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Protecting Private Property

In the second essay in an eight-part series on The Right to Property, we look at constitutional protections to this right. Read part one here.

Read the rest of the essays here: ThreeFourFiveSix, Seven, Eight.

In my previous essay, I discussed the economic and social importance of property rights. Given that private property is the bulwark of a modern system of exchange, property rights must be protected. If property rights are not stable, or under threat, the economic and social benefits created from a property rights system reduce or disappear. Individuals will not economise on the use of property, nor conserve it for the future, if they don’t expect to have the property rights secured for the future. Without the incentive structure created by property rights, there is no prosperity or innovation. This essay discusses principles for protecting private property.

The Hobbesian Problem

There are two different threats to individual liberty and property. The first is the threat from other individuals i.e. the threat of private aggression. Hobbes described this as the state of nature, where individual self-interest and greed makes life “nasty, brutish, and short.” To escape the constant threat of private aggression, individuals give the sovereign a centralized monopoly over violence. There are two assumptions at work here. The first is the inability of decentralized individuals to control private aggression – for which centralized power of the state is the response. The second is that voluntary coordination among decentralized individuals cannot generate the centralized power required to combat private aggression. (There are many cases where these two problems have been overcome by decentralized governance systems, but we will assume the need for centralized power for the moment). And thus emerges Hobbes’s Leviathan, when individuals surrender liberty to the sovereign to exit the state of nature.

While the leviathan decreases private aggression, it increases the threats to property rights from the sovereign i.e. threat of public aggression. Securing peace by giving the sovereign the monopoly over violence creates the problem of opportunistic behavior and expropriation by the monopolist. Therefore, the second task at hand to protect private property, is to limit the threat of public aggression, or the ability of the sovereign to expropriate from individuals.

Thus, the project to secure order has two components: limiting private and public threats to individuals and property. The conception of constitutional protection to property rights is based on these two aspects, and the tradeoff between private and public aggression. This idea is echoed by Madison in Federalist 51: “You must first enable the government to control the governed; and in the next place oblige it to control itself.”

It is within this context that one must conceive of a constitutional protection of the right to property. Constitutional rules are created to constrain the state, and therefore constitutional rules must have a provision to prevent the state from expropriating property. This is the foundation for the American conception of takings and placing constraints on the power of eminent domain. Richard Epstein’s Takings offers the best formulation of these principles. The broad principles from the American constitution inform takings doctrine in modern constitutions across the world.

Property Rights and the State

While discussing the constitutional protection of the right to property, it is important to first clarify that the state does not ‘create’ the right to property. It is merely a mechanism for securing existing property rights. The Lockean conception is that the sovereign has no power to ‘generate’ rights and limits the role of the state to securing property rights. Even instrumental or consequentialist approaches to property rights are compatible with the idea that property rights emerge from society bottom up, and not from the state. The institution of private property predates the existence of the state, and the idea that private property rights are created by the state is empirically incorrect. Scholars like Nobel Laureate Elinor Ostrom, Harold Demsetz, Peter Leeson, Bruce Benson, Robert Ellickson, etc. have conceptualized and documented the emergence of property rights and its enforcement in the absence of the state.

This has important implications for the limits to state action. If property rights are created by the state, then they can be taken away by following the procedure that was used by the state to create those property rights. However, since they are not created by the state, they are outside the purview of state action, except in certain cases. The purpose of constitutional doctrine is to outline these cases, i.e. where the state may interfere with an individual’s right to property.

This also implies that there can be some interference with private property and that property rights are not absolute. Almost all property rights theorists acknowledge that the state has the authority to regulate property through its police power and the power of eminent domain. The police power of the state (in contrast to eminent domain power) allows the state to take without compensation in response to a private taking. The key question is the extent of permissible interference with the individual. Classical liberal theorists would argue that the authority is very narrow, and limiting police power mostly to regulating nuisance prevention, and eminent domain power to very few cases of public goods. Other conceptions of property rights may allow for greater regulation of property under the same police power of the state, and a much broader conception of public use or interest for eminent domain power. The difference is the extent of interference of state over the individual. While discussing the constitutional protection of the right to private property, for the moment we limit ourselves to the power of eminent domain, and the limits placed by constitutional rules in the exercise of that power.

A Takings Doctrine

The idea behind granting the power of eminent domain to the state is that there are certain types of collective action problems that may be difficult to overcome. Therefore, in cases where the outcome would be welfare enhancing, or beneficial to all, the state can intervene and resolve the collective action problems in order to provide the good or service. This idea is rooted in economic benefits produced by provisioning public goods that are not easily provided by the market. The main argument in its favor is that holdouts may prevent the provisioning of socially beneficial public goods, and the use of eminent domain is likely to be efficient in case of holdouts.

Holdouts are situations where one or a small number of individual property owners refuse to sell their land for public goods project. In such cases, decentralized action might fail to produce an efficient outcome, because it is difficult to assemble the land required for such a project. Examples of these are land required to build roads, railroads, dams etc. where a large number of land parcels need to be assembled. However, there are cases where private developers may face holdout problems, to assemble land for a mansion, amusement park, or a factory. Therefore, the holdout problem is a necessary, but not sufficient, condition for exercising the power of eminent domain.

Even if it is established that there is a legitimate use of eminent domain power, there is a question putting safeguards in place, such that these takings are limited, legitimate, and prevent the state from infringing on individual rights beyond the immediate need of assembling a land parcel. There are four basic safeguards that form a part of eminent domain law and policy in order to create robust constitutional protection of the right to property. (1) there is a public use or public interest criteria for taking property; and (2) there is clarity regarding authorities within the state that are allowed to exercise this power; (3) such takings are only allowed by the due process of law; and (4) there is just compensation.

The first safeguard essentially asks the question “Why is the property being taken?” And the second safeguard asks the question “Which public or private body (if any) is authorized to use the power of eminent domain?” We address both of these together as they are quite interlinked.

To address these questions, there needs to be a clear public use or public interest doctrine formulated by the constitution and the courts in order to ensure that takings are economically and socially beneficial and not captured by special interests. In some cases, public use doctrine simply means for the use of a government project – whether or not it is for a public good. For instance, while acquiring land for building a railroad solves for a legitimate holdout problem, acquiring land for staff accommodation for railway workers does not fall into that category. While both are government projects, the former would definitely fall within most public interest doctrines, while the latter would not, or at least should not fulfill that criterion. Yet, in India, eminent domain power has been used for such government housing projects.

Similarly, if a private developer is developing a public good, should the use of eminent domain be allowed? These are instances of private railroad companies, or private road developers, facing the identical problem of holdouts as the state. Should the takings be allowed if the property is taken for private use, or a project that faces holdouts but is not beneficial to society in general (like a large mansion, factory, or an amusement park)?

The table below describes four different categories based on type of good/service provided, and the type of service provider.

  State Provider Private provider
Public Goods Government built roads or railroads Private railroads or roads
Non-Public Goods but in public interest Government built housing or museum Private industrial developments, housing projects, etc.

Historically the power of eminent domain was reserved for public goods provisioned by the state (top left quadrant). However, over the decades, and in different countries / jurisdictions, some or all of these categories are now considered as fulfilling the criterion for the justified use of eminent domain.

There are three good reasons to limit the power of eminent domain only to public goods provisioned by the state (top left quadrant). First, private parties have been successful in assembling large parcels of land without the use of eminent domain. Historically there are well-documented cases of private parties successfully assembling land for railroads, secret land assembly for Disneyland, movie studios, housing developments, etc. This is not easy, or costless, but is routinely done all over the world. The purpose of the power of eminent domain is not to make it easy for private firms, but to only intervene in the worst cases of holdouts. The second reason is that opening the gates to allowing private firms to benefit from takings may devolve into a rent-seeking and wealth-redistribution exercise, where judges must determine impossible questions of economic value of a particular project. Private firms may lobby for government to intervene in the acquisition of land when there are unwilling sellers. Third, in the case of the state providing non-public goods, there is a problem of placing limits and judging which of these non-public goods must be provided and which ones abandoned. Once again, there is no easy way for judges to address this problem on a case-by-case basis, and if it is not clearly a public good, then it should potentially be left out of the purview of eminent domain power.

A third safeguard is to clearly lay down principles and procedures by which the state would take private property. There are some broad principles that are typically applicable in this regard. For example, there are jurisdictions where takings are only allowed by the process of legislation, i.e. only the legislature can authorize takings, and no executive body or private body can exercise the power of eminent domain. To the extent that an executive authority or private body is the beneficiary of such takings, that must be clearly authorized and stated in the legislation. There may also be other procedural requirements like advance notice to private property holders, a procedure to appeal or challenge the takings, a set of principles to determine compensation, non-discrimination between different property owners, etc. While a good eminent domain policy requires that there should be due process, the due process safeguard is useful and should be required for every type of state action. In other words, this is not a test unique to takings, but all kinds of state interventions in the economy and society.

Finally, the most important safeguard is that there is a clear set of principles for compensating the property owner and this compensation must be just. Just compensation has different interpretations across the world. In some places it is “fair market value,” which means calculating the amount that the owner would have received had he been willing to sell it for market price; and this is calculated based on a comparable property. In some countries the doctrine of just compensation may allow for compensation greater than fair market value, because the owner may face losses greater than fair market value (if they made investments to the property, there is some special historical or emotional value etc). In other countries, the compensation may be lower than fair market value, especially in cases where the project is extremely beneficial to the general public. Whatever the case may be, there must be a clear doctrine for compensation.

There is an economic justification for providing compensation above market value. The reason is that because the owner is holding out, she may subjectively value her property at a higher value than the market price that was offered to her. Therefore, she would not be compensated, or made whole, if she then received only market value. A second reason is that by offering compensation that is higher than market value, limits the number of cases where takings can be abused, because it becomes more costly than the market alternative. This is particularly important when private takings are allowed – a higher compensation doctrine will help reduce the number of cases where private parties are abusing eminent domain.

This essay generally sets out the principles for protecting private property and outlining the four safeguards or limitations on the power of eminent domain. These principles will be applied to the Indian case in the next six essays.

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Read the next essay here and the previous essay here.

Also listen toImagine No Possessions, Episode 26 of The Seen and the Unseen, in which Shruti Rajagopalan talks to host Amit Varma about The Right to Property.

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About the author

Shruti Rajagopalan

Shruti Rajagopalan is an Assistant Professor in Economics at Purchase College, State University of New York, and Fellow at the Classical Liberal Institute, New York University Law School.