The volume's rents have come from scarcities given by nature — the land, the location, the finite resource — and from scarcities contrived by private barriers, as in the monopoly. This plate turns to a third source, neither nature nor private guile but the state's own word: scarcity conjured by decree. The radio spectrum, divided by law into exclusive bands; the airport slot, the taxi medallion, the emissions permit, the fishing quota, the patent — in each, the government, by rule, carves a scarce and exclusive right out of what was once a commons or a continuum, and in the carving creates both an artificial scarcity and the rent that attends it. The plate follows Coase, who first argued that such scarcities are best managed by property and price rather than by bureaucratic grace; finds that the creation of the scarcity and the distribution of its rent are two wholly different questions, the one a matter of efficiency and the other of justice; and arrives at the volume's question in a new key — not whether the scarcity ought to exist, for very often it ought, but who should pocket the rent that the rule has conjured into being.
Begin with the spectrum, the plate's namesake and its purest case. The electromagnetic spectrum is a continuum — an unbroken range of frequencies across which signals may be sent — and at first it was a commons, a free-for-all in which the broadcasters drowned one another in interference. The state's answer was to divide it: to carve the continuum into bands, declare each an exclusive right, and grant the right to broadcast on it to chosen licensees. By this decree the spectrum became scarce — there were only so many licences to be had — and the licence became a thing of enormous value, a rent conjured out of nothing but a rule. For decades the government handed these licences out by administrative fiat, weighing the "public interest" in solemn hearings and bestowing the valuable rights, for nothing, upon those it favoured. In 1959 Ronald Coase declared the whole arrangement absurd. The spectrum, he argued, is a scarce resource like any other, and ought to be allocated as scarce resources are best allocated — by property rights and the price mechanism, defined and then bought and sold — and not by the discretion of a bureau. The proposal struck the commissioners as very nearly a joke; it is now the law of the land, and the spectrum auctions that Coase's logic begot have raised the public tens of billions.
The spectrum is but one of a family. Wherever a resource is naturally a commons — owned by no one, used by all, and therefore abused by all, in that tragedy the overgrazed pasture made famous — the same device offers itself: let the state cap the total use, divide the cap into tradable rights, and a commons becomes a system of property. The polluted air becomes a cap on emissions, parcelled into permits that firms may buy and sell, so that the right to emit flows to whoever values it most while the total stays within the cap — the cap-and-trade that tamed the acid rain. The overfished sea becomes a total allowable catch, divided into transferable quotas, sparing the fishery the ruinous race to scoop the last fish first. The crowded airport becomes a fixed number of landing slots; the congested road, a set of priced permits to enter it. In each, a decree converts an unpriced commons into a priced scarcity; and in each, the conversion is, by the logic of Coase, efficient, for the created right flows by trade to its highest use and the resource is spared the ruin of the open commons. The scarcity is made by the rule — but the rule, in these cases, is made to cure a real and ruinous disease.
And here the plate reaches its crux, the distinction that governs everything that follows. For the creation of a scarce right poses not one question but two, and they are utterly unlike. The first is the question of efficiency: given that the resource must be rationed — only so much spectrum, so much emission, so much fish — how shall the rationing be done, so that the resource ends in its best use? And to this Coase gave the answer: define the right, and let it trade, and the market will carry it to whoever values it most, however it was first handed out. But the second question the first leaves wholly untouched. For the right, once created, is valuable — it commands a rent — and someone must receive that rent. Who shall it be? This is the question of distribution, and it is not a question of efficiency at all but of justice and of politics. The same efficient allocation — the right flowing to its best use — can leave the rent in entirely different hands, depending only on how the right was first bestowed. Coase's own theorem says as much: where rights are clear and bargains are cheap, the resource ends in the same efficient use no matter who held it first — so that the initial grant decides not the efficiency but only the distribution, only who is made rich by the rent the rule conjured.
The initial grant decides not the efficiency but only the distribution — only who is made rich by the rent the rule conjured.
The answer the state gives to that second question has ranged from the just to the scandalous. At one pole, the state may auction the created right, selling it to the highest bidder and pouring the proceeds into the public purse; and then the rent the decree conjured is captured for the public the decree was meant to serve — the people's airwaves earning the people's revenue, the value of a public scarcity returned to the public, in a manner the plate on the unearned increment would know at once for the very ideal of a tax that takes without discouraging. At the other pole, the state may simply give the right away — grandfathering it to the incumbents who held the ground before, granting the spectrum free to the established broadcasters, handing the emissions permits gratis to the very firms that had been doing the polluting, awarding the fishing quota by the record of the past catch. And then the rent the decree conjured falls, as a pure windfall, into private hands that did nothing whatever to earn it — a gift of public value, made by the stroke of a pen, to whoever merely happened to hold the incumbent's place. Between these poles lies every gradation; and the choice among them is settled not by efficiency, which is indifferent, but by politics — in which the incumbents, who stand to gain the windfall, lobby with all the energy the rent-seeking plate described, while the diffuse public, which stands to lose it, scarcely knows the question is being decided.
The purest case of all is the one where the thing made scarce has no natural scarcity whatever. The spectrum, after all, has its physical interference; the fish and the air, their real and finite limits. But an idea is boundless — it can be copied by anyone, endlessly, at no cost, the least scarce thing imaginable — and yet the patent and the copyright make it scarce, by decree, forbidding all but the holder to use it. Here the scarcity is purely a creature of the rule: there is nothing in nature to ration, only a right the law has summoned from the void, precisely so that the prospect of its rent shall call forth invention, as the monopoly-rent plate described. And this purest case lays bare what all scarcity by decree has in common: that its rent is the rent of a rule — a value that exists only because the law says it shall, and that would vanish the instant the law unsaid it. The rent of the spectrum is the rent of a sentence in the statute book; rewrite the sentence, and the rent moves to other hands, or melts away entirely. This is what sets the decreed rent apart from all the others in the volume: the rent of land would survive the repeal of every law but the law of property itself, while the rent of the spectrum, the permit, the patent, is law all the way down — conjured by the rule, sustained by the rule, and forever at the rule's mercy.
The rent of the spectrum is the rent of a sentence in the statute book; rewrite the sentence, and the rent moves to other hands, or melts away entirely.
And here the volume's scruple turns, for once, not to soften the indictment but to sharpen it — for not every decreed scarcity cures a real disease, and some cure none at all. The taxi medallion, capping the number of cabs in a city, served no purpose of interference or commons or externality; it served only to protect the incumbents who held the medallions, enriching them with a rent wrung from every passenger overcharged and every would-be driver shut out — a scarcity conjured for no reason but the rent itself, until a new technology dissolved it and the medallions' value crashed. The thicket of occupational licences that fences off one trade after another is, in great part, the same: a decreed scarcity dressed in the language of public safety but serving, often enough, to guard the incumbents' wages against the competition of newcomers. And the intellectual property that began as a spur to invention is forever being stretched — the copyright extended decade upon decade, the patent granted on the obvious and the trivial — past anything that invention requires, into a pure enclosure of the common stock of ideas, a second enclosure to rhyme with the first that fenced the open fields. Even Coase's elegant remedy has its limits: rights are not always cheap to define or to trade, the commons does not always carve cleanly into property, the community can sometimes govern its commons without either the market or the state, and the buying and selling of a created right can raise questions of justice that efficiency was never meant to answer. The decreed scarcity is a tool, and like any tool it serves whoever wields it — the public, where the rule is well made, and the incumbent, where it is not.
Return, then, for the volume's penultimate time, to its question. The rent of the spectrum and its kind is the most institutionally contingent in the whole volume — a rent that exists not because the earth is finite or the land fixed, but because the state has spoken, carving a scarce and exclusive right from a commons, a continuum, or the boundless stuff of ideas. The creation of that scarcity is, very often, no extraction at all but a remedy — the one way to spare a commons from ruin, to put a price on an externality, to call an invention forth — and managed by property and price, in the manner Coase taught, it is among the finest instruments the science has ever handed the state. But the rent the creation conjures must fall to someone; and there the volume's question truly lives — not in whether the scarcity should exist, but in who should have its rent: the public, whose resource it was and whose auction can reclaim it, or the incumbent, into whose lap the stroke of a pen can drop it free. The decreed rent is earned where the scarcity is needed and its rent fairly placed, and extracted where the scarcity is needless or its rent gifted to the favoured; and which it is, in any given case, is settled not by nature and not by effort but by the rule — by the sentence in the statute book that conjures the scarcity and disposes of its spoils. Whether a given decreed rent is the just price of a well-managed scarcity or the unearned windfall of a privilege the law bestowed — and the same permit, the same patent, the same slice of the air can be either, depending wholly on how the rule is written — is the question, asked now of the scarcity the law makes out of nothing. As the table says of every price within it, the argument remains open.