USA. Agricultural land and the law of the United States of America, origin of the Washington Consensus

The relationships between the law and the economy, in particular when agricultural land is concerned, are very different in the United States and in continental Europe, both at the level of general clauses as well as in their practical implementation ¹. This difference originates in the foundations of Anglo-Saxon law. At the same time, the particular way in which land ownership developed in the United States, where the historical relationships between land and man that underlie the land tenure systems of other countries were discarded, contributes to the marked differences between the American and the European land situations.

The terms of the “Washington Consensus” are heavily influenced by this situation, which is unique to the United States. Notably, the “Washington Consensus” has directly inspired the land policies that multilateral organisations promote in developing countries.

Agricultural land is regarded in quite a unique way in the United States

The history of the United States of America from its independence until the early 20th century is perceived as being the product of a common will to establish a “freehold estate”: a land ownership system emancipated from all feudal or community ties, which is considered as the principal condition of liberty and democracy ². The existence of a vast expanse of land deemed « public » (omitting the fact that it is land stolen from Indian nations by « treaties » signed after wars of conquest against autochthonous peoples) permitted the establishment of such ‘free’ ownership. When the availability of public land decreased at the beginning of the 20th century, the market became the principle means of according land ownership. For this reason, reflection about land is integrated into the general framework of economic thought in a country where both public opinion and official policies place the market on a level similar to, if not superior to, that of the government as an institution of social control. Since its origins, thought about land in the USA has therefore focused on processes of land allocation (by tender or through the market), without considering the social relations implied: reflection on agricultural unearned income coming from agricultural land holdings, typical in situations of land scarcity, is rare.

The agricultural land issue became an object of academic reflection in the United States at the end of the 19th century because public land was being depleted and the Civil War had ended, which raised the question of the fate of plantation land in the South. The percentage of tenant farmers within the whole of agricultural producers had risen from 25.6% in 1880 to 42.4% in 1930: tenant farming was therefore becoming a step toward ownership. Up until this time, tenant farming had been considered as contradictory to the ideal of a nation of free landowners; hence the invention of the concept of the « agricultural ladder ». Any hard-working and able person could eventually become a landowner by completing a series of steps. Furthermore, a path to land ownership was not obstructed by the presence of a class of landed gentry ³. This vision, which perpetuated the myth of free access to land originating in the settlement of the Wild West, lasted until the forties, even though the rise in the proportion of tenant farmers illustrates a very different reality.

At the time of the New Deal and the Second World War (1933-45), the State became a primary actor on the real estate scene. It intervened directly on land holdings by establishing different programs of soil conservation, the suspension of farming on arable land and rural development ⁴. The Second World War changed priorities, while doubts concerning the validity of the agricultural ladder arose. If one was not the son of a landowner, it was clearly difficult to become a landowner by climbing the rungs of the ladder. In fact, most landowners acquired their holdings by means of inheritance. Thus, the New Agricultural Ladder was created, according to which owning land was considered to be related to one’s social origin and not to one’s capacities to climb the Ladder. Moreover, in 1959, the percentage of tenant farmers working in the agricultural sector dropped to 19.8%. The New Deal agrarian programs, which had been suspended during the war, will never be truly reinstated. Likewise, agricultural land tenure has ceased to be central to economic thought as the American agricultural crisis is perceived to have come to an end and the economic weight of agricultural land is decreasing.

Laws, markets, and social regulation in the USA: the birth of the institutional economy

During the 1787 Constitutional Convention, Dickinson proclaimed, « experience must be our only guide, reason may mislead us. » This resolute pragmatism explains the key role played by the law and the courts in the economic regulation of the United States. While in France laws attempt to legislate ex ante on foreseen situations, American legislation tends to propose solutions to problems a posteriori that have already been raised concretely in the courts. Judiciary decisions thereby play a more important role than the law itself in the elaboration and application of economic rules.

Such pragmatism can also be found in American thinking about land and tenure. Exemplary are the first institutional economists’ statements concerning the respective roles of the market and the State (or, more generally, government institutions) that inspired the measures taken in the agricultural sector during the New Deal.

John Commons, one of the founders of institutional economics, placed the concept of working rules ⁵, at the core of his thinking. Working rules regulate the practical functioning of the economy, and can be modified, according to him, only by Supreme Court decisions. Commons’ thinking inspired Ely, the creator of the magazine, Journal of Land and Public Utility Economics (today Land Economics). Ronald Coase ⁶ is also representative of this sort of pragmatic thinking, which links judiciary decisions to the daily practice of economics. Commons and Coase consider the transaction to be a central theme of economic analysis. It is, in this sense, an essentially concrete object, which is at the core of the daily practice of social actors, and is more central than the supply and demand of goods, the subject of classical economists’ reflections. Transactions, approved by legal decisions in the event of disagreement between partners, came to occupy a privileged place in reflection about the relationship between the law and the economy. These early postulates of institutional economics were taken up again by different streams of neo-institutional economic thought, of which the primary traits concerning land are as follows:

• 1. Thinking in terms of property rights. An example of the connection between institutional economics and the analysis of legal decisions lies in formulations regarding property rights that were made after the publication of Hardin’s 1968 essay, “The Tragedy of the Commons”, which considered that « the institution of private property coupled with legal heritage » as the only alternative to efficiently manage humanity’s limited resources. This article was at the origin of the wide-spread belief that private property is necessary for the efficient use of re-sources ⁷. The historical becoming of property rights in the United States is the subject of numerous studies ⁸.

• 2. Transaction costs. This is the approach that most directly follows from Coase’s analysis. The existence of transaction costs modifies certain aspects of the classic approach of market regulation. It results in differential advantages for agents. De Janvry, Sadoulet and Thorbecke ⁹ consider that « the rural community is characterised by highly imperfect markets with low internal transaction costs but high external costs ». Such an approach explains market malfunctions regarding the neo-classical model. In practice, the transaction costs approach leads to a methodology that includes the examination of each step involved in different types of transactions.

• 3. Information is emphasised. Informational asymmetry is a proposition close to that of transaction costs ¹⁰. It is based on the fact that agents who exchange on the market do not possess the same level of information, which is particularly pertinent to land issues, where transparency is hardly the rule. Differential transaction costs and informational asymmetry are considered to be at the origin of the segmentation of markets between different categories of agents.

A decisive impact on the way in which multilateral institutions regard land issues

In general terms, land proposals formulated within the framework of multilateral organisations do not go beyond the aspects that we have just brought to light. Furthermore, they do not directly consider other essential aspects, such as the importance of political strife and power relations in the application of land policies.

Neo-institutional economic theory, which stems from reflection over domestic situations in the United States, and in particular, from the special place occupied by court decisions, inspires the land policies proposed by the majority of multilateral development organisations (World Bank, Inter-American Development Bank). Its postulates, which are endorsed by the United States government’s Agency of International Development (USAID) and by a number of American universities, constitute what has been called the « Washington Consensus ». It dictated the underpinnings of Third World land policies implemented in the 1980s and 90s: emphasis on the market as a regulator of land distribution; denigration of the agrarian reform programs of the sixties and seventies; withdrawal of the State from any direct involvement in rural development programs and reinforcement of individual ownership.

Recent developments seem to take us back to a less extreme position since the market and agrarian reform are both proposed as complimentary forms of land redistribution. The « post-Washington Consensus » ¹¹ proposes a « market-assisted agrarian reform » and insists on aspects neglected by earlier « market only » policies, such as a real recognition of bundles of property rights.

Olivier DELAHAYE is Profesor at the Faculty of Agronomy, Central University of Venezuela.

Paper editor: Michel MERLET (IRAM)

Translation: Mary Rodeghier (AGTER). 2007.

¹ With very unequal levels of application and a jurisprudence which often deviates from law regulations, according to regional situations and balances of power.

² However, practice does not follow this principle of ideal democratic ownership. The real land policy included immense concessions to railway or other companies, and sales to speculators.

³ The farmer was supposed to go through six stages in his career: farm apprentice, agricultural worker, farmer, cultivating landowner paying a mortgage, a mortgage-free cultivating land-owner, and finally retired land-owner.

⁴ The Agricultural Adjustment Act -AAA- managed payment programs for producers in compensation for a reduction of their cultivated surface area; the Resettlement Administration installed poor families on two million hectares bought by the federal government, and transformed into the Farm Security Administration, whose influence and programs quickly became marginal.

⁵ It’s a concept close to the broad definition of the term ‘institutions’ (see Neale, 1987) that covers not only social actors, but also formal and informal norms that influence their behaviour on the market.

⁶ Coase R. 1960. The Problem of Social Cost. The Journal of Law and Economics. 3(1):1-44.

⁷ Carter, Feder et Roth. Carter M. R. 1999. Old Questions and New Realities: Contemporary Land and Land Policy Research in Latin America. Congrès « Land in Latin America: New Context, New Claims, New Concepts ». Royal Tropical Institute. Amsterdam. 26/27-05-1999.

⁸ See in particular, Anderson and Hill, who propose a method to determine the moment where costs of private land ownership formalisation becomes inferior to the benefits one can expect from it. Anderson T. et Hill P.J. 1976. The role of Private Property in the History of American Agriculture, 1776-1976. American Journal of Agricultural Economics. 58(5):937-945. Anderson T. et Hill P. J. 1990. The Race for Property Rights. The Journal of Law and Economics. 33:177-197.

⁹ Janvry, de A. Sadoulet E. et Thorbecke E. 1993. Introduction. World Development. 21(4):565-575.

¹⁰ Bardhan P. 1989. The New Institutional Economics and Development Theories: a Brief Critical Assessment. World Development 17(9):1389-1395.

¹¹ Stiglitz, J. 1998. More Instruments and Broader Goals: Moving toward a Post-Washington Consensus. UNU/WIDER Annual Lecture. wider.unu.edu/stiglitz.htm