50Property Law

value (lumping all affected persons together and balancing their total losses against their total gains) is therefore Kaldor-Hicks efficient. Again, it is important to appreciate that efficiency in this sense has nothing to do with fairness or justice in distribution. A transaction cannot be Kaldor-Hicks efficient unless it leaves the net gainers with a gain that is great enough to compensate the net losers, but no compensation need actually be made. The outcome will remain efficient even if the gainers pocket all the gain and leave the losers worse off. If the transaction in question did involve all losers being fully compensated, and still left the gainers with a net gain, it would be Pareto efficient. Because of this, Kaldor-Hicks efficiency is sometimes called potential Pareto efficiency.

For these two reasons, therefore – because value-maximisation is not the same as happiness or utility-maximisation, and because efficiency requires only that there is a net gain in value or wealth, not that the gain is fairly or justly distributed – most people would not use economic efficiency as the sole criterion for judging the efficacy of property rules. It is, however, a criterion, and an important one. An inefficient allocation of resources may be justifiable on the basis that it produces socially or morally desirable ends, but it does require justification.

2.4. Things as thing and things as wealth

2.4.1. Functions of things

The final point to note in this chapter is that there are different ways in which an asset might be valued by a person. Specifically, it might be valued for its own intrinsic attributes, or it might be valued for the wealth it represents. In other words, at any one time an asset might serve one of two different functions for its holder: it might be held for its own qualities or it might be held as an investment. In the extract that follows, Bernard Rudden puts this distinction as the difference between things as ‘thing’ and things as ‘wealth’. So, an art gallery that owns a painting by Poussin and a tin of floor polish holds both as thing: it values the Poussin as a painting of the sort that it ought and wants to preserve and display, and it values the tin of floor polish as an aid in polishing the gallery floors. Most assets can be either thing or wealth: if a pension fund held the Poussin as an investment it would be wealth rather than thing, as would a tin of floor polish held by a supermarket as part of its stock.

In the article from which the passage below is extracted, Rudden uses this distinction to mount a sophisticated argument that we are not directly concerned with at this point, although we return to it in Chapter 8 where we look at fragmentation of ownership. For present purposes, it is sufficient to note that, broadly, his thesis is that, when things are treated as thing, modern law uses a fairly uncomplicated set of basic concepts such as ownership and possession, whereas when they are treated as wealth, the law uses concepts and techniques developed for, and more usually regarded as reserved for, feudal landholding. These involve,