Private property rights, economic freedom, and Professor Coase: a critique of Friedman, McCloskey, Medema, and Zorn.

• Author: Block, Walter
• Position: Ronald Coase, David Friedman, Deirdre McCloskey, Steven Medema, David Zorn

1. INTRODUCTION 923 II. COASEANISM 924 III. LIBERTARIANISM 927 IV. FRIEDMAN 927 V. MCCLOSKEY 935 VI. MEDEMA 938 VII. ZORN 946 I. INTRODUCTION

   Private property rights are the basic building blocks of economic freedom. They are a necessary condition for a free society. Therefore, it behooves us to study, in some detail, precisely of what they consist. If we are unclear on this issue, the entire edifice of free enterprise can collapse, as does a house with a poor foundation.

   Property rights have many enemies--socialists, environmentalists, feminists, communitarians, Marxists, specialists in black "studies," literary "studies," queer "studies," multiculturalists, sociologists, etc. These philosophies, although staunchly opposed to private property, have at least the virtue, from the point of view of the defenders of laissez faire, of being open and honest about their opposition and can therefore be criticized in a straightforward manner. That is, there is no question in anyone's mind, proponents or opponents of economic freedom alike, where scholarship emanating from these quarters stands on the issue of laissez faire capitalism.

   The same cannot be said, unfortunately, for Ronald Coase and the large literature of "Law and Economics" engendered in his name. For while this free market oriented Nobel Prize winner is widely interpreted as a defender of markets, I shall argue that he should be considered one of the most rigorous critics of property rights, and because of this misconception, Coase is a major threat to economic freedom.

   This appears to be a harsh and unexpected charge, in that the overwhelming majority of Coase's work is widely interpreted, and rightfully so, as being broadly supportive of the capitalist system. Certainly, this applies to his contribution to our knowledge of the firm (1) and to the economics of the radio spectrum (2) and advertising. (3) My critique of Coase is thus a limited one--it applies only (4) to his study of "social cost." (5) Yet it is not insignificant, because Coase's The Problem of Social Cost is tremendously influential and one of the most highly cited articles in all of economics. (6) It has inspired such writers as Posner, Demsetz, Landes, and Calibresi in the "Law and Economics" tradition. So let me be clear on the outset on what I am not saying. I do not hold that the entire corpus of Coase's work is contrary to of undermines private property rights and the free market system. Instead, my present criticism applies only to his analysis of social cost.

2. COASEANISM

   What is the essence of Coase's vision on social costs? For Coase, two possible states of the world exist--one in which there are very high transaction costs and the other characterized by low or zero transactions costs. (7) In the case of a dispute between two parties over property in the low-transactions-costs world, the judicial decision will have no effect on the ultimate allocation of resources, because whoever values them more will get the property. If the judge awards the property to the claimant who places a higher value on it, the claimant will retain it. If the judge awards the property to the party that places a lower value on it, he will sell it to the party that values it most (for a fee). Of course, the judge's decision does affect the relative wealth of the two parties, but he does not influence who will ultimately own the property. (8)

   The outcome is different in a more realistic high-transactions-cost scenario. Here, by definition, the judge's ruling will stand. Property will not be able to be transmitted from one claimant to the other; the transaction costs of doing so will outweigh the possible benefits from trade made possible by the claimant's differing utility considerations.

   In Coase's opinion, the goal of the judge is not to provide justice, but rather to maximize societal wealth, and this can best be attained by ruling in favor of the higher valued user who would have ended up owning the property in question under the assumptions of low transactions costs. In other words, the judicial role is not to act as a sort of central economic planner in cases of property disputes. The judge's role is not promote justice, but to rule in such a manner so as to maximize societal wealth, precisely the aim of the economic czar (or at least a czar with a benevolent disposition). As Coase states: "It is all a question of weighing up the gains that would accrue from eliminating these harmful effects against the gains that accrue from allowing them to continue." (9) According to Currie, "The modern Economics of Law derives from the view that in the light of transactions costs, legal decision-makers should assign rights in ways which maximize the value of society's output." (10) This public policy prescription has been put well by James Ryerson:

   When deciding truly novel cases, judges should not think of their task as preventing harm by honoring rights, but rather as distributing rights and harms in the same way that a free market would have done. For instance, rather than making slippery arguments about which party to a property dispute has an abstract claim to the contested goods, a judge ought to determine which party would have acquired the right to the property by bargaining for it in a perfectly free market. When judges distribute rights in the way that an ideal market would, they, like the market, are maximizing total social wealth. (11) Is Coase a libertarian? Not at all. Rather, he is more like a socialist. In Coase's view, proper law consists of figuring out what the free enterprise system would have done in the absence of transaction costs, and then imposing this result on people in the real high-transaction-costs world. Namely, like a socialist, he is attempting to impose his view of the good society on people. True, his vision is based on the result he thinks the free enterprise system would have rendered in the hypothetical zero transaction costs world, but this is beside the point. Imposition is imposition.

   Several problems exist with Coase's view. For one thing, socialism is socialism, no matter what its genesis. If we have learned one thing from recent economic history, or should have learned from it, it is that socialism does not work. (12)

   In what follows, I will defend the analytic framework I have thus far put forth. But I will not do so by resorting to the work of Coase, or his chief disciple Richard Posner, as I have already done. (13) Instead, I will criticize the research of several other followers and supporters of the master. But before entertaining criticism, we must first introduce the libertarian view of property rights.

3. LIBERTARIANISM

   In the libertarian view, man, a self-owner, comes to the ownership of private property through homesteading. The first one to "mix his labor with the land" (in the terminology of John Locke) becomes the owner of it. (14) He can then legitimately transfer it to another person through any voluntary means, such as barter, trade, sale, gift, or gambling. (15) The function of a legal system, when there are disputes as to who is the proper owner of a property, is to render a judgment not in accordance with whose ownership will maximize societal wealth, but with who is the rightful owner. As a result of this system, justice in property titles can be traced back to original homesteading and any legitimate title transfer. Because possession is nine-tenths of the law, the burden of proof is placed upon he who would overturn extant property titles.

   How would an issue of pollution be resolved in the libertarian non-Coasean world? Suppose that B, a homeowner, was settled upon his property when A, a chemical plant, set up shop next door. If A's pollution seeps out onto B's property, A is guilty of a trespass. He should be made to cease and desist, with an injunction granted to B by the court against A, plus ah award for damages.

   But suppose A was there first, sets up a chemical plant on one acre, and pollutes the entire square mile surrounding this property. Subsequently, B moves into this one square mile area and complains that A is polluting him, B. In this case, A has homesteaded the one acre of land on which his plant sits, plus the right to pollute in the entire square mile. B is "coming to the nuisance" and deserves only the back of the hand from the judge. (16)

   With this brief introduction, we are now ready to consider the Coasean philosophy from the perspective of several of its adherents.

4. FRIEDMAN

   In the view of David Friedman, Coase richly deserved his Nobel Prize in Economics because of his work in social costs, precisely the one I have called into question:

   His contribution to economics has largely consisted of thinking through certain questions more carefully and correctly than anyone else, and in the process demonstrating that answers accepted by virtually the entire profession were false. One side effects [sic] of his work was a new field of economics: economic analysis of law, the attempt to use economic theory to understand legal systems. (17) Friedman's point of departure is Coase's critique of Pigou on the issue of externalities. In the Pigovian view, when a steel mill pollutes sulfur dioxide that causes bad smells, sore throats, and corrosion on people down wind, something must be done about this to make the manufacturer more of a good citizen. Pigou advocated a system of pollution taxes that would internalize the externality. (18) That is, a penalty for pollution, per ton of pollutants, would give incentives to the perpetrators to reduce their level of incidence. (19)

   But Friedman rejects this reasonable if imperfect (20) notion of penalizing polluters on the ground that it is inefficient. He states:

   Suppose that, in a particular case, the pollution does $100,000 a year worth of damage and can be eliminated at a cost of only $80,000 per year (from here on, all costs are per year). Further assume that the cost of shifting...