Government's role in enforcing property rights and contracts

0:00- [Educator] It may not be obvious to a lot of folks, but the government actually has a fairly large role to make sure that markets work well. One of the core ideas in markets or in a market economy or in a capitalist economy especially, is this idea that people have ownership.

0:19That, for example, I own my house and no one else should be able to take it away from me as long as I don't sell it to them, as long as I've paid it off, as long as I'm doing everything that I need to do for that property by the law. But you could imagine, what if, you know, my house is right over here and a bunch of people showed up one day with some guns and said, "Oh, that's nice that you think it's your house.

0:43It is our house now." Well, that won't help much for the ownership. I might not be willing to save up and pay down a mortgage for a house where on any given day someone might be able to take it. Another thing that might happen that's less violent than that, but arguably just as bad is, we keep track...

1:01Right now, the government keeps track of who owns what. So it's in these county records office that this is Sal's house. But if someone were to go and bribe the person at the county records office and say, "Nope, that's not Sal's house now, that's now Bill's house."

1:21Well, that would be a problem too. I would have no trust in my ability to buy a house because it could be taken over by someone at any other time. And other countries in this part is actually reasonably common in a lot of countries that are still developing or not fully developed countries.

1:37Let's say that someone has a house and they're not staying there. Maybe it's a second house or it's a vacation house, or they've moved out of the city for a few months and then other people come and live in that house who are not them. There's even certain cases where there's laws that say, "This is now their house."

1:53Or even if it's not officially their house, there's no way of getting them out of the house. So it's effectively their house. Even though in theory you, not you, that's the guy with the gun. In theory, you were the person who thought you owned this house. And that introduces all sorts of problems because if people don't have trust in property rights, then market economies, capitalism breaks down.

2:22No one is going to be willing to invest in a house or buy a house or invest in a factory if other people could just take it by force or bribe someone and get the title shifted over to them. Or if other people just go squat at that factory or house, or take that car and take it away, no one's going to wanna invest in anything.

2:42No one's gonna wanna pay for anything. And it all just resorts to whoever's the best armed or whoever's the most connected in the government or who's bribing people. So it's a very important role for government to protect property rights. And in general, you'll see the places where markets are functioning the best, you have the strongest property rights.

3:02You see the least of what I just described. And it isn't just physical property rights. Everything I've just described is how do we know that you have a right to that house or to that car or whatever else? The government will protect you. If someone were to come and take your jewelry, we could hope there's an investigation.

3:21They're gonna catch them, and then they'll put them in jail. That's the government once again, protecting your physical property rights. But it's not just physical property rights. It can also be intangible. And when people say "intangible," it's something that you might not be able to touch or feel or intellectual property rights.

3:40So these are things, intellectual property rights are, "Hey, I'm a drug company and I just spent a billion dollars coming up with a new medicine and I need a patent on it so that I have an incentive to continue to produce that and I should be able to get a return on that billion dollars that I invested."

3:59Now there's a whole debate about what's the right price and the right return and when patents might go too far or not far enough. But I think we could agree that there should be an incentive for someone to want to invest that much money. And if the government didn't enforce the patent on that medicine, or on that widget that I just made, I dunno, this is my drawing of a widget that can maybe do something interesting.

4:23Then someone else can just copy and steal it and then take all of that investment that I put into it and so that I wouldn't have any incentive of doing that in the future. Intangible property rights or intangible property, these are things like copyrights. So I write a piece of music and I spent a lot of time and I produce it and I go perform it, but then as someone else starts recording the same thing and making money off of it, well that really lowers the incentive for me to invest in creating new content.

4:55And it might not just be music, it might be a book, it might be some type of a methodology. You could have trademarks, companies invest a lot in their, for example, their brands or the names of their products. Imagine if, all of a sudden, next door someone else created another organization called "Khan Academy."

5:13And it's horrible and it ruins what people's trust in Khan Academy. That's why it's important that we could go file a complaint with the government and they'll say, "Hey, that's not allowed. You have to be able to shut down that other company because they are violating your trademark."

5:28Now, the last thing I'll talk about, and this is a very high-level explanation of the role in government, is enforcing contracts. And this might not seem obvious, but just think about this a second. Let's say there's a car, and right now it is my car. That's me over there in blue, and you wanna buy this car from me and you hand over some money for this car.

5:55So that's the money. And then I hand over not just the car, but I hand over the title to the car and there's probably a contract, and it's usually part of the title. There's a little form where you could say, "I am handing over this car to you for this amount of money."

6:10Now, that is a contract but there's all sorts of contracts. There might be contracts where one company is buying intellectual property from another company. One person is buying a house from another person. But if this contract then gets ripped up by someone and thrown away, then people aren't going to have trust dealing with each other, buying things from each other, getting into partnerships with each other.

6:33And then you're not going be able to do all of the important roles that you need to have a functioning market, a functioning capitalist economy. So it's very important that if one of these parties feels that the other person's ignoring the contract that they could get lawyers, they could go to court and they could eventually get the government to enforce that contract in some way, shape, or form.