Power and Property Rights
Why local zoning has massive implications
Property rights are the fundamental basis of both economics and the American condition. John Locke identified three God-given rights: life, liberty and property. The Declaration of Independence, which was heavily influenced by Locke’s work, changed that last one to “the pursuit of happiness.” A distinction that was not simply stylistic.
There exists a practical difference between freedom and power. Freedom can be defined as the mere opportunity to say or do a thing, while power is the proper ability to perform the task. Locke outlined those three God-given rights as freedom distilled into its component parts. The Declaration of Independence chose to identify the ability to use property in the pursuit of one’s own desires.
Let that end this history lesson for the time being. Put simply, the US is built not on the pure idea of freedom, but of freedom in its practical sense. It was not enough to ensure opportunity, rather, our founding documents ensured the ability to access opportunity. They ensured individual property rights first and foremost.
Property rights are not just ownership, but the ability to utilize what one owns however he or she sees fit. Without property rights, market transactions don’t take place at all. If a person simply owns the property but holds no right to transact it or utilize it, what good is the right of ownership in the first place? It is important to separate property rights into these two parts: the right to property, and the access to utilize it. The right to property being simple ownership, while the access to utilize it being the practical power over the usage of that property. This distinction crystalizes a dichotomy that Chicago Economist Frank Knight identified in his collected works, ‘Freedom & Reform.’
“Freedom is also relative to power. Our ordinary citizen… feels no coercion in not being able to buy an object which he does not have money enough to pay for. It is nonsense to say that I am not free to fly or that a paralyzed man has his freedom restricted by locking his door… It is a clear misuse of the words to describe the wrong as a deprivation of freedom. It is a deprivation of power.”
- Frank Knight, Freedom & Reform, p15
It is both freedom and power that underpin market success — the freedom to possess and the power to use.
Many know Ronald Coase’s essay, ‘The Problem of Social Cost,’ for what another economist, George Stigler, popularized from it — the idea of the “Coase Theorem.” The Coase Theorem essentially states that, if parties are allowed to bargain, a market for an externality will result in mutually beneficial outcomes. I would be remiss not to mention that this idea was not developed by Coase. His essay repurposed a Smithian (Adam Smith) concept which George Stigler then ran with after the fact.
The thrust of the essay actually deals with common law. It is an exploration of how the distribution of property ownership materially impacts the result of negotiations regarding externalities. For Coase, it was not that the market simply provides the best solution, the reality is far more complex. Deciding exactly which path forward provides the best outcome for the least cost is properly impossible to measure, and thusly rather difficult to decide.
“The problem which we face in dealing with actions which have harmful effects is not simply one of restraining those responsible for them. What has to be decided is whether the gain from preventing the harm is greater than the loss which would be suffered elsewhere as a result of stopping the action with produces the harm. In a world in which there are costs of rearranging the rights established by the legal system, the courts, in cases relating to nuisance, are, in effect, making a decision on the economic problem and determining how resources are to be employed.”
- Ronald Coase, ‘The Problem of Social Cost’
Common law rulings distribute the right to property. In Knightian terms, common law distributes allocations of freedom. Legal rulings outline who has ownership of what, and these rulings are law until a new precedent is set. Power, however, is in many ways distributed by the government. Which finally brings me to zoning and local ordinances.
Consider a township that has a certain “look” for its downtown. That “look” can be whatever you’d like it to be, sign height, facia materials, fence setbacks, etc. In Knightian terms, what these ordinances do is restrict the power an individual or firm has over the property which they are legally deemed to hold ownership of.
For a firm, requiring a certain “look” at the storefront not only represents an up-front cost, but a use restriction. That firm cannot utilize the given downtown property until the ordinance is complied with. For an individual, a person may own property which contains a large tree but local regulation states that person may not cut down the tree if they desire to. Zoning, ordinances, and regulatory decisions practically restrict the power individuals and firms hold over their property.
Circling back to Coase, the distribution of the right to property impacts individual negotiatory outcomes because they substantially shift the power dynamic within those discussions and decisions. Property ownership provides the upper hand to the property owner, and as such, the distribution of that ownership materially affects the outcome. If a government were to try and plan for a desired outcome, for example, less air pollution produced by a factory, it would need to know how to distribute those the ownership of the air pollution in question! And as Coase notes, it’s an impossible task.
The fallout of these are what are known as transaction costs. These are both material and immaterial costs that every market participant accrues. For example, the internet has substantially decreased the transaction cost associated with searching for a product. Suppose you wanted to purchase a new computer, the internet can tell you what computer to buy, where that computer is sold, and what store has the best deal that day. In the past, you would have needed to ask your friends about computers, perhaps read a few consumer reports magazines from the library, and then shop store to store to find the best deal. Every minute spent on that search is a transaction cost, in this case, an opportunity cost.
These costs are not just opportunity costs, however, as a transaction cost can practically be any cost caused by the purchasing process. Think of the gas it takes to drive to stores, the selection of restaurants in a given area and their prices, your time, your effort, etc. These costs are ranging and, in some cases, not measurable, and yet they undoubtedly impact the buying decisions of individuals. In fact, firms themselves emerged in response to pervasive transaction costs, as they internalize things like searching, construction, and other costs that otherwise would be accrued by the buyer.
Just as the distribution of the right to property impacts transaction costs, so too do zoning, ordinance, and regulatory decisions. Where the right to property ensures the freedom to own, regulations restrict access to use. In this way, zoning decisions can be thought of as restrictions to the ability to access one’s property rights. The economic impact of which is no different than simply redistributing the right to property in the legal sense.
That local law restricting all downtown buildings from exceeding 30ft may indeed preserve the street-level mountain view, but at the cost of a litany of tangentially related transaction costs. This is not to say the view is not worth the costs — it very well may be. But the challenge is recognizing that these simple and seemingly small ordinances have a massive impact on both the firm and the consumer.
Consider how these small laws impact the housing market, for example. Localities may require a certain number of affordable housing units in a new apartment complex, or restrict the height of the apartment building which limits the number of units to what can be built horizontally, or require an artificially high standard of piping or fixtures or window glazing. These things not only are passed on to the consumer through the price of rent, but also limit the supply of apartments, which places more renters in the market and increases the time it takes to find an apartment. All these additional renters may look at houses or condos as well, which may impact the mortgage market as buyers with less credit history apply for loans.
Perhaps these potential renters now drive more than they otherwise would have, increasing carbon emissions. It’s possible these renters eat out less, or maybe more! Either is a transaction cost. The renters may require public assistance due to the increased price of rent, which has an impact on local taxes. And if these renters are driving more, does that increase traffic on roads? Does that impact parking downtown? The dominoes don’t end, and that’s the point.
What makes these decisions so difficult is that any restriction on the access to utilize a property right creates a ripple effect of transaction costs that are not only accrued to those directly impacted by the regulation, but those tangential to it as well. These costs are wide ranging and potentially massive. The question for local and state lawmakers, then, is to be aware of this ranging impact, and decide what regulations are worth the entirety of these costs.
