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The market system consists of a price
mechanism, built on the foundation of a system of property,
and contract. In many developing, and transition economies,
the market system functions poorly. In many cases, if not
most, the malfunctioning is not simply in the price system
(for example, anti-competitive activities), but in the
underlying property system (such as contracts being
breached, and externalities in the sense of transfers not
covered by contracts). Economic theory tends to take the
functioning of the system of property, and contract for
granted, and focuses on the operation of the price
mechanism. Property theory focuses on the underlying system
of property, and contract. In this paper, the author
inaugurates the mathematical treatment of property theory.
In contrast with earlier work in "law and
economics", and the "new institutional
economics", this approach uses principles drawn from
jurisprudence, and does not attempt to reduce
"law" to "economics" in the sense of
efficiency considerations, such as the minimization of
transaction costs. The main results are the two fundamental
theorems of property theory that are analogous to the two
fundamental theorems of price theory that, in essence, state
that: 1) A competitive equilibrium is Pareto optimal. 2)
Given a Pareto optimal state, there exists a set of prices
such, that a competitive equilibrium at those prices would
realize that Pareto optimal state.
