I. INTRODUCTION 923 II. COASEANISM 924 III. LIBERTARIANISM 927 IV. FRIEDMAN 927 V. MCCLOSKEY 935 VI. MEDEMA 938 VII. ZORN 946
Private property rights are the basic building blocks of economic freedom. They are a necessary condition for a free society. Therefore, it behooves us to study, in some detail, precisely of what they consist. If we are unclear on this issue, the entire edifice of free enterprise can collapse, as does a house with a poor foundation.
Property rights have many enemies--socialists, environmentalists, feminists, communitarians, Marxists, specialists in black "studies," literary "studies," queer "studies," multiculturalists, sociologists, etc. These philosophies, although staunchly opposed to private property, have at least the virtue, from the point of view of the defenders of laissez faire, of being open and honest about their opposition and can therefore be criticized in a straightforward manner. That is, there is no question in anyone's mind, proponents or opponents of economic freedom alike, where scholarship emanating from these quarters stands on the issue of laissez faire capitalism.
The same cannot be said, unfortunately, for Ronald Coase and the large literature of "Law and Economics" engendered in his name. For while this free market oriented Nobel Prize winner is widely interpreted as a defender of markets, I shall argue that he should be considered one of the most rigorous critics of property rights, and because of this misconception, Coase is a major threat to economic freedom.
This appears to be a harsh and unexpected charge, in that the overwhelming majority of Coase's work is widely interpreted, and rightfully so, as being broadly supportive of the capitalist system. Certainly, this applies to his contribution to our knowledge of the firm (1) and to the economics of the radio spectrum (2) and advertising. (3) My critique of Coase is thus a limited one--it applies only (4) to his study of "social cost." (5) Yet it is not insignificant, because Coase's The Problem of Social Cost is tremendously influential and one of the most highly cited articles in all of economics. (6) It has inspired such writers as Posner, Demsetz, Landes, and Calibresi in the "Law and Economics" tradition. So let me be clear on the outset on what I am not saying. I do not hold that the entire corpus of Coase's work is contrary to of undermines private property rights and the free market system. Instead, my present criticism applies only to his analysis of social cost.
What is the essence of Coase's vision on social costs? For Coase, two possible states of the world exist--one in which there are very high transaction costs and the other characterized by low or zero transactions costs. (7) In the case of a dispute between two parties over property in the low-transactions-costs world, the judicial decision will have no effect on the ultimate allocation of resources, because whoever values them more will get the property. If the judge awards the property to the claimant who places a higher value on it, the claimant will retain it. If the judge awards the property to the party that places a lower value on it, he will sell it to the party that values it most (for a fee). Of course, the judge's decision does affect the relative wealth of the two parties, but he does not influence who will ultimately own the property. (8)
The outcome is different in a more realistic high-transactions-cost scenario. Here, by definition, the judge's ruling will stand. Property will not be able to be transmitted from one claimant to the other; …