Property Rights and Political Stability
Another way policymakers can foster economic growth is by protecting property
rights and promoting political stability. This issue goes to the very heart of how
market economies work.
Production in market economies arises from the interactions of millions of indi-
viduals and firms. When you buy a car, for instance, you are buying the output
of a car dealer, a car manufacturer, a steel company, an iron ore mining company,
and so on. This division of production among many firms allows the economy’s
factors of production to be used as effectively as possible. To achieve this outcome,
the economy has to coordinate transactions among these firms, as well as between
firms and consumers. Market economies achieve this coordination through market
prices. That is, market prices are the instrument with which the invisible hand of
the marketplace brings supply and demand into balance in each of the many thou-
sands of markets that make up the economy.
An important prerequisite for the price system to work is an economy-wide
respect for property rights. Property rights refer to the ability of people to exercise
authority over the resources they own. A mining company will not make the effort
to mine iron ore if it expects the ore to be stolen. The company mines the ore only
if it is confident that it will benefit from the ore’s subsequent sale. For this rea-
son, courts serve an important role in a market economy: They enforce property
rights. Through the criminal justice system, the courts discourage theft. In addition,
through the civil justice system, the courts ensure that buyers and sellers live up
to their contracts.