THE FUNCTION OF SEVERAL PROPERTY
AND FREEDOM OF CONTRACT

 Randy E. Barnett *

Social Philosophy & Policy (1992)

 
9 Social Philosophy & Policy 62

 

 

I. THE  NATURE OF FUNCTIONAL ANALYSIS

                Suppose you are on a commercial airplane that is flying at 3.5,000 feet.  Next to you sits a man who appears to be sleeping.  In fact, this man has been drugged and put upon the plane without his knowledge or consent.  He has never flown on a plane before and, indeed, has no idea what an airplane is.  Suddenly the man awakes and looks around him.  Terrified by the alien environment in which he finds himself, he searches for a door or window from which to make an escape.  As luck would have it, he is seated right next to a window exit and he begins to pull the handle that will open the window. 1 You are aware that opening the window exit at this altitude will cause the cabin to quickly depressurize and that this man, you, and probably several other passengers will be sucked out the window to your deaths.  You desperately want to stop him from opening the window.  Now assume that for some reason it is impossible to prevent him physically from performing the deadly act.  Your only option is to rationally persuade him to leave the window exit alone.  You cry out to him and, with both hands on the handles, he turns to face you and waits to hear what you have to say.  What sort of argument would you make?

              I suggest that you would  begin by trying to explain the function of the window exit he is trying to remove.  This will not be easy.  Remember, he has a no conception of air travel.  You will have to explain to him the concept of an airplane and the fact that this airplane is flying at 35,000 feet.  Even  though you are both seated in an airplane, your explanation will have to persuade him that airplanes really "exist." Suppose he responds that he does not believe in any nonsense about flying machines ("nonsense without stilts" he calls it; and that he will just remove the window, exit and see for himself.  For him to appreciate the hazard of his empirical experiment, you will have to go on to explain the concept of air pressure and the fact that the cabin is pressurized and that his removal of the window will cause rapid depressurization that will suck both him and you and probably many others to their deaths.

              If you succeed in getting the man to understand and accept all the concepts and facts that comprise a functional explanation of the window, he will in all probability cease his deadly course of conduct and you and the other passengers will be saved.  Of course, even though you will be a hero, you will not have offered a "complete" explanation of why the man should refrain from opening the window.  Suppose he responded to your functional analysis as follows: "I understand all you say and accept it as true.  But now explain to me why I should care if you, me, and countless others will be sucked out the window to our deaths?" Clearly some other line of argument will now be required to answer this challenge.  But whatever other arguments might be required, no set of arguments against his opening the window will be complete without a "functional" component.

               If this were an introduction to a paper on environmentalism, a functional analysis would require no further explanation.  We are now familiar with the "spaceship earth" metaphor and arguments to the effect that if we continue to do X on a large scale (emit fluorocarbons, pollute the groundwater, destroy the rain forest, etc.), we will suffer consequences that all would deem to be objectionable.  But while many now understand the concept of a physical environment in which certain actions if widespread will have devastating effects on everyone, most are far less conscious of our legal environment in which certain actions if widespread will also yield devastating effects on everyone.  My thesis is, then, that all of us in this world are flying together in a "social airplane," but, while many people are aware of the rule that "they should not open the window exit, " only a handful of people appreciate the function of the window or even that they are flying at 35,000 feet.  Consequently, very few understand entirely why this rule should exist and why they should obey it.

              Several property and freedom of contract 2 are concepts that have, like the window exit on an airplane, vital functions in the social airplane in which we are all flying.  They cannot be understood completely without appreciating these functions.  To fully understand the function of the window exit, one must understand the problems that this device is intended to handle.  Similarly, to understand the concepts of several property and freedom of contract fully, one must appreciate the problem or problems these concepts handle and how they handle them. 3 Whatever else is required to completely explain the concepts of several property and freedom of contract, no account is complete without this sort of functional analysis.  Understanding the problems that are handled by several property  and freedom of contract will go a long way to appreciating why the laws of any society should not be inconsistent with these principles.

            Several property and freedom of contract are the conceptual mainstays of the liberal conception of justice, which - together with the liberal conception of the rule of law-addresses three general categories of social problems: problems of knowledge, of interest, and of power.  Each of these categories of problems is actually a set of associated problems.  There are at least three distinct problems of knowledge, three problems of interest and two problems of power.

            Some of the problems in each category result from our efforts to solve other problems.  For example, the second-order problem of knowledge is to communicate the substance of justice in a form that can generally be known and acted on.  This problem arises from using the liberal conception of justice (which includes the concepts of several property and freedom of contract) to solve the first-order problem of knowledge as described in Section II.  The second-order problem of knowledge is handled by regulating human conduct by means of action-guiding rules and principles that conform to the formal requirements of the liberal conception of the rule of law and by having principles of justice that normally regulate objectively manifested conduct rather than subjective intent.  The third-order problem of knowledge is to discover and promulgate a particular set of these concrete action-guiding rules and principles that is consistent with the liberal conception of justice.  This problem is addressed by the common-law adjudicative process whose procedural attributes comprise another part of the liberal conception of the rule of law.

                The problems of interest include the problems of partiality, of incentives, and of compliance.  The partiality problem arises because persons tend to favor their own interests over the interests of others when making judgments concerning resource use.  The incentive problem arises when persons have inadequate incentives to use the resources that lie within their proper jurisdiction.  The compliance problem arises when persons do not find it in their interest to conform their actions to the requirements of justice or the rule of law. (The first two of these problems will be discussed at greater length in Section III.) While each of these problems of interest would exist independently of any knowledge problem, they cannot be entirely understood without taking into account the way we handle the knowledge problem by means of the liberal conception of justice and the rule of law.  Similarly, the two problems of power-which will not be treated in this paper-are actually specialized problems of knowledge and of interest that arise when force is used to address the compliance problem.  The problem of enforcement error that arises from mistaken applications of legal coercion is a type of knowledge problem; the problem of enforcement abuse that arises when legal coercion is used for improper purposes is a special problem of interest.

               None of these problems is easily explained.  Perhaps this is why they are generally neglected.  It is impossible to discuss in this paper every aspect of each of these problems or how each is addressed by the liberal conceptions of justice and the rule of law.  I shall confine myself to explaining the aspects of these problems that are handled by the concepts of several property and freedom of contract. 4 Those problems -such as the twin problems of power -that are primarily handled by other aspects of the liberal conception of justice or by the rule of law will be omitted.

             One more preliminary matter must be stressed.  Although I shall begin by considering how the concepts of several property and freedom of contract address the knowledge problem, the function of these concepts cannot be understood solely from the perspective of this problem.  Important aspects of the concepts of several property and freedom of contract cannot be appreciated fully without also taking into account their ability to handle the problems of interest.  The more work each of these concepts performs, the more valuable it is.

II.  THE PROBLEM OF KNOWLEDGE

               Although, as just noted, the liberal conception of justice and the rule of law addresses three distinct orders of knowledge problems, what I will call the first-order problem of knowledge is handled primarily by the concepts of several property and freedom of contract.  The first-order problem of knowledge arises because access to the vast range of knowledge possessed by individuals and associations is limited.  For example, each person has knowledge of his particular situation -including knowledge of his abilities, his interests, his preferences, and his opportunities- and access to this knowledge by others is extremely limited.  When persons seek to act on the basis of the knowledge in their possession, such action necessarily involves the use of physical resources (including their bodies).  Many of these actions will conflict, in the sense that attempts by some to use physical resources to put their knowledge into action will inevitably interfere with the efforts of others to do the same.

            No one has placed greater stress on this particular knowledge problem than Friedrich Hayek.  As he explains:

    The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.  The economic problem of society is thus not merely a problem of how to allocate "given" resources -if "given" is taken to mean given to a single mind which deliberately solves the problem set by those "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only those individuals know.  Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. 5

Hayek's account does not assume that everything that people believe is true.  Rather, it maintains that there are many things that each of us believes that are true and that access to these "truths" by others is severely limited.

        The radically dispersed knowledge that Hayek is describing may be either "personal" or "local," depending upon the degree of its accessibility.  Individuals have access to their own personal knowledge that others necessarily lack. 6 Only I know what I am thinking and feeling right now as I write this passage; only I can observe the room I am working in from this vantage point; only I know what it is I plan to write; only I know that I would like something to drink.  A list of my personal knowledge would be both endless and impossible to compile. 7

           Local knowledge is knowledge that, unlike personal knowledge, is publicly accessible to particular associations of persons.  Like personal knowledge, however, access to local knowledge is limited.  A dinner conversation between two people in a crowded restaurant is accessible to both conversants, but not to everyone in the restaurant.  Even persons at the next table may be hard-pressed to understand what is being said.  Knowledge need not be limited to a few people to be local.  Sixty-five thousand people could watch a football game.  Their knowledge of the game is local in the sense that the rest of the world does not have access to what the spectators can observe about the game in progress.  Even if millions more are watching on television, such knowledge would still be local in the relevant sense since billions lack access to it.

           We are now in a position to characterize the first-order problem of knowledge that is caused by this radical dispersion of knowledge.  It has two aspects or dimensions:

    (1) One must be able to act on the basis of one's own personal knowledge or the local knowledge one has access to as a member of an association; (2) when so acting, one must somehow take into account the knowledge of others of which each person is hopelessly ignorant.

The dispersal of personal and local knowledge can be pictured as a "knowledge glass" each of us possesses that is both half-full (what each of us knows) and half-empty (what each of us is ignorant of).  The problem is making use of the half that is full while taking into account the half that is empty.  People must be able to develop and to act on the basis of their own personal and local knowledge, but we understand that their actions are likely to affect others in ways that can scarcely be known.

               The first step in seeing how this problem is addressed is to recognize that the first-order problem of knowledge is (a) to enable each person to act on the basis of his own knowledge while (b) enabling each person to take into account the knowledge of others.  The actions of some, not their knowledge, are what interfere with the ability of others to act on the basis of their personal and local knowledge.  Ideally, what is sought is a social order in which the use of everyone's knowledge is possible.  Although differing preferences and opinions can give rise to conflicting actions, we need not control preferences and opinions themselves to handle the problem of conflicting action.  We need only control actions.  Nor need we control any actions that do not impede the ability of others to put the knowledge in their possession to good use.  In sum, to solve the first-order knowledge problem requires only an "order of actions," 8   not an order of preferences.  An order of actions requires some scheme in which conflicts among actions are minimized.

                Human action must occur during particular periods of time and in particular physical spaces; this imperative is reflected in the term "order" itself.  An "order" of actions initially suggests a scheme of temporal priority. ("First her actions, then his.") But spatial priority is another dimension of order. ("She acts over here; he acts over there.") Thus, to achieve an order of actions one must regulate the use of physical resources in a society.  An order of actions is achieved when the individual or associational uses of physical resources (human action) are temporally and spatially coordinated so as to reduce or eliminate the possibility that two persons or associations will attempt to use the same resource at the same time.  If human actions can be suitably regulated, then we need not attempt the potentially tyrannical effort to remold or coordinate personal preferences themselves.

                Yet although the concept of a social order in which human actions are coordinated is useful to clarify our objective, the concept itself specifies neither the type of order that is most desirable nor the manner by which such an order of actions can be achieved.  Lon Fuller, for example, distinguished between the order "of a morgue or cemetery" and "an order . . . at least good enough to be considered as functioning by some standard or other." 9 Social order could be achieved by allocating the use of resources by a lottery, by brute force, or by some other method, but what kind of order would this be ?  The preceding analysis of the knowledge problem provides a way out of the open-endedness of the concept of social order.  For it suggests that we want an order of actions in which personal and local knowledge is developed, disseminated, and acted upon.  Not every kind of ordering method will be able to accomplish this equally well.

A. Two methods of ordering actions

                  Let us now distinguish between two quite different methods of achieving an order of actions: centralized and decentralized ordering.  Centralizeii ordering attempts to order the actions of diverse persons and associations by delegating the authority to regulate the conduct of other persons or associations in a society to some persons or associations in that society.  Decentralized ordering attempts to order the actions of diverse persons and associations by delegating to each person or association in society defined authority to regulate their own conduct.

              1. Centralized ordering. 10 The idea of centralized ordering of society as a whole is both attractive and plausible in light of its familiarity, for we witness centralized ordering in nearly every facet of our daily lives.  The family is organized in this way, with parents making decisions about the disposition of family assets among the family members.  Larger commercial firms are organized this way as well, with a hierarchical association of persons called "management" making decisions about using the resources of the company, subject to the approval of a board of directors. perhaps the military, with its extremely well-defined chains of command, is the most explicit scheme of centralized ordering.

             Centralized ordering is undoubtedly a valuable method of capitalizing upon both personal and local knowledge.  One individual acting as a central director or planner can effectively order the actions of other persons so as to capitalize on the planner's personal knowledge.  For example, it can harness the personal knowledge of a parent of the needs of her child, an entrepreneur's personal knowledge of an unfulfilled demand in a market and a practical way of fulfilling it, or a field officer's personal knowledge of a tactical situation in combat.  Or centralized direction can capitalize upon the local knowledge of an association.  For example, it can harness the local knowledge of a husband and wife, the talented managers of a corporation, or a military command.

              Centralized ordering is completely unsuited, however, to handle the first-order knowledge problem.  Suppose we delegated to some person or association the responsibility for coordinating resource use in accordance with the diverse knowledge of all persons and associations.  To achieve an overall order of actions with such a strategy, some person or identifiable set of persons in a society would somehow have to (a) obtain the personal and local knowledge of all persons and associations in that society, (b) incorporate this knowledge into a coherent or coordinated "plan" of human actions, and then (c) transmit instructions on resource use consistent with this plan to everyone in the society so that persons may act accordingly.  Serious problems arise when trying to establish the order of an entire society in such a manner.

             The very strength of centralized direction in capitalizing on the personal and local knowledge of central directors is at once its weakness as a strategy for solving the first-order problem of knowledge.  Centralized ordering is especially effective when those in charge of the ordering scheme have access to useful personal or local knowledge.  Although central directors have access to their own personal and local knowledge, they lack the access to the knowledge that they would need to reconcile the e@,er-changing diversity of personal and local knowledge dispersed throughout a society.  Access to such knowledge is essential if a centralized ordering strategy for the society as a whole is to be implemented, but such access is simply unavailable.

               In sum, centralized direction cannot solve the first-order problems of knowledge in society at large because central directors cannot possibly have access to the personal and local knowledge that such an ordering strategy requires.  They are hopelessly ignorant of the knowledge that is needed to achieve an order of actions.

                2. Decentralized ordering.  How could the first-order knowledge problem possibly be addressed by anything but central direction without immediately descending into chaos or disorder?  The answer - at the most abstract and general level-involves the concept of jurisdiction.  A jurisdictional strategy attempts to handle the first-order problem of personal and local knowledge dispersed throughout society by using the idea of "bounded individual and associational discretion." This method of social ordering defines a jurisdiction or domain within which an individual or association is free to act on the basis of personal and local knowledge.

                  Implicit in this jurisdictional strategy is a crucial distinction between the judgment-maker and the judgment to be made.  Or, to use the language of American sports, such a strategy distinguishes the question of "who makes the call?" from the question of "what is the correct call?" 11 Although both of these questions require knowledge to answer, each question requires substantially different knowledge.  To answer the second of these questions requires personal and local knowledge of particular circumstances- knowledge that is inaccessible to centralized mechanisms.  The first of these questions requires only that we know who is in the best position to have this knowledge.

                 We may refer to this quality of "being in the best position to know" as the quality of institutional or personal competence.  The knowledge required to answer the second of these two questions differs substantially from that required to answer the question of competence.  Even when we do not know the correct call to make, we may know who is most likely to have the knowledge that such a call requires.  Instead of requiring that we gain access to the personal and local knowledge needed to make the decision in question, such an assessment requires only that we determine who is in the best position to obtain the knowledge that the decision requires.  In baseball, for example, we may know that the umpire is in the best position to assess whether or not a pitched ball is in the strike zone without knowing anything about a particular pitch.

           The earlier discussion of personal and local knowledge suggests that individuals and associations have a comparative advantage over centralized mechanisms.  They have access to these types of knowledge that centralized mechanisms must lack.  The fact that individual persons and institutions are generally in the best position to make the right call does not, however, mean that they will always make good use of their access or that others are never in a better position to make a particular call.  Nor does it mean that an analysis of personal and institutional competence would never benefit from a substantive assessment of the right call to make.  We may, in fact, bolster our assessment of personal and institutional competence by sampling a few decisions to see if they appear to reflect the knowledge we expect these persons and institutions to possess.  A pattern of egregious decisions would call into question the competence of the decision-maker.

             Still, the possibility of second-guessing the wisdom of the decisions of those in the best position to make a call does not change the basic analysis.  Given that no decision-maker is perfect, we need to make a comparative and generalized judgment when determining the appropriate jurisdictional allocation.  A persistent bias in favor of centralized decisionmaking results from our apparent ability to second-guess the wisdom of the decisions of others when these decisions go awry.  Such a bias is an instance of the fallacy of the whole; it falsely assumes that what is unquestionably true about individual decisions-that others can sometimes know better - is also true of systematic decision-making - that others are more competent generally.  An institutional competence to second-guess the correctness of another's call on occasion does not entail an institutional competence to make correct calls for others systematically.  The concept of competence does not rest on an ability to make every decision better than anyone else; it rests on being in a better position than anyone else to make knowledgeable decisions.

             The idea of jurisdiction based on "bounded individual and associational discretion" is, of course, far too general to define actual conduct as permissible or prohibitable.  It says nothing about the nature of the domain or the extent of the boundary.  Nonetheless, even at this extremely general level, such a strategy is theoretically revealing in several ways.  First, it identifies discretion (or liberty) as a means of capitalizing on knowledge that cannot be transmitted through a chain of command to central directors.  Second, it places discretion in the hands of individuals who are most likely to possess personal knowledge and in the hands of associations which are most likely to possess local knowledge.  Finally, it immediately suggests that discretion must somehow be bounded, albeit in a manner that does not undermine the purpose for adopting the strategy.  The boundaries of this discretion are defined by two distinct conceptual components: decentralized jurisdiction over physical resources and consensual transfers of these jurisdictions.  Let us consider each in turn.

B. Decentralized jurisdiction

               The first-order problem of knowledge has two aspects or dimensions. First, we need to enable persons to develop and act upon the basis of their own knowledge.  Second, we need to enable persons to take into account the knowledge of others of which they are ignorant when making their decisions of how to act.  Decentralized jurisdiction is the principal means of coping with the first aspect of the problem.

               Before briefly considering the basic principles of such a strategy, a caveat is in order.  I do not contend that the following rather abstract principles of decentralized jurisdiction are capable of yielding specific allocations of jurisdiction to particular individuals.  Instead, these principles serve as functional criteria for evaluating the set of conventional rules that is needed to determine specific allocations.  In other words, these general principles cannot take the place of laws to govern the allocation of resources, but any such laws should be critically assessed to determine if they function in a manner that is consistent with these principles.

           Jurisdiction or discretionary control over resources must be delegated to identifiable individuals and groups.  The fact that access to personal and local knowledge is dispersed throughout society gives rise to the first-order problem of knowledge.  Knowledgeable decisions cannot be made concerning the use of resources if the decision-maker lacks access to this vital personal and local knowledge.  If decisions concerning resource use are to be knowledgeable, decision-making authority concerning resource use must belong to the persons and associations with access to such knowledge.  Conversely, those who, by assumption, lack the requisite knowledge of resource use should also lack the authority to interfere with the decisions made by those with knowledge-at least as a general matter.  All else being equal, the distribution of jurisdiction over physical resources, should mirror as closely as possible the distribution of access to knowledge in society.

             The allocation of jurisdiction should reflect an assessment of who is in the best position to have personal and local knowledge of the resources in question.  Insuperable knowledge problems prevent us from allocating jurisdiction on the basis of who actually has the best knowledge of certain resources.  If a centralized institution charged with allocating jurisdictions knew what it would need to know to make such allocations, we would not need a decentralized jurisdictional strategy in the first place.  The most we can hope for is to determine the general characteristics of those who are in the best position to have knowledge of potential resource uses, regardless of whether they in fact always have the best knowledge.  In sum, we rely on these general characteristics to establish a presumption of competence in favor of individuals and groups who have access to the personal and local knowledge pertaining to their own situation.

            The domain accorded a y particular individual or group must be bounded.  If the distribution of jurisdiction over physical resources mirrors as closely as possible the distribution of knowledge in society, then this also means that such jurisdiction must be limited or bounded.  Because access to personal and local knowledge is limited, no one has access to all such knowledge. Consequently, no person or group should have jurisdiction over all resources.

             Because the knowledge of individuals and associations is dynamic, not static, jurisdictional boundaries must be subject to revision. jurisdiction cannot be allocated once and for all.  Knowledge is constantly changing; consequently, the person or association in the best position to have this knowledge may change as well.  Absent the need to continually adjust the jurisdiction of individuals and associations, we might imagine a centralized regime being able to allocate jurisdiction once and for all.  However, a centralized regime would simply be swamped by the need to constantly readjust jurisdictional boundaries according to shifting personal and local knowledge.  The restricted access to such knowledge renders such an approach not merely impossible, but inconceivable.

             Although the dynamic nature of the first-order problem of knowledge makes changes in jurisdiction necessary, allowing jurisdictional boundaries to change gives rise to very ticklish problems.  Rarely will it be sufficiently clear whether the current jurisdiction-holder or some other potential decision-maker is in the better position to use the resources in question.  If a potential user were permitted simply to displace the present user on the basis of a mere assertion of superior knowledge, this would provide no way of knowing that the new user is really in any better position to use the resources than the present user.

             The only way that such a decision can reflect the knowledge of both parties is to require that transfers occur only with the consent of the current holder of jurisdiction.  In this way, a requirement of consent is the key to solving the second aspect of the first-order problem of knowledge: that of enabling individuals to take into account the knowledge of others when making their decisions.  It is to this requirement for solving the first-order problem of knowledge that I now turn.

C. Consensual transfers

                The concept of bounded individual and associational discretion is crucial to harnessing the local and personal knowledge that is dispersed throughout society.  Recall the two dimensions or aspects of the first-order problem of knowledge discussed above:

    (1) one must be able to act on the basis of one's own personal knowledge or the local knowledge one has access to as a member of an association; (2) when so acting, one must somehow take into account the knowledge of others of which each person is hopelessly ignorant.

The concept of consensual transfers addresses both dimensions of the first order problem of knowledge.  First,  permitting consensual transfers of jurisdiction addresses the problem of enabling persons to act on the basis of their personal and local knowledge by authorizing them to transfer jurisdictions they currently have in exchange for jurisdictions they believe they can put to better use.  In this way, a transfer of a person's jurisdiction reflects this person's local and personal knowledge.

               Second, the requirement that all transfers of jurisdiction must be by consent addresses the second dimension of this knowledge problem by enabling-indeed, forcing 12 -persons to take into account the knowledge of others when making their decisions.  For changes in boundaries to reflect the knowledge of all affected parties, such revisions must be based on the manifested consent of the individuals or associations whose boundaries are changed.  By requiring consent, the new claimant is compelled to take the knowledge of the present jurisdiction-holder into account -including the present holder's knowledge of her own perceptions, preferences, opportunities, etc.

             For example, if Ann, the present holder, would prefer to maintain jurisdiction than see it transferred to Ben, the new claimant, then Ben must offer Ann something that he has reason to think she would value more.  In other words, the onus falls upon Ben to provide Ann with jurisdiction over some other resource that she would prefer to the jurisdiction she currently holds.  So, for example, Ben could offer Ann jurisdiction over a book she has yet to read in exchange for her jurisdiction over a book she has already read.  Only if Ben must obtain Ann's consent is there any assurance that his claim to jurisdiction will take her knowledge into account.

              The requirement of consensual transfers affects our ability to take into account the knowledge of others far more profoundly than this simple example suggests.  Such a requirement also makes possible the evolution of a powerful institution that enables this personal and local knowledge to be "encoded" and transmitted worldwide in a form that can be easily understood by others and incorporated into their decisions without centralized direction.  In short, the requirement of consent permits the evolution of prices.

              Prices are by far the most neglected form of knowledge we have.  The reason for this is that the knowledge embedded in prices is not explicit; we are never conscious of it as knowledge.  It is encoded knowledge, and we are conscious only of the code.  Prices reflect the vast personal and local knowledge of the many competing uses to which any physical resource may be put.  My computer is constructed of plastic, glass, various metals, and other resources.  My desk is made of wood.  These resources could have been used in a variety of other ways by people throughout the globe.  I have not the slightest way of knowing even a small fraction of the specific alternative uses that others might find for these resources.  And yet without a comprehensive knowledge of all the alternative uses of these resources, how can a knowledgeable decision be made on how these resources should be used?

               In light of the dispersed nature of personal and local knowledge, the problem of knowing alternative uses of resources is immense.  For the relevant alternative uses of resources depend upon each person's personal knowledge of perceptions, interests, and opportunities.  They also depend upon the local knowledge of associations as to their shared interests and opportunities.  This personal knowledge is generally inaccessible to others, while this local knowledge is inaccessible to those outside the relevant association.  Moreover, persons and associations are not neutral towards the variety of other resource uses of which they are aware.  They have preferences among the available alternatives and these preferences or subjective values- are constantly changing.  In deciding what I should do, how can I possibly take the knowledge of alternative resource use into account?  How could I possibly "weigh" the limitless alternatives?

           This is a knowledge problem of such enormous proportions that less information is preferable to more.  That is, even if we could have direct access to all the knowledge we require, the sheer volume of such knowledge would prevent us from ever putting it to use. We need somehow to condense this knowledge to a usable form.  We need to convert it to a form of local knowledge that can itself be integrated into each person's personal knowledge.  And this process of condensation need not be perfect to be superior to the only alternative: near-total ignorance.  This vital function is performed by the device of resource prices.

       Resource prices condense the personal and local knowledge of each one of us into a form of local knowledge that can be integrated into the personal knowledge of all of us.  Resource prices are local knowledge insofar as they are communicated from one person to another in an intelligible form.  Once communicated, they may be integrated into the personal knowledge of individuals concerning their available opportunities.  For example, a trip to Paris has a resource price attached to it.  When I consider this choice, I must consider the costs to me of paying this price.  This cost is the most highly valued set of opportunities that I will forgo by choosing to go to Paris. 13 Of course, even with a price of zero, there is no such thing as a truly cost-free trip to Paris, since such a trip will require me to forgo other potential uses of my time.  But the monetary price of a trip to Paris will strongly influence the cost to me of such a trip.  And the monetary price reflects the uses to which others may put the resources that it would take to get me to Paris.

             Here the requirement of consent is crucial.  Prices are able to communicate this information only because the consent of those with jurisdiction over particular resources is required before jurisdiction may be transferred to another.  None of this calculation would have been performed had I not been required to obtain the airline's consent to fly me to France and had the airline not been required to obtain the consent of all those whose cooperation is needed to make the flight.  The need of others to obtain the consent of a jurisdiction-holder means that anyone wishing to obtain a transfer of jurisdiction must offer the present jurisdiction-holder jurisdiction over other resources that the present holder believes he or she would put to better use.  The types of offers, as well as the number of persons offering to make exchanges, serve to educate the holder of the value that others place on the resources over which she has jurisdiction.  When this value reaches a certain level, the holder is induced to make an exchange, thereby revealing that the value she placed on the resource was less than the value to her of the resources offered.  Without the requirement of consent, this information would never be revealed and prices could not arise.

                With a set of prices a person is able to- indeed, she must 14- decide whether to use a resource, save it for later use, or exchange it for another resource by comparing her knowledge of the different uses she may have for a resource and of her own preferences among these uses with the knowledge and preferences of countless others that are encoded in the market price for the good.  If the market price is higher than the value she places on the resource, then she will be induced to exchange it.  If the market price is lower, she will either use the resource or conserve it for later use or exchange.  The process is dynamic in that the holder of jurisdiction is incorporating price signals - a form of local knowledge - into the personal knowledge on which she bases her decision; in turn, her decision (to hold or sell) will influence the price signals received by others and will then be incorporated into their personal knowledge.

                We may summarize this analysis as follows.  In making personal or local decisions about resource use, each person or association needs "input" or knowledge about the potential resource use of others relative to the supply of resources.  Resource prices provide this knowledge in a usable form and in the only manner that such knowledge could ever be provided systematically.  And such a knowledge-conveying mechanism would cease to exist without the requirement that one's jurisdiction over resources cannot be displaced without one's consent, for it is consent-based exchanges that generate prices.  Without such consent-based exchanges, prices could not emerge and the knowledge they convey would be hopelessly inaccessible.

D. The liberal conception of justice

                  We have now identified a two-part strategy to handle the first-order problem of knowledge.  First, recognize the jurisdiction of individuals and associations over physical resources so as to permit them to act on the basis of their own personal and local knowledge.  This enables individuals and associations to harness the knowledge in their possession.  Second, allow the transfer of a person's or association's jurisdiction only with manifested consent.  This permits changes in jurisdictions to reflect changes in knowledge, while making possible a price system that enables persons to take the knowledge of others into account when deciding how to act.

              This two-part strategy is reflected in the liberal conception of justice.  According to the liberal conception of justice, the use of force in society is governed by rights.  The first part of the strategy- decentralized jurisdiction -is reflected in the nature and scope of these rights.  Rights concerning jurisdiction over physical resources are usually called property rights.  According to the classical liberal view, to have property in a physical resource - including one's body - means that one is free to use this resource in any way one chooses, provided that this use does not infringe upon the rights of others.

             Because this concept of property protects the discretionary use of resources by private persons, as opposed to government officials, this idea is often referred to as "private property." However, for present purposes, the term "several property"-a term favored by F. A. Hayek and the figures of the Scottish enlightenment-may be more illuminating. 15 This term makes it clearer that jurisdiction to use resources is dispersed among the "several" -meaning diverse, many, numerous, distinct, particular, or separate-persons and associations that make up a society, rather than being reposed in a monolithic centralized institution.

              The second part of the strategy - consensual transfers only - is reflected in a concept that is sometimes called "freedom of contract." The concept of freedom of contract consists of two distinct principles: the principle of freedom to contract and the principle of freedom from contract.  Freedom to contract holds that persons may consent to legally enforceable transfers of their property rights; freedom from contract holds that transfers of property rights should not be imposed upon them without their consent.  In other words, freedom to contract permits consensual transfers, while freedom from contract requires that transfers be by consent.  Against a backdrop of several property, the two principles that comprise freedom of contract regulate the transfers of the several property rights persons have.  The manifested consent of the rights-holder is, under normal circumstances, sufficient to transfer a property right; property rights may not normally be transferred without the consent of the rights-holder. 16

              We are now in a position to summarize a primary function of the concepts of several property and freedom of contract: both concepts help address the first-order problem of knowledge.  By delegating discretion to make choices concerning the uses of resources, several property enables persons and associations to act on the basis of their personal and local knowledge.  Freedom to contract enables persons to exchange their rights on the basis of their knowledge that other rights would better serve their purposes; it also enables them to make gifts of their rights on the basis of their knowledge that others could make better use of these rights.  In this way, rights to use resources are permitted to flow to those who believe that they know best how to use them.  Freedom froM contract protects the expectations of current rights-holders, permitting them to put their knowledge into effect over a period of time free from the interference of others.  Moreover, without adherence to the principle of freedom from contract, resource prices cannot arise; it is then impossible for the knowledge of others to be taken into account when individuals and associations attempt to put their own knowledge into action.  The price system of knowledge transmittal would be short-circuited and disrupted by forced transfers of rights.

             The ideas of several property and freedom of contract correspond to a traditionally powerful conception of rights -those rights that are sometimes called "negative rights" (as distinct from "positive rights") or, more informatively, "liberty rights" (as distinct from "welfare rights"). 17 It makes a great deal of sense to represent the idea of jurisdiction based on bounded individual and associational discretion by the term "rights." It conforms to common usage to say that a person who is exercising her jurisdiction to regulate the use of particular resources is exercising her rights and that others have a duty to refrain from interfering with her actions.

            However, there is a serious problem with the rhetoric of rights that arises when rights are defined as "justified" or "valid" claims, as modern philosophers are wont to do.18   Since anything can be made the subject of a claim, a fortiori anything can potentially be the subject of a right.  Because, however, this modern conception of rights permits any claim to be cast in the form of a rights-claim, we can be easily misled into mistakenly validating invalid rights claims.

             In contrast, the idea of jurisdiction based on "bounded individual or associational discretion to use resources" offers a much more specific conception of rights.  Unlike the entirely open-ended modern concept of a right as a justified or valid claim, the liberal conception of rights ties the concept of a right to a jurisdiction over particular physical resources.  And part of what counts as an acceptable justification of such claims stems from the need to solve the first-order problem of knowledge and other pervasive social problems.  The concrete "legal rights" that are actually enforced by a legal system may or may not be consistent with the abstract "background rights" specified by the liberal conception of justice.  But if the first-order problem of knowledge is to be addressed, they ought to correspond as closely as possible with the background rights to possess, use, and dispose of scarce resources that are a part of the liberal conception of justice.

E. Ownership and "distributive" justice

               The liberal conception of justice based on principles of several property and freedom of contract gives particular content to one of the oldest ways of expressing the idea of justice: "to each his own." The obvious problem with the principle of "to each his own" is that is seems to beg rather than address the question of justice.  For, while urging that justice is the respect for what is rightfully one's own, this principle says nothing about what is properly one's own.  Indeed, the idea of ownership or "one's own" seems to be little more than a conclusion of a more fundamental analysis that this principle Simply assumes and cannot possibly provide.  It would seem that the first question of justice must be to ask what exactly ought to be one's own.

               Yet the analysis of the first-order knowledge problem presented here suggests a new way of looking at this problem-or at least a new starting point.  Instead of beginning the analysis with a determination of what physical resources ought to be one's own-an analysis that looks completely open-ended-it begins by acknowledging the prior existence of one's "own" knowledge.  To understand the nature of personal and local knowledge is to recognize implicitly that one's knowledge is inescapably one's own. 19 The very definition of personal knowledge presented above is that unique constellation of perceptions, preferences, and opportunities possessed by the individual and to which only the individual has access.  In short, to address the knowledge problem, justice must contain some notion of ownership because personal knowledge is inescapably one's own.

But doesn't this argument merely push the normative question of ownership back one level without serving it?  In the case of physical resources, it is one thing to claim that a person is naturally in possession n (de facto) of certain resources; it is quite another to claim that such possession is normatively justified as ownership (dejure).  After all, what did the individual do to deserve this possession?  Similarly, it is one thing to claim that only the individual (or association) is in possession of certain knowledge; it is quite another to suggest that such possession says anything about what distribution of resources is normatively justified.  After all, what did the individual do to deserve the possession of knowledge on which resource ownership is allegedly based ? 20 From this observation comes an argument that physical resources should be "distributed" in a manner so that "no one gains or loses from his arbitrary place in the natural distribution of assets or his initial position in society without giving or receiving compensating advantages in return. 21

           This argument is based on notions of "distributive justice" that seem somehow out of place in the context of the serious problems generated by the limited access to personal and local knowledge.  No one would suggest that the "distribution" of knowledge could be redistributed any more than can the "natural endowments" that some possess and others lack.  Indeed, the first-order problem of knowledge arises precisely because personal and local knowledge unavoidably resides within particular persons and associations and cannot be redistributed.  There simply would be no knowledge problem if personal and local knowledge really could be freely redistributed.

          But if people do not deserve the knowledge they possess, how does the mere "arbitrary" fact of possession justify any I particular distribution of physical resources?  Given that the distribution of knowledge throughout society cannot be redistributed, a jurisdiction to exercise bounded individual and personal discretion over physical resources- what I am calling several property rights-enables persons and associations to put their knowledge to work.  Although physical resources differ from personal and local knowledge in that it is possible to redistribute them, if adhering to the liberal conception of justice described here is the best or only way to handle the first-order problems of knowledge, then the fact that personal and local knowledge cannot be redistributed places serious limits on the wisdom or justice of redistributing physical resources in some other manner.

         Moreover, the objection that the liberal conception of justice bases rights, in part, on characteristics such as the possession of knowledge that are not deserved rests heavily on the concept of desert.  The knowledge one naturally possesses is not "deserved," it is said, and therefore nothing concerning justice can flow from the "arbitrary" fact of possession alone. However, even if it is true that persons do not deserve the knowledge they have (a claim that is less plausible than the claim that natural endowments are undeserved), a recognition that the concepts of several propertv and freedom of contract function, in part, to handle the first-order problem of knowledge suggests that the notion of "moral desert" is irrelevant and even pernicious in this context.

        The dispersion of personal and local knowledge to which individuals and associations have limited access is the first problem addressed by the concept of justice being examined here.  The idea that the possession of resources or entitlements or knowledge  must be  deserved  has no place in solving this problem.  The knowledge problem exists whether or not individuals and associations deserve the knowledge in their possession.  To the extent that persons are deprived of their ability to act on the basis of their knowledge and the information needed to take the knowledge of others into account, distributing physical resources according to principles that ignore all "undeserved" personal characteristics exacerbates the problem.

          Finally, the argument that the de jure ownership of one's knowledge cannot be derived from de facto possession of one's knowledge and that the distribution of this sort of personal endowment is "morally arbitrary" because such endowments are not deserved employs a normative standard desert-that, in this context, borders on absurdity.  Given that one's knowledge is inseparable from oneself, this is tantamount to claiming that before the distribution of knowledge in society may properly influence the requirements of justice, persons must show they deserve to retain their own consciousness, their own thoughts, and even their own life.  Only then would these facts of ownership become morally significant.  The concept of ownership of one's knowledge cannot be dismissed as a "mere assertion" requiring ultimate justification in terms of desert, because the fact of such ownership is too embedded in the nature of human beings living in society with others.  For this reason, ownership of one's knowledge can provide a morally significant reason for a conception of justice that allocates ownership of physical resources in a manner that permits persons to exploit the knowledge in their possession.

             Viewing justice as a means of solving the pervasive social problems caused by the radical dispersal and relative inaccessibility of personal and local knowledge casts the age-old debate over distributive justice in a new light.  Using the concept of desert to drive a wedge between ownership and justice is a mistake because it prevents the concept of ownership based on several property and freedom of contract from performing one of its functions.  But the knowledge problem is not the only reason for a liberal conception of justice that is incompatible with some redistributive schemes.  As will be explained in Section III, such schemes can also obstruct our ability to cope with the pervasive problems of interests.

F.  The Principle of first possession

             An important aspect of the liberal conception of justice is yet to be considered.  We have discussed at considerable length the concepts of several property and freedom of contract.  The concept of several property suggests that the control of resources should reflect the dispersal of personal and local knowledge, and the concept of freedom of contract governs how rights to owned resources are to be transferred.  Still, we have yet to specify any principle to govern how physical resources come to be owned in the first instance.

           The principle of property acquisition associated with classical liberalism is that of first possession.  The principle of first possession  specifies that unowned resources come to be owned by the first person or association to establish control over them. 22 The principle also embraces self-ownership- the ownership of one's body- since only the person controls his or her own body.  Although the most important and best-known function of the principle of first possession is probably its ability to address the problems of interest - i ii particular, the incentive problem - it also plays a generally overlooked role in addressing the first-order problem of knowledge.

               Consider what happens when Ann first comes upon i resource that is unowned, perhaps a section of ocean floor that can be named for minerals.  The first function of a principle of first possession is to enable Ann to act on the basis of her knowledge by asserting control over the resource.  And, because the resource is unowned- that is, no one else maintains a prior claim to the resource - her actions do not disturb the order of actions in her society; her actions do not interfere with the actions of others.  This is not the only way that the principle of first possession reflects the need to address the first-order problem of knowledge.

                 Second, since her time. and other resources are scarce, her efforts to establish control over the seabed come at the expense of other opportunities she must necessarily forgo.  The fact that Ann incurs these opportunity costs by using resources she already owns-for example, her body -to establish control over this resource reveals that she has knowledge of how it may be used, in much the same way that the requirement of consensual transfers reveals such knowledge.  She would rather invest this portion of her time and energy on using this resource than for any other purpose.  Because Ann is the first, she is also the only person to demonstrate such knowledge in so reliable a fashion.  At this point, by her committal of her own scarce resources to establish possession of the unowned seabed, Ann is the only potential claimant who is demonstrating that she knows of good uses for it.  The principle of first possession acknowledges this fact by allocating the ownership of this resource to Ann.

                    Third, when Ben later comes to the seabed, unless Ann and Ben agree to share the resource, some way of deciding between his claim and hers must be established or a conflict will occur and the order of actions will be breached.  From the perspective of the ongoing order of actions, the two claims are quite different.  Ann's first possession -solely because it was first -did not jeopardize the order of actions bv dispossessing the previously lodged claim of any other person.  Ben's claim, on the other hand, does threaten to dispossess Ann's previously lodged claim, entailing a loss of her prior investment of time and resources and the defeat of her previously formulated plans that depend upon her continued possession of the resource.  In this respect, favoring the claim of the first possessor is less disruptive to the order of actions that permit persons and associations to act on the basis of their knowledge.  The timing is of the essence.

                Fourth, unless Ben is obliged to obtain Ann's consent to use the resource, we have no way of knowing that Ann's previously demonstrated knowledge is being taken into account by Ben when he decides to pursue his claim.  Put another wav, without a requirement of obtaining the consent of the first possessor, any subsequent claimant will not "internalize" the cost imposed by his claim on the first possessor.  In this respect, the principle of first possession performs the same general function as the requirement of consent-that is, it assures that the knowledge of others will be taken into account when one acts on the basis of one's own knowledge.  This should not be surprising, since the principle can be viewed as a specific application of the requirement.  Indeed, the resource price mechanism (which has to begin somewhere) begins when Ben is required to "bid" for Ann-, previously established claim to the resource and Ann must decide whether to transfer her rights, perhaps in exchange for something that Ben has offered, or to hold on to them.  Whichever person ends up in possession of the resource will have internalized the opportunity cost of that possession to the other claimant.

             Although the principle of first possession can be seen as addressing the first-order problem of knowledge in these ways, I want to emphasize that I am not suggesting that the first possessor necessarily has "better" knowledge than any subsequent claimant, any more than the requirement of consensual transfers is based on a claim that a present right-holder is necessarily "more knowledgeable" than every potential transferee.  The analysis of the function of several property and freedom of contract presented here entails no such effort at interpersonal comparisons of knowledge.  Rather, it is precisely because as observers or as claimants we are unable to make such comparisons that some such criterion as the principle of first possession is needed to handle the twofold knowledge problem arising from the radical dispersion of personal and local knowledge.

              Of course, if a consensual transfer of rights occurs between the first possessor and a subsequent claimant, then this is prima  facie evidence that the subsequent claimant can put the resource that is the subject of the rights-transfer to better use than the rights that are being transferred to the first possessor (and, conversely, that the first possessor can put what ever rights are received in return to better use than the rights transferred to the subsequent claimant).  Adhering to the principle of first possession addresses the knowledge problem, in part, by revealing this information.  In contrast, any principle of allocation that requires for its operation that such information be obtained first runs afoul of the knowledge problem.

G. Beyond the first-order problem of knowledge    

                 The principle of first possession (and the other principles of justice discussed here) has other functions besides that of handling the first-order problem of knowledge.  So, for example, a more concrete version of the principle of first possession-"first to stake a claim, first in right"addresses the problem of communicating justice (the second-order problem of knowledge) that is handled by the liberal conception of the rule of law.  Only a more concrete expression of the principle of first possession can provide a useful guide to action before costly investment is made by two conflicting parties.  And, as I discuss in Section III, the principle of first possession also addresses the important problem of incentives.  Ann will have the incentive to use her knowledge only if she can be assured that she will not be dispossessed by latecomers.

       The first-order problem of knowledge does not unequivocally determine the entire scope of the liberal conception of justice, because this problem is one among several pervasive social problems addressed by the liberal conception of justice.  Therefore, from the perspective of this particular knowledge problem or any other problem, it may be possible to imagine alternative conceptions of justice or other types of solutions that may work as well as the concepts of several property and freedom of contract.  But the fact that the liberal conception of justice (and the rule of law) is seen as handling several different social problems means that ties at the level of the first-order problem of knowledge can be broken by taking into account further stages of analysis involving other problem.

              Indeed, one weakness of previous accounts of liberalism is their tendency to focus exclusively on a single problem or on only a small number of the problems that liberalism is needed to handle.  The basic tenets of liberalism become more authoritative as the number of pervasive social problems they address increases.  When the answers liberalism provides to one set of problems are refined in light of other pervasive problems, the importance of liberalism becomes much clearer- as does the comparative weakness of alternative approaches.

             For example, my analysis of the first-order problem of knowledge has stressed that knowledge is dispersed, that individuals and associations are usually in the best position to make knowledgeable decisions, and that individuals and associations are therefore entitled to a presumption of competence and i jurisdiction over resources that will effectuate their decisions.  It would be easy, however, to identify instances where individuals and associations seem incompetent to make decisions for themselves, and others seem more competent.  If this were the only problem we faced we might imagine other institutions intervening, perhaps only in exceptional circumstances, to correct the errors that individuals and associations will inevitably make.

          However, permitting such interventions gives rise to a serious partiality problem-one of the pervasive problems of interest.  Once the power of intervention is legitimated, interveners are quite likely to pursue their own interests rather than serving the interests of the person allegedly being protected.  Moreover, because individuals and associations will not always think they have made a mistake, the intervening decision-makers will often have to impose their decisions by force.  Using force aggravates both the problems of knowledge and of interest by raising the costs of both enforcement error and enforcement abuse; these are the problems of power.

          Advocating such interventions on the grounds that they will address the first-order problem of knowledge better than adherence to the liberal conception of justice is, therefore, insufficient.  It must also be shown how the other serious problems avoided by the liberal conception of justice but exacerbated by such interventions can be adequately handled.

III. THE PROBLEMS OF INTEREST

             The problems of interest take many forms, but they all spring from the common tendency of persons to make judgments or choose actions that they believe will serve their interests.  Put another way, people tend to try to satisfy their subjective preferences (although these preferences may not always be self-regarding).  The fact that people make choices on the grounds of interest is not, by itself, a problem.  Social theories that posit the end of all actions based on interest are positing the end of human beings as we know them.  Such theories are "utopian",- they require a basic change in the constitution of human beings that is probably impossible to achieve, even if it is desirable to do so.  Rather, acting out of interest can be considered a problem only against some normative background, that distinguishes objectionable from unobjectionable Actions.

            In this section, I discuss how the liberal conception of justice based on several property and freedom of contract helps to address two distinct problems of interest: the partiality problem and the incentive problem. 23 The fact that my presentation of these problems of interest is shorter than my discussion of the knowledge problems does not reflect the relative importance of these respective problems; rather, it demonstrates the degree to which the problems of interest are far better known and easier to explain than the problems of knowledge.  Moreover, the manner by which the liberal conception of justice and the rule of law addresses the problems of interest - particularly the incentive problem - is also more widely understood.

            I  shall thus spend the bulk of my time explaining some of the less well understood ways that the concepts of several property and freedom of contract address the partiality problem and the incentive problem.  These problems of interest would require some solution even if we faced no problems of knowledge.  That the concepts of several property and freedom of contract address these problems provides additional reasons for adhering to these concepts beyond those offered in Section II.  Those who urge that these concepts be abandoned or highly qualified must explain how this vital function can be performed in some other manner.

A. The partiality problem

             The partiality problem is extremely fundamental; it would exist whether or not we faced the sort of knowledge problem I described in Section II.  It arises from the fact that people tend to make judgments that are partial to their own interests or the interests of those who are close to them at the expense of others.  The word "partial" reflects both the cause and consequence of this problem.  One meaning of the term is "affecting only a part; not complete or total." In this sense, it is inevitable that individuals can have only a partial or incomplete view of the facts that go into reaching any decision.  It is very hard to avoid seeing the world from one's own particular, and therefore partial, vantage point.  Like other interested action, the existence of partial judgment is not itself a problem.  The term "partial" merely denotes an incomplete, rather than an incorrect, point of view.

           But this partiality or incompleteness of vision also leads to a tendency to favor one's own interest that comprises the other meaning of the term partial: "favoring one person, faction, etc. more than another; biased, prejudiced." Partiality, in this sense, is judgment affected by interest.  Once again, this is not in itself a problem.  Just as most of our actions are motivated by interest, much of our judgment is to some degree partial towards our own interests and the interests of those whom we care about whose interests, for this reason, become part of our own.

         A partiality problem arises when persons whose viewpoints are influenced by their own interests are called upon to make judgments that are supposed to take into account the interests of persons remote to them as well as their own.  This type of impartial or objective assessment is required when making a general or society-wide determination of how resources are to be used.  Yet it is simply very difficult for persons charged with making such a decision to set their own interests in proper perspective in order to make an impartial assessment.  We may summarize this problem of partiality as follows: the partiality problem refers to the difficulty of making judgments concerning resource use that take into account all available personal and local knowledge without succumbing to the tendency of persons to give priority to their own knowledge and interests.

              Moreover, the tendency of interest to render persons' judgments partial would create a need for the liberal fusion of justice and the rule of law even in the absence of serious knowledge problems.  That is, even if, contrary to my thesis (but as many believe), persons with centralized jurisdiction over resources can gain sufficient access to the personal and local knowledge of others to address the knowledge problem, we would still need to confront the problem of partiality.  Assuming that these persons have access to the local and personal knowledge of others, what assurance do we have that their decisions concerning resource use will be based impartially on this knowledge, rather than on a partial judgment of what is in their own interest?  What is to preclude these judgments concerning resource use from being made on a partial rather than a complete view of all the knowledge at their disposal? 24 In what follows, I explain how the concepts of several property and freedom of contract address this problem.

               1. Partiality and several property.  The degree to which the partiality of a decision concerning resource use becomes a problem depends on the extensiveness of the jurisdiction over resources.  Consider the extreme case of one person having jurisdiction over all the resources in the world, including other people's bodies.  Quite obviously, a partial decision by this ruler will overlook vast amounts of knowledge possessed by others; consequently, it will have far more serious consequences for their interests than a regime in which each person has jurisdiction over his own body and some comparatively small fraction of the world's resources.  In the former regime, a partial judgment will reflect the interest of just one person, whereas in the latter regime a multitude of partial judgments will reflect a multitude of interests.

                To better appreciate this point, consider a submarine with many different compartments that can be sealed off from the others should a leak occur.  Normally, of course, people on the submarine are free to move unimpeded from one area of the ship to another.  When leakage threatens, however, the compartment with the leak can be closed off quickly to limit the extent of the damage to the ship.  The problem of partial judgment concerning resource use is analogous to the leak of water in the sub, except that partiality is the norm, not the exception.  When it inevitably occurs, it is important to limit the area it can affect.  Were there no compartmentalization of decision-making, a single exercise of partiality-like a single leak of water in the submarine-could seriously jeopardize the interests of everyone else.

             The concept of several property reflects a strategy of decentralizing jurisdiction over resources to the level of those individuals and associations that are most likely to be in possession of personal and local knowledge.  Such a regime not only makes possible the utilization of personal and local knowledge as I discuss in Section 11; it also limits the impact of judgments made on the basis of only partial information.  We may summarize this as follows: decentralized jurisdiction through the device of several property takes possible the effective compartmentalization of partiality.

            The term several property is preferable to private property precisely because it emphasizes the plurality and diversity of jurisdictions in a regime governed by the liberal conception of justice.  Like the submarine with separate compartments, in such a regime the jurisdiction of any particular individual or association will be bounded or limited.  In most (but clearly not all) circumstances, a partial exercise of such bounded jurisdiction will mainly affect the person exercising this judgment.  Where the exercise of jurisdiction on the basis of partial judgment does affect others, .the extent of these "external" effects will be limited.  Indeed, the thrust of much of liberal legal theory is to cause actors to "internalize" the costs of their actions by making them liable for the harms their actions cause to others.  For example, whole categories of external effects caused by the use of physical force or fraud are prohibited.  What external effects of partiality remain can often be adjusted by the consummation of mutually satisfactory consensual exchanges that the liberal principle of freedom to contract makes possible.

               Compartmentalization does not eliminate all partiality; that would be both impossible and undesirable.  Instead, it dampens the problem of partiality by limiting the range of resources over which a single partial interest will prevail.  So limited, partiality can be a good thing rather than a problem.  As has been known since The Wealth of Nations, the pursuit of one's own interest and the interest of those one cares about can be a powerful motive for conduct that is beneficial both to self and to others.  It also is the motive that propels the marketplace of consensual exchanges that, as we will discuss in the next section, helps solve the incentive problem.

          Moreover, decentralization also makes possible a system of effective checks and balances on partiality.  At the constitutional level, a system of checks and balances was one of James Madison's solutions to the problem of "faction" by which he meant

    a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community . 25

Madison's solution to this instance of a partiality problem was, in part, to divide powers so that each institution could resist the others.  While this idea is well known among constitutional theorists, that several property plays the same function at the level of individuals and associations is usually overlooked.

           The fact that persons retain jurisdiction over their respective resources - especially including their bodies - means that they often have a way to retaliate in kind with actions that undercut the interests of a person whose partial judgment has adversely affected them.  In this way, the decentralized jurisdiction resulting from several property permits the undue partiality that affects the interests of others to be discouraged by a strategy of "tit for tat." When I take action that adversely affects the interests of others, those whose interest I have hurt are more likely to be able to retaliate in kind than they would be able to in a regime in which all jurisdiction resided in a single person or association.  The demonstrated ability to retaliate in this way has proved to be a powerful deterrent to the initiation of conduct that adversely affects the interests of others.  The existence of such a deterrent can also lead to a general and quite powerful norm of cooperation. 26

              2. Partiality and freedom of contract.  The concept of freedom of contract also can be seen as addressing the partiality problem.  When seeking to obtain the rights held by another, we cannot expect a person to be impartial in assessing whether he can make better use of the resources than the present right-holder.  By making consent of a right-holder a necessary condition of a rights-transfer, the principle of freedom from contract forces prospective rights-holders to take the knowledge of current holders into account when deciding whether to effectuate a transfer.

              The fact that property rights may not transfer without the consent of the current owner means that, to acquire the right to use these resources, any prospective owner is compelled to induce the current rights-holder to consent to a transfer.  The amount and kind of this inducement reflects the personal and local knowledge of the current rights-holder as to how these resources may be used.  In this way, the knowledge of the current rights-holder becomes part of the prospective owner's cost of obtaining control over the resource.  This in turn forces a prospective owner to take the current rights-holder's knowledge into account without requiring that the prospective owner have direct access to the personal or local knowledge of the current rights-holder. (The principle of first possession also performs this function with respect to subsequent claimants of previously unowned property that has been subject to the control of a first possessor.)

                  It is now apparent how the system of resource prices that arises from adherence to the principle of freedom from contract addresses not only the first-order problem of knowledge but also the partiality problem.  The requirement that everyone pay the price for resources held by others does more than enable persons to take into account the knowledge of others; it forces them to take the knowledge and interests of others into account, even when they would not otherwise find it in their interest to do so.  In this manner, the concept of freedom of contract functions with the concept of several property to ameliorate the partiality problem.

B. The incentive problem

                 The strategy of solving the first-order problem of knowledge by adhering to the concept of several property assumes that people in such a regime will have sufficient interest in exercising their jurisdiction over resources knowledgeably.  Suppose, however, that right-holders lack adequate incentives to employ their knowledge in their decisions concerning the use of their resources.  This is the incentive problem and we may summarize it as follows: The incentive problem concerns choices among actions that justice permits; it refers to the need to close the gap between the conduct that personal and local knowledge recommends and what persons perceive to be in their interest to do.

                The incentive problem arises most graphically when the benefits of exercising knowledgeable control over resources do not accrue to the person or persons exercising such control.  In the next two sections, I consider two different policies of redistribution.  The first policy gives rise to serious incentive problems; the second policy is needed to solve incentive problems.

                1. The incentives of redistribution.  To appreciate the nature of the incentive problem, let us imagine a world of several property where control over resources was decentralized in much the same manner as we witness in western countries -perhaps even more so.  Those who were generally in the best position to have beneficial knowledge of resource use were those who had legal control as well.  In other words, the allocation of legal control to individuals and associations closely reflected the distribution of personal and local knowledge.

            Now imagine that all the benefits accruing from a knowledgeable exercise of control were routinely siphoned off and given to others- for example, via a steeply progressive income tax or a confiscatory wealth tax.

          The inability to reap any of the benefits resulting from the use of knowledge to exercise control over resources would greatly reduce the incentive to exercise knowledgeable control in the future.  Some incentive to act productively might still exist if the activity of exercising control was intrinsically rewarding to the person exercising control.  As the inherent interest in doing a job declines, however, even this residual incentive to act knowledgeably would diminish as well.

           This analysis suggests that, just as the distribution of control over resources should correspond to the distribution of knowledge in society, the distribution of benefits should correspond to the distribution of control.  While the concept of several property disperses the control of resources throughout society in a way that tends to match the distribution of knowledge, an important function of the principle of first possession and the two principles that comprise the concept of freedom of contract -freedom from contract and freedom to contract-is to address the incentive problem.

            The principle of first possession ensures that someone investing scarce resources in establishing control over a resource will not be divested of the benefits of this investment at some later time when another person makes a claim for the same resource.  Without such a principle, first possessors would lack a right to continued possession on which they could rely.  This would undermine anv incentive they might have to employ their knowledge to make full use of the property.  For example, their incentive to invest their time, energy, and other resources into improving the newly possessed property in some permanent way would be seriously undermined if the next person along could dispossess them without their consent.

            Like the principle of first possession, the principle of freedom from contract ensures that changes in control of resources reflect the knowledge of the original right-holder.  Only if the right-holder consents to a transfer will it be recognized as valid.  Consent to a rights transfer will not be given unless the right-holder subjectively values (ex ante) the resulting distribution of rights more highly than the original distribution of rights that preceded the transfer.  Without a requirement of consent, the incentive to rely upon or improve the property within one's rightful jurisdiction would be adversely affected by the prospect that others could come along and dispossess the right-holder without his or her consent.

              Finally, the principle of freedom to contract provides incentives for beneficial transactions by enforcing agreements motivated by the prospects of receiving a benefit or "profit." The prospect of such gains creates powerful incentives to investigate and discover previously unknown opportunities for beneficial transfers.  Entrepreneurship is the ability to identify previously unknown or neglected opportunities for beneficial transactions.27 If contracts producing so-called "speculative" gains were unenforceable, then the incentive for such entrepreneurial activity would be eliminated.

             Conversely, the prospect of incurring a "loss" induces a level of caution in persons' actions.  One has an incentive to be careful about putting one's knowledge into action if one must incur the full cost of having made a mistake.  Moreover, the only way to eliminate losses is to transfer resources to the actor who has made the bad bargain from others who have not.  In the absence of consent by the person to whom the loss is shifted for example, a consent to a risk-pooling or insurance scheme -such a policy of coerced loss-spreading will have adverse incentive effects on those from whom this compensation is confiscated.

          The liberal conception of justice, then, both inhibits transfers that adversely affect interest and encourages beneficial transfers.  The principles of first possession and freedom from contract -that is, no transfers without consent -ensure that rights transfers will not create negative incentives.  The principle of freedom to contract-that is, consensual transfers are valid -makes entrepreneurship possible by ensuring that positive incentives exist for beneficial rights transfers.  In these ways, the concepts of several property and freedom of contract function not only to address the knowledge problem, but the problem of interest as well.

        2. Redistribution as compensation for injustice.  The preceding analysis of the incentives of redistribution has another implication for the liberal conception of justice that takes me somewhat beyond the subject of several property and freedom of contract to the subject of the appropriate remedy for violations of the rights that these concepts entail.  When incentives to act knowledgeably are diminished by forced transfers, it is not enough simply to condemn such redistribution as unjust.  Condemnation will not preserve the incentives for productive activity that are undermined by transfers without consent.  Some form of compensation to the victim of redistribution is needed to restore the benefits taken from the rightholder.  Unless compensation is made, persons will have greatly reduced incentives to use their knowledge to increase the value of the resources they control.

           Where is this compensation to come from?  There are really only two choices.  Compensation can come from the person who received the benefits of the redistribution, or it can come from someone else who did not.  If compensation is taken from persons who did not receive the proceeds of the redistribution, a new and equally debilitating forced transfer will occur.  From the standpoint of the incentive problem, there is no reason to prefer the first victim of redistribution to the second.  It would seem that as between (a) the victim of a forced transfer, (b) all persons in the world who received no benefit from the unjust distribution, and (c) the person who received a benefit, the compensation should come from the perpetrator of the injustice.  Only a redistribution from the perpetrator of an unjust taking will preserve the victim's incentives to act knowledgeably without at the same time undermining the incentives others have to employ their own knowledge.  In the liberal conception of justice, the requirement that the perpetrator of an unjust redistribution compensate the victim of the injustice is called the principle of restitution: the principle of restitution requires that one who violates the tenets of justice must compensate the victim for the cost of the injustice. 28

                Let me conclude by summarizing the analysis presented here and by placing it in proper perspective.  A functional analysis of several property and freedom of contract enables us to see how these allegedly "economic" rights address the problems of knowledge and interest that must somehow be solved.  At the risk of oversimplification, the functional analysis presented here may be summarized as follows:

    a. The concept of several property (including the principle of first possession) handles the first-order problem of knowledge by allotting jurisdiction over resources to individuals and associations, the persons in possession of personal and local knowledge.  It addresses the partiality problem by compartmentalizing the pursuit of interest.

    b. The concept of freedom of contract is composed of two principles:

      (1) freedom to contract and (2) freedom from contract.

      1. Freedom to contract addresses the first-order problem of knowledge by permitting transfers of resources when rightholders discern an opportunity for improving upon the current allocation.  This principle addresses the incentive problem by creating opportunities for profitable exchanges or entrepreneurship; the prospect of losses arising from exchanges provides an incentive for the exercise of caution.

      2. Freedom from contract (along with the principle of first possession) addresses the first-order problem of knowledge by protecting right-holders' ability to make and effectuate knowledgeable plans in reliance on their continued control of resources.  Further, these principles make possible the existence of resource prices that convey in coded form the local and personal knowledge of potential users of resources, so that this knowledge may be taken into account when persons decide how to act.

             Freedom from contract (and the resource prices it makes possible) also addresses the partiality problem by forcing those who aspire to control resources to take into account the knowledge and interests of present right-holders.  This principle addresses the incentive problem by preventing redistributive activity that deprives owners of their incentive to knowledgeably exercise their rightful jurisdiction.

           I want to reiterate that a functional analysis does not constitute a complete explanation of these concepts.  Other modes of analysis -such as, perhaps, a more abstract moral theory -are needed to answer other criticisms of these concepts.  The fact that a functional analysis cannot answer every criticism that may be made of the concepts of several property and freedom of contract, however, does not by itself undermine the value of this approach.  As I have explained elsewhere, to the extent that different modes of analysis converge on the same conclusion, our confidence in that conclusion increases.  In this way, depending on how the term is used, either competing modes of analysis are not truly "redundant," or redundant modes of analysis are valuable. 29

           Still, I have not attempted to present a complete functional analysis of several property and freedom of contract.  A complete presentation would require a thorough treatment of every serious proposal to weaken or eliminate these concepts to see how such proposals deal with these (and other) problems of knowledge and interest, as welt as the problems of power.  It would also require consideration of any proposals that may exist for better handling these pervasive social problems.  A complete analysis would be more rigorously comparative than this presentation, but what has been presented provides good reason to adhere to these concepts in the absence of a showing that other approaches can adequately handle the pervasive social problems that must somehow be handled.

         In sum, the analysis presented here, while not complete, supports a presumption in favor of several property and freedom of contract.  Critics of these economic rights cannot merely point to their shortcomings.  They also must show persuasively how they would address these pervasive and very serious social problems.  This is a burden that, to date, critics of such rights have been both unwilling and unable to bear.

Chicago-Kent College of Law, Illinois Institute of Technology

FOOTNOTES:

* The research for this paper-which is part of a larger project-was supported by the Marshall Ewell Research Fund of the Illinois Institute of Technology, Chicago-Kent College of Law and by the Humane Studies Foundation. This paper was presented at the "Conference on Economic Rights" sponsored by the Social Philosophy, and Policy Center and it a faculty, workshop at Loyola University School of Law, New Orleans.  I am grateful for the helpful comments provided by, the participants at both events and by Ellen Paul.

1 Although the pressurized cabin and the design of airplane exits would make this impossible, assume that he can open the window exit.

2 These concepts will be defined below.

3  See Randy E. Barnett, "The internal and External Analysis of Concepts," Cardozo Law Review, vol. 11 (1990), pp. 525-35.

4 The rights of several property and freedom of contract are widely viewed as "economic rights." Yet they can be as personal as any "personal right" one can imagine. Property understood, the right of several property includes the right to control one's body, including one's sexual behavior.  The right of freedom of contract includes the right to purchase books, birth control devices, or intoxicating substances from willing sellers. This is not, however, an analysis of the distinction between personal and economic rights. Instead, it is an analysis of the function played by the rights of several property and freedom of contract.  Since, whatever else these rights embrace, they embrace economic activities then, a fortiori, this is an analysis of economic rights.

5   Friedrich A. Hayek, Individualism and Economic order (Chicago: University of Chicago Press, 1948), pp. 77-78 (emphasis added).  For additional discussion of the knowledge problem, see Don Lavoie, National Economic Planning: What is Left? (Cambridge: Ballinger, 1985); Rival and Central Planning (New York: Cambridge University Press, 1985); Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980).

6 Although I have borrowed the term "personal knowledge" from Michael Polanyi, his use of the term differs markedly from mine, as do the types of problems his analysis is intended to address.  See Michael Polanyi, Personal Knowledge (Chicago: University of Chicago Press, 1962).

7 Personal knowledge includes a tacit dimension that, as Michael Polanyi has explained, contains "an actual knowledge that is indeterminate, in the sense that its contents cannot be explicitly stated." Michael Polanyi, Knowing and Being (Chicago: University of Chicago Press, 1969), p. 141.

8  This helpful phrase is Hayek's.  See, e.g., Friedrich Hayek, Law, Legislation, and Liberty, vol. 1 (Chicago: University of Chicago Press, 1974), p. 96.

9 Lon L. Fuller, "Positivism and Fidelity to Law: A Reply to Professor Hart, " Harvard Law Review, vol. 71 (1958), p. 644.

10   "'The following discussion of centralized ordering is heavily influenced by Hayek.  See, e.g., Hayek, Individualism and Economic  Order, pp. 119-208; New Studies in Philosophy, Economics and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 232 46.  Hayek's analysis and that of others arguing in the same vein is explained and applied in Lavoie, National Economic Planning: What is Left? and Rivalry and Central Planning.

11 The phrase "making the call" in American sports derives from baseball umpires who are said to "call" whether a pitch is a ball or a strike.  So we could distinguish the question of who it is that is to make the call - the umpire - from the question of the correct call to make-a ball or a strike.

12  The fact that persons must take the knowledge of others into account addresses, not the problem of knowledge, but a pervasive problem of interest discussed in Section III: the partiality problem.  The set of resource prices that results from this requirement, however, does address the second aspect of the first-order problem of knowledge by enabling persons to take the knowledge of others into account when they decide whether and how to act.  In this respect, the ability of the requirement of consent to address the knowledge problem depends to some extent on its ability also to address the problem of interest.

13   For a discussion of the subjective costs of choice, see James Buchanan, Cost and Choice (Chicago: Markham, 1969).

14  Once again, by forcing - as opposed to enabling - persons to take into account the knowledge of others, the requirement of consent also addresses the partiality problem discussed in Section III.

15 See, e.g., Hayek, Law, Legislation and Liberty, vol. 1, p. 124.

16  I discuss the implications of this principle for contract law in Randy E. Barnett, "Contract Scholarship and the Reemergence of Legal Philosophy," Harvard Law, Review, vol. 97 (1984), pp. 1223-45; "A Consent Theory of Contract," Columbia Law Review, vol. 86 (1986), pp. 269-321; "Contract Remedies and Inalienable Rights, " Social Philosophy and Policy, vol. 4 (1986), pp. 179-202; "Squaring Undisclosed Agency With Contract Theory," California Law Review, vol. 75 (1988), pp. 1969-2003; and Randy E. Barnett and Mary C. Becker, "Beyond Reliance: Promissory Estoppel, Contract Formalities, and Misrepresentations," Hofstra Law Review, vol. 15 (1987), pp. 443-97.  A condensed and revised account of this approach appears in Randy E. Barnett, "Rights and Remedies in a Consent Theory of Contract," eds. R. G. Frey and Christopher Morris, Liability and Responsibility: Essays in Law and Morals (Cambridge: Cambridge University Press, 1991), pp. 135-72.

17 See, e.g., Loren E. Lomasky, Persons, Rights, and the Moral Community  (New York: Oxford University Press, 1987), p. 84.

18 See, e.g., Joel Feinberg, "The Nature and Value of Rights," in Rights, Justice, and the Bounds of Liberty (Princeton: Princeton University Press, 1980), pp. 151-52: "Some identify right and claim without qualification; some define 'right' as justified or justifiable claim, others as recognized claim; still others as valid claim.  My own preference is for the latter definition."

19  I am not speaking now of the source of one's knowledge, which may or may not be "socially determined" according to the curret vernacular.  I am speaking of the knowledge in one's possession, however acquired, to which cithers have limited access.

20 This objection to the moral relevance of one's own  knowledge is suggested by John Rawls's analysis of natural endowments.  Compare John Rawls, A Theory of Justice  Cambridge: Harvard University Press, 1971). p. 102: "No one, deserves his greater natural capacity, nor merits a more favorable starting place in society."

21 lbid, p. 102.

22 One must be careful to distinguish the, principle of first possession that has long  dominated the law of property from theories that seek to explain or justify the principle, such as the "labor-mixing theory" of John Locke.  Offered here is a functional theory of the principle of first possession that stresses its role in handling the problems of knowledge and interest.  For a concise account of how this principle is applied in the of property, see Richard A. Epstein, "Possession as the Root of Title," Georgia Law Review, vol. 13 (1979)  pp. 1221-43.

23 A third important problem of interest- the compliance problem- involves gaps that may arise between the requirements of justice and the rule of law and a person's perception of interest.  In most cases, these gaps are narrowed by powerful socializing influences in others, they are narrowed by the use of force or power.  The use of force or power results in two serious problems of power: the problem of enforcement abuse and the problem of enforcement error.  Space prevents me from explaining how the liberal conception of justice and the rule of law, including the concepts of several property and freedom of contract, addresses these problems-but it does.

24 Within the public choice school of economics, "interest group theory" argues that much of the behavior of government actors can be explained as exercises of interest rather than as exercises of impartial judgment of the public good.  For a sympathetic portrayal of this approach, see, e.g., lain McLean, Public Choice (Oxford: Basil Blackwell, 1987); Jerry L. Mashaw, "The Economics of Politics and the Understanding of Public Law," Chicago Kent Law Review, vol. 65 (1989), pp. 123-60.  For a critical appraisal, see Daniel A. Farber, "Democracy and Disgust: Reflections on Public Choice," Chicago Kent Law Review, vol. 65 (1989), pp. 161-76.

25 The Federalist No. 10 (James Madison) (New York: Modern Library, 1937), p. 54 (emphasis added).

26  See Robert Sugden, The Economics of Rights, Cooperation, and Welfare (Oxford: Basil Blackwell, 1986).

27  The theorist most responsible for stressing the nature and importance of profits and entrepreneurship is Israel Kirzner.  See, e.g., Israel M. Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973).

28  See Randy E. Barnett, "Restitution: A New Paradigm of Criminal Justice," Ethics, vol. 87 (1977), pp. 279-301; "The Justice of Restitution," American Journal of Jurisprudence, vol. 25 (1980), pp. 117-32.  A functional analysis of the sort I apply here to the rights of several property and freedom of contract would add considerably to what I have previously said in defense of pure restitution and against both pure punishment and punitive restitution.  However, because restitution is not considered an "economic Eight," I do not offer this analysis here.

29   See Randy E. Barnett, "The Virtues of Redundancy in Legal Thought," Cleveland-State Law Review, vol. 38 (1990), pp. 153-68; "Foreword: Of Chickens and Eggs -The Compatibility of Moral Rights and Consequentialist Analyses," Harvard Journal of Law and Public Policy, vol. 12 (1989), pp. 611-36.