March/April 2012

Private Property, the Rule of Law, and the Perils of Political Discretion

The most profound domestic change in America over the past century has been the massive surge in the size of government under the progressive worldview. The signs are increasingly clear, however, that government is creaking under the enormous weight of its own expansion. In his new book, Design for Liberty: Private Property, Public Administration, and the Rule of Law, Richard Epstein argues that the driving force behind this growth is an ambitious social agenda — one that introduces massive amounts of administrative discretion into the political process. Epstein, the Laurence A. Tisch Professor of Law at New York University and an adjunct scholar at the Cato Institute, laid out the problems with modern American governance at a Cato Book Forum in December.

RICHARD EPSTEIN: When I started writing Design for Liberty, my original title for the book was going to include only two elements after the semi colon: Private Property and the Rule of Law. The original plan was to address what I came to believe was the unique fit between those two elements. But as I continued to write, it soon became clear that I had to insert a nasty little element in the middle about “public administration” — based on the simple but critical insight that complex social institutions do not run on rules alone.

The first mission of this book is to understand how it is that the first two systems — private property and the rule of law — develop, and thereby illustrate what is commonly observed, namely the tight empirical connection between them. The system of private property starts with the usual assumption of individual autonomy: each person owns his own body and is entitled to do with it what he chooses, so long as he does not interfere with the liberties of others. This simple proposition, it turns out, establishes the only acceptable starting point for understanding how to allocate human talents and resources, both economic and personal.

The next major question, then, is, how do these individuals come to own external assets? Ownership is not an arrangement created by nature, but rather one created by human beings to achieve various social ends. Yet by the same token the most desirable of these arrangements are so ubiquitous that they rightly travel under the name of natural law, given their pervasive reach across cultures and long durability within cultures. Every legal system — no matter what its philosophical commitments — rests upon private ownership based on the rule of first possession. Once you possess something, it’s yours, and everyone else has to respect that.

The next two elements of the system are equally durable. First, the assets that all people have in labor or property must be protected against others who would seek to circumvent the system. This requires the development of the law of both crime and tort to respond to such aggressors. Second, both labor and external resources are of limited value if their owner can only use or consume them without any cooperation with other persons. The ability to dispose of these assets through different cooperative arrangements therefore requires the development of contractual rules, which essentially allow you to sell, lease, or pool your assets.

The central social task is to make this system of ownership and exchange work at low transaction costs by establishing at each stage in the productive and cooperative process who owns what. The combination of these basic rules does not increase the rights that people hold either alone or in combination. But what the rules can do is to allow redeployment in ways that increase the value by moving property from people who value it less to those who value it more. The great institutions of property and contract are what make these gains possible. The lower the frictions in the system, the more secure the transactions, the higher the overall level of prosperity.

How then does private property mesh with the rule of law? Note first that the rule of law does not seem to run into any serious opposition from any part of the political spectrum, in large measure because all of its virtues turn out to be abstract in form. For example, if a government wishes to impose legal obligations on private parties, it must give notice of those obligations to make private compliance and then public enforcement of the law both easy and reliable. One major problem with modern criminal law is that so many things become illegal that compliance is difficult even after consultation with a lawyer — a luxury that most people cannot afford. The requirement of simple notification, on the other hand, is one of the core values associated with the rule of law.

The basic obligations of a system of private property do not present that problem. “Keep your hands to yourself” may provoke clever evasion, but the basic proposition is understood by all socialized individuals. Notice of the basic law is so clear that it need not be specially provided. Next, this system of rights is easily scalable: let a society expand from a thousand people to a million, and the nature of the rights among random pairs of individuals does not change. The law still requires forbearance among strangers. In addition, the basic rules are invariant with wealth. The constancy of the rules in good times and bad thus reduces the pressure to subject them to costly shortterm adaptations. Fourth, strong property rights have the advantage of numerosity: in thin markets, comprised of a small number of people, the ability to get accurate pricing is compromised. But as the number of individuals increases — and markets become thicker — trade becomes quicker and more reliable because competition tends to force all vendors to a unique price. Taken together, these features reflect the very strong coherence between the rule of law and a system of private property. In contrast, the administrative state, with its broad system of entitlements, never gains that kind of coherence. It is all too eager to create positive claims against the state, whose content is difficult to define, hard to communicate, and subject to constant fluctuation with changes in economic and social conditions. The cost of transactions increase, their direction misfires, and the overall system is compromised.

One great challenge to the classical system of property rights is that it is not robust in all contexts. Nonetheless, what happens if it is not possible to reach a competitive equilibrium when there are multiple players — when large numbers of individuals must cooperate toward a single objective in order to achieve their individual objectives? Such is required with the renunciation of force. Once a stable society is formed, the creation and operation of roads and communication systems often have this characteristic. Take a society of n people, in which all but one of them agree to surrender the use of force voluntarily. The one person who remains outside the social contract can disrupt the entire political equilibrium. The only way to stop this system breakdown is to qualify the system of individual property rights to allow the regulated use of state force to raise the revenues needed to create public order. To overcome this dire threat, all societies must add in two other kinds of institutions: taxation, in order to get the revenues needed, and eminent domain, in order to secure particular assets, like land. How do we constrain the amount of administrative discretion in these areas?

In designing a tax system, the last thing to worry about is the good fortune of the top 1 percent. The much larger issue is how to create an orderly political use of power. Over the long run, the only solution that achieves the needed stability is a flat tax. Like private property rights, that is the one system that is invariant in structure, regardless of the demands on the public treasury or the level of wealth in society. This intrinsic stability does an enormous amount to counteract the dangers of political favoritism. It also leads to a simpler system of public administration — the middle piece in the tripartite design for liberty.

The system of eminent domain limits state power by forcing the government to pay for what it takes. Without that constraint, the power to coerce takings leads to excessive government action. The discipline on government power is dangerously eroded by the modern distinction between a physical taking and a regulatory one, which rests on a fatally flawed account of property rights. The system of private property works because property owners can divide wholes into useful parts and protect them equally once the division takes place. A lease, a mortgage, a covenant, or an easement are all entitled to strong legal protection. The law of eminent domain must therefore follow that lead by not allowing administrative discretion to pick off these private interests without compensation, lest political majorities gang up on vulnerable and isolated groups.

The limits of discretion are a key element of any sound legal system. But it is important to ask why public administration forms a key part of the overall equation. There is a great deal of uncertainty associated with the operation of any legal system on such simple questions as the truth of various accusations. When dealing with murder, theft, or rape, there is often uncertainty as to who did it and under what circumstances they committed the crime. The public must therefore trust somebody to decide whether or not the evidence associated with a particular crime warrants the case being brought.

The reason public administration is important, then, is that no society can rely solely on ex post intervention by the courts to address even this simple uncertainty. A sound society has to develop a strong civic sense of responsibility — an esprit de corps. Without these internal social norms, the management of key offices can slide into cynicism and confusion, such that the rest of the system will collapse under the weight of repeated rights violations by faithless or incompetent public servants. Those risks are reduced under any sound system of property rights, where the level of discretion entrusted to public administrators can be smaller precisely because of the relatively clear boundary lines between legal and illegal conduct. The fact-finding tasks on which these determinations rest can be correspondingly simplified.

The three pieces — private property, public administration, and the rule of law — thus neatly fit together. The broad claim that I’m making is that a traditional administrative state — focused on, for instance, modest licensing requirements — will do far better than a modern administrative state, where the discretion on how money is raised and spent is essentially unbounded. One great challenge that faces any society is that even skilled individuals are very bad at making decisions under conditions of uncertainty. The modern tendency is to regulate too much too soon, instead of waiting for more information to surface. When private property, public administration, and the rule of law are not in sync, governments tend by excessive regulation to destroy economic production at the bottom and transfer wealth from the top, which cannot be sustained.

Modern societies are thus locked into this fatal contest between the soundness of their political institutions and the forces of technological innovation. At one time, I was confident that the forces of growth and prosperity could maintain the upper hand against the excesses of state power. But in watching the recent flailing of political actors, and the subsequent drift of our economic system, I am no longer so sure. One hope is that my little book will offer some guidance on the sharp change of course that is necessary, both in the United States and elsewhere, to correct the encroachment of state power in areas that should be left to the voluntary choices of private individuals.