Any effort to create a free society requires a profound interaction between the two dominant institutions of classical liberal thought: the rule of law and the institution of private property, which itself can only survive in connection with a social infrastructure of support.

The initial question is how these institutions relate to each other. On that score it is commonly claim that the rule of law and private property are the same and that only a classical legal position is consistent with the rule of law. I think that this is a mistake. There is a close connection between the classical liberal position and the rule of law, but it is not a necessary one. It is an empirical one. Let me explain how the two pieces fit together.

The rule of law is an ancient concept that predates the rise of modern democracy and the rise of open markets. In its original conception it is an effort to control the power of monarchs which would otherwise be absolute. When there are no other institutions in place, the use of exhortation is perhaps the best way to limit royal power. So all of the elements of the rule of law are intended to place limits on the arbitrary power of the state. The best list of these is from Lon Fuller in his book called the Morality of Law, and it lists eight attributes. These are, first that there are indeed rules, so that we do not face arbitrary individual judgments. The villain in this situation is ad hoc solutions. Their supposed advantage is that they allow good rulers to tailor solutions to the particulars of a case. The dangerous corollary is that bad rulers are now subject to no real limitations. Better that one worry about the bad than take comfort in the good, given the natural tendencies of individual self interest. The second of these is publicity of the rule in question. Publicity is not possible of there is no rule. But once it is publicized, the sovereign will find it awkward to deviate from the rule and the individual citizen or subject will know how to behave. There is greater freedom on the part of the individual and less danger of abuse from the state.

Next there is the concern with obscure and unclear legislation, to the same effect. Obscurity reduces the odds of compliance by the citizen; and increases the risk of capricious application. Fourth there is retroactivity, which puts people in an impossible position if the rules are changed after the conduct is undertaken. Once again the same objective as before. Limit the sovereign and empower the citizen or subject. The avoidance of contradictions again is designed to make compliance. And putting impossible demands creates a situation where public discretion is at a high if you can decide which people to punish and which are not. Unstable legislation is yet another risk because if it changes, we have the same pairing. And the slippage between formulation and execution again has the same outlook.

Note that all of these virtues matter no matter what the content of the law, which is why everyone tends to favor rule of law in the abstract. It also explains why it is that rulers tend to avoid it whenever possible. They like discretion in a large number of cases. The rule of law, however, is consistent with severe rules that make all sorts of conduct illegal. So the question is how to strengthen it by adding some substance? It is here where private property kicks in as the key institution. First we have to know what that system entails. The first element of private property is the rule of acquisition, which means that those things which are amenable to private ownership (which rivers and beaches are not) go to the first possessor. The question then is what that person gets, which is the right of exclusive possession, use and disposition. This collection of rights is what is needed to get the system of markets going. Exclusive possession means that we know who owns and therefore who can develop and sell a thing. It reduces transactions costs for any and all future ways to develop, either by use or by exchange or by both together. The key two features of this system are that everyone has the duty to forbear from using or entering the property of another. There are also rules dealing with nuisances that are short of entry. Once that sphere of space is created for property (and for the property that one has in himself), use rights are powerful. The ability to dispose thus allows for particularized contracts with designated individuals that allow for gains from trade. If the system is lubricated with good institutions (deeds, registries) the velocity of transactions can take place.

Note that all elements of this system comport with the rule of law. There is no ad hoc judgments. The general rules on forbearance are simple. They work for small and large societies, for rich and poor ones. There is therefore no needless obscurity and no retroactivity. Complexity, impossibility and contradiction are to one side. The connection between the rule of law and private property thus follows from matching the requirements with the institution.

Now note that there are breakdowns in this system, real market failures. These include a situation where the right of first possession yields to an exhaustion of the common pool assets in fisheries and for wildlife. Some external constraint is needed, so the second part of the system of private property answers the call. Eminent domain, the power to take (and to regulate) so long as compensation is provided. Here is the test. Where coordinated behavior is needed, but voluntary cooperation is too costly (more than five hunters cannot agree to overall limits, typically) a state system that caps the catch by each preserves the stock for the long haul and leaves all better off than before. The rule of law is well satisfied in cases of this sort because the prorate nature of the state involvement limits discretion and favoritism. The overall project thus products gains from which all can share.

The administrative state works in a different fashion. To be sure, all states have administration. There are lists for voters, licensed drivers, real estate owners, and the like. There are tests and qualifications. But these are with little discretion. It is the right to determine who gets what through central allocation that creates the difficulty. One example is with the spectrum. It can be allocated sensibly by a system of occupation through use or by auction. But societies that think that they know better than markets set up elaborate hearings to decide who gets what, but find themselves unable to make sensible distinctions and decisions. The behavior becomes ad hoc and inconsistent; the rules change all the time; retroactive variations are commonplace. And the rule of law suffers. The same could easily happen with systems on land use, where the ability to build or rip down anything is subject to state approvals that look to far more than whether there is a nuisance created. The same ad hoc process with expensive adjudication and large amounts of public discretion take place. It is not as though there is a free–for-all in some anarchic state. But there is a level of discretion that makes citizen activity hard to plan, and government activity often arbitrary and abuse. The break down in the rule of law follows from the indefinite nature of the property rights in the public space. I know of no short term fix that can alleviate this problem.

Richard A. Epstein is a Professor of Law at the University of Chicago.

Article is an abstract of the lecture presented at the Conservative Economic Quarterly Lecture Series (CEQLS) held by the Conservative Institute of M. R. Štefánik in Bratislava on March 22, 2010.

The lecture is available also as a video here.

Article was published in Slovak language in Conservative Letters 03/2010, a newsletter of the Conservative Institute.