Perhaps the best way to see the influence of judicial oversight of rate making on the conception of property is to turn to the intense debate during the 1920S about value in determining the base from which to judge the fairness of a public utility's rate of return.
From the moment that the U.S. Supreme Court imposed a reasonableness requirement as a check on confiscatory rates, the definition of the value of property became a major question of federal constitutional law. In Smyth v. Ames (1898),97 the Court sought to establish a test to determine the reasonableness of rates. "The conflicting desires which plagued the Supreme Court in the [rate] cases were reconciled by the unanimous adoption of a formula which conceded what the majority of the court desired, the power to regulate, and yet guarded against what the minority feared, confiscation." 98
Whether the Court's decision in Smyth v. Ames should be given its traditional reading as establishing a set of multiple (and hence difficult to administer) factors to be considered in determining the fair value of property or, as one scholar has argued,99 be read as in fact adopting a "reproduction cost" standard, everyone agrees that somewhat later, during the 102os, the Court did finally fix upon reproduction cost as the required constitutional measure of value. 100
By this time, reproduction cost had begun to be extremely controversial, since it had only recently become extraordinarily favorable to railroads and other utilities as a result of war-induced inflation. While "[o]ver the first decade and a half after Smyth v. Ames the price level slowly rose," between 1913 and 1920 prices increased by almost 150 percent. Suddenly, "[t]he relative equivalence of historic and present costs was broken; decidedly different results once again followed from whether reproduction [or historical cost] set the limits on government rate regulation." 101 The standard for measuring value suddenly became both a central issue of public policy on which millions of dollars turned and a fundamental theoretical question about the nature of property. Beginning in 1920, a number of prominent legal scholars addressed these questions.102 They showed how, by the time Smyth v. Ames was decided, the idea of reasonableness in rate regulation and come to rest "on the analogy of the law of eminent domain." 103
It had not always been so. Justice John Marshall Harlan had proposed analyzing rate regulation under a contract theory by which the corporate charter had impliedly required reasonable rates.104 Even Justice David J. Brewer, who eventually became the leading proponent of a property theory that analogized the problem to eminent domain law, had seemed to propound the contract theory as late as 19ol. "[I]s there not force in the suggestion," Brewer wrote, that as the State may do the work without profit, if he voluntarily undertakes to act for the State he must submit to a like determination as to the paramount interests of the public?" 105
The debate over contract versus property theories symbolized much deeper conflicts over basic ideas about property. The analogy to eminent domain lawthe property conception-was correctly charged with having a bias in favor of higher valuations. As Donald R. Richberg wrote in 1927:106
In the public utility field, monopoly (partial or complete) is accepted as a desirable condition. But for many centuries such monopolies have been subject to regulation in order to prevent the charging of unreasonable rates. The charging of unreasonable rates, if skillfully imposed, undoubtedly would enhance the value of the property used. Thus we find that the very purpose and necessary effect of public regulation is to diminish the value that otherwise might be realized.107
The Court, in insisting on reproduction cost as the measure of value, Richberg wrote, was assuming, by contrast, "that the private owner of public utility property should be given the same value for his property that it would possess if it were being used in private business." 108 The Supreme Court's adoption of reproduction cost grants the utility its "monopoly value," not its competitive value, Richberg charged:
The theory of the opinion . . . permits the utility to disregard its implied promise . . . that the private operation of the public service should not be used as the means for compelling the public to pay rates grossly in excess of those which could be secured for the public by public operatir-a of public service. Public competition has been prevented by assurance that the benefits of "free competition" would be preserved. Essentially the demand of the utilities for a monopoly value is a breach of faith. 109
The Supreme Court's adoption of the eminent domain theory represented an acceptance of the view that the natural starting point for analysis was private, not governmental, ownership and that rate regulation was thus essentially confiscatory. Richberg had begun to develop the alternative Legal Realist view-given its classic formulation the very same year by Morris R. Cohen in "Property and Sovereignty" 110-that property constituted a delegation of state power to private individuals. And more specifically, Richberg was part of a movement that emphasized that the measure of value was not simply a factual or scientific question but also one deeply embedded in controversies about the nature and purpose of property.
The Supreme Court's rate-making decisions, Gerard Henderson saw in 1920,111 were regularly shrouded in an aura of science-he called it "the illusion of juristic necessity." "[T]he [C]ourt has been trying to ascertain not a rule of policy, but a discoverable fact. The question has been, not what is it wise to allow the company to earn, but what is the value of the property on which it must be allowed to earn a return." 112
Why invoke the authority of science, of the "conception that there is a fact which can be discovered . . . and which, once it is found, will provide a mathematical solution of all rate-making problems . . . ?" 113 Henderson answered:
Above all, the judges must have been anxious to avoid the suspicion that they were substituting their own discretion for the will of the legislature. . . . What the value of a railroad was, seemed on the surface to be a pure question of fact. . . . A judge who upset a state statute on the ground that it failed to allow a reasonable return on the fair value of the property seemed protected against any charge of usurping legislative power.114
The brilliant and extensive technical writing on the measure of value in ratemaking seems clearly to have inspired some of the more general theoretical Legal Realist literature on the nature of property. Not only do both bodies of writing share a common hostility to "the illusion of juristic necessity"-to the substitution of scientific for political discourse-but each sought to demonstrate how de-physicalization encouraged the view that the legal conception of property was completely circular. Just as the shift in the eminent domain cases from physical invasion to reduction in market value threatened to "freeze" the world by "propertizing" expectations of stable market values, the identification of value with market value in the rate cases created a similar dilemma.
The first thinker to see the relationship between the de-physicalization of property and its abstraction into market value was the great Wisconsin institutional economist John R. Commons. His penetrating-though often obscure-Legal Foundations of Capitalism (1924) traced the late-nineteenth-century judicial shift to a market value standard. The Rate Cases, in particular, allowed Commons to appreciate that it was the guarantee of a future income stream that determined the present value of property. "All value is expectancy," Commons proclaimed. 115 In rate-making cases, "market value is the present value of the expected rates. If the rates are unreasonable, so is the market value." 116
Judges who believed that reasonable rates could be deduced from fair market value were "reasoning in a circle," Commons declared."' He relied on Gerard C. Henderson's extraordinarily brilliant demonstration of circularity four years earlier."' Henderson had imagined a dialogue between an economist and a lawyer before a rate-setting commission:
The company's attorney . . . suggests that it be allowed always a certain percentage on the value of the property. If value goes up, rates should go up proportion ately. But the economist points out that the only accepted and sensible meaning of the word "value" is "value in exchange,"-the amount which the property would brin
g at a free sale, and that obviously this depended mainly on earnings. "But earnings," he said, "will depend partly on what we allow you gentlemen to charge the public. If we reduce your rates, your value goes down. If we increase them, it goes up. Obviously we cannot measure rates by value, if value is itself a function of rates. 119
Henderson's demonstration of the circularity of prevailing notions of value was widely accepted. Indeed, it may have provided the model from which Commons succeeded in generalizing the point to cover all forms of property. Commons was thus able to claim not only that the shift from landed to intangible forms of property required an increasingly abstract idea of property, but also that it made any distinction between present market value and future income entirely circular.
If, as Commons argued, "all value is expectancy," it pushed the legal idea of property to the verge of the reductio ad absurdum that antebellum land-based ideas had for so long succeeded in obscuring. Since any prospective change in the law that reduced future income necessarily also reduced the property's present market value, it seemed to mean nothing less than a constitutional guarantee that the future should remain unchanged. Antebellum physicalist ideas had long managed to avoid this dilemma.
The next step in the developing critique of the property idea was taken by Robert L. Hale, an extraordinarily fertile economist on the Columbia Law School faculty. In "Rate Making and the Revision of the Property Concept" (1922),120 Hale argued that the developing analysis of value in the public utility area needed to be generalized to all property.
A "monopoly" analysis of the justification of public utility regulation was too restrictive. "There is scarcely a single advantage possessed by a business affected with a public use which cannot be matched in the case of some unregulated concern. . . . [There is not a single income-yielding property right, inside or outside the utility field, which can be enjoyed on equal terms by everyone. To speak of equal rights of property is ridiculous." 121
The truth which most rate bodies lack the courage to face is, that in regulating the rates of utilities the law is trying the experiment in one limited field of turning its back on the principles which it follows elsewhere. The experiment may perhaps be extended to other fields if successful. We are experimenting with a legal curb on the power of property owners. In applying that curb, we have to work out principles or working rules-in short a new body of law. Those principles will necessarily differ from the ones upon which the law acts in other fields--for in other fields it acts on the assumption that whatever income a property owner can get without fraud by virtue of his ownership is legitimately his. In the utility field, standards of what it is proper for an owner to get out of his ownership have to be worked out de novo. Because, therefore, the law permits various kinds of income outside the regulated field, it does not follow that similar forms are to he approved within the regulated field. The revision of property rights worked out within the utility field may very well serve as a model, wherever applicable, for the revision of other property rights. I"
Next, Hale used Hohfeld's analytical scheme to reach a striking conclusion:
The right of ownership in a manufacturing plant is, to use Hohfeld's terms, a privilege to operate the plant, plus a privilege not to operate it, plus a right to keep others from operating it, plus a power to acquire all the rights of ownership in the products. The analysis is not meant to be exhaustive. Having exercised his power to acquire ownership of the products, the owner has a privilege to use them, plus a much more significant right to keep others from using them, plus a power to change the duty thereby implied in the others, into a privilege coupled with rights. This power is a power to release a pressure which the law of property exerts on the liberty of the others. If the pressure is great, the owner may be able to compel the others to pay him a big price for their release; if the pressure is slight, he can collect but a small income from his ownership. In either case, he is paid for releasing a pressure exerted by the government-the law. The law has delegated to him a discretionary power over the rights and duties of others."'
Hale's conclusion that "the law has delegated" to property owners "a discretionary power over the rights and duties of others" represented a major analytical breakthrough that should perhaps be considered one of the moments at which Legal Realism separated itself from Progressive jurisprudence. It not only laid the foundation for one of the great classics of Legal Realism, Morris Cohen's "Property and Sovereignty" (1927);124 it also anticipated Hale's own original gem, "Coercion and Distribution in a Supposedly Non-Coercive State" (1923).125
Hale not only totally reconceptualized property as a delegation of state power to private individuals but also pushed this conclusion still further. "Ownership is an indirect method whereby the government coerces some to yield an income to the owners. When the law turns around and curtails the incomes of property owners, it is in substance curtailing the salaries of public officials or pensioners." 126
Frequently the owner can only exercise his power of coercion as a result of having rendered in the past some service in the production of wealth, or of having abstained from consuming all the wealth which he might lawfully have consumed. For this and other reasons of policy it would be as bad to abolish all incomes arising from ownership as it would be to abolish all salaries and pensions. On the other hand it would be as absurd to justify any particular utility values on the ground that their legitimacy is generally recognized in other fields, as it would be for a municipal administration to justify a salary of a sinecure on the ground that some other administration of some other city still pays that sort of salary. Any value which is still to be allowed to a utility company must be justified on some independent ground of policy. 117
Property as Public Law
With the relativization of the concept of property, Progressive legal thinkers pushed on to challenge the distinction between public and private law as it applied to property.
By and large, Progressives of Brandeis's generation had great difficulty in transcending the great gulf posited by the legal system between public and private law. Instead, they tended to conceptualize most legal questions as involving the need to strike a balance between private property and the public interest. Thus, while they seemed to accept the private law character of property, they agreed that it might be modified constitutionally in the case of "businesses affected with the public interest."
The really radical reconceptualization of property that I would identify with Legal Realism is associated with a far more fundamental challenge to the private law status of property ideas. The most prominent example is the great article "Property and Sovereignty" (1927), in which the philosopher Morris Cohen offered a major contribution to the disintegration of the orthodox distinction between public and private law. 128
"Th[e] distinction between public and private law is a fixed feature of our lawschool curriculum," Cohen began. 129 First, he emphasized what Hohfeld and Hale had begun to make clear. "Whatever technical definition of property we may prefer, we must recognize that a property right is a relation not between an owner and a thing, but between the owner and other individuals in reference to things." 130 Next, he challenged the unbounded claims of legal orthodoxy to protect all forms of property. "[I]n all civilized legal systems there is a great deal of just expropriation or confiscation without any direct compensation." 131 The abolition of slavery and the prohibition of liquor were two examples. "We may go farther and say that the whole business of the state depends upon its rightful power to take away the property of some (in the form of taxation) and use it to support others." 13' Here we see clear evidence of the dramatic defeat that ratification of the Income Tax Amendment in 1913 represented for the orthodox goal of creating a clean distinction between a tax and a taking. Not only had the constitutional legitimacy of the progressive income tax muddied that distinction but, even more important, it had discredited the Classical notion that a neutral state entailed opposition to redistribution.
Finally, under t
he heading "Property as Power," Cohen challenged the Classical private law definition of property. "The character of property as sovereign power compelling service and obedience may be obscured for us in a commercial economy by the fiction of the so-called labor contract as a free bargain and by the frequency with which service is rendered indirectly through a money payment." 133 Here Cohen was summarizing almost a generation of American legal and social thought emphasizing the coercive character of property.
Since at least the turn of the century, Progressive economists had highlighted the coercive character of property. As early as 1903, for example, in a book ded icated to Justice Holmes, the Progressive economist Richard T. Ely emphasized that an increasingly concentrated and unequal distribution of wealth had resulted in "the coercion of economic forces." 131 "The coercion of economic forces is largely due to the unequal strength of those who make a contract, for back of contract lies inequality in strength of those who form the contract." 135
Beginning with the founding of the American Economic Association in 1885, anti-laissez-faire economists had developed arguments either for public ownership or for regulation of monopoly, as well as for governmental intervention to improve working conditions, to prohibit child labor, and to allow concerted action by labor unions.
Perhaps the most influential Realist work to highlight the connection between property and power for an entire generation was The Modern Corporation and Private Property (1932), by Adolph A. Berle and Gardiner C. Means. Its famous distinction between absentee shareholder ownership and management control of the property of the modern public corporation captured the imagination of a wide array of scholars of law and economics.
Berle and Means argued, "The shifting relationships of property and enterprise in American industry . . . raise in sharp relief certain legal, economic, and social questions which must now be squarely faced." Under "the traditional logic of property" the shareholders-the legal owners-were entitled to the entire profits of the enterprise. But "since the powers of control and management were created by law, in some measure this appeared to legalize the diversion of profit into the hands of the controlling group." Under the traditional logic of property, "it is clear that these powers are not absolute" but rather "are powers in trust" for the legal owners, the shareholders. "Yet, while this conclusion may result inevitably when the traditional logic of property is applied to the new situation, are we justified in applying this logic? . . . [M]ust it necessarily follow that an owner who has surrendered control of his wealth" by becoming "a supplier of capital, a risk-taker pure and simple . . . should likewise be protected to the full?" 136
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