The Libertarian Quartet

Richard Epstein from the January 1999 issue

(Page 2 of 3)

The case for this libertarian quartet is so powerful that it would be foolish for anyone to mount a frontal assault on it. But that is just the point. The opponents of freedom of contract never take so silly a position as to urge the prohibition of
all contracts. Rather, they make selective claims of market failure that are said to justify various forms of state intervention. Barnett's defense of this libertarian quartet is underdeveloped because he does not explicitly address and reject the focused attacks on freedom of (and freedom from) contract that form today's conventional wisdom.

On the top of that list stand anti-discrimination laws, which forbid the use of race, sex, age, disability, and sexual orientation (for starters) as reasons for refusing or failing to do business with someone. I have already climbed to the top of the rafters to denounce these interventions in competitive labor markets as mischievous. We would have more vibrant labor markets by scrapping the entire government apparatus in favor of the 19th-century common law regime that allows people to refuse to deal for good reason, bad reason, or no reason at all. Barnett has to agree with this conclusion, so it would be nice to see him call outright for the repeal of Title VII of the 1964 Civil Rights Act and similar legislation.

That position is not necessarily conservative, since (as I argue in Forbidden Grounds) repealing anti-discrimination laws would undermine the color-blind norm in private competitive industries--a norm that is supported by such prominent conservative thinkers as Abigail and Stephan Thernstrom--and pave the way for private affirmative action programs, however foolish they may seem or be. The decentralization of the affirmative action problem would allow individual firms to take advantage of local knowledge. Research universities, for example, might have different thresholds for affirmative action than regional colleges. Or affirmative action might be introduced at lower cost in the social sciences than in the physical sciences. Allowing different levels of affirmative action for different institutions would help defuse the chronic political tension from pointless presidential commissions that search for a misguided social solidarity on matters best left to the multiple judgments of separate firms.

But on this question Barnett gives us only silence. Ditto for wrongful dismissal suits (detailed in such gruesome particularity by Walter Olson's The Excuse Factory), collective bargaining laws, minimum wage laws, equal pay, family leave, and mandatory pension laws--all mistakes in his view and mine. Opponents of contractual freedom trot out arguments of exploitation and market failure to justify their schemes. To make good Barnett's claim that freedom of and from contract represents sound social policy requires a close, patient analysis of the proposed reforms and the institutional dislocations they cause. Barnett's Olympian detachment sounds ecumenical, but it does not take the fight to where his political opposition lives. His elegant theoretical defense can be airily dismissed by people who assert that this finespun theoretical structure could not survive the pounding it would receive in the real world.

Barnett's adversaries are not solely on the left. One commonly cited source of market failure is the inability of firms to take into account safety risks when they set working conditions for their employees. Enter the Occupational Safety and Health Administration, with its bureaucratic imperatives, nosy inspectors, and mind-numbing regulations. Philip Howard achieved massive and deserved publicity with his book The Death of Common Sense by pointing out the absurdities this system has wrought. One unintended but powerful consequence has been to disrupt local safety regimes with external standards imposed by people who mistakenly think that capital improvements are more effective than worker cooperation in achieving safety objectives.

Yet Howard's book fizzles in the end, because he is unable to rid himself of the thought that OSHA has a useful role to play in workplace safety. He therefore veers away from the evils of inflexibility by embracing a common-sense discretion that allows officials to waive OSHA's rules based on local conditions. But in so doing Howard substitutes one set of vices for another. Which firms get the waivers, and why? Discretion is often exercised in arbitrary and capricious ways that cannot be ferreted out by the crude devices available to the legal system. One connected firm gets a waiver, and it then lobbies fiercely to keep its key competitors from getting the same relief. Barnett could have advanced his case mightily by pointing out that a system based on freedom of contract avoids these multiple embarrassments by reducing tout court the opportunities for political intrigue. And he could have referred to economist W. Kip Viscusi's solid empirical studies, which show that firms face the lash of a hefty wage premium (even with OSHA in place) if they do not tend to worker safety.

My first criticism of Barnett, then, is that he does not tackle head on his chief adversaries in those arenas where the quartet of libertarian principles is able to ward them off. My second criticism cuts in the opposite direction. Barnett does not satisfactorily defend the quartet as the outer limit of state intervention--though, to his credit, he is well aware of the challenges that are raised in both moral and economic theory to this four-part approach.

The first challenge involves the so-called cases of necessity, wherein a person in imminent peril wishes to override the absolute right of an owner of private property to exclude other individuals. The basic virtues of a rule of exclusion for land and chattels is well understood. Without exclusion, cultivation, development, and conservation of natural resources are curtailed, because B can always reap or destroy the crops that A has planted. The necessity exception, endorsed by virtually every legal system that proceeds by the common law method Barnett defends, does not allow B to enter A's land willy nilly. But it sometimes does permit entrance if B must take refuge from an ocean storm, subject to his obligation to compensate A for any loss thereby inflicted. It might not let B enter A's cabin if A is present, but it would allow him to break into A's unoccupied cabin in order to forestall death from starvation or cold, just as it would allow B to enter A's land to save the life of C.

As these examples show, the exact scope of the privilege is hard to define because so much depends on the messy balance between B's need and the strength of A's property interest. But we have to fight through the examples to reach rough cloture. To say that B may be "morally" entitled to take A's resources while denying that B could be "legally" entitled is not very helpful. To say that a slippery slope could lead to the unacceptable expansion of the privilege (which has not been the case) is to ignore the dangers of a rigid rule that allows no privilege at all. Some limitation on liberty and property is recognized in practice. Barnett is mistaken to conclude that the principle of absolute exclusion is deductively necessary. A more nuanced concern with the demands for social utility under extreme conditions would lead to a better result.

The necessity cases represent only the thin edge of the wedge. The greater challenge to the libertarian quartet arises when the stubbornness of a single individual can prevent the implementation of a collective goal that advances the subjective interests of all parties, especially maximizing the output of common-pool resources. A group of landowners sits atop a valuable pool of oil and gas. Many people own property along a river or stream. Many fishermen or hunters have access to wild fish or birds. In each case, the rule of first possession is inadequate to stop the premature consumption of valuable resources. From the earliest times, legal systems have responded to these risks by adopting systems of common property that operate side by side with systems of separate property. Often these common systems are customary in origin, as with the rules that govern rivers and beaches. Sometimes they are developed by painful experience, as with statutory restrictions on groundwater use, fishing, and oil and gas exploration.

In each of these cases, the pattern runs roughly as follows. When resource utilization is low, people see great merit in a rule of capture, which is cheap to enforce and gives clear title to the first possessor. But when utilization rates increase, the first possession rule leads to premature and wasteful efforts to gobble up resources before others do. The capture rule for groundwater yields to some mushy regime of correlative rights and duties. The fishery is subject to catch limits. Oil and gas exploration is governed by spacing and unitization rules that prevent overexploitation. In each of these cases there are smart ways and dumb ways to proceed after the first possession rule is abandoned. But the strengths and weaknesses of the various approaches have to be examined directly. It simply will not do to assume that the capture rule, with its enormous defects, always comes out on top simply because the alternatives are subject to error.

The same difficulty with the libertarian quartet arises with the provision of classic public goods: common carriers, street lights, lighthouses, and the like. Barnett is very skeptical of taxation and regulation because they run smack into the problems of knowledge, interest, and power with which he is rightly concerned. But as with natural resources, it is wrong to assume that the imperfections of the libertarian quartet are smaller than those of some collective solution.

The requirement that common carriers serve all comers (explicitly overriding freedom from contract) is of very old origin, and it represents one possible response to the question of monopoly power. Even today, the strongest defenders of competition in the telecommunications market recognize that some form of regulation is necessary to secure interconnection (with appropriate access fees) between the local exchange carrier that controls the last mile of wire and the long-distance carriers that compete with each other. Volumes could be written about mistakes in the design and implementation of the 1996 Telecommunications Act. But the one objection that does not hold water is the idea that businesses with a legal or de facto monopoly should have the absolute power to exclude.

Barnett does not deal with these ex-amples directly. Rather, he notes, correctly, that the mere presence of a coordination problem does not justify the use of government intervention to whip recalcitrant participants into line. But that skepticism can be incorporated into a more sensible view that weighs the gain from overcoming the monopoly problem against the administrative costs of putting some particular solution into place.

Barnett engages in a calculation of that sort when he relies on economist Ronald Coase's famous 1974 article, "The Lighthouse in Economics," which attacked the orthodox view denying the ability of private firms to provide lighthouses. The beacon so provided has been called a public good that no one will pay for if others will provide it anyway. Since all self-interested parties can take the position of free-riders, the lighthouse will never get built. But it turns out that it does get built, and the fees for it are collected not as ships sail by on the open sea but when they dock at nearby ports.