PBS recently aired a fascinating documentary, "The Commanding Heights: The

Battle for the World Economy." Part of the series focused on the sorry

economic performance of countries in the developing world. Instead of

blaming the usual suspects, e.g., colonialism and insufficient foreign aid,

the series explored more fundamental and subtle barriers to progress.

Economic progress and social well-being depend primarily on two variables:

people's character, i.e., their abilities and attitudes, and their social

and political institutions. Differences in these factors largely explain

differences in levels of economic progress. America's founders understood

the importance of all these factors, especially institutions, when designing

our Constitution.

A legal system that allows individuals clear rights to property is a key to

success. Most individuals in developing countries "own" things, but have no

legal or formal rights to them. Hence, long-term contracts can't be created

or enforced; without contracts, credit can't be obtained; and lack of credit

stifles entrepreneurship. This dramatically inhibits wealth creation.

In his book, "The Mystery of Capital," Peruvian Hernando de Soto explains

how the growth of wealth requires property rights which can be exchanged.

"It's about building capital or loans on property rights. What we've

forgotten...is that the poor don't have property rights."

In America we've taken the notion of property rights for granted and

forgotten what a profound and subtle role they play in a moral system

fostering prosperity. America's most grievous faults involve deprivation of

these rights. Slaves, Native Americans, and the Japanese internees of WWII

are obvious and compelling examples.

As we're seeing in the developing world, rights to private property play a

fundamental role in advancing or retarding social progress. Here's how:

Clear, enforceable rights to property create solid expectations. And

expectations guide decision making. The holder of property rights can

transfer the fruits of her efforts to whomever she chooses. This reinforces

the value of family as a social unit and increases the incentive of people

to provide for future generations. If property rights are insecure, time

horizons are dramatically shortened and long-term investment suffers.

Here is the key. Property rights enable individuals to use and exchange

their resources as they see fit; but only as long as this use doesn't harm

others. When they are well defined and enforced, property rights ensure

peaceful competition, foster human rights, and protect from abuses of state

power. When rights to property are insecure, all other rights are at risk.

In any economic system property rights strongly influence how individuals

make decisions. Each society does in fact define, allocate, and protect

property rights. Even Communists recognize them; they simply assign them all

to the government. However, we've learned that without the basic social

building block of private ownership, economic prosperity, human rights, and

the environment suffer. As evident in so many Third World nations, graft and

violent chaos grow in the absence of clearly enforced rights.

When people own their assets ­ their intellectual or physical capital and

the product of their labor ­ they will bear the consequences of their

behavior, both positive and negative. The erosion of private property rights

erodes both personal responsibility and incentives to cooperate with others.

This tendency to assume risk and responsibility is important for economic

growth.

Concerns over globalization are fueled by fears of disenfranchisement. These

concerns are real. Most developing countries lack a legally defensible

property system. This excludes about 80 to 90 percent of all entrepreneurs.

When the poor and the middle classes are blocked from improving their

positions, they ultimately rebel.

Capitalism is the only economic system that works in the modern world.

Capitalism is the system that has allowed the poor to have economic rights

which only nobility and the high bourgeoisie had earlier tasted.

Again, from de Soto: "The general idea here is that we haven't properly yet

understood the capitalist system. It's much more profound, it's much more

subtle than we all expected.... Most of it has to do with the rule of law,

putting in place a system that allows all of us to prosper."

When private property is protected by a legal system such that everyone,

especially the rulers, is subject to the same laws, economies and social

well-being flourish.