Tabarrok on Medical Patents

Over at Marginal Revolution, Alex Tabarrok has an excellent post on the intellectual property bar's latest efforts to propertize everything, no matter what the social costs, including perverse consequences for research and innovation.

"Property in Land and Other Resources" Is Now Available for Pre-Order

My new book, co-edited with Elinor Ostrom, Property in Land and Other Resources (Lincoln Institute 2011), is now available for pre-order at Amazon.com (here) for just $28.63. That's $6.37 (18%) off the cover price. According to the Amazon listing, the book will be published on November 28.

You can also purchase the book directly from the Lincoln Institute of Land Policy (here).

You can see the full Table of Contents, read Doug North's forward, and read Lin and my Introduction to the book here.

Why Isn't the Conversion of Public Property for Private Use a Compensable Taking?

The Taking Clause of the Fifth Amendment to the US Constitution provides, "not shall private property be taken for public use, without just compensation." The text makes clear that compensation is required for takings of conversion of private property to public property, but not vice versa. It's worth considering why the Taking Clause operates in only one direction, despite the fact that privatization of public property clearly imposes costs on the public.

Just last week, for instance, the US Supreme Court heard oral arguments in the case of Golan v. Holder,  concerning a federal statute that confers copyright protection on works already in the public domain (Congress passed the law to comply with the Uruguay Round Agreements of the WTO). Putting to one side the merits of the statute, it is clear that the act of privatizing works already in the public domain imposes costs on consumers of music and literature by limiting access and use. Why shouldn't those consumers be compensated for the costs they suffer as a consequence of the appropriation of their property? (This is not a novel question but in similar contexts throughout history. See, for example, E.P. Thompson's Whigs and Hunters, which chronicles the history of the enclosure movement in early eighteenth-century England.

Offhand, a few plausible answers (or parts of a single answer) come to mind:

(1) The framers of the Fifth Amendment were myopic because, when it was written and enacted, the costs (to the public) of privatization were relatively low because resources were, generally speaking, abundant relative to demand.

(2) Majoritarianism was then (but no longer) thought likely to preserve socially-valued common-pool resources. By contrast, Madison was explicitly concerned that majoritarianism might lead to widespread deprivation of private property.

(3) The costs of privatization are diffuse and thinly spread among the population. The transaction costs of providing compensation may exceed the value of the compensation received by each member of the affected public.

Modern scholars understand acts of privatizing the public domain as "givings," the obverse of takings. It remains unclear to me, however, why they should not be thought of simply as a taking in the opposite direction, especially when the resource's prior status as public property is well-defined and legally recognized.

New Books I'm Reading

Every year or two, UCLA legal historian Stuart Banner comes out with a great new book. The latest, American Property: A History of How, Why, and What We Own (Harvard 2011) is one of his best (though I seem to say that about every one of his books). This book may become a centerpiece of my Property Theory Seminar in the Spring.

My good friend Shi-Ling Hsu has just published The Case for a Carbon Tax: Getting Past Our Hang-ups to Effective Climate Policy (Island Press 2011). In it, he argues for a carbon tax as preferable to cap-and-trade, traditional regulation, or alternative energy subsidies for curbing greenhouse gas emissions because it is simpler to design, implement, and administer. His arguments are entirely persuasive. Although, I'm not sure it makes a carbon tax any easier to actually enact as a political matter. In fact, I'm not sure that policy makers (aside from the bureaucrats of the European Commission and, perhaps, the State of California) are ready to institute an effective climate policy of any kind.

Common Pool Resources (CPRs) v. Common Property Regimes (CPRs)

In the social science literature, the abbreviation CPR stands for two related, but distinct, phrases that are too often conflated: common-pool resources and common-property regimes. Yesterday, at a conference at NYU Law School on "Convening Cultural Commons" (about which I previously posted here), a small and short debate arose between two scholars I greatly admire, Lin Ostrom and Carol Rose, about the two types of CPRs. Carol, if I understood her correctly, suggested that the distinction is insignificant because common-pool resources inevitably are defined as such within an institutional context. Lin responded that resource attributes such as relative subtractability and excludability, are not institutionally determined and play a crucial role in determining whether or not a resource is a commons.

Because the exchange was brief and, basically, an aside to other issues being addressed at the time, I hesitate to make too much of it. But I must say I find Carol's position baffling. An institutional structure - whether common-property, individual private-property, or some other management system - obviously affects rates of  extraction/resource-depletion. But it does not affect subtractability which depends exclusively on ecological circumstances.* Ecological circumstances can/should affect the applicable institutions, for reasons explained by Hardin (1968), Demsetz (1967) and many others. But institutions don't alter the fundamental ecological conditions. Put differently, a subtractable resource remains subtractable whether the current rate of demand, under prevailing institutional structures, is either zero or very high. (This is why Ostrom's social-ecological systems framework quite rightly pays as much attention to ecological conditions as to institutions.)

*Institutions can affect excludability, if only indirectly, by affecting incentives to innovate technologies that, themselves, can enhance excludability, at least with respect to some resources. Thus, the invention of barbed wire in the mid-19th century enhanced excludability of lands in the western US, where lack of timber had previously made enclosure too expensive (Anderson and Hill 1975). 

Coming This November...

Harold Demsetz Comes Down from the Fence

Harold Demsetz, an economist I have always greatly admired, has written a somewhat  baffling article (here)  in which he attacks Coase's correction of Pigou's treatment of externalities in social-welfare economics. Demsetz's disagreement with Coase is summed up in a single sentence, which suggests that Demsetz himself has finally descended from his perch between the Chicago School of neoclassical economics and the New Institutional Economics, landing firmly on the Chicago side:

"Coase has treated the legal system and its courts as if they are parts of the economic system, when they are not."

 In a footnote expanding on the point, Demsetz adds, "The neoclassical model ... assumes that all resources are privately owned and that ownership is fully respected; there is no place in its deductions for the courtroom drama imagined by Coase." That, of course, is precisely Coase's problem with the neoclassical model, and why he rejected it in favor of a "new institutional" approach. Interestingly, just one or two pages later Demsetz himself rejects the assumption of complete allocation of property rights, when he argues, in a way perfectly consistent with Coasean analysis, that "[t]here is an efficient degree of ownership that generally is smaller than '100 percent.'"

As usual, Demsetz's article is full of insightful points and witticisms, but his attack on Coase misses the mark. Coase has never focused myopically on market failure as a category; indeed, in a brief 1964 article, Coase pointedly argued that the category of government failure should be every bit as important in economic models. Moreover, Demsetz's assertion that the legal system is not part of the economic system is mind-boggling, especially coming from someone who has spent much of his career writing about property rights and other legal institutions as they affect economic activity.

More on Merrill and Smith's Attempted Resurrection of the In Rem/In Personam Distinction

In yesterday's post on Thomas Merrill and Henry Smith's new article on Coase's conception of property (see here), I noted my strong disagreement with their efforts to resurrect the in rem/in personam distinction the common law inherited from Roman law, but which fell into obsolescence during the first part of the twentieth century. However, I did not present many of my reasons for opposing a return to the in rem/in personam distinction because I wanted to keep the focus of that post on Merrill and Smith's analysis of Coase.

So, just in case anyone's interested, I am embedding below a brief essay I drafted a few years ago, but never completed or published, in response to a few earlier articles by Merrill and Smith complaining about how property is treated in Law & Economics (prominently including Coase's theories) and advocating a return to the old in rem/in personam distinction.

In Rem In Personam Distinction

Merrill and Smith on "Making Coasean Property More Coasean"

See the full paper here. The abstract:

In his pioneering work on transaction costs, Ronald Coase presupposed a picture of property as a bundle of government-prescribed use rights. This picture is not only not essential to what Coase was trying to do, but its limitations emerge when we apply Coase’s central insights to analyze the structure of property itself. This leads to what we term the Coase Corollary: in a world of zero transaction costs the nature of property does not matter to allocative efficiency. But as with the Coase Theorem itself, the real point is the implication for a positive transaction cost world: we need to subject the notion of property to a comparative institutional analysis. Because transaction costs are positive, it is no accident that property is defined in terms of things as a starting point, that uses are grouped under exclusion rights, and that in rem rights are widely employed: these features of property receive a transaction cost explanation. Simple lumpy packages of property rights motivated by transaction costs form an important baseline that furnishes presumptive answers to bilateral use conflicts. A more thoroughly Coasean approach points back to a picture of property more like the traditional one furnished by the law.

The gist of their argument is almost certainly correct: standardization of recognized property forms may well serve to economize of transaction costs (especially those relating to enforcement of title). It's easy to imagine Coase concurring with the "Coase Corollary;" it's already implicit in the "Coase theorem." If it doesn't matter which party has the property rights (in a counterfactual world of zero transaction costs), then the "nature," scope, or extent of those rights is hardly likely to matter either.

I continue to believe, however, that Merrill and Smith are (as they have been in previous articles) less than generous in attributing to Coase the claim that property rights are nothing more than "ad hoc bundles of government-prescribed use rights." It's certainly true that Coase does not share Merrill and Smith's deep (almost obsessive) appreciation of the in rem nature of property rights (that is, that property rights are good against "the entire world" -  a legal conceit if ever there was one); and perhaps he does not share their belief that the right to exclude  is the most important property right (I do not claim to know whether he does or not). There is, however, no particular reason to attribute to Coase the belief that property rights are anything other than what common-law courts say they are. Indeed, at one point in their article Merrill and Smith "seriously doubt that Coase entertained the notion that property rights are purely ad hoc assemblages of rights and privileges, like ingredients at a Mongolian barbecue restaurant." If so, then why do they keep attributing to him precisely the attitude they doubt he entertains? And if they don't believe he entertains it, then what attitude do they believe he actually holds about property? As it is, they seem to be attacking a straw man and calling him "Coase."

As in earlier articles, Merrill and Smith suggest that Coase was somehow infected by the Legal Realists' notion of property as a "bundle of rights," although once again they fail to identify the vector of contagion. Nor do they make a convincing argument that the "bundle of rights" view of property is either incorrect or pernicious. They complain that it "obscures," in various ways (all of which are debatable), the in rem nature of property, but then they concede that the "bundle of rights" conception of property is "not logically incompatible with the understanding that property rights are in rem." I believe that last statement is correct. Moreover, the main, positive contribution of their article - the argument that legal limitations of property ownership to a relatively few standardized forms may be efficient on a comparative transaction cost analysis - does not seem to depend on a conclusion that the "bundle or rights" view of property is erroneous or pernicious.

For many reasons (too many to go into here), I strongly disagree with Merrill and Smith's efforts to resurrect (from what is, in my opinion, a deserved obsolescence) the in rem/in personam distinction, and with their desire to elevate exclusion as the sine qua non of property (I just don't see why the right to exclude is necessarily more important or valuable to every owner than rights to alienate, possess, or use). But I will restrict myself here to just two objections that bear directly on their reception of Coase's work:

(1) Whether or not property rights are in rem has little or no bearing on the resolution of boundary disputes (among other types of property conflicts).

(2) Contrary to Merrill and Smith's assertion, recognizing the in rem nature of property does not render "utterly implausible" Coase's notion that land use conflicts invariably involve reciprocal harm (i.e., social costs).

Consider both objections in light of the famous case of Ampitheaters, Inc. v. Portland Meadows, 184 Or. 336 (1948). In that case, lights from a racetrack (used for evening racing) interfered with the operation of the neighboring drive-in movie theater. The racetrack had taken some steps to reduce the light emissions; the neighboring theater had done nothing to protect itself. The court ruled in favor of the racetrack, finding that it was not liable for a nuisance because the drive-in theater constituted an "abnormally sensitive" activity.

Both parties in that dispute were fee simple absolute owners of their respective lands. Even if we were to assume for the sake of argument that property rights were in rem, I don't see how that fact helps us. Does it avoid the problem before it arises, resolve the conflict (out of court) after it arises, or predetermine the outcome in court? Perhaps Merrill and Smith would argue that in rem would have resolved Portland Meadows (and similar cases), assuming that in rem rights entail the ad coelum maxim, which they mention in passing in their new paper. According to that maxim, property boundaries extend upwards to the heavens and down to the center of the earth. If that maxim were treated as a rule of property, stemming (however obscurely) from the in rem nature of property rights, the court in Portland Meadows might have been compelled to rule in favor of the drive-in theater because the light from the racetrack crossed the boundary between the two properties.

That solution would problematic in several respects. In the first place, no one to my knowledge, including Merrill and Smith, has argued that the ad coelum maxim is a necessary concomitant of in rem rights. Moreover, while often touted in dicta by common-law courts (far more in the US than the UK), the ad coelum maxim has never been consistently applied as a legal rule, let alone as a necessary concomitant of in rem rights. Finally, and most important for present purposes, the Supreme Court expressly disavowed the ad coelum rule in US v. Causby, 328 US 256 (1946) on grounds of - wait for it -  transaction costs (although the Court did not refer to them as such). The Court concluded that the ad coelum rule had "no place in the modern world" because it would have created insufferable (cost) barriers to civilian aviation. (On the problematic history of the ad coelem maxim, see my new paper on "Property Creation by Regulation" and Stuart Banner's marvelous 2008 book, Who Owns the Sky?).

Finally, returning to my second objection to Merrill and Smith's claims about the supposed in rem nature of property, in light of the outcome of Ampitheaters, Inc. v. Portland Meadows, it is clear that the owner of the drive-in theater was harmed by the court's decision. It had to either invest in high fences to block the light, pay the race track not to use its lights, move, or close down. Presumably, it chose the least expensive of those options, but every one of them entailed substantial costs. Now, consider if the court had come out the other way. In that case, the race track owner surely would have been harmed. It would have had to invest in better fencing to keep the light from crossing over the boundary, paid the drive-in theater to become an enclosed theater (or something like that), moved, or shut down. Simply put, the harm truly was reciprocal, and it's difficult to see how recognizing the in rem nature of property could possibly have changed that. Either way, one party or another is being prevented from doing what they want to do, and that is always costly, in the strict economic sense of that term, regardless of the ethics or legality of their wants.

We are left with the none-too-surprising conclusion that Coase was right! And just to end on the same positive note with which I began this post, Merrill and Smith are almost certainly right that the standardization of property rights, possibly even including the legal fiction of property rights good against the entire world, may serve to reduce transaction costs and maximize the social product across the run of foreseeable conflicts. I'm not sure that conclusion is "more Coasean," but it certainly is Coasean.

Revised Working Papers on SSRN

I have revised and updated versions of two working papers on the Social Science Research Network. They will both be published later this year in Daniel H. Cole and Elinor Ostrom, Property in Land and Other Resources (Cambridge, Mass.: Lincoln Institute of Land Policy, 2011):

"The Variety of Property Systems and Rights in Natural Resources" (with Elinor Ostrom) (available for download here).

"Property Creation by Regulation: Rights to Clean Air and Rights to Pollute" (available for download here).

Private Property Claims in Parking Spaces on Public Streets

The New York Times has the story (here) of how residents who go through the trouble of clearing snow from parking spaces claim a labor-based, temporary "right" to those spaces, which they mark with orange cones, potted plants, lawn furniture, or just about anything else imaginable. The purpose of the scare quotes in the last sentence is to indicate that the term "right" is being used in a very loose sense; it is not at all clear what party, if any, has an enforceable "duty" not to take the parking space. The "rights" at issue are really in the nature of extra-legal claims based on presumed social norms (or even, dare I say it, natural law).

Are such claims enforceable? Well, according to the New York Times story, in South Boston such claims are legally authorized for up to 48 hours after a snow storm. But it's not clear how strictly that limitation is enforced. In any case, it's doubtful that the claimed right to a parking space could be enforced in a court of law. But such rights often are self-enforced by the claimants, e.g., with threats of slashed tires, broken mirrors, or other acts of retribution, which themselves may be technically illegal, if difficult to enforce. One problem of self-enforcement, of course, is the heightened risk of conflict escalation including the potential for violence.

I don't know of any empirical studies that have investigated the prevalence of temporary private property claims in public parking spaces after snowstorms. Certainly, they have become a normal feature in various neighborhoods in many cities subject to significant snowstorms. It would be interesting to learn just how prevalent the norms are, how they are similar or differ in structure and enforceability from one city (or neighborhood) to another, and what legal acceptance, if any, they have attained in various jurisdictions.  

Thatcherism on Steroids in the UK

I previously posted (here) about the Tory/Lib Dem Coalition's plan to privatize some of the UK's national forest reserve in order to help bring down the public debt. Today's The Guardian reports (here) that the privatization might well include all state-owned English trees. Not even Baroness Thatcher ever contemplated such a thing. I don't know whether Terry Anderson and other "free-market environmentalists" are advising the current UK government, but the idea is a bad one for a whole hosts of reasons, only some of which are addressed in the article.

The article's author John Vidal expresses concern that foreign interests might buy up all the state timberlands and clearcut them for use as renewable energy or to exploit subsurface resources, including coal. At first glance, this seems far-fetched. After all, economic theory suggests that private woodland owners should conserve (not preserve) timber resources to maximize their long-rune economic value. However, as the Canadian economist and mathematician Colin Clark demonstrated in a couple of articles he published in 1973, complete exploitation of a scarce resources might be an optimal strategy under some circumstances. And there is a good deal of empirical evidence, from both the UK and the US, of private timber owners doing exactly what most economists say they would never do. Indeed, the UK's Forestry Commission was founded in 1919 precisely because timber harvesting on private lands was close to denuding Britain of trees.

The forests of largest concern, when it comes to privatization, are those with the greatest public values attached to them, which would surely include ancient woodlands and sites of special scientific interest. For those sites in particular, privatization would likely be a disaster because, even if private owners can be expected to engage in conservation, their conservation decisions will seek to maximize their private utility, not public welfare.

One way that at least some of these concerns might be ameliorated is for the government to issue new regulations on harvesting privately owned timber. However, such regulations would reduce the market value of the timberlands at auction by some uncertain amount, which would be contrary to the government's expressed concern with paying down the debt.

Public opposition to the wholesale privatization of forest reserves is growing. And politics rather than economics will, as always, have the final say. I remain cautiously optimistic that this short-sighted plan to privatize - corporatize would probably be a better word - the UK's entire woodland patrimony will be aborted.