From the perspective of the New Institutional Economics, the rather recent stream of research within neoclassical economics where social and market institutions are again put front and center in the analysis, we can adopt Oliver Williamson’s “levels” of institutional analysis. Douglass North similarly speaks of the “play of the game” versus the “rules of the game,” which is an important distinction. The former consists of the actions carried out in the market and the commonalities, patterns and structures to how people interact; the latter constitutes the demarcation of the market landscape and the “exogenous” limitation to what is permissive market action.

Private property is an important “rule of the game” that facilitates a certain type of market action, voluntary exchange, and decentralized production. The question from a theoretical point of view, however, is whether private property is necessary. Or is it the case that any set of “rules of the game” suffices?

One can produce interesting arguments for the general “any institution goes” view. If we rely on the Austrian perception of human action as a category rather than a relative quality, by which rationality and goal-orientedness as well as such things as time are derived, it appears obvious that actions will adapt and adjust to any set of rules. This is what we see in any economy as regulations change: the market adapts. It was the case even in the Soviet Union, which was at first 100% government but then – with Lenin’s New Economic Policy (NEP) – introduced a limited form of consumer market. There was still allocation and reallocation of resources relying on market mechanisms despite rules prohibiting such action. One can even argue that the reason the Soviet Union did not immediately implode (which, by the way, was the case – communism was “saved” by adopting the NEP (that is, limited markets)!) was the prevalence and inexterminability of rational human action.

It was not simply the case that the Soviet Union’s central planners could rely on market prices in the “free world” (which they did) or that they depended on the West’s foreign aid (which they also did), but that they had rather extensive underground or “black” markets domestically. These markets were fought and the authorities attempted to exterminate traders, but this was impossible. (Which was probably a good thing for Soviet communism.)

The question then is, if markets prevail even under communism – are the rules of the game really all that important? Or do they simply amount to different levels of overall cost to bringing about efficient resource utilization?

I think it would be a mistake to assume that the rules of the game – society’s institutions – are somehow “necessary” for an economy. It is futile to argue that a certain type of private property, for instance, is a necessary precondition for the existence of a market. Indeed, in my previous work I have pointed out the problems of both the Lockean or neo-Lockean (libertarian, if you wish) view of absolute private property as well as the leftist possession-only right to hold resources. Both regimes “work” in the sense that they do not constitute the end of human civilization. The real question is not if a certain set of institutions will allow us to survive, but how supportive they are of prosperity and civilization.

In this sense, private property is not in any sense necessary.

However, if we use a “thicker” definition of society and civilization than simply the survival of humankind, then the answer changes. Different sets of institutions support productive developments to differing degrees. Here private property appears to have been core to the development of Western civilization. Or rather: the common acceptance and acknowledgement of private property. There should be little doubt that an explicit and formalized property regime, in the sense of simple and easily interpretable “rules of the game,” is more likely to facilitate economic growth, entrepreneurship, and civilization than the Soviet system of common (that is, state-owned) property and the repression of market action. This was very clear to most people in 1989 when we finally gained information on the state of affairs in that huge and hugely mismanaged nation.

The picture becomes clearer if we consider the argument put forth by Hernando de Soto that poor people in poor nations do not in reality lack capital but lack capitalization. What de Soto means is that poor people in poor countries already enjoy ownership to a much greater degree than we commonly assume. The problem is that there are no markets, so they cannot use their capital resources in productive ways: there is no way of obtaining credit, of keeping profits, of investing.

This is often interpreted as an argument for formal institutions – again, the “rules” – but I think this is too simplistic and a much too extreme top-down and social engineering perspective. It is perhaps easily perceivable that the institutions are lacking for these poor capital owners, but we must also consider where these institutions come from. As in the statement above regarding different property regimes, the rules themselves change the structure and pervasiveness of economic action – but not economic action itself. The reason for this is that institutions are not exogenous demarcations of the market place that need to be “gotten right” (as Williamson has it).

Instead, consider Mises’s argument that no political regime can survive against the will of the majority. While Mises’s argument is expressed as and therefore interpreted as a solely political argument, it is applicable to the market as well. Or, I would claim, more so. The reason is that, as we saw in the example of the Soviet Union, even the worst and most oppressive and anti-market policies, supported by (over-)exercising the death penalty and labor camps, cannot pull the plug on market action. The Soviet Union imploded already in the early 1920s (prior to adopting the NEP) because it tried to institute formal institutions in direct conflict with human [market] action.

This is not a black-or-white issue, but along a continuum from “very bad” to “very supportive” of human prosperity. The original Soviet Union was at the “bad” end, the NEP-based Soviet Union was a little more to the “supportive” end (but not much), and Western civilizations are further still toward that end of the spectrum. But how close to the “very supportive” end are we? It is impossible to tell, but surely we are not “there.”

People may express whatever political convictions they wish in elections, but what matters is really how they act. How limiting on the structure of society is a law that is either not enforced or that is impossible to enforce simply because nobody cares about it? The latter was what happened in the Soviet Union – the authorities surely tried to stifle exchange, at least in the beginning, but were unable to. Market action, the simple and natural acting for one’s own benefit (subjectively perceived) within a social context, is inextinguishable. It will exist for as long as people are people, and the cost people are willing to bear to engage in exchange increases with poor/hostile institutions.

Whether these institutions are political or not is of little importance: what matters is where they fit on the spectrum between repression and facilitation of action. Destitute or oppressed people find it necessary to find other ways to deal with their situation, and it is not uncommon to engage in black market exchanges and the indirect creation of trade networks even in the face of life imprisonment, condemnation to labor camps, or the death penalty. As frictions to free and self-interested yet social market action lessen, prosperity is increased and the willingness to bear the cost thereof decreases. This is why even slight regulations in the so-called market societies in the West bring about such awesome misallocation of resources: in a relatively well-functioning market capital is easily reallocated toward sections of the market where frictions are slightly less pervasive.

Institutions, whether they are supportive of market action or not, are neither fixed nor eternal. It is probably wise to consider them temporary to the degree that they constitute a hindrance of economic action, whether or not they are of political origin. It seems to me that institutions neither precede market action nor make market action possible, but are the result of either market action or political force. It should be of little importance whether a particular institution was instituted/adopted spontaneously through market action or implemented politically; what matters is to what degree the institution is supportive of market action. In this sense, one cannot timelessly and contextlessly conclude that private property or any other institution is necessary for a prosperous market order.

It may seem likely that institutions that emerge spontaneously through patterns of market action are “better” than politically implemented such, but it is impossible to say for any individual institution and its effect on the economy. What matters is how it is perceived by market actors and whether they are willing to accept it (for whatever reason) and act under (or avoid) it. In this sense only the best institutions will survive over time, where “best” should be understood as the most appropriate from the point of view of market action. Institutions change and should change with preferences and values held by market actors, but the structure of human action does not. For this reason, institutions are subject to human action – not the other way around.

There is to my knowledge little work done on this very important point.