Property Rights and Regulatory Takings

Keynote Address to the WA PGA's Property Rights Conference,
Mandurah, 25 June 1999

INTRODUCTION

Australia's founding fathers, like those of the US, and drawing heavily on UK tradition, understood clearly that private property is the foundation not only of prosperity but also of freedom itself.  Through common law and the constitution, they protected property rights -- the rights of people to acquire, use and dispose of property.

With the growth of the modern state, governments at all levels today are eliminating these rights through so-called "regulatory takings" -- that is, by imposing regulatory constraints on people's property which reduce the value and uses of that property while leaving title with the owner.  Moreover, they are doing this without adequate compensation:  the courts have done little to protect such owners.

This process -- which amounts to theft -- is not unique to Australia but is a worldwide phenomenon.  The rise of regulatory takings and the failure by the courts to protect property has led to a vigorous property rights movement in the US.  The focus of reform there has been state governments, primarily because the states have the constitutional power over the resources -- land-use, water, wildlife, etc. -- which are the main subject of regulatory takings and because the states provide less rigorous constitutional protection of property rights.

This movement is starting to have success.  Legislation requiring identification of regulatory takings currently exists in 18 states and legislation requiring compensation for regulatory takings has been passed in 25 states.

It is time that Australia contemplated a similar process.  This will not be easy.  People have long become accustomed to others providing them with free goods, and governments, which face ever-rising welfare bills, will be loath to pay for what they take.  The issue is, however, vital to our individual and collective prosperity and will not be addressed without concerted efforts.

What I would like to do today is:

• outline the importance of private property;
• discuss the importance of our British heritage;
• describe what has gone wrong;
• clarify when compensation is required;  and
• outline the US approach and it usefulness for Australia.

PROPERTY:  THE FOUNDATION OF PROSPERITY AND FREEDOM

Why have some countries prospered and become free and open societies and others remained mired in poverty and despotism?

More specifically, why did England suddenly increases prosperity from the end of the seventeenth century while other countries on the continent and outside Europe remain stagnated?

There are many contributing factors, such as the Protestant Work Ethic, climatic conditions, the overthrow of feudalism, the commitment to free trade and technological advancement.  But as Tom Bethell has painstakingly documented it, ⁽¹⁾ the overwhelming factor was the commitment to the security of private property rights.

As Mr Bethell points out, the institution of property is intricately tied to traditional conceptions of freedom, justice and peace and he argues that prosperity and civilisation can only arise where people hold private property securely.

FREEDOM

As Milton Friedman has said, "you cannot have a free society without private property". ⁽²⁾

Private property rights give people the freedom to participate, to make choices, to advance, to take risks, to feel secure.  Importantly, they give people the capacity and a reason to take care of themselves.

Private property also provides an important bulwark against the state and against the powerful.  In a society that protects and respects property, property ownership will tend to be unequal.  Nonetheless, and contrary to received wisdom, property rights give protection to the poor against the rich.  The poor might not have much, but what they do have cannot be taken from them under a secure property rights regime.

Private property also assists in limiting freedom.  It is a compromise between our desire for unrestricted liberty and the recognition that others have similar rights and similar constraints on their aspirations.  It is, I believe, a necessary institution for people who wish to be free and secure and one that acknowledges the right to freedom of others.

JUSTICE

A society that enshrines private property goes a long way towards institutionalising justice.  A private property regime makes people responsible -- in a negative and positive sense -- for their own actions.  As Mr Bethell says:  "Property puts up fences, but also surrounds one with mirrors, reflecting back upon us the consequences of our own actions". ⁽³⁾

As James Q. Wilson said, "property is a powerful antidote to unfettered selfishness".

PEACE

Property both disperses power and shields us from the coercion of others.  It gives us the capacity and a reason to work within the system.  Among other things, it gives us strong reasons not to cheat and to respect (even protect) the rights of others.  The obligations are mutual and therefore self-reinforcing.

PROSPERITY

As was well recognised by the early economists, property and prosperity are intimately connected.

Jean-Baptiste Say, writing in 1803, said that only with secure property rights "can the sources of production ... attain their utmost degree of fecundity", a truth he regarded as "so completely self-evident that demonstration is quite superfluous". ⁽⁴⁾

Exchange is basic to market activity.  When goods are not individually owned they cannot be effectively traded.  Free markets, therefore, can only be built on a private property base.  By allowing people to enjoy the benefits without having to share them with other people, property rights provide people with an incentive to plan, save, and work.  Private property permits people to evaluate what they own, to use it, sell it, or alter it to maximise its value.  It enables people to decide how much to ask, or bid, for the goods or services flowing from their property.

Many economists blinded by the false promises of socialism -- particularly from 1930 to 1989 -- lost sight of the importance of property rights.  Even they, however, have been mugged by reality with the fall of the Berlin Wall and the economic, environmental, and social mess that it exposed.  The socialist experiment was an "all points failure" and the main reason for that was the absence of private property rights.

As for the ancient philosophers -- Aristotle noted that "What is common to the greatest number gets the least amount of care.  Men pay most attention to what is their own:  they care less for what is common". ⁽⁵⁾

AUSTRALIA'S INHERITANCE:
COMMITMENT TO SECURE PROPERTY RIGHTS

Why did the Industrial Revolution take place in Britain rather than on the continent of Europe?  There are two reasons:

• the commitment of the law to supporting property rights;  and
• the commitment to laissez-faire philosophy.

British common law, developed by judges piece by piece since the Middle Ages, evolved a sophisticated system of property rights.  Property became defined in many ways but every definition was based on the principle of equality of rights for all.

Significantly, under the common law, the rights of all people were equal whether they were tenants or proprietors, lords or peasants.  Each had rights and each right was protected by law.

Common law recognised that property entails numerous rights -- the right to acquire, dispose and use property.  It also developed a sophisticated system of adjudicating disputes about conflicting rights and the limits of rights.  It was also significant that common law held that the Crown was also subject to, and not above, the law -- the rights of the government or the Crown were upheld but these did not override the property rights of ordinary men and women.

In short, the industrial revolution came to England first because the rule of law was established there first, and the "democratisation" of property laws in England stimulated the creation of wealth.

It also came first to Britain because a political philosophy of laissez-faire replaced a philosophy in which it was thought that the duty of the State was to watch over individual citizens.

As William Pitt the Elder argued in the House of Commons in 1766:  "there are many things a parliament cannot do.  It cannot make itself executive, nor dispose of offices which belong to the crown.  It cannot take any man's property, even that of the meanest cottager ... without him being heard". ⁽⁶⁾

It is believed that during his time of more than 20 years as Prime Minister, Pitt did not carry out a single legislative measure in the Parliament.  Moreover, during this period, most counterproductive regulations were either repealed or allowed to wither away. ⁽⁷⁾

CONSTITUTIONAL PROTECTION OF PROPERTY RIGHTS

The Founding Fathers of the US and Australia grasped this lesson of history.

At the formation of their nations, they enshrined commitments to the protection of property rights and to equality of rights before the law.  They did so first by the adoption of common law -- Britain's greatest legacy.  Second, they enshrined the protection of property rights in their Constitutions.

The US Bill of Rights explicitly enshrines the right of all men to freely acquire and use property.  Importantly, it also prohibits the taking of property without just compensation, stating that "... nor shall property be taken for public use without just compensation".

The Australian Constitution, like the American, incorporates the view that individual freedom should prevail alongside a limited role for government.  Section 51(xxxi) requires that if the government acquires property from any State or person, it does so on just terms.  Just terms have been defined by the High Court as "full and adequate compensation" where the acquisition is a compulsory taking.

We should note, however, that section 51 (xxxi) only applies to the Commonwealth.  It does not bind the States nor do the States have "just compensation" clauses in their own constitutions.

DECLINING SUPPORT FOR PROPERTY RIGHTS

There has been a substantial decline in support for upholding the security of private property rights by the courts and by governments of all levels over the last 50 years.

This decline has not led to ignoring these property rights altogether.  Rather, it has led to the narrowing of the definition of property rights, a widening of the definition of "public use" and the limiting of the grounds for compensation.

When governments expropriate property outright, taking title from the owner, courts relying on Section 51(xxxi) generally require governments, at least the Commonwealth government, to compensate owners for their losses.

The modern problem does not lie there.  The problem lies with governments taking part of the use of the property while leaving title with the owner.  Courts have been reluctant to award compensation in such cases because they have failed to grasp the principle of the matter -- due, in part, to an unwarranted deference to the regulatory state.

The central principle is that property is not a singular concept.  It is not just a matter of the title.  Property is a bundle of rights:  take away any of these rights and you take something that belongs to the owner.

Property rights included the right to acquire property, the right to dispose of property;  the right to exclude others, the right against trespass, the right to quiet enjoyment and, importantly, the right of active use -- with the general proviso, of course, that one may do so only as long as these rights do not hinder the rights of others to enjoy or use their property.

In fact, property law recognises that property is a "bundle of sticks" any one of which could be bought, sold, rented or bequeathed in every area except takings.  Takings law has clung to the idea that only if the entire bundle is taken does the government have to pay compensation.

This all-or-nothing view enables government to extinguish nearly all uses through regulation -- and hence to regulate nearly all value out of the property -- yet escape the compensation requirement because the all-but-empty title remains with owner.

This is clearly wrong.  Compensation should be required when government takes any right -- whether partial or full title.

WHEN IS COMPENSATION REQUIRED?

When is compensation required?  Or rather, when is compensation not required?

First, when government acts to secure rights -- when, for example, it stops someone from polluting his neighbour's land -- it is acting under its police powers and no compensation is due to the owner, whatever his financial loss, because the use -- pollution -- was wrong in the first place.  Since there is no right to pollute, we do not have to pay polluters not to pollute.  The relevant question is not whether value has been taken by regulation but whether a right has been taken.

Second, if governments act to provide the public with some good and that act does not take a right, then even if it results in a financial loss, no compensation is due.  For example, if a government builds a public housing estate and neighbouring property values decline, no compensation is due because the action took nothing that they owned.  The neighbours own their property and its uses.  They do not own the value in their property.

Compensation is required when governments act not to secure rights but to provide the public with some good -- for example, a wildlife habitat or the preservation of historic buildings -- and in doing so take away some otherwise legitimate use.

The principle is quite simple:  the public has to pay for the goods it wants and takes, just like any private person would have to.

THE APPROACH OF THE US PROPERTY RIGHTS MOVEMENT

The first lesson to learn from the US is that the problem of takings begins with regulation.

The Founding Fathers could not have foreseen the modern regulatory state.  They could not have envisaged our obsession with regulating every conceivable human activity.

One hundred years ago, when governments took property, they generally took it all.  Hence the constitutional focus on seizure.

In recent years -- while governments have been busy privatising over $70 billion in assets and supposedly deregulating the economy -- governments have produced massive quantities of regulation.  Indeed there have been more regulations put in place in the last 15 years than in the first 80 years of the history of our nation.

Some of these regulations are legitimate;  especially those aimed at securing genuine rights.  Many more are aimed at providing some citizens with benefits at the expense of others.  But even if these benefits are justified, they should not be provided at the expense of other individuals but at the shared expense of the whole community.

To take a prominent example, some endangered species may indeed be worth saving, but we should not expect a few farmers to bear all the cost of preservation.

In the face of this mushrooming regulation, the task is to convince governments to review their many regulations, to determine which impose regulatory takings, to estimate the cost of these takings and to cut back on these regulations.  In the US, 18 states have passed laws requiring such a review.

The second lesson is to put in place legislation that specifies the need to compensate property owners for regulatory takings.

The last 50 years and more have shown that we cannot rely on the courts to protect the rights of property owners.  There is a need for legislation, drawing on common law principles, which clearly enshrines the rights of property owners.  Twenty-five states in the US have enacted such legislation.  Although many of the laws are new, they seem to be effective -- not just in generating compensation but in stopping governments from putting new takings in place.

The third lesson is that the legislation will need to define "just compensation".  In the US, courts have tended to put in place large compensation thresholds and fail to take into consideration the full cost of the loss in rights The legislation will need to make it clear that "just" compensation means compensation for all losses that arise from the takings.

Finally, as in the US, our focus should be on the states.  Under the Constitution they have responsibility for most of the powers that give rise to takings -- including land-use and the environment.  They impose most of the regulatory takings.  And their constitutions provide no protection for takings and for compensation.

SUMMARY

Property rights are essential to freedom, justice, peace and prosperity.  They are basic rights.  Despite common law and constitutional protections, property rights are increasingly being taken by the modern regulatory state.  The time has come to restore respect for property rights.  It is unjust for governments to take rights without compensation.  The provision of free goods for the many, but paid for by the few, leads to excessive demand for such goods, to excessive regulation and to bigger government.  Unless governments are forced to pay for the goods they take, they will undervalue the costs and as a result take far too many.

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ENDNOTES

1. Bethell, Tom, The Noblest Triumph, St Martin's Press, New York, 1998.

2. Friedman, Milton and Rose, Free to Choose, Macmillian, Sydney, 1980, page 61.

3. Bethell, op. cit., page 11.

4. Ibid., page 98.

5. Aristotle, Politics, Book II, Chapter 3.

6. Bethell, op. cit., page 90.

7. Ibid., page 90.