Neglect of Politics: Neo-classical economists focus on the price mechanism but ignore "coordination through authority" (law enforcement).
  2. Performance vs. Structure: Following the work of Douglass C. North ($1981$, $1990$), Sened distinguishes between economic performance (profits, input mix) and the political structure (institutions, ideology). Economists wrongly assume performance dictates structure.
• The Hidden and Visible Hands: Free markets cannot exist without central law enforcement. The "hidden hand" of the market requires the "visible hand" of government as an ally.

Publication Data and Acknowledgments

• Copyright: Cambridge University Press ($1997$). Publication locations include Cambridge ($CB2\,1RP$ and $CB2\,2RU$), New York ($40$ West $20\text{th}$ Street), and Melbourne ($10$ Stamford Road).
• Library Information: Library of Congress Cataloguing in Publication data: $JC605.S46\,1997$. Dewey Decimal classification: $323.4'6\,dc20$. ISBN: $0\,521\,57247\,9$.
• Typestyle: Minion $10.5/12pt$.
• Dedications: Dedicated to Yoav Sened ($1952-73$) and William H. Riker ($1921-93$).
• Acknowledgments: Recognition given to historical researchers (Steve Lewis), colleagues at Washington University (Lee Benham, Douglass C. North, Norman Schofield, Jack Knight, Barry Ames, Lee Epstein, etc.), and colleagues at Tel Aviv University (Avi Ben-Tzvi, Gad Barzilai, Gideon and Becki Doron, etc.).