Property Rights and the Knowledge Economy
| Author | Călin Vâlsan |
| Pages | 376-383 |
Călin Vâlsan. Williams School of Business, Bishop's University Sherbrooke, QC J1M 1Z7 Canada (cvalsan@ubishops.ca).
Page 376
The pinnacle of microeconomic organization is the public corporation; it provides a superior mechanism for handling risk by limiting the scope of moral hazards and compensating the lack of social bonds with formal contracts [Novaes and Zingales (2004)]. It also provides a mechanism for reducing the transaction costs of allocating resources, by replacing relative market prices with administrative fiat [Williamson (1975)].
For more than four centuries capitalism has thrived because property rights have proven apt at coping with economic and social risk better than anything else devised by man. As a tool for allocating residual cash flow and control, they allow for the internalization of the economic surplus. This frames the corporation as a positive sum game, engendering cooperation among economic agents. Yet, the history of capitalism so far is that of the industrial revolution: the industrial model of production has been made largely possible by the nature of firm-specific assets and that of the output. Capital has been historically invested in tangible assets and output has been dominated by goods that are rival and exclusive. These two characteristics have made the separation between ownership and control tenable and have fostered the managerial revolution and the now-familiar centralized, hierarchical governance model. As we move from an industrial model to a production model dominated by knowledge, the role of property rights is about to change. The current paper is attempting to sketch and discuss the important changes that a new economic paradigm is about to usher into our world.
It is widely acknowledged that property rights are a precondition for a dynamic and efficient economy [Hart and Moore (1990)], but this statement needs to be qualified; strong property rights and fair regulation sometimes merely mirror social practices engendered by a vibrant moral community, while other times are badly needed to offset moral deviance and opportunism [La Porta et al (1998)].
Page 377
The traditional economic model links financing to the provision of capital. This view is nevertheless incomplete. All organizations need some mix of financial, social, and human capital in order to function [Schultz (1961), Becker (1964)]. The link between finance and growth, however, is a well documented empirical issues [Guiso et al (2008)]; it is easier to quantify financial capital, as opposed to less observable, and morally-laden concepts like talent, trust, and cooperation.
The provision of capital is a risky economic endeavor. The entrepreneur sinks one's capital into a specialized, firm-specific project. The assets generates economic value only when used in connection with a given project: an airplane can only be used to fly passengers and cargo. One cannot use it to drill for oil, to grow corn, or to bake bread. Given its very specialized use, the equipment has a limited market, and its liquidation would occur at a substantial cost to the owner. If the project is thriving, the entrepreneur is fully rewarded, if it falters, the entrepreneur is stuck with an asset that is costly to redeploy. This is why the entrepreneur is entitled to reaping the rewards of his venture.
Understandably, as organizational complexity increases, one should expect a division of labor to occur: some individuals will specialize in the provision of capital and risk-bearing, while others will specialize in making managerial decisions. Since specialization gives rise to agency problems, the modern corporation represents a trade-off between risk and internal economic performance [Jensen and Meckling (1976), Fama (1980), Schleifer and Vishny (1997)]. Moreover, arm's length contracting bolsters volatile social capital with the help of enforceable contracts in order to achieve collective action. Finally, the corporation rationalizes transaction costs by engendering resource allocation based on fiat instead of relative market prices.
The specialization between risk-taking and decision-making is tantamount to the separation between ownership and control [Berle and Means (1932), Demsetz(1983), Demsetz and Lehn (1985)]. In the smokestack era of the industrial revolution, most capital was represented by industrial equipment that was easily managed top-down in hierarchical organizations owned by absentees capitalists. A great portion of labor was relatively unskilled and, as illustrated by Henry Ford's assembly line, largely interchangeable. For centuries, workers were ultimately handled not much differently than workhorses. This is the context in which Karl Marx decried the alienation of the proletariat from the product of its own labor. He saw it as a situation in which the worker was denied the right of self-ownership; capitalism was thus the moral equivalent of modern slavery.
As it becomes more and more obvious that knowledge represents the main ingredient of economic, social and moral progress, the separation between ownership and control is blurring. Knowledge is a paramount trait of human capital, which is bound to eclipse financial capital in terms of economic significance. Since a free and democratic society rejects any form of slavery and servitude, a clear-cut separation between ownership and control could never be achieved. The manager has to devolve a great deal of authority to lower organizational echelons simply because the specialized knowledge of many workers makes them better at making decisions than the manager. The increasing complexity of modern economic life requires teamwork, because teams are better at monitoring their members and evaluating complex outcomes that are not readily measurable or observable by independent third parties [Baker et al (1988)]. The future of economic organization will arguably revolve around knowledge-based goods and services hard to quantify, and around complex production processes that cannot be prescribed ex-ante by conventional...
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