A. The first argument

In his 1961 essay “Ownership,” A. M. Honoré observes that ownership—at least full, liberal ownership—is actually a complex of rights, terms, and conditions. They include the items in the following “bundle”:

1. (1) The right to exclusive physical possession;

2. (2) The right to manage, which includes the right to use or modify, as well as the right to enter into contractual relations with others to use or modify;

3. (3) The right of disposition, which includes the right to alienate or destroy;

4. (4) The right to the income and to the capital value;

5. (5) The right to bequeath;

6. (6) A prohibition on harmful use;

7. (7) The right to security, that is, immunity from expropriation;

8. (8) Absence of term (that is, the other incidents of ownership do not automatically expire at a specified time);

9. (9) Liability to execution of debt (alternatively, the right to pledge as security for debt).Footnote ⁶

Let us consider for a moment item (4): the right to the income and to the capital value. What is the nature of the state's claim on the income and wealth of a society in light of its taxing and spending authority? On behalf of modern liberals, it could be argued that the state has a kind of priority of ownership (in a sense to be explicated as this argument unfolds) on an indeterminate portion of citizens' income and wealth. This priority of ownership is based on the fact that the state has wide discretion in how it exercises its taxing and spending authority. Consider, first, taxation. The state can use the tax code for a variety of purposes other than raising revenue, including changing the distribution of wealth and income. In contrast, if private individuals have this priority of ownership, the state is more constrained in what it can legitimately do through its tax policy. Classical liberals, who represent the other side in this debate about the proper role of government, believe that the state must provide something in exchange for the taxes it raises, because they believe that priority of ownership resides with private parties.

Modern liberals believe that it is perfectly appropriate for the state to manipulate the tax code for various social purposes. They believe that the tax code is an important vehicle by which government can achieve a variety of objectives. One of these is the redistribution of after-tax income through a progressive income tax. Some economists have argued, however, that the state is much more limited than one might suppose in its ability to change the distribution of income through progressive taxation on income. Roughly, the idea is that labor markets tend to adjust so as to offset the degree of progressivity of an income tax and to reestablish income differentials that would have existed in the absence of a progressive income tax.Footnote ⁷ In addition, it has long been observed that the estate tax is not a very effective vehicle for changing the distribution of wealth.Footnote ⁸ For various reasons, taxes on the capital value of assets that are bequeathed to heirs tend to be ineffective. Finally, there is the familiar public choice argument that once the tax code is open to manipulation through the political process, the powerful and the organized will benefit at the expense of the powerless and the unorganized, and that redistribution from the rich to the poor will be, at best, incidental.

Changes in the tax code are also used as a tool of macroeconomic policy. Tax cuts are sometimes instituted in an attempt to stimulate economic activity, as are adjustments in depreciation schedules. Tax increases are used in an attempt to lower government deficits and thereby lower interest rates. Tariffs and “voluntary” import quotas are used to protect jobs from foreign competition. Finally, political leaders change the tax code to encourage behaviors they think should be encouraged and to discourage behaviors they think should be discouraged. For example, “tax shielding” for funds spent on medical care or on higher education are designed to encourage spending on medical care and higher education at the expense of spending on other things.Footnote ⁹ On the other side, increases in taxes on tobacco are seen as a useful vehicle for discouraging smoking, as well as for allocating the alleged social costs of smoking to smokers, though that has turned out to be mostly fiction.Footnote ¹⁰ The use of the tax code to change the distribution of income, to promote macroeconomic goals, and to encourage or discourage certain forms of spending are reflective of the attitude that a portion of citizens' income fundamentally belongs to society at large, for which the state acts as an (often imperfect) agent.

Further evidence for this conception of ownership can be found in a widely shared attitude among modern liberals toward proposed tax cuts and toward how resources are allocated by the market. Modern liberal politicians and policy analysts label proposed tax cuts as “tax expenditures,” which are conceived of as fully equivalent to government subsidies. That is, tax cuts are viewed as subsidies to their beneficiaries, and the question then becomes whether such subsidies are a better use of society's wealth than other things on which these funds might be “spent.” For example, in 2001, the U.S. government was trying to determine what to do with actual and projected budget surpluses. For modern liberals, the question was how best to spend this money—society's money. On their view, one way to spend it was to give tax cuts (or welfare payments such as the Earned Income Tax Credit), preferably targeted to those with low incomes (or to some more narrowly delimited segment of the population in order to achieve some other worthy objective).

Negative pronouncements about how society allocates “its” resources abound among those with modern liberal sensibilities, and this provides a further window on modern liberal attitudes about the ownership of income and wealth. Consider the following quotation from Arthur Caplan, in which he reflects on the wisdom of using society's resources to treat infertility:

What is especially telling about this example is that infertility treatments are not paid for by the government, and are normally not even covered by private insurance plans, a fact of which Caplan is surely aware. To say that the amount of “social resources” that are allocated to assisted reproduction should be subjected to society's (i.e., the state's) judgment about what it “is willing to … pay for” implies pretty clearly that Caplan regards the funds that infertile couples might spend on infertility treatments out of their own pockets as belonging in the first instance to society, in which case society must consider other goods or services on which these funds might be spent; that is, it must consider the opportunity costs. Modern liberals might object that the source of Caplan's observation is the fact that the state directly and indirectly heavily subsidizes medical care. It is not that the state is claiming ownership over the resources private couples would spend on infertility treatments, but that it is simply exercising its ownership rights over the resources it has provided to the medical community. This reply, however, will not do, since it assumes that in any arena in which public and private funds mix, the state should determine how private resources can be spent in the course of deciding how resources controlled by the state can be used. If the state is big enough and ubiquitous enough (as indeed it is in contemporary American society), almost anything a person spends his or her money on will be in a place where public and private funds mix. This reduces to the view that the state has an ownership stake in the resources people use to purchase just about anything, which is exactly the view I have been attributing to modern liberals. More precisely, what stands behind the view of Caplan and countless others who question how scarce resources are being allocated in a market society is a conception of ownership in which society has, through the state, a kind of priority claim on an indeterminate portion of all wealth and income.

The priority of society's claim on a portion of social wealth is given further expression in the writings of leading modern liberal political philosophers on the fundamental problem of distributive justice. This is clearest in John Rawls's A Theory of Justice, where Rawls defines the problem of distributive justice as the problem of determining how the benefits and burdens of social cooperation should be distributed.Footnote ¹² Given that it is the state's job to ensure (distributive) justice, this assumes, as Robert Nozick has pointed out, that the state has the right to determine how those benefits and burdens are to be distributed.Footnote ¹³

Of course, anyone who is not an anarchist, including Nozick, would admit that the state has some legitimate claim on a person's income and wealth; thus, by itself, this proposition cannot be the basis for the claim that modern liberals are socialists. But it should not be taken by itself; it must be considered in light of other propositions about the taxing and spending authority of the modern state. Among those propositions are (1) the claim that it is up to the state to decide, within fairly broad limits, what proportion of people's income to take in taxes, and (2) the claim that the state can expend resources on pretty much whatever programs it believes to be worthwhile.

Rawls is not the only modern liberal theorist who believes that society has some sort of antecedent claim on assets found within a state's borders. Ronald Dworkin, in his exposition of his theory of distributive justice, asks us to consider a hypothetical auction in which all of society's (nonhuman) resources are to be bid upon by people with equal wealth.Footnote ¹⁴ Bruce Ackerman poses the problem of distributive justice in the context of a story about people in a spaceship trying to decide how to divide up a valuable commodity that they are about to acquire on a planet they are approaching.Footnote ¹⁵ All of these conceptions of the problem of distributive justice clearly presuppose that the community, for which the state acts as agent, has a prior ownership claim on all natural resources and productive assets, which it then has to decide how to distribute.

To articulate further this view about the modern liberal conception of ownership, more needs to be said about the notion of priority. What does “priority” mean in this context? I would answer that it consists of two things. First, in the language of social contract theory, it means that society, or the community, would have an enforceable, morally legitimate claim on some of people's income and wealth in a state of nature. This does not mean that the community has full, liberal ownership of all productive assets in a state of nature. That might be one conception of communism. The claim only extends to an indeterminate portion of the income those assets generate or to a portion of the wealth those assets represent, and not to control of the assets themselves. Second, and perhaps more importantly, it means that the extraction of revenue from individuals by the state need not be conceived of as a (forced) exchange for which the state must provide something of comparable value in return, since that revenue did not, at the most fundamental level, belong to individuals in the first place. On this conception of ownership, if the state takes from Peter and gives to Paul, Peter has no legitimate complaint that he does not benefit. The state, acting as an agent for the community at large, is simply taking what antecedently and rightfully belongs to its principal—society—and is using it in ways that it sees fit. Possible foundations for these propositions will be investigated shortly.

The best explanation for this view about ownership is that the state has a claim on the relevant income or on the assets themselves, which it can choose to exercise or not as it sees fit. The question at issue is whether modern liberalism is committed to the view that the state (or society as a whole, for whom the state acts as agent) has a prior ownership claim on some part of the income associated with productive assets. It seems that an affirmative answer to this question cannot be avoided as long as modern liberals maintain that the state has wide discretionary authority both to tax and to spend.

Other considerations support this notion. Notice that private individuals, who also have (partial) income rights in productive assets, are relatively unconstrained in how they can acquire income from employing those assets and what they can spend that income on. The state is similarly unconstrained; it can exercise its income rights in productive assets through myriad forms of taxation and even more multifarious forms of spending. Of course, private individuals, unlike the state, cannot exercise their income rights through coercion. In a corresponding manner, the state faces some modest legal constraints, as well as more substantial political constraints, on its taxing and spending authority, though the political constraints on spending seem to have evaporated in recent years. The only constitutional constraint on private property in the United States is that the state cannot take possession of a parcel of real property, or effectively seize the entire value of someone's property, without compensating the owner.Footnote ¹⁶

The assumption or presupposition of social ownership best explains the modern liberal attitude that it is up to the state to decide, within fairly broad limits, what proportion of the total wealth and income of a society to take in the form of taxes, how those tax burdens should be allocated, and how the revenues collected should be spent. That spending, on the modern liberal view, can, at least in theory, include selective tax cuts, as well as government spending. In light of these considerations, it is hard to deny that modern liberalism is committed to the view that the state has wealth and income rights in productive assets. What about the other incidents of ownership?

Government regulation is another way in which the state can exercise its ownership rights in productive assets, especially when it effects a regulatory taking for which compensation is typically not owed. Perhaps the most significant Supreme Court case in this regard was Penn Central Transportation Co. v. New York City (1978).Footnote ¹⁷ New York City's Landmarks Preservation Law allowed the Landmarks Preservation Commission to designate buildings and the sites on which they are located as historic landmarks. Among other things, this law required owners of designated properties to get permission before they made major changes to the structure's facade. Penn Central's Grand Central Terminal was designated a landmark. The company wanted to build a multistory office tower in the space above the terminal. The Landmarks Preservation Commission prohibited the proposed development and refused to pay compensation; the company ultimately challenged that refusal in the Supreme Court under the due process clause of the Fourteenth Amendment and the takings clause of the Fifth Amendment, and lost. The denial of compensation is significant, since it shows that the state is under no obligation to pay for development rights it takes from a private party. Of course, if the Penn Central Transportation Company did not own these rights in the first place, then the state took nothing from the company, and indeed, on the modern liberal view, it did not. There is a line of other cases that confirms this ruling.Footnote ¹⁸

On what grounds might this presumption of social ownership be based? One might take the view that there is a primordial social obligation to share the fruits of one's labor, land, and capital with the community at large. This might, in turn, depend on deeper principles of moral philosophy, which take a presumption of equal treatment as fundamental to the moral point of view.Footnote ¹⁹ Alternatively, as sociologist L. T. Hobhouse has argued, society contributes in innumerable ways to the value of productive assets and to what entrepreneurs and capitalists are able to earn in a market economy.Footnote ²⁰ A more direct argument, also suggested by Hobhouse, drops the presumption that the state acts as an agent for society (its principal). The state itself is responsible for a substantial portion of the value of land, labor, and capital, since it provides a stable framework within which its citizens can use their property to further their own ends.Footnote ²¹ It defines and enforces property rights, which involve expensive and complex criminal and civil justice systems, and it provides for the common defense against external enemies. After all, it is the state that allows us to pass from a state of nature into civil society. It might be argued that the marginal difference the state makes in the value of all forms of property is so substantial that it justifies the partial-ownership claim the state makes on the income and wealth of a society.

B. The second argument

The second argument for the claim that modern liberals are socialists is adapted from an essay by two economists, Sanford Grossman and Oliver Hart, written in the mid-1980s.Footnote ²² Their argument begins with the observation, which is foundational for transaction-cost analysis, that complete, costlessly enforceable contracts cannot be written. Also foundational is the proposition that there are asset specificities—that is, some assets are worth considerably more than they otherwise would be when combined with other assets that are fixed as to location, specific use, etc. Finally, transaction-cost analysis presumes that economic actors are inclined to be opportunistic, that is, to take advantage of opportunities to renegotiate contracts to the detriment of other parties when they find that they are able to do so. These conditions combine to create what is called in the literature an “expropriation hazard.” That is, some of the value of an asset can be leached away when that asset is tied down to a specific use for which it is particularly valuable.

Part of Grossman and Hart's contribution to this discussion is to distinguish between what they call “specific rights” and “residual rights”:

Grossman and Hart's interest is to explain the determinants of vertical integration. It permits the theorist to discover the factors that determine how far back into the supply chain a firm can profitably go, as well determining how far a firm can profitably go forward into the distribution of the product. Ronald Coase inaugurated this line of research by asking a simple question: “Why are there firms?” Or, alternatively, “Why is it that some transactions take place across markets and others take place internally within a firm?” The general answer that Grossman and Hart offer is that some transactions are best (i.e., most efficiently) organized within the firm and some are most efficiently carried out across markets. The rest of their essay attempts to elucidate the conditions under which the firm or the market does a better job of handling these transactions.

It should be reasonably clear how this distinction between specific rights and residual rights can be adapted to show that modern liberals favor some form of socialism. For modern liberals, residual rights of control reside with the state. The main reason for this is that the state is entitled to impose, without compensation, a variety of regulatory restrictions on private property—restrictions that exactly parallel those placed on income rights and the rights to the capital value of productive assets. These restrictions are so comprehensive that it is fair to say that the state de facto possesses residual rights of control, though of course it does not possess them de jure. The legal fiction that private parties have ownership rights is maintained, but it is merely a fiction. For example, government restricts management rights by determining the terms and conditions of the employment relation in the form of minimum-wage and antidiscrimination laws; state governments further restrict employment rights by regulating occupations through occupational licensure laws. Health and safety regulations comprehensively regulate the right to dispose of the product. This includes the requirement that most drugs be prescribed by a physician and the requirement that pharmaceutical products be shown to be safe and effective before being put into the stream of commerce. Initially, these restrictions were unilaterally imposed by the Food and Drug Administration (FDA), though they were later codified in the 1951 Humphrey-Durham amendment to the Food, Drug, and Cosmetic Act of 1938. There is also regulation of health and safety conditions in the workplace by the Occupational Safety and Health Administration (OSHA) and the Mine Safety and Health Administration (MSHA). Nonmedical consumer products are regulated by the Consumer Product Safety Commission (CPSC), which is empowered to issue recalls of dangerous products. Finally, there is environmental regulation, notably the Endangered Species Act of 1973, which prohibits the taking of members of endangered animal (and plant) species, and Section 404 of the Clean Water Act of 1972, which regulates wetlands. Both are designed to protect and enhance biodiversity, and neither requires that compensation be paid. The right to the income and capital value of assets has already been discussed, as has the right to bequeath. As I noted above, prima facie violations of the right to security of possession for which compensation is owed have been limited to physical possession or seizure by the state or to the expropriation of essentially all the value of private property.

To this argument it might be objected that these regulations are restrictions on the associated rights and thus do not imply the reassignment of residual rights of control to the government. The problem with this objection begins with the open-ended character of government regulation. The state can impose on owners of private property pretty much whatever regulatory regime it wants, subject to the exceptions just noted; those exceptions can be conceived of as a residuum of nostalgia for the days when full, liberal ownership rights were more fully respected. Restrictions on any of the other incidents of ownership are permissible—and compensation need not be paid. The state can even impose comprehensive wage and price controls, which it did under President Richard Nixon from 1971 through 1974.Footnote ²⁴ Although Nixon is usually thought of as a conservative, this policy is thoroughly consistent with modern liberal principles. Indeed, it is difficult to imagine a more comprehensive regulation of the right of disposition than wage and price controls, and, of course, no compensation was offered when those controls were put in place. Because of the open-ended character of government regulation and because compensation need not be paid in most cases, property rights have effectively been eroded to the point where the state has in fact, though not in law, assumed residual rights of control. It just chooses to exercise those rights across a broader or narrower range of circumstances and conditions.

C. Summary

The foregoing two arguments establish that modern liberals are socialists who have not yet come out of the closet. To summarize, the first argument is based on the proposition that the state, through its taxing and spending authority, has a kind of priority of ownership on the income and wealth associated with private property. The second argument extends this to government regulation, which typically imposes uncompensated burdens on owners of private property.

In passing, one might ask: What is the harm? What is objectionable about the taxing and spending authority of the state and about all forms of government regulation? Some of these regulatory restrictions, after all, do some good. Nonetheless, taxation and spending, as well as the associated regulatory regimes, fundamentally change the relationship between citizens and the state. The Internal Revenue Service (IRS) is privy to the most intimate details of citizens' lives. Because these regulatory regimes are open-ended, people appear before the various regulatory bureaucracies as supplicants and not as citizens with private property rights and the independence those rights ensure.Footnote ²⁵ Regulatory bureaucracies can delay permits, withhold approvals, etc., and suffer no adverse consequences. They do not have to pay, even through the state, for the regulatory restrictions they impose. Moreover, because of the nature of their mission, regulatory bureaucracies must be given broad discretionary power, which will be—indeed must be—exercised in essentially arbitrary ways. The language of the mandates of regulatory agencies such as the Environmental Protection Agency (EPA) and the Fish and Wildlife Service (FWS) is vague and aspirational.Footnote ²⁶ It must be filled in through the rule-making process. Of course, there is an opportunity for public comment on any proposed rules, but the various regulatory bureaucracies can proceed in the face of public opposition to proposed rules or rule changes. Finally, the existence of regulatory agencies with broad discretionary power makes property rights relatively ill-defined, and this leads property owners to conceive of their world as one of threats and opportunities. They have an incentive to hire lobbyists to block the threats and seize the opportunities that government regulation and tax policies present. This is a recipe for deadweight welfare losses all the way around.