David R. Henderson  

Eminent Domain Bleg

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In a comment on my earlier post today, Tom West writes:

I'm fairly certain that most infrastructure projects like pipelines or electrical transmission corridors would *never* get built without the government power of eminent domain.

That's a reasonable view, and it was my view before I learned something new in the late 1970s or 1980. Now I can't find the reference because the publication lasted only a few years and my copy was consumed in my 2007 fire.

So I have a request. The odds that someone will be able to find this publication are low, but here goes. First, the background.

In 1979 or 1980, Reason magazine or the Reason Foundation--I've forgotten which--started publishing a short inside-the-libertarian-movement newsletter. The newsletter was called either Frontline or Frontlines. It had an anti-Cato thrust. At the time, there was fierce rivalry and bad blood between some people at Reason and some at Cato, especially Ed Crane. Charles Koch was, at the time, a major supporter of Cato.

Someone in a Frontline article wrote a criticism of Koch Industries. The author charged Koch Industries with being unlibertarian because the company used eminent domain to build pipelines. So far, this sounds similar to what Tom West is saying.

But then, an issue or two later, if I recall correctly, Charles Koch wrote a response saying, basically, yes, we do use eminent domain and yes, that is unlibertarian. But he went on to point out that Koch Industries had traditionally been successful at building pipelines without using eminent domain. My memory is sketchy here, but I think Charles said that some government, I think the feds, had made it hard with disclosure regulation for companies that wanted to build pipelines to conceal their intent. Concealment is crucial because of the holdout problem. To take a numerical example, if the value of a pipeline, in excess of construction cost (not including acquisition of right-of-way) is $100 million, and there are 1,000 properties whose owners would each be willing to sell their right of way for $80K, there is a $20 million surplus to play with. And the margin could easily be slimmer. So if people on the path find out in advance, many of them will be holdouts who try to get a lot of the surplus. If enough people do this, the deal won't happen, even though, in this hypothetical, it would be in everyone's interest for the rights of way to be granted.

So here's my question: Am I remembering correctly? And my bleg: does someone have a copy of the original article and Charles Koch's response, a copy that he/she is willing to share?

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COMMENTS (10 to date)
happyjuggler0 writes:

I don't have an answer for you, and I apologize if you saw that there was a comment and hoped it was answer.

However it occurs to me that you should simply try to contact Charles Koch directly* and ask him.

*You would probably have to go through an assistant or something, but if such a reply of his actually existed (as opposed to someone else replying in similar fashion) as you recall, then it sounds exactly like the sort of thing they would be happy to track down for you. Indeed they may even be grateful to you for remembering it, since a quick google search shows that the Koch Brothers take a significant amount of flack for their use of eminent domain.

Mr. Econotarian writes:

NOT AN ANSWER...but...

But I had to laugh when I read this from this source:

A suggestion was given to Janes by Colonel E.C. Clark (Clark & Sumner of Tarr Farm) who thought that the first step should be to seek a general pipeline charter from the Pennsylvania Legislature. Since a contract for laying the line was already worded, but not signed, it was quickly submitted to the Legislature in 1861. However the bill was put aside due to a great outcry from the thousands of teamsters in the oil trade who feared that their livelihood would be wiped out.
Tom West writes:

But he went on to point out that Koch Industries had traditionally been successful at building pipelines without using eminent domain.

Well, I'll be surprised if true. (However, wouldn't be the first time I've been surprised...)

In my experience, property ownership has a *hugely* varying utility function. Many will sell for market value + small x%, but some value their property at 10x the market rate.

For them, it's more akin to asking what they'd sell their left hand for. Even if they can buy and re-attach another left-hand, it won't be *their* left hand.

As an aside. I'd also guess that eminent domain reduces the social erosion that accompanies the sort of infrastructure project that have negative externalities associated with them.

It's one thing when your neighbor is forced to sell for a hydro line that knocks $100K of the market value of your land. Another when they do so voluntarily and make a "profit" from it.

AMW writes:

I have no idea if that document exists or can be found. But I did work at Koch's headquarters for about four years, and had a bit of interaction with Koch Pipeline. I can tell you that I was told (by someone other than Charles Koch) that there was a regulatory requirement for them to make a proposed route public knowledge. If I recall correctly it was part of the environmental regulations.

On a side note, the existing experimental economics literature shows that for small-scale projects (2-5 land owners) assembly failure is fairly rare, though costly delay in assembly is very common. In these experiments the "land owners" were aware that a single buyer needed all of their parcels in order to be paid.

Don Boudreaux writes:

Also not an answer (except to say, David, that I have a vague memory of what you refer to - but the relevant word here is vague)....

I'm too lazy myself now to do the research, but I distinctly recall that, when in 1985 I was researching the history of New York City's subway system, I ran across mention of a New York high-court ruling that denied to the government the power to use eminent domain to build the elevated ("L") lines that ran along some of Manhattan's avenues. These "L" lines - built, I think, in the 1880s - were the state-government's eventual substitutes for the private subway lines that would then have been built had not the state blocked efforts by private developers (such as Alfred Ely Beach [founder of Scientific American]) to build subway lines beneath Manhattan. (New York City's first subway line, the BMT, didn't open until 1904 - in October of that year, I think.)

I wonder if any EconLog reader knows of the NY State court ruling that I (think that I) recall. (The ruling, I believe, was from the NY State Court of Appeals - which is, unlike the misnamed NY Supreme Court - the supreme court in the state of NY.)

At Reason.org, it seems Bob Poole is still involved. He might have record.

The whole idea that holdouts could threaten a project which would be broadly beneficial to many people gives one more example of David's Intervention Leads to More Intervention. Such thinking grows in a population in which many government interventions are taken for granted.

To see this view which I express probably requires unusual ambition to imagine society sans state. It is a view which I developed in the Free Nation Foundation. Consider for examples the provision of roads and utilities.

  • Government provides highway access generally to all property owners without considering holdout status. Are you sure that a privately owned highway company would contract for access services under those terms?

  • Government regulates utilities such as electricity and probably requires those "private" companies to give service irrespective of holdout status. But real free-market companies would be more likely to feel and pass on pressures from other customers.

So in what I call a free nation a holdout property owner may loose access from the road service company, and may find the electric company unwilling to provide service.

For any who may be interested, here are two papers which expand such views: The Power of Ostracism and Gateway to an Altered Landscape.

Daniel Klein writes:

Perhaps this TIR article by Bruce Benson treats the intervention dynamic you suggest?

Don Boudreaux writes:

Regarding my earlier comment on this thread:

Last night I quickly reviewed some books that I had readily at hand about the history of NYC's subways. The story on Alfred Ely Beach's efforts to build a subway is more complicated than I remembered last night. An entrepreneurial predecessor in subway building, Hugh Willson, was indeed thwarted by the state legislature in Albany in his earlier efforts to build a subterranean line in Manhattan; Beach, however, may have been thwarted by difficulty in finding sufficient funding.

I say "may have" because my memory (perhaps faulty) still recalls other accounts that tell of Beach's frustration with the state government - a government that blocked his, as it had earlier blocked Willson's, efforts to build a private subway line in New York City. (But I wanted here to explicitly note that my earlier comment - suggesting that it is without question that Beach's problems came from Albany - is mistaken.)

RPLong writes:

Off-topic sidebar: There is a Frank Zappa interview floating around on YouTube in which he makes the point that he would consider himself a libertarian if libertarians didn't have apparently contradictory views. He points out that (I guess at the time?) the LP platform had a bit in it about returning stolen land to Native Americans, but that the LP was also purportedly against eminent domain. Zappa's question: how is the land going to be returned, if not by eminent domain?

Glen Raphael writes:

If it weren't for disclosure rules, an obvious tactic is to buy options to buy land, and only commit to a route (and exercise the relevant options) once your options add up to a complete path.

RPLong - Regarding your sidebar issue, the government still owns vast amounts of property taken from Indians; surely they could return that land without having to seize it. Couldn't that be the intended plan?

But if we wanted to "return" land that's now owned by private individuals, the government could raise money to purchase it at the market rate (preferably by selling a even MORE land and buildings rather than by raising taxes) and use that money to make an offer. If the owners aren't willing to sell at a reasonable price - say, 150% of the current market value - we could just give the Native Americans the money and let them buy other roughly equivalent land with it.

Why assume eminent domain unless that strategy is explicitly stated?

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