Richard Epstein on Property Rights, Law and Economics

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>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast, an official podcast of the Hoover Institution Economic Policy Working Group. Where we talk about economics, markets, and public policy. I'm Jon Hartley, your host. Today, my guest is Richard Epstein, who's one of the most cited legal scholars of the 20th and 21st centuries.

 

He's a longtime professor at the University of Chicago and New York University Law School. He's also the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution. He's also the author of many books, including his Bang. The Classical constitution, released in 2014. Welcome, Richard.

>> Richard Epstein: It's great to be here.

 

Thank you so much for having me, Jon.

>> Jon Hartley: So, I want to first get into your early life. You were born in New York City in 1943, when World War II is still happening. Your parents were in the medical profession. How did you first get interested in the law profession?

 

 

>> Richard Epstein: Well, I mean, they were, but they were entrepreneurs as well. My father was a sole practitioner, and it was very common in those days for you to take it basically in a semi-attached house, redo the first floor into offices. And in my case, my father was a radiologist, so we had X-ray machines and so forth.

 

My mother ran the office, and I would watch them run upstairs for lunch and then fall downstairs again. And I began to realize very early on that whatever they were doing, ie, medicine, was a business. And they were extremely entrepreneurial in the way in which they did it.

 

I don't remember the war. I was basically two when it ended. But certainly by the mid to late 40s, I was reasonably confident. And by 1950, I was an expert, quote unquote, on the Korean War. And I could tell you all the electoral votes in 1952 in the Eisenhower-Stevenson campaign.

 

How did I become interested in law? It was by a combination of observation and a deep recognition of the fact that I was a klutz in the following sense. If you asked me to make anything, build anything, fix anything, I could not do it. So I was not going to make my living with my hand.

 

I was going to make it with my mouth and my pen. And I knew that very, very early on life and the single biggest problem I had with my parents was persuading them that my father. Who was immensely good with his hand, did not have a son who followed in his footsteps.

 

And I became more and more interested in sort of the natural law tradition. Now what do I mean by that? From a very young age, I used to just sit there and watch things and I would watch everyday things and so, you know, how do lines work? Going in and out of subways, for example, was a very interesting problem for me.

 

And if I wasn't looking at subways, what about delicatessens and then what about banks and so forth? And so my life began as somebody who sort of observed implicit regularities. And kind of realized that the people who were doing this stuff had no idea of what they were doing and helped you stop them and ask them to explain.

 

And then probably they could. Well, that turns out to be the origin of a natural law theory which you develop as you get somewhat older. The reason they use the word natural law is most of this stuff just happened. And the way in which the great early thinkers, which I was raised in, I'll talk about that in a second and develop this stuff, is by an incredible sense of observation of what had happened.

 

And then identifying the regularities that the people who participated in these events were often unable to do. So I go through law school, rather through college, and that basic temperament of my mind was very much set there. The single most dominant constraint on my academic career is I do not know how to take notes.

 

And I mean that quite literally. And so I can't do any kind of archival work because it's utterly useless. I can't take notes in class. And it also was a case in which I like to flip back and forth between areas and then figure out how they were put together.

 

So in my sophomore year, I go to the dean at the college at Columbia, a man named John Alexander, a great man, I might add. And I said, I don't want to major in anything. I like to concentrate on a bunch of things. Math, I'm not very good at it, but good enough.

 

Philosophy, a little bit better and I did sociology. And then I always took courses in the physical sciences because largely under the influence of my father, developed them by myself. I became aware of the fact that my general academic strength was an all purpose guy without any distinctive peak and without any real weakness.

 

And so I was able to move back and forth across different areas more rapidly than anybody else. And so then in the college I did that. And then where do you go to law school? And I made the decision semi historic. I like to think that I would try to get myself a scholarship to Oxford, but I would not study philosophy, politics and economics because I already had so much of that stuff.

 

Because in those days at Columbia, in my third year, I took graduate courses in philosophy as I just didn't think I needed. So I said, I go there and Study Rome law and medieval English law and so forth. And by God, the program actually took and I did all the things that I said.

 

And so I come back to the United States and this is extremely important. I'm a student who's out of sync with the rest of the world. I enter into the Yale Law School, half freshman, half second year student. On the freshman courses, I had half of them in strange ways.

 

And I could still remember trying to go into the intricacies of various rules on civil procedure. And the teacher didn't want me to talk about that detail tale at all. But that's the way I've been raised at Oxford. And then I took the upper division courses and I, you know, I had many influential teachers.

 

The one I'll mention most was an economist named Ward Bowman. He was not a lawyer, but he was a guy who always tried to figure out how these institutions were put together. And he often got it wrong. But he was always on the right track. And sometimes he actually got it right.

 

So I leave the Yale Law School and I have this kind of strange background that I have to interview for a teaching job. And this is where fate intervenes. It turned out it was the seventh game of the Boston Red Sox St. Louis Cardinals worker series and Jim Lomberg was pitching against Bob Gibson.

 

A friend of mine now retired from Stanford, Tom Gray, had put his name at the bottom of a list organized by a man named George Lefkoe for teaching at the University of Southern California. And so I put my name down as 11th between his and Tom says, you know, I already have a job at Stanford.

 

Shows you what the world was like. You could take my interview. And it was the last interview, and it was supposed to be for 20 minutes, and it lasted for two and a half to three hours because we just kept on sparring. And George was one of these guys who sort of liked to show how much smarter he was than all the undergraduates in the law school he was talking about.

 

And I would have nothing of that. And so we got into a real tussle. And one of the nice things about that interview is when George understood what was going on, then he stopped pretending to be a Grand Mass. And he really had kind of cheek by jowl fighting and so forth.

 

And he invited me out to USC to teach. It was kind of a wild time. And so I tell this story to everybody, and you have to believe me because it's true. So I go out there and I get there for an evening dinner, this very bright little kid, 7 years old, is there.

 

And I think to myself, he's going to be a law professor someday. And sure enough, he went to the University of Chicago. Editor in chief, and he became dean of law school. His name, Mark Miller. You could figure it out at that age. And why could I figure it out?

 

Because I was kind of like that kid, too. Precocious and slightly obnoxious, but very respectful of other people. And then I kept on going the next day, on and on. And finally, when it's all over, 14 hours of straight interviews, a man named Martin Levine, who just retired, I think, from usc, takes me to a topless bar.

 

That was the way in which we did business in those days, rather differently. And so I go back and I get the offer, and I go out with Dorothy Nelson, who's still the dean. She retired, but she's still alive and in pretty good health. And so she says, well, what you want to teach?

 

And so I. I didn't understand this question. I said, well, Dorothy, what do you want me to teach? And she said, I'm gonna do you a favor. She says, I'm going to let you teach the heaviest load on the faculty. And thank God she did. So I taught four major courses in the legal writing program my first year.

 

And you asked about how I came to write takings books like that. Well, the answer is that book was written 17 years into my career. And I started off as an Oxford kid, and I knew a lot of Roman law and a lot of medieval law and a lot of tors law and so forth.

 

And as I went through all this stuff, my own sense of systematization took over. And I found a lot of these areas very unruly. And I became allergic to the view that if you don't understand the way things are, that's because nobody can understand the way things are.

 

You have to sort of muddle through case by case. But I had had been trained in the sciences, in math, and I always thought there was a formal structure on this stuff. And I worked very hard to figure out what it was when I wrote my book Simple Rules for a Complex World.

 

This was many years later when I kind of figured out what the basic outlines were. And so as I went through the taught property and contracts law and restitution law and so forth, I taught them all mainly because I wanted to see how they fit together. And what happens is I do all this stuff, and then I look at constitutional law, and I said, you know, there's something deeply wrong here.

 

There are two sets of books, there's this private world set of books that makes perfectly good sense, and this public set of books, which seems to me to be stirred crazy. So you ask, what was the mission in the most general terms of my takings? Well, it was to say that if you understood how the private world, private law world looked, you could then translate it into a public world.

 

So you would not have two separate spaces. You would have one comprehensive theory. And then when you try to put the two halves together, a comprehensive theory essentially meant that the public side was quite crazy. And so I sat there, this is in the middle of the Reagan administration, so there was some sympathy trying to explain that you have to start completely over again.

 

And once you do that, with some fairly innocent premises and moving this way and that way, by the time I got to page 281 of my Takings book, it turned out I discovered that the New Deal was flatly unconstitutional. So what was the reason behind that? Well, the simplest version was there are always collective action problems.

 

And the correct way to try to think about them is to figure out what everybody's initial stake is before you have the government intervention and then try to expand the pie without shifting resources back and forth so that everybody gets an equal rate of return on whatever investment he has in that system.

 

The modern view on this stuff was, yes, we put everybody into the pot. And then what we can do is we could take the surplus and move it wherever we want. And by God, if we're really clever about it, we can make sure that some of the initial endowment is transferred to somebody else.

 

And so what you did is you had these two completely different versions of the public sphere. And my view was that the transfer for society is always going to be unstable because the winners will be avaricious and the losers will be desperate, and they'll constantly fight. Whereas if you stayed in the first world where you get pro rata improvements on your investment, the only way you could get better off is to make somebody else better off.

 

And so you have an expanding pie, not a shrinking pie. And strangely enough, by having strong property rights and a government that can get rid of this high transaction cost situation, you're much better off than you are in this other state. And this was decided 40 years ago.

 

I wrote many books in the interim, including or afterwards including the Classical Liberal Constitution. But if you're trying to figure out the sort of the one thing that would be the one that organizes pretty much everything.

>> Jon Hartley: So I'm going to get to that and just, you know, I guess go back to, you know, you've been teaching since the late 60s, since 1968, and a lot of your work has been focused on property contracts, towards law and economics.

 

You've taught all these classes and many more, and from there you build this conception of constitutional interpretation from that. A lot of this is discussed in your 2014 book, House Global Constitution. We just talked a little bit about your first big hit in the legal profession, which was on Takings and Eminem Domain, and you published this 1985 book, Takings Private Property.

 

 

>> Richard Epstein: Yeah.

>> Jon Hartley: Domain.

>> Richard Epstein: Yeah, but before that, I should mention, I wrote a bunch of articles on tort theory starting in 1973, 74, 75, and 1979, which developed a comprehensive theory of the private law. And so starting on takings, it was a question of figuring out what I had developed, mentioning the method, I told you, a translation, and putting the two things together, which is very much not the style of most constitutional lawyers.

 

 

>> Jon Hartley: And then takings work a lot of this was sort of explaining where takings clause in New Deal jurisprudence went wrong. And then fast forward to 1994, you write this book, Bargaining with the State. You articulate sort of a doctrine of conditions in where you speak a lot about how the government uses monopoly power, received grants, licenses from the government.

 

Milton Friedman wrote a lot about occupational license during his PhD thesis and his book Capitalism Freedom, 1962 book, one of his bestsellers. Occupational Licensure has actually grown a lot since these books.

>> Richard Epstein: Only gotten worse.

>> Jon Hartley: Only gotten worse, now about 30% of the US workforce is licensed.

 

It's up from like say 5% in the 1950s. I mean, explain your thinking on occupational licensing.

>> Richard Epstein: Let me explain it. What happened is you have to figure out what's the relationship between the takings book and the bargaining with the state book. And what happens is in the takings book, at the beginning, I put a picture of two pies literally on page one.

 

And the first pie is the inner pie, and it has slices that are reasonably determinate, a point that you could argue. And then there's the second pie, which gets bigger than the first pie. And the key element about the outer ring is it doesn't compromise the inner ring.

 

So the first set of insights about a taking doctrine is that there's somebody who has X set of entitlements in the initial state of the world. Either he keeps those entitlements or he gets compensation from them for everybody else. So you can't have a situation of Pareto superiority, I'm much better off than you are worse off.

 

Because those things lead to exactly the kind of political struggles that I mentioned. Well, I finished that, and then I looked again at the outer ring, and I said to myself, why are you saying that this outer ring has to be proportionate to the inner ring? Which is the thing that I had argued beforehand, and I thought a long time about all of this stuff.

 

And then it turns to me that there's a very simple economic insight that allowed you to know this. So I'm going to ask the reader or the listener to think of a world in which you have the northeast quadrant on the Y axis. You can improve one player by going up, and on the X axis you can prove the other player by going down.

 

If in fact the only thing you believe in, in Pareto improvement, your first move could be anywhere in that area. So just to take two numbers, there could be either 5 for x and 1 for y, or 5 for y and 1 for x. But how do you decide which of those two things is correct when they're both Pareto improvement?

 

And the answer is, if you don't have a normative theory, you're just going to fight. And so if you had the optimal cooperation, you may have been able to get six units of gain, but by the time you're done with the swabbling, you're down to two or three.

 

And so the question is, how do you discipline that outer circle? And then what I did, I drew in line at the 45 degree angle and I said, what happens is, if you're serious about this, the doctrine of unconstitutional conditions said that you always have to be on the diagonal, that X has to be equal to one.

 

And so if you can do that, the only way X can go up is to make Y go up. And so what happens is it necessarily ensures that there's an even division of the surplus and stops dividing. The next question is, can you generalize? And the answer is you can.

 

What you do is instead of having a graph, what you do is you now have a multi tuple thing of a jiggy and you have 22 people in there, a one, a two, a three, a four, and you figure out what it is. And what you do is you insist that there be a non discrimination rule, so that the rate of gain of each of these people from the original position is also constant.

 

And so the insight about how you stabilize the surplus turns out to be scalable. And if it turns out to be scalable, then it turns out to be stable. So you then have to do is you gotta look around the legal system and say, are you just whistling Dixie or there's some people out there who actually do this.

 

And it turns out there are a large class of rules both in private law and in public law called non-discrimination rules. And what are those rules about? They're about collective action problems where the non discrimination rule keeps you on that diagonal and so therefore prevents surplus dissipation. And you see this in property, and you see this under the dormant Congress clause.

 

And so what you come up with is the best of all things develop a theory abstractly seem to think that has the right properties. And then when you look around, you don't find the rare Avis that never appears. It turns out that the huge numbers of doctrines that are developed which actually comport to that situation.

 

And it was from that that I developed the unconstitutional conditions doctrine. And so what are the questions that you start to ask is how do you figure out what's a deviation from that doctrine and what's not? So I'll just give you the simplest of examples. One of the questions you always have to ask is, how does the state exercise its monopoly power when you wish to get a driver's license and go on the public roads, right, fair question.

 

And so I give people two statutes. One statute said, if you wish to get a license, then what you have to do is to register to vote for the Democratic party. And the other statute says if you wish to drive in this particular state, you have to agree as a condition of getting a license to resolve any particular dispute that arises out of accidents in this state.

 

In this state. And that's an efficiency condition, because otherwise, if you have somebody in Massachusetts who's from Wyoming and somebody else is from Florida where they supposed to litigate this suit, and so what you do is go through all the conditions that can and cannot be attached and figure out whether or not they have efficiency properties or not.

 

This gives you the following enormous advantage, which is you can now tie everything up to the antitrust law insofar as it's the body of law which is trying to figure out what particular private actions are disadvantageous in a principled fashion and which are the ones that are justified on efficiency ground.

 

So what I discovered is when I was a libertarian, I didn't have much use for the antitrust law because it's not force nor fraud. And you remember when you made the introduction, you started to talk about that principle, but it turns out you have to keep that thing in place.

 

And so that the world is not dichotomous, whether you're talking about the public sector or the private sector. It's a trichotomy. You have to have anti force and fraud rules, you have to have pure competition rules, and then you have to have rules regulating monopoly powers of which the most common are common carriers in public utility.

 

So at this point, what you do is, you go back and you start to read some of this stuff. And amazingly enough, these guys knowing nothing about anything, okay, what they were able to do is to intuit the rules that you had to put into play. And so there are geniuses like the man named Matthew Hale who figured out that you needed to have some form of rate regulation on what you can charge if there Was only one harbor in town to which all boats had to come.

 

And he developed a very sophisticated theory which essentially, 200 years later, was carried over into the American rate making business by name. And then we had all the great issues that basically came with the rise of the railroads and so forth and telecommunication in the period, roughly speaking, between the end of the Civil War and the beginning of the Second World War.

 

And when I look back at these principles, I said, who are these bozos? They seem to understand what was going on. And so, even if their rationales were not always the most precise, and they were not always wrong by any means, they were. They seemed to have a very intuitive branch of what was going on.

 

And so that point you develop a theory of judicial knowledge. And it turns out there are very few judges who are as nutty as I am and constantly go back to first principles in this way. But these are people with an immense amount of experience. And what they do is they have a keen sense of observation, and they put it all together and they develop a system, Tinker with it a little bit.

 

Make the occasional mistake here, but essentially the great genius of the American law is in the period of industrialization. If you start looking at what legal doctrines start to take place in what space, it turns out most of the stuff is reasonably benevolent and quite good. And so they would make mistake at the edges, but they had the right attitude on rate regulation, right attitude on assumption of risk and various kinds of cases, Very strong and skillful rules with respect to intellectual property, including both copyrights and patents and so forth.

 

A pretty good sense of how it is that federal jurisdiction should apply. And so you come out of the 19th century and you say, my God. Now, let me contrast that with the general view in the legal profession. We have a dirty word in law called Lochner, do you know what Lochner is?

 

 

>> Jon Hartley: No. No, I'm not.

>> Richard Epstein: Lochner is a case called Lochner against New York. It was decided in May of 1905, and it had to do with the question as to whether or not the state could impose a maximum hour regulation on workers in the bakery industry. And it turned out this case was deeply problematic, and in the court below, the state regulation was upheld 4 to 3.

 

And it comes up to the Supreme Court. And by five to four, they say that this regulation is not a legitimate health regulation. It turns out they regarded it as an imposition on commerce. So you now put yourself in the position of the New Dealers and so forth, who, for the most part, did not think that there was any logical preference for monopoly by competition over monopoly.

 

And the denunciations pretty much were everywhere about this case. And it became known as the Lochnet era, as if it defined every case that took place between 1870 and 1940. Because what it did is essentially it invalidated safety regulations of some sort or another. And so I start looking at this case.

 

And there was also a lot of work by David Bernstein, who did a lot of this stuff. And all of a sudden I realized that this, this case was perfectly sensible. They actually knew what they were doing. What they did is they did not like monopoly regulation. What they did is they didn't mind safety regulation.

 

But if you looked at this particular statute and saw who was covered by it and who was exempted by it, it turns out it was a classic illustration of what economists know to be the case, which is you can have fake health care regulations in an effort to distort the competitive relationship between two rival firms, one of whom is under the regulation and one of whom is not.

 

And so that led me in part to the Takings book, realize that many of the things that modern constitutional law regarded as abhorrent were essential parts of my system. So then there is this following contradiction. If you looked at the progressives, their attitude would be, my God, we've got all this kind of regulation.

 

The world must be coming apart at the seams, right? Exploitation everywhere. You then look at the economic position and what's the period of greatest growth by far in American life? 1870 to 1940, same period. So they just got everything wrong about the way in which the system started to work.

 

And then if you start looking at the justifications that take place in the New Deal, the central proposition the New Deals have is we are completely indifferent as a constitutional matter about the relationship of competition to monopoly. And if what we want to do is to put a monopoly statute in place, God bless us, you're not allowed to stop it.

 

And so there was a famous case called Nebby against New York, in which what they did is they decided to have price controls on milk, right, in a perfectly competitive industry demanding minimum prices. Now standard regulation is a monopoly in which you put maximum prices skillfully determined to prevent that kind of extraction, making sure that the firms get enough money so they could recover on their capital.

 

But. But this was a case in which they put minimum prices at the request of the farmers to essentially ensure that they could organize a cartel. And it was upheld in these things. And so that's the kind of model you have. And in the post war period, there's this constant struggle.

 

Are we trying to protect monopolies? Are we trying to undermine them? And what happened when I started writing in the Reagan years, for the first time, there was a reasonably coherent group of individuals, of which I was one, who said the distinction between competition and monopoly is well worth making.

 

And the Takings book was meant to make sure that monopoly type regulations that the state gave to its favorite person could no longer survive. We were called to be ruthless individuals, but this was, I thought, the most social program possible. And so you put the whole scheme together, we're kind of moving that way.

 

Did Milton Friedman and so forth and George Stigler understand it? Want the real answer? Not really, because they had a very different way of looking at the world. And not a bad way because it was immensely important at the time. All of these guys basically grew up in the 30s and the early 40s, right?

 

They're born 1912, stick on 1911, coast 1910. And what they do is they come up in a world where New Deal cartels are riding on and their first instinct is to be anti cartel guys. And it turns out in these industries there aren't any real particular reasons why it is that you need any form of rate regulation at all because they're competitive industry.

 

And so their great contribution was to say, strike this thing down, get rid of this one and so forth. Market liberalization was what they were behind. Then you start getting to other kind of industries where it's not so clear that you could have a competitive market. It's a network industry and so forth.

 

Or you have the, the great problem, the marginal cost problem with respect to the bridge. You remember that one, Jon? You know, you have, you have to build a bridge over a river. And you can do it one of two ways. What you can do is you can say, okay, we'll let the guy charge whatever he wants.

 

And it turns out that if he does that, he gets a monopoly, right? Or you say we can regulate him, at which point you run the risk of confiscation. And so you know what they did in the actual contracts in the 1880s, incredibly clever, they said, we're going to give you a period where you can get prices above the variable cost until you pay off the underlying front end cost, after which you can only charge for the variable cost since you paid for the equipment.

 

It was a two tiered system and it was written about by both Vickery in the United States and Ronald coast in England, if you recall. Right. Now, what they did is they kind of devised the same problem. Because what they saw is if you don't have a competitive solution, what you have to do is to figure out which kind of inconvenience you can live with and which kind of inconvenience you have to bear.

 

And so instead of developing a model of ideal behavior which we all love to have. All of a sudden you're in a very different kind of world saying which of the two risks that we are facing in this particular case is the greater? And how do we figure out institutional arrangements that were counteracted?

 

And so what happens is, if you could get a competitive market, really want to keep it, but if you can't get it, then you enter into this terrible space where you're trying to figure out what kind of regulation is better than what other kind of regulation, knowing that what you do, you can't quite get it perfect.

 

And so the thing that you have to learn as a lawyer is when there are competitive situations that are ideal, don't mess with Mother Nature. But if there aren't, then the question is how you rig a system to figure out the way in which you put, for example, the fixed cost with respect to a bridge.

 

And this becomes the same problem that you face with patent law. So friend of mine named John Duffy wrote a nice piece applying the marginal cost controversy to patents and wrote it 15 years ago. And what you can see that was that the doctrines that apply to 19th century problems also carry over to 20th century problems, and you have to be able to kind of deal with it.

 

And so I never got myself involved with intellectual property as a serious matter until I was hired by somebody who said, we have this serious problem on an inducement to breach of contract claim, which is something I worried about. Inducement to breach of contract is something that, you know, under the name of tampering.

 

So the most famous case was there was that famous opera singer named Ms. Wagner, and she was under contract to perform for one movie theater or opera's house. And somebody else stole her contract away and said, you have to work for me for a higher price. And the question is, what remedies did the person who made the original appointment have to stop her?

 

And it turned out it's not an easy question to figure out what goes on. But they allowed the injunction to take place. They wouldn't allow the woman to be forced to sing for the first part. Ms. Wagner was from Germany. She could have gone back to work for the first company, but the ground was so spoiled that what she did is she went back home to Germany.

 

And the lesson, of course, was very clear. There was certainly a lot of gains to be had by having her sing in England. She was a great singer. And somehow or other, after they balls everything up, all that stuff gets lost. And so one of the things that you then do as a business lawyer is you say if I have something that looks like it's heading down the road, how do you figure out a way to prevent the abuse?

 

By one party, on the other hand, without killing off the deal on the other hand, because both of these are completely undesirable outcome. Now this, of course, then explains something else about why I'm a kind of a strange constitutional lawyer, right? Very few constitutional lawyers actually are business lawyers, and I've always been a business lawyer from the first day.

 

And understanding how these business arrangements work then gives you a sense as to what kind of regulations that you put on top of them are likely to make sense and what kind of regulations are not going to make sense. And so you tailor your situations there. And so this pattern that I had in college was know a lot about everything, but huge amounts about nothing.

 

It turns out to be the right strategy as far as I'm concerned, because you get a range out of academic stuff that you can't get if you deeply specialize in one particular area.

>> Jon Hartley: On Sea Monopoly. I think that's a great summary. I mean, it's amazing to see how powerful the administrative states become at the federal level, the congressional power there.

 

We'll talk a little bit more about that in a bit. Occupational licensing at the state level, rapidly, not only do we license doctors, but we also now license dog walkers, nail technicians and braiders and so forth. I want to sort of get more into constitutional interpretation because I think that this is really where the focus of a lot of your career has been in the past few decades.

 

And so, in 2006, you wrote how progressive we wrote the Constitution. 2011, you wrote Design for Liberty, Private Property, Public Administration, and the Rule of Law. I'm just curious, how might your thinking, you're thinking, you know, you say you're in the natural law tradition. How might it differ from original, let's say, Bork and Scalia, who you were on, Chicago law faculty with at various points, and they were legal positivists.

 

It's textualists, they help [INAUDIBLE] meaning of the text. Is it fair to say that they're, you know, maybe similarly unhappy with the progressive legal movement during the 20th century, you know, having, you know, maybe calling that sort of living Constitution, you know, being promoted during the Warren and Berger courts.

 

And we also have, I'd say, other sort of ideas, jurisprudence, say Adrian Vermeul's common good constitutionalism, which is also very different. I'm curious, you know, what is your synthesis of constitutional interpretation that's embedded in your 2014 book, the Classical.

>> Richard Epstein: Okay, well, I mean, where do we start to go back to Roman law?

 

And it Turns out that the rules of interpretation that Scalia and Bork tend to believe in bear no relationship to the historical rules of interpretation done by large numbers of people, none of whom you would call progressives or Marxists or anything of the sort. They were people who, I think, were much more sensitive to the way in which language worked and developed a whole series of protocols to understanding what went on.

 

And so before I did the book on the constitutional law, I spent my time interpreting the lexicolia. And that's a statute, which I'm sure is on the tip of your lips, but it roughly said, in effect, anybody who kills a kidder unlawfully, a slave, or a herd animal shall be liable and damaged by some rather arcane formula.

 

And so you look at this statute, and then you say, well, how do they explicate it? And it turns out that they spent 30 or 40 pages figuring out what it means to kill things and what it means for these things to be unlawful. And they didn't quite get it 100% right.

 

But essentially what it did is it tied in with a very powerful theory of how you organize a case, which was also captured in the Roman pleading laws, which that are develop rules that develop at the same time. So essentially, the way to understand language is what it is is it's a game of successive approximation between the descriptive and the normative.

 

And the question is, how do you make these steps and why? And the first thing that everybody notes about a particular language is you can't say everything at once. You can't say everything first. What you have to do when you're thinking about language is to start with the notion that what you're trying to do is to find a way to get clear the message so that you don't get overwhelmed by the noise that's surrounding it.

 

And so the pleaders essentially started in the following way. What I have to do is to explain to you why it is prima facie as a first look, you should be liable to pay damages to me. And it has to be a clear enough reason that everybody can understand it.

 

And it has to be operative so that other people can apply the rules that are applicable to it in a way that doesn't lead to hopeless squabbles and division. And it turns out the way in which everybody starts this is with a phrase which says, you can't hit anybody else.

 

Now, what does that mean? And then you realize it's a funny word. You could hit somebody in the sense by giving them a love tap or you could hit somebody and try to maim them. And what's quite clear is you're not trying to rule out beneficial conduct. And so what you're trying to do is to figure out that situation which by either a physical or a chemical change, results in the position of the party who's been hit having been essentially made worse off.

 

And so what do you do? You have to worry about describing it, then you have to worry about evasions. So you have to have a clear principle and then recognize that somebody who's going to be tagged for a large liability will do an enormous amount of singing and dancing in order to escape it.

 

And you have to be able to prepare countermeasures, right? So it's a kind of a game. And so I will give you the illustration that does this, involving my 5 year old nephew at the time, and he was acting up like a 5 year old and I said to no, stop hitting me.

 

So what do you think he did? He kicked me.

>> Jon Hartley: Maybe.

>> Richard Epstein: Now what, what was he thinking? He said, well, you said I can't hit you. Everybody knows that the word hit involves the hand. So you didn't tell me I couldn't kick you. And then somebody says, as an outsider, is that what you really meant in terms of the social situation?

 

What you say is Noah's evasion of the hit norm resulted in the same amount of harm. And it turns out you said, don't hit me with your hand. So I take a stick and I start hitting you with the same thing. So we have what we call the need for a description of what's wrong.

 

And what's wrong turns out to be, to use the phrase that they eventually hit upon the application of force by one person against the body of another. And the Romans called that corpora kapori by the body to the body. Right. And the reason they do that rather than the other phrase is because of the anti circumvention norm.

 

And they wanna make sure that all applications are force of court so that you can't play these kinds of games. And so you start to see that and it develops in the Roman law. And then you go, you look at the English law many hundreds of years later and you know what happens?

 

They do exactly the same thing. Now why are they doing this thing? There may have been some cross influence between them, but even if there is, you have to say, why is it that an Englishman would accept a set of rules developed by a bunch of Romans 1200 years before, when their cultures are many ways are completely different?

 

Well, it turns out. There is an answer, and that's the natural law answer. You can think of a state of the world in which presumptively, it's better for one people to use force hostilely against somebody else. And so if you figure out in Rome, you're going to figure out the same thing in England.

 

And the reason there would be a reception, which it sometimes is, is because the same conditions apply. And this is true whether you hit me with a gun or whether you hit me with a sword or a howitzer or a laser beam, right? And so it turns out that the principle is pretty universal, as is the question about controlling these evasions so that you use that term.

 

But people are much more clever. So the second thing that comes up and then I'll fig out is, okay, I won't hit you. What I'll do is I'll set a dish of poison in front of you and tell you that it's helpful. That's not the application of force.

 

So in every system, what develops is what they call an action under the special circumstances, where in effect, if you give something somebody and they consume it under mistake or under coercion, you treat it just as if you had done the other thing. And it turns out that's developed everywhere.

 

So now you look at constitutional law. What does this have to do with constitutional law? What you do is you get the state right and it says that it's not allowed to take anything from. So what it doesn't do is it doesn't take it, it just simply blows it up.

 

And the question is, can you recover under the constitutional norm for that? And you could see immediately how it is that you're going to need the same anti circumvention norm there to prevent essentially the willful aggrandizement of one person's property at the expense of another. And so you go through all these cases and what you discover is exactly the same technique of interpretation is given to the use of force in public law that is given in private law.

 

Because what's common about these situations are the sort of invariant physical conditions against all which this stuff takes place. They're the same in every language. So what happens is, if you understand the physical stuff, you sort of understand where the universality comes from. Well, that's part of it, but then you got other things you have to worry about.

 

So somebody says, well, yes, I hit you. And then he turns around and he said, you know, but I did it in self defense. Well, you assumed the risk. And so all of a sudden what you're saying is, yes, your prima facie case is right, but there are reasons why it is that you should not be able to make good because it turns out that you were really the aggressor, right?

 

You were not the aggressor, self defense is why I hit you. And so the plaintiff was saying you were an aggressor, but you weren't, you were responding to his threat. And what you slowly do is build out the system. And it turns out the same invariant rules apply whether you're building it out in modern England, ancient Africa, Roman society.

 

Because the physical and chemical constants are what drives a particular analysis. And so when you do comparative law, what you almost always discover is that all the differences that you find are on second order question. I mean, so to give you what's the second order question you ask, right.

 

Well, suppose somebody's taking your property and it's the person who gave it to you. What kind of remedies do you have against them? Well, the Roman remedy said that you could never get a declaration against the party who was about to take your property. You had to wait until it was taken and then bring an action for being evicted.

 

The American law allows a declaration that you can't do it. Well, what's the difference between the two of them? Not all that much. Right, but there is a difference. And why the difference? Well, the Romans were very much more constrained on the resource side, right? You can imagine.

 

And so what they did is they waited to the last possible moment they had before they applied the remedy. Whereas in America and England, you have more prophylactic abilities to do so, so that you're willing to intervene a little bit sooner. Now, how much of a difference does this make?

 

Well, in certain situations it could be very important, but in most cases, let me ask you the question. How many times in your life have you felt uncertain about the possession of your property vis a vis somebody else, that you felt necessary to consult the lawyer as to whether or not you were entitled to some kind of protection?

 

And they answered that question. What are you talking about, Guy? Right, so the reason that these things don't matter and do matter is in the large society, if you look at the kinds of cases, the great achievement of the legal system is not that it solves disputes after they occur.

 

It's that what it does is it guides people's conduct so they don't engage in stealing other people's property. So you don't have to figure out what the remedies are when they start to do and then which cases get to the lawyers? Well, it's not the cases where everything goes right, it's the cases where everything goes wrong.

 

And at that particular point, it was a very rarefied subset. And now all of a sudden, all these remedial complications make a great deal of importance to the way in which particular cases should come out. So that when I started teaching law, my view was always to look at a particular dispute and figure out who was right and wrong and what remedy applied and why.

 

And you could get a lot of divergence of opinion. And it's very important to be able to do that because that's what litigators do to this very day. But as I became a little bit older and maybe wiser less so, what happens, I realized that the great importance of these various rules was not in the way that they necessarily solved disputes that took place, but the way in which they limited the number of disputes that occur.

 

And so when you start then looking at all constitutional law, it's the same method, First Amendment freedom of speech. Well, there are a lot of cases where you're asking whether or not somebody is engaged in freedom of speech. If what he does is he yells fire in a crowded theater, takes out a rifle and says, I'm gonna shoot you unless you capitulate, and so forth.

 

And so now what you do is you have a rule that says freedom of speech is protected, but the threat of force is not right. Well, you then have to figure out, well, how do you know which it is? And so the famous case from private law was somebody who said to somebody else, if this were not a size time, I would run my sword through you.

 

And so the first thing you ask is, what's the size time, right? Well, size time is the judges are in town and what the guy is saying, I would kill you except for the fact that they hear. Now the issue you then have to ask, is he faking or is he telling the truth?

 

He's saying that because he's going to kill you and he wants you to put your guard down or not. Well, that's a fact intensive dispute. Fast forward 2000 years or whatever it is. And now you have somebody who's in an assembly and what they're trying to do is to encourage people to rebel against the state.

 

And so what are they doing? Is it a bunch of people reading a Marxist tract about the necessity for class warfare, or is it a bunch of guys who's sitting there trying to tell you how it is that you put together a bomb and plant it on somebody.

 

Right. And so it's the same question. This is anticipatory conduct. Can the First Amendment catch it? And here there's no immediate threat. But as the famous judge said, the threat may not be immediate, but if you wait until it is immediate, it's too late. And so, this was a problem of international law.

 

What are the intermediate cases? Well, you look at Grotius, the great 16th, 17th century writer, and he posits one case to which we yet to have an answer. He says, what you do is you have an enemy, and what they do is they amass on your border, but they don't attack.

 

The question is, can you have a preliminary attack or response against them, or do you have to wait until the attack is imminent? When was the last time Time that problem came up. In Iraq, Iranian, right? What happens is the Israelis are sitting there. Do you have to wait until the bomb is in the air?

 

Can you take out the Phillies preemptively? And it turns out it's a very delicate calculus as to what you do and all of these things. The strategy is you're always making approximations, you're always doing the public and the private law comparison. And essentially what you do, I think in the last of these cases is waiting is utterly futile.

 

What's the seriousness of the intention? Well, the first thing you do when you're doing this stuff, if somebody says he really hates you and he wants to kill you and he's going to do everything he possibly can to achieve that, you believe it, you know, and you know, that's the rule.

 

So whenever you go through a security line, remember they always tell you we take all jokes seriously. Right. So don't talk about carrying a wet penny because we're going to respond. And so we basically wean ourselves from the immediacy rule, which is a very safe rule in the sense of preventing undue aggregations of force, but it's a very dangerous rule because it could let the amassing take place until it's too late.

 

And if you recall, the Israelis have faced this before. They faced it in 1967, right, when the Egyptians blockaded. First question, is a blockade an act of war? The answer is yes. Does it involve the use of force? The answer is yes, but you haven't shot anybody. But it's a threat of force made credible by the weapon you have.

 

And the Israelis basically attacked. And then the question is, you look at the United Nations Charter and it says anticipatory, the self defense is not allowed. So what do you think happens to the charter? It gets junked because it's too restrictive a condition nobody's going to abide by.

 

 

>> Jon Hartley: I guess one question I just have is like in terms of a lot of this, you know, I guess taking a property centric kind of lens of constitutional interpretation, like, you know, how do you determine, you know, what is property and what are limitations, I guess in.

 

Terms of what is property? Well, well, I mean, I mean you can see these, you know, issues like for example, you know, can, can people be property and you know, think servitude? I mean, these were huge issues that were sort of left somewhat open that depending the country and there was a civil war fought over it.

 

Even now there's some questions of can you indenture yourself? Can you sell shares in your yourself for,say, student loans, income share agreements? Is there something that, you know, Friedman?

>> Richard Epstein: Well, I mean, it's a very interesting question. I will tell you what the historical argument was. There is a huge debate into the literature as to whether or not self ownership is a coherent concept, right?

 

I own my arms, but there's no doubt that anybody has that you can own the ring on your finger. And so the question is how you defend the person if you're not quite sure of this. And in the end, what people do is they fudge it. They treat it as though it's a property protection.

 

But in effect, they then use the word autonomy to describe what it is that you have. And it then becomes exactly the gate presumptively. The argument has always been you do anything as a purpose of agent, then you've done it for your own advantage. So if we start the Pareto ball rolling, we have somebody who's better off and by definition nobody else who's worse off.

 

And so the argument in favor of freedom is that condition is desirable. But remember I started to talk about defenses, self defense and so forth. Suppose now the thing that you want to do is to take a saber and put it through somebody's heart. At this particular point, the defense becomes credible because the gains to the other side are so enormous that what we do is we allow it to stop.

 

The central classical liberal thing is suppose the guy doesn't want to beat your brains out, but you're selling mushrooms on a corner stand and he decides to go to another corner of the street and sell mushrooms of a higher quality for a lower price. What happens? He said, I'm really being hurt.

 

And you're saying this is just an exercise of my liberty. And why is it that you're right and the other guy is wrong? Because you can figure out these disputes simply looking by the two parties to the disagreement. There are customers out there, and in the case where you kneecap somebody to prevent them from selling to the customers, it's not just a rival who's worse off, it's all the customers who can't get the business right.

 

But if what you do is to cause the same amount of economic dislocation by offering a better price product at a lower price at that particular point, the consumer welfare flips over 100%. And so what we develop in a very principled way is the classical liberal distinction between force and on the one hand, and competition on the other, where one is Allowed and one is not.

 

And then we developed three separate phrases and three different ways to explain this. The Romans understood this, sort of, and they called this. And what the hell does that mean, right? Well, damn means harm, ab square means without legal injury. And what they're saying, in effect, these are the kinds of harms that you're absolutely privileged to complain.

 

And you then ask, is there a complete theorization of this in the Roman leadership? Answer no. You then ask the second question, do they make any fundamental mistakes with respect to the court case? The answer is no again. And so what it is, their rough intuitive empiricism steers them away from problem.

 

Now when you come to the economists and so forth, they start talking about externalities, right? And what kind of externalities are these? Are these legitimate externalities? Are they illegitimate externalities? And what they want to say is, they may be just pecuniary externalities. You've heard that term, right? It's one of the more useless terms in the English language because it doesn't distinguish between two conditions, between competitive losses and losses to a monopolist who essentially has some ability to exclude you from a particular market.

 

And then the lawyers, they have a third term for that. They talk about actionable injury as opposed to non actionable injury. But the only way you can solve the problem is to go from the two parties who are conflicting and take into account general equilibrium analysis about the way in which their dispute affects everybody else.

 

And so the force case has negative externalities to third parties, but the competition cases, positive externalities to third party. They're going to be some funny cases in between, as you always know, like trade, slander and so forth. But the point is, if you understand the economics correctly, merge it with law, all of a sudden a lot of the classical liberal distinctions come up as being completely legitimate, coming out of what I think are fairly spare spartan set of initial premises.

 

And so you ask what my constitutional regime has been for low these last 40 or 45 years is to take these kinds of missions, go to area after area that I can find in public and private law, and show to the extent that it's possible that you could actually make the system stand.

 

Now that means that you have to really learn stuff about all these fields. And so that's why I've always made it a promise to teach things at least once or to consult on the problem. Because what happens is you as an outsider may have a better theory about everything, but the guy on the inside has done this for 40 years.

 

And so the secret of being an outside analyst is you don't tell them what to do. You listen to people talk, tell them about their field, and you sit back and you do something which I find very difficult in principle, which is to be a passive. To speak person, right?

 

Tell me more about your business. And once you learn about the business, then I'm saying, well, this is why you did this. And so what the great question is, is a practical matter for the antitrust laws, for example, and so forth, was this an efficiency justification or was this a restrictive practice?

 

And lots of times when people tell you something, they actually think it's a restrictive practice, but it turns out to have an efficiency justification. They just didn't quite understand it. So your job is to explain their businesses to them after they explain their businesses to you.

>> Jon Hartley: Just to stop you there.

 

I'm curious what you think about the Coase theorem. So Ron Coast.

>> Richard Epstein: Yeah, I will tell you-

>> Jon Hartley: Property rights. And he kind of said that, you know, if you assign property rights people, even if it's not fair, it'll lead to an efficient outcome. And so, you know, even if you, for example, had some sort of cap and trade system where you gave all the rights to one company, for example, they could still trade them away, you know, and even though that may seem very unfair or maybe inexpropriative at some level, that they'll still be able to trade these rights away to others, leading to an efficient outcome.

 

And so there's. Okay, a lot of people point to the Clean Air Act and asset RA program during the 90s as being sort of successful example of this limiting sulfur dioxide emissions. And maybe spectrum options are sort of similar in that regard, I'm sure. What you think about the Coase term?

 

 

>> Richard Epstein: Well, first of all, Ronald and I were very close friends to the end of his life. And it's because he actually, he disliked intensely blackboard economics, as he called it, which meant that he became a kind of institutionalist. But Ronald did not understand his own theory and how powerful it was.

 

So it was kind of one of the ironies. The last time I had a meal with Ronald, he was about a hundred, and he sat down and he announced that my life has been a failure. I said, ronald first answers, anybody whose name becomes an adjective is not a failure.

 

So it's you, it's Marx, it's Freud. No, Einstein. Okay, Ronald, stop. But I said, now let me tell you why you're wrong. And he didn't quite get it. Ronald basically looked at a series of very sophisticated late 19th century English nuisance cases in which you had variations from the simple problem of one person, many huge amounts of pollution, to the land of another.

 

So one of his cases was, you emit some pollution, it hits a wall, and it bounced back and gets you into your own attic. The question is the guy who building the law responsible for the nuisance or not? And things like that. I told Ronald, I said, no, that's not what this is about.

 

That is one illustration of a larger problem where you have large numbers of people with different inputs and so forth and they're voluntary transaction barriers to voluntary transaction or cost and trying to figure out how to organize voluntary transaction. So what you have said is first you may have an ideal theory of what you want to do, but then measurement problems and similar issues arrive and your first best solution cannot be done.

 

So give you best a very simple kind of situation. You want to charge somebody for your services and the ideal way is to try to figure out what the marginal contribution that you have made by when you supply him, right? And then you start looking about this in terms of landlord tenant relationships and how many people run leases where that's what the landlord gets marginal contribution, nobody.

 

So what do you do? You take a percentage of sale. Why do you do that? Because that number you can compute by looking at the books. You figure out what a good guess is, whether it should be 2% or 5%. The other stuff is gonna completely break down.

 

So what you do is you give up on ideal theory in order to get something that's a bit more workable. And it requires people a lot of skill to know these industries and the norms and the ratios to get them right. Ronald did not think of the world that way, so he could never accept the generalization of his theory.

 

And what I told him, I said, Ronald, you may not know it, but I'm going to ask you one question. Why is there no second Coase theory now? 60, well, at this point, it was 50 years after he'd done the first thing, I said, the reason there is no second theory, Ronald, is you don't need one.

 

If you actually understand what you're talking about. You have this zero transactions cost world in your mind where everything instantaneously goes everywhere else. Then what you do is in this world, you sit down and figure out what's going to happen to people. And slowly you develop a series of rules and practices, all which are designed to do the following thing.

 

Minimize the total level of transactions cost in order to maximize the total amount of gain. And I said, if you do that, what you are doing, you can make this operational and you don't have to know everybody's value functions, right? If you want to be a Keynesian, you have to do everything under the sun.

 

And the aggregates, your method is much more efficient than his, which is why people always talk about your work instead of his work when it comes out to doing things on a level. And that is in fact. Right. So the Coase theorem essentially uses a mnemonic device, the zero transaction cost world.

 

But what you then do is try to get into the stuff in the transaction cost world. And Ronald was well aware enough about all of this that he would start to figure out what odd anomalous rules seem to be put into place which had this effect of essentially reducing transactions cost relative to gain.

 

Right, and that's a social welfare theorem, which is operational as opposed to this other stuff. So I've never been a Keynesian because I don't know what you do with these aggregates, particularly since the people in the aggregates are always acting individually. So take a simple thing. If you were to give people, everybody $100,000, say $1,000 like George Bush did, you don't have any idea what each individual is going to do.

 

Someone's gonna pay off past debt, somebody's gonna build the fund for his child to go to college, right? Somebody's going to go to a fancy restaurant. It just all varies out. So don't try-

>> Jon Hartley: [INAUDIBLE] people save it?

>> Richard Epstein: They'll save it in different-

>> Jon Hartley: Like [INAUDIBLE] ideas, people are supposed to be spending it, right.

 

And there's this virtual.

>> Richard Epstein: But that's all crazy, of course. There's no way you can figure out what people will do. And in fact you don't want to. The whole point is if I'm better off investing my money and somebody else is better off at confusing it, we don't want to force the two of us to take the identical ratios when it's going to benefit us, neither of us.

 

So you just, you want to make sure that all those decisions are disaggregated and he insist upon aggregating them. And this is not a small error, this is a catastrophic blunder. And you don't have to be a sophisticated economist to start realizing that talking about aggregates is a very dangerous situation because what was the phrase you used at the beginning of this talk?

 

Methodological individualism. Right.

>> Jon Hartley: And just to close up there, I'm just curious, you're, you're a self described libertarian, you're a big believer. Methodological individualism. This is no secret. I'm curious, what kind of libertarian are you? Are you Richard and, and this, are you a fan of the non aggression principle?

 

 

>> Richard Epstein: There's nothing wrong with the non aggression principle.

>> Jon Hartley: I'm just curious. What are. What would there in your mind, what would the limits on such a principle.

>> Richard Epstein: Let me. Let me just.

>> Jon Hartley: Theft, and are you an anarcho, the British?

>> Richard Epstein: I'm not. I'm a classical liberal.

 

 

>> Jon Hartley: What is the role of the state in your mind?

>> Richard Epstein: Let me sort of put it, the problem about being an anarcho-libertarian is you don't have a state. The bad guys will form one on their own terms. So it's a kind of a preemptive situation. And the basic difference between a classical liberal and an anarcho libertarian is a classical litus has the following general proposition.

 

You may be very careful about it, impose various kinds of limitations and taxes on individuals, so long as when you look at the pie in the aggregate, the individual who's so burdened is on average left better off than before. And so the argument, for example, about a flat tax with respect to general revenues and so forth and expenditures and is we can't think of any device which will fund the need for collective goods that has less disruptive effect than that.

 

And so that would mean tariffs are out as a revenue source. Right, because they're differential in terms of the way they go. The base is too small, the rates are too hot. So crazy. And so I've always been that. And so I wrote a book, you know, several articles about nobody could beat a flat tax.

 

And then you have special taxes for special benefits and special harm. And so you're not somebody who's an anarcho libertarian. Non aggression is certainly something that's in the principle. But Murray birthwise sort of is the only thing that you were worried about. So cartelization in his world is just fine, right?

 

And you don't believe that. So what happens is the way I treat it is, you ask me, what's the first move you made out of a state of nature. It would be essentially the control of force. But is that the only move you made? No. If it turns out we could then have another set of rules that allow us to have infrastructure, another set of rules that control monopoly abuse and so forth.

 

You may continue to make additional adjustments to the basic system that you now have at stage one or two, so long as the Pareto gain position holds. Now what happens? It's a system of diminishing marginal utility. The first moves are really going to be huge. Right? But by the time you get further down the road, you're not quite sure which way it's going to go.

 

And that's where you want lawyers. Our job is to decide cases that are inconsequential at the margin, so long as they don't mess up the core cases which allow us to organize civilization in the way we want. So basically I'm a tinker at the edges, but my most important contributions are telling people how you organize a world in which my services are not needed.

 

 

>> Jon Hartley: Richard, I really want to thank you for coming on. This has been a great-

>> Richard Epstein: My pleasure.

>> Jon Hartley: Conversation.

>> Richard Epstein: Okay, great. Thank you so much, Jon.

>> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast, an official podcast with the Hoover Economic Policy Working Group, where we talk about economics, markets, and public policy.

 

I'm Jon Hartley, your host. Thanks so much for joining us.