Regulation

Keep it Simple, Solons

|

Simple Rules for a Complex World, by Richard Epstein, Cambridge: Harvard University Press, 361 pages, $35.00

You remember Richard Epstein. He's the guy who wrote Takings, the book on compensation for government regulation of private property that Sen. Joseph Biden held up for the cameras during Clarence Thomas's confirmation hearings for the Supreme Court. Biden made it clear that Thomas's having read or, worse yet, having been swayed by that scandalous tome would have done more to disqualify him in Biden's eyes than being the consumer of hard-core pornography implicit in Anita Hill's testimony.

Biden was right. If Thomas has been influenced by Epstein–and some of his decisions on the High Court are eloquent evidence that he has been–then Biden and all other regulatory liberals are in for a tough 30 years (roughly how long Thomas intends to serve on the Supreme Court). Epstein's new book, Simple Rules for a Complex World, will give them even more cause to be afraid. Very afraid.

Epstein literally wants a revolution in the American legal system, turning it away from its heavy emphasis on government regulation as the solution for most social ills. He advocates a return to a simplified and modified version of the common law–judicial decisions applying "a set of simple rules capable of handling the most complex set of social relations imaginable, whether in the United States or anywhere else." In the wrong hands–say legislators or judges–this book could make Takings look positively soft-core.

Here's where Epstein comes from: "[I] think that permanence and stability are the cardinal virtues of the legal rules that make private innovation and public progress possible. To my mind there is no doubt that a legal regime that embraces private property and freedom of contract is the only one that in practice can offer that permanence and stability….

"In reaching this conclusion, I have been heavily influenced by the work of Friedrich Hayek….Hayek's major target was central planning…the question of whether government officials could ever acquire the information routinely imparted by prices to organize product and labor markets. Today there is little general sentiment…in favor of the collective ownership of the means of production….Instead the newer pattern is to preach the virtue of markets in the abstract, and then to insist that government regulation of private enterprises is necessary to correct the legion of supposed market failures that arise in complex market institutions….

"[T]his book [i]s a reply to the argument that regulation is normally desirable even in circumstances where government ownership of the means of production is not. In my view, there is no sharp dichotomy between government regulation of wages and prices, on the one hand, and government ownership, on the other. Rather, regulation takes certain elements from the owner's bundle of rights and transfers them to the state, where they again fall prey to the same difficulties that arose when central planning was defended on a grand scale. If the downfall of socialism comes from the inherent gaps in information available to public officials and from the inability of legal rules to constrain their self-interested behavior, the forms of modern regulation attacked in this book are subject to the same criticism."

"Too Many Lawyers, Too Much Law" is the title of the first chapter, and it's all downhill for lawyers and regulatory liberals after that. Epstein cites a recent study to the effect that each additional lawyer reduces U.S. gross domestic product by $2.5 million, and that the optimal concentration of lawyers in the United States is 60 percent of today's level. Epstein has some ideas on how to get rid of the need for some of these lawyers–his "simple rules" which, properly applied, could form a powerful analytical tool for legislatures to apply to new and old laws alike. There will still be lawyers after Epstein is through–you didn't think you could get rid of us that easily, did you?–but they will be more productively employed. Under Epstein's preferred legal regime, we would see no more technicians who spend their time becoming experts on the Internal Revenue Code, environmental regulations, or the Fair Labor Standards Act, to name just a few of the more uncreative ways lawyers today waste their time and their clients' money.

Epstein's first two rules set the stage for all that follows. The first is individual self-ownership. The second is the right to own property and defines how rights in property are acquired. As Epstein says:

"My first two rules [would do] a good deal to create order in the legal landscape. The first rule gives people control of their own lives; the second assigns each external thing an owner….[T]he common law rules of personal autonomy and individual ownership necessarily decentralize control of both human and material resources. No single person, no select group of individuals, can decide who is going to own what things or who is entitled to deal with whom on the transfer and use of labor or talents."

The next two rules are the freedom to make and enforce contracts and the right to protect the things you own from harm by third parties. When combined with the first two, they "establish what some might call a libertarian synthesis. They describe a world with strong and well-defined rights in persons and property, complete freedom of exchange and powerful protection against external threats."

Epstein recognizes, however, that the first four rules won't solve every legal problem. He creates a fifth rule to apply where two parties, each with certain rights, are thrown together in unavoidable situations not covered by a contract and one side is in a position to indefinitely hold out against the weaker side–if you strictly adhere to the first four rules. Epstein calls it the rule of "Necessity, Coordination and Just Compensation."

It covers a lot of territory, is the least simple of all the rules, and is probably the most difficult for the lay reader to understand. For example, "there are some situational monopolies that the law does not create, and whose occurrence it cannot prevent. In those circumstances–which first arose in cases of necessity–controlling aggression is but one side of the coin. The other side of the coin is the problem of coordination when one party is in a position to hold out the other for a huge portion of the potential gains from any contract. Here the task is to minimize the total distortions from two problems that often work at cross purposes with each other."

See what I mean? Epstein applies the rule to theoretical problems involving dying of thirst in a desert and joint ownership by mistake and to everyday problems like divorce, compelling specific performance of a contract, injunctions to protect against anticipated or threatened harm, and conspiracies against competition. I think he tries to do too much–any rule that can handle all that is not simple.

Take necessity–if I'm dying of thirst and you have water, this rule says I can refuse to pay the outrageous price you demand (even if I can afford it) and simply take the water. In turn, you cannot use force to keep me from your water and all the law will give you is "just compensation" from me for the water I took, i.e. the market price. Epstein distinguishes this situation–a bilateral monopoly where nobody but me is dying of thirst and I can get water nowhere else–from other cases of necessity like natural disasters where some merchants take advantage of shortages to gouge victims. There is no monopoly and the market–voluntary exchange–will quickly reassert itself.

Just compensation and bilateral monopolies are the keys here. There are bound to be many occasions where two parties have conflicting interests and a court is going to have to resolve them by balancing the competing interests, like divorce. By consent of both or at the choice of either? Epstein says neither and proposes "a system where the divorce takes place as of right, upon payment of just compensation for the release–alimony and support."

The sixth rule is directed at compensation for the harmful effects of government regulation:

"The current law fails to limit the use of government regulation under the principle of take and pay. A new start is needed, one that does not have as its mission preserving from constitutional attack as much of the regulatory state as possible….[T]he ONLY correct position is to recognize that ALL forms of regulation are subject to scrutiny under the takings clause. By design this position is meant to subject every form of government restriction to constitutional scrutiny….Any form of regulation thus requires compensation in cash for the losses inflicted (1) unless the regulation is necessary to prevent the kinds of losses that neighbors could enjoin under ordinary tort law principles…or (2) unless some compensation in kind is furnished to the party whose property is taken."

In the second half of his book, Epstein applies these simple rules to employment law, compulsory collective bargaining, employment discrimination, affirmative action (all taken care of by rules one and three), product liability, securities law, insider trading (rules three and four), and environmental protection (rules two, four, and six).

I won't go into detail on all of the practical applications of his rules, but their overall impact in all the areas listed above would be to reduce litigation. Reduce, but not eliminate. Other areas would probably see more litigation: defamation suits against the media, for example, where truth would be the only defense, not to mention the many suits against all levels of government whose regulations had diminished the value of private property.

The book would have its greatest immediate impact if legislatures would heed the lessons of the simple rules. From Epstein's first principle of government action, "Do no direct harm," to the rules themselves, performing a "Simple-Rules Analysis" (or an "Epstein Analysis") on proposed legislation should be the initial reaction of any thoughtful legislator contemplating a new law herself or confronted with a colleague's proposal.

As for regulatory liberals, they better hope that Newt Gingrich is too busy with his book tour or writing the sequel to his novel and Dick Armey too distracted with the burdens of replacing the tax code to read this book. A simple-rules analysis works just as well on existing legislation as on proposed.

The book's possible impact on the judiciary would not be as direct or immediate. Despite the activism of some judges, the judiciary is essentially passive in a way legislatures are not: Judges can only decide cases which come before them. They can't wake up in the morning and decide to change the law unless they happen to have a pending case that permits them to do so. Even then, they are subject to review by appellate courts. Moreover, unless they can find constitutional grounds to do so, they have to enforce the laws legislatures have passed–ill-conceived or not. Nevertheless, in the right case in the hands of a good lawyer, a simple-rules analysis will be a powerful weapon.

Epstein does not pretend that his simple rules address all of the legal issues confronting society, including those involving health care, church and state, education, and the military. The book features "nothing, in short about many of the issues that dominate political discourse today," Epstein says. Nevertheless, like the five lawyers at the bottom of the sea on the first page of Epstein's book, it's a good start.

But don't worry about us lawyers. It's still a complex world out there and you're still going to need us to apply these simple rules on your behalf the next time you're in a jam, for example if one of your competitors hires away your best employee despite a non-compete clause she signed. Or your neighbor decides that a backyard smelter won't really harm neighborhood values. Or your employer reneges on that bonus he promised, which lured you to move half way across the country. Or a local judge sues your television station for libel for filming him at a bar when he should have been on the bench. Or the person you bought your new home from lied when you inquired about roof leaks. Or you're sued for an automobile accident which really wasn't your fault at all, not at all. We believe you. You've been wronged. You deserve justice. And after you've purchased our allegiance in the form of an appropriate retainer, we'll represent you. Just like we always have.

Oh, by the way: Epstein hopes his simple rules will reduce our ranks by some 40 percent to reach our optimum number. That means there will be greater demand for those of us still left in the profession. So you may notice an ever-so-slight upward adjustment in our normal, customary, and ever-so-reasonable fees. See rules one and three.

Contributing Editor Michael McMenamin is a lawyer in Cleveland.