Stephen Laniel’s Unspecified Bunker

(Attention conservation notice: 1100 words about an excellent, readable book that will change the way you think about property rights.)

The subtitle here, as is so often the case, is provocative but misleading as to the book’s contents. You’d think, based on the subtitle, that The Gridlock Economy is either in the Code and Other Laws of Cyberspace line, or (if you’re not familiar with that tradition) that it’s socialist in some way. In fact, without looking at the 17 other Amazon reviews that are up there right now, I’d bet $10 that a few of them are written by disciples of Ayn Rand or Murray Rothbard, screaming that “CENTRALIZATION FAILED! FREE MARKETS 4 ALL!” They insert themselves everywhere.

Fortunately (?), Randians have nothing to fear. Michael Heller’s book might be better subtitled “How To Do Free Markets Right.”

The idealized free market can be framed in a number of ways, but the Coase Theorem is one of its more intuitive pillars. The idea is that, under certain well-specified conditions, property lands in the hands of those who value it most, regardless of who gets that property at the beginning. Now you need to specify those conditions. One is that it’s costless for sellers to find buyers, and costless for them to carry out the sale. Under these conditions, I sell my property to person A, who sells it to person B, and so on until it finds the person who values it the most. (The mathematicians would say that this is an “if” rather than an “only if”: there may be other conditions under which property finds the right home, but at least we know that it does so under the given conditions.)

The trouble is that in the real world, transaction costs are nontrivial. To sell a piece of property, you need to engage the services of a lawyer to draw up the contract and need to pay various fees to various government agencies to maintain the records of who owns what. This isn’t just “bureaucratic friction”; it’s essential to the system’s functioning.

So the Coase Theorem doesn’t apply in the real world. To his credit, Coase understood this; his work is where much of the economic study of institutions starts. Humans establish institutions, goes the story, when their own uncoordinated actions would lead to manifest market failures. In a world with positive transaction costs, institutions spring up to bring us somewhat closer to the world predicted by the Coase Theorem. The Gridlock Economy is, in part, an exploration of these institutions. And it’s a fun read.

There are cases in which Coase breaks down rather viciously; these are the cases that Professor Heller tackles in The Gridlock Economy. Not all private property is created equal. Sometimes land is unavoidably split and cannot be put back together without political changes — as, for instance, with the Rumaila oil field shared by Iraq and Kuwait. In these cases a prisoner’s dilemma can develop: without coordination, and enforceable penalties for violation, both Iraq and Kuwait will extract as much oil as they can, as quickly as possible, from the ground beneath them. If they don’t, they know that the other guy will.

This story of competing for a resource when property rights are split, leads to the longest and most fascinating story in The Gridlock Economy, about the fight between Virginia and Maryland over oyster-harvesting rights. The fight lasted 300 years, led to untold deaths, and was a real-world example of how property rights matter.

The general theme is that often property rights are divided in such a way that they prevent optimal use of a resource. Too many people with divergent interests need to be coordinated before the whole mass of them can move. Heller’s clearest and most entertaining example in this direction (what Daniel Dennett would call an “intuition pump”) is the Quaker Oats Klondike Big Inch, whereby those who bought Quaker products 40-some years ago each got a deed on a single square inch of Alaskan land. It was all very clever at the time, but what happens to that land when someone wants to develop on it years later? Any potential developer needs to track down every last “big inch” owner and buy up his land. Quaker didn’t, of course, register all of those who owned big inches, so the costs even of finding those owners are prohibitive, not to mention contracting with them.

Imagine, instead, that those big inch owners were regularly in contact with one another (they’ve all established a Big Inch Alumni Club, say). Word starts getting around that a developer is buying up their inches. Pretty soon owners stop selling, or they jack up the prices at which they’ll sell. The developers must, of course, realize that this will happen before they even start buying. So smart developers will either buy up the land slowly — as big-inch owners die, say — or they’ll establish many front companies to convince owners that the buying effort is uncoordinated. This obviously imposes huge transaction costs. These transaction costs are as high as they are because each big-inch owner has something akin to monopoly power: one owner out of a million can block the entire transaction. It’s private property like any other, but it’s private property done wrong.

Cities normally use eminent domain to get around this monopoly problem: forcibly buy land at fair market value, then hand it over to a private developer. But eminent domain is pretty ugly, and isn’t voter-friendly. (As it happens, eminent domain is exactly how Alaska got around the big-inch problem with this bit of land.)

The endorsement on the cover from Larry Lessig suggests to potential buyers that we’ll be encountering gridlock in the copyright and patent domains, and indeed we do. As Lessig and many others have pointed out, the new “mashup economy” can’t work if every mashup artist needs to contact the source of every song he’s sampling. Songs go unproduced. Here’s where Heller asks us to add a word to our vocabulary: rather than just thinking about “overuse,” which the tragedy of the commons forces us to consider, Heller’s tragedy of the anticommons makes us think about underuse — for instance, underuse of music samples that could otherwise be put to profitable use, or big inches laying fallow in Alaska.

For a sub-200-page book, The Gridlock Economy is highly enlightening. I know of few other books which capture patent, copyright, real-estate law and transaction costs under a single simple, readable framework. In a just world, Heller’s book will change the way we think about markets and property. By the time it’s finished, Heller sees gridlock everywhere, and so do we.