Friday, February 18, 2011

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.

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