The Fundamental Interrelationships Between Government and Property

The Fundamental Interrelationships Between Government and Property THE ECONOMICS OF LEGAL RELATIONSHIPS, Volume 4 Serie...

Author: N. Mercuro

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The Fundamental Interrelationships Between Government and Property THE ECONOMICS OF LEGAL RELATIONSHIPS, Volume 4 Series Editor: Nicholas Mercuro, Michigan State University

STATEMENT OF SCOPE The Economics of Legal Relationships monograph series is dedicated to publishing original scholarly contributions that systematically analyze legal-economic issues. As with other monograph series, each monograph can take a variety forms: (1) Each monograph may be comprised of a collection of original articles devoted to a single theme, edited by a guest volume editor. (2) A monograph may be a collection of refereed articles derived from the series editor’s “call for papers” on a particular legal-economic topic. (3) An individual may wish to author an entire monograph. Each monograph is published in hardback, approximately 250 pages in length and is dedicated to: • Formulating and/or critiquing alternative theories of law and economics-includingthe new law and economics, the economics of property rights, institutionalist and neoinstitutionalist law and economics, and public choice theory. • Analyzing a variety of public policy issues related to the interface between judicial decisions and/or statutory law and the economy. • Exploring the economic impact of political and legal changes brought on by new technologies and/or environmental concerns. • Examining the broad array of legal/economic issues surrounding the deregulationreregulation phenomena. • Analyzing the systematic effects of legal change on incentives and economic performance.

CALL FOR AUTHORS/VOLUME EDITORS/TOPICS An individual who is interested in either authoring an entire volume, or editing a future volume of The Economics of Legal Relationships should submit a three to five page prospectus to the series editor. Each prospectus must include: (1) the prospective title of the volume; (2) a brief description of the organizing theme of the volume whether singleauthored or edited; (3) an identification of the line of literature from which the proposed topic emanates; and (4) either a table of contents or, if edited, a list of potential contributors along with tentative titles of their contributions. Send prospectus to the series editor. Please note that the series editor only accepts individual manuscripts for publication consideration in response to a specific “call for papers.” Send prospectus directly to the series editor: Professor Nicholas Mercuro Institute of Environmental Toxicology

Michigan State University-Holden Hall East Lansing, MI 48824 PHONE: (517) 353–6469 FAX: (517) 355–4603 e-mail:[email protected]

The Economics of Legal Relationships Series Editor: Nicholas Mercuro, Michigan State University

Volume 1. Compensation for Regulatory Takings Thomas J.Miceli and Kathleen Segerson, University of Connecticut 1996, 253 pp. $73.25/£47.00 ISBN 1–07623–0111–2 CONTENTS: Preface. PART A: INTRODUCTION. Review of the Case Law and Literature on Takings. PART B: THEORETICAL ANALYSIS. The Basic Model. Landowner vs. Regulator Incentives. A Re-examination of Taking Doctrines. Capitalization and Takings. Investment-Backed Expectations and Compensation. The Timing of Development and Compensation. PART C: APPLICATIONS TO ENVIRONMENTAL PROTECTION AND RESOURCE USE. Applications of Historical Significance: Mining, Zoning, and Historic Landmarks. New Concerns: Protection of Wetlands and Endangered Species. Extension to Non-land Based Resources: Water Allocation. PART D: CONCLUSION. Volume 2. Dispute Resolution: Bridging the Settlement Gap David A.Anderson, Centre College 1996, 237 pp. $73.25/£47.00 ISBN 1–07623–0139–2 CONTENTS: An Introduction to Dispute Resolution, David A.Anderson. Case Selection, External Effects, and the Trial/Settlement Decision, Bruce H.Kobayashi. Bargaining Impediments and Settlement Behavior, Samuel Issacharoff, Charles Silver and Kent D.Syverud. Issues of Informational Asymmetry in Legal Bargaining, Amy Farmer and Paul Pecorino. Theoretical Analysis of Settlement Devices, Tai-Yeong Chung. Empirical Research on the Success of Settlement Devices, Thomas D.Rowe, Jr. and David A.Anderson. The Structure of the Legal Bargaining Game, W.Kip Viscusi and Robert L.Scharff. Risk Aversion and the Allocation of Legal Costs, James W.Hughes and Geoffrey R.Woglom. The Dawning of Arbitration Techniques, Mette H.Kurth. Alternative Dispute Resolution and the Settlement Gap, Gary B.Charness. Index. Volume 3. The Law and Economics of Development Edgardo Buscaglia, William Ratcliff, Stanford University and Robert Cooler, University of California at Berkeley 1996, 348 pp. $73.25/£47.00

ISBN 0–7623–0107–4 CONTENTS: Preface, Hernando de Soto. Introduction, Edgardo Buscaglia. PART I: GENERAL FRAMEWORK. What Makes Poor Countries Poor?: The Role of Institutional Capital in Economic Development, Michael J.Trebilcock. Law’s Contribution to Economic Growth, Thomas S.Ulen. PART II. PRIVATE LAW AND ECONOMIC DEVELOPMENT. The Economic and Legal Context of Contemporary Technology Transfer, John H.Barton. The Rule of State Law versus the Rule-of-Law State: Economic Analysis of the Legal Foundations of Development, Robert D.Cooter. Making the Other Path Efficient: Economic Analysis and Tort Law in Less Developed Countries, Mauro Bussani and Ugo Mattei. A Quantitative Analysis of the Legal and Economic Integration in Latin America, Clarisa Long and Edgardo Buscaglia. PART III. PUBLIC LAW AND ECONOMIC DEVELOPMENT. An Economic Analysis of Constitutional Law, J . G.Backhaus. Jurisprudence of the Antitrust Commissions in Chile, Ricardo D.Paredes-Molina. Competition Policy and Deregulation in Mexico in the Late Nineties, Gabriel Martínez. PART IV. PROCEDURAL LAW AND ECONOMIC DEVELOPMENT. Impediments to Judicial Reform in Latin America, Edgardo Buscaglia and Pilar Domingo. Judicial Reform: Institutionalizing Change in the Americas, William Ratliff and Edgardo Buscaglia. Index.

In memory to our colleague and friend Walter Adams …someone who did not treat the subject of this volume lightly and uncritically…

The Fundamental Interrelationships Between Government and Property Edited by Nicholas Mercuro and Warren J.Samuels Michigan State University This book was undertaken under the auspices of: Professor Stuart Nagel Policy Studies Organization, University of Illinois

JAI PRESS INC. Stamford, Connecticut

This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge's collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Library of Congress Cataloging-in-Publication Data The fundamental interrelationships between government and property/ edited by Nicholas Mercuro and Warren J.Samuels. p. cm.—(The economics of legal relationships; v. 4) Includes bibliographical references and index. ISBN 0-7623-0600-9 1. Property—United States. 2. Right of property—United States. 3. Economic liberties (U.S. Constitution) I. Mercuro, Nicholas. II. Samuels, Warren J., 1933– . III. Series. KF562.F86 1999 346.7304—dc21 99–31825 CIP Copyright © 1999 JAI PRESS INC. 100 Prospect Street Stamford, Connecticut 06901–1640 JAll rights reserved. No part of this publication may be reproduced, stored on a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, filming, recording, or otherwise, without prior permission in writing from the publisher. ISBN 0-203-48465-7 Master e-book ISBN

ISBN 0-203-58487-2 (Adobe eReader Format) ISBN: 0-7623-0600-9 (Print Edition) Library of Congress Catalog Number: 99–31825 Manufactured in the United States of America

CONTENTS LIST OF CONTRIBUTORS AN INTRODUCTION TO ESSAYS ON THE FUNDAMENTAL INTERRELATIONSHIPS BETWEEN GOVERNMENT AND PROPERTY Warren J.Samuels THE ORIGINS OF PROPERTY AND THE POWERS OF GOVERNMENT Richard Adelstein GOVERNMENT’S ROLE IN PROPERTY OWNERSHIP: HOBBES MEETS GILLIGAN David Anderson DISAGGREGATING THE CONCEPT OF PROPERTY IN CONSTITUTIONAL LAW C.Edwin Baker A PROBLEM ABOUT PRIVACY, PROPERTY AND CUSTODY: DISPUTES ABOUT THE DISPOSITION OF “FROZEN EMBRYOS” Scott Brophy and Douglas E.Edlin PROPERTY APPROPRIATION AND THEORY OF THE FIRM David Ellerman GOVERNMENT AND PROPERTY, DEMOCRACY AND MARKETS Louise A.Halper PRIVATE PROPERTY AND THE STATE Herbert Hovenkamp TECHNOLOGY, LAW AND POLITICS: THE CASE OF PRODUCT STANDARDS Samuel Krislov THE INTERPLAY BETWEEN THE PUBLIC AND PRIVATE ADMINISTRATION OF PROPERTY RIGHTS: ORDER AND EFFICIENCY S.Todd Lowry THE GOVERNMENT-PROPERTY RELATION: CONFESSIONS OF A CLASSICAL LIBERAL Steven G.Medema GLOBALIZATION, DECLINE OF THE NATION-STATE, AND FOUCAULT Gary Minda CREDIBLE TESTAMENTS, PROPERTY, AND THE ROLE OF

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GOVERNMENT Barry M.Mitnick GOVERNMENT, CIVIL SOCIETY, AND PROPERTY: RESTRAINING THE LEGAL-ECONOMIC NEXUS Laurence S.Moss PROPERTY: QUESTIONING EFFICIENCY, LIBERTY AND IMPERIALISM Pitman B.Potter WHAT GOVERNMENT CAN DO FOR PROPERTY (AND VICE VERSA) Carol M.Rose WORDS FROM A LARGELY FORGOTTEN MAN John Henry Schlegel GOVERNMENT, PROPERTY, MARKETS…IN THAT ORDER…NOT GOVERNMENT VERSUS MARKETS A.Allan Schmid INDIVIDUALS, CHOICE AND INSTITUTIONS: AN AUSTRIAN ECONOMIC APPROACH TO THE FUNDAMENTAL RELATIONSHIP BETWEEN GOVERNMENT AND PROPERTY Linda A.Schwartzstein ENVIRONMENTAL PROTECTION: GOVERNMENTS AND THE ALLOCATION AND USE OF PROPERTY Kathleen Segerson PROPERTY LAW AND EFFICIENT RESOURCE USE Thomas S.Ulen A RETROSPECTIVE INTERPRETIVE ESSAY ON THE DIVERSE APPROACHES TO THE FUNDAMENTAL INTERRELATIONSHIPS BETWEEN GOVERNMENT AND PROPERTY Nicholas Mercuro and Warren J.Samuels INDEX

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LIST OF CONTRIBUTORS Richard Adelstein Department of Economics Wesleyan University David Anderson Department of Economics Centre College C.Edwin Baker Law School University of Pennsylvania Scott Brophy Philosophy Department Hobart and William Smith Colleges Douglas E.Edlin Practicing Attorney with Friedman Siegelbaum LLP Roseland, NJ David P.Ellerman Economic Advisor to the Chief Economist World Bank Louise Halper School of Law Washington & Lee University Herbert Hovenkamp School of Law University of Iowa Samuel Krislov Department of Political Science University of Minnesota Todd S.Lowry Williams School of Commerce, Economics, and Politics Washington & Lee University Steven G.Medema Department of Economics University of Colorado at Denver Nicholas Mercuro Lyman Briggs School Michigan State University Gary Minda Brooklyn Law School Barry M.Mitnick Katz Graduate School of Business University of Pittsburgh Laurence S.Moss Economics Division Babson College Pitman B.Potter Faculty of Law University of British Columbia Carol Rose Yale Law School Yale University Warren J.Samuels Department of Economics Michigan State University John H.Schlegel School of Law State University of New York Buffalo A.Allan Schmid Department of Agricultural Economics Michigan State University Linda A.Schzuartzstein School of Law George Mason University Katheen Segerson Department of Economics University of Connecticut Thomas S.Ulen College of Law University of Illinois at Urbana-Champaign

AN INTRODUCTION TO ESSAYS ON THE FUNDAMENTAL INTERRELATIONSHIPS BETWEEN GOVERNMENT AND PROPERTY Warren J.Samuels

INTRODUCTION In 1989 under the auspices of the Policy Studies Organization directed by Stuart Nagel of the University of Illinois, Warren J.Samuels published Fundamentals of the Economic Role of Government (Westport, CT: Greenwood Press). This was a collection of commissioned essays responding to the question-What are the most fundamental things you can say concerning the economic role of government? The present book is a sequel, a collection of commissioned essays responding to the question-What are the most fundamental things you can say concerning the interrelations between the institutions of government and property? What the earlier volume had to say about government, about the diverse approaches to the economic role of government, about the various models of polity and economy, and about the legal-economic nexus, obviously bear on the topic of the present collection. Inter alia, it is clear from the earlier collection that while there are positive and normative theories of government, many of which describe the relation of government to other parts of society, government is not a given concept. The collection also established that government is important; that the study of government can be undertaken on various a priori ideological or on closely argued empirical grounds; that multiple taxonomies of the economic role of government are deployed; that most writers theorize about government in the context of liberal democracy; that power and selective perception are both important relevant concepts, that both selective perception and especially power can be conceptualized and theorized about in numerous ways; and that in establishing any social process, normative direction is given to government, and thereby the process in which the determination of whose interests government is to be used to protect is worked out. As will be seen below, many of these same themes pertain to property and to the fundamentals of the interrelations between the institutions of government and property. As with the earlier volume, the authors of commissioned essays come from numerous fields. Each author was given complete discretion in formulating their essay. They were told that the editors’ desire is that the fundamentals they identify be positive and nonnormative, though we are aware that a strict

The Fundamental Interrelationships Between Government and Property

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approach would be question-begging and perhaps unduly narrowing. We also said that we would like their essays not to be property-government system specific, but that this too should not be taken to unduly narrow discussion. We asked that, apropos of both ideology and particular property-government systems, their essay identify the subjects with respect to which both ideology and specific property-government systems take positions, adding that their specific points should penetrate to the deepest (most fundamental) levels of property-government organization, to the existential problems that define that level and not with the various positions, or sets of social relations, that can be taken on them. As the reader will see, the authors took full advantage of the discretion given them, and responded to the question posed to them, and to these general admonitions, in various ways, all illuminating both severally and jointly.

PROPERTY It will be useful to commence this introductory interpretive essay by reproducing, with the kind permission of the publisher, Edward Elgar, the entry “Property” authored by Warren J.Samuels for the Elgar Companion to Institutional and Evolutionary Economics (Samuels 1994, pp. 180–184). Many of the themes presented in that entry clearly pertain to our understanding of the present subject. William Blackstone, in his Commentaries on the Laws of England postulated the right of property as “that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe.” One of the “absolute rights,” says Black-stone, “inherent in every Englishman, is that of property: which consists in the free use, enjoyment, and disposal of all his acquisitions, without any control or diminution, save only by the laws of the land” (II.I.2). This understanding pervades the mentality of modern Western civilization, as belief in private property and the autonomous individual replaced the institutions and mindset of medieval feudalism. Yet the Blackstonian conception obscures some fundamental aspects of the nature and operation of private property in modern economy and society. Property is one complex form of participation in economic decision making; it therefore is a form of power understood as participation in decision making and/ or the bases thereof. Property rights, accordingly, are interests given legal protection as property. To have property is to have one’s interests (however identified by the individual) defined and protected as property and thereby to participate in economic decision making. Property, or the system of property, including its distribution, is part of the larger social system. The law of property is part of the constitution of society. Indeed, in the absence of a written constitution, the law of property becomes for many practical purposes the constitution of society. Property is not an absolute; it is a bundle of rights and obligations or duties.

An Introduction to essays

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Each right, or each bundle of rights, is relative to other rights, or other bundles of rights, and to legal and nonlegal (for example, customary) determinations of limitations on rights. Moreover, although in principle it is better for the individual to have property rights than not to have rights (rights represent protected interests), the economic significance of property rights is of contingent, problematic significance: The economic value of a right is dependent upon market and other conditions, including the legally protected interests of others which permits them to compete and thereby potentially to reduce the economic value of one’s property (the very nature of competition). Thus, the meaning of private property can change with a changing system of economic organization. Adolf Berle and Gardiner Means argued in The Modern Corporation and Private Property (1933) that the rise of the modern corporation, and its management, has been accompanied by a fundamental change in the locus and nature of private property. Berle and Means demonstrated centrifugal dispersion of ownership and centripetal concentration of control. The discretion of legal holders of equity interests is confined to holding or selling stock. The managerial class has discretion over the issuance of stock and the acquisition, use and disposition of corporate assets. The stockholders have only pro forma control over management. Formal ownership of property may or may not provide for participation in economic decision making—a view also stressed, in the context of central planning, by Milovan Djilas in The New Class (1957). Property is not protected by government because it is property; it is property because it is protected by government. The slogan, “the role of government is to protect property,” is misleading because it fails to acknowledge that what is thereby understood as property is already established protection of interests and that it was government which made property what it is in the first place by selectively protecting interests. One of the functions of government is to determine, in the case of conflicting interests and claims, which interest is to be recognized and protected as property. The putative exclusive nature of rights and the ubiquitous conflicting interests and claims pertaining to property underscore the importance of the dual nature of rights, notably property rights. Whenever economic actors are in the same social space, for one actor to have a right is for all other actors to have a nonright and thereby to be exposed to the exercise by the actor of his or her rights. The dual nature of rights underlies the reciprocal nature of externalities: Whether Alpha is allowed to harm Beta or Beta is allowed to harm Alpha, and thereby the substance of the realized externality, will depend on who has what rights and whose interests are protected by rights. Property rights can be defined, mistakenly, as if they existed independently of the regulatory or police, and tax, powers of government, in which case the exercise of its regulatory or police and tax powers by government becomes a fundamental infringement on and loss of property rights. Alternatively, property rights can be defined so as to recognize and encompass the ongoing role of the regulatory or police and tax powers of government, in which case the exercise of


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those powers is a constituent part of the nature of property itself, and no such fundamental infringement or loss occurs. In this regard, regulation is the functional equivalent of deregulation; each is a mode of protecting interests as rights, albeit the interests of opposite parties. Thus, the Blackstonian formulation of a “sole and despotic dominion… without any control or diminution, save only by the laws of the land” commences by seemingly affirming the first definition but effectively adopts the second. In Adam Smith’s “Lectures on Jurisprudence,” he utilizes the concept of the impartial spectator as a mode through which social control exercised by changing beliefs in what constitutes property and the use of property is administered. In modern society and economy, property rights are what the law says they are, granted within the penumbra of belief and customary usage, a penumbra which is heterogeneous, thereby permitting and indeed requiring the exercise of legal choice. Conflicts arise typically not over whether there will be a covering body of law, as there always is, but over legal change of law and thereby legal change of the interests to which government is to be used to give its protection. A distinction needs to be drawn between the institution of private property and particular property rights. To have the institution of private property does not necessarily mean that some particular private property rights are to be adopted, or that there cannot be change of property rights and thereby of the interests to which government gives its protection. Private property rights have sometimes been juxtaposed, often in a pejorative manner, to human rights. The juxtaposition is incomplete and misleading, although perhaps of rhetorical value in the mobilization of political psychology. Property rights are the rights of human beings, either as individuals or in organizations, such as corporations. Apropos of the corporation, the corporation as a legal entity is juxtaposed between management decision making and those who feel the effects of decisions. Corporations arose in part as a legal buffer for owners and, eventually, for management. This permits evasion of public accountability for decision makers on most but not all issues. Yet this insulation applies to most if not all private property, corporate and individual. Moreover, inasmuch as property signifies the selective protection of interests and thereby established participation in economic decision making, it is necessary to recognize other modes of legal protection of interests and establishment of participation in decision making. These modes, for example, labor relations and protective labor legislation, social insurance and various other “entitlement” programs, not recognized de jure as property rights, constitute private property equivalents in performing the same functions as property rights, albeit often if not typically for different individuals. The genesis of extant property rights can be comprehended in two ways, ways which appear to be mutually contradictory but which are both nonetheless historically true, although they give rise to two different legitimations of property as an institution and of particular property rights. In one respect, property rights can be seen as deriving from the control of government by those


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otherwise in a position of power or influence, such that they are able to get their interests protected as property by government. In this case, property is established through the control of government power. In another respect, property rights can be seen as emerging from efforts to protect private interests against government, or against the use by others of government to adversely impact the interests already protected as property. In this case, property is a limitation on government, not a consequence of not government. One can argue that different particular rights arose in each of these contexts, although it is not always clear in which context a particular fits. It is also important that even when understood as protection against government, private property is in fact a matter of legal rights; thus, in both respects property rights are a matter of law, even when the law is understood to limit government-law itself. Moreover, also even when understood as protection against government, private property rights function to structure private power; that is, particular private rights are relative to both government and to other private rights. Property rights have, therefore, a dual private and public character. They eminently are private rights but they have a public, that is, legal, character to them; the private rights that are of economic significance are public or legal in origin and status. Moreover, property rights have the technical public-good character of all rights: determinations of private rights for one party is not only a matter of public or legal action, but applies to all other relevant parties, without ability to exclude and without additional cost. There are theories that explain and theories that legitimize (and others that denigrate) property as an institution and property rights in general, and a fundamental distinction must be drawn between them. Theories which purport to explain property are concerned with how and why particular private property arrangements have arisen and deal with what is, or has been, the case. Theories which propose to either legitimize or delegitimize particular private property arrangements are normative in character and deal with questions of desirability, of what ought to be the case. Inasmuch as one cannot derive an “ought” from an “is” alone, but only with additional normative premises, there is a fundamental disjunction between theories of description-explanation and theories of legitimation-delegitimation. Nonetheless, in practice the two are often conflated. In the conventional interpretation and use of John Locke’s theories of property and government, for example, one finds that his labor appropriation theory of property is taken to be both explanation of the origin and legitimation of the existence of property in the state of nature, though these are quite two different matters, and that the labor appropriation theory is cavalierly applied to civil society, whereas Locke himself argued that in civil society the rights that count are a function of civil law itself. In conventional microeconomic theory, property (and arguably all other rights) constitute the initial entitlements on the basis of which trade takes place, leading to Pareto optimal resource allocations. A central thesis of institutionalist theory (if not also that of other schools) is that there is no unique Pareto-optimal allocations, only power-structure- or rights-structure-specific outcomes. In such


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a context, the allocation of resources is a function of the initial determination— definition and assignment—of rights, including property rights. Broadly, resource allocation is a function of market demand and supply, which is in turn a function of power, which is a function of property rights (understood as a mode of participation in decision making, or power), which are a function of law, which is a function of government, which is a function of the results of the contest over the control of government to use it to protect certain interests rather than others. Government and property, therefore, are interdependent variables; each is both dependent and independent relative to the other; each is formed and influenced by the other. The ineluctable problems are always: which, or whose, interests are to count; through which institutional or power structure are they to be defined so as to count; and with what legal change of law are legal rights to be revised.

A SYNOPTIC INTERPRETATION AND CRITIQUE OF THE CONTRIBUTIONS TO THIS VOLUME Now, in the light of these observations on property, let us consider the several contributions to this collection, the purposes being both to introduce them and to interpret and critique them (in the sense of literary criticism) in the context of the foregoing. Be the latter as it may, each essay stands on its own as an answer to the query—What are the most fundamental things you can say concerning the interrelations between the institutions of government and property? Richard Adelstein: Adelstein’s essay illustrates one manner in which property and government are institutions, not only both expanding and contracting freedom (John R.Commons) but also comprising some set of beliefs (Thorstein Veblen). The essay deals with the ways in which the relation of property and government is a matter of ideology and sentiment and theory, as well as of empiricism which itself is influenced by ideology and sentiment and theory. One illustration is the multiplicity of possible interpretations and applications of constitutional clauses (e.g., the takings clause in relation to the police power versus eminent domain) as different ideologies, sentiments and theories are read into them. At bottom is the conflict between the Lockean idea that property is pre-governmental and the Benthamite idea that property is what it is because of government action or inaction—but always in combination with selectively specified property rights, which is often the point at issue. Here we have the critical role of the courts—and therefore of the ideology, sentiments and theories held by the judges. One example of the vast subtleties involved is in Adelstein’s quotation from Justice Field in Allgeyer: the language “in all lawful ways” points to the role of the courts in determining as between eminent domain and police power reasoning; after all, what is “lawful” is precisely the point at issue. The predicament is precisely that having to do with Blackstone’s definition of property, discussed in Section II, supra: property is an


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absolute right subject to the law of the land, which determines what is “lawful” and therefore what is property. David Anderson: Anderson’s essay is a good example of what Adelstein calls the Lockean approach to property, but a more subtle version of that approach than one often finds. Private property of sorts can exist without government, though perhaps not too securely; in any event it hardly pertains to the existing economy, with intangible and incorporeal interests, for example, given protection as property. Government protection of property is a matter of the relative costs of private versus governmental protection, the norms and ethical standards of a community, and the degree of contest over established property distribution. Anderson calls attention to the critical roles of definition of terms and of authority status. Interestingly, Anderson’s treatment of the Coase Theorem does not apply to Ronald Coase. Coase emphasizes the non-zero transaction cost case and how different transaction cost systems yield different allocations of resources, hence how legal rules and institutions matter. The example of the Coase Theorem being formulated in a manner to indicate the irrelevance of government is indicative of both the ideological use to which certain lines of economic analysis can be put and the role of antecedent assumptions, in matters of property and government, which may bear no relation to existential reality. Edwin Baker: Baker rejects the notion of private property as an undiffferentiated singularity in favor of property as a collection, or bundle, of diverse rights each with putatively different functions which have different normative valences, none of which rights necessarily go with any other. The unified conception serves no meaningful descriptive or analytical function, and is mainly a rhetorical—ideological or sloganizing—device. Baker’s is a social constructivist conception of property: The bundle of rights which comprises private property is given by neither nature nor theory. It is a product, necessarily, of social decision-making processes which work out the details of what constitutes property. The most relevant decision-making process is that of law/politics; property is essentially a political or governmental phenomenon, at the levels of both constitutional and ordinary politics. Moreover, there are no universally recognized (or recognizable) decisional criteria or rules. Baker’s analysis requires that distinctions be made between rights as (1) claims, (2) legally recognized claims, and (3) the relevant protective sanctions and/or procedures. The disaggregation of property calls attention to the variety of and conflict among different claims and values, all of which must be worked out. Such is made further complicated by recognition of the different functions served by property: allocative, sovereignty, protective, privacy, use, personhood and welfare—much of his article explores these complications and considerations. Different functions are involved, are at stake, in relation to different property claims, and choices/ tradeoffs must be made. Law and politics are the essentially and inherently collective processes through which choices are made. Inasmuch, for example, as there is no unique best allocation, governmental choices


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between competing property claims govern the actually existing set of property (and other) rights and thus help determine the achieved allocation. Moreover, as Baker says, no singular plausible normative or economic theory can abstractly govern those choices or conclusively explicates the array of relevant legislation and decision. Determinations have to be made as to when uses of property are abusive and when they are not; when government actions are improper or invidious; when regulation goes “too far” and when not; when a taking is a taking and when not (in the process he tries to make sense of the takings’ decisions), and so on. Property is willy nilly power, and exchange is an exercise of power; structuring property serves to structure and channel the exercise of power. Moreover, Baker recognizes that property always exists within, indeed is an important aspect of, the structure of dominance in society and the partisan interests of important classes. Baker’s concluding section gives effect to two points: (1) the fact of social construction of property, that somehow, somewhere decisions are made in its composition and to change it, and (2) liberal democracy as the form of decision making taken by social construction. Baker’s analysis thus puts into perspective the conventional language, for example, (1) that government protects property: government determines the interests it will protect, and some of those protected interests are what we call property; and (2) that courts determine when legislation is a constitutional violation of property rights: this involves court, rather than legislative, determination of whether Alpha’s or Beta’s interest will be given the protected status of property. Scott Brophy and Douglas E.Edlin: Brophy and Edlin discuss the problem of frozen embryos permitted by in vitro fertilization. Their contribution illustrates several important points, including (1) the ineluctable necessity to have a body of covering law pertaining to any area of human relationships, such that with new medical technology, new conflicts arise, leading to recourse to courts and/or legislatures to make new law; (2) the multifaceted nature of legal relationships and thereby of legal issues, leading to a multiplicity of approaches that interested parties and courts/legislatures can take to working out a solution; (3) that property concepts and discourse constitute but one of these approaches; (4) that legal reasoning tends to look backward to formulate analogical treatments of new problems—an approach which so far from avoiding multiplicity of approaches serves as a means of their coming to fruition; (5) that adoption of one approach or another may substitute for direct consideration of the question, What policy do we want? which is to say, How should frozen embryos be treated? such that reasoning by choice of analogy is a means of solving the problem—or of stating the solution, given whatever basis on which the choice was in fact made; and (6) the utter complexity, messiness, and ultimate exercise of choice involved in working out/ socially constructing the law to cover novel situations. Also clear are (7) that any desire to avoid having the state intrude on a private decision is logically fallacious, insofar as the state willy nilly must decide whose private decision it will be; (8) that any desire to


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have a uniform treatment across jurisdictions of people similarly situated confronts the federal nature of government in the United States; and (9) the relativist nature of all idealized, absolutist, natural-rights expressions of any or all of the approaches which might be followed—no less and no more relativist than the solutions actually chosen. David Ellerman: Ellerman’s argument is essentially as follows: (1) the government treats as property that which comes about through private contract; (2) included in/as a result of private contract is the determination of who has right/title to the product; (3) the resultant entitling (property right creation) will vary between capital hiring labor, and labor hiring capital; the factor which does the hiring secures title to the product; and (4) the corollary that the structure of social power “determines” who does the hiring. Ellerman’s explicit focus is on the theory of the firm, not on the question concerning the interrelations of property and government. With regard to that matter, however, his argument is that government, by enforcing the titling due to contract is reenforcing and giving effect to the structure of social power. The analysis of the firm is instrumental to that result. Government prohibits slavery but not contracts which alienate the final output from labor and leave it in the hands of capital, hence the appearance, the “myth,” that capital, which only appropriates the output by force of contract, is only getting its rights of ownership. It has been said that the law of property is the de facto constitution of England; somewhat the same thing is true here. Ellerman shows not only that the right of ownership (and the related ideology) is separable from the right of appropriation, but how that is so and, by implication, how government, by enforcing contract rights generated by capital hiring labor, gives effect to and reenforces the structure of social power which (as Rodbertus and Marx understood) results in capital employing labor and not vice versa. Ellerman identifies the “myth” that rights to the product are due to the ownership of the means of production, its role in the justification of distributive shares, and its application to both capital theory and corporate finance theory. Government action and inaction is seen to be fundamental to basic economic concepts, categories and theories. The key, Ellerman says, is neither ownership per se nor the market mechanism for appropriation, but the legal validation of the capital-hiring-labor employment contract; all else flows from that. Though surely the owners and managers of capital must believe that ownership conveys the right to employ, Ellerman argues it is a matter of contract, and that the private-property economic system would be different if the capital-hiring-labor employment contract was not enforced and if law facilitated self-employment and labor hiring capital. Eller-man’s arguments are both positive and normative, and the normative argument rests upon his positive analysis of the role of government with regard to the capital-hiring-labor employment contract. Louise A.Halper: Halper examines property and government in a complex context whose elements include (1) the conflict between two ontological positions, (a) property rights as antecedent to government, hence the implication


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of nonintervention, and (b) property rights as empirically based on the systems of economic of political relations, hence (by implication) the legal-economic nexus; (2) the twin beliefs that (a) market economies require political democracy and (b) political democracy requires market economy; (3) the tension between (a) markets as a function of rights and (b) rights as a function of markets; and, inter alia, (4) the relevance and importance of (a) the structure of domination and (b) the distribution of wealth. (For (5) and (6), see below.) The abstract autonomous individual takes on actual form within all these elements, and legaleconomic policy debate is conducted within a tension between emphases on historical facts and on eternal truths, the former seen by the latter as neglecting the latter and the latter seen by the former as out and out selective reification of the status quo. Halper then points to the system of property which comprises both property and propertylessness, as a function of the distribution of wealth, with the corollaries of (1) a saving-investing and employing elite and (2) those who have nothing to sell but their labor. A fifth element, therefore, is (5) the system and structure of dependence and independence; and the sixth is (6) the system and structure of security and insecurity. Halper concludes her analysis with a discussion of aspects of the role of government in the formation of propertylessness which both is reminiscent of and asymptotic to Ellerman’s analysis concerning the conditions and consequences of who gets title to the final product and also points to the more general point that government is used to structure markets, allocation and distribution by hierarchically superior groups in their favor, thus leading to a seventh element, (7) the conflict between (a) using government to advance already protected interests and (b) using government to advance interests not as yet (or as much) protected, and an eighth element (8) rival theories of how property promotes or does not promote interests, especially of the masses of the propertyless. Herbert Hovenkamp: Hovenkamp’s approach to property and the state combines three elements: a neoclassical view of how the economy operates, a constructivist view of property, and a view of modern property as emerging through both state and contract. He envisions perfectly competitive markets with full information and fully defined property rights as generating efficient results, with effi-ciency—or maximum value of output—understood in terms of exhausting gains from trade. The role of the state in fully defining property rights is critical. Governmental decisions about the recognition and scope of property rights through property rules affects value but most distinctive modern property rights arise, in his view, from contracts, thereby making government recognition and enforcement of property rights an affirmation of the will of the contracting parties. (Ellerman, for one, might suggest that government exercises choice in doing so.) Property rights are also influenced by the laws which insinuate into the valuation process values and considerations other than those of the contracting parties. But in a “perfect” world, the assignment of rights will have no affect on their final ownership, because the property will end up in the hands of the party who values it most—the logic of the Coase Theorem.


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Hovenkamp is aware that actual markets are far removed from perfect markets: adoption of different transaction cost systems will affect allocation (the assignment of rights is not allocatively neutral), and bargaining in the image of the Coase Theorem is bilateral, and probably with asymmetrical information, thus suspending two of the critical assumptions of the “perfect” model. So there is no unique maximization of value, or of physical output, or of property values, only maximization influenced by actual property rights systems. Property rights are a function of both state action and the actions of contracting parties. Governmental corrective action, say, in the case of externalities, must choose between which of each pair of reciprocal externalities it will support. Interestingly, Hovenkamp’s analysis also implies that taxes—and presumably also government spending—can be considered part of the system of property rights. Also implicit in Hovenkamp’s analysis are (1) the irrelevance of natural rights theory for analyzing and justifying property rights (or very much of the simple liberal theory as set forth in the last essay of this volume by Nicholas Mercuro and Warren J.Samuels) and (2) the importance of power in bargaining (contract making) and in determining whose interests government will support as property rights. Relevant to both points is the ubiquity of standardized contracts, to which the nondrafting parties either adhere or reject, bargaining in the classical sense being relatively limited. Samuel Krislov: Krislov knows what very few seem to appreciate: the importance of product standards for an industrial economy. It is always a matter of collective action, sometimes governmental, other times not. And he is aware that because of standards—and because of the process by which standards are formed—the relationships between freedom, property and government are highly problematical. More than that, too, he shows (a) the difficulties of overly general theorizing, (b) the multiplicity of arrangements, practices, and results, as well as relational patterns, (c) technology as both constraint and as chosen and shaped by political and economic agents, (d) how the systems of formal and informal product standards are deeply embedded in culture and social system— and that such is also true of markets, and (e) that the relations between nominally political and economic agents is symbiotic, two-way, and so on— such that all forms and uses of power are problematic, laden with potentialities not certainties. The paper is rich in showing diversity and complexity, and how much the story of property and government is in the details—details typically eclipsed and finessed by general formulations, whether or not driven by ideology of immediate material interest. S.Todd Lowry: Lowry envisions different economic systems—ranging from the traditional and flood-plain agricultural economies of the ancient world to feudalism and industrial capitalism—as so many different administrative systems. Each has its own rules and structures of rights which give systemspecific orderliness and predictability facilitating rational planning and effective production. Each is also profoundly influenced by the dominant technique of production (technology). But each actual system, especially each’s legal and governmental structure


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and system of policy, is, on the one hand, a hybrid reflection of previous economic and political conditions and, on the other, a hodgepodge of historically explainable premises rather than a coherent and logically consistent intellectual fabric. Although the modern distinction between “privat” and “public” does not strictly apply to all historical systems, they all involve various systems of governance in the form of various combinations of ruling institutions and participative rights. It is always difficult to separate the governmental from the economic, especially in the ancient civilizations, in which the system of formal control and the system by which a livelihood was obtained were coterminous; in the modern system, the legal-economic nexus is also present, only more recondite. Modern states, in particular, exhibit a tension between incentive and productivity in matters of regulation and taxation. In all systems, property rights, in such form as exist, are synthetic and historical, emanating from a multiplicity of sources. Steven G.Medema: Medema identifies elements of the deep legal bases of the economic system—its existence, structure and performance. He identifies and shows the unrealism and wishful-thinking nature of sentimental, ideological beliefs about property and government, which are powerful but misleading. Like much else about property, the idea of natural rights is only a part of the belief system which people bring to issues of policy (see the essay by Richard Schlegel) and only beg the issue, while simultaneously both obfuscating the fact that an issue exists and channeling selective perception of whose interest is to count. Medema establishes that the social control of property is both ethical (nonlegal) and legal, using both Janet Landa’s example of socially and ethnically close people and Robert C.Ellickson’s example of cattle men and farmers, providing meat to the importance of the passing of non-stranger situations to understand the increased reliance on legal action (legal social control) pertaining to property, thus providing added meaning and empirical weight to the Benthamite positivist view that the rights that count are those of the law (apropos of the stranger-non-stranger distinction, see also Carol Rose’s essay). Government and property are both involved in the choosing, that is, valuational process, but property itself is a function of the governmental exercise of choice as to whose interests are to count. Some of this exercise of governmental choice takes the form of choosing between different series of precedents, and some, however inadvertently, the structure and level of transaction costs. Gary Minda: Minda seemingly is silent on private property, seemingly concerned only with the economic role of government. But there is more to what he says than what might first meet the eye. Minda points to a technologicalmarket nexus replacing the legal-economic nexus. However, he notes (1) that the economic role of government will remain important, however much relegated to the background and (2) the growing importance of international organizations, as well as of (3) coordinated regulatory efforts by nation-states. Certain implications may be drawn from the foregoing: (1) the international corporate system will tend strongly to replace the nation-state system, and is


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doing so increasingly; (2) conflicts among corporate entities will generate the future’s international equivalent of the Law Merchant—a form of government; (3) international organizations will comprise, de facto or de jure, the “formal” government of the future international order—the prelude to world government, one dominated by the international corporate system probably more than by the nation-state system; (4) the United States is a critical force behind the international organizations and the combination of it and them constitute an amorphous first, de facto world order; (5) the institutions and the order will become transformed as more is expected of them; (6) the world order will be the situs of efforts to regulate concerning the environment, working conditions, and “local” conflicts. (The germs of international policing of local conflicts are present, and growing.) Minda says that nation-states can promote but cannot control the Internet (a proxy for other things, too). But different ways of promotion represent, in fact if not in belief and aim, different modes of regulation—just as different ways of institutionalizing private property constituted its regulation. What, then, of property? What Minda’s analysis amounts to is that, whether or not localized in the legal-economic nexus, a system of governance has existed and will continue to exist, involving the power to make important decisions affecting others, some in nominally public (government) hands and some in nominally private hands. The “background” operation of government is pertinent in this regard, as are the actions of the international organizations. But the corporations will, through the internal policies and their contracts with others, form and reform the new system of governance, in effect the new property system—just as they have done in the past under national capitalisms. Minda correctly emphasizes the critical roles of (1) technology and (2) belief systems-ideas-ideology-intellectual paradigms. These latter, in changing form, will fuel the new order, the new system of governance—and people will more or less so come to believe in them that they will consider them the definition of reality. Apropos of the other essays, for example, Ellerman’s analysis concerning who gets the title to output, and thereby the question of the structure of social power, will remain critical. The greater mobility of capital in relation to labor will be critical, as firms use contracts to work out the new institutions of the market, as they have been doing all along, facilitated and sanctioned by governments. The new international order will approximate what Laurence Moss, in his essay, calls “Civil Society” but it will also constitute governance, with, apropos of Moss’s fears, the same problems as government. The future international order will have problems and potentialities more or less comparable to those of the past. But they will, it seems be more constituted by the international corporate system than in the past and with greater diversity of factors and forces, including strong residues of the present nation-state system, especially the presently hegemonic states. Barry M.Mitnick: Mitnick identifies and analyzes a very deep account of


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government as part of the social construction of reality in a world cognitively constructed and valorized by its participants. In his view, government helps create and legitimize arrangements which enable reliable bases of action, facilitating and stabilizing inter-agent relations through what he calls credible testaments: statements about events and conditions of the past and present which help in the construction of the future. These include government records and private documents, such as contracts, which constitute the legal forms serving as the critical bases of property and other relationships. Exchange involves not only rational calculation and the transfer of assets but also the use of socially constructed forms and participant beliefs, in whose construction government participates. Mitnick effectively uses the work of Douglass North and Barry Weingast, among others, to trace the devolution of the critical forms of checks and balances within government, and the role of government finance in forming capital markets and banking institutions—including in both respects arrays of instruments of credible testament. The actions of government officials and the promulgation of official ideological rationalizations have helped build credible commitments through the erection of belief systems, official documents, and various means of enforcement of and limitation on government power, including public expenditures. The public and private sectors have each contributed to the development, for example, of credible procedures and language for the auditing and financial reporting of both joint stock companies (corporations) and government. Mitnick’s analysis establishes the historical and social constructivist nature of both property and government, neither given, transcendent or self-subsistent, but each involving so many systems of belief—beliefs abetted by governmental creation of various means of certification. At one point, Mitnick writes of the king still being “able to act outside the rules of the system, remaking them to serve his own ends.” There are three points here: first, the content of the rules of the system are precisely the matter to be determined; second, the ostensible rules outside of which the king acted were those which may be seen as desired by others; and third, the king, the nobility and the common people were engaged in a continuing process of working out/ revising those rules—a process which continues to the present day. Apropos of Mitnick’s discussion of principal-agent relationships, one distinguishing feature of government as an agent is the political cum legal process of working out both ends and means. Two interrelated processes are therefore involved, that working out the rules of the system and that working out both ends and means, neither of which is established once and for all time; this is what Samuels has called the legaleconomic nexus. In this context, the construction of credible testamentary evidence is suf-fused with the problem of continuity versus change and is therefore problematic in its economic significance. Credibility promotes continuity (reliability) which promotes Schumpeterian dynamic constructive change; but dynamic constructive change generates alteration of both the rules


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of the system and the operative ends and means—and it is confident belief in constitutional and other doctrines, establishing the deepest credible testaments, which both make it all possible and help structure the results. Laurence S.Moss: Moss presents a sophisticated version of the Lockeanlibertarian position, with its important concerns over tyranny. His essay nicely illustrates how much the focus of relevant literature has been on providing an intellectual defense of the property system in the status quo—ironic because the status quo property system not only “works” but involves multitudinous continuous change. Security of rights is important, and so is “abuse” of government power, though “abuse” is subjective. But the institution of property is itself the means of securing interests through property rights, and the institution “works” to that end, Richard Epstein and colleagues’ lamentations notwithstanding. Moss appreciates that the advent and eventual cultural hegemony of capitalism, during the last three centuries at least, involved ubiquitous changes in law, including, indeed especially, the law of property, derivative of the rise of business; to wit, the transformation from landed property law to nonlanded property law. The law was transformed to institutionalize business and was further transformed during the reign of business, to this day. Gradually and incrementally, not all at once, but in truly multitudinous ways, constantly. Yet people still have believed, or been induced to believe, that law protects existing property arrangements. Ironically, this belief system nonetheless thereby enables the incremental but nonetheless wholesale change of property arrangements. Moss’s sentiments concerning disincentives to much legal change are important but must be kept in context. If they were wholly and unequivocally correct, (1) the transformation from landed to nonlanded property would either not have happened or happened only partly so, with disincentive effects reckoned in terms of the past, but then-hegemonic, landed property system, focusing on agriculture and landlord (economic and political) interests (that was what the corn law controversy was all about—plus zillions of other legal changes; and (2) we would not have had the enormous economic development/rise in living conditions which accompanied the aforementioned continued transformation of the law of property. The problem, as Moss appreciates, is which/whose changes are to take place, and how is the process of change to be regulated. The editors’ published analysis of the compensation problem (takings clause) conclusively demonstrates, we think, that it is impossible to compensate for all losses due to legal change of rights; the substitution of eminent domain for police power thinking is futile, because necessarily selective—whether we like it or not (Samuels 1974, pp. 113–134; Samuels and Mercuro 1979, pp. 157–194; Samuels and Mercuro 1980, pp. 103–128). The literature on takings thus has turned into a quest for rules, with the conclusions, we urge, that no set is conclusive or self-enforcing and that not all losses will be compensated; in part because different tests define injury and evidence of injury differently. The search for ubiquitous compensation is futile;


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so is the search for rules. But the search performs the function of maintaining belief that property rights are being protected. One can see this as a fraud, or as a cultural necessity, that is, absolutist legitimation. The apparent willingness of various writers to rely on utilitarian considerations in the reformulation of property rights (often but not only, the reconciliation of conflicting past property rights) brings to mind a modern version of the old saw, that no man’s property is safe when the legislature is in session (how ineluctably true!): no man’s property is safe in the hands of the benefit-cost specialist. All one needs is to “prove” by utility calculation that Alpha’s dollar means more to Beta than to Alpha, and property is changed. How ironic when in the hands of those who affirm that property precedes (or should be treated as if it preceded) government and that takings, broadly defined, should be compensated! Moss’s position is a good example of the sensible and commonplace (I do not mean to denigrate it by saying that) understanding of property in relation to government. But with regard to how much change of rights is permissible and when such change is compensable, no formula will suffice to apply his argument, however agreeable his sentiments—and he knows it: vide his concluding sentence. Pitman B.Potter: Potter shows as well as can be done that property has no independent ontological existence; that, if anything, property has a realpolitik and social constructivist nature; and that theories of property are not about something ontologically given but form the contents of political discourse about whose interests should count and the means of their counting. He provides a broad-gauged survey of classical and contemporary classical liberal and contemporary approaches to private property, for the most part theories of legitimation of property, with their differing economic and political and communitarian rationales. These theories accept private property but differ as to the grounds of their acceptance, the nature of the justification (absolutist versus relativist), and the putative strength of a presumption against legal change of property rights. The belief, however, in “largely undiminished property rights” fails to reflect the empirical facts that these rights are always situational, a temporary product of evolution, and that the redetermining of the situation, and therefore of the content of what constitutes property and its various protections, is always the point at issue. Absolute property, so-called, is only relatively absolute. The realpolitik and social constructivist nature of property interestingly is identified and explored by Potter in regard to the various inevitable privileging of certain interests and marginalizing of others in the formation through international organizations and conventions creating a body of uniform international commercial and property law under the rubric of globalization. Globalization does not just create uniformity; it creates uniformity that entrenches certain norms and certain interests and not others, thus replaying on a global stage the process historically operative within nation-states. Insofar as the unifying law limits the power of states to the advantage of certain interests, one


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can say that government is not restricted but actually is deployed in favor of those interests and not others. The role of elites within industrialized countries and of industrialized countries per se in the formation of a body of law which favors them, in part through their control of the international organizations, also replays parallel historical intra-national developments. Generalizing, if property and associated law is drawn up effectively on behalf of Alpha interests, and Beta interests are sacrificed, (1) it is not surprising that Alpha interests will adhere to an absolutist theory of property—even though their activities may belie same; (2) Beta interests will likely eventually seek a redress of their grievances; and, inter alia, (3) the issue will not actually be the attractiveness of, say, the economic and/or utilitarian justifications of property, but whether only some or putatively all people are to have their interests, as they see their interests, represented in the continuing reformulation of property. The problem, in other words, as Potter recognizes, is the conflict between hierarchy and equality, between institutions of property and government generated on behalf of some interests and institutions responsive to all interests, between economic and political oligarchy and economic and political democracy. This is as true of industrialized and unindustrialized societies in a global context as it was of landlord and peasant and of capitalist and laborer in historic nation-states. Potter also provides a critique of the ubiquitous rational utility approach, raising such questions as: whose utility is to count, and how; whose liberty is to count, and how; and what about group or universal interests, such as environmental protection. He shows how the operative question is not “government or no government” but which/whose conditions of utility maximization and liberty will government support, especially with regard to reconciling competing claims. Instead of a preoccupation with elite interests and justification and accountability in elitist terms, Potter raises the question of broader, more widespread interests and accountability. Institutions of property and government produced under elitist conditions will likely be different in material respects from those produced under democratic, or pluralist, conditions. Discourse which reifies Alpha law, law generated under Alpha auspices, is still discourse; the same is true of discourse which reifies Beta law. Absolutist theories, including theories of efficiency, will build in and give effect to existing rights by considering only those interests registered and valorized in markets, may be appealing for their seeming logicality, but they are not empirically accurate, however much they may be useful for selective parties to advance their interests. Carol Rose: Rose’s essay suggests much of the vastness of property and of proerty-government relations. Her approach of identifying bottom-up and topdown sources of property is useful; and her argument that both are simultaneously present and empirically important is sensible. Her emphasis on the importance of large-number, large-scale, hence impersonal “stranger” relations is important, inter alia, for the relative rise of legal in contrast to informal, non-legal social control. Interestingly, though with some passing allusions, Rose does not discuss the


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vast extent to which property substance arises bottom-up, through contract (e.g., vide Ellerman’s essay). Rose’s discussion of the origin of government comprises an implicit blend of rational choice, public choice, social choice, game and social contract theory. She considers neither the history of feudal-monarchical residues and evolutionary developments that empirically have been so important nor government as a means of rule by those with the power/means of checking others with power—part of the Enlightenment experience. John H.Schlegel: Schlegel’s essay deconstructs the rhetoric of property and government. Schlegel’s argument is opposed to the reification of government and of property. Both are seen to be belief systems in the process of development, through social construction and selective perception, though deployed to defend or aggress positions and interests. His argument is that these patterns of habitual behavior and belief are used to obfuscate as much as, if not more than, to reveal. This is especially important because that which are obfuscated and hindered are critical issues of policy. The obfuscation is precisely the goal of those who want property and government so perceived that they can assure that it is their felt interests, and not those of others, which will count. Property and government, as he puts it, are each a conclusion, not a premise, though the pretense often is made that they are premise, that is, given and transcendent, and though, selectively perceived, they do serve as premises for reasoning. The same is true of publicness and privateness, of course. His point concerning the symmetry of selective perceptions between stories is highly apposite and effective; and his examples, the bulk of the paper, are strikingly useful for his purpose. A.Allan Schmid: Schmid presents in a concise manner the point of view largely taken in this introduction; not surprisingly, inasmuch as he and Warren Samuels have co-authored several publications on the topics covered herein. Schmid treats property in an empirical manner. He argues that the institution of property establishes relationships among people, that it is a product of collective action, that it governs people’s respective status in the economy under conditions of intedependence and scarcity, and that it is part of the larger social process of continuity versus change. Property is therefore a normative phenomenon, reflecting choices among conflicting interests, including changes in the interests protected as property. Moreover, inasmuch as property emerges through legal-governmental processes, those processes are an arena in which conflicting parties struggle to get their respective interests recognized and protected as property rights. The on-going result is a structure of rights, including rights to seek, within the legal process, to change rights. One means through which rights change is called regulation, with deregulation being a functional equivalent thereof. Linda A.Schwartzstein: Schwartzstein presents an exposition of the conventional Austrian view applied to our subject, one complementary to that in Moss’s essay. Individuals engage in decision making and exchange under uncertainty within markets which coordinate actors’ actions. Two critical roles are of expectations and entrepreneurial searching for niches. Autonomous


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individual decision making takes place within institutions acting to provide knowledge and rules, as social control. A critical role of institutions is to reduce uncertainty and to provide stability and predictability to the decision-making environment. Government should maintain a system of law which both provides, through its stability, a high degree of certainty while being flexible to adapt to change. The common law, she argues, is more suitable in providing this function than is legislation. This argument can be understood in a larger context. First, government— including common, statute, administrative and constitutional law—is a major source of change. But business—economic activity generally—is also and arguably a greater and more pervasive source of change, hence of uncertainty and of Schumpeter’s combination of creation and destruction. Law—court and statute law—is an object of control and use by economic entrepreneurs, and has been since the advent of the modern Western economic system. Law for them is a means of change, not only a response to change. Much of the burden of change is arguably visited, through unemployment and threat of unemployment, on workers, but much is also visited on other property owners—and government is ineluctably involved. Second, considering the vast magnitude of state and federal court decisions and of state and federal legislation, it is not entirely conclusive that one is more incremental and less totalist and large-scale than the other (with due regard to differences of jurisdiction); it is partly a matter of definitions of relevant domain and period. Nor is it the case that legislation is more salient and court decisions less conspicuous; some of each type of change of law is salient, but much, perhaps most, is not. Third, court-made law is in principle nondemocratic, whereas legislation is in principle democratic; though insofar as judicial appointments and elections and legislation reflect power, influence and money, it is not clear that any branch is democratic in the sense a wide range of interests is allowed to count. Fourth, the key question is, whose interests count, not only in law making but in price-cost formation. Considerations of government action “interfering” with market price formation, especially “distorting” prices, must be comprehended within a larger system of understanding, in which the structure of prices (and therefore costs) is in part a function of the state of the law, the law governing whose interests are to count. There is no given or transcendental price-cost structure with which government only “interferes” and which it “distorts” (Samuels and Schmid 1997). Nor is there a given and transcendent market, or set of markets, independent of government. Markets—and the prices made in markets—are a function of the institutions, especially legal institutions, such as property, which both form and operate through and channel them. Fifth, law does have to respond to change. But the critical issues are: how does law respond to change, to whose interests does law give its protection in the face of change? Sixth, the problem of balancing stability with flexibility, like so much else pertaining to government and to property, is not conclusively amenable to


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solution by formula; it must be worked out—and also to be worked out is the process by which such balancing is to be worked out. Seventh, property, as an institution, is already a mode of giving special protection to interests. Restriction of the modes of changing property law further enhances that special protection. Kathleen Segerson: In the context of considering several conventional topics, such as “market failure,” Segerson makes a number of useful points: the connection between (1) government allocation and protection of property rights and (2) incentive structures and efficient allocations; the role of inalienability rules; the potentially further narrowing or expansive role of Richard Epstein’s nuisance exception; the reciprocal and inclusive nature of damages, that is, limiting polluters as damaging their property versus polluters’ actions as damaging the property rights of others—with government inexorably having to putatively “take” someone’s rights, hence the impossibility of universal compensation; the differences between strict liability and injunctive relief; a tendentious identification of governmental redefinition and/or reassignment of rights as constituting communism; the key issue of governmental determination of the rules by which rights can or cannot be changed over time; and the difference between liability and property rules in protecting property interests. Thomas S.Ulen: Ulen identifies several relations of government to property: Government determines what is to be given the protection of property law, how that protection is to be given (injunction or compensation for injury), the dimensions of property rights, and the limitations to be put on property (police power regulation and eminent domain). He also applies a particular logic to a particular slice of legal-economic issues: the utilitarian logic of value maximization through benefit-cost comparisons having to do with externalities and transaction costs, and transaction-cost considerations in other types of cases, with the role of law seen as facilitating and, where necessary, substituting for, but trying to mimic, private contractual solutions to disagreements. Two points are immediately clear. One is the futurist nature of legal decisions, in other words, the law of property sets the stage for future actions of economic actors, thereby helping channel their behavior. The other is the subjective nature of ostensibly utilitarian “calculations”—really judgments influenced by various factors—as to when social benefit exceeds social cost. Ulen thus deals with a slice of a large subject. Moreover, mimicing market solutions, as he appreciates, competes with pursuit of other social goals, such as public goods and moral and distributional considerations. Ulen also appreciates that while the institution of property (as distinct from particular bundles of rights designated as “property”) can help facilitate economic growth, economic growth generates problems of interdependence which can lead to calls for reconstituting the bundle of rights that is property at any time. What is conventionally—and sometimes pejoratively—called “regulation” are limitations on property in the process of redefinition of the bundle of rights. What property is at any point in time is in part a function of past regulation, and is open to future regulation. Government must, in a wide


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range of cases, resolve conflicts between interests based upon some notion of public purpose; the nature of politics and litigation is to influence the notion of public purpose employed. Sometimes the conflicts are between property owners; other times, between property owners and advocates of claims of interest to be protected by government as yet unprotected. In all this, property is neither independent to nor preexistent to government. Government is the process by which the interests to be protected as property are continually being worked out. And the combination of (1) both property and non-property interests and (2) official government form part of the totality of “governance.” Moreover, what is here called “efficient” is itself neither independent of nor preexistent to government. What becomes the efficient use of resources is a function of circumstances, and among those circumstances are (1) the law which determines what is given protection as property and thereby becomes a resource of economic significance and (2) the law which governs whose interest will be protected by law, and whose not, and therefore whose interest will count, in part as costs to others. Efficiency is rights-structure specific, and among the rights that are relevant are the various, and changing, bundles of property and nonproperty rights. No unique efficient solution exists, nor does any unique structure of prices and costs; that which becomes operative is in part a function of law. As Ulen knows, the standard Coase Theorem formulation, involving zero transaction costs, is misleading: different sets of laws yield different systems of transaction costs and thereby different results, different sets of “highest valued uses.” As already noted, Ronald Coase, after whom the Coase Theorem is seriously misnamed, insists that institutions matter, not least legal institutions, including, perhaps most especially, the law of property. It should be clear, and no surprise, that not only are the meanings of government and of property a matter of selective perception, and therefore subject to multiple interpretation, but that the relationships between government and property are likewise. And that applies to the positive, nonnormative renderings as well as to the normative ones. Moreover, government and property are so important in modern society and to our sense of both self and personal situation that we must have some personal conception of property, government and their interrelations. These personal conceptions often are quasi-religious and ontological in nature. They are readily subject to wishful thinking, grandiose ideology, and personal material interest. It is, therefore, manifestly difficult to treat these personal conceptions in an objective, arm’s length, and critical manner. The reader is asked, nonetheless, to subject his or her own ideas, the ideas articulated by the contributors, and the ideas presented in this chapter and in the concluding chapter to an objective, arm’s length, and critical analysis. On every point, it is suggested, the reader should ask him or herself, why some position is “true,” in what sense of “true,” over against what alternative position, on what basis does one prefer one position over the other, and on what deeper ground does one prefer that basis over against some alternative basis, and so on. To the expected objection that taking such an approach will result in asking


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questions about the status quo that are dangerous and should not be asked, the replies include, first, what status quo? second, what does that concern about danger say about what property, government, and their interrelationships are really all about? and third, what do you make of alternative answers to the foregoing questions? Like it or not, property and government and their interrelationships are important matters. Unless one has a pretty good idea about what they involve, one is left hanging subject to the winds of wishful thinking, ideology, and personal material interest—hardly a sensible basis on which to conduct civic discourse. All of which brings us to the premier normative premise underlying this work—the value of serious public discussion of important, fundamental issues.

REFERENCES Berle, A., and G.Means. 1933. The Modern Corporation and Private Property. New York: Macmillan. Blackstone, W. 1765–1769. Commentaries on the Laws of England (4 vols.) (II.I.2). Djilas, M. 1957. The New Class. New York: Praeger. Samuels, W.J. 1994. “Property.” Pp. 180–184 in Companion to Institutional and Evolutionary Economics (vol.2), edited by G.M.Hodgson, W.J.Samuels, and M.R.Tool. Brookfield, VT: Edward Elgar. Samuels, W.J. 1974. “An Economic Perspective on the Compensation Problem.” Wayne Law Review 21:113–134. —. 1989. Fundamentals of the Economic Role of Government . Westport, CT: Greenwood Press. Samuels, W.J., and N.Mercuro. 1979. “The Role and Resolution of the Compensation Principle in Society: Part One-The Role.” Research in Law and Economics 1:157–194. —. 1980. “The Role and Resolution of the Compensation Principle in Society: Part Two-The Resolution.” Research in Law and Economics 2:103–128. Samuels, W.J., and A.A.Schmid. 1997. “The Concept of Cost in Economics.” In The Economy as a Process of Valuation , edited by W.J.Samuels, S.G.Medema, and A.A.Schmid. Aldershot, Edward Elgar Publishing.

THE ORIGINS OF PROPERTY AND THE POWERS OF GOVERNMENT Richard Adelstein

INTRODUCTION In every social system, property stands at the center of the relationship between the individual and the state. Not just the political quality of the regime, but the institutions of its economy and the customs of its people are largely determined by whom the state recognizes as having the authority to control the disposition of objects and ideas, and in whose interests that authority is exercised. This is most obvious in totalitarian systems, where all rights to property lie ultimately in the state, and individuals exert only the control over things that the state, in pursuit of its own interests, chooses to allow them. But it is equally true of market orders based on private property and the individuality of interests. If, as James Madison (1788, p. 356) put it, men were angels, they would see that respecting the property of others is both a guarantee of peace and a means to the advancement of their own purposes, and act accordingly without external compulsion. But real men and women need the power of a state to protect their property and the market that surrounds it, to ensure that they do what they must to preserve the regime of freedom itself. Without the state, then, there is no property. Yet there are obviously profound differences in the political character of states, and much of this variation can ultimately be traced to the attitude of their governing ideologies toward the nature and origins of property, or more specifically, to the answers they offer to the question of whether property precedes the existence of the state or is itself necessarily a product of the state. At any moment in time, and more clearly than in any of their other aspects, it is in the way that different regimes address this question that their essential political and moral qualities are revealed. And as even a brief glance at the constitutional history of the United States suggests, the differing answers given to it by a single people over the course of time may leave a deep and lasting imprint on the development of its political culture and institutions.

LOCKE AND BENTHAM For John Locke (1690), hoping to justify resistance to the sovereignty of a king claiming to govern by divine right, the property of men sprang from the will of God, and government was the instrument men devised to protect it from one

The orgins of property and the powers of Government

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another’s predations. Much as Luther had argued that man’s spiritual relationship to God was direct and personal, unmediated by the established church, Locke maintained that God did not vest political authority in a king whose prerogatives could only be challenged by an act of blasphemy, but had touched every man as an individual, granting him personal sovereignty in the form of natural rights to liberty and property and the authority to punish those who would deprive him of these rights. The state of nature was thus a regime of private property and free exchange, in which only the unreasoning few would deny their fellows the peaceful enjoyment of their rights. But the threat to order and prosperity posed by these few, coupled with the problems of discipline and proportion that would inevitably attend the efforts of wronged individuals to vindicate their rights on their own, made it rational for every person to renounce the state of nature and join in a contract with the others that would establish a political entity endowed with powers sufficient to secure their liberty and property. The terms of this contract define the nature and the constitutional contours of the state embodied in it. Locke’s contractors do not surrender all their rights; to protect their natural rights to liberty and property, they agree to designate some of their number as agents of the state, a government, and vest in them only their personal right to punish transgressors, and this only so long as the agents use these rights to violence for the specific purpose they were given, the protection of the individual’s remaining pre-existing rights. The contract is not a covenant between individuals and the state, but an agreement among these individuals themselves to create a government of fallible men authorized to exercise limited powers in the name of the state. Like the intangible conventions that induce men to trade useful or beautiful objects for the otherwise worthless bits of paper they agree to call money, the state is an abstraction, a state of mind representing consent to a monopoly of legitimate force that may be benign and protective, threatening and dangerous, fragile and contested, or all of these at once. And as with any ordinary contract at common law, nonperformance is grounds for rescission; if government proves unable to protect the God-given rights to liberty and property it was constituted to defend, or if it threatens those rights itself, the people may withdraw their consent to its powers and, in so doing, dissolve the state and deny legitimacy to its agents. The political implications of this quintessentially liberal vision are crucial. For Locke, the rights and interests of living men and women are not just the starting point of the analysis but, in the end, its only point. Civil society is not, as many American intellectuals would come to understand it two hundred years after the Second Treatise, a reified, purposive collective, ontologically distinct from and politically superior to the individuals who comprise it (Tariello 1982, pp. 53– 69), nor is the abstract state embodied in the contract the active manifestation of this social being in the world of affairs. Government exists solely to protect the pre-existing rights of its individual creators, and has no warrant to make any person an instrument for the welfare of others, individually or collectively, without his consent. The protection of every person’s liberty and property, the


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raison d’etre of government itself, imposes an implicit constitutional constraint on its powers, for in taking one person’s property against his will for the benefit of another, the state’s agents themselves transgress the law of nature and become the very thieves they were commissioned to punish. By 1800, the principle that protecting the right to property was a defining duty of government, enforceable by the courts even against the will of the legislature, had become an axiom of American constitutional jurisprudence. “I cannot,” wrote Justice Samuel Chase in Calder v. Bull (1798, pp. 386, 388), “subscribe to the omnipotence of a state Legislature or that it is absolute and without control.” A statute that “takes property from A. and gives it to B.” must be void, even if it is not expressly forbidden by the Constitution, since an “act of the Legislature (for I cannot call it a law) contrary to the great first principles of the social compact, cannot be considered a rightful exercise of legislative authority.” Nor was this early postulation of natural rights an isolated or idiosyncratic assertion of judicial authority. As the nineteenth century unfolded, where it could not appeal to explicit constitutional text to defend personal property against hostile legislation by the states, the Supreme Court repeatedly invoked the “nature of society and government,” the “principles of natural justice” and “the fundamental maxims of a free governmen” to justify its holdings. 1 As the moral philosophy of John Rawls (1971) and the “constitutional economics” inspired by James Buchanan and Gordon Tullock’s Calculus of Consent (1962) make clear, the contractarian perspective retains great power even today as a framework for the normative analysis of political relations. But as social science, Locke’s theory was dealt a fatal blow by Charles Darwin. Darwin saw human beings not as fully formed, atomistic individuals who had once lived in a presocial state of nature and then purposefully chosen to leave it, but as descendants of the great apes, whose territoriality and group behavior suggested the existence of primitive and culturally heritable forms of property and social organization well before the arrival of homo sapiens and made it impossible to argue seriously for the historical reality of the state of nature or the social contract. And by replacing the teleology of Genesis with the directionlessness of natural selection, Darwin cast the idea of universal, natural human rights itself into grave doubt, making it very hard for modern liberals to argue for their existence to those not already persuaded of it. But the central tenets of Locke’s politics had been challenged well before this. In the midst of the French Revolution, Jeremy Bentham (1791, p. 501) derided the idea of natural rights held independently of the state as “nonsense upon stilts” and dismissed the notion of a social contract designed to protect them. The only meaningful rights men possessed were those the state chose to enforce, he argued, and the state’s purpose in creating and allocating these rights should be to maximize the aggregate of individual utilities (Dinwiddy 1989, pp. 25–28, 49–53). The effect of Bentham’s insistence that property was the creation of the state was to stand the relationship between the individual and the collective implied by the Lockean contract on its head. Where Locke had seen the state as the lifeless tool of its sovereign creators, politically subordinate to them and


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constructed to protect their rights, Bentham gave primacy to the interests of the state over those of its individual constituents and assigned it a clear purpose of its own, and if his own characterization of that purpose is at least arguably compatible with the liberal spirit, he nonetheless cleared the way for successors less liberal than he to portray the modern nation-state as an organic, selfinterested being and to ascribe other, more collectively defined objectives to it. And where Locke’s government had been strictly limited in its powers by the constitutional principle of consent and the natural rights of its citizens, Bentham’s legal positivism made the liberty and property of every individual an instrument of the public interest, and freed government from any constraint on its authority not consistent with this broad and malleable collective purpose.

THE TRIUMPH OF THE PUBLIC INTEREST For 75 years after the Civil War, variants of these contrasting visions vied for supremacy in the American political economy. As the successful movement to liberalize state incorporation laws and new technologies of mass production and distribution combined to transform the nation’s economy in the second half of the nineteenth century, property that had once been held by real men and women in the form of sole proprietorships and small partnerships increasingly passed into the metaphorical hands of huge limited liability corporations. Clearly not living souls granted liberty and property by the law of nature, but endowed by the law of man with legal personality distinct from their owners and the rights to own property and enter contracts in their own name, these new corporations were an anomalous presence in the Lockean universe. The vast new material wealth they produced brought with it wrenching economic and social dislocation, and as first progressive intellectuals and then the public at large gradually came to perceive these changes in terms of their effects on a broadly defined public interest or on the health of the social organism, state legislatures began to experiment with utilitarian measures that redistributed wealth and regulated private property in ways that could not be reconciled with the contractarian ideology of Calder v. Bull. 2 The response of the federal courts was to use the newly ratified fourteenth amendment to resist these initiatives in the name of fundamental rights whose existence preceded that of the state governments and sharply limited their powers. The fifth amendment, ratified in 1791, protected citizens against deprivation of their lives, liberty and property by the federal government “without due process of law,” protection now extended by the new amendment to state governments as well. Due process had traditionally been held to require only a fair hearing before an appropriate public body before a person’s liberty or property could be taken, but now, led by Justice Stephen Field, the Supreme Court began to add substance to the guarantee of fair procedure by reading into the fourteenth amendment specific limitations on the power of the states to adopt laws that denied or interfered with the individual’s fundamental rights and


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freedoms. But in the new world of Darwin and Bentham, profoundly skeptical of the God-given rights at the core of Locke’s system, what was the origin of these inviolable, pregovernmental rights, and how, precisely, were they to be defined? Field’s solution, first proposed in the context of the new amendment’s privileges and immunities clause in the Slaughterhouse Cases (1873), was to locate them in the common law brought by the colonists from England as part of their “indubitable rights and liberties” to become the basis for the new legal institutions they would construct in America. Field’s invocation of the common law brilliantly addressed both of the major objections raised by his contemporaries to the older logic of natural rights. If the state of nature had never really existed, and the contract that emerged from it could no longer be taken seriously as fact, no one could doubt the historical reality of the common law and its ancient sources, or the centuries of tradition and practice prior to the creation of the American states that had legitimized it as a judicial check on the power of kings and parliaments. And if the specific content of Locke’s broadly defined natural rights remained contested and uncertain in a complex, modern world, the common law, despite the permanent ambiguity at its margins that propelled its evolution, offered an easily apprehended set of principles from which a closed and relatively fixed list of rights could be derived. Dissenting in Slaughterhouse, Field had unsuccessfully invoked the common law right to ply a lawful trade in support of Louisiana meat packers who claimed that a legislatively enforced monopoly in the local market denied them their fundamental rights. But the Court was soon persuaded of the virtues of reading pre-existing individual rights into the Constitution. By 1887, stressing that “the courts are at liberty—indeed are under a solemn duty—to look at the substance of things, whenever they enter upon the inquiry whether the legislature has transcended the limits of its authority,” it made clear that it would strike down on due process grounds any state statute it found to be “a palpable invasion of the rights secured by the fundamental law.” 3 Ten years later, Field’s crusade to establish the sanctity of Lockean rights against the rising tide of Benthamism was crowned with success in Allgeyer v. Louisiana (1897), as Justice Rufus Peckham, voiding a statute regulating insurance contracts, expansively defined the liberty protected by the fourteenth amendment against the state’s claim of power to legislate in the public interest. That liberty, he wrote, means not only the right of the citizen to be free from the mere physical restraint of his person, as by incarceration, but the term is deemed to embrace the right of the citizen to be free in the enjoyment of all his faculties; to be free to use them in all lawful ways; to live and work where he will; to earn his livelihood by any lawful calling; to pursue any livelihood or avocation, and for that purpose to enter into all contracts which may be proper, necessary, and essential to his carrying out to a successful conclusion the purposes above mentioned. “Has not,” he asked, “a citizen of a State…a right to contract outside of the State


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for insurance on his property—a right of which state legislation cannot deprive him?” 4 Thus began the era of substantive due process, a period of some 40 years in which the Court struck down dozens of state and federal regulatory statutes intended to advance the public interest on the ground that they unreasonably abridged fundamental liberties protected by the fifth and fourteenth amendments, most often the freedom of contract identified in Allgeyer. In this, the Court reflected the ambivalence of the people themselves. On the one hand, the rapid changes in economic relations and the conditions of daily life brought about by industrialization seemed to threaten the well-being of the nation as a whole and fueled the demand for corrective legislation, but on the other, it was clear that the movement for reform had greatly extended the reach of government and resulted in new and sometimes questionable limitations on rights and freedoms to which the majority of Americans had long been accustomed. 5 But the Court’s defense of Lockean principle was fatally compromised from the start. Urged on by Stephen Field, the Court held in 1886 that corporations as such were “person” within the meaning of the fourteenth amendment and thus as entitled to the protection of the due process clause as any living man or woman. 6 For this, there was no justification, either in the logic of natural law or the liberal impulse that motivated legislation to preserve the autonomy and dignity of ordinary people against the corrosive effects of industrialization. By 1920, it was apparent that the principal beneficiaries of substantive due process were not working men and women, as Peckham’s rhetoric seemed to imply, but their corporate employers, shielded by the Court from legislation meant to level the playing field in their dealings with workers. Soon, an antimajoritarian doctrine that had always been unpopular was made intolerable by the Depression, and in 1937 the Court abandoned it, reading liberty of contract out of the fourteenth amendment and forswearing interference in the states’ efforts to legislate the greatest good for the greatest number. 7 The triumph of positive law in the public interest seemed complete.

BENTHAM AND LOCKE REDUX But the Lockean impulse could not be entirely stilled. By 1973, a Court committed to fundamental liberties had once again made the due process clause the vehicle for a challenge to Benthamism, first in its expansion of the procedural rights of criminal defendants in state courts 8 and then in its resurrection of substantive due process, this time in the context of a fundamental right to privacy in matters of contraception and abortion. 9 More recently still, the idea of pregovernmental rights has also been revived in the area of constitutional law that speaks most directly to the concept of property as Locke and Bentham understood it, the problem of “takings.” The Framers themselves provided that private property “shall [not] be taken for public use, without just compensation,” thus writing into the fifth


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amendment both the ancient doctrine of eminent domain, the power of government to take private property for public use against the will of its owner, and its limiting corollary, firmly established in common law by the seventeenth century, that fair payment must be made for the taking. 10 But they also recognized that the same common law that encoded the Lockean principle of compensation also gave government broad, often implicit police powers to promote the health, safety, and welfare of the public through appropriate legislation, with no need to compensate those dis-advantaged by the enactment. The Framers saw no contradiction in this. The takings clause was not intended to abrogate the police power, but to ensure that the government’s actual taking of title to land or other property would always be accomplished by eminent domain, with just compensation paid to the owner. Because the concept of property itself was closely linked to physical possession or control of tangible objects, the line separating eminent domain from the police power was sharply drawn. Legislatures typically employed the police power to regulate or limit the use of private property rather than to take title to it, so regulatory legislation, even where its effect was to render property whose title remained in the owner all but worthless, was rarely seen to raise the question of compensation under the takings clause. Thus, for example, in Mugler v. Kansas (1887) the Court, despite its foreshadowing of substantive due process, denied compensation to owners of breweries for the substantial devaluation of their property in the wake of the state’s prohibition of liquor. By 1900, however, the law’s traditional identification of property with possession had largely been supplanted by the more complex idea that property is, as the economist Richard T.Ely (1914, p. 60) put it, a “bundle of rights” with each stick in the bundle representing the legal authority to use or dispose of an object in a particular way. Property in an object was thus not just one right of possession or control, but a potentially infinite number of rights to specific uses that might be held (or traded) simultaneously by different individuals and the state itself. In Mugler, for example, the state could now be said to have taken from its owner only the single right to use his facility as a brewery, leaving him in full possession of the other sticks in the bundle, the rights to use it for all the other purposes not addressed by the prohibition statute. New legislative regulation of private property could thus be interpreted as a seizure of one of the sticks, and thus a compensable taking of property, even where the owner’s legal title was not disturbed. Ely himself, decidedly a Benthamite but not always a friend of aggressive government, made just this argument (1914, pp. 200–226), and saw it adopted by the Court in Pennsylvania Coal Company v. Mahon (1922), in which owners of subsurface coal were granted compensation for the almost total destruction of the economic value of their property by a statute that forbade mining the coal but left title to it in the owners. But Mahon opened a Pandora’s box for the Court. The new principle it announced remained extremely vague; all Justice Holmes could say was that “The general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking” (1922, p.


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415). The clarity of the earlier distinction between eminent domain and the police power was entirely lost, and every new act of regulation now raised the question of whether compensation must be paid to those adversely affected by it, a question to which Locke and Bentham suggest very different answers. For the Lockean, government’s defining role as the guardian of pre-existing rights implies that any regulation of property, no matter how urgent the public’s desire for it, must be compensated unless the regulation is intended to eliminate a common law nuisance, that is, to prevent an owner from using his property so as to infringe upon the rights of others. But for the Benthamite, for whom property rights are granted solely by the state in the interests of the public, the essential subordination of individual interests to those of the public presumptively places all legislation within the police power and requires compensation only where the larger public interest would be served by paying it. Cut from the moorings of the earlier rule, the Court since Mahon has vacillated for some 80 years between these contrasting philosophies, carried this way and that by the ideological currents of the day, unable to settle upon any clear or durable theory of the takings clause. 11 In the mid-1960s, Frank Michelman (1967) offered a general solution to the problem, anchored in a Benthamism that, unlike the standard of wealth maximization that had by then come to dominate neoclassical welfare economics, left room in the calculation of social utility for personal, subjective costs and benefits created by such nonmaterial factors as the fairness of the income distribution and the degree of sympathy observers might feel toward those affected by the regulation. Michelman’s utilitarianism, itself a reflection of the commitment to active government characteristic of the 1960s, encouraged an expansive view of the police power and left its mark on the court, which in 1978 denied compensation to owners of structures designated as historic landmarks for the costs imposed by statutory restrictions on their use. 12 But by then, the ideological winds had already begun to shift, and Michelman’s analysis was soon countered by the explicit Lockeanism of Richard Epstein (1985), who argued for strict limits on the government’s power to regulate without compensation and who, like Stephen Field, drew the fundamental rights and obligations at the base of his system from the English common law. Epstein’s position too found support in the Court, which in 1992 held that compensation must be paid to owners of seafront property adversely affected by environmental regulations. 13 But the tortuous history of the takings problem makes clear that it, like the larger ontological dispute between Locke and Bentham that underlies it, is not a matter to be settled by logic or experiment. As Richard T.Ely recognized long ago, the controversy turns ultimately on the ontological and normative commitments we bring to it, and as these commitments change with time, the line separating the police power from eminent domain will shift along with them. “The police power,” he wrote in 1914, “is the power of the courts to interpret the concept property…and to give the concept a content at each particular period in our development which fits it to serve the general welfare” (Ely 1914, pp. 206–207). For good or ill, in a


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democracy such as ours this may in the end be the most important thing of all to be said about the relationship between government and property.

NOTES 1. Fletcher v.Peck (1810, p. 135); Terrett v.Taylor (1815, p. 52); Wilkinson v.Leland (1829, p. 657). See also Tribe (1988, pp. 560–562). 2. Tariello (1982, pp. 97–114); Wiebe (1967); Fine (1956). 3. Mugler v. Kansas (1887, p. 661). 4. Allgeyer v. Louisiana (1897, pp. 589, 590–591). 5. Compare Fiss (1993, pp. 155–184). 6. Santa Clara County v. Southern Pacific Railroad (1886). 7. West Coast Hotel Company v. Parrish (1937). 8. Through the doctrine of “selective incorporation,” the Court found certain of the procedural rights protected by the fourth, fifth and sixth amendments to be “implicit in the concept of ordered liberty” (Palko v. Connecticut, 1937, p. 325) and thus binding upon the states as well as the federal government. See, for example, Mapp v. Ohio (1962); Gideon v. Wainwright (1963); Duncan v. Louisiana (1968); Henkin (1963). 9. Griswold v. Connecticut (1965); Roe v. Wade (1973). 10. Thus, the right to compensation “is not inherent in the concept of eminent domain but is imposed upon the sovereign government by constitutional and statutory enactments. So universal has the requirement of compensation become, however, that for practical purposes any working definition of eminent domain must now include it” (Netherton 1968, p. 39, emphasis in original). On the historical origins of these principles, see Lenhoff (1942, pp. 596–601); Ely, Jr. (1992, pp. 23–24). The “takings clause” of the fifth amendment was held to bind the states through the fourteenth amendment in Chicago, Burlington & Quincy Railroad v. Chicago (1897). 11. Cf. Michelman (1967, pp. 1183–1202). 12. Penn Central Transportation Company v. New York City (1978). 13. Lucas v. South Carolina Coastal Council (1992).

REFERENCES Allgeyer v. Louisiana 1897. 165 U.S. 578. Bentham, J. 1791. Anarchical Fallacies . In The Works of Jeremy Bentham (vol. 2), edited by J. Bowring. Edinburgh: William Tait. Buchanan, J., and G.Tullock 1962. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press. Calder v. Bull 1798. 3 U.S. (3 Dallas) 386. Chicago, Burlington & Quincy Railroad v. Chicago 1897. 166 U.S. 226. Dinwiddy, J. 1989. Bentham. Oxford: Oxford University Press. Duncan v. Louisiana 1968. 391 U.S. 145.


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Ely, J., Jr. 1992. The Guardian of Every Other Right: A Constitutional History of Property Rights . New York: Oxford University Press. Ely, R.T. 1914. Property and Contract in Their Relation to the Distribution of Wealth (2 vols.). New York: Macmillan. Epstein, R.A. 1985. Takings: Private Property and the Power of Eminent Domain . Cambridge, MA: Harvard University Press. Fine, S. 1956. Laissez Faire and the General-Welfare State: A Study of Conflict in American Thought . Ann Arbor: University of Michigan Press. Fiss, O. 1993. History of the Supreme Court of the United States, Volume VIII: Troubled Beginnings of the Modern State, 1888–1910 . New York: Macmillan. Fletcher v. Peck 1810. 10 U.S. (6 Cranch) 87. Gideon v. Wainwright 1963. 372 U.S. 335. Griswold v. Connecticut 1965. 381 U.S. 479. Henkin, L. 1963. “‘Selective Incorporation’ in the Fourteenth Amendment.” Yale Law Journal 73: 74–88. Lenhoff, A. 1942. “Development of the Concept of Eminent Domain.” Columbia Law Review 42: 596–638. Locke, J. 1690. Two Treatises of Government , edited by Peter Laslett. Cambridge, UK: Cambridge University Press, 1988. Lucas v. South Carolina Coastal Council 1992. 505 U.S. 1003. Madison, J. 1788. “Federalist #51.” In The Federalist , edited by B.F.Wright. Cambridge, MA: Harvard University Press, 1961. Mapp v. Ohio 1962. 367 U.S. 643. Michelman, F. 1967. “Property, Utility and Fairness: Comments on the Ethical Foundations of ‘Just Compensation’ Law.” Harvard Law Review 80:1165– 1258. Mugler v. Kansas 1887. 123 U.S. 272. Netherton, R. 1968. “Implementation of Land Use Policy: Police Power vs. Eminent Domain.” Land and Water Law Review 3:33–57. Palko v. Connecticut 1937. 302 U.S. 319. Penn Central Transportation Company v. New York City 1978. 438 U.S. 104. Pennsylvania Coal Company v. Mahon 1922. 260 U.S. 393. Rawls, J. 1971. A Theory of Justice. Cambridge, MA: Harvard University Press. Roe v. Wade 1973. 410 U.S. 113. Santa Clara County v. Southern Pacific Railroad 1886. 118 U.S. 394. Slaughterhouse Cases 1873. 83 U.S. (16 Wallace) 36. Tariello, F. 1982. The Reconstruction of American Political Ideology, 1865– 1971 . Charlottesville: University Press of Virginia. Terrett v. Taylor 1815. 13 U.S. (9 Cranch) 43. Tribe, L. 1988. American Constitutional Law (2nd ed.). Mineola, NY: Foundation Press. West Coast Hotel Company v. Parrish 1937. 300 U.S. 379. Wiebe, R. 1967. The Search for Order, 1877–1920 . New York: Hill and Wang. Wilkinson v. Leland 1829. 27 U.S. (2 Peters) 627.

GOVERNMENT’S ROLE IN PROPERTY OWNERSHIP: HOBBES MEETS GILLIGAN David Anderson

INTRODUCTION For life itself, property and government are inessential and separable, but from the standpoint of maximizing social welfare, they are essential and inseparable. While government is not a necessary ingredient in property creation, the lineage of government goes back to the desire to allocate and defend property. Traditionally, conservatives have asked government to protect existing, often inherited property rights so as to preserve the hierarchical order of society. Liberal capitalists favor competitive individualism and the natural right for middle-class workers to own property as a reward for labor. Socialists want a cooperative society based on the collective ownership of property. And in their Communist Manifesto (1848), Karl Marx and Friedrich Engels suggest that with collective ownership, a government with the primary function of protecting property rights would be unnecessary. Today’s governments reflect a sometimes healthy conflict between these influences. Secular governments are relatively new, the act of governance at all is older. Many primitive societies appear to have been quite democratic: Sumeria (5000 to 2500 BCE), Native American Anasazi (1000 CE to present) and nineteenth century New Guinea were all run by elders who were also responsible for overseeing the religious sector. Egyptian government from c. 3000 BCE to Roman times was a national phenomenon, both religious and political. People have been living in groups for some 40,000 years, usually with the cooperation of the religious and political sectors; the holy rites were used to empower the leaders and hold off chaos. Until modern times, however, most parts of the world were not under any government at all or for long. Consider America before Cortes arrived in 1426; the Aztec controlled Mexico in a theocratic dictatorship begun in 1300, but all of North America and Canada hosted nomadic populations whose use of land was not protected by the authority of government. What is the relationship between the institutions of government and property? Generally speaking, government is the elder sibling that takes care of property when it is in trouble. Government is not necessary for property to exist, but in a state of anarchy, it would be easier for the envious to take property and for the disrespectful to abuse it. Of course, what big brother does with property is not


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always what is best for society. Government can mishandle property with greater force than the individuals it dominates, or it can improve and protect property with less combined effort. This essay explains the fundamentals of the relationship between government and property, with an emphasis on government’s potential to serve the common good.

DEFINITIONS Too many of the main points of contention regarding the tangled roles of government and property result from inconsistencies in the definitions of both institutions. Thus, semantics are the first order of business. To define property to include one’s self, as English philosopher John Locke did (1947, Second Treatise, chap. 5, p. 27), trivializes all issues of whether property is necessary for life or whether government is necessary for the existence of property. Sure, we can say that every person is his or her own property, but abstraction from this consolation permits a more meaningful discussion. On the other hand, the fact that we have bodies pre-cludes us from excusing ourselves from the issues discussed here by saying we are not materialists. To exist is to have a body that necessitates space, food, and shelter. A similar inability to make significant statements exists when government is loosely defined. The difference between a brain trust and an effective government, as between a band of brigands and a corrupt government, is largely size. Saint Augustine quotes a captured pirate as saying to Alexander the Great, “Because I [keep hostile possession of the sea] with a petty ship, I am called a robber, whilst thou who dost it with a great fleet art styled emperor” (1934, p. 140). Size and strength can convey authority. Government authority can be gained by acclimation from the populace as in a democracy, or solely through military might. Neither source of authority assures prosperity or despair, although democratic elections provide obvious incentives for selfish goals to translate into actions that benefit larger contingencies. The history of property allocation under each type of authority bears evidence that these incentives matter. The socialist governmental system speaks of ownership by all, but how does this differ from ownership by none, if the individual has no ability to alter or sell what is “owned”? It is of little virtue to own title to property if the title does not convey privilege. Austrian political economist Carl Menger (1963) described property as the only solution to the disparity between requirements for and the availability of resources. This allocative function of property is not achieved if ownership does not convey the ability to master a scarce resource. A meaningful definition of property must include a provision for the ability to control or make decisions about the resource in question. To own something and not have control over it is different from non-ownership only due to one’s ability to say, “I own this.” This type of ownership may have value in one’s mind; many would find enjoyment in knowing they own a national park or a star, but if

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ownership has no associated prerogatives, why not decree that everyone owns everything? Government ownership of land, buildings, and infrastructure means that citizens can gain access, if that, and occasional access is not ownership. If it were, we would own every free country and every retail establishment, by virtue of being able to gain occasional access to them. For the purposes of this essay, let property be defined as anything in which one can have a vulnerable controlling interest, and let government be defined as an organized body that exercises authority.

IS GOVERNMENT NECESSARY? Many authors have argued that government is essential. English philosopher Thomas Hobbes wrote that “during the time men live without a common power to keep them all in awe, they are in that condition which is called war…. In such a condition there is no place for industry…no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, short” (1946, p. 82). Locke also speaks of insecurity in a stateless society: “This makes [an individual] willing to quit this condition which, however free, is full of fears and continual dangers; and it is not without reason that he seeks out and is willing to join in society with others…for the mutual preservation of their lives, liberties and estates, which I call by the general name—property” (1947, First Treatise, chap. 9, p. 123). English philosopher T.H. Green (1964, p. 53) said, “It is only through the guarantee which society gives him that he has property at all, or strictly speaking, any right to his possessions.” And according to Italian theologian and philosopher St. Thomas Aquinas, “It is lawful for a man to hold private property; and it is necessary for the carrying on of human life” (1964, II-II, q. 66, art. 1). In the United States, movements against government involvement in religion, and more recently in the arts, the welfare of the poor, and “big government” itself have elevated the proportion of government’s responsibility that lies with the protection of property. Is government necessary for property, and indirectly, for life itself? Government, as defined above, is not necessary for the existence of property. There is property in the absence of government, although in an immoral world, it can be more difficult to control than under the best possible government. On the other hand, governments can and do seize property. And Marx (1948, p. 23) summed up the theory of the Communists as simply, “Abolition of private property.” Thus, private property is only possible in the absence of a communist system of government. We need not fall into a fantasy akin to Gilligan’s Island to see property ownership without government. Cave dwellers enjoyed property ownership without government, as have people in nineteenth-century America and twentieth-century Africa, for example, when and where a government was not in


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effect. If Washington, D.C. were to fall into the Potomac, property in the United States would not disappear; it would simply go to those who can defend it for as long as they can defend it, and then it would belong to someone new. That system of property ownership also applies today, but our need for defense is less common, and our defensive tools include the courtroom and police in addition to weapons and other anti-theft devices. As populations become more dense and less respectful, the private defense of property becomes more costly and less successful. It is the norms and ethical standards of a community that determine its need for government protection of property. In Osaka, Japan, for example, coins placed in shrines on public sidewalks are untouched despite the existence of notably few police officers. In London, England, police seldom find it necessary to carry firearms. In other places (not named to avoid offense, not for lack of examples), government gunmen line the streets to counteract immoral behavior. In the United States, the aggregate burden of crime exceeds $1 trillion annually (Anderson 1999). French philosopher Jean Jacques Rousseau (1901) argued that humans are essentially good, but corrupted by society. Governments play a role in shaping society. Through education and welfare programs, and with leaders who are good role models, government itself can foster the type of moral climate that makes its capacity as forceful defender less necessary. In 1913, German sociologist Max Weber wrote that “the modern economic order under modern conditions could not continue if its control of resources were not upheld by the legal compulsion of the state” (1978, p. 65). This is probably closer to the truth. Property would exist without government, but its allocation might be different from that which would exist under a particular governmental system. Consider a few scenarios for the need and influence of government. Where property is uncontested, organized protection is unnecessary, and a government interested merely in providing security would have little effect. As new lands were discovered on the earth and new galaxies are discovered in outer space, there is little or no immediate need to protect them. Similarly, we do not currently need assistance to own a controlling interest in some air. Every continent, ocean floor, and planet experiences a period during which some of its riches are as abundant as the gold in Voltaire’s E1 Dorado. Government is not necessary to allocate that which is free for the taking. We also do not need government protection where property is scarce but uncontested. This can be the case among groups with too little to be worth stealing (monks), too much for it to be worth the trouble to steal (Harvard board members), or too much respect to challenge one another’s property. The satiation of wants, moral enlightenment, and having too much to lose from conflict also dim contention. Of course, a governmental body could exist to reallocate property or serve other functions, for better or worse.


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WHAT IS THE ROLE OF GOVERNMENT? Government does not create property, but it can help to minimize the cost of property ownership. Government can protect our property from other individuals and other governments, and from ourselves. Some parts of a government may even protect us from other parts of the same government. In the preamble to his Economic Bill of Rights, then-President Ronald Reagan (1987) said, “To protect your right to own and use your property, my administration will pursue successful efforts in the courts to restore your constitutional rights when the government at any level attempts to take your property through regulation or other means.” Government regulations on pollution, efforts towards diplomacy, and limits on the power held by any person or organization prevent ignorance and greed from bringing apocalypse or Armageddon that would end the usefulness of everything we own. The destruction of war, the desperation of poverty, and the agony of disease are all within the bounds of government intervention, and all are addressed by some governments today. Unfortunately, Darwin’s theory of evolution foretells that those who act to benefit themselves endure, and governments guided by selfish human nature tend to work towards alternative goals. Property is too often allocated to satisfy short-run goals with little attention to the long-run consequences. We see this in the alleged destruction of the ozone, rainforests, and native habitat at the expense of future land (due to erosion, and an increase in ocean levels resulting from global warming), oxygen (due to the loss of green plants which produce it), and medicinal cures (due to the loss of plant and animal species). When acting more wisely, government can increase the value of our property by providing public goods and correcting for external effects as discussed below. As English economist David Ricardo (1911) points out, the easy exchange of property is crucial to our production and standard of living. Allocating property to those who are able to enhance its value, or those who value it the most, is the key to efficiency. The harder it is for a potter to receive clay, the fewer and more expensive are pots. If the owner of a cow values it at $100 and can deliver it to another who values it at $200, and the cow sells for a price between $100 and $200, both parties are better off. It is a role of government to facilitate such commerce by providing infrastructure and protecting each side from fraud and breach of contract. It is apparent in the economic literature that incentives matter. Humans respond to incentives, and if the incentive is to conquer the property of others, that will be attempted. But government can assist by setting up incentives not to create property disputes. If property is contested and government does not exist, property will be allocated to those with the greatest might. One can imagine that in prehistoric times, the strongest cave dwellers held controlling interests in the largest caves near a water source. Likewise, dominant Native American tribes,


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outlaws, and settlers held the lion’s share of property in the western United States prior to the emergence of government rule. Property exists without government, but relative to its provision under a capitalist system, ownership belongs to those individuals or groups who are best able to defend their property, and when there are many capable parties in competition, ownership may change hands frequently. One purpose of government is to protect our rights to property by limiting the expense and uncertainty associated with uncivilized dispute resolution. Dispute Resolution The instinct to acquire keeps us alive, but tempts our moral fibers. At the time of this writing, the richest person in the world is in court trying to acquire even more through allegedly monopolistic activities. The proletariat are abusing the commons, the bourgeoisie are mowing their lawns a few feet wider than their true property lines, and the bureaucrats are taking credit for each other’s contributions in an attempt to win the corner office. It is natural for those who do not own a valuable piece of property to envy those who do, or challenge those with conflicting claims. If one’s envy or need for another’s property is strong, government may be asked to defend the property, carrying its unique license for the legal use of physical force in its back pocket. It can also offer assistance with the needs behind the quest for others’ belongings. If property rights are not clearly defined, government can determine who gets what. When property is not protected by dominant government, civilized dispute resolution becomes less likely. Courts, the keystone institution of dispute resolution at last resort, have little influence when they do not have the backing of a stalwart government. International conflicts reveal the dangers of limited authority. Because there is no government with authority over the planet, decisions made by international courts often have little bearing on disputed property ownership. Check today’s newspaper for the latest example of property being allocated based on contests between deadly war machines. Dispute resolution within regions that lack a government or other form of decision making exacts large tolls from everyone involved. Public Goods Beyond defining and protecting property rights, government helps to allocate goods and services that would be over- or under-consumed if private individuals were left to their own devices. When hungry mouths are fed and roofs are put over children’s heads by a government program, society benefits. The recipients need not resort to desperate attempts to steal the property of others in order to survive. They need not exhibit their humiliating state as beggars on public sidewalks, grating on the consciences of passers by and depressing property values. Crime rates decrease and life becomes relatively pleasant for rich and poor alike. The benefits from not having to live amid starvation and despair are


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non-rival and non-excludable; one’s enjoyment of a relatively safe, happy environment does not preclude another’s enjoyment, nor can one exclude another from this enjoyment. Economists refer to goods defined this way as public goods. Individuals looking to maximize their wealth have an incentive to claim disinterest in such goods, hoping to rely on others to provide them. The ensuing free rider problem is that the private provision of roads, parks, and the military, which enhance and protect property values, would be inadequate as individuals feign disapproval. Government collects taxes and pays for public goods for the benefit of all. Externalities Property owners also make decisions that effect the property of others. When we decide how many miles to drive in our cars, how many widgets to produce in our factories, and how many years of education to fund for our children, our choices are likely to be based on private costs and benefits, without consideration of their effects on others. To the extent that this is true, the invisible hand which Scottish political economist Adam Smith (1776) said would guide self-interested parties to promote the public interest, might mishandle the situation. We drive our car until the additional benefit to us from going another mile is less than the additional cost. From a societal standpoint, however, we will drive too far if we only consider the cost of auto maintenance and gasoline, and not the cost of pollution, road congestion, and other potential harm to others. Likewise, we will produce too many widgets and educate our children too little if we do not internalize the costs and benefits felt beyond or “external to” ourselves. The work of English economist Ronald Coase (1960) suggests that market failure will not result from such externalities if all affected parties can bargain to an efficient solution. For example, if noise from the cobbler’s work is eroding the value of the rental property next door, and the harm to the property owner is $200 a week while the cobbler’s profit from that work is $100 a week, the property owner could pay the cobbler some amount between $100 and $200 (say, $150) a week to end that type of production and both parties would be better off. This assumes agreement that the cobbler has the right to make noise. It also assumes that the transaction costs associated with the negotiation-the costs of identifying and contacting the relevant parties, assessing costs and benefits, and creating and enforcing contracts-are not prohibitive. Efficient private solutions to problems involving many parties or complex issues are less likely. In those cases, government can step in to tax or limit activities causing negative externalities, and subsidize or otherwise promote activities that cause positive externalities. This is why we see governments subsidizing research, education, tree planting, and drug rehabilitation, while taxing or restricting the use of tobacco, gasoline, alcohol, and toxic emissions.


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CONCLUSIONS Government is not a creator, but a crutch, for property ownership. Property would still exist in the absence of government, but it might be allocated differently, and the costs of any necessary protection or public goods provision would be higher than under the best-possible system of government. Of course, the property allocations enforced by governments are not necessarily superior to an every-man-for-himself scenario. Governments can and have abetted destruction and despair. In the view of this author, the most fundamental statement that can be made about the relationship between government and property is that in the face of covetousness and transaction costs, governments have the potential to define property ownership and reduce the costs of its provision.

ACKNOWLEDGMENTS I am indebted to a number of contemporary American philosophers for their contributions and critiques, including Daniel Stroup, Donna Anderson, Nayef Samhat, Elizabeth Anderson, Robert Anderson, Sarah M.Harvieux, and Kevin Floyd.

REFERENCES Anderson, D.A. 1999. “The Aggregate Burden of Crime.” Journal of Law and Economics 42(2) (October) Forthcoming. Aquinas, Saint T. 1964. Summa Theologica . New York: McGraw-Hill. Augustine, Saint. 1934. The City of God , translated by M.Dods. New York: Charles Scribner’s Sons. Coase, R. 1960. “The Problem with Social Cost.” Journal of Law and Economics 3(October): 1–38. Green, T.H. 1964. The Political Theory of T.H.Green , edited by J.R.Rodman. New York: Meredith. Hobbes, T. 1946. Leviathan , edited by M.Oakeshott. Oxford: Blackwell. Locke, J. 1947. Two Treatises of Government . New York: Hafner. Marx, K., and F.Engels. 1948. The Communist Manifesto . New York: International. Menger, C. 1963. Problems of Economics and Sociology , edited by F.J.Nock. Urbana: University of Illinois Press. Reagan, R. 1987. America’s Economic Bill of Rights. Speech, July 3. Ricardo, D. 1911. The Principles of Political Economy and Taxation . New York: E.P.Dutton.


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Rousseau, J.J. 1901. “The Social Contract.” In Famous Utopias. New York: Tudor. Smith, A. 1776. The Wealth of Nations . New York: Penguin. Weber, M. 1978. Economy and Society , edited by G.Roth and C.Wittich. Berkeley: University of California Press.

DISAGGREGATING THE CONCEPT OF PROPERTY IN CONSTITUTIONAL LAW C.Edwin Baker

INTRODUCTION 1 Defending or critiquing property has long been the stuff of politics. The libertarian assertion that taxation is theft duplicates neatly the Marxist claim that property is theft. Thus, no political theorist would be surprised that constitutional disputes often involve assertions about property rights. More interesting is the extraordinary lesson taught by the Supreme Court’s treatment of property claims. To put this lesson most boldly, property is not a single concept; it is not a single package to which a Justice offers a level of protection based on her particular ideology. Rather, property involves a diverse set of claimed rights that further different functions which have different normative valances. In contrast, the popular view of property as a single concept gives the political right undue ideological leverage by allowing it to rely on those rights of property that should be immune from political control to prop up public support for other property rights. And a unified conception inclines the left toward misguided Utopian projects. Modern theorists see property as a bundle of rights. An owner, for example, might have a right to use land or objects to relax, eat, sleep, play, or create. And she might also have a right to be able to invite others to engage in these activities with her; to keep others, including the government, out; to prevent the government from taking her property or prevent it from doing so unless various conditions, such as payment of compensation, are met; to build an aesthetically atrocious structure or cut down her beautiful sugar maples; to give her land or objects to another; or, finally, to sell or exchange them for desired performances by an exchange partner. The point of the notion of a bundle of rights is that a person could have almost any of these rights without having others. The lesson from constitutional law embodies but implicitly goes beyond this modern “bundle of rights” notion of property. The additional point is that the normative status of a particular type of property right varies depending on the function the right serves. Different normative status does not mean so much how important the function is but rather how the claim should be treated by the collective political and legal order. Therefore, once this normative disaggregation of the bundle occurs, the unified conception of property can be seen to serve mainly ideological or sloganizing functions. By allowing a claimant of a particular right to associate her claim with other entirely different rights which have different normative implications, the unified conception


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distorts thought. In contrast, disaggregation opens up intellectual space-for example, it makes a view such as “libertarian socialism” a plausible entry into political debate rather than an oxymoron. Interestingly, the crucible of constitutional litigation has often focused attention in a manner that has led the Supreme Court, with periodic lapses, to follow the recommendations of this disaggregation approach. I will proceed in two steps. First, I will quickly review the main provisions in the United States Constitution relating to private property. Then I will discuss this disaggregation thesis.

THE LAW The source of property-as opposed to the source of material objects-is in collective practices such as custom or, more relevantly for the modern world, law. Property (or ownership) is not a natural matter; it is a legal relation between people or between a person and government and it exists only in communities. This insight might imply that in democracies the collective should have unrestricted authority to decide what property rights to recognize and how to sculpt their content. But this has not quite been the case in the United States. Courts have often found government decisions to be constitutional violations of property rights. This history of court intervention suggests one common reading of the American experience: conservative judges use constitutional protection of property (and of freedom of contract) to block progressive, often egalitarian, democratic policies. If this were the entire report, the obvious lesson would be that a democratic country should avoid either the institution of judicial review or any constitutional status for property. However, on closer examination, the American experience teaches a more complex lesson. Under the single rubric of property, very different claims serving different values are made and their constitutional treatment has varied depending on the value at stake. This observation suggests the thesis of this paper: the notion of property should be disaggregated with the status of any claimed right varying depending on the value or function it serves. Constitutional provision for private property 2 is sometimes thought to consist of two texts in the Fifth Amendment: the so-called “due process clause” that “[n]o person shall…be deprived of life, liberty, or property without due process of law” and the “takings clause” – “nor shall private property be taken for public use, without just compensation.” Commentators also often consider the provision prohibiting a state from “impairing the law of contracts” [Art. I, Sec. 10], which was frequently invoked during the second half of the nineteenth century to strike down progressive legislation, to involve constitutional protection of property. Despite the common focus on the above texts, other provisions can involve property. 3 The First Amendment often protects a person’s use of property in her

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expressive or communicative activities 4 –leading, for example, to Liebling’s suggestion that freedom of the press belongs only to the person who owns one (Liebling 1981, p. 32). The Third Amendment restricts the government’s authority to quarter soldiers in people’s houses. 5 The Fourth Amendment prohibits “unreasonable searches and seizures” of the people’s “houses, papers, and effects.” The Eighth Amendment protects property by prohibiting “excessive fines.” The Thirteenth Amendment prohibits ownership of people. The Fourteenth Amendment’s guarantee of the “equal protection of the laws” has little obvious relation to property rights. Still, early in this century courts invoked equal protection to strike down various economic regulations that were said to unequally restrict property rights. More recently, the equal protection clause has supported some egalitarian claims to those resources needed to serve a person’s basic needs. Finally are the aspects of the Constitution that Americans would be most likely to forget. As many as ten provisions in the original Constitution directly or indirectly supported treatment of human beings as property, specifically as slaves (Wiecek 1977, pp. 62–64). Still, because of their centrality in constitutional history and direct relevance to the ideological debates about private property, the Fifth Amendment’s due process and takings clauses merit special attention. First, consider due process. Some commentators reasonably prefer to read the guarantee that a person will not be “deprived of life, liberty, or property, without due process of law” only to require appropriate procedures (Linde 1970). Nevertheless, through logic that was internally coherent but relied on premises now almost universally rejected, the Supreme Court once used this guarantee to protect substantive property rights. During a 40 year Lochner-era (Lochner v. New York 1905), the Supreme Court issued by some counts over 175 decisions finding laws regulating property or economic activities unconstitutional. It invalidated laws providing for minimum wages or maximum hours of work, regulating prices or entry into business, and prohibiting discrimination against union members. After the Court rejected the reasoning underlying Lochner (West Coast Hotel v. Parrish 1937), repudiation of the Lochner approach to due process became a major cornerstone of modern constitutional law. Later generations divided only on the question of precisely where the earlier Court went wrong. Was the mistake: (1) that the activist Court was generally too ready to invalidate laws as unconstitutional, thereby thwarting democracy? Or (2) that it ignored the specific language of the Constitution? Or (3) merely that its substantive conclusions about property and liberty were misguided, leading to improper protection of property and market freedom? The clear result of this history, however, is that the Court and all but a few extreme right-wing scholars now accept as unproblematic that the Constitution does not significantly limit governments’ power to regulate the economic sphere-at least as long as the regulation avoids unconstitutional discrimination, for example, on the basis of race or sex, and violates no other specific protection of individual’s civil liberties, such as their rights of free speech and freedom from unreasonable


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searches and seizures. The Fifth Amendment’s takings clause—“nor shall private property be taken for public use, without just compensation”—has a somewhat different history. Commentators agree that the takings clause has proper applications but often disagree about what those applications are. Three elements receive considerable attention: (1) What action constitutes a taking? (2) Does the constitutional provision implicitly deny government the power to take property except for public use and, if so, what is a “public use” and who decides? And (3) what compensation is just? I put the third question aside except to note that courts assert that compensation requires a “perfect equivalent” and then, in an overtly ideological reductionism, apparently assume that such a “full and exact” equivalent can take the form of money. Although a monetary equivalent for goods held for sale is easily imaginable, an exact equivalence makes much less sense in respect to a sacred site, a local community, or an ancestral home. As to the second question, most commentators agree that a taking, even with compensation, 6 is only permissible for a legitimate “public” as opposed to a mere private use. However, essentialist criteria for “public” have been rejected at least since 1937. This leaves only democratic discussions and decision to identify or formulate the public’s interest. Consequently, the political decisions about “publicness” are not seriously reexamined by the judiciary (Berman v.Parker 1954; Hawaii Housing Authority v.Midkiff 1984). Identification of a “taking” is controversial. Mandatory transfer of title or effective ouster of an owner from possession of land, manufacturing plants, or moveable property is routinely considered a “taking” unless the government properly imposed the deprivation as a punishment or forfeiture due to misdeeds. The area of controversy is whether regulations that, for example, destroy all or a significant portion of the economic value of property or prohibit particular desired uses or require (limited) pubic uses of property constitute a taking? Throughout the twentieth century, the consistent answer is “yes” for regulations that go “too far” -but what is “too far” is endlessly disputed (cf. Penn Central Transportation Co. v. New York City 1978). Certainly, regulations can be almost as detrimental to the owner as loss of title and can serve the government’s interests as well as gaining title. Imagine the government wanting a park. Rather than buying the land, the government might zone the particular private plot of land as scenic, prohibit all commercial uses, deny the owner power to exclude trespassers, and require the owner to maintain park-like facilities. Has a taking occurred? A judge might find that, individually, none of these regulations is a taking. A likely “yes” answer to their combination reflects the fact that courts sometimes find regulations to be takings for which the Constitution requires compensation even though title is not taken and some “ownership” rights remain (cf. Lucas v. South Carolina Coastal Council 1992).


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DISAGGREGATION THESIS The “disaggregation thesis” embodies five points: First, a variety of rights are asserted under the common label of property. Second, collectively, property rights serve multiple values or functions. Third, most individual property “rights” relate predominately to some values or functions and not to others. Fourth, normatively persuasive reasons support constitutional guarantees relating to some of these values but not to others. Finally, from these three points it follows that the constitutional question should not be how much protection to give property; rather the question should be whether particular values justify constitutional protection for the type of claim asserted. Constitutional litigation reveals seven functions served by property. 7 First, property rights, and the rules relating to property, serve to structure the societal allocation of resources to productive or otherwise desired uses. This is the allocative function. Second, especially within the process of exchange, control over property is a basis of personal power. Property provides the owner with a means to get another to do what that other would not choose to do except for the owner’s ability to transfer ownership of property. This normatively ambiguous power I label the sovereignty function (Cohen 1927; see also Kessler 1943). Third, both injustice and civic passivity can result from the government’s capacity to invidiously pick on, burden, manipulate, or discriminatorily exploit a person. Property rights that provide (limited) protection from this invidious, arbitrary treatment perform a protective function. Fourth, property can serve a privacy function to the extent that an owner controls space from which she can exclude others. As the negative example of George Orwell’s 1984 illustrates, the capacity to escape periodically from unwanted observation can be essential for the development of personality, for dignity, as well as for the thought, discussions, and experiments crucial for developing cultural and political alternatives. Fifth, without any orientation toward eventual market exchanges, people constantly use property in their everyday life. This is the use function or “use value” of property. Two sorts of use might be highlighted for their special normative importance. People sometimes intertwine their identity or personhood in certain objects. Rights in these objects can support a personhood function (Radin 1982). Finally, resources can satisfy various basic needs-for example, for food or warmth or medical attention needed for survival. Property rights serve a welfare function to the extent that they provide for at least minimal levels of those goods or opportunities perceived as basic to meaningful life and full membership within a given society. Although other functional listings are possible, most could be restated in terms of one or more of these seven-the allocative, sovereignty, protective, privacy, use, personhood, and welfare functions. Thus, the first important observation is that property rights play normatively distinguishable roles. Even


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more important, different property claims usually implicate different functions. This variability makes possible varying the constitutional treatment or status of the property claim depending on the function at stake. Below, I briefly consider the constitutional treatment of each. Allocative Property rules make contributions to achieving desirable allocations of resources. A modern society depends heavily on the effectiveness of its economic order. A desirable allocation involves getting resources into the hands of people who can and will use the resources wisely or productively. Nevertheless, since the best allocation is always a culturally variable and socially disputable matter, no particular set of property rights necessarily generates the best allocations (Kennedy and Michelman 1980; Baker 1975). Neither private property combined with market exchange, bureaucratic allocation according to need, common property shared by all people in a community, allocation to serve cultural or religious visions, queuing, governmental or public control, nor any other method of identifying valid property claims is necessarily best or best for all circumstances and all property. The best allocation is essentially contested. The choice between and scope of alternative allocative mechanisms can only be resolved collectively. Whatever prevails requires acceptance (whether voluntary or coerced) by diverse potential claimants. Given this inherently collective aspect, the rules of the allocation practice should be a matter of democratic political choice, that is, a matter of collective self-definition that takes into account varying considerations of efficiency, justice, and individual and community identity. Failure to recognize that choice among property rights is inherently a collective matter was possibly the most fundamental jurisprudential mistake of one of the worst periods of American constitutional law, the so-called Lochner era referred to above. But for the last 55 years, the Supreme Court has carefully rejected all claims that the Constitution requires specific methods of allocation or offers any protection of free markets-although the lessons of both history and reason may be forgotten as a new generation of conservative judicial activists gain power (Phillips v. Washington Legal Foundation 1998; Eastern Enterprises v. Apfel 1998). No plausible normative (or economic) theory can abstractly rank ways of performing this function. Therefore, despite being absolutely vital, the allocative function and the rules that relate to it receive no constitutional protection but are left entirely to the political process. This does not mean, however, that private property receives no constitutional protection-only that the allocative function of property receives none, leaving market-oriented uses protected only when the government action also interferes with some other function. Of course, lack of constitutional protection does not prevent democratic political bodies from deciding to rely heavily on market mechanisms for allocative purposes-but such a political choice is subject to any modifications that are democratically adopted.


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Sovereignty Often intertwined with the allocative function is what I label the sovereignty function, with “sovereignty” here understood to mean the ability to get others to comply with the sovereign’s wishes without themselves wanting what the sovereign wants. This label highlights that one reason people want property is the capacity it gives them to obtain desired performances from others. Property is power. People use property the way governments use law (as well as property): to get other people to behave as the power holder desires. In a market exchange, an owner gets another to do something the other would presumably otherwise not do. Of course, each party to the exchange exercises power over the other, each usually favors the result (although often only as compared to the prior status quo), and each usually can (and in all failed exchanges, does) resist the exercise of power. But these facts do not detract from the exchange being an exercise of power-an offeree uses property purely instrumentally in order to get the other to act in a way she would not wish except for the offer. Obtaining performances through the exercise of power is, however, only one way of structuring relations among people. One alternative, for example, is the exercise of influence through communicative action. This method of structuring relations results in solidaristic interaction reflecting agreement on what is good or right rather than power (Cohen and Arato 1992, pp. 472, 486–487). Of course, some opportunities to use power rather than influence can usefully reduce the burden of discursive coordination and can be socially and individually useful. A modern economy would hardly be imaginable without such mechanisms (Habermas 1987). Nevertheless, as I will argue further below, exercise of power over another is not intrinsic to the normatively significant notion of individual liberty or autonomy. Availability of such opportunities ought to be and is left by the Constitution to democratic, self-defining choice. Thus, governments often limit the agreements people can enter or enforce and the exchanges they can make. Governments sometimes limit even the transactions that a person can reject. Civil rights statutes prohibit the refusal of many transactions, for example, transactions that would be offered to others of the “favored” racial, sexual, or ethnic group. These statutes impose on private sovereignty normative requirements identical to those that the Constitution imposes on governmental sovereignty. The Court occasionally interprets the Constitution itself to limit private sovereignty rights. Property owners cannot enforce an agreement to racially restrict who can buy the purportedly restricted property (Shelly v. Kraemer 1948). The Court likewise held that the Constitution denies the private owner of company town power to deny people an opportunity to speech on their property (Marsh v. Alabama 1946). 8 But more significant than these Constitutional limits on property’s sovereignty rights is the fact that the Constitution permits the government to block any type of exchange to which it objects-that is, it can always restrict the use of property as power. 9 Thus, the Constitution gives virtually no constitutional protection to the


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allocative or sovereignty rights of property. This contrasts sharply with the situation of the five remaining functions. Protective As conceptualized here, the protective function refers to relatively specific, limited, but normatively significant rights. No law or constitutional provision can protect a person from all adversity or danger or mistreatment. But the Constitution recognizes property rights that offer a person some protection against being improperly picked on by her government. Many criminal procedure guarantees, such as the Fourth Amendment’s requirement that the government obtain a judicial warrant based on probable cause before it searches a person’s property, relates in part to this concern. Similarly, the Fifth Amendment’s prohibition on deprivations of property (and of life or liberty) without observing proper procedures reduces the likelihood of invidious or arbitrary treatment. The normative goal of protecting a person from being “picked on” helps identify government actions as “takings” for which compensation is required. The Constitution does not compel compensation for many legal changes that greatly reduce a person’s wealth. Most zoning or environmental laws, regulation of commercial uses of property, or huge tax increases are fine. I suggest that the government must compensate primarily in situations where the likelihood is especially high that the legal change is an invidious imposition on an individual. Acts like mandated transfer of title, actual government ouster of an individual from control, or permanent government occupation of property are highly vulnerable to invidious abuse since usually the government could have as easily used someone else’s property. This danger makes the requirement of compensation appropriate. In contrast, more general justifications explain the identity of property subject to most regulatory policies, even those causing drastic reduction of the value or significant limitations on the use of specific property. These impositions suggest democratic policy making-general evaluations of activities or attempts at redistribution-rather than invidiously picking out specific people to bear costs. This benign characterization, however, becomes less convincing if the deprivation results from ad hoc individualized decisions, as in spot zoning not guided by general criteria or in cases where a property holder relies on a governmental promise given especially to her and then the government reneges. Thus, a takings could result if the government explicitly tells a developer that she could continue to control access to a lagoon if she constructs on her property a channel that connects her lagoon to the sea but then, after she relies, the government applies navigation law to grant unrestricted public access (Kaiser Aetna v. United States 1979). Privacy Some privacy may be essential to human flourishing. Because I agree with


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Brandeis that “the greatest menace to freedom is an inert people” (Whitney v. California, Brandeis, concurring 1927), I am troubled by current inclinations to protect and reward people’s retreat into private spheres. It is arguably perverse to reward those who avoid public life with greater protection from defamation (Gertz v. Robert Welch 1974). Nevertheless, people’s autonomy or dignity may require some protection from the government’s gaze. Under the Fourth Amendment, “houses, papers, and effects” as well as “persons” cannot be searched or seized unreasonably, which normally means only if a magistrate issues a warrant based on probable cause. These property rights allow a person to engage in activities outside the public or government’s routine view. The property right to exclude trespassers also partly responds to this concern. This right of exclusion is generally not constitutionally enshrined. Surely states could rescind this right in respect to non-damaging trespasses on uninhabited property. The privacy value, however, might dictate a different outcome in respect to spaces being personally occupied or currently used by an owner. Use Property’s role in people’s chosen activities is possibly its most obvious function. Here I refer to all non-market-oriented “uses” of property but especially emphasize those that a person substantively values and that do not involve violence or exercise power over others. These uses are expressive of people’s identities. A non-paternalistic government will usually leave decisions about these uses to private property holders. Most modern government’s regulations relate either to the property’s instrumental uses in violence or its commercial uses. The most common rationale for regulating non-violent personal uses of property involves significant spill-over effects on others. Residential zoning, building codes, and other forms of land use planning can provide efficient solutions to collective action problems. Recreational uses of property-speeding in my BMW-are sometimes regulated to reduce the risk of violation of other’s rights. Still, regulations of use can be constitutionally questionable interferences with individual liberty or autonomy (Baker 1997; Mill 1859). When regulation represents majoritarian repugnance towards other’s self-defining expressive conduct, courts sometimes intervene to protect property rights. The Supreme Court invalidated a zoning regulation as applied to prohibit a home owner from living with her extended family (Moore v. East Cleveland 1977). It also protected people’s use of birth control devices within a valued form of association (Griswold v. Connecticut 1965) and possession of obscene pictures within the home (Stanley v. Georgia 1969). Personhood People sometimes invest a portion of their identity or self-conception in particular items of property-in ancestral homes or wedding bands, to take individualistic examples, or in religious shrines or territory (Kymlicka 1989, pp.


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146–147) for more collectivist illustrations. Because different individual’s personhood might require conflicting uses of the same resource and because a person could find her personhood tied to immense quantities of valuable property, society neither could nor should honor all property claims based on personhood. Still, respect for human dignity suggests these claims’ special ethical importance, which appropriately could receive some constitutional recognition. Since an object’s uniqueness is often key to its personhood role, usually no “perfect equivalent” 10 can be given. Arguably, a governmental taking of personhood-identified property should be impermissible if an alternative “taking” would reasonably serve the government’s need. Although unfortunately in dissents, several justices argued that the Constitution requires the government to take account of this type concern when deciding whether to build a road that would destroy a site pivotal to Indian religious identity (Lyng v. Northwest Indian Cemetery Protective Association, Brennan, Marshall, Blackmun, dissenting 1988). Moreover, since the person who invests objects with personhood significance often values the object much beyond its market measure, if a takings occurs, arguably justice requires the government to go beyond market value in providing compensation. Welfare Finally, possession of property-at least, access to and use of some minimal level of resources-is essential to survival. Surely a key reason for people’s concern with property is their dependence on it for the necessities of life. A major measure of a society’s legitimacy is how well its property rules serve this welfare function. Michael Walzer reads history to indicate that all democratic societies guarantee their members those goods or opportunities that the particular society considers basic for meaningful membership-although the precise content of these goods and opportunities varies from society to society (Walzer 1983; San Antonio Independent School District v. Rodriguez, Marshall dissenting 1973). Of course, as society changes, the needs considered fundamental, and hence the property rights that the state should guarantee, will change. Today, a right to minimal education probably falls into this category. Similarly, although material goods might suffice to serve certain basic needs, a society might conclude that human dignity requires recognition of a universal property right to (meaningful?) employment (Macpherson 1973, pp. 133–134). Amartya Sen claims that major modern famines never result from mere inadequate production of food but rather from a country’s mal-distribution of entitlements. He further argues that severe famines never occur in democraciesdefined as countries with competing political parties and a free press-thus, implicitly endorsing Walzer’s observation at least in respect to food (Sen 1993). With an obvious intellectual debt to John Rawls (Rawls 197), some constitutional scholars argue that the Fourteenth Amendment’s equal protection clause requires the government to provide people with entitlements to at least a


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minimal level of goods, especially welfare-based goods considered basic by American society (Michelman 1969, 1979; Baker 1983). Society and even government often recognize this responsibility. Once it has, any lapse in provision for a specific group ought to be characterized as invidious discrimination. At times the Court has agreed. Some controversial, sometimes inadequately rationalized Court decisions as well as powerful judicial dissents are only comprehensible on the basis of a constitutional status for claims to property that serve this welfare function. The Supreme Court declared unconstitutional legislation that denied otherwise available welfare benefits to people who had recently moved into the jurisdiction (Shapiro v. Thompson 1969), that denied food stamps to people involved in unusual living arrangements (United States Dept. of Agriculture v. Moreno 1973), and that denied a public education to illegal alien children (Plyler v. Doe 1982). It invalidated practices that discontinued welfare benefits or public housing without providing an adequate pre-termination hearing to see if the person continues to qualify (Goldberg v. Kelly 1970). It also refused to allow lack of property to cause the loss of certain fundamental opportunities. Between 1963 and 1983, the Court held it unconstitutional to deny to indigents unable to pay the opportunity to stay out of jail, to marry or get divorced, or to obtain a criminal defense attorney in initial appellate proceedings. 11 Some state courts have gone further and found state constitutional guarantees to minimal food, shelter, and education. These egalitarian decisions protect claims to property (or to opportunities that property can buy). Even if these property rights are in tension with a market society’s standard notion that ability to pay or produce or obtain transfers is the source of property, these rights arguably (partly) replace readily available land in serving property’s historically crucial welfare function. Ideological or historical unity? This brief review of constitutional doctrine shows different property rights relating to property’s different functions. In most circumstances, recognition of one right does not require or imply recognition of the others. Nevertheless, under some historical conditions, it may have seemed best (at least to people within the dominant element of society) to recognize a single conceptual amalgam under the term, “property.” An owner’s unified dominion over land or objects might have appeared to have been an appropriate way to serve all of these functions. Moreover, governmental authority to regulate the sovereignty aspect of property may have seemed less urgent because the power aspect of private property may have seemed less dangerous. At least, these conclusions might be true if a person can secure a livelihood almost entirely from land and if land is readily available to anyone who will work it. That may describe a real or imagined Jeffersonian world of small, independent farmers (cf. Macpherson 1973, pp. 135–136) and, thus, help justify constitutional protection of property in that society (Mensch 1982). Within this arguably mythical (ideological?) vision, making normative distinctions between differing aspects of property might seem relatively unimportant for either policy or legal purposes. And even if this unified conception were overtly inadequate to


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serve some of property’s functions for many people, the conception may have served the partisan interests of a new class of entrepreneurs. But surely today a single concept distorts more than it enlightens. Today, in culturally plural, market societies where most individuals do not own means of production, only more specialized property rights, often requiring affirmative state provision, will adequately serve the welfare and other functions. The various different rights suggested by the concept of property ought to be distinguished, with different policy and constitutional treatment following from the normative role and status of the function involved. Some extraordinarily important property rights should be sculpted by positive law. They should not and do not receive significant constitutional protection. Others should and do-with the differing nature of the constitutional protection related to the functions served.

THE PRIORITY OF DEMOCRACY OVER SOME ASPECTS OF PROPERTY Constitutionally, two functions-the allocative and sovereignty-have been left completely subject to democratic decision making. Our society routinely relies on private allocation of property through markets but accepts virtually any legal deviation or regulation as constitutional. Against this teaching of constitutional history, challengers claim that reliance on decisions of private owners within markets (often 12 ) should be constitutionally mandated because of the normative value of autonomy and its companion concept, voluntariness. They argue that people enter into market exchanges voluntarily-except for the occasionally “coercive” force of need or desire 13 –and that the exchanges benefit both parties. Market exchanges embody exercises of liberty that merit some constitutional protection. This view is wrong. Use rights and exchange rights differ fundamentally in: (1) the type of capacity the right gives the owner in relation to other people; (2) the right’s relation to the owner’s capacity to define or express herself; and (3) the primary societal significance of the right. 14 First, using property in an exchange always involves exercise of power over another person. The owner gets the other to do something that she would not choose to do except for the offer of the property. This exercise-of-power quality does not make market practices necessarily objectionable-society wisely leaves much of economic life to this form of coordination. But it does distinguish exchange from uses of property within a person’s own activities. It even distinguishes exchange from other uses of property within joint interactions. In the non-exchange voluntary interaction, like in having a guest over for dinner, conducting a jointly desired political or religious meeting, or using a contraceptive device in a sexual association, the interaction can involve solidarity and a person can value both her own and the other person’s participation. The property creates a joint opportunity rather an exercise of power.


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Second, the dominant liberal conception of liberty involves free choice about one’s own development or self-expression. If society respects people’s autonomy and self-definitional choices, it must respect their substantive value choices. Thus, respect for people’s autonomy may require a presumption that the law permit a person to use resources that the society leaves in her hands within the actual activities that she chooses and values. But this conception of liberty does not imply opportunities to exercise power over another. Moreover, in contrast to use of property within the substantively self-realizing aspects of a person’s activities, property is valued by the owner only instrumentally when used in an exchange to obtain another’s performance. It serves only as a means to obtain something else the owner wants. Given scarcity and the societal selfdefining as well as distributive consequences of one or another means of obtaining property for use, society need not allow any particular privately favored method of obtaining resources. The various reasons for recognizing a person’s use rights do not additionally require allowing the person to employ property to exercise power over others. Third, since the primary social role and individual significance of exchange is to allocate resources, since exchange is merely one possible framework for arranging allocations, and since exchange as compared to other frameworks advantages some people and some societal self-definitions and not others (Kennedy and Michelman 1980), the scope of and limits on exchange as a means to create a preferred allocation are properly political matters. This collective or political role follows for other reasons too. The parties to the exchange are not the only people with an interest in how or what allocations occur. The methods and the resulting allocations are matters of society’s cultural and ethical self-definition (Radin 1996). And they affect the chances for particular persons to obtain desired opportunities. Moreover, since allocations require collective recognition of when a person has a proper claim in respect to property, the allocative framework is logically a collective matter. Only collective practice (whether originating in culture and history, democratic reflection, or forceful imposition) can determine the rules or principles or framework that identify allocations. Radical decentralization of the choice of allocative frameworks is impossible. Hence, individual autonomy here is most advanced by democracy-everyone having a part in the public liberty to choose these frameworks. In contrast, substantively valued “uses” of property most fundamentally involve self-definition or self-realization. These matters usually can and usually should be decentralized to individuals’ decisions over use of resources collectively recognized as their private property.

CONCLUSION I have advanced three claims. (1) At least in present historical circumstances, a unified notion of property improperly distorts policy and normative vision. Politics should follow constitutional law in distinguishing various types of


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claimed rights that might be combined into a uniform concept of property. (2) The most important normative values embodied in the Constitution, particularly respect for people’s dignity, liberty, and equality, explain why claims to resources needed to satisfy basic needs, that is, welfare rights, merit constitutional protection. They also help justify constitutional protection from intrusions destructive of privacy, special deference to claims to property central to personhood, and property rights that provide some protection against individualized, invidious exploitation by government. (3) Combining liberal normative premises and a disaggregated notion of property also explains leaving market practices or economic activities aimed at market transactions completely subject to democratic decision-making.

NOTES 1. This essay is based on Baker (1986) and is revised from a talk given in Addis Ababa, Ethiopia, May 1993. 2. Since my topic relates to private property, I do not consider provisions such as that in Article IV, Sec. 3, providing that “Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States.” 3. In addition to those mentioned in the text, many provisions not generally thought of as relating to property might so relate from some perspectives. For example, consider the Article I power granted to Congress to legislate to regulate interstate and international commerce or the Fourteenth Amendment’s guarantee of aspects of the federal debt. The Fourteenth Amendment also ruled out certain property claims by prohibiting state payment of any debt incurred by the states engaged in rebellion against the United States—assuring the worthlessness of Confederate script-and by prohibiting states paying any compensation to slave owners due to loss caused by the emancipation of former slaves-thereby providing the precedent for denying compensation when previously legally recognized claims are now seen as sufficiently unjust. 4. Cf. Ladue v. Gilleo (1994) (right to place at least non-commercial signs on one’s residential property) with City Council v Taxpayers for Vincent (1984) (no right to place signs on public property such as utility poles). 5. “No soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.” 6. The requirement of compensation was slow to take hold in the early nineteenth century. In contrast to the assumptions implicit in the question in the text, some early courts thought that the inapplicability of the takings requirements to government takings for private use meant that not only were they permissible but also that they did not require compensation (Horwitz 1977, p. 65). 7. This list should not be taken as canonical. Any commentator can formulate different categories; this list or any alternative should be evaluated for its usefulness for the particular inquiry. 8. The Court initially reached but then rejected the same conclusion as applied to private owners of shopping centers. See Amalgamated Food Employees v. Logan


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Valley Plaza 1968; Hudgens v. NLRB 1976. 9. I ignore here limits on governmental power to restrict the use of property to pay for speech. See, e.g. Buckley v. Valeo 1976; Meyer v. Grant 1988. 10. In what might be seen as an ideological commitment to a market system of value, the Supreme Court states that just compensation requires that government provide a “perfect equivalent” for what it takes (Monongahela Navigation Co. v. United States, 1893). 11. Tate v. Short 1971 (prison for non-payment of fine); Bearden v. Georgia 1983 (revocation of parole for non-payment of fine); Zablocki v. Redhail 1978 (marriage); Boddie v. Connecticut 1971 (divorce); Douglas v. California 1963 (attorney on appeal). See also Harper v. Virginia St. Bd. of Elections 1966 (invalidating the poll tax). Development of this line of constitutional doctrine has been largely stopped by the mostly conservative judges appointed by the Republican Party’s last four presidents. 12. Most challengers to state power would still permit regulation to handle overt externalities and collective action problems as did the Court during the Lochner period, at least where the benefits were clearly “public.” 13. Kronman concludes that the mandate of no coercion would commit a consistent libertarian to an egalitarian distribution of wealth (Kronman 1980; see also, Macpherson 1973, pp. 146–147). 14. For a different but quite persuasive argument on this point, see Michelman 1992.

REFERENCES Baker, C. E. 1975. “The Ideology of the Economic Analysis of Law.” Philosophy & Public Affairs 5:3. ——. 1983. “Outcome Equality or Equality of Respect: The Substantive Content of Equal Protection.” University of Pennsylvania Law Review 131:933. ——. 1986. “Property and Its Relation to Constitutionally Protected Liberty.” University of Pennsylvania Law Review 134:741. ——. 1997. “Harm, Liberty, and Free Speech.” Southern California Law Review 70:979. Cohen, J. L., and A.Arato. 1992. Civil Society and Political Theory . Cambridge, MA: MIT Press. Cohen, M. 1927. “Property and Sovereignty.” Cornell Law Quarterly 13:8. Habermas, J. 1987. The Theory of Communicative Action (vol. 2). Boston: Beacon. Horwitz, M. J. 1977. The Transformation of American Law , 1780–1860 . Cambridge, MA: Harvard University Press. Liebling, A. J. 1981. The Press . New York: Pantheon Books. Linde, H. A. 1970. “Without Due Process: Unconstitutional Law in Oregon.” Oregon Law Review 49:125. Kennedy, D., and F. Michelman. 1980. “Are Property and Contracts Efficient?” Hofstra Law Review 8:711. Kessler, F. 1943. “Contracts of Adhesion—Some Thoughts About Freedom of


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Contract.” Columbia Law Review 43:629. Kronman, Anthony T. 1980. “Contract Law and Distributive Justice.” Yale Law Journal 89:472. Kymlicka, W. 1989. Liberalism, Community, and Culture . Oxford: Oxford University Press. Macpherson, C.B. 1973. Democratic Theory: Essays in Retrieval . London: Oxford University Press. Mensch, E. 1982. “The Colonial Origins of Liberal Property Rights.” Buffalo Law Review 31:635. Michelman, F. 1969. “Foreword: Protecting the Poor through the Fourteenth Amendment.” Harvard Law Review 83:7. ——. 1979. “Welfare Rights in a Constitutional Democracy,” Washington University Law Quarterly : 659. ——. 1992. “Liberties, Fair Values, and Constitutional Method.” University of Chicago Law Review 102:91. Mill, J. S. 1859. On Liberty . Radin, M.J. 1982. “Property and Personhood.” Stanford Law Review 34:957. ——. 1996. Contested Commodities . Cambridge, MA: Harvard University Press. Rawls, J. 1971. A Theory of Justice . Cambridge, MA: Harvard University Press. Sen, A. 1993, May. “The Economics of Life and Death.” Scientific American 40. Walzer, M. 1983. Spheres of Justice . Cambridge, MA: Harvard University Press. Wiecek, W.W. 1977. The Sources of Antislavery Constitutionalism in America : 1760–1848 . Ithaca: Cornell University Press. Cases Amalgamated Food Employees Local 509 v. Logan Valley Plaza, 391 U.S. 308 (1968). Bearden v. Georgia, 461 U.S. 660 (1983). Berman v. Parker, 348 U.S. 26 (1954). Boddie v. Connecticut, 401 U.S. 371 (1971). Buckley v. Valeo, 424 U.S. 1 (1976). City Council v. Taxpayers for Vincent, 466 U.S. 789 (1984). Douglas v. California, 372 U.S. 353 (1963). Eastern Enterprises v. Apfel, 118 S.Ct. 2131 (1998). Gertz v. Robert Welch, 418 U.S. 323 (1974). Goldberg v. Kelly, 397 U.S. 254 (1970). Griswold v. Connecticut, 381 U.S. 479 (1965). Harper v. Virginia St. Bd. of Elections, 383 U.S. 663 (1966). Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984). Hudgens v. NLRB, 424 U.S. 507 (1976). Kaiser Aetna v. United States, 444 U.S. 164 (1979). Ladue v. Gilleo, 512 U.S. 43 (1994).


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Lochner v. New York, 199 U.S. 45 (1905). Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992). Lyng v. Northwest Indian Cemetery Protective Assoc., 485 U.S. 439 (1988). Marsh v. Alabama, 326 U.S. 501 (1946). Meyer v. Grant, 486 U.S. 414 (1988). Monongahela Navigation Co. v. United States, 148 U.S. 312, 326 (1893). Moore v. City of East Cleveland, 431 U.S. 494 (1977). Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978). Phillips v. Washington Legal Foundation, 118 S.Ct. 1925 (1998). Plyler v. Doe, 457 U.S. 202 (1982). San Antonio Indep. Sch. Dist. v. Rodriguez, 411 U.S. 1 (1973). Shapiro v. Thompson, 394 U.S. 618 (1969). Shelly v. Kraemer, 334 U.S. 1 (1948). Stanley v. Georgia, 394 U.S. 557 (1969). Tate v. Short, 401 U.S. 395 (1971). United States Dept. of Agriculture v. Moreno, 413 U.S. 528 (1973). West Coast Hotel v. Parrish, 300 U.S. 379 (1937). Whitney v. California, 274 U.S. 357 (1927). Zablocki v. Redhail, 434 U.S. 374 (1978).

A PROBLEM ABOUT PRIVACY, PROPERTY AND CUSTODY: DISPUTES ABOUT THE DISPOSITION OF “FROZEN EMBRYOS” Scott Brophy and Douglas E.Edlin

INTRODUCTION The law of property is the law of ownership. Relations among individuals and between individuals and the state are structured by legal principles governing ownership. The law structures these relations by defining what sorts of things can and cannot be considered property, and by delimiting what sorts of things can and cannot be done with property as the state has defined it. 1 New technologies have raised difficult questions about the fundamental nature of property and the role governments might play in regulating it. Just as computer technology has raised problems about intellectual property, medical technology has raised problems about biological property that have forced courts and legislatures to address fundamental legal and philosophical concepts. One such problem has recently arisen in connection with the reproductive technology of in vitro fertilization. In several cases, marriages dissolved and there were disagreements about which former spouse had decisional authority over cryogenically preserved zygotes created during the in vitro fertilization process. Some courts have treated these “frozen embryos” as property, and others have not. Some courts have held couples to prior directives and contracts, while others have not. The courts have begun to offer rules and principles for deciding these disputes, and so have some legislatures, but many of the issues at stake remain controversial. In what follows, we propose to untangle some of the fundamental relations between property and government involved in this problem by examining the responses of the courts to these cases. In vitro fertilization technology has forced state courts and legislatures to determine whether a fertilized egg is something that can be “owned” by the progenitors of that zygote, whether it is not property but a person, or whether it is neither of these. This review of different governmental efforts to categorize and control individuals’ use of the zygotes that are produced via in vitro fertilization reveals the powerful connection between definition and determination. Where a court or legislature defines a zygote as property or as a person, this leads directly to the determination of what rights a progenitor can exercise over that zygote. Where the zygote is defined as neither property nor person, the principles of determination are more subtle and interesting.

A problem about privacy, property and custody

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PRE-EMBRYOS Many couples who wish to have children cannot do so without medical intervention and the assistance of some kind of reproductive technology such as artificial insemination or in vitro fertilization. Of all life choices, perhaps none is more fundamental and personal than deciding to have a child. This is clearly a realm of life we prefer to keep out of the reach of governmental regulation of any kind, whenever that is possible. But when agreements break down, circumstances change, and disputes find their way to the courts, it is not possible for government to remain silent about the principles underlying the resolution of these disputes. Several cases arising from the use of in vitro fertilization have raised particularly interesting puzzles about fundamental legal concepts, including questions about the nature of property and personhood. The courts’ resolutions of these disputes have depended on the extent to which the frozen embryo has been understood to be disputed property or the subject of a custody disagreement. At the heart of these issues is the question of what, as far as the law is concerned, “frozen embryos” are. While there is nothing in particular objectionable about using the term “frozen” for something subjected to cryogenic preservation, many scientists and physicians object to calling the thing that is frozen an “embryo.” A few words of clarification about the process may help avoid some confusion. The in vitro fertilization (IVF) procedure begins with hormonal control and stimulation of a woman’s ovulation. This control and stimulation allows the retrieval of more than one egg at one time and permits the egg retrieval procedure to be scheduled for a specific time. The eggs are then removed by laparoscopy or ultrasound directed needle aspiration and placed into a glass petri dish. Sperm are then introduced to the eggs in the dish. If a sperm fertilizes an egg, this conceptive product, or zygote, divides until it reaches the four- to eight-cell stage. At this point, there are two options for individuals seeking children. First, the zygote can be transferred immediately to the woman’s uterus via a cervical catheter. If this procedure succeeds, the zygote will attach itself to the uterine wall, develop into a fetus, and be carried to term. Second, the zygote can be cryogenically preserved in liquid nitrogen for later use. Because the initial hormonal stimulation often results in the retrieval of more eggs than can be implanted at one time, cryopreservation affords several advantages: (1) the woman need not undergo the invasive burden of the hormone stimulation and egg harvesting procedure with each attempt at impregnation; (2) the woman (or couple) saves the financial burden of paying for the egg retrieval procedure; and (3) the chances at a successful pregnancy may be increased because only the strongest embryos survive the cryopreservation process, and the uterine wall is more receptive to impregnation after some time passes (Feliciano 1993; Kass v. Kass 1998). The first court of last resort to rule on the disposition of cryopreserved


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zygotes was the Supreme Court of Tennessee, in Davis v. Davis (1992). In Davis, the Court realized that the words chosen to describe this process can shape the ensuing discussion of the rights and interests at stake. As the Tennessee Supreme Court put it: “[S]emantical distinctions are significant in this context, because language defines legal status and can limit legal rights. Obviously, an ‘adult’ has a different legal status than does a ‘child.’ Likewise, ‘child’ means something other than ‘fetus.’ A ‘fetus’ differs from an ‘embryo’” (Davis 1992, pp. 592–593). For this reason, linguistic precision is important. The popular term “frozen embryo” is not consistent with current medical and scientific practice. Summarizing the testimony of Dr. Irving Ray King, one of the expert witnesses who testified before the trial court in the Davis case, the Tennessee Supreme Court wrote: The currently accepted term for the zygote immediately after division is “preembryo” and that this term applies up until 14 days after fertilization. [Dr. King] testified that this 14-day period defines the accepted period for preembryo research. At about 14 days, he testified, the group of cells begins to differentiate in a process that permits the eventual development of the different body parts which will become an individual….[T]he first cellular differentiation of the new generation relates to physiologic interaction with the mother, rather than to the establishment of the embryo itself. It is for this reason that it is appropriate to refer to the developing entity up to this point as a preembryo, rather than an embryo (Davis, 1992, pp. 593–594, emphasis supplied). Given the discussion in the next section, this distinction carries some significant weight. We will, therefore, use the more precise term “pre-embryo,” rather than “embryo,” to describe the fertilized egg in its two- to eight-cell stage at cryopreservation. 2 Whatever one calls these eggs that have been fertilized ex utero, the substantive legal question is who gets to decide what happens to them when a couple divorces. The answer to this dispositional question depends upon the same issues raised by the definitional question. That is, it depends upon how the law understands and defines what these fertilized eggs are. The biological, developmental characteristics of a cryogenically preserved pre-embryo could turn out to be morally or legally relevant in distinguishing it from people or even from more fully developed embryos in utero.

CUSTODY The trial court in the Davis case treated the pre-embryos as people. The trial court was apparently taken with the expert testimony of a French geneticist, Dr. Jerome Lejeune. Insisting that there was no recognized, scientific distinction


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between the terms “pre-embryo” and “embryo,” Dr. Lejeune referred to the four- to eight-celled pre-embryos as “early human beings,” “tiny persons” and “kin” (Davis 1992, p. 593). 3 The trial court reasoned that, if there is no distinction between pre-embryos and embryos, then Dr. Lejeune’s conclusion that “human life begins at the moment of conception” must have been correct (Davis, 1992, p. 594). Accordingly, the trial court determined that the eightcelled pre-embryos were “children in vitro.” After reaching this determination, the trial court applied the doctrine of parens patriae and held that it was “in the best interests of the children” to be born rather than destroyed. Applying this “best interests analysis,” the trial court awarded custody of these “children in vitro” to Ms. Davis rather than Mr. Davis because Ms. Davis wanted to see them brought to term and Mr. Davis did not (Davis 1992, p. 594). The Davis trial court’s reasoning and result are mirrored by a Louisiana statute. According to Louisiana Revised Statute 9:121 (1998), the intentional destruction of a cryopreserved pre-embryo is prohibited and any disputes about their disposition must be resolved in the “best interest” of the pre-embryo. The reasoning and ruling of the trial court in Davis are legally 4 and medically 5 suspect, as is the Louisiana statute. But they underscore the important connection between definitions and determinations. If one conceives of a preembryo as a person, then legal principles of custody will apply and will require that these people are not destroyed.

PROPERTY If one concludes that pre-embryos are not people, it is tempting to conclude that they must be the parents’ property. In this regard, we might ask whether the preembryo is “owned” by the individuals who donated the constitutive egg and sperm that were joined to make the pre-embryo. This was the understanding employed by the United States District Court for the Eastern District of Virginia in York v. Jones (1989). In York, as a result of an IVF process, the plaintiffs (husband and wife) had a pre-embryo cryogenically preserved at the Howard and Georgeanna Jones Institute for Reproductive Medicine (the “Jones Institute”) in Norfolk, Virginia. The plaintiffs asked the Jones Institute to transfer the frozen pre-embryo from the Jones Institute in Virginia to the Institute for Reproductive Research at the Hospital of the Good Samaritan in Los Angeles, California. The Jones Institute refused. After several requests by the plaintiffs and their California physicians were unsuccessful, the Yorks sued the Jones Institute seeking transfer of the preembryo from Virginia to California. The parties focused on the language of the plaintiffs’ agreement with the Jones Institute. The parties’ agreement provided, in pertinent part: We [the plaintiffs] have the principle [sic] responsibility to decide the disposition of our pre-zygotes. Our frozen pre-zygotes will not be


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released from storage for the purpose of intrauterine transfer without the written consents of us both. In the event of divorce, we understand legal ownership of any stored pre-zygotes must be determined in a property settlement and will be released as directed by order of a court of competent jurisdiction. Should we for any reason no longer wish to attempt to initiate a pregnancy, we understand we may choose one of three fates for our pre-zygotes that remain in frozen storage. Our prezygotes may be: (1) donated to another infertile couple (who will remain unknown to us) (2) donated for approved research investigation (3) thawed but not allowed to undergo further development (York 1989, p. 424). The Yorks argued that the Jones Institute’s refusal to transfer the pre-embryo in accordance with their wishes was a violation of the parties’ agreement (York 1989, p. 424). The Jones Institute argued that “plaintiffs’ proprietary rights in the pre-embryo are limited to the ‘three fates’ enumerated in this provision [of the agreement] because there is no established protocol for the inter-institutional transfer of pre-zygotes” (York 1989, p. 425). The Eastern District of Virginia decided this dispute by noting that the parties’ agreement consistently referred to the pre-embryo as the “property” of the Yorks (York 1989, p. 425). 6 After determining that the Jones Institute explicitly acknowledged the Yorks’ property rights in the pre-embryo, the York Court concluded that a bailment relationship was created by the parties’ contract. 7 The York Court appeared interested in deciding the case before it, and nothing more. The agreement executed by the Yorks and the Jones Institute permitted the Court to apply the legal rules applicable to bailment and detinue and resolve the issues before it without engaging in any esoteric debates about the epistemology of ownership or the moment at which life (or personhood) begins. As we discussed in the previous section, once the Davis trial court concluded that pre-embryos are persons, its task in determining that dispute became fairly simple. Similarly, by defining pre-embryos as property, the York Court simplified its task as well. But as with the Davis trial court’s reasoning, there are problems with the York Court’s conception of pre-embryos as property. 8

PRIVACY Neither the treatment by the trial court in Davis of the pre-embryo as a person, nor the treatment by the York Court and the intermediate appellate court in Davis of the pre-embryo as property seems to capture the unique characteristics of preembryos (Davis 1992, p. 597). In Davis, the Tennessee Supreme Court recognized that pre-embryos are neither people nor property. Properly understood, pre-embryos are more than property and less than people. Justice Daughtrey of the Tennessee Supreme Court was sensitive to this intermediate status of pre-embryos in her discussion of what she termed, “The ‘Person’ vs.


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‘Property’ Dichotomy” (Davis 1992, pp. 594–595). In her discussion of this dichotomy, Justice Daughtrey relied on the ethical standards articulated by the American Fertility Society in attempting to articulate a “third position,” according to which: The preembryo is due greater respect than other human tissue because of its potential to become a person and because of its symbolic meaning for many people. Yet, it should not be treated as a person, because it has not yet developed the features of personhood, is not yet established as developmentally individual, and may never realize its biologic potential (Davis 1992, p. 596; citing American Fertility Society 1990, pp. 34S–35S). Relying on the Report of the American Fertility Society’s Ethics Committee, the Tennessee Supreme Court ruled that “preembryos are not, strictly speaking, either ‘persons’ or ‘property,’ but occupy an interim category that entitles them to special respect because of their potential for human life. It follows that any interest that Mary Sue Davis and Junior Davis have in the preembryos in this case is not a true property interest. However, they do have an interest in the nature of ownership, to the extent that they have decision-making authority concerning the disposition of the pre-embryos” (Davis 1992, p. 597; Robertson 1990a, p. 447). This is a crucial distinction. Saying that a pre-embryo “belongs” to its progenitors simply reflects the progenitors’ authority to determine the disposition of the pre-embryo. Put differently, terms of property or ownership apply to pre-embryos as a reference to the locus of decision-making authority rather than as a statement about the nature of pre-embryos themselves (Robertson 1990a, pp. 454–455). Having drawn these conclusions, the Davis Court determined that the biological progenitors of the pre-embryo have legal authority to determine the fate of the pre-embryo: “[T]he progenitors, having provided the gametic material giving rise to the preembryos, retain decision-making authority as to their disposition” (Davis 1992, p. 597). The legal and philosophical justifications for leaving decision-making authority and autonomy in the sole control of the pre-embryo’s parents are compelling. Legally, the United States Supreme Court has established and repeatedly reaffirmed “the private realm of family life which the state cannot enter” (Prince v. Massachusetts 1944, pp. 158, 166). 9 The Supreme Court has also expressly determined that the Constitutional right of privacy protects “individual autonomy in matters of childbearing (Carey 1977, p. 687). 10 The stringent protection of individuals’ right to procreate traces to the philosophical foundations of American society: Procreation and child rearing are necessary conditions for individual and social well-being. Because of the central importance of childbearing decisions, individuals and couples have been granted


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substantial autonomy in their decisions about whether and when to bear children. The size of their families and the timings of the births are matters of personal judgment, not government mandate (Andrews 1986, pp. 357, 359). 11 In fact, the Supreme Court has expressly held that parental autonomy is central to our society’s formation and organization because the family is “the institution by which we inculcate and pass down many of our most cherished values, moral and cultural” (Bellotti v. Baird 1979, p. 3035). The overarching, philosophical importance of autonomy is not solely a socio-political facet of American society. Autonomy is fundamentally important as a matter of normative ethics generally and biomedical ethics, in particular. 12 For these reasons, the use of IVF and cryogenic preservation of pre-embryos is a form of individuals’ fundamental right to procreate (Andrews 1986, p. 361). 13 Understood as an element of the fundamental right to procreate, any governmental restrictions placed upon the decisions of a pre-embryo’s progenitors about the disposition of that pre-embryo will be subject to strict constitutional scrutiny: “The reasons for protecting childbearing decisions justify protecting decisions to use alternative reproduction. Consequently, state actions that restrict, prohibit, or mandate alternative reproduction will be subject to a strict standard of review. State actions that infringe that right will be justified only if they further a compelling state interest in the least restrictive manner possible” (Andrews 1986, p. 361). Justice Daughtrey of the Tennessee Supreme Court sought to preserve the rights of the Davises to determine their procreative fate without interference from the state. Indeed, Justice Daughtrey indicated that no state interest was compelling enough to justify any intrusion into the Davises decision about the disposition of their pre-embryo: It is further evident that, however far the protection of procreational autonomy extends, the existence of the right itself dictates that decisional authority rests in the gamete-providers alone, at least to the extent that their decisions have an impact upon their individual reproductive status….[N]o other person or entity has an interest sufficient to permit interference with the gamete-providers’ decision to continue or terminate the IVF process, because no one else bears the consequences of these decisions in the way that the gamete-providers do (Davis 1992, p. 602). 14 All of this leads to one conclusion: the progenitors of the pre-embryo must determine the fate of the pre-embryo, unfettered by governmental circumscription. 15 This seems a very workable and reasonable conclusion. And it is, provided that the “parents” of the pre-embryo agree about the disposition of the pre-embryo. 16 But the problem posed by Davis is how to resolve a dispute that arises when the “mother” and “father” of the pre-embryo do not agree. There


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are several options available to courts and legislatures seeking guidance in resolving these disputes. But, as we have discussed, the propriety of each option depends upon the underlying understanding of what pre-embryos are.

OPTIONS FOR RESOLVING DISPUTES BETWEEN THE PREEMBRYO’S “PARENTS” Mandatory Parental Implantation The first option for resolving disputes where one of the pre-embryo’s parents desires to implant the embryo and the other parent does not is to establish a rule requiring that the embryo be implanted either in the egg donor or in the partner of the sperm donor. 17 The rationale behind this rule is easy to understand, particularly where one’s underlying conception is that the pre-embryo is a human life from the moment of fertilization. 18 The parents have a right to procreate that is constitutionally protected. Therefore, a proponent of mandatory parental implantation would argue that if one parent wishes to implant a preembryo in an effort to realize her or his right to reproduce, then the law must always permit that result. This was the reasoning of the Davis trial court 19 and the American Bar Association has proposed a policy that would award frozen pre-embryos “to the spouse who favors gestation,” at least where no prior agreement of the progenitors exists (Carelli 1998). Letting the Facility Decide: Institutional Autonomy Another possible route for resolving disputes between the pre-embryo’s parents is to allow the facility at which the pre-embryo is stored to decide its fate (Andrews 1986, pp. 357, 406). Granting the storage facility the right to determine the pre-embryo’s fate would, of course, deny the progenitors their right to determine whether, when and how they will become parents. For this reason, this solution is disfavored even by those who view the pre-embryo as human life at conception (Browne and Hynes 1990, p. 120). For those who consider the pre-embryo to be property, it would be a very odd bailment relationship to resolve a disgreement among “co-owners” of property by allowing the storage facility to decide which of them, if either, will receive it. Critics therefore insist that whatever the pre-embryo is, decisional authority over it should rest with its biological progenitors, not the storage facility. Mandatory Third-Party Implantation or Donation to Research Another option available where the pre-embryo’s parents disagree is a rule requiring implantation of the pre-embryo into a third-party. This has been described as the “adoption” of the pre-embryo (Wurmbrand 1986, pp. 1079, 1099).


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The problem with this approach is that the wishes of both parents are frustrated. The parent seeking to achieve procreation must know that his or her offspring will be born and raised by a stranger. The parent seeking to avoid procreation must live with the knowledge that he or she has been forced into genetic parenthood against his or her will (Andrews 1986, p. 405). Dividing and Distributing the Pre-Embryos Yet another approach would simply divide up the remaining, frozen preembryos and give half to the egg donor and half to the sperm donor. But this Solomonic “splitting of the babies” seems the worst of both worlds. The parent that wishes to avoid procreation knows that he or she may be a parent against his or her will if the other progenitor’s efforts at implantation are successful. Likewise, the parent that opposes destruction of the pre-embryos knows that at least some of his or her inchoate progeny will be destroyed (Davis 1992, p. 591). Exclusive Female Decisional Autonomy Another resolution of disagreements between gamete providers is simply to award sole decision-making authority to the female partner, in every instance. Their are two independent rationales for this rule. The first is the “sweat equity” model. The “sweat equity” rule grants complete decision-making authority to the female gamete provider based upon her greater effort and role in the IVF process (Davis 1992, p. 590). The second rationale for granting the female gamete-provider complete decisional autonomy is the abortion analogy. This rationale equates the status of a cryogenically frozen pre-embryo to a fetus growing in woman’s womb. 20 To be sure, the physical demands IVF techniques currently place on women are substantial. The woman’s role in the IVF process requires far more inconvenience, effort and discomfort than the man’s role (Davis 1992, pp. 591– 592; Feliciano 1993, p. 307). But the mere fact that the IVF procedure presents genuine physical discomforts for the female participant does not necessarily enhance her moral and legal rights as a prospective parent or diminish those of the male participant (Poole 1990, p. 81). After all, if medical science devises a procedure tomorrow that allows immediate and painless egg retrieval this would not suddenly alter the balance of the procreative rights at stake. Moreover, imagine that the new, painless IVF procedure is substantially more expensive than the current method. This could not mean that a wealthy woman who can afford the painless procedure has less of a right to procreative liberty than an impecunious woman who cannot afford this more advanced technique. The abortion analogy also is problematic. This reasoning equates the status of a female IVF participant with a pregnant woman who is considering an abortion. But the female participant in the IVF process is not pregnant. This is critically important because “none of the concerns about a woman’s bodily integrity that have previously precluded men from controlling abortion decisions is applicable


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here” (Davis 1992, p. 601; cf. Robertson 1990a, pp. 454, 456). In the IVF procedure, the bodily intrusion for the woman is split into two phases with a flexible window of time and deliberation interposed. First, the woman undergoes the egg retrieval process. Second, the woman undergoes the implantation process. This is the sui generis aspect of in vitro fertilization: “the fact that in vitro fertilization is a technology that severs the traditional link between gestation and maternal identity” (Caplan 1990, p. 99). The separation of these two processes-egg retrieval and implantation-distinguishes IVF fertilization from traditional pregnancy and renders the abortion analogy inapposite (Kass 1998, p. 174). Prior to implantation, no invasion of a woman’s bodily integrity is necessary to terminate the development of a pre-embryo. IVF’s bifurcation of the pregnancy process into separate stages of fertilization and impregnation leaves both progenitors in a equal position to determine the fate of their progeny. Prior to implantation, there is no reason (other than “sweat-equity,” which was discussed above) to grant the woman greater autonomy or authority over the childbirth decision. Put another way, in the IVF context, no concerns of bodily integrity can allow a woman to force a man to procreate (or not to procreate) against his will. The Contract Enforcement Rule As was discussed above, the York Court enforced the contract executed by the Yorks and the Jones Institute (York 1989, p. 425). The Davis Court also indicated that it would have enforced a contract between the Davises, had they signed one (Davis 1992, p. 597). The New York Court of Appeals agreed with the Tennessee Supreme Court. In Kass v. Kass (1998) New York’s highest court ruled that “agreements between progenitors, or gamete donors, regarding disposition of their prezygotes should generally be presumed valid and binding, and enforced in any dispute between them” (Kass 1998, p. 565, citing Davis 1992, p. 597). The Kass Court then enforced the parties’ prior agreement to donate their pre-embryos to scientific research (Kass 1998, p. 569) over the objections of Maureen Kass that the argument was ambiguous and this was her only chance at genetic motherhood (Kass 1998, p. 569). The notion that a couple’s prior agreement should control the disposition of frozen pre-embryos has appealed not just to the courts, but to commentators as well (Robertson 1990b, pp. 407, 414). There are two general types of prior agreements addressing the disposition of pre-embryos in the event of a future dispute between progenitors: (1) an agreement that the pre-embryos will be implanted in the egg donor or in a person of the sperm donor’s choosing, or (2) an agreement that the pre-embryos will be discarded or donated to a third-party (Poole 1990, pp. 91–92). Generally speaking, these contracts are triggered by events such as divorce, death or incapacitation of a progenitor (Kass 1998, pp. 565–566). Without question, enforcement of prior contracts governing disposition of pre-embryos simplifies


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the resolution of subsequent disputes. The expediency and efficiency of a contract enforcement rule has led two states, New York and New Jersey, to consider legislation codifying the rule. 21 Those courts and commentators who have embraced enforcement of contracts concerning the disposition of pre-embryos all indicate that changed circumstances cannot vitiate the contract. In making advance agreements, the parties must consider all possibilities: “Knowing that advance agreements will be enforced under-scores the seriousness and integrity of the consent process; advance agreements as to disposition would have little purpose if they were enforceable only in the event the parties continued to agree” (Kass 1998, p. 566). A rule of contract enforcement seems neutral, objective and equitable. Moreover, proponents of a contract enforcement rule cite that rule as respecting and promoting procreative choice. 22 Although the contract enforcement model is gaining acceptance among courts and commentators, it does have its detractors. The fundamental criticism of contract enforcement is that it avoids the true, human realities underpinning IVF agreements. Consider the couple who signed a contract concerning disposition of their pre-embryos, underwent the IVF process and are now divorced: [A] person involved in a happy and secure marriage who has no anticipation of divorce may be unable to imagine what he would want done with the embryos in the event of divorce. Even if he would be able to determine his own feelings with sufficient introspection, he may not treat the exercise seriously because he does not anticipate that the situation will arise. In addition, couples might avoid serious discussion of the topic out of a fear of causing disagreement. If the contract was formed without sufficient thought and introspection, it may be unfair to enforce it after disagreement arises. If it is impossible for the parties to truly anticipate their feelings, then enforcement of the contract would also be unfair (Poole 1990, pp. 91–92). For the opponent of contract enforcement, this is not just a function of people not treating the contractual exercise seriously or insightfully. Many people simply cannot know, and cannot be expected to know, years earlier, how they will feel about procreating, or about procreating with a particular person (Davis 1992, p. 597). Many people divorce who took very seriously the decision to marry. After a person has already decided not to remain another person’s spouse, it makes little sense for the courts to enforce an agreement predicated upon the very condition that no longer exists. 23 In response, the proponent of the contract enforcement rule might argue that prenuptial agreements and other partnership dissolution contracts exist for precisely these reasons, and that the enforcement of advance agreements about the disposition of pre-embryos is in principle no different. The problem, however, is that this treats the pre-embryo merely as property. If pre-embryos were property, a contract between the “parents” might be binding. If pre-


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embryos were children, however, it would be no more binding than a prenuptial agreement specifying the custodial disposition of future children. So if we suppose that the pre-embryo is something “in between” a person and property, the contract enforcement model is problematic to the extent that the pre-embryo is “more” than property. Opponents of the contract enforcement model also disagree with the premise that this model reinforces a couple’s procreative choice. While it is true that preembryo disposition agreements manifest the couple’s procreative choices at the time the contract was made, the contract enforcement rule then seals that decision in amber. Stated very carefully, the contract enforcement rule promotes the couple’s procreative choice, not the individuals’ procreative choice. After all, the contract enforcement rule seeks to enforce the couple’s decision even after the progenitors have decided no longer to be a couple. Opponents of the contract enforcement rule argue that at least in some circumstances, procreative choice should include being able to reconsider such “a quintessentially personal, private decision” (Kass 1998, p. 565). The Implied Contract Model Some have suggested that participation in the IVF process constitutes a “commitment to reproduction and would require transfer either to the female provider or to a donee” (Davis 1992, p. 591). One version of this position states flatly that “by enrolling in an IVF program an implied contract to reproduce is formed, and one partner wishes to reproduce and can show that he or she relied to their [sic] detriment on the other party’s participation in the program, then the partner who opposes implantation of the embryos should be estopped from asserting his or her right not to reproduce” (Feliciano 1993, p. 346; see also Trespalacios 1992, pp. 828–829). Such a view is susceptible to the same criticism as the contract enforcement rule. The dissenting opinion in Kass points out that: [T]he ex-husband’s participation in the IVF program [cannot have] constituted a waiver of his right to avoid procreation. By participating in the program, the ex-husband indicated his desire to father a child with his then-wife, and absent evidence to the contrary, he did not waive for all eternity any objections to his ex-wife bearing his child long after the termination of their union….It is naive to cavalierly conclude that a marital attempt to conceive constitutes a waiver of the right to avoid procreation in a nonmarital context. Clearly, when two people pursue the extraordinary steps of in vitro fertilization to conceive a child in the context of their marriage, the termination of that union is an intervening event which may provide the parties with an opportunity to reconsider their decision (Kass 1998, p. 177). In addition to the question of whether individuals should be bound to their prior


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decisions, the implied contract model introduces the interesting problem of what exactly is the implicit agreement implied by participating in an IVF program with one’s spouse. One could argue that it is to conceive a child; but one might also argue that it is to conceive a child with one’s marital partner. If it is the latter, then the termination of the marriage may be sufficient reason to uphold one former spouse’s wish destroy the frozen pre-embryos. After all, the IVF process was undertaken in order to conceive a child in the context of a marriage. Critics of the implied contract could therefore argue that without a clear, persuasive case for interpreting the behavior of participating in an IVF program as implying one or the other of these two implicit agreements, this principle provides little guidance for resolving the dispute over the disposition of the preembryo. The Balancing Test To resolve disputes between progenitors about the disposition of pre-embryos, the Davis Court adopted a balancing test (Davis 1992, pp. 603–604). This was the same approach favored by the Appellate Division dissent in Kass (1998, pp. 177–178). The Davis Court indicated that the balancing test should be employed only if there is no prior agreement of the progenitors in place (Davis 1992, p. 604). Although in Davis, the Tennessee Supreme Court viewed a balancing test as an option available only in the absence of an agreement, there is no conceptual reason that the balancing test could not be employed in the first instance, in all cases, as the Appellate Division dissent argued in Kass (1998, p. 561). Employment of a balancing test would require courts to consider and weigh “the parties’ respective interests and burdens, as well as their personal backgrounds, psychological makeups, financial and physical circumstances… independent ability to support the child and the sincerity of [the parties’] emotional investment in this particular reproductive opportunity, as well as the burdens attendant upon a respondent’s unwanted fatherhood [or motherhood]” (Kass 1998, pp. 561–562). There is great appeal to such a test. It seems flexible, equitable, progressive and sensitive. But as a practical matter, it poses two fundamental problems. First, consider what the test would require of a trial judge. That judge would be forced to review and digest voluminous, discursive and probably desultory materials describing each progenitor’s personal history, psychological health, financial and physical strengths and weaknesses, and reach a decision without the guidance of legal principles about how to weigh the competing interests at stake upon which a family court judge would have to rely. To the extent that the frozen embryo is not a child whose interests should govern the outcome, the balancing test asks a judge to weigh the competing rights of the parents with little guidance from the law in how to strike the appropriate balance. While some favor such an open-ended approach, others see it as inviting unequal treatment under the law. Without articulating the principles to be used


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in weighing the competing rights and interests at stake, the balancing test could very well leave citizens in different jurisdictions, similarly situated, being treated dis-similarly. Moreover, both aggrieved parties can argue persuasively that their constitutionally protected rights have been violated. We may still be left with one litigant arguing that her right not to procreate has been violated and the other arguing that her right to procreate has been trampled. Neither of these problems implies that the rights and interests of those involved in the dispute should not be weighed and balanced, but more analysis is needed about the principles by which this can be accomplished. The Appellate Division concurring opinion in Kass, which is discussed below, is an interesting step in that direction (Kass 1998, pp. 591–594). The Parties’ Intentions In J.B. v. M.B. (1998) the Superior Court of New Jersey became the most recent court to resolve a dispute between former spouses concerning the disposition of their frozen preembryos. J.B. is unusual in two respects. First, the former husband (rather than the former wife) sought “custody” of the pre-embryos, and the former wife sought their destruction. Second, a child was born to the couple by natural means while the couple was in the midst of the IVF process. Although complementary of the Tennessee Supreme Court’s reasoning in Davis, the J.B.Court opted for a different analysis. Rather than the balancing test employed in Davis, the J.B.Court chose to infer the parties’ intentions in embarking upon the IVF procedure (J.B. 1998, pp. 5–6). The J.B.Court concluded that “this couple went through the I.V.F. process in an attempt to conceive a child for themselves. They were happily married to each other and desired a family” (J.B. 1998, p. 6). In reaching this conclusion, the Court rejected the former husband’s argument that “frozen embryos are living entities that are endowed with a status greater than property” (J.B. 1998, p. 6). The Court also rejected the former husband’s argument that “the agreement between the parties was to ‘create life’” (J.B. 1998, p. 7). The problems with the J.B.Court’s “intentions of the parties” analysis are twofold. First, the court searches for the parties’ “intentions,” but the husband explicitly argued that his intention was to “create life” (and he claims this was his ex-wife’s intention, as well). In searching for the parties’ intentions, the J.B.Court ignored this stated intention of one of the parties in reaching its decision. The second flaw is related to this first one and to the problem with the express and implied contract models. An intention of the parties analysis will always be indeterminate because the party seeking to avoid procreation can (and will) always argue that his or her intention in entering into the IVF procedure (and/or contract) was to have a child with this partner. Like the implied contract model, the intentions of the parties model provides little guidance in precisely the disputes it is intended to resolve, where one party intended to create life, and the other intended to have a child within a marital relationship (which no longer


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exists). Like the balancing test, it appears to invite inequality of treatment by allowing judges to disguise their own beliefs about what the outcome should be as a principle for resolving disputes. 24 The Veto Rule The Davis Court recognized that procreative autonomy encompasses both the right to procreate and the right not to procreate, and that these are rights of “equal significance” (Davis 1992, p. 601). Moreover, the Court in Davis also appreciated that “the equivalence of and inherent tension between these two interests are nowhere more evident than in the context of in vitro fertilization” (Davis 1992, p. 601). A rule that attempts to balance the need for clarity and guidance for the courts and litigants, fairness to the progenitors and respect for their equal and intractable rights to reproduce and not to reproduce is a rule permitting the progenitor who does not want to reproduce to veto implantation. 25 The veto rule can take two forms: a per se rule or a rebuttable presumption. A per se veto rule provides that, in all cases, the progenitor seeking to avoid procreation can prevent implantation of the pre-embryos to which he or she contributed gametic material. It is based on the principle that no law should coerce a person to reproduce, at least when terminating the reproductive process amounts to no more than the destruction of cryogenically preserved preembryos. The per se rule is certainly a bright and clear line for courts and litigants to follow. Although clear, opponents of the per se rule consider it overly rigid. For example, if one of the pre-embryos’ progenitors had lost the ability to reproduce (for whatever reason) after the pre-embryos were frozen, then these pre-embryos represent that person’s last opportunity at genetic parenthood. The per se rule affords no weight to the intervening, permanent loss of one progenitor’s ability to reproduce at any time in the future. Some suggest that the intervening loss of one progenitor’s reproductive capacity is irrelevant to the other progenitor’s right to prevent implantation. This is the most forceful argument in support of this position: [T]here is no reason to believe that the harm of never achieving parenthood is ever greater tha[n] the harm of being subjected to unwanted parenthood such that the donor desiring parenthood should be favored over the donor wishing to avoid it…. The pain in being childless, though great, cannot haunt a person in the same way as the knowledge of unwanted parenthood. Therefore, one donor should be able to veto the implantation of the embryos by the other donor even when the embryos represent the other party’s last chance at parenthood and that party agrees to shoulder all childrearing responsibilities (Poole 1990, p. 81). Not only is the per se rule clear and easy for courts to apply, it “would probably


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be upheld as constitutional” (Davis 1992, p. 598). But opponents can point to two potentially serious problems with it. First, the statement upon which the per se rule is based, that “the pain in being childless…cannot haunt a person in the same way as the knowledge of unwanted parenthood,” is far from self-evidently true: Parenthood and the deprivation of parenthood are unique and profound experiences that invariably impact deeply upon the lives of both the willing and unwilling potential parent. It is a particularly precious experience to individuals who are required to resort to the extraordinary procedures of IVF. To the party resisting implantation after a relationship has failed, the psychological and financial burdens of unwanted parenthood will be a bitter pill to swallow. For the party who has suffered physically and invested heavily, emotionally, and financially in a desperate attempt to achieve parenthood, deprivation of this possibly singular opportunity may be devastating (Kass 1998, p. 182). 26 Indeed, the knowledge that one cannot and will not ever reproduce, despite one’s heartfelt desire to do so, may be one of the most poignant, personal and haunting emotional pains a person can endure. 27 Second, a critic of the per se rule might argue that it is insensitive to a genuine and perfect equality between one progenitor’s right not to procreate and the other progenitor’s right to procreate. Where the progenitor seeking implantation will have the opportunity to reproduce in the future, it seems equitable to view the other progenitor’s right not to procreate as paramount. Where the progenitor seeking implantation has lost the opportunity to reproduce in the future, it is not so simple. Consequently, some advocate a more flexible rule to account for the rare situation where a progenitor’s right to procreate may override the other progenitor’s right not to procreate, because this is the last hope of achieving genetic parenthood for the progenitor seeking implantation. This variant of the veto rule is the rebuttable presumption. A rebuttable presumption veto rule would presume that the right not procreate of the progenitor opposing implantation will prevail; however, the party seeking implantation can rebut this presumption by proving that she or he has lost the ability to reproduce in the time since the pre-embryos were frozen. This version of the veto rule was the solution favored by Justice Friedmann in his concurring opinion at the intermediate appellate level in Kass: It is my belief that the party seeking to implant the pre-zygotes-here the former wife-should be required to establish as a threshold matter that she cannot undergo IVF with a new partner or a sperm donor because, for example, she has lost her ability to ovulate or has some other major medical contraindication to egg retrieval. Mere discomfort, expense, or other potentially surmountable difficulties should not


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suffice to defeat the defendant’s fundamental right to avoid biological fatherhood in a case of this sort. In addition, adoption should be regarded as among the “other reasonable alternatives” to pre-zygote implantation. The wife’s mere preference for genetic parenthood should not override her former spouse’s prerogative to elect not to procreate in circumstances such as these. Only following a prima facie showing by the plaintiff that she lacks all other means of achieving genetic parenthood and that adoption is not a feasible or satisfactory option for her should [a court consider permitting her to implant the pre-embryos] (Kass 1998, p. 182). Although Justice Friedmann viewed prior agreements between progenitors as dispositive of subsequent disputes between them (Kass 1998, p. 165), a rebuttable presumption rule can exist independent of an antecedent contract enforcement rule. Such a proposed solution is not without its problems. Those objecting to such a rule might point to the outcome from the point of view of someone who had never wished to procreate outside a marital relationship, and now sees him or herself as being compelled by the state to reproduce. While it differs from the per se veto rule only in rare cases where, after the pre-embryos are frozen, one of the progenitors loses the ability to procreate, this difference is of great conceptual interest. In providing a principle for “balancing” the reproductive rights of both prospective progenitors, this case provides something of a litmus test. Opponents of the rebuttable presumption veto rule will argue that a person’s interest in the pre-embryo as the last chance at genetic parenthood is simply not weightier than the other person’s claim not to be “forced into reproducing.” The arguments on both sides of this particular question go to the heart of the puzzles posed by the cases we have discussed in this chapter.

CONCLUSION We have sought in the preceding pages to clarify the relationship between the question of what pre-embryos are and the question of what should happen to them when there is a dispute about their future. Our goal has been to provide a conceptual framework which clarifies the complex interrelations among the fundamental principles, and may therefore add clarity to the puzzles that have already emerged. The principles for resolving the question of who is given decisional authority over frozen pre-embryos are easy enough to isolate if one believes that the preembryo falls under the traditional concepts of property or person. If the preembryo is a “tiny person” or “kin,” then the principles of resolving custody disputes apply, and decisional authority should be granted to the person whose decision will be in the best interest of the “children in vitro.” That may require, contrary to the wishes of both “parents,” putting their zygotes “up for adoption.” If the pre-embyo is jointly owned biological property, then the rules of


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property and contract law apply. Private contracts and advance directives would be binding, as they are in prenuptial agreements. If no prior contract existed, one could impose by judicial or legislative fiat an interpretation of the agreement or intentions a reasonable person would have had in entering an IVF program, but courts will have to adjudicate the opposing agreements or intentions “to create life” and “to reproduce with my marital partner.” Perhaps we can at least rule out the kind of claim made by the storage facility against the Yorks, that the storage facility should be granted decisional authority even where both prospective progenitors wish to have the pre-embryos transferred to another facility. If, however, the pre-embryo is neither property nor person, then several policy options appear plausible, even if there are problems for each to overcome. As Chief Judge Kaye of the New York Court of Appeals appreciated in Kass, where progenitors’ disagree about the disposition of their pre-embryos, “what is plain...is the need for clear, consistent principles to guide parties in protecting their interests and resolving their disputes” (Kass 1998, p. 564). Many find the contract enforcement model appealing for this reason. Where contracts exist, enforcing them may call for the least governmental intrusion into decisions that are best left a private matter. But a persuasive case must be made for the assertion that contracts should be binding for non-property entities such as preembryos, and for the assertion that they should be binding when circumstances change one’s situation in a way one could not appreciate in advance. Of course, if one holds the contract enforcement view, and there is no contract in place, one must still adopt a way to resolve the dispute. An implicit agreement or the prior intentions of the parties could be inferred from the behavior of the parties who undertook IVF. Or one could decide that without an explict contract governing the disposition of the pre-embryos, a balancing test or one of the veto rules should be invoked to resolve the dispute. However, if one believes one ought to be able to reconsider prior decisions, advance directives, contracts, and intentions, then the balancing test and the veto rules will be more attractive. If the balancing test is too open-ended, then the best policy is one of the veto rules. And if the per se veto rule is overly rigid in never permitting any considerations to override the interests of the person wishing to destroy the pre-embryos, then the rebuttable presumption veto rule will allow, in some cases, the interest in not reproducing to be overridden. But in so doing, the rebuttable presumption veto rule allows the law to dictate that a person must reproduce against his or her will. If one believes this grants the government excessive power to intrude upon what should be a private decision, then one might be forced to reconsider either the per se veto rule, or go back to the drawing board and, perhaps, reconsider whether private contracts about these matters should be binding. There will no doubt be further case law and legislation about the disposition of pre-embryos in the near future, and the solutions that are adopted are likely to be among those discussed in this chapter. In the existing case law and literature on this issue, there is a tension between the need to find the best principle for


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settling these disputes and the fear that embodying any such principle in law will constitute judicial or governmental interference in a quintessentially private realm. Although the courts have no choice but to settle the legal disputes between individuals, legislatures could choose to remain silent by considering it a private matter unsuitable for public, statutory law. While current and pending legislation may be challenged on a variety of constitutional grounds, the disposition of disputed “frozen embryos” continues to become a legislative issue in several states, including Florida, New Hampshire, and New Jersey (Booth 1998, pp. 993, 1010). At the moment, however, the courts remain the principal governmental institution involved in recognizing and defining the boundaries of the privacy, property, and reproductive rights of individuals in the unique circumstances arising from in vitro fertilization technology.

ACKNOWLEDGMENT The authors would like to thank Laura Brophy and the editors of this volume for helpful comments on an earlier draft.

NOTES 1. In addition to public, statutory law, we understand the courts and the state’s administrative agencies to be substantively involved in structuring property relations. We see no need, for the purposes of this paper, to distinguish this role as a function of the state properly speaking, such as in legislation and criminal law, from the law embodied in the established precedents which govern judicial decisions in “private” cases. 2. “The most technically accurate name for the four- or eight-celled structures is ‘preembryo’” (Trespalacios 1992, p. 803). Another point worth clarifying is that the term “zygote” refers to the fertilized egg, so the occasional use of the term “prezygote” in the literature and court documents to refer to the pre-embryo at the twoto eight-cell stage is inconsistent with ordinary scientific use. We have avoided it, but cited others who use it without our taking issue in each instance. 3. Dr Lejeune is not alone. For another argument in favor of treating pre-embryos as “human” in both the biological and moral senses, see Tiefel (1990). “The embryo is indeed someone. The biologic definition of the start of individual human life should coincide with the scope of our ascriptions of human status. The burden of proof should lie with those who would divide them. Nor should we avoid the costly dilemmas that follow from drawing the circle of humanity so widely as to include all human life” (Tiefel 1990, pp. 132–133). Nonetheless, Tiefel believes, as Dr. Lejeune apparently would not, that “the unborn have and should have fewer rights than the born” (Tiefel 1990, p. 133). 4. The law does not recognize any principle for the protection of pre-embryos as “persons.” Indeed, the United States Supreme Court has repeatedly refused to identify any independent rights possessed by a fetus in utero (Roe v. Wade 1973, p. 705; Thornburgh v. American College of Obstetricians and Gynecologists 1986, p.


5.

6.

7.

8.

9.

10.

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2169). The Supreme Court has consistently reiterated that “viability remains the critical point” for recognition of any independent legal rights (Webster v. Reproductive Health Services 1989, p. 3040). And, as the Tennessee Supreme Court noted in Davis, as a stage of fetal development, viability “is far removed, both qualitatively and quantitatively, from that of the four- to eight-cell preembryos in this case” (Davis 1992, p. 595). See also Robertson (1990a, pp. 437, 450). As with the law, medicine does not recognize pre-embryos to be persons. Dr. Lejeune’s testimony in Davis notwithstanding, the consensus of medical opinion is that pre-embryos cannot properly be envisioned as “persons” in any biologically or medically meaningful sense of that word. Recalling the testimony of Dr. King before the trial court in Davis, the Tennessee Supreme Court noted that Dr. King’s testimony was corroborated by the American Fertility Society, an organization of 10,000 physicians and scientists who research infertility issues (Davis 1992, p. 593). The Court also refers to “the plaintiffs’ proprietary rights in the pre- zygote” and legal ownership of the pre-embryo being “determined in a property settlement” (York 1989, p. 425), pointing out that “defendants fully recognize plaintiffs’ property rights in the pre-zygote” (York 1989, p. 427). “The Court begins its analysis by noting that the Cryopreservation Agreement created a bailor-bailee relationship between the plaintiffs and the defendants” (York 1989, p. 425). The problems might be summarized in the following way: First, as the litigants and the Court recognized in Davis (1992), pre-embryos are not what we ordinarily understand to be “property”: “[A]sking whether or not they constitute ‘property’ is not an altogether helpful question. As the appellee points out in his brief, ‘[as] two or eight cell tiny lumps of complex protein, the embryos have no [intrinsic] value to either party.’ Their value lies in the ‘potential to become, after implantation, growth and birth, children’” (Davis 1992, p. 598). Second, pre-embryos simply do not comport with our traditional, legal conceptions of property: “Property designated relationships between people and tangible objects. Over these objects, owners had essentially exclusive control. Interference with property, by the state in particular, required the weightiest justification…The vital idea and ideal of this conception were reflected in Blackstone’s description of property as a man’s place of ‘sole and despotic dominion’” (Krier 1990, p. 75). Simply put, pre-embryos are not just furniture to be placed wherever the owners wish. Literally and symbolically, pre-embryos represent the hope and dream of genetic parenthood so desperately desired by so many people. “To clients, the embryo symbolizes hope and potential parenthood. It affirms the wife’s femininity, the husband’s masculinity, and the couple’s potency. It is a powerful symbol with which clients establish emotional connections. It may be the closest thing to parenthood the wife and husband experience” (Robertson 1990a, p. 448). See also Carey v. Population Services International (1977, pp. 678, 687). “[T]he Constitution protects individual decisions in matters of childbearing from unjustified intrusion by the State.” See, for example, Skinner v. Oklahoma (1942, pp. 535, 541) describing procreation as one of the “basic civil rights of man;” Pierce v. Society of Sisters (1925, p. 510); Meyer v. Nebraska (1923, p. 390).


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11. See also Davis, 842 SW.2d at 601. Cf. Ronald Dworkin (1996, p. 111). “[T]he principle of procreative autonomy, in the broad sense, is a principle that any remotely plausible explanation of our entire political culture would have to recognize.” 12. See for example, the examination of autonomy in the context of biomedical ethics Beauchamp and Childress (1983, pp. 66–102). Gerald Dworkin also discusses the “special” role of autonomy in health care in Dworkin (1988, pp. 112–120). 13. “[T]here is a fundamental right to make procreative decisions, and the state has a compelling interest only after viability” (Poole 1990, pp. 67, 74). 14. For this reason, the Louisiana statute is likely unconstitutional “because of its potential interference with couples’ right to privacy to make procreative decisions, the Louisiana law is constitutionally infirm” (Andrews 1986, p. 409). 15. It might seem that this conclusion is incompatible with the view that the preembryo is more than property but less than a person After all, if the pre-embryo deserves some special respect as a result of its potential for life, it may seem inconsistent to conclude that the pre-embryo’s progenitors enjoy complete autonomy to determine its fate. But there is no incongruity between these positions because of the nascent stage of the pre-embryo’s development: “The burdens on the couple of overriding their decision-making control over the embryo are great. In contrast, few claims of harm can be made on behalf of the embryo. It is not viable and has no right to life. There is no evidence that an embryo at this stage can feel pain, so there is no claim that there is a duty to avoid pain” (Andrews 1986, p. 406). 16. Some commentators have argued that a problem is presented even where both progenitors want the pre-embryo destroyed. In this instance, one argument concludes that the progenitors’ right to procreate as they see fit is outweighed by the pre-embryo’s “right to life” (Browne and Hynes 1990, p. 116). 17. “Once an embryo has been created, efforts must be made to protect its life and liberty by arranging for it to be implanted as soon as possible to avoid its death or its parents’ death before implantation…. When one natural parent competes for custody against the other who is the spouse or former spouse, the embryo must be considered a person, and the matter of custody must proceed as if the embryo were born, without regard to property law. The best interests of the embryo are of utmost importance. If one parent wishes to make his or her best efforts to implant the embryo, facilitate its birth, and raise the resulting child, that parent must receive priority over the other, barring evidence that such parent is unfit” (Browne and Hynes 1990, pp. 97, 118, 121). 18. “Ideally, embryo legislation should declare that human life begins at conception and embryos must, therefore, be legally protected from the moment fertilization occurs” (Browne and Hynes 1990, pp. 117–118). Panitch (1991, pp. 543, 573–574) argues for a mandatory implantation rule without a “right to life” basis. 19. “He [the trial judge]…held that it was ‘in the best interests of the children’ to be born rather than destroyed. Finding that Mary Sue Davis was willing to provide such an opportunity, but that Junior Davis was not, the trial judge awarded her ‘custody’ of the ‘children in vitro’” (Davis 1992, p. 594). 20. In Kass v. Kass, the trial court granted the egg donor exclusive custody, reasoning “that a female participant in the IVF procedure has exclusive decisional authority over fertilized eggs created through that process, just as a pregnant woman has


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exclusive decisional authority over a nonviable fetus” (Kass 1998, p. 561). 21. New York Senate Bill No. 5815, 220th Sess (1997); Booth (1998, p. 1315). 22. “Advance directives…maximize procreative liberty by reserving to the progenitors the authority to make what is in the first instance a quintessentially personal, private decision” (Kass 1998, p. 565). “Prior directives present the best way to maximize the couple’s reproductive freedom” (Robertson 1990b, p. 565). 23. This is also the reason that the “reliance” arguments in favor of contract enforcement fail. Some argue that pre-embryo disposition agreements must be enforced because the progenitor who seeks enforcement of the contract relied upon the other party’s position as stated in their agreement (e.g., Robertson 1990a, p. 466). There are at least three problems with this argument. First, as will be discussed below, contract enforcement is not the only way to provide the certainty and clarity needed for couples and programs to proceed with IVF procedures. Second, this argument begs the question in that it concludes that these contracts must be enforced because people presumed they would be enforced (Poole 1990, p. 92). Third, this argument ignores a more fundamental form of reliance that underlies the very formation of the contract itself. The parties relied upon their continued marriage (or relationship) as a prerequisite to entering into the agreement. Once that element of reliance is removed from the equation, enforcement of the contract predicated upon that precondition becomes far less compulsory. See Dehmel (1995, pp. 1377, 1400). 24. Moreover, like the contract model, prior intentions are considered to be binding. Critics of the contract model who argue that prior contracts ought to subject to revision would no doubt argue that the same is true of prior intentions. 25. Cf. Planned Parenthood of Central Missouri v. Danforth (1976, pp. 2831,2850– 2851). Applying Danforth to the competing rights at stake in a dispute over the disposition of pre-embryos renders the principle gender-neutral and eliminates the bodily integrity issues associated with an abortion decision. With these modifications, the logical extension of Danforth would support the veto rule by acknowledging that, all things being equal, a progenitor’s constitutionally protected right not to procreate outweighs the other progenitor’s constitutionally protected right to procreate. 26. Justice Friedmann views adoption as an alternative to implantation and he would require the party seeking implantation to demonstrate not just that biological parenthood is no longer possible, but also that adoptive parenthood is not a viable option. We are not convinced that the rebuttable presumption veto rule should require proof that the party seeking procreation and genetic reproduction through implantation cannot become an adoptive parent. 27. “She offered him all the kingdom/but he wanted only this—/a living thing/to call his own/And being mortal/who can blame him?” (Anne Sexton, 1982).

REFERENCES American Fertility Society. 1990. Report of the American Fertility Society (June). Andrews, L.B. 1986. “The Legal Status of the Embryo.” Loyola Law Review


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32:357–409. Bellotti v. Baird, 443 U.S. 622, 634, 99 S.Ct. 3035, 61 L.Ed.2d 797 (1979). Beauchamp, T.L., and J.F.Childress. 1983. Principles of Biomedical Ethics . New York: Oxford University Press. Booth, M. 1998. “Assembly Bill Would Control Fate of Contested Frozen Embryos.” New Jersey Law Journal 151 (September 28): 993, 1010. Browne, C.M., and B.J.Hynes. 1990. “Note, The Legal Status of Frozen Embryos: Analysis and Proposed Guidelines for a Uniform Law.” Journal of Legislation 17:97–122. Caplan, A.L. 1990. “The Ethics of In Vitro Fertilization.” In Ethical Issues in the New Reproductive Technologies , edited by R.T.Hull. Belmont, CA: Wadsworth. Carelli, R. 1998. “Frozen Embryos: Lawyers’ Association Mulling Policy Statement.” (February 2) at www.oakridger.com/stories/020298/aps_frozen.html . Carey v. Population Services International, 431 U.S. 678 (1977). Davis v. Davis, 842 SW.2d 588 (Tenn. 1992), cert, denied sub nom., Stowe v. Davis, 507 U.S. 911,113 S.Ct. 1259, 122 L.Ed.2d 657. Dehmel, J. M. 1995. “Note, To Have Or Not To Have: Whose Procreative Rights Prevail In Disputes Over Dispositions of Frozen Embryos?” Connecticut Law Review 27(Summer): 1377–1403. Dworkin, G. 1988. The Theory and Practice of Autonomy . New York: Cambridge University Press. Dworkin, R. 1996. Freedom’s Law. MA: Harvard University Press. Feliciano, Tanya. 1993. “Note, Davis v. Davis: What About Future Disputes?” Connecticut Law Review 26(Fall): 305–350. Hull, R.T. (Ed.). 1990. Ethical Issues in the New Reproductive Technologies . Belmont, CA.: Wadsworth. J.B. v. M.B., Superior Court of New Jersey, No. FM–04–95–97, slip op. (Law Div. September 28, 1998). Kass v. Kass, 91 N.Y.2d 554, 696 N.E.2d 174, 673 N.Y.S.2d 350 (1998). Krier, J. E. 1990. “The (Unlikely) Death of Property.” Harvard Journal of Law and Public Policy 13(Winter): 75–83. Louisiana Revised Statute , 9:121 et seq. (1998). Meyer v. Nebraska, 262 U.S. 390 (1923). New York Senate Bill No. 5815, 220th Sess. (1997). Panitch, A. R. 1991. “Note, The Davis Dilemma: How to Prevent Battles Over Frozen Preembryos.” Case Western Reserve Law Review 41: 543–579. Pierce v. Society of Sisters, 268 U.S. 510 (1925). Planned Parenthood of Central Missouri v. Danforth, 428 U.S. 52, 96 S.Ct. 2831, 2850, 49 L.Ed.2d 788 (1976). Poole, E.K. 1990. “Allocation of Decision-Making Rights to Frozen Embryos.” American Journal Family Law 4(Spring): 67–102. Prince v. Massachusetts, 321 U.S. 158 (1944). Robertson, J. A. 1990a. “In the Beginning: The Legal Status of Early Embryos.”


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Virginia Law Review 76(April): 437–516. —. 1990b. “Prior Agreements for Disposition of Frozen Embryos.” Ohio State Law Journal 51: 407–424 Roe v. Wade, 410 U.S. 113, 162, 93 S.Ct. 705, 35 L.Ed.2d 147 (1973). Sexton, A. 1982. The Complete Poems . New York: Houghton Mifflin Company. Skinner v. Oklahoma, 316 U.S. 535 (1942). Thornburgh v. American College of Obstetricians and Gynecologists, 476 U.S. 747,106 S.Ct. 2169,90 L.Ed.2d 779 (1986). Tiefel, H.O. 1990. “Human In Vitro Fertilization.” In Ethical Issues in the New Reproductive Technologies , edited by R.T.Hull. Belmont, CA: Wadsworth. Trespalacios, M.J. 1992. “Comment, Frozen Embryos: Towards An Equitable Solution.” University of Miami Law Review 46: 803–834. Webster v. Reproductive Health Services, 492 U.S. 490, 529, 109 S.Ct. 3040, 106 L.Ed.2d 410 (1989) (O’Connor, J., concurring). Wurmbrand, M. J. 1986. “Note, Frozen Embryos: Moral, Social, and Legal Implications.” Southern California Law Review 59(July): 1079–1100. York v. Jones 717 FSupp. 421 (E.D.Va. 1989).

PROPERTY APPROPRIATION AND THEORY OF THE FIRM David Ellerman

WHAT ARE THE QUESTIONS? In some fields of intellectual inquiry, it is the questions that are difficult, not the answers. Once the questions are well-formulated, the answers might be quite straightforward. Questions involve assumptions and a conceptual framework. Much of the work in developing a theory-such as a theory of the firm-is in building up the conceptual framework to pose the right questions. What are the questions that a “theory of the firm” is supposed to answer? Many theories of the firm are aimed at answering vastly different questions, so the theories do not give competing answers to the same question; they provide different answers to different questions. I will approach the theory of the firm from the viewpoint of a positive, descriptive property theory. A positive property theory describes how property rights are initiated, transferred, and terminated in a private property market economy. The usual “economic” approach to the firm is to emphasize cost minimization or, more generally, allocative efficiency. 1 “The main hypothesis is that contractual designs, both implicit and explicit, are created to minimize transaction costs between specialized factors of production” (Holmstrom and Tirole 1989, p. 63). While this economic approach has its domain of applicability, it operates within a framework of mechanisms for the initiation and termination of property rights and for the transfer of property rights. That framework is our topic.

THE LIFE-CYCLE OF A PROPERTY RIGHT A positive theory of property for a private property market economy should describe how property rights are created or initiated, how they are transferred from party to party, and finally how property rights are terminated. Property rights are created in firms and households, and property rights are also terminated by firms and households. In between is the market where property rights are transferred. The instrument for transferring property rights is the voluntary contract which is fulfilled by the transfer of the de facto possession and control of the property from the old owner to the new owner (usually in exchange for other property going in the opposite direction).

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Theory of Appropriation While it is well-known that property rights are transferred by voluntary contract, the question remains-what is the legal means by which property rights are initiated and terminated in a private property market economy? It will be helpful to first establish some notation and terminology. Consider a simplified description of a productive opportunity Q = f(K,L) where the outputs Q are produced by applying the labor L to the capital services or non-labor inputs K. 2 The initiation of a property right is called the “appropriation” of the property right. Symmetrically the termination of a property right might be called the “expropriation” of the property right but that word has now been corrupted to mean the forced transfer or “taking” of property by the state. 3 The word “expropriation” can be avoided by referring to the “expropriation of the assets X” as the “appropriation of the liabilities -X.”

Figure 1 . “Life-Cycle” of a Property Right In the productive opportunity Q = f(K,L), the property rights to Q are initiated and the property rights to K and L are terminated so this could be described as the appropriation of the assets Q as well as the appropriation of the liabilities -K and -L. It will be useful to adopt a simple vector notation with three components representing outputs, non-labor inputs, and labor inputs respectively. Thus the vector of outputs or assets appropriated in production is (Q,0,0) and it will be called the “positive product.” The vector of liabilities (signifying the used-up inputs) appropriated in production is (0,-K,-L) and it will be called the “negative product.” Sum-ming the positive and negative products component-wise gives vector of assets and liabilities appropriated in the productive opportunity (Q,-K,L) which I will call the “whole product.”


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The “whole product” is simply a property-theoretic name for the production vector familiar to economists in the production set treatment of production where the outputs are listed positively and the inputs are listed negatively. 4 How does a private property market economy determine who appropriates the whole product? There is a “laissez-faire” or market mechanism of appropriation. Better known is the alternative non-market assignment of liabilities by the legal authorities which takes place in a trial for property damages when the defendant is found guilty and held liable for some property that was destroyed. To understand the market mechanism, one must consider who would appropriate the liability -X (i.e., terminate the property right to X) if the property X is usedup, consumed, or otherwise destroyed when the legal authorities do not intervene (i.e., the laissez-faire case). In that case, the liabilities -X are borne by the last legal owner of X. Thus one could say that in the absence of any state intervention to reassign liabilities such as a trial for damages, the liabilities -X for used-up or destroyed property Xis assigned by the “invisible judge” (the juridical version of the “invisible hand”) to the last legal owner of X. Any new property created in the process of using up the old property would be assigned by the “invisible judge” to the same legal party who bore the liabilities for the used-up property since that party in the absence of any reassignment of the liabilities would have the defensible legal claim on the produced property if the case were brought before a (visible) judge. Market Mechanism of Appropriation: Let the liabilities for the used up inputs lay where they have fallen (i.e., in the hands of the last owner of the inputs), and then let that party have the claim on any produced outputs. It should be noted that this mechanism of appropriation only works for produced outputs as opposed, for example, to gifts of nature. In terms of our example, the last legal owner of the non-labor inputs K and labor inputs L would laissez-faire appropriate the negative product (0,-K,-L). In the absence of any state intervention to reassign those liabilities, that same party would have the defensible legal claim on the positive product (Q,0,0). Putting the two products together, one has the market mechanism for the appropriation of the whole product (Q,-K,-L). The legal party who appropriates the whole product of a productive opportunity will be called the “firm” (with respect to that opportunity). Since that party would pay for the liabilities -K and -L and receive the revenue from the outputs Q, the whole product appropriator is also called the “residual claimant.”


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THE FUNDAMENTAL MYTH ABOUT PROPERTY RIGHTS The “market mechanism of appropriation” might all seem like a fancy way to restate the obvious, but it has quite strong implications. For instance, it shows that in order for a legal party to be the “firm” with respect to a given productive opportunity, it is sufficient for the party to be the last legal owner of all the inputs used up in the production process. Then that party has the defensible legal claim on the outputs that emerge in production so that party would appropriate the whole product. Since it is the fact-pattern of the input contracts (e.g., whether capital hires labor or labor hires capital) that determines who is the last legal owner of the used-up inputs, the identity of the “firm” (= whole product appropriator) is contractually determined. There is no need for the legal party to additionally “buy” or “own” the production function or production set. There is no such thing as the “ownership” of a production function or production set in a private property market economy. It is not by the “ownership” of a production set that whole product vectors are assigned to legal parties but by the market mechanism of appropriation. The idea that there is a property right (variously called “ownership of the firm,” “ownership of the production function,” “ownership of the productive opportunity” and so forth) which determines which party legally appropriates the whole product of a productive opportunity is such a pervasive and important idea that it will be called the Fundamental Myth about property rights. An understanding of the Fundamental Myth is important to our argument because if it is thought that the whole product is already owned by the “owner of the firm” then the entire question of appropriation (initiation and termination of property rights) in production is not even formulated. The question of appropriation in production is not well-formulated in the law and economics literature. For example in the Putterman and Kroszner anthology (1996) on the “economic” nature of the firm, none of the papers pose the question of appropriation in their treatment of the firm. The question of appropriation in the firm is similarly ignored in the “economics of property rights” (e.g., Furubotn and Pejovich 1974) and in the so-called “property rights approach” to the firm (e.g., Hart and Moore 1990; Hart 1995). Any discussion of the appropriation or initiation of property rights is ordinarily relegated to a rather mythical original state of nature [e.g., in the philosophical literature] or to a situation where unowned international resources are being privatized. For instance, Harold Demsetz (1967) considers how private property in land with fur-bearing animals was established as a result of growth in the fur trade. John Umbeck (1981) considers how gold rights were established in the 1848 California gold rush on land recently ceded from Mexico. Yoram Barzel (1989) considers how minerals under the North Sea were privatized. But in Barzel’s book (see particularly Chapter 5 “The Formation of Rights,” 1989) as elsewhere in the economics of property rights literature, there is no recognition that the appropriation of the


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outputs (and the symmetrical appropriation of liabilities for the used-up inputs) takes place in normal production. Only the conversion from unowned property to private property is considered in the law and economics literature; the question of appropriation when private property is used up in the production of other private property is not considered. Thus the question of appropriation at the heart of the theory of the firm is not even posed in the “economics” literature on property rights and the firm. This illustrates our opening remark that in some fields it is the questions that are difficult. Once the question of appropriation is asked, the descriptive answer of the market mechanism of appropriation is relatively straightforward.

“OWNERSHIP OF A FIRM” AND OWNERSHIP OF A CORPORATION What are the origins of the Fundamental Myth that firmhood is established by an ownership right (“ownership of the firm”) rather than by the contractual status of being the last legal owner of all the inputs to production? Perhaps the most common origin is a misinterpretation of the “ownership of a corporation.” Before turning to that, it might be noted that economists use the notion of “ownership of the firm” in more general contexts independent of corporations. In an abstract model, entrepreneurs are “bidding for ownership of the firms” (Hirshleifer 1970, p. 124) and become the “owners of the productive opportunity” (p. 125). A proprietor may sell “the rights to the transformation function” or “his rights to the venture” (Fama and Jensen 1996, p. 341) to another proprietor. The entrepreneur is the “owner of a production function” (Haavelmo 1960, p. 210). There is no corporate law in Crusoia, but Robinson Crusoe nonetheless “owns the firm” (Varian 1984, p. 225). The most common or “standard” origin of the “ownership of a firm” notion is to (mis)interpret the ownership of a corporation that is currently undertaking a production opportunity Q = f(K,L) (by virtue of its contractual position) as being “ownership” of the productive opportunity. But this interpretation can be easily defeated by changing the contractual position of the corporation without changing its ownership. For instance, if the capital services K were hired out rather than the labor services L being hired in, then the “firm” in the sense of whole product appropriator would shift but the ownership of the corporation would be in the same hands. The role of the corporation would shift from being the firm (with respect to that opportunity) to being an input supplier to the firm. This argument might be better understood by considering a productive opportunity both outside and inside a corporate form. Consider a simplified process where the labor L is applied using the services K of a widget-maker machine in order to produce the widgets Q during each time period. If the machine is owned by an individual, then it is clear that the person could hire in the labor L and produce Q-or could hire out the services K to another party. The pattern of contracts determine whether the individual operates as the firm (with


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respect to that opportunity) or as an input supplier to the firm. Now suppose that the individual incorporates a company and issues all the stock to himself in return for the machine. This legal repackaging changes nothing in the market logic of the argument that separated capital ownership from residual claimancy. The corporation (rather than the individual) would own the widget-maker machine and, depending on the direction of the hiring contracts, may or may not appropriate the whole product of the productive opportunity using the widgetmaker. The process of incorporation does not miraculously transubstantiate the ownership of a capital asset into the ownership of the whole product vectors that might be produced using the capital asset.

Figure 2 . Two Ways to Take Over a Production Opportunity and thus “Become the Firm” In realistic markets, there are likely to be large transaction costs to rearranging the input contracts. The incumbent corporate residual claimant has sizable firstmover advantages so that any challenging party would have to incur such high transaction costs to redirect the input contracts that it might be just as cheap or cheaper to simply buy the corporation and thereby take over the residual claimant’s position in the existing pattern of input contracts. These transaction cost barriers create the image that the existing corporate residual claimant “owns” the production opportunity. One of the advantages of idealized frictionless models in economics, as in physics, is that they show the basic logic of the system without irrelevant distractions. In a world without transaction costs, the input contracts could be costlessly rearranged to switch residual claimancy from one party to another without changing the ownership of a corporation from one party to another. That shows the underlying logic of the contractual determination of residual claimancy in a private property market economy.


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The transaction cost barriers to rearranging contracts in real-world markets create the illusion of a property right such as the everyday notion of “ownership of the firm.” Transaction cost barriers are only that; they are not property rights. For instance, as transaction costs change it might become more feasible to acquire residual claimancy by rearranging input contracts rather than by purchasing the corporation. This would not violate the corporation’s “ownership of the production set” since it had no such property right in the first place. 5

THE FUNDAMENTAL MYTH IN CAPITAL THEORY The Fundamental Myth has an important role in many parts of conventional economics. I will only touch on its role in capital theory and corporate finance theory. One of the simplest forms of the Fundamental Myth is the assumption that the bundle of rights that constitute ownership of an asset includes “a right of owner-ship-over-the-asset’s-products, or jus fruendi” (Montias 1976, p. 116) or simply “the right to the products of the asset” (Putterman 1996, p. 361). The ambiguous jus fruendi expressions are innocuous if the “products of the asset” such as the aforementioned widget-maker asset are just the services K. But the expressions involve the Fundamental Myth if the “products of the asset” includes the product Q. A similar error occurs routinely in capital theory with the notion of “returns to a capital asset.” A capital asset is used passively when it is sold or rented out in return for some market price or rental. An asset is used “actively” when, instead of being evaluated directly on the market, it is used up in production, usually along with other resources. Then the liabilities for the used-up resources and the rights to any produced assets are appropriated. Appropriation by the asset owner is involved in the active case, not in the passive case. Difficulties arise in the usual treatment of the active case, since economic theory tends to ignore appropriation. The economic return in the active case is not just the value of the original resource but the extra value of the appropriated property. But the total return in the active case is mistakenly imputed only to the original resource, as if the ownership of the appropriated property were already included in ownership of the original resource. That version of the Fundamental Myth pervades orthodox capital theory and is then carried over to corporate finance theory (viewing a corporation as a complex machine). Property which is appropriated cannot be previously owned; otherwise it could not be appropriated. The extra value of the appropriated property (e.g., the whole product) is not a return to the original resource. In the context of the market appropriation mechanism, it is a return to the contractual role of being the hiring party, the last legal owner of the used-up resources. Suppose that the widget-maker machine yields K units of machine services per year for n years and then has no scrap value. The asset owner has the property right to the stream of capital services K or, in vectorial terms, (0,K,0) each year for n years. But if the asset owner also has the contractual role of the


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firm or residual claimant in that production opportunity for the n years, then that party will additionally appropriate the whole products (Q,-K,-L) which sum for the stream of net ownership vectors (Q,0,-L) for n years (the first row plus the second row equals the bottom row in the following Table 1). Orthodox capital theory then discounts the value of the net vectors (Q,0,-L) (bottom row in Table 1) back to the present to arrive as the “capitalized value of the asset” as if the right to the whole products (second row) had been part of the ownership of the assets. But the appropriation of the whole products is contingent on a certain contractual fact-pattern, and it is not a violation of the ownership rights of the asset owner to have the asset hired out instead of labor being hired in. Thus the value of the whole products (“profits”) might or might not go to the asset owner depending on the future pattern of the input contracts. The so-called “capitalized value of the asset” is actually the value of the asset (discounted value of the (0,K,0) stream in the first row) plus the discounted value of the stream of whole products (discounted value of the (Q,-K,-L) stream in the second row)-where the latter may or may not accrue to the asset owner.

Table 1 . Year 1 Property vector owned by asset owner. (0,K,0) Property vector appropriated by last owner + (Q,of inputs (residual claimant). K,-L) Net property vector accruing to asset = (Q,0,owner who is also the residual claimant. L)

Year 2 … Year n (0,K,0) … (0,K,0) + (Q,- … + (Q,K,-L) K,-L) = (Q,0,- … = (Q,0,L) L)

When a man buys an investment or capital-asset, he purchases the right to the series of prospective returns, which he expects to obtain from selling its output, after deducting the running expenses of obtaining that output, during the life of the asset (Keynes 1936, p. 135). This is incorrect. In fact one thereby purchases only the asset. Any further return will depend on one’s contracts. If one rents out the asset, then one receives only the rental income stream. If, instead, one hires in labor, bears the costs of the used-up labor and capital services, and claims and sells the outputs, then one receives the net proceeds mentioned by Keynes. In each case, one owned the asset. The difference lies in the pattern of the subsequent contracts. By making the contracts so that one was the hiring party, one could additionally appropriate the whole product each time period with its positive or negative value. The capitalized value definition fallaciously imputes the value of the appropriated whole products to the capital assets rather than to the contractual role played by the capital owner. Capital theory is conceptually flawed at its root. All potential income must be capitalized. That is to say, we start with


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institutional property rights. Each income account “belongs” to some “person” (Samuelson 1937, p. 477). Property appropriated in the future may have a present capitalized value but it does not have a present owner.

THE FUNDAMENTAL MYTH IN CORPORATE FINANCE THEORY There is no legal necessity that the owner of the machine be the residual claimant (with respect to, say, the widget making process), and the same holds when the owner is a corporation. Yet corporate finance theory carries over the same captal-theoretic mistake of interpreting the whole product as part of corporate ownership. For instance, the discounted cash flow method of valuation routinely assigns to the corporation the present value of the net cash flows (e.g., from (Q,0,-L) on the bottom row of the table) from production rather than the present value of the cash flows from the services of the underlying corporate assets (e.g., from (0,K,0) on the top row). There, in valuing any specific machine we discount at the market rate of interest the stream of cash receipts generated by the machine; plus any scrap or terminal value of the machine; and minus the stream of cash outlays for direct labor, materials, repairs, and capital additions. The same approach, of course, can also be applied to the firm as a whole which may be thought of in this context as simply a large, composite machine (Miller and Modigliani 1961, p. 415). But in order to plausibly count the future whole products as part of the present property rights of the corporation, all the future input contracts would have to be made in favor of the corporation at the present time. Moreover, since contracts are generally not enforceable until one side performs, the corporation would have to have paid all future input contracts at the present time in order to have a present property claim on all future products produced by those inputs. Since those conditions would hardly be fulfilled, the usual discounted cash flow method of valuation does not value the property rights “of the corporation.” It values the underlying assets of the corporation plus the additional value that would accrue to the corporation if it had the contractual role of residual claimant throughout the projected future time periods. Since the usual corporate valuation formulas count the corporation as already owning that which is not pre-owned (future whole products), corporate finance theory shares the same root flaw as capital theory.


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GOVERNMENT’S ROLE IN THE PRESENT PROPERTY SYSTEM While our focus is on positive property theory, this understanding of actual property rights directly determines the relevant questions for normative analysis. For instance, the defenders and the Marxist critics of “capitalist production” all agreed that the rights to the product were part of the rights of capital ownership, and then they disagreed about whether those rights of capital should be privately or publicly owned. We saw that their common presumption was mistaken; the product rights are not a part of “ownership of the means of production.” Since the product rights are not a pre-owned part of the rights of capital, we saw that the product is appropriated via a market mechanism of appropriation. That in turn raises the normative question about the norms of property appropriation (e.g., the old idea that people ought to appropriate the fruits of their labor). Since the market mechanism of appropriation is based on the pattern of inputs contracts (i.e., on who is the last legal owner of the used-up inputs), that focuses normative attention on the specific contract that prevents people from legally appropriating the fruits of their labor, namely the employeremployee contract. That employment contract is the short-term version of the life-time labor contract or self-enslavement contract. The Fundamental Theorem of Welfare Economics (“A competitive equilibrium is Pareto optimal”) requires full future markets in all commodities including labor (see Debreu 1959) so the basic efficiency theorem requires that the self-enslavement contract be legally allowed. Now it is time to state the conditions under which private property and free contract will lead to an optimal allocation of resources…. The institution of private property and free contract as we know it is modified to permit individuals to sell or mortgage their persons in return for present and/or future benefits (Christ 1975, p. 334). Yet the government interferes in the free market and prevents these “optimal” conditions from holding since the voluntary slavery contract was abolished along with involuntary slavery-in spite of the long history of the voluntary selfenslavement contract (see Ellerman 1995, chap. 3). When the self-sale contract was legally permitted, social power may well have determined “who buys who and on what terms.” But the resolution of the problem did not lie in better market regulation or in making these markets more competitive. The resolution was to abolish those markets. The short-term contract for the hiring or renting of people is however still considered legally valid in today’s market economies. The basic contribution of the government to the present property system is the legal validation of the employment contract for the hiring or renting of human beings. We have seen


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how property appropriation depends on the pattern of contracts and how the violation of the traditional norm of people appropriating the fruits of the labor is based on the employment contract. Without the employment contract, we would have a rather different private property market economy based on people always being jointly self-employed in democratic self-managed companies. Signing a contract to alienate self-government in an otherwise democratic workplace would not be an option just as selling one’s vote is not an option in a democratic living community-in spite of the long history of the Hobbesian contract to alienate the rights of self-government (see Ellerman 1992, chap. 7). The “equity rights” in a democratic company would be attached to the workingmembers of the company, so there would be no “equity capital” just as there is no “equity capital” in a democratic town, city, or state. The people working in a company would legally appropriate, via the market mechanism of appropriation, the positive and negative fruits of their labor. The key to the present property system lies not in the market mechanism for appropriation but in the legal validation of the employment contract. The “free market” where all contracts between consenting adults are legally valid is only a fantasy supported by economists’ learned ignorance of the doctrine of inalienable rights, a doctrine that descends from the Reformation and Enlightenment (see Ellerman 1992, chap. 9). Voluntary lifetime labor contracts as well as Hobbesian non-democratic constitutions are now outlawed, but the contract for renting people is still permitted. Since slavery was abolished, human earning power is forbidden by law to be capitalized. A man is not even free to sell himself: he must rent himself at a wage” (Samuelson 1976, p. 52). That is the basic contribution of the government to this specific form of private property market economy.

NOTES 1. For an excellent anthology exclusively on the “economic” analysis of the firm, see Putterman and Kroszner (1996). 2. Many different types of labor and non-labor inputs could be considered but that would only complicate the notation and would not change the underlying logic. 3. “This word [expropriation] primarily denotes a voluntary surrender of rights or claims; the act of divesting oneself of that which was previously claimed as one’s own, or renouncing it. In this sense, it is the opposite of “appropriation.” A meaning has been attached to the term, imported from foreign jurisprudence, which makes it synonymous with the exercise of the power of eminent domain” (Black 1968, p. 692, entry under “Expropriation”). 4. The production vector is also called a “production possibility vector” (Arrow and Debreu 1954, p. 267), an “activity vector” (Arrow and Hahn 1971, p. 59), a “production” (Debreu 1959, p. 38), an “input-output vector” (Quirk and Saposnik


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1968, p. 27), or a “net output vector” (Varian 1984, p. 8). Marginal productivity theory can also be developed using vectorial product notions such as “marginal whole product of labor” and the like (see Ellerman 1995, chap. 5). 5. While the lay misinterpretation of ownership of a corporation might be understandable in a world of significant transactions costs, it is less clear why economists should still be wedded to the lay concept in the “standard model” of general equilibrium in an idealized world free of transaction costs. For instance, the fabled attempt by Arrow and Debreu (1954) to show the existence of a competitive equilibrium with positive “pure profits which are distributed to the owners of the firm” (Arrow 1971, p. 70) is flawed in theory because they incorrectly assume there is the ownership of production sets in a private property market economy. To pinpoint the error in their mathematical formulation, the problem is not in assuming corporate ownership, that is, that the ith consumer owns “a contractual claim to the share aij of the profit of j th production unit” (Arrow and Debreu 1954, p. 270) where “production unit” is a corporation. The error is the assumption that for “each production unit j, there is a set Yj of possible production plans” (p. 267) and that this corporation is the only party allowed to bid on the inputs for that production opportunity. The ownership of a corporation is misinterpreted as the ownership of a production set even in the idealized frictionless model where a challenger corporation could bid slightly higher for the inputs (and get lower but still positive profits) to take over a production opportunity and thus defeat the purported “competitive equilibrium” with positive pure profits.

ACKNOWLEDGMENT The findings, interpretations, and conclusions expressed in this paper are entirely those of the author and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to the members of its Board of Directors or the countries they represent.

REFERENCES Arrow, K. J. 1971. “The Firm in General Equilibrium Theory.” In The Corporate Economy , edited by R. Marris and A.Woods. Cambridge: Harvard University Press. Arrow, K. J., and G.Debreu. 1954. “Existence of an Equilibrium for a Competitive Economy.” Econometrica 22:265–290. Arrow, K. J., and F.H. Hahn 1971. General Competitive Analysis . San Francisco: Holden-Day. Barzel, Y. 1989. Economic Analysis of Property Rights. New York: Cambridge University Press. Black, H. 1968. Black’s Law Dictionary . St. Paul: West Publishing. Christ, Carl F. 1975. “The Competitive Market and Optimal Allocative Efficiency.” Pp. 332–338 in Competing Philosophies in American Political


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Economics , edited by J.Elliott and J.Cownie. Pacific Palisades, CA: Goodyear. Debreu, G. 1959. Theory of Value . New York: John Wiley & Sons. Demsetz, H. 1967. “Toward a Theory of Property Rights.” American Economic Review 57(May): 347–359. Ellerman, D. P. 1982. Economics, Accounting, and Property Theory . Lexington, MA: D.C.Heath. ——. 1992. Property & Contract in Economics: The Case for Economic Democracy . Cambridge: Blackwell. ——. 1995. Intellectual Trespassing as a Way of Life: Essays in Philosophy, Economics, and Mathematics . Lanham, MD: Rowman & Littlefield. Fama, E., and M. Jensen. 1996. “Organizational Forms and Investment Decisions.” Pp. 336–344 in The Economic Nature of the Firm (2nd ed.), edited by L.Putterman and R.Kroszner. Cambridge: Cambridge University Press. Furubotn, E., and S.Pejovich. 1974. The Economics of Property Rights . Cambridge: Ballinger Publishing Company. Haavelmo, T. 1960. A Study in the Theory of Investment . Chicago: University of Chicago Press. Hart, O. 1995. Firms, Contracts, and Financial Structure . Oxford: Clarendon Press. Hart, O., and J.Moore. 1990. “Property Rights and the Nature of the Firm.” Journal of Political Economy 98:1119–1159. Hirshleifer, J. 1970. Investment, Interest, and Capital . Englewood Cliffs, NJ: Prentice-Hall. Holmstrom, B. and J.Tirole 1989. “The Theory of the Firm.” Pp. 61–133 in Handbook of Industrial Organization (Vol. I), edited by R.Schmalensee and R.Willig. Amsterdam, North-Holland. Keynes, J.M. 1936. The General Theory of Employment, Interest, and Money . New York: Harcourt, Brace & World. Miller, M. H., and F. Modigliani. 1961. “Dividend Policy, Growth, and the Valuation of Shares.” The Journal of Business 34 (October): 411–433. Montias, J. M. 1976. The Structure of Economic Systems . New Haven: Yale University Press. Putterman, L. 1996. “Ownership and the Nature of the Firm.” Pp. 361–369 in The Economic Nature of the Firm , edited by L.Putterman and R.Kroszner. Cambridge: Cambridge University Press. Putterman, L., and R.S.Kroszner (Eds.). 1996. The Economic Nature of the Firm (2nd ed.). Cambridge: Cambridge University Press. Quirk, J., and R.Saposnik. 1968. Introduction to General Equilibrium Theory and Welfare Economics . New York: McGraw-Hill. Samuelson, P. 1937. “Some Aspects of The Pure Theory of Capital.” Quarterly Journal of Economics 51 (May): 469–496. ——.1976. Economics (10th ed.). New York: McGraw-Hill. Umbeck, J. 1981. “Might Makes Right: A Theory of the Formation and Initial Distribution of Property Rights.” Economic Inquiry 19(1): 38–59.


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Varian, H. 1984. Microeconomic Analysis (2nd ed.). New York: W.W.Norton.

GOVERNMENT AND PROPERTY, DEMOCRACY AND MARKETS Louise A.Halper

A current, perhaps dominant, view of the relationship between property and government is twofold: on the one hand, a stable system of exchangeable property rights, that is, a market, requires democracy, that is, something like our current political system, and, on the other, democracy requires markets. Markets require democracy because a fundamental precondition of exchange is that all market participants be free to contract and equal in their capacity to do so, economic characteristics whose full realization is said to require their political counterparts as well. Democracy requires markets, because only a stable system of exchangeable property rights creates security and independence from government or patronage, the preconditions for effective citizenship. This is the classic liberal position and may rest upon either utilitarianism or natural rights. Utilitarianism describes markets and democracy as productive of the greatest amount of human happiness; a natural rights account describes them as both precursors and consequences of the full expression of the personalities of individual rights-bearers. Under either of these historical accounts, property rights are a moral and legal precondition of our existence as individuals, and are either useful or innate. It is the duty of the state to protect them, both positively and negatively. Such rights are positively protected by a legal regime of property, contracts and torts; they are negatively protected by the command to the state to intervene in markets as little as possible. Protection of property rights makes possible individual security and independence and the expression of the individual personality in the world. Because the good of the individual is the welfare of society, the protections afforded private property result in an ordered and decent society. According to this theory, “Private law is inseparable from notions of the public good…[because] society is the aggregate of its members rather than something standing apart from them and having its own interests” (Posner 1995, p. 231). The sum of all transactions entered into voluntarily, and no more, amounts to the public good. This construction holds that non-intervention or limited intervention in markets by government is a precondition of a stable system of property rights. That system is one in which opportunities for exchange exist and the outcome of exchanges are protected by law, by custom or ultimately by force. In our society, a well-articulated legal regime protects these exchanges; as Judge Richard Posner of the University of Chicago and the federal appellate bench, says, “Almost the whole of so-called private law, such as property, contract and tort law, is instrumental to the public end of obtaining the social advantages of free


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markets” (1995, p. 231). According to Cass Sunstein, a somewhat more liberal Chicago colleague of Posner’s, writing about constitution-making for the former socialist states, a right to private property “free from government interference…is…a necessary basis for a democracy” (Sunstein 1993). 1 Although voters in those countries might reject a market economy because it “impose[s] conspicuous short-term costs, a stable system of property rights…is actually necessary to democracy and not opposed to it at all” (Sunstein 1993). In other words, democracy demands property rights and markets. The reason is that with a stable—that is, government-protected/protected-from-government—system of rights in property, “[p]ersonal security and personal independence from government are guaranteed” (Sunstein 1993). Government protection of rights protects individuals from others, but also from government itself, from the insecurity that would exist if people were wholly dependent upon the state for their means of living and their status as citizens (Sunstein 1993). It is this independence which makes citizenship and thus democracy possible. Another view of property rights sees them as neither innate nor necessarily useful. In this view, law exists primarily to regulate exchanges of value in the marketplace; its other functions are epiphenomenal. An exchange, a contract, expresses the will of the parties, but the Hegelian natural law corollary that the parties’ wills express their personalities, their individuality, their capacity for rights, does not follow. This is because the apparently private nature of the exchange, two individuals willing an act, is an incomplete account. Rather, participants to a contract are but the personifications of the economic relations that exist between them. Exchange is in fact a social transaction. The notion of the independent individual, which for liberals forms the basis of property rights, is a consequence, a reflex, of the recognition of property rights required to facilitate exchange. The rights of individuals are created by the market, and are not its precondition. In order that commodities may enter into relations with each other as commodities, those who have possession of them must recognize each other as owners of private property. Their status as individuals stems from the possibility of exchange; that exchange is not merely an expression of the will of individuals possessing pre-existing rights. This is the account of the Russian legal scholar Evgeny Pashukanis. According to Pashukanis, while it is descriptively correct to say that property is afforded protection by law, that protection is historically consequential, rather than naturally or morally warranted by individual rights or utility. “Property in the legal sense did not arise because it occurred to people to invest one another with this legal capacity, but because they were able to exchange commodities only in the guise of property-owners” (Pashukanis 1978, p. 125). Market exchange requires that its participants are freed of limitations on account of status, creed, birth, rank, occupation or other ascribed qualities; in other words, that they are considered equal. The equality of the legal subject in respect to the entitlement to the legal protection of rights is the byproduct of the exchange of commodities. “[T]he economically active subject…acquires…a will, juridically

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constituted, which makes him absolutely free and equal to other owners of commodities like himself (Pashukanis 1978). The abstracted individual, the rights bearer, comes to replace the fish-wife, blacksmith, weaver, knight, dairymaid, priest or feudal lord, that is, the actual person. “Every person becomes man in the abstract” (Pashukanis 1978). From this point of view, the liberal property rights theorist is expressing an historical fact, rather than an eternal truth. It is only in a fully developed market society that the theory of individual rights develops, a theory in which the abstract notion of rights, that is, the individual as legal subject, is separate from actual control over any particular thing or concrete ability to act in the world. “The idea of the isolated and selfcontained nature of the human personality…corresponds exactly to commodity production, where the producers are formally autonomous, linked only by the artificially created legal system” (Pashukanis 1978). 2 The rights of the individual exist and are protected in order to make possible and to facilitate her transactions. Individuals are traders in commodities and are recognized by the law primarily in that capacity. In addition to the conclusion that rights are a product of the market, not the market a product of rights, there is yet another conclusion to be drawn. In a fully developed market society, labor is also a commodity, one sold by those who have nothing else to sell. The sale of labor is not tangential, but essential to that economic form and the society which develops from it, for it is the difference between the cost of labor and the cost of what labor produces that constitutes profit. Since labor will be sold only by those who have no other means of obtaining income, its sale is the province of the propertyless. Propertylessness is thus a precondition of profit. So while the abstract existence of property rights is a precondition of a fully developed market, the actual non-existence of property rights is also its precondition (McNally 1993). Hence, a full description of a market society is not provided by the statement that property rights are protected; for propertylessness must also be maintained. And it is the law, in the form of common law, statute and custom, which serves to bring about this situation. This is an insight of the American legal realists of the 1920s, 1930s, and 1940s, who deconstructed the paradigm of two spheres of law, public and private, by describing the ways in which private law—the law of contracts, torts and property—also partook of the coercive power of the state and of sovereignty. 3 Propertylessness is the current state of affairs for most American households. Imagine the total privately held wealth of the United States divided into equal thirds: a third is held by one percent of households, another third by the next nine percent and the last third by 90 percent of American households. 4 Indeed, it is hardly overstating the case to say that the majority of American households own nothing, aside from a car and a television. The poorest quintile of American households has a negative net worth, and is made up of households owing more than they own, while the second poorest, with less than two percent (1.58%) of total assets, is also virtually propertyless. The middle 20 percent owns about a twentieth (5.56%) of American wealth (Bradsher 1996). 5 In sum, 60 percent of


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households hold about seven percent of wealth. A quarter of all wealth (mostly in the form of residential real estate generally unavailable as income) is held by the fourth quintile from the bottom and the bottom half of the top quintile (Henwood 1997). And at the top, two-thirds of all wealth is held by 10 percent of the population. The inequality is thus extreme: the top one-half of one percent has almost as much (28%) as the bottom 90 percent (33%) (Henwood 1997). As Judge Posner notes, “[T]hese are glorious days for wealthy people” (Posner 1997). In the 1990s, the share of wealth of the wealthiest has increased, with corresponding decreases in the shares of others; the most marked decrease has been among the poorest. Since 1984, the richest quintile has increased its share of the nation’s wealth by about 1.5 percent (Kennickell, McManus, and Woodburn 1996). 6 The share of all four other quintiles in the nation’s total wealth decreased about 20 percent between 1989 and 1994, 7 with the share of the bottom fifth decreasing the most, about 35 percent. 8 Wealth is not only concentrated, but the direction of change is toward yet greater inequality with all its consequences. 9 The bottom 90 percent of American households have few resources available other than their labor. While those households may have independence from the government, at least so long as their wage-earners remain employed and off welfare, they are at least dependent upon employers. The existence of protected property rights hardly guarantees their personal security, at least to the extent their security requires a continued source of income. Whatever their current income, the propertyless are never more than a few paychecks from welfare or the street. 10 Where then is the personal security that, according to Sunstein, a stable system of property rights should give? In the United States, the market has rewarded those manifestations of organized capital which, increasingly unfettered by organized demands by employees, have diminished the personal security of their employees by widespread layoffs. Indeed, this generation of workers has far less security in employment than their parents did. It is the collapsed socialist system that had full employment as its raison d’etre and may have been undone by its inability to extract from a personally secure workforce the intensive effort required to keep its economy competitive with the international market economy. The economy’s spur to participation is not just the Beamers and the Benzes, the rewards of success, but also the enormity of failure; consumerism’s evil twin is homelessness. The market’s rich rewards to those who succeed is balanced by no tenderness for those who fail. The argument that personal security of the propertyless nonetheless depends upon the security of property rights could rest on an indirect connection: one might say their personal security depends upon the security of their employers’ rights. But even employers secure in their rights of ownership are not necessarily secure in their profitability. Their employees’ security is immediately dependent upon factors other than the existence of a propertyprotective regime: whether their employers are successful, whether that success relies upon “down-sizing,” whether their employers are importers or exporters in a time of overseas financial crisis, and so on. Thus, it is rather a stretch to tie


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wage-earners’ security to a stable system of property rights. Such stability exists in good times and bad, but the wage income upon which propertyless households entirely rely is not quite so stable. The liberal response is twofold. First, inequality and poverty are different things. A society may have great inequality of wealth, and little poverty. “[P] roperty rights help create wealth, and greater wealth will often benefit the most vulnerable” (Sunstein 1993). This trickle-down theory holds that equality may reduce social wealth while inequality may increase it. 11 If it were the case that greater inequality produced social benefits, we would expect to see less poverty, that is, higher income, as the rich grew richer. But in fact, over ten years between 1985 and 1995, as the stock market boomed, poverty rates turned up slowly after 30 years of decline (Henwood 1995). Second, inequality encourages market activity and thus leads to growth. That is, people participate in markets for gain and that incentive demands satisfaction. The outcome of competition is that some succeed and some fail; without both carrot and stick, the competition itself is meaningless. Thus, unfettered opportunities for exchange must be protected, even though they result in great social inequality, because they also produce economic growth which is beneficial to all. But growth does not occur only within an unfettered market. There have been several other categorical experiences of large-scale growth in the twentieth century. One historical case is the industrial transformation of the Soviet Union in the 1930s; another is the wartime and postwar growth in market economies, a third that of the Asian “tigers.” All are examples of growth sponsored by governments. In the case of the United States, wartime growth was a consequence of government consumption; in the case of Europe and Japan, postwar growth was the consequence of large-scale American governmental intervention in the form of loans and concessions to recreate markets; in the cases of South Korea, Taiwan, Singapore, and the others, government intervention generally took the form of protection against external competitors and internal labor demands. Though the latter occurred within a market context, the participation of government was essential. 12 And the consequence, at least in the United States, was both prosperity and diminished wealth inequality lasting until the Reagan era. 13 Growth, in other words, may occur without inequality, or at least, with a good deal less inequality than an unfettered market produces. Wealth inequality, in short, does not necessarily produce less poverty nor is it the only means to growth. To sum up, those who have no more than the opportunity to acquire property and participate in the market find that opportunity meaningless in practice and productive of neither independence nor security. They are, in fact, dependent upon others and do not necessarily benefit from a democracy’s protection of the market. The liberal theory holds that the propertyless who do not acquire property in the market nonetheless are served by the market, insofar as others, who do acquire property, are able to provide them with enhanced employment and consumption opportunities. But government intervention or social


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ownership of property could provide the same; on that basis, there is no reason to suppose the propertyless better off with democracy and an unrestrained market. That combination has given them, employees or unemployed, the necessity to depend upon others in order to sell their labor an outcome that requires no particular political system. One may of course say that, at least as consumers, those citizens are better off in a private property regime than any other, since, at least in good times, there is more for them to consume. But that reduces the exercise of democratic rights to the decision between Nike or Reebok; Revlon or Maybelline. This indeed seems to be the essence of the notion of markets as democracy; market participants act only to satisfy themselves, hence the market is democratic. 14 Even if one were willing to conflate consumption with democracy, it would still be necessary to consider the question of sustainability; it no longer appears that unlimited consumption is an unalloyed good. While the liberal claim is that the actual acquisition of private property and participation in the market protects a democratic system because it maintains the private sphere and keeps the state from acting like Leviathan, it appears to be the case that for the majority the consequence of the market is propertylessness, rather than property. But does the law enforce propertylessness? The liberal understanding of a stable system of property rights is asymmetric. Though everyone has an opportunity to acquire something, no one has an enforceable right actually to own. As Pashukanis points out, it is precisely because ownership is always subject to change, that we think about rights at all: “Only the continual reshuffling of values in the market creates the idea of a fixed bearer of…rights” (Pashukanis 1978). The right to own is universally available in theory, but most people cannot exercise it in practice. Again Pashukanis: “The legal form of property…qualifies all persons as being equally eligible for property, but in no way makes property-owners of them” (Pashukanis 1978). However, once one does own something in particular, it cannot be taken on the grounds that the opportunity to acquire another thing is retained. So while actual ownership of property is not necessary to give effect to the right to own, prosecution of the violation of actual ownership is considered necessary to effectuate the right. Obviously, that asymmetry favors those who already own over those who do not (Waldron 1988). If both actual ownership and protection against violation of actual ownership were required to vindicate the right to property, we would have some system of distributive justice. If we had only the abstract opportunity to own property, without the enforceable right to retain it, we would also have some system of distributive justice. If we had protection neither for actual ownership nor for violation, we might also have a more egalitarian though perhaps more violent system. Only the combination of abstract opportunity and protection against actual violation gives us our current system of property rights, in which those who own something are protected by the law from its seizure, while those who own nothing have no enforceable rights. For one whose property right is no more than the opportunity to own, the


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freedom that property ownership protects is abstract. She has an opportunity to own; if that becomes concrete, she then has the power to act; until then, she does not. While one remains abstract, so does the other. Actually owning property may have important features for the owner, in terms of her independence, her ability to express her will, her freedom to act, but the opportunity to own property does not automatically confer similar benefits. In fact, the mere opportunity to own property, without actual ownership, leads to the requirement to sell one’s labor power, and thus to dependence upon an employer, lack of personal security, and the inability to act freely. Then, the benefits actual ownership confers are available only as a matter of charity or as a right to provision of those benefits by the government in consequence of one’s citizenship status, rather than one’s ownership status. Does the law afford protection to the propertyless? In fact, democracy, when our system of property rights obtains, is probably the only means by which the benefits of ownership can accrue to those who are not owners. We might then say that a market, a system of private property rights, requires democracy as a matter of justice, that is, as providing all citizens, whether owners or nonowners, the ability to make available to themselves the benefits that ownership brings to some. Thus, while political and civil rights may, as in Pashukanis’ account, exist to facilitate market transactions, or, as in the liberal account, be qualities of human individuality or guarantors of human happiness, today they are ways to vitiate the market’s consequences. It is in that sense that we may say that the market requires democracy and law affords it protection. And what we mean will be that only democracy can protect people from the market.

ACKNOWLEDGMENT My thanks to Alfred Donnarumma, Todd Lowry and participants in the Spring 1998 W&L Faculty Workshop for their helpful comments on earlier versions of this piece.

NOTES 1. Emphasis supplied. 2. Pashukanis cleverly points out that even this abstraction, the “impersonal legal subject,” is subjected to yet further abstraction: “The legal subject acquires a double in the shape of a representative, and himself attains the significance of a mathematical point, a centre in which a certain number of rights is concentrated” (Pashukanis 1978, p. 115). 3. This is an insight shared by pioneering post-World War I American legal scholars, who deconstructed the classical paradigm of two spheres of law, public and private, describing the ways in which private law-the law of contracts, torts and property-also partook of the coercive power of the state and of sovereignty. See, for example, Robert L.Hale (“Unless, then, the non-owner can produce his own


4.

5. 6. 7. 8. 9.

10.

11. 12.

13.

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food, the law compels him to starve if he has no wages, and compels him to go without wages unless he obeys the behests of some employer…. It is the law of property which coerces people into working for factory owners”) (Hale 1923); (characterizing property rights as “sovereign power compelling service and obedience…. [DJominion over things is also imperium over our fellow human beings”) (Cohen 1927). In 1992, the bottom 90 percent of American households owned about a third (32.8%) of the nation’s net worth, while the top 10 percent owned two-thirds (67.2%). The top .05 percent, the wealthiest households in the United States, held 22.8 percent of net worth (Kennickell, McManus, and Woodburn 1996). Bradsher’s article is based on data collected at the University of Michigan. 76.84 to 78.47 percent (Kennickell, McManus, and Woodburn 1996, p. 26). 23.02 to 19.27 percent (Kennickell, McManus, and Woodburn 1996, p. 26). -.52 to -.70 percent (Kennickell, McManus, and Woodburn 1996, p. 26). It is worth noting that the pattern is global. The richest 20 percent of the world population controls 85 percent of the total global GDP of $23 trillion, while 80 percent of the world population live in countries which account for about 20 percent of the total GDP (Keegan 1996, p. 13) Keegan’s data source is the United Nations Development Program’s Human Development Report 1996. As to income, the pretax distribution as of 1992 was somewhat more egalitarian with the bottom 80 percent of households having a little over half (53.1) of all income and the top quintile with the other half (46.9). Despite the relatively egalitarian distribution, this represents an increase of 4.1 percent in the income share of the top quintile over the previous quarter-century (U.S. Bureau of the Census 1993). (“There may be fewer poor people in a society that does not attempt to make the distribution of income more equal than in one that does”) (Posner 1997, p. 350). The current woes of the Asian economies are also evoking responses at least interventionist, for example, government oversight of the banking system in Japan, and even Keynesian, in the calls for tax cuts there. Percentage of national wealth held by top one percent of the population:

17761862 1870 1929 1933

15% 29 (Homestead Act) 27 (post-seizure of southern rebel lands) 43 (stock market boom) 32 (stock market crash)

1938 35 1943 26 (war economy/New Deal welfare reforms) 1953–73 30 1973–75 18 (stock market deflation) 1982 31 1992 36 (Abraham 1996) (For ease of reading, I have rounded off Abraham’s figures to the nearest whole number.) 14. See, for example, Milton Friedman 1962, pp. 13–15.


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REFERENCES Abraham, D. 1996. “Liberty Without Equality: The Property-Rights Connection in a ‘Negative Citizenship’ Regime.” Law and Social Inquiry 1:24. Bradsher, K. 1996, June 22. “More Evidence: Rich Get Richer, and the Middle Class Makes Gains.” New York Times , p. 31. Cohen, M. 1927. “Property and Sovereignty.” Cornell Law Quarterly 13:8. Friedman, M. 1962. Capitalism and Freedom . Chicago: University of Chicago Press. Hale, R. L. 1923. “Coercion and Distribution in a Supposedly Non-Coercive State.” Political Science Quarterly 38:470. Henwood, D. 1995. “Race and Money.” Left Business Observer (Sept.): 1. —.1997. “Measuring Privilege.” Left Business Observer (July): 3. Keega, V. 1996, July 28. “Highway Robbery by the Super-Rich.” Guardian Weekly , p. 13. Kennickell, McManus, and Woodburn. 1996. “Weighting Design for the 1992 Survey of Consumer Finances.” Federal Reserve Board Paper (March 11) 18. McNally, D. 1993. Against the Market . London: Verso. Pashukanis, E. B. 1978. Law and Marxism: A General Theory . Edited by Chris Arthur and translated by Barabara Einhorn. London: Pluto Press. Posner, R. 1995. Overcoming Law . Cambridge: Harvard University Press. —. 1997. “Equality, Wealth and Political Stability.” Journal of Law, Economics & Organization 13:344. Sunstein, C. 1993. “On Property and Constitutionalism.” Cardozo Law Review 14:907. U.S. Bureau of the Census. 1993. “Money Income of Households, Families and Persons in the United States, 1992.” Current Population Reports , Series P60– 184. Waldron, J. 1988. The Right to Private Property . Oxford: Clarendon.

PRIVATE PROPERTY AND THE STATE Herbert Hovenkamp

Every theory about the role of government in establishing and defending property rights must have a premise about what the state’s goal for the property rights system should be. This essay’s premise is that the government’s principal purpose in establishing the property rights system is to maximize total social and private value. Placing the emphasis on aggregate value is hardly the same thing as saying that the government’s role in fairness or distribution is less important. Questions about distribution are best considered as arising after property rights have been settled. Indeed, the central problem of the Marxist state is that it confused the state’s role in declaring property rights with the state’s role in ensuring a measure of economic equality for its citizens. By defining a great deal of property as communal, Marxism may have gained distribution equality but it completely undermined the normal incentives to maximize the value of property. The result may have been more even distribution of resources, but at the expense of a much, much smaller value for Marxist society’s aggregate assets. At the same time, concerns for distribution cannot be excluded entirely from a definition of property rights. For example, such a concern may lead a state to declare that relatively more property (such as national parks or shores) be held in common and never subjected to private ownership in the first place. By and large, however, in American society concerns about distribution are taken care of after property rights are determined. For example, first I earn my salary, and then the government takes something back for Social Security or redistribution through the welfare or educational systems. To be sure, the amount that the government takes back and the way in which it takes it back can have a big impact on my incentive to earn it in the first place. But this question about reaching the right balance between incentive to earn and concern for distribution is not a question about property rights as such but about optimal tax policy. Taxes are paid out of one’s property, which entails that property must be defined first and the amount to be taxed away established later. One important role for the state is to define property rights in a way that corrects or compensates for market failures such as decreasing costs (natural monopoly), information failure, or externalities, all of which make markets work less efficiently. When markets fail to work efficiently property ownership tends to become lopsided, in that property is often assigned to someone other than the person who places the highest value on it. In that case society has failed to maximize property values.


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In sum, balancing the relationship between the appropriate amount of distribution and the amount of reduced incentive to create value is an extremely important part of state policy. So is the government’s role in correcting market failures. But neither of these is the most important thing that the government can do for the property rights system. Rather, government’s most important task is the development of unambiguous rules of ownership. In determining the fundamental relationship between property and government one must distinguish “value” from “property.“ Justice Holmes correctly stated the distinction in lawyerly terms. Value presents a “question of fact,” while property presents a “question of law.” 1 Economically speaking, “value” describes the purely private question of the amount in one resource a person is willing to forego in order to have a certain amount of a different resource. For example, if I value a car at $20,000,1 would be willing to part with $20,000 in order to have that car, which is simply another way of saying that I prefer the car to some other combination of goods or services that $20,000 would buy. Or if I value my children more than life itself, I would presumably be willing to die rather than see something terrible happen to them. Thus as a starting proposition the government does not determine value; individuals or other economic decision makers do. Nevertheless government policy has an important impact on value, and its decisions about the recognition and scope of property rights can both create or increase value on the one hand, and reduce or destroy it on the other. “Property,” by contrast to value, refers to a set of legal rules that govern peoples’ ability to claim ownership, which is the power to profit from a given resource or the power to exclude. The reason I value the car at $20,000 is that the government has created a set of prior rules stating that once I have purchased it (1) I will be able to drive it or enjoy other indicia of ownership, such as parking it in my driveway to make the neighbors jealous; and (2) no one else can assert these rights without my permission. These are not questions of value, but questions of law. I may value certain things a great deal, but until I have purchased them or acquired them by other lawful means, they are not my property. Property rules are nothing more than a set of governmental criteria for determining who has ownership of a given resource. The complexity and source of these rules varies greatly from one society to another. They may be the product of legislation in a democratic society, or of the commands of a dictator in a less democratic one. In many societies, but particularly a common law society such as the United States, they are significantly a product of judicial decisions. They may also be the consequence of rules made by administrative agencies, such as the Environmental Protection Agency or a municipality’s board for operating a rent control or taxicab system. Historically in common law societies such as Great Britain and the United States, the meaning of property rights was defined objectively through judicial decisions or legislation. For example, the term “fee simple absolute” or “life estate” defined qualities of property ownership to which certain attributes were

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attached by government mandate. Judicial decisions generally determined the set of powers that went along with a fee simple absolute, as well as the formalities required for creating or transferring it. Significantly, the set of “estates,” or types of ownership that one could have, was limited to a relatively small set of categories. The American system of real property inherited most of the classifications. For example, think of a gift of property “to A for life and then to As heirs.” Does that gift create a right in A’s heirs that cannot be taken away from them, or does it merely state that the grant to A is of indefinite duration, lasting until A should decide to sell or give it to someone else? The person who made this gift—perhaps of the family home to a son named A—probably intended that A should live in the home for the rest of his life and then the home should go to A’s surviving spouse or children. But in this case the common law’s categorical system of property rights frustrated the intent of the person who created the right in the first place. Under the so-called Rule in Shelley’s case, the grant of property “To A for life and then to A’s heirs” created an absolute, or fee simple, property right in A and nothing at all in the heirs. 2 Or consider the case of the grandparent who, wishing to create incentives for grandchildren, wills valuable property “to my first grandchild who graduates from medical school.” At the time of the grandparent’s death there is a grandchild in her first year of medical school, and no other grandchild has gone to medical school. That child would take nothing, even if she completes school and gets her degree. The right was said to be “contingent,” and under the common law a contingent right had to be mature and ready to take immediately upon the termination of the preceding estate, which in this case was the grandparent’s ownership. Thus, even though the grandparent did not so intend, the right was good only if the grandchild actually graduated from medical school while the grandparent was still alive. 3 Beginning in the late eighteenth century, however, and escalating rapidly in the nineteenth, common law forms of property ownership became much more contractual in nature. The important characteristic of a contract is that the parties can agree about pretty much anything they wish, and in the process they can thus define their own categories. For instance, the common law system of estates would never have created a property right so idiosyncratic as the right that someone else keep a garden and perpetually maintain a statue of a man on a horse. But in Tulk v. Moxhay (1848) a British court held that a promise by a land owner that he and all future owners of that land would do that created a perpetual property interest. Courts in the United States soon followed. For example, the Trustees of Columbia College case (1877) held that once two neighbors agreed that they and future purchasers of their lands would never use them for commercial purposes, the agreement effectively created a property interest in each that they and all future owners would use the land in ways consistent with the agreement. Such a right could be destroyed only if the parties “released,” or granted back, the no-commercial-use right. One of the most significant developments in property law in the United States in the twentieth century has been the development of a law of “servitudes,”


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which effectively transforms a wide variety of contractual rights into property rights. The result is that a very great variety of highly idiosyncratic and specific property rights can be created. For example, the owner of a home in a modern residential subdivision might have a property right that his neighbors have nothing but Sequoia grass on their lawns, or only cedar shingles on their houses, or not operate side businesses in their basements or garages. These rights are property rights in virtually every traditional sense. For example, as the property to which they are attached is sold, given away, or passed by will, these rights (and corresponding obligations) will travel along. The law of intellectual property rights very largely emulates these developments, and patent or copyright license agreements create property rights that are defined by the scope of the contracts creating them. Thus in a very significant sense it can be said that the modern law of property has collapsed the distinction between traditional property and traditional contract. A property right is really a contract right that typically survives the makers of the contract, and that binds those to whom an asset is transferred just as the original owner was bound. This understanding of property does two critically important things. First, it gives maximum weight to the intent of those who created the property right in the first place. Second, it aligns property rights with the market, and the state’s interest in protecting property rights with the gains to be had from making the market work as well as possible. Of course, for policy reasons the state may wish to constrain the wishes of private persons. Just as the sovereign may refuse to enforce a contract to kill someone, so also it may refuse to recognize a property right that runs counter to some other policy that the state values. For example, in Shelley v. Kraemer (1948), the Supreme Court declared that a racially restrictive covenant barring Afro-Americans or people of Asian descent from living in a house was unenforceable under the United States Constitution. As a result, it is impossible in the United States to acquire a property right in the racial identity of one’s neighbors. 4 Understanding this close relationship between property and contract illuminates the role of government in making and enforcing property rights. Government recognition and enforcement of a property right is really nothing more than the government’s insistence that a certain prior agreement must be honored and its interpretation of the appropriate scope or meaning of that agreement. Consistent with our strong commitment to free markets, the most important thing that the government can do through its system of property rules is make questions of ownership clear. Both the value of property rights and the functioning of the market system depend on unambiguous and easily determined rules of ownership. For instance, the First Theorem of Welfare Economics shows that when all markets are competitive, trading will lead to a situation in which total social value is maximized. 5 In such a world, trading continues until every resource has been assigned to the person who places the highest value on


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it. Likewise, the Coase Theorem (Coase, 1960) makes somewhat stronger assumptions 6 but shows that when two people have conflicting claims on a resource, the resource will go to the person who places the highest value on it. As a result, free trading will lead to a situation in which these two persons maximize their joint wealth. Further, this situation is also socially efficient if no one else is affected one way or the other by the resulting bargain (Hovenkamp 1990). The First Welfare Theorem, and even more the Coase Theorem, illustrate the interesting result that in well functioning markets social wealth does not depend on who is assigned the initial ownership of a particular resource. With unrestricted trading, the resource will end up with the person who places the highest value on it. Thus the so-called invariance thesis of the Coase Theorem shows that the outcome of private trading (when the conditions for the Theorem are met) is “invariant” to the underlying private law rule (Hovenkamp 1990, pp. 784–785). For example, suppose that you own a house with solar cells on the roof to provide you with energy, and I own the adjacent lot and am planning to build a house that threatens to block the sunlight going to your solar cells. Suppose further that you value your solar collectors at $100 and I value the right to build my home in this precise location at $125. The relevant property right in this case is either your right to operate your solar collectors free from my interference or my right to build my house where I please. In the absence of any other form of regulation, a judge in the United States would probably apply the common law of nuisance to this question. 7 But the invariance thesis of the Coase Theorem says that it really does not matter which way the government comes out on this question; in either case, I am going to build the house. That is, the decision about where the property right will be assigned is determined by the value of the right to those bargaining for it, and not by the rules of ownership. If the court decides that building my house in the designated spot is not a nuisance—thus giving me the property right—then I will build. You would be willing to pay you up to $100 to build it elsewhere or not build it at all, but I will not accept anything less than $125, so we will not have a deal. By contrast, if the court decides that building my house in this spot is a nuisance, you are entitled to an injunction against me. But I would be willing to pay you as much as $125 for a release from this injunction, and you would be willing to accept as little as $100. Thus we will strike a bargain at some price between $100 and $125 and the house will be built. In sum, whether the common law rules “for” or “against” the offending house, the house will be built. Or to say it another way, the question whether the house will be built is invariant to the underlying legal rule assigning the property right to one person or the other. Thus when markets are well functioning the system of property rules does not determine the final resting place of resources, which is not generally a question of state policy (“property”) but rather of private market decision making (“value”). But what the system of property rules does do and must do, is establish clear rules of ownership, for these are necessary before bargaining can even begin. If you and I know clearly that (1) I can build my house anywhere I


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please, or alternatively that (2) I may not build my house so as to obstruct your solar collectors, then we can confidently bargain to the result described above. But if we are unsure about who owns the right, perhaps because the courts or the legislature have never stated any conclusion on this issue or have stated inconsistent conclusions, or perhaps because the current dispute is factually distinguishable from previous disputes, then bargaining over this right could prove very costly. Indeed, one of the reasons that competitive markets work as well as they do is because underlying ownership rules are clear. For example, if I walk into the Safeway grocery store to purchase a carton of milk, there is no question when I walk in about who owns the milk. Who is the buyer, who is the seller, and what is the scope of the right are all rather clearly determined. We ordinarily would not bargain about whether I already owned the milk before I entered the store, or whether the dairy farmer rather than Safeway still owns it. Given the very strong presumption that Safeway owns the milk and I do not, about the only thing we have to settle on is the price. That makes the bargaining process in this case very efficient. As soon as rights become more complex and idiosyncratic, however, determining who owns a particular property right and what its scope is becomes much more difficult. Most protracted and costly litigation occurs not because the sums in issue are large, but because the underlying property right has not been assigned with sufficient clarity. For example, once emitting factories know precisely how much of a particular substance, such as sulphur dioxide, they are entitled to emit, then we can expect to see a market emerge in which the right to pollute or to be free of pollution can be traded. As long as no one knows for sure, however, we can expect a great deal of costly litigation. As the preceding discussion suggests, both the First Welfare Theorem and the Coase Theorem indicate that one of the biggest impediments to efficient bargaining is high transaction costs. Indeed, perfectly functioning competitive or Coasian markets assume that bargaining is costless. If bargaining is costly, then we can no longer rest assured that resources will be assigned to the person who places the highest value on them. In the previous example I valued the right to build my house in a certain spot at $125, and you valued your conflicting right of access to sunlight at $100. In a world where bargaining is costless, we would strike the efficient bargain no matter what the underlying legal rule. But suppose that bargaining in this case is very costly—say, $40—because assignment of the right is ambiguous. In that case, if the court assigns the property right to you, I will not purchase it even though I value the right by more than you do. Once bargaining costs are paid, I would incur costs of $140 in purchasing the right, but I am willing to pay only $125. The most serious source of high transaction costs is ambiguities about ownership. While such ambiguities may be relatively rare in competitive markets for simple commodities, they are much more common in markets where property rights are both unique and complex. But given the complex world we live in, private owners frequently create complex property claims. For example,


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we divide property rights temporally by creating “present” and “future” interests. If you do something as simple as rent an apartment, you have a “present” possessory right and your landlord has a future interest that will become possessory when the lease is terminated, as well as some other rights that are stipulated either by the private lease agreement or by legal rules. When money is lent, creditors my acquire a position as “secured” creditors, such as a bank making a mortgage loan, or “unsecured” creditors, such as the typical issuer of a credit card. These differentials in type of creditor create important property interests when the borrower has inadequate resources to pay all his debts. Or some property interests may be divided up, as when purchasers of a condominium acquire an “exclusive” right to their individual unit, but a right in common with other owners to such shared facilities as the pool and tennis courts or laundry facilities. All of these types of quite ordinary arrangements can create complex rules of ownership, and if these rules are indeterminate the markets in which they are exchanged can work very poorly. As noted previously, the common law historically addressed the problem of ambiguous property rights by greatly limiting the categories that would be recognized as “property” to objectively defined “estates” or other legal species of ownership. But the emphasis on contract-as-property has largely removed that constraint. By their nature contracts are unique and employ language chosen by the contracting parties themselves. If we really want to give recognition to their intent, the legal system must try to determine the meaning of this language. At the same time, however, determining the meaning of contract language on a case-by-case basis is costly and invites ambiguities, or situations where the same language might mean different things when used by different parties. Suppose that I leave my house “To my son as long as he refrains from excessive drinking; but if he should fall off the wagon, to my daughter.” This rather common form of property grant will create severe interpretative difficulties for a later court when the daughter sues for her property right, claiming that the son’s consumption of two beers per night constitutes “excessive drinking.” The legal system could of course develop an objective, or legal, definition of “excessive drinking,” perhaps by consulting some health care specialists or Baptist ministers. The result might be greater clarity in the definition of this particular property right, and thus reduced bargaining costs. But in the process the legal system could be undermining a particular individual’s intent, which after all was probably developed without reference to such a legal definition. Alternatively, the legal system might try to establish the actual individual intentions of the deceased grantor, but the cost of administration under such a rule would be extraordinarily high and not likely to produce satisfactory results in any event. This problem very largely accounts for the development of elaborate statutes such as the Uniform Commercial Code, which are really extended definitions of the meaning to be assigned to certain words. When business persons covered by the Uniform Commercial Code place certain words or phrases in their contracts, they are ordinarily held to the meaning given by that statute. The court will not consider the fact that a particular business person might have had a quite


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different, private meaning in his own mind. In sum, the most important thing government can do to define and defend the property rights system in our market economy is to define ownership with clarity. In accomplishing this task, perhaps the most difficult problem the government faces is the creation of unambiguous ownership rules that give maximum freedom to participants to contract for whatever they want. Once ownership rules are sufficiently clear, the market itself becomes the engine for producing social value.

NOTES 1. International News Service v. Associated Press (1918): Property, a creation of law, does not arise from value, although exchangeable-a matter of fact. Many exchangeable values may be destroyed intentionally without compensation. Property depends upon exclusion by law from interference, and a person is not excluded from using any combination of words merely because some one has used it before, even if it took labor and genius to make it.

2.

3. 4.

5.

6. 7.

(Holmes, J., dissenting from the majority’s conclusion that by virtue of creativity alone the plaintiff had a property right in news stories that could not be Copyrighted under the then existing Copyright Act). Cf. Zacchini v. Scripps-Howard Broadcasting Co. (1977) (concluding that the “human cannon-ball” had a property right in his 15 second act of being shot from a cannon, which prevented a news producer from filming the entire act for re-broadcast without compensation). That is to say, the court interpreted the grant “to A and then to A’s heirs” to create an estate that gave A the power to pass the property on to his heirs. But if A decided to do something else, such as give it or will it to the Salvation Army, she was entirely free to do so. American courts historically adopted the Rule in Shelley’s Case, but nearly all have now rejected it in favor of the actual intent of the grantor. See, for example, McFeely’s Lessee v. Moore’s Heirs (Ohio, 1832), (following Rule in Shelley’s case); Society National Bank v. Jacobson (Ohio, 1990) (rejecting it). This destructibility doctrine has also generally been abolished (Kurtz and Hovenkamp 1999, pp. 307–310). See also Hill v. Community of Damien of Molokai (N.M. 1996) (restrictive covenant interpreted so as to exclude a group home for AIDS patients from residential neighborhood violated federal Fair Housing Act; in sum, one cannot acquire a property right in the exclusion of AIDS patients as neighbors). For a mathematical proof of the theorem, which depends on a premise of perfectly competitive markets, see Arrow and Hahn (1971). On some implications of the First Welfare Theorem, see Just, Hueth, and Schmitz (1982). In a typical Coase Theorem situation the market is not perfectly competitive. Indeed, there may be only one seller and one buyer of the resource in question. The leading case is Prah v. Maretti (Wis. 1982), which found a possible common law nuisance in the defendant’s construction of a house that interfered with the


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plaintiff’s solar system, but remanded so the trial court could determine whether the social value of solar access was greater than the value of the right to build one’s house where one pleased.

REFERENCES Arrow, K. J., and F.Hahn. 1971. Competitive Equilibrium Analysis San Francisco: Holden-Day. Coase, R. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3:1. Hill v. Community of Damien of Molokai, 121 N.M. 353, 911 P.2d 861 (1996). Hovenkamp, H. 1990. “Marginal Utility and the Coase Theorem.” Cornell Law Review 75:783. International News Service v. Associated Press, 248 U.S. 215, 246 (1918). Just, R. E., D.L.Hueth, and A.Schmitz. 1982. Applied Welfare Economics and Public Policy. Kurtz, S., and H.Hovenkamp. 1999. Cases and Materials on American Property Law (3rd ed.). McFeely’s Lessee v. Moore’s Heirs, 5 Ohio 464 (1832). Prah v. Maretti, 108 Wis.2d 223, 321 N.W.2d 182 (1982). Shelley v. Kraemer, 334 U.S. 1 (1948). Society National Bank v. Jacobson, 54 Ohio St.3d 15, 560 N.E.2d 217 (1990). Trustees of Columbia College v. Lynch, 70 N.Y. 440, 446–453 (1877) (Columbia College is now Columbia University). Tulk v. Moxhay, 2 Phil. 774, 41 Eng.Rep. 1143 (Ch. 1848). Zacchini v. Scripps-Howard Broadcasting Co., 433 U.S. 562 (1977).

TECHNOLOGY, LAW AND POLITICS: THE CASE OF PRODUCT STANDARDS Samuel Krislov

INTRODUCTION Modern political science generally is an amalgam of political philosophy (largely Anglo-Scottish in origin), the Roman law tradition (principally furthered by Germanic writers) and German-Polish conflict sociology. These traditions have cross-fertilized each other in social science generally as well. The original impulse was philosophy or theory. Like economics, political science has been deeply permeated by Neo-Lockian thinking linking freedom and property. To Locke property was (as the word’s etymology suggests) linked to a sense of self. Property was the means to vindicate liberty. Even socialistwelfare concepts like that of T.H.Green (1895) and John Rawls (1971) accept that linkage and infer a social obligation to further a sense of worth and a vindication of rights. So too does the anti-Leninist literature of Martov (1938) and Djilas (1957), Popper (1945) and Wittfogel (1957) which warns against the dangers of folding property ownership back into the arms of political leaders. At this juncture in history the ideological dispute seems resolved firmly in favor of that school and decisively rejecting not merely the East European brand, but the Marxist generic as well. Of course, history teaches us that grandiose pronouncements such as “the end of ideology” often appear silly a decade or two later (Bell 1963; Fukuyama 1992). It is the empirical linkage of politics and economics that still remains at the fore-front of social science concerns. The linkage between capitalism and freedom, or even between free markets and social prosperity seems testable and firm conclusions just beyond our grasp. But they remain illusive and elusive. “Prediction is difficult” according to a folk-saying, “especially about the future.” In recent years political scientists and legal sociologists have attempted to study matters as broad as the link between open markets and/or democratic structures and economic development and as narrow as the link between economic development and litigation rates (Inglehart 1997; Krugman 1993; Krislov 1983; Morley 1993). The results have been disappointing, conclusions have been based on narrow time frames. (Practically any method of investment works during a boom-market and studying Asian economic systems under the prosperity of 1985–95 hardly seems as decisive after the debacles of 1997–98.) The categories are so broad the surrogate measures used often seem remote for what they purport to measure or often turn out to be subtly or crudely interconnected (as “race” and “class” often are, for example). These are typical and


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repeated blunders. And yet the core of some materialist causation attributing shaping power to economic relations seems too right and too powerful to cast aside. We are in the position of Jane Eyre agreeing with the Biblical injunction “the race is not always to the swift nor the battle to the strong” yet softly murmuring “but that’s the way to bet.” In a typically sardonic “tribute” to Isaiah Berlin shortly after his death, Paul Johnson accuses him of waffling by disputing with Marx while retaining a sense of admiration for him (Johnson 1997). But surely, that is not an aberration of Berlin’s but rather a preponderant view. Similarly we reject any monolithic, iron, monocasual materialistic view, as Engels himself apparently did (Engels 1890); and find no evidence of some monotonic input either. Rather we find the relationship more complex, less amenable to formula analysis than we have found to date. As social scientists and legal theorists have tried to wrestle with materialism as a matrix for their fields, they have met with a great deal of sorrow. They have realized that, methodologically and practically, this approach is quite ambiguous on the one hand and over-determined on the other. That Germany in the 1930s should adopt Nazism and Russia in the aftermath of World War I Marxism was itself paradoxical. On the other hand, purely ideational, or “cultural” explanations or casual histories that rely on unique political and personal accounts are not compelling (Sorokin 1957). They seem to leave out crucial forces even as they multiply evidence, routes and players. A close examination of Weber’s exposition of religious values shows that much of the driving force really involved technological possibility (Weber 1964). It would be difficult to explain the diverse implementation of the same ideational system in different locales without reference to economic limits. Naive neo-Weberianism did not produce societal transformation in Latin America (Trubek and Galanter 1974) and both naive and sophisticated laissez-faire approaches have produced a variety of results from moderate success to abysmal failure in Africa and East Europe. In short, economy and power are elu-sively related, much as Popper and Berlin argued. Marxism’s attempt to see them as two sides of the same coin emerges as a failure, but an interesting and still challenging one. In a sea of relentlessly alternating fadism of ideas that are “not even wrong,” it is an island of some clarity and a point of possible departure. My own research strategy for some time has been to abandon the dominant amorphous and ideology-ridden terminology and to investigate instead a more modest but analogous set of questions. I have pursued the problem of product standards, how they are set, and their influence upon societies (Krislov 1997). Earlier, I had also tried to find patterning in the standards societies have used to deal with the relationship of religion and state (Krislov 1985). My next task is to show how “hard” product standards influence “soft” social standards—merit, education, personal rewards, and so on. By starting with the relatively definable term “product standards” instead of the more global “means of production” and using conscious, regular compliance,

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more precise relational patterns are teased out. This is not to say that all ambiguity is avoided. Even “product standards” are themselves rife with multipurpose, multi-strain emphasis. Sometimes they embrace quality or efficiency. In other instances they suit the needs of technological necessity or they serve other desirable or parochial social purposes (Krislov 1997; Marshall 1948; Kahn 1968). Compliance is seldom simple and calculable. Yet compared with a century-and-a-half of Marxists and their research that ranges from crude money conspiracy studies to subtle sociological analyses (often drawing from the “young Marx” formulations) and brings us mostly inconclusive results, this seems to me at least to be a modest, hopeful agenda. Naïvely starting from the ideational end (principles of separation of religion and state), I found no obvious links to economics. Cultural patterns and religious affiliations essentially predetermined standards. Agricultural Catholic countries still bear a closer resemblance to Catholic industrial nations than they do to Protestant; Muslim practices were even more divergent. Furthermore, variations were again more traceable to variations in demographic and cultural differences rather than economic ones. Turkey is, for all its religious homogeneity, ethnically and historically different from its Arab neighbors. Norway and Sweden are sharply different economically but do not move toward the Dutch model on religion. Similarly, at a level more linked to payoffs and economics, I tried to understand the selection process of American society for professional and skilled positions. I did this by studying the ETS (Educational Testing Service) and its processes (unpublished manuscript 1990). After completing my research, it was easy to make a number of glib conclusions. First, there was a clear attempt to invoke science in its elaborate “verification.” Painstaking internal emphasis of reliability of items is obvious. Yet its passionate avoidance of the question of validity was also painfully obvious. Tests predicated success in schools. Real-life ultimate validation was not ETS’s responsibility. Science was the model for its campus; its tone. But the organization was created like a corporate merger and its major tests had actually been created by its predecessors’ component organizations. There was (and is) a product-andconsumer approach to all of its tests; from admissions to school to qualification for professions and skilled licensure that mimics business structures. But any real linkage to social forces and social values eluded me. Any deeper understanding did not come to me, at least.

STANDARDS AND POLITICAL CONTROL Consequently and reluctantly I decided to start with the “materialist” end of things and made sure to stick as closely as possible to narrow definitions of product standards. I envy the linguists who have acutely and sharply charted the emergence of standard languages from rural dialects, and tracing the parallel emergence of languages and nationalism (Joseph 1987). But in the domains of


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religion and skill, values were only faintly congruent in a way that I could not trace. Standards started on a cleaner plain. There exists a set of ireluctable technological facts. For a plane to fly, for example, it must comply with the laws of aerodynamics. These technological facts set limits that cannot be crossed without consequences. Product standards dealing with such limits are redundant warnings that should not be ignored. In this sense, technology sets the limits that power or money (like King Canute) cannot control. These limits create conditions for production, efficiency, and profit. Planes must be constructed and tested in relatively standard ways, though these limits are more flexible. (This immutable relation has been compared by legalists and theologians to “natural law” beliefs.) Of course, planes have evolved radically in design as the use of jet engines have allowed us to surpass previously unachievable physical limits. This still leaves motors, gliders, and blimps appropriate for some functions. Integrally, we are told that, like the tax code, a modern aircraft has thousands of parts and myriad systems. As a result, no one person has a full and comprehensive understanding of all components. For this reason, changes in systems or component parts are even easier to adopt though their consequences are even less predictable. There is a lot of wriggle room, if not complete freedom, in the choice of even basic technology. This wriggle room is at its maximum when new technologies are involved. In a sense this is demonstrated by introduction of rival technology in different societies. These inaugurations often reflect the principle of independent invention. That is, technology often develops in logical progression in different places with variations of differing significance. Once a technology is set, the wriggle room tends to close down. It is often easier to make a slight inefficient adjustment than to replace an existing standard (Krislov 1997). The failure of the United States to switch to the metric system stands as an example of this phenomenon. It is easier to provide double-preparation of goods (e.g. labeling) for foreign exports than it is to convince consumer and workers to change behaviors. While momentous technological innovation is, by definition, a blue-moon thing, in the modern world it is virtually continuous. Political and economic power each have much influence at these points. This influence need not be controversial or widely publicized. Key decisions such as those relating to the ownership of dynamos and powerlines may fix matters quickly and decisively. Political power can regulate resources flowing to producers or the channeling of new products, often without resistance. The birth-control pill is more easily nipped in the bud than banned after a period of use (Salter 1989). Total regimes can exclude foreign technologies. For instance, computers were largely banned in Eastern Europe to prevent erosion of the communication monopoly. Similarly, attempts were made to regulate Xerox and mimeographs. Furthermore, governments have historically tried to control the export of technological information with varying degrees of success. The histories of


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Chinese silk, Italian weaponry, and supercomputer knowledge all involve restricted data that governments tried to hoard for their own social purposes. The potential predominance of the political sphere is amply demonstrated by the experiences of the twentieth century. Pol Pot’s experiment with radical transformation and almost complete abandonment of previous technological investment shows that efficiency is only an operative factor in normal societies. In “Asian despotisms” (a Marxist category which Wittfogel [1957] demonstrates is an un-Marxist description, but which he analogizes to societies desperately seeking water) the social purpose is used to subordinate individual or group claims. Albania, North Korea, and Rumania have all demonstrated that overtly inefficient regimes can outlast several generations of misuse and abuse of social forces, including human labor. North Korea withstands famine and Pol Pot was only moved from power by the Vietnamese, whose invasion of Cambodia was based on long-standing societal rivalries (Krislov 1982). Inefficient production and consequent unavailability of socially necessary arms is punished much more rapidly than, say, Rumania’s human and humanitarian lapses. In more industrialized societies, the process of gaining control is more complex. It generally reflects greater capacity to resist controls by a citizenry that is amply endowed with products they regard as essential. But the use of noose-tightenings (or “salami tactics,” which have been described by one communist leader as the taking of one thin slice of control followed by another and another) usually is successful. Burin has documented the anti-Weberian success of the Soviets and Nazis in subordinating bureaucracies to their will without loss of efficiency (Burin 1952). Patient noose-tightening forced the bureaucrats to train their successors and make themselves dispensable. In Germany, the Nazis (and later the Communists) ousted or co-opted the top industrialists. In many instances, the production managers remained the same. However, there are only isolated examples of the economic entities forcing their priorities on their rulers. These extreme cases do reveal the potential predominance of the political realm, whether dealing with standards or other aspects of the economy. On a more usual level, import and export controls are governmental, and the spearhead to alter restrictions are also likely to require a political challenge. GATT and the WTO may use the arguments of efficiency, but it is political clout that prevents those arguments from falling on deaf governmental ears. Governments are typically more attentive to immediate domestic political claims and cries. Importers seldom have the strength of domestic producers.

STANDARDS AND PROPERTY But, this clear predominance of the political is not what is experienced on a dayto-day basis. That is because the “pure” case is highly exceptional. Most politics is closely linked to economics and most politicians are sensitively attuned to complex economic forces. The most durable base for political power is


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prosperity and it is difficult to routinize power in a society that is floundering. The techniques for maintenance of power have been the instruments of tyranny. Their use has been raised to a form of high art in the twentieth century. But the enforcement of tyranny requires a great deal of ruthlessness and skill. The normal relationship of economic power and political might is, then, a symbiotic one. Economic power shapes technology, often unobtrusively, as within limits. The choice of technology is often determined by the selling power of the producers or distributors. Overplaying one’s advantage may be a bad strategy as IBM’s diminished capacity demonstrates. When West Publishing attempted to save its “Key Word” system, an artificial system compared to real word retrieval, it almost doomed Westlaw. However, West swallowed its pride in time, ultimately matched Lexis in retrieval convenience, and saved its preeminence throughout the legal information field. Political regulation also fixes powerful parameters on technology through the patent systems and such requirements as television reception standards. The political order is often the optimal arbiter in cases where it is more important that there is a uniform system than it is for the system to be the ideal one. This in turn can involve a test of political muscle among producers, consumers, and even other players. The dual relationship thrives even when not readily apparent. So purely commercial, property relationships ultimately rest upon potential court action and police enforcement. Governments, like armies, march on their bellies particularly when salaries are not forthcoming. Political breakdowns can lead to business breakdowns, private armies, and feudal fiefdoms. Islands of government disability, such as the inability of the Japanese to protect business meetings and thereby expose them to blackmail by gangsters, have helped produce both business failure and political crises (Upham 1987; Haley 1991).

ECONOMIC POWER AND POLITICAL COMPLIANCE Governments are often at the peak of their power at times of takeover, particularly when the movement is ideological (and minimally economic) in nature. The Taliban can outlaw opium growing more readily than normal, “consent of the governed” regimes, or probably than an established authoritarian regime with stable partnerships among economic groupings. Certainly the prison and defense industry groupings in the Soviet Union had more clout than the newly freed serfs in czarist Russia. New economic relationships lead to political alliances. The absence of consumerist voices in Eastern Europe notoriously led to the worst ecological abuses in the world, a product of fusion of producer interests and political might. In that instance, producer interests blotted out social benefits in another demonstration of the blindspots in Marxist theory. The voiced aspirations of Marxist-Leninists were production for social good, and interesting experiments were tried in the early years. The natural system reflected an


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emphasis on production almost for its own sake. Minimal attention was paid to quality standards, and none was given to the ideas of pride-of-workmanship and fulfillment-of-self in labor that were originally touted (Boitsov 1975; Zile 1988). The system certainly became state capitalism at its worst. It is difficult to assess the damage wreaked upon the economic order by vested interests in such a system as practiced by Mao. China observers note that the “Great Leap Forward” was a blow to China’s resources that dwarfed the devastation of the human spirit that was the Cultural Revolution (Barnett 1974). An ignorant man convinced his insights were Godlike, Mao believed that China could attain greatness by maximizing iron and steel production even as the world was both glutted with these products and also transcending them. Century old forests were sacrificed for minimalist one-time gains in iron production. The ecological and personal tragedies that came as a result of this short-sightedness have been recorded and are well understood. These acts were mitigated, at considerable personal risk, by identifiable persons and groups within the China’s leadership. This makes China, when and if archives are opened up, a potentially richer source for tracing political powers entanglement with economic reality than Russia or Germany (where resistance was easily overcome) and Cambodia or North Korea (where it basically was nipped in the bud). The best parallel test of dominant economic forces over government and politics I can think of was the failure of the Popular Front government in France. Business and industry waged a political civil war of sorts, using legal and quasilegal means to resist hours limits and other economic reforms (LeCoutre 1982). More specifically, they exploited Premier Blum’s Jewishness and the role of the Communist party, and used mechanisms for the expatriation of capital, and encouraged unrest. Many of these tactics were imitated in Frei’s Chile, aided by the CIA, rendering the later effort a less-than-pure case. It is easy to enumerate examples of regimes seizing property or otherwise using political power to metamorphisize economic relationships. Examples of the obverse do not come so easily to mind. Reprivatization in Eastern Europe has not only been a political process, but all too often the old political masters have gone off with some of the business spoils. Businesses do not, a la Huxley, take over countries; rather, they empower political allies who often turn authoritarian and are not always gentle towards their old partners. As Emile Noel, one of the gentle visionaries of the EC said to me two decades ago, “In economic terms we have succeeded beyond our wildest dreams, but politically, we lag behind them. Perhaps that is because businesses do not seem to become governments” (Krislov 1986; Spryt 1994). Though businesses do not seem to supplant regimes and control the new ones, it may well be that they profit inordinately under normal conditions. Certainly even in modern democracies economic power constrains the ability to control fiscal mechanisms. Basic trade mechanisms, foreign relations, war, and peace are usually defined by representatives of basic economic power. In the United States, Great Britain, Japan, and Germany, the circulation of elites in key governmental spots is normally to and from such economic roles. Lenin’s fundamental question, “Who, Whom” (that is, who dominates) remains


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speculation rather than demonstrated reality. But the suspicion lingers that political power is, in reality, distributed much as income is in most societies.

CONCLUSION I have attempted to develop my views of politics and economics more precisely through an analysis of product standards. At the same time I have not abandoned my views that stable governments—the ones that maximize the power of economic forces—are also ones that accommodate the non-powerful through some fair-share in society, and constitute not just a representative bureaucracy, but some representative participation in government and issues generally. Giving the “great unwashed” ability to affect changes in moods and policies is as the British nobility instinctively know and have demonstrated: the most conservative of all societal strategies. The stake in stability all have in any society allows claims that all must acknowledge or deny at their peril. Conquering Mongols, Ottoman emperors, biblical kings made important gestures through marriage, adoption of the religion of the conquered, acceptance of local autonomy in exchange for allegiance almost as often as they have demanded the reverse. This leads to the not surprising conclusion that all of these forms of power are not inevitable or inelectable forces but potentialities. We can state the matter even more sharply as weighted probabilities. Punditry and prediction are possible, but timing basically not. Furthermore, each dodging of a bullet reopens the odds and permits further postponement. “Inefficient” regimes can use the time gained to build up their political instruments as illustrated by, for example, Iran. Protection against foreign intervention—a potent danger for “inefficient” regimes can be mounted while sacrificing minimally in a domestic sense (Krislov 1987). The ultimate test is whether political resolve finally gives way to the steady, not necessarily articulated demands of technology. Societies have obviously dodged such bullets for nearly a full century. Such avoidance of necessity fulfills Keynes’ suggestion that death and several generations can cycle before the inevitable happens and therefore potentially may never occur. The study of standards supports this proposition. If an internal market is large enough, standardization can be achieved with accommodation to cultural values, political aspirations and/or autarchic economic goals. That Korean standards are often similar but not identical to Japanese or American standards reflects their desire not to be dwarfed by either. That the Japanese are willing to accept many ANSI requirements is consistent with their market strategy. That American standards have historically just grown larger independent of world constraints reflects both its indifference to worldwide concerns and both conscious and unconscious efforts to create non-tariff barriers. There are clear limits to cultural and political goals with respect to standards. Modern rapid diffusion of products and findings limits the development of inferior models to the point where the basic investment dwarfs the marginal gains of shifting to the new system.


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Airports are more like each other throughout the world than train stations, and even planes than railroad cars. Nationalistic pride in idiosyncratic mathematics notation is less likely to occur when papers are transmitted quickly by fax or email than when the Herr Professor largely shared his findings with his students and disciples. Different national technologies for example video display also compute internationally from day one rather than the older plan of first consolidation itself in a national sphere and then gingerly spreading. A major issue looms large in the context of product standards, the issue of globalization. It is argued that the “global village” requires standardization and even boring homogenization. McDonald’s, Nikes, T-shirts and jeans are everywhere. Coca-cola has even drawn a bead on its major world competition— water. These products are universal; McDonald’s imports potatoes in the countries unable to meet its size-and-characteristic requirements for french fries made in the American image (Nye 1990). More significantly, product components of an international stripe are made everywhere and shipped everywhere to be assembled into simple clothing or complex computers or multi-thousand part airplanes. Made in the U.S.A. (or France or Japan) is almost meaningless as the FTC argued in an abortive effort to alter the definition. Such goods are produced by standards set by national or intranational arbitersthe ISO (International Standards Organization), ANSI (The American National Standards Institute), construction engineering societies, or less formal ones such as Underwriters Laboratory or a growers seed association based in Geneva. Increasingly flexibility in sales and trade is gained through adherence to such global standards. The process increasingly involves less tangible (and arguably more important) regulation of business practice such as bank reserve requirements or the ability to deduct bribes paid to foreign government officials as a cost of doing business. But both in the past and the present the limits of globalization, regionalism and even nationalism have been amply demonstrated. Virtually autarchy was the operating philosophy of the Eastern bloc and it creaked on for (as noted above) one-half to three-quarters of a century in different countries. The compensating balances that ensued is reflected in the difficulty such countries have had in regaining their old economic stature under capitalism. Of course the old system had collapsed and it needed only a nudge to begin that final decline, and most have, albeit slowly, begun an ascent. In any event, standardized items constitute only a small fraction of any economy. They may be necessary or highly desirable as competitive (or safe) designs for some products, or to enter most international markets. Though they may be a source (sometimes almost the only source) of marginal profit, most domestic economies dwarf their foreign exports. Though the balance is shifting, this remains the reality even in industrialized nations like the United States and Japan. So a move toward protectionship, or even autarchy, is generally wrenching but except for unusual cases like Denmark or Japan would not be immediately catastrophic whatever the future might bring on as time unfolded. By the same token the American and German predominance in setting


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standards and the American and Japanese preeminence in technical innovation and patents are strong ultimate assets. Still our trade representatives have spent much time in trying to protect “intellectual” ownership—easily piratable publications indicating “basic” technology is perhaps less protectable through such recourse. Probably it contains its own protection, with reasonable return for the art not necessarily visible from the blueprint. It is interesting that there is value in being the standardizer and especially a standardizer with a reputation for objectivity. In that regard ANSI has been cited to me by both Japanese and Chinese standardizers as the least biased standardizer in the world. It is interesting to speculate on how such a reputation helps spread American standards everywhere, whether nice standards finish first, and what ultimate influence—political and economic—accrues from such a reputation.

REFERENCES Barnett, A. 1974. Uncertain Passage: China’s Transition to the Post-Mao Era . Washington: Brookings. Bell, D. 1963. The End of Ideology . New York: Free Press. Boitson, V. 1975. Standardization in the U.S.S.R . New Delhi: Oxonian Press. Burin, F. 1952. “Bureaucracy and National Socialism.” In Reader in Bureaucracy , edited by R.Merton. Glencoe: Free Press. Djilas, M. 1957. The New Class . NY: Praeger. Engels, F. 1890. “Letter to Bloch, September 21, 1890.” Fukuyama, F. 1992. The End of History . NY: Free Press. Green, T.H. 1895. Lectures on the Principals of Political Obligation. London: Longmans. Haley, J. 1991. Authority Without Power . Oxford: Oxford University Press. Inglehart, R. 1997. Modernization and Post-Modernization . Princeton: Princeton University Press. Joseph, J. E. 1987. Eloquence and Power: The Rise of Language Standards and Standard Language . London: Francis Pinter. Johnson, P. 1997, November 12. “A Low-risk Philosopher.” New York Times , p. A31. Kahn, A. 1968. “Cartels and Trade Associations.” International Encyclopedia of the Social Sciences . Krislov, D. 1994. “Computers and Competition.” In Law and Technology in the Pacific Community , edited by P.S.C. Lewis. Boulder: Westview Press. Krislov, S. 1982. “The Politics of Control.” In Social Control , edited by J.Gibbs. Santa Monica, CA: Sage. ——. 1983. “Theoretical Perspectives on Case Load Studies.” In Empirical Theories on Counts , edited by K.Boyum and L.Mather. New York: Longmans. ——. 1985. “Alternatives to Church and State.” In Religion and the State ,


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edited by J.Wood. Waco: Waco Baylor University Press. ——. 1997. How Nations Choose Product Standards and Standards Change Nations . Pittsburgh: University of Pittsburgh Press. Krislov, S., et al. 1986. “Political Organs, Integration Techniques and Judicial Process.” In Integration Through Law , edited by M.Capalletti. New York: De Gruyter. Krugman, P. 1993. Theory, Policy and Dynamics in Trade . Cambridge: Cambridge University Press. LaCoutre, J. 1982. Leon Blum . New York: Holmes and Meier. Marshall, A. 1948. Principles of Economics (8th ed.). New York: Macmillan. Martov, J. 1938. The State and the Socialist Revolution . New York: International Review. Morley J. 1993. Driven by Growth . New York: M.E.. Sharpe. Nye, J. 1990. Bound To Lead . New York: Basic Books. Popper, K. 1945. The Open Society and Its Enemies . London: Routledge. Rawls, J. 1971. A Theory of Justice . Cambridge: Harvard University Press. Salter, L. 1989. Mandated Science . New York: Kluwer. Sorokin, P. 1957. Social and Cultural Dynamics . Boston: Extending Horizons Books. Spryt, H. 1994. The Sovereign State and Its Competitors . Princeton: Princeton University Press. Trubek, D., and M.Galanter. 1974. “Scholars in Self-Estrangement: On the Crisis of Law and Development Studies.” Wisconsin Law Review . 1062. Upham, F. 1987. Law and Social Change in Postwar Japan . Cambridge: Harvard University Press. Weber, M. 1964. The Theory of Social and Economic Organizations . New York: Free Press. Wittfogel, K. 1957. Oriental Despotism . New Haven: Yale University Press. Zile, Z.I. 1988. “Product Quality and Liability in the USSR.” In D.Berry et al. Law and the Gorbachev Era , edited by D.Berry et al. London: Kluwer.

THE INTERPLAY BETWEEN THE PUBLIC AND PRIVATE ADMINISTRATION OF PROPERTY RIGHTS: ORDER AND EFFICIENCY S.Todd Lowry

INTRODUCTION All analyses benefit from an examination of the historical and institutional milieu in which the relevant issues evolved. This is particularly true when investigating the ongoing tension between government policy toward property interests on the one hand, and on the other, personal or private interests or rights in productive property. In an area where intellectual traditions are also interacting with material developments, we can begin by surveying the complexity of the political and institutional fabric that is in constant interaction with the material matrix of the economy. We may then look briefly at the issues that grew out of the long history of individual and administrative involvement in agricultural production. Finally, as primarily agrarian property interests evolved into the modern industrial system, we can gain some insight into the adjustments and contradictions evolving in the tension between public policy and individual property rights by considering the seventeenth- and eighteenth-century transition in English law and economics. If we were to begin our inquiry with the most contemporary concern over the relationship between governance and property, the gestating status of information control would dominate the scene. In this field, the government’s interests and objectives have not yet been strategically or tactically developed. At the same time, the private uses by individuals and economic institutions are being appropriated in a chaotic fashion (Branscomb 1994). As economic conditions change, the historical pattern is for legal forms and economic rationalizations to provide an awkward and frequently inadequate superstructure for resolving new problems and developing sound policies. This is the intellectual history aspect of paradigm shifts. Values can be appropriated by economic entities, but property can only be defined as those values that are publicly recognized and publicly defended on behalf of the claimant. Putting aside personal property such as weapons and tools for the moment, agricultural land has been the primary property interest under-girding human civilization for the last six to eight thousand years. However, the institutional or legal nature of such property changed as centralized administrative empires based on irrigated agriculture gave way to


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feudal and national political structures and village life was assimilated. Subsistence was based on increasingly individualized agricultural production dependent on initiative and some degree of vested control that would foster individual planning. At the same time, the legal structure that supported governmental activities-levies, dues, or taxes—was a hybrid reflection of previous economic and political conditions. This carryover is even more evident today as governmental traditions and agrarian economic values are adapted to modern regulatory government presiding over commercial and industrial organizations. Modern governments have created the corporation that serves as a significant force in the economy while applying concepts of individualism appropriate to family freehold agriculture. Meanwhile, ad valorem taxes are levied on idle land but not on idle bank balances although neoclassical economic theory rationally treats them both as forms of capital (Gaffney 1994). The modern problem is, of course, one in which government must administer power to implement policy and enforce property rights through a rational system of law. This rationality is an ideal that gives predictability and permits planning by decision-makers who rely on the stability of the framework of rules and regulations, whatever they may be. One cannot effectively participate in a game if the rules are not known in advance and enforced by the referee. In society, as in games, a level of order and predictability is the operative criterion of efficient action and planning. The extension of law to various problems and sectors of the economy is, however, better understood as being based on a hodgepodge of historically explainable premises rather than as elements in a coherent and logically consistent intellectual fabric. The challenge to law is to amend and interpret such guidelines into an ever more rational system. In this context, we must agree with Jeremy Bentham’s view that concepts of “‘natural and imprescriptible rights’ are ‘nonsense on stilts’” (quoted in Rose 1996, p. 330). As a parallel, we live in an economic system where agrarian property traditions, corporate organization, and valuable information are scrambled and abstracted as market values. This pseudo-rationality grew out of the widespread acceptance of rights in freely arranged contracts in the eighteenth century. With rights to the “benefits of the bargain” one could plan commercial activities into the future just as an agriculturalist with a freehold tenure could. Although the establishment of contractual rights and the recognition of contractarian theories of government date from antiquity, their explosion in the eighteenth century coincided with the late seventeenth-century dissolution of archaic land tenure rules in England. This contributed to a justification for a free market perspective on individual rights sometimes articulated as possessive individualism. The association of concepts of economic justice with the industrial revolution characterizes C.B.Macpherson’s conclusions and, in a broader sense, those of Atiyah and Shapiro regarding the emergence of concepts of contractual rights (Macpherson 1985; Atiyah 1979: Shapiro 1986). It is worthy of note that, at the outset of modern commercial dominance of the economy, Bernard Mandeville recognized the significance of the legal structure

The interplay between the public and private administration

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that provided the stability for market transactions and individual planning. This is of particular interest because Mandeville is usually cited as an early spokesman for laissez-faire economics: (using the musical clock as analogous with the city of London) There is no Part of the wholesome Regulations, belonging to it, even the most trifling and minute, about which great Pains and Consideration have not been employ’d…and if you will look into the History and Antiquity of any such City, you will find that the Changes, Repeals, Additions and Amendments [388], that have been made in and to the Laws and Ordinances by which it is ruled, are in Number prodigious: But that when once they are brought to as much Perfection, as Art and human Wisdom can carry them, the whole Machine may be made to play of itself, with as little Skill, as is required to wind up a Clock; and the Government of a large City, once put into good Order, the Magistrates only following their Noses, will continue to go right for a great while, tho’ there was not a wise man in it (Mandeville, vol.2, p. 323 [387–88]). The preceding quotation is significant both because of its appreciation of the role of law in the functioning of a great commercial city at the threshold of the eighteenth century and its recognition of the important linear force of bureaucracy in apparently selfrunning systems such as market economies. Mandeville also reminds us of the insights to be gained from an examination of parallel episodes in the past. As a methodology, this will lead us to sketches of the political and economic transitions of even earlier times, emphasizing governance as power with law as its rational process interacting with participative rights contributing to the efficient use of property. Evolving rights in property have marked the reformulation of productive administration and the science of efficiency on which economics has built its claim to rationality. The overlap of these two aspects of society, government and property rights, has naturally led to the appreciation of their study as better designated by the term “political economy.”

INSIGHTS FROM ANTIQUITY The earliest human organizations obviously evolved around elements of the basic reproductive unit that we designate as the family. However, depending on custom, geography, and property relationships, matriarchal and patriarchal systems evolved. In either case, the system of formal control, that is, government, and the system by which a livelihood was obtained were coterminous. We can limit this generalization to various hunter-gatherer economies where immediate direct contact between all participants obviated the need for any formal articulated rules or rationalized customs. Personal clothing,


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tools, and weapons were generally specially made for the individual and property rights in such implements were taken for granted. With the development of flood-plain agriculture in Mesopotamia and the Nile Valley of Egypt, a new order of organizational complexity was implicit in the annual planning cycle necessary for the administration of irrigation and the resurveying of fields. This transition has been characterized by some historians as the beginning of the modern world system (Frank and Gills 1996; Mann 1986). With the management of the annual inundations leading to irrigation systems combined with high yields of grain that could be stored effectively in dry climates, a centralized organizational structure was induced. From modern perspectives, it is difficult to separate the governmental from the economic in such a system. In addition, the institution under whose aegis these systems were developed was, to some degree, the temple with the ruler evolving as a resident god, particularly in Egypt. The development of symbols that evolved into arithmetic and writing was demonstrably part of central administration in the urban centers in late third millennium B.C. Mesopotamia. Recently published analyses of the Erlenmeyer Collection have demonstrated that records were kept from year to year with projected production from a milling operation balanced against cost in labor measured in labor days and materials (Nissen et al. 1994). Such a system of record keeping with shortfalls and surpluses carried over from year to year was also applied to agriculture. Such a system clearly introduces a structural basis for rational planning and efficiency comparisons. In this system, the distinction between government and economy is hopeless. Nevertheless, the birth of abstract rational classification and planning is the indisputable frame of reference for the science of efficiency. It is difficult to reconstruct the scope of individual allotments of housing and methods of organizing the tilling of the land. Nevertheless, we can assume that the religiously oriented state and king controlled the product of the land and were responsible for its storage and redistribution (Polanyi et al. 1957). The ancient Mesopotamian city was composed of some 10 to 20 thousand people and had to be administered with generalized rules and rations. In that sense, we must distinguish between rights as assertable claims that the government will enforce, on the one hand, and uniform allotments or rations that involve equal treatment of individuals, on the other. The former assumes a system of rights that is assertable by the individual. The latter is uniformity, or administrative equality and has little to do with rights, as such. Nevertheless, the system tends to establish anticipations and reliance. For administrative purposes, consistent treatment and stable rules permit individuals to plan their affairs with reliable expectations. Wrapped in the security of a stable economic and social fabric, a society can be remarkably stable despite disparities in class status and vested privilege. The emphasis on justice as a derivation from absolute pronouncements that would be uniformly and consistently applied in the core civilizations echoes this characteristic of the administratively organized states. It is exemplified by the publicly posted codes such as Hamurabi’s in eighteenth century B.C.Babylon and the tradition of the “unchanging law” of the Persians.


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The concept of justice articulated from below was as pleas for superiors to honor their commitment to the law and the gods. This was a plea for order rather than an assertion of rights. Pleas to superiors to do their duty characterized justice in the Mediterranean World through early and medieval Christian thought (Nitsch 1998; Firey 1998). The early Egyptian account of “The Eloquent Peasant” that draws on the scales or balance as a symbol of administrative justice also illustrates this tradition (Brandon 1969). It is not the system of weights and measures that is questioned, or the relative values attributed to commodities being weighed that attracts attention, but the question of whether the arms of the balance are “on the level” or “square with the plumb line.” The cultural force of the civilizations generated by the productivity of the Mesopotamian and Egyptian irrigated agricultural economies has been characterized as the historic core of the “modern world system” (Frank and Gills 1996). It merged with the Greco-Roman and Judaic traditions to dominate modern European society. Within this system, property is whatever the government defines it to be. Long term planning and organization rely on order and predictability or objectively derived administrative standards and relationships. As long as they are designed to permit an efficient and productive outcome with functionally adequate distribution, social peace and stability can be anticipated. Irrationality and caprice are, of course, the destabilizing threats to the system of property relationships.

RIGHTS BETWEEN EQUALS Within the shadow of the administrative system, a secondary body of legal relations had to be developed. This involved the problem of the maintenance of order between individuals over issues that were otherwise irrelevant to the administration. One of the most revealing and illustrative references to such a process is found in Xenophon’s Cyropaedia where the training of the absolute ruler, Cyrus the Great, was described. Cyrus, as a youth, was assigned the responsibility to judge disputes among his fellows. When a tall boy with a short tunic forcibly exchanged tunics with a short boy with a long one, Cyrus adjudicated the dispute in favor of the tall boy on the grounds that both boys were better fitted as a result of the exchange. Cyrus’ mentors rebuked him for this decision, pointing out that he was not asked to judge the welfare aspects of the exchange, but the justice or ownership (personal property) rights (Cyropaedia, 1, 3, 15–17). It is clear from this account and many other discussions in ancient Greek literature that volition was understood as the basis for justice in exchange and that individual personal property rights were accepted as a secondary ingredient in the administrative tradition (Lowry 1987, pp. 78–79). Personal volition and the presumption of mutual benefit evolved as the basis of contract theory in Roman law (Lowry 1987, chap. 7).


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AN ALTERNATIVE SOURCE OF PROPERTY RIGHTS The most extensive economic structure associated with the development of agriculture was the village organization. This political and economic entity was an outgrowth of “rainfall-dependent” farming and the extended family. It proliferated into kinship groups of 100–300 people. It has many common elements from south-east Asia to northwest Europe that include common grazing lands, inherited land rights as village members, and shifting allocations of strips of land. The system is generally regulated by a council of village elders that adjusts land assignments and grazing rights. In this tradition the land essentially belongs to the community, but so do the adult inhabitants. Some scholars have identified the Greek oikos with this tradition where extended family estates were held together under a patriarchal head for several generations. They have argued that the state and the empire were replicas of the oikos, “writ large” (Pearson 1957) The oikos may, however, be better identified with the nomadic herding culture that dominated much of the Near East. The Greek and Roman agrarian traditions seem to have vested something approximating fee simple land title in individuals in classical times, but the Greek concept of the polls as articulated by Aristotle in his Politics shows a close parallel with the extended agrarian village in non-irrigated agriculture, growing out of small groups of related families. It was also the cohesive identity of these entities combined with the effective hoplite method of fighting that underwrote the popular democratic trend in Greece. It was the Gracci in late second century B.C.Rome who lost their lives leading a conservative revolution to reestablish the traditional peasant agrarian basis of the Roman economy and the tribal assembly as the popular legislative body. In her analysis of the development of a sensitivity to individual rights in the Roman legal tradition, Vivenza finds no indications of such in the imperial tradition. She suggests that the tradition more likely evolved from the agrarian family position in the primitive communities that were the foundation of the Roman republic. The idea of individual property rights beyond immediate personal property is also closely associated with the Stoic tradition that looked to natural right and provided a basis for the questioning of slavery. It must be kept in mind through all of this discussion that, except for the significant surpluses produced by the Mesopotamian and Egyptian economies, the rest of the Mediterranean world was living in near-subsistence labor-intensive agriculture. Slaves were the most important form of property aside from land, and wealth was most readily accumulated by military enterprises (Vivenza 1998, pp. 273–276, 322–325). Although the heavy dependence of the state on military exploitation continued, individual wealth accumulation was primarily dependent on agricultural estate-building, but was gradually ameliorated for some classes by the growth of commerce. What stands out most sharply in this material is that the major concern of government in the economy, namely, taxation, was


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directed to levies on personal wealth and was not associated with the productivity of land. Even though land was an index of wealth, it was not until the work of Quesnay in 1758 that economic thought focussed sharply on productivity as the basis for taxation. The English tradition of natural rights and individual rights in real property has frequently been associated with the Lockean formulation of Stoic naturalism and Roman rationalism in the form of the social contract that goes back to Book II of Plato’s Republic in the written literature. Nevertheless, legal scholars recognize that, despite the authoritarian character of feudalism introduced by William of Normandy in 1066, the Common Law tradition drew on a deeply embedded sense of individual rights. This culminated in Sir Edward Coke’s spirited defense of “the natural rights of Englishmen” that was expressed in the Petition of Right in 1628. In his study of the history of the Common Law, Van Caenegem finds that the village tradition, “the hundred,” continued to function under the feudal and manorial system and protected popular rights in land (Van Caenegem 1973). It perpetuated the jury system and provided a base for Common Law judges. He finds its origins in the wide spread village commune structures among the Germanic tribes in northern Europe (Van Caenegem pp. 86–91). The parallelism between this concept of a popular legal genesis and the sophist doctrines articulated by Protagoras should be noted. Consistent with the participative decision-making traditions of the small ancient Greek city states, Protagoras argued that the best laws for a city were those it made for itself. The doctrine coincided with his thesis that “Man is the measure of all things” (Lowry 1987, chap. 6). This perspective has been traced by Donald R.Kelley into Aristotle’s concept of natural law, that is, the law generated by popular consensus, that was absorbed into a major undercurrent in Roman law (Kelley 1990). There were two dominant jurisprudential schools among the Roman jurisconsults. As analyzed by Peter Stein, the Proculians followed a tradition of strict objective analysis of textual law using rationality, logic, and grammar to interpret law (Stein 1995). The Sabinians followed popular custom, naturalis ratio, (natural reason or common sense) (p. 1549), and when dealing with broader policy questions, utilitas communis, or the general welfare (p. 1553). The Sabinians, therefore, reflected the same general sense of community generated law that Protagoras advanced. The question remains, how did this community orientation influence real property rights?

EGALITARIAN DISTRIBUTION Another historical aspect of the dynamics of property rights growing out of divisions, exchanges, and contracts is found in Hesiod’s Theognis (pp. 535– 565). It presented the classic case where equal sharing is achieved when one party divides and the other chooses (Lowry 1991). Here, we have the core concept that a person cannot rationally be construed as having made a voluntary


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choice that is unjust to him or herself (Lowry 1998). This principle underpins the presumption of voluntarism and mutual benefit on which property rights in contracts are enforced. It should be pointed out that these principles apply to the simple sale, but the significance of contract is its dynamic element. It permits commitments to be made in the future so that commercial and productive activities can be planned. The Romans developed this futurity aspect of contract, but it is seldom noted that a parallel evolution in land law was going on in England in the fifteenth century with future interests enforced in chancery permitting credit and planning that circumvented the rigidities of Common Law (Reid 1995). The modern significance of the basics of the bargaining process has been developed in a recent work on fair division (Brams and Taylor 1996).

ANALYSIS AND CONCLUSIONS A determination of the major purposes being served by the various politicaleconomic relationships treated above is the key to an appraisal of the rationality of the process. We can assume that the most primitive social organizations involved an economic life based on hunting and gathering at the extended family level. To the extent that such a process was reflected upon or rationalized, organization followed charismatic leadership, tacit consent to intimidating authority, and acceptance of unwritten laws of respect and negotiation within the group. Property rights existed presumptively in personal clothing, weapons, and tools. With the development of rainfall-based agriculture, a village economy with a coincident tribally derived political structure organized and coordinated land allocation and common grazing with real property held ultimately by the community. With the domestication of grazing animals evolving from field agriculture, nomadic herding became an economic pursuit perpetuating a system based primarily on the extended family and personal property based on livestock. Negotiative processes characterized relationships among similar groups and military adventurism was directed toward sedentary agriculturists. The great administrative urban centers of cultural and technical progress of the fourth and third millennia B.C. were spawned by the explosion in productivity per acre of flood-plain agriculture and the evolving irrigation systems that interacted with population concentrations. These systems, particularly in the Mesopotamian and Nile valleys, involved a coterminous economic-politicalreligious organization where organization of personnel and land resources over time generated sophisticated rational processes emphasizing efficiency, quantification and record-keeping. Here, however, the administration of real property and the control and distribution of revenues were highly centralized. With the assimilation of more varied economic patterns by the empires and the replication of their administrative authority by smaller states, the primary problem of government seems to have been that of financing public projects from temple building and fortifications to public ceremonies and military ventures (Andreades 1933). At the village or tribal level, cooperative volition


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and peer pressure were the bases for financing public programs augmented by tribute from other states. With higher administrative systems, temple treasuries and royal granaries provided reserves. In ancient Athens, a tithe on booty from warfare and income from sacrifices supplied the public temple treasury while special contributions from wealthier individuals were expected and later, demanded to finance public events. As Vivenza brings out so clearly, even in ancient Rome, warfare was considered the primary source of funds for the imperial treasury and levies on the wealthy were based on their accumulated liquid assets. Such a form of taxation was difficult to enforce and an undependable source of revenues to support planned activities. The strength of a country was associated with the size of its population which determined its military potential. The allocation of small plots of land to an agrarian peasantry seems to have guaranteed their self-sufficiency and a supply of sturdy hoplites or centurions. The modern correlation between productivity and public income from taxation was not made in antiquity. The closest identification may have been in Egypt where the pharaoh’s lands were parceled out to peasants and intermediary vassals who paid a major share of the produce to the central administration. Since yields were predictable, based on the level of the Nile and the stable climate, a fixed payment in grain was easier to collect than a share of the harvest. The share system requires a resident monitor at harvest time. The land continued to be the basis for national wealth and power with close to 85 percent of the population in agriculture until the eighteenth century. Individual or customary rights in agricultural land were necessary to provide the stability and initiative for longer and more complex commitments. Feudal tenures placed individuals in control of land subject to a military obligation to the crown. This combined a form of taxation for military purposes with rights in real property, that is, the realm or royal domain. As military service became less relevant and the English crown required money from imposts on trade and levies on rich lords to build ships and hire mercenaries, land tenures drifted under Common Law judges toward systems that would result in a more productive agriculture. In England, despite the Norman imposition of feudalism, the Germanic village commune, the Hundred, was often left intact, providing a secondary focus for independent organization. The relationships between manor lord and serf (villeins), the hundred (village of freeholders), and copyholders seems to have varied from manor to manor. The copyhold was apparently augmented by the plague in the fourteenth century to induce tenants to take up land in a period of population decline. Copy-hold tenures were recorded on the rolls of the manor and sometimes extended to a hereditary right. Freeholders and yeomen or copyholders did not owe personal services to the manor lord. The copyholder received a specific tract of land subject to specified rents or payments and not subject to the reallocation powers of the hundred (Baak 1979; Reid 1995, p. 241ff). The demise of the village or “hundred” would appear to have been the result of its insulated commitment to subsistence agriculture and not to the nineteenth-century rationalistic view of the tragedy of competition on the commons. The village elders practiced “stinting,” the reallocation of land


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and grazing rights according to family needs. The copyhold tenure seems to have been a dead end development, favoring small holders. The gradual expansion of equitable rights in agricultural land through the fifteenth and sixteenth centuries facilitated alienability and increased commercial production on the land. It also increased the political assertiveness of the landed population, but it did little for government economic power. It remains difficult for modern scholars to appreciate that during the sixteenth and seventeenth centuries, when the modern world system was gestating and England was emerging as the leading European nation state, laying the foundations for the industrial revolution, the crown was dependent on its own crown lands, feudal wardship rights, and customs duties for most of its revenues. In times of war or other emergencies, the crown would have to go to the parliament and request specific levies of money from the manorial establishment or borrow from continental bankers. Although the land was understood to be the property of the crown, the royal domain, it was primarily reached through wardship rights on grants to knights. Popular pressure resulted in the abolition of this right in the crown in the Statute of Tenures in 1660 and the following years saw land law developing so as to facilitate the movement of land into larger efficient market oriented commercial farms. This became the backbone of the revolution in agricultural production in the eighteenth century that supported urbanization and industrialization (Reid 1995). As tax systems evolved to support the necessary functions and powers of government based on agricultural productivity and ostentatious urban construction, the basis for productivity had shifted to industrial organizations. The income tax on the cash revenues of wealthy individuals is about as collectable as the Roman levies on the liquid assets of the landed aristocracy while the balance of the income tax system functions as a pay roll tax. It has been suggested that the fear of taxes on liquid assets was part of the inspiration for the wealthy in Renaissance Italy to solidify their wealth in magnificent villas, sculpture, and paintings that were not taxable. With the shift of economic power and legal rights to contractual relationships and certificates of corporate ownership, one would expect government to formally rationalize the tension between incentive and productivity as the basis for regulation and taxation. Historically, idle wealth has been a prime object for taxation but one suspects that it is its identifiability that influences the fiscal authorities. The dilemma is that the accumulation of real property is traditionally considered an incentive since all classes crave to become either homeowners, country squires, or manorial barons. At the same time, productivity is sheltered from taxation in the interest of rapid economic growth. It would appear that there is a great deal of historical baggage that encumbers both the legal and the economic theorists in their commitment to rationalize the fabric of industrial society. Clearly, property rights are synthetic and historical. They must be defined in a manner consistent with formally identified values and objectives appropriate to a modern society. At the same time, government or law provides the rules and regulations that permit the massive industrial-commercial system to function as


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Bernard Mandeville said almost 300 years ago. Unlike law, modern economics was given birth by the awareness of the importance of industrial production and exchange. Initially, land rent was written off as a monopoly income. Little modern emphasis is focussed on the distinction between speculative and productive property rights and between the proper evaluation of alleged values being produced. Since antiquity, jurisprudent and social theorists have borne the responsibility for offering guidance and leadership to public opinion. This intellectual challenge transcends the mere tallying of votes or watching the market.

REFERENCES Adelson, H. L. 1995. “The Origins of a Concept of Social Justice.” Pp. 25–38 in Social Justice in the Ancient World , edited by K.D.Irani and M.Silver. Westport, CT: Greenwood Press. Andreades, A. M. 1933. History of Greek Public Finance (rev. ed., 2 vols.). Cambridge, MA: Harvard University Press. Atiyah, P. S. 1979. The Rise and Fall of Freedom of Contract . Oxford: Clarendon Press. Baak, B. 1979. “The Development of Exclusive Property Rights to Land in England: An Exploratory Essay.” Economy and History 22(1): 63–74. Brams, S. J., and A.D.Taylor. 1996. Fair Division: From Cake-Cutting to Dispute Resolution . Cambridge: Cambridge University Press. Brandon, S.G.F. 1969. ‘The Weighing of the Soul.” In Myths and Symbols: Studies in Honor ofMircea Eliade. Chicago: University of Chicago Press. Branscomb, A.W. 1994. Who Owns Information? New York: Basic Books. Firey, A. 1998. ‘“For I was Hungry and You Fed Me’: Social Justice and Economic Thought in the Latin Patristic and Medieval Christian Traditions.” Pp. 333–370 in Ancient and Medieval Economic Ideas and Concepts of Social Justice , edited by S.T.Lowry and B.Gordon. Leiden-New York-Koln: Brill. Frank, A.G., and B.K.Gills (Eds.). 1996. The World System: Five Hundred Years or Five Thousand . London and New York: Routledge. Gaffney, M. 1994. “Neo-Classical Economics as a Stratagem Against Henry George.” In The Corruption of Economics , edited by M.Gaffney and F.Harrison. London: Shepheard-Walwyn Ltd. Kelley, D.R. 1990. The Human Measure: Social Thought in the Western Legal Tradition . Cambridge: Harvard University Press. Lowry, S.T. 1987. The Archaeology of Economic Ideas: The Classical Greek Tradition . Durham, NC: Duke University Press. ——. 1991. “Distributive Economics and the Promethean Meat Division: Myth, Folklore, and Legal Precedent.” Pp. 45–58 in Ancient Mythology: East and West , edited by M.Silver and Savage. MD: Rowman and Littlefield Publishers. ——. 1998: “The Economic and Jurisprudential Ideas of the Ancient Greeks:


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Our Heritage from Hellenic Thought.” Pp. 11–38 in Ancient and Medieval Economic Ideas and Concepts of Social Justice , edited by S.Lowry and B.Gordon. Leiden-New York-Koln: Brill. Macpherson, C.B. 1985. The Rise and Fall of Economic Justice and Other Essays . New York and Oxford: Oxford University Press. Mandeville, B. 1988. The Fable of the Bees (vol. 2, facsimile edition of 1924 Oxford ed.). Indianapolis, IN: Liberty Classics. Mann, M. 1986. The Sources of Social Power: A History of Power from the Beginning to A.D. 1760 (vol. 1). Cambridge: Cambridge University Press. Nissen, H.K., P.Damerow, and R.K.Englund. 1994. Archaic Bookkeeping: Early Writing and Techniques of Economic Administration in the Ancient Near East, trans. by Paul Larsen. Chicago and London: University of Chicago Press. Nitsch, T. 1998. “Social Justice: The New-Testament Perspective.” Pp. 147–162 in Ancient and Medieval Economic Ideas and Concepts of Social Justice , edited by S.T.Lowry and B. Gordon. Leiden-New York- Koln: Brill. Pearson, H. W. 1957. “The Secular Debate on Economic Primitivism.” Pp. 3–11 in Trade and Market in the Early Empires , edited by K.Polanyi et al. New York: The Free Press. Polanyi, K., et al. 1957. Trade and Market in the Early Empires . New York: The Free Press. Reid, C. J. 1995. “The Seventeenth Century Revolution in the English Land Law.” Cleveland State Law Review 43:221–302. Rose, C .M. 1996. “Property as the Keystone Right?” Notre Dame Law Review 71(3): 329–366. Shapiro, I. 1986. The Evolution of Rights in Liberal Theory , Cambridge: Cambridge University Press. Stein, P. 1995. “Interpretation and Legal Reasoning in Roman Law.” Chicago / Kent Law Review 70 (4): 1539–1556. Van Caemegem, R. C. 1973. The Birth of the English Common Law. Cambridge: Cambridge University Press. Vivenza, G. 1998. “Roman Thought on Economics and Justice.” Pp. 269–332 in Ancient and Medieval Economic Ideas and Concepts of Social Justice , edited by S.T.Lowry and B.Gordon. Leiden-New York- Koln: Brill.

THE GOVERNMENT-PROPERTY RELATION: CONFESSIONS OF A CLASSICAL LIBERAL Steven G.Medema

The rules governing rights pertaining to property are among the most important structural determinants of economic behavior and performance. Yet until comparatively recently, economists have tended to pay relatively scant attention to this relationship. 1 While the reasons for this neglect are many, Ronald Coase (1960) has shown us that, within the neoclassical paradigm, this neglect is eminently justifiable; to wit, the structure of property rights does not influence the allocation of resources under standard neoclassical assumptions. The fact that Coase was correct does not obviate the general inapplicability of the result, 2 rendering it necessary to attempt to come to grips with the relationship between property and economy and, by extension, between property and government. An analysis of the government-property relation requires that meaning be imputed to these respective concepts. We shall take as our definition of the former that property is a bundle of rights with respect to a thing—that thing being, potentially, either tangible or intangible. This bundle of rights can be said to govern possession, use, and disposition. The term government, as used here, is said to be an agreed upon authority whose pronouncements are considered to be legally binding on the citizens living within its sphere—to the extent that it can use its power to compel obedience or punish disobedience. In a nutshell, I am using the term government to refer to the sovereign state. As an entree to the issue of the relationship between property and government, we must ask the question of whether government is really necessary to the existence of property. The answer, quite simply, is no. Let me make it clear that I am not asserting that property exists whenever an individual stakes out a plot of land which he, in the absence of government, then has to defend against marauders who would take it over. This land is not his property, as I hope will become clear in the following discussion. But consider the following historical anecdote. Janet Landa’s (1994, 1996) research on Hokkien Chinese traders shows that they operated in the absence of any formal system of contract law, but yet had a well-developed trading system that closely mimics the markets of the West. The operative features of this trading system were the Confucian code of ethics and social/ethnic position. By classifying traders according to kinship, clan, dialect, and so on, these traders were able to discern which potential trading partners were most morally obligated to them under the


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Confucian ethical code. And by trading almost exclusively with those socially/ethnically closest to themselves, they were able to maintain a smoothly functioning system of exchanges because the ethical code by which they were all bound enforced compliance with contractual promises. Failure to do so led to ostracism and economic ruin. It seems quite obvious that these same types of relationships could be generalized to the property rights realm (perhaps accompanied by some Tiebout-like 3 locational sorting among ethnic groups) and generate a stable property system without the mechanism of government rights enforcement. This much having been said, it would be foolhardy to consider this anything more than a special case 4 —the reasons underlying which are suggested by Landa’s study, read in light of Adam Smith’s analysis in The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776). As social distance increases, the bonds of ethics and/or benevolence between individuals become weaker and weaker, and the forces of self-interest become stronger and stronger. The social context within which property is situated depends on harmonious relations between strangers, where the forces of self interest are much stronger than those of ethical obligation. The existence of property within such a context thus depends on the existence of a government able to reign in the forces of selfinterest that would otherwise render the concept of property vacuous. Another angle at this same issue involves considering the juxtaposition between the ethical basis for rights and the legal basis for rights. In Landa’s study, the former is sufficient. In theory, at least, common law makes the two coincidental—that is, legal rights, being based in the notion of justice, have an ethical underpinning. 5 But the simple fact of the matter is that a right is only enforceable against others if it has the force of compulsion behind it, which, in modern society, means government. 6 Ultimately then, rights are rights because they are protected by government. In Bentham’s words, “Rights are the fruits of the law and the law alone; there are no rights without law—no rights contrary to law-no rights anterior to the law” (Bentham 1833–43, vol. III, p. 221). As such, government is an integral component of the notion of property in that property rights are what government declares them to be. The thesis that property rights do not exist apart from government has a number of implications, a few of which are worth touching on in the present context. First, Lockean and other notions of property that attempt to provide an extra-governmental justification for rights are normative theories describing how government ought to act rather than positive theories that describe the origins of rights. Claims that these rights are preexistent or somehow inhere in nature and thus ought to be protected by government are wrongheaded; these property interests are not rights unless and until government grants them its protection. While Lockeans, for example, may find this unsettling, it does not imply that Lockean notions ought not to be the basis for determining rights within judicial and legislative decision making. Second, as the definition of property and the structure of property rights flowing out of it have important implications for economic behavior and

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performance, government is an integral component of the economic system. This is no less true in a market system than in any other system. Market performance depends crucially on property and other rights—including, for example, those residing within the laws of contract and tort—and government is thus an important operative factor within a market system. Because of this, notions such as government versus the market, having more or less government intervention in the market, and regulation versus deregulation are shown to be rhetorical devices that are essentially devoid of meaning. Government is operative in the market through rights, and the only question is that of whose interests the government will protect through rights. The powerful but misleading nature of the rhetoric here is nicely illustrated in the uses to which the Coase theorem has been put within legal-economic discourse. The theorem has been used by some to support the claim that government intervention is not necessary to deal with certain classes of externality problems. 7 Many opponents of the theorem have essentially bought into this same rhetoric, arguing that the theorem is pro-market and antigovernment. 8 Yet, both of these groups have it wrong. As has been noted above, one cannot simultaneously be pro-market and anti-government in the general sense. Moreover, both sides neglect to note that the theorem assumes that government has completely defined rights over the externality-related resource. Simply put, one of the numerous lessons to be taken from the Coase theorem is that of the necessity of government within the market context. Third, the relationship between property and government has bound up within it, inexorably, the notion of choice. Government’s basic role is to determine who will have rights, and to what extent, and who will be exposed to the exercise of those rights by others. As such, the government must determine the criteria based upon which rights are to be assigned. The process of creating or enforcing rights is thus necessarily an exercise in valuation, with which comes the attendant influences of selective perception and sentiment. This is evident both in the choice of the criterion(a) upon which rights are to be based and in the application of the criterion(a). For example, the process of reasoning from precedent is considered by many to give law an objective, scientific air—removing the roles of normativism, value judgments, and arbitrariness from the legal decision-making process. Yet, no case that comes before the court is perfectly identical to any previous case, and, as a result, the court must classify a new case among and within precedential schema in order to apply precedential reasoning. This involves (i) the inclusion of some facts and the exclusion of others, according to whether the facts are similar or dissimilar, respectively, to a particular precedent, and (ii) the weighing of the facts. And, as John R.Commons has pointed out, Weighing the facts is not a mere statistical enumeration of them. The facts, when they come before a person, do not automatically seek their own specific gravity. Weighing is not a mere intellectual process of distinguishing the various qualities or faculties of objects or persons.


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Nor is it a logical process of abstracting a certain class of qualities and arranging them in a system. It is also an emotional valuation of qualities and faculties of social life (Commons 1924, p. 348). Both the process of classification and the process of weighing are exercises in choice-of what will be included or excluded, and, for that which is included, the weight which it will be given in the decision calculus. And throughout this process, valuation, and the influence of selective perception and sentiment, are unavoidable. Government’s role within this valuation process thus necessarily and directly bears on what ultimately constitutes property. The valuation issue applies equally to naturalistic, efficiency, and distributional criteria for the assignment of rights. The notion that rights somehow inhere in nature opens itself to the problematic question of determining that which nature intends. Any such resolutions are thus necessarily impacted by the content given to the term “natural” within the legal decision-making process. Natural rights, then are only natural with respect to the belief system of the agent (s) doing the choosing. Efficiency-based notions of rights are equally problematic owing to the difficulty of identifying and the selective perception regarding the magnitude of benefits and costs. 9 And distributional criteria reflect the distributive weights applied by those vested with rights-making authority. The bright thread running through all of this is that the protection of property interests through rights is necessarily the outcome of a vast process of valuation of competing interests, and this is no less true of economic “facts” or “values” as of those values that are more commonly considered to be normative. As Commons (1924, p. 211) has noted, “value is a process of valuing,” and thus “the purpose of the valuation determines what the value shall be.” Fourth, through the definition and assignment of property rights, government necessarily has a hand in defining the scope and boundaries of the opportunity sets of agents within the economic system. Through this, it influences the distribution of income and wealth, relative prices, costs, and so on-and, in doing so, structures the incentives and constraints under which agents make choices. And, as rights evolve over time—ranging from more macro issues such as the expansion of the legal definition of property to include, for example, intangible property to more micro issues such as the 50–50 asset split under no-fault divorce law—opportunity sets, and thus incomes, wealth, prices, and costs are altered, giving rise to new incentives and constraints which alter the structure of economic outcomes. Thus, both point-in-time economic outcomes and the evolutionary path of the economic system are profoundly influenced by the government-property relation. The idea that property exists only de jure cannot be taken to imply that the property relations established by law are determinative of property relations de facto. Consider Robert Ellickson’s (1991) study of the effects of open- versus closed-range laws on cattle trespass disputes in Shasta County, California. Under open-range laws, cattlemen are not usually responsible for accidental trespass damage, whereas they are strictly liable under closed-range laws. Ellickson finds


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that cattlemen and their neighbors cooperate to resolve their disputes regardless of who is liable and, in doing so, seem to rely on community norms to determine their behavior. Under closed-range laws, the cattleman is obligated to fence in order to mitigate damages, while the neighboring farmer is obliged to fence under open range laws. Yet, in Shasta County, at least, it is almost always the cattleman who installs the fence because both cattlemen and their neighbors believe that the cattleman is morally obligated to do so, since his cattle cause the damage. Here, community norms seem to have much more force than the legal rule in place. 10 The fact that community norms may cause agents to less than fully press their potential rights-based claims in no way obviates the thesis that rights do not exist apart from government. At the most basic level, and using Ellickson’s example, the ranchers could, under open-range law, simply refuse to fence and remain absolved from liability for damage caused to crops by roaming cattle. The norm that cattlemen are obliged to fence holds no force under open range if compensation claims are pressed within the legal arena. But an equally important lesson to be taken here is that property rights, and thus government, simply determine the boundaries of choice sets rather (at least in most cases) the specific outcome that is generated. The outcome that actually obtains will be a function of those boundaries, as well as of the preferences of agents, the structure and level of transaction costs, and so on. The task for legaleconomic analysis thus becomes that of developing an understanding of how these factors translate into legal-economic outcomes. The sub-title of this chapter, “Confessions of a Classical Liberal,” contains more than a little irony. The ideas expressed herein are not those traditionally associated with classical liberalism and, in fact, are often viewed as heretical and antithetical to it. Nothing could be further from the truth. Nor do all classical liberals retain the dogma of market versus government. 11 In fact, these ideas are necessary for an honest liberalism and reveal its essentially normative nature. Conservative columnist George Will (1981) has expressed this sentiment very nicely in the context of tax policy: [T]he choice of any tax program is a choice from a large universe of alternatives. Any tax program has special social consequences; it raises some revenues rather than others, encourages and discourages particular behavior…. But American conservatives [and many classical liberals] are addicted to the pose of hostility to government power, so they systematically misdescribe their own attempts to use government energetically. When, Oh Lord, shall we be delivered from the conservatives’ pretense that they, unlike liberals, do not believe in using government to promote their values through social change? If that were true, there would be no point in electing conservatives. In the end, the fundamentals of the relationship between property and


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government are what they are. How the legal-cum-political process should operate to structure the property relations within society is another question for another essay.

NOTES 1. An exception here is the institutionalist tradition, exemplified in the work of John R.Commons (1924). See Mercuro and Medema (1997) and Medema, Mercuro, and Samuels (1998) for surveys. 2. This inapplicability owes to the ubiquitous nature of transaction costs-most importantly, perhaps, in the form of information costs. 3. See Tiebout (1956). 4. Although McKenzie and Tullock (1978, p. 78) argue that formal government may not be necessary to deal with externalities of certain types in small group settings because people will “spontaneously” respect each others rights. See also Buchanan (1975, p. 20). 5. In a related vein, the Legal Process School derives its ethical underpinning from the fairness of the process by which rights are determined. 6. Thus we find Adam Smith (1776, p. 777) stating, in his first maxim regarding taxation, that “The subjects of every state ought to contribute towards the support of the government….in proportion to the revenue which they respectively enjoy under the protection of the state” (emphasis added). 7. See, for example, Cheung (1978) and Posner (1992). 8. See, for example, Kelman (1979) and Gjerdingen (1986). 9. For an elaboration of this line of reasoning, see Medema and Samuels (1998). 10. Elllickson suggests that this may be due to the fact that relations among the neighbors are both complex and continuing, because of which the transaction costs associated with acquiring information and litigating disputes are high, and reliance on norms offers a lower-cost way of resolving these disputes. 11. See, for example, the surveys of the classical economists’ views on the economic role of government by Lionel Robbins (1952) and Warren J.Samuels (1966).

REFERENCES Bentham, J. 1838–43. The Works ofJeremy Bentham , published under the superintendence of John Bowring, 11 vols. Edinburgh. Buchanan, J. M. 1975. The Limits of Liberty: Between Anarchy and Leviathan . Chicago: University of Chicago Press . Cheung, S.N.S. 1978. The Myth of Social Cost: A Critique of Welfare Economics and the Implications for Public Policy , London: Institute of Economic Affairs. Coase, R. H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3 (October): 1–44. Commons, J. R. 1924. Legal Foundations of Capitalism . New York: Macmillan. Reprinted; Clifton, NJ: Augustus M.Kelley, 1974.


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Ellickson, R. C. 1991. Order Without Law: How Neighbors Settle Disputes . Cambridge, MA: Harvard University Press. Gjerdingen, D. H. 1986. “The Politics of the Coase Theorem and Its Relationship to Modern Legal Thought.” Buffalo Law Review 35:669–698. Landa, J. T. 1994. Trust, Ethnicity, and Identity: Beyond the New Institutional Economics of Ethnic Trading Networks, Contract Law, and Gift-Exchange . Ann Arbor: University of Michigan Press. ——. 1996. “Doing the Economics of Trust and Informal Institutions.” In Foundations of Research in Economics: How Do Economists Do Economics? edited by S.G.Medema and W.J.Samuels. Aldershot: Edward Elgar Publishing. McKenzie, R. B., and G.Tullock. 1978. Modern Political Economy: An Introduction to Economics . New York: McGraw-Hill. Medema, S. G., N. Mercuro, and W.J.Samuels. 1999. “Institutional Law and Economics.” In The Encyclopedia of Law and Economics , edited by Aldershot: Edward Elgar Publishing, forthcoming. Medema, S. G., and W.J.Samuels. 1999. “The Economic Role of Government as, in Part, a Matter of Selective Perception, Sentiment, and Valuation: The cases of Pigovian and Paretian Welfare Economics.” American Journal of Economics and Sociology , forthcoming. Mercuro, N., and S.G.Medema. 1997. Economics and the Law: From Posner to Post Modernism . Princeton: Princeton University Press. Posner, R. A. 1992. Economic Analysis of Law (4th ed.). Boston: Little Brown. Robbins, L. 1952. The Theory of Economic Policy in English Classical Political Economy . London: Macmillan. Samuels, W. J. 1966. The Classical Theory of Economic Policy . Cleveland: World. Smith, A. 1776. An Inquiry Into the Nature and Causes of the Wealth of Nations . New York: Modern Library, 1937. Tiebout, C. M. 1956. “A Pure Theory of Local Expenditures.” Journal of Political Economy 64:416–424. Will, G. 1981, March 1. “Reaganism Is Not Quite Thatcherism.” Washington Post p. C7, col. 5.

GLOBALIZATION, DECLINE OF THE NATION-STATE, AND FOUCAULT Gary Minda

INTRODUCTION In this chapter, I am interested in considering how the phenomena of globalization is transforming the intellectual, political, and economic landscape that had once defined the fundamentals of the economic role of the nation-state. The bewilderingly pace of change brought about by globalization can be considered by the way the world looked just a mere decade ago, when the precursor to this volume was published (Samuels 1989). The most fundamental propositions about the economic role of government were then premised upon a world that was still divided by the cold war, by geographic isolation, and by nationalistic themes and policies. In the West, debates and controversies about the economic role of government were a way for western democracies to define the contours of the modern welfare state. We were a world of interrelated economies where geographic distance made trade more expensive and complicated. The Internet was not yet up and running, and the source of power of government and business was defined largely in terms of geographic and political territory and nationalistic endowments. Socialism and communism were still sharply pitted against liberalism and capitalism. The “fundamentals” of the economic role of government, in the West, invariably concerned whether private economic power should be subordinated or be limited by state regulatory control (Adams and Brock 1989; Altman 1989). It was assumed that the economic functions of government were invariably in tension with private markets, but that intervention in the private economy was necessary, in order to protect the public interest and promote a health and vital economy (Anderson 1989). In canvassing the scholarly opinion of the contributors to the earlier volume, Warren J.Samuels concluded that, in the West, the economic role of government could be defined within a “legaleconomic nexus” 1 (Samuels 1989). Today, all has changed, completely changed. The Berlin Wall has come crashing down and the cold war has given way to new political alliances based on transnational forms of private economic activity. Communism and socialism have collapsed and have been transformed by a global market paradigm. The integrated world-wide web of the Internet has, in turn, shrunk the world and has created a new planetary cyberspace for the interplay of economic activities. The technology of this new medium, the global geographic distributions of its users, and the nature of its global electronic content, is thought by many to be immune


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from nation-state regulation. Where once grater distance made communications progressively more expensive and complicate, now distance is increasingly irrelevant (Cairncross 1997). In the emerging new world order, the “international” is no longer something that is “out there,” “foreign”or “dangerous“ to our national identity. What was “local” and hence “national” is now incorporated within a “discipline” that no longer sees the “international” as being something that is “out there;” something “foreign,” or “dangerous,” to national sovereignty (Kennedy 1994: Cao 1997). The new imageries of this world order reflect the belief that the nation-state framework of the cold war era is rapidly undergoing fundamental changes that are creating a “woven world” of deep integration that is part of a political and economic revolution in the nature of the relation between government and the market. Daniel Yergin and Joseph Stanislaw, authors of a popular new book, Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World, are perhaps the best known global enthusiasts who see the history and the politics of the postwar years establishing a new set of ideas and practices for the twenty-first century (Yergin and Stanislaw 1998). Yergin and Stanislaw represent a new breed of global theorists who are establishing a new discipline for analyzing the profound changes that are transforming the established intellectual paradigms used to describe and evaluate the fundamentals of the economic role of government in the cold war era. Globalization, a term coined not much more than a decade ago, describes this new discipline. The discipline of globalization attempts to describe the most crucial changes since the fall of the Berlin Wall that have dramatically set the stage for the most important economic revolution of the second half of this century. The discipline thus attempts to describe a “new reality” that is said to be responsible for the decline in the influence and power of the nation-state and a shift toward global market community that exercises the type of economic power once exercised by governments. This does not mean nation-state sovereignty is irrelevant or that government no longer performs an economic role. It merely means that nation-state power is now exercised by a technology that relies upon a new global discipline to implement power and authority. Governments will continue to remain the last resort for a host of societal demands, but the scope of government and role of their regulation is decidedly declining. Yergin and Stanislaw, like other global theorists, conclude that “governments have come to plan less, to own less, and to regulate less, allowing instead the frontiers of the market to expand.” 2 The new discipline of globalization attempts to describe the familiar process of change brought about by deep economic integration and internationalization of economic activities and strategies that are rendering boarders of nation-states “porous,” and creating a “woven world” based on computer information systems that permit instantaneous communications and connections that make it difficult for any government to manage. 3 These new realities enable the practitioners of the discipline of globalization to proclaim that there is an ongoing alteration

Globalization, decline of the nation-state, and foucault

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taking place in the traditional relation between government and the market (Yergin and Stanislaw 1998). Globalization theorists thus see the emergence of a unified global market rendering nation-state boarders essentially irrelevant, and the deep integration of economic activity represents to them a move away from government control of the nation-state to a new form of marketplace discipline. The mood of globalization could be summed up by the slogan, “nation-state is out, market is in.” Hence, the “decline of the nation-state,” and the new unified “global system.” In thinking of the new mood of globalization I am reminded of public relations copy of the Ford Motor Company announcing its new Lincoln. In introducing the Lincoln to the market, L.S.Jacques A.Nasser, president of Ford automotive operations states that the Lincoln was “designed to travel beyond the borders—beyond the design borders, beyond the geographical borders and beyond the psychological borders—that Lincoln has traditionally operated in” (Krebs 1998). When it comes to where we are today this statement by Mr. Nasser does a pretty good job of describing the aesthetic of the new world order of globalization. In the new global order, markets are designed so that transactions travel beyond borders—beyond the geographic borders and beyond the psychological borders of the “legal-economic nexus” described by Warren J.Samuels (1989).

THE GLOBAL DIGITAL INFORMATION SYSTEM The new discipline of globalization reflects a fundamental transformation in the way global international trade and communication operates. By far the most important change in the operation of global markets is technology, especially electronic technology using computers to instantly disseminate diverse sources of information. As Yergin and Stanislaw have recently observed: Information technology is creating a woven world of distinct encounters and instant connections. Knowledge and information do not have to wait, within, outside, and across organizations and national boundaries, people are tied together, sharing information and points of view, working in virtual teams, bartering goods and services, swapping bonds and currencies, exchanging chatter and banalities, and passing the time. Information of every kind is available. With the establishment of the U.S. Government data Web site in 1997, a ten-year old could gain access to more and better data than a senior official could have done just five years earlier. Libraries are open for business on the Internet. Researchers share their results in real time. Activists band together to promote their causes. Would-be terrorists surf for weapons design. All this is increasingly heedless of the nation-state and outside the traditional structure of organizations. 4


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The industries which are involved in the development of global information technologies (e.g., software computer programs, fiber-optics, cellular communication, and so forth) have, created technological standards that place economic power in the hands of a small number of standard-bearers. In the world of computer software, microchips and global communication, global electronic commerce guided by new competitive rules shaped by gateway technology to the “informational superhighway.” Technology monopolies such as Microsoft thus have, by virtue of their lock on the software gateways to the Internet, exercise considerable power to control and exclude users (Minda 1995). Indeed, Internet enthusiasts point out that unlike the traditional political cartography of nation-states where the world was once divided into contiguous and opposing territories, there is now deep integration that renders the old oppositions based on territory and politics irrelevant. On the Internet “information wants to be free” of governmental control, and the technology is designed to be resistant to regulation. The technology has created the possibility that “[i]nformation is costless to copy, should be spread widely, and cannot be confined.” Hence, “trying to regulate the Internet is like trying to prohibit evolution.” 5 The Internet, originally designed by the Defense Department to survive a nuclear war, resists regulation of nation-states by packet switching to get messages delivered by computers despite blockage, holes, and malfunctions. 6 While nation-states can and must promote the Internet, they are unable to control it. Mobility and integration are the hallmarks of the new globality (Yergin and Stanislaw 1998).

THE NEW MARKET CONSENSUS A new global “market consensus” has, in turn, established a global political agenda for managing, maintaining and coordinating the functions of governments and their national interests on the international level (Tarullo 1987). Key features of the new market consensus include: the increasing importance of transnational corporations in the economy; a corresponding decline in importance of national products and technologies (Reich 1991); emergence of an information economy rather than a “production economy”; economic power resulting from the ability to manipulate information rather than the fact of “ownership”; inability of any national government to regulate global commerce (Jameson 1983); and, finally, the decreasing relevance of the nation as the source of power and influence (Yergin and Stanislaw 1998). The New Democratic and Labor Parties of the West—Tony Blair in the United Kingdom, and Bill Clinton in the United States,—have achieved considerable political success in persuading constituents that a new market consensus will serve democratic values of fairness and equality by advancing greater economic freedom. 7 The effort to manage and expand global economic interests, however, has unleashed a global corporate power that may be dangerous to democratic values and basic notions of equality (Rodrik 1997).


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Globalization has made it easier for firms to outsource production to countries were labor differentials are lower, thus enabling global firms to easily substitute foreign workers for local ones. Because capital is mobile and labor is not, globalization has brought about downsizing of work forces in the west, loss of job security, and a general erosion of non-wage benefits and weakening of trade unions. Fluidity of capital and production has also meant that nation-states are having a much more difficult time regulating the activities of global firms and this has made it increasingly difficult for the state to provide social insurance (Rodrik 1997). On the other hand, globalization theorists speculate that rich and poor nations stand to benefit from free trade and that the potential increase in economic welfare created by the globalization effort will enable all nations to benefit (Yergin and Stanislaw 1998). The emerging organizations of world government—NAFTA, GATT as well as the World Trade Organization (WTO), and International Labor Organization (ILO)—are the new social spaces for working out the legal-economic nexus. The market orientation of these international organizations has been restructured by the privatization and deregulatory movements, and these market oriented movements are now well entrenched by the New Democratic and Labor Politics of the Clinton/Blair governments. The protocols of international trade and the economic and political policies of the European and North American communities represent a profound transformation in the economic role of government, one which some believe to be profoundly at odds with liberal values of justice and equity (Karliner 1997; Cassel 1996). Yergin and Stanislaw argue that the success of the “new market consensus” will ultimately be judged by its “consequences”—that is, whether the global market system “delivers, by fairness criteria, and by the quality and cost of services it provides” (Yergin and Stanislaw 1998). Perhaps the greatest threat to the new market consensus is the collapse of the Asian financial markets. The Asian market crash of 1996–1997 has revealed the vulnerability of internationally linked financial markets. The vulnerability of global capital markets to regional disruption creates financial risks that may hamper the future development of the global economy. Confidence in the new market consensus will also depend on whether governments and nation-states will be capable of responding to the needs of democratic communities demanding a public interest oriented market economy. Creating global democratic mechanisms to temper the pursuit of economic selfinterest and preserve the environment are necessary to foster global corporate responsibility. Global corporate accountability based on democratic values, however, may be the fundamental element missing in the new global world order. In the cold war era, the conduct of nation-states precipitated a revolution of human rights in international law. Today, a second human rights revolution appears to be underway involving the human rights objectives, not of governments, but of transnational corporations (Cassel 1996). Boycott initiatives and proxy proposals have been shown to be somewhat effective in redirecting corporate responsibility and changing behavior (Spiro 1996). Hence,


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nongovernmental organizations such as Green-peace, Amnesty International, Human Rights Watch, the Lawyers Committee for Human Rights, and others, have attempted to perform the fundamental role of government in protecting public interest in the new global economic order (Cassel 1996; Spiro 1996). The politics of globalization, privatization, and information technology has thus created a “woven world” that promotes a new nexus for the ongoing struggle over power to control and shape the social and economic construction of nationstate sovereignty and economic power. Social democratic movements seeking greater citizen participation in the global order may serve to precipitate antagonism and struggle at the local and national levels and thereby generate new interests in the importance of protecting national interests and identity from the homogenizing effects of globalization. Some of these efforts can be seen in the way citizen groups and governments have resisted the importation of American and West values and tastes into other non-Western cultures. Resistence to McDonald’s or Disney World in Paris, France, for example, is becoming a frequent occurrence as local and national politics reacts to the politics and power of globalization. The global context of the transnational corporation is, however, making it much more difficult to manage the responsibility and behavior of global corporate interests. Some believe that a new Global New Deal may be necessary to establish an international initiative for global social planning (McGinnis 1996; Spiro 1996).

DILEMMAS AND CONTRADICTIONS OF GLOBALIZATION At century’s end, we thus seem to be moving to a new global and high-tech “cosmopolitan” sensibility or policy style for talking about the economic role of government. Termed “cosmopolitan” by Professor David Kennedy, this new sensibility is framed by the awareness that we live “in a much more fluid world, outside—or perhaps beyond-the neat jurisdictional delineations of public authority.” 8 The cosmopolitan is concerned about harnessing public and private actors to the management of complex forces-public, private, governmental, and commercial-which constitute the international market.” 9 The new international cosmopolitans thus situate themselves in the international affairs of economics and business law pertaining not to the interests of the nation-state, but rather those of global corporate organizations. To the extent that the international cosmopolitan is focused on global business interests, internationalization has invariably called for the elimination of national sovereignty. “Sovereignty, after all, remains the conceptual locus for ‘intervention’ in a presumptively ‘free’ or ‘normal’ set of market practices.” 10 And yet, the cosmopolitan sensibility has also activated and motivated nationstates to recapture their national sovereignty through efforts of coordination between nation-states. For example, Professors Enrico Colombatto and Johnathan R.Macey, relying on public choice theory, have recently explained how nation-states attempt to preserve their individual autonomy and sovereignty


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in the face of internationalization by coordinating their regulatory efforts on the international level (Colombatto and Macey 1996). They claim that nation-states now attempt to protect their borders by using the international levers of power to control and limit global activity. The new sensibility of Cosmopolitanism thus puts in force a reaction from an older, more traditional “metropolitan” sensibility that attempts to preserve national sovereignty through coordinated efforts of nation-states for intervention in the international. This “metropolitan” sensibility represents a shift back to the way nation-states have attempted to protect their boundaries and preserve their autonomy in the cold war era. The shift to an older metropolitan sensibility signals the potential renewal of national markets and interests. The dialectic between metropolitan and cosmopolitan thus sets in motion “a dance with their own policies” (Kennedy 1994). A new form of metropolitan world government, what Professor John O. McGinnis has called a new “international federalism” (McGinnis 1996), is seen by some to offer the “nexus” for working out the conflicts between government and the global market while maintaining the normalcy of national sovereignty. The regime of “international federalism,” however, has many of the same conflicts and contradictions of the old national regime of nation-states. The same economic interests and political conflicts or dilemmas characteristic of the nationalistic regimes of nation-states are also characteristic of the international federalism. Corporate accountability; ecological responsibility; protecting against labor exploitation, for example, are involved in the activities of both governments and private transnational corporations. The challenge today is to conceive and carry out structural changes in a global government capable of effectively responding to the regulatory dilemmas of a global economy. The World Trade Organization (WTO), the place where structural changes could be carried out, however, has yielded to the market interests of individual actors in the global marketplace. The creation of free trade pacts such as NAFTA and GATT have consequently created the political foundation for a market paradigm that operates to shrink government regulation of nation-states in order to protect the individual autonomy of market actors. Confidence in the market system buttresses the global economy and justifies the withdrawal of the economic regulation of the global economy. As we withdraw from nation-state regulation and move toward a cosmopolitan sensibility we experience the need for collective norms to protect individuals and nations from the dangers of the global market. Regulation of the market is thus seen to be both necessary to and incompatible with global economic freedom. As technological change, financial integration, and other global variables threaten to weaken national power and sovereignty, regulators of individual nation-states are motivated to protect their autonomy through new forms of international regulatory efforts (Colombatto and Macey 1996). The “fundamental contradiction” identified by critical legal thinkers in analyzing the pattern of liberal legalism in the West (Kennedy 1979) thus reappears at the global level. The dilemma involving the “degree of collective as opposed to


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individual self-determination” is as fundamental on the global level, as it is on the national or local level. Nations try to maintain their sovereignty and protect their turf as their power and authority declines. It is thus ironic that economic regulation is viewed today by many as a hindrance to global economic development. There is a sense that the economic regulations of the welfare state must be further deregulated, if not extinguished, in order to carry out the economic development of global markets. Globalization effort has been supported by a political vision that has actively sought to dismantle the domestic welfare program created during the New Deal to assist those who cannot survive in a market-based system. Hence “[the] global New Deal lurks far over the horizon, if at all.” 11 The privatization and deregulatory policies adopted by the Reagan and Thatcher governments during the 1980s, have reduced significantly the economic role of the government, leaving the poor, unemployed and less well off more vulnerable than ever. Welfare programs of governments, following the lead of the Reagan and Thatcher governments of the 1980s, have adopted market-oriented policies that no longer offer any meaningful governmental responsibility for human needs. In poor nation states of Africa or the Balkans, where economic struggle has given way to economic collapse and military warfare, globalization is itself threatened by local strife and discord that renders market intercourse nonfunctional. In such cases, a resort to international coordination is needed to enable the governments of the world to respond to the threat of local disruptions of the world order. These efforts of international coordination are rare and seem to require the type of international crisis that rises to the level of the Iraqi intransigence during the Gulf War. In more normal times, the politics of deregulation and privatization movement have rendered benign the effort to coordinate nation-state power to manage the global economic system. Unregulated markets, of course, do not exist autonomous or a priori of national markets, and the legal systems that establish the framework for those markets. The global marketplace is, like the marketplace of the nation state, a social construction of particular legal rules, ideology and social arrangements. Hence, the background regime of nation-states will continue to shape and renegotiate globalized spaces. The goal of maintaining justice and equality, citizen participation, and democratic pluralism at the national level is thus intimately related to and will thus influence the type of choices and freedom existing on the global level. Perhaps the “common love-hate relationship with government,” noted by Warren J.Samuels in his essay in the first volume (Samuels 1989), may continue to characterize the current situation of government in the new global world order. On the other hand, the “love-hate relationship” with national government may have ended the day the Berlin Wall fell. With globalization, we have begun a new illicit affair with the powers of the market. In the global system, the market is both the source of governmental power and the new mechanism for implementing that power. Globalization and the supposed decline of the nation-


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state has brought about a huge transfer of wealth and power from lower skilled workers and less developed nations to the owners of capital assets and the new technological entrepreneurs. A new technological aristocracy is growing on the global level and the power of this new aristocracy represents a serious threat to the social relations of democratic societies. In the new global order, global nongovernmental interests of a technological new discipline exercise the power of the state in the technologies they design and control (Boyle 1997). Political leaders who advance the politics of globalization preach and practice a new form of global capitalism that conceals its power in the technological design of an information technology based on distant encounters and instant connections.

POWER, DISCIPLINE, GLOBALIZATION, AND FOUCAULT The fundamental economic role of government in the twenty-first century seems to be following the insights of Michael Foucault. 12 Foucault, a post-World War II philosopher and social theorist, never had the opportunity to write about issues of globalization and economic integration. While he never even addressed the problem of the state’s economic role, Foucault does offer important insight on our topic. Foucault offers, I believe, a provocative lens for understanding how power is excised by the globalization discipline. At the heart of Foucault’s theory is the idea that the power of the state is exercised by multitudinous private sources of “surveillance” and “coercion” that work silently within “disciplines” of the private sectors of society to enforce state power. 13 Foucault’s insight enables us to see how sovereign power is exercised “at the capillaries,” to use Foucault’s term. The sovereignty of the nation-state has not “declined;” to the contrary, state power is exercised by a “type of power” that is tied to the means of surveillance and discipline of a global network of economically integrated private actors. Following Foucault’s insight about the nature of the power of the state, one could see how power of the state is now diffused in the “capillaries” of a global marketplace, digitally wired and electronically linked with computer technology. The decline of the nation-state thus represents a shift of sovereign power of a legal-economic nexus to the disciplinary power of a technological-market nexus, which lies outside the regulatory efforts of nation-states. Foucault argued that the private disciplines of society were in fact a much more fruitful way for understanding how power of the modern state operates to control human behavior. Foucault’s idea was that the rise of so-called private disciplines of schools, prisons, as well as fields of study such as statistics and economics established “disciplinary power” to regulate human behavior. 14 Foucault’s central insight was that the nation-state was, in the modern era, no longer the locus or “nexus” for defining sovereign power. As Foucault explained: “This non-sovereign power, which lies outside the form of sovereignty, is disciplinary power.” 15 If we take Foucault’s insight about the source of power of the modern state


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and apply it to the study of globalization, I think we can find reasons for understanding how state power is in fact exercised in the new global order. In the new global order, the nation-states of the west are working hard to redesign their authority in the commands of the technologies and ideologies of the globalization discipline. One could say that in the new digital discourse of the global marketplace, sovereignty and power of the nation-state is hardwired into the technologies and ideologies of globalization itself, such that this nonsovereign power is “disciplinary power,” to use Foucault’s term. Hence, commentators who proclaim that “[i]nformation technology is creating a woven world of distant encounters and instant connections,” 16 are in fact describing the new ways in which the power of the state has become embedded or in the “capillaries” of global networks that are technologically linked by a digital “Net” of the Internet. The digital technology is now the source of power of the nation state and the exercise of this power is national-ized by a new discipline called globalization. The new discipline, digitally integrated by computer technology, and politically entrenched by the ideology of a new global market consensus, is providing a global framework for the exercise of nation-state power. A technological-market nexus is thus replacing the legal-economic nexus of the nation-state and a transnational corporate system is replacing the nationstate system. The Internet, originally designed to survive nuclear war, provides the perfect medium for understanding how power of the technological market system is exercised in the capillaries of globalization. “Cybercommerce,” “transnational,” “globalization,” “privatization,” “woven-world,” “sovereignty-free collectives,” “world-wide sourcing” “electronic commerce,” “information economy” are the new power words of this new discourse. The new discourse of nation-states sovereignty and power is hidden within a new technological world-view that persuades us that “technology is free,” and that governmental regulation is “restraint.” In the global marketplace, law and national governments are “local ordinances” and “regulatory” obstacles to be “routed around.” To the Internet enthusiast, resistance to censorship or regulation is “not a bug, but a feature” (Boyle 1997). Computer software filters enable technological gatekeepers to exercise a type of power not unlike that of the modern state. By determining who gains access to the “information superhighway,” private gateway keepers can control global information through acts of surveillance and coercion (blockage). The information superhighway thus moves in a fluid space, outside-or perhaps beyond-the jurisdictional or geographical delineations of state authority, but the power of the state is “hardwired.” I think the same dynamic is now happening with the new politics of the discipline of globalization. Authors like Yergin and Stanislaw are providing compelling tales for understanding how politicians and theorists have created a new discipline that is “hardwired” by the politics of global capitalism.


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CONCLUSION It may be that in the twenty-first century, the global market, rather than government, will be the source of our affection and disdain. The new romance with the market signals a fundamental charge in attitudes about the economic role of government. Perhaps, the most significant thing that can be said about the “fundamentals” of the role of government is that they are exercised by a new discipline of globalization that aims at justifying the way power is exercised by global corporate interests that are now reshaping the social, economic and political landscape. Indeed, as Foucault teaches, government may be something we nostalgically long for in a world increasingly ruled by informal disciplines in the capillaries of the information systems controlled by transnational corporations like Microsoft and technological entrepreneurs like Bill Gates.

NOTES 1. The dialectic of the “legal-economic nexus” was where the ongoing solutions to legal, economic, and social issues of the day were to be resolved for the nationstate. The territorial boundaries of the nation-state, and the power of the governmental bodies of the state, determined the dynamic of the legal-economic nexus. The “fundamentals” of the economic role of government were imagined to define a social, economic and political space that had a definite location, a center, a core, or “nexus.” 2. Yergin and Stanislaw 1998, p.12. See also Symposium: The Decline of the Nation State And Its Effect on Constitution And International Economic Law, 18 Cardozo L. Rev. 925–1216 (1996). 3. Yergin and Stanislaw 1998, p. 14. 4. Yergin and Stanislaw 1998, pp. 326–383. 5. Boyle 1997, p. 183. 6. See generally Todd Flaming, An Introduction to the Internet, 83 Ill. B.J. 311 (1995); Joshua Eddings, How the Internet Works (1994). 7. Yergin and Stanislaw 1998, p. 13. 8. Kennedy, David 1994, p. 13. 9. Spiral 996, p. 958. 10. Spiro 1996, p .958. 11. Spiro 1996, p. 958. 12. Michael Foucault wrote in the post-war era; he was not therefore concerned with issues of globalization, economic integration and the decline of nation-state power Foucault’s most important work dealt with modern prison culture. See Michael Foucault, Discipline and Punishment: The Birth of the Prison, edited and translated by A. Sheridan, 1979). Recently, legal scholars have used Foucault’s insights about the nature of power to rethink the legal privacy problem in the cyberspace context See James Boyle, Foucault in Cyberspace: Surveillance, Sovereignty, and Hardware Censors, 66 U. of Cinn. L.Rev. 177 (1997); J.M.Balkin, What Is a


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Postmodern Constitutionalism? 90 Mich.L.Rev. 1966,1987 (1982); Larry Lessig, Reading the Constitution in Cyberspace, 45 Emory L.J. 869, 895 (1996). 13. Foucault, Discipline and Punishment. 14. Foucault, Discipline and Punishment. 15. Michael Foucault, Power/Knowledge: Selected Interviews and Other Writings, 1972–1977. 78, 105 (Colin Gordon ed. & Colin Gordon et al. trans., 1980). 16. Yergin and Stanislaw 1998, p. 369.

REFERENCES Adams, W., and Brock, J.W. 1989. “Government and Competitive Free Enterprise,” In Fundamentals of the Economic Role of Government , edited by W.J.Samuels. Westport, CT: Greenwood Press Altman, J. 1989. “Power Politics and Economics.” In Fundamentals of the Economic Role of Government , edited by W.J.Samuels. Westport, CT: Greenwood Press. Anderson, J. 1989. “Government and the Economy: What is Fundamental?” In Fundamentals of the Economic Role of Government , edited by W.J.Samuels. Westport, CT: Greenwood Press. Boyle, J. 1997. “Foucault in Cyberspace: Surveillance, Sovereignty, and Hardwired Censors.” University of Cincinnati Law Review 66:177. Cairncross, F. 1997, September 15. “A Connected World.” The Economist. Cao, L. 1997. “Toward a New Sensibility for International Economic Development.” Texas International Law Journal 32:209. Cassel, D. 1996. “Corporate Initiatives: A Second Human Rights Revolution?” Fordham International Law Journal 19:1963. Chon, M. 1997. “Radical Plural Democracy and the Internet.” California Western Law Review 33:143. Colombatto, E., and J.R.Macey. 1996. “A Public Choice Model of International Economic Cooperation and the Decline of the Nation State.” Cardozo Law Review 18:925. Eddings, J. 1994. How the Internet Works . Emeryville, CA: Ziff-Davis Press. Jameson, F. 1983. “Postmodernism and Consumer Society.” In The AntiAesthetic Essays on Postmodern Culture , edited by H.Foster. Port Townsend, WA: Bay Press. Foucault, M. 1979. Discipline and Punishment: The Birth of the Prison , edited and trans. by A.Sheridan. New York: Vintage. ——. 1980. Power/Knowledge: Selected Interviews and Other Writings , 1972– 1977 , edited and trans. by C.Gordon. New York: Pantheon. Karliner, J. 1997. The Corporate Planet: Ecology and Politics in the Age of Globalization . San Francisco: Sierra Books. Kennedy, D. 1994. “The International Style in Postwar Law and Policy.” Utah Law Review 7. Kennedy, D. 1979. “The Structure of Blackstone’s Commentaries.” Buffalo Law


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Review 28:209. Krebs, M. 1998, April 12. “There, on the Autobahn, Could It Be a Lincoln?” New York Times , Sect. 12, p.1. McGinnis, J. O. 1996. “The Decline of the Western Nation State and the Rise of the Regime of International Federalism.” Cardozo Law Review 18:903. Minda, G. 1995. “Antitrust at Century’s End.” Southern Methodist University Law Review 48:1749. Reich, R. 1991. The Work of Nations: Preparing Ourselves for 21st Century Capitalism. New York: Knopf. Rodrik, D. 1997. Has Globalization Gone Too Far? Washington, DC: Institute for International Economics. Rosenau, J. N. 1992. “Citizenship in a Changing Global Order.” In Governance Without Government: Order and Change in World Politics , edited by J.Rosenau and E.Czempiel. New York: Cambridge University Press. Samuels, W. J. 1989. “Diverse Approaches to the Economic Role of Government: An Interpretive Essay.” Fundamentals of the Economic Role of Government , edited by W.J.Samuels. Westport, CT: Greenwood Press. Spiro, P. 1996. “New Global Potentates: Non-Governmental Organization and the ‘Unregulated’ Marketplace.” Cardozo Law Review 18:957. Tarullo, D. 1987. “Beyond Normalcy in the Regulation of International Trade.” Harvard Law Review 100:546. Yergin, D., and J.Stanislaw. 1998. Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World (1998).

CREDIBLE TESTAMENTS, PROPERTY, AND THE ROLE OF GOVERNMENT Barry M.Mitnick

INTRODUCTION Recently, a local news story featured a woman who had received a letter requesting payment of real estate tax on her house, together with late penalties. It carried a threat: If taxes were not paid, she might lose her property. Such a letter would be hardly unusual, of course, except for the fact that the tax year in question was back in the 1970s. The county had sold the right to pursue delinquent accounts to a private firm, which was merely pursuing collections. The woman had contacted the consumer reporter for a local television station because her claim to having paid the tax 25 years ago was being ignored. Indeed, she said that she had always paid the tax promptly. Unfortunately, she no longer had 25–year-old tax receipts to prove it. Even her bank no longer had records of check payments from that era. No statute of limitations protected her. Her only defense, it seemed, was the ability to produce the paper receipt she had long ago discarded. The reporter conveyed a sense of outrage mixed with absurdity: Government had abdicated its role in certifying the integrity of property ownership, having transferred that to a mercenary firm governed only by the greed of the marketplace. But the issue turned not on the action or inaction of a government representative or delegatee, or on policy questions regarding the enforcement of real estate tax laws. It turned on the absence—the unavailability—of a piece of paper. Produce the paper, and all would be well. Arbitrary? Unusual? What magic resides in the testament of a piece of paper, especially one from a government? In this essay I will lay out the role of government in providing credible testaments to facilitate transactions and create stability in the multitude of agency relationships that populate society. The classic explanations of the functions of government highlight its characteristic status as the only legitimate purveyor of force; its ability to extract adequate resources is due both to its size and its possession of that ability to use legitimate force. Classic treatments identify such typical governmental functions as allocation, distribution/ redistribution, stabilization of the economy, and the like (see Musgrave and Musgrave 1973 for a classic public finance perspective; see Weimer and Vining 1992; Samuels 1989; for more recent perspectives). But there is, in addition, an essential function typically overlooked in such discussions: Government is the ultimate provider of credible testaments in society. This role goes far beyond its obvious role as supplier of value to the


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currency, which it backs with its “full faith and credit.” Government is, quite pervasively, the guarantor of last resort. This functions as both a strength and a weakness: It gives extra weight to assertions certified by government paper. It also compels government to act as if all its communications and certifications have this weight. That is a tremendous burden, and government behavior continually reflects that burden. Thus, unlike Weber, we see government bureaucracy not as the rational and rationalized specialist that uses paper to make impersonal decisions, independent of individual whim, possible. Rather, government is the prime guarantor of exchange, and its statements are sought more for their properties of guarantee, than for their rationalism. After all, there are many agencies of specialized expertise in society, which includes private as well as public bureaucracy. But government is different. Thus we should not be surprised when we see public bureaucracy act in ways judged wasteful and contrary to its supposed rationalistic efficiency. That is not the primary purpose of government organization. Government’s burden is to be not only efficient, but to be credible and to lend its credibility to others. The approach in this paper will make use of the theory of testaments, which seeks to explain how and why agency relationships form (e.g., Mitnick 1996/ 1998). It applies as well to certain other relationships in which the behavior of actors is joined or coordinated. The approach is a component of the institutional theory of agency and presumes a social constructionist view; meanings are assigned by social actors, with the social world cognitively constructed and valued by its participants. The agency approach at the base of the theory of testaments is about as old as the perhaps more familiar economic theory of agency (Mitnick 1973, 1975) and shares many of its basic theoretical drivers (e.g., the problems that exist when agents act for principals). But the approach is not limited by the assumptions common in the economics approach regarding human motivation. Furthermore, it has been developed in the context of descriptive organization theory rather than of formal patterns of risk, information, and incentive structures (on the development of theories of agency, see Mitnick 1992, 1997). To illustrate the relevance of the theory of testaments to an understanding of the fundamental role of government as guarantor, I will begin with a summary of the factors that led to an expansion of governmental as well as private sector economic capabilities in the seventeenth and eighteenth centuries, as argued by North and Weingast (1989). Key among the factors permitting economic success are the government’s ability to establish constitution-like limits, that is, “credible commitments,” that make its behavior reliable, as well as auditing systems that make it possible to monitor the behaviors of economic agents. I argue that implicit and essential to these analyses is the development of systems of credible testaments. One cannot commit and measure without a mechanism that convinces observers that what is claimed is true. Credible testaments must accompany credible commitments. I will then present a brief summary of the chief elements of the theory of

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testaments and discuss its relevance to an understanding of one of government’s primary roles.

FISCAL AND GOVERNMENTAL INSTITUTIONS IN THE SEVENTEENTH CENTURY In an intriguing and beautifully constructed analysis, North and Weingast (1989) ascribe economic growth, political stability, and the emergence of Great Britain as a power in Europe to the development of political institutions that could support reliable economic exchange. Such institutions must do more than facilitate the functioning of participants’ reputations for reliable exchange; they must also bind or commit participants in such a way—provide “credible commitments” (Williamson 1983, 1985)—that future interactions will be reliably governed by terms adopted under these institutions. Reputation for fulfilling promises in exchange—for meeting the terms of contract—facilitates future contracting, of course. When parties to a contract believe that those they contract with are likely to keep their bargains, the costs of the exchange will be lowered. Parties will be less likely to insist on elaborate contracting provisions and safeguards; a handshake backed by informal norms rather than elaborate references to enforcers of contract noncompliance may suffice (Macaulay 1963). With repeat play, the parties to contract add experience to the indicator of generalized reputation. The more reliable a contracting partner proves over time, with experience, the more willing the partners will be to drop formality and eliminate the boilerplate of enforcement. Under duress, however, exchange built merely on reputation and experience can prove to be a structure built on sand. North and Weingast (1989) cite examples of historical contexts in which sovereigns ditched reputation in favor of short-run, expedient gains. What makes the state different is that its expedience may be backed by coercion. When private contracting fails due to noncompliance, parties may lick their wounds, cash the chips still left on the table to retrieve, resolve to avoid deals with the unsatisfactory exchange partners, and move on to other exchanges. When the sovereign reneges, it is usually with the backing of the sovereign’s control of coercion. The result is qualitatively different: one-sided forcing, rather than contract collapse in the face of opportunism or simple failure to perform. There are no wounds left to lick; the sovereign clears the table. Further, with coercion available, the sovereign may force future exchanges. These, of course, are takings, not exchange with mutual benefits. That empties the pockets of traders; they cannot go elsewhere if the sovereign picks their pockets. Further, they have a disincentive to reveal that anything is left in those pockets, available for picking. Indeed, why engage in the industry to fill those pockets if no opportunity will exist to glean the benefits of exchange? Better to consume what is valuable, than to put one’s capital at risk of confiscation. So confiscation by the sovereign encourages consumption rather than exchange.


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The sovereign then gains a reputation that has the effect of shutting down rather than promoting exchange. Faced with the prospect of a sovereign who can renege, backed by force, traders will want to erect restraints that will credibly inhibit the sovereign’s breaking the deal. They cannot merely be more elaborate terms of contract, since the sovereign is the available enforcer. Thus the institutions that commit and defend the deal must be outside the contract itself; they must be a feature of the contexts of exchange that compel the parties’ compliance. And they must be sufficient to deter the forcing of the contract by those who possess the coercion to do so. Finally, the parties to the exchange must believe that these external provisions are up to the challenge—that they will indeed be sufficiently robust to deter forcing. Hence, “credible commitments”: Not only must we have the mechanism to protect the deal from forcing; beyond constraint we must have belief—whether or not the constraint is capable of committing the exchange, the parties to the contract must believe that it is; it must be credible. The means by which credibility is assured is a critical feature of the arrangement. Given the reputation of the sovereign, it may be necessary to provide over-kill—multiple checks on the sovereign’s potential abuse of the agreement, in order that exchange partners believe in the efficacy of the institutions guaranteeing the exchange. Thus, we may argue that the exchange is far from a rational calculation of the countervailing forces; rather it is a social construction of the beliefs of participants. Were the parties to the exchange— including the sovereign—to gravely believe that the tooth fairy had powers to overcome the sovereign’s armies, and were the power of the tooth fairy never tested (why should it, if true belief inheres), then the exchange is guaranteed. Between credibility and commitment, it is credibility that is the more important component. On what basis may credibility be supplied? How do people come to believe? It is here that the crucial role of testaments becomes apparent. According to North and Weingast (1989, pp. 808–812), the Stuart kings at the beginning of the seventeenth century had chronic difficulties in raising the funds necessary to run Crown activities. One source of income was sale of Crown lands. Elizabeth had sold lands to help pay for the war with Spain, and the Stuarts, James I and Charles I, continued this practice, eventually selling them all. Because these lands had provided half the Crown’s income, their sale removed a major source of income. So the Stuarts looked elsewhere. They raised customs fees, over the objections of Parliament, sold monopolies, sold peerages, sold “dispensations,” which permitted individuals to avoid compliance with certain laws, managed properties held in trust by the Crown for the benefit of the Crown rather than for their nominal beneficiaries, and seized property opportunistically, paying below-market prices or nothing at all. In addition, they demanded “forced loans,” under terms that they proceeded to ignore. The loans were either not repaid on schedule, not repaid with interest, or not repaid at all. Sometimes the king unilaterally re-wrote the terms of the loan. Not surprisingly, few were eager to loan to the Crown.


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The institutional setting permitted the Stuart kings to ignore or evade the efforts made by Parliament to control these abuses (North and Weingast, pp. 812–815). When the kings called on Parliament for new revenues, Parliament demanded satisfaction of “grievances” in return, but no agreement could be reached. The Crown had legislative powers via the “royal prerogative,” which permitted it to issue ordinances and enforce them through its own set of courts. It could grant dispensations, usually for a fee, for individuals to avoid compliance with the law. It controlled the Star Chamber, the court of last resort that could sometimes reverse decisions against the Crown. And, because judges served at the Crown’s pleasure and were paid by it, the Crown was able to put in place judges who supported its interests. In essence, the Crown controlled all three functions: legislative, executive, and judicial. Although many of these abuses were eliminated during the Civil War era, the return of the Stuarts under the Restoration in 1660 also saw a return to arbitrary behavior by the Crown. Through “rechartering” the king was able to ensure the exclusion of most of his opposition from Parliament. The king was therefore still able to act outside the rules of the system, remaking them to serve his own ends. When this behavior extended to his own adherents, a united opposition formed that ended Stuart reign. Under the Glorious Revolution that followed, the rules of the game were changed (North and Weingast 1989, pp. 815–819). First, Parliament had now shown that two kings could be removed, presenting a credible threat to any new monarch. The king’s prerogative powers that had been used both to secure economic gains for the king as well as to provide political cover, were eliminated, and a Declaration of Rights held as a tripwire for such removal. Thus economic and political liberties were obtained together. Parliament asserted economic powers, limiting the Crown’s independent access to funds, retaining the power to tax, and obtaining the ability to audit the government’s expenditures. In return for asserting these new powers, Parliament agreed to provide sufficient revenue to the government. The Crown, not Parliament, had the ability to propose expenditures, but these had to be approved by Parliament. Parliament was itself limited by the fact that the diversity of its membership inhibited unilateral takings; that diversity prevented it from becoming a kind of substitute dictator. Indeed, the then politically dominant Whig faction sought to protect business supporters by limiting the regulatory activities of the government and freeing the courts from political influence. This established an independent judiciary. Given the division of function, any actor seeking to steer the government to serve its private interest now had to be able to influence the Crown to propose action and request funds, influence the Parliament to approve those requests, and influence the courts to defend challenges to its actions. Those were high bars to clear. With the record of the removal of two kings still fresh, these changes to the rules constituted a set of credible commitments that bound the actors. North and Weingast (1989, pp. 819–828) trace the results of this collective binding. The government was able to vastly increase its ability to secure loans,


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with new institutions formed to control those funds. Parliament earmarked taxes to ensure repayment of interest on loans. This removed the king’s ability to hold up or divert payment from his revenue stream. The Bank of England was formed from subscribers to a large loan. It handled the government’s loan accounts, so that the government’s creditors were in effect controlling the flow of funds under the loans. This made it possible both to credibly track the government’s compliance and to interrupt the flows, should the government fail to meet its obligations. Government debt vastly increased, permitting a war with France. Rather than appearing as a one-time run-up to finance a single effort, substantial debt was maintained by the government after the war ended. With institutions in place to monitor lending to government and oversee compliance, it was easier for the government to undertake costly ventures like wars. Private capital markets began to expand; the Bank of England began private operations, for example, and other private banks appeared. Private credit expanded, and securities markets flourished. With a combination of political and economic institutions providing increased security, interest rates declined from their seventeenth century levels, permitting further expansion. By creating a system of overlapping, credible veto powers, the constitutional reform of the late seventeenth century created firm commitments that provided security for actions that in the earlier era would have been undertaken only with extreme risk. Moreover, the political reforms created the framework that proved essential for economic exchanges to expand. The North and Weingast (1989) thesis regarding the importance of establishment of this constitutional system as a system of credible, limiting commitments is certainly compelling. But consider the following amendment to the argument: First, as North and Weingast (1989) note, the struggles of the seventeenth century did not occur completely within the realm of political or economic contests; they were informed as well by ideological concerns. These concerns were recorded and proffered as testaments in the struggle. Parliament’s complaints against the Stuarts were taken with respect to lists of grievances adopted by the Parliament; the Glorious Revolution featured a Declaration of Rights recognized by the actors. When formal commitments are sought and/or established, they tend to be referenced with respect to formal testaments. Even the king would give reasons, however insubstantially based. Public action requires public rationalization. Hence one role for testaments is to provide the locus for building support for public action. Where testaments are held credible, action, and the commitments associated with that action, may be held credible as well. Second, the institutions established to commit parties usually require a means to track that commitment (on measurement, cf. Barzel 1982). It is meaningless to create a threat without the ability to know when and how that threat may be implemented. By retaining the power to request actions and funds from Parliament, the monarch retained the ability to specify as well as rationalize public action. Funds were requested for a reason. Parliament would certainly not grant funds and/or raise revenues just because the king asked. By retaining


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the power to approve and allocate funds, and to audit the government’s expenditure of them, Parliament necessarily became involved in providing credible testaments for government expenditures. That is, it certified what it was that the government was doing and that it in fact did what it said it was going to do. This, more than the existence of the commitment by itself, transmitted certainty to the system of actors who sought security in this new constitutional system. When the Bank of England was formed to pool investor funds as well as to track and police their flow to and from government, it was supplying credible testaments that the government in fact lived up to its obligations. The Bank’s auditing provided credible testaments to other economic actors regarding the government’s reliability. Credible commitments require more than a system of limits that rational actors will follow; they requirre a system of credible testaments that provide knowledge of how, when, and why those commitments will be effective. Watts and Zimmerman (1983) provide some evidence that the practice of auditing matured during the years of political and fiscal revolution in England. While auditing has its roots in the early English merchant guilds, its emergence in more modern forms—as a means to track the behaviors of the managers who direct the pooled assets of the corporation—appears to coincide with the growth of joint stock companies. Watts and Zimmerman (1983, pp. 622–624) propose that the scale of the new companies’ efforts as well as their high risk led to a pooling that permitted that risk to be shared. The accounts of these companies were then audited, an obviously essential feature where assets are pooled. The first such companies appear to have been the Russia Company and the African Adventurers, in 1553. While its appearance pre-dated the seventeenth century, the joint stock company then flourished in the wake of the Glorious Revolution. During the latter part of the period under review, joint stock companies were typically audited by committees of shareholders and/or directors. Merchants of high reputation were elected as directors and/or appointed as auditors. Records show that such merchants sometimes served in these roles for multiple companies (Watts and Zimmerman 1983, pp. 624–626). In these early companies, a relatively high proportion of the members, or owners, served also as directors (“assistants”), and many of these directors served also as auditors. Today it might seem strange to see management auditing itself, but the early companies featured what was, in essence, a high level of owner-management. Through participation in both directing and auditing, the members could be more sure of both protecting their own interests as well as giving credibility to their reports to other members regarding the state of the company. We would see this as not only reducing agency costs, but as providing essential, credible testaments regarding the conduct of the company. Thus, at the same time that the public sector was developing the means to assure reliable public action using pooled debt, as well as the means to provide credible reports that that was indeed the case, the private sector was developing the capability to provide assurances that pooled funds in private enterprises were being used as claimed. Credible testaments were as important to the growth of


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the modern corporation as they were to the success of the modern state.

A SKETCH OF SOME ELEMENTS OF THE THEORY OF TESTAMENTS Agency can be a useful analytical tool to apply to organizations because its problems seem to capture so many generic concerns in the organization of joint action. It is difficult and costly to give directions to others and to monitor what is done. Hence, it often does not pay to correct the behaviors of agents; it may be more costly to intervene than to suffer the effects of the agents’ errors. Agents’ private interests may be at odds with their principals’ interests in their performances, but the sources of agency problems may lie in a number of areas, including differences in information, in skills, in contextual or systemic factors, and so on. A critical problem in understanding agency deals with the means by which agency is created. This is particularly important because it often reaches into the bases for the relation, which may help to understand its future course, the origins of the governance structures in the relation, including the original contract, if any, and the agreed means by which the agent will be directed and policed, and so on. I have proposed that a useful way to investigate the formation of agency is to develop a theory of testaments (Mitnick 1996/1998). Testaments are statements about events and conditions in the past, present, and anticipated future. Social actors assign credibility to these statements, and adjust their behaviors on that basis. There are three basic types of testaments: Reports about the past, claims about the present, and predictions about the future. As they evaluate testaments, social actors seek verification of the reports, validation of the claims, and confirmation of the predictions. Two competing processes are generally seen: In mobilization of credibility actors accumulate reinforcing testaments in order to build certainty about appropriate action in an uncertain world. For example, two references, rather than a single letter, may be required. Or candidates may be requested to both submit written materials and subject themselves to a personal interview. The second process, minimization of the assurance load, responds to the fact that the accumulation and evaluation of testaments is costly. Thus, only two letters, not 10, are required to accompany an application to a competitive college. The use of testaments can vary, depending on the setting. Thus, when dealing with organizational entry, the testaments are remote and self-reported by applicants, deal heavily with qualities, character, or traits, and are verified and/or validated using surrogate measures, objective measures that permit benchmarking, and redundancy. Once inside the organization, the testaments are based on observation, may be performance-based, and can be verified or validated on the basis of direct comparisons at the same or different times. In general, when making judgments under uncertainty, reports are preferred to claims, and claims are preferred to predictions. The more risk averse the


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evaluator, the greater the emphasis on redundant, objective reports. In the historical example presented above, the new system of constitutional commitments in England after the Glorious Revolution made it possible to substitute reports for claims and predictions, greatly improving the reliability of government. The method by which the monarch was given the power to request, and the Parliament the power to review and approve and audit, virtually guaranteed the creation of a paper trail. Arbitrary monarchs need only make claims and predictions; because they are not tied by contract nor by past events, they have less need for verified reports before committing to action. And where reports are written, they can be written after the event and adjusted as the monarch sees fit. This is not so, however, where the content of reports is subject to scrutiny and forms a basis for decision. The roles of the Parliament as auditor of government, and the Bank of England as auditor and controller of funds flows, would make it essential to develop a system of financial reporting that permits comparison over time. And it must be a credible, verifiable one. If not, the system would be open to manipulation and would ultimately fail. Hence my argument that the credible commitments of the Glorious Revolution by their very nature required also a system of credible testaments.

GOVERNMENT AND TESTAMENTS In light of the above, government may be viewed as the ultimate provider of credible testaments in society; it is, as we have noted, the guarantor of last resort. First, government is the only legitimate purveyor of force in society and so can back decisions and arbitrate disputes with convincing backing. Second, apart from its control of force, government is legitimate, in that it is established with a base of consent in a democratic society and is hence accepted. Government’s pronouncements come nominally with the consent of the people, who, according to the democratic process, select their agents and have the power to remove those elected representatives. That is what confers legitimacy in a democracy. Third, government is reasonably permanent. Though constitutions change, government is established under a myth of permanence. It is connected to its successors by provisions for democratic change in its rules. Of course, that is not always the case, but belief in the permanence of the government is important in supporting testaments from government. Given the first three features, government is unique. There is no other entity in society that has a monopoly of force, legitimacy, and permanence. As a result, government is uniquely situated to supply credible testaments. Because of the above statuses, the need for verifcation of reports is minimized. Indeed, one major reason to rely on government testaments, over testaments from other sources, is to minimize the assurance load. Government testaments are likely to be superior to competing ones because they are backed by force, legitimate, and stable. This also places an enormous burden on government utterance: It must be right the first time and always. In order to meet this burden,


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and to satisfy the expectation that its history reflects permanence, government tends to emphasize the most credible means of verification: reporting. Furthermore, in order to meet the test of history, each act of government is recorded and verifiable. Thus “red tape” is less a dysfunction of government than a reflection of one of government’s basic roles. A number of consequences flow from this analysis. There is space here only to cite a few. • Government certification drives out private certification. Government can provide more compelling testaments that, for example, a particular condition is true, or that an individual has achieved particular skills. Its monopoly on coercion means that government can exclude others from making credible claims, and can affix the label of legitimacy to the outcome. In contrast, claims in the private sector may be based on the face value of the claim and may not be as defensible against competing claims. As a result, private certifiers will seek government ratification for their claims. This may include such diverse things as a Department of Agriculture label or a law degree. Professional licensure typically involves coercive defense of the license by government, an advantage actively sought by the profession. With respect to the example with which this paper begins, claims made on government paper will in general be superior to other claims, and government will issue paper with that in mind. • Government paper is more valued than government speech. Paper drives out speech. Because government has force, legitimacy, and permanence, the reasons and certifications it gives must take permanent form; government’s status would itself lose credibility if its reasons were not reproducible. Thus, in order to preserve its credibility and serve in its role as guarantor, government must create permanent records; that is, it must record what it does, and drive all interaction with it in the direction of recorded utterance. Therefore, government demands paper, and produces paper; it reserves the ability as well to deny the credibility of its speech, if that speech is not recorded. Red tape leaves a trail; speech does not. The administrative process is therefore a formal process and it is difficult to get government to engage in informal procedures. Indeed, such procedures may be “off the record.” The discussions of parties to a regulatory negotiation engage in such an informal process. Government is not committed to the outcome, and its discussions do not have the sort of status that a legislative record might in determining rulemaking intent. Indeed, in a way, “reg-neg” is almost an extragovernmental activity. • Government will demonstrate a preference to base decisions on the existence of evidence rather than on the content of that evidence. One standard rule in the evaluation of appeals from agency decisions is that the courts will back the agency if the decision followed all procedures and is backed by substantial evidence on the record. That is, the scope of review


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extends only to the presence of appropriate evidence, not to whether the content of the evidence bears on the outcome, one way or the other. This may be viewed as an extension of a doctrine that holds that agencies are merely supplementary lawmakers, delegated by the legislatures to make such decisions because of their alleged expertise. It follows that the unelected courts should not become lawmakers by substituting their views. But if there is one hole in the democratic logic, it is that democratic government is essentially procedural; it is a mechanism for translating the views of voters into services for the polity. While there may be statements akin to a Bill of Rights, or a Declaration of Rights, as in seventeenth century Britain, the means to translate such collective norms to action are usually unclear. Hence it is so often the appellate courts that define outcomes where constitutional values conflict. Thus government’s first response will be to act as an accumulator of credible evidence, not as a balancer of subtly expressed values. Yet government is very, very good at standing in the role of credible testator. In the classic film, Miracle on 34th Street, an elderly gentleman maintains that he is the one and only true Santa Claus. A child comes to believe him, but not the Man-hattan district attorney. His defense lawyer faces the seemingly impossible task of proving that Kris Kringle is who he claims to be. He hits upon a tactic that goes to the heart of what government is all about: Remembering that letters to Santa go to the Post Office, and that the Post Office can never deliberately misdeliver the mail, he arranges to have bags of letters to Santa delivered by the Post Office to his client in the courtroom. If the Post Office thinks Kris Kringle is the real Santa Claus, why, then, he must be: Government is, after all, the ultimate guarantor. And so it is.

REFERENCES Barzel, Y. 1982. “Measurement Cost and the Organization of Markets.” Journal of Law and Economics 25(1): 27–48. Macaulay, S. 1963. “Non-contractual Relations in Business: A Preliminary Study.” American Sociological Review 28:55–67. Mitnick, B.M. 1973. “Fiduciary Rationality and Public Policy: The Theory of Agency and Some Consequences.” Paper presented at the 1973 Annual Meeting of the American Political Science Association, New Orleans, LA. In Proceedings of the APSA , 1973. University Microfilms. ——. 1975. “The Theory of Agency: The Policing ‘Paradox’ and Regulatory Behavior.” Public Choice 24:27–42. ——. 1992. “The Theory of Agency and Organizational Analysis.” Pp. 75–96 in Ethics and Agency Theory , edited by N.Bowie and R.E.Freeman. New York: Oxford University Press. ——. 1997. “Agency Theory.” Pp. 12–15 in The Blackwell Encyclopedic Dictionary of Business Ethics , edited by P.Werhane and R.E.Freeman. Oxford, UK: Blackwell Publishers.


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——. 1996/1998. “The Theory of Testaments.” Paper presented at a showcase session of the 1996 Annual Meeting of the International Society for Business and Society, Santa Fe, NM. In Proceedings of IABS, 1996. A significantly revised version of this paper was presented at the 1998 Annual Meeting of the American Political Science Association, Boston, MA. September 5. Musgrave, R.A., and P.B.Musgrave. 1973. Public Finance in Theory and Practice. New York: McGraw-Hill. North, D.C., and B.R.Weingast. 1989. “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England.” Journal of Economic History 49: 803–832. Samuels, W. J. (Ed.). 1989. Fundamentals of the Economic Role of Government . Westport, CT: Greenwood Press. Watts, R.L., and J.L.Zimmerman. 1983. “Agency Problems, Auditing, and the Theory of the Firm: Some Evidence.” Journal of Law and Economics 26:613– 633. Weimer, D.L. and A.R.Vining. 1992. Policy Analysis: Concepts and Practice. Englewood Cliffs, NJ: Prentice-Hall. Williamson, O. E. 1983. “Credible Commitments: Using Hostages to Support Exchange.” American Economic Review 73:519–540. ——.1985. The Economic Institutions of Capitalism . New York: Free Press.

GOVERNMENT, CIVIL SOCIETY, AND PROPERTY: RESTRAINING THE LEGAL-ECONOMIC NEXUS Laurence S.Moss

INTRODUCTION The economic system is housed within something broader and perhaps as interesting-what is called civil society (Shils 1996 p. 38). According to Edward Shils, “the term civil society is well-established in Western tradition of thought about politics, government, and society.” In particular, it evolved from the wellfounded distinction in Western Europe between a city of the divine and a secular city of man. Georg Hegel identified it in a much more specific sense as “the sector of society beyond the family and short of the state…it was the sphere of private interest, in other words, the market”(Shils 1996 p. 38). In my view, civil society includes the market sector but much more as well. It consists of myriad associations, clubs, business organizations, guilds, labor union, political parties, families, and religious organizations. Civil society is best protected and preserved by a rule of law that delineates the organizations and their members’ rights and duties, including the right to associate, to petition directly or through representatives for a change in government, to have contractual promises enforced, to have human rights protected, to enjoy due process and the opportunity to be listened to, to personal privacy, and to private rights to property. These institutions separate and protect us from the worst abuses that especially governments can inflict. Of course, not all societies have developed an understanding of and appreciation for the workings and sanctity of civil society. By way of contrast, one type of government that works to eliminate the customs and institutions of civil society is totalitarian government (Hayek 1963; Arendt 1973, pp. 447, 455). Communism falls into this category. It is significant that with the fall of the Berlin Wall in 1989, and the triumph of Western-style democratic institutions, those intellectuals living under communist regimes now demand Western-style democratic institutions, they demand “westernization” by which they mean the restoration of civil society (Hoffman 1993). Civil society requires a body of rules that sets out the property rights assigned to individuals and provides for their clarification, transfer, and protection in a variety of situations. Such a rule of law an efficient system respectful of individual liberty and the integrity of voluntary groups and associations— provides some degree of stability and certainty about what is mine and what is


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thine. The rule of law does not and should not rule out public control of private property in the name of more vital public-interest concerns. However, vital public interest concerns are exceptional and unusual events requiring a secondary body of law to protect civil society from the threatened advance of government and the tyranny of special interest legislation (Epstein 1985). Shils summarized the connection between civil society and the rule of law guaranteeing property rights quite succinctly as follows: “Civil society is founded on a dual attitude toward governmental authority. On one side is the belief that the powers of government are limited by constitution, law, and tradition and kept under the scrutiny of citizens; on the other is the belief that citizens are entitled, and even have a duty, to participate in political activities in a critical and affirmative manner” (Shils 1996 p. 46). 1 I have devoted much of my teaching career to the miraculous reshaping of civil society—from the eighteenth-century English industrial revolution to the twentieth-century mechanization of housework, to the vast improvement of material living standards that many regions of the world have come to enjoy. I take a positive view of the market system and the importance of the rule of law. However, the story I tell my students has something of an air of unreality about it. In its simplest formulations, the story leaves out a careful consideration of Warren Samuels’s “legal-economic nexus.” It is by way of the legal-economic nexus that ambitious entrepreneurs use both the government and the market system to modify the rule of law usually for personal advantage and gain. Such behavior sometimes has decisive financial and always unintended consequences. This means that property rights structures are in a constant state of redefinition, expansion, and contraction. Men and women do not enter into society to protect pre-existing rights and enforce primordial duties. Instead, rights and duties are created, modified, and sometimes eliminated by the “legal-economic nexus” itself. The legal-economic nexus is not a place but a series of mental connections, customs, laws, habits, patterns of behavior, and most important shared meanings. All together it can be thought of as a sphere or network of interconnections reflecting the interaction of people who possess varying degrees of status (Searle 1995). Samuels urges us not to fall into the error of regarding the economy and the government as “essentially self-subsistent and independent spheres or processes” (Samuels 1989, p. 1565). According to Samuels, “in the legal-economic nexus, the law is a function of the economy, and the economy (especially its structure) is a function of law” (Samuels 1989, p. 1567). “[L]aw and economy are jointly created through complex human social decision-making processes. Both are not discovered, but created simultaneously in the legal-economic nexus. The legal economic nexus is the key social process in which the social (re)construction of reality takes place” (Samuels 1989, p. 1568). “The legal-economic nexus is the sphere in which the most proximate critical matter is worked out: the legal change of law, the change by law of the interests to which government is to give its support. The legal-economic nexus exists in that sphere in which problems of legal

Government, civil society, and property

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change of legal rights (and other legal arrangements) are worked out, even when the goal is to maintain the integrity and economic significance of existing rights or arrangements” (Samuels 1989, p. 1572). In one extreme set of cases, it is by way of the legal-economic nexus that ambitious politicians and similarly situated government officials can extort tribute from the private sector by threatening subsequent regulations and strategic controls (McChesney 1997). This unholy abuse of the legislative process is another manifestation of the “legal-economic nexus.” It also a troubling phenomena. I claim that public control of private property sometimes compromises the market system’s ability to raise living standards. Where property is subject to immediate confiscation (without compensation) the workmen, artisans, and other workers lose interest in hard work. Hence, the various mechanisms of the legal-economic nexus must be intentionally restrained through “higher order” rules about the ways to change the basic rights and duties assigned to individuals. In the case of the United States, the full power of the legal-economic nexus to reshape and in the extreme, undermine the rule of law has been long held back by the Constitution and its various amendments, especially the Fifth amendment. The apparent weakening of this retarding mechanism in the twentieth century may leave the legal-economic nexus unrestrained. An unrestrained legaleconomic nexus will undermine the power of civil society and its attendant institutions to raise material living standards.

THE POWER OF THE MARKET SYSTEM According to our contemporary followers of John Locke (Buchanan 1975; Nozick 1974; Rowley 1993) a government claiming to have a monopoly on the legitimate use of force and violence in a geographical area is supposed to use its coercive power to protect its citizens’ property rights, not violate them. An important feature of effective government is that it provides a framework within which members of a civil society swap their property rights, give them away, and most ingeniously separate possession of the beneficial features of owning private property from the legal status of property ownership (Epstein 1985; Penner 1997). 2 Under modern conditions, entrepreneurs and their promoters try to shuffle property rights into combinations that are expected to be more valuable in market settings. Collections of such rights, sometimes in the form of business organizations, can be valued in secondary markets where buyers and sellers form beliefs about the expected future value of the profits these combinations represent. The expected value of these organizations ultimately derives from their customers who can be thought of as trying to obtain some satisfactory combination of product or service characteristics. When a particular group of promoters hits a popular combination, other business groups replicate that combination, and it is this competition that leads to an abundance of those goods


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and services. In exchange systems, this lowers (relative) prices and increases real income. According to the modern Austrian school, the entrepreneurial process consists almost entirely of individuals obtaining property rights from others and using them to correct “errors” in the market. The new combinations either produce profits and signal success or produce losses and signal failure. Ludwig von Mises explains that it is “mental acts, it is the mind of the entrepreneur, from which profits ultimately originate. Profit is a product of the mind, of success in anticipating the future state of the market” (Mises 1952, p. 120). Mises’s student, Israel Kirzner, offered an arbitrage theory of entrepreneurship centering on the middleman who discovers opportunities in market settings of how resources can be reshuffled from existing to more valued uses (Kirzner 1973, 1985). Douglass North and other proponents of the “new institutional economics” emphasize the enterprising middleman who discovers ways of facilitating trade and exchange by economizing transaction costs (North 1996). Acting on these beliefs about future market conditions, the middlemanentrepreneur tries to capture the extra market value in terms of profits and capital gains. Consider the problem of production. Entrepreneurs discover how to transform inputs into outputs by relying on the practical knowledge of artisans and the clever discoveries of applied engineers (Petroski 1996). The entrepreneurs strive to identify more valuable combinations of characteristics than do their competitors. Consumers reward successful entrepreneurs with higher prices and profits. The inputs often have other uses in the economy and their contribution to this production must be induced by entrepreneurs’ paying higher-thancompetitive market prices. In production settings, the entrepreneur who discovers how to add value to the original resources must devise a business plan specifying how he or she intends to capture all or a significant part of that value. Newly discovered market opportunities are generally not sustainable because they attract imitators. The source of the “extra value” eventually gets competed away unless some other set of institutions or special circumstances prevents the entry and success of copy-cat rivals. A rigorous course in business economics needs to assess business opportunities in terms of (1) the source and magnitude of the competitive advantage, and (2) how sustainable the profits thus attained from this competitive advantage are likely to be (Kay 1995). In 1911, Joseph A. Schumpeter broke new ground. He surmised that the entrepreneurs often produce goods and services before there is any demand for them. Entrepreneurs do not simply anticipate future demand before it becomes evident by way of rising prices or evident shortages at old existing prices. Rather, entrepreneurs produce goods and services and then educate consumers about them to change their beliefs about the need for the products and alter the way they work and live (Schumpeter 1961). Innovation in this sense is both a culturally and a socially thick activity. Most innovative activity actually takes the modest form of small incremental


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changes and adjustments (Landes 1998, pp. 186–199). This sort of creativity is less like a Schumpeterian cyclone upsetting the way we work and live and more like a gradual evolutionary adjustment process carried out in imperceptible tiny steps (Moss, 1982). Many technological developments are incremental improvements by which each new artifact differs from the prior one in small but important ways (Basalla 1988). This process of discovery and creativity that complements the Mises-Kirzner theory of entrepreneurship involves a psychological sliding from one concept to the next—a creative process that Hofstadter called “slippage” or “variations on a theme” (Hofstadter 1985). Historically, this process of incremental innovation has resulted in mass production (Hounshell 1984). When we remember that mass production is production for the masses, we understand the important links among creativity, productivity, and improving material living standards. The practical result of these creative endeavors has been the unbelievable and unmistakable improvements in living standards from 1860 through today (Landes 1998; Rosenberg and Birdzell 1986; Simon 1996). The normative features of a market system are so persuasive that the intellectual arguments in favor of civil society and the institutions that permit experimentation and entrepreneurship were won decades before the defects and glaring inconsistencies of central soviet-style planning became apparent (Mises 1920 ; Lavoie 1985). The story I tell my students about the power of the market system to raise living standards is compelling. It directs their attention to the enormous improvements in living standards brought about in the last 300 years. One important question remains: Is this story complete? Unfortunately, it is seriously incomplete because it omits mention of the legal-economic nexus.

THE LEGAL-ECONOMIC NEXUS-WHAT ENTREPRENEURS ALSO DO Enterpreneurs do not only reshuffle existing property rights, the legal system and cultural attitudes empowers them to create new rights and therefore impose new duties on others. They do this both within the rule of law and sometimes despite the rule of law. Considering themselves inventive and savvy business leaders, entrepreneurs apply for and often obtain new property rights. By combining those rights with other forms of property, they sometimes manage to capture profits and avoid losses (Moss 1995). Politicians also create new rights and correlative duties to extract favors from business leaders (McChesney 1997). Let us consider several instances in which entrepreneurs create property rights ab initio. Many legal systems, especially that of the United States, allow entrepreneurs to obtain and enforce various forms of intellectual property, which may provide a sustainable competitive advantage. A discussion of trademarks and patents two species of intellectual property can explain this point.


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Through trademarks, service marks—both called “branding” and certain formalities associated with these legal devices, businesses can claim the exclusive rights to certain names and marks especially if the public associates those names and marks with a particular source of supply of the product or service in question. In fact, ownership of a trademark encourages vendors to maintain a praiseworthy reputation. To safeguard his rights, the vendor can appeal to the coercive power of government to stop one supplier from masquerading or pretending to be another supplier. One result of marketing a product under a symbol of a highly regarded vendor is that this particular product or service may command a premium price. This premium might be the source of a sustainable competitive advantage. The interrelationship between government and civil society is also evident in the area of patenting. The U.S. Congress enacted an examination patent system early in the nineteenth century (Hughes 1985). The current legislation encourages inventors to file early for a patent monopoly for patentable inventions, including machines, improvements to those machines, new compositions of matter that did not exist independently in nature, and new methods of transforming inputs into outputs (Diamond v. Chakrabarty 1980). If the inventor waits too long to apply for a patent his invention will no longer qualify for this special property-rights status. An inventor that seeks to obtain a patent must prove to the satisfaction of the patent office that the proposed invention is patentable by law and, in addition, that the proposed invention is original, not obvious, and useful. An invention meeting all of these criteria will receive a patent. The patent owner has the exclusive right to use his or her invention for a limited period of time—now 20 years from the date of filing—and can now trade, transfer, mortgage, rent, assign, bequeath, or license that right to others. When entrepreneurs expend resources on lawyers, draftsman, and marketing specialists to define trademarks or perfect patent rights they are reshuffling resources in the same way as they do when they pursue other types of capital gains. By obtaining legal rights to discourage imitation, they secure competitive advantage for a particular period of time. This protection should encourage innovative effort. There are other less-regarded examples of the legal-economic nexus. Two are addressed here. First, consider the work of developers in securing exceptions or variances to zoning ordinances. In Boston, Massachusetts the zoning law of 1924 grew out of the original 1871 building code that provided for a department “for the survey and inspection of buildings” and the appointment of an inspector of buildings to oversee construction in Boston (Barr 1998). The regulators might have reasoned that if all the buildings in a certain part of town are set back eighteen feet from the street (what is called a “floor area restriction”) the quality of life in that part of town will increase, more shoppers will come to shop. More shoppers means higher store rents, which will capitalize into higher real estate prices. Tax assessments will increase as well. If one building owner were exempt from this general rule and allowed to build


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his or her building closer to the street, the developer would capture both the benefits of the favorable shopping climate along with the extra value of the extra rentable floor space. Similar examples can be constructed for building height restrictions as well. This logic is nothing more than what goes through the heads of all rule breakers—they favor strict enforcement of the rule for everyone else but themselves! In Boston, if the inspectional services department turns down a builder’s request for a variance, the matter can be brought before the Boston Board of Zoning Appeal (ZBA). The ZBA can consider an exception to the entire zoning code if it finds that “there are special circumstances or conditions…applying to the land or structure for which the variance is sought…peculiar to such land or structure but not to the neighborhood…[and] that the application of the provisions of this [zoning] code would deprive the appellant of the reasonable use of such land or structure” (Barr 1998, p. 144). Further requirements and tests have to be met, but all are achievable with adequate preparation and professional assistance. Bribes to ZBA members are often the subject matter of rumor and speculation. The legal-economic nexus thus creates a property right—the zoning variance—where none existed before. In another case, the 1974 Pulitzer Prize winning account of local politics in New York City, investigative journalist Robert A.Caro recounted the concession contract between an Arnold Schleiffer and the City of New York for the right to carve out a portion of Central Park for what turned out to be a “rich man’s” concession stand (Caro 1974). 4 Apparently, Park Commissioner Robert Moses gave Schleiffer the right to build a restaurant in exchange for a written promise to pay over to the city “5 percent of the gross income” on the renovated sheepfold of the park (Caro 1974, p. 997). Schleiffer also obtained rights to deduct certain “improvements” from his rent payments to the city which reduced his payment to the city to one-half percent of gross revenues. From this Caro concluded that “Moses had made the concessionaire rich…at the city’s expense” (Caro 1974, p. 998). 5 Schleiffer petitioned government officials for special privileges that become a source of competitive advantage and helped sustain his business profits. 6 A long and distinguished literature that characterizes certain business situations as “rent seeking,” or as investing resources in redistributing the national product rather than discovering ways of producing more of it, generally squanders entrepreneurial talent and can detract from increasing living standards (Tullock 1993). In all the cases I have discussed in this section the entrepreneur is creating property rights by engaging in processes that we identify with the legal-economic nexus. In certain cases living standards rise, in other cases they fall


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SLOWING DOWN THE POWER OF THE LEGAL-ECONOMIC NEXUS TO ERODE CIVIL SOCIETY Having acknowledged Samuels’ main point that the interaction between the economy and government is ubiquitous, I advance an important distinction. In a totalitarian setting, the concept of civil society is tightly drawn. In extreme forms of fascism, such as that in 1930s Germany, there is only Jew and Nazi Party, the individual and government. All other groups and private networks are irrelevant. There is no rule of law, civil society is a wasteland of denuded organizations and the individual stands naked and terrified before his government (Arendt 1973). In such settings the government has swallowed up the buffer provided by civil society and the individual has lost all sense of autonomy. Terror replaces thoughtful deliberation. Civil society is completely different. The rule of law protects the autonomy of individuals, including their private property and their expectations about those property rights in the future. Individuals decide how much money to save through various financial intermediaries that determine the range and character of private investment. In non totalitarian societies that is societies that have a vibrant civil society component—individuals are more likely to save (and invest) when there is some certainty that rights and duties change slowly and are not subject to behind-the-scene transfers to political favorites. When used to fund mass production manufacturing, private investment generally inures to the benefit of the masses by raising living standards. This is what the classical school of economists commonly attributed to the security of property (Smith 1976; Mill 1965). While the legal-economic nexus operates in both totalitarian and nontotalitarian settings, and “maintain[s] the integrity and economic significance of existing rights” (Samuels 1989), in non-totalitarian societies it operates slowly and incrementally. This snail’s pace movement is intended not to upset the popular belief that a rule of law exists to protect existing property entitlements. According to Epstein, a constitutional scholar, one important limitation on the confiscation of private property was installed in the United States Constitution as part of the Fifth amendment (Epstein 1985). Quite simply, both the federal government and the state legislatures are prohibited from enacting laws that would take private property from individuals, except for “public use” and only then with just compensation. According to Epstein, “the public use requirement is a strict limitation upon the power of government to take private property” (Epstein 1985, p. 162). Epstein’s argument is that there are instances in which government should modify the “rules of the game,” by terminating rights to private property and contract rights in the name of the public interest. For example, airplanes need to intrude into the air spaces above private property and mill owners need to build dams, which flood other people’s farmlands behind the dams. Epstein adopted


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the language of Paretian optimality and the benefit-cost accounting associated with modern welfare economics, to outline those instances in which government modification of the rules can be justified. But private manipulation of the state’s “eminent domain power to capture the surplus” for private purposes must be forbidden under a rule of law (Epstein 1985, p. 164). 7 Epstein also reported that the twentieth century adjudication of this public use doctrine has turned out to be shockingly disappointing. In a 1954 case, Berman v. Parker, the Supreme Court struck the public use limitation a mortal blow. It held that the concept of public welfare is broad enough that the power of the state to exercise eminent domain for ends defined by Congress is legitimate. This allowed Robert Moses and others to displace tens of thousands of tenants under proposed highway and related park projects spanning nearly four consecutive decades from 1924 until 1968, and commanding more than 27 billion dollars in public works expenditures. In his comprehensive study of the legal-economic nexus and the processes behind it in New York City, Caro documents numerous examples of the eminent domain power in ruthless pursuit of social engineering and at the service of narrow private interests (Caro 1974). According to Epstein, the erosion of the public use protection culminated in the 1984 Supreme Court decision of Hawaii Housing Authority v. Midkiff. 8 Indeed, if Epstein’s history of the fall of the public use doctrine is correct, then these decisions removed one important constitutional check on which the United States relies to limit self-dealing and rent-seeking. Any surge in rent seeking activity is regarded by many as inconsistent with what is needed to encourage a continued improvement in living standards in the next millennium (Tullock 1993). Taking our cue from Epstein’s analysis, we can acknowledge Samuels’ point that the legal-economic nexus reflects a more fundamental process always going on behind the scenes in our study of government, society, and the individual. Property rights were not created in a “big bang” and government set up as a preservationist organization vigilant about the eternal perpetuation of those precise rights. When entrepreneurial ability alters and limits the rights and duties of individuals in certain well-defined and well-researched settings, and when the law provides meaningful compensation to those who experience certain types of losses, private citizens feel more secure about their abilities to capture entrepreneurial returns from their investments. Trademarks, service marks, patents, and certain types of public takings are examples of wealth enhancing processes in which new property rights and correlative duties are created out of activities identified with the market system. These activities offer the most assurance over the long run that material living standards will rise. On pragmatic grounds, a normative or policy argument can be made for limiting but not forbidding several of the fundamental processes behind the legal-economic nexus. Indeed, the quest for constitutional limitations on what voting majorities can do to property rights structures reflects an implicit commitment to those selected processes that have in the past generated the most robust increases in material living standards.


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CONCLUSION The story I tell my college students sketched in the introduction to this paper is seriously incomplete. That is why in the third section, I called attention to the importance of the legal-economic nexus because it continually sustains, renews, and modifies property rights structures. The fact that we have identified a tendency for property rights and correlative duties to be constantly renegotiated does not mean that a free people should acquiesce to this tendency. The most fundamental point that I can make about the connection among property, civil society, and government is simply this: some processes behind the legaleconomic nexus must be encouraged while others restrained so that entrepreneurs can both create, reshuffle, and reshape selected rights into configurations roughly calculated to raise living standards. Still, there are instances and circumstances when rights and duties do change suddenly and in response to self-regarding behavior. It is important that when these events occur, citizens see these changes as legitimate and consistent with broader public choices and objectives. Generally, I believe that the legal system should err on the side of conservatism and adopt the rhetoric of conservatism, because the stability of rights and the persistence of duties is surely part of what we mean by civil society and the rule of law, which, standing steadfast between the individual and government provides so much of what we consider to be civilization and rejects much of what we consider to be totalitarianism. This chapter questions the normative claim that the purpose of government is to protect the rights and duties that individuals possessed in some preconstitutional settng before government was instituted. Indeed, many important rights and duties are created and constantly renegotiated within processes at work today that both involve government and inform what Samuels termed the “legal-economic nexus.” Still, I reach a conservative conclusion—one I share with the minimalist libertarians such as Richard Epstein and others. The processes by which the rights structures of a free people are renegotiated and modified must be constrained by public sentiment or by constitutional safeguard. A reasonably stable property rights system encourages saving and investment behavior that promotes the entrepreneurial shuffling and reshuffling of those rights into new and more valuable combinations. This entrepreneurial process is responsible for the dramatic and continuing rise in material living standards from 1700 on, occurring first in England and now characterizing many of the westernized economies of the world. Accelerated and rapid redefinitions of property rights and associated structures generally weaken the entrepreneurial process. The legal-economic nexus is too important to be ignored and too damaging of wealth creation unless constrained. I am aware that my analysis might sound suspiciously like the rhetoric of the older classical ideas about the need for security of property as a precondition for discovery and venturing. I share these views but not in any


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dogmatic way and certainly not without the important qualifications mentioned here.

NOTES 1. Consider ancient China and the Confucian tradition that still claims numerous adherents today. While Confucius anticipated several early and important milestones on the way to the development of the concept of civil society, especially the concept of the civil service, Confucius saw value only in the center of society, that is, the Emperor and his small army of civil servants. According to Shils, Confucius considered the rest of society as simply a “material precondition or an instrument of the center” (Shils 1996 p. 70). Confucius maintained a barrier between the center and the periphery and this impermeability is the “fundamental obstacle [that kept Chinese society from developing the Western idea of] civil society” (Shils 1996 p. 70). Hence those who seek to install “Westernized” institutions in East Asia and Eastern Europe cannot draw sustenance entirely from the Confucian tradition that explains a large part of China’s economic backwardness (Landes 1998, Rosenberg and Birdzell 1986). 2. Under feudalism, what is now called “real estate” was assigned to individuals and intended to “reflect an individual’s status in the political, economic, and legal order” (Penner 1997, p. 152). The land was supposed to remain with certain families and perpetuate duties from that family to the sovereign. For a market system to come into full force and effect, those property rights must transfer from one individual to the next. The power to transfer property “is part and parcel of the right of exclusive use” and the institution of making this transfer by contract is part of the development of the law of contracts-developments that legal scholars use to distinguish one from another (Penner 1997). The institutions freeing up the land for exchange and the rise of contract took centuries to evolve. 3. The owner of the mark even may license others to trade under its mark and earn royalties under a franchise contract. The competition for reputation is an outstanding feature of market systems and dramatically illustrates how a property right that at one time did not exist emerges to become the focal point of so much interesting and noteworthy market activity. 4. Caro’s book, The Power Broker (1974), is about Robert Moses, who, as Park Commissioner of New York State and a variety of other key administrative positions reigned over the development of New York City for 30 years. 5. Why had Moses done this? Caro commented that “the arrangement with Schleiffer was a typical Moses arrangement, no different from scores in effect for more than 20 years with the favored concessionaires who were so integral a part of his [Moses’] empire…. There was nothing illegal about it. Moses certainly was not making a dime from it; he even insisted, to Schleiffer’s voluble dismay, on paying for every meal he ate there. He favored it partly because it allowed him to circumvent the city’s budgetary requirements for capital improvements-and mainly because by giving the concessionaires huge profits he was in a position to ask them to throw huge parties, the lavish dinners and receptions that were an integral part of his way of power” (Caro 1974, p. 998). 6. If no one else were permitted to build an upscale restaurant in Central Park then


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relieved from competition and favored with a small rent, the site value alone would reap premium prices and premium profits on such a simple service as the common hamburger dinner. Schleiffer was not a rogue and not a conman. Neither was the developer seeking a variance before the relevant zoning board. Both were squarely within the four corners of the law and simply acting differently than those who use some federal statutory scheme for obtaining a valuable status or exclusive property right. The impact of these cases on economic development is, however, more problematic than it was with trademarks and patents. This behavior may redistribute income rather than raise its amount. 7. The “public use” requirement in U.S.Constitutional law served as a restraint preventing the private taking of the property of another. When one private individual was in fact taking the property of another then the additional proviso that the surplus (value) thus created must be “evenly divided” among the public and not privately hoarded. Epstein insists that the “mill acts and related cases [circa 1860s and 1870s] mark a watershed in the Supreme Court treatment of the public use limitation. The examination of the question was serious and responsible, and the result was correct” (Epstein 1985, p. 176). 8. Here the tenants had apparently ganged up against their landlords to take property for private use with no provision for the surplus to be divided among the public. In effect, selected tenants had gotten the Hawaii legislature to establish a local commission to designate certain properties in which tenants already owning longterm leases were allowed to purchase the remainder interest in the property from their landlord without his consent and at judicially mandated prices.

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Mind and Pattern . New York: Basic Books. Hounshell, D. A. 1984. From the American System to Mass Production, 1800– 1932 . Baltimore: Johns Hopkins University Press Hughes, T. P. 1985. “How Did the Heroic Inventors Do It?” The American Heritage of Invention and Technology 1 (Fall): 18–25. Kay, J. 1995. Why Firms Succeed. New York: Oxford University Press. Kirzner, I. M. 1973. Competition andEntrepreneurship. Chicago: University of Chicago Press ——. 1985. Discovery and the Capitalist Process . Chicago: University of Chicago Press. Landes, D. S. 1998. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor . New York: Norton. Lavoie, D. 1985. Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered . Cambridge: Cambridge University Press. McChesney, F. S. 1997. Money for Nothing: Politicians, Rent Extraction, and Political Extortion. Cambridge, MA: Harvard University Press. Mill, J. S. 1965 [1848]. Principles of Political Economy with Some of Their Applications to Social Philosophy , Vols. 2 and 3 of Collected Works of John Stuart Mill , edited by V.W.Bladen. Toronto: University of Toronto Press. Mises, L. von. 1952. “Profit and Loss.” Pp. 198–150 in Planning for Freedom . South Holland, IL: Libertarian Press. ——.1963 [1920]. “Economic Calculation in a Socialist Commonwealth.” In Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism , edited F.A.Hayek. London: Routledge & Kegan Paul. Moss, L. 1982. “Biological Theory and Technological Entrepreneurship in Marshall’s Writings.” Eastern Economic Journal 8(January): 3–13. ——. 1995. “Robber Barons and Entrepreneur-Promoters.” In Advances in Austrian Economics , edited by P.J.Boettke and M.Rizzo. Greenwich, CT: JAI Press. North, D. C. 1996 [1990]. Institutions, Institutional Change and Economic Performance . Cambridge: Cambridge U. Press. Nozick, R. 1974. Anarchy, State, and Utopia . New York: Basic Books. Penner, J. E. 1997. The Idea of Property in Law . Oxford: Clarendon Press. Petroski, H. 1996. Invention by Design: How Engineers Get from Thought to Thing . Cambridge: Harvard University Press. Rosenberg, N., and L.E.Birdzell, Jr. 1986. How the West Grew Rich: The Economic Transformation of the Industrial World . New York: Basic Books. Rowley, C. K. 1993. Property Rights and the Limits of Democracy . Aldershot, England. Edward Elgar. Samuels, W. J. 1989. “The Legal-Economic Nexus.” George Washington Law Review 51 (August): 1556–1578. Schumpeter, J. 1961 [1911]. The Theory of Economic Development . New York: Oxford University Press. Searle, J. R. 1995. The Construction of Social Reality . New York: Free Press.


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Shils, E. 1996. “Reflections on Civil Society and Civility in the Chinese Intellectual Tradition.” In Confucian Traditions in East Asian Modernity: Moral Education and Economic Culture in Japan and the Four MiniDragons , edited by Tu W.Cambridge: Harvard University Press. Simon, J. L. 1996. The Ultimate Resource 2 . Princeton: Princeton University Press. Smith, A. 1976 [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations (2 vols.). In the Glasgow edition of the Works and Correspondence of Adam Smith , edited by R.H.Cambell and A.S.Skinner. Oxford: Oxford University Press. Tullock, G. 1993. “Rent Seeking.” In Property Rights and the Limits of Democracy , edited by C.K. Rowley. Aldershot, England: Edward Elgar.

PROPERTY: QUESTIONING EFFICIENCY, LIBERTY AND IMPERIALISM Pitman B.Potter

INTRODUCTION The discourse of private property rights in the western liberal democracies has centered on notions of economic and political utility. Locke and Bentham argued that property rights were useful to encourage economic accumulation and wealth. Madison held that private property rights were essential politically, in order to protect individual liberties. The situs of property rights in the individual was disputed by Hegel, who viewed the political utility of private property rights as dependent on their relation to other interests in society. These classical views have been re-iterated and applied to contemporary conditions, while the end of the Cold War and the apparent demise of communism have emboldened proponents of private property regimes to promote their vision internationally under the guise of globalization. However, in light of current historical conditions, the classical discourse of property and its contemporary variants can appropriately be subject to critique and re-evaluation, and their applicability internationally subject to challenge.

CLASSICAL LIBERAL APPROACHES TO PRIVATE PROPERTY Although contemporary liberal doctrines about private property rights often begin with Locke, the classical tradition of theorizing about these issues began long before. Continental scholars such as Bartolus (1313–1357) and Grotius (1583–1645) examined and commented upon property law doctrines derived from Roman law, and articulated views about tenancy, enforceable rights to property, and the natural law foundations for private property realms independent of the state (Bouckaert 1990). Responding to the feudal legacy of limited private property rights, enlightenment theorists began to articulate a vision of private property that would insulate the emerging bourgeoisie from the reach of the crown (Herman 1983; Tigar and Levy 1977). Influenced by these antecedents, the classical theorists Locke, Madison, and Hegel addressed the economic and political utility of private property rights by reference to themes that may be identified as economism, republicanism and collectivism.

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Locke addressed property rights as having economic utility within a broader theory of governance. Locke viewed property as an appropriate mechanism for recognizing the value of labor (Rose 1995/96; Coval, Smith, and Coval 1986). Thus, Locke contemplated private property as a basis for establishing production and labor incentives, and promoting economic accumulation. Locke considered it a duty of the state to protect property rights as part of its responsibility to build economic and social wealth. The political utility of private property rights was addressed more explicitly by Madison. Drawing on Locke’s focus on the property rights of individuals, but less concerned with purely the economic utility of the approach, Madison viewed property rights as an essential element of insulating society from intrusion by the state (Madison 1961; Beard 1941; Underkuffler 1990). While he recognized that differential access to property and the disparities of benefits that might result would contribute to contention between “factions” in society, Madison insisted on government protection of the rights of the minority of property holders. These views were particularly influential on the drafting of restraints on government control of private property into the U.S. Constitution (Beard 1941). While Marx stands as the foremost critic of private capitalism and its foundations in private property (Marx 1978; Rader 1979), critical approaches within the liberal discourse of private property rights are more specifically influenced by Hegel. Political utility informed Hegel’s thinking, although he reached conclusions significantly at variance from those of Locke and Madison. Hegel began with an assessment of property rights of the individual as an “abstract right” (Stillman 1989; Lin 1998), but then examined the resulting implications for social relations. In the context of the “ethical life” (Sittlichkeif), the property rights derived from the inalienability of the individual and its labor should in Hegel’s view be qualified by the relations of community and civil society. Thus, Hegel called for attention to be paid to the material realities of social and economic life as a basis for restraining the unfettered application of abstract concepts of absolute rights to private property. While the various strands of thought articulated by these classical liberal theorists are by no means uniform in their approach to the nature, situs and conditions for private property and private property rights, a common theme is the importance of the state. For Locke, the state’s interest in economic accumulation presented a utilitarian basis for property rights. For Madison, the interests of republican justice demanded that the state protect property owners against the demands of factional majorities. For Hegel, the state was a steward for the community and had responsibility to qualify the absolutist exercise of the abstract right of private property. Contemporary liberal scholars continue to debate the role of the state in ways that reveal the continued effects of economism, republicanism and collectivism evident in the views of the classical thinkers.


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CONTEMPORARY APPROACHES TO PRIVATE PROPERTY The themes of economic and political utility are useful to describe the approaches taken by many contemporary property thinkers, although not necessarily in the same ways as characterized the work of Locke, Madison, and Hegel. The centrality of economic utility is evident in the work of law and economics scholars such as Richard Epstein (Epstein 1990) and Richard Posner (Posner 1986), whose support for largely undiminished private property rights stems from assessments of the greater economic benefits to be derived therefrom. Broadly speaking, this approach suggests that the protection of property owners against most kinds of interference promotes freedom of exchange and hence advances the economic well-being of society as a whole (Epstein 1990). Economic utility approaches often cross over into the territory of political utility, through assertions that private property’s implications for protection of individual liberty constitute a utilitarian political benefit (Krier 1990). The republicanism of Madison is taken up most obviously by proponents of strict protection of traditional private property, who argue that the individual liberties associated with private property are the best reason for its protection (Fried 1990). Madisonian republicanism is also raised by those who argue for limits on political regulation of private property (Rabkin 1990), although this view is rebutted by critical scholars who note the fundamentally political character of all property regimes (Schauer 1990). The dilemmas of republicanism are evident as well in contrasting perspectives of the political philosophers John Rawls and Robert Nozick, who address the utility of various property regimes for the distribution of wealth (Stick 1987a). In contrast to Rawls’ approach calling for relative protection of property rights in light of the need to redress social and economic inequalities, Nozick adopts a more absolute standard. Nozick considers justly acquired property to be an entitlement, which can be appropriated only with the consent of the owner. While these conflicting approaches obviously have different consequences for governmental policies on the protection of private property, they remain at root utilitarian, albeit with a conflicted view of the common good and the means for achieving it. 2 Natural rights theorists, on the other hand, challenge approaches based on economic or political utility, and suggest that the balancing analysis attendant to determinations of common good should give way to absolutist views on the rights of the individual (Paul 1990). The communitarian views associated with Hegel also appear in the contemporary discourse, primarily in the form of critiques of absolutist doctrines of private property rights. Some writers call for a comprehensive approach to property rights, that accounts for collective interests to a greater degree than is possible under more traditional approaches (Underkuffler 1990). Communitarian views are also evident in calls that property rights not be considered exclusively

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the province of the individual, but need intersect with principles of democracy (Rose 1995/96). Collective approaches to property rights have also been raised by comparative scholars looking to the legal traditions outside the bounds of the West (Frame 1992). The importance of public welfare as a component of economic utility has been noted by some economists and law and society scholars (Corden 1974; Silbey 1997). Louis Kelso’s “Binary Economics” offers an approach that aims to empower all members of society to acquire an adequate holding of capital (Ashford 1990/91). This it is suggested will enable a broader distribution of economic opportunity, with a resulting increase in the application of economic utility. Although the emphasis on distribution of opportunity departs significantly from the individualist orientation of traditional economic utility thinking, the Binary Economics approach does not depart significantly from traditional themes of private property rights as a key element of economic accumulation and the production of wealth. Collectivist challenges to traditional private property rights regimes are not limited to the realm of economic utility, however. A nuanced consideration of private property rights in the context of political utility is advanced by theorists of the “New Property,” who suggest that social entitlement policies empower individuals to participate more fully in society, and therefore to enjoy the exercise of individual liberty to a more meaningful extent than would be possible for individuals trapped in poverty (Reich 1990). The proponents of the “New Property” approach deny conservative rhetoric that governmentsponsored programs recognizing and protecting property interests in employment, housing, health care and so on represent a paternalistic diminution of individual liberty. Instead, the New Property proposals are aimed at promoting individual liberty by redressing the inequalities between individuals and the organized units of political (governmental) and economic (corporate) actors that have come to dominate contemporary life and which undermine the meaningful exercise of individual liberties (Reich 1990; Rabin 1990). In contrast to property rights discourses aimed at the protection of corporate interests (Kunstler 1990), the New Property approach aims at promoting public wellbeing in order to preserve the republican ideals of individual liberty articulated by Madison. This remains at root a utilitarian discourse—though one with a markedly different view of political utility than that advanced by traditional Madisonian republicanism. Thus, the bulk of contemporary scholarship on private property rights tends to rely on variations of classical theories of economic and political utility as the basis for argument. While debates emerge as to how best to achieve economic and political utility, there remains a broad, if unrecognized, consensus that private property rights remain the most effective mechanism for achieving economic and political well-being.


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IMPERIALISM: GLOBALIZATION AND THE EXPORT OF PRIVATE PROPERTY NORMS The export of liberal notions of private property is one of many aspects of the current discourse of unification of private international law and globalization (Trubek 1993). Calls for unification of private law, whether through the Convention on Contracts for the International Sales of Goods (“CISC Convention”), the World Trade Organization (“WTO”) and its ancillary agreements, or the Multilateral Agreement on Investment (“MAI”), have given centrality to liberal ideals of private property rights. The term “globalization” has been used to describe the contemporary spread of liberal ideals of free markets and private property relations around the world. That the post-Cold War world is often be described in terms of the spread of liberal market and property regimes should not be surprising since the Cold War itself can be depicted as entailing primarily if not exclusively a conflict between property norms. Rhetorically, at least, the Cold War was widely described as pitting the private property norms of the West, along with ideals of economic efficiency and individual liberty that they entailed, against the public property norms of socialism, and their concomitant support for state planning over markets, and collective responsibility over individual liberty. Globalization of private law is often juxtaposed against public law regimes aimed at a collectivist approach to social welfare (Kennedy 1994). Indeed the fall of communism in the former Soviet Union, the economic collapse of North Korea and even the financial crises in the non-liberal “crony capitalism” economies of East and Southeast Asia have been seen to support the rhetorical ascendancy of the liberal free market/private property paradigm. While particular attention has been given to economic transformation in developing economies, not even the Europeans are safe from the aggressive spread of the liberal ideals of free markets and private property (Reynolds 1997). The insertion of these norms from the international economic system into domestic institutions and economies is seen as a crucial first step (Kohona 1987). Such an approach has significant implications for the state. In particular, under the rhetoric of “deregulation,” the state is called upon to withdraw from direct engagement with economic relations. And indeed the state’s capacity to control transnational commercial and investment activity is severely restricted by the confines of territorial sovereignty and by the limits of still-incomplete institutions and processes for international cooperation. Resigned to the limits on sovereignty presented by trends toward global economic integration, some contemporary thinkers hold out the hope, somewhat wistfully I would suggest, that international legal regimes will be appropriate and capable of protecting local community interests (Hainsworth 1995). The notion of “globalization” may well be an ideology (White 1995), but its origins lie in material interest. For just as states deploy and manipulate

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international economic organizations to suit their own policy imperatives (Trachtman 1996–97), so too do states as well as private actors build popular support for particular institutional and normative regimes through the deployment and manipulation of ideas. 4 Thus, while political and economic elites often decry the over-use of the term “globalization,” it is these same elites who make the most use of opportunities for increased international mobility of capital and information. And while the international movement of people and goods often involves sub-elites more directly, as migrants, producers of exports and consumers of imports, the conditions under which these activities occur remain subject to the priorities and imperatives of elite managers and policymakers. While the capacity of the liberal industrial economies to promote visions of globalization derives as much from political and economic power as from the inherent wisdom of the ideas themselves (Wagner 1988), there is little doubt that the influence of liberal ideals of private property has spread dramatically in the past decade. The circumstances of the CISG Convention, the WTO agreements on intellectual property rights (“TRIPS Agreement”) and dispute resolution (the “Dispute Resolution Understanding”), and the MAI are particularly noteworthy examples of the globalization of private law and private property regimes. Each of these agreements operates to entrench norms and institutions of private law that are essential to liberal private property regimes. The CISG convention purports to establish uniform standards for international sales contracts (UN 1980; Spanogle 1991). The agreement was initially a creature of the U.N. Commission on International Trade Law (UNCITRAL). When it became clear that a treaty of some sort on international contracts would be concluded, interest increased on the part of the industrialized economies, and particularly the United States, such that the final version drew heavily on principles derived from the U.S. Uniform Commercial Code. As a result, the property interests of capital equipment exporters (generally identified with the industrialized economies of the West) receive privileged treatment through limitations on the time frames and processes for acceptance or rejection of goods (cf. Farnsworth 1988, p. 446). The convention promotes the liberal private law paradigm more generally by limiting the extent to which contracting parties can bar oral modification of contracts-a common practice in developing economies (Hillman 1988). Thus, the private property norms of liberal industrial capitalism are privileged while informal and collectivist norms most often associated with non-Western economies are marginalized. While the CISG Convention is presented as intended simply to bring uniformity to international contracts, it is a uniformity that entrenches liberal norms of private law relations. These are intimately bound up with private property rights regimes, particularly under circumstances of contract assignment and futures contracts. Property rights arguments have been used to protect the autonomy of real estate development contracts from government regulation (Rogers looseleaf). More fundamentally, the normative environment for contracts also supports the norms underlying liberal regimes of private property.


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The WTO also reflects the export of liberal notions of private property rights. The completion of the Uruguay round of the GATT, the finalizing of the Marrakech Agreement and the formation of the World Trade Organization reflect the liberal market paradigm associated with the Western capital and technology-exporting economies (Thomas and Meyer 1998). The regulatory norms associated with the intellectual property and dispute resolution agreements associated with the WTO are useful examples. 5 The TRIPS Agreement identifies intellectual property rights and provides standards for enforcement that extend significantly beyond the existing international regimes set forth under the World Intellectual Property Association Treaty, the Berne Convention on copyrights, and the Universal Copyright Convention (ILM 1994a; Reichman 1995). This expanded regime for private property rights in technology is of particular benefit to the technology-exporting economies, which dominate newly protected business sectors such as integrated circuits and computer software, bio-technology, unregistered trade secrets, and entertainment. As well, the TRIPS provisions limiting the capacity of governments to impose compulsory licensing to combat anti-competitive behavior by technology licensors undermines the role of the state as an agent for development, and works against the interests of technology importing economies. While Article 40 of the agreement appears to permit states to enact legislation to limit anti-competitive practices by technology licensors, the conditions attached are more severe than previous provisions on compulsory licensing associated with the WIPO, Berne and Universal Copyright Conventions. Thus, the TRIPS Agreement operates to protect private property rights of technology licensors while undermining the role of technology importing states in attempting to ensure that the uses and distribution of technology serve the goals of social and economic development. Similarly, the WTO’s Dispute Resolution Understanding, particularly its provisions for binding decisions by dispute resolution panels, reflects preferences for the pre-eminence of private law associated with liberal capitalism (ILM 1994b; Young 1995; Shell 1995). The political negotiation processes recognized in the original GATT structures for dispute resolution have largely been replaced with institutions of legalistic formality. This privileges the legal culture of the industrialized economies, not least because they have been the dominant sources of the norms embodied in the Dispute Resolution Understanding itself. Moreover, the greater lawyering capacity of the industrialized economies lends significant material advantage under the new WTO dispute resolution processes. The Multilateral Agreement on Investment, while limited by its terms to the OECD economies, stands as a model for a global investment protection treaty (Thomas 1997). The agreement embraces policy preferences of capital exporting economies with regard to property rights in foreign direct investment. A comparison of the MAI with the various model Bilateral Investment Treaties suggests that the policy preferences of capital exporting states have been particularly influential (U.S. Congress 1988; U.S. Presidential Documents

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1983). Following an absolutist approach to private property rights, the MAI treats foreign direct investment as a right which should not be limited except with the consent of the investor. This is supported by provisions for private rights of action by corporate actors against states, which expand on the provisions of the treaty governing arbitration under the International Center for the Settlement of Investment Disputes (“ICSID”) (UNTS 1966; Shihata 1993; Brewer 1995). Whereas the ICSID treaty requires that a state named as a respondent in an arbitration brought by a private entity must consent to the process, under MAI state consent is granted presumptively upon ratification of the agreement. Expansive concepts of market access requirements permit MAI signatories to transcend even the relatively minimal market protection provisions of the WTO. The process of globalization is profoundly imperialistic, and serves in large part as a vehicle by which Western and particularly American visions of private property rights are disseminated around the world. Rather than inviting a process of voluntary selection of ideas by the affected cultures and economies, globalization entails the compulsory adaptation of norms and institutions whose value and applicability are assumed by the proponents with little if any consultation by the recipients. Ironically, despite increased potential for transborder flows of information and ideas, and increased availability of information and experience about different approaches to social and economic organization, broader recognition of the potential alternatives to liberal private property rights regimes has not been forthcoming (Lindblom 1977). Instead, notions about globalization have been laden with implicit norms of imperialism and convergence, as the liberal policy preferences of the industrialized economies are imposed as a model for the rest of world to follow.

CHALLENGING RATIONAL UTILITY The dominance of private property ideals and their dissemination internationally through globalization entail a dynamic that is facilitated by the extent to which the themes of efficiency and liberty operate to constrain discussion and debate about the appropriate place for private property in contemporary society. Economic utility theorists emphasize the importance of efficiency, and acknowledge the side benefits of individual liberty that stem from the absolute (or near absolute) private property regime. Political utilitarians emphasize the importance of private property rights for protection of individual liberties, while noting the efficiency gains to be had from the system as well. Taken together, efficiency and individual liberty work as a trump card to protect the private property discourse from challenge, and result in the entrenchment of private property into law and popular culture. Under conditions where the ideals of efficiency and individual liberty remain largely unchallenged, the burden to be satisfied in obtaining lawful sanction for the control of private property is heavy indeed. Thus, while few would dispute that


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the unfettered exercise of private property rights can have effects on communities, consideration of these effects, be they in terms of conditions and availability of employment, housing, medical care, education, environmental conditions or other less tangible factors, is all too often condemned to a secondary role in the face of the talismans of efficiency and liberty. That this is largely the result of the extent to which the ideologies of efficiency and liberty are deeply ingrained in the European and North American legal culture is less an excuse than a call for critical engagement (Gibbons 1984). Challenges offered by the “Binary Economics” approach to efficiency and the “New Property” approach to individual liberties each suggest ways in which norms of liberty and efficiency can be respected while still transforming existing private property regimes. These are fundamentally conciliatory approaches, however. While challenges have been raised to the sanctity of private law regimes generally (Brudner 1989; Casebeer 1989; Yablon 1989), and efforts have been made to reconcile perceived conflicts between liberal and socialist approaches (Simon 1991), perhaps more extensive questions can be raised directly about the norms of efficiency and liberty.

ECONOMIC UTILITY: RE-THINKING EFFICIENCY While the approach to economic utility suggested by Kelso’s “Binary Economics” is useful, it does not confront a fundamental problem with the utilitarian notion of property, namely the limits imposed by utility’s reliance on flawed notions of efficiency. First of all, it is widely accepted that ideals of efficiency often go unmet in practice, as a result of human behavioral preferences (Porter and Scully 1987; Wyatt 1983). Since there appear to be at work in social and economic life certain imperatives that challenge conventional notions of efficiency, it would seem appropriate to re-examine these notions. Both Pareto optimality analysis and Kaldor-Hicks efficiency analysis acknowledge potentially broad parameters for notions of public good and the appropriate measure of compensation for re-allocations that are at the root of optimality and efficiency (Trebilcock 1991). Thus, it might be useful to include in efficiency analysis the wide range of factors that are present in the empirical world, and which affect the calculus of efficiency by economic actors themselves. And just as Berle and Means revolutionized the world of corporate economics by demonstrating that those in control of corporations did not necessarily act out of the same perception of self-interest that would drive decisions by owners (shareholders) (Stigler and Friedland 1983), contemporary scholars of property rights might ask the question whether measures of efficiency ought to take into account the interests of the communities whose interests are not measured by their ownership of the property in question (Malloy and Braun 1995). Thus, the determination of the “highest and best use” of land for the purposes of re-zoning might for example extend beyond simply the rate of return to be

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derived from the commercial purposes to which the land might be put. Following the theme of common property rights analysis, general social interests which are not grounded in specific ownership rights might usefully be included in the assessment of highest and best uses of land (Trebilcock 1991). Thus a full accounting might be made as to the general social interest in permitting certain types of activities—farming for example—to continue in various locales, even if this is a less-than-optimal use of the land measured solely in terms of economic return. Might there not be a general social interest attached as well to the scenic and environmental benefits of retaining old growth forests in the face of demands that logging and residential development would yield a higher economic return. And while replacing a dairy farm with a shopping mall, or clear-cutting an old-growth forest to build condominiums might generate more revenue immediately, perhaps the calculus of desirability should include the benefits derived by members of society from their enjoyment of the knowledge that their communities have dairy farms or old-growth forests nearby. 6 In addition to including the intangible but no less real aspects of social wellbeing in the calculus of efficiency, consideration might be given to the time frame within which conventional analyses are made of allocative, productive and dynamic efficiencies (Warner 1994). Such an approach might usefully apply social cost analysis, but extend it to include long-term costs of externalities and market failures for example, which might usefully be discounted to present value and included in the assessment of efficiency (Coase 1960, 1993). To the extent that this process is already accepted, key issues center on the role of the discount rate—which might reasonably be expected to account for increasing cost over time of degradations in living conditions, environmental quality and so on. Even inter-generational analysis addressing loss of future opportunities associated with current property development policies might usefully be considered.

POLITICAL UTILITY: RE-THINKING INDIVIDUAL LIBERTY In addition to re-thinking efficiency as the basis for economic utility, a reassessment may also be warranted as to whether individual liberty should remain the primary measure of political utility. If, as the New Property theorists suggest, the conditions of individual liberty are tied intimately to the circumstances within which the individual lives, then an appreciation of the particular material conditions of the moment is essential to determining the value of particular forms of liberty. This entails not only an analysis of current social conditions, but also a review of the changing role of the state. For just as the social, economic, and political conditions that drove Madison to champion the importance of individual liberty have long since past, the state today is far different from that of Madison’s time. The peculiarly American myth of the frontier is gone, and the modern administrative cum bureaucratic state plays a central role in the definition of the individual freedoms which are to be


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preserved through private property rights (Rabin 1990). Individual liberties that are purportedly a central goal of private property rights are dependent in large part on the state’s willingness to yield spheres of autonomy, and also to create conditions where the enjoyment of individual liberty is practically valuable. First, the state sets the conditions by which notions of individual liberty are identified and enforced—whether these entail liberty in terms of insulation from state intrusion, or liberty in terms of relations with others in society. The socalled “private sphere” is not self-enforcing or self-regulating, but is dependent on the consent of the state (cf. Habermas 1973, 1984). If rights are to be viewed essentially as privileged claims (Waldron 1984; Dworkin 1978), then by reason of its mechanisms for identifying and enforcing rights the state remains the arbiter of competing claims and the dispenser of privilege. Conflicts of rights over land use, for example, ranging from classic nuisance cases to the exercise of environmental and zoning regulations through police power, depend essentially on determinations by administrative agencies as to the relative validity of competing claims (Blake 1992; Craig 1994). And although this process remains subject to judicial review, the capacity of the courts to mediate the state’s exercise of political authority to balance competing claims is limited by the resources of those who might seek access to judicial review, and by the power of legislatures to limit court jurisdiction. One example of this is the experience of Initiative 164 in the State of Washington. (Mohrman 1996). The initiative was enacted into law as the “Property Rights Regulatory Fairness Act” in 1995, and required compensation to property owners for loss of value resulting from lawful regulation for public benefit. The legislation was intended in part to limit the ability of the courts to follow Washington case law holding such compensation to be an improper gift in violation of the Washington State Constitution. While the act was subsequently repealed following a referendum in opposition, ongoing efforts continue to use legislative action to limit the capacity of courts to uphold state regulation of property. The state also wields significant potential power to determine the circumstances of communities within which claims to individual liberty are exercised. While individual liberty as an abstraction has inherent worth, it may be of little consequence to individual members of society unless the material conditions under which it is exercised lend it practical value. Through its power over budgetary allocations and taxation, the state has the capacity to determine how are to be distributed the costs of ensuring the quality and availability of fair labor conditions, available housing, health care, education, environmental quality, and the like, and in particular to the extent to which these costs will be borne by public organizations on behalf of individual members of society who are by virtue of their individuality unable to bear the costs themselves. In light of the its power to recognize and enforce individual liberties, and to support conditions that make such liberties practically valuable, the state becomes an essential starting point for review, particularly with regard to liberal democratic processes through which individual liberties are defined and enforced, and by which are created the conditions under which individual

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liberties are exercised. In the area of defining rights and balancing claims, a key issue is accountability-the basis for developing communication and community between the state and the subjects of its rule (Hunt 1993). While the state, and the elites with which it is commingled, retain significant power to determine the terms by which the performance of the state is evaluated, the fundamental issue remains of accountability to society as a whole in the course of state management of conflicting liberty claims. The structure of liberal democracies empowers those with organizational resources to bring influence to bear on decision makers. Organized lobbying compels the attention of members of Parliament and Congress to a degree that the dissaggregated and often unarticulated views of society at large cannot. And of course it is more often than not the case that the most visible and effective lobbying groups act on behalf of property-based interests. Thus, it is not surprising to find that systems of accountability in liberal democracies permit the state to take decisions that favor property-based claims over claims founded in rather more amorphous notions of public welfare. These decisions are then easily justified by reference to the sanctity of the individual liberty component of private property rights. In the area of providing conditions that support the meaningful exercise of individual liberties, a key issue is public resources. In large part as a result of its voluntary withdrawal from regulation of property interests, and incidentally from the collection of revenues from these interests, the state faces significant financial restraints on its capacity to act. Ongoing cutbacks in budgets for employment assistance, affordable housing, medical care, education, environmental protection, and a host of other areas prevent the state from exercising a meaningful role in creating conditions wherein the exercise of individual liberty is of practical value. Whether the focus is on resources or accountability, the state’s role in setting conditions for the exercise of rights to liberty, and in defining these rights, has tended to support the primacy of private property rights over issues of social well-being. Unfortunately, because the Madisonian ideals of private property rights and individual liberty were intended to be immune from challenge through the exercise of democratic institutions and processes (the famed protections against “majoritarian tyranny”), the political processes for change may be unavailing. Hence attempts at a Kuhnian paradigm shift (Kuhn 1970; Mercuro and Medema 1995) may require a fundamental rethinking of the Madisonian norms themselves. With regard to the character and enforcement of individual liberties, should not questions be raised regarding the practical benefits to be derived from whatever definitional and procedural conclusions are reached. What should be the response if the opportunity costs associated with the exercise of individual liberties in employment, housing, health care, education, environmental conditions and the like are such that, despite use of a generalized definition of liberty, only a small privileged sector of society has the wherewithal to enjoy its exercise—a reverse application to be sure of Balbus’ critique of the formal equality embodied in regulations prohibiting sleeping under bridges (Balbus


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1977). Are the rights of individual liberty to be dependent, for example, on the capacity of individuals to find and keep meaningful unemployment, decent housing, adequate health care and education and a clean environment? If so, will approaches such as Reich’s New Property be sufficient to ensure relatively equality of opportunity to enjoy individual liberty, or are other approaches necessary and desirable? Should we not ask as well whether the potential for practical enjoyment of private property rights is sufficiently widespread in society to justify a private property regime that itself may diminish the regulatory capacity of communities to preserve conditions of social justice and public welfare. To what extent should the pursuit of abstract notions of individual liberty be sustained to the extent that social interests in working opportunities and labor conditions, housing, health care, education and environmental protection are undermined? These kinds of questions address not only the material conditions of social and economic relations, but also implicate the political circumstances of the state which protects the definition and enforcement of individual liberty and the conditions in which it is exercised.

RE-THINKING RATIONAL UTILITY Re-thinking assumptions about efficiency and liberty should not be perceived as a call to open the gates to the castle of liberal democratic society to the barbarian hordes of authoritarianism and waste. Instead, the process of re-examining the assumptions underlying ideals of efficiency and liberty permit consideration of new approaches to economic and political utility. Decisions on regulation of property need not extend beyond an assessment of the purported interests and responses of the “rational utility maximizer.” 7 But the calculus of rational utility in the protection of property rights might appropriately take into account broad conceptions of community as an essential prerequisite for the exercise of individual liberty, and social welfare as an integral component of efficiency (Rose-Ackerman 1986). Under the conditions of legal and political culture that prevail in liberal industrial society, it may not be sufficient to classify issues such as structural unemployment, homelessness, deteriorating health and education systems and environmental degradation simply as externalities the imperfect management of which is due to market failures, and have done with. Perhaps it is as a result of the narrow conceptions of rational utility that these consequences are seen as “external” to the processes which generate them, and as a result their cost is not recognized as a matter of political imperative and reimposed on the economic processes and actors from which they arose. Perhaps what is called for is more than proposals suggesting that economic utility can be obtained by empowering members of society to become more effective economic actors, or that government-sponsored social welfare systems permit society’s marginalia to become more able to exercise their individual liberties. Perhaps the fundamental

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norms of individual liberty and efficiency themselves should be reconsidered.

CONCLUSION The classical and contemporary liberal approaches to private property rights rely heavily for their legitimacy on ideals of efficiency and liberty, which are now being exported internationally as part of the dynamic of globalization. While these notions originated under historical circumstances that no longer obtain in contemporary society, they retain significant power to resist challenges from those with a different vision of how best to achieve social well-being. One suspects, however, that it is the talismanic character of efficiency and liberty as rhetoric of legitimation, rather than their demonstrable effects on social wellbeing, that supports the resiliency of the liberal private property regime. By rethinking the parameters and the inner dynamics of the ideals of efficiency and liberty, perhaps new approaches can be found that achieve these goals more effectively by acknowledging and responding to the material realities under which they operate.

NOTES 1. Carol Rose lists a broad range of justifications for property rights, including (1) priority; (2) power-spreading; (3) independence; (4) symbolics; (5) civilizing tendencies; (6) distraction; and (7) pursuit of luxury See Rose 1995–96. Without denying the merits of such a detailed approach, I would suggest that each of the enumerated justifications for private property rights fits within the broad parameters of economic and political utility. 2. Rose’s critique of Stick’s analysis focuses on the perspective of the “rational utility maximizer” (RUM), who serves as an individuated expression of social response to the alternatives presented by Rawls and Nozick, and who in Rose’s view find both somewhat wanting. See Rose 1987; Stick 1987b. 3. While, of course, issues of nationalism and imperialism were also evident, the methods and mechanisms for economic organization and growth were key points of difference between the Soviet Union and the NATO alliance during the Cold War. See Brzezinzki, 1970. 4. Gramsci’s ideas about “cultural hegemony” should cause observers facing the rhetoric of globalization to question whose interests are being served by the dissemination and consumption of these ideas. See Gramsci 1971; Greer 1982; Hunt 1993. 5. For discussion of norms, see Kelsen 1991. For application in the context of regulation of competition, see Craig 1994; Bryden 1991. 6. For discussion of the potential role for psychology and sociology in law and economics analysis, see Ellickson 1989. For discussion of the potential for including imperatives of social justice in the calculus of efficiency, see Stigler 1992. 7. Compare Malloy 1995 with Rose 1987.


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WHAT GOVERNMENT CAN DO FOR PROPERTY (AND VICE VERSA) Carol M.Rose

INTRODUCTION Economic reasoning is fundamental to property. Even ancient and medieval natural law theorists thought this; while they pointed out that property had a variety of virtues, such as enabling owners to practice liberality, they also observed that a central function of property is to induce people to invest care and effort in the things that they own (Aristotle; Aquinas). The classical economists of the seventeenth and eighteenth centuries focused particularly on that central function, and generalized it to a single dominating object for property regimes: by rewarding effort, investment and careful management, property fosters the production of wealth, not simply for individuals but for society at large (Bentham 1802; Locke 1690). Modern neoclassical economists have added another point: property identifies who has what, and thus makes trade possible (Holderness 1985); trade in turn encourages specialization, rendering individual effort on one’s own property all the more valuable, and additively creating what Adam Smith called the “Wealth of Nations” (Smith 1776). Marxist and related economic critics, of course, have argued that property serves largely to reinforce class inequality. But for such critics as well as for proponents, property plays a central role in economic ordering, and hence has clear importance for government. But which came first, government or property? Classical proponents of property engaged in something of a battle of the books on the point. John Locke took the “bottom up,” property-first position, that is, that human beings invent property prior to government, and indeed only bother with government in order to protect property (Locke 1690). Jeremy Bentham, on the other hand, was a “top-down” advocate, responding that property is nothing but a basis for expectation, while secure expectations themselves are entirely the creation of law-that is to say, government (Bentham 1802). The practical legal popularizer William Blackstone no doubt would have thought this debate “savours too much of nice and scholarly refinement” 1 but a certain version has persisted into our own time. Today, post-socialist governments try to decide what kinds of tweaking from above might induce the creation of private property down below; but in the meantime, the so-called “new institutional economists” take the bottom-up perspective, pointing out that vast numbers of informal property regimes exist throughout the world without benefit of government (McCay & Acheson 1987; Ostrom 1990). The position of


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this essay is that property in fact mixes bottom-up with top-down origins; but the two perspectives nevertheless illuminate some important features of the relationship of property to government.

BOTTOM-UP PROPERTY Much speaks for the bottom-up viewpoint. Small children astonish their elders with their precocious insistence on mine and thine, but adults themselves assert property claims at every turn. People form queues for movies and opera tickets, they put coats on library seats to save favorite spots, they place boxes or chairs in newly shoveled parking spaces in snowy weather, and they thus create recognizable property interests even in the face of official prohibitions on property claims (as is indeed the case with parking spots on public streets) (Rose 1994). On a more sinister note, when black-marketeers traffic in illegal drugs, endangered species, or contraband ozone-depleting chemicals, they illustrate an upwelling of property and its close cousin, contract, in the teeth of government prohibition. More benignly, the burgeoning of electronic communication has coincided with a remarkable efflorescence of new and informal common property regimes, as user groups create discussion spaces while devising tactics for policing ill-behaved interlopers. In the last generation, institutional economists have considerably enriched our knowledge of a particular type of “bottom-up” property, the sometimes complex “common property regimes” through which communities all over the world informally manage such diverse resources as fisheries, forests, pastures, and irrigation systems (Acheson 1988; McCay & Acheson 1987; Ostrom; 1990). Here too the role of government may be irrelevant or even obstructionist, a point to be discussed later in this essay. No one knows quite how people create property from below, even though we know that in fact they do so. The conventional Lockean story is that property is a reward for mixing one’s labor with something. This “desert” theory is attractive to some as a moral principle, but it is rather misleading in practice. The true hallmark of property is rather that other people recognize one’s claim; otherwise, no matter how much labor one has mixed with a thing, one has only a temporary occupation of it, lasting only as long as one can defend it against interlopers and predators (Rose 1994). But what explains this recognition by others? Why doesn’t the other person take the predator role-that is, grabbing and running away with what you claim? At bottom, property relations are a kind of Prisoners’ Dilemma, in which the players are collectively better off by cooperating (recognizing one anothers’ claims), but individually better off by defecting (grabbing and running). Sheerly self-interested rational actors would never get a property regime off the ground, but would instead behave like rational predators (de Jasay 1989; Elster 1989). Luckily for everyone, we do not behave entirely like rational actors, and instead we manage to come up somehow with the cooperation, mutual forbearance and trust that lie at the basis of property (Frank 1988; Hoffman &

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Spitzer 1985; Rose 1995; Sabel 1992). Modern game theory suggests that we do so most readily when we are involved in repeated play or long-term relationships, or when we care about reputation for the sake of future deals (effectively, an extended form of repeated play) (Axelrod 1984;Ullman-Margalit 1977). In turn, the game theory approach suggests that norms of cooperation will form more easily among some groups than others. Robert Ellickson, for example, predicts the formation of norms of entitlement and forbearance among “close-knit” groups; the members of such groups are likely to be involved with one another through a variety of interactions, and they have many opportunities to observe one another’s behavior and to police mischief through such informal sanctions as gossip and ostracism. But Ellickson is agnostic about the prospects for norm-formation in larger groups (Ellickson 1991). All this suggests that there are limits on informal property regimes: they may emerge relatively easily among close-knit groups, but they may be vulnerable and ineffective in the context of relationships with strangers. It is in this more distant context that formal governance and the rule of law moves onto center stage in the formation and defense of property.

TOP-DOWN PROPERTY Ever since the eighteenth-century flowering of the classical economic arguments for property, many governments have gone beyond bottom-up property and have attempted to foster private property from above (Rose 1996). Governmental leaders have often done so with the idea of creating greater social wealth and hence more taxable revenue, but the practical limitations of informal property regimes also suggest why governments have needed to take such steps. Property regimes are never costless. It costs something to put up a fence, to watch out for trespassers, and to repel them or get the neighbors to help in doing so. Under some circumstances, the technological and organizational costs of property may be too high for individuals and small groups to shoulder. This may be the case, for example, where strangers enjoy relatively easy and unmonitored access to the propertized resource (your wallet on the crowded subway), or where one needs to enter property relations with strangers (buying or selling stocks), or where the resource itself is so large or multi-faceted that it exceeds the management capacity of a close-knit group (a system of roads). In such cases, a government may be the most efficient entity to define or defend property-not necessarily owning property itself, but helping individuals or groups to do so. From this comes the top-down argument that property depends on law and government. It may be that property does not require government or law all the time, but property is much more likely to require government where stranger-relations predominate.


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GOVERNMENTAL ROLES IN PROPERTY—“EVERYDAY” AND “HOT POTATOES” Given the great numbers and importance of stranger relations in a modern commercial society, what can government do for property? In many instances, of course, government impedes or disrupts property rather than assisting, sometimes due to ideological commitments incompatible with property, sometimes due to incompetence and the temptations of rent-seeking, sometimes due to inertia or opposition from stakeholders in prior economic arrangements (Libecap 1989; Olson 1982). But in what follows, I will generally describe roles that government can take in facilitating, maintaining and policing property relations, given the necessary commitment and capacities. These governmental roles divide roughly into two categories: the “everyday,” about which there is relatively little controversy, and the “hot potatoes,” about which there is considerably more. I begin with the everyday governmental functions in property, and then move to the more controversial. Government can play the cop. All modern states have criminal laws against larceny. These can be quite elaborate, including not only coarse crimes like armed robbery, but also the more subtle forms of involuntary transfer, like embezzlement, fraud, and intimidation. One seldom needs such laws in the church group or the close-knit neighborhood, except when the parishioners or the neighbors find that perhaps they did not know one another quite as well as they thought, or when they realize that their defenses are weak against one who turns predator. The tort system polices inroads onto property as well, giving the aggrieved party the right to restoration or damages; one function of these remedies is to deter careless or cavalier treatment of the property of others (Posner 1992) Neighboring property owners may sometimes engage in mutually conflicting activities on their properties (one operates a jackhammer, the other plays the dulcimer); where they cannot resolve their own disputes, the courts in trespass or nuisance suits play the role of deciding which should prevail, frequently referring as well as they can to community norms of reasonable behavior (Ellickson 1973; Halper 1990; Merrill 1985; Polinsky 1979; Polinsky 1980). Government can help to publicize property entitlements. Property often passes from one person to another, then to another, and so on; hence information about property is especially important, so that successive owners know what they are getting (Epstein 1997). In a role that is as unremarkable as it is essential, governmental bodies keep records so that people can find out who owns a given property, and what claims might be outstanding against it. One form of publicity is action through the courts: through judicial proceedings, claims against a given property become public knowledge. But especially important vehicles for publicity are the various recording and registry systems for land transactions. It is not an accident that land is a major locus of such records. Unlike other assets,


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land effectively never goes away, and thus claims on a given piece of land can accrete virtually indefinitely. Without some system of records, we would have to rely on local memory for information about claims, and we would be confined to relatively simple land transactions, rather than the leases, mortgages, and special use restrictions we now can concoct on landed property. 2 In the United States, the land recording system is easy to use, but this ease comes at the cost of a certain sloppiness. Other countries have struck different balances. And of course government has no monopoly on record-keeping. Other parties can keep property records too, as title insurers do with “banks” of title abstracts, or as credit agencies do with files on debtors’ repayment history (McCormick 1992). Government can provide off-the-rack property entitlements. This function is closely tied to record-keeping. Once again, arrangements about property are unlike many contractual agreements in that they have a life beyond the immediate parties. When you make a deal with your neighbor to guarantee yourself a driveway easement across his land, it is very likely that you will want your arrangement to apply not only to the two of you, but also to whoever buys his house or your house when one of you move away, so that your house will have secure access indefinitely (Ellickson 1973). But because you want your property arrangements to have this longer life beyond your own and your neighbor’s personal ownership, it is important that your immediate deal be packaged in such a way that subsequent purchasers can understand the way it works. Here again, government can help by defining off-the-rack versions of entitle¬ ments that individuals (or at least their lawyers) can understand; even more than standard-form contracts, off-the-rack property devices can reduce transactions costs among multiple parties, including multiple parties over multiple time periods. Common-law courts set an example in past years by creating the system of “estates in land.” The various estates now seem almost risibly crude and antiquated (references to the “fee tail” seldom fail to bring a smile); but the estates system did define a variety of standard-form interests in land, including some, such as the “life estate,” that continue to have modern utility. More recently, courts and legislatures have created a number of standard-form property arrangements more attuned to modern needs, from such simple matters as an easement for a walkway across a neighboring property, through sets of subdivision restrictions that bind successive owners, to highly complex condominium packages for ownership within multiple-dwelling housing developments, or even to corporate shares in publicly held business firms. Such off-the-rack property packages often implicitly or explicitly include mandatory features, often relating to disclosure; just as nineteenth-century courts would not enforce easements that did not signal their presence by physical or recorded signs, 3 so modern securities law requires that a corporate share offering be accompanied by a disclosure statement. Private parties may contract around many features of off-the-rack property forms—for example, parties may create specific condominium restrictions or securities features—but the process of modification draws attention to the changes; thus either through default rules or


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mandatory terms, our legal institutions normally require that individually tailored features be clear enough that subsequent purchasers know what they are getting (French 1982; Ayres and Gertner 1989). One should notice that, as with governmental record-keeping or publicity devices, standardized or off-the-rack property forms are especially important in deals among strangers, who are not already intimately acquainted with a given property, its historic provenance or current owners. Government can terminate obscure, neglected or outmoded property claims. Governmental bodies—again, especially the courts, but legislatures too—have devised a variety of ways to dispose of unduly burdensome claims against property. Such remedies reduce overall transactions costs, and as such they are closely related to recording systems and off-the-rack property packages. Thus, if you do not record or register your claims, either to real property or to commercial interests, you may forfeit those claims over against someone else who innocently buys your property and had no way to find out about your prior claim. If you and your neighbor agree to place conditions on your respective properties, the courts will not hold subsequent purchasers to your conditions, unless the conditions themselves are obvious either through direct observation or through registration in the land record system. Such threats of governmental dissolution, of course, give people incentives to publicize and record their claims and to use standard-form property packages (Dukeminear and Krier 1998). Related but somewhat more controversial are governmental terminations of what might be called stale or neglected claims. Statutes of limitation are common ways to cut off stale claims against others, and they are present in other legal arenas aside from property law—even crimes sometimes may not be prosecuted beyond some statutorily defined time. But squatters have doubtless existed as long as property in land, and something must be done to settle their claims, especially after third parties come to regard them as owners. In AngloAmerican property law, the doctrine of “adverse possession” enables an actual user of land to claim ownership rights to property after a certain period of undisputed use, even though this means that the trespasser or squatter dispossesses the true owner. Understandably, doctrines of this sort are limited to cases in which the true owner has had plenty of time and opportunity to notice that someone else is using his property, but nevertheless neglects to oust the trespasser. 4 During this period, however, the neighbors and potential purchasers may well have come to think that the trespasser is in fact the true owner; they may have made trades and deals on this basis, and in order to prevent the disruption of their expectations, after some point the courts cut off the claims of the old owner. Even more controversial, government sometimes cuts off property claims because they are obsolete or out of tune with surrounding circumstances. Easiest to understand is the nuisance scenario: a house that is so decayed as to present a fire hazard may be destroyed as a public nuisance. This is simply a way to cope with the externalities of neglected property, and it is arguable that all property


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owners are better off, ex ante, if government has the power to take such measures. In recent years, private planned communities and subdivision restrictions have created scenarios in which governmental institutions may usefully assist individuals to deal with obsolescence. An old subdivision restriction, for example, might call for what are now outdated building materials, but because these subdivisions can be quite large, there could be serious holdout problems if each property-holder’s consent were required for modification. Doctrines of “changed circumstance” enable courts sometimes to void restrictions that have lost their original purpose and value, obviating the need to collect unanimous owner consent. Such doctrines are controversial because they may appear to erode principles of freedom of contract; but on the other hand, the availability of a moderately applied judicial doctrine of “changed circumstance” arguably makes all the subdivision properties more valuable ex ante, by eliminating serious holdout problems (Reichman 1982). Government can provide public goods and manage large-scale resources. Everyone is aware of the role that government can play in protecting both life and property by providing for the common defense. Government can also help to provide the transportation and communication infrastructure that (among other things) enlarges the scope of commerce, and thus indirectly adds to the value of private property by creating a larger market for it (Rose 1994). For such purposes, governments often hold the power of eminent domain in order to assemble the necessary land without threat of holdout by individual landowners. Finally, governments often manage large-scale resources whose value is great but not easily captured by private individuals—the air mantle, whose relative purity is important to public health; surface and subsurface waters having similar importance; common recreational facilities in the forms of parks or scenic and educational areas, whose availability arguably also enhances public health and general civility. In turn, in recent years there has been special interest in governmental devolution of large-scale resource management back to individuals, through “hybrid property” devices like tradeable emission rights or individual fishing quotas. This leads directly to the next subject: Government can create new forms of property to manage diffuse resources. Some types of resources—like air or water—do not lend themselves easily to conventional private property, because these resources are large, diffuse and difficult to define in any physical way. Yet the absence of rights may dissipate rents and encourage waste, particularly where mutually unknown strangers have open access to the resources. A well-known example is the fishery, where open access has given rise to a classic account of rent dissipation now widely (if somewhat controversially) known as “the tragedy of the commons” (Gordon 1954; Hardin 1968; Scheiber 1997). 5 Government can help to preserve such resources by limiting access, and sometimes this has entailed a further step: after placing a cap on the total allowable use of a given resource stock, governments can subdivide and reallocate the allowable total ration into smaller individual portions, which in the most sophisticated versions can be traded to those who


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most want or need them. The hope is that these hybrid property-like rights will do what property often does for us: encourage investment and careful use of the propertized resource (Stewart 1990). Such property-like rights are creatures of law—defined and defended largely by abstract law rather than by physical fences. Wildlife preservation illustrates a relatively old example of hybrid property, albeit of a non-tradeable variety: governments have capped the annual total take of certain wildlife stocks, while granting individual hunting and fishing licenceseffectively individual property rights—up to the limit of that allowable take. In a more sophisticated version, governments have limited the total loading of certain pollution emissions into the air, while granting “tradeable emission rights”—a set of licenses to pollute—within the limits of the total allowable pollution loading (Rose 1991; Stewart 1990). Somewhat analogously, governments have created property rights in the electronic spectrum, though the forms of these rights has been criticized (Coase 1959). And of course governments have created limited patent and copyright property in order to encourage the production and dissemination of creative ideas, in an arena where conventional private property rights are especially difficult to maintain (Kitch 1977). Once again, in small or close-knit groups, governmental rights-creation may be unnecessary. In that context, people have many ways to police and enforce the “ownership” even of quite unconventional property; academic groups, for example, reward original ideas and generally have an etiquette that restrains members from appropriating one another’s ideas without attribution. Similarly, with respect to natural resources, close-knit groups often find ways to cooperate to avoid rent dissipation, over time creating elaborate common property regimes for conserva-tionist management of fisheries, pastures and water (Ostrom 1990). Indeed, one role for government may be to encourage such close-knit groups to maintain common property regimes of their own, as for example allocating resource rights to indigenous communities, or allowing patent holders to form “pools” of related patents (Breckenridge 1992; Merges 1996). Unfortunately, as we shall see shortly, government sometimes acts-wisely or unwisely-to prevent such common-property regimes. All the above government roles are relatively conventional in property, though certainly very important. But other governmental roles in property are considerably more controversial. The next few paragraphs briefly describe these “hot potatoes,” without attempting to solve the controversies they engender. Governments can arrange for transitions from one property regime to another. This is one of the hottest of the hot potatoes because it raises the very difficult question of “takings” of property (Epstein 1985; Fischel 1995; Michelman 1968). One reason that transitional issues arise is that resources do not lend themselves equally easily to treatment as property. For example, in the environmental area, land is quite easy to “propertize,” but air or water are more diffuse and hence much more difficult to stake out, and are hence less likely to be marked out as property. Owners of the propertized land resource can grow


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accustomed to using adjacent unpropertized water, air and wildlife “for free”; and they may come to believe that their uses of these diffuse resources are part of their property rights even when the air or water becomes congested with damaging pollution. A fundamental dilemma is raised here. For the sake of encouraging investment, governments should wish to secure owners in their property claims; but for the sake of correcting and avoiding common pool losses, property rights may have to be redefined through regulation-for example, pollution control may cut back on what landowners thought were their rights to burn leaves or dump wastes into an adjacent stream (Libecap 1989; Rose 1997). Governments can address this oft-repeated dilemma with a variety of compromises, though none may be entirely satisfactory as a matter of theory; such compromises include grandfathering, some compensation under various versions of constitutional “takings” clauses, and simply requiring owners to “lump it” insofar as they have arguably not been singled out for special losses (Libecap 1989). Government can prohibit property. Governments sometimes discourage the treatment of resources as property. Contraband items-weapons, drugs, endangered eagle feathers, many body parts, and so forth-are banned from ownership in part on the theory that the ban on ownership will dry up the market for such goods and the unattractive activities surrounding their use. More interestingly, governments often also ban property in order to undermine the close-knit groups that would otherwise claim some kinds of resources as a kind of informal group property. Thus governmental strictures against workplace nepotism, racial mistreatment and sexual harassment effectively prevent certain groups of workers from treating the workplace as their own “turf” (Schultz 1998). Other governmental restrictions prevent enterprises (including criminal conspiracies like the Mafia) from carving up exclusive territories or creating monopolies, effectively treating their respective customer pools as their own private preserves. Governments also sometimes prevent local communities from treating certain natural resources as their own; since the nineteenth century, for example, many governments have claimed that fisheries are open to all citizens of the jurisdiction (though not necessarily of other jurisdictions), just as courts in some areas have nullified private communities’ claim to own certain portions of the beach (Rose 1994). In the case of restraints on mob cartels or the banning of workplace discrimination, citizens generally applaud governmental inroads on what are effectively predatory or discriminatory property regimes. But the governmental dissolutions of informal property claims may be more problematic in other arenas. In particular, when a central government dissolves local community claims to natural resources, it may turn long-standing, community-based common property regimes into “tragedies of the commons”; this is because the ensuing access by the general public may disrupt local management, overexploit the resource, and transform an otherwise renewable forest, fishery or pastureland into a wasting asset, sometimes creating serious human rights claims among local indigenous communities (Breckinridge 1992; Ostrom 1990).


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Governments can redistribute property. This is no doubt the very hottest of the hot potatoes, at least from a libertarian perspective (Epstein 1985). But from a practical perspective, redistribution is quite common, even in governments where free market principles generally dominate. There are various economic rationales for enforced governmental redistribution of property. One is that the marginal utility of wealth declines as one acquires more, an argument that has been described as an “uneasy case” for a graduated income tax (Blum and Kalven 1953). Another rationale draws on concepts from insurance or risk aversion, that is, that most people would rather spend a bit more now for the sake of knowing that they will never face destitution without assistance. An influential philosophical version of this rationale appears in John Rawls’ famous Theory of Justice (Rawls 1971). Still another is an argument from constrained altruism: I would like to give to the poor, and so would other citizens, but we only want to do so if we know that everyone else is doing so as well; hence we all want government to act as a mandatory collection agent to solve our collective action problem (Posner 1992). 6 Historic views about property certainly assumed that the haves should give to the have-nots; perhaps the root of this sentiment taps one or more of these economic rationales, even though the historical arguments were much more likely to have been couched in the language of noblesse oblige or religious obligation (Rose 1994). As with so many other aspects of governmental roles with respect to property, however, the redistributionist role for government seems much stronger where social networks grow large enough to include strangers. Under those circumstances, one cannot rely on personal knowledge, shaming sanctions, gossip and the like gently to urge the other neighbors to do their part.

CONCLUSION These, then, are some of the major tasks that government plays with respect to property. A point that I have pressed throughout is that these governmental roles make the most difference in the context of stranger relationships. Close-knit groups and repeat players often can work out for themselves the necessary informal norms about who owns what, and what that ownership includes, and how infractions might be policed. Indeed, close-knit groups continue to create property norms that are sometimes quite unlike the formal legal rules (Ellickson 1991). From that perspective, governmental definitions and enforcement of property fill in where informal property norms break down or cannot take hold, particularly in the context of stranger relations. Perhaps it was in that sense that Locke thought that human beings acquired property first, and then formed government to protect their property. But the intriguing analytical question then becomes, how do people form governments? Just as property is a PD game, rather mysteriously overcome in fact when people do form informal property norms, so their formation of


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government to protect property is a larger PD game, equally mysteriously overcome in fact. Rational actors, one would suppose, would just as soon leave the committee work and difficult enforcement duties of governance to others, enjoying the fruits of a governmentally secured property regime while shirking the startup costs, administrative work, and policing expense; but if we all were to take this rational attitude, government would never get started or keep going (Elster 1989; Krier 1992; Rose 1994). How then does government get started, and how does it continue? One possibility is that property and commerce themselves educate a citizenry in the minimal civic responsibilities entailed in starting a government and keeping it running. At least some eighteenth-century thinkers thought so; some promulgated the idea that “gentle commerce” makes people pay attention to the needs and wants even of complete strangers (Hirschman 1977). On this view, property, far from being solitary and individualistic to the point of isolation, instead is an institution that creates a community of interest and fosters trust, cooperation and responsibility—in short, the preconditions for government. But then, of course, by providing even an awkward and flawed framework for property in the larger arena of stranger relationships, government also enhances and shapes the role of property within smaller groups. It seems highly likely that public discourse about property rights, and about the give-andtake, responsibility, and mutual forbearance entailed in those rights, has feedback effects on citizens’ understanding of their much more intimate forms and norms of property (Sunstein 1996). That is why, in answer to the question whether property is a bottom-up or a top-down institution, it is equally just to say that it is both, and at the same time.

NOTES 1. Blackstone so described the debate over whether or not a person needed the consent of the rest of mankind before appropriating previously unowned things out of the state of nature (Blackstone, 1775–79, vol. II, p. 8). 2. For some of the elaborate ceremonies to memorialize legal relations in the absence of written records, see Hibbitts (1992). 3. Judicially created “servititudes” -claims against property that would run with the land-had a number of features that assured that they would be noticed by subsequent purchasers. English courts, for example, refused to enforce “negative easements” that were unlikely to give notice of themselves, and American courts required that servitudes be created in transactions that were likely to be memorialized in a deed. For a description and illustration of some of these devices, see Dukeminear and Krier 1998, pp. 854–868. 4. A further limitation in some jurisdictions is that the trespasser must have some claim to be right-fully on the property (even if the claim is mistaken), a doctrine that effectively limits conscious market bypass by trespassers. In an interesting study, Richard Helmholz found that juries tend to be unsympathetic to the claims of wilful trespassers, whatever the actual formal doctrine of the jurisdiction (Helmholz 1983).


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5. The name, “tragedy of the commons,” derives from Garrett Hardin’s article of that title (Hardin 1968), though the theory had been worked out earlier (Gordon 1954). More recently, institutional economists have attacked the idea that the commons is necessarily tragic, requiring either individual private property or government intervention to salvage resources. Instead, these scholars argue that the “tragedy of the commons” literature has confused common property regimes with unmanaged open access. In their view, open access may indeed lead to tragic overuse or underinvestment, but common property regimes have often been well managed for long periods of time by communities or groups without either individual property or governmental intervention. Indeed, these scholars maintain that individual property may be inappropriate for the commons, and that government sometimes is actually the culprit in destroying previously viable informal common property regimes (Ostrom 1990; McCay and Acheson 1987). 6. Though he does not discuss redistribution as such, Jon Elster gives an extensive analysis of a similar phenomenon, that is, social cooperation conditioned on cooperative behavior by others (Elster 1989).

REFERENCES Acheson, J.M. 1988. The Lobster Gangs of Maine . Hanover, NH: University Press of New England. Aquinas. 1957. The Political Ideas of St. Thomas Aquinas , edited by D.Bigongiari. New York: Hafner Publishing Co. Aristotle. 1962. The Politics of Aristotle , editied by E.Barker. New York: Oxford. Ayres, I., and Gertner, R. 1989. “Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules.” Yale Law Journal 99:87. Axelrod, R. 1984. The Evolution of Cooperation . New York: Basic Books. Bentham, J. 1931 (1802). “Principles of the Civil Code.” In Theory of Legislation , edited by C.K. Ogden. London: Kegan Paul, Trench, Trubner & Co. Blackstone, W. 1979 (1765–69). Commentaries on the Laws of England (4 vols.). Chicago: University of Chicago Press. Blum, W.J., and H.Kalven, Jr. 1953. The Uneasy Case for Progressive Taxation . Chicago: The University of Chicago Press. Breckenridge, L. 1992. “Protection of Biological and Cultural Diversity: Emerging Recognition of Local Community Rights in Ecosystems Under International Environmental Law.” Tennessee Law Review 59:735. Coase, R. H. 1959. “The Federal Communications Commission.” Journal of Law and Economics 2:1. de Jasay, A. 1989. Social Contract, Free Ride: A Study of the Public Goods Problem . Oxford: Clarendon. Dukeminear, J., and J.E.Krier. 1998. Property (4th ed.). New York: Aspen Law and Business. Ellickson, R. C. 1973. “Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls.” University of Chicago Law Review 40:681.


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Ellickson, R. C. 1991. Order Without Law: How Neighbors Settle Disputes . Cambridge, MA: Harvard. Elster, J. 1989. The Cement of Society: A Study of Social Order . Cambridge: Cambridge University Press. Epstein, R. A. 1985. Takings: Private Property and the Power of Eminent Domain . Cambridge, MA: Harvard. ——.1997. “A Clear View of The Cathedral: The Dominance of Property Rules.” Yale Law Journal 106:2091. Fischel, W. A. 1995 Regulatory Takings: Law, Economics, and Politics . Cambridge, MA: Harvard. Frank, R. H. 1988. Passions Within Reason: The Strategic Role of the Emotions . New York: W. W. Norton & Co., 1988. French, S. F. 1982. “Toward a Modern Law of Servitudes: Reweaving the Ancient Strands.” University of Southern California Law Review 55:1261. Gordon, H. S. 1954. “The Economic Theory of a Common-Property Resource: The Fishery.” Journal of Political Economy 62:124. Halper, L. 1990. “Nuisance, Courts and Markets in the New York Court of Appeals, 1850–1915." Albany Law Review 54:301. Hardin, G. 1968. “The Tragedy of the Commons.” Science 162:1243. Hibbitts, B. J. 1992. ‘“Coming to Our Senses’: Communication and Legal Expression in Performance Cultures.” Emory Law Journal 41:873. Hirschman, A. O. 1977. The Passions and the Interests: Political Arguments for Capitalism Before Its Triumph . Princeton, NJ: Princeton University Press. Helmholz, R. H. 1983. “Adverse Possession and Subjective Intent.” Washington University Law Quarterly 61:331. Hoffman, E., and M.L.Spitzer. 1985. “Entitlements, Rights and Fairness: An Experimental Examination of Subjects’ Concepts of Distributive Justice.” Journal of Legal Studies 14:259. Holderness, C. 1985. “A Legal Foundation for Exchange.” Journal of Legal Studies 14:321. Kitch, E. 1977. “The Nature and Function of the Patent System.” Journal of Law and Economics 30:265. Krier, J. E. 1992. “The Tragedy of the Commons, Part Two.” Harvard Journal of Law & Public Policy 15:325. Libecap, G. D. 1989. Contracting for Property Rights . Cambridge: Cambridge University Press. Locke, J. 1963 (1690). “The Second Treatise of Government.” In Two Treatises of Government , edited by P.Laslett. Cambridge, England: Cambridge. McCay, B.J., and J.M.Acheson (Eds.). 1987. The Question of the Commons: The Culture and Ecology of Communal Resources . Tucson, AZ: University of Arizona Press. McCormick, J. L. 1992. “Torrens and Recording: Land Title Assurance in the Computer Age.” William Mitchell Law Review 18:62. Merges, R. P. 1996. “Contracting Into Liability Rules: Intellectual Property Rights and Collective Rights Organizations.” California Law Review 84:1293. Merrill, T. W. 1985. “Trespass, Nuisance, and the Cost of Determining Property


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Rights.” Journal of Legal Studies 14:13. Michelman, F. I. 1968. Property, Utility, and Fairness: Comments on the Ethical Foundations of ‘Just Compensation’ Law.” Harvard Law Review 80:1165. Olson, M. 1982. The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities . New Haven, CT : Yale University Press. Ostrom, E. 1990. Governing the Commons: The Evolution of Institutions for Collective Action . New York: Cambridge. Polinsky, A. M. 1979. “Controlling Externalities and Protecting Entitlements: Property Right, Liability Rule, and Tax Subsidy Approaches.” Journal of Legal Studies 8:1. ——.1980. “Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies.” Stanford Law Review 32:1075. Posner, R. A. 1992. Economic Analysis of Law (4th ed.). Boston: Little, Brown. Reichman, Uriel. 1982. “Toward a Unified Concept of Servitudes.” University of Southern California Law Review 55:1179. Rawls, John. 1971. A Theory of Justice . Cambridge, MA: Harvard. Rose, C. M. 1991. “Rethinking Environmental Controls: Management Strategies for Common Resources.” Duke Law Journal 1991:1. ——.1994. Property and Persuasion: Essays on the History, Theory, and Rhetoric of Ownership . Boulder, CO: Westview Press. ——. 1995. “Trust in the Mirror of Betrayal.” Boston University Law Review 75:351. ——.1996. “Property as the Keystone Right?” Notre Dame Law Review 71:329. ——. 1997. “Property Rights and Responsibilities.” In Thinking Ecologically: The Next Generation of Environmental Policy , edited by M.R.Chertow and D.C.Esty. New Haven, CT: Yale University Press. Sabel, C.F. 1992. “Studied Trust: Building New Forms of Co-operation in a Volatile Economy.” In Industrial Districts and Local Economic Regeneration , edited by F.Pyke and W.Sengenberger. Geneva: International Institute for Labour Studies. Scheiber, H.N. 1997. “From Science to Law to Politics: An Historical View of the Ecosystem Idea and Its Effect on Resource Management.” Ecology Law Quarterly 24:631. Schultz, V 1998. “Reconceptualizing Sexual Harassment.” The Yale Law Journal 107:1683. Smith, A. 1869 (1776). An Inquiry into the Nature and Causes of the Wealth of Nations (2 vols.), edited by J.E.T. Rogers. Oxford: Clarendon Press. Stewart, R. 1990. “Privprop, Regprop, and Beyond.” Harvard Journal of Law and Public Policy 13:91. Sunstein, C. R. 1996. “Social Norms and Social Roles.” Columbia Law Review 96:903. Ullmann-Margalit, E. 1977. The Emergence of Norms . Oxford: Clarendon Press.

WORDS FROM A LARGELY FORGOTTEN MAN John Henry Schlegel

INTRODUCTION After I had agreed to contribute to this volume, I reflected on the not so subtle irony of my doing so. My hero, if I have any hero, is the American Legal Realist, Underhill Moore. His first significant publication was a savage criticism of a book much like this one, a book called The Rational Basis of Legal Institutions, that offered a series of essays on several legal institutions—liberty, property, succession, the family and punishment. Moore observed that legal institutions were only patterns of habitual human behavior, the rationality of which depended on the ends to which the behavior was a means and so rephrased the editor’s question as, “What are the means to legal institutions and to what proximate ends are legal institutions means? Concretely, of what facts are group habits consequences and what are the consequences of group habits?” (Moore 1923). There is a wonderful reductionism to Moore’s observation, as well as a behaviorism, that securely position him in the 1920s and not the 1990s. Both the reductionism and the behaviorism raise concerns about the relevance of Moore’s observations to conditions today. Moreover, as the editors have not posed the question about the rationality of either government or property, that fact would appear to make Moore’s observations still less relevant. However, to ask a question about the fundamental relationship between government and property is to pose a question at a very high level of generality, a level at which the wisdom underlying the legend on my son’s t-shirt, “Never underestimate the power of stupid people in large groups,” becomes quite indistinct. So, in Moore’s spirit I wish to suggest that for the question posed to make much sense we need to drop the level of generality significantly. For nearly 80 years scholars have recognized that to identify something as “property” is not a matter of description, but of laying a label on a set of relationships between actual or potential streams of income or enjoyment and various individuals—owner(s) and non-owner(s) of various types. Property is a conclusion, not a premise. The same is true of “government.” Identifying something as a government is not a matter of description, even of a set of formal powers, but the laying on of a label on a set of relationships between citizen(s) (and also non-citizen[s]) that are mediated by an apparatus of persons that has its own set of internal and external relationships. Government is a conclusion, not a premise.


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The problem with conclusions like property or government or sovereignty or liberty is that humans then use these conclusions as premises for reasoning. Thus, the conclusion that someone has or lacks a “property interest” is the premise for much reasoning about the applicability of the Fourteenth Amendment to a whole range of “government” activities. In a like manner, the conclusion that some aggregate of human beings is not a government, that is, that the group’s actions constitute a “private” activity, not a “public” one, is the premise for much reasoning about when group activity is even subject to the restrictions on conduct imposed by that amendment. The conclusions thus hide the questions being asked and answered, generally questions about appropriate behavior by humans or groups of humans, often the stupid people in large groups whose potential for destructive action my son wishes to see that we do not forget, toward each other. Questions hidden are questions not addressed, often with horrendous consequences at a later point in time. Thus, I wish to suggest that the fundamental relationship between property and government is that they are concepts that at best hinder the ability to pay attention to important questions about the economic and social relationships between and among individuals and groups and at worst allow some of those individuals and groups to avoid discussion of these questions at all. To illustrate this proposition I would like first to look at the treatment of declining industry in this country.

EXAMPLE: THE STEEL INDUSTRY By then end of the Korean War, if not earlier, it had become clear that the steel companies had stopped making capital investments in plant and equipment for anything but specialty steels. The reason was simple. The growth of the European Coal and Steel Community was supplying the needs of the relatively protected European market and the rebuilt Japanese steel plants had put in the best current technology and so enjoyed a significant cost advantage over American plants, a cost advantage that was exacerbated by wage differentials between the two countries with respect to factory labor. In the United States, steel, one of the two great anti-trust causes at the turn of the century, was essentially a dying industry. What to do with a dying industry, be it buggy whips, cast iron pipe, textiles or steel is a classic problem about which conventional economics has little to say beyond, “Shut it down; sunk costs are sunk!” That bit of advice is, on the whole, not helpful, for unfortunately, sunk costs are what support ways of life. And not just for workers and their families. They are career tracks for management; tax base for teachers and other public servants; hope for community leaders; resource industries for defense planners; continuing streams of income or business on the basis of which careers and retirements are built in commercial banking, investment banking, and investment management; not to mention the simple retirement income from pension plans or personal investments for management and workers. And while capital is mobile, at least until the music

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stops, labor is for the most part mobile only until real family roots are put down—say two children over the age of eight-and then not again until the children are old enough to find jobs on their own, at a time when age makes retraining a sticky proposition. Communities are not mobile at all. So, then how does one shut down this deep, complicated combination of dreams, economics and settled expectations? The question is anything but easy. In the 1950s the choice was high wages for a declining number of jobs; capital investment limited to necessary maintenance and specialty products, but not for adoption of the newly viable basic oxygen technology; and an ostrich-like view of the problem. By the 1970s, when the Viet Nam War ended a brief period of government support for the steel industry through defense purchasing, attempts were made to stave off the inevitable through trade sanctions. But, overall, communities like mine—Buffalo—were decimated. One by one steel plants closed as the market could no long support the highest cost producer even at a marginal cost price. Lower wage, largely non-union jobs were created in the mini-mills that processed, really recycled, scrap, but these were organized far away from the existing steel town communities. Some companies simply died out completely; other diversified into more promising investments, most often located in other areas of the country. Steel continues to die its slow and painful death. Might there have been another story? In one sense, of course, things might always have been different. But consider, for a moment one particular path to shutting down the basic steel capacity in United States steel industry. One might simply have directed the quick shut down of that capacity, paying workers of all stripes transition income as well as providing significant retraining benefits, and directing that existing capital be redeployed within the community to provide as many jobs as possible for the retrained workers. Call this Plan One. Plan Two might have been reducing wages to the point where existing plant was profitable, forbidding new hires and gradually terminating production as the work force retired, in the meantime identifying new, local uses for such capital as would be left at the actuarially predictable time when production would terminate. Plan Three then might have been mandating significant new investment in steel technology, lowering wages and providing job training for the workers who would run the new processes. Note that all three of these plans would have resulted over some time period in the retention of some proportion of jobs in the local community combined with some out migration of employees. All three implicitly would have recognized that steel wages were significantly raised in the 1950s at a time when there was only insignificant world competition for the domestic steel industry. All three implicitly would have rejected the solution of radically raising import duties on steel products as a way of maintaining a domestic steel industry, in effect subsidizing that industry through the increment added to the price of goods that use steel. And all three implicitly would have recognized that the providers of capital have some obligation to the communities that grow in


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response to decisions that are made to deploy that capital in particular geographic areas, but not an obligation endlessly to pour new money down the proverbial rat hole. While I have an aesthetic preference for Plan One, I do not think that there is any particular reason to prefer one of these plans over another. With that question put aside, what then would likely have been the objections to these plans had they been put forth seriously, and how would those objections have been phrased? I would expect those objections would have been as follows. Labor unions would have objected to any plan that would have resulted in a loss of membership, after all labor power is a function of numbers and dues are willingly paid only where power is effectively exercised. Unions as entities have no greater interest in closing their doors than do companies. Individual workers—blue collar, white collar or management—would have objected to any plan that would have reduced present income. Lives are built around expectations of stable present as well as future income. Such expectations are not easily given up. The question of these worker’s separate objections to any termination of basic steel production would likely have been more complicated. My guess is that to be the last of a breed is a pretty sad thing and so that the inability to pass one’s job down to others, always implicitly one’s children, however much one says “I am working to give my kids a better life than I had,” is an important objection to any plan, though clearly less strong of an objection than to loss of expected present and future income. Still less clear would be the reaction to retraining and the prospect of moving to find employment with newly acquired skills. Age surely is a factor here; in general, the young are more willing to do these things than the old. But without regard to age, there is no reason to believe that workers of any age or station are particularly attracted to the opportunity to try new jobs with new skills; for all, the fear of not succeeding in the new endeavor is great. That said, it is nevertheless true that for some the chance to escape old associations will be attractive, while for others, it will be quite terrifying. Thus, for workers, be they nominally management or unionized labor, there is likely to be a bias in the direction of keeping the status quo as long as possible. For the steel firms themselves the matter would likely have been no less problematic. Redeploying capital requires that a sale of existing capital goods be made. Unless one is exiting the industry entirely, purchase by a new and possibly more vigorous competitor is hardly an event to be welcomed, should such an entity even exist. But to exit entirely is for management to admit that they have been engaging in a fruitless endeavor for a long time, an admission of bad judgment that risks losing jobs, and to face the prospect either of distributing a stock of capital much diminished from what has been asserted earlier, close to admitting that lies have been told and therefore likely to bring forth stockholder displeasure, or of attempting to begin in a new business endeavor with respect to which management may share the same insecurities as does labor. So management will in all likelihood try to delay the day of closing as long as possible and, even if a decision is made to start over in a new field, to


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make the transition slowly so as to avoid admitting too obviously that the original endeavor ended in failure. Anyone who has followed the slow demise of the domestic steel industry will recognize that I have done no more than supply plausible motivations for the actual actors in this long-running saga. Bethlehem Steel seems to be following the strategy of delay; United States Steel has recently completed the strategy of slowly starting over. But it is important to recognize the economic effect of either scenario. With none of the parties comfortable with other than incremental actions, the inevitable result is that the modest stock of capital gets used up, not redeployed, giving a new meaning to the notion that sunk costs are sunk. And how will these decisions be explained and defended? By relying on the concepts of government and property. Since the only entity that might disequilibriate this sad set of interactions is some government, objections to such disequilibriation and to the pursuit of any of my alternative plans will be in terms of government and property, treated as trump cards, as ways of shutting off consideration of a problem and not as economic considerations directed toward identifying an acceptable solution. Consider Plan One. Management, relying on its property interest in the business, and labor, transmuting its contract interest into a property interest, will object to immediate shut down on grounds varying from due process to unconstitutional takings and will assert its separate protection of its private interest from depredations of the government. Transition income and retraining benefits, if secured through government expenditures, will be objected to on the grounds that they are only benefiting private interests, not governmental ones, and, to the extent demanded of the steel companies themselves, will be objected to because their provision violates the firm’s property interest in doing with its capital and income what it pleases. As to the directed redeployment of capital, the firm’s objection is likely to be the same and that of other communities that might possibly have been a site for the redeployment, of government interfering with the actions of private actors in the pursuit of their self interest. Now, I do not wish to oppose these arguments either by deconstructing the notion of property or by asserting some over-riding “public” interest in the question of how and when capital is to be redeployed from a given failing industry. Deconstruction leaves the political force of rhetoric largely untouched and at the same time makes tolerably clear that there is no such thing as “the” public interest, but only interests that various groups seek to validate, and so to have preferred, by having them identified as “public.” Rather, I wish simply to illustrate how the concepts of government and property are deployed to avoid dealing with the question at issue, to be an answer and not a question, and so to highlight the function of either concept in the argument over what to do with a failing industry. Now, I am sure that the reader has little interest in my going through the same painful analysis of Plans Two and Three. And I have neither the qualifications for, nor the interest in, identifying the “correct” solution to the hypothetical question of what should have been done with the declining American steel


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industry. But it does seem to me that another example of the way in which the concepts of property and government obscure, rather than answer, questions seems to be in order.

EXAMPLE: GOVERNMENTAL REGULATION All questions about what is colloquially know as Governmental Regulation, whether it be zoning, endangered species, occupational safety, pollution control or what-have-you, take the same form as the dispute over how to shut down the steel industry. Property and privateness are treated as definitive answers, just as are government and publicness. A less obvious example, one that shows the degree to which these concepts detrimentally pervade our thinking can be seen in an obscure debate that is at the root of much discussion over urban policy. What caused the decline of the central cities of the northeastern rust belt (and elsewhere) is a testy question that probably should be answered before the question of what, if anything, to do about that decline can be sensibly addressed. The sequence is rather clear, if its meaning is not and, of course, at some level, even fights about shutting down the steel industry are fights about meaning, about the appropriateness of behavior, about who is good and who is bad. In the years immediately after World War II the availability of cheap automotive transportation coincided with the great demand for housing for veterans (as well as the great availability of well-paid un- and semi-skilled jobs in a manufacturing sector insulated, for the time being, from significant foreign competition.) The existence of economical automotive transportation made the development of tract suburban, single family housing a plausible economic proposition. The attractiveness of such suburban housing, which expanded on a style of urban housing that was first popular as cities grew to their borders in the 1920s, created demand for highways to move the increasing amount of traffic. The provision of highways further increased the attractiveness of suburban housing and thus its supply. Soon much of the middle class had left the central city leaving behind mostly poor people, disproportionately poor black people. The proportionate increase in poor people in the city core made the central city more frightening and less attractive for work, shopping or leisure with the result that all three activities moved increasingly toward suburban locations. Urban core residents too had increased access to automotive transportation; soon patronage of, and support for, mass transport within the urban core, as well as between the urban core and suburban jobs, stores and theaters, declined with the result that the urban core became both more isolated and relatively more impoverished, as well as absolutely more segregated. The decline of the urban core in midwestern cities of 10–25,000 that had little or no system of public transportation, little or no highway development and little or no segregation (because they were, and remain, largely white) should suggest that caution is necessary when giving meaning to the story of the relatively larger urban centers. Still, the meaning ascribed to the more prominent story is


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interesting. Or rather meanings, for there are two. In one version of the story evil (or unthinking) government aided and abetted white flight from the central city through programs of housing subsidy—VA and FHA mortgage insurance, but also, and indirectly, through support for the destruction of neighborhoods through urban renewal and for high-rise public housing construction—that failed to address the effects of these housing programs on segregated housing and lending practices and through programs of road construction-primarily the NDHA—that made it easy to wipe out urban neighborhoods, as well as for new suburban homeowners to commute to their existing jobs. The other version, less likely to be heard today, is that these same programs allowed families who never before could have owned a home of their own, to do just that while keeping well paying urban industrial jobs and that urban renewal and public housing was a way to protect urban blight from infecting other neighborhoods. The most extraordinary aspect of both of these stories is that they blend notions of property and government in ways that are assumed to make each impossible to criticize. The former story validates a “public” governmental obligation to mitigate economic, residential and particularly racial segregation at the same time that it denies support for the “private” market in housing through mortgage insurance and highway construction. On the property side, it also validates governmental action directed twoard the maintenance of old property in existing neighborhoods while denigrating the establishment of property in new neighborhoods, turning the expectations of some into property and denying the same status to similar expectations of others. The latter story is an absolutely symmetrical opposite, about as good a demonstration as could be wanted that the notions of property and government are largely make-weights in a argument about something else. That something else seems to be the two central questions of their time. How does one manage decline of housing stock in an essentially segregated society at a time when population pressure is great and is matched by a relative affluence of the unionized (and parts of the non-unionized) working class? I think that this question was understood in part during the relevant years; the other question surely was not. Is it important that a city maintain an urban core or is a metropolitan area with disbursed centers, like Los Angeles and Dallas-Fort Worth, an adequate plan for a city? This question could have been raised at the relevant time only by the clairvoyant. Faced with these two questions I think that the affected persons would have been deeply ambivalent. The white urban industrial worker had deep attachments to the ethnic neighborhoods that were home, great pride in the hard work that brought him or her income and a deep fear of being overwhelmed by the expanding black neighborhoods. Moving to the suburbs was for these people the equivalent of a halfback running for daylight on a broken field; the original play was impossible, there were big guys closing in and at least forward was the point of the game. The black urban worker shared the attachment to the home neighborhood, but not to the substandard housing in it and equal pride in the accomplishments from work. While not afraid of expanding black


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neighborhoods and surely envious of the ability of white workers to acquire a home in the suburbs, new subsidized housing (at least at first) or old but good housing in vacated white neighborhoods was similarly a reasonable second best, a better place to raise a family. Note then that neither party in this essentially racially structured pair of alternatives was likely to have been particularly interested in survival of the urban core. After all, the urban shopping (as opposed to transportation and industrial) core was in these years a recent invention, an invention the had earlier sapped the vitality of neighborhood shopping centers, except for food stuffs. Thus, in significant measure, the prototypical ethnic city was organized like Los Angeles. It was the middle class for who the amenities of the urban core had an attraction. Already relatively less rooted in ethnic neighborhoods, it was for this group the shopping, dining and entertainment center that the neighborhood was for the industrial worker. And this group was surely as conflicted about the dispersal of workers to the suburbs; after all, it was just such moves within the city that had created economically and not ethnically defined areas within the city in the first place.

CONCLUSION Again, I have neither the expertise nor the interest in identifying the “correct” solution to what should have been done with the decline of urban housing stock after World War II. My interest extends to understanding what happened—what people and institutions wanted and why they acted as they did. And, of course, people acted in part because they understood the world in ways that made concerns about property and government seemingly central to their actions. But for me the important thing is to see the way in which these concepts made it easy to avoid addressing the underlying problem, the way they hid issues rather than facilitated their resolution, the way they made it difficult to address directly the questions that Moore identified- “What are the means to legal institutions and to what proximate ends are legal institutions means?” If we are going to attack this question from a largely forgotten man, we are going to have to drop the level of generality significantly.

ACKNOWLEDGMENT This piece reflects the pigheadedness that remains after hours of discussion with Frank Munger and Fred Konefsky.

REFERENCE Moore, U. 1923. “The Rational Basis of Legal Institutions.” Columbia Law

Words from a largely forgotten man Review 23:609–617.

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GOVERNMENT, PROPERTY, MARKETS…IN THAT ORDER…NOT GOVERNMENT VERSUS MARKETS A.Allan Schmid

INTRODUCTION Property is a relationship among people that establishes who may act, produce, or consume without the consent of non-property holders. It may also prescribe acts that others must take to provide opportunities to the rights holder. These rights are antecedent to markets and determine who is seller and who is buyer. Collective action is the process by which this relationship becomes operative. The most fundamental thing that one can say is that property is a public (social) fact and government is the process by which this property relationship becomes fact. Property is a social fact or it is no fact at all. It is not something that is established by individual assertion. The latter is only part of persuasion or a veiled threat of harm. Acquiescence to threat is not property, but only dominance by force. Property is a matter of shared expectations, and the learning and sanctioning of these expectations is an exercise in collective action whether formal or informal. The learning and evolution of ideologies, myths and metaphors underlies the consent that makes the opportunities of owners real. While informal learning underlies attitudes toward property, it is the formal processes of government that settle conscious conflict. In common law countries, the courts select from custom. With or without this process, it is legislatures that ultimately endorse, modify or originate rights. The nondeliberative evolution of customs interacts with deliberative critique. The extent of government is coterminous with the extent of human interdependence. If there is a way that people can get in each others hair, there is a right established by government to sort it out and allocate opportunities. If people have conflicting interests, there is an ineluctable process of government if there is to be order and predictability. The concept of “minimalist government” is without content except as an expression of the speaker’s preference for one allocation of a right over another. If there is an interdependence and scarcity, there is property which says who can act without the permission of others. In markets, the holder of an opportunity is in a position to accept bids from buyers who would like the opportunity, but do not own it. Unless they have other sufficient property to offer in exchange, they are exposed to the acts of owners and are likely to do without.


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Could not government remain silent with respect to a given interdependence? Governmental silence effectively means that the opportunity is open to whomever can grab it physically. But grabbing begets counter grabbing, and if there is not government, there is only physical struggle. For example, if there were no property in air, then it would be grabbed by industrial polluters dominating breathers. The smoke stack dominates the nose. But that is not the end of it, for the breathers may entertain blowing up the smoke stack the same way they eliminate other pests of nature. At that point, there is government deciding if the disposal of smoke is a rightful use of air, or there is something like war. It is this collective process that occasions a market bid from breathers to polluters or vice versa.

ETHICS Government is an arena of debate about ethics. Since property rights necessarily allocate opportunities among conflicting interests, the choice of rights is a choice among interests. When one chooses one interest over another, one is making a moral choice. Humans appear to demand reasons for these choices and many are offered. And when reasons are widely accepted, rights have legitimacy. When the reasons are rejected, government is only organized theft as in the case of many despotic rulers. The legitimacy of rights is critical, for police are only effective at the margin. Without some threshold of legitimacy, there are not enough self limits to avoid what we call a “police state.” The persons who are not favored with a right in a particular conflict of interests will not voluntarily limit themselves if they do not accept the legitimacy of the asserted right. Legitimacy is related to fairness and fairness is related to just deserts. We ask whether an opportunity is deserved. Thus, the sustainability of property depends on widely held conceptions of distributive justice. These conceptions evolve and are learned and constitute an aspect of culture. It is hard to regard another’s opportunities as deserved if the other person is hated. And it is easier to legitimize the property of those who we care for and who are like us. Government is collective action but the collectivity which constitutes it is to be worked out. The boundaries of our community are a matter of who we regard as a subject with rights or only an object to be manipulated (Taylor 1966). This is a fundamental ethical question of who is my brother/sister. Whose utility is interdependent with mine? As Kenneth Boulding puts it, “a public requires some sort of organization, an organization implies community, a community implies some kind of clustering of the benevolence function…which denies the assumption of independent utilities.”

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THE STRUGGLE TO USE GOVERNMENT AND CREATE PROPERTY Continuity and change is one of the tensions in the rights creation process. Continuity and stability of rights is often cited as a prerequisite to economic development. People do not sow if they do not expect to reap. But, at the same time, the environment is changing and the meaning of the words describing opportunities must be interpreted. Words in statute books do not speak for themselves. Habits of mind have unexpected results in a changing world. Government is the process of continual definition of property. Change in the environment means that it is hard to distinguish a redistribution of existing status quo rights from claims to new opportunities created by knowledge and technology. Some will claim that the new opportunity is a simple extension of their previous rights and others will claim that the interdependence is new and could not have been anticipated in any previous definition of rights (Samuels 1971). Some label certain definitions of property as “rent seeking,” but this just describes the speaker’s preference for one person’s interests over another person. For example, consider the new interdependence created when airplanes were invented. Is the opportunity to use the sky a simple extension of the surface owner’s previous rights or is it something that they never had. It does not help to label the farmers, or airplane manufacturers, or the airlines as rent seekers. Of course they are seekers of opportunity, and will attempt to use government to that end. In the process, the very meaning of development and progress gets defined. If the riders in the sky had to buy out the land owners, we would be a world relishing peace and quiet instead of speed. The struggle to use government represents an interplay between political and economic power. Property is sought in the governmental process to realize money in the future. And money in the present is used to influence the political process. The institution of property is both a dependent and independent variable. The definition of property is important for the content of economic development if there are significant transaction costs and wealth effects. As individuals seek new opportunities or to reallocate presently realized opportunities, they use government to create institutions of property (North 1990). Property is not only the opportunity to use things, but also to make a claim on the output of complex production. In many cases, it is impossible to identify the contributions of individuals to output. For example, what is the contribution to output of the person who turns on the generator to create electricity for an industrial plant? What is the contribution of the secretary as distinct from the professor? What is the contribution of previous scientists versus the latest twist supplied by a researcher? There are many inputs which stand as complements whose marginal value product is meaningless. Nevertheless, property rights allocate the rewards to


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each, that is, who shares in output. Rights give rise to costs and costs are the basis of people’s incomes (Samuels and Schmid 1997). A particular right is embedded in a system of complementary rights. Performance is path dependent and change in a particular right may not achieve its desired outcome. The legal system has its own momentum which constrains those who want to use government to serve their economic objectives. In this sense the law can be said to have some autonomy from the economy.

FREEDOM, REGULATION, AND RIGHTS Regulation is not a denial of property rights, but rather a means of rights distribution. A regulation (thou shalt not) of Person A is the means of B’s opportunity. To remove a regulation is not to achieve more total freedom, but rather to re-allocate opportunity. Regulation is distinguished by being a use right rather than an exchange right. Nevertheless, if a regulation protects the opportunity of a group, one can imagine that some in the group would reject a bid from non-rights holders even if the opportunity occasioned by the regulation were to be made exchangeable. When government defines property, it allocates freedom. This is ineluctable. The issue is not government versus the people, but people versus people as they struggle to use government. If interests conflict, then everyone can not be free to do as they wish. If one person is to have a field of predictable and ordered opportunity, another person must not interfere and is exposed to the consequences of other’s choices. Property is the present resolution of conflicting freedoms. To have a right is to be able to coerce. The non-property rights holder gets what is left. If property does not coerce it is not worth having. The fact that subsequent to rights distribution, one person volunteers to exchange does not contradict the necessity to choose who is the right holder—that is, who is buyer and who is seller; who has the power and who is supplicant. The market is the arena of momentarily resolved conflict reflected in property, and government is the arena of that ongoing resolution. Some get their opportunities via private property rights which are defined by tort law (private suit) while others’ rights are occasioned by public prosecution of statute violations or public administration. Some writers try to make a distinction between rights which underpin the market and regulations which intervene. But, as Terrence Daintith puts it, “Unfortunately, law itself does not furnish any obvious insignia to show when it is operating in its underpinning role as opposed to its (broad) regulatory role” (1997, p. 9). There is no autonomous market with which government can only constitute interference. Thus the term “free market” has no analytic meaning. Without government, there is no market to be intervened.

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REFERENCES Boulding, K. 1970. “The Network of Interdependence.” Unpublished paper read at the Public Choice Society meetings, February 19. Daintith, T. 1997. “Regulation.” In International Encyclopedia of Comparative Law (vol. 17, chap. 10, “State and Economy”), edited by R.Buxbaum and F.Madl. Tubingen: Mohr Siebeck. North, D. 1990. Institutions, Institutional Change and Economic Performance . Cambridge: Cambridge University Press. Samuels, W. 1971. “Interrelations between Legal and Economic Processes.” Journal of Law and Economics 5:435–450. Samuels, W., and A.Schmid. 1997. “Costs and Power.” In Borderlands of Economics , edited by N. Aslanbeigui and Young B. C. London: Routledge. Taylor, J.F.A. 1966. The Masks of Society . New York: Appleton-CenturyCrofts.

INDIVIDUALS, CHOICE AND INSTITUTIONS: AN AUSTRIAN ECONOMIC APPROACH TO THE FUNDAMENTAL RELATIONSHIP BETWEEN GOVERNMENT AND PROPERTY Linda A.Schwartzstein

Few economists will deny that the market operates within a framework of legal and other institutions, that its modus operandi may be helped or hindered by the varying modes of this framework, and that the outcome of market processes will not be unaffected by changes in it. That the obvious implication of these facts for the operation of the modern market economy are so rarely understood is of course to some extent due to the circumstance that in the products of the textbook industry they are commonly ignored. This neglect is largely the result of the fact that in the general equilibrium model of neoclassical economics institutions do not qualify as “data” of the system and hence are abstracted from. —Ludwig Lachmann 1

INTRODUCTION A discussion of the fundamental interrelationship between government and property requires an understanding of how individuals function in society and the basis for their social and economic transactions. This understanding can be provided by the Austrian school of economics, which I will use as the conceptual underpinning of my essay. When viewed from the perspective of the individual decision-maker, acting under conditions of uncertainty and at a particular moment in time, I believe the fundamental role of government as an institution in providing a framework for forming expectations about the consequences of those decisions becomes clear. After a brief overview of Austrian economics, I will show how Austrian economics informs my view of the fundamental relationship between government and property.


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THE AUSTRIAN SCHOOL OF ECONOMICS The Austrian school traces its heritage back to the work of Carl Menger, whose Principles of Economics first appeared in Austria in 1871. Menger emphasized the subjective nature of individual decision-making. Individuals make decisions based on their experience, their interpretation of that experience, their beliefs and predictions about the future, their own motivations and their view of what possibilities are available to them. Menger emphasized that since economic decision-making occurs in the present based on beliefs and predictions about the future, that these decisions would be made under conditions of uncertainty and limited information was inevitable. Menger’s views regarding the subjective nature of human interaction in the economic world was further developed by later generations of Austrian scholars, most notably Ludwig von Mises, Friedrich August von Hayek, and Ludwig Lachmann. Today major centers of Austrian economics exist at George Mason University and New York University and there has been a revival of interest in Austrian economics. 2 The Austrian school continues to stress subjectivism and to emphasize the implications of decision-making under conditions of uncertainty. For Austrians, economics is the study of human action. The impact of time on economic actors also remains central. In addition, Austrians articulate a view of the market as a process of social and economic interaction that provides information in the form of prices to market participants. The market is a mechanism that allows individuals to calibrate their expectations. As entrepreneurs, producers and consumers interact in the market, new information is created, prices naturally adjust for supply and demand, and people perceive new opportunities. Even plans or investments that fail, as expectations are not met create new information and knowledge. Individuals adapt to their perceptions of the market. They interpret prices and other market information from their subjective viewpoint and use their perceptions as a basis for their decisions. As time elapses, economic opportunities change, technology changes, perceptions and preferences change and new information becomes available. Entrepreneurs try to exploit perceived gaps in the market, either by discovering arbitrage opportunities or by discovering innovations or new services that can be offered. The knowledge created by the success or failure of these entrepreneurial plans is incorporated into the market. The market process is a spontaneous order, one that is on going and open-ended (Lachmann 1986; Kirzner 1973). The market evolves through the discovery of new opportunities.

CHOICE Examining choice, under the inevitable conditions of time and uncertainty,

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highlights the significance of the Austrian economic framework for assessing the fundamental relationship between government and property. One way to understand the Austrian perspective is to think in terms of one’s own life at any given point. For example, when in university, you had to project the type of work for which you wanted to prepare. Your decision was based on a limited amount of information. In addition, your decision would later be affected by the job prospects that were available to you. In a time of rapidly changing technology, new types of jobs are rapidly created, so that in the future, you may end up with an occupation that does not even exist yet. Other events that may occur that will affect you are whether you get married, and if so, whether you stay married, what occupation your spouse has, if any, whether you have children, whether you move, whether you need to support your parents, whether you stay in good health, and so on. In examining your own life, you can see that at any given moment you are making decisions that impact the future, are making plans based on expectations, and that you have limited information and knowledge on which you are basing your decisions. In addition, even though you formulate visions of what the future will hold, the future is clearly unknowable. The philosopher, G.L.S.Shackle emphasized this in his work: If, as my theme assumes, there is an essential, irreducible, pervasive non-determinacy in human affairs, no single supposed sequel can be deemed certain to prove true, no list of such hypotheses can be deemed certain to contain among its members the one that will prove true. The valid concept is a skein of imagined, invented sequels, a list endlessly variant and augmentable, subject only to the constraint of adjudged possibleness (Shackle 1988, p. 2). Another example is that of an entrepreneur. While neoclassical economics often treats capital and labor as homogenous, Austrian economics focuses on the specificity of assets and their use. As each of us does in our personal lives, entrepreneurs must make choices with respect to the use of their capital assets and their labor. Their choices will again be made at particular moments in time, under conditions of uncertainty, and the success or failure of their choices will depend, in part, on the information they have and use, and how accurately they predict the future. Even in the same industry, different entrepreneurs will choose different combinations of capital and labor based on their experience and their subjective interpretations of that experience. As unanticipated events occur in the future, it may be difficult to adjust investments already made. New discoveries, technological change, or other changes in the economy mean that returns may be more or less than anticipated (Lachmann 1978). Often the consequences of these unanticipated events will be that assets that the entrepreneur had employed in what he or she believed was their optimal use will have to be redeployed in a sub-optimal way. The market environment has become ever more fast paced; the rate of change is accelerating. Functioning in this market requires continuous adaptation. As noted by Rosabeth Moss Kantor,


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“To compete effectively, companies must innovate continually and in ever shorter cycles” (Kantor 1995, p. 50.) Both the market participant and the individual making personal decisions will make certain investments that are unrecoverable. The extent to which their assets or investments will return the value that was anticipated will depend not only on the perceptiveness and accuracy of their expectations but also on future events, the actions of others and the impact of those actions on the choices that were made.

THE ROLE OF INSTITUTIONS Austrian economists, because of their emphasis on subjectivism, pay considerable attention to the formation and reformation of expectations, as new information or experience becomes incorporated into an individual’s knowledge base and as some knowledge or beliefs become obsolete or are modified to reflect the new information or experience. 3 Individuals engage in active and creative decision-making. Subjectivism allows room for individual autonomy, creativity, and decision-making (O’Driscoll and Rizzo 1985). Choices are always made under conditions of uncertainty. The unpredictability of the future makes this inevitable. Starting from the vantage point of the reality of lives of continuous choice and decision-making under conditions of uncertainty, and the inevitability of constant change, much of it quite unpredictable, leads to a view of the role of institutions in general and government institutions in particular. Institutions transmit knowledge and information. Institutions may be simply a pattern of routine behavior, or in the case of government institutions sets of rules and procedures that must be complied with. Institutions provide rules that guide individuals to act within certain boundaries and patterns. Rules, standards and customs shape expectations and behavior. The market process provides information through prices. People adjust their expectations and plans as prices change and reveal opportunities or mal-investments. In this way the market provides a mechanism for coordination and exchange. Institutions develop as people find the need for rules to help order their lives and bound the uncertainty with which they must live. A social institution is a recurrent pattern of conduct that reduces the possible range of action that may be taken. The development of a common legal tender is one example of such a social institution. As trade became more complex and barter became increasingly inefficient, different forms of currency developed that facilitated trade and made it unnecessary to find a direct exchange of item for item. Money provided both a standard for value and also made it possible to trade not only across distance, but also across time. We have seen many times how a common currency has been adopted to facilitate trade and exchange. When the United States was formed, one of the needs became a common currency. Currently we see the Euro-dollar being adopted in the Common Market. What is the role of government in this process? I contend that a major


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function of government should be to reduce uncertainty and to provide stability and predictability to the extent possible to the environment in which individuals must function. Thus government institutions ideally supply some social commonality and support coordination among the disperse individuals who interact directly or indirectly in society and the economy. Government rules and actions should be stable enough to provide a fairly high degree of certainty while being flexible enough to respond to change. The government’s relationship to property is one very important aspect. The law is a social institution that facilitates the interaction of members of society (Hayek 1960). In The Constitution of Liberty, Hayek presented an evolutionary theory of societal institutions. Built on work of earlier philosophers and jurists, Hayek’s theorized that the common law develops out of experience, is modified by new developments, and after numerous iterations becomes stable enough to be considered an institution, which then provides some boundaries to the uncertainty of everyday social and economic interaction. Legal rules provide a framework that guides people in the formulation of expectations. The law forms part of the individual’s knowledge base that in turn informs his or her decisions. When viewed in this way, the need for the evolutionary development of law becomes apparent. As Hayek wrote: But the important point is that all coercive action of government must be unambiguously determined by a permanent legal framework which enables the individual to plan with a degree of confidence and which reduces human uncertainty as much as possible (Hayek 1960, p. 1066). Ludwig Lachmann also discussed the role of institutions as providing orientation for human plans that are always made in an uncertain and changing world. This requires that they be relatively stable but flexible enough to adapt to changes in society and technology (Lachmann 1971). Legal institutions provide the framework in which market and social interactions take place. They also provide some common understanding and become part of our tacit or express knowledge. Law provides guidance for our behavior and a basis for expectations and predictions about the consequences of our actions. Legal doctrines such as standing and stare decisis maintain stability and support orderly evolution. In two interrelated articles, Professor Maxwell Stearns has used social choice theory to show that these doctrines reduce doctrinal uncertainty, and make the manipulation of outcomes less possible (Stearns 1995a, 1995b). However, while the judicial process has developed doctrines that facilitate the evolutionary adaptation of the law, such doctrines are largely absent in legislative law making. To the extent that deliberate legislative action is taken to improve society, it should be done incrementally within existing frameworks and not by totally redesigning institutions (Hayek 1960).


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THE ROLE OF GOVERNMENT WITH RESPECT TO PROPERTY As a social institution, the fundamental role of government with respect to property is to provide structures of stability and predictably within which people are allowed to pursue their own goals (Lachmann 1979). 4 Such structures allow people a framework in the midst of the inevitable uncertainty of the market. The legal system can provide boundaries to uncertainty by narrowing the possible outcomes and providing some limitations concerning possible outcomes. Law is non-determinate in that there is no end to the evolution of legal institutions, but the nature of that evolution and how law is created is critical. While the judicial process largely creates evolutionary change and adaptation of the law, the legislative process often results in large-scale change. While courts have recognized the need for stability in order to allow people to formulate reasonable expectations, Congress apparently has not. The result is that in addition to the uncertainty inherent in everyday life, the legislature has created another source of uncertainty. Instead of government providing a stable framework for human action, government ends up contributing to the uncertainty through constant legislative change. As O’Driscoll and Rizzo have stated: “To paraphrase Robertson, market interventions generate islands of calculational chaos in a sea of markets. It is a misnomer to speak of ‘calculating’ the benefits and cost of intervention, when the evident effect of such intervention is interference with the market’s calculational procedures” (O’Driscoll and Rizzo 1985, p. 141). This dichotomy is clearly seen in the area of taxation. Taxation is one of the most fundamental interrelationships between government and property. The exercise of the power of taxation can greatly alter the economic risks and rewards from any economic activity. By understanding the market process, the importance of the stability of a system of taxation becomes manifest. Even the threat of legislative action can create market distortions and alter economic behavior. Frequent changes made by tax legislation create economic losses, interfere with the planning process and present obstacles to assets being devoted to their highest and best use. New rules force changes in behavior. They also create gains and losses. Individuals and firms generally cannot easily adapt to changes in government regulation. Costs include not only out-of-pocket expenses, but also sunk costs, including assets that are now less valuable or not valuable at all, and opportunity costs. The ability to predict the return on any investment is critical in making a decision on whether to make that investment. The profitability of an investment will depend on many factors that will involve the subjective judgement of the individuals involved. In addition to their prediction about the overall feasibility of the investment, there will be many factors over which the investors have little or no control: competitors, critical suppliers, technological advances, the overall


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economy, interest rates, acts of God, and so on. To all of these sources of uncertainty and possible obstacles, Congress has added another: what will be the tax rules that will impact the profitability of the investment? The Supreme Court has clearly recognized the importance of the stability of a tax regime. For example, in Quill Corp. v. North Dakota, the Supreme Court clearly recognized the benefit of providing stability in legal rules in order to allow people to formulate expectations. In that case, the court was asked to reconsider an earlier decision, National Bellas Hess Inc. v. Department of Revenue (386 U.S. 753 [1967]), which had disallowed the imposition of a use tax on mail order sales. In their majority opinion, the Supreme Court stated: Moreover, a bright-line rule in the area of sales and use taxes also encourages settled expectations and, in doing so, fosters investment by businesses and individuals. Indeed, it is not unlikely that the mail-order industry’s dramatic growth over the last quarter-century is due in part to the bright-line exemption from state taxation created in Bellas Hess (386 U.S. 753 [1967]). Compare this approach to what has happened in Congress over the last decade and a half with respect to taxation. Rather than promoting a stable tax regime, Congress has seemed to become increasingly attracted to changing important tax laws (Doernberg and McChesney 1987; Schwartzstein 1996). Rates and concepts that are fundamental to profitability include, for example, the taxation of net capital gains, marginal rates on individuals and corporations, and depreciation rates. In addition, Congress has added additional rules that have significant impact on predicted returns, such as the passive loss rules and the at risk limitations. These rules impacted investments that had already been made. Not only do these tax law changes change the economics of investments, but also every time Congress suggests that the tax law may be changed, taxpayers’ plans are disrupted, often with considerable cost. For example, the Clinton Administration suggested that the interest deduction should be disallowed on corporate issued debt with terms over forty years. Deals involving hundreds of millions of dollars were frozen in place and many simply died as the issue of whether this proposal would be made law was debated (Herman and Raghuvan 1995). Given the complexity of the tax law and the complexity of the market, it is not surprising that often legislation results in apparently unintended consequences. When Congress imposed a luxury tax on new yachts, apparently the devastating impact on shipworkers and shipyards was not anticipated. When the consumer interest deduction was repealed as an incentive to save but interest on home equity loans was made deductible, the resulting reduction in home equity put people’s ownership of their houses in jeopardy. Also, the increase in home equity has often been the source of retirement funds as senior sold their houses. Home equity loans made it easier for people to dis-save, making it less likely that this source of retirement funds would be available when needed. It is hard to


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imagine that this is the result that Congress intended. An understanding about the nature of decision-making and the need for government institutions to reduce uncertainty and instability rather than add to it, helps to highlight the damage done when legal institutions are made to undergo rapid, inconsistent, and broad based change within relatively short amounts of times. For this reason, I think it is important to increase understanding of the fundamental role of government with respect to property: that of providing a stable framework for economic decision-making.

CONCLUSION The value of the Austrian approach when evaluating complex issues such as the fundamental relationship between government and property is that it allows us insight into the impact of governmental action on individual decision-making in a complex economy. Austrian economics also provides insight into the critical role of institutions in a market economy. Taxation is one area in which government as an institution directly impacts economic relationships. Because of this, taxation provides a fertile field for exploring the consequences of frequent government intervention in the market. However, the insights of the Austrian economic approach can be broadly applied to inform any analysis of the economic interaction between government and individuals.

ACKNOWLEDGMENT I would like to thank Thomas B.Fatouros, for his excellent research assistance. In addition, I would like to acknowledge the generous funding provided through the Law and Economics Center of the George Mason University School of Law.

NOTES 1. “The Flow of Legislation and the Permanence of the Legal Order,” 1979, reprinted in Lachmann 1994 at 249. 2. For a more detailed history and broader discussion of fundamental concepts of Austrian economics, see Schwartzstein (1992), Dolan (1976), and Vaughn (1994). For an excellent collection of essays on Austrian economics, see Littlechild (1990). 3. See, for example, Gerald P.O’Driscoll, Jr., and Mario J.Rizzo, “Subjectivism, Uncertainty, and Rules” in Subjectivism, Intelligibility and Economic Understanding, edited by I.M.Kirzner, 1986. 4. As noted by Ludwig Lachmann, in The Legacy of Max Weber: “Freedom of contract allows both a structure within which parties may act, while simultaneously allowing the parties a wide range of choice about the terms of any transaction they entered into.”


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REFERENCES Doernberg, R.L., and F.S.McChesney. 1987. “On the Accelerating Rate and Decreasing Durability of Tax Reform.” Minnesota Law Review 71:913. Dolan, E.G. 1976. “Austrian Economics as Extraordinary Science.” P. 3 in The Foundations of Modern Austrian Economics , edited by E.G.Dolan. Hayek, F. A. 1960. The Constitution of Liberty . Chicago: University of Chicago. Herman, T., and A.Raghuvan. 1995, December 11. “Derailment of Several Bond Offerings by New Tax Plan Considered Likely.” Wall Street Journal , p. A3. Kantor, R. M. 1995. World Class . New York: Simon & Schuster. Kirzner, I. M. 1973. Competition and Entrepreneurship . Chicago: University of Chicago. Lachmann, L. M. 1971. The Legacy of Max Weber: Three Essays . Berkeley, CA: Glendessary. ——.1978. Capital and Its Structure . Kansas City: Andrews and McMeel. ——. 1979. “The Flow of Legislation and the Permanence of the Legal Order.” Expectations and the Meaning of Institutions , edited by D.Lavoie. New York: Routledge. ——.1986. The Market as an Economic Process . Oxford: Blackwell. ——. 1994. Expectations and the Meaning of Institutions , edited by D.Lavoie. New York: Routledge. Littlechild, S. (Ed.). 1990. Austrian Economics . Brookfield, VT: Edward Elgar. O’Driscoll, G.P., Jr., and M.J.Rizzo. 1985. The Economics of Time and Ignorance . New York: Blackwell. ——. 1986. “Subjectivism, Uncertainty, and Rules.” In Subjectivism, Intelligibility and Economic Understanding , edited by I.M.Kirzner. Schwartzstein, L. A. 1992. “Austrian Economics and the Current Debate Between Critical Legal Studies and Law and Economics.” Hofstra Law Review , 20:1105. ——. 1994. “An Austrian Economic View of Legal Process.” Ohio State Law Journal 55:1049. ——. 1996. “Smoke and Mirrors: Tax Legislation, Uncertainty and Entrepreneurship.” Cornell Journal of Law and Public Policy , 6:61. Shackle, G.L.S. 1988. Business, Time and Thought . New York: New York University Press. Stearns, M. L. 1995a. “Standing Back from the Forest: Justiciability and Social Choice.” California Law Review 83:1309. ——. 1995b. “Standing and Social Choice: Historical Evidence.” University of Pennsylvania Law Review 144:3092. Vaughn, K. I. 1994. Austrian Economics in America . New York: Cambridge University Press.

ENVIRONMENTAL PROTECTION: GOVERNMENTS AND THE ALLOCATION AND USE OF PROPERTY Kathleen Segerson

INTRODUCTION The last three decades have seen a greatly expanded role for the government in the protection of environmental quality and the management of environmental resources. Environmental policymaking is essentially the design of rules to govern the use of property when that use has the potential to impact others. When one party’s use of property has a direct negative impact on others, two fundamental issues arise. First, these negative impacts generally lead to conflicts or disputes that must somehow be resolved, where the resolution of the dispute will ultimately affect the well-being or welfare of the parties. Second, the potential for resource misallocation exists—depending on the rules governing property use, the party engaging in the potentially harmful use may not consider the full costs of that activity (including the costs imposed on others) when deciding whether and how much of the activity to undertake. The first issue concerns the allocation of property rights across individuals, while the second concerns the allocation of resources across alternative uses. Although in some cases these two allocation problems are separable, in others the allocation of property rights will have implications not only for welfare distribution but also for the allocation of resources and hence for the aggregate amount of “wealth” generated by the society’s resources. Whether independent or not, in the context of environmental protection the fundamental relationship between the government and property hinges on two functions: the allocation and protection of property rights, and the design of rules governing use of property that create incentives for resources to be allocated efficiently.

THE ALLOCATION OF PROPERTY RIGHTS The Basic Issue It is well-known that a key role of the government is to establish and protect property rights (e.g., Bromley 1991). This is particularly apparent in the context of environmental protection, where, for example, the government must establish whether a local factory has the right to emit pollutants into the air or instead the


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local residents have the right to breath air that is free of those pollutants; whether a local landowner has the right to cut down his trees even if it destroys the habitat of an endangered species or instead the public has the right to protection of the habitat and the affected species; and whether a developer has the right to build a large hotel on a beachfront or the public has the right to be free from the erosion that the construction of the hotel would cause. The establishment and protection of property rights is necessary in order for any society to function, since it essentially defines and enforces the rules of interaction among the members of that society. Thus, some entity (e.g., “the government”) must serve this role. This need exists for all types of societies and economic systems, from free-market capitalistic societies to socialist and communist systems. The differences among the types of societies reflect to a large extent differences not in whether property rights are allocated but rather in how they are allocated. For example, in a capitalist system, most rights are allocated to individuals. Conversely, in a communist system, most of the rights are allocated to the “state,” or more precisely to the group of people who benefit from state ownership. Note that this group of beneficiaries does not necessarily include all members of the society. For example, people whose property is expropriated by the state may not benefit from the allocation of rights to the state. Reallocation of Rights: The Dynamic Dimension The government must decide not only how property rights will be allocated at a given point in time (a static allocation problem), but also the rules by which those rights can or will be changed over time (a dynamic problem). A key difference across political and economic regimes is the extent to which society tolerates (uncompensated) changes in the allocation of rights over time. The call for such changes can be precipitated by a number of different factors, including changes in information, values, incomes, or political power. For example, new information about the health effects of particular pollutants might precipitate a demand for changes in the permitted use of different environmental media (air, water, land) for waste disposal. Similarly, new information about the link between habitat and species protection might precipitate a demand for restrictions on previously permitted land uses. In addition, as incomes rise and the demand for environmental amenities increases, society may be faced with pressures to ensure that these amenities are supplied. One extreme approach to the dynamic allocation of property rights is to ensure complete protection of the existing allocation, that is, to allow no changes over time. (Of course, this begs the question of how the existing allocation was determined in the first place, but this is an issue of static rather than dynamic allocation.) One way to implement such a rule is to prevent any kind of exchange, even voluntary exchanges viewed by the parties as mutually beneficial. Calabresi and Melamed (1972) call this an “inalienability rule.” It is more likely to be applied to basic rights such as a right to vote or a right to life,

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rather than to the exchange and use of property. However, an inalienability rule might be invoked in some cases of environmental protection. For example, individuals might be prevented from “selling” their health by agreeing to work under very hazardous environmental conditions in exchange for high wages. An alternative way to protect existing rights, particularly property rights, is through compensation. Under this approach, any restrictions placed on the use of property that reduce its value must be compensated, so that the net effect of the restriction plus compensation leaves the original owner of the property as well off as she or he was before the restriction. Thus, only true Pareto improvements, that is, changes that make everyone better off and leave no one worse off, would be allowed. Guaranteed protection of existing property rights might be viewed as characteristic of an extreme private property rights regime. In fact, private property rights advocates have often taken this position. They have recently articulated this position most vocally in the context of what have been termed “regulatory takings” (see, e.g., Yandle 1995). They have argued that government restrictions that limit the use of private property, such as restrictions on development to protect endangered species habitat or prevent erosion or water pollution, constitute “takings” and hence must be compensated under the Fifth Amendment of the U.S. Constitution. The Fifth Amendment states that “nor shall private property be taken for public use, without just compensation.” The interpretation of this clause, particularly its applicability to regulatory actions and its relationship to the state’s police power, has been the subject of heated debate. Advocates of compensation for these regulations argue that they have a right to protection of their existing property rights. Even the “nuisance exception” advocated by Richard Epstein (1992), which calls for compensation of all regulatory restrictions except those that would have been imposed anyway under nuisance law, is essentially a call for protection of existing rights. The nuisance exception is based on the premise that activities that would have been prohibited under nuisance law were not part of the landowner’s original bundle of rights and hence do not require protection. While the “no change” approach to property rights reallocation forms the basis of many arguments for compensation for regulatory restrictions, it can also be interpreted to imply complete protection of individuals from damages imposed on them as the result of the actions of others. If individuals initially have a right to be free from those damages, then the imposition of damages would have to be coupled with sufficient compensation to ensure that on net the “victim” is no worse off than before. For example, if individuals have the right to breathe clean air, then a local factory that emits harmful pollutants into the air must pay damages to those victims who suffer as a result. Similarly, if residents have a right to clean ground-water and pesticides used by local farmers are found in the water, the residents must be paid for any damages that result or to cover the cost of any mitigation activities (such as buying bottled water or installing water filters) that they undertake in response. The same argument allows victims of oil spills to claim that oil companies must pay compensation


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(and/or undertake restorative activities) to offset the negative impacts of a spill. This approach to protection of victims’ property rights forms the basis for both strict liability (payment for all damages) and injunctions (prohibitions on harmful activities) under the law of torts. In contrast, a negligence-based tort law would not ensure complete protection of existing property rights, since damages that stem from non-negligent behavior would not be compensated. Hence, under a negligence rule, if the injurer is non-negligent, the victim will be left worse off as a result of the (allowed) action by the injurer. The victim has the right to be free of damages caused by negligent behavior, but does not have a right to be free of damages caused by non-negligent behavior. The protection of existing property rights is also evident in other rules embodied in environmental and other regulations. For example, “grandfather clauses” are designed to ensure that the rights of existing establishments are protected when regulations are imposed. Similarly, the establishment of tradeable permit markets for pollutants requires a designation of the rules to be used in the initial allocation of permits, which in turn determine any possible redistribution of rights (e.g., Tietenberg 1985). For example, free distribution of permits to existing firms based on past emissions effectively protects existing rights (or some fraction of those rights), even if firms subsequently trade those rights to other firms since firms receive payment (compensation) for relinquishing their right (i.e., trading it) to another firm. In contrast, if the initial allocation of permits is through an auction mechanism, then the existing structure of rights is not protected. While the “no change” approach to protection of property rights represents one extreme form of protection, at the other extreme is the approach that gives the state free reign to reallocate rights over time without any form of compensation. This would, of course, allow changes that make some people worse off for the sake of an improvement in the well-being of others. Under this approach, all property ultimately belongs to the state or the group empowered to reallocate rights. This group effectively allows individuals to “use” the group property temporarily but gives no long term right to that use since it can be rescinded at any point in time. This approach underlies the basic communist philosophy, and provides the rationale for state expropriation of private property. A less extreme, but at least to many private property advocates conceptually equivalent, example is the imposition of uncompensated regulatory restrictions that reduce (even though they do not eliminate) private property values. As noted above, the belief that these regulations constitute state “expropriation” of property through the restriction of use rights underlies their demand for compensation for such “takings.” The above discussion suggests that, while a key role for the government is to allocate property rights initially, an equally and perhaps more important role is to define the rules by which those rights can or cannot be changed over time. One can view the two positions discussed above as two opposite ends of a spectrum regarding the extent to which a society will allow uncompensated reallocations of property rights over time. Of course, most societies operate in


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the middle ground, where some reallocations are allowed yet some protection of property rights also exists. In this middle ground, a key role for the government is to delineate the class of rights that are to be granted protection over time and by so doing also delineate those that will not be protected. Protection Mechanisms In addition to designing rules regarding the dynamic reallocation of property rights, governments must also determine the means by which rights designated for protection will be protected. Calabresi and Melamed (1972) identify two alternative protection rules: liability rules and property rules. To illustrate the difference, consider two persons (A and B) where A can undertake an action or land use harmful to B. Suppose that society chooses to protect B’s property right, that is, to ensure that B’s initial utility level is maintained. If society protects this right through a liability rule, then A is free to impose the harm on B if he or she so chooses but must pay compensation to B to offset the damages B would suffer and hence to maintain B’s pre-damage utility level. Note, however, that in practice the amount of compensation to be paid is determined by a court, which may set the amount incorrectly. Thus, in practice full protection of B’s property right is not guaranteed under a liability rule. In contrast, if society protects B’s right with a property rule, then A cannot impose the harm on B unless B voluntarily agrees to allow the action in exchange for compensation in an amount sufficient to offset the damages. The key difference between the two rules is whether A must secure B’s consent before undertaking the activity and hence whether bargaining must occur. Under the liability rule, no bargaining is required, while under the property rule A must bargain with B prior to undertaking the activity. Calabresi and Melamed (1972) argue that the choice between the two rules should be based on the magnitude of the transaction costs associated with bargaining between the two parties. In addition, the optimal protection mechanism will depend on the relative effectiveness in deterring socially undesirable activities or land uses (see Shavell 1993). The distinction between liability and property rules is useful in categorizing possible approaches to environmental protection and the associated protection of property rights. Policy instruments used for environmental protection usually take one of the following forms: (1) regulation without compensation; (2) regulation with compensation; (3) imposition of strict liability or pollution taxes (i.e., making polluters pay for damages, in total or at the margin); and (4) no response (i.e., no regulation or liability/taxes). These four approaches differ in terms of whose rights are protected and whether that protection is through a liability rule or a property rule. Clearly, when it imposes strict liability or pollution taxes, society effectively protects the rights of pollution victims with a liability rule. It allows potentially harmful activities to be undertaken, but requires that those undertaking the activities pay for any damages that result. In contrast, regulation, or prohibition


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of activities without compensation effectively protects the property rights of potential victims of pollution by a property rule. In this case, the harmful activity is not allowed. While in principle polluters could bargain with victims to allow the activity to proceed, in practice regulation is often used in contexts where the number of victims is large and hence bargaining is unlikely to occur. If society chooses not to regulate at all, it is effectively protecting the rights of the polluter through a property rule since victims have no legal right to curtail the harmful activity and hence impose the associated losses on the polluter. Of course, victims could try to induce voluntary curtailment of the harmful activity, but this would require some positive inducement to offset the polluter’s losses. In fact, voluntary environmental programs that entail substantial subsidies to induce participation (such as those often found in the agricultural sector) are examples of attempts to induce consensual reductions in polluting activities by parties whose basic property rights are being protected through subsidies. Finally, regulation with compensation, as has occurred in the context of regulatory takings, constitutes protection of polluter rights through a liability rule. In this case, the party responsible for the potentially harmful activity (e.g., the landowner) must comply with the regulation, that is., society is allowed to impose the associated losses on him, but he is compensated for those losses. Thus, if the amount of compensation is set at the amount of his loss, his basic property right is protected. As noted above, in practice court-determined levels of compensation under a liability rule may not provide full compensation. In this case, he receives less than full protection. The above discussion suggests that the role of the government vis-à-vis property is not only to define whose rights will be protected (both at a given point in time and over time) but also to determine the means by which they will be protected. It is notable that in some contexts governments may choose to protect the rights of polluters while in other contexts they choose to protect the rights of victims. In addition, even when protecting the rights of a given party, the chosen means of protection can vary across contexts.

ALLOCATION OF RESOURCES: THE ROLE OF INCENTIVES Both the allocation of property rights and the means by which those rights are protected can have implications not only for the distribution of wealth within a society (i.e., equity effects) but also for the uses to which alternative resources are put (i.e., efficiency effects). Despite the well-known Coase Theorem (Coase 1960), which states that in the absence of bargaining costs and income effects the allocation of resources is independent of the allocation of property rights, it is clear that in many cases the allocation of rights and the choice of a protection mechanism can affect the incentives that property owners face in making economic decisions regarding use of their property.


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The Basic Problem: Market Failure It is well-known that in the absence of well-defined property rights, parties whose use of property imposes negative impacts on others, that is, negative externalities, will have a tendency to devote too many resources to the potentially harmful activities since they will not generally consider the costs imposed on others when weighing the costs and benefits of the activity (e.g., Baumol and Gates 1988). This is a familiar problem of market failure. It is also well-known that in some (although not all) cases, government intervention can serve to reduce this tendency and hence reduce the associated misallocation of resources. Thus, quite apart from the question of how any net gains from a reallocation of resources would be distributed, the government must deal with the question of how it can (or should) provide incentives or directives designed to correct (or reduce) the misallocation. In the context of environmental protection, this of course means incentives or restrictions to reduce the amount of pollution. Property Rights and Resource Allocation While the issues of property rights allocation (across individuals) and resource allocation (across different uses) are conceptually separable, the policy instruments that can be used to allocate and protect property rights simultaneously provide incentives for resource allocation. For example, an important dimension of the economic debate over compensation for regulatory takings, which (as noted above) is essentially a debate over whether the rights of landowners should be protected by a liability rule or the rights of victims should be protected by a property rule, is the incentive created by paying or not paying compensation. Economists have argued that payment of compensation effectively provides insurance for landowners against the private losses that would result if regulation occurs (Blume, Rubinfeld, and Shapiro 1984). This insurance, in turn, creates the usual moral hazard problem associated with insurance, namely, it creates an incentive for the private landowner to overinvest in private development of the property since the social losses associated with the possible subsequent destruction of the private investment will not be internalized by the landowner. Conversely, failure to pay compensation for any taking can create an incentive for landowners to make inefficient investments in an effort to reduce the likelihood or impact of regulation (Miceli and Segerson 1996). For example, if compensation is not paid for land use restrictions imposed to protect endangered species, landowners might engage in “preemptive” destruction of habitat. Similarly, the choice between use of a voluntary program for environmental protection (i.e., protection of polluter rights using a property rule) and compulsory regulation (i.e., protection of victim rights using a property rule) can affect not only the distribution of income between polluters and the rest of


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society but also the level of environmental protection. If regulators and polluters bargain over voluntary pollution reduction agreements, the outcome of the bargaining process will depend on the financial inducements that the regulator is willing to offer as well as the pollution abatement costs associated with participation in the agreement or voluntary program (Segerson and Miceli 1998). In addition, it depends on the allocation of bargaining power between regulators and polluters. The resulting level of environmental protection can be higher or lower than the level that might have been imposed under direct regulation. Thus, the need to attain the polluter’s voluntary participation in the program or agreement (i.e., his consent) can lead to a level of environmental protection that is different from the level that a regulator might have imposed if consent were not required.

SUMMARY The above discussion suggests that, at a fundamental level, the government’s role vis-à-vis property is to (i) determine the allocation of property rights at a given point in time, (ii) determine the extent to which reallocations of property rights over time will be allowed (and under what conditions), (iii) determine the mechanism by which rights will be protected (e.g., via a liability rule or a property rule), and (iv) create (proper) incentives for the efficient use of property. Every piece of legislation and every policy decision that the government makes will simultaneously involve most if not all of these “functions.” In particular, when the government contemplates the passage of any piece of environmental legislation, or when the courts evaluate any dispute involving environmental protection, the decision can be evaluated in terms of (i) the implied allocation of property rights, (ii) the extent to which that allocation changes or maintains the previous allocation (in a manner consistent with the rules for “allowable” changes), (iii) the control that property right owners have over changes that affect them, and (iv) the effect that those decisions have on the incentives of both those whose rights are protected and those whose rights are not protected to utilize their resources efficiently rather than wastefully. These dimensions illustrate the fundamental ways in which governmental policy decisions, particularly those relating to environmental protection, affect property.

ACKNOWLEDGMENT I would like to thank Tom Miceli for useful comments on an earlier draft of this essay.


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REFERENCES Baumol, W. J., and W.E.Gates. 1988. The Theory of Environmental Policy . Cambridge: Cambridge University Press. Blume, L., D.Rubinfeld, and P.Shapiro. 1984. “The Taking of Land: When Should Compensation be Paid?” Quarterly Journal of Economics 99:71–92. Bromley, D. W. 1991. Environment and Economy: Property Rights and Public Policy . Oxford: Basil Blackwell. Calabresi, G., and A.D.Melamed. 1972. “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral.” Harvard Law Review 85:1089– 1128. Coase, R. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3:1–44. Epstein, R. 1992. “Ruminations on Lucas v. South Carolina Coastal Council: An Introduction to Amicus Curiae Brief.” Loyola of Los Angeles Law Review 25:1225–1232. Miceli, T. J., and K.Segerson. 1996. Compensation for Regulatory Takings: An Economic Analysis with Applications . Greenwich, CT: JAI Press, Inc. Segerson, K., and T.J.Miceli. 1998. “Voluntary Environmental Agreements: Good or Bad News for Environmental Protection.” Journal of Environmental Economics and Management 36(2): 109–130. Shavell, S. 1993. “The Optimal Structure of Law Enforcement.” Journal of Law and Economics 36(1), Pt. 2:255–288. Tietenberg, T. H. 1985. Emissions Trading: An Exercise in Reforming Pollution Policy . Washington, DC: Resources for the Future. Yandle, B. (Ed.). 1995. Land Rights: The 1990s’ Property Rights Rebellion . Lanham, MD: Rowman & Littlefield Publishers, Inc.

PROPERTY LAW AND EFFICIENT RESOURCE USE Thomas S.Ulen

INTRODUCTION For at least the last 200 years in the developed economies of the West the definition, assignment, and protection of property rights have been deemed vital to vigorous economic growth (Landes 1998; North and Miller 1973). Because government is generally the most efficient agent for performing these functions, there has long been an important relationship among governmental authority, property, and economic growth (Blackstone 1979, orig. 1765–1769). In a relatively early phase of modern economic growth the governmental role with respect to property is straightforward: define and protect private property rights, particularly in land, but do not over-regulate them. But as economic growth proceeds, the governmental role with respect to property becomes more complicated. Among other things, new forms of property appear or become more important—for example, intellectual property in patents and copyrights— and new problems arise as individual and governmental interference with private property becomes more frequent—example, because of societal concerns to preserve wetlands. The appropriate relationship between government and private property in these more advanced stages of development is far more nuanced than can be captured by such slogans as “strong private property rights” or “common ownership of society’s valuable resources.” In this essay I shall attempt to outline these more complicated relationships between government and property for a wealthy, growing society. I shall take it as given that there is a background of strong private property rights so that I need not take time to outline the important issue of the boundaries between public and private property.

AN OVERVIEW OF FOUR ASPECTS OF PROPERTY LAW I shall elaborate, from an economic viewpoint, four fundamental interrelationships between government and property. First, to what resources ought the protections of property law be extended? And to whom should society assign initial entitlements to those resources? Should they be made to individuals or to society as a whole? Second, how should society protect entitlements to property once they are made? The choices are between protection through means of equitable remedies (the award of an injunction against interference with someone’s property) and legal remedies (the award of


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compensatory damages). Third, what are the dimensions of an owner’s rights to property? May he exclude all other individuals from his property? Are there circumstances in which other individuals may make use of someone’s property without the owner’s consent? And fourth, what limitations may the government place on an owner’s use of her property? To what extent may the government regulate a private owner’s property uses? May the government compel a private property owner to sell her property? If so, under what circumstances?

WHAT MAY BE OWNED AND BY WHOM? Any resource of value is a candidate for protection by means of property law. Clearly, this includes such tangible resources as land, machines, books, computers, and the like. But increasingly it includes such intangible resources as musical scores, computer software code, trade secrets, trademarks, pharmaceuticals, created bacteria, and gene maps—issues that are dealt with in intellectual property law. Given the great contribution that these intangible resources are now making to national economic well-being, this is one of the most rapidly growing and important areas of the law. The government’s role in assigning initial entitlements to property is considerable. On the one hand, the government must simply provide a recordkeeping and administrative function of who owns what. By keeping track of ownership claims, providing a registry that the public can consult, adjudicating disputes, providing rules for what is to be done with property upon the owner’s death, specifying rules for establishing ownership through adverse possession, and more, the government fosters the efficient use of society’s valuable resources. These administrative functions (which, incidentally, need not necessarily be performed by government) foster the more efficient use of resources: people can determine at low cost with whom they should deal if they want to purchase a resource; they can determine whether or not to invest in a resource (such as a seemingly abandoned mineral deposit) that might be owned by someone else, and so on. The ultimate social benefit of this system is that the ownership of valuable resources, combined with a regime of secure, enforceable contract law, encourages the movement of resources to their highest-valued use. One of the most important of these foundational aspects of governmental involvement with property is the assignment of initial entitlements to property. In an ideal world, government would assign property initially to the person who values that property the most. In some circumstances, this is not a difficult task. For instance, it would seem to be uncontroversial to assert that persons have the right to their own bodies, so that government should take it as given that no person may own another person. But for other valuable resources the initial assignment of property rights may be more complicated. Government could establish ownership according to a rule of first possession, by auction to the highest bidder, or according to some more sophisticated rule (Calabresi and Bobbitt 1978). The importance of these rules for initial assignment becomes

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greater for extremely valuable but scarce resources, such as transplantable body organs. One of the most famous articles in modern legal scholarship suggests that agonizing about the appropriate initial assignment of property rights may not be necessary (Coase 1960). The Coase Theorem holds that when transaction costs (that is, the costs of effectuating an exchange, which costs include those of finding someone with whom to bargain, of negotiating, and of enforcing the terms of the bargain) are zero, bargaining can always rearrange property holdings so as to move resources to their highest-valued use. Therefore, even if government makes a mistake in the initial assignment—by, for example, awarding the ownership to someone who values the resource at a low level, the resource may move to a higher-valued use through exchange. (The vast literature on this topic is summarized in Cooter and Ulen 1997; Korobkin 1995; Korobkin and Ulen 1998.)

THE PROTECTION OF PROPERTY RIGHTS Once government has assigned a property right, the issue arises of how best to protect the owner’s right. The traditional method of protecting a property right against infringement is to award compensatory money damages for past harms and to enjoin future harms. So, if someone trespasses across another’s property, the law will award the owner compensation for the trespass that has already occurred and will enjoin any further infringement. Indeed, this equitable relief is so closely associated with the protection of property rights that an injunction is referred to in the literature as a “property rule.” In an important article Calabresi and Melamed suggested that Coasean considerations should figure in the choice of remedy for property infringement (Calabresi and Melamed 1972). The overarching problem is to determine whether the property owner values the right to be free from interference more or less than the infringer values the right to make use of the owner’s property. For instance, suppose that Adams owns a parcel of real estate and that Jefferson wishes to cut across Adams’ property going to and coming from his workplace. The issues on which Calabresi and Melamed invite us to focus are, first, whether Adams values not having Jefferson cut across his property more or less than Jefferson values being able to take the shortcut and, second, what is the best method of making that determination of relative valuation? Calabresi and Melamed suggest that if the transaction costs between the property owner and the infringer are low, then the most efficient method of protecting the entitlement is by means of an injunction. This is because the low transaction costs between the parties make bargaining the most efficient method of resolving the issue of relative valuation. If Adams values not having Jefferson cross his property less than Jefferson values the shortcut and if the costs of bargaining are low, then presumably Adams will sell Jefferson an easement across his property. The more valuable use of the property has prevailed. If


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Adams valued not having Jefferson cross his property more than Jefferson valued being able to take the shortcut and transaction costs were low, then presumably Adams would not have sold an easement across his property to Jefferson. And again the more valuable use of the property would have prevailed. The connection to the issue of an injunction versus damages is this: an injunction is to be perceived, according to Calabresi and Melamed, as a statement by the court that the two parties—the owner and the potential infringer-are better placed than is anyone else to resolve the matter of relative valuation. Awarding an injunction in the owner’s favor is tantamount to directing the two parties to leave the court and bargain to a resolution of their dispute. Contrary to the traditional legal understanding of an injunction, the economic theory posits that the injunction does not necessarily preclude Jefferson’s taking the shortcut. Rather, Adams is free to waive his right to enforce the injunction if he receives something in exchange for that waiver from Jefferson.

CONSTRAINTS ON THE OWNER’S USE OF HER PROPERTY A possible shortcoming of this analysis of the resolution of private property disputes is that it pays scant attention to societal issues that may be of great importance. Suppose that everything is as before between Adams and Jefferson but that Adams despises Jefferson’s politics. As a result, the value to Adams of not transacting with Jefferson is far greater than the value to Jefferson of the easement. Should society tolerate the failure to transact between these two parties? Probably so. There would seem to be no compelling reason to forbid Adams to exercise his dislike of Jefferson’s politics (or his distaste for Jefferson’s favorite color, favorite baseball team, and so on). But suppose that Jefferson is a member, not of a political party that Adams despises, but rather of an ethnic or religious group that he despises. Should government continue to leave the relative valuation to bargaining between Adams and Jefferson? This is a closer question. Our society does not want its members to derive value from disliking others because of their ethnicity and religion. Even so, one must recognize that the costs of determining the true ground on which parties bargain or fail to bargain may be very high. Therefore, government’s ability to police bargains where transaction costs are low may be limited. A crucial assumption of the discussion so far has been that transaction costs between the owner and the infringer are low. Suppose that the transaction costs between Adams and Jefferson in the example above are high. (This might occur because not only Jefferson but all the people in the neighborhood desire to cut across Adams’ property so that Adams faces a negotiation not just with one person but a multilateral negotiation with many people.) As a result, it is not plausible for the parties to conclude a bargain about relative value—namely, Adams’ valuation of not having his neighbors cross his property vis-à-vis the


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collective value to the neighbors of taking the shortcut across Adams’ property. If Adams brings an action against the trespassers, what remedy most efficiently protects his property? In these circumstances an injunction might result in inefficient property use. Even if the infringers’ collective valuation on taking the shortcut exceeds Adams’ valuation on not having them cross his property, no bargained-for easement will result because the costs of transacting are too high. Calabresi and Melamed suggest that in circumstances of high transaction costs between the owner and the potential infringer the court should award compensatory money damages through what they term a “hypothetical market transaction.” That would involve the court’s making a determination of the price at which the owner would have been willing to sell the right to use or invade her property if transaction costs had been low (Schwab and Krier, 1995; Kaplow and Shavell, 1996). There are many pitfalls to this “hypothetical market transaction,” one of which is that the court’s valuation is unlikely to reflect any subjective elements of the owner’s valuation, such as sentimental value. This shortcoming could lead to the court’s mistakenly deeming the infringer to place a higher value on the prop erty’s use than does the owner. And this mistake could compound itself because legal relief, in essence, announces a price at which continuing infringement may occur. Nonetheless, an award of money damages to the owner in a situation of high transaction costs typically results in efficient property use: the owner receives the compensation that she would have demanded for the infringement of her property, and the infringer internalizes, in economic jargon, the cost of making use of another’s property. If the court has determined the level of compensatory damages accurately, then infringement will occur and compensation will be paid only if the value of infringement exceeds the level of compensatory money damages, which, by assumption, adequately compensates the owner for the infringement (but see Ayres and Talley 1995; and Symposium 1997). Because the determination by a court of relative value to an owner and an infringer is rough-and-ready, courts are reluctant in property disputes to perform this hypothetical market transaction. They are far more comfortable with adopting the general rule of protecting property through equitable rules and reserving compensatory money damages for extraordinary circumstances. These considerations would seem to suggest the very strong general rule that only consensual interference with another’s property is allowable. But are there ever circumstances in which it would be appropriate for the government to allow non-consensual private interference? A special case arises when an emergency makes the transaction costs between the owner and the infringer so high that there is no time to conclude a bargain and yet there are good reasons for believing that the infringer’s use of the property was more valuable. These circumstances arose in the famous case of Ploof v. Putnam, 71 A. 188 (Supreme Court of Vermont, 1908). Ploof and his family were sailing on Lake Champlain when an unexpected, violent storm arose. Ploof determined that he needed to secure his boat to land and made for the pier on Putnam’s island.


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Ploof made to tie up to Putnam’s pier, but Putnam’s employee pushed the boat off. The storm dashed Ploof’s boat against the rocks, damaging both the boat and members of the Ploof family. Ploof brought an action for compensation against Putnam on the grounds that he and his family would not have suffered injuries if Putnam had offered them shelter and that they were entitled to that shelter. Putnam’s defense was that his ownership of property entitled him to exclude people from his property. The Vermont Supreme Court held, instead, that Putnam must pay compensation to Ploof. That case has given rise to the doctrine of private necessity, under which an infringer may make use of another’s property without his consent in an emergency. Is it efficient to limit a property owner’s rights so as to require him to allow another to use his property in an emergency? The reason that Ploof and Putnam could not make a bargain is that there was no time to do so. While it is not certain that, if there had been enough time in which to bargain, they could have concluded a mutually satisfactory agreement, the odds are that they would have done so. Surely the values to Ploof of having his family protected from harm and of having his boat safely moored were greater than the value to Putnam of having his pier free. Surely, too, Ploof would have agreed to compensate Putnam for any damage that his boat did to Putnam’s pier during the storm. This seems like such a reasonable hypothetical transaction that the court probably was correct to hold Putnam liable for the consequences of failing to conclude this transaction. Beyond doing justice as between these two parties, the court could well have been concerned to create efficient incentives for similarly situated parties in the future. By holding Putnam liable for Ploof’s injuries, the court was signaling to other parties in similar situations that, where transaction costs would have been low but for an emergency situation, the court will presume that a mutually satisfactory transaction would have taken place and will hold the parties liable for the consequences of failure to conclude a transaction. (See also Vincent v. Lake Erie Transport Co., 124 N.W. 221 [Supreme Court of Minnesota, 1910].) This is an important limitation on the use of one’s property, but it is a limitation that makes good sense.

GOVERNMENTS POWER TO REGULATE AND TAKE PROPERTY The rights of the private property-owner vis-à-vis the government are also limited. Specifically, government retains the power to regulate the use of property and to “take” the property—that is, to compel the owner to sell the property to the government. (The power to take is sometimes referred to as the power of eminent domain.) Clearly, this is an extraordinary power that no private individual can exercise against another individual owner. What justifies governmental powers to regulate and take? An example of governmental regulation of private property is zoning; under that form of regulation, government may specify that property in a particular


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area be single-family occupied, multiple-family dwellings, for commercial use only, that the principal structure on each parcel be set back at least many feet from the edges of the property, and so on. One justification for governmental regulations on the use of private property use is that they correct for a failure of collective action. Private property owners themselves might desire to reach an agreement to impose mutual restrictions on their use of their property—that is, to set aside certain areas as residential areas and other areas as commercial areas—but might be frustrated in achieving this agreement by high transaction costs. Governmental regulations may simply implement the agreement that property owners desire but are unable to conclude. Another justification for governmental regulations of private property is that they restrict uncompensated externalities that one private property might involuntarily inflict upon others. This justification requires more elaboration than the failure-of-collective-action justification because there are other tools besides government regulation for minimizing external harms arising from a neighbor’s actions or failure to act. One such tool is voluntary exchange. A neighbor who is harmed or offended by his neighbors’ actions or failure to act may bargain with the offender to lessen the harm—paying him to refrain or to act or accepting payment in exchange for the harm or the failure to act. In the extreme a neighbor might purchase his neighbor’s property to minimize external harm. An alternative to private bargaining as a method of solving crossboundary problems is nuisance law. A neighbor can bring an action against an offending neighbor and, if successful, receive compensatory money damages or an injunction against the harm’s continuation. Where bargaining is costly, this possibility of being held liable may induce neighborly behavior. In light of the fact that there are already these possibilities for the solution of problems between neighbors, what role does governmental property regulation play? One possibility is that governmental property regulations incorporate the norms that nuisance actions have established or would have established if allowed to operate over a long period of time. Another possibility is that property regulations implement community standards that, although desirable, are unlikely to be achieved because of shortcomings of the market for voluntary agreements or of the litigation process. For instance, as we have seen, the transaction costs of multilateral agreements to implement community norms of property use may preclude a market solution to the problem of nuisance. And litigation may be so expensive that victims fail to bring actions against injurers, thus failing to send signals to other potential injurers about what constitutes appropriate behavior (see Ellickson 1973). The other element of the government’s power with respect to private property is the power to take—that is, to compel the sale of the owner’s property to the government. Why should the government have that power? The answer is that the exercise of that governmental power, if done under certain constraints, fosters efficient property use. The takings clause of the Fifth Amendment to the United States Constitution contains two such constraints that bind the federal government in its exercise of the eminent domain power: “nor shall government


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take private property for public use without just compensation” (Epstein 1985). Economic analysis can provide justifications for those two constraints and important interpretations of them. For instance, the requirement that the government pay just compensation when it compels the sale of private property at least guarantees that the government values the property more than the fair market value of the property. There is no guarantee that the government values the property more than does the owner. As a result, there is the possibility that the transfer of the property to the government at fair market value may be inefficient, in that it is a transfer from a higher- to a lower-valuing user. This means that the just-compensation constraint is a necessary condition for the efficiency of the taking power, but it is not sufficient. We need at least one additional constraint on the exercise of that power in order to guarantee efficient taking. The second constraint on the exercise of the taking power is that the government take the property for a public use. That is, the government must have a legitimate governmental goal in mind for the property and not, say, a transfer to a prominent supporter of the party in power. One can identify three public purposes for which the government might efficiently exercise its power of eminent domain. First, government might efficiently take private property to provide large-scale public goods, such as roads, military bases, airports, national parks, wetlands, and the like. The qualifier “large scale” restricts the exercise of the taking power to those circumstances in which the provision of the public good requires the assembling of such massive tracts of land that the transaction costs of assembling the parcel through arm’s-length exchanges would be prohibitively high. Second, government might efficiently take private property to overcome a significant monopoly problem that the government faces in the provision of goods and services. For example, if there is only one suitable place for the government to place a military satellite tracking station, then unless the government could compel the private owner to sell at fair market value, that owner might insist on a monopolistic price that might frustrate the governmental provision of the station. Or there may be only one place that is suitable for an exit from a freeway and all the land in that area is owned by one person. Third, government might exercise the taking power to further important societal distributional goals. For instance, the State of Hawaii took private property whose ownership was very highly concentrated in order to redistribute that land in the form of public housing (Hawaii Housing Authority v. Midkiff, 467 U.S. 229 [1984]). In each of these three instances the potential social benefits from exercising the power to take would seem to exceed the social costs (Fischel 1995).

REFERENCES Ayres, I., and E.Talley. 1995. “Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade.” Yale Law Journal 104:1027–1117.


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Blackstone, William. 1979, originally 1765–1769. Commentaries on the Laws of England (4 vols.). Chicago: University of Chicago Press. Calabresi, G., and A.D.Melamed. 1972. “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral.” Harvard Law Review 85:1089– 1128. Calabresi, G., and P.Bobbitt. 1978. Tragic Choices: The Conflicts Society Confronts in the Allocation of Tragically Scarce Resources . New York: W.W.Norton and Co. Coase, R. A. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3 (1): 1–28. Cooler, R. D., and T.S.Ulen. 1997. Law and Economics (2nd ed.). Reading, MA: Addison-Wesley-Longman. Ellickson, R. C. 1973. “Alternatives to Zoning: Covenants, Nuisance Rules, and Fines as Land Use Controls.” University of Chicago Law Review 40:681–781. Epstein, R. 1985. Takings: Private Property and the Power of Eminent Domain . Cambridge, MA: Harvard University Press. Fischel, W. A. 1995. Regulatory Takings: Law, Economics, and Politics . Cambridge, MA: Harvard University Press. Kaplow, L., and S.Shavell. 1996. “Property Rules Versus Liability Rules: An Economic Analysis.” Harvard Law Review 109:713–790. Korobkin, R. 1995. “Policymaking and the Offer/Ask Price Gap: Toward a Theory of Efficient Entitlement Allocation.” Stanford Law Review 46:663– 708. Korobkin, R., and T.S.Ulen. 1998. “Efficiency and Equity: What Can Be Gained from Combining Coase and Rawls?” Washington Law Review 73:329–348. Krier, J., and S.Schwab. 1995. “Property Rules and Liability Rules: The Cathedral in Another Light.” New York University Law Review 70:440–483. Landes, D. 1998. The Wealth and Poverty of Nations . Cambridge: Cambridge University Press. North, D. C., and R.P.Miller. 1973. The Rise of the Western World: A New Economic History . Cambridge: Cambridge University Press. Symposium on the Twenty-Fifth Anniversary of Calabresi and Melamed. 1997. Yale Law Journal 106: 2201–2213.

A RETROSPECTIVE INTERPRETIVE ESSAY ON THE DIVERSE APPROACHES TO THE FUNDAMENTAL INTERRELATIONSHIPS BETWEEN GOVERNMENT AND PROPERTY Nicholas Mercuro and Warren J.Samuels

INTRODUCTION: COMMENTARY ON GOVERNMENT AND PROPERTY Neither property nor government are given, transcendental or self-subsistent. Both are artifacts and the issues at stake in both theory and practice relate to how they are to be further worked out. The overriding tendency in the property/ government discourse is to selectively reify property and government when both are, arguably in point of fact, politically constructed-meaning a function of choice and power. This discourse often involves the reification and projection to independent ontological status of socially constructed structures of property and government. This phenomena arises in part because of a tension between (i) the tendency to commit the naturalist fallacy—that because something exists it must be grounded in the ultimate nature of things, and (ii) the rather very pragmatic consideration of a putative need to render absolute, for purposes of legitimation and psychic balm, that which is in fact relative. Reification always operates selectively, sometimes to hinder change, sometimes to sanction and otherwise abet change, but always to channel change, always giving effect to implicit normative premises as to which/whose particular interests are to count in particular situations of conflict between interests. Theories of property are of different types. Some theories explore the origin of property, while others describe the nature of property. Some serve as a justification of property, while still other theories focus on the evolution or development of property. Theories of property may also be a priori, metaphysical, and empirical, and so on. These theories apply to both the institution of property writ large and particular incidents, or rights, of property; one problem being that of applying general propositions to particular cases. It is often difficult to disentangle the positive from the normative elements of a theory; and very often argument proceeds from “is” to “ought” without explicit acknowledgment that one cannot do so without an additional normative premise.


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Also relevant is wishful thinking, which is derivative in part from the situation that the idea of “rights” can be understood and used in various ways: (i) as claims, (ii) as adjudicated conflicts over who can do what to whom, and/or (iii) as supportive/protective legal sanctions. Arguably, property and government coexist and are formed within a process of mutual interdependence and cumulative causation. Property is in part a function of government, and government is in part a function of property. It is arguably the case that both government and property emerge from a common source, the legal-economic nexus (Samuels 1989). Also relevant here is that “law” can be understood and used in various ways: common law, constitutional law, statutory law, and administrative law, in addition to private law or public law. Apropos of court-determined law, the meaning of law is further variable. “Law” can signify: (i) court decisions; (ii) the ratio decidendi of a case: the ground of a decision, the basis of the holding; (iii) the precedential sequence, somehow interpreted; (iv) the principle or rule of which the former (i, ii, and iii) are evidence or manifestations; (v) the overarching rule or principle of which former are evidence or manifestations; and, inter alia, (vi) natural law. One can also distinguish between the law on paper and the law in action, for example, the choice between competing sets of precedents, versus choices over prosecutorial, judicial and enforcement discretion. Property is not the only mode of governmental protection of interests; law other than the law of property—for example, protective labor law and labor relations law-does so likewise, albeit, in Western society, without the honorific aura which attaches to “property.” Moreover, the “sources of law”—in part a function of one’s definition of law—also are arguably many: (i) custom, (ii) morality and equity, (iii) public policy, (iv) statutes, (v) force (will of the sovereign, with sovereignty ultimately a matter of force), (vi) past judicial precedents (judicial authority), (vii) opinions of experts (academic…and so on authority), and (viii) legal theory (analytical jurisprudence). Throughout most discourse on property and government is some conception of “public interest” or “public purpose.” On the one hand, insofar as government is involved in the resolution of conflicts of interests between private parties, some conception of public purpose, or public interest, tends to be the basis of choosing between conflicting claims. On the other hand, these two conceptions are invoked in arguments to selectively legitimize interests. The two usages, however, are difficult to separate. In any event, the concept of public purpose or public interest can be variously understood as (i) a claim of a substantive goal of policy, (ii) a criterion by which to choose between claimants, and, inter alia, (iii) a mode of discourse. Government can be seen as either or both a defender or a threat to property; property can be seen as either a defense against government or a result of controlling government (thereby determining whose interest is protected as property by government). Government can be seen as either a check on private power or a source of private power. Property can be seen as either theft (PierreJoseph Proudhon’s answer to the question, “what is property”) or as the

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warranted result of productive activity (with the word “productive” variously understood and defined). Much of the foregoing is infused with the need to work out more or less temporary solutions to the problem of order: the conflicts between freedom and control, between continuity and change, and between hierarchy and equality. Also suggested above is that whatever one’s theory of the interrelationships between property and government and of the legal-economic nexus, the institutions of both property and government are important parts of the system of governance in society. If one defines governance as the effective power to make decisions affecting the important interests of others (either interests which others consider important or interests objectively defined as important), then governance resides in both government—nominally public governance—and property—nominally private governance. Arguments about property often give a privileged status to some theory of property, some theory of government and governance, some theory of law, and, inter alia, some theory of the sources of law. Notwithstanding the tendency to identify property in terms of “things,” corporeal and incorporeal, property has to do with relationships and these relationships are typically conceptualized in one or another set of abstractions or one or another mode of discourse. It is these conceptions, abstractions and modes of discourse which form theories of property, law, governance, and so on, and whose selective use is invoked in arguments on behalf of particular interests or groups of interests. Conspicuous by their absence from this collection are essays which affirm that property is theft and that government is a conspiracy run by some executive committee as it were, a ruling class. Also missing are essays which affirm that both property and government should be subordinated to religious authority. Such omissions are not intended to deny, for example, that legal/government determinations of protected interests in dual-right situations can lead to judgments that amount to abuse or theft, or that such determinations are, at least to some extent, driven by normative or moral judgments.

THE SIMPLE LIBERAL VIEW AND THE SOPHISTICATED LIBERAL VIEW This collection, for whatever attention it draws to the concept of power, considered nonpejoratively, tends comparatively in the direction of a harmonistic view of liberal democracy—the liberal view. We shall distinguish between what we call the simple liberal view and the sophisticated liberal view of the relations between government and property. Part of what is relevant is indeed power: economic power, social power, political power, the structure of mutual coercion, the legal-economic nexus, the overall system of governance of which both property and government are inevitably intertwined. Part of what distinguishes the simple liberal view from the sophisticated liberal view is that the former is more susceptible, and the latter less susceptible, to selective


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manipulation by ideological interests, partisan political interests, and particular economic interests. While the former is laden with wishful thinking within the context of harmony, we argue the latter, by focusing on conflict, is more descriptively accurate and candid in identifying what are the truly fundamental issues of policy—the interrelations between property and government. With regard to the simple liberal view versus the sophisticated liberal view, we want to underscore that the focus is on the liberal view. The issue here is not between the virtues of private property versus radical reconstructions of property; nor is it an issue of a market allocation of resources versus having the government control the allocation. The fundamental point is that with respect to property, legal change is ubiquitous and changes in property—definitions, assignments, and enforcement—result in different power relations and, ultimately, different allocations of resources and distributions of income. Thus, how we think about property as related to government and their mutual impact on each other, fundamentally effects the character of economic life. We contend that the simple liberal view obfuscates the role and construction of property, the ongoing role of government (and its relation to property), and in doing so, serves to simplify the interrelations among property, government, and the market. The simple liberal view, in providing simple formulations, results in disengaging some of those in the political-economic arena to believe that there are simple solutions-the role of government becomes one of merely protecting private property and enhancing the role of markets! With such simple remedies at hand, the disengaged find little reason to alter the legal relations governing society. They stand on the sidelines while those who are aware of the stakes work to alter the working rules and property rights to their advantage. The sophisticated liberal view is liberal in the sense that it rejects neither private property nor its protection, indeed, it affirms them and recognizes the wide role of markets in Western industrialized countries, together with the corresponding role of government. However, it does not try to obfuscate what is transpiring. Within the liberal property-government debates over policy (and other instances as well) one important fact is that often-used terms like “property,” “private property,” “government,” “government regulation,” “free enterprise,” “private enterprise” are typically undefined or characterized in ambiguous, presumptuous and/or tendentious ways. These terms, and the actual institutions which give rise to their meaning, are neither given nor self-subsistent. While useful in certain contexts, their invocation often only gives effect to general sentiments and wishful thinking. Their use in policy discourse requires substance and in actual social, economic and political affairs, this substance must be worked out-each are institution specific. It is unlikely that general agreement could be had as to what property “is” in the present, for it always is a sum of conflicting elements, tendencies and precedential sequences. Nonetheless, changes in property are readily designated as contrary to “property” as it presently exists. Such usage tends to selectively reify the status quo and obfuscate the process through which property and


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government have evolved. The point here is not that it is undesirable to have stability in the details of what constitutes property (or government), for that is in part what the institution of property is about; however, complete stability is both unrealistic and undesirable—property has always undergone change. With complete stability, industrialized society we would never have gotten to where we are. The very nature of property in market economies is Schumpeterian creative destruction. Buried within and inherent to that process of creative destruction are decisions as to who, how, and within what limits can one set of interests upset which received property and governmental relationships. Most discourse about property and government are contributions to the process of working that out, and as such are part of the larger, total system of governance. A central theme to which numerous authors in the collection contribute and which the editors wish to stress, is that (i) the meanings of property and of government, and (ii) their interrelations, must be understood as part of the total system of decision making in society—what we call the system of governance. Decision making connotes power and one characteristic of power is its combination of diffusion and concentration. An important facet of power is the system and structure of subordination and superordination. Property and government are both dependent and independent variables, consequences and causes, in that system and structure. Adam Smith, one of the great founders of liberalism, recognized not only that people are impressed by rank and practice status emulation, but that property and government are parts of the structure of subordination and superordination. In The Wealth of Nations, Smith (1776, pp. 670, 674) wrote that: Civil government supposed a certain subordination. But as the necessity of civil government gradually grows up with the acquisition of valuable property, so the principal causes which naturally introduce subordination gradually grow up with the growth of that valuable property. And, moreover, that Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all. The property that is protected by government reflects the interests which government has been used to define and assign to some parties, rather than to others. In large part, the property which government protects is the product-as property-of government. The simple liberal view of property and government postulates that property be treated as if it were antecedent to and independent of government, and consequently, one role of government is to secure property. The view that people should be secure in their property is attractive—not least to the editors


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who, in the grand scheme of the distributions of income and wealth, are quite affluent and like to think of their property as the product of their successful hard work. But that only addresses property as a general category regarding the assignment and enforcement of rights to property, not what constitutes property. It ignores the bundle of rights which comprise property as a social category. It ignores the complex processes by which that bundle of rights has evolved and to which processes its content will be subject in the future. The simple liberal view, however attractive, is essentially a sentimental view. It is a view amenable to selective specification, affirming some past property interests, while denigrating and denying some other past property interests. It is a view which readily serves as a normative premise underlying discussions of property and government but always with selective specification of the interests to be treated as property, or given other protection by government. This is not to deny that some normative premise is necessary. Indeed, the basic issue is in fact which interests are to be protected and a fundamental fact is that interests designated and protected as property are already given a special protection—not least in the protection which government provides through its enforcement of contracts (see Ellerman in this volume). The simple liberal view either obfuscates or ignores the condition that property and government, like constitutions, are made, not found. And it does so while quietly contributing to the on-going social reconstruction of property and government, doing so by selectively advancing one conception of property and/or of government and some specification of whose interests have been protected in the past and should be protected in the future. The sophisticated liberal view holds that whether we like it or not, property is a legal institution, just as government is an institution influenced-the latter strongly influenced, if not controlled-by property. Government protection of particular interests as property affects not only the past and present distributions of income and wealth but also the ability of those who own or control property to influence the role of government in the future in these and other matters. Whereas the holders of the simple liberal view either believe or act as if they believe that the function of government together with their view of property is largely to protect existing configurations of the bundle of rights, the holders of the sophisticated liberal view reject the reification, obfuscation, and finessing of issues of policy that are inherent in that view. The former seek to foreclose undesirable change of property; the latter, to point to the sources of change and the processes of change, not least of which emanate from the so-called private sector and which, often, government is called upon to ratify. Indeed, parties who seek to have their interests protected as property in an ostensible absolute way (that is, subject to eminent domain together with the takings clause and not the police power), in effect, are seeking to advance their interests at a cost to other parties. For example, say Alpha, the creator of an external bad visited on another, say Beta, seeks to defend their ability to do so by invoking their property rights against government regulation. In doing so, Alpha’s success in having those costs visited upon Beta amounts to a taking of Beta’s property. A


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potential protective regulation can protect Beta against Alpha; thereafter, socalled deregulation can protect Alpha against Beta. But in each case the action of government has the same analytical effect, protecting one set of interests and denying the correlative set of interests, as property. In each case the result is the same, to give effect, in principle, to some normative premise—operating under the rhetoric of the public interest or public purpose—as to whose/which interest should count in the sense of being given protection by government. The sophisticated liberal view acknowledges the desideratum of private property as a means by which people can both have a sphere of autonomy and command and enjoy resources independent of the state. At the same time, it acknowledges that both the institution of property and the rights constitutive of property are what they are because of law. Which is to say that the independence is both substantive and illusory. Substantive in that particular rights of property protect individuals from other individuals and from the state. Illusory in that particular rights of property are always relative to others’ rights. That working out of what constitutes property and the protection accorded by property—in the resolution of competing claims—is undertaken through the total system of governance. Independence is a constrained, or relative, independence. The sophisticated view recognizes the fundamental relevance of both continuity and change in what is protected as property. The issue almost always is whether some interest hitherto protected as property is to be given continued protection, or some other interest is somehow to be protected by government. Government simply cannot behave in the Lockean manner with which the sentiment of the simple liberal view so readily resonates. Property is attacked by other property interests in the product and resource markets and in the marketplace of ideas. Whenever that happens, either under some pre-existing law or some new law of property, some interests will inexorably be sacrificed to other interests. Government must willy nilly make a choice. That process of choice, in the simple liberal view, is typically understood to be subject to the rule of law. That means, first, that the decisions that count are those made by law, for example, either statute or court law. It also means that the decisions are bound by rules. That is indeed a noble desideratum, particularly when one considers the varieties of abuse of government power that have taken place throughout history. The “rule of law”—the purported application of known principles without the intervention of discretion in their application—has not prevented invidious, class-differentiated legislation and court decisions. But it is only a desideratum, a truly noble and eminently useful sentiment. Government must choose. On the one hand, all aspects of government are inexorably matters of the exercise of discretion. In Alpha-Beta conflicts, some interests will and other interests will not be protected by government. On the other hand, while there may be in law some “known principles,” typically in a court decision, the choice is between one line of precedents or another, or creating a new line. In addition, a rule of law need not be equally applied; another rule of law may itself treat people differently. Then there is the predicament/paradox of how to


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treat people otherwise unequal equally: If you treat them equally, you are giving effect to and reenforcing their inequality; to treat them equally, given their inequality, you may have actually to treat them unequally. The ideal of the rule of law is inescapably tied up with and therefore has aspects of the conflicts between hierarchy and equality and between continuity and change. In any case, governmental/ governance choice is inevitable. Liberal society in the simple liberal view can seemingly try to constrain the exercise of choice by government, but both the agenda of items among which government chooses and the choices themselves are largely open. What helps objective analysis-that which is sought by the sophisticated liberal view—is to avoid couching choices as “in the nature of things” and therefore “not governmental.” Objective analysis recognizes choices as “governmental” in the nonpejorative sense, and in doing so tries to identify the parties of interest and differentiate the impacts brought on by certain choices made. There are three fundamental things that can be said about the interrelationships between property and government. First, their interdependence is open-ended. Second, one of the functions of the prevailing discourse about property and government is to provide the selective antecedent normative premises which help drive that open-ended process. And third, both of the foregoing, and other factors, comprise the system of governance in society. Government and property and their interrelations, the legal-economic nexus, are systems of belief and they are driven by systems of belief. The simple liberal view either pretends that no choice is involved and/or provides the implicit selective antecedent normative premise in particular cases to lay minds to rest about the choice being made. The sophisticated liberal view identifies what necessarily goes on and leaves it to the process of governance to work out which choices will be made as to selective normative premises and as to which/whose interests will count in the sense of being given protection by government as property. The distinction between the simple liberal view and the sophisticated liberal view and the fundamental interrelationships between property and government can also be analyzed and interpreted through a “comparative institutional analysis.” The next section is devoted to this task.

COMPARATIVE INSTITUTIONAL ANALYSIS The comparative institutional approach to law and economics 1 provides an important vantage point from which we can better understand the simple and sophisticated liberal views of property and government. Comparative institutional analysis is general rather than partial (Samuels 1972, pp. 582, 585) and consists in describing and analyzing the systematic relationship between (1) the structure of political-legal-economic institutions, focusing on the rights and rules by which they operate; (2) the conduct or observed behavior in light of the incentives (penalties and rewards) created by the structure of institutions; (3) the


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consequent economic performance, that is, the allocation and distribution of resources that determine the character of economic life under these institutions (Mercuro 1989, p. 11, emphasis in original). Within the structure-conduct-performance paradigm, the object, then, is to explain and compare the outcomes that will occur under real, discrete, alternative institutional structures. Contemplating the ultimate purpose of such an approach, A.Alan Schmid posed the rhetorical question: “If [institutional law and economics] has no dispositive answer to resolve policy arguments, what is it good for?” His response: “It can identify many less than obvious sources of power in an economy so that people can know where their welfare comes from. It can raise the level of normative debate so that issues can be joined and people can live with tragic choices rather than ignoring and dismissing them” (Schmid 1994, pp. 36–37). Elsewhere he stated that this institutional approach to law and economics must ask: “How do the rules of property structure human relationships and affect participation in decisions when interests conflict or when shared objectives are to be implemented? How do the results affect performance of the economy?” (Schmid 1987, p. 188). The comparative institutional approach draws no distinction between jurisprudential, legislative, bureaucratic, or regulatory treatments. All are seen as particular aspects or manifestations of the interrelation of government and the economy, or of legal and economic processes. A comparative institutional approach to law and economics emphasizes the need to explain and analyze the available alternatives and the consequences of choice at three distinct stages: (1) the constitutional stage of choice—the social contract that binds people together, which is subject to reinterpretation and revision; (2) the institutional stage of choice—the structuring and restructuring of political-legal-economic institutions through the adoption or revising the working rules; and (3) the economic impact stage of choice—describing the economic impacts of existing or potentially revised legal-economic relations, be they in the form of private property rights, status rights, communal property, or open-access resources (Mercuro 1989, pp. 3–6). 2 Throughout all three stages are issues and questions concerning property, government, and the total system of governance. The selection or establishment of a specific set of institutions, and thus the character of life in a society, is the product of choice-choices that take place at all three stages of choice as identified above. Before exploring the elements of each stage of choice, as set forth earlier, we reiterate-neither property, nor rules, nor government are given, transcendental or self-subsistent. Property is in part a function of government, and government is in part a function of property; government can be seen as either a check on private power or a source of private power. Both government and property emerge from a common source, the legal-economic nexus wherein both law and economy are jointly produced, not independently given and not merely interacting (Samuels 1989, p. 1567). Through the legal-economic nexus are worked out the structures of the law, property, government, and the economic system. That is, legal rules govern the terms of access to and


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participation in the economy and in government by legal-economic actors. In total, property, rules, and rights, govern whose preferences will be given effect through the market and through government in the ongoing construction of legal-economic reality. Elements of a Comparative Institutional Approach to Law and Economics Figure 1 provides a simple way to characterize the basic elements of what constitutes the comparative institutional approach. In attempting to address the issues and concerns regarding property, government, and the system of governance, Figure 1 describes the three different levels of choice: (i) the constitutional stage of choice, (ii) the institutional stage of choice together with its working rules, and (iii) the economic impact stage of choice including the private property rights, status rights, communal rights, open-access resources (in total comprising the legal relations governing society)—giving rise to the private, public, communal, and open-access resource sectors, respectively. The underlying logic of the approach recognizes that altering the law (i.e., changing the constitution, altering working rules or the legal relations governing society in any one or all of the four sectors) has a direct impact upon economic performance. This logic or line of reasoning can de depicted as follows: ∆ law/working rules → ∆ incentive structure → ∆ institutional behavior → ∆ economic performance

Figure 1 .


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The emphasis is on the interpenetration and interrelations between government and the economy, so that the legal structure and consequent conduct in the mixed market economy, and economic performance are dependent on each other in a process of circular and cumulative causation. Constitutional Stage of Choice In order to understand the nature of the choices necessary at the constitutional stage, it is useful to start with society in a conceptual state of anarchy. Under anarchy, individuals will contemplate the opportunity costs associated with the protective-defensive resource diversions that are necessary and essential for life under a system of anarchy. Once they recognize the potential prospects for improvement in the character of their economic life brought on by establishing a social contract or constitution, they will enter into some form of social contract or formally adopt a constitution. In establishing the constitution, the individuals will seek to spell out the behavioral limits of what is and what is not mutually acceptable conduct and lay out the so-called rules for making rules. It must be noted that while the established constitution is typically thought to have only a subtle effect on the allocation of resources and distribution of income, that subtle impact cannot go ignored; it can be cumulatively huge and have a pervasive effect. In addition, since constitutions are not immutable, the methods by which constitutional rules can be revised are developed at this level of choice. Further, it should be noted that the relationships among emergent institutions are also partially resolved at the constitutional stage of choice. Once the constitution is framed, it will then provide the basis for the emergence of a broad assemblage of legal-economic institutions. The structuring of these legaleconomic institutions constitutes the institutional stage of choice and they affect the allocation of resources much more directly. The Institutional Stage of Choice The institutional stage of choice focuses directly on the structure of the political/ legal institutions (more commonly referred to as the State) as well as the revision of those institutional structures. It is the specific working rules that are at center stage—the complex set of rules that give rise to the institutional decision-making processes. More often than not the decision-making processes of an institution are formally worked out by the institution itself in developing its own working rules (e.g., an institution’s by-laws). In addition, the decisionmaking processes of a legal institution are partially established by the rules worked out at the constitutional stage of choice, and, as well, they are also a partial function of the decisions of other institutions worked out often under complex procedures. 3 As in the case of constitutions, legal institutions are not set in stone, but rather are themselves a response to economic needs and, as such, can and do undergo structural revisions. A full understanding and appreciation of the role of working rules is fundamental in resolving legal-


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economic disputes. With respect to the fashioning or the redesigning of working rules, much work remains to be done to identify which institutional structures go towards enhancing the effectiveness or efficacy of legal institutions in accomplishing their stated goals. Changes in the working rules of legal institutions will revise the decision-making processes of those institutions and, as a result, alter the institutional choices that directly impact the legal relations governing a society—the extant structure of private, public, and communal property rights and open-access resources. It is these choices as to the structure of property rights to which we now turn by exploring the economic impact stage of choice. The Economic Impact Stage of Choice Conceptually, it is useful to begin with the notion of four distinct property right systems for organizing and controlling the allocation of society’s scarce resources: (i) the market sector, (ii) the public sector, (iii) the communal sector, and (iv) the open-access resource sector (Bromley 1991, pp. 14–40). Initially each sector is treated as if it exists separate and apart from the other sectors. As will be seen, typically, all four systems operate contemporaneously to allocate resources in western industrialized societies. The market sector. In the pure market sector, all property rights are held privately as bundles of fee simple absolute rights. According to the conventional legal-economic definition of property rights, what are owned by individuals are not goods or resources but are the rights to use goods and resources. With this structure of private property rights established by the individuals in a society, acting through their institutions and with the market as the system of social control, it is then possible for the individuals to further enhance their welfare by specializing and engaging in exchange through trade or realigning the use of resources in production. 4 This process of trade is conventionally viewed as a purely voluntary endeavor and, as characterized here, it is what transpires in the market sector. The final allocative outcome will be arrived at once all the gains from trade have been exhausted in both exchange and production. Thus, given a defined set of private property rights and given a specified and enforced initial distribution of rights, barring externalities and the problem of public goods, one can expect, consistent with the duality theorem, the market outcome to provide a Pareto-efficient allocation of resources. Public sector. The public sector is yet another arena for organizing and controlling the allocation of resources in a society. In this idealized sector the allocation and distribution of all resources will be determined by the State. That is, in response to the individuals who comprise the society, the legal-economic institutions will define and assign status rights which are, in effect, eligibility requirements for individuals to gain access to goods and resources. Status rights are rights to goods and resources which are exclusive, nontransferable, and are provided to individuals at the discretion of either the local, the state, or the federal level of government (or some combination thereof). Thus, the provision


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of status rights may be conceived of as a form of ‘government regulation’ in its broadest sense. As such, political-legal institutions are understood to make a broad spectrum of decisions that give rise to status rights. With the public sector as the system of social control, the emergent structure of status rights has a direct impact on the allocation of society’s scarce resources. However, unlike the market sector resource allocations, within the public sector the decision makers formulate public policies that may or may not be efficient. 5 Communal sector. Individuals in a society, acting through their legaleconomic institutions, may decide that commodities or resources will be communally owned (res communes). In essence, common-property resources are private property owned by a group of co-owners. Under communal ownership a group of individuals would have the rights to use and transfer the resource. Typically, a management group oversees the manner by which a common property resource can be used and reserves the right to exclude nonmembers. Depending upon the group rules used to manage the resource, communal property can result in an efficient allocation of resources. Open-access resource sector. Finally, individuals in a society, acting through their legal-economic institutions, may decide that commodities or resources will be owned by no one, equally available to all (res nullius), and thus, will effectively belong to the party to first exercise control over the resource. In this case there are no formal property rights to the resource. The resulting openaccess allocation of the resource would be allocatively efficient only if supply exceeds demand at a zero price. If supply does not exceed demand at a zero price and society nonetheless retains the resource in open access, the resource will be overused. 6 The complex legal-economic arena. Typically, western industrialized societies are structured so that the character of life is determined by all four systems of social control: the market sector, the public sector, the communal sector, and the open-access resource sector. The relative scope and content of each of the systems of social control is the result of a collective determination of those who have prevailed in choice-making processes in the political/legal economic arena. Figure 1 is intended to integrate the three stages of choice—the constitutional, institutional, and economic impact stage together with the market, public, communal, and open-access resource sectors. In brief, the participants in the political/legal economic arena will (from the bottom up) establish a constitution so as to avoid the pitfalls of anarchy; they will set in place working rules thereby structuring the legal-economic institutions; and they will structure the legal relations governing society—that is, the private property rights, status rights, communal rights, open-access resources—giving rise to the private, public, communal, and open-access resource sectors, respectively. Members of society, in attempting to promote economic welfare can act both individually and collectively to revise the constitution, to structure and restructure the institutional working rules, and to alter the property rights (be they private, status, communal, or open-access resources) in the market, public,


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communal, or open-access resource sectors in order to achieve an allocation of resources that will enhance their individual welfare. This is accomplished under the recognition that neither (i) the constitution, nor (ii) the decision-making processes of the legal institutions (i.e., the working rules), nor (iii) the legal relations governing the size and scope of the market, public, communal, and open-access resource sectors are given immutably by nature but are themselves a response to economic needs and flexible in response to changes in those needs.

SIMPLE AND SOPHISTICATED VIEWS OF PROPERTY, GOVERNMENT, MARKETS AND GOVERNANCE From the vantage point of the comparative institutional approach outlined above certain things become evident. In the sophisticated liberal view, government is seen to play a central and inevitable role in fashioning the character of economic life that hinges on theories of and treatment of property and government. In addition, advocates of the sophisticated liberal view reject singular solutions to issues of property and government that reflect only one particular set of value premises and one particular conception of the facts—including the theoretical construction of property, the role of government and the resulting rights and rule-specific benefits and costs. The sophisticated liberal view, by recognizing the multiplicity of potential solutions and underlying value premises, attempts to flesh out both what is actually going on in the legal-economic nexus and the alternative possibilities that are open to society in the ongoing social construction and reconstruction of legal-economic reality. Finally, while interested in identifying the alternatives open to policy and trying to say something of their consequences, those who advocate the sophisticated liberal view are reluctant to substitute their preferences for those of actual legal and economic actors engaged in the processes of working solutions out by and for themselves. This is contrary to the simple view which often speaks of property and government in terms which purport to provide an unconditional defense of the former (at the same time promoting enhanced market solutions) while often denigrating and trying to reduce the scope of the latter. The agenda of those who advocate the simple view becomes one of “protecting” property and “privatizing” that which otherwise isn’t yet in the market. Each of these points will be explored below. Role of Government In the sophisticated liberal view constitutional provisions, working rules of the state, and property rights are not rights and rules because they are preexisting, but rather are rights and rules because they are protected by government. The rights and rules are whatever interests government protects vis-à-vis other interests when there is a conflict; rights and rules are thus relative to and contingent upon the legal limitations inherent in (i) their identification and


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interpretation, (ii) the exercise by others of their rights, and (iii) legal and nonlegal change. Each of these factors is a function of the rights and rulescreation (and re-creation) process, and hence of the ability of individuals to secure rights (or a change therein) through the use and control of government. Government thus becomes an object of control for those seeking private legaleconomic gain or advantage, a mode through which relative rights rules and therefore relative market (income securing) status is given effect. The question is not, then, one of more versus less government, more rights versus fewer rights, or more rules versus less rules, but rather of whose interests government gives effect to through law-that is, through the process of creation and recreation of property rights and working rules. Optimal Solutions Whereas some of those who advocate the simple liberal view seek unique, determinate optimal equilibrium solutions to questions regarding property and government, the sophisticated liberal view finds such solutions to be questionbegging and concentrates on identifying and analyzing the processes by which the various legal structures, the conduct, and the economic performance are worked out. The latter do not feel obliged to identify particular legal arrangements as “optimal.” They argue that putatively optimal solutions to problems of policy only give effect to selective preconceptions and assumptions as to whose interests are to count, for which economists have no particular basis on which to choose, especially given that so-called optimal solutions are driven by and specific to the choice of rights, rules and so on which produce them. Markets versus Government Nowhere is the distinction between the advocates of the simple liberal view and the sophisticated liberal view more evident than in their perceptions of the market vis-à-vis government. Advocates of the simple view continue to maintain a proclivity for markets (along with the underlying private property rights) together with the concomitant view of a reduced role of government. But here market advocates remain somewhat vague as to what constitutes the “market.” They appear to have one of three constructions in mind in calling for an expanded role for the market: (1) a market economy (typically a mixed-market economy, often somewhat vague on “the mix”), (2) a conceptual market (a market typically characterized with a vaguely described “minimalist government” in the context of “pure competition” from economics 101), or (3) markets in general (typically a euphemism invoked to avoid a discussion of the important factors and details required in the previous two conceptions as well as the problems inherent in both). In the sophisticated liberal view the focus is on actual institutionalized markets (Medema, Mercuro, and Samuels 1998) and describing the consequences of legal changes inherent therein. The difference between these two views is evident from the discussion of


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Figure 1. Advocates of the simple liberal view’s refuse to concede that both property and the market sector only exist within the context of the constitutional laws, the surrounding working rules of the state, and the other sectors that society has chosen to institutionalize—including the public sector, the communal sector, and an open-access resource sector—simple liberal views notwithstanding. Consequently, just as “property” is devoid of meaning except in some context of the presiding institutions, so too is the “market” devoid of meaning in that the market sector is niched within legal-economic institutions and thus, can not have meaning independent of these legal-economic institutions, that is, without specifying the institutionalization of that market— the very focus of those who advance the sophisticated liberal view. Accordingly, the sophisticated view questions not only the simple liberal view as to (i) the protection of property and their generally blind reliance on “the market sector” whether type (1, 2 or 3 as described above) vis-à-vis other sectors to allocate society’s resources, but also questions (ii) their silence on the ongoing reconstruction of the legal-economic institutions within which the market sector is embedded and its primary source of existence (as is now so well understood by former Soviet-bloc countries). Those who advocate the simple liberal view somehow seem to have missed the essential point that institutionalized markets are a function of the institutions and power structures which form and operate through them. In all this, the state stands as the essential complement to the market-the latter not an assumed superior substitute for the former. As Neil Komesar stated: Attempts to trivialize these issues by easy assumptions are intellectually dangerous. Whether and to what extent the structures of government thought to support the market do in fact enhance transacting, increase resource allocation efficiency, or promote any other social goal are issues too important and difficult to be assumed (Komesar 1994, p. 114). There is an inevitable necessity of choice—law is not something that is given or to be discovered, but is instead a human artifact marked by deliberative and nondeliberative human choice at all three stages of choice (outlined above)—in the legislatures, in the courts, and in government agencies where people have a say and where discretion is exercised in consideration of consequences. The fact that law is a human choice process means that value judgments will necessarily be introduced in choosing between competing interests, and legal-economic outcomes are thus an expression of the values of those who have participated and prevailed at each stage of choice in the political-legal-economic arena—that is, those who are able to most effectively use government to further their own ends be it through the market sector, the public sector, the communal sector or the open-access resource sector. Thus, to affirm solution by a market together with the outcome which obtains and then purported to be optimal, is to give effect to a particular structure of law,


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working rules, rights, and therefore power and thus beg the operative issue(s). In the real world of Alpha-Beta conflicts, those who narrowly seek the unabashed protection of property together with market solutions and their putatively optimal solutions will be missing most of what is at issue. By narrowly framing the issue as either one of protecting property or the need for more markets and less “government intervention” is misleading, in that government is omnipresent in all of its manifestations. The issue as to who will have rights, or what working rules will benefit whom, or whose opportunities are expanded in enhancing the scope of any one sector vis-à-vis another, thus turns on the question of whose interests government allows to be realized and who is able to use government for what ends. The critical matter is who is able to control and use the legaleconomic nexus in order to control legal-economic continuity or change.

CONCLUSION Most theories of property are theories of legitimation. These theories generally fail on two grounds. First, they do not distinguish between property as an institution writ large and the particular rights and rules that relate to property. And second, they fail to acknowledge that particular sets of property rights and rules can conflict with other sets, that particular interests can conflict with other interests, and that the latter often results in change of the former. When interests conflict, government is under an inexorable necessity of having to choose between different configurations of property rights and working rules. The operative problem has two aspects: (1) that government will have to change the interests to which it gives its protection, and (2) that some of the interests to which it gives its protection are called property, and are thereby given a privileged position relative to other interests, some of which are not called property. The legal-economic system will produce different results depending upon (i) the size and scope of the relative systems of social control set in placethe market sector, the public sector, the communal sector and the open access resource sector; (ii) whether, as Ellerman points out, labor hires capital or capital hires labor; (iii) whether Alpha interests or Beta interests, both designated property, are chosen when they are in conflict; and (iv) whether Alpha interests or Beta interests, only one of which is designated property, are chosen when they are in conflict. We again want to underscore that with regard to the simple liberal view versus the sophisticated liberal view, the focus here remains on the liberal view. As we noted earlier, the issue here is not between the virtues of private property versus radical reconstructions of property; nor is it an issue of a market allocation of resources versus having the government control the allocation. No one denies the importance and continued role of property, the market, and government; but there are different ways to think about the fundamental interrelations between them and about the ongoing reconstruction of the legaleconomic arena.


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One ultimate irony in all of this is that property does not exist until the legislature and, eventually, the courts says it exists—and in each case the defeated interest can only wish that it had turned out otherwise-all the while paying lip service to some transcendent notion of “property” together with an expressed willingness to abide by “the rule of law.” A further ultimate irony is that in a “competitive” market economy (whether type 1, 2, or 3 as characterized above), just as no one’s property is safe from the legislature or the court (or some cost-benefit analyst), so too is it true that no one’s property is safe from the “market” where the actions of some property owners invariable adversely affect the property of others and of non-owners. The legitimation role of the simple liberal view of property allows society to think and speak differently about losses that occur through government versus those that attend in the market. The sophisticated liberal view accepts the factual and normative status of property as an institution but does not wrap such acceptance around status quo property rights; nor does it treat losses selectively. Just as property is held to the vagaries of government, so too is that same property held subject to the vagaries of the market, with its gales of creative destruction, driven by the use of the very property which the absolutist theories of property would have us believe is sacrosanct. The focus of the sophisticated liberal view is on analyzing how property, comprised of changing bundles of rights and rules, in government and the market, evolves over time. The almost universal perception is that the problem of property in relation to the market and to government is that of government control of property. This is at best misleading and at worst simply wrong. The pretense, or belief, of property or the market being independent of government is only a pretense, or belief. Property whether expressed as private property in the market sector, status rights in the public sector, or as communal property, or treated as an openaccess resource is a matter of social control of law. The belief or perception that property or the market are somehow independent of government is always selective and always functions to selectively reify what is in fact evolving. Property is a matter of collective action and the principal operative issue is whether collective action-through law and by government—is or is not to continue to protect the interests hitherto protected. It must be noted that this is not all a matter of belief, but it is also, as Potter notes, a matter of power. But power begets reigning belief and changes therein, just as reigning belief begets power and changes therein. Here is yet another fundamental of the interrelations between property and government, for both are matters of power and of belief, as is the system of governance as a whole.

NOTES 1. The need for a comparative institutional approach to legal-economic policy has long been recognized. Other proponents of a comparative institutional approach, coming from somewhat different perspectives include Ronald H.Coase (1960, pp. 42–44);


2.

3.

4. 5.

6.

291

Harold Demsetz (1969); Neil K.Komesar (1981, 1994); Richard B.Stewart (1987); and Kenneth A.Shepsle and Barry Weingast (1984). An expanded version of this conceptual model is provided in Mercuro (1997, pp. 72–80). The distinction between common property and open access resources is elaborated on in Bromley (1991, pp. 25–31). Examples of the latter include a court decision which imposes certain restrictions or obligations either upon the decision-making processes of a legislative body regarding environmental statutes or upon the decision-making processes of a government agency regarding the regulation of natural resources. The former a move “off to on” a contract curve in commodity space; the latter a move “off to on” a contract curve in input space. For example, we have in mind here the some of the theories proffered by Posner (1986) on the efficiency of the common law and Breton (1996) on the efficiency of legislature and government agencies. This was the essence of the seminal article by Hardin (1968).

REFERENCES Breton, A. 1996. Competitive Governments: An Economic Theory of Politics and Public Finance . New York: Cambridge University Press. Bromley, D. W. 1991. Environment and the Economy: Property Rights and Policy . Cambridge, MA: Blackwell. Coase, R. H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3:1–44. Demsetz, H. 1969. “Information and Efficiency: Another Viewpoint.” Journal of Law and Economics 12:1–22. Hardin, G. 1968. “The Tragedy of the Commons.” Science 162:1243–1248. Komesar, N. K. 1981. “In Search of a General Approach to Legal Analysis: A Comparative Institutional Alternative.” Michigan Law Review 79:1350–1592. ——. 1994. Imperfect Alternatives: Choosing Institutions in Law, Economics, and Public Policy . Chicago: University of Chicago Press. Medema, S. G., N.Mercuro, and W.J.Samuels. 1998. “Institutional Law and Economics.” In The Encyclopedia of Law & Economics , edited by B.Bouckaert and G.De Geest. Mercuro, N. 1989. “Toward a Comparative Institutional Approach to the Study of Law and Economics.” Pp. 1–26 in Law and Economics , edited by N.Mercuro. Boston: Kluwer Academic Publishers. Mercuro, N. (Ed.). 1997. Ecology, Law and Economics . Lanham: University Press of America. Posner, R. 1986. Economic Analysis of Law . Boston: Little Brown. Samuels, W. J. 1972. “Ecosystem Policy and the Problem of Power.” Environmental Affairs 2:580–596. ——. 1989. “The Legal-Economic Nexus,” George Washington Law Review 57:1556–1578. Schmid, A. A. 1987. Property, Power, and Public Choice: An Inquiry into Law


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and Economics (2nd ed.). New York: Praeger. ——. 1994. “Institutional Law and Economics.” European Journal of Law and Economics 1:33–51. Shepsle, K. A., and B.Weingast. 1984. “Political Solutions to Market Problems.” American Political Science Review 78:417–434. Smith, A. 1776. The Wealth of Nations . New York: Modern Library edition, 1937. Stewart, R. B. 1987. “Crisis in Tort Law? The Institutional Perspective.” University of Chicago Law Review 54:184–199.

INDEX Adverse possession, 200 Agency, theory of, 154 Aggregate property rights, 42 Agrarian property interests, 122–4, 127–8 historical contexts, 134–135 Allgeyer v. Louisiana , 6, 26 Allocation, 36–9 basic issues, 250 dynamic reallocation, 250–251 protection mechanisms, 253–255 and regulatory takings, 251–253 and role of incentives, 255–256 stinting, 140 Allocative function, 34, 45, 46–7 and priority of Democracy, 58–60 American National Standards Institute (ANSI), 118 Anarchy, 259 ANSI (American National Standards Institute), 118 Appropriation market mechanism, 87–88 theory of, 86–88 Asian markets crash and internationally linked markets, 155 economies, 103 Hokkien Chinese traders, 144 289 and standardization, 127 Assets, 85–6 Assurance loads, 160 Auditing, 159 Austrian school of economics, 222–3 Balancing test, pre-embryos, 67–8 Bank of England, 159 Bargaining, 107 Bartolus, 178 Bentham, Jeremy, 123, 195 rights and law, 144–145 versus John Locke, 26–28, 31–33 Berle, Adolf, 3 Berman v. Parker , 172 Berne Convention on copyrights, 183

Index Binary Economics, 180 limitations of, 199 Blackstone, William, 2, 3, 195 Bottom-up property, 195–6, 203 Branding, 169 Bull v. Colder , 250, 25 “Bundle” of rights, 2, 27–8, 42, 133 Bureaucracy, 154–5 Calabresi, 242–4 Calder v. Bull , 250, 25 Capital theory, Fundamental Myth in, 84–6 Caro, Robert A., 170–1 Certification, 162 “Changed circumstance” doctrine, 200 Chase, Samuel (Justice), 250 Checks and balances, 157 China, 116 Choice, 222–9 constitutional stage, 277–280 economic impact stage, 277–279, 280–281 institutional stage, 277–279, 280 levels of, 279 necessity of, 285 public choice theory, 157 in simple liberal view, 276–277 social choice theory, 243–244 see also Decision making Civil rights, 47–8, 104 market transactions, 105 Civil society, 251 defined, 177–178 and liberty, 178 and protection of individual rights, 184 Claims, 160 terminating, 214–215 Coase, Ronald, 38–9, 133 Coase Theorem, 105–7, 242 and necessity of government, 145 and resource allocation, 255 Cold War, 141, 148 Columbatto, Enrico, 146 Common Law, 129 and bargaining, 138 common law societies, 111–112 courts of, 213–214 and individual rights, 137 Communal sector, 260–1

294

Index

295

Communism, 35 Communist Manifesto , 33 Communitarian views, 180 Community norms, 136 Comparative institutional analysis, 256–62 Compensatory damages, 244 Confucian ethical code, 133 Constitutional law, 42 Fifth Amendment, 49–51, 54, 184– 185, 251 Fourteenth Amendment, 29–31, 224 Fourth Amendment, 54 see also Takings Contracts and “changed circumstances,” 215 concession contract for Central Park, 183–184 contract-as-property, 115–116 contract enforcement and pre-embryos, 72–74 Convention on Contracts for the International Sale of Goods (CISG Convention), 195– 197 employment, 94–95 in Hesiod’s Theognis , 138 ideology of, 27, 29 implied contract model and pre-embryos, 74–75 vs. innate rights, 100–101 Convention on Contracts for the International Sale of Goods (CISG Convention), 181–3 Copyrights, 183, 241 Corporate finance theory Fundamental Myth in, 93–94 Corporations and Fundamental Myth in finance theory, 93–94 and human rights, 156 The Modern Corporation and Private Property , 3 ownership of, 89–91 Courts, 6 Common Law, 213–214 and dispute resolution, 42 and meaning of law, 270 role in defining property/government relationship, 25–33 Supreme Court, 49–50, 57 Culture and standards, 112 Custody vs. ownership, 59 Cyropedia , 126 Damages, 244 Darwin, Charles, 250–24 theory of evolution, 41 Davis v. Davis , 65, 66, 68 veto rule in, 77–79

Index

296

Decision making, 38 female decisional autonomy and pre-embryos, 71–72 individual, 240 and system of governance, 273 see also Choice Democracy and markets, 99–105 in primitive cultures, 37–38 priority over allocative and sovereignty functions, 51–3 Department of Revenue v. National Bellas Hess Inc. , 227 Deregulation, 182 Digital information, 142–3 Disaggregation, 7, 45–51 Dispute resolution, 37 and “parents” of pre-embryos, 70–79 Dispute Resolution Understanding of WTO, 183 Documentation see Testaments Due process, 26–8, 43–4 Economic Bill of Rights, 36 Economic role of government, 141 Economic utility, 178–80 Efficiency, 184–5 and limitation of rights, 264 Ellickson, Robert, 136, 196 Ely, Richard T., 27–8, 28 Embryos see Pre-embryos Eminent domain, 27 Engels, Friedrich, 33 Entitlements, 198 Entrepreneurial process, 167–8, 172– 3 Entrepreneurs, 167–71 from Austrian school perspective, 240–241 Environmental protection, 48, 232–8 and consumerist influences, 125 policy instruments, 254 Environmental regulations, 36, 186 and takings, 33 Epstein, Richard, 171–2, 234 and utility, 193 Ethics, 218 Confucian ethical code, 144 Exchanges, 52–3 exchange rights vs. use rights, 58–60 and money, 243 vs. takings, 168 voluntary, 265 Externalities, 38–9

Index

297

and regulation, 265 Federalism, international, 146 Feudalism, 129 Field, Stephen (Justice), 25–6 Fifth Amendment, 48, 234 taking clause, 49–51, 184–185 First Theorem of Welfare Economics, 87–8, 105–7 Foucault, Michael, 148–9 Fourteenth Amendment, 209 Fourth Amendment, 48 Free riders, 38 Freedom allocated, 236–237 see also Liberty Frozen embryos see Pre-embryos Fundamental Myth of property rights, 81–2 capital theory, 91–93 corporate finance theory, 93–94 Fundamental Theorem of Welfare Economics, 87–8, 105–7 Fundamentals of the Economic Role of Government , 1 Game theory, 196, 203 GATT see General Agreement of Tariffs and Trade (GATT) Gender female decisional autonomy and pre-embryos , 64–5 General Agreement of Tariffs and Trade (GATT), 115, 144, 147, 183 Globalization, 141–9 defined, 152–153 dilemmas and contradictions, 156– 159 and Foucault’s theory, 159–161 as ideology, 196 market consensus, 154–156 and private property norms, 195–198 and product standards, 127–128 Glorious Revolution, 158–61 Government definition of, 38–39 necessity of, 39–41 Government certification vs. private certification, 161 Governmental roles, 262–5 assigning initial entitlements, 260– 261 “crutch,” 44 economic, 151–152 and entitlement, 213 as guarantor, 167, 174 policing, 212–213 prohibiting property, 217–218

Index

298

providing stability and predictability, 244 redistributing property, 218 resource management, 215–217 terminating claims, 214–215 Grandfather clauses, 202, 234 “Great Leap Forward,” 116 Grotius, 178 Growth, 96–7, 241 Guarantor, role of government, 241 Hawaii Housing Authority v. Midkiff , 172, 248 Hayek, F. A., 225 Hegel and utility, 178–9 Hobbes, Thomas, 35, 88 Human rights and transnational corporations, 145 Hybrid property devices, 200–1 Ideology and power, 115–6 Inalienability rights, 95 rules, 251 Incentives, 37 and resource allocation, 255–256 taxes and investment, 245–246 Individual decision making, 222 Individual rights, 25, 126–7 in English tradition, 137 protected in civil society, 184 in Roman tradition, 137–138 Information and institutions, 224 Information technology, 142–3, 148– 9 Innovation, 223–4 Institutions, from Austrian school perspective, 224–6 Intellectual property rights, 119, 169, 241 ownership of ideas, 216 TRIPS Agreement, 196–197 World Intellectual Property Association Treaty, 197 International Center for the Settlement of Investment Disputes (ICSID), 183 International markets, 141 (check against globalization), 127– 128 and CISC Convention, 195–197 International Standards Organization (ISO), 127 Internet, 143, 149 Invariance thesis of Coase Theorem, 105 Invitro fertilization technology see Pre-embryos ISO (International Standards Organization), 118 J.B. v. M.B. , 69 Joint stock companies, 159

Index Jones v. York , 60 Jus fruedi , 84 Kansas v. Mugler , 28 Kelso, Louis, 180, 185 Keynes, John Maynard (Baron), 118 and capital theory, 93 Komesar, Neil, 264 Kraemer v. Shelley , 104 Labor, 88 relative immobility, 225 and substantive due process, 30 unions, 226 voluntary self-enslavement, 94–95 Lachmann, Ludwig, 222, 226 Land vs. air or water as property, 217 basis of wealth, 139–140 determination of “best use,” 200 and efficiency, 200 open range laws, 147 see also Zoning Law as source of property, 48–51 sources of, 270–271 Legal-economic nexus, 165–6, 250, 261 and entrepreneurs, 180–184 Legitimacy of rights, 217 Liabilities, 246 rule of, 253–255 Liberal views, 252–6, 263–6 Liberty, 52 and civil society, 178 and efficiency, 198–199 freedom, allocated, 236–237 linked to property, 119 and political utility, 201–203 Lobbying, 187 Lochner v. New York , 44 Locke, John, 195 and bottom-up property, 210–211 Charles Darwin, 27–28 and contemporary theorists, 179–180 and contracts, 26–27 vs. Jeremy Bentham, 26–23, 31–33 and property, 38, 145 stateless society and insecurity, 39

299

Index

300

and utility, 192–193 Louisiana v. Allgeyer , 6, 26 Macey, Johnathan R., 146 Madison and utility, 178–9, 180–1 Mahon v. Pennsylvania Coal Company , 28 Mandeville, Bernard, 123 Market consensus, 143–5 Market mechanisms, appropriation, 80–1 Markets from Austrian school perspective, 240 global market paradigm, 152 vs. government, 284–286 market failures, 110, 255 market sector, 281 Marx, Karl, 33, 35, 179 Marxism, 102, 112 Materialism, 112 and standards, 121 M.B. v. J.B. , 68–9 Means, Gardiner, 3 Melamed, A.D., 243–4 Menger, Carl, 34, 222 Mesopotamia, 124–5 Michelman, Frank, 28 Microeconomic theory, 5 Midkiff v. Hawaii Housing Authority , 172, 248 Miracle on 34th Street , 162–3 Modern Corporation and Private Property , 2 Money, 225 Moore, Underbill, 208 Moxhay v. Tulk , 104 Mugler v. Kansas , 28 Multilateral Agreement on Investment (MAI), 181–3, 183 NAFTA see North American Free Trade Agreement (NAFTA) National Bellas Hess Inc. v. Department of Revenue , 227 Natural rights, 250, 24, 25, 127, 195 and utility, 194 Naturalist fallacy, 250 “New Property” approach, 180–1, 184 New York v. Lochner , 44 Nile Valley of Egypt, 124–5 “No change” approach, 234–5 Noel, Emile, 117 Non-intervention, 93 North American Free Trade Agreement (NAFTA), 144, 146 North Dakota v. Quill Corp. , 227

Index

301

Nozick, Robert and utility, 179–80 Nuisance exception, 234 Oikos , 126 Open-access resource sector, 261 Open-range laws, 136 Ownership contractual, 111–112 and custody, 63–81 defined by government, 37–44 established by government, 261 of firms and corporations, 3, 89–91 independent of government, 40 and individual rights, 136 and information, 154–155 of intellectual property, 128 jus freudi , 91 owners and non-owners, 224 of products or productive opportunities, 79–88, 82–3 rules of, 114–116 socialist, 39 termination of claims, 214–215 of unconventional property, 216 Paper trails, 162 Parens patriae doctrine, 59 Parker v. Berman , 172 Parliament, 157–9 Pashukanis, Evgeny, 94, 97–8 Patents, 169, 241 Pennsylvania Coal Company v. Mahon , 28 Per se veto rule, 69–71, 72 Person vs. Property Dichotomy, 61 Personhood function, 46, 49 Ploof v. Putnam , 245 Pol Pot, 114 Police power, 27, 197–8 Policy instruments, 236 Polls , 126 Posner, R. and utility, 179 Power exercise of power, 59 as potentiality, 126 Pre-embryos balancing test, 75–76 contract enforcement rule, 72–74 cryopreservation, 65–66 custody of, 66

Index

302

dispute resolution options, 70–79 dividing and distributing, 71 donation to research, 71 and facility’s institutional autonomy, 70 and female decisional autonomy, 71– 72 implied contract model, 74–75 and intentions of parties, 76–77 mandatory implantation, 70 Person vs. Property Dichotomy, 68 privacy, 68–70 as property, 66–67 reproductive technology fundamentals, 64–66 third-party implantation, 71 and veto rule, 77–80 Predictions, 160 Principles of Economics , 222 Prisoner’s Dilemma, 196, 203 Privacy and custody of pre-embryos, 61–3 Privacy function, 45, 48 Private certification vs. government certification, 162 Private property and constitutional law, 43 Product standards, 111–8 and economic power, 124–126 and globalization, 127–128 and political compliance, 124–126 and political control, 122–123 and property, 124 vs. “soft” social standards, 121 technology, 122–124 Production claims on output, 236 and entrepreneurs, 180 ownership of production function, 88–89 rights as product of markets, 101– 102 vectors of, 87 Production economy vs. information economy, 144 Productive opportunities, 79–83, 82–3 taking over, 90 Property defined as human relationship, 233 definition, 38–39 as social construct, 233–234 Property rights “bundle” vs. singularity, 3, 31–32, 47–48, 143 life cycle, 86–88, 86 origin, 5 Property Rights Fairness Act, 186–7 Property rules, 235–7

Index defined, 110–111 Property lessness, 94–8 in United States, 101–103 Protection mechanisms, 253–255 and regulation, 274–275 Protective function, 45, 48 for property less, 105 Public choice theory and sovereignty, 157 Public goods, 38, 200–1 Public interest, 24–7 Public lands and open range laws, 136 Public sector, 260 Public vs. private, 4, 213 Putnam v. Ploof , 245 Quill Corp. v. North Dakota , 227 Race, 104 Rational Basis of Legal Institutions , 208 Rational utility, 189 Rawls, John, 250–24, 203 and utility, 193–194 Reagan, Ronald (President), 36 Record keeping, 242 “Red tape,” 161, 162 Redistribution of property, 129 Regulation and protection, 274–275 Regulations, 228, 265–267 abuse of power, 179 of global market, 158–159 and negative externalities, 44 as rights distribution, 236–237 and takings (eminent domain?), 50 51 zoning ordinances, 182–183 Reification of property, 250 Religion, 112 and standards, 121 Reports, 160 Resources allocation incentives, 255–256 environmental, 249–250 large scale, 215–216 new forms of property, 216 open-access resource sector, 282 Ricardo, David, 37

303

Index Rights creation, 235–236 legitimacy, 234 and regulation, 236–237 Roman law, 127, 178 Rules contract enforcement, 72–74 inalienability rules, 251 liability rules, 253–255 of ownership, 114–116 property rules, 110–111, 253–255 rules for making rules, 279–280 veto rule, 77–79 working rules, 280 “Salami tactics,” 115 Samuels, Warren J., 1, 141, 166 Schumpeter, Joseph A., 168 Segregation, 214 Servitudes, law of, 104 Shelley v. Kraemer , 104 Shils, Edward, 165 Simple liberal view, 252–6, 263–5 Slaughterhouse Cases , 25–6 Slavery, 43 self-enslavement, 94–95 Smith, Adam, 3, 38, 134, 195, 254 Social choice theory, 225–6 Social constructivism, 178–89 Social value, 102 Social welfare, 39 see also Welfare Sophisticated liberal view, 252–6, 263–5 Sovereignty function, 45, 47–8 and priority of democracy, 58–60 Standards common currency, 243 Stanislaw, Joseph, 142, 144 Statutes of limitation, 199–200 Steel industry, 209–12 Stinting, 130 Stranger relationships, 197 Stuart kings, 157 Subjectivism, 224 Supreme Court, 42, 43–4 and welfare function, 57 Takings, 27–8, 48, 246–7

304

Index

305

clause, 31–33, 49–51 and Mahon , 32 compensation for regulatory takings, 255–256 constraints upon, 266–267 vs. exchanges, 168 government’s role in transitions, 217 limited by Fifth Amendment, 184– 185 and Parliament, 170 public takings as wealth enhancing processes, 185 regulatory takings, 251–253 Taliban, 116 Taxation ad valorem , 132 in agrarian societies, 139 as disincentive, 109–110 and evidentiary documents, 165 evolution, 140–141 interrelationships between property and government, 244 and investment, 245–246 and policy instruments, 254 and positive externalities, 44 Technology digital information, 153–154 information, 160–161 innovations and entrepreneurs, 181, 241–242 and standards, 122–124 technological aristocracy, 159 Testaments defined, 172 documentation vs. speech, 175 elements of theory, 172–173 government as guarantor, 173–174 government as record keeper, 213 historical context, 167–172 private certification vs. governmental certification, 147 theory of, 165–176 Theory of Justice , 202 Title to product, 79–89 Top-down property, 196–7, 203 Totalitarianism, 171 Trademarks, 169 Transaction costs, 39–40, 83–4, 107, 219, 242 Trustees of Columbia College case, 104 Tulk v. Moxhay , 104 Uniform Commercial Code (UCC), 108 and CISC Convention, 196–197 United States

Index

306

anti-government movements, 39–40 and legal-economic nexus, 179 property lessness in, 101–103 Urban decline, 212–3 Use function, 45–6, 48–9 Utilitarianism markets and democracy, 99–100 and takings, 32–33 see also Utility Utility, 178, 179 use rights vs. exchange rights, 58–60 Value, 135 vs. property, 110–111, 114, 132 Veto rule, 69–71 Vetoes and 17th century constitutional reform, 158 Victim rights, 237 War, 128 Cold War, 151, 159 and globalization, 158 Gulf War, 158 Wealth inequalities, 103–104 and property lessness, 102–103 Weber, Max, 36, 112, 114 and government bureaucracy, 166 Welfare, 147 First Theorem of Welfare Economics, 94–95, 113–115 social welfare, 43 and Supreme Court, 57 welfare function, 52, 57–58 Welfare function, 46, 50–1 Wildlife preservation, 201 Working rules, 259 World Intellectual Property Association Treaty, 183 World Trade Organization (WTO), 114–5, 144, 146, 181–3 Dispute Resolution Understanding, 197–198 Xenophon, 126 Yergin, Daniel, 142, 144 York v. Jones , 60 Zoning, 48, 185, 187, 246 ordinances, 182–183

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