The Meaning of Property

Property rights are presented in a constitutional perspective. Property rights are constitutional rights. They grant prerogative which are protected both by the State and against the State. Contrary to what most economists think, possession plays a secondary role in the notion of property. Property is a right of decision and rule-making as a matter of principle towards the object of property. Laws affecting the use of property are only limited derogations to this principle. This view is congruent with the theory of ownership developed by Oliver Hart and applies in both Civil and Common Law legal systems. Understanding property in this fashion is a key to the understanding of the operation of the existing Power System.

Sovereignty and Property

The Chapter deals with the relationship between the two concepts of sovereignty and property. It first addresses the thesis developed by North, Wallis and Weingast on the role of organized violence in the development of a modern, open access society. Their intuition is that the « limited access order » of the « natural state » in which personal relationships form the basis of social organization had to leave the way to an « open access order » in which impersonal categories of individuals interact. This is generally correct. But they neglected the role of law in the process and, in particular, the role of the development of constitutional modes of government. Via modern international law, starting in Europe in the middle of the seventeenth century, sovereignty was allocated among States. Via modern liberal constitutions, internal sovereignty was decentralized as a matter of principle to owners, who are decision-makers as a matter of principle towards the objects of property. The operations of political Organs of the State, of administrative Organs of the State and of law can usefully be viewed in this perspective.

Coping with Firms

The Chapter addresses the need to cope with firms as participants in the World Power System. « Agency theory » has led to biased firm governance. The bias extends to accounting rules which do not provide a full picture of the impact of a firm’s operations and actually prevents firms from adapting their ways to the requirements of today’s predicament. Addressing world issues such as climate change requires the making of decisions to change our ways of producing, travelling and consuming. In an open economy, the competition among large business firms derivatively leads to a race to the bottom among States to offer firms accommodating legal environments. This limits the States’ ability to internalize negative externalities and to redistribute income. Given the inherent defects of our divided State System, it is at the firm level that governmental rules must be developed so that firms consider the consequences of their activities to a larger extend than they do today. Economic decisions within organizations are made on the basis of the accounting of their operations. To change the decisions they make, we need to amend the ways organizations account for their operations.

Towards a Sustainable World Power System

Finally, we look at some of the tools available to address the issue of climate change in the present World Power System. We must find the way to reengineer multinational enterprises in a way that they address climate change issues in their day-to-day operations. A flawed agency theory has led to improper firm governance, the maximization of shareholder short-term interests leading to a massive production of negative externalities. We need to move to true cost accounting by integrating into the accounts of reporting entities the replacement cost of the CO2 used in their value chains. Using the notion of replacement cost prevents any attempt at pricing environmental services. Pricing would be subjective and/or artificial. The move allows to go beyond the financial sustainability of firms, which is a prerequisite but is insufficient. Firms also need to show that they are compatible with the preservation of natural resources. It is the only way to ensure the sustainability of our kind of society, with strong rights of autonomy, including property rights.

The Spreading of the Corporate System and its Consequences

Business corporations developed in the industrializing world in a legal environment which was initially hostile to them. Incorporation was transformed from a privilege into a right. The development of corporate law has led to the advent of Financial Capitalism, in which two forms of capital exist in connection with any given bundle of assets and contracts There is first the capital and contracts required by the productive activity; and there is then the financial capital represented by the financial instruments issued by the corporation. The Chapter provides an example of the evolving relation between firms and States in a globalized economy. The model of a firm adapting its corporate structure to the opportunities offered by the evolving legal rules in an international economy is used. It leads to a reassessment of the necessity to differentiate firms from corporations and to insist on the importance of the rules of corporate governance. The opportunities offered to multinational firms by the international economy combined with an improper mandate to maximize short-term shareholder value, and the biased accounting rules accompanying it, lead to the accounting acknowledgement of « shareholder value creation » even when no real « value » is being created.

General Introduction

Most of the intellectual production in the social sciences is the outcome of an implicit assumption that we are still living in a State System when in fact the globalization of the economy is reducing the States’ ability to adopt proper rules to address societal issues. To understand this state of affairs, it is important to understand the role played by property in the operation of the liberal Power System. Property is a right of autonomy constitutionally protected. Its justification can be found either in the defence of the individual’s autonomy or via efficiency considerations. The fact is, however, that a sizable proportion of productive property today is concentrated in large, corporate organizations. The exploitation of the possibilities offered by an international open economy to these organizations has led to the production of potentially deadly negative externalities such as climate change, unbearable inequalities and the impoverishment of public institutions. The development of these large organizations has induced changes in the operation of the Power System. They must be understood to identify the existing potential means of action, in particular via proper rules of accounting for the impact of their activities.

The Modern Constitutional Mode of Government

The notions of State and of the « Organs of the State » are explained in some details to distinguish their prerogatives from private prerogatives. Private property, in this respect, grants autonomy from the « Organs of the State ». It is part of the constitutional prerogatives protecting private persons against excessive public governmental encroachments. It is part of a constitutional order which combines both democracy and distrust for democracy, by limiting the prerogatives of the Organs of the State. The approach developed proposes a unitary view of the Constitution as providing for both public and private prerogatives, the first ones being exercised by Organs of the State and the second ones by legal persons which are not Organs of the State. Public and private prerogatives operate via fundamentally different rules, private property rights entitling their holders to exercise their prerogatives in a despotic manner, i.e. they can do what they want with what they have without the need to take anybody’s advice or authorization - which is the definition of despotism.