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Milton Friedman vs. Private Property

Written by Gary North on March 18, 2017

This story deserves to be better known.

One of the foundations of Western liberty is the defense of private property against invaders. This principle goes back to the Mosaic law.

If a man shall cause a field or vineyard to be eaten, and shall put in his beast, and shall feed in another man’s field; of the best of his own field, and of the best of his own vineyard, shall he make restitution. (Ex. 22:5).

In 1960, an obscure economist at the University of Virginia wrote an article attacking this position. He argued that judges should ignore the question of who owns the field. Instead, they should decide, on their own authority, whether it would benefit society more if the farmer should pay the cattle owner to build a fence for his cattle, or whether the cattle owner should pay for the fence. Henceforth, there should be no automatic compensation to the victim.

If this legal theory were ever adopted by the courts, it would end private property by ending the predictability of the law. The tyranny of the judges would begin. Fortunately, the courts have generally ignored it.

The economist submitted the article for publication in the University of Chicago’s new publication, The Journal of Law and Economics. The editor was Milton Friedman’s brother-in-law. He showed the article to Friedman.

Friedman wanted to challenge this thesis. So, he and the entire department of economics invited the economist to fly to Chicago and discuss it. He accepted the invitation. He had dinner with all 20 members. Friedman led the attack.

Two hours later, the visitor had converted every member of the department to his position. This meeting was described by George Stigler in his 1988 autobiography, who was present at the meeting. Stigler won the Nobel Prize in 1982.

The article was published in October. It has since become the most cited article in the history of American law journals. It is the second-most cited article in the history of American economics journals. An entire new academic field came out of that article, law and economics.

The economist was hired in 1964 by the University of Chicago Law School. He became the editor of The Journal of Law and Economics.

He won the Nobel Prize in 1991, mainly for this article.

His name was Ronald Coase. He died at the age of 102 in 2013.

I wrote a book against the article in 1992. No one paid any attention. I sent a copy to Coase. He never replied. He had 21 years to do so. I sent copies to a hundred economists. One replied to thank me. I never saw it reviewed in any economics journal. The Journal of Libertarian Studies published my refutation of his article in 2002. He had 11 years to reply. Silence.

On March 11, 2017, I delivered a lecture at the Mises Institute’s Austrian Economics Research Conference. I attacked Coase’s article as an assault on the legal foundation of private property. You can hear it here:

This was my handout to the audience.

Quotations from Chairman Coase
I. THE RECIPROCAL NATURE OF THE PROBLEM: The traditional approach has tended to obscure the nature of the choice that has to be made. The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm (p. 2).

Whether the cattle-raiser pays the farmer to leave the land uncultivated or himself rents the land by paying the land-owner an amount slightly greater than the farmer would pay (if the farmer was himself renting the land), the final result would be the same and would maximise the value of production. Even when the farmer is induced to plant crops which it would not be profitable to cultivate for sale on the market, this will be a purely short- term phenomenon and may be expected to lead to an agreement under which the planting will cease. The cattle-raiser will remain in that location and the marginal cost of meat production will be the same as before, thus having no long-run effect on the allocation of resources (p. 6).

Of course, if market transactions were costless, all that matters (questions of equity apart) is that the rights of the various parties should be well-defined and the results of legal actions easy to forecast. But as we have seen, the situation is quite different when market transactions are so costly as to make it difficult to change the arrangement of rights established by the law. In such cases, the courts directly influence economic activity. It would therefore seem desirable that the courts should understand the economic consequences of their decisions and should, insofar as this is possible without creating too much uncertainty about the legal position itself, take these consequences into account when making their decisions (p. 19).

If factors of production are thought of as rights, it becomes easier to understand that the right to do something which has a harmful effect (such as the creation of smoke, noise, smells, etc.) is also a factor of production. Just as we may use a piece of land in such a way as to prevent someone else from crossing it, or parking his car, or building his house upon it, so we may use it in such a way as to deny him a view or quiet or unpolluted air. The cost of exercising a right (of using a factor of production) is always the loss which is suffered elsewhere in consequence of the exercise of that right–the inability to cross land, to park a car, to build a house, to enjoy a view, to have peace and quiet or to breathe clean air (p. 44).

R. H. Coase, “The Problem of Social Cost,” Journal of Law and Economics (1960).

Coase on Social Cost

[Note: the bit.ly short links are case-sensitive.]

R. H. Coase, “The Problem of Social Cost,” Journal of Law and Economics (1960). www.bit.ly/CoasePSC

Gary North, “Undermining Property Rights: Coase and Becker,” Journal of Libertarian Studies (2002). www.bit.ly/NorthCoaseBecker

Gary North, The Coase Theorem: A Study in Economic Epistemology (Institute for Christian Economics, 1992). www.bit.ly/NorthCoase

Walter Block, “Coase and Demsetz on Private Property Rights,” Journal of Libertarian Studies (1977). www.bit.ly/BlockCoase1977

Walter Block, “On Ronald Coase as political economist,” Selected Works (Oct. 30, 2015). www.bit.ly/BlockCoase2015

Peter Lewin, “Pollution Externalities: Social Cost and Strict Liability,” Cato Journal (1982). www.bit.ly/LewinCoase

Murray N. Rothbard, “Law, Property Rights, and Air Pollution,” Cato Journal (1982). www.bit.ly/RothbardCoase

Murray N. Rothbard, “Comment: The Myth of Efficiency,” Time, Uncertainty, and Disequilibrium, ed. Mario J. Rizzo (Lexington Books, 1979). www.bit.ly/RothbardEfficiency

Arthur Allen Leff, “Economic Analysis of Law: Some Realism About Nominalism,” Virginia Law Review (1974). www.bit.ly/LeffCoase,/a>

Richard Thaler, Misbehaving: The Making of Behavioral Economics (Norton, 2015), pp. 261-66. www.bit.ly/ThalerCoase

George Stigler, Memoirs of an Unregulated Economist (University of Chicago Press, [1988] 2002), pp. 75–76. [The 1960 dinner meeting of Coase and the University of Chicago economics department.] www.bit.ly/StiglerCoase

Fred Shapiro and Michelle Pearse, “The Most-Cited Law Review Articles of All Time,” Michigan Law Review (2012). www.bit.ly/CoaseCitations2012

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