The Essential Right

Wednesday, October 30, 2002

To avoid anarchy, citizens create order by agreeing on rules that specify who can do what, who reaps the benefits from productive activity, and who bears the costs of disruptive activity. These rules are the essence of property rights. Property refers to much more than just real estate. Property rights determine who may cultivate a field, who can park in which slot in a parking lot, who is responsible for pollution, and who can profit from the sale of music. If property rights are clearly defined and enforced, cooperation replaces conflict as property owners bargain with one another and share in gains from trade.

But no matter how well specified the property rights are, anarchy may still prevail if people do not share a belief in the property rights system. Constitutions, federalism, and common law all contribute to the sanctity of property rights, but, ultimately, adherence to the rules requires that the populace believes in limited government and respects the rights of others.

From Defense to Erosion

The United States enjoys considerable security of property rights, which encourages freedom and economic progress, especially when compared to other countries around the world. Measured against the sanctity of property rights at the time of the nation’s founding, however, a breakdown has occurred.

The Founding Fathers took the business of preserving liberty through the protection of property rights seriously. In their debates over ratification of the Constitution, the Federalists recognized that “in framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.” They were clear in the Fifth Amendment that no person should “be deprived of life, liberty, or property without due process of law.”

With the Constitution ratified, the next step was implementation and interpretation, which again reflected the founders’ belief that protecting property rights was paramount to the success of their experiment. No other justice of the Supreme Court was more forceful in protecting property rights than Chief Justice John Marshall. Using the Contracts Clause, the Commerce Clause, and the Fifth Amendment, he continually fortified barriers against takings. In his dissent in Ogden v. Saunders (1827), the only case during his tenure in which he was in the minority, Marshall staunchly defended the right of the individual to contract on the grounds that it “results from the right which every man retains, to acquire property, to dispose of that property according to his own judgment, and to pledge himself for a future act. These rights are not given by society, but are brought to it.”

By the last quarter of the nineteenth century, however, the barriers erected by the Founding Fathers were beginning to break down. Much of the erosion came in the form of regulations found to be constitutional as long as they were “reasonable” and in the “public interest”—two vague terms that gave regulators substantial latitude. In a dissenting opinion in one of the most famous regulation cases, Munn v. Illinois (1877), Associate Justice Stephen Field warned, “If this be sound law, if there be no protection, either in the principles upon which our republican government is founded, or in the prohibitions of the Constitution against such invasion of private rights, all property and all business in the State are held at the mercy of the majority of its legislature.”

Breakdown

One area in which the breakdown of property rights has accelerated over the past 50 years is environmental regulations. The Endangered Species Act (ESA) of 1973, for example, specifically precluded the taking of a listed species, meaning intentionally shooting, trapping, or harming an endangered animal or harvesting an endangered plant. Because ownership of wild animals in the United States has always resided with federal and state governments, few questioned these regulations in the beginning. The word harm, however, was interpreted by the Fish and Wildlife Service to include habitat modification on private and public lands, and through court rulings, harm was defined more and more broadly. Eventually, habitat modification that did not harm a specific animal or plant but that had the potential to do so was interpreted to constitute a taking of an endangered species and therefore caused the land to be subject to regulation.

Not surprisingly, habitat became a word that landowners dreaded hearing. Listed species on private land brought with them the prospect of financial penalties and restrictions on land use. A family in Riverside County, California, for example, was denied the right to plow its land, and was threatened with a fine of $50,000 and a year in prison if it did so, because the area was habitat for the endangered kangaroo rat. In another case, landowner Ben Cone was prevented from harvesting old-growth pine on his property because it was home to red-cockaded woodpeckers. As a result of the regulation, Cone began harvesting trees at 40 years of age rather than 80 to preclude the trees from growing old enough to provide woodpecker habitat. Because landowners consider regulations under the ESA as a taking, such regulations create perverse incentives that pit landowners against species.

Rebuilding the Barriers

From the Magna Carta to the present, people have struggled to create governments that are strong enough to protect property rights but that are prevented from taking property rights without due process and just compensation. The challenge we continue to face is little different from that of the Founding Fathers—namely, how can property rights be protected from taking by individuals and by government? To rebuild the barriers against property rights takings, we must resurrect constitutional limitations, encourage federalism that devolves governmental authority to lower levels that are more accountable, and rely more on common law than on regulation.

Resurrecting Constitutional Barriers

The framers of the Constitution created the Fifth Amendment as the primary barrier for the protection of property rights. Economist Bruce Yandle has described the Fifth Amendment as America’s chief property rights wall, a wall that preserves resources and allows government and liberty to coexist while enabling a society to prosper and flourish. In order to protect this wall new mortar must be applied when cracks appear. Property rights advocates often look to the courts to act as the mortar. In many ways, according to Yandle, “property rights advocates are calling for a modern day Magna Carta.” Once again, ordinary people are seeking to contain government. But instead of having to settle differences with swords, the struggle resides in the courts and legislative bodies.

The primary protection of property rights in the United States rests on the interpretation of the Constitution by the courts. Heavy regulations throughout the 1970s, such as the ESA, sparked a nationwide movement of protest against government encroachment on private uses of land, which included a shift by the Supreme Court toward greater protection of property rights. Consider the landmark case Lucas v. South Carolina Coastal Council (1992). Petitioner Lucas bought two residential lots on a South Carolina barrier island for $1 million, intending to build homes similar to those on the adjacent parcels of land. Two years after Lucas purchased the lots, the state legislature enacted the Beachfront Management Act, which barred Lucas from building. He filed suit, contending that the ban deprived him of all “economically viable use” of his property and therefore constituted a taking under the Fifth and Fourteenth Amendments. The Supreme Court decided in favor of Lucas, and the Coastal Council paid Lucas $1.5 million for his property. Here the Supreme Court helped place property rights back on par with the individual rights protected by the First Amendment and helped reverse a trend of the Court—developing for nearly a century—of approving various government infringements on the rights of individuals in the name of the public interest.

Federalism

Court decisions are not the only way to protect property rights and keep government from roaming too far from its constitutional borders; the regime can be reined in by reinforcing the concept of federalism. President Reagan defined federalism by saying it “is rooted in the knowledge that our political liberties are best assured by limiting the size and scope of the national government.”

Federalism and property are connected because delegation of power to lower levels of government promotes accountability by making the costs and benefits of government actions more transparent. This in turn helps limit the size and scope of government and makes it more difficult for government to take away property rights.

Consider the decision of a governmental body to obtain land for a public park. The taking power of the government allows it to condemn the property and pay compensation, but is this worth doing? If the benefits from the park accrue to the local community and if payment for the property must come from local taxes, decision makers will have more incentive to weigh the benefits and costs of providing the public park. Suppose, however, that the park is provided by a higher level of government that can diffuse the costs of paying for the land over a wider group of citizens, many of whom get no benefits from the park. In this scenario, local interest groups have an incentive to lobby for more parks than they otherwise would because they do not bear all the costs. Moreover, if the costs are diffused, taxpayers will likely be poorly informed about the costs and benefits, and government is more likely to convert private to public property when the benefits of doing so may not warrant it.

When made at the local level, governmental decisions to acquire property rights are further constrained by the ability of people to “vote with their feet.” If a community takes property without compensation or raises taxes to pay for acquiring property that is not worth the costs, citizens can move to communities that more carefully weigh benefits and costs. If the acquisition is done at higher levels of government, however, the citizen who believes that the government is not being fiscally responsible has few options. As the potential for voting with one’s feet declines, the probability of inefficient acquisitions increases. Communist countries surrounded by fences during the Cold War provide an example of what can happen when federalism is disallowed and migration is restricted. In this setting, the potential for taking property and freedom is without limit.

Relying More on Common Law

Common law provides a way for property rights to evolve from the bottom up. Common law is judge-made law, which exists and applies to a group on the basis of historical legal precedents developed over hundreds of years. It is also a continuous process, and opportunity for modification is afforded each time a common-law judge writes an opinion. Common law resolves disputes between competing users of a resource who bring their contested uses before a court. For example, if one person dumps effluent into a stream from which another person takes domestic and livestock water, there is a conflict over which party has the right to use the stream for their respective purpose. Either the two parties must bargain out of court to resolve their differences or go to court for resolution. In court, each party will try to make the case that it has the right to use the stream for his or her particular use and that violation of this right causes harm. Whenever possible, the court will rely on precedent to give continuity to the evolution process, and in reaching a decision it will establish further precedent for who has what rights.

Because litigation is a negative-sum game in which one party’s loss is the other party’s gain and both parties to the dispute will bear costs in the fight, each has an incentive to minimize the cost of settlement. For this reason, a majority of disputes are settled out of court. When disputes do go to court, it is because the rights are so unclear that both parties strongly believe that their rights were violated. In short, the common-law approach to the evolution of property rights provides continuity, precedent, stability, and efficiency.

Contrast the common-law approach to resolving conflicts over property rights with the statutory or regulatory approach. The statutory or regulatory approaches have two types of costs. First, regulations seldom promote efficiency because the benefits are usually concentrated on the group promoting the regulation and the costs are diffused over a larger population that is less likely to be aware of the costs. For example, consider a zoning regulation that disallows building large discount stores that might compete with existing businesses. Local business owners well understand the effect of competition and therefore have an incentive to seek the regulation. If the regulation is effective, it will mean higher prices for consumers and lower property values for owners who might sell their property to the discount store. These consumers and property owners, however, are not necessarily well identified and are less likely to be organized in opposition to the regulation. Hence, even if the regulation generates more costs than benefits, it is still likely to be implemented.

Second, regulations cause rent seeking—the time and money that individuals or groups invest in the political process to prevent their property from being taken or to get someone else’s property redistributed to the rent seeker. Because the regulatory approach puts property rights up for grabs, it encourages the same type of race that resulted from homesteading (the act of claiming public land). Without property rights, people race to capture valuable assets or expend precious time and effort fighting over ownership. People who fear that their property rights will be taken through regulations will invest in protecting their rights, and people who think they can get those rights will invest in trying to influence the regulations in their favor. Billions of dollars are up for the taking in each legislative session, adding to the rent-seeking cost and making property rights even less secure.

Beyond Formal Barriers

Although institutional barriers such as constitutions, federalism, and common law are the bulwark of property rights protection, these formal institutions have little effect if people do not believe in limited government and the sanctity of property rights. All the written rules that one can imagine will not thwart powerful leaders and their followers from usurping legitimate rights. Indeed, property rights institutions were generally cast aside during the hundred-year experiment with communism. And President Robert Mugabe’s current tyrannical reign in Zimbabwe provides a classic case of a leader supposedly elected in a democratic vote and constrained by a constitution that explicitly protects property rights riding roughshod over private property owners. Explicit rules protecting property rights may be a necessary condition for preserving their sanctity, but such rules are not sufficient in and of themselves.

Ultimately, protecting property rights requires a populace that understands the importance of this institution; that recognizes that limited government is a necessary condition for protecting property rights; and that is willing to elect political agents who are prepared to defend property rights and limit government’s reach. This understanding has waxed and waned since the drafting of the Constitution.

One indication that an appreciation of property rights is currently on the rise is the number of states enacting laws to protect private property rights. In 2001, 23 states passed laws requiring their governments to assess whether governmental actions constituted a taking of property rights and to compensate when this was the case. At the national level, Congress has recently considered various bills that would require assessments and compensation similar to state laws.

We have made great progress over the past 50 years in guaranteeing civil rights, but we have failed to make the connection between civil rights and property rights. The former can only exist if the latter are secure. As the Supreme Court declared in Lynch v. Household Finance Corp. (1972): “Property does not have rights. People have rights. . . . In fact, a fundamental interdependence exists between the personal right to liberty, and the personal right in property. Neither could have meaning without the other.” John Adams said that “the moment that idea is admitted into society that property is not as sacred as the laws of God, and that there is not a force of law and public justice to protect it, anarchy and tyranny commence. Property must be sacred or liberty cannot exist.”

The rise in the number of laws explicitly requiring government to assess the impacts of its regulations on private property is a good sign. But explicit laws will only be effective if we have the will to defend property rights. With that will also comes freedom and prosperity.