friedman david- choosing metarules for legal change

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American Economic Association

Choosing Metarules for Legal ChangeAuthor(s): David FriedmanSource: The American Economic Review, Vol. 82, No. 2, Papers and Proceedings of theHundred and Fourth Annual Meeting of the American Economic Association (May, 1992), pp.285-289Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/2117415 .

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Choosing Metarules or LegalChange

By DAVID FRIEDMAN*

The central issue of T. NicolausTideman's (1992) paper is not what legalrules there ought to be, but how to imple-ment a change in legal rules. The questionis one of constitutional rules-more preten-tiously, metarules-for legal change.

How legal rules are changed may dependon why they are being changed. One possi-ble reason is that existing rules were correctin the past but are no longer so. This is notthe sort of situation Tideman is considering.He is concerned with a change such as theabolition of slavery, in which case the rea-son for changing legal rules is not a changein circumstances but in understanding. Theview of an abolitionist in 1860 or of almostany American at present is that slavery iswrong and always was.

How should such a change be imple-mented. Should slave owners be reimbursedfor the loss of their valuable "property"-and if so, by whom? Should slaves be reim-

bursed for the cost unjustly imposed onthem under the old rules? If a modernversion of Henry George's single tax is insti-tuted, should landowners be reimbursed forthe drop in the value of their land or shouldcurrent landowners, and anyone else withwealth derived from past land rents, bebilled for rents that should have been taxed?

I. Two Possible Metarules

At least two different metarules suggestthemselves'. One is continuity: change legalrules in a way that minimizes the effecton the

relative welfare of members of the society.The other is retroactivity: try to create thesituation that would have existed if the cor-rect ruleshad been recognizedand enacted inthe distantpast.

One argument for continuity is that itreduces the cost of changing legal rules. If achange makes me much better off and youmuch worse off, I have an incentive to workfor it, and you to work against it. A societywhose metarules imply that changes in legalrules will be accompanied by large changesin individual wealth is therefore likely tospend considerable resources fighting oversuch changes. It may also get bad rules,since desirable changes may be blocked bythe opposition of politically influentialgroups that expect to be injured by them,and undesirable changes may be imple-mented by politically influential groups thatexpect to be benefited2

One ethical argument for continuity is

that it is unjust to punish people for gettingthe wrong answer to a hard ethical ques-tion. If the site value of a landowner's landis confiscated, still more if he is billed for allpast site-value rents received, he is pun-ished severely for not getting the right an-swer to an ethical question that almost ev-eryone has gotten wrong for hundreds ofyears. This seems to violate the moral normof basing punishment on moral desert.

An alternative ethical argument might bemade from an entitlement rather than a

desert standpoint.3 Even if the state couldand should have taxed away past rents onthe site value of land, it did not. By failing

*Olin Fellow, University of Chicago Law School,

1111 E. 60th St., Chicago, IL 60637.'In this paper, I limit myself to discussing the two

metarules discussed here, although some of the argu-ments might imply that a third metarule-change thingsin the simplest possible way-is superior to either.

2This argument, applied on a smaller scale, is usedin Richard Epstein (1985) as a reason for requiringlegal changes such as zoning to be made in a way that

injures no one.

3For the distinction I am making here, see RobertNozick (1974 pp. 155-64).

285



286 AEA PAPERSAND PROCEEDINGS MAY1992

to do so, it implicitly gave away that value tothe landowner and cannot now reclaim it.

One might carry the argument further.

When the landowner bought his land, histitle was based on the existing legal system.If, relying on that system, he bought a claimthat is now considered invalid, he has areasonable case for reimbursement.

Continuity, whether right or wrong froman ethical or economic standpoint, appearsat least twice in the U.S. Constitution. Thefifth amendment's "takings" clause ("norshall private property be taken for publicuse, without just compensation") seems de-signed to prevent government acts from re-

ducing the wealth of particular individuals,and the prohibition on ex post facto punish-ment (Article 1, Section 9) explicitly forbidsthe retroactive imposition of legal changes.

To see the economic argument on theother side, imagine that, over time, moreand more people realize that the existinglegal rules are wrong and will eventually bechanged. Under a metarule of continuity,someone who anticipates the change has noincentive to act on his anticipation. Moneymade under the old rules will still be kept

under the new, so he might as well takeadvantage of the old rules while they last.

That is not true under retroactivity. OnceI realize that legal rules are going to changeI also realize that everything done until thechange will ultimately be reevaluated underthe new rules. So it is in my interest to actas if the new rules were already in place.Thus, retroactivity provides retroactive in-centives for those who correctly foresee thelegal change.

Retroactivity also provides an incentivefor research designed to predict what legalrules will become persuasive in the future.If I realize that site value is going to betaxed away before it actually happens, I canmodify my behavior to take account of thenew legal rule: to avoid, for instance, ac-quiring large amounts of undeveloped prop-erty.

One ethical argument in favor of retroac-tivity is that it is equivalent to requiringproperty to be returned to its owner. Even

if the present possessor has committed nolegal or moral offense, the real owner has a

better claim. A slaveholder who did notrealize that a slave was a person with rights

that he was violating may perhaps be morally

innocent, but he is still in possession ofproperty produced by labor stolen from itstrue owner.

II. Choosing a Metarule

These arguments suggest that the choicebetween the two metarules should be based

on the answer to one question: How clear isthe nature and desirability of the legalchange to which the metarule is being ap-

plied? If, once the arguments have been

made, it is obvious to everyone that theproposed new rule should be adopted, the

problem of rent-seeking disappears. Thereis no point in hiring a high-priced lawyer to

argue that two plus two equals three. Andthe clearer the correctness and nature ofthe new rule, the more practical it is forfarsighted individuals to predict the changeand adjust their behavior accordingly.

If the arguments for the new rule, or the

detailed nature of the rule implied by thosearguments, are unclear, the balance tips the

other way. Investments in lobbying, propa-gandizing, and litigating may determinewhether the change occurs and what formthe new rule, if adopted, will take. Such

expenditures may make the change an ex-

pensive one. And it will be hard for evenvery farsighted individuals to adopt to thenew rule in advance if there is no way ofknowing whether it will be adopted or inwhat form. Under those circumstances,retroactivity will only produce legal confu-sion during the period just before the

change.The ethical arguments are also affected

by how clear the decision is. Society will be

more willing to consider people morally cul-

pable for taking advantage of the old legalrule the clearer it is now that that rule was

wrong-and the clearer it is what the right

rule is under which they should have acted.

The conclusion seems straightforward. If

the new rule is sufficiently clear, it should

be adopted retroactively; if it is sufficiently

fuzzy, it should be adopted under a metaruleof continuity.



VOL. 82 NO. 2 THE ETHICS OF LAND-VALUE TAXATION 287

III. Application to the Case at Hand

Tideman appears to favor retroactivity,

insofar as it is practical to impose it. Thearguments I have offered above suggest thatthis is a sensible rule only if the case for,and the implications of, site-value taxationare clear. On the evidence of the paper,that condition is not met. The conclusionshe reaches are rich in maybe's. The criteriahe suggests are not only difficult to apply,they are difficult even to define.

Consider the following (from an earlierversion of Tideman's paper):

"On the other hand, if trades in landhave created a pattern of holdings inwhich there is no discernible relation-ship between the sale value of a per-son's current land holdings and thevalue in his or her portfolio that isattributable to past appropriations ofland, past rises in the sale value ofland, and gifts and inheritances ofvalue derived from such sources, thenthe initiation of social collection of therent of land falls so far short of itsgoal, that some form of compensation

may be necessary."

The author does not explain what it meansfor a gift or inheritance to be derived froma particular source. Suppose I am the sonand heir of a farmer half of whose incomewas due to his labor, the other half comingfrom the rental value of his land. Whichhalf is my inheritance derived from? If hegave gifts to people during his lifetime,which half were they derived from? If hepurchased the land himself from a previousowner, can he deduct the purchase pricefrom the part of his income "derived from"the site value of the land?

In discussing his case 6, where land pricesfall gradually as more and more people an-ticipate the victory of site value taxation,Tideman appears to argue that the onlypeople who may have legitimate claims tocompensation are those who held their landthroughout the period of change. Whatabout those who sold at a reduced price?

Consider a retired farmer. As the move-ment for site-value taxation spreads, the

value of his land falls. Afraid of being en-tirely wiped out, he sells his land for half itsoriginal value. Is he less entitled to compen-

sation than if he had held the land? Whyshould the claim to compensation be re-tained if one person holds the land through-out the period but vanish like a burst bub-ble with a transfer? How should the periodduring which a transfer will annihilate aclaim be determined? Ever since AdamSmith discussed the virtues of site-value tax-ation, all sale value of real estate has, ar-guably, been depressed, albeit only slightly,by the possibility that such a policy wouldbe adopted. Does it follow that compensa-

tion is only due to those who have heldtheir land since before 1776?

These are a few of the problems thatoccurred to me in reading through Tide-man's paper. My claim is not that his an-swers are wrong-merely that good argu-ments can be made both for and againstthem. If so, the correct conclusion is fuzzy,which is an objection to the metarule thatTideman appears to be arguing for.

IV. The Retroactive Metarule:

Alternative Definitions

Consider two different ways in which themetarule might be defined.

Version 1: A change in legal rules shouldcreate, insofar as possible, the situation thatwould have existed if the legal rule nowconsidered correct had been in force for-ever.

Professor Tideman, after a long career asan economic theorist, turns his talent to awider field, authoring several wildly success-ful books in defense of site-value taxation.One result is the triumph of the proposal. Asecond result is an income of several milliondollars in royalties. According to the versionof the metarule proposed above, all of hisroyalties are forfeited, since they would nothave been made in a world where site-valuetaxation had been in force forever.

This is an extreme example of a very

general problem. A legal rule affects manypeople who do not themselves make use of



288 AEA PAPERSAND PROCEEDINGS MAY1992

it. Realtors, land surveyors, taxpayers, andvery nearly everyone else will have differentincomes in worlds with and without private

ownership of the site value of land. Version

1 of the metarule conflates the illegitimategains of the thief with the legitimate gainsof the manufacturer of locks and burglaralarms-both made possible by a systemwith insufficiently strong laws against theft.

Version 2: A change in legal rules shouldcreate the situation that would have existedif the legal rule now considered correct hadbeen in force forever but individuals had allacted as if the old legal rule was in force-as

they in fact did.

This version is suggested by the passagequoted earlier, in which Tideman refers to"sale value... attributable to past appropri-ations of land, past rises in the sale value ofland, and gifts and inheritances of valuederived from such sources." His objectiveseems to be to identify and confiscate gainsthat would have been illegitimate if the new

rule had been in force.Here too there are problems. Some I

have discussed earlier: how do you decidewho got the tainted part of the inheritance?Others are suggested by the attempt to limitthe transmission to "gifts and inheritances."Presumably the idea is that someone whoprovided something of value in exchange forthe tainted money deserves his payment;but stolen property does not become legiti-mate just because it is used to buy some-

thing.Suppose that, in Tideman's case 4, in

which the land has been seized by a band of

marauders, one of the marauders sells hisland. Anticipating future legal changes, he

specifies that he is transferring whateverrights he has in the land and makes noclaim as to what those rights are. After alater democratic revolution cancels the

rights of the conquerors, can he justly claimthat he is entitled to every cent he received,since he transferred all the rights he had inthe land (i.e., none)? If so, then the claimsof anyone who sold his land depend on thedetailed wording of the contract, and there

may be many intermediate cases.

To make sense out of version 2, one mustconstruct a complete liability system de-scribing exactly how actions making use oflegal rules now known to be unjust createclaims by some people against others. Per-haps it could be done, but it would be

difficult, and any difficulty in applying theretroactive metarule is a strong argument infavor of using continuity instead.

I have offered two versions of the retroac-tive metarule. Perhaps there is another thatavoids the difficulties. I accordingly closethis section with a challenge to Tideman:give a clear definition of exactly what itwould mean to impose a new legal rule

retroactively.

V. Final Words

It is almost always a mistake to use politi-cal or legal mechanisms to do complicatedthings, not only because they are likely toget them wrong, but because the attempt toget them right provides an opportunity forlarge expenditures designed to influence theoutcome. It is especially dangerous whenthe decision matters a great deal to many

private individuals. If legal rules arechanged, it should be done in a way that isas simple as practical, and designed to avoidlarge transfers of wealth. If site-value taxa-tion is implemented, it should either pro-vide no reimbursement for landowners (thesimplest rule) or reimburse them for thedrop in their land value.

In closing, I would like to suggest that thearguments I have applied to the choice ofmetarule are also relevant to the particularlegal change under discussion. As with the

metarule, so with the rule: the fuzzier theprescription, the greater the room for rent-seeking behavior. Elsewhere, Tideman(1990, 1991) has proposed elaborate andingenious versions of the Georgeian single-tax scheme. As theoretical curiosities theyare interesting and admirable. As practicallegal and political proposals they are nei-ther, since they require the legislature andthe courts to engage in complicated calcula-tions, using mechanisms that could easily besubverted to serve the private interests ofthose controlling them.



VOL. 82 NO. 2 THE ETHICS OF LAND-VALUE TAXATION 289

Consider a much simpler version, andone that might have seemed practical earlyin American history, when most of the

country belonged to the federal govern-ment. Let all public lands be auctioned offto the highest bidder. The result will be totransfer to the public purse the ex anteestimate of the site value, including anyfuture increases thereof. This does not pro-vide the side benefits of more elaborate

schemes, but it does achieve the core pur-pose, and it does so in as simple a way asone could reasonably hope for.

It has been tried. For the first 60 years ofthe 19th century, the federal governmentattempted to raise revenue by auctioning off

the public lands. The result was a massivefailure, with de jure auctions converted to

de facto homesteading through a mixture of

political pressure, rigged bidding, and

threats of physical injuryto any "speculator"rash enough to bid against an (illegal) set-tler for "his" land. A full account of that

particular episode in American historywould take me far beyond the bounds of

this paper; but the failure of the govern-

ment to apply the simplest possible versionof site-value taxation does not leave meoptimistic about the prospects for more

elaborate versions.

REFERENCES

Epstein, Richard, Takings: Private Propertyand the Problem of Eminent Domain,Cambridge, MA: Harvard UniversityPress, 1985.

Tideman, T. Nicolaus, "Integrating LandValue Taxation with Internalization ofSpatial Externalities," Land Economics,August 1990, 66, 341-55.

, "Commons and Commonwealths,"in R. V. Andelson, ed., Commons WithoutTragedy, Savage, MD: Barnes and Nobel,1991, pp. 109-29.

, "Being Just While Conceptions ofJustice Are Changing," American Eco-

nomic Review, May 1992 (Papers and Pro-ceedings), 82, 280-4.

Nozick, Robert, Anarchy, State and Utopia,New York: Basic Books, 1974.

friedman david- choosing metarules for legal change

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