A review of Design for Liberty: Private Property, Public Administration, and the Rule of Law, by Richard A. Epstein

If angels were to govern men," James Madison wrote in The Federalist, "neither external nor internal controls on government would be necessary." Yet it's only a slight exaggeration to say that our modern administrative state presupposes that those angels exist, and therefore that we can abandon external and internal controls on governmental power.

In Design for Liberty: Private Property, Public Administration, and the Rule of Law, the distinguished legal scholar Richard Epstein argues that our abandonment of Madison's wisdom has caused many of our present ailments. The cure is to marry the rule of law with a regime of strong property rights, which will limit the discretion of public officials. Design for Liberty is a masterly analysis of the problem of our modern administrative state and a highly practical manual for putting the law back on the right track.

The essential argument of the book is that the rule of law and the protection of private property, though theoretically distinct principles, in practice necessarily go together: "the rule of law cannot survive in a regime of weak property rights." As administrative discretion increases, property rights become increasingly precarious. Epstein quickly dismisses the notion that property rights "must be absolute in form and content just because they are important." All societies in human history have needed common or public property. What is needed is "a more measured…system of strong, but not absolute, property and contract rights."

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Epstein considers a variety of practical examples of the necessary and proper regulation of property rights, starting with land use and eminent domain, the areas for which his scholarship is famous. The justification for takings, he argues, is that "the conscious use of coercive state power" is necessary for certain public purposes such as the building of transportation and communication networks. Absent this state power, the private sphere would often duplicate these networks inefficiently or fail altogether to produce them because of a "systemic bargaining breakdown" when a few individuals hold out in order to exploit the others. Epstein's discussion of eminent domain is so excellent, accessible, and relevant, that it should be required reading for every local and state political official. He covers seamlessly such topics as rent control, regulatory taking, and just compensation, identifying a number of ways in which policy could be reformed at the local and state levels to support property rights and the rule of law.

He identifies two sources of danger inherent in the administrative state—one of which is often overlooked. Like all critics of modern government, he is concerned that "broad declarations of legislative purpose give vast amounts of delegated authority to administrative agents." But he reflects on another, less well-known problem, too, namely that when particular cases are decided by administrative tribunals, "individuals receive less protection" for their rights than they would receive in independent courts. Because "it is now permissible to combine investigative and adjudicative functions in the same persons…the usual separation of functions that applies in judicial trials is no longer present."

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Unfortunately, the judiciary's response to the administrative state has made matters worse. When an agency decision involves an interpretation of its founding or organic statute, the sensible approach for a reviewing court would be to examine the interpretation de novo, without any deference to the agency—which is bound to be biased when it interprets the very law that gives it authority. But in administrative law judges routinely defer to agencies' own legal interpretations. Conservatives should take note of this because it is chiefly conservative justices, avowed enemies of "activism," who frequently push for such deference to administrative agencies.

In his final chapter Epstein points to the "fourth wave" of the administrative state—the Dodd-Frank financial reform bill and the Affordable Care Act (ACA)—to illustrate the bureaucracy's ongoing expansion. His analysis of the likely consequences of these laws is alone worth the price of the book. His critics might reply: "What's the alternative—a harsh, unfeeling policy of laissez-faire." But far from abandoning regulation altogether, he proposes to supply the needed regulation through a combination of private law and the traditional police power.

The police power allows government to restrict certain uses of liberty and property without compensation. The common law of nuisance provides for the same restriction, but in some contexts (such as pollution in a modern industrial society) "the mind-boggling complexity of countless private lawsuits" renders a reliance on torts infeasible. Police power is a valid option where "the state may, by administrative action, fine, limit, or ban those activities against which citizens could bring valid private lawsuits to collect damages or obtain injunctions." "The state's extensive permit power should be constrained solely to these ends," Epstein argues.

The one area in which the government's power can legitimately extend beyond restricting actual or imminent harm is where tort liability cannot adequately provide restoration or restitution to the injured party. Someone who is dead or severely injured cannot adequately be compensated or restored. Thus in certain cases of public health, "ongoing inspections before the fact are an essential part of the overall regulatory process." He offers the example of nuclear power. Here he could have noted that inspections, as well as the police power, have a long tradition in American political practice. Even during the 1790s goods such as pork and lumber were inspected before they could be sold. His insistence that we can have regulation without an administrative state is thus backed up by American practice, and these precedents can be applied to 21st-century issues.

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Why is the rule of law, joined to a strong conception of property rights, superior to rule by experts? Epstein says there are several reasons. Ultimately, he focuses on two grounds: natural law and utilitarianism. It is here, in his discussion of first principles, that one might quibble with Design for Liberty.

His opening question in deciding between natural law and utilitarianism is this: "what metric should be used to make judgments about desirable social policy?" The question is crucial. Today's conservatives usually vacillate between these foundations, whether they recognize it or not. They denounce government's efforts to take over our lives and infringe our God-given liberties, and then cite the most recent policy analysis that shows how many jobs or how much GDP will be lost in the process. Although Epstein argues that a "pat opposition between just acts and desirable consequences does not quite ring true," he accepts the dichotomy and chooses utilitarianism over natural law.

In Epstein's view, "traditional natural-law theories suffer from serious limitations, especially when applied to the complex institutions of the modern administrative state." In some contexts, where natural law and utilitarianism converge, the natural law is perfectly well equipped to tackle these complex matters. But in many other situations the natural law is ill equipped for addressing tough issues such as "preservation of domestic law and order, national defense, construction of social infrastructure, and control of monopoly power by the use of an antitrust law and/or the regulation of network industries." He concludes, "a natural-law theory based on libertarian principles has nothing to say about" such issues as anti-competitive practices, and "it becomes imperative to articulate a more systematic way to analyze the costs and benefits of different social arrangements."

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That systematic way, he explains, is a combination of "Pareto optimality," the "Kaldor-Hicks criterion," and "proportionate-gain standards." In English, this means that government policies must meet three standards: that a social arrangement must leave at least one individual better off without making any other individual worse off (Pareto optimality), that those who may gain by the new arrangement are so much better off that they can compensate those who are worse off and still be better off than before (Kaldor-Hicks), and all gains from the new arrangement are divided among the participants in the project proportionate to their investment in it. The basic utilitarian principle, as Epstein states elsewhere, is that "[t]he use of government power should create win/win situations."

Yet he too easily dismisses the natural law. One need only read early American legal treatises such as James Wilson's Lectures on Law to see why. Jurists like Wilson believed that natural law could be applied to modern circumstances, including municipal regulations and construction of social infrastructure. The kind of natural law approach that Epstein dismisses is mainly the deontological, categorical condemnation of any government activity that interferes with absolute freedom of contract—a theory characteristic of today's "small government libertarians" (in Epstein's words) rather than the leading figures of the American Founding.

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One suspects that Epstein is aware of this, for he tiptoes around the issue in his discussion of natural law. He acknowledges an alternative natural law tradition reaching back to classical Rome, which "stood for the proposition that the rules of social interaction should be conformable to human nature." If we understand natural law in this way—as an approach that allows us to examine the "salutary effect" of sound legal systems on the citizens they govern, in accordance with human nature—as Epstein admits, "the key switch from natural law to modern forms of consequentialism…is less dramatic than it first appears." The natural law is conducive to human flourishing, and human flourishing is an aim of the natural law. The opposition between natural law, properly understood, and utilitarianism is thus more apparent than real.

Though it's a shame that he doesn't avail himself of the most powerful natural law arguments in his critique of the administrative state, it doesn't seriously detract from the force of his argument. Design for Liberty traces the economic consequences of the administrative state and constructs a powerful argument that we'd all be much better off with more regular, predictable regulation derived from a governmental system of divided and checked powers. The fact that we deserve such a system as a matter of natural law (not simply as a matter of utility) merely reinforces the need to reconsider the alternatives to the administrative state, until we find those angels to govern us.