Free Liberal

Coordinating towards higher values

In Defense of Eminent Domain

By Charles McDowell

There appears to be universal condemnation in libertarian and conservative circles of the recent Supreme Court ruling in Kelo vs. City of New London. While I don’t have a lot to say about the specifics of this particular case (and even though I’m sure I’ll suffer the wrath of almost every libertarian who reads this), I thought this would be an appropriate time to point out that there actually are times when eminent domain makes sense. Furthermore, libertarians and property-rights conservatives may want to think twice before getting too bent out of shape about the fact that a private project was the subject of this case.

On the surface, eminent domain appears to be a simple matter of the government seizing private property against the will of the owner. While it may occasionally come to that, eminent domain is actually compulsory purchase, and, in fact, that’s what they call it in other places such as the U.K. “Eminent domain” is a term specific to the United States. The specific term used is not particularly relevant, except that calling it “eminent domain” makes it easier to forget that the property is not merely being seized; fair compensation is also part of the arrangement.

The term “owner,” especially when applied to something like real estate, can be slightly misleading. When we say that someone owns something, it implies that it is “fully” his, to do with as he pleases. In actual fact, however, this is seldom the case – especially in real estate. The rights of homeowners to do whatever they want with or on their land has always been heavily restricted, and always will be in any workable society (the alternative would be that each landowner is the ruler of his own sovereign nation).

I think the best way to think about this is that when you purchase land, you are purchasing a set of rights in the land, you aren’t actually purchasing the land itself. The city or state - the same one that recognizes and defends your rights when they are being infringed, incidentally – defines what ownership rights specifically include (or, to be more precise, the state generally defines the largest set of rights that can be privately owned in the land; subsets can also be transferred between private owners, as in renting or restrictive covenant arrangements).

Generally speaking, we probably call the person who owns most of the rights that come up in day to day activities the “owner.” But the owner doesn’t own all the rights. Obviously, for example, you, on your property, are still subject to the basic laws of the jurisdiction in which the land is located. You can’t kill people just because they are on your property, at least not in general. You can’t capture trespassers and keep them in a makeshift dungeon in your basement.

As property owner, you’re right to exclude people is also limited. You have to allow the police onto your land if they are conducting an investigation or are in pursuit of a criminal. You have to allow firemen onto the property under various circumstances, even if you don’t want to. In many places, you have to allow hunters onto your property if they are pursuing wounded game. And so on. Now, we can certainly wish things were different - maybe it would be nice if people had a little more “sovereignty” on their own property – but we can’t legitimately complain too loudly, since we never purchased those rights in the first place; the previous “owner” did not have them to sell. You can imagine that purchasing unlimited rights to an acre of land in a busy urban center would be significantly more expensive than purchasing the limited rights that currently pass from person to person under the existing system.

Please note that I do not intend to defend the ever increasing number of restrictions placed on homeowners. I’m endlessly baffled and frustrated by the limitations placed on me for seemingly trivial things, like changing outlets or plumbing in the basement. Restrictions such as these are a rights violation at the time they are added. In these cases, a previously owned right is being removed without compensation. Systems are possible that allow new restrictions to be added or removed in rights respecting ways, but I’m not aware of one ever being implemented.

Eminent domain, when viewed in the context of “rights of ownership,” is just another way of saying that people do not, under all circumstances, possess the right to refuse to sell their property.

Limiting the scope of rights that come with ownership of various things is really done for practical reasons. If you are still convinced that people, “by rights,” ought to have full and unrestricted rights in the things to which they hold the title, then you really ought to have an answer to the practical problems that would be created. In the case of real estate ownership, eminent domain is a solution to the holdout problem.

The holdout problem goes something like this. A person or group of people has an idea for some sort of a large project than requires a lot of land in an urban or suburban area. We’ll assume that the project managers are intelligent and well organized. They know the value of their project and determine that they can buy out the homeowners in the target area - at market value or slightly above - and still come out ahead.

The project organizers can’t just go out and start making offers to all the homeowners though; they need to ensure that everyone will agree to sell before they buy any homes at all (they can’t complete their project unless all the land is available). What they can try to do then, is make offers to everyone, each offer contingent on all the offers being accepted. But by going about things this way, they’ve tipped their hand; now everyone knows that something big is in the works - and everyone gets greedy.

And that’s where the holdout thing comes in. Each homeowner knows that he alone has the power to hold up the entire deal. He figures that as long as everyone else accepts a reasonable offer, he can hold out for a ridiculous payout. After all, if it comes to that, the developers are sure to pay; if they don’t then the whole project is dead in the water. Problem is, almost everyone will think along the same lines. Even those who don’t ask for a ridiculous amount are still quite likely to ask for a nice premium from the “wealthy” developer. Suddenly a project that, by any reasonable standard, ought to be undertaken, is dead in the water.

I’m a great believer in free markets, but there are some cases in which they don’t operate the way we’d like. Eminent domain is a way around this particular mode of market “failure.” Consider the case of roads. Sometimes we really, really need a new road. Without eminent domain, creating new roads in congested areas would be virtually impossible. If people knew that the government could not resort to eminent domain, they could hold out for multi-millions of dollars. Road developers would have to play games with landowners, snaking and jogging the roads around the various holdouts in an attempt to pay the least unreasonable of the available unreasonable offers. A road would cost millions of dollars more than necessary, only the most urgently needed ones would be built, and we’d all have to drive around in gridlock unnecessarily.

When thinking about this stuff, it’s good to keep things in perspective. While free markets are very appealing in an abstract right-vs.-wrong, “natural rights” kind of way, the real reason they are popping up all over the world is because they work. Market pricing tells people where their effort is best spent and drives resources toward the applications where their need is most urgently felt. This is as true with land as it is with anything else. Projects that people find the most valuable generate the most revenue; managers of those projects can then afford to bid more for the land.

As described above though, there are cases in which the free market doesn’t quite work the way we want. The price mechanism initially indicated to the project managers that they could have a profitable venture. Assuming that the managers’ estimates of market value - or the profitableness of their venture - were not wildly off the mark, this indicates that the land is better used for the new project. If the holdout problem stops it, then things aren’t going as well as they could; the efficient action is being stifled.

A real sore point of the recent SCOTUS case seems to be that eminent domain is applied to a private project as opposed to a public project like a road. But what difference does it really make? Foregone gain is foregone gain regardless of who the project managers are. The principle remains the same. And people who would like to see a leaner, less intrusive and less expensive government need to be particularly careful. It doesn’t make sense to only allow eminent domain for government run projects and at the same time ask for more and more projects to be done by the private sector. It is fair to note, however, that the use of eminent domain for private projects does create an opportunity for abuse by corrupt politicians who take up partnerships with private organizations. Vigilance and sensible checks are required to ensure that eminent domain isn’t used as a vehicle to pay landowners less than they deserve.

I think it’s fairly difficult to be opposed to eminent domain in principle. The principle is easy: pay people what their homes are worth, to them, plus an allowance for their time and trouble. In other words, pay them enough so that they are at worst indifferent to the whole thing. While it’s certainly not ideal to remove the homeowner’s choice of whether to sell, if we do things right everyone is better off in the end - or at least nobody is worse off. Who could complain about that?

The problem, of course, is in determining when to apply eminent domain, and, most importantly, figuring out fair prices when the owners are going out of their way to hide them. The whole market system, after all, is based on the idea of revealed preference; we only know for sure that someone prefers X dollars to a widget when they voluntarily give up the widget for X dollars. Socialism fails because, among other reasons, there is no pricing information. But this isn’t socialism – it’s a special case situation within the context of a larger market economy. Almost by definition, eminent domain cases take place in reasonably sized cities which, presumably, have active real-estate markets. These markets provide the information we need to come up with reasonable market prices for homes that are not actually for sale.

So, one approach to it is as follows. Make the developers attempt to purchase the desired land through normal, market means (contingent offers and the like). If they make offers up to as much as, say, 125% of current market price of all the land in question and still can’t get the deal to go through, they can attempt to invoke eminent domain (if that’s still what we want to call it).

Our desire, then, is to pay each person enough to fully compensate him for his home, aggravation, moving expenses and so on. But how much is that? We have a bound on the low side based on the market price estimate. We can be pretty sure the owner is owed more than that though, since (presumably) the home in question was not already up for sale. If he wanted market price, he would have already sold. One option would be to pick an arbitrary number, say 15-25%, as a price premium above the market value and go with that. This would be above and beyond payments for fixed costs such as moving expenses and possibly temporary lodging. Other situations, such as severe housing shortages, might also need to be considered, although the market price generally ought to capture that.

Once all the individual numbers have been arrived at, they can be tallied up and the bill offered to the developer. If he wants to pay it, then the project can go ahead. Is this approach perfect? Not by a long shot. Since we have to overshoot market price in order to reduce the likelihood of shortchanging a homeowner, efficient projects that are nonetheless close to the margin will be unable to go through. At the same time, even with a 25% (or whatever) buffer above market price, some homeowners will feel worse off for the deal.

What I’ve intended to convey here is not that eminent domain is never abused, I’m certain it is all the time. Talk of using it to enable projects that “create more tax revenue” makes me shudder. At the same time, I think it’s just a little naďve to condemn eminent domain in all cases, because it does have a place. Large projects in congested areas may well be impossible without some way of getting around the holdout problem. At the least, the holdout problem would make many desirable (i.e. profitable, efficient) projects impossible due to the significant extra costs; only the most desperately needed projects could proceed. And while coming up with a fair and reasonable eminent domain system is a thorny problem at best, I think with some thought a method could be worked out that strikes a balance between underpaying homeowners on the one hand and dis-enabling marginally efficient programs on the other.

Charles McDowell is an engineer living in the midwest. He enjoys writing about and debating topics in politics, economics and philosophy. More of his essays can be found on his website, Contact him by E-mail at