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How do private property rights come into being, and what factors explain why privatization efforts are more effective in some contexts than others? Demsetz (1964, 1967, 2002) argues that property rights will be established when the costs of privatizing a resource fall below the expected gains from privatization (or, conversely, when the gains from privatization rise above the costs). Although his conclusion sparked ample debate, the essential features of his argument have been generally accepted (Anderson and Hill 1975; Umbeck 1977; Hornbeck 2010).
Insights from the socialist calculation debate, however, complicate Demsetz's account. Mises ([1920] 2008, [1936] 1981, 1948) argues that economic calculation (profit-and-loss accounting) relies on the prior existence of markets with well-defined property rights. This poses a puzzle: if private property is a prerequisite for economic calculation, as Mises argues, then how can economic agents calculate whether or not to establish property rights in the way that Demsetz suggests?
There is an obvious solution to this apparent tension. Mises himself points out that calculation is necessary for economizing in advanced industrial economies, but not in every context. Primitive barter economies are not sophisticated enough to need money prices. In such settings, calculation (profit-and-loss accounting) is not necessary for economizing (moving resources from lower-valued to higher-valued uses).
What is interesting to us, however, are the implications of this insight for assessing the costs of privatization in advanced economies. Our core contention, building on both Mises and Demsetz, is that assessing these costs is far more difficult in "incomplete markets," where property rights are either absent or poorly enforced, than in "complete markets," where they are clearly defined and enforced. We should therefore expect privatization efforts to be more successful in more advanced, well-functioning markets than in nonmarket settings. For example, we should expect privatization to be far more effective in more market-oriented economies like post–Warsaw Pact Poland than in more command economies, like that of the Soviet perestroika.
Piano and Rouanet (2018) distinguish calculation about the decision to privatize from profit-and-loss accounting. Primary calculation refers to traditional profitand-loss accounting that takes place in complete markets on the basis of money prices (what Mises calls "monetary calculation"). Secondary calculation, in contrast, refers to calculating whether to establish property rights or to rely on markets in...