The source: “Did Insecure Property Rights Slow Economic Development? Some Lessons From Economic History” by Naomi R. Lamoreaux, in The Journal of Policy History, 2006: No. 1.

One item stands atop the list of reforms the World Bank and the International Monetary Fund push on developing nations as part of what’s called the Washington Consensus: better guarantees of property rights. If the full force of the law isn’t behind the principles that investors’ assets can’t be seized, that corporate accounting can’t be tampered with, and that loans must be repaid on time and in full, then people will be reluctant to risk their hard-earned cash in a country’s economy.  

That logic seems incontestable, observes Naomi R. Lamoreaux, an economist and historian at the University of California, Los Angeles, but it is contradicted by both history and the latest doings on the Web.  

A few years ago, for example, an Oklahoma man plunked down $750 for a nine-room stone house in a quaint seaside village—quite a deal, except that it was a virtual house that existed only in the Internet fantasy game Ultima Online. The buyer had no property rights whatsoever. Yet such virtual investments are becoming increasingly common in online games. Wired magazine’s blog recently reported that a Miami man paid $100,000 for a virtual space station resort, from which he hopes to make money.

The real world offers its own counterevidence. In late-19th-century America, investors poured millions into the country’s rising corporations, even though minority shareholders enjoyed scant protection under the legal doctrines of the day. Corporate executives and majority owners (often a handful of people) were largely free to manipulate busi­nesses to their own advantage. In 1850, for example, the Rhode Island Supreme Court stoutly upheld the New England Screw Company’s sale of assets on favorable terms to another company largely controlled by New England Screw’s majority shareholders. American courts generally assumed that majority owners always acted in the best interests of the company.  

Why did Americans (and others) continue to invest in the new corporations? Because the profit opportunities, despite the risks, were superior to the alternatives. Lamoreaux points out that the federal government had a great deal to do with creating those opportunities, through actions such as providing the legal authority and the “financial fillip” to build the nation-spanning railroads, opening public lands to prospectors and others, and creating the U.S. Geological Survey to map those lands.

That brings Lamor­eaux to the Beijing Con­sensus, an alternative to the Washington version that calls for a more active governmental role in economic development and less preoccupation with property rights. These will emerge “endogenously” over time, advocates say, as the beneficiaries of economic development become larger and more powerful, just as they did in the United States. And today’s globalized econ­omy adds another endogenous influence, since developing-country governments know that investors can easily go elsewhere if they com­pletely trample property rights. Attracting those investors in the first place with more profitable opportunities, Lamoreaux believes, ought to be priority number one.