The Answer Is Transaction Costs

Desert Town Dilemmas and the Problem of Property Rights

• Michael Munger • Season 1 • Episode 26

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 We embark on a journey through the lenses of Hume, Smith, and Coase, piecing together the roles of observation and empirical study in shaping our understanding of societal conventions and moral philosophy. David Schmidtz recounts a defining moment from his academic path, sparking a robust discussion on the fusion of economics with moral considerations in the realm of ownership and resource distribution.

The discussion with David delves into the essence of property ownership, dissecting what it means to hold rights over something as abstract as an idea or as concrete as land. We grapple with the notion that property is not just a "bundle of sticks" but a set of societal constructs, born from necessity and shaped by our collective desire for harmony. Through examples of conflict resolution and the negotiation of public and private interests, such as eminent domain and navigation easements, we confront the delicate dance between individual autonomy and the greater good. The philosophical undercurrents of property law are laid bare, revealing the presumption in favor of liberty in those deep waters.

The "Desert Town" source:  https://www.cambridge.org/core/books/abs/elements-of-justice/desert/268B6C7A9B17949572933A4DAA0CAB09

Wall Street Journal article on Costco gold purchases: https://www.wsj.com/finance/investing/selling-costco-gold-bars-f14e966f 

Biden DOT rule on airline refunds:  


Lynne Kiesling on The Essential Ronald Coase, Fraser Institute.

Books:

C. Johnson, R. Lusch, Schmidtz, Commercial Society: A Primer on Ethics & Economics (Rowman & Littlefield). 
Bryan Caplan and Ady Branzei. Build, Baby, Build. Graphic novel just published by the Cato Institute  

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Michael Munger:

Do wild bears fight in the woods? Property rights, late nights, worrying about moral justifications is ideal theory, and the transaction costs of traffic management. Today's interview takes up those topics with one of the most important political philosophers of the 21st century, david Schmitz. Four new Ttwedges, plus this month's letters and more.

Michael Munger:

David Schmitz uses a philosophical method that focuses on what works, much in the vein of David Hume, adam Smith and a hero of this podcast, Rronald Coase. Let's listen to a short clip from Ronald Coase from an econ talk in 2012.

David Schmidtz:

(RUSS ROBERTS, Host of Econtalk): You've been critical of what you call blackboard economics. Oh yes, what does that mean to you? What do you mean by blackboard economics?

Ronald Coase:

Blackboard economics is an economics which you can put on the blackboard in which you study an imaginary system. It's not empirically based at all. It's not concerned with what really happens. It's what you imagine could happen and what you imagined didn't happen. I would recommend more empirical work. Study what actually happens. Start from there.

Ronald Coase:

I don't mean the study that people do with a lot of statistics and so on, not finding out what really happens and getting conclusions based on the investigations, but on bunches of statistics. My view is that you should get down and study what actually happens. Economists don't do that.

Michael Munger:

And now the interview with David Schmitz, a scholar who independently arrived at both the method and many of the conclusions of Ronald Coase, but who comes to that work from a very different and important direction. David, I want to welcome you to. The Answer is Transaction Cost, and, as I always ask guests to give an introduction to how you came to be someone who studies the particular things that you do, and in particular, today we're going to talk about some of your contributions in the institution of property. So how did you come to think about philosophy, how did you become interested in economics and what would turn you towards thinking about property as a subject of academic study?

David Schmidtz:

Hey, mike, good to see you, good to be on the show. Let me go back to the end of my first year in graduate school, when I hadn't been doing, I didn't do well in my first year. But one thing I did as I was scrambling to get, maybe get into some other program and get my student visa renewed and so on, and I ended up in economics. But I meanwhile, along the way, I took a course in the law school, taught by Jules Coleman, and Jules Coleman was teaching about property rights and he said something like well, if you were trying to decide who has the right of way, who is the proper owner and proper decider in the case of a dispute where some rancher's cattle has trespassed on the neighboring farmer's land and eaten the farmer's corn, how would you decide who the proper owner is from an efficiency standpoint? And I said, well, I don't know about efficiency, but like, really, we're supposed to just say what's efficient. And he said yeah. And I said, well, what's the difference? And I said something. He said, oh, that's interesting, explain. I said, well, it's something along the lines of there either are gains for trade or there aren't. And if, if it's, if, it's efficient for the cows to be eating the corn, then you'd think a deal will be made and the cows will be able to eat the corn. And if it's not efficient to be eating the corn, then then a fence will get, will get built, if it's worth building the fence anyway.

David Schmidtz:

So Jules said have you ever heard of Ronald Coase? And I said no. And he said have you ever taken an economics course? I said no and he said yeah, see me after class. So after class, jules said I've got a friend named Vernon Smith. I'm going to introduce you, because you can't go through life not knowing anything about economics when you've got intuitions like that. I talked to Vernon Smith. I met Vernon Smith and Mark Isaac and a bunch of other people as well, of course. But Vernon said I've got an experimental economic science laboratory. I've got an experimental economic science laboratory. Are you looking for work? And I said well, actually I am. In fact I'm about to be deported for lack of visible means of support and I can't work in the US unless I do something to get another student visa or get the conditions met.

David Schmidtz:

So I ended up working in the economic science lab for two years and learned a whole different way of doing philosophy and, incidentally, as one of the wonderful things about that particular economics department is, while I was working on it I stopped at the MA. I didn't go on to do the PhD because by the time I finished a year or so, graduate director in philosophy called Kevin McCabe, who was the graduate director in economics, and said is this guy okay, I'm just wondering how he's doing? And we didn't intend him to be inherited by anybody. And Kevin said, yeah, he's the best we've got. And so then Jules gathered some more information and then came and said we want you back in the philosophy program because we just made a mistake when we terminated you after your first year. We shouldn't have done that and we want you back. So that's how I ended up doing a PhD in philosophy.

David Schmidtz:

But then I took while I was at Yale. I sat in on courses being taught in the law school on property by Robert Ellickson and Carol Rose, and they were both revelations as well. So in a way I've been working on that ever since. I've been working on. Well, what if the grand question, say, in the theory of property isn't something like which is it communism or capitalism? Instead, it's something like when is it a liability rule that's protecting your property, rather than a property rule? When do you have a case for adverse possession? When do you have a case for distinguishing sharply between accidental and intentional trespass, or when is the answer transaction costs? So all of those things really made me think in a whole different way about philosophy, about political philosophy, about moral theory.

David Schmidtz:

I started thinking that these questions of observation and of course they're questions of thick observation it's not mere sensation, but it's observing, like Adam Smith did, what's working. So he didn't have a theory of justice and then applied it to the question of whether tariffs were just. What he did is say what's going on, how are these things working, why are these things being passed? And what's happening to the price of beer? What's happening to unemployment? What's happening to the nature of communities? What's happening to? What's happening to the nature of communities, what's happening to foreign relations between Portugal and England and France, and so on. So he started with observation, like a scientist might, and extracted a theory from observation. And when you extract a theory from observation, what's the conclusion? The conclusion is well, I might be wrong, but what I've seen suggests that this is the pattern, suggests like I'm not seeing causation Hume pointed that out. What I'm seeing is correlation. But the correlations that I'm seeing, it looks like the way to explain why B keeps following A is that A is causing B. So I started thinking that's actually what Hume was trying to do.

David Schmidtz:

Now I'm starting to understand Hume. Now I'm starting to understand Adam Smith and thinking those people were on the track to doing a kind of philosophy that got derailed in the 1800s and philosophy by the 1900s had become something altogether different. So that's my background in gradually coming to think the way that I think about it now, and I've been publishing papers, as you know, for like three decades, but basically leading to where I am now in understanding the point of investigating philosophical questions by saying what do we see when we look around? How are these? So I don't ask moral theories or theories.

David Schmidtz:

Since the 20th century, since Sidgwick, a moral theory has been what we call a moral theory. It's been a theory about what to do, like how to achieve the greatest happiness for the greatest number, say. And that's not what Adam Smith was doing. Adam Smith was theorizing about what works. David Hume was theorizing about what works. That wasn't a theory about what to do. It was about what works. And I'm thinking they weren't even trying to answer the same question, a very different question. So if you go back and say, well, I think Locke was basically a utilitarian or Adam Smith was a utilitarian, that's not exactly wrong, but it is anachronistic, because they weren't trying to tell us what to do. They were trying to tell us what to work, what works Like.

David Schmidtz:

So, for instance, respecting, like bears know this. Any animal capable of locomotion understands there's some reason to defer to the animal that got to the territory first. So you have a new bear and the new bear shows up on the old bear's territory and the old bear says move on, kid. And the new bear says, yeah, you're going to make me. But the thing is, here's what the old bear says next, says hey, kid, read my lips. You don't have much to lose.

David Schmidtz:

For you, the question is whether to keep moving. For me, the question is whether to give up my identity as having labored on this territory, having spent years protecting this territory and staking out this territory and investing in this territory. And if you just keep moving, that doesn't send much of a signal. But if I let you boot me off, that sends a signal that I am not someone whose claims command respect. So I've got way more to lose than you do. You don't have a reason to fight to the death, but I do. And then the new bear says I get it. And the new bear moves on. So there's a reason why first possession is not something it's obviously. It's not something that John Locke made up. The principle of first possession emerged with, you know, with the emergence of the animal kingdom.

Michael Munger:

Basically, Well, what's interesting about that, about your whole approach, is that Ronald Coase, when he was still a socialist and decided in 1933 to come across the ocean and ask questions of US corporate CEOs, his goal was just to see how things actually work. There were these theories that markets use price to allocate things, but it looked like these CEOs were giving commands. He was going to go find out by actually finding out how things work. He observed the way contracts work and he came up with a set of generalizations that were based on what he had observed. So the story, the account that David Hume gives of property as a convention, has almost no moral content. It is that there are some nations that seem to have this norm convention and equilibrium can bin more claims. It's an equilibrium of repeated game. There's all sorts of stories you can tell about it, but the fact is it seems to be a pattern that I expect you to respect my property and you do respect my property because you share that expectation, but it's reciprocal. I will also respect your property Now, and it's actually fairly hard to break this. The convention's not universal, so the convention might come from all of us acting in this way, but I want to pose a different view of this, because a philosopher comes along and says well, wait a minute. What you're saying is you can take something from the common stock of resources and you can just arbitrarily declare you know, this is mine, which means that it is not yours, so it's my property, which means not only do I have the right to use it, but I have the right to exclude you from using it.

Michael Munger:

Where does that second part come from? So let me read famously from Rousseau's treatise on inequality the first man who, having enclosed a piece of ground but thought himself saying this is mine, and found people simple enough to believe him, was the real founder of civil society. From how many crimes, wars and murders, from how many horrors and misfortune might not anyone have saved mankind by pulling up the stakes, filling in the ditch and crying to his fellows? Beware of listening to this imposter. You are undone if you once forget that the fruits of the earth belong to us all and the earth itself to nobody.

Michael Munger:

So Rousseau thinks about this and he says yeah, that's what people do, but it's wrong. In fact, a world that is based on that kind of convention is morally evil. We have to rise up against it and change it. So the convention, it doesn't seem to me, gets to the claim that it's a right I am morally obliged to respect. It's a convention in the sense we're all better off. There are many different equilibria of games. One equilibrium is we all respect property rights. Another one is none of us respect property rights. That one's probably worse. Maybe that's the Hobbesian state of nature. Rousseau says there are some other ones that we can imagine and we should strive for those. We should not be bound by your archaic story of bears. Okay, that's a question. There's supposed to be a question. Why is it that we don't all say oh, now I see the scales have fallen from my eyes, Rousseau has solved this problem.

David Schmidtz:

Well, yeah. So Hume says property is a convention, and that's not the only thing that is true about property, but that is a truth about property. So property rights are artifacts in the sense that societies invariably don't take up Rousseau's selection. Societies invariably recognize pathways to legitimizing property claims, and what that means is the propensity to do this. The propensity to create artifacts is not itself an artifact, so it's built into the human condition that we have a reason to do that and that we have a reason to respect it, because there is such a thing as traffic management and this is all part of that. So if you have someone thinking taking an opportunity to make land more productive and someone says, okay, fine, I will take that now, Now that's a little bit like the bear. Now how does it become human and not just right dueling predators or something like that? Well, it becomes human when we become able to talk about it and acknowledge, articulate the signals that we're sending. And then, when we can articulate the signals, then we can ask questions about the signals too, we can ask for justifications, but the thing that does the justifying at the end of the day, I don't know if it's at the end of the day or the beginning of the day. But the point is to say that's not the point where you bring in a theory, that's the point where you observe. So you say, excuse me, sir, we drive on the right side of the road in this town, not the left. And then the person says something well, I just got here and I'm from a long way, Okay. So then you say no, sir, we drive on the right side of the road, period.

David Schmidtz:

And if someone says well, why not the left? Isn't that arbitrary? So yeah, it's arbitrary, but our propensity to have conventions that we don't regard as arbitrary is not arbitrary. So we say no, see, the point isn't that the right is better than the left. The right is better than the left here because that's what people are expecting from you.

David Schmidtz:

It's that people are expecting it that makes it better. It's that people are expecting. It is what makes it peaceful for you to do what they expect and more or less disruptive or warlike for you not to do what they expect. So the convention is emerging and it's not being bootstrapped by morality. It's the other way around. The emerging convention is what's bootstrapping morality into the place. That's the point where you start developing the machinery that will enable people, at some point, to start saying, hey, that's unfair, that's mine, or there's a reason why I regard it as mine and don't regard it as yours. And nobody else regards it as yours. Everybody regards it as mine because that's the convention out of which you can build communities, or at least this community.

Michael Munger:

So the property is theft. People are all going to say, yeah, but slavery, patriarchy, those are conventions too, but we know they're wrong and so we should try to switch them and so we should get rid of property is theft because it's as bad as slavery or patriarchy. You actually have an interesting argument about the presumption in favor of original appropriation where it is. You could argue that property is a convention. There's a sort of Lockean story, at least about I've combined my labor with it, but it's not the end of the argument, it's actually the beginning, and the reason that that's important is that then somebody else comes along and does what we're so described, that you put a fence up. Why don't I just toss the fence down? What do you say that persuades me?

David Schmidtz:

I'm not sure what position I'm saying this from. Like you know, if, say, I build the fence, you take it, I file suit Now. Now the question is what does the judge say? The judge is going to say something and that judgment is going to become part of the law. So what makes it right for the judge to say one thing rather than another? What makes a difference?

David Schmidtz:

The reason it isn't arbitrary you, the second comer. You say, hey, there's nothing morally significant about having gotten here first. And I say, well, there's one small thing that is significant, which is that I'm not proposing to take your stuff. You're proposing to take mine of the land that I am turned the land to producing. I don't have to disregard a first comer's claim in order to do that. You would have to disregard a first comer's claim in order to do that. Is that a big difference Point? Is it is a difference Point is I have some connection to the land that you don't have. You can't make even as much of a claim as I made without disregarding me, right? So there's a way in which you're I'm not denying your personhood by saying good luck. You are denying my person by saying move over, I'm taking what you've got.

Michael Munger:

In effect this creates a presumptive claim. It's not a knockdown claim. It's not that I can pour a can of orange juice in the ocean and claim to own the ocean. Maybe the extent to which I can claim something there's a limit. So there may be some Lockean considerations. Your claim about the presumption in favor of first use is a way of fixing, of remediating Locke's proviso, because the Lockean proviso seems to be talking about. I've always thought of it just as a sufficient condition. Many people want to argue it's a necessary condition and unless there's as much and as good, I can't claim property. I would say this is just an arbitrary sufficient condition. There's many others and the presumption of first use might be one that Locke was talking about sufficient conditions.

David Schmidtz:

just the language that he used said well, this is fine, at least if there's enough, and is good for others. So he meant to say the point of the Lockean proviso was to identify what would count as sufficient grounds for a complaint in order to overcome the presumption which, as you correctly say, it doesn't need to be more than a presumption. What the first comer does is raise the bar on what it takes to justify a subsequent taking. The first comer doesn't have to justify taking it away from somebody. The second comer does.

Michael Munger:

Well, so that raises a question about the nature of property. Could you say in the abstract what you think is the what is the definition of property? And there are a number of examples that you use in your teaching that I'm quite fond of the idea of property with. I believe it was Hinman-Ehr. The Hinman-Ehr legal case was an interesting illustration of the problem of property. So could you say what property is and then how the Hinman-Ayer case illustrates that?

David Schmidtz:

Yeah, this is tricky. Again, there's a lot that falls out of figuring out what works rather than falls out of a theory. But basically, property is Property, is it's been understood since maybe the 1870s, as a bundle of sticks. It's more than one thing. To have a property right in something or to something is to be able to sell it, maybe to have a right to collect money for transferring it. It's a right to give it away, it's a right to bequeath it. It's a right to give it away, it's a right to bequeath it, it's a right to use it as collateral and so on and so forth.

David Schmidtz:

And I say there is a fundamental if it's a bundle there's, it's not. They're not all, not all the sticks or branches, though there is one that's the has be the trunk, and that's the right to exclude, the right to say no. If you don't have a right to say no, nothing else is sufficient to make your claim a property claim. So that's why I want to say it. So if you say whose bicycle is this, and I'll say it's mine, say oh, can I borrow it. You say whose bicycle is this, and I'll say it's mine, say oh, can I borrow it. And if I say yes and I'm the one who gets to say yes, well then I'm the owner. But if you have the right to say yes to someone who proposes to borrow it, then I'm not the owner in any regular sense. So the one who has the right to say no is the one that has the core, the trunk, right, and I would take it. That's for whatever it's worth. I don't know if it's worth talking more about that. All you asked for was a definition, but I guess I would say maybe there's something inherently liberal about the whole idea of property, because you know, when you're you were complaining about slavery and such things is the thing that makes you not a full person is not having a right to say no. Um, like, if someone else gets to say yeah, he said no, but uh, I decided that no means yes, uh, that person is running over you and then not treating you as a self-owning person. Okay, so that's kind of characterizing property.

David Schmidtz:

And now I want to say there are all kinds of other practical issues that come up that result in conflict, right, and so again, where a philosopher wants to say well, here's my theory about how conflict, here's my theory about the principles of fair conflict resolution, I want to say, yeah, I got trained that way too, but it still seems backwards to me now. Now it seems like if you actually want to come up with an answer, rather than just have dueling intuitions, that where the dual cannot be resolved, then you've got to start with something other than philosophy. So start with what it takes to keep the peace, start with what it takes to get people to stop fighting, and so you say are people capable of attaining some kind of truce under conditions that really aren't fair? Yeah, of course, which is why that's not talking about a definition anymore. That's not talking about a definition anymore, right, that's talking about how you get off the ground with understanding what it takes to resolve conflict and thereby move in the direction of something that might be the ballpark of justice. But you've got to start with conflict resolution if you're even going to get to the ballpark of justice.

David Schmidtz:

So then we'll say there are all kinds of things with, say, the Calabresi-Malamad kind of schema that they gave us, which was kind of interesting, and not only them, but you could say there are times when you can't really protect property with property rules, right? So your neighbor knocks on your door and says I'm really sorry, I didn't realize where your kid had parked his bike on the sidewalk and as I was backing out of the garage I ran over it. I'm sorry, what does it cost? I'll buy the kid another bike. And then you say, well, maybe now I've got a difficult decision, because now I've got to say this sounds like, yeah, we've been neighbors for a long time and honestly, that doesn't sound like your fault. And then you say, well, how about if I like your fault? And then you say, well, how about if I I'll? You know, I'm going to buy the kid a hundred dollar bike, but that wasn't only that was only worth 50 bucks anyway. So how about if we split the cost, or something like that? And will that make us good neighbors?

Michael Munger:

And so the distinction you're making because it is an important one the property enforcement would be I have somehow infringed on your property because I broke important one. A property enforcement would be I have somehow infringed on your property because I broke the bike. A liability rule would be that I have to make you whole by restoring the value of the bike. You are saying actual conflict resolution here. We've been neighbors a long time. My idiot son had no business laying his bike down in your driveway and yeah, you drove over it, but that let's just split it, and so that that's kind of a bargaining solution that has a longer run. It's more like liability rather than pure property. It's not even clear what the trespass you would.

David Schmidtz:

Well, it's some way of it's a way of showing respect for property when maybe the horse is out of the barn and it's too late for the property rule. And so you could say this is why it matters whether we're talking about accidental or intentional trespass, like if the person says look, we've been neighbors for a long time and I, I don't want to. I want us to remain on good terms, but your kid said something you know said. It used a slur against my kid. So I'm telling you what I'm. I'm just letting you know what I'm going to do. I'm going to run over your kid's bike whenever I see it, and and I'll just pay you to buy another bike, because I don't want you to be mad at me, but I do want your kid to live in fear of what I'm going to do next. So I want that, but I'll pay you for any damages. And then that's the point where you get to say no, no, you don't get to decide that it's okay to run over my kid's bike. That's not your call, it's not your property. You don't get to do that.

David Schmidtz:

A property rule protects you, protects me against you, in that sense. But if it was an accident, that's different. Yeah, oh, that we're. Sometimes, you know, we, we have a lot of friends who think, uh, that, uh, something like a fifth amendment of takings clauseinent domain. It's an abomination. It's part of any property system I've ever heard of. Because here's the thing you have to say about that Humean Convention it's presupposed that if it's going to be a Humean Convention, we can live with it, we can afford it. So that gets us to the Hinman case that it would be nice to talk about.

Michael Munger:

That's really interesting. So what you're saying is it's a rebuttable presumption, but it can be rebutted in the case that it would be very inconvenient and so I will put up the link. It would be very inconvenient and so if I will put up the link. And Hinman versus Pacific air 1937 was it's interesting that you raised the bundle because I, if I live in Texas, I could sell or rent off the mineral rights, which means I own the land, I own the air above it. But the mineral rights the right to take oil or uranium or whatever else that's below the surface I can sell that off and it's separable. So I have a bundle of sticks. I find that one stick that you want which is the mineral rights, and I hand it to you and you give me money. We sign a contract and we both agree that we're better off. Now maybe I regret it later, but we have a contract. Hinmanier wasn't really like that. Hinmanier was taking one of the bundle of sticks and it was against the will of the owner.

David Schmidtz:

Yep, okay. So let me give me a minute, mike. Let me do, here's, a transition between eminent domain and the idea of a navigation easement. So with eminent domain, you say so. With eminent domain, you say our community is premised on respect for personhood. We built a community by making it affordable for people to live close to each other. We've dialed down the threat that people pose to each other. We've made it possible for people to trust each other.

David Schmidtz:

All kinds of ways, things that we've done to make it possible for people to trust each other and property is a big part of that. Like, maybe it's one of the biggest parts of that is to say, hey, there is such a thing as minding your own business that's not internally inconsistent. There is such a thing as minding your own business If that's your basement, yeah, you get to do what you want, except when you don't. There are things you don't get to do, even if it is your basement. But at some point you say, okay, we had this understanding that you could put a fence around your property, you could put up a no trespassing sign, and that was not to be balanced, that wasn't to be weighed in a utilitarian calculus. You had the right to say no. You said no, end of story. And now you say okay, I know we said that we thought we meant it. We did mean it in some sense, but the facts weren't what we thought they were. The facts are we thought you could do that, but the fact is you doing that on your property is turning out to pose an external cost on other people, it's turning out to be poisoning their water supply or it's turning out to cut off their access to the port. It's doing something that we didn't anticipate. And because it's doing something that we didn't anticipate, that the community can't afford to countenance, we have to say I am really sorry, but we are going to take back some of what we, for very good reason, said was yours and we said you had the right to say no. We thought we could afford to respect that, but we can't.

David Schmidtz:

Okay, now, easements are like that. They're, in effect, like a mini eminent domain, and we can get at the idea of easement by talking about that Hinman versus Pacific Air Transport case, because do you have a right to say no trespassing? Well, sure you do. You put up a fence, you say no, trespassing. No means no, period, end of story. And then you have a rancher who files suit and says yeah, they're trespassing. The judge says what do you mean? Well, they're flying over my land. At what height? 10,000 feet. And the judge says yeah, is that true? And Pacific Air Transport says that's not trespassing, though Like it's not land.

Michael Munger:

Well, as the name suggests, we're an air transport company and so, yes, we're flying over his land.

David Schmidtz:

And so the rancher says well, you know, we've known for 2,000 years, we've understood for 2,000 years that to own the land, he who owns the land owns it to the heavens. And there's like a cylinder going up, or maybe it's a cone going up, something that's not really super clear, doesn't have to be super clear, but anyway you own your land all the way up and maybe all the way down. That turns out not to be quite right either. Okay, so here's what the judge says. That turns out not to be quite right either. Okay, so here's what the judge says. The judge says it's all transaction costs.

Michael Munger:

Right, there's a smiling puppy dog there. The answer is transaction costs.

David Schmidtz:

Yeah, Murphy knew I was going to say that. So the judge says, okay, clearly, I know what the verdict has to be. The verdict has to be it's not trespassing. But I also know that that can't be the case because, like I can't abolish property, I can't be the judge who said who ruled that property is theft. I have to say, no, no, trespassing means no trespassing. You really can't trespass. But then the judge says well, really, but property rights just don't extend that high. It's like you know, people were wearing skins and kilts and things and togas back when that rule was interpreted that way. There weren't any airplanes back then. So we can't do that. So we have to say property rights, don't go that high. And then, like within a couple of weeks, the interpreters and people like you know, writing case books and things. They said well, here's what actually happened. The ruling was that that isn't trespassing.

David Schmidtz:

But the reason it isn't trespassing is that there have always been navigation easements. This isn't some where he can't get out. And we've known that if you cut off access to the beach then you have to open up a space between your fence and the neighbor's fence so as to allow public access to the beach. We've known that you can't put a wall across a stream. That is a navigational water. That is what ships use to get their merchandise to the city center. You can't do that. There are easements, and so this is just a navigation easement. We've always recognized that there were such things, and now we've just recognized that we have them at 10,000 feet as well.

Michael Munger:

And the interesting thing about it was that the to the extent that property can be oversimplistically a right to use and a right to exclude. All they were saying was that he didn't have the right to exclude. If he wanted to fly airplanes over his house, he was welcome to. He still had that right. It's just that other people did also and probably they didn't have the right to park a giant balloon over his land permanently and block out the sun, right.

David Schmidtz:

And they didn't have a right to empty the latrine on his land as they were flying over. So that would have been trespassing. That would have been, you know, the rancher would have won the suit in that case. But the reason it's all transaction costs is the judge has this alternative right? It's to say okay. It turns out that, like when I was a kid, it took six weeks for a piece of mail to get from New York to LA. Now it's going to take six hours. Do I want to be the person who said no, we can't have that. No, I don't want to do that. But if I say every landowner on the ground has a right to seek rents and to threaten to veto this passage, I can't be the person who ruled that way. I can't turn everybody on the ground into a troll at a draw bridge, threatening for no particular reason to shut down commerce.

Michael Munger:

And that is a problem with Rousseau's argument about the it certainly is. It's the anti-commons. So the problem with the anti-commons is, if I have to get everyone's permission, I can never do anything. And we want me and you and you and you all to be able to do things, not to the extent that we violate property rights. But an easement means I get to use it for a particular purpose for a brief amount of time.

Michael Munger:

It is interesting that if you read the case closely, there are two claims really. One is nuisance and one is trespass. The nuisance claim some of the planes were flying pretty low and they were loud. This was 1937, so they were flying pretty low and the judge agreed to the nuisance action. It was upsetting the cows. You guys should fly higher, but you can fly, because the alternative would be you have to get permission of everybody between Chicago and Los Angeles in order to deliver the mail. That's prohibitively expensive in terms of transactions costs and there's no justification for it because we've had these easements for a very long time.

Michael Munger:

So that brings me to the last question yours, because the example of me having to go and get the permission from every landowner makes me think of the example of Desert Town, where we have a couple of alternatives about how we might decide how to do things. So can you say, how did you come up with the example of Desert Town? Because I actually want to make a movie. I have to admit. I would like to get with my good friend, john Papala, and the guy who did the Keynes Hayek rap videos with Russ Roberts, and we should do a five-minute Old West-style video for Dessert Town. So please, if you would share the origins and the story of Dessert Town, Thank you.

David Schmidtz:

As far as I know, mike, you're the one who came up with the name Desert Town, maybe Rawlsian position, but not only Rawls. But if it's a Rawlsian position it's pretty mainstream. But Rawls had said look, I've got two principles of justice, of principles about how to slice the pie. And what I've always said is, yeah, well, that's what happened in the 20th century. We started thinking that justice was about how to slice the pie. We forgot that justice is about how to treat bakers and that's a terrible thing to have turned that you know the dynamics of the human condition to turn that into a photograph where you see, hey, some people have a red light, some people have a green light. That's really unfair. Everybody should have a green light at the same time. So I started coming up with ways of picturing what people were saying and just saying you, you would never get that from reality. You like a judge who could not possibly take that seriously. We, you could only be in, you could only say that if you're in the grip of a theory. So I started talking about all of the ways in which what yeah, the the paper was called how to Deserve and, yeah, it got a lot of attention, basically talking about ways in which the way we live recognizes all kinds of ways, indispensably recognizes all kinds of ways in which respect involves respecting what we bring to the table. It isn't to say you know, the important thing about you is you as a consumer of a slice of a pie, you as a stomach into which we shovel a slice of pie. The important thing is you brought the pie to the table and with it you brought a right to say no. So how do we respect that? Because that's what justice is actually going to be.

David Schmidtz:

Article where the preface was like you know, a cop pulls me over on the side of the road and says, sir, you're new in town. And I said, yeah, yeah, I just got here. And the cop says so do you know what you did wrong? And I say no, I sorry. I mean there wasn't. I didn't go through a stoplight, I didn't go through a stop sign and the cars on the cross street were stopped. So I took myself to have the right of way and I kept going. And the cop says, sir, in this town we distribute according to dessert.

David Schmidtz:

And so when now it's the Rousseauian move turns out, it's like it's officer Rousseau says when motorists meet at an intersection, they stop to compare destinations so as to ascertain which of them has the worthiest claim to the right of way. And so if you attend our track meets, you'll see the same thing. We don't award gold medals for running the fastest, we award them for giving the greatest effort, because, anyway, that's why the other cars honked when you drove through, because you didn't stop to compare destinations and to compare relative destinations. And so the cop looks and I say I'm sorry, officer, you got to be joking, but I don't get the joke. And so the cop looks and I say I'm sorry, officer, you got to be joking, but I don't get the joke. And the officer says sir, justice is not a joke. I was going to let you off with a warning until you said that. So that's, I think, where dessert town comes from. That wasn't. I didn't come up with a name for it. I think you came up with the name.

Michael Munger:

Well the pun. Of course it looks like desert town, but because it's spelled the same, and so that is what I enjoy so much about it. So I have used that example to illustrate problems of regulation of antitrust. I have used that example to illustrate problems of regulation of antitrust, and one of the arguments it can be marshaled to try to make is for rural utilitarianism generally. So we have a rule, and the rule we might pick in this case is the unfair rule.

Michael Munger:

You already mentioned a stoplight, and stoplights really make me mad. I'm often late. Clearly my errand is of great moral significance. I know these other people. They're just poking along, but they happen to have a green light. It's not fair. If I had a forum where I could argue for the moral significance of my errand, then that would be more just. The problem is that the maximum time I have to wait with a stoplight is two minutes. The minimum, if we all get out and argue, is seven and maybe 20 minutes, and so we might unanimously pick an unfair but just in the sense that it's arbitrary rule over a rule that requires us constantly to make only justice rather than the costs of living our lives the primary factor, and so that's why I think it's such an interesting general example.

David Schmidtz:

Well, I appreciate it, mike. Thank you, I mean I'm honored just to be on the show at all, but I'm honored to have this conversation in particular. I think you know my view about this, that we do well not to equate arbitrary with unfair, that, in fact, if you say no, I'm the referee of this game, I will make sure that the best team wins. And you say no, no, the ideal is for the best team to win, but the referee's job has nothing to do with making sure that the best team wins, right. So and so you might say, well, what makes a lottery fair? And you might say, well, what makes a lottery fair? And you might say well that what makes a lottery fair is that the winner is chosen arbitrarily. If the winner is not chosen arbitrarily, then you say that's, that's where the unfairness came in, is the lack of arbitrariness.

David Schmidtz:

So so Rawls, I think, really wants to Crush the distinction between, say, what he calls the natural lottery that's just what happened and he wants to and Nozick understands this, nozick pointed this out like that's not a situation in which somebody decided that some people will be born with a cleft palate, some people will be born destined to be Wilt Chamberlain and nobody's born destined to be Wilt Chamberlain. The point is, some people have the genetic potential to be Wilt Chamberlain, but yeah, that's not fair. But it's not unfair if it's arbitrary, if it's chosen, if we is, if we say we want to engineer a lower class, that starts to sound heinous. If it just happens, then there's a question about how to respond to it. But what we're responding to isn't injustice, isn't unfairness, it's just a tragedy that can be alleviated, or suffering that can be alleviated, and a tragedy that can be alleviated, or suffering that can be alleviated. So I want to say that about the difference between being arbitrary and being unfair.

Michael Munger:

Well, we could obviously talk about this for a long time. I do recommend I'll put up several of David Schmitz's writing on the show notes. Let me ask one final, more open-ended question what progress have we made in legal understanding of property, in intellectual property, in the last 20 years? And this is something that I think you've thought about.

Michael Munger:

I don't know if you've written much about it, but in the last 20 years there's an awful lot of things music, art of various kinds, writings that, because they're in the public domain, on the internet, can be used to train artificial intelligence, that can be used to train computers that can generate images that are indistinguishable they're in the style of the author or the singer. To what extent is your view about first use, because I'm not preventing you from using it and what I'm saying is I'm going to use something of your likeness, your voice, and I'm going to produce a new Beatles album of what they might do today. I'm going to produce new art that Picasso might have made. Is there some ownership that persists beyond the creation of intellectual property? And what's going to happen with the new artificial intelligence, the ability to internalize this and then create new things? Is property a concept that's going to kind of disappear and wither away, in this realm at least.

David Schmidtz:

Yeah. So the mark of a good philosopher, mike, is that their go-to answer either is it's transaction costs or else I don't know. So I really don't know. I've heard many arguments about this. I kind of believe them all. They contradict each other, so that's a problem for me. So I really see things being pulled both ways. I don't see theory answering this. I see convention emerging to answer this.

David Schmidtz:

I do think there are principles that are relevant. So enforcement cost is relevant. Incentivizing research and development and creativity is maybe the most relevant thing. So if an artist is producing novel works that really matters, I mean that should be celebrated, honored, rewarded. Now if somebody says, okay, but here's the thing, what you would want ideally is for an idea to emerge, to be perceived as cutting edge, to be perceived as a path of progress, and you would want people running with it. So you don't want to turn the original artist into a troll at the drawbridge, but you also do want the original artist to want to be the original artist and to feel rewarded for having been the original artist.

David Schmidtz:

So it's like you know, with traffic management, property rights aren't like green lights, property rights are like red lights. And you say so. Why would you want to have red lights? Well, because then you know your turn is coming up in two minutes and you can live with that. And other people know your turn is coming up in two minutes. And a fundamental thing about this is, if your turn is coming, you don't have to sort people out into upper class and lower class destinations. Right, you can actually have a liberal, egalitarian society if it's governed by something like traffic lights. If you're governing by the relative importance of destinations, that's going to be a tyranny. Okay, now with intellectual property, I don't know where to go with that.

David Schmidtz:

But, like I said, another issue is enforcement costs. So if you say, well, yeah, the Beatles, that's pretty unique stuff, ought to be respected, should never be forgotten, should be superseded for God's sake superseded, but don't forget it. Always honor that, that originality. But, on the other hand, if the suppose some technology comes out of China for making is it CDs? Is it digital music?

David Schmidtz:

What is it when, in effect, you took a 10-foot electrified, barbed wire, razor-wired fence that people couldn't get over and you lowered that to one inch and then you said, hey, people don't step over that line, you got to respect this. And they say, well, yeah, when it used to be illegal for me to spend $5 remaking an $8 record that was the law was some disincentive. But when it costs two cents to make a pirate copy of an $8 record, I'm going to make a million two-cent records and I'm going to get rich and I'm going to get out of town before the law can catch me. So you can't.

David Schmidtz:

If you respect property, you've got to respect the lines where no trespassing signs can actually be effective, and so if there's no place for you to draw a line technologically and protect property there, then you've got to realize when it's a lost cause and you, pretending that you can and have drawn the line, there is just words step frontiers here where what was an answer a generation ago will have been rendered moot by the technology that's just around the corner. So I do see the point of intellectual property, I do see the limits of it and I just don't know what else to say.

Michael Munger:

Well, you advanced some principles that we might at least wrestle with, and that's pretty helpful, so I want to thank my guest today, david Schmitz, for having been on. The Answer Is Transactions Cost, david, thanks very much.

David Schmidtz:

Thanks Mike, thanks Murphy. It's been great to be on the show.

Michael Munger:

Whoa. That sound means it's time for the twedges these week's economics jokes. First, I should note that David Schmitz signing off for my dog, murphy, was partly because Murphy kept barking. I cut the barking part out, but David was kind enough to acknowledge that Murphy had been an important part of our conversation so I thought I should explain if he had been an important part of our conversation. So I thought I should explain.

Michael Munger:

The first twedge Pierre Proudhon goes up to the counter and orders a tazzo green tea with toffee nut syrup, two espresso shots and pumpkin spice mixed in. The barista warns him that's going to taste terrible. Pa scoffs Proudhon, proper tea is theft. Second, pa scoffs Pradone Proper tea is a theft. Second, jeremy Bentham goes up to the counter at a coffee house holding a $50 bill. What's the cheapest drink, you ask? He asks Well, that would be our cheap coffee roast, I guess the drip, for only $1.99, says the barista. Good, says Bentham and hands her the $50. I'll buy those for the next 25 people who show up.

Michael Munger:

Third, what do you get when you cross a joke with a rhetorical question? Fourth, the dean asks the head of the physics department to see him. Why are you using so many resources, all these labs and experiments and stuff. This is getting expensive. Why can't you be more like mathematicians? They only need pencils, erasers, paper and a trash bin. Or, better yet, philosophers All they need is pens and paper.

Michael Munger:

We got some letters. One letter writer notes that people are buying gold bars and coins at Costco, using the spending on their credit card to get cash back or airline miles and then reselling the gold bars. Except it turns out that reselling is expensive. Well, transaction costs and the bid-ask difference more than eats up the expected profit. So people are actually holding overpriced gold bars that they thought they were going to be able to make money from. Interesting article about this in the Wall Street Journal. I'll put up a link to that in the show notes.

Michael Munger:

Second, from Ryan Berkmman, a past guest. He writes a letter that there's a huge change. Airlines operating in the US will soon have to automatically refund you when your flight is canceled or even delayed three hours domestic or six hours international or if your bag is lost. The refunds have to be paid within seven days. The new rule of the Biden Department of Transportation starts in six months. Well, it's interesting to think about what is likely to happen as a result of that. I thank Ryan for the letter. His point is that it's likely to have quite a few unintended consequences in terms of price and how long in advance a flight might be canceled, because if they can't be sure that it's going to be full or if there's a chance of bad weather, they're better off just not flying at all.

Michael Munger:

Now it's time for Book of the Month. There's two books that I want to suggest this month. First, johnson, lush and Schmitz. David Schmitz, who was our guest this month, in their book Commercial Society, a Primer on Ethics and Economics was published by Roman and Littlefield. It's a terrific consideration of a lot of the practical problems and ethics in commerce. So not abstract, but at the same time not really business ethics, it's a serious treatment of the morality of commerce. And then a graphic novel that was just published by the Cato Institute that I'm a big fan of. It was written by Brian Kaplan and Adi Brenzai, called Build, baby, build. Well, the next episode will be released on Tuesday, may 28th, the last Tuesday of the month. We'll have a new interview, have another book in a month, plus we'll have four more hilarious twedges and more next month on Tidy C.