===== PAGE 1 =====

Ethics, Efficiency, Coasian
Property Rights, and Psychic
Income: A Reply to Demsetz

Walter Block

The Debate over Property Rights

he purpose of the present article is to continue my part in
the debate over property rights in which I have become

enmeshed with Harold Demsetz. It all began with the
publication of my piece (Block 1977a), which was critical of Coase
(1960) and of Demsetz (1966, 1967). The second round consisted
of Demsetz (1979), in which he replied to my critique (Block
1977a).

Ronald Coase

In his seminal article, Coase (1960) turned the world of eco-
nomics upside down. It might even be said that with one (longish)
stroke of the pen, he created the entirely new sub-discipline of
Law and Economics; and that he did so out of the ashes of at least
one part of the traditional field as it stood before his onslaught:
that occupied by Pigou (1932).

Previously, the view of the profession regarding invasions
against another person or his property was the classical liberal
one of cause and effect. A was the perpetrator, B the victim. To be
sure, there was some equivocation amongst the Pigovians as to
whether the proper public policy response to this was to tax A in
an effort to force him to stop his depredations, or to give him a
subsidy so as to entice him toward this end (ibid., p. 184). But the

Walter Block is associate professor of economics at the College of the Holy
Cross. The author wishes to thank Gary Anderson, Michael Levin, Murray Roth-
bard, Karen Selick, and two anonymous referees for helpful comments and sug-
gestions. The usual caveats apply.

The Review of Austrian Economics Vol.8, No. 2 (1995): 61-125
ISSN 0889-3047

61


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62 The Review of Austrian Economics Vol. 8, No. 2

idea of property rights was maintained intact: there was always
a clear cut distinction maintained between the violators of that
institution and those who suffered thereby.

As well, in the more traditional perspective, wealth maximi-
zation was the byproduct of private property rights, rather than
the progenitor. In other words, economic considerations was the
tail, and property rights was the dog. Locke (1955, 1960), for
example, did not ask whether the homesteader was the most
efficient utilizer of virgin territory. For this philosopher, it was
enough that a person was the first to “mix his labor with the land”;
this, and this alone, would suffice to make him the legitimate
owner. Following in the footsteps of Locke, libertarian philoso-
phers (Rothbard 1962, 1970, 1982a; Hoppe 1989, 1993; Nozick
1974; Epstein 1985) did not attempt to determine who was the
Coasian “most efficient user” of a good, or “least cost avoider” of
an accident as a means of assigning rights, blame or punishment.
Instead, resort to property rights and strict liability was made.

But all this changed with Coase and his adherents. In this
new view, property rights became the handmaiden of so called
economic efficiency. The very determination of private property
became dependent on cost considerations. Another way to put this
is that in the pre-Coasian days, property rights were exogenous
to economics. Thanks to Coase and his followers (Demsetz 1966,
1967; Posner 1986; Landes 1971, 1973, 1979),! this is no longer
true. Now, if anything, economics is the independent variable;
property rights have become indigenous on it.

Further, reciprocity was nominated to take the place of pre-
viously sacrosanct causal relationships. It was no longer true that
the factory that emitted sparks which set ablaze the farmer’s
crops was at fault.” The latter became equally blameworthy, or
rather, since it became no longer appropriate to relegate blame
to anyone, responsible. Had the farmer not planted in that spot,
no harm would have befallen him. Says Coase (1960, p. 37), ‘Iit]
is not that the man who harbors rabbits is solely responsible [for
damage to neighboring farms]; the man whose crops are eaten is
equally responsible.”

This is only the tip of the veritable iceberg. These four are perhaps the most
prominent of the Coasians. But most economists have now accepted the method-
ology and tools of analysis pioneered by Coase. Indeed, it is probably no exaggera-
tion to say of virtually the entire profession that we “are all Coasians now.” See
Samuelson (1976, p. 193) who quotes Milton Friedman to the effect that we are
“all Keynesians now.”

?Indeed, the very concept of “fault” began to sound archaic.


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Block: Property Rights: A Reply to Demsetz 63

And what was the advice to the judiciary which emanated
from this new outlook? Judges were to rule in such a way as to
maximize the value of economic activity. Under a zero transac-
tions cost regime, it really wouldn’t matter—as far as the alloca-
tion of resources was concerned—which of two disputatious par-
ties received the rights in question. If they were given to the
person who valued them more, well and good. If not, the loser
would be able to pay off the winner so as to enjoy their use. But
in the real world of significant transactions costs, in contrast, the
juridical determination was absolutely crucial. Whatever the
judge decided would endure; there could be no opportunity for
mutually beneficial exchange, ex post.

From these deliberations emerged, especially in the writings
of his followers, the “Coasian” public policy recommendation. The
jurist must ignore tradition, property rights, ownership, and the
niceties of Lockean homesteading theory upon which all were
based, and instead make his award solely in order to maximize
wealth. That is, he should find in favor of the disputant who
values the rights in question more strongly; the one who, had he
lost the court battle in the zero transactions cost world, would
have successfully bribed the winner.?

Demsetz (1967), for example, went so far as to apply this to
matters of freedom. In his view, it doesn’t matter—for purposes
of resource allocation—whether the army hires the recruit (the
volunteer military) or commandeers him (the draft), but then
allows him to buy his way out of this predicament.

There is an alternative way of characterizing Coase’s very
interesting contribution to economics. He maintained, contrary
to the prevalent (Pigovian) belief at the time," that under certain
circumstances a judicial decision concerning property rights
would not affect the allocation of resources.

Take the case of the sparks from the factory which set afire
the farmer’s flowers. The farmer sues, demanding among other
things that the factory add a smoke prevention device, so as to
protect his private property rights. Coase argues that under zero

3Posner (1986, p. 45) makes this point most succinctly. He states: “It does not
follow, however, that the initial assignment of rights is completely immaterial from
an efficiency standpoint. Since transactions are not costless, efficiency is promoted
by asssigning the legal right to the party who would buy it—the railroad in our
first hypothetical situation and the farmer in the second—if it were assigned
initially to the other party.”

4Pigou, of course, also dealt with “positive externalities,” not just with property
rights invasions.


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64 The Review of Austrian Economics Vol. 8, No. 2

transactions costs assumptions, resource allocation—whether or
not the smoke prevention device is used—will not depend upon
the court’s finding. If the factory values the right more, it will use
that right if its suit finds favor with the judge. That is to say, it
will not install the smoke prevention device. Under a negative
ruling to it, the factory will purchase these rights from the farmer.

To be sure, the decision from the bench would have some
effect. States Coase (1960, p. 488), it “would not affect the alloca-
tion of resources, but would merely alter the distribution of
income as between the two parties, plaintiff and defendant.”
(Henceforth, I shall refer to this as statement “A.”) In other words,
the property rights finding of the court may be irrelevant to
resource allocation, but it would be of great importance to the
wealth positions of the two legal opponents.

Walter Block

The next installment in this brief history of the debate con-
cerns my criticism of Coase and Demsetz (Block 1977a). In that
article I attempted to distance myself from Coase on several
points. I took the position that not only was Coase required to
assume zero transaction costs in order to reach his conclusion, he
also needed to make a supposition about the form in which the
wealth was held. I maintained that as long as the values of both
sides in the legal dispute were real, or general’ that Coase’s
Theorem was correct. However, if these values were psychic or not
general across at least a few people, it was incorrect. Alternatively,
I took the position that yet another assumption was required by
Coase in order to defend his Theorem; namely, that the values
could not be psychic or specific to one particular person.’

The question to be emphasized is this. How does the farmer
bribe the factory, in the case where the farmer values the crop more
than the factory, and the court decides against the farmer? With
collateral, real, objective, general wealth at stake, there is no
problem. That is, if the crop is worth something to the factory, or to
someone else, the bribe is easy to finance. The farmer can give part of
this crop to the factory. But if this is not true, the bribe cannot occur.’

My response (Block 1977a) to Coase and Demsetz made the
following points:

That is, of value to other people as well as to the owner.

®Becker (1964) makes this distinction between general] and specific with regard
to on-the-job training.

"I also assume that the human capital of the farmer can not serve as collateral,
or that if it can, it is worth less than the damages in this made up case.


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Block: Property Rights: A Reply to Demsetz 65

(1) It does matter for resource allocation purposes who wins
a property rights lawsuit—even under zero transaction costs
conditions, even ignoring the wealth effects of the judicial deci-
sion. This is because there is no guarantee that the loser will have
the requisite funds with which to bribe the victor, even if he
indeed values the bundle of rights under contention to a degree
greater than his opponent. Coase had supposed that the payment
could be financed out of the greater value; but if this took the
form of mere psychic income, it would be unable to do any such
thing.

(2) The Coasian advice to the judge is arbitrary, and counterpro-
ductive. Due to the subjectivity of costs and evaluations (Buchanan
1969; Mises 1963; Rothbard 1977) and to the impossibility of inter-
personal utility comparisons (Rothbard 1977), it is inconceivable for
anyone, even a magistrate, to know who is the most efficient user,
or the least cost accident avoider. It is extremely difficult to foretell,
under the zero transaction costs assumption, who would end up
bribing whom. To place such a burden on our court system moreover
would be to saddle it with the same task so dismally acquitted by
the communist central planning boards in the former U.S.S.R.,
Eastern Europe, and all throughout the third world.

(3) It is morally problematic to overturn property rights, surely
a bedrock of western civilization, even if the purpose is benevolent—
to promote utility. It is morally questionable to make legal findings
not on the basis of justice but rather wealth maximization.

(4) Yes, a tort is reciprocal, or mutually determined, in the
narrow sense that if the victim were not present, it could not have
occurred. But by that token, there could never be any real crime.
It takes “two to tango,” so to speak, and without one of the
participants, the dance cannot occur. Where is the murderer,
rapist or thief who could not make use of this unique legal
defense? All he has to do is plead that but for the presence of the
victim, the crime could not have taken place; therefore, the victim
is actually a contributor to the villainy. Cause and effect, then,
not mutual determination or reciprocity, is the only proper basis
for settling disputes over personal or property rights.

Harold Demsetz

The third chapter in this tale was written by Demsetz (1979).
In it, he accused me of failing to take into account one of Coase’s
explicitly made assumptions. Were I to have done so, Demsetz

8All otherwise unidentified page number citations refer to this one article.


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66 The Review of Austrian Economics Vol. 8, No. 2

challenges, I would not have been able to write my critique of
Coase, or at least a large part of it.

In Demsetz’s own words (p. 98), “The substantive issue has to
do with whether or not the assignment of right ownership will alter
the mix of output when ‘bargaining transactions . . . are costless
[and] changes in the distribution of wealth . . . can be ignored.’
Coase and I [with a proviso about ‘free riders’] say no; Block says
yes. Block then presents some examples that appear to refute our
analysis, but which really only violate our explicitly made
assumption” Henceforth, I shall refer to this statement as “B.”

The first thing to notice about B is that it appears without
benefit of citation.’ This makes it difficult to evaluate, because
there is no context available in which it can be embedded.

Secondly, A and B are by no means equivalent, although
Demsetz appears to treat them as such. The fact that they are not
may have led him astray. It is important to realize that Block
(1977a) was written in response to a paper which contained A
(Coase 1960) not B (Demsetz 1979). Therefore, if A and B are
different, while it 1s of course legitimate and permissable to
criticize Block (1977a) for attacking Coase (1960) while violating
an explicitly made assumption A, it is by no means permissible
to do so with regard to Demsetz (1979), e.g., B.

So we arrive at the issue of whether A and B are equivalent or
not. On the face of it, B seemingly undermines the validity of the
criticism I launched against Coase (1960), while A does not. This is
because B assumes away the possibility of wealth or income effects
while A makes no such stipulation.’ On the contrary, A specifically
mentions that the distribution of wealth will change.

Thus Block (1977a) does not violate an assumption made by
Coase (1960)—the only article it was criticizing on these grounds."
My 1977a article is entirely innocent of Demsetz’s charge that it
attacked Coase on a ground from which he had explicitly absolved
himself. In 1977a I claimed merely that under certain circum-
stances (the farmer has only psychic assets which are specific to him
and are thus not attractive to the factory, or anyone else, as would
be general assets which are of value to all or many persons) the

Despite numerous efforts, I have been unable to uncover the source of this
quotation.

his is a charitable interpretation. One might say, alternatively, that Dem-
setz didn’t really “assume away” wealth or income effects; he just ignored them.

Un this context, that is. Block (1977a) did indeed go on to take Demsetz (1966)
to task, but not for a confusion over specific vs. general wealth. It did so on entirely
different grounds.


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Block: Property Rights: A Reply to Demsetz 67

farmer will not be able to bribe the factory into using the smoke
prevention device in the zero transactions cost world, even though
he (subjectively, specifically, psychically) values his flowers or
crops more than the cost of the smoke prevention device.

In A, Coase merely states that while different court decisions
will imply different states of wealth distribution between the
farmer and the factory, the use of the smoke prevention device
(resource allocation) is invariant with regard to the juridical
finding, again, assuming zero transaction costs. Coase is wrong
in this contention, as I claimed in 1977 and still maintain; and
my utilization of the distinction between general and specific
wealth in no way violates any strictures set up by this author,
certainly not in statement A.

Let us put this in other words. In A and B there are two
different articulations of what may be roughly called “wealth
effects.” In A, it involves “the distribution of income as between
the two parties.” In B it concerns the claim that “there are no
wealth effects on the demands for the commodities being dis-
cussed. . . . and that changes in the distribution of wealth can be
ignored.” Although these expressions are interchangeable for
Demsetz, they are actually quite different.

Wealth distribution

The first case carries a clear implication. It is that Coase and
Demsetz are conceding, for the sake of argument, that there may
well be changes in the distribution of wealth depending upon
whether the judge rules in favor of plaintiff or defendant. How-
ever, since they have made no claim one way or another on this
matter, no allegation, or even proof—that a change in the distri-
bution of wealth from this source actually occurs—can be counted
against their hypothesis.

Coase actually does make such a concession. He does so
several times in the course of his 1960 article. Clearly, were any
critic, such as the present writer, to have upbraided Coase with
the fact that changes in the distribution of wealth would result
from different court decisions, Demsetz would be correct in as-
serting that “Block then presents some examples that appear to
refute our analysis, but which really only violate our explicitly
made assumption” (p. 98).

Now consider the second case referred to by Demsetz: that
“there are no wealth effects on the demands for the commodities
being discussed” (p. 98). The meaning of this, in contrast to the
first case, would appear to be that both plaintiff and defendant


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68 The Review of Austrian Economics Vol. 8, No. 2

will spend whatever additional monies awarded to them by the
Coasian judge in exactly the same manner. Therefore, no matter
which one wins, the same goods and services will be purchased.
Thus, there will be no wealth effects on the demands for the
commodities being discussed. Here we find the elements of a
completely different charge against Block (1977a). In this case I
am not guilty of violating the explicit assumption of Coase and
Demsetz that changes in the distribution of wealth would result
from different court decisions. Rather, I violate their very differ-
ent explicitly made assumption that both plaintiff and defendant
will spend whatever additional monies are awarded to them by
the Coasian judge in exactly the same manner.

Let us now turn to Block (1977a) to see which one (or both) of
these violations can be found therein.

In my view, neither error is committed. Paradoxically, the best
source of this claim is none other than Demsetz himself. Let us
quote him in full on this matter:

[Block] considers a case involving “psychic income” wherein a
smoke prevention device can be installed for $75,000 by a factory
which, in the absence of such a device, will ruin a neighbor’s
flower bed because of smoke pollution. The flower bed is worth
nothing to anyone else, but to the neighbor it is worth $100,000
because of sentimental value. The factory would not be willing to
pay its neighbor more than $75,000, the cost of the smoke
cleaning device, for his permission to pollute the air, so, if the
neighbor has a right to a soot-free garden, the factory owner
would elect to install the smoke cleaning device rather than pay
the $100,000 demanded by its neighbor. But if the factory
owner has the right to use smoke-producing fuel, the neighbor,
being so poor, would be unable (unwilling) to pay the factory
owner the $75,000 required to install the smoke cleaning de-
vice. With the first assignment of rights, there is a flower
garden and no smoke (and there also is less factory output).
With the second, there is smoke (more factory output) and no
flower garden. The mix of output is contingent on the assignment
of rights. True, but only because of the income effect, as can be
seen with the aid of figure [1]). (pp. 98, 99)

But Demsetz has misdescribed the case. The flower bed owner
is not “unwilling” to pay the $75,000 required to install the smoke
cleaning device. Why should he be unwilling? By stipulation, the
garden is worth fully $100,000 to him. Surely—in the case under


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Block: Property Rights: A Reply to Demsetz 69

G

Ga

AW
N Uz
Gr Ni

Bi

Be

Fo Fo

Figure 1
Rights Assignments and Income Effects

Source: Harold Demsetz, “Ethics and Efficiency of Property Rights Systems,” in Time,
Uncertainty and Disequilibrium: Explorations of Austrian Themes, Mario Rizzo, ed.
(Lexington, Mass.: D. C. Heath, 1979), p. 99.

discussion where the court assigns the right to pollute to the
factory owner—if the farmer had such an amount of funds avail-
able to him, he would gladly pay the $75,000 in order to forestall
damage to his property valued at $100,000. In this way he could
earn a profit for himself of $25,000, the difference between what
he must pay to protect his flower bed, and its value to him.

Income effect

Let us now discuss the income effect. A careful reading of
Block (1977a) indicates not that there is an income effect (which
might conceivably violate the Coase-Demsetz explicitly made
assumption), but that there is not. After all, the flower bed owner
starts out with no income, and never gets any, at least in the
situation where the court awards pollution rights to the factory
owner. It is difficult to see how an income effect can be constructed
out of such paltry raw material.

Nevertheless, we can try. What of the “income effect” that can
be construed to take place between the situation where the court
awards pollution rights to the factory owner, and the one where
these rights are awarded to the owner of the flower bed? In the
former case, the florist has absolutely nothing. He loses his
$100,000 flower bed, because he lacks the $75,000 with which to


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70 The Review of Austrian Economics Vol. 8, No. 2

bribe the proprietor of the factory. In the latter case, he retains
the use of this $100,000 flower bed.

One could conceivably call this an “income effect.” There are
reasons for and against. On the pro side is the fact that the flower
lover gains a value, to himself, of $100,000, as between the cases
where he is not, and is, awarded the requisite rights. On the con
side is the fact that there is no real income or money or wealth
involved. It is all a psychic value.

But it is not really important whether one chooses to call this an
income effect or not. The issue between Demsetz and myself is
whether or not Coase anticipated this sort of “income effect,” in which
case Block (1977a) has indeed violated explicitly made assumptions.
And, as we have seen, this charge cannot be substantiated.

Coase stipulated only that wealth effects as a result of court
decisions be ruled out of consideration. I didn't consider them.
Instead, I focussed on something entirely different: that one of
the parties not have sufficient funds with which to make the
requisite bribe. Demsetz conflates the two. That is the substan-
tive issue between us.

Obstacles

Now for an even greater challenge. We have seen that Block
(1977a) can pass muster with regard to A. Can it do so even for B?

At first glance, this is an impossible task. We have seen that
B demands that we ignore wealth distribution changes, while my
1977a article depends intimately upon certain states of the dis-
tribution of wealth. These are dependent on court decisions
which, in turn, are intimately associated with wealth effects.
Nevertheless, from this rather unpromising beginning, it is still
possible to reconcile B with Block (1977a).

It can be done by realizing that B is not a statement about
comparative statics, as Demsetz seems to think. For him, the
problem with Block is that it compares two states of the world:
one where the farmer has the right to impose a smoke prevention
device on the factory, and one where he does not. Since there is
indubitably a change in the wealth position of the farmer when
he goes from one of those states of the world to the other, Demsetz
sees a violation of B (changes in the distribution of wealth cannot
be ignored) and cries “foul!”

But Demsetz misinterprets Block. This article does not re-
quire any dependency on changes in wealth. All it says is that—by
use of psychic or specific wealth—a scenario can be concocted in
which the Coasian Theorem no longer holds true. No change in


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Block: Property Rights: A Reply to Demsetz 71

wealth is required for this scenario to obtain. All that is necessary
1s that there be an otherwise penniless farmer who derives more
value from his flower bed than the cost of installing a smoke
prevention device, and cannot bribe the factory to install it, even
though he inhabits a zero transaction costs world. He cannot do
s0, to repeat, because even though his psychic income is $100,000,
and the smoke prevention device costs a mere $75,000, this
psychic income is specific to him and him alone. It does not
translate into a value recognized by anyone else, particularly
including the factory owner. He cannot sell this flower bed to a
third party, and use the proceeds to bribe the factory owner. This
is because the flower bed, his only possession, is not valued by
anyone else besides himself.

It is impossible for him to “give up $75,000 of the other goods”
(as claimed by Demsetz in his indifference curve analysis) be-
cause he simply does not have such funds available to him. We
conclude that property rights determinations are relevant to
resource allocation. That property rights are irrelevant depends
upon the loser being able to bribe the winner of the lawsuit; if he
is unable to do so, the entire scenario does not arise.

The geometry

This is why Demsetz in figure 1 (p. 99) is misdirected. It
depends, crucially, on a nonexistent income or wealth effect. How
else can one explain the move in budget lines from G2B1 to
G3B2? But there are additional problems with this diagram,
and with the analysis that accompanies it.!? It clearly indicates

121¢ is possible to criticize all uses of indifference curves. The main problem is
that there is no way to reconcile them with human commercial interaction. In the
real world, markets consist of people ranking goods, preferring and setting aside,
ordering (Mises 1963; Rothbard 1962). If I buy a newspaper for $.50 it is because
I value the paper more than $.50. If the vendor sells it to me, it is because he values
it less than my coins. Technically speaking, there can be no indifference in such a
world.

On the other hand, “indifference” is a perfectly good English word, and it must
refer to something in order to be used coherently. In ordinary language, it refers
to cases where we just don’t care very much which of two alternatives we choose,
But once we act, we demonstrate, by that very fact, that we preferred the option
we took to the one we renounced. In common parlance, Buridan’s Ass was indifferent
to the two bales of hay. However, once he headed off in one direction, as a technical
matter of economics we are entitled to say that he preferred the bale toward
which he moved to the one he spurned; that there is no way that he, or anyone else
for that matter, can demonstrate indifference. Even standing equi-distant between
the two haystacks, and starving to death, does not demonstrate indifference. It
shows only that the stupid animal preferred death to picking one of the bales,
either of them.


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72 The Review of Austrian Economics Vol. 8, No. 2

that Demsetz has not applied the difference between general and
specific wealth. Consider his statement:

If the neighbor has the right to soot-free air, he consumes P2
containing F2 of flowers and G2 of other goods. But since he can
sell the right to pollute the air for $75,000, he also can consume
no flowers, FO, and G3 of other goods, where G3 - G2 equals
$75,000 worth of other goods. He therefore confronts a budget
line, B2, that passes through P2 and G3.

The second rights assignment alters the budget line on which
he can operate. Given his income and no right to soot-free air, he
can consider G2 of other goods and enjoy no flowers or he can give
up $75,000 of the other goods, consuming only G1 of these but
increase his garden to F2. The second rights assignment, there-
fore, has reduced his budget line to B1. (p. 99)

The first rights assignment G3B2 is straightforward. As we
have seen, I do not criticize Coase only with regard to his case
where the farmer is given the right to clean air. He need not do
any bribing, here, so no problem arises. The second rights assign-
ment, G2B1, however, is highly problematic. The difficulty is that
my assumption (Block 1977a) is that the farmer has no other
income, wealth or goods. It is impossible, then, for him to “give
up $75,000 of the other goods,” because he simply does not have
any amount of goods available to him (apart from his flower bed),
let alone an exalted amount such as $75,000. I therefore continue
to maintain that property rights determinations are relevant to
resource allocation, at least under present assumptions. The
Coasian claim to the contrary depends, once again, upon the loser
of the judicial decision being able to bribe the winner of the
lawsuit; since he is unable to do so, the situation described by
Demsetz does not occur.

On the assumption, just for argument’s sake, that indiffer-
ence curves have a legitimate role to play in economics, how can
Demsetz’s figure 1 be altered so as to be consonant with the
analysis of the situation? It is very straightforward. G2P2 should
be converted into the x axis. All else on the diagram would simply
disappear. My assumption is that the farmer has no money at all
and only one flower bed, for which no one else will give anything
at all in trade. Therefore, there is no budget line. There are no
terms of trade offered to the farmer. U2 remains, only the part of
it above G2 (now the x axis) depicting a “corner” solution at P2:
flowers, but no money.


===== PAGE 13 =====

Block: Property Rights: A Reply to Demsetz 73

Twist and turn as one may, it cannot be denied that property
rights are relevant to resource allocation. Even with zero trans-
action costs, the entire bribery scenario can never take place, and
it is this upon which the Coasians rely in order to maintain the
contrary position.

Let us summarize to this point. We have claimed that Dem-
setz makes two mistakes. First, he falsely ascribes to me the
obligation of overcoming objection B against Block (1977a). But I
meant this article as a criticism of the Coasian A, not the Dem-
setzian B. Second, more radically, he fails to show that even B can
be used, successfully, to disparage that article. He seems unwill-
ing to apply the distinction between general and specific wealth,
and between comparative statics and an unchanging static situ-
ation, to this case.

Contrary to fact conditional

This is a rather complex issue. In order to further clarify, let
me attempt yet another way of explicating my side of this debate.
What would I have had to have said were Demsetz to be correct
in his criticism that I was attacking Coase on a point of which he
was fully aware, and indeed had specifically assumed away in his
analysis? To reiterate, Coase said that assuming zero transactions
costs, resource allocation would be invariant with regard to the
way in which the judge decided nuisance cases (statement A).

Demsetz would have been correct had I attributed to Coase
the following: that it doesn’t matter, as far as matters of equity
are concerned, which conclusion the judge reaches; that the eco-
nomic welfare of each litigant is the same whether the judge finds
in his favor or not; that litigants are indifferent to judicial deci-
sions. But for Coase’s specific assumption, that Chicago econo-
mist would have left himself open to such an interpretation.
However, because of the fact that this Nobel prize winner did
indeed make this assumption, he is guiltless of this charge.

I would have had to have said something along these lines in
order to be guilty of the charges leveled against me by Demsetz.
In actual point of fact, however, I said no such thing. Instead, I
claimed that Coase’s mental experiment couldn’t work because it
depends upon the farmer or the factory having an income or
wealth with which to bribe its opponent, should it find itself on
the losing side of the courtroom battle. If it is only psychic income
that the loser can rely upon, no bribe can be financed. But as the
Coasian insight depends crucially upon this bribe, the whole
scenario falls apart in the absence of the necessary funding.


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74 The Review of Austrian Economics Vol. 8, No. 2

Even though mistaken, one can readily discern why Demsetz
should have confused these two very different concepts. After all,
both employ wealth, or income. But we must not lose sight of the
fact that they are, at the end of the day, very different. One,
Coase’s, deals with questions of equity. The other, mine, deals with
Coase’s major and paradoxical finding, that under the assumption
of zero transaction costs, court decisions do not affect resource allo-
cation. Coase, unfortunately, needs one more assumption in order
to make good on his discovery: that the benefits to both parties in
the dispute must be real; they cannot consist of psychic income
alone. But this was precisely my point in Block (1977a).

Background

It is now time to consider several aspects of Demsetz’s article apart
from those relating to the flower bed-psychic income example. But
before we begin, a little bit of context might be in order.

There are several issues separating Demsetz and myself
(more broadly, these distinguish from one another the Chicago
positivist School of Coase, Posner, Demsetz, et al., and the Aus-
trian-Libertarian School led by Murray Rothbard).

A crucial one is how property rights should be defined, in
general and in particular in the (real world) situation where
transaction costs make post definitional bargaining difficult or
impossible. Demsetz’s suggestion is that they be defined in such
a way as to maximize total wealth. My contention is that the rules
of homesteading and voluntary trade be employed instead.

But this is merely my own way of characterizing the dispute.
Demsetz sees the matter quite differently. In his view, my discus-
sion rests on “emotionalism,” and “strong ethical feelings as to how
property rights should be defined” (p. 100). Instead of using reason,
my views are supported by little or nothing more that the “definite-
ness with which they are held” (p. 100). In contrast, he is not
“emotional,” nor given to normative “should” statements. He has far
more in his intellectual arsenal than mere definiteness. Further, and
perhaps even worse, I employ easy examples to buttress my views,
particularly the right to be free of the draft.'® The remainder of

13He allows that this has a certain intuitive appeal, although “the ownership
by the gardener of the right to control the soot content of the air does not” (p. 100).
As stated, this is something of a straw man, since I never called for total control
of the air’s soot content by the gardener. Rather, following Rothbard (1982b), I took
the view that the gardener has the right to be free of invasive interferences with
his physical and human property (lungs). As to whether this is intuitively appeal-
ing, there is little doubt that in this rabidly ecological oriented age, it certainly is.


===== PAGE 15 =====

Block: Property Rights: A Reply to Demsetz 75

Demsetz’s (1979) essay is devoted to correcting my many errors
and oversights. Let us consider his objections in some detail.

Competition and sports

He starts off by approvingly quoting Frank Knight. According
to Knight, there is a strong similarity between “competitive busi-
ness” on the one hand, and “the sporting view of life” on the other.
Both have “a detectable impact on our basic psychological drives”
in that in a society earmarked by them, people go out and emu-
late, or copy others, goal of getting ahead, or succeeding.

But the Knightian analogy between business competition and
sports is mistaken. Business competition is a positive sum game,
while sports are a zero sum game. Business consists of the
concatenation of trades (purchases, sales, hirings, etc.) in a given
society. As such, both participants who engage in any particular
business arrangement gain, at least in the ex ante sense. That is,
neither would have agreed to commercially interact with the
‘other did he not expect to improve his condition thereby. In the
sporting arena, in contrast, benefits for one do not necessarily
benefit the other.'* On the contrary, when one team scores a goal,
for example, far from the other team also gaining an advantage,
it actually loses out."

There is a second error as well. Citing sociobiological findings,
Demsetz is led to assert that basic inner drives cannot “be modified
significantly by the choice of institutional environment” (p. 97).
However, unless “significantly” is used tautologically to deny that
different economic arrangements can ever alter people’s psycho-
logical states, it would appear that there is ample evidence to the
contrary. After 70 years of communist rule, for example, the ten-
dency of people in the former U.S.S.R. to “barter and truck,” in Adam
Smith’s felicitous terminology, has been vastly attenuated. At the

However, to be fair to Demsetz, we must realize that he wrote in the late 1970s,
long before the advent of modern “greenism.”

14They might well, however. Both the winning and losing teams may obtain a
psychic advantage from playing the game. This is so, for the losers, if their love
for the sport outweighs their frustration at being second best.

15 et it not be objected that both teams gain revenue from the fact that they
can sell large numbers of expensive tickets to an audience if their game is expected
to be a competitive one. This is true, and in this regard sports are indeed also
mutually beneficial. But this is the sense in which athletic events are actually a
competitive business. Both teams, that is, gain not from the game they play with
each other, but rather from the transaction they are both able to effect with their
customers. In the pure sense of sport, unrelated to commercial endeavors, one
team’s gain is still the other’s loss.


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76 The Review of Austrian Economics Vol. 8, No. 2

very least, it has been perverted into something very different
than what once it was, or, better yet, what it might otherwise have
been. Consider also the different psychological states regarding
commercial risk and endeavor that now—in 1995—exist in East
and West Germany. Before 1945, the inhabitants of these two
areas were one virtually homogeneous people. After experiencing
the Sovietization of their economy, there are few in the east of
this country who retained the entrepreneurial spirit that charac-
terized the original population, but this still prevails to a great
degree in the West.

There is yet another difficulty in Demsetz’s introduction: he
pays insufficient attention to the distinction between the norma-
tive and the positive. It might be too harsh to charge that he
totally conflates the two; on the other hand, he seems to think
that “ethical judgments about economic organization” are inextri-
cably connected to the “Austrian economics [which] centers on the
praxeology of human action” (p. 97). The truth of the matter, how-
ever, is that “the simplistic faith of a few libertarians” (p. 98) is
totally a normative concern, while, in contrast, the economics of
the Austrian school is totally positive (Egger 1979, p. 119; Roth-
bard 1973a; Block 1975). Also, Demsetz uses his introduction to
take a gratuitous swipe at religion (p. 98); but the less said about
this the better.

Austrian Pure Snow Trees

Demsetz offers the case of the Austrian Pure Snow Trees, which
are owned by a religious sect. This resource is the only cure for
cancer, but these islanders will not allow it to be used for that
purpose, reserving it instead for religious worship.®

Demsetz then asks what I consider to be a very misleading
rhetorical question. His challenge: Is it really “evil and vicious’
to believe it would be preferable for someone else to own the right
to this ingredient?” (p. 100).

But it is not at all my contention that this state of the world
would not be preferable. On the contrary, given his highly emo-
tional example, it is indeed hard to resist the notion that it would
be preferable if the trees were used as a cancer cure.

Here is Hamowy’s (1978, p. 289) trenchant criticism of Hayek's (1960) version
of Demsetz’s example: “Is the owner of the spring acting coercively if he refuses to
sell his water at any price? Suppose, for example, he looks upon his spring as sacred
and to offer its holy water to non-believers a sacrilege. Here is a situation which
would not fall under Hayek’s definition of coercion since the owner forces no action
on the settlers.”


===== PAGE 17 =====

Block: Property Rights: A Reply to Demsetz 77

Emotionalism can be a double edged sword, however. As long as
our intuitive imagination has been unleashed by Demsetz in this
creative way, why not push the envelope a bit? Consider, then, the
case where the views of this religious sect are absolutely correct!
That is, if the trees are torn down for so idolatrous and unimpor-
tant a purpose as curing cancer, then we’ll all be consigned to Hell
forever. Wouldn't it then be “intuitively appealing” to allow the
islanders to continue their ownership of these trees?’

But this is all somewhat beside the point. For my contention
had nothing to do with preferability. Rather, it focussed on what the
law should be.’ It held, specifically, that private property rights are
sacrosanct, and should not be overturned, even for “good” pur-
poses. Even though he does not state the issue in this manner,
it will be interesting to interpret Demsetz as if he were making
the claim not merely that it would be preferable to divert the
Pure Austrian Snow trees from prayer to curing cancer, but that
the law should be employed in this manner; or, at the very least,
that seizing the trees is permissible, and should not be interfered
with.

It is “interesting” to interpret Demsetz in this way, even
though he might resist, for the alternative renders his position
totally unintelligible. If all he wishes to assert is that it would be
preferable that the Austrian Pure Snow Trees be allocated to
curing cancer, then we can perhaps agree with him if the
religious fanatics have a mistaken theology, and disagree if
they are correct. But all the preferring in the world will not
change reality in Demsetz’s health oriented direction.'” For this,
the forces of law and order must swoop down on the recalcitrant

1"hemsetz, in taking the opposite position, is acting as if the cult is erroneous
in its religious beliefs. But assume for the moment the “cultists” to be correct in
their world view. It would then be justified—according to Demsetz—not only to
protect them from the onslaught of the cancer victims, but to seize the assets of
the latter if this would in any way help the former. Suppose, that is, that there
was a cancer cure, owned, now, by the victims of this dread disease, but that for
some reason the worshippers determined that this material would help them in
their efforts to contact the Deity. Then, according to the logic established by
Demsetz, it would be appropriate public policy to forcibly transfer the cure to the
control of the religious “fanatics.” Surely Demsetz knows nothing—for certain—
that would render such a conclusion invalid.

18 here is all the difference in the world between these two concepts. For
example, I might prefer that all ice cream come in one flavor, the one favored most
by me. But I would hardly urge the passage of a law which banned all other
alternatives.

19That is, physically health oriented direction. If the worshippers are correct,
then it is only their remedy which will achieve spiritual health.


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78 The Review of Austrian Economics Vol. 8, No. 2

zealots,” and compel them to yield their Austrian Pure Snow
Trees to the medical profession. That is to say, Demsetz must
claim that the law should be written so as to attain this result, if
that is his actual goal.

But if he does so, he is just as un-value-free, and “emotional,”
as he accuses me of being. Demsetz would then be revealing
himself as a person with “strong ethical feelings as to how prop-
erty rights should be defined in such cases” (p. 100).

Even mere preferability, let alone legal justice, runs into
problems of interpersonal comparisons of utility. As we have seen,
there is no warrant, anywhere within the corpus of value-free
economics, for us to compare the utilities of one group of people—
e.g., “worshippers” with another, “cancer patients” —and to claim
that one outweighs the other. Demsetz as a private citizen may
engage in all the preferring he wants; but it is impermissible for
him to do so gua economist.

In his view, “the instrumental nature of property rights is
made clear in this Austrian Pure Snow Trees example” (ibid.).
Perhaps. A better description for property rights in his philosophy
would be “provisional.” That is to say, when a “better” use for
someone’s property is found—curing cancer instead of worship-
ping—there is at least a prima facie case for re-ordering the
relevant property rights. He states, “A question of the ownership
of this ingredient, unavailable elsewhere, arises” (ibid.). Interest-
ing word, “arises.” How is this to be distinguished from advocacy
of theft? Can we in this vein say that during the Los Angeles riots
of 1992 the question of the legitimate ownership of all of those
looted television sets “arose?”

Ethical superiority?

Consider now my claim that “It is the gardener who should
have the right to soot free air, and the potential [military] recruit
who should have the right to his freedom” (p. 100). Demsetz is
highly critical. He states: “One is entitled to an explanation of
why these assignments of property rights are ethically superior
to their alternatives” (ibid.). We already know of the ethical

20preferable” is one thing; taking the cancer cure away from the worshippers
by force is entirely a different matter. Suppose the religious sect fought back to
defend its legitimate ownership of the Austrian Pure Snow Trees, based on
“being the first to mix their sweat and blood with the island’s soil, thus
satisfying Rothbard’s principle of ‘original ownership’ (p. 100). Would the
forces of law and order be justified in doing to them what was done to the Branch
Davidian sect in Waco, Texas? No less than that seems to be implied by the
Demsetzian analysis.


===== PAGE 19 =====

Block: Property Rights: A Reply to Demsetz 79

perspective from which Demsetz chooses between these options:
pick that which maximizes wealth or utility, or income. And as we
have seen the Achilles heel of his vision—it founders on the rock
of interpersonal comparisons of utility—we do well to follow
Demsetz’s advice and to offer an explanation of our own.

At one level, the most unsophisticated and commonsensical,
we have the right to our freedom, and to not have our lungs
invaded by soot particles, because of Adam Smith’s “Obvious and
natural and simple system of liberty” ([1776] 1965). If a woman
“owns her own body,” as most people would concede, then so, too,
do men. If this is true, then slavery, or the draft, is illegitimate.
For it means that outside forces can dictate to the supposed owner
of the body in question.?' At another level, people should be free
and secure in their persons, at least in the U.S., because our
constitution guarantees this.

But perhaps the most powerful basis on which this claim to
freedom can be defended is the philosophical. The freedom phi-
losophy is ethically superior to all alternatives because is it
necessitated by the laws of logic. Demsetz’s position, in contrast,
is untenable because it commits a logical contradiction.

This UCLA economist considers himself to be a rational man.
He is willing to argue his differences with me. Were this not so,
instead of writing an article critical of my own, he would have
sought to physically abuse me. But in taking this eminently
sensible, legal and moral tack, he has necessarily associated
himself with certain positions. When the implications of these are
elaborated upon, it will be seen that the arguments he uses to
refute me are rendered invalid by his very decision to employ
argumentative methods against me in the first place.

By engaging in only verbal fisticuffs, and eschewing physical
ones, he has conceded my right to my own body; to be secure in
my person; to be free of physical invasion. In a word, by the
choices Demsetz has made, he has left himself open to the inter-
pretation that he respects the freedom of others. Since “actions
speak louder than words,” we are entitled to discount his anti-
freedom verbiage, and to focus on his pro-liberty behavior.

Hoppe explains:

2114 is also logically inconsistent, since the argument of the draft board is that
this system of raising an army is necessary in order to “promote freedom,” by
protecting the domestic nation from the external aggressor. The problem is, the
country which relies on compulsion to attract soldiers for this purpose starts off
by violating the very rights of the citizenry the war was supposedly engaged in to
overcome.


===== PAGE 20 =====

80

The Review of Austrian Economics Vol. 8, No. 2

First, it must be noted that the question of what is just or
unjust—or, for that matter, the even more general one of what is
a valid proposition and what is not—only arises insofar as I am,
and others are, capable of propositional exchanges, i.e., of argu-
mentation. The question does not arise vis-a-vis a stone or fish,
because they are incapable of engaging in such exchanges and of
producing validity claiming propositions. Yet if this is so—and one
cannot deny that it is without contradicting oneself, as one cannot
argue the case that one cannot argue—then any ethical proposal,
as well as any other proposition, must be assumed to claim that
it is capable of being validated by propositional or argumenta-
tive means. . .. In fact, in producing any proposition, overtly or
as an internal thought, one demonstrates one’s preference for
the willingness to rely on argumentative means in convincing
oneself or others of something; and there is then, trivially
enough, no way of justifying anything, unless it is a justification
by means of propositional exchanges and arguments. But then it
must be considered the ultimate defeat for an ethical proposal if
one can demonstrate that its content is logically incompatible
with the proponent’s claim that its validity be ascertainable by
argumentative means. To demonstrate any such incompatibility
would amount to an impossibility proof; and such proof would
constitute the most deadly smash possible in the realm of intel-
lectual inquiry.

Secondly, it must be noted that argumentation does not con-
sist of free-floating propositions, but is a form of action requiring
the employment of scarce means; and furthermore that the
means, then, which a person demonstrates as preferring by en-
gaging in propositional exchanges are those of private property.
For one thing, obviously, no one could possibly propose anything,
and no one could become convinced of any proposition by argu-
mentative means, if a person's right to make exclusive use of his
physical body were not already presupposed. It is this recognition
of each other’s mutually exclusive control over one’s own body
which explains the distinctive character of propositional ex-
changes that, while one may disagree about what has been said,
it is still possible to agree at least on the fact that there is
disagreement. And obvious, too: Such property right in one’s own
body must be said to be justified a priori. For anyone who would
try to justify any norm whatsoever would already have to presup-
pose an exclusive right to control over his body as a valid norm
simply in order to say “I propose such and such.” And anyone


===== PAGE 21 =====

Block: Property Rights: A Reply to Demsetz

disputing such right, then, would become caught up in a practical
contradiction, since arguing so would already implicitly have to
accept the very norm which he was disputing.

Furthermore, it would be equally impossible to sustain argu-
mentation for any length of time and rely on the propositional
force of one’s arguments, if one were not allowed to appropriate
next to one’s body other scarce means through homesteading
action, i.e., by putting them to use before somebody else does, and
if such means, and the rights of exclusive control regarding them,
were not defined in objective physical terms. For if no one had the
right to control anything at all except his own body, then we would
all cease to exist and the problem of justifying norms-—as well as
all other human problems—simply would not exist. Thus by
virtue of the fact of being alive, then, property rights to other
things must be presupposed to be valid, too. No one who is alive
could argue otherwise.

And if a person did not acquire the right of exclusive control
over such goods by homesteading action, i.e., by establishing some
objective link between a particular person and a particular scarce
resource before anybody else had done so, but if, instead, late-
comers were assumed to have ownership claims to things, then
literally no one would be allowed to do anything with anything as
one would have to have all of the late-comers’ consent prior to ever
doing what one wanted to do. Neither we, our forefathers, nor our
progeny could, do or will survive if one were to follow this rule.
Yet in order for any person-—past, present or future—to argue
anything it must evidently be possible to survive then and now.
And in order to do just this property rights cannot be conceived
of as being “timeless” and non-specific regarding the number of
people concerned. Rather, they must necessarily be thought of
as originating through acting at definite points in time for
specific acting individuals. Otherwise, it would be impossible
for anyone to first say anything at a definite point in time and
for someone else to be able to reply. Simply saying, then, that the
first-user-first-owner rule of libertarianism can be ignored or is
unjustified, implies a contradiction, as one’s being able to say so
must presuppose one’s existence as an independent decisionmak-
ing unit at a given point in time.

And lastly, acting and proposition-making would also be im-
possible, if the things acquired through homesteading were not
defined in objective, physical terms (and if, correspondingly,

81


===== PAGE 22 =====

82 The Review of Austrian Economics Vol. 8, No. 2

aggression were not defined as an invasion of the physical integ-
rity of another person’s property), but, instead, in terms of sub-
jective values and evaluations. . .

By being alive and formulating any proposition, then, one
demonstrates that any ethic except the libertarian private prop-
erty ethic is invalid. Because if this were not so and late-comers
were supposed to have legitimate claims to things or things owned
were defined in subjective terms, no one could possibly survive as
a physically independent decisionmaking unit at any given point
in time, and hence no one could ever raise any validity claiming
proposition whatsoever . . .

As regards the utilitarian position, the proof contains its
ultimate refutation. It demonstrates that simply in order to pro-
pose the utilitarian position, exclusive rights of control over one’s
body and one’s homesteaded goods already must be presupposed
as valid. And, more specifically, as regards the consequentialist
aspect of libertarianism, the proof shows its praxeological impos-
sibility: the assignment of rights of exclusive control cannot be
dependent on the—“beneficial” or whatever else—outcome of cer-
tain things; one could never act and propose anything, unless
private property rights existed already prior to any later outcome.
A consequentialist ethic is a praxeological absurdity. Any ethic
must, instead, be “a prioristic” or “instantaneous,” in order to
make it possible that one can act here and now proposing this or
that, rather than having to suspend acting and wait until later.
Nobody advocating a wait-for-the-outcome ethic could be around
anymore to say anything if he were to take his own advice
seriously. And to the extent that utilitarian proponents are still
around, then, they demonstrate through their actions that their
consequentialist doctrine is, and must be, regarded as false.
Acting and proposition-making requires private property rights
now, and cannot wait for them to be assigned only later. (Hoppe
1993, pp. 204-7)

What Demsetz does in speaking out against freedom and
property rights, but acting in a manner compatible with them, is
to engage in a performative contradiction. This is logically iden-
tical to a person stating “I am unconscious.” Here, behavior belies
a mere verbal claim. Demsetz’s view of property rights, is, of course,
a utilitarian one. As he sees things, one cannot define matters in
this regard “a prioristically.” Rather, they must be defined in terms
of beneficial consequences; in his case, wealth maximization.


===== PAGE 23 =====

Block: Property Rights: A Reply to Demsetz 83

You got to have heart

Let us extend the Demsetzian argument in yet another dimen-
sion. Suppose that it was not the islanders’s trees that could cure
cancer, but rather their hearts. That is, the only way to save the
sufferers from this disease would be to kill, not the Austrian Pure
Snow Trees, but their owners, the members of this religious sect,
and then to take their hearts, chop them up, and feed them to
cancer victims. Would Demsetz (“emotionally”) support this “mod-
est proposal” to do just that? It is hard to say. From his perspec-
tive, he would have to ascertain the answer to a series of empirical
questions before he could vouchsafe us an answer: What is the
rate of transformation between dead cultists and live cancer
patients; e.g., how many islanders would have to be murdered
(killed? final solutioned? homesteaded? harvested?) in order to
save how many cancer victims? Which group has higher incomes?
Which has more members? Would this act set up anti-wealth
precedents for the future? Who are more productive—wealth
maximization is the criterion—the heart “donors” or recipients?
The only constant in the world of Demsetz (the writer, that is,
who ideologically contemplates the justification of theft, enslave-
ment, murder; not the man whose actions show he refrains from
engaging in initiatory violence) is the overwhelming need to
increase wealth.

Ultimately, there are only two ways of settling such problems.
All others are merely combinations and permutations of these
two. On the one hand, there is a provisional or instrumental
property rights system. Here, holdings are secure only as long as
no one can come up with a plausible reason for taking them away
by force. Under this system, either dictators or majorities (or dicta-
torial majorities) hold the key to property rights. The difficulty is
that there are no moral principles which can be adduced to derive
any decisions. Presumably, utility or wealth or income maximiza-
tion is the goal; but due to the utter impossibility of interpersonal
comparisons of utility, this criterion reduces to arbitrariness.

On the other hand is a thoroughgoing and secure property
rights system. Here, one owns one’s possessions “for keeps.” The
only problem here is the temptation to overthrow the system in
order to achieve some vast gain, such as the cure for cancer.” But

22 ow is that justified as “ethically superior to alternatives?” (p. 100).

23Demsetz’s example is so forceful by virtue of the fact that he expects his
readers will consider a cure for cancer to be more valuable than a pagan rite—he
knows it is likely they will engage in interpersonal comparisons of utility.


===== PAGE 24 =====

84 The Review of Austrian Economics Vol. 8, No. 2

these temptations are easily resisted as they are inevitably imagi-
nary and artificially constructed. We have yet to be presented
with a real world example where there is a clear cut case for
massive property rights violations.”

Note how far from reality Demsetz must remove himself in
order to manufacture an example that is intuitively consonant
with his support? for what in any other context would be consid-
ered murder (hearts) or theft (trees) or slavery-kidnapping
(draft).?® It is perhaps possible—in the sense that it would not be
logically contradictory—to cite an actual case where a great boon
to millions of people is denied by a recalcitrant minority, on
seemingly frivolous grounds.?”’” In very sharp contrast indeed,
resort need not be made of fanciful examples to defend the
libertarian vision.

Here is another problem. It is Demsetz’s view that in the
world of zero transaction costs, it doesn’t matter (for resource
allocation purposes, not for the distribution of wealth) who gets
the cancer cure trees. Surely in this case transaction costs are
very low. There are very few worshippers. It is just a small cult.
They are all located on one small island. (If nothing else, the
world wide publicity attendant upon the discovery of the
magic trees would undoubtedly reduce transactions cost to near
Zero.)

If we wish, we may even suppose that there is only one
worshipper (to get closer to the case of the single farmer with the
flowerbed). Under these conditions, Demsetz is logically obliged
to maintain that if the Deity is more important than physical
health, the Pure Austrian Snow trees will (and should) continue
to be utilized for prayer; on the other hand, if the cure is worth
more than the worship, the trees will (and should) be used for

247 am not objecting to the technique of artificial constructions per se. Hypo-
thetical arguments have their undoubted philosophical use. The point being made
here, in contrast, is that libertarian rules are only inconsistent with broad based
utilitarian concerns in the imagination, not in reality.

25 must say “possible support” in this case, since he hasn’t consented to this
proposition.

However, the draft during World War II furnishes what for many people
would be a counter example.

The tree worship is frivolous only to us; to the members of Demsetz’s fictitious
religious sect, this practice is anything but. Otherwise, they would hardly withhold
a cancer cure from a suffering humanity. In any even remotely real world situation,
possibly, some of their own number might have cancer. Alternatively, the money
that would be forthcoming from highly motivated purchasers would likely sway
them to go off and worship some other kinds of entities.


===== PAGE 25 =====

Block: Property Rights: A Reply to Demsetz 85

medicinal purposes. In any case, there is no case for forcibly
transferring these trees from the cultists to those afflicted with
cancer. The “market” will tend to ensure that the Austrian Pure
Snow Trees will come to be owned by those who value them most.

By use of this example we have furnished ourselves with yet
another refutation of the Coase Theorem. If under zero cost
conditions the sale from islanders to doctors does not take place
on its own, this is prima facie evidence for the claim that the trees
are worth more to the worshippers than to the victims of cancer.
A cancer cure, after all, can only improve the body. Worship aims
higher, at the soul.

To be sure, Demsetz asserts that “the religious sect will in no
way, for any compensation, allow that ingredient to be extracted”
(p. 100). So what? On his own premise, this just shows that the
worshippers value the Austrian Pure Snow Trees more than
alternative users. If true, this cuts against his own claim that
resource allocation is invariant with respect to decisions as to
property rights, given zero transaction costs.

In contrast, the libertarian need ask none of these questions.
For this philosophy it is sufficient that the religious fanatics, not
the cancer victims or their agents, own the curative hearts, or the
Austrian Pure Snow Trees. And it really doesn’t matter whether it
is body parts, trees, or anything else that is the property in question.

There is yet another problem with Demsetz’s analysis of the
Austrian Pure Snow Trees. And this difficulty is pinpointed by no
less an authority on property rights theory than Richard Posner
(1986). According to him as long as there are zero transaction
costs, there is no warrant for seizing the property of another. On
the contrary, this is the purpose of markets: to transfer goods from
those who value it less to those who value it more.

He states:

The landowner’s right to repel a physical intrusion in the form of
engine sparks is only a qualified right. The intruder can defeat it
by showing that his land use, which is incompatible with the
injured landowner’s, is more valuable. But if your neighbor parks
his car in your garage, you have a right to eject him as a trespasser
no matter how convincingly he can demonstrate to a court that
the use of your garage to park his car is more valuable than your
use of it.

The difference between the cases is, at least on a first pass at
the problem, the difference between conflicting claims and con-
flicting uses. In general, the proper [because cheaper and more


===== PAGE 26 =====

86 The Review of Austrian Economics Vol. 8, No. 2

accurate] method of resolving conflicting claims is the market. If
your neighbor thinks your garage is worth more to him than to
you, he can pay you to rent it to him. But if he merely claims
that he can use your garage more productively, he thrusts on
the courts a difficult evidentiary question: Which of you would
really be willing to pay more for the use of the garage? In the
spark case, negotiation in advance may be infeasible because
of the number of landowners potentially affected, so if courts
want to encourage the most productive use of land they cannot
avoid comparing the values of the competing uses. (Posner 1986,
pp. 4849)

So there we have it. If Posner, another Coasian traditionalist,
is correct, Demsetz’s critique of my article cannot be sustained.
For the garage and the snow trees examples are directly analo-
gous. One must, according to Posner, convince the garage owner
to rent it to the would be user. If one cannot do so, one must do
without the services of the garage. The clear implication is that
this applies as well to the cancer victims. If they can convince the
religious sect to sell them the Austrian Pure Snow Trees for
medicinal purposes, well and good. If not, and Demsetz posits
this, then, at least according to Posner, the religious group has
the “right to eject [the cancer victims] as a trespasser no matter
how convincingly [they] can demonstrate to a court that the use
of the [snow trees to cure cancer] is more valuable than your use
of it” for purposes of prayer. Demsetz’s argument, then, is not only
with me. It is also with Posner.

Tennis, Anyone?

Next, consider Demsetz’s analysis of the tennis game. Here, he
attempts to show that my philosophy cannot reconcile the de-
mand for noise on the part of tennis players with that for peace
and quiet on the part of would be sleepers, while his Chicago Law
and Economics perspective can accomplish this task.

As he sees this matter, there really is no debate at all. The
only way to settle the dispute between tennis players and sleepers
is through the use of the Coase-Demsetz insights. All that needs
to be done is to determine the value to each side of daytime and
evening accommodation, and (on the assumption of high transac-
tion costs which preclude rearranging property rights) have the
judge rule in such a way that the group which benefits more
attains the property rights in question. In that way wealth will
be maximized, and resources used “efficiently.”


===== PAGE 27 =====

Block: Property Rights: A Reply to Demsetz 87

Since, in Demset2’s opinion,

the dollar value of benefits of assigning rights over noise levels
during nighttime hours to would-be sleepers plausibly exceeds
the dollar value of costs thereby imposed on would-be nighttime
tennis players (p. 101, emphasis in original),

the decision is easy and straightforward. Only an Austrian Pure
Snow Tree cultist could fail to see this: grant the after dark noise
rights to the sleepers.

Similarly, the assignment to tennis players during daytime
hours of the right to control noise levels yields a dollar value of
benefits that exceeds the dollar value of costs imposed on neigh-
bors. (ibid.)

So, give the nod to the netmen during the day.

But there are problems with this. First is the issue of infor-
mation. How is the judge supposed to know who values which
asset more highly??® We have stipulated that there are no possible
markets, given out of reach transaction costs. In their absence,
such a determination is impossible.

Yes, it seems reasonable to suppose that people would rather
sleep at night and play tennis during the day. But is this always
so? Might there not be “night people” who prefer the exact oppo-
site? If so, wouldn't Demsetz’s advice to the court lead to wealth
reduction, and inefficiency?

Note that when discussing the night situation, Demsetz only
goes so far as to say that it is plausible that the sleepers value
the midnight hours more than the jocks. However, when it comes
to the hours of sunlight, there is no modifier at all. Demsetz in
this case contents himself with the claim that during these hours
the right to control noise “yields” more to the racket wielders than
to the pillow wielders. Why the difference? Is it that Demsetz
mentions the evening case first, and is tentative about this
somewhat dubious position, as well he should be, but then gets
into the “rhythm” of the thing, and by the time he reaches the
daylight hours, has picked up some momentum, and is therefore
now more sure about who values what to a greater degree? If so,
this seems rather a weak foundation on which to base the edifice
of property law. Sure, it is “plausible” to make the Demsetzian
supposition; but the very opposite is “plausible” as well. Out of

28gee Cordato (1989, 1992); North (1992); Krecke (1992).


===== PAGE 28 =====

88 The Review of Austrian Economics Vol. 8, No. 2

such raw material it is rather difficult to construct an edifice that
will withstand the rigors of everyday events.*

Not content to criticize my tennis game, Demsetz throws his
racket at Rothbard as well. He castigates his views about home-
steading and original ownership as “hopelessly superficial and
vague.” He claims that “such a criterion (could not) be applied to
the conflict over decibel levels between would-be tennis players
and sleepers” (p. 107).

How would Rothbard’s philosophy work in the present case?
Simple. Whoever “got there” first would decide whether tennis
could be played at night or not.

For example, consider town A, which was first settled by night
owls. They sleep all day long. But when the sun sets, the inhabi-
tants come sailing out of their homes, ready to do battle across
the tennis net. Sleep? Not in town A—at least not at night. There
must be a vampire gene in there somewhere.

The point is, from the Lockian—Rothbardian perspective, the
after dark athletes have Aomesteaded the rights to make noise
during the evening. But not any old noise. Only the decibel levels
appropriate to tennis. If a normal person moves into town A and
complains about nighttime tennis playing, he will have no re-
course at law, nor should he. This is because the right to play ball
at all hours of the evening is owned by the tennis buffs. However,
if these people suddenly escalate, and begin playing steel drums
at night, or turn their “ghetto blasters” onto high gear at 3:00
a.m., it is they who will be guilty of a rights violation, since the
night sleepers in town A are entitled to the limited peace and
quiet afforded them by tennis, but no less than that.

As well, tennis playing would be strictly prohibited during the
day, when the inhabitants of A take to their beds. This is because,
by assumption, it is the sleepers who have homesteaded the
rights to peace and quiet during daylight hours.

2%True, far more people hold day jobs than night jobs. Therefore there are far
more “day people” than “night people.” If we can infer interpersonal comparisons
of utility from so light a straw (not likely!), we can then indeed agree with Demsetz
that in the general case wealth will be maximized by allowing noise to emanate
from the tennis court during the hours of light, not darkness. But even here we
cannot be sure that this will hold true in any specific case.

On the other hand, the situation in very hot climates would seem to cut against
Demsetz’s supposition. There, the only practical time to play tennis is at night,
since it is somewhat cooler then. One might as well sleep (take a siesta) during
the day, for this reason. (I owe this point to Karen Selick.) Are we then to have
one set of property rights for the nothern climes, and a different one for the
southern? Suppose that the temperature changes, due to global warming, or
cooling. Should we then change the previous set of property rights?


===== PAGE 29 =====

Block: Property Rights: A Reply to Demsetz 89

Town B, in contrast, is more “normal.” They sleep at night,
and work and play while the sun still shines. Anyone engaging in
an act of tennis there at night would and should be forced to cease
and desist, because he would be trespassing on the property
rights of the sleepers who had homesteaded quiet evening hours.

We can now return to the Demsetz critique of my analysis. In
his view,

Both rights assignments are equally private and both seem
equally productive of individual freedom. Neither exhibits any
obvious ethical superiority over the other even when one’s prefer-
ences are highly weighted in favor of individual freedom. (p. 101)

But it is clear that under the homesteading assumptions we
have made, Demsetz is in error. It is not true that both rights
assignments are compatible with the libertarian code. On the
contrary, only one is appropriate for town A, and a very different
one is appropriate for town B.

Demsetz claims that “Neither exhibits any obvious ethical
superiority over the other even when one’s preferences are highly
weighted in favor of individual freedom” (p. 101). But in this he
is again mistaken. The Lockean system is far more heavily
weighted in favor of individual freedom than is that which ema-
nates from the Chicago Law and Economics tradition. In the
former case, property rights are “for keeps,” as we have seen. Once
they are established, through homesteading, no court can trifle
with them. All justification of property titles is traceable to this
original ownership, plus a legitimate process of transfer (Nozick
1974). In contrast, in the latter case the courts can always break
into the voluntary chain of market transactions, and render them
asunder. Harking back to the Posner insight, freedom consists of
keeping your own garage if you wish, despite the claims of others,
no matter how plausible. In my philosophy, this is guaranteed. In
Demsetz’s there is at best a presumption in this direction. But
the door is always open. The judge must decide cases on their
“merits,” with, presumably, little “favoritism” in the direction of
extant owners.

Property Rights Definitions

Another of Demsetz’s parries reads as follows:

Once a private property rights system is defined . . . it can be
expected that subsequent negotiations will tend to tolerate only
efficient uses of scarce resources. (p. 101)


===== PAGE 30 =====

90 The Review of Austrian Economics Vol. 8, No. 2

This, it must be allowed, makes perfect sense. Once property
rights limitations are clearly made, the market is perfectly capa-
ble of “bartering and trucking” them around in a way that pleases
all parties to any agreements. But the key, here, is that property
rights be clearly delimited, and reliably be expected to endure. If
not, it is extremely unlikely that any deals will be made on the
basis of them.

But this is something that Demsetz, at least during his Aus-
trian Pure Snow Trees example, steadfastly refuses to do. There,
he eschews “for keeps” property rights systems. If he did so in that
context, however, he cannot logically utilize them in the tennis
example.

Demsetz dismisses as “hopelessly superficial and vague”
Rothbard’s eminently sensible view that

every man has the absolute right of property in his own self and
the previously unowned natural resources which he finds,
transforms by his own labor, and then gives or exchanges with
others. (p. 107)

In particular, Demsetz casts aspersions on the contention that
this dictum could be applied to the tennis at night conflict.

However, the libertarian theory of private property rights
most certainly can be applied to this case, as to every other. Of
course this does not

mean that everyone has the right to use his person as he pleases,
for the very question of defining private property rights is that of
determining what can and what cannot be done by one’s self.
(ibid.)

But Rothbard in the above quoted statement certainly does
answer “the very question of defining private property rights.” He
agrees, moreover, “that [it consists] of determining what can and
what cannot be done by one’s self.” Demsetz in contrast is simply
not open to even consider the common sense notion that homestead-
ing, trade, exchange, etc., can serve as a rule by which boundaries
can be placed between one person’s fist and another’s chin.

Now it is one thing to assert that the libertarian property
rights rule is inferior to his own. Demsetz, however, is not merely
claiming this. In this section of his paper, he attempts to maintain
that the homesteading rule is incoherent; incapable, even, of
unambiguously—albeit wrong headedly—settling boundary dis-
putes. But surely this is erroneous. The Lockean—Rothbardian


===== PAGE 31 =====

Block: Property Rights: A Reply to Demsetz 91

method, whatever its flaws?’ is after all buttressed by hoary
tradition. It, not the Coasian vision, is the established order, at
least outside of the economics profession.

Interpersonal Comparisons of Utility

In this section of his paper Demsetz launches a blistering attack
on Murray Rothbard. Specifically, Demsetz®’ takes issue with Roth-
bard’s claim that “the free market always benefits every partici-
pant, and it maximizes social utility ex ante” (p. 105). His criti-
cism is that Rothbard relies on interpersonal comparisons of
utility, “a notion fraught with pitfalls and arbitrariness” (ibid.).
This is rather remarkable, emanating as it does from a person,
Demsetz that is, who advocates allocating property rights on the
basis of their divergent values to different people. This, it would
appear, is a paradigm case of the pot castigating the kettle for being
black.

But even if Demsetz himself relies on interpersonal compari-
sons of utility, that does not mean that Rothbard is guiltless of
this serious charge. Is he? At first glance, the case against Roth-
bard seems strong. He does resort to the problematic phrase
“social utility,” and Demsetz, reasonably enough, maintains that
“The maximization of ‘social’ utility implies interpersonal com-
parisons of utility” (ibid.).

The problem, here, is that Demsetz has not carefully read this
quote. He fails to take cognizance of the import of the phrase
“every participant.” Strictly speaking, there are only two partici-
pants in every trade. (The free market is no more than the
concatenation of all such trades.) And surely, at least in the ex
ante sense, both parties to the commercial interaction benefit.
That is, “the free market always benefits every participant” or all
participants. It is in this sense, and this sense alone, that the
market maximizes “social utility.” Interpersonal comparisons of
utility simply do not enter the picture. If I buy a newspaper for
$1.00, then both the vendor and I benefit. We (the two of us, that
is) all gain. Every one of the two of us is better off. Social utility
increases. That is, the total utility of myself and the vendor rises.

305uch as that furnished by the Austrian Pure Snow tree cancer cure example.
The fact that he offered this criticism is evidence of the fact that he does consider
homesteading to be logically coherent, even if wrong. His analysis in that section
of the paper is thus incompatible with that which appears in this section.

3!1t is somewhat difficult to discern whether or not Demsetz is quoting
Rothbard accurately, and in context. This is because Demsetz, again, fails to cite
his source. Efforts on the part of the present author to trace down this citation
again proved to be of no avail.


===== PAGE 32 =====

92 The Review of Austrian Economics Vol. 8, No. 2

This is not due to a comparison of his utility and my own, but
rather to the fact that the utility of each of us, in the ex ante sense,
is enhanced by the trade. In this sense, also, there is unanimity:
all of the trading partners, me and the newsdealer, the totality of
the two participants, unanimously agree to interact in this man-
ner in the expectation of gain.

Demsetz sees matters very differently. For him, the market
yields both “beneficial and harmful effects” (p. 105). The benefi-
cial effects are easy enough to discern, but from whence spring
the harmful ones? For Demsetz, it is not true that there are only
two participants in each market engagement. Rather, there are,
at least potentially, thousands of third parties: competitors, buy-
ers and sellers of complements and substitutes. As well there are
the external®® diseconomic effects, which give rise to people for
whom the traders’ utility enters their utility functions in a nega-
tive direction.’® Demsetz correctly sees that if the views of all of
these people have to be considered before any trade could take
place, that is, if the market prohibited such “harmful effects,”
commercial activity would quickly grind to a halt, an abrupt one.
In his view, a system that did prohibit such harmful effects, “such
as one based on the unanimity principle, would be . . . intolerably
impractical” (ibid.).

So there we have it. For Rothbard, unanimity is the guarantee
that trade will maximize the social utility of the market. For
Demsetz, unanimity is the hangman's noose of the business; once
give it credence, and there can be no market.

How can we decide between these two starkly contrasting
views? I propose that we do so based upon the one principle that
both these economists claim to hold firm: the impermissibility of
interpersonal comparisons of utility. One of their views is com-
patible with this stricture, and one is not. We will reject the one
that is inconsistent with this agreed upon doctrine.

On this basis, it is clear that Demsetz is in logical hot water.
On the face of it, his views cannot be reconciled with the imper-
missibility of interpersonal comparisons of utility. Remember
that for him the market is the source of both “beneficial and
harmful” (p. 105) effects. If we are to be able to sustain the claim
that the market, on net balance, is utility enhancing (let alone
maximizing) we must claim that the beneficial effects outweigh

32For a critique of the literature supporting this perspective, see Block (1983);
and Hummel (1990).

33%We need not mention positive external economies, since these would be listed
under beneficial, not harmful, effects.


===== PAGE 33 =====

Block: Property Rights: A Reply to Demsetz 93

the harmful ones. But to do any such thing would surely be an
instance of interpersonal comparison of utility. Remember also
that it is impossible to apply this criticism to Rothbard. For in his
view it is not true that there are beneficial and harmful effects
which must be weighed, one against the other, thus giving rise to
interpersonal comparisons of utility difficulties. On the contrary,
the market for him is the unambiguous locus of utility enhancing
activity (always in the ex ante sense.)’*

Demsetz tries an end run around this objection. Although
valiant, and even brilliant, it unfortunately fails. He argues that
his perspective doesn’t need to rely on interpersonal comparisons of
utility because the market itself will determine whether or not the
harm outweighs the benefit. As an example he mentions the
introduction of a new product which benefits customers, but hurts
their previous suppliers:

The open market will allow the innovation to succeed only if custom-
ers and new product producers . . . are benefitted more than com-
petitive sellers are harmed. If the customers experience a gain worth
$100 by shifting their trade to the innovator while the sellers they
leave suffer a loss of only $80 as a result, then these sellers will
be unwilling to cut prices sufficiently to hold their customers.
Whereas, if these sellers suffer a loss of $150 if customers switch,
they would be willing to cut prices sufficiently to retain patronage.
The innovation succeeds only if the gains it confers, measured in
dollars, exceed the cost it imposes. (pp. 105-6)

The problems with this are manifest. The first is based on my
original criticism of Coase in terms of psychic income. Consider
the situation of the seller who suffers a loss of $150. According to
Demsetz, this person would in effect bribe the fleeing customers
to return to the fold. But suppose that their loss takes the form
of psychic income, and that they do not have the wherewithal to
make the bribe. Under these conditions, the scenario falls apart.
Second, we must assume perfect competition,* in that Demsetz
mentions “competitive sellers.” But under perfect competition,

34praxeologically, the claim of utility enhancement must be limited to the ex
ante sense. But as a matter of practicality, the presumption is that trades,
particularly if they are ongoing, promote utility gains for both parties in the ex
post sense as well. One could, conceivably, purchase a one shot item (a meal while
on the road, a toy bought on impulse) and not achieve a utility gain ex post. But
this can hardly often apply to repeat purchases.

35The Austrians, of course, need do no such thing. For a critique of this notion,
see Rothbard (1962); Armentano (1972, 1982); Armstrong (1982); Block (1977b).


===== PAGE 34 =====

94 The Review of Austrian Economics Vol. 8, No. 2

profits are assumed to be zero, and full employment of all land,
labor and capital is a given. Why, then, under these wierd and
exotic conditions, would anyone even notice the departure of
customers, much less offer to do anything about it? Third is the
problem that Demsetz here covers only pecuniary externalities.
But what about real externalities? What about soot pollution, for
example? How is the market going to determine whether the
benefits are greater than the costs, without engaging in the odd
sport of interpersonal comparisons of utility? Demsetz tosses
about figures such as $80, $100, $150; this is all well and good as
a hypothetical example. But when push comes to shove, interper-
sonal comparisons of utility are required if we are to determine
real world values. In contrast, the Lockean—Rothbardian posi-
tion®® clearly need not rely on interpersonal comparisons of util-
ity. The first settler is entitled to either clean or dirty air, which-
ever he established before the advent of the second settler. The
latter must accept the situation as he finds it.*” The issue of
interpersonal comparisons of utility does not arise.

Fourth, Demsetz is in effect arguing that we don’t really need
extraneous doctrines such as the homesteading principle to de-
termine property rights. Instead, the market can do this for itself
without resort to interpersonal comparisons of utility via the
principles adumbrated to us in the case of the introduction of the
new product. But this is a serious mistake. The market is
merely the totality of all trades. Before any commercial inter-
action can properly take place, the issue of legitimacy must be
faced. I may give you $1 for a newspaper, but if this arrange-
ment is to be part of the free market, it must be assumed that
each of us has valid title to that which we are giving up. For
example, if I stole the $1, or you the newspaper, this contract,

383ee Block (1990), and Rothbard (19822).

#"Does this mean that a person who moves into a dangerous neighborhood,
e.g., Harlem in New York City, must not protest at the epidemic of crime he finds
there? Not a bit of it. The cleanliness of the air, and noise pollution at different
times of day or night, define the property rights in operation there. They determine
what the newcomer can homestead, and what is owned by others. (I owe this
example to Ben Klein.)

Crime, in contrast, is an attack on the person or property of the new settler.
These are objects over which he has clear title before he came to inhabit the new
area. For example, his own body. As a self owner, he has a right not to be murdered.
If this happens to him, he (his estate) has the right to the fullest compensation
allowed by law, even if the “reasonable man” would not have ventured there in the
first place. If he brings property such as a car with him, and people trespass upon
it, they have no right to do so even if this is the practice common in Harlem.
Presumably, Posner would rise to the defense of anyone victimized in such a manner.


===== PAGE 35 =====

Block: Property Rights: A Reply to Demsetz 95

however described, cannot be considered part of the free enter-
prise system. To deny this is to argue in a circle. It is to say that
market activity can be based, ultimately, upon market activity.

This circularity is too much for even Demsetz to incorporate
into his philosophy. Indeed, he states:

The definition of rights by the legal system, which precedes market
negotiations, of course, does not have the benefit of market-re-
vealed information when ownership decisions are made. (p. 106)

But if this is so, how can he logically maintain that the market
1s sufficient unto itself to define property rights?

Stability of Property Rights

In the libertarian philosophy, rights are stable. Indeed, totally so.
This holds true in the sense that theft is strictly forbidden, and
so is the law of eminent domain. The only way that property can
change hands is through voluntary, e.g., market activity: trade,
barter, purchase, gift, gambling, inheritance, etc. Nozick (1974)
called this the theory of legitimate entitlements. In this way, all
legitimate property titles, at least in principle, can be traced back
to the homesteading stage.

The Law and Economics perspective is very much the oppo-
site. Here, stability of property titles is instrumental at best,
certainly not intrinsic. Demsetz specifically does not:

endorse frequent involuntary reassignment of such [private prop-
erty] rights . . . Frequent involuntary reassignment would destroy
confidence in the longevity of property rights and all long-run
consequences of resource use will tend to be neglected, at least in
a world of uncertainty and positive transaction cost. Efficiency
calls for a high degree of stability in property rights definitions,
but it does not necessarily forbid all involuntary reassignment,
especially when high exchange cost or free-rider type problems
reduce the efficacy of allocations through the market. (p. 106)

No Marxist, he, but this is hardly a ringing endorsement of
property rights. Happily, one supposes, we live in an era of
“uncertainty and positive transaction cost.” If not, one would
shudder at the prospect of leaving the determination of property
rights to the Chicagoans. On the other hand, this is scant comfort,
for we most certainly do live in a “high exchange cost” world, and
in which, moreover, people like Demsetz see “free-rider type
problems” under every bed.


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96 The Review of Austrian Economics Vol. 8, No. 2

The Panglossian Demsetz arises again when he asserts:

The producer of a new product receives the right to offer it for sale
to all potential buyers; producers of rival old products are denied
the right to the trade of their customers, and these producers
therefore suffer an uncontemplated loss. [There is good reason for
this rights assignment. It would be too costly to ascertain who is
harmed by how much, or who would be harmed by how much,
when a new product is to be introduced.] (p. 106)

But this account is problematic for several reasons. First of
all, whenever one hears of government having solved a problem,
no matter how simple, one should check one’s wallet; extreme
suspicion is the only appropriate response to such claims. Imag-
ine: the very same government which brings us the U.S. Post
Office, minimum wage, rent control, tariffs, and thousands of
other wealth destroying institutions, has finally “got it right.” It
has somehow thrust itself forward into the breach, and come up
with a rational property rights determination. If so, it is probably
despite its best efforts.

Second, while Demsetz’s account of present law is indubitably
correct in some particulars, this state of affairs did not always
exist. During medieval times, for example, it was by no means
true that people with new products were free to offer them for
sale. On the contrary, the guild system was then in place, and
monopoly powers were often enjoyed by these government sanc-
tioned cartels. Even nowadays some vestiges of this system still
endure. Medical and other occupational licensure laws (Friedman
1962; Williams 1982) prohibit people who wish to, from offering
services to customers. In effect “producers of rival old products
are not denied the right to the trade of their customers,” at least
vis-a-vis doctors and taxi cab drivers who would like to offer their
wares, but are prohibited by law from doing so. If the government
is so gloriously efficient, how does Demsetz explain these counter-
examples?

Third, why “uncontemplated?” Surely every person who ever
conducted a business fears the possibility that one day his cus-
tomers will desert him in favor of a better offer. Indeed, the
nightmares of businessmen probably consist of little else. Not
that this is relevant to legitimate property rights determination,
a normative question. Whether loss is or is not contemplated
determines on the positive issue of whether these considerations
are capitalized into prices.


===== PAGE 37 =====

Block: Property Rights: A Reply to Demsetz 97

Rear End Collision

Demsetz next seeks to buttress his “law is wonderful” thesis by use
of the rear end collision case. “The driver of the second car is liable,”
he tells us, “because’ in the general case the driver of the second car
can avoid such accidents more cheaply than the driver of the first
car” (p. 108). According to Demsetz, the system works this way for
slow speed congested traffic. But for “high speed expressways” where
“the driver of a second car has a more difficult time avoiding rear end
collisions, . . . we often observe minimum speed limits” (ibid. ).®

The implication, here, is that some modicum of efficiency has
been attained as far as road and highway operation, legislation,
and institutions are concerned. The judiciary is flexible enough
to be able to function in two very different kinds of situations:
slow and fast speeds. Not only does state law call down penal-
ties on the correct party in rear end collisions at slow speeds
(the second car), it even focuses on the correct party at higher
speeds (the first car, by forcing it to travel above a minimum speed
level.) Its functioning has nothing to do with so philosophical a
notion as causation, responsibility, guilt. On the contrary, it is
tightly calibrated enough to be able to maximize wealth under,
seemingly, all conceivable conditions. Just let it loose, let “the law
be the law,” and watch it avoid accidents as “cheaply” as possible.

But there are serious reservations which must be registered
about this optimistic scenario. If it is true, why, then, are people
being slaughtered like flies on the nation’s highways? Surely,
unnecessary deaths cannot be completely irrelevant to wealth
maximization. On the contrary, life is the very basis of wealth.
Without people to enjoy them, goods and services are just so many
wasted molecules and actions.

If the law is so efficient, why does it allow for road socialism,
that is, government ownership and management of highways? This
is the cause of 40,000 plus traffic fatalities per year, more than two
million serious injuries, and untold loss of property values (Block
1979; Woolridge 1970; Rothbard 1973b). If leaving auto travel to
the tender mercies of the state is such a good idea, why do
commuters in large cities face congestion that virtually stran-
gles movement? We all know that socialism is inefficient.*® What

380ne wonders whether Demsetz would accept as a refutation of his theory
those cases where there are no minimum highway speed limits?

39Chicago economists, as well as Austrians, have been preaching this message
for years. On the former, see M. Friedman (1980); D. Friedman (1989); on the latter,
Mises ([1969] 1981); Hayek (1989); Hoppe (1989).


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98 The Review of Austrian Economics Vol. 8, No. 2

Demsetz does not seem to realize is that this applies not only to
steel mills, trains and foodstuffs, but also to motor vehicle trans-
portation arteries. It pertains to both slow speed city traffic and
high speed expressways. Judges, in interpreting the law*® so as
to allow road socialism, are thus inefficient, contrary to Dem-
setz. For every penny possibly saved by holding the second
driver responsible for accidents on city streets, and placing
minimum speed limits on freeways, much more is lost by pro-
hibiting roads from being run on market based private property
right principles.

There is a second argument against the position staked out
by Demsetz. Take slow speed crashes. How does he know that “the
driver of the second car can avoid such accidents more cheaply
than the driver of the first car?” Where is his proof? The problem
is that in order to adduce any evidence, Demsetz would have to
violate the strictures of interpersonal comparisons of utility,
something we have seen him on record as opposing.

Third, there is an asymmetry in Demsetz’s analysis. He main-
tains that in slow traffic the second car must be held liable
because he can avoid the accident more cheaply. He states that
things are different in fast traffic. Here, logically, we are entitled
to deduce that the first driver can more cheaply avoid the acci-
dent, and hence must be hold liable. But Demsetz never reaches
this point. Instead, he contents himself with the comment that
“we often observe minimum speed limits on expressways.” But
why only “often?” Why not “always,” or at least “almost always?”
Could it be that the government sector is not the cheapest con-
ceivable option, as is mandated by the system of socialist law
which undergirds it? Why not carry through on the logic of this
claim and call for holding liable the first car in a rear end collision
on the highway? Alternatively, he could have inverted things;
adopted the speed limit policy he uses in high speed cases for local
traffic. That is, he could have claimed as efficient a maximum speed
limit under congested traffic conditions—rather than a finding of
liability.

“OThere is a bit of an equivocation as to the institution for which Demsetz is
claiming such great efficiency. On the one hand, he on numerous occasions states
that this is the judicial bench. On the other hand, the officials in charge of imposing
minimum highway speed limits are not judges, but rather highway bureaucrats,
or legislators. In Demsetz, then, we have a writer who deems the state, the political
process, the bureaucracy, government courts, to be highly efficient. That he is
despite this widely seen as an advocate of markets is a phenomenon in need of
explanation.


===== PAGE 39 =====

Block: Property Rights: A Reply to Demsetz 99

There is yet another difficulty: the alternative hypothesis has
by no means heen refuted by Demsetz. The commonsensical
notions of cause, blame, fault, come into play here. The reason
the second motor vehicle operator is found liable is not that he
could have more cheaply avoided the accident, but rather that he
caused it. He crashed into the first automobile, not the other way
around. He is at fault. This is shown by the fact that if the party
of the first part suddenly jammed on his brakes for no reason at
all, or, worse, put his gear into reverse and rammed into the party
of the second part, no one in his right mind would find the latter
liable, despite their relative positions.

Demsetz, himself, of course, would have to agree with this
latter point. After all, he states only that “there is a prima facie
case that the driver of the second car is liable” (p. 108), not that
he always is, or necessarily is. But if so, we arrive at a reductio.
How does a Demsetzian determine, in a particular rear end
collision, who is liable? He cannot rely merely on the positions of
the two vehicles. He has to look beneath this superficiality, to the
underlying causal relationship. Namely, he must look to cause, to
negligence, to choice, in short, to all the common sense notions he
is so anxious to throw out in favor of cost calculations and mutual
determination.

Factory vs. Laundry

By his comments on this subject, Demsetz shows himself not so
much in disagreement with Rothbard, as unable to comprehend
the latter. In Demsetz’s view,

If the owner of a factory considers locating next to an existing
laundry, and the owner of that laundry protests in court that soot
from the factory will raise the cost of laundering, the factory
owner is more likely to be held liable for damages than if it is the
laundry that contemplates locating next to an existing factory. (p.
108) :

And why is this? It is due

to the generally correct judgment that he who has not yet located
his business can move his business to another location at less cost
than he who has already fixed his assets into a particular location.
(p. 108)

Demsetz castigates Rothbard for eschewing this wealth maxi-
mization based analysis, and instead determining the property


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100 The Review of Austrian Economics Vol. 8, No. 2

rights in this case on the ground “that every man has the absolute
right of property in the previously unowned natural resources
which he finds” (p. 108).

If this is the best Demsetz can find in Rothbard as an answer
to this question, he is dealing with a straw man. To be sure,
Demsetz’s is an accurate protrayal of a view Rothbard has ex-
pressed. But Rothbard did so in another context. In this context,
Rothbard would say nothing of absolute property rights. Instead,
he would utilize the homesteading principle. If the factory was
located there first,*! it would have homesteaded the right to spew
forth soot into the area under contention, in Rothbard’s view. That
is why the Johnny-come-lately laundry would have to take the air
as it found it, not because of absolute property rights in virgin
territory. Alternatively, if the laundry were the original home-
steader, it would be deemed by Rothbard to have established
rights to enjoy the same air quality it found upon arrival, namely,
pure.*? This firm would be granted an injunction against the late
arriving factory polluter not because of the costs of moving people
before they establish themselves, not because of the notion of
absolute property rights in hitherto unowned resources, but be-
cause of the homesteading maxim: first come, first served. The
first arrival gets the right to interact with nature as he sees fit.**
Demsetz, in other words, has not succeeded in achieving “real
disagreement” with Rothbard. He does not even understand the
view of the latter, a necessary precondition.

Nor is his own perspective in this regard above reproach.
Based on his statements, one would expect symmetry from Dem-
setz. It shouldn’t matter who locates in the given area first; the
newcomers should always have lower relocation costs than the
established firm—before, that is, he has put down roots. There-
fore, the property rights nod should always be given to the
business concern with assets fixed into the geographical space.

In the event, however, we are disappointed. This works just
fine when the soot creating factory owner is the new kid on the
block. However, when it is the laundry’s turn to play newcomer,
this no longer holds. Nor are we vouchsafed any explanation as
to why not.

*!I now assume that there are only the two firms to be considered, the factory
and the laundry.

42Assuming, again, that the only way this air quality could be altered would
be by intervention of the factory.

43That is, after he becomes the owner of it. And this he can do by “mixing his
labor with the land” in a productive manner.


===== PAGE 41 =====

Block: Property Rights: A Reply to Demsetz 101

Boat Dock

Nothing daunted, Demsetz next illustrates his philosophical per-
spective with a case in which a boat and a moving dock collide,
leaving the latter damaged. In his view, it is nonsense to think
that the former caused the harm and is thus liable, while the
latter was the recipient of the harm and is thus the victim. Why?
Because “all motion is relative” (p. 108). One could with equal
reasonableness say that the boat bashed the dock, or vice versa.
And attempt to discern blame or fault would be foolish.

Demsetz’s alternative scenario fairly leaps off the page at us.
Whoever “could have prevented the damaging interaction at least
cost . . . is viewed as ‘causing’ the accident” (ibid.). He does not
explicitly state that this party should be held legally responsible
for the accident, but this is the clear implication.

We have already seen that the impossibility of interpersonal
comparisons of utility could bar the court from making a
non-arbitrary determination of least cost. In the economic
sense cost is the next best opportunity foregone by taking any
action. This, by its very nature, can only be known by the eco-
nomic actor himself, and not by anyone else, such as a Coasian-
Demsetzian judge.

Let us however explore not the economic notion of cost, but
rather Demsetz’s stipulative definition. One possible tack he
could have taken would have been to maintain that if a boat and
a dock crash together, and this causes damage to either, the owner
of the one who failed to put in place protective barriers (e.g., rubber
tires) should be found liable.** This appears to be the logical conclu-
sion, since “an ounce of prevention is worth a pound of cure,” and
Demsetz is, if nothing else, an avid proponent of wealth maximiza-
tion. The problem, here, though, is that it all depends upon one’s
level of time and risk preference. The old adage applies, clearly, if
the boat/dock owners are risk avoiders or even risk neutral, and
have a low time preference. But if their preference for risk is intense
enough, and their time preference rates are high enough, it may,
paradoxically, be cheaper to “go full speed ahead and damn the
possible, later, interactive damage consequences.” That is, the
rational course of action is to gamble: to use no protection at all.

Let us now abstract from objections based on time or risk
preference and consider the case in which, for some reason,

4%We here assume that rubber tires of one level of thickness is sufficient to
prevent damage.


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102 The Review of Austrian Economics Vol. 8, No. 2

neither the boat or dock owner uses such protective devices. One
could maintain that cost’ is proportional to the length of the side
of the edifice, and that since the dock is larger than the boat, the
latter is the least cost avoider, and should hence be penalized for
any crash. However, even though this is true, the precise area
where the two may come into contact with each other is precisely
the same. That is, a 100 foot boat may only hit 100 feet of a 1,000
foot dock, no more, no less.*® So this is no solution to the problem,
since the cost of installing rubber tires is identical .*’

Now let us assume that the costs of tire installation (for any
given perimeter) is cheaper for the dock than for the boat because
the former is more stationary, is located closer to the land (where
used tires may more cheaply be found), is closer to sources of cheap
labor, etc. Here, at last, we would have a relatively clear cut
non-arbitrary judicial decision*®: theowner of the dock, not the boat,
is the least cost accident avoider, and hence should be legally liable.

There are still problems, though, even in this “clear cut” case.
It is always possible to ask the following questions: The dock
owner is the least cost avoider of the accident, but is he respon-
sible for it? Is it just to penalize someone, given that he didn’t
cause an accident, merely because he could have avoided it more
cheaply than someone else? The answer that springs to mind is
No, it is not just to penalize a person who has not caused an
accident,*® even though he could have more cheaply avoided it.

Demsetz’s thinking, however, does not lie in this direction.
Instead of speculating about different cost scenarios, he focusses
on one: “the dock was rotten for want of maintenance” (p. 108).
But why would this make it cheaper for the dock owner to invest
in taking ameliorative action? To be sure, it would presumably be
easier for the dock owner to repair his own dock than for the boat
owner to do this for him (at the very least, the latter would have

>We are now discussing cost in the superficial out-of-pocket sense of this term,
not the proper alternative cost doctrine.

i a abstract from the possibility of multiple collisions, at different points of the
ock.

47If the boat is made of wood, and the dock of metal, the former may be easier
to destroy, and hence deserving of more protection, under the vision we are now
considering.

**Due, of course, to our many assumptions which violate economic axioms. But
the decision would still be arbitrary, unless we also jettison our analysis of
interpersonal comparisons of utility.

“This does not apply to a firm or a condominium which announces beforehand
that this is precisely the role of “justice” it will employ. Then, if one enters into its

territory, one in effect gives consent to be bound by this rather idiosyncratic notion
of justice.


===== PAGE 43 =====

Block: Property Rights: A Reply to Demsetz 103

to undergo the expense of obtaining permission from the former
in order to do this). The question is, why would it be less expensive
for the dock owner to repair his facility than for the boat owner
to take defensive measures? One possibility leaps to mind. Sup-
pose that the dock’s state of disrepair consisted of protruding
material sticking out into the water with a sharp point at the end
of it. For example, if there were a knife edged pole which extended
off the dock 20 feet into the water, this would require that the
boat come equipped with a 21 foot thick coating of rubber tires.
As this is clearly more expensive’ than repairing one protruding
20 foot sharp pole, Demsetz’s case is made: the dock owner should
have ordered and paid for the necessary repairs. Since he didn’t,
and he could have done it more cheaply than bedecking the boat
with a thick layer of tires, he should be liable for any resulting
accident.

Demsetz reckons without one point however. What renders this
example intuitively obvious is this sharp pole, sticking out into the
water as it does. That is why it is proper to hold the dock owner
liable for the accident. That protuberance offends our sense of
justice; without it, we would be outraged by holding the dock owner
responsible, merely because he was the least cost avoider.

This pole also makes the case for the alternative hypothesis
based on blame. If the pole (attached to the dock) and a boat ram
into each other, it is no longer true that “all motion is relative.”
On the contrary, it is now clear that one person caused the
accident, and the other was the victim. Even more telling, it is by
no means clear that the incident should still be labelled an
accident. Surely, a dock with an extending pole is more like an
accident waiting to happen (e.g., a threat of initiatory violence)
than a normal accident. When one goes walking down the street
waving a big pole around, if it connects with an innocent person
the result is not so much an accident as it is assault and battery.

There is a much more basic attack to which Demsetz opens
himself. Just as he is a road socialist, he is also a water socialist.®’
The point is that the whole problem of boat vs. dock liability arises
because the water upon which both sit is an unowned resource.
According to the Lockean-Rothbardian theory with which we are

50A¢ least under the artificial assumptions under which we are now laboring.

3115 characterizing Demsetz as a road or water socialist, I mean only to point
to his lack of reliance on private property rights in these areas. I certainly do not
mean to imply that he takes an anti-market stance on other issues, such as
minimum wage, rent control, trade, welfare, etc.


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104 The Review of Austrian Economics Vol. 8, No. 2

contrasting Demsetz’s Law and Economics perspective, this state
of affairs is unnatural and improper. In this view, the law should
allow for the private ownership of bodies of water, such as lakes,
rivers, streams, seas, oceans, etc.’ If it did, problems of the sort
mentioned by Demsetz simply would not arise.

For example, suppose I owned a lake. And on this lake there
appeared the Demsetzian dock and the Demsetzian boat. I, as
owner of the body of water in which they both sit, would have the
legal right to determine the liability rules for accidents. Just as
the private owner of the highway sets the rules of the road, so too
does the private owner of the body of water determine the laws
which shall prevail on the lake or ocean.’ Under these conditions,
in one fell swoop, the whole problem would disappear. Now it may
well be that if I set up the wrong liability rules I will go bankrupt.
After all, I will be competing with every other lake owner in the
area for customers, and if any part of my service is found want-
ing—cleanliness, fish stock availability, access roads, or liability
rules—I will face the threat of Chapter 11 reorganization. And
this is where Demsetz comes in as a force for good. It may well be
that his least-cost-avoider principle—however much wanting we
have found it to be on purely economic grounds—may be of some
service to lake owners. If so, we may wish Demsetz Godspeed in
his entrepreneurial task.

In other words, Demsetz’s Law and Economic perspective
serves a putative economic role under water socialism. Someone
must advise judges on liability rules from an economic perspective,
and his theory, no matter how problematic, at least serves this role.
But under water freedom, the perspective reduces to a mere mana-
gerial technique. Here, Demsetz can take his place alongside

52This need be no more of a normative claim than Demsetz’s view that liability
should be assigned to the least cost aveider. What Demsetz really means by this
is the positive claim “If you want to maximize wealth, then liability rules should
be written in such terminology.” Likewise, our claim could also be couched in this
manner: “If you want to maximize wealth, privatize all resources, particularly
including aqueous ones.” However, while I do indeed subscribe to this claim, [ also
hold the normative view that it is right that private property rights be extended
to all resources. This is because it is a violation of the libertarian legal code to
prohibit any non-invasive act, and homesteading the oceans (or any other virgin
territory) is certainly not invasive. On the libertarian legal code, see Hoppe (1993),
Rothbard (1982a). On lake and ocean privatization, see Anderson (1983), Block
(1992).

33Subject, of course, to the basic libertarian axiom of non-aggression. For
example, no lake owner can entice the fishing or boating public to his facility, and
then kill them with impunity, on the grounds that it is “his” lake. This is no more
justified than the same occurrence in a private residence.


===== PAGE 45 =====

Block: Property Rights: A Reply to Demsetz 105

biologists who advise the lake owner on fish stocks, sanitation
engineers who recommend policies on water cleanliness, etc.

Why do the Demsetzians of the world spend their time on
endless ruminations about least cost avoiders? One possible ex-
planation arises from the insight of water socialism. There is a
long socialist tradition of blaming the market for what are really
problems of interventionism, or the lack of markets based on
private property rights. For example, they castigate free enter-
prise for unemployment, without realizing that this problem
stems from unions, wage legislation and the lack of a one-hun-
dred-percent gold standard; they tax capitalism with the housing
(homelessness) crisis, which is actually caused by a plethora of
interventions, such as rent control, welfare, zoning, urban “re-
newal,” etc. They hold the market responsible for crime, not the
government with its mismanagement of welfare, prisons, educa-
tion, drugs, etc. Road and water socialists make a similar mis-
take. They see numerous externality and liability problems. Not
realizing that these are the result of interventionistic elements
in the economy, they do not see markets and private property
rights as the solution. Instead, they propose further government
incursions, this time judicial ones.

Of course there is an “externality problem” with street lights
on sidewalks, but not in shopping malls. This is because the one
does not benefit from the institution of private property while the
other does. In the latter case, but not the former, the externality
is internalized. In similar manner, there is a problem assigning
liability to boats and docks which sit on unowned bodies of water;
but this problem would not occur under privatization.

Economists see externality problems as widespread, but not
within restaurants. Yet they exist there, too, at least potentially.
If the tables are located too close to one another, each customer
will be a negative externality to the others under the resulting
crowded conditions. Management consultants are needed to give
locational advice to restaurant entrepreneurs. These problems
are widespread, but tend to be ignored by “welfare” and “public
administration” economists, because they do not appreciate that
the market tends to internalize these externalities, when (and
only when) private property rights are allowed.™

54paradoxically, Coase (1974) has done more than perhaps anyone else to show
the inapplicability of the externalities model to bodies of water. One would
therefore think that people who write in his Law and Economics tradition, such
as Demsetz, would have incorporated these insights into his analysis.


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106 The Review of Austrian Economics Vol. 8, No. 2

Last Clear Chance Rule

Let us now consider Demsetz’s comments on the railroad killing
a trespasser by running him over. As usual, this economist is
concerned entirely with least cost avoidance efficiency and wealth
maximization; rights and wrongs never enter the picture, except
for his view that there is nothing more to ethics than efficiency:
“It is difficult to ever describe unambiguously other criterion for
determining what is ethical” (p. 109) apart from efficiency.

The libertarian answer to the trespasser is rather straightfor-
ward. The trespasser is a thief (of services) and should be dealt
with the fullest extent of the law. Certainly, there would be no
question of holding the victim of this act, the railroad, guilty for
going about its legal business of transferring people and goods. If
the trespasser is hurt or killed by the train, the blame rests with
him, not the victim of the trespass.

Demsetz, in contrast, regards the trespasser who is hit by the
train on its own property as the victim. His rendition of his
opponents’ point of view is of great interest:

Since the trespasser could avoid the accident at less cost than the
railroad, it would seem that efficiency would call for liability to
rest on the trespasser even if the railroad made no attempt to
warn. (pp. 108-9)

Demsetz dismisses this view as “superficial.” Before proceed-
ing with his analysis in detail, I must note that this is more than
passing curious. All during the course of his article (1979), effi-
ciency has been defined in terms of least cost avoidance. Now,
however, when Demsetz wishes to defend the last clear chance
rule (unless the railroad engineer attempts to warn the tres-
passer, the railroad is held liable for hitting him) all bets are off.
In this case, efficiency is now defined in terms of “the likelihood
of saving a man’s life and the value of doing so” (p. 109).

Human life is of course valuable, although this should be at
least somewhat attenuated in the case of trespassers. Demsetz,
however, is a neoclassical economist, one who lives or dies by the
falsifiability principle. If one case can be cited where least cost
accident avoiding should not in his opinion entail liability status,
he must in all conscience give it up, at least as an absolute maxim.
Here, he himself furnishes us with just such a case. However,
instead of admitting, or even acknowledging that this concession
has shot his own thesis in the foot, so to speak, he blithely moves
on.


===== PAGE 47 =====

Block: Property Rights: A Reply to Demsetz 107

His concern, now, is with saving the trespasser’s life, and with
deterring anything that militates against that goal. The story
now becomes more than a little difficult to follow. First, Demsetz
avers that the trespasser could have avoided the accident at less
cost than the railroad. (He gives no reason to suppose this, but let
that pass; this is not the first time he has merely assumed the costs
at issue to be greater on one side than the other.) This would seem
to imply trespasser liability, at least for him. Then, he reverses field
and concludes that the life of this tortfeasor is worth more than the
inconvenience to the legitimate owner of the private property in
question. (Again, no explanation for this calculation is offered, but
let that pass, too.) Clearly, Demsetz is tailoring the rules to arrive
at a conclusion he wishes to reach on other grounds.

Judicial Equity

Professor Demsetz does not claim perfection for his system. He
freely concedes the possibility of error. Not for him are the niceties
of perfect competition, purchased at the cost of irrelevance to the
real world. He states

I do not mean to miscalculate the difficulty of the problem, to
suggest that mistakes are not made, or to underestimate the com-
plexity of the real institutions used to resolve the problem. (p. 109)

This is all well and good, and certainly imparts a measure
of moderation to the proceedings. The only problem is, given the
exigencies of interpersonal comparisons of utility, how can Demsetz
determine, even in principle, that a blunder has been made in any
given case? The same difficulties that face the court in comparing
the necessarily subjective costs of one person with another also
make it impossible for the analyst open to the possibility of judicial
error, such as Demsetz, to be aware of it. For example, let us suppose
that a judge rules in favor of a tennis player vis-a-vis a would-be
sleeper, because he thinks that the benefits of athletics during the
afternoon are worth $100, while the costs foregone by the wannabe
sleepers, because there are so few of them at that hour, are only $40.
In his opinion, the decision “saves” society $60. Along comes Dem-
setz, ever ready to find “mistaken” judicial decisions. He pounces
upon this one as being in error. To do this, he must make a claim along
the following lines. Namely, that the benefit to the racketeer has been
overestimated by the judge and in point of fact is only $70, while
the costs to the insomniac have been underestimated by the jurist
and are actually $90. The point is, the same necessary arbitrariness


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108 The Review of Austrian Economics Vol. 8, No. 2

that. faced the judge in his initial determination now casts its
baleful countenance upon Demsetz, in his attempt to second
guess the member of the court. If the first had no objective
considerations upon which to base a decision, then neither does
the second (e.g., Demsetz), in his attempt to check for “mistakes.”

Whether these miscalculations can be recognized or not, Dem-
setz thinks there is a force which can overcome this possible lacuna:

There is reason to believe that a series of common-law type
decisions will tend to converge on efficient definitions of rights
because a legal decision that generates inefficiency is more likely
to set in motion a stream of appeals and new cases designed to
upset that decision than would be the case had the decision been
correct from the viewpoint of efficiency. “Losers” generally have
more to gain from upsetting a decision than “winners” have in
defending that decision when it has produced an inefficient allo-
cation of resources, and just the reverse when it has produced
an efficient allocation. (p. 109)

Even at first glance this seems to be a weak foundation upon
which to base the entire Law and Economics edifice. It appears
especially flimsy compared with the profit and loss weeding-
out system of free enterprise which tends to ensure that
extant businesses are the best of an imperfect lot. It suffers in
comparison to the economic market in that while the loser of
what Demsetz is pleased to call an inefficient decision can indeed
launch an appeal, whether it is acted on, or accepted, is entirely
at the discretion of the judiciary, the very institution which puta-
tively created the error in the first place. In contrast, under the
free market system, the dissatisfied customer can patronize a
firm other than the one which initially failed to please him.

In the case of markets, moreover, the firm that fails to satisfy
consumers loses out, necessarily so. In comparison, judicial error
first cannot be recognized, and second, even if it could, the
tendency for mistake making judges to be shorn of their judicial
robes on this ground is very weak. Judges are elected, or
appointed by a relatively non-responsive political system.” This
1s hardly a recipe for accountability.

55Dollar voting takes place everyday, dozens of times. Political votes occur
every two or four years. The former can be pinpointed as narrowly as that for
different flavors of bubble gum; the latter is a package deal, where the citizen
cannot distinguish between a candidate’s activities on scores of fronts. There is a
case, moreover, for rational voter ignorance, given the unlikelihood that any one


===== PAGE 49 =====

Block: Property Rights: A Reply to Demsetz 109

There is, however, a possible rejoinder open to Demsetz, but
I am inclined to doubt that he will wish to make it. What if judges,
too, were part of the market? That is, consider a system verging
upon free market anarchy (D. Friedman 1989; Rothbard 1970,
1973, 1982a; Benson 1989, 1990) where judges are not appointed
through the political process, but are instead market partici-
pants, forced to rely upon voluntary payments for their financial
sustenance. Then, only the first of these problems would exist.

There is another theoretical difficulty. If it is true that losers
have more to gain from challenging an inefficient decision than
winners, it is equally true that they will have fewer resources with
which to do so. Whether one effect swamps the other is impossible
to say. But the upshot should yield little comfort to advocates of
judicial equilibrium tendencies such as Demsetz.

Then, too, there is the practical problem. Business concerns
which survive the market test of profit and loss are more or less
efficient—no matter which criterion is used to make that deter-
mination. The same, alas, cannot be said for the political-legal-
judicial process. Rather than “efficiency,” the word that springs
to mind is the very opposite. Furthermore, if there is an inexora-
ble tendency for good laws and sensible court decisions to ema-
nate from Washington, D.C. and the state capitals, why are they
centers of graft and corruption? Apologetics of this sort takes a
particular brand of courage, and we can indeed credit Demsetz
for showing far more than his fair share of this quality.

As well, there is the legal doctrine of “stare decisis,” a corner-
stone of our existing judicial system. This implies a rather slavish
respect for precedent, which tends not only not to weed out bad
decisions, but rather to entrench them.?® If one ill conceived
finding is rendered, all similarly aggrieved parties will not be
motivated to re-litigate the issue, as their probability of success
is now lower than it was in the first instance. In a monopoly
justice system, poor decrees discourage those with valid com-
plaints from litigating.

Private vs. Community Property Rights

Demsetz now returns to a discussion of public goods, free riders,
externalities and high transaction costs. It is on the basis of these
phenomena that he tries to “rationalize a role for the state” so as

person will be a tie breaker in an election; this of course does not apply to the
consumer in a market who buys for himself.

561 owe this point to Karen Selick.


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110 The Review of Austrian Economics Vol. 8, No. 2

to solve the problem of national defense, foreign policy and clean
air. His discussion leaves much to be desired.

Demsetz starts off his call for “communal property rights,” i.e.,
government control, by citing situations “when the gains or costs
associated with particular interactions are not confined to a few
parties, but, instead, are spread thinly over large numbers of
individuals” (p. 110).

William F. Buckely Jr. once described the conservative move-
ment as an entity sitting athwart history, and yelling “No!” It would
appear that economists who point out the illegitimacy of making
interpersonal comparisons of utility perform a similar role. The
problem is, this way of putting the issue runs afoul of interpersonal
comparisons of utility prohibitions. How do we know when gains or
costs are confined narrowly or spread thinly? Yes, we can note
trespass (of people or runaway soot) and, as a result, the problem
of dirty air can easily be solved by private property rights insti-
tutions. Demsetz allows that

it is difficult to see how costs and benefits can be internalized at
practical cost, as would be true with regard to air pollution in any
private property rights system that I have been able to envisage.
(p. 110)

The problem here, however, is not the market. Rather, it 1s
Demsetz’s lack of imagination. Perhaps some new scenarios
would present themselves if he perused some of the libertarian
environmentalist literature (Block 1990; Rothbard 1982b; Hor-
witz 1977). Here, he would learn that the reason we have dirty
air is that for decades government judges refused to uphold the
trespassing laws against errant soot particles—and that this has
nothing to do with externalities, neighborhood effects, costs, ete.
Rather, it was a philosophical failure. The point is, interpersonal
comparisons of utility present no difficulties to he who seeks prop-
erty rights violations as the source of air pollution problems; in
contrast, it sets up insuperable barriers to the Law and Econom-
ics high-transaction-cost hypothesis.

As to national defense, the obvious rejoinder is that “one
man’s meat is another man’s poison.” Defense may well be a value
to most people in the U.S.—at least as shown through public
opinion polls.” But what about pacifists, for whom a national

5TBut if there is one thing that is certain, it is that people lie to pollsters. In
the absence of markets, of course, there is no way that true preferences can be
revealed, or demonstrated.


===== PAGE 51 =====

Block: Property Rights: A Reply to Demsetz 111

defense would presumably be a disutility? Unless one is willing
to state that either there are no pacifists in the U.S, or that the
benefits they receive are somehow outweighed by the losses
suffered by the majority—in blatant contradiction to the stric-
tures against interpersonal comparisons of utility—one cannot
even talk about the “gains” accrued by national defense. On the
contrary, this argument is incoherent (Hummel 1990).

Then, too, there is the misuse of language. By the phrase
“communal private property rights” Demsetz does not refer to the
decision of individuals to voluntarily pool their legitimately
owned resources. Examples of such cooperation which merit the
term “private property rights” include the kibbutz,’® the monas-
tery, churches, firms, cooperative and condominium housing de-
velopments, stock companies, partnerships, etc. In contrast,
Demsetz uses this term to refer to the government’s seizure of
private assets for its own purposes. The proper appellation in this
case is not the contradiction in terms “communal private property
rights,” but rather “lack of property rights,” or “theft.” To assert
that a group of people has communal property rights is to imply
the notion that they have a right to use the property in any
(non-invasive) way they wish, and to exclude others from using
them at all. But if the way the property came to the community
in question was against the wishes of its original and legitimate
owners, then this group of people most certainly does not have
their right to use these resources as they wish respected. On the
contrary, the rightful owners are forced to give up their property;
it is then used in a manner determined by the government, or by
a majority of those deemed to be members of the “communal” or
“cooperative” group.

This democratic philosophy is not without its flaws. Suppose
that a friend of mine and I break into your home, and you catch
us in the act of absconding with your bicycle. You protest that this
is theft. We criminals, being of a philosophical turn of mind, are
willing to debate this issue with you. To prove our point (that this
bike is now “communal private property”) we hold an election.
First we ask “how many people think the bicycle should be left
right where it is, under the control of its [previous] owner, that
is, you?” One hand goes up. Yours. Then we ask “How many think

58Abstracting from the fact that in Israel these organizations typically receive
state subsidies. What I have in mind is perhaps best thought of as a Platonic
Kibbutz, one which adheres to all the voluntary communal aspects of that kind of
group, but does not receive tax money forcibly mulcted from nonmembers.


===== PAGE 52 =====

112 The Review of Austrian Economics Vol. 8, No. 2

it ought to be taken away, and used for communal private prop-
erty purposes, to be determined by the majority?” Two hands go
up. Ours.” Would such a justification satisfy Demsetz? Hardly.

Ethics

With this as a jumping off point, Demsetz now begins his analysis
of ethics. In the case of the familiar public goods, given high
transaction costs and the free rider problem, he asserts:

government intervention may be thought to be clumsy, costly, and
misdirected, but it is seldom thought to be unethical. Similarly,
the opposition to the government’s use of defense forces may be
based on its involvement in an immoral war, or its use of an
immoral draft, but it is seldom based on the immorality of the
principle of using the government to provide for the “common”
defense. But when a government confiscates property rights that
could have been obtained through the market, as with condemna-
tion proceedings, the military draft, or the nullification of gold
clauses during the recession of the 1930s, there is more than a
hint of belief that an unethical theft of rights has been perpetu-
ated. (pp. 110-1)

But why is the good professor so sure that none of these things
can be justified on Law and Economics grounds? Surely, if we take
him at his (interpersonal comparisons of utility) word, these are
all empirical questions. Their answers can only be determined
after a thorough and exhaustive cost-benefit analysis has been
concluded. As it stands now, however, the text makes Demsetz
appear as if he has adopted “religious and intuitive faith” (p. 98).
After all, in his own view, condemnation of private property and
gold clause nullification are not objectionable in principle. How,
then, has he come to the conclusion that these acts (even if proven
inefficient through empirical interpersonal comparisons of utility
calculations) are an “unethical theft of rights?” This would surely
surprise his Chicago colleagues.

Demsetz is clearly uncomfortable with the language of ethics.
And this should occasion little surprise; after all it is he who took
the view that there is no more to morality than economic effi
ciency. However, there is one exception to this generalization. He
pulls no punches with regard to the military draft. Demsetz is on
record as equating ethics and economic efficiency. If so, why resort

1 owe this example to Marshall Fritz,


===== PAGE 53 =====

Block: Property Rights: A Reply to Demsetz 113

to the language of morality at all? Why not stick to what for him
is the tried and true world of wealth maximization?

A Walk Around the Block

Demsetz and I once took a long walk together around the block
(as it happens, it was during a break at the meeting of the Mont
Pelerin Society in Munich). As we proceeded, a lost man ap-
proached us, asking for directions. Demsetz’s comment to me
afterwards (since we were both strangers, we could not help him)
was that this person was properly allowed by law to break into
our conversation to ask directions since the information we could
possibly have rendered him would likely be more valuable to him
than would the trivial loss of time, and the interruption of the
flow of conversation, be costly to us. My reply was that this was
properly allowed by law only because it did not constitute an
invasion of person or legitimately held property rights.

Several other thoughts now occur to me. First, there were two
of us and only one of him. If we make the heroic assumption of
equal value placed on time for the three of us, then it is likely that
our loss was twice his gain. If there were 5 or 10 of us walking
along and talking, then on this account the man almost®® certainly
should have been legally penalized for reducing wealth.

Second, I could probably specify conditions under which it
would be improper or illegal for one person to break into the
conversation of another, except, perhaps, under the most extreme
of circumstances. This is a point in Demsetz’s favor, as the
criterion appears to depend upon to whom is the interruption
more important and valuable: the interrupter or interruptee. But
the problem with this is that ex ante, it is extremely difficult to
tell. Here private property rights, contrary to Demsetz, can come
riding to the rescue. In symphony halls, hospitals, during lec-
tures, movies, the owners can specify “quiet please” rules, which
prevent, or at least reduce, the incidence of vocal interruptions.
Those who do this and thereby satisfy their customers, will
prosper. Those who do not will not. This is why people feel free to
break into conversations or not. On the public street, in contrast,

807 am forced to speak in this modest and unsure terminology given that
without interpersonal comparisons of utility, we are at sea without a rudder as far
as such calculations are concerned. More precisely, it is not objectionable at all to
say in common parlance that had one man asked directions of five or ten, the gain
to the former is likely to be less than the loss to the latter. In ordinary language,
there can be no objection. As a commonsensical matter, we make interpersonal
comparisons of utility all the day long. But Demsetz and I are engaged in an
intellectual debate, where a certain precision of language is required.


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114 The Review of Austrian Economics Vol. 8, No. 2

this institution cannot work, because the streets are unowned
and there are thus no legitimate private property rules which
obtain there (street socialism). People are therefore forced to
employ the mores learned in other contexts, with sometimes
unfortunate results. For example, it is by no means unknown for
young males in the inner city to kill people who have merely
looked at them. This occurs on the street and in public parks, but
more rarely on relatively more well guarded private property.

Paternalism

Our author now enters into a train of thought which might be
seen as peripheral at best to Block (1977a) the article he is
presumably debating. We shall nevertheless pursue him on these
grounds since, as it turns out, there is some relevance to matters
of mutual concern after all.

He starts out, reasonably enough, defining paternalism as the
“coerced denial of normal contracting rights” (p. 111). One might
expect that as an economist concerned with wealth maximization,
he would eschew paternalism as contrary to the interests of
people involved in mutually beneficial trades. If so, one would be
disappointed: “it is not clear. . . that there should be no paternal-
ism, nor how far paternalism may be carried” (p. 111). But this,
to say the least, is surely incompatible with wealth maximization,
assuming that we are not dealing with children or madmen. After
all, if ordinary people cannot be trusted to know their own inter-
ests, who can be?

At this point Demsetz goes off into a disquisition on sociobi-
ology. This, it would appear, is an effort to uncover people who
can be trusted to act paternalistically, but to do so in the best
interests of others, their wards.

The libertarian must look at this entire enterprise with a
certain amount of equanimity, since he rejects paternalism right
off the bat, on principle. Not so for the benevolent interventionist,
such as Demsetz. To him, it is a matter of no little concern that
the person assigned the paternalistic role actually carry it out for
the benefit of his ward, despite the well known Acton axiom about
the corruptibility of power.

Who, then, can be trusted with this delicate task? Sociobiol-
ogy, according to Demsetz, offers a recommendation: “To a large
extent, altruism is limited to kinship relations” (p. 111). Say what
you will about this initiative, his defense of “kinshipocracy” is at
least novel and inventive. The problem is, there is much more that
can be said about Demsetz’s view of it, none of it too positive. From


===== PAGE 55 =====

Block: Property Rights: A Reply to Demsetz 115

a libertarian point of view the notion of paternalism must be
completely negative; but it is even problematic from his own Law
and Economics perspective. Where is the argument that pater-
nalism will actually promote wealth maximization? If anything,
the reverse should be apparent. Setting aside a man’s decision
because his brother, or all five of his siblings together will it, is
hardly a guarantee of welfare improvement in his behalf. Nor is
there even an expectation that this goal would be attained. If is
of course likely that a stranger, or any five people picked at
random from the general population, would do far worse than the
man’s kin. Sociobiology does give strong evidence for that conten-
tion. But so what? Demsetz’s self-claimed brief is to improve
economic welfare, not to advance policies that disrupt wealth
creation less than even worse alternatives.

There is his positive claim in this context: “Paternalism is, in
fact, largely limited by natural selection to intrafamily relation-
ships” (p. 112). Stuff and nonsense! The biggest paternalist the
world has ever known, the most thoroughgoing, and, as it hap-
pens, the most vicious and depraved, is of course that very
institution Demsetz seems so intent on defending: the govern-
ment. George Washington may have been called the “Father of
our country,” but this is meant only in a figurative sense. He and
his successors are certainly no kin to the rest of us. And yet,
particularly in the last 100 years or so, governments have been
exercising more and more paternalistic powers over the entire
citizenry.

How else can we interpret the actions of Stalin or Hitler? Each
was doing what he thought was his level best for his “kinfolk”
(respectively, proletarians and Aryans). Of a more benevolent
variety, the actions of such leaders as F.D.R., Kennedy, Johnson,
Bush and Clinton may also be interpreted as paternalistic. Yet it
is hard to see how the reductions of economic freedom they
brought about were actually beneficial.

Competition

If any further evidence of Demsetz’s moral myopia were needed,
his discussion of competition more than fills the bill.
He begins by describing the phenomenon:

There are a multitude of methods for competing, ranging from a
brick through a rival’s place of business to a reduction in price to
the introduction of a superior product. (p. 112)


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116 The Review of Austrian Economics Vol. 8, No. 2

Even at this level, objections must be registered. In econom-
ics, competition is a way of cooperating. Paradoxically, even
though business rivals may go “hammer and tongs” at each other,
their activity is part and parcel of the market, and such commer-
cial interactions are a cooperative endeavor melding together the
goals of millions of people. Its reach is limited only by the extent
of the division of labor. Many people think that professional
athletic teams are only competing with one another. But economi-
cally speaking, they are in a deeper sense engaged in mutual
cooperation, putting on a show for the paying customers. For all
of the fabled rivalry which occurs in this venue, they cooperate
with each other precisely as much as member of other large firms
which entertain the public: symphony orchestras, movie compa-
nies, etc.

The point is that they refrain from aggression; competition,
at least in the economic sense, is limited to non-invasive acts.
This even includes boxing. Superficial appearances to the con-
trary, no aggression takes place in the ring (apart from pur-
poseful head butts, hitting below the belt, and other such rules
violations). The ordinary right cross, which in most other con-
texts would count as aggression, does not qualify as such in this
context. For both pugilists, agreeing to take part in this athletic
contest, have mutually rendered what would otherwise be con-
sidered assault and battery into voluntary, “cooperative” behav-
ior.

Paradoxically, the more competitive is the athletic contest,
the more economic cooperation occurs. No one would regularly
pay good money to see games with scores like 150 to 0. Thus,
without a fiercely battled contest, where the identity of the
winner is not a foregone conclusion, little if any economic coop-
eration will take place.

Given that competition is at bottom a cooperative effort,’* we
can immediately see that there is no “multitude” of competitive
models, at least not along the lines sketched out by Demsetz.
Lowering prices and introducing better products? Yes, of course.
But throwing a brick through a rival’s plate glass window? How
can that be competitive? If it isn't cooperative, it cannot be
competitive either, at least not in the legal and economic sense.
What is it then? It is a private property rights violation, pure and

1This of course is not to deny that rivalry may well, and often does, exist
between the competitive parties.


===== PAGE 57 =====

Block: Property Rights: A Reply to Demsetz 117

simple. It doesn’t deserve to be listed alongside such peaceful
activities as price and quality competition.®?

Demsetz does concede that “social scientists] and the human-
ist philosophers” (p. 112) make an ethical distinction between the
tossed brick and the lowered price. But biologists do not. Even
apart from his glowing rendition of sociobiology, it is clear where
Demsetz’s loyalties lie, academic discipline-wise: with the latter.

Am I being unfair to Demsetz? He does, after all, allow that
“there is a strong correlation between the efficiency conse-
quences of various forms of competition and the degree to which
they are judged to be proper or ethical” (p. 113). He could
scarcely make that point if he absolutely refused to draw
ethical distinctions between the brick and the lowered price.
However, he takes this all back (and more) when it comes to his
analysis of monopoly:

The securing of monopoly through legislated protection, how-
ever, seems much less likely to yield these gains than the
securing of monopoly through superior products. It is difficult for
me to see how to distinguish these two sources of negatively
sloped demand curves other than by judging their likely contri-
butions to real wealth, and it is only when judging that ethical
considerations become relevant. (p. 113)

Here he is, back at the same old ethics-consists-of-no-more-
than-efficiency lemonade stand. If he can’t see a moral difference,
over and above “likely contributions to real wealth” between
attaining single seller® status by legislative fiat and by satisfying
customers, it is hard to see how it can be claimed that he has any
moral faculty at all.

There are those, moral relativists, who think that by definition
every society, every culture, and even every individual absolutely
must? have a moral faculty. Even the Nazis and Communists, who
killed millions of innocent people, are defended in some quarters
as having a moral sense. To the query “How can this be?” they
reply “They just have a different sense of morals.”

62T% be sure, one can define competition to include both invasive and non-in-
vasive activities. Stipulative definitions cover a multitude of opinions. But to
conflate these very different kinds of behavior is at least problematic from the
point of view of precision of language. It also leaves a large moral vacuum, in that
these activities have very different ethical implications.

3For an explanation of why I refuse to employ the word “monopoly” to describe
market success, see Armstrong (1982), Block (1977a), Armentano (1972, 1982) and
especially Rothbard (1962).


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118 The Review of Austrian Economics Vol. 8, No. 2

But there is a fallacy here. Suppose we come across a new breed
of creatures, who speak an entirely different language.®* Our first
task in setting up relations with them is to create and English - X
language dictionary. We begin by pointing to an object, and saying
“cup.” They are accommodating, and point to various cup like ob-
jects, and say “plunk” as they do so. They apply “plunk” to glasses,
bowls, pots and pans and wastepaper baskets. They refuse to apply
it to apples, bananas, bicycles and pencils. We conclude the “plunk”
and “cup” are rough translations. Next, we point to the appendage
at the end of our leg, and say “foot.” They point in the same direction
on themselves and say “garr.” We say to ourselves, “aha, ‘foot’ and
‘garr’ are equivalents in our two languages.” But then, rather to our
dismay, they point to a rock, a rowboat and a giraffe and use the
same word “garr.” What are we to make of this? Are we to still
maintain that “garr” and “foot” are the same, only that their under-
standing of “foot” is different than ours? Not a bit of it. We must,
reluctantly if need be, conclude that they simply do not have a concept
of “foot” in their language, at least not commensurate with our own.

Now suppose we meet a “Martian.” We are trying to determine
whether this creature has a concept of morality or ethics. Thanks
to our previous considerations, this is by no means a foregone
conclusion. Like good logical positivists, on the contrary, we are
going to test this proposition. We start out well enough. We maintain
what we take as a paradigm case of morality: “It is wrong to kill an
innocent baby.” Now we invite the Martian, who we have reason to
believe speaks the same language, to give us another instance of an
ethical statement. He starts off on a good note with “a thrown brick
...and...areduction in price... [are] not viewed as equally ethical”
(p. 112). At least this Martian is clearly making the crucial distine-
tion. However, then he goes and ruins it by saying:

Efficiency seems to be not merely one of the many criteria under-
lying our notions of ethically correct definitions of private prop-
erty rights, but an extremely important one. It is difficulty even
to describe unambiguously any other criterion for determining
what is ethical. (p. 109)

In other words, “ethical” is exhausted completely by “effi-
cient.” Alternatively, “ethical” means no more than “efficient.” Are
we to say that the Martians have a perfectly reasonable, coherent,

54Note the contradiction here?
551 owe this example to Martin Lean.


===== PAGE 59 =====

Block: Property Rights: A Reply to Demsetz 119

sensible understanding of the moral realm, it just happens to be
somewhat different than our own? Not at all. The plain fact of the
matter is that Demsetz lacks an understanding of ethics, in the
same way an atheist does not have an appreciation of God, or a
color blind person of color, or a tone deaf person of music. Even
his distinction between brick throwing and price reducing can now
be understood in this vein. He means by it (or at least denotes) no
more, and no less, than that bricks are far less efficient in an
economic sense than are price alterations. The logical implication
is that if this situation were somehow reversed, that is, that brick
throwing became a better means to achieve wealth maximization
than diddling with prices, then Demsetz would line up behind the
former and eschew the latter. Nor would it be a matter, for him, of
balancing the moral against the efficacious; reluctantly accepting
the wealth maximization goal, but regretting the loss of morality.
In the Demsetz world view, the two are precisely the same. There is
nothing to regret. There is no trade off. If brick throwing gets us out
onto the highest indifference curve possible, well by gum and by
golly, that is the very meaning of ethical behavior .®

Conclusion

This way of interpreting Demsetz is buttressed by his concluding
remarks. Here we are treated to yet another version of ethical
relativism: “The ethical weight accorded efficiency in property
rights assignments is thus dependent on the ethical properties of
prevailing tastes and preferences” (p. 114).

These tastes and preferences, in turn, are determined by sur-
vival. “Life styles that promote survival come to be viewed as ethical.
. . . Our present preferences and tastes must reflect in large part
their survival promoting capabilities” (ibid.). This means that sur-
vival, a sort of “super efficiency,” is what ethics amounts to.

Now, there is a good bit of truth to this. Our moral codes hardly
amount to a recipe for mass suicide. On the contrary, the rules of
the Bible, the Talmud, and other religious documents have passed
the test of time; those societies living in at least rough accordance
with them have prospered to a far greater degree than those
which have not. However, this is no warrant for equating human

56No doubt there are many more people who equate wealth maximization with
ethics than Demsetz. My first experience with this phenomenon, however, was
with Henry Manne at a Liberty Fund conference in 1988 who maintained through
thick and thin that economic freedom consisted of no more than maximizing GNP
and its rate of growth. See statements by Manne in Block (1991), pp. 12-14, 49-50,
125-26.


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120 : The Review of Austrian Economics Vol. 8, No. 2

survival with morality. Suppose, just suppose, that there were
hundreds of intelligent species besides our own in the universe,
and that for some perverse reason our survival depended upon
killing them all, even though they did not in any way directly
threaten our survival. (For example, a Super Being such as “Q” in
the Star Trek series demanded that we kill everyone else, or he
would kill us.) Here is a case where no facile equation of morality
and human survival could pass muster.

Demsetz imparts a morally relativistic “spin” to his under-
standing of the relationship between survival and ethics. It de-
pends on time, or place, or war, or peace, or population size, or
the degree of wealth or poverty. He states:

what has survival capability in one environment, or century,
may not do so well in another. A command social structure is
likely to da better in small tribal societies than in large complex
societies. War and peace are likely to bring forth different ethical
precepts. A society of plenty can tolerate more altruism toward
special hardship cases than can a society of poverty. We are
bound to view the proper resolution of legal problems from
the perspective of what presently seems efficient. (p. 115)

Yes, yes, different things may be required for survival in
different contexts, but this doesn’t make what is moral in one case
immoral in another. It doesn’t matter that a command economy
can do more harm in large complex societies than in small simple
ones. It is wrong in both cases to violate economic freedom. It is
simply not true that rape, theft, brutality, etc., which are far more
prevalent in war than in peace become moral on that ground.
Charitable giving is easier to finance (and less needed) under
general affluence than poverty, but it is still a moral act in both
cases.

In contrast to the amoralism emanating from Demsetz,
Knight is a pillar of objectivist rectitude on this matter. Says he:

The conditions of survival are merely the laws of biology. It may
well be the part of prudence to act in accordance with them,
assuming that one wants to survive, but it can hardly be associated
with the notions of right or duty, and if these have no meaning
beyond prudence the realm of ethics is illusory. (p. 115)67

8"Knight 1935 (p. 71), quoted in Demsetz (p. 115).


===== PAGE 61 =====

Block: Property Rights: A Reply to Demsetz 121

Needless to say, the present author warmly supports this
view. The problem is, Demsetz offers this citation only to criticize
Knight. His criticism amounts to little more than a rehearsal of
sociobiology, only applied, now, to ethics itself: “it is the set of
ethics that does survive and prosper that will identify what is
efficient and what is not” (p. 115).

Demsetz ends his essay on what can best be described as an
uncertain note. On the one hand, he seems to see the present
debate—between he and Coase on the one hand and Rothbard and
myself on the other—as wasteful:

Those who value freedom highly would seem to be wasteful of
their efforts and those of others to issue a call to debate where
no substantial issue of freedom is involved; the choice between
alternative private property definitions would seem a case in
point. (p. 116)

But this is unacceptable. It is not true that no substantial
issue of freedom is involved in this disagreement. On the contrary,
there is a chasm as large as the Grand Canyon separating the two
sides. In my own view, what Demsetz is pleased to call his
“alternative private property definition” is no such thing. Rather,
it is almost a complete abnegation of property rights. Moreover,
it is a chimera. It is an attempt to define property not in terms of
past accomplishments—homesteading, trade, etc.—but on the
basis of supposed future consequences. It is based on a judge’s
arbitrary opinion as to who can best utilize a given resource.
Demsetz, for his part, is equally critical of the Locke—Rothbard
view. He cannot paper over this dispute in the last paragraph of
his essay after devoting all of his efforts to a critique.

On the other hand, appearing to take this all back, he seems
to find some value in debate, “as in arguing for deregulation” (p.
116). This, too, is hard to follow, as the entire Demsetzian edifice
is based on a call for regulation of markets, albeit by judges, not
by politicians, bureaucrats, licensing boards, wages and price
controllers, and other more typical regulators.

Consider the counterargument: Demsetz doesn’t at all call for
regulations; he merely favors a different kind of decision in property
rights disputes. However much one may disagree with his views, it
is improper to call them akin to a defense of economic regulation.

The problem with this defense is that regulations, too, are
“merely a different kind of decision in property rights disputes.”
Take rent control for example, the very paradigm case of an


===== PAGE 62 =====

122 The Review of Austrian Economics Vol. 8, No. 2

economic regulation. Is it not true that this is “merely a different
kind of decision in property rights disputes?” The landlord wants
to charge $500. The sitting tenant thinks that it would be more
fair for him to pay only $300. Is this not a property rights dispute?

But couldn’t this also be said of the free enterprise answer to
the dispute—to which undoubtedly Demsetz would agree—
namely, that the landlord should be able to set whatever rent he
wishes for his property? No. It would be a travesty of language to
maintain that defending the landlord’s right to own his property,
and to demand whatever rent he wishes for it is tantamount to
regulating his business.

As it happens, it is inconsistent with his general philosophy
for Demsetz to take an anti-rent control stance, however much he
may wish to do so in other contexts. For if he is to remain true to
the Coasian Law and Economics doctrine, he cannot blithely
condemn all rent controls. On the contrary, he must first deter-
mine whether the landlord’s use of the rental fee of $500 will
benefit him more than the loss of this money will negatively
impact on the tenant. Who says, after al}, that the landlord is the
“rightful” owner of the property in question? For the Demsetzes
of the world, this should always remain an open question or
perhaps a meaningless one. It is for the judge to decide upon this,
and he should do so, as we have seen, based upon which decision
will maximize total wealth. There is absolutely no reason to
suppose that this always implies that landlords should be allowed
to keep their property, let alone unilaterally set the rent level. It
must of course be conceded that Demsetz and his colleagues have
been in the forefront of the effort to marshall evidence show-
ing the deleterious effects of rent control. However, as a consis-
tent Demsetzian, he cannot universally condemn this law.

Our author ends his essay with a ringing call for freedom. But
what can this possibly mean, if freedom consists of no more than
wealth maximization? I would find his well spoken call for free-
dom far more eloquent if for Demsetz there were some difference
between freedom and economic efficiency.

As I see matters, far from there being no real disagreement
between us, we have only begun to scratch the surface of disputation.
What we sorely need is more debate, not less. I therefore invite
Demsetz and other devotees of the Law and Economics philoso-
phy to continue the discussion. It is the only hope of attaining the
truth on these very interesting and important matters.


===== PAGE 63 =====

Block: Property Rights: A Reply to Demsetz 123

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