Mr. DeMuth failed in one fundamental respect, in the way in which he announced me. He gave the title of the book, but he didn’t give the subtitle of the book, which is a source of immense uneasiness to its author, and perhaps he might change it before publication—save for the fact that it is too late.
"Reconciling Individual Liberty with the Common Good," is the subtitle. Now, most of the people in this audience are very happy with the words "individual liberty." "Reconciliation" all of a sudden starts to talk about a certain kind of squishiness that is not consistent with the kind of intellectual rigor that you’d expect from one called into these parts. And the words "common good," when used in any kind of a title, sound to be positively mushy, generally dangerous, possibly subversive. "Why on earth would anyone want to talk about it?" I think is the issue.
And indeed, when I actually went back, after I wrote the book and picked the title, to figure out how the term had been used in general parlance and discussion, I came up with the same sense of uneasiness that most of you feel. I was just a little bit too thick to recognize it earlier on in the process.
If you go back and try to find the great decisions inside American constitutional law which limit the scope of property and its ownership, almost invariably the police power drips with references to the common good. So that we are told that every individual holds their property subject to implied conditions associated with the advancement of the common good.
And the way in which you’re supposed to understand that is, the individual sits on one side of the ledger; the common good sits on the other side of the ledger. And when the two of them somehow or other get together, it’s like watching the balloon pop underneath a lead weight.
Now unfortunately, that’s the benign use associated with the term. I had the pleasure of receiving a book from Richard Pipes, the great Russian historian, who is writing a book called Property and Freedom, which is a title I think three or four other people have used in the last year or so. And what he did in this book was to quote various passages that talk about the common good, and how it is that we all believe in private property but recognize that it must yield to the common good. And the authors of his quotes were Stalin and Hitler.
What made the thing so utterly frightening was that, if you actually looked at the grammar and checked it to make sure the translations were correct, the phraseology was indistinguishable from that which was found in the Supreme Court cases. And that, of course, has to leave you very nervous for lots of reasons, some of which are even good.
One of the reasons it ought to leave you nervous is, why is it that a terminology which seems to be so appealing can be used in support of great state powers within the American framework, but totalitarian horrors on the other; and yet, resonate so powerfully with respect to most individuals, when you’re trying to figure out how it is that you combine these atoms called "individuals" into some sort of a cohesive society?
That is, what you have to do is not only to find out what the similarities are about. You actually have to think a little bit about the differences in applications of these particular terms, in order to understand when the term might have some actual salience and assistance—which I believe it does and which I will try to demonstrate—and when it turns out to be downright mischievous and destructive, which is the way it is often used, particularly in modern academic discussions where, again, the wipe-out of individuals is what is associated with the common good.
And in order to do that, I think, in effect, the way you answer the question is not to immediately plunge into political disputes—about which I’m not particularly learned—but to go back and to ask yourself the question of methodology: How is it that you try to organize rules that deal with individuals inside a society? Once you understand something about the methodological constraints, then you can start to look about something of the substantive concerns, and slowly and appreciably you can build together something that looks like a coherent system.
And here, in effect, the methodological approach that I’m going to plumb is the absolute antithesis of the common good, at least when you start out. I happen to be a great devotee of a general principle known as methodological individualism.
Now, that mouthful is in fact an effort to do the following. It’s to say that, to be sure, when we make judgments about what is a good and a bad society, we have to make judgments that aren’t solipsistic. It’s just not enough to say. "It’s good for me; therefore, the rest of you don’t count." If all of us were to do this simultaneously, the inconsistencies that would emerge from such a situation would just simply be too palpable to ignore.
And so what we have to do is to figure out some way in which we can kind of put these people together. And what that means, in effect, is we have to have a system that reduces every statement about law and social aggregates to statements about the welfare, the success, the failure, the happiness, the pains, the pleasures, in the subjective or objective or otherwise, of all the individuals that turn out to compose it.
The trick under these circumstances is that perhaps no longer can we say that individuals are endowed with natural and inalienable rights. That language may be a bit too flowery. It may not even persuade those of us who would like to believe in it. But of course, in this modern age it is perfectly appropriate to say that each individual is an irreducible argument and a social utility function—which resonates with nobody except a few classical economists who actually understand what it means and realize that it turns out it means a great deal.
What you’re trying to say, in effect, is we may not at the outset know exactly what a series of rights look like. But we do know that when we try to put this particular calculation together there is no one, however humble in station or however great in power, who somehow or other can be ignored in order to achieve the advancement of other individuals.
It is an effort to create an analytical structure that says there’s a certain stubbornness each person has inside the social position, even if it turns out that that’s not correlated one-to-one with a series of what used to be called natural rights.
This is, in effect, a very opposite definition of how it is that you approach the common good from that which is commonly associated with many kinds of utilitarian or political theories. The common good in many cases is dangerously disembodied. We say there’s something out there called "society" or some kind of group or some kind of entity, and we attribute to that particular entity various states of goodness and badness. And we’re prepared to say that the entity as such may well dominate the individuals who compose it.
And what I think one has to recognize is that when you start to talk about the way in which a man like Hitler or Mussolini or Stalin was prepared to use the term "common good," it was in that disembodied sense. It was in the sense of the identification with the state, which in the end became an identification with self, which in the end became identification with a utility function that had only one argument that counted—the dictator’s—in terms of the way in which the system operated.
So just recognizing the kinds of constraints that this sort of approach places on you does something that I think every political theorist welcomes. It reduces your ability to manipulate and to contrive various clever sorts of schemes, and forces you each and every time that you want to do something, to make sure that when you look around a large, complex, and diverse universe, that every person in it has to have some way in which his or her particular needs, desires, and welfare will be taken into account in the overall system.
So to that extent, if you have this approach, what you’re trying to do is to find aggregate measures of social welfare. And that only can be done to the extent that you respect various forms of individual liberty.
Thus far I’ve talked about this problem at a very high level of abstraction. And now what I want to do is to see if I can make it concrete, and to try to indicate why it is that when we take this approach, under some circumstances it will yield very traditional conceptions of natural rights or individual liberties, and under other conceptions it will in fact yield situations where various forms of collective ownership of certain means of production—to use a fairly familiar phrase—may in fact be welcome and needed in the society in question.
And in this regard I think it’s important that I correct some of the things that I said in my book Takings—by way of emphasis and nuance, not by way of fundamental recantation. (That’s not my style.) I simply point out that the older version of Takings, and to some extent the thinking of most classical libertarians, is that what you try to do is you start with this collective ooze, and somehow or other you assume that you’re only in a stable equilibrium position when you’ve got all private and no public property associated with the final state of this society.
I think, in effect, that position is going to turn out to be profoundly wrong in the way in which we ought to assess this society. And so one of the ways in which we can say that the title of this essay—which is "Reconciling Individual Liberty with the Common Good"—turns out to be appropriate is that in equilibrium many forms of common property are needed for the successful operation of a society, and their proper management, supervision, and control do not necessarily trench upon individual liberty.
So now the question is: How can you put all of this together? How can you find, for example, those particular cases where the collective image seems to ring true—and is something that I think most of you will find moderately congenial on reflection, and a little bit uneasy—and where it is that the thing turns out to be utterly false, so that your traditional, strong, nearly absolutistic views will continue to have a certain degree of moral currency.
Well, in order to start with the political theory, you always have to start with some kind of a baseline. You have to have a point of reference from which you depart. It would be nice if the point of reference from which I could depart is the place where I would like to end up, but that’s probably cheating a little bit. So one ought to begin as follows: try to conceive of a universe in which it turns out that each of us have whatever desires, lusts, passions, and emotions that we possess—all of the natural endowments that we can physically exercise by virtue of our biological nature—but live in a universe where essentially none of us have any rights and duties vis-a-vis another.
For those of you who studied the classics, this of course is the Hobbesian world in which it turns out the definition of "liberty" is any conduct that you can get away with before somebody else decides to stop you. And then, ask yourself, under this particular situation, whether or not you are happy with the degrees of freedom that are created for us in that particular kind of endeavor.
And I think that the answer of the classical natural law theorist on this particular point is, we may start in this particular Garden of Eden, but to some extent we’d rather graduate to a place which has a few walls and a few cloisters. The explanations for this are extremely powerful, and they’re as good today as they were 2,000, 5,000, or 10,000 years ago. Whenever you look around this room, one of the things that you’ll discover is that, while there are differences amongst you, they are not so vast that there’s anybody in this room who could take on ten other individuals and hope to survive.
There is, in effect, just a kind of a rough proximate equality. And to the extent that we say about individuals, "You have what you have, and you can keep it so long as you can keep it; but once you lose it you’re wiped out," everybody suffers—I think quite freely—from a massive set of insecurities: That even if they’re stronger than their rivals, any coalition could topple them. And any individual who’s part of a winning coalition on day one may discover that there are some other individuals who are going to be part of a winning coalition on day two.
And so we start at the most fundamental level with a constant tension between the liberty of action, which we all prize, and the desire for security, which we equally crave, and we discover quite quickly that there is no way we can have both of them in their pure forms simultaneously.
So what do we do in order to try to relax the kinds of stresses that we have? Well, one of the things that we might be able to do—assuming that we postulate an enforcement mechanism that does not yet exist—is to enter into a series of voluntary arrangements with other individuals in which we include bilateral peace negotiations, much the way we have NATO and SEATO and other organizations in the world economy, and hope that that will bring us the kind of peace that we want.
And I think one of the things that we ought to understand is that this strategy will surely fail. Because the more contracts that you make of this bilateral nature, the more likely it is that either somebody is going to turn one of these arrangements into an instrument of aggression or that somebody else outside the situation will pick off these people one at a time; since they’re not bound by the requirements, they’re simply subject to the threat that these individuals will overtake them.
And this brings us back to a very classical view of social contract theory that we can nicely revise into a somewhat more modern age. The way I like to understand social contract theory is quite simply this: What happens is, "contract" is used in this particular expression to indicate that the outcomes of the process are those that we’d expect to find from voluntary transactions entered into by informed persons. That is, knowing what their individual endowments are at the outset, we are confident that both sides will regard themselves as better off after the consummation of the agreement than they were before.
But what makes this particular case a social contract is, we know in the modern Koscian [ph] sense that high transactions costs prevent these contracts from becoming universal. And we also know that, to the extent that they’re bilateral and that some individuals are excluded from their participation, the effectiveness of these arrangements for the benefit of the whole is going to be minimal.
So what we do is develop a social contract. We impose upon all individuals duties which work to their reciprocal benefits, in the expectation, given what we know about human psychology, that they will be better off with the restraints than they were with the liberties that they surrendered in order to obtain them.
And so I think the great insight of the classical social contract theorist is that the mutual renunciation of force by individuals and the protection of autonomy that necessarily comes with it is, in effect, the first great step toward civilization. And I daresay that with the increase in technology and the complexity of modern life, understanding that as the fundamental set of terms is not altered one whit.
Now, what are the terms that you are going to create when you start to deal with the surrender? Well, I think what typically happens under most circumstances is that all of us will agree to some kind of limitation with respect to the uses that we can make of our natural facilities, but it doesn’t necessarily follow that we all agree to share the natural talents that we have with one another.
And one of the reasons why we draw the line at this particular point is that, if you simply try to have mutual forbearance by way of common transactional goals—that is, through this property rights system—it paves the way for individual voluntary transactions which can now be successful. That is, by having this background condition of mutual forbearance, private contracts for the exchanges of goods and services that are mutually beneficial can now take place.
And once those contracts can take place, the spillovers that they will generate will tend on average to be positive. That is, other individuals will now have greater opportunities to trade in virtue of the increased wealth that the earlier trades have been able to generate. And if you keep reproducing this strategy over and over and over again, it turns out that the cumulative effects are going to be positive, just as the individual transactions are going to be positive as well.
So that what happens is, in this effort to try to reconstruct the universe, we recognize fully that any system of society necessarily imposes limitations on the natural liberties of action that all individuals have, but that they do so for a comparative advantage that we all receive.
Now this point turns out to be quite important when you start to look at some of the philosophical texts on modern libertarianism that are made. And there’s a cottage industry of this stuff out there.
I mean, I happen to be on the editorial board of Critical Review. And every argument—including the one that criticized me in the last issue—explains why it is that libertarianism is fatally and conceptually flawed. And I think, in effect, what’s happened is that they are attacking straw men, rather than serious positions.
And the argument that is typically made, and most notably associated with a man named G.A. Cohen [ph], who works out of Oxford, is, in effect, that you can’t be a consistent libertarian, in virtue of the fact that, in order to respect the individual liberty with yourself, you have to necessarily limit the liberty of the trespasser, the murderer, and the rapist. And therefore, under these circumstances, you don’t have a system of full and complete liberty.
I think the answer is exactly correct. You don’t have that. But that’s not the point. When we start to use liberty in political discourse, we’re really talking about a very different world. We’re working in a world in which we recognize that this first comprehensive renunciation of the use of force is something which has limitations upon us all and provides benefits to us all. That it is not a question of trying to show that something is all good or all bad. What you have to do is to defend or attack the system on the grounds that you think that the net benefits that it produces—taking into account these costs and benefits across multiple individuals—are sufficiently small that you would want to repudiate and abandon the system altogether. And that requires empirical estimations.
And when we start to assume, therefore, that a system of liberty is a system that respects the autonomy of the person and respects the power of private property under particular circumstances, what we’ve done has had such a powerful judgment that this mutual renunciation of the use of force effectuated through collective means is beneficial, that that now becomes the new baseline against which all future actions are judged. And the reason we call somebody a murderer or a rapist or a trespasser is that we want to build a sense of wrongdoing into those forms of conduct, so that in the particular cases we do not have to assess the costs and benefits, the worth and non-worth, of that particular transaction or behavior. We now have strong presumptions based on general principles; which means that you can prosecute wrongdoers and offenders without having to go through the drill that generated the social contract in each and every case of its application.
And the fact that our ordinary language uses "liberty" in both the sense of the Hobbesian way of covering just about everything and in this more restrained sense shows how powerful the social convergence is on the consensus that we have. It doesn’t show conceptual incoherence. It shows the powerful resonance that these ideas have with everybody to the extent that they actually have to deal with concrete situations.
Well, if the position with respect to individuals turns out to be complex, the position with respect to external things turns out to be more complex still. And it’s here that one has to really worry about the way in which the world is organized.
If I were to try to explain the retreat that I had from a naive libertarianism to what I like to think is a richer view of the world, which keeps most of the good libertarian elements firmly within it, I would say that teaching a class in property law, more than anything else that I’ve done in my professional academic career, has led to that particular change in world view.
And the reason I say teaching a class in property law is that taking a class in property law, which I did when I was a student in England in the mid-1960s, did not achieve that. It taught me mastery of the rules against perpetuity. It taught me about restraints on alienation. I could tell you everything about leases and wills and devises and freehold estates and future interest. But it didn’t teach me about the richness and fullness of property because, in the English curriculum—and to a large extent the American curriculum—the definition of property was irreducibly land-based, with a few little discussions of what we call "personal property," that is, movables and chattels and so forth. And you only understand the importance of the common good, or the limitations of the standard libertarian theories of property, when you start to take into account property rights that are generated in other kinds of things that have value and are subject to systems of ownership.
And this is a case, in fact, where the empirics surely preceded the theory. One of the things that’s quite striking, if you go back to the system of English law, is that most people made a rough distinction—which only our Supreme Court does not understand, but that’s a different story—between land and water; and that these individuals, who were perfectly absolutist and exclusionary with respect to their property rights in land, understood intuitively that systems of common ownership were absolutely necessary for water, subject to various kinds of riparian overrides, which gave a system of "mixed public and private property."
The point is particularly important because it shows that individuals who are socialized in certain sensible ways and who live with customary practices do not find that these sorts of changes and shifts in property regimes require them to surrender their internal intellectual coherence. It’s not as though the fellow says, "I bathed in the waters of the Thames, and therefore I renounce my exclusive ownership to Blackacre forever." That doesn’t happen.
What happens is, they understand perfectly well—although they cannot necessarily articulate why—that the common regime seems to work pretty well for water, that the separate property regime works pretty well for land.
And one could keep on moving. What do you do with patents? What do you do with copyrights? What do you do with trademarks? What do you do with information? What do you do with the spectrum? Etcetera, etcetera, etcetera. Once you start to look at these questions carefully, you discover that the dynamic of the situation is much more complicated than the typical private-property-only scenario will generate, which I didn’t sufficiently appreciate when I started the talk in Takings.
And in order to get the point across here, I’m going to go back for a moment to Roman law, which was the first subject that I studied in law school. And the first chapters of Roman law dealing with property immediately, in good biological style, divided it into two species right within the common genera.
One of them is common property, and the other is said to be res nullius, or in the Latin res commun and res nullius. And to many—including, for example, John Locke—there isn’t much of a distinction between these two systems. What the Lockean system said, in effect, is that God gave the earth to mankind in common, and then individuals were allowed to appropriate part of it to themselves by the act of removing it through their labor from the common and then converting it by adding value through this, that, or the other thing, transforming it in one way or another.
Romans were much smarter than Locke—who did not, by the way, in his particular accounts differentiate between land and water, but sort of assumed that the same mechanism of first possession would apply to both of these things. And yet, that’s profoundly wrong.
If you start to go back to the historical forms of property, they said that there were two kinds of property. The kind of property that was called res commun, in effect, was the sort of property for which nobody could unilaterally decide to divide the whole thing and keep some fraction of it to himself. That is, the usual form of individual acquisition, which is associated with land, and MacPherson [ph] writing about possessive individualism, has always been repudiated with respect to water.
The system was much more complicated. And the basic origin of the system has to do with the tradeoff between two particular variables. One of the things that you have to ask is the extent to which you think that there is value in an asset by virtue of the fact that it is kept in collective solution. And the second thing you have to ask is, what’s the value of a particular asset to the extent that you introduce it to a system of individual rights? And there’s this constant question as to which form is going to be better.
Now, one can state at the abstract level what the tradeoff is going to be. But to run the empirical weight over the tradeoff, you must know something about the nature of the underlying resource. There is simply no dominant answer that covers all resources for all times under all circumstances.
Now, the way in which you start to understand the nature of the basic tradeoff is as follows: The great advantage, of course, of common property is that nobody turns out to be excluded from its operation. And so to the extent that you have any of these so-called left-wing aspirations to make sure that everybody participates in the whole, there is a kind of a warm and fuzzy feeling which is associated with common property. But that, of course, was not the source of its origin, in terms of our own historical experience.
The reason why these forms of property were in fact frowned upon in some cases is that inclusion gave rise to an alternative problem, which would in fact be very severe. And that’s the problem of governance. When you have large numbers of individuals who own some form of property, you have to decide in some way which individuals are going to be entitled to use that property, how much of it that can be consumed, whether there are going to be repairs of the property, how they’re going to be financed, and so forth. And anybody who’s ever owned a property in joint tenancy with siblings will understand that even under these ideal circumstances, these questions of collective management in fact can turn out to be extraordinarily difficult.
And so when you start dealing with common property you have to be able to provide an answer to the coordination and governance problems that remain. And when you’ve sought to have private property with exclusions, these problems magically disappear. Now what you do is you have the lesser question of how it is that you manage to police the boundary lines between two neighboring individuals. And, to put it another way, I may be a perfectly appropriate neighbor for the guy who’s living next-door; I may be a lousy partner with respect to that fellow. And a system of private property says that it’s easier to police boundaries between neighbors than it is to form partnerships between individuals.
But that is not a universal conclusion. And there are all sorts of things that will turn it the other way. With water, for example, the key element is the moment you privatize the resource you fundamentally change its nature. You no longer have a flowing river that is the source of fishing, the source of transportation, with an aesthetic element associated with it. You’ve got a bunch of bottles that you put on the shelf, which you can drink. It turns out that the privatization therefore destroys what one might wish to call the going-concern value of the particular entity in question.
And every ancient person understood all of this. And so the first set of rules was profoundly anti-Lockean in their origins. Nobody could take the river by unilateral action, even though individuals were allowed to fence off certain portions of land and to till and to improve them by dint of their hard labor.
And it’s the nature of the asset, rather than any sense of what we think to be the proper individual or communal desires, that led to that particular element.
Now, maintaining something in communal form therefore has extreme values. The question that one has to ask about these resources: Is there any way to fine-tune the system so as to allow some improvement? And the reason why we start to have mixed systems with respect to something like water is that it turns out at the margin there are certain gains that allow individual riparian landowners to appropriate some fraction of the water for drinking, for farming, and so forth. And what you do is you make a kind of rough, back-of-the-envelope, social calculation, as the ancients did, that a little bit of privatization of a common resource would yield more by way of private gain than it would cost by way of diminution to the river. So that, to the extent that the flow was undisturbed and the volume was imperceptibly reduced, all of these private uses started to be allowed off the common solution.
So you have this very elaborate utilitarian calculus that starts to explain this kind of division of ownership. And when you start going to land, you have none of these particular calculations. Land doesn’t move from one place to another. It doesn’t serve as a means of transportation in quite the same way. It doesn’t necessarily have quite the aesthetic value. And singularity of ownership under these circumstances will tend to yield more efficient outputs than they will under the other system.
So that when you’re trying to understand the way in which a property system runs, it would be a desperate mistake to say of all sorts of legal resources that they sit there in some sort of loose Lockean collective solution waiting to be privatized by individual actions. In some cases, with land and with labor, that is surely true. It was true 2,000 years ago; it is true today. With other assets, like water and so forth, it is probably false. And in fact, I have only described the English riparian system. There are at least six or seven other water regimes, and every one of them is driven by topology. What kind of rivers do you have? What kind of agriculture is possible along their banks? Is transportation feasible? Are they coming from the top of a volcano, as is the situation in Hawaii, and so forth?
It’s not as though you can’t figure out what principles govern the operation of the system. But just as we talked about the tradeoffs associated with individual liberty and individual security, so it is, if you’re trying to figure out what property is about, you have to talk about the tradeoffs between exclusion on the one hand, which has negative costs on outsiders, and governance on the other hand, which in fact can paralyze the use of the resources.
Locke himself of course was very smart about all of this, and he intuited part of the problem. The passage I love to quote comes from paragraph 28 of chapter 5, in which he’s talking about why that individuals are allowed to gather and to eat acorns. (This is the guy who believes that consent is the source of political obligation. Remember this fellow?) He turns around and he says, "Look, it can’t possibly be, if these acorns are owned in common, that I have to have the consent of everybody else before I could eat one, or we should all starve before that kind of consent could be obtained." This was essentially the recognition that the bargaining breakdown difficulties with collective ownership were so enormous that we’re better off with everybody grabbing the little.
And then what he tried to do is to figure out how it is that he could respect the common pool elements by putting on prohibitions against waste and against excessive consumption. It turned out that none of these really worked very well and that the old common law rules in effect are probably better when they simply say, "Let’s just stick with first possession," and you can take as much as you want. The natural limitation is the way in which others start to impose their will on the world by taking some fraction of it.
But again, one has to be extremely careful. I’ve already indicated why it is that taking possession of water and taking possession of land work by very different dynamics. It also turns out that when you apply this thing to animals, again, this same thing occurs.
One of the things that I’ve read recently is a book by a man named Jared Diamond [ph], who is talking about guns, germs, and history. And what it reminded me of is something which I thought I knew, but had tended to forget, which is that most of the massive extinctions of wild animals have taken place in prehistoric times. They are not the result of modern activity. And the reason they took place is, essentially, the collective action problem associated with wildlife was something which was not appreciated with respect to the first possession rules.
It turns out there is no way that you can stop this problem by fiddling around at the edges with the weak Lockean constraints on waste on the one hand, and leaving as much and as good for your neighbor. They’re both quite incoherent. You have to have a systematic public arrangement which says, in effect, the way that we get acquisition is from taking, but what we have to do collectively is to limit the amount that any individual can take in order to make sure that a sustainable yield is preserved.
We have a fundamentally different kind of problem. And again, what we have to do is to figure out what kinds of limitations are going to be appropriate with respect to the nature of the resource, given the way in which the thing turns out to operate.
Now, with that said, one has to move forward into modern times. What is characteristic—though I’ve not stressed the point thus far—about all the resources I’ve talked about is that, to the extent that you decide whether or not they are to be held in common or to be held separately, what you’re trying to do is to allocate something nature has provided for you. It’s the running water. It’s the natural animals. It’s the acorns from the tree, and so forth.
When we start to think about investment, then all of a sudden the questions that we have to worry about become vastly more complicated. And just as you might expect, they don’t point in any one particular direction.
In some cases, the case for investment powerfully strengthens the case for privatization. And in other cases, strangely enough, it strengthens the case for commonality of ownership, at least with respect to limited ownership by way of access.
Let me just give you one illustration. If you want to get yourself into political wars from which there is no escape, simply go to Hawaii and get yourself involved in some of the disputes over land use, land regulation, and land ownership. The only comfort that you can take from this particular Hawaiian situation is as follows: All of the decisive political acts which took place on the island took place before it became part of the United States in 1898 or so. They took place in what is known as "The Great Mahili [ph]," in around 1849, and they were internally and endogenously generated.
This is essentially the question: What do you do when you now wish to get permanent investment on the island? The first thing that you discover, as the traders start coming in numbers, is nobody will build privately on commonly held land. That sort of axiom turns out to be perpetually true, because nobody will take the risk that the owners of the land will evict you from the improvement. And therefore, what happens is the moment you wish to erect permanent improvements on any form of real estate, some system of privatization is going to be necessary.
That should come as no particular surprise to you. Because if you’re trying to figure out historically what the great impulse was to the creation of private property, go back to the agricultural metaphors that say those who sow are the ones who ought to reap, and you will recognize that in a system in which you don’t have permanent land ownership, the huge front-end cost of clearing could not be recovered with a single crop. So that permanent ownership necessarily had to be required.
So that there’s a certain sense in which dealing with particular investments in a system tends to drive you powerfully to a system of private property. It does not, however, drive you cleanly to a system of private property. Because one has to recognize that the moment you make a partition in commonly held lands, the king is going to take the lion’s share of what is produced, which is exactly what happened in the Hawaiian situation.
That is, the story of privatization says you have to switch from one form of ownership to another. What it doesn’t tell you is who’s going to get what bit of ownership. And that political struggle results in the classic rent games, the classic political power struggles, that we’ve talked about from time immemorial.
In other circumstances, however, it turns out that the configuration of property rights we’re talking about leads to a qualified form of collective ownership, rather than one of separation.
And here what I want to do is to be jargony for at least a second, and to say that the key element in understanding the distinction is to ask whether you’re talking about production that could be done independently or production that takes place through a network industry. That is the situation where you’re having some kind of canal, some kind of road, some kind of wire, which has its value in virtue of the fact that everybody tends to be hooked up to the same system.
To put it in another way, when you build a factory and you could pick the customers to whom you sell, the model of voluntary exchange that I referred to earlier in this lecture holds perfectly well: I build this factory. You come and work on it. The two of us can enter into a contract with one another that will , in fact, be gainful, even if everybody else in the society is only required to forbear.
But the moment you start worrying how you’re going to construct highways and canals, how you’re going to lay telephone wire across the United States, how you’re going to provide for public utilities, it turns out that that particular model does not work.
The land holdings that are efficient with respect to production, which, crudely speaking, are kind of square or round with sharp boundaries, are utterly incompatible with the holdings necessary to work the network industries. That’s the kind of stuff that has to be long and sinewy, like veins and arteries. And to the extent that you have those situations, the blockade problem that can exist if one owner decides to prevent the formation of the transcontinental railroad is large enough that you start having to think that the coordination problem that we thought we could put to one side and solve by voluntary contract comes up again.
Formally, the proposition is stark and powerful. If you’ve got n people in a world and you’re working in an industry where dyads can make profits, the larger the number of individuals in the society, the more efficient the competitive market is going to be. Because the number of choices that each person has will increase as that increases, up to the level of n-minus-one.
But to the extent that you’re working in a network industry, my definition is nobody’s going to be on line in this particular industry unless everybody turns out to be on line in this industry. And under those circumstances, as n starts to increase in number, the danger that voluntary bargains will start to break down increases, and you now have to start to think about collective mechanisms that will overcome the problem. And that gets you back to the issue of takings.
It comes up in at least a couple of ways. One of the ways in which this thing comes up is the question of assembly, how it is that you put this particular network together. And you can be very clever about private ownership with respect to the railroads and so forth, or even with highways and turnpikes; but don’t think simply because they’re collectively or privately owned and operated that they were privately conceived. Each and every one of these things is either acquired through an eminent domain power, or by private agreement which takes place in the shadow of the fact that if you don’t sell at a certain kind of pre-existing price then we’re simply going to condemn that property from you.
And the collective solution for this is dead correct, but not consistently applied. It’s quite simply one that says, "Look, put aside the value that’s added by the network that we’re about to create. What we’ll do is we’ll pay you the fair market value of the land in its highest and best use, independent of the network that we’re going to put in place."
That means that you avoid the individual wipeout. That means that that person’s got a place in that utility function that I’ve talked about. And it also allows you to advance the cooperative good by creating a network whose value is going to be vastly greater than the private property which has been put together in order to assemble it.
So that’s the way in which we tend to handle the assembly problem. And we don’t have to deal with that with water, because the rivers are assembled by somebody else. But you have to do that with highways. And the only way you’re going to be able to do that, typically, is to work under some system of public constraint associated with takings, which immediately drives you toward the compensation solution that I’ve talked about.
But it is equally important to remember that once you talk about this network being assembled, there is still the question about access. And one of the things that our good common instincts tell us is that, to the extent that you have a highway system, everybody’s allowed to enter it. To the extent that you’ve got yourself a bridge, everybody else is allowed to cross it from one side of the river to the other. To the extent that you’ve got a telecommunications system, the company can’t say, "Epstein, I don’t like the color of your eyes. I’ll only service you if you pay double that of DeMuth, who happens to have a better complexion and live next door and has got a little more political influence than you."
So typically, what happens under these circumstances is that, from the earliest time, clearly articulated at the very latest by the 1670s by Sir Matthew Hale, one understood that the creation of monopolies carried with them necessary correlative duties of common service. So that these properties may be privately owned. A grist mill at part of the river may be owned by a private firm, but it would be subject to a public trust, in the sense that if it had a monopoly position, everybody who was in the business of needing their grain to be threshed would have to go to that place, if it had the monopoly. And the monopolies were certainly much more powerful when you started dealing with centralized provision of electricity, gasoline, and so forth.
So huge portions of what took place in the United States, starting in the period of 1865 to the present, carrying all the way through the Telecommunications Act.
And here the only modest point that I want to make out of this particular operation is that simply using the classical model of private property is accurate, insofar as it says you’d rather have Bell Atlantic be privately owned—I think you would say that—than have it be state-run. But nonetheless, the thought that somehow or other they could exclude individuals from service arbitrarily is not something that any of us would expect.
And so what typically happens is the way in which we’d want to state the modern proposition is that we are all sympathetic to some degree to common property, to the extent that it’s necessary to control the potential abuses associated with a monopoly. In other words, what happens is the correlative to monopoly power on the one hand turns out to be some system of universal access on the other hand.
This in turn led to huge political discussions and debates in the United States. Once we had these investments and this system of universal access, we then had to figure out how we could regulate this business to avoid the two classical risks associated with the entire problem. One is that the monopoly would, in effect, discriminate against various individuals, or raise its prices to inopportune levels. And the other is that a regulator would come along and not only quash the monopoly element in the situation, but essentially wipe out the cost of capital, telling the company, "We’ll cover your variable costs that allow you to stay in business, but we won’t allow you to recoup your original capital."
And I think the way in which you handle that problem could be the subject of another rather long lecture. But just understanding the nature of that dynamic powerfully enough would indicate why the common ownership scheme and the restrictions on private ownership when it’s serving in the common good need not necessarily be an invitation to socialism.
It could, in effect, simply refer to the question of how it is when you have these collectively generated facilities you manage to generate a system of financing and acquisition that satisfies the following two tests—or the following single test. Look at the cost of each individual; look at the benefits of that individual; and the system will be pronounced, judged, to the extent that you can make it such, that each individual’s benefits are in excess of his or her costs.
Then you have a second-order problem: if you satisfy the first condition, how do you allocate the surplus amongst the various individuals to the group, where the standard Paretian [ph] requirements will no longer satisfy, because in fact all of these solutions are Pareto [ph] superior to whatever happened before you took place?
Now, since the lecture is drawing to a close, I want to indicate exactly what this system does do, and what it doesn’t do. Beforehand, I mentioned again—I guess Charles Murray was pushing me, and I said, "Look, Charles, my newfound interest in common property is not the same thing as a newfound interest in redistribution of wealth from one group to another."
It is not that I’m going to necessarily rule out that case. But it seems to me that, at the very least, our analytical abilities are only going to be enhanced if we separate that issue from the question of the collective provision of public goods that I’ve been talking about before. I said that the adequate system of financing of this particular system was one in which every individual was subject to an exaction that gave him a benefit greater than the exaction to which he labored. And that’s a system that, by its nature, necessarily rules out all sorts of redistributions.
And in addition, if you start going back to some of the classical illustrations of common carriage—the obligation of an innkeeper to take travelers, for example—the rule was never that you had to take a traveler below the cost of furnishing the room. What you had to do was to take that traveler at a reasonable price. And if it turned out that the traveler could not pay, then the traveler could not travel. That is what simply happened under these circumstances. You were trying to get the monopolist to behave as though it were a competitive party. In a competitive industry people don’t get anything for free unless somebody else is prepared to supply it for them as such. And one wanted to keep exactly the same kind of situation alive in dealing with all of these commonly provided industries.
This, in turn, explains why we have such huge battles over regulation today. Because the classical model is completely at war with another model that talks about social insurance and social regulation in a rather different fashion than I talked about social contracts.
I talked about the "social" in "social contract" as a way of producing positive-sum games in which each individual shares in the net benefit. The modern definition of "social" before anything—like "social insurance" and so forth—always carries with it exactly the opposite situation. It means that we believe in a system of social insurance for medical care: that group "A" is going to have to subsidize group "B." And the way we do that is by charging them differential rates going into the pool. So that some individuals necessarily take out more by way of benefits than they paid in by way of cost, and other individuals will have exactly the opposite take place for them.
What makes public policy debate so difficult today is that the two functions of regulation—one, the coordination function, and the other, the redistribution function—are totally at war with one another. And yet, time after time, you can see statutes which, in neighboring, sections will treat them as though they’re perfectly compatible goals with respect to the operation of the system.
So if you go back, for example, to the Telecommunications Act, it tries—although it doesn’t quite do it—to get off to a tolerably good start in its basic provisions, which essentially stipulate, with just compensation and reasonable charges for services, the interconnection obligations that allow all of these separate carriers to compete with one another in the consumer market, but to form an integrated network in the production market, where they have to cooperate with one another.
The next section after 253, which is the last of three sections on interconnection, is that on universal service. "The following subsidies are hereby decreed to be put into the system," right? And what happens is, modern sensibilities treat these things as though they’re exactly the same. My view about the situation is that they’re completely different. And to the extent that there is going to be an argument for or against redistribution, it has to be considered on its own merits, totally separate from the question of coordination.
And somebody may want to say that the diminishing marginal utility of wealth is such that a case for redistribution is powerful. And if so, you may want to form a progressive tax. But you may be against it for all sorts of incentive-based reasons, and so forth.
How you resolve that question at the end of a lecture is not going to be the thing that dominates the discussion. But what I think should dominate the discussion is as follows:
You can clearly understand the limitations that are associated with strong liberty and autonomy and property based systems which are required to integrate these common good elements in water and oil and gas and air and whatever it turns out to be; and at the same time, be very skeptical about the redistribution question, because it turns out to be separate and distinct.
So what’s wrong with the classic libertarian framework—and I think most classical libertarians, except those of an exceedingly dogmatic variety, tend to understand this—is that it can’t deal with the provision of public goods, the coordination question, the collective action problem. But that once you put that on the table, there are ways to deal with that issue which don’t lead you to the opposite conclusion that so long as you allow a state to overcome coordination difficulties there’s no principle of limitation on what the state can do.
And that brings us back to the earlier theme, and on this note I’ll close. You’re trying to figure out why it is that the Hitler version of the common good and the Stalin version were horrible, and then trying to figure out what’s so dangerous about some of the American police power versions. Well, in the first case, in the extreme versions, by the time you stripped them away, the collective good became identified with the welfare of a single individual, which is so arbitrary and so horrible it’s something that you can’t even contemplate when you think of its operation.
In the American system, we never let it get that far. To some extent, we always had the rule that the state cannot occupy somebody else’s land. And while that’s not a perfect protection for property, it’s certainly a powerful limitation against the worst forms of confiscation. At the very least, even when we get to regulation, it’s majoritarianism, rather than dictatorship, that dominates. And that’s going to produce a rather different result.
But I think you can even do one better than the American system. A system of strong constitutionalism will say that the state can have the power to decide when it wishes to create various kinds of collective goods, how much it wishes to invest in them, but that there are strong distributional constraints on the way in which it finances the money, so that it cannot use investment regulation as a form of transfer payments between individuals, which can lead to corrosive and divisive effects.
So, in effect, if I were to think about what was wrong with Takings, it did not give common property its due. But what I think was right about Takings, in some sense, is that it understood in the end that you could have all sorts of collective action problems satisfied without putting you down the road to redistribution, which became totally destructive, oftentimes bearing no relationship to the problems of rich and poor.
And so in trying to figure out how to reconcile the individual liberty with the common good, that would be the road map that I would follow. I daresay it is somewhat different from those that have been followed by others who’ve spoken before me.