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Property Rights

Property Rights

The right to own land and other property is taken for granted in many countries. It is one of the cornerstones of private enterprise and capitalism, and makes it possible for people to control where they live and work. In space, however, this right is an open issue. International treaties appear to bar people from making ownership claims to property on celestial bodies but do not explicitly prohibit it. Although the topic of property rights in space is not yet a major issue, it is something that will have to be resolved before major commercial development of space, particularly the Moon and other nearby celestial bodies, can proceed.

Treaties and Property Rights

Two international treaties address, at least to some extent, the question of property rights in space. The Outer Space Treaty of 1967, the first treaty to deal exclusively with space, specifically prohibits nations from making claims in outer space. Article 2 of the treaty states: "Outer space, including the moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means." This provision is similar to one in the Antarctic Treaty of 1959, which prevented countries from making new claims on territory in Antarctica, although that treaty allowed existing claims to stand.

The Outer Space Treaty does not specifically prohibit nongovernmental organizations, including individuals and businesses, from making claims to or owning property on other worlds. However, because no nation can claim another body, it becomes much more difficult for private claims to be enforced. If two people have a dispute over the ownership of a parcel of land in the United States, that dispute can be resolved through American courts because the United States clearly has jurisdiction over that parcel. However, since no nation has jurisdiction over land on another celestial body, it is unclear how disputes, registration of deeds and claims, and other aspects of property rights could be managed.

The United Nations made an effort to eliminate this concern in 1979 through a separate treaty that is known popularly as the Moon Treaty. This treaty, like the Outer Space Treaty, prohibits countries from claiming property on other worlds. However, the Moon Treaty also bars nongovernmental organizations from owning property on other worlds. The treaty considers the Moon and the celestial bodies of the solar system the "common heritage of mankind" and would require an international organization of some kind to oversee development on other worlds. That organization also would be responsible for the distribution of the benefits realized from any such development among all nations.

Although the Moon Treaty could settle the question of property rights in space, the accord has been largely ignored. Only nine nations have ratified the treaty, none of which play a significant role in space exploration. The United States and other major spacefaring nations have never signed, let alone ratified, the treaty. Although the treaty technically has gone into force because of the small number of nations that have ratified it, the agreement has very little real power. This has left the question of private property rights in space unsettled.

Private Property Right Claims

Despite the current ambiguity regarding private property in space, some companies and individuals have attempted to make claims on celestial bodies. One of the best-known claims was made by Dennis Hope, an American entrepreneur. In 1980 Hope filed a claim for the surface of the Moon, the other planets in the solar system (except for Earth), and their moons. The claim was filed with a claim registry office of the U.S. government under the Homestead Act of 1862. Hope also sent copies of the claim to the United Nations and the Soviet Union, neither of which, according to Hope, contested the claim. Hope has been selling property on the Moon and other solar system bodies since he registered the claim through a company called Lunar Embassy.

Many space law experts do not believe that Hope's claim is valid. They contend that it runs afoul of Article 2 of the Outer Space Treaty, which pre- vents nations from claiming territory in space. Because no nation can claim the Moon or another world, there is no nation that would have jurisdiction over such a claim. Moreover, there is more than one claim to ownership of the Moon: A German, Martin Jürgens, has a declaration given to one of his ancestors by the Prussian king Frederick the Great that gives that person ownership of the Moon. While maintaining the legitimacy of his claim, Hope carefully skirts around the legal issues by noting that the deeds he sells for property on other worlds are "novelty items."

In February 2001 the National Aeronautics and Space Administration's (NASA) Near Earth Asteroid Rendezvous (NEAR) spacecraft landed on the surface of the asteroid Eros after orbiting the body for a year. Shortly afterward Gregory Nemitz, chief executive officer of Orbital Development, a San Diego company, submitted a letter to NASA headquarters. That letter stated that Nemitz and Orbital Development had filed a claim in 2000 for the asteroid with the Archimedes Institute, which maintains a registry of such claims but is not supported or endorsed by any government entity. Nemitz asked NASA for a nominal "parking/storage fee" of $20 per century for landing NEAR on the surface of Eros.

In response, NASA General Counsel Edward Frankle said that the agency would not pay the fee. Frankle cited Article 2 of the Outer Space Treaty, which prohibits nations from claiming celestial bodies, as the main reason why he believed Nemitz's claim was not valid. Although Nemitz made a number of arguments stating why he believed that article of the treaty did not apply, NASA was not swayed. The space agency continued to decline to pay the fee, saying that the claim was not sufficiently established. NASA declined to take a position on whether Article 2 of the Outer Space Treaty applied to individuals or whether the treaty should be amended to deal specifically with this issue.

Other companies have taken a more circumspect approach to the question of property rights. Applied Space Resources, an American company that is planning to land a spacecraft on the Moon, has made a conscious decision not to claim any territorial rights on the Moon. The company is concerned that any near-term debate over property rights could prove detrimental for commercial efforts because it believes that one possibility would be a moratorium on commercial space projects until the legal questions about property rights are resolved.

The Future of Property Rights in Space

A complete solution to the question of private property rights in space probably will require either changes to the Outer Space Treaty or an entirely new accord. As of this writing, however, there are no efforts under way to amend existing treaties or write new ones. In light of the relative lack of activity in commercial space enterprises to date, it may be some time until nations take action on this issue.

However, there have been some low-key efforts to address the property rights issue. Attorney Wayne White has drafted a proposed treaty that deals with property rights on the Moon and other bodies. Under his proposal, private entitiesindividuals or companiesthat operate a space facility of some kind on the surface of another world for at least one year would be accorded the right to the property on which the facility is located as well as a "safety zone" extending up to 1 kilometer (0.62 mile) from it. This provision would prevent people from claiming entire planets without even landing a spacecraft on them. The proposal also includes provisions for transferring property and revoking property rights if the facility is abandoned or is not used for peaceful purposes. White has presented his draft treaty and papers based on it at meetings of the International Institute for Space Law, but the proposal has not been taken up by any nation.

Although property claims on other celestial bodies have not been recognized by any nation, there is a registry for tracking those claims. The Archimedes Institute, which was established by law professor Lawrence Roberts, operates a claims registry where individuals can file claims on objects throughout the solar system. Claims filed with the Archimedes Institute have no special protection or priority over other claims because no nation has recognized such claims. However, the institute hopes that the creation of the registry will encourage the formation of new agreements that will recognize private property rights in space.

see also Governance (volume 4); Land Grants (volume 4); Law (volume 4); Law of Space (volume 1).

Jeff Foust

Bibliography

Reynolds, Glenn H., and Robert P. Merges. Outer Space: Problems of Policy and Law. Boulder, CO: Westview, 1994. Ward & Partners. "Sovereignty in Space." <http://www.spacelaw.com.au/content/sovereignty.htm>.

Internet Resources

Space Property Rights. Applied Space Resources.<http://www.appliedspace.com/property_rights.htm>.

White, Wayne N. "Proposal for a Multilateral Treaty Regarding Jurisdiction and Real Property Rights in Outer Space."Space Future. <http://www.spacefuture.com/archive/proposal_for_a_multilateral_treaty_regarding_jurisdiction_and_real_ property_rights_in_outer_space.shtml>.

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Property Rights

Property Rights

THE CLASSICAL LIBERAL POSITION

THE SOCIALIST POSITION

EXTERNALITIES AND THE TRAGEDY OF THE COMMONS

BIBLIOGRAPHY

Property rights consist of a persons ability to own, transfer, and use that which a person owns without government coercion. Property rights and economic freedom are interrelated in that a person cannot engage in economic activity if the state does not recognize and defend that persons right to own property, and because it is meaningless to have the ability to speak and act freely if one lacks the ability to monetize ones words and actions.

The way in which property rights are defined depends on which of two premises is taken as the starting point. Rights of ownership either originate with society as a whole and are bestowed by society on individuals from time to time or originate with individuals and are bestowed by individuals on society from time to time. The former is the position of socialist philosophers; the latter, that of classical liberal philosophers.

THE CLASSICAL LIBERAL POSITION

Classical liberalism begins with the premise that an individuals life belongs to that individual. This ownership of self, classical liberalists believe, is not something that is bestowed by human-made law but is a natural right that arises by virtue of an individuals status as a human being. Starting from the assumption that individuals own their own lives, classical liberals argue that it logically follows that individuals own their own labor because labor is the action of the self and individuals own themselves as a matter of natural law. Because individuals own their own labor, they also own the wages they earn from that labor because the wages are what they receive in exchange for the labor they own. Similarly, an individual owns the things that individual buys with his or her wages because those things are traded for the wages that were traded for labor that is the result of action by the self that the individual naturally owns. Thus, classical liberals maintain that property rights are sacrosanct as a matter of natural law.

The principle of natural law is invoked in the U.S. Bill of Rights, which speaks of inalienable rights: rights that exist as a matter of peoples state as humans and that can be neither established nor revoked by government action. Although the individual may choose to give up some property rights to society for the common good or in exchange for protections granted by society, classical liberals maintain that those rights are the individuals to give up, not societys to take.

THE SOCIALIST POSITION

Socialism begins with the position that it is the responsibility of society to ensure an equitable distribution of ownership. That obligation falls to society because, socialists believe, when individuals are left to their own devices, political and economic power become concentrated in the hands of the strong, who then exploit the weak. Thus, because it is the responsibility of society to protect all its members, property rights must belong to society as a whole. In the socialist framework the society bestows property rights on individuals to maintain equality of income and wealth.

The socialist position was greatly influenced by the exploitation of western workers in the late nineteenth century. The German philosopher Karl Marx maintained that workers had a right to the value of their labor and that a system that allowed employers to profit from the fruits of workers labors is destined to bring about the exploitation of those workers. Marxist socialists maintain that the way to avoid this exploitation of labor is for the state to own the means of production. Removing private ownership means that the government must decide how the means of production are to be used. This is accomplished by a central planning board that decides how much output industries will produce, what prices they will charge, and how much they will pay their workers.

Communism is regarded as the next evolutionary step beyond socialism. In the socialist system, the government owns the means of production only. Individuals still maintain ownership of their personal property. In the Communist system, the government keeps all property rights to itself and the individual owns nothing. In the Communist system, people work for no wage and receive everything they need from the government at no cost. What is common to the socialist and Communist frameworks is that property rights originate with society, not with the individual. Despite the use of the term, no modern country has ever achieved a Communist framework. Even those that have come closest, Russia, China, and North Korea, have not succeeded in attaining government control of all property. Modern examples of Communist systems are seen in religious communities whose members take vows of poverty. In these communities, the individual owns nothing but is granted use of property owned by the community.

EXTERNALITIES AND THE TRAGEDY OF THE COMMONS

Economists argue that it is important that property rights be well defined. When they are not, there is a disconnect between individuals who make decisions and individuals who must live with the consequences of those decisions. This situation is known as externalities and the tragedy of the commons.

In the case of externalities one individual imposes a cost on another that would necessitate compensation for the second individual if property rights were well defined. For example, a factory that pollutes the air imposes a cost on people who breathe the air. Because the factory does not bear the cost of pollution, it has an incentive to pollute more than it would otherwise. If property rights are defined so that those people own the air, the factory is forced to compensate them for the air it pollutes. The result is that the factory pollutes less. If property rights are defined so that the factory owns the air, people must pay the factory to pollute less so that the air will be breathable. Again, less pollution is created. Thus, when property rights are poorly defined, the economy produces more of the good than is socially optimal. When property rights are well defined, regardless of whom the rights are assigned to, the economy produces the socially optimal quantity of product.

The economic problem of the tragedy of the commons also results from poorly defined property rights. For example, if everyone in a village together owns a plot of pastureland (a commons), each person is free to graze his or her cattle on the land. However, because the ownership is spread over so many people, no single person has an incentive to maintain the land. The result is that the land will be overgrazed. However, if one person owned the land, that person would have the ability to profit from owning the land and therefore would have an incentive to maintain it.

A contemporary example of the tragedy of the commons is the treatment of endangered species. In countries that have outlawed the killing of elephants the elephant population dwindles because poachers have an incentive to evade the law and no one has an incentive to protect the elephants. Conversely, in the few countries in which killing elephants is legal, the elephant population is flourishing because people have an incentive to help the elephants thrive so that they can be harvested at a profit. As an extension of this example, cows are not endangered in the United States despite the fact that Americans consume millions of tons of beef annually. Because it is legal to own cows, farmers have an incentive to maintain herds and cull them at a profit. The decimation of the American buffalo, in contrast, occurred because cattlemen came to the plains before the rule of law was established. Without law to enforce property rights, the buffalo were a common resource and so were hunted to near extinction.

SEE ALSO Bill of Rights, U.S.; Capitalism; Coase Theorem; Communism; Externality; Freedom; Government; Individualism; Liberalism; Market Economy; Natural Rights; Property; Socialism; State, The; Tragedy of the Commons

BIBLIOGRAPHY

Bastiat, Federic. 1850. Economic Harmonies. Ed. George B. de Huszar, trans. W. Hayden Boyers. Irvington-on-Hudson, NY: Foundation for Economic Education, 1996.

Hoppe, Hans-Hermann. 1989. A Theory of Socialism and Capitalism. Boston: Kluwer Academic Publishers.

Marx, Karl. 1867. Capital. Trans. and ed. S. Levitsky. Washington, DC: Regnery, 2000.

Von Mises, Ludwig. 1979. Economic Policy: Thoughts for Today and Tomorrow. South Bend, IN: Regnery/Gateway.

Antony Davies

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Property Rights

PROPERTY RIGHTS

In many situations, property rights are easily determined. Boundaries to stationary, observable assets such as land can be defined and enforced clearly. Property rights to crude oil and natural gas are far more troublesome, for two reasons. Both resources lie below the surface, making it difficult to locate the exact limits of the deposits, and they migrate within subsurface reservoirs. Some reservoirs cover many square miles, including hundreds of property owners, each with a competing claim to the oil and gas. Moreover, other reservoirs straddle national boundaries, encouraging international competition for the oil and gas. For these reasons energy production from crude oil and natural gas can involve serious common-pool losses. Although there is much to be gained from cooperation among property owners to avoid these losses, reaching a cooperative solution can be very difficult.

The problems of the common pool were most dramatically illustrated in Garrett Hardin's famous 1968 article "The Tragedy of the Commons." Exploitation of valuable resources when property rights are absent or poorly defined can be extremely wasteful. Because the parties must capture the resource before it is appropriated by another, time horizons become distorted, with undue emphasis on short-term production and neglect of long-term investment. Even if the trend of market prices indicates that resource values would be greater from future, rather than current, use, production will not be postponed. The losses are compounded by excessive capital investment in extraction and storage.

Common-pool problems characterize many resources where it is difficult to define property rights to restrain access and use. In North America, common-pool conditions in oil and natural gas production are created when firms compete for hydrocarbons in the same formation under the common-law rule of capture (which also governs fisheries and many other natural resources).

Under the rule of capture, ownership is secured only upon extraction. In the United States, production rights are granted to firms through leases from those who hold the mineral rights, typically surface land owners. Each of the producing firms has an incentive to maximize the economic value of its leases rather than that of the reservoir as a whole. Firms competitively drill and drain, including the oil of their neighbors, to increase their private returns, even though these actions can involve excessive investment in wells, pipelines, and surface storage, higher production costs, and lower overall oil recovery.

Oil production requires pressure from compressed gas or water to expel oil to the surface. There are three main types of reservoir drives to flush oil to wells: dissolved gas drive, gas-cap drive, and water drive. With a gas drive, the oil in the reservoir is saturated with dissolved gas. As pressures fall with oil production, the gas escapes from solution, expands, and propels oil to the surface. Hence it is important to control gas production so it remains available to remove the oil. With a gas-cap drive, the upper part of the reservoir is filled with gas, and oil lies beneath it. As oil is withdrawn, the compressed gas expands downward, pushing oil to the well bore. As with a dissolved gas drive, gas production from the gas cap should be restricted to maintain reservoir pressure to expel the oil. Finally, with a water drive, the oil lies above a layer of water. The compressed water migrates into the oil zone as the oil moves to the well and helps to push it from the rock formation. High oil recovery rates require that subterranean water pressures be maintained.

Maximizing the value of the reservoir requires that full reservoir dynamics be considered in drilling wells and in extracting oil. Gas and water must be recycled through the strategic placement of injection wells; wells with high gas-oil or water-oil ratios must be closed or not drilled; and the rate of oil production must be controlled to maintain underground pressure.

Each reservoir generally has a dominant drive, an optimal pattern of well locations, and a maximum efficient rate of production (MER), which, if exceeded, would lead to an avoidable loss of ultimate oil recovery. Unfortunately, oil, gas, and water are not evenly distributed within the reservoir. With multiple leases above the reservoir, some lease owners will have more oil, gas, or water than will others, and coordination among competing firms in well placement and in controlling production rates is difficult. Efficient production of the reservoir suggests that some leases not be produced at all. Further, since each firm's production inflicts external costs on the other firms on the formation, some mechanism must be found to internalize those costs in production decisions.

Maintaining subsurface pressures; effectively placing wells; coordinating timely investment; and controlling oil production across leases while protecting the interests of the various lease owners under conditions of geologic and market uncertainty are formidable challenges. Yet, if they are not adopted, common-pool losses are likely.

Common-pool problems in oil and gas have been observed since commercial production began in the United States in 1859. The solution, unitization, also has been understood for a long time. With unitization, a single firm, often with the largest leased area, is designated as the unit operator to develop the reservoir, ignoring lease boundaries. With unitization, optimal well placement and production are possible as is coordination in other activities to increase overall recovery from the reservoir; These activities include pressure maintenance; secondary recovery; and enhanced oil recovery (EOR), whereby heat, carbon dioxide, or other chemicals are injected into the reservoir.

All lease owners share in the net returns of unitized production, based on negotiated formulas. As residual profit claimants, the lease owners now have incentives to develop the reservoir (rather than the lease) in a manner that maximizes its economic value over time. When producers expect unitization to occur, exploration is encouraged because greater recovery rates and reduced costs are anticipated. Bonuses and royalties to landowners are higher because the present value of the oil and gas resource is greater with unitization.

Despite its attractions for reducing common-pool losses, use of unitization has been more limited than one would expect. Joe Bain (1947, p. 29) noted: "It is difficult to understand why in the United States, even admitting all obstacles of law and tradition, not more than a dozen pools are 100 percent unitized (out of some 3,000) and only 185 have even partial unitization." Similarly, in 1985 Wiggins and Libecap reported that as late as 1975, only 38 percent of Oklahoma production and 20 percent of Texas production came from field-wide units.

To be successful, a unit agreement must align the incentives of the oil-producing firms over the life of the contract to maximize the economic value of the reservoir without repeated renegotiation. Unit contracts involve a number of difficult issues that have to be addressed by negotiators. Because remaining production often lasts twenty years or more, unit agreements must be long-term and be responsive to considerable uncertainty over future market and geological conditions. They must allocate unit production and costs among the many firms that otherwise would be producing from the reservoir. Additionally, they must authorize investments that may be made later to expand reservoir production, and distribute the ensuing costs among the individual parties.

These are formidable tasks for unit negotiators. The negotiating parties must agree to a sharing rule or participation formula for the allocation of costs and revenues from production. There may be different sharing rules for different phases of unit production, such as primary and secondary production, and the rules should apply to all firms on the reservoir. This arrangement is termed a single participating area. There should not be separate participating areas for oil and gas; otherwise, different incentives for oil and gas production will emerge. Development, capital, and operating costs must be allocated in proportion to revenue shares in an effort to align all interests to maximize the economic value of the reservoir. In that case, each party will share in the net returns from production and hence will have an incentive to minimize development and production costs and to maximize revenues. Further, a single unit operator must be selected to develop the field. Multiple unit operators lead to conflicting objectives and hinder the coordinated production practices necessary to maximize the value of the reservoir. Supervision of the unit operator by the other interests must be determined, with voting based on unit participation.

All of these issues can be contentious, but reaching agreement on the revenue sharing or participation formula is the most difficult. Shares are based on estimates of each firm's contribution to the unit. Those firms with leases that reflect a natural structural advantage (e.g., more resources or easier access to resources) seek to retain this advantage in the unitization formula. Such firms are unlikely to agree to a unitization agreement that does not give them at least as much oil or gas as they would receive by not unitizing. Even if the increase in ultimate recovery from unitization is so great that these parties will receive more from unit operations than from individual development, they have a much stronger bargaining position in negotiations than less-favored tract owners. The former can hold out for the most favorable allocation formula, secure in the knowledge that the regional migration of oil will continue toward their tracts during any delay in negotiations. Indeed, holding out may increase the value of a structurally advantageous location. If the firms form a subunit without the participation of the owners of better-located tracts, the pressure maintenance operations of the unit may increase the amount of oil migration toward the unsigned tracts. The holdouts, then, benefit from the unit without incurring any costs of the pressure maintenance activity.

The information available to the negotiating parties for determining lease values depends upon the stage of production. During exploration, all leases are relatively homogeneous, and unitization agreements can be comparatively easy to reach using simple allocation formulas, often based on surface acreage. Information problems and distributional concerns, however, arise with development as lease differences emerge. Because reservoirs are not uniform, the information released from a well is descriptive of only the immediate vicinity. There will be disagreements over how to evaluate this information in setting lease values. As a result of disagreements over subsurface parameters, unit negotiations often must focus on a small set of variables that can be objectively measured, such as cumulative output or wells per acre. These objective measures, however, may be poor indicators of lease value.

Conflicts over lease values and unit shares generally continue until late in the life of a reservoir. As primary production nears zero, accumulated information causes public and private lease value estimates to converge, so that a consensus on share values is possible. Without unit agreement, secondary production from all leases may be quite limited. The timing of a consensus on lease values, however, suggests that voluntary unit agreements are more likely to be reached only after most of the common-pool losses have been inflicted on the reservoir.

Reaching agreement on these issues is a complex process. In a detailed examination of seven units in Texas, Wiggins and Libecap showed in 1985 that negotiations took four to nine years before agreements could be reached. Moreover, in five of the seven cases, the area in the final unit was less than that involved in early negotiations. As some firms became frustrated, they dropped out to form subunits, which led to a partitioning of the field and the drilling of additional wells but generally did not minimize common-pool losses. For example, 28 subunits, ranging from 80 to 4,918 acres, were established on the 71,000-acre Slaughter field in West Texas. To prevent migration of oil across subunit boundaries, some 427 offsetting water injection wells were sunk along each subunit boundary, adding capital costs of $156 million.

Other costs from incomplete unitization are shown on Prudhoe Bay, North America's largest oil and gas field, which was first unitized in 1977. Two unit operators, separate sharing formulas for oil and gas interests, and a disparity between revenue sharing and cost sharing among the working interests have resulted in protracted and costly conflicts. The parties on the field do not have joint incentives to maximize the economic value of the reservoir, but rather seek to maximize the values of their individual oil or gas holdings. Because ownership of oil and gas in Prudhoe Bay is very skewed, with some firms holding mostly oil in the oil rim and others holding mostly natural gas in the gas cap, the firms have been unable to agree to a complete, reservoirwide agreement. Disputes have centered on investment and whether natural gas should be reinjected to raise oil production, or liquefied and sold as natural-gas liquids. In 1999 Libecap and Smith showed that skewed ownership in the presence of gas caps characterizes other incomplete unit agreements elsewhere in North America.

Most states, as well as the U.S. government, have some type of compulsory unitization rule to limit the ability of a minority of holdouts to block a unit. Mandatory unitization began in the United States in Louisiana, in 1940. Due to political opposition by small firms that receive regulatory-related benefits, Texas, surprisingly, has not had a compulsory unitization law. Texas court rulings have tended to restrict unitization.

Although unitization is most problematical in North America, where there generally are more operators on a given oil field, the problems of coordinated production to avoid common-pool losses exist elsewhere. In the North Sea, Argentina, Ecuador, and the Caspian Sea, lease and national boundaries often do not coincide with reservoir boundaries. Under these conditions a nation may engage in competitive drilling to drain the oil and gas before its neighbor does. This incentive appears to explain the initial pattern of Norwegian drilling only along its boundaries with the United Kingdom (Hollick and Cooper, 1997).

Gary D. Libecap

See also: Governmental Approaches to Energy Regulation; Government Intervention in Energy Markets; Oil and Gas, Drilling for; Oil and Gas, Exploration for; Oil and Gas, Production of; Pipelines.

BIBLIOGRAPHY

Bain, J. S. (1947). The Economics of the Pacific Coast Petroleum Industry, Part III: Public Policy Toward Competition and Prices. Berkeley: University of California Press.

Hardin, G. (1968). "The Tragedy of the Commons." Science 162:1243–1248.

Hollick, A. L., and Cooper, R. N. (1997). "Global Commons: Can They Be Managed?" In The Economics of Transnational Commons, ed. P. Dasgupta, K-G. Maäler, and A. Vercelli. Oxford: Clarendon Press.

Libecap, G. D. (1989). Contracting for Property Rights. New York: Cambridge University Press.

Libecap, G. D., and Smith, J. L. (1999). "The Self-Enforcing Provisions of Oil and Gas Unit Operating Agreements: Theory and Evidence." Journal of Law, Economics, and Organization 15(2):526–48.

Libecap, G. D., and Wiggins, S. N. (1984). "Contractual Responses to the Common Pool: Prorationing of Crude Oil Production." American Economic Review 74:87–98.

Libecap, G. D., and Wiggins, S. N. (1985). "The Influence of Private Contractual Failure on Regulation: The Case of Oil Field Unitization." Journal of Political Economy 93:690–714.

McDonald, S. L. (1971). Petroleum Conservation in the United States. Baltimore: Johns Hopkins University Press.

Smith, J. L. (1987). "The Common Pool, Bargaining, and the Rule of Capture." Economic Inquiry 25:631–644.

Sullivan, R. E., ed. (1960). Conservation of Oil and Gas: A Legal History, 1948–1958. Chicago: American Bar Association.

Weaver, J. L. (1986). Unitization of Oil and Gas Fields in Texas: A Study of Legislative, Administrative, and Judicial Policies. Washington, DC: Resources for the Future.

Wiggins, S. N., and Libecap, G. D. (1985). "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information." American Economic Review 75:376–385.

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Property Rights

PROPERTY RIGHTS

In the discourse of American constitutionalism, the idea of property has been both primal and protean.

First, there is the text. The due process of law clauses of both the Fifth Amendment and fourteenth amendment, rank property by name with life and liberty as a chief human interest to be secured against arbitrary and excessive interference from government. The Fifth Amendment's eminent domain, or "taking," clause even adds a special restriction against uncompensated taking of property for public benefit. Constitutional law perceives various high aims in these general protections for property. Courts dealing with claims of taking without compensation find in property an antiredistributive principle, opposed to imposition on a select few of the costs and burdens of government operations. When the claim is one of deprivation without procedural due process, modern doctrine treats property as primarily a legalistic (or bureaucratic) principle, opposed to subversion of legally warranted expectations by faithless or irregular administration of standing law. Of course, expectations build on constancy in the law itself, as well as on reliable administration. The doctrine of substantive due process arose, in part, out of concern for protecting legally vested rights against retrospective disturbance by changes in law. In a more dramatic form of substantive due process, property has figured as a libertarian principle of independence from state regulation: the right of an owner, as Justice john paul stevens recently wrote in moore v. city of east cleveland (1977), "to use her own property as she sees fit."

Second, proprietary norms and notions have inspired and organized constitutional-legal doctrine apparently far removed from the immediate scope of the property-specific clauses. Both the third amendment and fourth amendment obviously tap special values of domestic sanctuary—refuge and privacy—from one prototypical image of property, the home or house. In griswold v. connecticut (1965) the Supreme Court marshaled these provisions with others in the bill of rights to construct a constitutional right of privacy in the conduct of marital intimacies at home. By the time of roe v. wade (1973), the Court had reconceived this as a right to choose for oneself "whether to bear or beget a child." In buckley v. valeo (1976) the Court treated deployments of private wealth in electoral politics as exercises of the freedom of speech and the freedom of assembly and association protected by the first amendment. In perry education assocation v. perry local educators assocation (1983), the Court confirmed an old idea that a government acting as a proprietor (rather than as a lawmaker) is unusually free to restrict freedom of speech. In a series of cases including Reeves, Inc. v. Stake (1980), the Court similarly relieved states acting as owners from normal duties under the commerce clause to refrain from commercial discrimination against out-of-state competitors. In contrast, courts adjudicating under the rubric of substantive due process currently treat economic liberties (aspects of self-direction concerned with acquisition, exchanges, and deployment of property) as categorically less resistant to state regulation than more "fundamental" or "personal" aspects, such as control over family formations.

Third, on a broadly ideological level, legal depictions of property have figured strongly in imaginative conceptions of the American constitutional system. Property held a glorified place in the common lawyer's Whig history imbibed by early Americans from william blackstone. With its naturalistic imagery of clearly demarcated "closes," property offered a paradigm of legally sanctioned authority that was supreme within its limits yet firmly delimited by law. Such an image of legal property apparently helped later generations of Americans to represent and confirm to themselves the workings of check-and-balance institutional schemes—federalism and separation of powers—that depend on jurisdictional boundaries judicially patrolled. More fundamentally, the image has from the beginning helped inspire and sustain a core idea of constitutionalism: a legally limited government based on a secure bounding of the state's domain from those of the market and private life.

Finally, at the level of practical debate over institutions, the question of property's relation to politics has always been foundational for American constitutionalism. In the strongly influential natural rights philosophy traced to john locke, the relation is oppositional. Property—here meaning acquisition of goods by effort and exchange and retention against force and fraud—is considered a native attribute of humankind, not an artificial contingency of state power and political choice. Accordingly, the state's business is to secure natural property against breakdowns of mutual forbearance that only a supreme civil authority can prevent. For Lockeans, then, the relation of property to politics is that of an a priori external limit and a test of legitimacy.

Yet in an older tradition of civic republicanism, to which the Founders were also heir, questions of property entitlement and distribution are inseparable from constitutional design and political ministration. By the traditional republican understanding, property, or wealth, is power in politics. Undue concentration of wealth portends either oligarchy or revolution, and warding off those contingencies is very much the business of republican government. Morevoer, in civic republican thought, "corruption" of political motives by preoccupation with private need or advantage (as opposed to public honor and common good) is a chief internal threat to the stability and success of popular governments. Elements of this traditional view, modernized and coupled with Lockean liberal ideas, plainly appear throughout the federalist (saliently in james madison's famous essay on "faction") and in thomas jefferson's political writings. They appear in the Constitution, as well, and in early American constitutional practice. By such devices as indirect election and large constituencies, the Framers avowedly designed the Constitution to ensure that only men of means and repute would attain national legislative or executive office.

Moreover, it was normal in the early United States for states, which under the Constitution set electoral qualifications even for congressional and presidential elections, to restrict voting rights to persons of independent social status (free adult males) who also held a substantial property endowment or income of a kind not too dependent on governmental machination. In the more egalitarian democratic ethos tracing to the Jacksonian period, reconstruction, and the civil war amendments, wealth discrimination in the field of voting rights has become constitutionally intolerable. Rather, debate has inevitably arisen over the converse claim that a democratic-republican constitution requires assurance to all, at public expense if necessary, of the material prerequisites of political independence and competence.

In summary, the American constitutional rhetoric of property and property rights is a congested manifold of cross-cutting and contested doctrinal and normative evocations. As might be expected of such an overloaded vocabulary, ambiguity and conflict affect not just normative emanations and doctrinal derivations, but the direct reference of the central terms themselves. In constitutional disputation, "property" and "property right" variously signify holdings, entitlements, and institutions. At one moment, "property" (or "property right") may refer to specific holdings of social wealth that various persons currently claim or practically enjoy; at another, to a set of legal or moral rules and principles supposed to define and condition entitlements to possession and enjoyment of parcels of social wealth; and at still another, to institutional regimes of privatization (the "free market").

This variability of reference would little surprise the generations of Anglo-American theorists—the line runs from David Hume and Jeremy Bentham to Wesley N. Hohfeld, morris r. cohen, Felix S. Cohen, Robert L. Hale, and beyond—who have attempted conceptual analyses and critiques of legal "property." Vagaries in constitutional-legal usage of "property" echo the academic discussions, which have themselves obviously been sensitive to partisan political and constitutional debates. In some respects, however, constitutional-legal usage strays from established jurisprudential positions.

It is common ground, at least, that legal "property" is a relation, not a substance. Property does not consist in parcels of wealth or "stuff." Academic sophisticates have long agreed that it also does not consist in any relation between a person and "his" stuff; neither possessory acts, proprietary intentions, nor both together constitute property. Rather, property is a matter of relations among persons: the social relations and practices that accord to bare, empirical, person-to-parcel connections a measure of public recognition, normative legitimacy, and practical reliability. But that is not all property is, either. Also indispensable to property, say the theorists, is the element of entitlement or legal sanction: there is no true "property" in a casual neighborhood practice of allowing me to farm a field and reap the fruit when we all also know that others may stop me at any time without running afoul any law. The question then becomes whether the law that constitutes property entitlements consists strictly of the "positive" human inventions of legislatures and of courts filling gaps in the common law or, rather, is found in some method of reason or traditional understanding that composes a prelegislative "higher" or "Natural" Law. On this question, jurisprudence remains deeply divided.

It is easy to find constitutional-legal doctrine officially accepting each step of the jurisprudential consensus so far as it goes. Yet constitutional law seems also often driven to resist the abstract logic of the consensus. According to the theorists, a legal regime that secures the exclusive possession of landowners against unauthorized entry certainly constitutes a property entitlement, but so, by the same reasoning, does a legal regime that permits (and protects against interference) a particular mode of using a parcel—for example, an owner's strip mining of land. Constitutional law, by contrast, differentiates sharply between legal restrictions on use that leave possession undisturbed and laws subjecting owners to "permanent physical occupations" of land. As the Supreme Court recently confirmed in Keystone Bituminous Coal Association v. DeBenedictis (1987) and Nollan v. California Coastal Commission (1987), new use restrictions, however severe, rarely amount to constitutionally challengeable takings or deprivations of property, but state-sponsored dispossession, however trivial, almost always does. Or consider a law plainly stating that a sheriff may seize goods from a person who bought them on credit whenever the creditor tells the sheriff that the loan is in default. In the sophisticated view, such a law simply defines the extent of the installment buyer's property right and so cannot itself be a constitutionally questionable deprivation of property. Constitutional law on procedural due process officially adopted that view in board of regents v. roth (1972), a case of peremptory unexplained dismissal from a government job expressly held at the supervisor's discretion. Yet at about the same time, in Fuentes v. Shevin (1972), the Court found an unconstitutional deprivation of property without procedural due process in the law authorizing unceremonious seizure of goods from an installment buyer's possession. Unlike academic jurisprudence, constitutional law has to mediate practically among demands for proprietary security, sound policy, and popular acceptance, along with the demand for consistent theory. Operating within this field of forces, courts evidently find that governmentally engineered trespasses on extant private possessions are uniquely and unacceptably insulting to property's ideological function as a paradigm of limited government, that is, as private domains secured against governmental intrusion.

A like irresolution appears in constitutional law's response to the theorists' requirement of legal entitlement as essential to property. The Court both expressly avows this requirement and rejects its full implications. Faced in United States v. Willow River Power Co. (1945) with a hydroelectric company's claim that the government took its property by damming a river and thereby flooding the tail end of its generating plant, Justice robert h. jackson memorably declared that judicial delineation of property rights turns not on any intelligible essence of "property," but on discovery and construal of prior and contemporaneous law: "We cannot start the process of decision by calling [every existing economic interest or advantage] a 'property right' … Such economic uses are property rights only when they are legally protected interests." In short, discoverable legal entitlement is required to qualify an "economic interest" as the "property" mentioned by the Fifth and Fourteenth Amendments. The Court has further perceived that those constitutional mentionings cannot themselves be read (without apparent circularity) to confer the legal status of property on any disputed "interest or advantage." Rather, according to Regents v. Roth, the entitlement must be grounded in "an independent source such as state law." The Court has even hitched such a "positivist" approach to the theory of federalism, declaring in pruneyard shopping center v. robins (1980) that "the United States, as opposed to the several states [is not] possessed of … authority … to define 'property' in the first instance."

Repeatedly, however, the Court has defied this logic and found that the Constitution's property clauses directly demand protection for interests plainly not treated as property by standing subconstitutional law. dred scott v. sandford (1857) is the earliest instance. The missouri compromise of 1820 established the northern portion of the Louisiana Territory as "free soil." According to the law of many jurisdictions, a slave taken by a master onto free soil was thereby emancipated. Given that as the standing legal rule, a master's legally grounded entitlement in a slave simply would not extend to retention of title after the master had taken the slave into free territory. At a time when this plainly appeared to be the applicable, governing rule, Scott's "owner" took him from Missouri to north Louisiana Territory. The Supreme Court held that to grant Scott his freedom on that basis would be to deprive Sandford of constitutionally protected property without due process of law.

Although a deservedly infamous decision, Dred Scott is not aberrational in its refusal to allow subconstitutional congressional and state lawmaking to dictate the limits of constitutionally protected property. In Pennsylvania Coal Company v. Mahon (1922) the Court granted arguendo the public safety justifications for a law forbidding coalmine owners to remove coal in such a way as to cause the collapse of surface structures, but still found that the law unconstitutionally took the property of mining firms on which it had confiscatory retrospective impact. Justice oliver wendell holmes, jr. wrote that, despite the long-established rule subordinating all property to public-safety regulation, "if regulation goes too far it will be recognized as a taking." The rule's "implied limitation" of property rights "must have its limits, or the contract and due process clauses are gone." In Kaiser Aetna v. United States (1979) the Court dealt similarly with the standing rule subordinating all shoreline property holdings to public rights of access to navigable waters. It refused to apply the rule strictly when doing so would have subjected the complaining owners not only to unwelcome "physical invasions," but to loss of their "distinct investment backed expectations" of privacy. Most recently, the Court's opinion in Nollan v. California Coastal Commission (1987) strongly implied that a state legal regime expressly subjecting all shoreline land titles to public rights of pedestrian passage would violate a baseline normative standard for property institutions contained in the Fourteenth Amendment.

The Court has thus refused to read the Constitution's property clauses as completely delegating to legislative politics the definition of legal regimes of property rights. It has refused to reduce the judiciary to the ancillary role of protecting persons against retroactive alteration and capricious administration of these subconstitutional legislative regimes. It has done so when the alternative struck it as betrayal of substantive constitutional values linked to property, notably, private sanctuary and limited government. Such cases lie along that contested boundary of judicial activism and judicial restraint where the demand for constitutional vindication confronts the demand for contemporary democratic accountability.

In such cases, the Court is not, however, necessarily rejecting jurisprudential insistence on legal entitlement as a prerequisite to property. It may rather be denying that property-constitutive law can be found only in the "positive" lawmaking acts of legislatures and common-law adjudicators. Not surprisingly (considering the conflicting normative pressures for both a rule of law and government of the people by the people), this choice between an exclusively "positive" and a "natural" provenance for property-constitutive law is just where the jurisprudential consensus on legal property falls apart. We can see the Court in these cases as allying the Framers with those theorists who appeal to "natural" criteria of reason or tradition for a higher-law conception of property entitlement. The Court, in effect, conceives the Framers to have been referring to such criteria when they prescribed constitutional protection for "property."

Thereby, the Court also, and to a like extent, apparently aligns itself (or the Framers) with the Lockean liberal (as opposed to civic republican) antecedents of American constitutionalism. Rather than treat the design and adjustment of property regimes as a central legitimate concern of republican government, the Court to this extent treats property rights as prior and external to state and politics. But the civic heritage may not yet be entirely expunged from American constitutional doctrine or disputation. This heritage may help explain the Court's unshakable tolerance for legislative schemes of property-use regulation that plainly and grossly exceed the bounds of any plausibly Lockean notion of police power. More pointedly, it may help explain the settled acceptance of statutory income transfer schemes that appear to "take property from A and give it to B" in defiance of an oftcited first principle of Lockean higher law. Commentators have argued vigorously, and vainly, that such schemes are both constitutionally obligatory and constitutionally forbidden. The modern Court's refusal of commitment to either view may be its mediation between the civic and the libertarian underpinnings of American constitutionalism.

Frank I. Michelman
(1992)

(see also: Economic Due Process; Economic Equal Protection; Economy; Property Rights and the Human Body.)

Bibliography

Ackerman, Bruce A. 1975 Private Property and the Constitution. Cambridge, Mass.: Harvard University Press.

Cohen, Felix S. 1954 Dialogue on Private Property. Rutgers Law Review 9:357–387.

Epstein, David F. 1984 The Political Theory of the Federalist. Chicago: University of Chicago Press.

Epstein, Richard 1985 Takings: Private Property and the Law of Eminent Domain. Cambridge, Mass.: Harvard University Press.

Kennedy, Duncan 1980 Toward a Historical Understanding of Classical Legal Consciousness: The Case of Classical Legal Thought in America, 1850–1940. Research in Law & Society 3:3–24.

Michelman, Frank I. 1987 Possession vs. Distribution in the Constitutional Idea of Property. Iowa Law Review 72:1319–1350.

Nedelsky, Jennifer 1989 Private Property and the Limits of American Constitutionalism: A View from the Formation. Chicago: University of Chicago Press.

Singer, Joseph William 1982 The Legal Rights Debate in Analytical Jurisprudence from Bentham to Hohfeld. Wisconsin Law Review 1982:975–1059.

Symposium 1988 The Jurisprudence of Takings. Columbia Law Review 88:1581–1794.

Treanor, William 1985 The Origins and Original Significance of the Just Compensation Clause of the Fifth Amendment. Yale Law Journal 94:694–716.

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