Think about the oldest and most familiar principles of American law, property and proportional liability, in a new and surprising way, and learn to apply economic reasoning to an especially important and interesting aspect of life.
Erasing the Bright Red Line
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Property and Liability: An Introduction to Law and Economics
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Property, Utility and Technology
The concept of property is developed in two new directions. One concerns the problem of eminent domain and evokes the ancient conflict between individual rights and collective needs – in what circumstances, and to what extent, should private property be protected against uncompensated taking by government? How do the different theories of property considered earlier each answer this question? The other asks how voluntary exchange can be organized when technology makes it easy for people to take others' property rights without compensation. If existing rights are insufficient to prevent these takings from occurring on a large enough scale to make voluntary exchange impossible, new kinds of property rights are needed to encourage efficient levels of production and exchange. This is illustrated by the problem of intellectual goods and the new forms of property that have evolved over centuries to make exchange in ideas possible.
Conoce a los instructores
Richard AdelsteinProfessor
Department of Economics
Hi, everybody. Welcome back.
Last time, I outlined what I call the Bright Red Line, that for the framers of
the Fifth Amendment. Characterize the distinction between an
eminent domain taking that requires compensation and a police power
regulation that doesn't. The red line was drawn at physical taking
of the object. So, if the government takes actual
physical or legal possession of the object, that's an eminent domain taking
that requires compensation. But on the other side of the bright red
line, if government merely regulates the use of an object, while leaving
possession of the object in the owner, then it's not a, an eminent domain
taking, instead it's a non-compensable police power regulation.
Let me offer an example of the way in which the courts enforced the bright red
line through the nineteenth century. It's a famous Constitutional case called
Mugler v. Kansas, and it concerns a brewery that
was built by Peter Mugler in 1877 in Salinas, Kansas.
Here on the slide you can see a picture of several operations in a 19th-century
brewery. We might imagine that Mugler's brewery in
Salinas looked something like Like this. When Mugler built the plant and got it
running, evidence of his trial more in just a moment, showed that the brewery
was worth $10,000, quite a bit of money, I might say, in 1877.
But in 1881 Kansas went dry, that is. it prohibited the production and sale of
beer, wine and spirits anywhere in the state of Kansas but it did not take title
or ownership of the brewery itself. But because the brewery now couldn't be
used to brew beer and indeed couldn't be used for many much in its stead, most of
the equipment in the brewery had to be sold for scrap and the property lost a
great deal of its value. So once the prohibition statute was in
place, the brewery that had been worth $10,1877 had now been reduced in value.
Down to a mere $2500 or head loss 75% of it's value.
Mugler argued that taking so large a proportion of a value of his property
essentialy amounted to a taking. He argued that the fifth amendment was
put in place precisely to guard against the situation that had happened to him.
That is that the state, in pursuit of what might be its lawful and proper
objectives, had taken action against Mugler's property and reduced the value
of that property substantially by 75%. Mugler argued that states ought not to be
able to pursue their aims in this way, and that the only way to protect people
like himself from ruin as the state pursued its lawful objectives, was to
provide that when, in fact Value is diminished at such a level as it was in
his particular case by what would ostensibly be a regulation, that to
protect Mugler and others like him, the state ought to pay compensation.
In this case, $7,500 for the lost value of Mugler's property.
But when Mugler's case came before the Supreme Court, the court denied his claim
in an opinion by Justice John Marshall Harlan the first, who is the grandfather
of the Justice John Marshall Harlan II, whom we saw writing the majority opinion
in the MacArthur versus California. Harlan I was a famous and great judge,
he's most famous for his opinion, his lone dissent in Plessy versus Ferguson.
A case dealing with segregated railroad cars in the South, in the early part of
the 20th cent, excuse me in the late part of the 19th century 1896.
And Harlan is famous in his dissent for writing that the constitution is color
blind. That in fact it can not count in then
separate facilities for African-American people and for white people, an opinion
that was 50 to 70 years ahead of it's time.
But in this particular case Harlan wrote, that despite the destruction of three
quarters of the value of Mugler's quiver, since Kansas did not physically or
legally take Mugler's property from him. This was not a compensable taking, but it
was instead a non-compensable police power regulation, and that in principle
Mugler would have to suffer the loss of three quarters of the value of his
property so that the state of Kansas could pursue its prohibition policy.
A very harsh ruling, one would think. Indeed, after the Mugler ruling,I think
not because of the Mugler ruling, but after the Mugler ruling as we said
earlier in the course, a newer theory of property rights, the one associated with
the metaphor of a quiver of arrows was being developed.
In the United States, one of the principle theoreticians behind the new
view of property, was the economist Richard T.Ely, who was the first
president of the American Economic Association, a progressive economist, a
christian socialist, and a utilitarian, a benthamite.
But despite being a utilitarian, he was no friend of aggressive government.
[UNKNOWN] idea of conceptualizing property as a bundle of sticks or quiver
of arrows has now been giving the game conceptional severance.
That is we sever each of the different property rights associated with an
argument. Conceptually from each of the other
property rights that are associated with the object which allows us conceptually
to treat the arrows as separate pieces of property, if you will.
This was Ely's idea and Ely argued that every regulation of use of property
amounts to the taking of an arrow. The value of which, he argued, should be
fully compensable. So indeed, though he was a utilitarian,
he argued for view of property that would make it more difficult for the state to
use the police power without compensation and would tend to push them toward the
emminent domain power. which requires compensation, even when
the State's regulation can be said only to have taken a single arrow, however
valuable it might be, from the quiver of a, of a property owner.
Ely was a friend of the great Supreme Court Justice Oliver Wendell Holmes.
And when Ely wrote his theory in a book published in 1914, while the book was
still in manuscript, he sent a copy to his friend Oliver Wendel Holmes, who was
then sitting on the Supreme Court. And Holmes read Ely's treatise and was
much impressed by it and thought it was fiulled generally with good sense.
And so not too many years later, Justice Holmes got the opportunity to put Ely's
theory of conceptual severance and its relation to the takings clause to the
test, in a very famous case called Pennsylvania Coal Co.
v. Mahon, decided in 1922.
Here's a diagram that indicates what the problem in the Pennsylvania Coal case
was. The Pennsylvania Coal case owned a piece
of land, which I've delineated in the, in the drawing as lying between these two
dotted lines. Under an ancient commomn law doctrine,
ownership of land was assumed to include ownership of everything that was beneath
that plot of land all the way down to the center of the earth.
And everythig that was above that plot of land all the way to the edge of the
universe. So if you bought a plot of land, you got
more than simply the right to walk on the surface.
You also got rights to everything that was below the land down to the center of
the earth, and you got rights to the airspace above the land, in principle out
to the edge of the universe. And so, some time well before the case
itself arose, the coal company which owned all of the rights to its pieces of
land, to this particular piece of land, decided that it was not interested in
mining the coal underneath the surface of the land for several years.
As a result, it sold the surface rights of the land to a couple called the
Mahons, who built a house on the surface of the land.
This means, as we've seen, that the coal company had full property rights to all
of the land below the surface down to the center of the earth.
What had now severed the property rights relating to the land from the surface
until the edge of the universe. It had severed those property rights to
the land, and sold them to the Mahons. Presumably the Mahons [COUGH] knew what
they were purchasing. And they got a better price on the
surface rights then they would of had to pay, if they were purchasing the entirety
of the quiver of arrows relating to that plot of land that was owned by the coal
company. But the Mayans knew that the coal company
might someday enter its land underneath their house, mine the coal, and that this
would put the Mayan's house in some danger.
So this situation obtained for many dec, not many decades I suspect for, but for
several years until the state of Pennsylvania toward the end of the
nineteenth century experience some growth And many cities in pennsylavnia began to
expand out into the edges of coal fields. If the coal were mined under these
expanding cities, then houses or other buildings which were built over the coal
mines which were now being used, were in some danger of collapsing due to the
subsitives. As it were, that is, when the coal was
dug out from the, from the land underneath the buildings.
The land is weaker and can't support the buildings.
And so in 1921 the legislature of Pennsylvania passed the aptly named
Kohler Act which prohibited the mining of coal below dwellings or other related
buildings. And by prohibiting the mining of coal
underneath the dwelling, the Kohler Act reduced the value of the coal company's
mining rights, the property rights that it retained to the land beneath the
surface, to zero but it did leave the ownership of those subsurface rights in
the company. Notice that this is not a reduction of
the rights of the coal company close to zero.
It's a reduction of the rights of the coal company to zero.
Because under the terms of the act, it's not possible for the coal company even to
enter its land. That is to say to dig in the land
underneath the man's house. So whether they mine coal, or not.
The coal company can't do anything with its land because it can't physically
enter the land at all. And if it tried to sell that land, that's
the right that it would sell to any buyer.
So any buyer would not have the right to enter the land at all either.
So the ownership in this case, in, in practice, turns out to be completely
abstract. The coal company owns the mining rights,
that is, the right to enter the land from below, but now the coal company has said
it can't use those rights. And since there are no other rights of
value associated with that land, then in fact the company has lost the full value
of its land. And so, much like Mugler, but with what
the coal company thought was an even stronger case, it went to the Supreme
Court and argued that although ownership of the land had been left in the company
by the Cohler act, the effect of the Cohler act was to completely destroy the
value of the land. And the Kohl company argued, as Muggler
had argued, that the state, in pursuit of it's legitimate objectives, ought not to
be able to use the police power in this way.
If they use the power that they have to destroy the value of someone property
completely, the Kohl company argued, then this should elevate the action to a
compensable taking, within the emminent domain power.
And when he went to the Supreme court with his claim, the court agreed with
him. In opinion written by Justice Holmes, the
court accepted Ely's theory of conceptual severance.
It noted that the Act effectively destroyed all of the value of the
company's property right, just as if the legal title to that land had actually
been taken by the government. Even though in this particular case that
had not in fact occurred. And, agreeing with the coal company
Holmes wrote that in such a case the police power cannot shield the people
from paying for the value of the rights they take.
Holmes didn't doubt that the Kohler Act was a wise piece of legislation.
He didn't doubt that the benefits for the people of the state of Pennsylvania, that
would flow from the polar act, exceeded the costs that would be imposed upon
others in Pennsylvania by the imposition of the polar act.
But despite this balance of greater benefits over lesser costs, Holmes argued
that it was unfair to concentrate those costs on the coal company and its small
number of fellows in the way that this act actually did.
And, therefore, this act, despite the fact that it left the ownership of the
Sub surface rights in the coal company, this act would not be characterized as a
mere regulation in the police power. But as a taking in the imminate domain
power, that would require full compensation to the company for the value
of the mining rights that it had lost. As a general rule Homes said, in place of
the bright red line, if a regulation goes too far, it will be re, recognized as a
taking . In this case, the regulation took 100% of
the value of the coal company's property. Holmes however doesn't say how far the
legislation has to go before it will be recognized as a taking.
So we don't know for example, whether Holmes would have decided Mugler verses
Kansas differently than the court actually did.
Did the 75% diminution of value of Mugler's property go too far?
And thus would it be characterized as an imminent domain taking?
Or, does eminent domain in cases like this require a complete or almost
complete deprivation of the value of the property rights, as was the case in the
actual Pennsylvania coal situation? Holmes doesn't say he simply has risk
case decided as an eminent domain taking. And puts out the general vague rule that
if a regulation goes too far, it will be recognized as a taking.
And so, in doing this Holmes erases the bright red line, and offers no clear
alternative rule in it's place. After 1922 it was no longer the case,
that an imminent domain taking would require the actual physical or legal
possession of the property by the government.
After Pennsylvania Coal it was possible for an imminent domain taking to be
found, even in a situation where the individual obtained his property.
But there was no clear rule any longer after the erasure of the bright red line
to allow courts, and indeed citizens in general, to distinguish those government
actions that would generate a requirement of compensation And those government
actions that wouldn't. And as we'll see, this generated decades
of chaos in the supreme court's decisions in cases involving the 5th Amendment's
takings clause.
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