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Richard Epstein on Property Rights, Law and Economics | Hoover Institution · The Capitalism and Freedom in the Twenty-First Century Podcast

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  [MUSIC]
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  >> Jon Hartley: This is the Capitalism and Freedom in the 21st Century podcast,
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  an official podcast of the Hoover Institution Economic Policy Working Group.
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  Where we talk about economics, markets and public policy.
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  I'm Jon Hartley, your host.
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  Today my guest is Richard Epstein,
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  who's one of the most cited legal scholars of the 20th and 21st centuries.
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  He's a longtime professor at the University of Chicago and
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  New York University Law School.
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  He's also the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.
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  He's also the author of many books, including his Bang.
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  The Classical constitution, released in 2014.
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  Welcome, Richard.
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  >> Richard Epstein: It's great to be here.
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  Thank you so much for having me, Jon.
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  >> Jon Hartley: So I want to first get into your early life.
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  You were born in New York City in 1943, when World War II is still happening.
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  Your parents were in the medical profession.
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  How did you first get interested in law profession?
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  >> Richard Epstein: Well, I mean, they were, but they were entrepreneurs as well.
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  My father was a sole practitioner and it was very common in those days for you
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  to take it basically in a semi attached house, redo the first floor into offices.
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  And in my case, my father was a radiologist, so we had X ray machines and
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  so forth.
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  My mother ran the office and I would watch them run upstairs for lunch and
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  then fall downstairs again.
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  And I began to realize very early on that whatever they were doing, ie,
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  medicine was a business.
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  And they were extremely entrepreneurial in the way in which they did it.
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  I don't remember the war.
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  I was basically two when it ended.
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  But certainly by the mid to late 40s I was reasonably confident.
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  And by 1950 I was an expert, quote unquote on the Korean War.
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  And I could tell you all the electoral votes in 1952 in
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  the Eisenhower Stevenson campaign.
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  How did I become interested in law?
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  It was by a combination of observation and
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  a deep recognition of the fact that I was a klutz in the following sense.
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  If you asked me to make anything, build anything, fix anything, I could not do it.
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  So I was not going to make my living with my hand.
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  I was going to make it with my mouth and my pen.
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  And I knew that very, very early on life and the single biggest problem I had with
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  my parents was persuading them that my father.
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  Who was immensely good with his hand,
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  did not have a son who followed in his footsteps.
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  And I became more and more interested in sort of the natural law tradition.
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  Now what do I mean by that?
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  From a very young age, I used to just sit there and watch things and
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  I would watch everyday things and so, you know, how do lines work?
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  Going in and out of subways, for example, was a very interesting problem for me.
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  And if I wasn't looking at subways, what about delicatessens and
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  then what about banks and so forth?
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  And so my life began as somebody who sort of observed implicit regularities.
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  And kind of realized that the people who were doing this stuff had no idea
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  of what they were doing and helped you stop them and ask them to explain.
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  And then probably they could.
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  Well, that turns out to be the origin of a natural law theory which you develop as
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  you get somewhat older.
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  The reason they use the word natural law is most of this stuff just happened.
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  And the way in which the great early thinkers, which I was raised in,
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  I'll talk about that in a second and develop this stuff,
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  is by an incredible sense of observation of what had happened.
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  And then identifying the regularities that the people who participated in these
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  events were often unable to do.
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  So I go through law school, rather through college, and
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  that basic temperament of my mind was very much set there.
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  The single most dominant constraint on my academic career is I
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  do not know how to take notes.
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  And I mean that quite literally.
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  And so I can't do any kind of archival work because it's utterly useless.
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  I can't take notes in class.
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  And it also was a case in which I like to flip back and
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  forth between areas and then figure out how they were put together.
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  So in my sophomore year, I go to the dean at the college at Columbia,
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  a man named John Alexander, a great man, I might add.
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  And I said, I don't want to major in anything.
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  I like to concentrate on a bunch of things.
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  Math, I'm not very good at it, but good enough.
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  Philosophy, a little bit better and I did sociology.
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  And then I always took courses in the physical sciences because largely under
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  the influence of my father, developed them by myself.
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  I became aware of the fact that my general academic strength was an all
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  purpose guy without any distinctive peak and without any real weakness.
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  And so I was able to move back and
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  forth across different areas more rapidly than anybody else.
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  And so then in the college I did that.
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  And then where do you go to law school?
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  And I made the decision semi historic.
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  I like to think that I would try to get myself a scholarship to Oxford, but
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  I would not study philosophy, politics and economics because I already had so
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  much of that stuff.
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  Because in those days at Columbia, in my third year,
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  I took graduate courses in philosophy as I just didn't think I needed.
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  So I said, I go there and Study Rome law and medieval English law and so forth.
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  And by God, the program actually took and I did all the things that I said.
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  And so I come back to the United States and this is extremely important.
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  I'm a student who's out of sync with the rest of the world.
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  I enter into the Yale Law School, half freshman, half second year student.
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  On the freshman courses, I had half of them in strange ways.
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  And I could still remember trying to go into the intricacies of various rules on
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  civil procedure.
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  And the teacher didn't want me to talk about that detail tale at all.
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  But that's the way I've been raised at Oxford.
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  And then I took the upper division courses and I,
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  you know, I had many influential teachers.
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  The one I'll mention most was an economist named Ward Bowman.
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  He was not a lawyer, but he was a guy who always tried to figure out how these
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  institutions were put together.
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  And he often got it wrong.
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  But he was always on the right track.
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  And sometimes he actually got it right.
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  So I leave the Yale Law School and I have this kind of strange background
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  that I have to interview for a teaching job.
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  And this is where fate intervenes.
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  It turned out it was the seventh game of the Boston Red Sox St.
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  Louis Cardinals worker series and Jim Lomberg was pitching against Bob Gibson.
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  A friend of mine now retired from Stanford, Tom Gray,
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  had put his name at the bottom of a list organized by a man named George Lefkoe for
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  teaching at the University of Southern California.
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  And so I put my name down as 11th between his and Tom says, you know,
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  I already have a job at Stanford.
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  Shows you what the world was like.
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  You could take my interview.
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  And it was the last interview, and it was supposed to be for 20 minutes, and
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  it lasted for two and a half to three hours because we just kept on sparring.
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  And George was one of these guys who sort of liked to show how much smarter he was
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  than all the undergraduates in the law school he was talking about.
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  And I would have nothing of that.
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  And so we got into a real tussle.
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  And one of the nice things about that interview is when George understood what
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  was going on, then he stopped pretending to be a Grand Mass.
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  And he really had kind of cheek by jowl fighting and so forth.
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  And he invited me out to USC to teach.
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  It was kind of a wild time.
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  And so I tell this story to everybody, and you have to believe me because it's true.
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  So I go out there and I get there for an evening dinner,
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  this very bright little kid, 7 years old, is there.
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  And I think to myself, he's going to be a law professor someday.
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  And sure enough, he went to the University of Chicago.
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  Editor in chief, and he became dean of law school.
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  His name, Mark Miller.
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  You could figure it out at that age.
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  And why could I figure it out?
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  Because I was kind of like that kid, too.
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  Precocious and slightly obnoxious, but very respectful of other people.
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  And then I kept on going the next day, on and on.
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  And finally, when it's all over, 14 hours of straight interviews, a man named
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  Martin Levine, who just retired, I think, from usc, takes me to a topless bar.
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  That was the way in which we did business in those days, rather differently.
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  And so I go back and I get the offer,
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  and I go out with Dorothy Nelson, who's still the dean.
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  She retired, but she's still alive and in pretty good health.
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  And so she says, well, what you want to teach?
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  And so I.
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  I didn't understand this question.
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  I said, well, Dorothy, what do you want me to teach?
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  And she said, I'm gonna do you a favor.
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  She says, I'm going to let you teach the heaviest load on the faculty.
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  And thank God she did.
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  So I taught four major courses in the legal writing program my first year.
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  And you asked about how I came to write takings books like that.
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  Well, the answer is that book was written 17 years into my career.
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  And I started off as an Oxford kid, and I knew a lot of Roman law and
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  a lot of medieval law and a lot of tors law and so forth.
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  And as I went through all this stuff, my own sense of systematization took over.
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  And I found a lot of these areas very unruly.
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  And I became allergic to the view that if you don't understand the way things are,
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  that's because nobody can understand the way things are.
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  You have to sort of muddle through case by case.
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  But I had had been trained in the sciences, in math, and
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  I always thought there was a formal structure on this stuff.
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  And I worked very hard to figure out what it was when I wrote my book Simple Rules
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  for a Complex World.
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  This was many years later when I kind of figured out what the basic outlines were.
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  And so as I went through the taught property and contracts law and
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  restitution law and so forth,
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  I taught them all mainly because I wanted to see how they fit together.
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  And what happens is I do all this stuff, and then I look at constitutional law, and
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  I said, you know, there's something deeply wrong here.
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  There are two sets of books,
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  there's this private world set of books that makes perfectly good sense, and
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  this public set of books, which seems to me to be stirred crazy.
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  So you ask, what was the mission in the most general terms of my takings?
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  Well, it was to say that if you understood how the private world,
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  private law world looked, you could then translate it into a public world.
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  So you would not have two separate spaces.
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  You would have one comprehensive theory.
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  And then when you try to put the two halves together,
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  a comprehensive theory essentially meant that the public side was quite crazy.
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  And so I sat there, this is in the middle of the Reagan administration, so there
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  was some sympathy trying to explain that you have to start completely over again.
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  And once you do that, with some fairly innocent premises and
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  moving this way and that way, by the time I got to page 281 of my Takings book,
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  it turned out I discovered that the New Deal was flatly unconstitutional.
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  So what was the reason behind that?
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  Well, the simplest version was there are always collective action problems.
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  And the correct way to try to think about them is to figure out what everybody's
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  initial stake is before you have the government intervention and
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  then try to expand the pie without shifting resources back and forth so that
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  everybody gets an equal rate of return on whatever investment he has in that system.
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  The modern view on this stuff was, yes, we put everybody into the pot.
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  And then what we can do is we could take the surplus and move it wherever we want.
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  And by God, if we're really clever about it,
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  we can make sure that some of the initial endowment is transferred to somebody else.
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  And so what you did is you had these two completely different versions of
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  the public sphere.
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  And my view was that the transfer for
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  society is always going to be unstable because the winners will be avaricious and
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  the losers will be desperate, and they'll constantly fight.
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  Whereas if you stayed in the first world where you get pro rata improvements
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  on your investment,
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  the only way you could get better off is to make somebody else better off.
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  And so you have an expanding pie, not a shrinking pie.
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  And strangely enough, by having strong property rights and
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  a government that can get rid of this high transaction cost situation,
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  you're much better off than you are in this other state.
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  And this was decided 40 years ago.
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  I wrote many books in the interim, including or
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  afterwards including the Classical Liberal Constitution.
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  But if you're trying to figure out the sort of the one thing that would be
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  the one that organizes pretty much everything.
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  >> Jon Hartley: So I'm going to get to that and just, you know,
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  I guess go back to, you know, you've been teaching since the late 60s,
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  since 1968, and a lot of your work has been focused on property contracts,
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  towards law and economics.
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  You've taught all these classes and many more, and
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  from there you build this conception of constitutional interpretation from that.
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  A lot of this is discussed in your 2014 book, House Global Constitution.
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  We just talked a little bit about your first big hit in the legal profession,
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  which was on Takings and Eminem Domain, and
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  you published this 1985 book, Takings Private Property.
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  >> Richard Epstein: Yeah.
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  >> Jon Hartley: Domain.
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  >> Richard Epstein: Yeah, but before that, I should mention,
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  I wrote a bunch of articles on tort theory starting in 1973, 74,
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  75, and 1979, which developed a comprehensive theory of the private law.
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  And so starting on takings,
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  it was a question of figuring out what I had developed, mentioning the method,
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  I told you, a translation, and putting the two things together,
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  which is very much not the style of most constitutional lawyers.
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  >> Jon Hartley: And then takings work a lot of this was sort of explaining where
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  takings clause in New Deal jurisprudence went wrong.
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  And then fast forward to 1994, you write this book, Bargaining with the State.
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  You articulate sort of a doctrine of conditions in where you
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  speak a lot about how the government uses monopoly power,
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  received grants, licenses from the government.
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  Milton Friedman wrote a lot about occupational license during his PhD thesis
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  and his book Capitalism Freedom, 1962 book, one of his bestsellers.
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  Occupational Licensure has actually grown a lot since these books.
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  >> Richard Epstein: Only gotten worse.
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  >> Jon Hartley: Only gotten worse, now about 30% of the US workforce is licensed.
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  It's up from like say 5% in the 1950s.
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  I mean, explain your thinking on occupational licensing.
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  >> Richard Epstein: Let me explain it.
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  What happened is you have to figure out what's the relationship between
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  the takings book and the bargaining with the state book.
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  And what happens is in the takings book, at the beginning,
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  I put a picture of two pies literally on page one.
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  And the first pie is the inner pie, and
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  it has slices that are reasonably determinate, a point that you could argue.
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  And then there's the second pie, which gets bigger than the first pie.
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  And the key element about the outer ring is it doesn't compromise the inner ring.
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  So the first set of insights about a taking doctrine is that there's
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  somebody who has X set of entitlements in the initial state of the world.
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  Either he keeps those entitlements or he gets compensation from them for
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  everybody else.
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  So you can't have a situation of Pareto superiority,
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  I'm much better off than you are worse off.
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  Because those things lead to exactly the kind of political struggles that I
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  mentioned.
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  Well, I finished that,
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  and then I looked again at the outer ring, and I said to myself,
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  why are you saying that this outer ring has to be proportionate to the inner ring?
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  Which is the thing that I had argued beforehand, and
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  I thought a long time about all of this stuff.
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  And then it turns to me that there's a very simple economic insight that allowed
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  you to know this.
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  So I'm going to ask the reader or the listener to think of a world in
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  which you have the northeast quadrant on the Y axis.
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  You can improve one player by going up, and
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  on the X axis you can prove the other player by going down.
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  If in fact the only thing you believe in, in Pareto improvement,
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  your first move could be anywhere in that area.
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  So just to take two numbers, there could be either 5 for x and 1 for y,
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  or 5 for y and 1 for x.
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  But how do you decide which of those two things is correct when they're both Pareto
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  improvement?
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  And the answer is, if you don't have a normative theory,
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  you're just going to fight.
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  And so if you had the optimal cooperation, you may have been able to get six units of
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  gain, but by the time you're done with the swabbling, you're down to two or three.
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  And so the question is, how do you discipline that outer circle?
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  And then what I did, I drew in line at the 45 degree angle and I said, what happens
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  is, if you're serious about this, the doctrine of unconstitutional conditions
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  said that you always have to be on the diagonal, that X has to be equal to one.
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  And so if you can do that, the only way X can go up is to make Y go up.
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  And so what happens is it necessarily ensures that there's an even
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  division of the surplus and stops dividing.
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  The next question is, can you generalize?
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  And the answer is you can.
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  What you do is instead of having a graph, what you do is you now have a multi tuple
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  thing of a jiggy and you have 22 people in there, a one, a two, a three, a four, and
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  you figure out what it is.
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  And what you do is you insist that there be a non discrimination rule, so
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  that the rate of gain of each of these people from the original position is
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  also constant.
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  And so the insight about how you stabilize the surplus turns out to be scalable.
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  And if it turns out to be scalable, then it turns out to be stable.
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  So you then have to do is you gotta look around the legal system and say, are you
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  just whistling Dixie or there's some people out there who actually do this.
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  And it turns out there are a large class of rules both in private law and
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  in public law called non-discrimination rules.
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  And what are those rules about?
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  They're about collective action problems where the non discrimination rule keeps
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  you on that diagonal and so therefore prevents surplus dissipation.
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  And you see this in property, and you see this under the dormant Congress clause.
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  And so what you come up with is the best of all things develop a theory
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  abstractly seem to think that has the right properties.
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  And then when you look around, you don't find the rare Avis that never appears.
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  It turns out that the huge numbers of doctrines that are developed which
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  actually comport to that situation.
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  And it was from that that I developed the unconstitutional conditions doctrine.
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  And so what are the questions that you start to ask is how do you figure out
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  what's a deviation from that doctrine and what's not?
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  So I'll just give you the simplest of examples.
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  One of the questions you always have to ask is,
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  how does the state exercise its monopoly power when you wish to get
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  a driver's license and go on the public roads, right, fair question.
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  And so I give people two statutes.
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  One statute said, if you wish to get a license,
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  then what you have to do is to register to vote for the Democratic party.
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  And the other statute says if you wish to drive in this particular state,
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  you have to agree as a condition of getting a license to resolve
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  any particular dispute that arises out of accidents in this state.
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  In this state.
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  And that's an efficiency condition, because otherwise,
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  if you have somebody in Massachusetts who's from Wyoming and
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  somebody else is from Florida where they supposed to litigate this suit, and so
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  what you do is go through all the conditions that can and cannot be attached
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  and figure out whether or not they have efficiency properties or not.
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  This gives you the following enormous advantage, which is you can now tie
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  everything up to the antitrust law insofar as it's the body of law which is trying to
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  figure out what particular private actions are disadvantageous in a principled
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  fashion and which are the ones that are justified on efficiency ground.
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  So what I discovered is when I was a libertarian,
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  I didn't have much use for the antitrust law because it's not force nor fraud.
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  And you remember when you made the introduction, you started to talk
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  about that principle, but it turns out you have to keep that thing in place.
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  And so that the world is not dichotomous,
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  whether you're talking about the public sector or the private sector.
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  It's a trichotomy.
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  You have to have anti force and fraud rules,
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  you have to have pure competition rules, and then you have to have rules regulating
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  monopoly powers of which the most common are common carriers in public utility.
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  So at this point, what you do is, you go back and
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  you start to read some of this stuff.
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  And amazingly enough, these guys knowing nothing about anything, okay,
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  what they were able to do is to intuit the rules that you had to put into play.
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  And so there are geniuses like the man named Matthew Hale who figured out that
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  you needed to have some form of rate regulation on what you can charge
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  if there Was only one harbor in town to which all boats had to come.
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  And he developed a very sophisticated theory which essentially,
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  200 years later, was carried over into the American rate making business by name.
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  And then we had all the great issues that basically came with the rise of
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  the railroads and so forth and telecommunication in the period, roughly
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  speaking, between the end of the Civil War and the beginning of the Second World War.
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  And when I look back at these principles, I said, who are these bozos?
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  They seem to understand what was going on.
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  And so, even if their rationales were not always the most precise, and
• 21:25
  they were not always wrong by any means, they were.
• 21:28
  They seemed to have a very intuitive branch of what was going on.
• 21:31
  And so that point you develop a theory of judicial knowledge.
• 21:35
  And it turns out there are very few judges who are as nutty as I am and
• 21:39
  constantly go back to first principles in this way.
• 21:42
  But these are people with an immense amount of experience.
• 21:45
  And what they do is they have a keen sense of observation, and
• 21:48
  they put it all together and they develop a system, Tinker with it a little bit.
• 21:53
  Make the occasional mistake here, but essentially the great genius of
• 21:57
  the American law is in the period of industrialization.
• 22:00
  If you start looking at what legal doctrines start to take place in what
• 22:04
  space, it turns out most of the stuff is reasonably benevolent and quite good.
• 22:09
  And so they would make mistake at the edges, but they had the right attitude on
• 22:14
  rate regulation, right attitude on assumption of risk and various kinds of
• 22:18
  cases, Very strong and skillful rules with respect to intellectual property,
• 22:22
  including both copyrights and patents and so forth.
• 22:25
  A pretty good sense of how it is that federal jurisdiction should apply.
• 22:29
  And so you come out of the 19th century and you say, my God.
• 22:34
  Now, let me contrast that with the general view in the legal profession.
• 22:39
  We have a dirty word in law called Lochner, do you know what Lochner is?
• 22:45
  >> Jon Hartley: No. No, I'm not.
• 22:50
  >> Richard Epstein: Lochner is a case called Lochner against New York.
• 22:53
  It was decided in May of 1905, and
• 22:56
  it had to do with the question as to whether or not the state could
• 23:01
  impose a maximum hour regulation on workers in the bakery industry.
• 23:08
  And it turned out this case was deeply problematic, and
• 23:12
  in the court below, the state regulation was upheld 4 to 3.
• 23:17
  And it comes up to the Supreme Court.
• 23:19
  And by five to four,
• 23:20
  they say that this regulation is not a legitimate health regulation.
• 23:25
  It turns out they regarded it as an imposition on commerce.
• 23:29
  So you now put yourself in the position of the New Dealers and so forth, who, for
• 23:34
  the most part, did not think that there was any logical preference for
• 23:38
  monopoly by competition over monopoly.
• 23:41
  And the denunciations pretty much were everywhere about this case.
• 23:45
  And it became known as the Lochnet era,
• 23:48
  as if it defined every case that took place between 1870 and 1940.
• 23:53
  Because what it did is essentially it invalidated safety regulations of
• 23:58
  some sort or another.
• 23:59
  And so I start looking at this case.
• 24:01
  And there was also a lot of work by David Bernstein, who did a lot of this stuff.
• 24:05
  And all of a sudden I realized that this, this case was perfectly sensible.
• 24:10
  They actually knew what they were doing.
• 24:12
  What they did is they did not like monopoly regulation.
• 24:16
  What they did is they didn't mind safety regulation.
• 24:18
  But if you looked at this particular statute and saw who was covered by it and
• 24:22
  who was exempted by it, it turns out it was a classic illustration of what
• 24:26
  economists know to be the case, which is you can have fake health care regulations
• 24:31
  in an effort to distort the competitive relationship between two rival firms,
• 24:35
  one of whom is under the regulation and one of whom is not.
• 24:39
  And so that led me in part to the Takings book,
• 24:42
  realize that many of the things that modern constitutional law regarded as
• 24:47
  abhorrent were essential parts of my system.
• 24:50
  So then there is this following contradiction.
• 24:54
  If you looked at the progressives, their attitude would be, my God,
• 24:57
  we've got all this kind of regulation.
• 24:59
  The world must be coming apart at the seams, right?
• 25:01
  Exploitation everywhere.
• 25:03
  You then look at the economic position and
• 25:06
  what's the period of greatest growth by far in American life?
• 25:12
  1870 to 1940, same period.
• 25:16
  So they just got everything wrong about the way in which the system started
• 25:21
  to work.
• 25:22
  And then if you start looking at the justifications that take place in
• 25:27
  the New Deal,
• 25:28
  the central proposition the New Deals have is we are completely indifferent
• 25:33
  as a constitutional matter about the relationship of competition to monopoly.
• 25:39
  And if what we want to do is to put a monopoly statute in place, God bless us,
• 25:44
  you're not allowed to stop it.
• 25:46
  And so there was a famous case called Nebby against New York,
• 25:50
  in which what they did is they decided to have price controls on milk,
• 25:55
  right, in a perfectly competitive industry demanding minimum prices.
• 26:00
  Now standard regulation is a monopoly in which you put maximum prices skillfully
• 26:04
  determined to prevent that kind of extraction, making sure that the firms
• 26:09
  get enough money so they could recover on their capital.
• 26:12
  But. But
• 26:13
  this was a case in which they put minimum prices at the request of
• 26:16
  the farmers to essentially ensure that they could organize a cartel.
• 26:20
  And it was upheld in these things.
• 26:23
  And so that's the kind of model you have.
• 26:26
  And in the post war period, there's this constant struggle.
• 26:29
  Are we trying to protect monopolies?
• 26:31
  Are we trying to undermine them?
• 26:33
  And what happened when I started writing in the Reagan years, for the first time,
• 26:37
  there was a reasonably coherent group of individuals, of which I was one, who said
• 26:42
  the distinction between competition and monopoly is well worth making.
• 26:47
  And the Takings book was meant to make sure that monopoly type regulations that
• 26:51
  the state gave to its favorite person could no longer survive.
• 26:56
  We were called to be ruthless individuals, but this was, I thought,
• 26:59
  the most social program possible.
• 27:02
  And so you put the whole scheme together, we're kind of moving that way.
• 27:07
  Did Milton Friedman and so forth and George Stigler understand it?
• 27:11
  Want the real answer?
• 27:13
  Not really, because they had a very different way of looking at the world.
• 27:18
  And not a bad way because it was immensely important at the time.
• 27:22
  All of these guys basically grew up in the 30s and the early 40s, right?
• 27:28
  They're born 1912, stick on 1911, coast 1910.
• 27:32
  And what they do is they come up in a world where New Deal cartels
• 27:37
  are riding on and their first instinct is to be anti cartel guys.
• 27:42
  And it turns out in these industries there aren't any real particular reasons why it
• 27:45
  is that you need any form of rate regulation at all because they're
• 27:48
  competitive industry.
• 27:51
  And so their great contribution was to say, strike this thing down,
• 27:55
  get rid of this one and so forth.
• 27:56
  Market liberalization was what they were behind.
• 27:59
  Then you start getting to other kind of industries where it's not so
• 28:03
  clear that you could have a competitive market.
• 28:06
  It's a network industry and so forth.
• 28:08
  Or you have the, the great problem,
• 28:10
  the marginal cost problem with respect to the bridge.
• 28:12
  You remember that one, Jon?
• 28:15
  You know, you have, you have to build a bridge over a river.
• 28:20
  And you can do it one of two ways.
• 28:23
  What you can do is you can say, okay,
• 28:25
  we'll let the guy charge whatever he wants.
• 28:28
  And it turns out that if he does that, he gets a monopoly, right?
• 28:31
  Or you say we can regulate him, at which point you run the risk of confiscation.
• 28:36
  And so you know what they did in the actual contracts in the 1880s, incredibly
• 28:40
  clever, they said, we're going to give you a period where you can get prices above
• 28:45
  the variable cost until you pay off the underlying front end cost, after which you
• 28:50
  can only charge for the variable cost since you paid for the equipment.
• 28:54
  It was a two tiered system and it was written about by both Vickery in
• 28:58
  the United States and Ronald coast in England, if you recall.
• 29:01
  Right.
• 29:02
  Now, what they did is they kind of devised the same problem.
• 29:05
  Because what they saw is if you don't have a competitive solution, what you
• 29:09
  have to do is to figure out which kind of inconvenience you can live with and
• 29:14
  which kind of inconvenience you have to bear.
• 29:17
  And so instead of developing a model of ideal behavior which we all love to have.
• 29:23
  All of a sudden you're in a very different kind of world saying which of the two
• 29:26
  risks that we are facing in this particular case is the greater?
• 29:30
  And how do we figure out institutional arrangements that were counteracted?
• 29:33
  And so what happens is, if you could get a competitive market, really want to keep
• 29:38
  it, but if you can't get it, then you enter into this terrible space where
• 29:42
  you're trying to figure out what kind of regulation is better than what other
• 29:46
  kind of regulation, knowing that what you do, you can't quite get it perfect.
• 29:51
  And so the thing that you have to learn as a lawyer is when there are competitive
• 29:55
  situations that are ideal, don't mess with Mother Nature.
• 29:59
  But if there aren't, then the question is how you rig a system to figure out
• 30:03
  the way in which you put, for example, the fixed cost with respect to a bridge.
• 30:08
  And this becomes the same problem that you face with patent law.
• 30:12
  So friend of mine named John Duffy wrote a nice piece applying the marginal cost
• 30:17
  controversy to patents and wrote it 15 years ago.
• 30:21
  And what you can see that was that the doctrines that apply to 19th century
• 30:26
  problems also carry over to 20th century problems, and
• 30:29
  you have to be able to kind of deal with it.
• 30:32
  And so I never got myself involved with intellectual property as a serious
• 30:37
  matter until I was hired by somebody who said, we have this serious problem
• 30:43
  on an inducement to breach of contract claim, which is something I worried about.
• 30:50
  Inducement to breach of contract is something that, you know,
• 30:53
  under the name of tampering.
• 30:54
  So the most famous case was there was that famous opera singer named Ms. Wagner,
• 30:59
  and she was under contract to perform for one movie theater or opera's house.
• 31:04
  And somebody else stole her contract away and said, you have to work for me for
• 31:08
  a higher price.
• 31:09
  And the question is,
• 31:10
  what remedies did the person who made the original appointment have to stop her?
• 31:15
  And it turned out it's not an easy question to figure out what goes on.
• 31:19
  But they allowed the injunction to take place.
• 31:22
  They wouldn't allow the woman to be forced to sing for the first part.
• 31:26
  Ms. Wagner was from Germany.
• 31:28
  She could have gone back to work for the first company, but
• 31:31
  the ground was so spoiled that what she did is she went back home to Germany.
• 31:35
  And the lesson, of course, was very clear.
• 31:39
  There was certainly a lot of gains to be had by having her sing in England.
• 31:42
  She was a great singer.
• 31:43
  And somehow or other, after they balls everything up, all that stuff gets lost.
• 31:48
  And so one of the things that you then do as a business lawyer is you say
• 31:53
  if I have something that looks like it's heading down the road,
• 31:57
  how do you figure out a way to prevent the abuse?
• 32:00
  By one party, on the other hand, without killing off the deal on the other hand,
• 32:04
  because both of these are completely undesirable outcome.
• 32:07
  Now this, of course, then explains something else about why I'm a kind of
• 32:11
  a strange constitutional lawyer, right?
• 32:14
  Very few constitutional lawyers actually are business lawyers, and
• 32:18
  I've always been a business lawyer from the first day.
• 32:22
  And understanding how these business arrangements work then gives you a sense
• 32:27
  as to what kind of regulations that you put on top of them are likely to make
• 32:31
  sense and what kind of regulations are not going to make sense.
• 32:35
  And so you tailor your situations there.
• 32:38
  And so this pattern that I had in college was know a lot about everything, but
• 32:43
  huge amounts about nothing.
• 32:45
  It turns out to be the right strategy as far as I'm concerned,
• 32:49
  because you get a range out of academic stuff that you can't get if you deeply
• 32:54
  specialize in one particular area.
• 32:59
  >> Jon Hartley: On Sea Monopoly.
• 33:01
  I think that's a great summary.
• 33:03
  I mean, it's amazing to see how powerful the administrative states
• 33:07
  become at the federal level, the congressional power there.
• 33:11
  We'll talk a little bit more about that in a bit.
• 33:13
  Occupational licensing at the state level, rapidly, not only do we license doctors,
• 33:19
  but we also now license dog walkers, nail technicians and braiders and so forth.
• 33:25
  I want to sort of get more into constitutional interpretation because I
• 33:29
  think that this is really where the focus of a lot of your career has been
• 33:34
  in the past few decades.
• 33:35
  And so, in 2006, you wrote how progressive we wrote the Constitution.
• 33:42
  2011, you wrote Design for Liberty, Private Property, Public Administration,
• 33:46
  and the Rule of Law.
• 33:47
  I'm just curious, how might your thinking, you're thinking, you know,
• 33:51
  you say you're in the natural law tradition.
• 33:53
  How might it differ from original, let's say, Bork and Scalia, who you were on,
• 34:00
  Chicago law faculty with at various points, and they were legal positivists.
• 34:06
  It's textualists, they help [INAUDIBLE] meaning of the text.
• 34:10
  Is it fair to say that they're, you know, maybe similarly unhappy with
• 34:13
  the progressive legal movement during the 20th century, you know, having, you know,
• 34:18
  maybe calling that sort of living Constitution, you know,
• 34:21
  being promoted during the Warren and Berger courts.
• 34:23
  And we also have, I'd say, other sort of ideas, jurisprudence,
• 34:28
  say Adrian Vermeul's common good constitutionalism,
• 34:33
  which is also very different.
• 34:35
  I'm curious, you know, what is your synthesis of constitutional
• 34:39
  interpretation that's embedded in your 2014 book, the Classical.
• 34:42
  >> Richard Epstein: Okay, well, I mean, where do we start to go back to Roman law?
• 34:47
  And it Turns out that the rules of interpretation that Scalia and
• 34:51
  Bork tend to believe in bear no relationship to the historical rules of
• 34:55
  interpretation done by large numbers of people,
• 34:58
  none of whom you would call progressives or Marxists or anything of the sort.
• 35:04
  They were people who, I think,
• 35:05
  were much more sensitive to the way in which language worked and
• 35:09
  developed a whole series of protocols to understanding what went on.
• 35:13
  And so before I did the book on the constitutional law,
• 35:17
  I spent my time interpreting the lexicolia.
• 35:20
  And that's a statute, which I'm sure is on the tip of your lips,
• 35:26
  but it roughly said, in effect, anybody who kills a kidder unlawfully,
• 35:32
  a slave, or a herd animal shall be liable and damaged by some rather arcane formula.
• 35:40
  And so you look at this statute, and then you say, well, how do they explicate it?
• 35:45
  And it turns out that they spent 30 or 40 pages figuring out what it means to
• 35:50
  kill things and what it means for these things to be unlawful.
• 35:54
  And they didn't quite get it 100% right.
• 35:57
  But essentially what it did is it tied in with a very powerful theory of how you
• 36:02
  organize a case, which was also captured in the Roman pleading laws,
• 36:06
  which that are develop rules that develop at the same time.
• 36:10
  So essentially, the way to understand language is what it is is it's a game
• 36:15
  of successive approximation between the descriptive and the normative.
• 36:20
  And the question is, how do you make these steps and why?
• 36:24
  And the first thing that everybody notes about a particular language is you can't
• 36:28
  say everything at once.
• 36:30
  You can't say everything first.
• 36:32
  What you have to do when you're thinking about language is to start with the notion
• 36:37
  that what you're trying to do is to find a way to get clear the message so
• 36:41
  that you don't get overwhelmed by the noise that's surrounding it.
• 36:45
  And so the pleaders essentially started in the following way.
• 36:49
  What I have to do is to explain to you why it is prima facie as a first look,
• 36:55
  you should be liable to pay damages to me.
• 37:00
  And it has to be a clear enough reason that everybody can understand it.
• 37:04
  And it has to be operative so that other people can apply the rules that
• 37:08
  are applicable to it in a way that doesn't lead to hopeless squabbles and division.
• 37:13
  And it turns out the way in which everybody starts this is with a phrase
• 37:18
  which says, you can't hit anybody else.
• 37:22
  Now, what does that mean?
• 37:23
  And then you realize it's a funny word.
• 37:26
  You could hit somebody in the sense by giving them a love tap or
• 37:29
  you could hit somebody and try to maim them.
• 37:32
  And what's quite clear is you're not trying to rule out beneficial conduct.
• 37:36
  And so what you're trying to do is to figure out that situation which by either
• 37:41
  a physical or a chemical change, results in the position of the party who's
• 37:46
  been hit having been essentially made worse off.
• 37:50
  And so what do you do?
• 37:51
  You have to worry about describing it, then you have to worry about evasions.
• 37:56
  So you have to have a clear principle and then recognize that somebody who's going
• 38:01
  to be tagged for a large liability will do an enormous amount of singing and
• 38:05
  dancing in order to escape it.
• 38:06
  And you have to be able to prepare countermeasures, right?
• 38:09
  So it's a kind of a game.
• 38:11
  And so I will give you the illustration that does this,
• 38:15
  involving my 5 year old nephew at the time, and
• 38:18
  he was acting up like a 5 year old and I said to no, stop hitting me.
• 38:22
  So what do you think he did?
• 38:25
  He kicked me.
• 38:28
  >> Jon Hartley: Maybe.
• 38:31
  >> Richard Epstein: Now what, what was he thinking?
• 38:33
  He said, well, you said I can't hit you.
• 38:34
  Everybody knows that the word hit involves the hand.
• 38:38
  So you didn't tell me I couldn't kick you.
• 38:40
  And then somebody says, as an outsider,
• 38:43
  is that what you really meant in terms of the social situation?
• 38:48
  What you say is Noah's evasion of the hit norm resulted in the same amount of harm.
• 38:54
  And it turns out you said, don't hit me with your hand.
• 38:56
  So I take a stick and I start hitting you with the same thing.
• 39:00
  So we have what we call the need for a description of what's wrong.
• 39:04
  And what's wrong turns out to be, to use the phrase that they eventually hit upon
• 39:08
  the application of force by one person against the body of another.
• 39:12
  And the Romans called that corpora kapori by the body to the body.
• 39:17
  Right.
• 39:18
  And the reason they do that rather than the other phrase is because of the anti
• 39:22
  circumvention norm.
• 39:23
  And they wanna make sure that all applications are force of court so
• 39:27
  that you can't play these kinds of games.
• 39:29
  And so you start to see that and it develops in the Roman law.
• 39:33
  And then you go, you look at the English law many hundreds of years later and
• 39:37
  you know what happens?
• 39:39
  They do exactly the same thing.
• 39:41
  Now why are they doing this thing?
• 39:43
  There may have been some cross influence between them, but even if there is,
• 39:48
  you have to say, why is it that an Englishman would accept a set of rules
• 39:52
  developed by a bunch of Romans 1200 years before,
• 39:55
  when their cultures are many ways are completely different?
• 39:59
  Well, it turns out.
• 40:00
  There is an answer, and that's the natural law answer.
• 40:03
  You can think of a state of the world in which presumptively,
• 40:07
  it's better for one people to use force hostilely against somebody else.
• 40:12
  And so if you figure out in Rome,
• 40:14
  you're going to figure out the same thing in England.
• 40:17
  And the reason there would be a reception, which it sometimes is,
• 40:21
  is because the same conditions apply.
• 40:23
  And this is true whether you hit me with a gun or
• 40:26
  whether you hit me with a sword or a howitzer or a laser beam, right?
• 40:30
  And so it turns out that the principle is pretty universal,
• 40:34
  as is the question about controlling these evasions so that you use that term.
• 40:39
  But people are much more clever.
• 40:41
  So the second thing that comes up and then I'll fig out is, okay, I won't hit you.
• 40:46
  What I'll do is I'll set a dish of poison in front of you and
• 40:49
  tell you that it's helpful.
• 40:51
  That's not the application of force.
• 40:53
  So in every system, what develops is what they
• 40:56
  call an action under the special circumstances, where in effect,
• 41:00
  if you give something somebody and they consume it under mistake or
• 41:04
  under coercion, you treat it just as if you had done the other thing.
• 41:08
  And it turns out that's developed everywhere.
• 41:11
  So now you look at constitutional law.
• 41:13
  What does this have to do with constitutional law?
• 41:15
  What you do is you get the state right and
• 41:18
  it says that it's not allowed to take anything from.
• 41:22
  So what it doesn't do is it doesn't take it, it just simply blows it up.
• 41:26
  And the question is, can you recover under the constitutional norm for that?
• 41:31
  And you could see immediately how it is that you're going to need the same anti
• 41:35
  circumvention norm there to prevent essentially the willful aggrandizement of
• 41:40
  one person's property at the expense of another.
• 41:43
  And so you go through all these cases and
• 41:45
  what you discover is exactly the same technique of interpretation is given
• 41:50
  to the use of force in public law that is given in private law.
• 41:55
  Because what's common about these situations are the sort of invariant
• 41:59
  physical conditions against all which this stuff takes place.
• 42:04
  They're the same in every language.
• 42:05
  So what happens is, if you understand the physical stuff,
• 42:09
  you sort of understand where the universality comes from.
• 42:12
  Well, that's part of it, but then you got other things you have to worry about.
• 42:16
  So somebody says, well, yes, I hit you.
• 42:19
  And then he turns around and he said, you know, but I did it in self defense.
• 42:23
  Well, you assumed the risk.
• 42:25
  And so all of a sudden what you're saying is, yes, your prima facie case is right,
• 42:30
  but there are reasons why it is that you should not be able to
• 42:34
  make good because it turns out that you were really the aggressor, right?
• 42:39
  You were not the aggressor, self defense is why I hit you.
• 42:42
  And so the plaintiff was saying you were an aggressor, but you weren't,
• 42:44
  you were responding to his threat.
• 42:46
  And what you slowly do is build out the system.
• 42:49
  And it turns out the same invariant rules apply whether you're
• 42:53
  building it out in modern England, ancient Africa, Roman society.
• 42:59
  Because the physical and
• 43:00
  chemical constants are what drives a particular analysis.
• 43:04
  And so when you do comparative law, what you almost always discover is that
• 43:09
  all the differences that you find are on second order question.
• 43:14
  I mean, so to give you what's the second order question you ask, right.
• 43:18
  Well, suppose somebody's taking your property and
• 43:22
  it's the person who gave it to you.
• 43:24
  What kind of remedies do you have against them?
• 43:26
  Well, the Roman remedy said that you could never
• 43:29
  get a declaration against the party who was about to take your property.
• 43:34
  You had to wait until it was taken and then bring an action for being evicted.
• 43:39
  The American law allows a declaration that you can't do it.
• 43:43
  Well, what's the difference between the two of them?
• 43:45
  Not all that much.
• 43:46
  Right, but there is a difference.
• 43:49
  And why the difference?
• 43:50
  Well, the Romans were very much more constrained on the resource side, right?
• 43:54
  You can imagine.
• 43:55
  And so what they did is they waited to the last possible moment they had before they
• 43:59
  applied the remedy.
• 44:00
  Whereas in America and England, you have more prophylactic abilities to do so, so
• 44:05
  that you're willing to intervene a little bit sooner.
• 44:08
  Now, how much of a difference does this make?
• 44:10
  Well, in certain situations it could be very important, but in most cases,
• 44:14
  let me ask you the question.
• 44:16
  How many times in your life have you felt uncertain about the possession of your
• 44:20
  property vis a vis somebody else, that you felt necessary to consult the lawyer as to
• 44:24
  whether or not you were entitled to some kind of protection?
• 44:27
  And they answered that question.
• 44:29
  What are you talking about, Guy?
• 44:30
  Right, so the reason that these things don't matter and
• 44:34
  do matter is in the large society, if you look at the kinds of cases, the great
• 44:40
  achievement of the legal system is not that it solves disputes after they occur.
• 44:46
  It's that what it does is it guides people's conduct so
• 44:49
  they don't engage in stealing other people's property.
• 44:52
  So you don't have to figure out what the remedies are when they start to do and
• 44:57
  then which cases get to the lawyers?
• 45:00
  Well, it's not the cases where everything goes right,
• 45:03
  it's the cases where everything goes wrong.
• 45:05
  And at that particular point, it was a very rarefied subset.
• 45:09
  And now all of a sudden, all these remedial complications make a great
• 45:13
  deal of importance to the way in which particular cases should come out.
• 45:17
  So that when I started teaching law, my view was always to look at a particular
• 45:21
  dispute and figure out who was right and wrong and what remedy applied and why.
• 45:27
  And you could get a lot of divergence of opinion.
• 45:30
  And it's very important to be able to do that because that's what litigators do to
• 45:34
  this very day.
• 45:35
  But as I became a little bit older and maybe wiser less so, what happens,
• 45:39
  I realized that the great importance of these various rules was not in the way
• 45:43
  that they necessarily solved disputes that took place, but
• 45:46
  the way in which they limited the number of disputes that occur.
• 45:50
  And so when you start then looking at all constitutional law,
• 45:54
  it's the same method, First Amendment freedom of speech.
• 45:58
  Well, there are a lot of cases where you're asking whether or
• 46:01
  not somebody is engaged in freedom of speech.
• 46:03
  If what he does is he yells fire in a crowded theater, takes out a rifle and
• 46:08
  says, I'm gonna shoot you unless you capitulate, and so forth.
• 46:12
  And so now what you do is you have a rule that says freedom of speech is protected,
• 46:16
  but the threat of force is not right.
• 46:19
  Well, you then have to figure out, well, how do you know which it is?
• 46:22
  And so the famous case from private law was somebody who said to somebody else,
• 46:28
  if this were not a size time, I would run my sword through you.
• 46:32
  And so the first thing you ask is, what's the size time, right?
• 46:35
  Well, size time is the judges are in town and what the guy is saying,
• 46:38
  I would kill you except for the fact that they hear.
• 46:41
  Now the issue you then have to ask, is he faking or is he telling the truth?
• 46:46
  He's saying that because he's going to kill you and
• 46:48
  he wants you to put your guard down or not.
• 46:50
  Well, that's a fact intensive dispute.
• 46:52
  Fast forward 2000 years or whatever it is.
• 46:55
  And now you have somebody who's in an assembly and
• 46:58
  what they're trying to do is to encourage people to rebel against the state.
• 47:03
  And so what are they doing?
• 47:05
  Is it a bunch of people reading a Marxist tract about the necessity for
• 47:09
  class warfare, or is it a bunch of guys who's sitting there trying to tell you how
• 47:13
  it is that you put together a bomb and plant it on somebody.
• 47:16
  Right.
• 47:17
  And so it's the same question.
• 47:19
  This is anticipatory conduct.
• 47:21
  Can the First Amendment catch it?
• 47:23
  And here there's no immediate threat.
• 47:26
  But as the famous judge said, the threat may not be immediate, but
• 47:29
  if you wait until it is immediate, it's too late.
• 47:32
  And so, this was a problem of international law.
• 47:35
  What are the intermediate cases?
• 47:37
  Well, you look at Grotius, the great 16th, 17th century writer, and
• 47:41
  he posits one case to which we yet to have an answer.
• 47:45
  He says, what you do is you have an enemy, and
• 47:48
  what they do is they amass on your border, but they don't attack.
• 47:52
  The question is, can you have a preliminary attack or
• 47:55
  response against them, or do you have to wait until the attack is imminent?
• 47:59
  When was the last time Time that problem came up.
• 48:03
  In Iraq, Iranian, right?
• 48:06
  What happens is the Israelis are sitting there.
• 48:08
  Do you have to wait until the bomb is in the air?
• 48:10
  Can you take out the Phillies preemptively?
• 48:13
  And it turns out it's a very delicate calculus as to what you do and
• 48:17
  all of these things.
• 48:18
  The strategy is you're always making approximations,
• 48:21
  you're always doing the public and the private law comparison.
• 48:25
  And essentially what you do,
• 48:27
  I think in the last of these cases is waiting is utterly futile.
• 48:31
  What's the seriousness of the intention?
• 48:33
  Well, the first thing you do when you're doing this stuff,
• 48:36
  if somebody says he really hates you and he wants to kill you and
• 48:39
  he's going to do everything he possibly can to achieve that, you believe it,
• 48:43
  you know, and you know, that's the rule.
• 48:45
  So whenever you go through a security line,
• 48:47
  remember they always tell you we take all jokes seriously.
• 48:51
  Right.
• 48:51
  So don't talk about carrying a wet penny because we're going to respond.
• 48:55
  And so we basically wean ourselves from the immediacy rule, which is a very
• 49:00
  safe rule in the sense of preventing undue aggregations of force, but it's a very
• 49:06
  dangerous rule because it could let the amassing take place until it's too late.
• 49:11
  And if you recall, the Israelis have faced this before.
• 49:15
  They faced it in 1967, right, when the Egyptians blockaded.
• 49:19
  First question, is a blockade an act of war?
• 49:22
  The answer is yes.
• 49:24
  Does it involve the use of force?
• 49:26
  The answer is yes, but you haven't shot anybody.
• 49:28
  But it's a threat of force made credible by the weapon you have.
• 49:32
  And the Israelis basically attacked.
• 49:34
  And then the question is, you look at the United Nations Charter and
• 49:38
  it says anticipatory, the self defense is not allowed.
• 49:41
  So what do you think happens to the charter?
• 49:44
  It gets junked because it's too restrictive a condition nobody's going to
• 49:49
  abide by.
• 49:51
  >> Jon Hartley: I guess one question I just have is like in terms of a lot of
• 49:54
  this, you know, I guess taking a property centric kind of lens of constitutional
• 49:58
  interpretation, like, you know, how do you determine,
• 50:01
  you know, what is property and what are limitations, I guess in.
• 50:05
  Terms of what is property?
• 50:07
  Well, well, I mean, I mean you can see these, you know, issues like for example,
• 50:11
  you know, can, can people be property and you know, think servitude?
• 50:15
  I mean, these were huge issues that were sort of left somewhat open that depending
• 50:19
  the country and there was a civil war fought over it.
• 50:21
  Even now there's some questions of can you indenture yourself?
• 50:26
  Can you sell shares in your yourself for,say, student loans,
• 50:31
  income share agreements?
• 50:33
  Is there something that, you know, Friedman?
• 50:34
  >> Richard Epstein: Well, I mean, it's a very interesting question.
• 50:37
  I will tell you what the historical argument was.
• 50:41
  There is a huge debate into the literature as to whether or
• 50:45
  not self ownership is a coherent concept, right?
• 50:48
  I own my arms, but there's no doubt that anybody has
• 50:53
  that you can own the ring on your finger.
• 50:57
  And so the question is how you defend the person if you're not quite sure of this.
• 51:02
  And in the end, what people do is they fudge it.
• 51:07
  They treat it as though it's a property protection.
• 51:10
  But in effect,
• 51:10
  they then use the word autonomy to describe what it is that you have.
• 51:16
  And it then becomes exactly the gate presumptively.
• 51:19
  The argument has always been you do anything as a purpose of agent,
• 51:23
  then you've done it for your own advantage.
• 51:27
  So if we start the Pareto ball rolling, we have somebody who's better off and
• 51:32
  by definition nobody else who's worse off.
• 51:35
  And so the argument in favor of freedom is that condition is desirable.
• 51:39
  But remember I started to talk about defenses, self defense and so forth.
• 51:44
  Suppose now the thing that you want to do is to take a saber and
• 51:47
  put it through somebody's heart.
• 51:49
  At this particular point, the defense becomes credible because the gains to
• 51:54
  the other side are so enormous that what we do is we allow it to stop.
• 51:59
  The central classical liberal thing is suppose the guy doesn't want to beat your
• 52:03
  brains out, but you're selling mushrooms on a corner stand and
• 52:07
  he decides to go to another corner of the street and
• 52:10
  sell mushrooms of a higher quality for a lower price.
• 52:14
  What happens?
• 52:15
  He said, I'm really being hurt.
• 52:17
  And you're saying this is just an exercise of my liberty.
• 52:20
  And why is it that you're right and the other guy is wrong?
• 52:23
  Because you can figure out these disputes simply looking by the two parties to
• 52:27
  the disagreement.
• 52:28
  There are customers out there, and in the case where you kneecap somebody to prevent
• 52:33
  them from selling to the customers, it's not just a rival who's worse off,
• 52:36
  it's all the customers who can't get the business right.
• 52:40
  But if what you do is to cause the same amount of economic dislocation by
• 52:44
  offering a better price product at a lower price at that particular point,
• 52:49
  the consumer welfare flips over 100%.
• 52:52
  And so what we develop in a very principled way is the classical liberal
• 52:56
  distinction between force and on the one hand, and
• 52:59
  competition on the other, where one is Allowed and one is not.
• 53:03
  And then we developed three separate phrases and
• 53:06
  three different ways to explain this.
• 53:08
  The Romans understood this, sort of, and they called this.
• 53:14
  And what the hell does that mean, right?
• 53:17
  Well, damn means harm, ab square means without legal injury.
• 53:23
  And what they're saying, in effect,
• 53:24
  these are the kinds of harms that you're absolutely privileged to complain.
• 53:28
  And you then ask,
• 53:29
  is there a complete theorization of this in the Roman leadership?
• 53:32
  Answer no.
• 53:33
  You then ask the second question,
• 53:35
  do they make any fundamental mistakes with respect to the court case?
• 53:38
  The answer is no again.
• 53:40
  And so what it is, their rough intuitive empiricism steers them away from problem.
• 53:45
  Now when you come to the economists and so forth,
• 53:48
  they start talking about externalities, right?
• 53:51
  And what kind of externalities are these?
• 53:54
  Are these legitimate externalities?
• 53:55
  Are they illegitimate externalities?
• 53:58
  And what they want to say is, they may be just pecuniary externalities.
• 54:03
  You've heard that term, right?
• 54:05
  It's one of the more useless terms in the English language because it
• 54:09
  doesn't distinguish between two conditions, between competitive losses and
• 54:14
  losses to a monopolist who essentially has some ability to exclude you from
• 54:18
  a particular market.
• 54:20
  And then the lawyers, they have a third term for that.
• 54:23
  They talk about actionable injury as opposed to non actionable injury.
• 54:27
  But the only way you can solve the problem is to go from the two parties who
• 54:31
  are conflicting and take into account general equilibrium analysis
• 54:35
  about the way in which their dispute affects everybody else.
• 54:39
  And so the force case has negative externalities to third parties, but
• 54:43
  the competition cases, positive externalities to third party.
• 54:47
  They're going to be some funny cases in between, as you always know, like trade,
• 54:51
  slander and so forth.
• 54:52
  But the point is, if you understand the economics correctly, merge it with law,
• 54:57
  all of a sudden a lot of the classical liberal distinctions come up as being
• 55:02
  completely legitimate,
• 55:03
  coming out of what I think are fairly spare spartan set of initial premises.
• 55:08
  And so you ask what my constitutional regime has been for
• 55:12
  low these last 40 or 45 years is to take these kinds of missions,
• 55:16
  go to area after area that I can find in public and private law, and
• 55:21
  show to the extent that it's possible that you could actually make the system stand.
• 55:27
  Now that means that you have to really learn stuff about all these fields.
• 55:30
  And so that's why I've always made it a promise to teach things at least once or
• 55:35
  to consult on the problem.
• 55:37
  Because what happens is you as an outsider may have a better theory about everything,
• 55:43
  but the guy on the inside has done this for 40 years.
• 55:47
  And so the secret of being an outside analyst is you don't tell them what to do.
• 55:52
  You listen to people talk, tell them about their field, and you sit back and you
• 55:56
  do something which I find very difficult in principle, which is to be a passive.
• 56:00
  To speak person, right?
• 56:02
  Tell me more about your business.
• 56:04
  And once you learn about the business, then I'm saying, well,
• 56:06
  this is why you did this.
• 56:08
  And so what the great question is, is a practical matter for the antitrust laws,
• 56:13
  for example, and so forth, was this an efficiency justification or
• 56:17
  was this a restrictive practice?
• 56:19
  And lots of times when people tell you something, they actually think
• 56:22
  it's a restrictive practice, but it turns out to have an efficiency justification.
• 56:27
  They just didn't quite understand it.
• 56:29
  So your job is to explain their businesses to them after they explain their
• 56:32
  businesses to you.
• 56:35
  >> Jon Hartley: Just to stop you there.
• 56:36
  I'm curious what you think about the Coase theorem.
• 56:38
  So Ron Coast.
• 56:39
  >> Richard Epstein: Yeah, I will tell you- >> Jon Hartley: Property rights.
• 56:43
  And he kind of said that, you know, if you assign property rights people,
• 56:47
  even if it's not fair, it'll lead to an efficient outcome.
• 56:50
  And so, you know, even if you, for example, had some sort of cap and
• 56:54
  trade system where you gave all the rights to one company, for example,
• 56:58
  they could still trade them away, you know, and even though that may seem very
• 57:03
  unfair or maybe inexpropriative at some level, that they'll still be able
• 57:08
  to trade these rights away to others, leading to an efficient outcome.
• 57:13
  And so there's.
• 57:13
  Okay, a lot of people point to the Clean Air Act and
• 57:17
  asset RA program during the 90s as being sort of successful example
• 57:22
  of this limiting sulfur dioxide emissions.
• 57:25
  And maybe spectrum options are sort of similar in that regard, I'm sure.
• 57:28
  What you think about the Coase term?
• 57:29
  >> Richard Epstein: Well, first of all,
• 57:30
  Ronald and I were very close friends to the end of his life.
• 57:35
  And it's because he actually, he disliked intensely blackboard economics,
• 57:41
  as he called it, which meant that he became a kind of institutionalist.
• 57:46
  But Ronald did not understand his own theory and how powerful it was.
• 57:51
  So it was kind of one of the ironies.
• 57:54
  The last time I had a meal with Ronald, he was about a hundred,
• 57:58
  and he sat down and he announced that my life has been a failure.
• 58:04
  I said, ronald first answers,
• 58:06
  anybody whose name becomes an adjective is not a failure.
• 58:09
  So it's you, it's Marx, it's Freud.
• 58:12
  No, Einstein.
• 58:13
  Okay, Ronald, stop.
• 58:14
  But I said, now let me tell you why you're wrong.
• 58:18
  And he didn't quite get it.
• 58:19
  Ronald basically looked at a series of very sophisticated late 19th century
• 58:25
  English nuisance cases in which you had variations from the simple problem
• 58:30
  of one person, many huge amounts of pollution, to the land of another.
• 58:36
  So one of his cases was, you emit some pollution, it hits a wall, and
• 58:40
  it bounced back and gets you into your own attic.
• 58:43
  The question is the guy who building the law responsible for the nuisance or not?
• 58:47
  And things like that.
• 58:48
  I told Ronald, I said, no, that's not what this is about.
• 58:51
  That is one illustration of a larger problem where you
• 58:54
  have large numbers of people with different inputs and so
• 58:57
  forth and they're voluntary transaction barriers to voluntary transaction or
• 59:02
  cost and trying to figure out how to organize voluntary transaction.
• 59:06
  So what you have said is first you may have an ideal theory of what you want to
• 59:11
  do, but then measurement problems and similar issues arrive and
• 59:14
  your first best solution cannot be done.
• 59:17
  So give you best a very simple kind of situation.
• 59:21
  You want to charge somebody for your services and
• 59:24
  the ideal way is to try to figure out what the marginal contribution that you
• 59:28
  have made by when you supply him, right?
• 59:30
  And then you start looking about this in terms of landlord tenant relationships and
• 59:35
  how many people run leases where that's what the landlord gets
• 59:38
  marginal contribution, nobody.
• 59:41
  So what do you do?
• 59:42
  You take a percentage of sale.
• 59:43
  Why do you do that?
• 59:45
  Because that number you can compute by looking at the books.
• 59:48
  You figure out what a good guess is, whether it should be 2% or 5%.
• 59:51
  The other stuff is gonna completely break down.
• 59:54
  So what you do is you give up on ideal theory in order to get something that's
• 59:58
  a bit more workable.
• 1:00:00
  And it requires people a lot of skill to know these industries and the norms and
• 1:00:04
  the ratios to get them right.
• 1:00:06
  Ronald did not think of the world that way, so
• 1:00:09
  he could never accept the generalization of his theory.
• 1:00:13
  And what I told him, I said, Ronald, you may not know it, but
• 1:00:16
  I'm going to ask you one question.
• 1:00:18
  Why is there no second Coase theory now?
• 1:00:20
  60, well, at this point, it was 50 years after he'd done the first thing, I said,
• 1:00:25
  the reason there is no second theory, Ronald, is you don't need one.
• 1:00:28
  If you actually understand what you're talking about.
• 1:00:31
  You have this zero transactions cost world in your mind where everything
• 1:00:35
  instantaneously goes everywhere else.
• 1:00:38
  Then what you do is in this world, you sit down and
• 1:00:40
  figure out what's going to happen to people.
• 1:00:42
  And slowly you develop a series of rules and practices,
• 1:00:46
  all which are designed to do the following thing.
• 1:00:49
  Minimize the total level of transactions cost in order to maximize the total
• 1:00:54
  amount of gain.
• 1:00:56
  And I said, if you do that, what you are doing, you can make this operational and
• 1:00:59
  you don't have to know everybody's value functions, right?
• 1:01:03
  If you want to be a Keynesian, you have to do everything under the sun.
• 1:01:06
  And the aggregates, your method is much more efficient than his,
• 1:01:10
  which is why people always talk about your work instead of his work when it comes out
• 1:01:14
  to doing things on a level.
• 1:01:16
  And that is in fact.
• 1:01:17
  Right. So the Coase theorem essentially uses
• 1:01:21
  a mnemonic device, the zero transaction cost world.
• 1:01:25
  But what you then do is try to get into the stuff in the transaction cost world.
• 1:01:30
  And Ronald was well aware enough about all of this that he would start to figure out
• 1:01:34
  what odd anomalous rules seem to be put into place which had this effect of
• 1:01:39
  essentially reducing transactions cost relative to gain.
• 1:01:42
  Right, and that's a social welfare theorem,
• 1:01:45
  which is operational as opposed to this other stuff.
• 1:01:48
  So I've never been a Keynesian because I don't know what you do with
• 1:01:51
  these aggregates,
• 1:01:52
  particularly since the people in the aggregates are always acting individually.
• 1:01:56
  So take a simple thing.
• 1:01:57
  If you were to give people, everybody $100,000, say $1,000 like George Bush did,
• 1:02:03
  you don't have any idea what each individual is going to do.
• 1:02:06
  Someone's gonna pay off past debt, somebody's gonna build the fund for
• 1:02:09
  his child to go to college, right?
• 1:02:11
  Somebody's going to go to a fancy restaurant.
• 1:02:13
  It just all varies out.
• 1:02:15
  So don't try- >> Jon Hartley: [INAUDIBLE] people
• 1:02:17
  save it?
• 1:02:18
  >> Richard Epstein: They'll save it in different-
• 1:02:20
  >> Jon Hartley: Like [INAUDIBLE] ideas,
• 1:02:21
  people are supposed to be spending it, right.
• 1:02:23
  And there's this virtual.
• 1:02:24
  >> Richard Epstein: But that's all crazy, of course.
• 1:02:28
  There's no way you can figure out what people will do.
• 1:02:31
  And in fact you don't want to.
• 1:02:33
  The whole point is if I'm better off investing my money and
• 1:02:36
  somebody else is better off at confusing it, we don't want to force the two of us
• 1:02:40
  to take the identical ratios when it's going to benefit us, neither of us.
• 1:02:45
  So you just, you want to make sure that all those decisions are disaggregated and
• 1:02:49
  he insist upon aggregating them.
• 1:02:51
  And this is not a small error, this is a catastrophic blunder.
• 1:02:55
  And you don't have to be a sophisticated economist to start realizing that talking
• 1:02:59
  about aggregates is a very dangerous situation because what was the phrase you
• 1:03:03
  used at the beginning of this talk?
• 1:03:06
  Methodological individualism.
• 1:03:07
  Right.
• 1:03:09
  >> Jon Hartley: And just to close up there, I'm just curious, you're,
• 1:03:12
  you're a self described libertarian, you're a big believer.
• 1:03:16
  Methodological individualism.
• 1:03:19
  This is no secret.
• 1:03:20
  I'm curious, what kind of libertarian are you?
• 1:03:23
  Are you Richard and, and this, are you a fan of the non aggression principle?
• 1:03:28
  >> Richard Epstein: There's nothing wrong with the non aggression principle.
• 1:03:30
  >> Jon Hartley: I'm just curious.
• 1:03:31
  What are.
• 1:03:32
  What would there in your mind, what would the limits on such a principle.
• 1:03:36
  >> Richard Epstein: Let me. Let me just.
• 1:03:38
  >> Jon Hartley: Theft, and are you an anarcho, the British?
• 1:03:41
  >> Richard Epstein: I'm not.
• 1:03:42
  I'm a classical liberal.
• 1:03:43
  >> Jon Hartley: What is the role of the state in your mind?
• 1:03:46
  >> Richard Epstein: Let me sort of put it, the problem about being
• 1:03:49
  an anarcho-libertarian is you don't have a state.
• 1:03:52
  The bad guys will form one on their own terms.
• 1:03:56
  So it's a kind of a preemptive situation.
• 1:03:58
  And the basic difference between a classical liberal and an anarcho
• 1:04:02
  libertarian is a classical litus has the following general proposition.
• 1:04:06
  You may be very careful about it, impose various kinds of limitations and
• 1:04:11
  taxes on individuals, so long as when you look at the pie in the aggregate,
• 1:04:15
  the individual who's so burdened is on average left better off than before.
• 1:04:21
  And so the argument, for example, about a flat tax with respect to general
• 1:04:25
  revenues and so forth and expenditures and is we can't think of any device which
• 1:04:30
  will fund the need for collective goods that has less disruptive effect than that.
• 1:04:35
  And so that would mean tariffs are out as a revenue source.
• 1:04:39
  Right, because they're differential in terms of the way they go.
• 1:04:41
  The base is too small, the rates are too hot.
• 1:04:44
  So crazy.
• 1:04:46
  And so I've always been that.
• 1:04:47
  And so I wrote a book,
• 1:04:49
  you know, several articles about nobody could beat a flat tax.
• 1:04:52
  And then you have special taxes for special benefits and special harm.
• 1:04:56
  And so you're not somebody who's an anarcho libertarian.
• 1:05:00
  Non aggression is certainly something that's in the principle.
• 1:05:03
  But Murray birthwise sort of is the only thing that you were worried about.
• 1:05:06
  So cartelization in his world is just fine, right?
• 1:05:11
  And you don't believe that.
• 1:05:12
  So what happens is the way I treat it is, you ask me,
• 1:05:15
  what's the first move you made out of a state of nature.
• 1:05:18
  It would be essentially the control of force.
• 1:05:21
  But is that the only move you made?
• 1:05:22
  No. If it turns out we could
• 1:05:24
  then have another set of rules that allow us to have infrastructure,
• 1:05:27
  another set of rules that control monopoly abuse and so forth.
• 1:05:30
  You may continue to make additional adjustments to the basic system that you
• 1:05:35
  now have at stage one or two, so long as the Pareto gain position holds.
• 1:05:39
  Now what happens?
• 1:05:40
  It's a system of diminishing marginal utility.
• 1:05:42
  The first moves are really going to be huge.
• 1:05:44
  Right?
• 1:05:45
  But by the time you get further down the road,
• 1:05:47
  you're not quite sure which way it's going to go.
• 1:05:49
  And that's where you want lawyers.
• 1:05:51
  Our job is to decide cases that are inconsequential at the margin,
• 1:05:55
  so long as they don't mess up the core cases which allow
• 1:05:59
  us to organize civilization in the way we want.
• 1:06:02
  So basically I'm a tinker at the edges, but my most important contributions
• 1:06:08
  are telling people how you organize a world in which my services are not needed.
• 1:06:14
  >> Jon Hartley: Richard, I really want to thank you for coming on.
• 1:06:16
  This has been a great- >> Richard Epstein: My pleasure.
• 1:06:17
  >> Jon Hartley: Conversation.
• 1:06:19
  >> Richard Epstein: Okay, great.
• 1:06:20
  Thank you so much, Jon.
• 1:06:22
  >> Jon Hartley: This is the Capitalism and Freedom the 21st Century podcast,
• 1:06:24
  an official podcast with the Hoover economic Policy working group where we
• 1:06:27
  talk about economics, markets and public policy.
• 1:06:30
  I'm Jon Hartley, your host.
• 1:06:31
  Thanks so much for joining us.