Formal Property Rights Required for Growth
False Assumption: A well-functioning system of formal legal property rights is necessary for significant commercial activity and economic take-off.
Written by FARAgent on February 09, 2026
In the mid-18th century, Adam Smith laid the groundwork for a enduring economic dogma during his 1755 lectures, positing that secure, formal property rights were the bedrock of commercial prosperity, a view that echoed through the works of later thinkers like Ronald Coase, Harold Demsetz, and Yoram Barzel. This assumption gained traction by extrapolating from the Anglo-American experience, where low-friction legal systems seemingly fueled industrial take-off, while command economies were dismissed as inherently stifling to trade. Economists, confident in this model, urged developing nations to adopt similar frameworks, assuming that without them, significant economic activity would remain elusive, much like expecting a symphony without sheet music.
Yet history, ever the cheeky contrarian, began to undermine this certainty. Latin American countries, dutifully implementing complex property rules, found themselves bogged down in bureaucratic quagmires that heightened transaction costs and stifled growth, while post-2008 recoveries in the EU and UK lagged behind the US, hinting at hidden frictions from over-formalized systems. Meanwhile, China's explosive rise under informal arrangements, as analyzed by scholars like Yingyi Qian, showcased bustling commerce without the full trappings of legal property rights, even as Xi Jinping's anti-corruption campaigns underscored the value of party discretion over rigid laws. These cases, alongside pre-communist historical evidence of thriving informal markets, exposed the hubris of assuming one-size-fits-all formality.
Today, growing evidence suggests this once-unquestioned belief may be flawed, with economists like Douglas Irwin highlighting how nuanced, informal mechanisms can drive economic take-off just as effectively. Increasingly recognized as an oversimplification, the assumption faces scrutiny for ignoring cultural and contextual variations, though the debate continues as experts weigh whether formal rights remain essential in certain settings or merely a convenient Anglo-centric myth.
People Involved
- In the mid-18th century, Adam Smith lectured at Glasgow University. He argued that peace, easy taxes, and tolerable justice were enough for prosperity. The rest would follow, he said. Governments often got in the way. [2]
- Centuries later, economists like Ronald Coase, Harold Demsetz, and Yoram Barzel built on similar ideas. They explained how trades relied on mutual acknowledgment of rights over assets. Formal law came second. [3]
- Douglas Irwin reviewed the literature and pointed out that informal norms protected property better than rules. [1]
- Yingyi Qian studied China's reforms. He showed how peasants de-collectivized land without official backing at first. Growth exploded anyway. [1] These voices challenged the orthodoxy, but the assumption held firm for decades.
▶ Supporting Quotes (4)
“As economist Douglas Irwin notes of the economic scholarship on property rights: A regular finding is that informal norms are more important than formal rules in protecting property”— How China did it
“In 2002, Chinese economist Yingyi Qian published a very revealing working paper (later expanded into a book) on the post-1978 Chinese economic take-off.”— How China did it
“According to Dugald Stewart, in 1755 Adam Smith told his students in a lecture that: 'Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.'”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“As various economists, such as Ronald Coase, Harold Demsetz and Yoram Barzel, have explored at length, a trade, an exchange, is actually a transfer of recognised possession—the mutually acknowledged right-to-decide—over some attribute or bundles of attributes.”— Property against the state
Organizations Involved
The Chinese Communist Party cracked down on private commerce after the Cultural Revolution. They labeled it illegal. Yet they later turned a blind eye, allowing growth to surge without formal rights. [1] Chinese emperors had long run monopolies, such as in salt. They profited from trade while calling it tribute. Merchants lacked formal status, but exchange flourished. [1] Academe reinforced the idea through its models. Beliefs became assets to defend. Dissent faced moral pushback. [2] The Chinese Party-State enforced a command economy. It allocated property from the top down. Private ownership stayed informal. Still, peasants reclaimed farmland through conventions, and the state eventually acquiesced. [3] These institutions clung to control, even as evidence mounted against their premises.
▶ Supporting Quotes (4)
“the early stages of economic commercialisation were not supported by the Party. But the Cultural Revolution (1966-1976) had so disrupted Party control in the countryside, that the CCP found itself fighting a losing battle against peasant-driven de-collectivisation and commercialisation.”— How China did it
“It is also clear that administrative simplicity was a major consideration in what taxes were levied... such imperial monopolies were more favourable to flourishing economic activity than an equivalent tax regime would have been.”— How China did it
“This was aggravated by academe systematically turning beliefs into moral and cognitive assets to be defended by moral abuse, punishing and deriding dissent as illegitimate.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“In China, in the late 1970s, de-collectivisation of farming land—its breaking up into private farms—was mostly done as a bottom-up process among the peasants dividing up the collective farms. This occurred due to massive disruption of local Party control by the Cultural Revolution of 1966-1976. This was a bottom-up de-collectivisation of farmland that the Chinese Party-State eventually acquiesced in.”— Property against the state
The Foundation
Economists drew from Western successes to claim formal property rights were essential for growth. They extrapolated from Anglo-American paths, where low transaction costs fueled expansion. This ignored other histories, where conventions supported commerce without state backing. [1] The idea stemmed from a view that property needed law to exist. Yet conventions of mutual acknowledgment created it everywhere, predating states. [2][3] Studies on command economies assumed they crushed all trade. But prosecutions during China's Cultural Revolution revealed persistent illegal activity. [1] Private goods seemed to require legal enforcement due to their rivalrous nature. Conventions, however, enabled rights without state mandates. [2] China's boom before formal rights challenged this directly. Norms self-reinforced, driving commerce. [2] Economists cited formal rights for performance, but their own work showed weak links to growth. Informal norms proved stronger. [3] Growing evidence suggests this foundation was flawed, though the debate continues.
▶ Supporting Quotes (8)
“Economists examining how to achieve economic take-off have typically worked back from what the most historically successful did (or at least apparently did). This ignores differences in starting points—both cultural and institutional.”— How China did it
“elevating the frequency and scale of exchange—and production for the same—is the core economic benefit of effective systems of legal property rights... this is—as we have also seen in earlier posts in this series—very different from stating or implying that such a happy situation is required for commercial activity to occur.”— How China did it
“It is clear from the scale of prosecutions for commercial activity—all of which were then illegal—that, even during the Cultural Revolution, there was a lot of commercial activity happening, despite the collectivisation of productive assets and commerce being illegal.”— How China did it
“established that property predates the state or the law. The second post examined how property could operate outside—or even against—the law.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“I was intrigued by how China managed to have a massive commercial take-off well before it legalised private commercial property (in 2004).”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“That private goods are both excludable and rivalrous makes easy to develop right-to-decide conventions by mutual acknowledgement (i.e. property).”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“While economists have struggled to find strong connections between overall economic performance and formal property rights, they have persistently found evidence that informal norms are more important than formal rules in protecting property.”— Property against the state
“The first post established that property predates the state or the law. This post looks at how even formal property rights rely on pre-existing conventions; how remarkably universal such conventions are”— Property against the state
How It Spread
Economic scholarship spread the assumption by working backward from Western cases. It overlooked different starting points in other societies. [1] Bureaucracies added friction through complex rules, making idealized legal systems seem vital by contrast. [1] Economists focused on monetized trades in academia. They sidelined how these embedded in conventions, connections, and non-market acts like gifting. [2] In low-trust places, market-dominant minorities used networks for reputation. This highlighted convention-based property without formal law. [2] Conventional thought emphasized formal primacy, surprised by China's rise. Studies increasingly prioritized informal norms. [3] The idea persisted through academic incentives, but growing recognition points to its weaknesses.
▶ Supporting Quotes (5)
“Economists examining how to achieve economic take-off have typically worked back from what the most historically successful did (or at least apparently did). This ignores differences in starting points—both cultural and institutional.”— How China did it
“bureaucracy can easily profit by increasing transaction friction, by people being forced to deal with it.”— How China did it
“Economists tend to focus on transactions, especially monetised transactions. Transactions are choices, they are interactive, and—if monetised—come with their own quantifications. Yet, transactions are, in all sorts of ways, embedded in connections.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“Market-dominant minorities emerge—especially in low-trust societies—because they are commerce-oriented and their internal networks operate as superior information, reputation and risk-management (and so trust) mechanisms.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“Legal ownership provides a potential security of title—via third-party adjudicated remedies—that does not extend to illegal goods... While economists have struggled to find strong connections between overall economic performance and formal property rights”— Property against the state
Resulting Policies
China amended its constitution in 2004 to legalize private property. But the massive takeoff happened earlier, from 1978 to 2004. Signals of tolerance came in 1988 amendments. Conventions drove the change, with policy trailing behind. [1][3] Legal frameworks that demanded formal rights often raised costs. They pushed trades into informal markets to avoid interference. [2] Under Xi Jinping, anti-corruption efforts increased party discretion. This cracked down on its misuse, leading to purges and more friction. [1] Growing evidence suggests such policies, built on the assumption, hindered natural progress, though experts still debate the full extent.
▶ Supporting Quotes (3)
“While private commercial activity was not fully legalised until the 2004 Constitutional Amendments, starting in 1988, a sequence of such Amendments signalled the increasing official tolerance of private commerce. Yet, even before 1988, there was already considerable economic take-off and commercialisation.”— How China did it
“law can increase transaction costs, thereby increasing transaction friction—i.e., slowing the rate which people engage in mutually-beneficial transactions. Precisely because property is based on conventions of mutual acknowledgement—so pre-law and pre-state—exchanges can then move to informal markets so as to transact more freely.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“I became intrigued by how China managed to have a massive commercial take-off well before it legalised private commercial property (in 2004).”— Property against the state
Harm Caused
Latin American states enforced complex property rules for centuries. This created high transaction friction. Economic activity stayed lower than in Anglo-America. Informal sectors ballooned as a result. [1] After the Global Financial Crisis, the EU and UK struggled to recover. Implied frictions slowed them, unlike the US. Stagnation followed. [1] Over-reliance on formal law oppressed commerce. Governments strong enough to enforce rights also blocked them. [2] Anti-discrimination laws limited private exclusion. This weakened natural sanctions like shunning, adding social friction. [2] State bans on goods denied protections. Black markets emerged, generating wealth but inviting violence. [3] Increasingly, these harms are seen as tied to the flawed assumption, with evidence building against it.
▶ Supporting Quotes (6)
“The biggest single factor in explaining the difference in economic trajectories between Latin America and Anglo-America is that state action in the former imposes high transaction friction through complex, time-consuming and expensive property use, registration and transfer rules compared to the latter.”— How China did it
“The US bounced back from the Global Financial Crisis and the Great Recession. The EU and the UK did not.”— How China did it
“President Xi Jinping is attempting to simultaneously increase Chinese Communist Party (CCP) control over, well, everything while rooting out corruption. He is thus increasing the potential value of CCP-official discretion while attempting to crack down on the sale of it. This is, fairly clearly, a losing game—hence the apparently endless purges.”— How China did it
“All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“for example, the forced associations of anti-discrimination law has clearly retarded the ability to sanction bad behaviour by shunning people.”— Conventions, conventions everywhere! (Also culture, pacification, law…)
“They can even flourish, generating great—if insecure and often violently contested—wealth. They are part of the wider informal economy of economic activity that is not regulated or protected by the state.”— Property against the state
Sources
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[1]
How China did itopinion
- [2]
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[3]
Property against the stateopinion