 The moment that systems become very large and complicated, what you have to do is to have simple rules that allow very complicated transactions to go through with a great deal of rapidity. Hi, my name is Richard Epstein. My main position is as the Lawrence A. Tisch Professor of Law at New York University Law School. I'm also the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution and the James Parker Hall Distinguished Service Professor Emeritus and Senior Lecture at the University of Chicago. So I work actively in three different cities pretty much every year. I'm here to talk about something which I wrote when I was a faculty member at the University of Chicago and which was prepared with the help of Roger P. Lone as my editor at the Cato Institute. And it's a book, I guess, whose most dramatic feature is its title, Simple Rules for a Complex World. And the reason the book has that particular title is that it's designed to essentially address a paradox about how we think about the law in modern times. The most common argument that one hears as you try to find the case for an ever larger regulatory state is that the more complex society, the more complex the regulation it turns out that you need. And in my view, the correct situation is exactly the opposite. The moment that systems become very large and complicated, what you have to do is to have simple rules that allow very complicated transactions to go through with a great deal of rapidity. So if you're talking about, for example, how you organize a wedding, you can have all sorts of negotiations about bride and groom, guest list, and so forth. But if you're trying to figure out how you put together an ATM system or a debit card system and so forth, and you try to have that level of individual negotiations, it turns out that everything will fall on its face. So in those particular cases, what you have to do is to build up a complicated system such that the user interfaces are apparent and all the steps that take place with respect to its operation proceed pretty much in an automatic fashion. So if you're trying to figure out, for example, how it is that you organize a wedding, people are actually going to be concerned about who's the bride and the groom and who's going to be invited and so forth. But if you're trying to deal with a credit card system, the entire thing would actually start to collapse if, in fact, you said before you take out your money, you have to explain to some government administrator the purposes for which you use it, otherwise the permission to withdraw from the account will be denied. What this suggests in effect is that when you have these kinds of complicated systems, you have to have a minimum of discretion in terms of the way in which they operate. So the paradox is this. The larger the system turns out to be in terms of the number of people that it wishes to reach, the simpler the rules have to be in order to put it together. So what happens is, in face of this kind of fundamental insight, what you see is a huge and determined effort at every level of government to have more laws and more regulations under those laws so that it turns out that we literally have to worry about this veritable swamp in which we can all put our feet only to sink and to die. The question, therefore, is can we think of an alternative way to think of the system, which depends less upon administrative discretion, less upon rulemaking, less upon full level of political participation, and more on a stronger system of private rights. And the book Simple Rules for a Complex World was designed to develop in fairly detailed ways the alternative vision of the universe that is the legal universe that I think in fact would do far better than the one that we have. Now when people start designing as I'm attempting to do here alternative universes, there's always going to be a charge that you become deeply utopian in the way in which you're doing things, and if you try to do something which has never been attempted before, what you're sure to do is to fail. And indeed, that is a very strong argument against most forms of regulation, but it's not an argument that could be raised against the positions that I'm taking here. What I do in this particular case is not to try to create new sets of arrangements that have never been tried before, but rather to look at long-established common law patterns and long-established regulatory patterns dealing with the power of the state to take, well, a taxation or through eminent domain and to put them into a single coherent whole. And the origins of this system go back a very long way. Some portions of it date to Roman law. Some portions of it date back to the English common law as it evolved. And some of it relates to sort of the organization of early constitutional practices which are recorded at the time of the founding after some influence from people like Montesquieu on the one hand and Blackstone on the other. So the argument here is I'm not going to start from scratch as I articulate the system. What I'm going to do is to take a bunch of rules that often get obscured in the cases and try to outline their basic problem. In order to do that, you have to be able to understand where it is that you begin. And classical writers on this subject used to talk about trying to figure out a set of rules in the state of nature, and more modern writers start to talk about this as being what are the rights and duties that people ought to have towards one another in the original position. I actually like the state of nature language because what it does is it asks you to figure out how it is that you put the rules together and to organize them before you have a state so that the creation of statehood becomes a function of how these rules interact rather than assuming at the outset that you have a well-established state in place and then allow that to dictate whatever rules it wants to the people at hand. And if you start from this particular situation, there are always two things that you have to worry about right at the get-go. One is how do you decide to place rights in people, and secondly, how you place rights in external things that exist on the earth. And for this, the classical solution is one that I think we widely accept today, at least presumptively, which is the rules having to do with individual autonomy on the one hand and the rules with respect to first possession on the other. Let me explain briefly what's it about. When you're trying to create a system of rights for a large number of people who are strangers one to another, what has to happen is you have to have signals such that each person know where his or her responsibilities begin and where his or her rights end so that you can have a way of people to interact with strangers, even if they don't know the peculiarities one to another. And the rule of individual autonomy or self-ownership essentially takes the proposition every person owns his own body. And to that, there turns out to be the very necessary exceptions of what happens to people before they reach full age and maturity. And they are, of course, not owned by their parents. The parents are essentially guardians with respect to their children required to take into account the interests of both before they decide the actions that they're going to take as part and parcel of a family unit. And that works pretty well for the most part, because they're natural inclinations based upon biology, which essentially say that parents are always invested in their children by virtue of their common genetic origin and so on. But with strangers, you don't have that stuff. And what the self-ownership rule does is it replaces the only other two alternatives that anybody can think of. One of them is an alternative which creates an arbitrary despot who tells everybody what he can and cannot do. And this person becomes a slave owner of sorts, and everybody else becomes a slave. Clearly, that's not stable. There'll be lots of overthrows and rebellions. Or you can say, no, we don't believe in hierarchy, but we believe in sharing. And so each person has a claim on the talents and resources of everybody else. But if you then try to figure out if everybody is as it were cross-collateralized with everybody else, how does anyone decide what to do with his or her own life? And this would apply to personal relationships like marriage, and it would also apply to various kinds of business relationships. So the only efficient system is one that I like to describe as one of natural necessity, that you end up with each person having the capabilities of controlling their own body. And then the next question is, how does this relate to external resources? Because you have to find a place to stand and food, tea, and all the rest of that nice stuff, which allows you to survive as a biological entity in need of 2,500 calories per day. And the rule that has always been used there from ancient times is the rule of first possession or occupation, the way in which you acquire title to land as you sit on it and mark its boundaries with various kinds of devices, the way you take ownership of a chattel like a seashell, for example, is to pick it up and put it in your pocket, and the way in which you take ownership of animals is you put a lasso around them so that, in effect, everybody now knows that they're yours. And the whole point of this particular egotistical enterprise is it means that each person now is the owner of determinate things, and once you have determinate ownership, it then becomes possible to figure out, hey, how these things are going to be protected because you know who's going to protect them. It gives notice to the rest of the world that they are allowed to keep off, and it gives the owner of the thing the right to use and to develop it so that, in effect, things that have value can now have their labor mixed with them, such that the combination of natural resources on the one hand and human labor on the other can create things of ever greater value. The situation, however, that I've talked about is incomplete because it doesn't explain how it is that you develop human cooperation. And the third of the simple rules is one that starts talking about the fact that you can combine either capital or labor or material objects with those of any other person through the arrangements of contract. You could have an outright sale. You could have a lease. You could have a partnership. You could form some kind of an association. And by virtue of making these changes, all self-interested individuals necessarily have to benefit somebody else in order to get themselves to go along, but they also benefit themselves for otherwise they would not do it. So essentially a system of voluntary transactions like that yields what economists like to call positive some games, a voluntary transaction makes everybody better off to it and nobody worse off. And then you might ask, what about strangers to the transaction? Well, there's an important notion implicit in this argument called that of the positive externality. If I can enter into a transaction with B, C, and D that all of us are better off and we don't trench upon the rights of any other person, now that we're better off, other people have more opportunities for trade themselves so that essentially the greater wealth of one individual creates greater opportunities for other and everybody else is in exactly the same position when they enter into these voluntary transactions. So that essentially if you could keep this system in place, what will happen is you'll have a steady spiral of improving wealth. Now in order to keep it in place, you need a fourth set of rules which we commonly call tort rules and those are rules which either enjoin you or punish you by way of damages. If essentially you try to violate any one of the first three rules having to do with individual self-ownership which you could violate by murder or molestation, having to deal with first possession which you could violate by theft or having to do with contracts which you can violate by making it physically impossible for people to transact with one another or by lying to one person about the status of another such that the defamation that you engage in will drive people off. So you have all of these kinds of arrangements and if in fact you could keep this system going in and of itself it would give you a very nice focal point for the way in which life size, human interactions ought to take place. But as I mentioned before, all of this is done without the creation or intervention of a state. And the one thing that we've become clear about it is that there will always be some people who have an incentive to deviate from these common solutions for short term advantages. And if you don't have a state above you then in effect each person has to be his own judge as to whether to enforce a particular right or not to enforce it. And as John Locke said about this arrangement it's very difficult to ask people to become impartial judges with respect to their own institutions and their own interests. So what you then have to do is to create a state and the issue is how do you create it? And the first thing you have to ask is how you fund it. And it turns out voluntary contributions generally will not work. And so therefore you must develop systems of taxation. And as I argue in the book, generally speaking the system of taxation that puts least strain on the public imagination is a flat tax which all people contribute to in proportion to the amount of wealth that they have in the society in question. So essentially the more you get out of the system the more you have to put into the system. If you get greater prosperity you now have a larger contribution to make. And conversely if it turns out your fortunes become somewhat less for favorable you now have a smaller contribution to make. The system has a minimum of discretion and it should give you essentially the kind of information and resources available so that you could then start to enforce the kinds of rights that you're talking about here. Now it also turns out that you cannot exist only with private rights. You have to figure out how it is you create various kinds of public infrastructure. And for that sometimes you have to exercise the power of eminent domain so that you could acquire that kind of resource which stands at the bottleneck of a situation such that if you had to pay a fortune which would dissipate the collective project. And the solution that one reaches in that case is you force the state to pay just compensation to the resource holder so he's not singled out for adverse treatment. And then what you do is you take public revenues in order to fund the rest of the project. And since you don't have the holdout problem you can create through public intervention a viable system of infrastructure, highways, defense and courts and so forth by putting together the taxation power with in fact the eminent domain power. Well then you must ask what is it that you'd like to spend these particular resources on? And in simple rules for a complex world the major argument that I'd make is for the most part you would like the government to act under circumstances where it creates what are technically known as public goods. Those goods which if you provide them to one person you must necessarily provide them to another. And the theory about these goods which are commonly provided is that people voluntarily will not do so on their own and if you restrict the state government to those cases you have a pretty good chance of making sure that there'll be relatively little disagreement as to what we need so that you could reduce the level of political strife associated with determining these goods. Nobody should be perfectly idealistic about that where you place a road or where you place a public park in fact can be quite a complex determination for it with difficulty. But if you must pay those people whose property is taken in order to build it you will tend to build in those places where the private resources that have to be converted to public use are the lowest value so that you can maximize the overall gain from the operation of the system. One must understand however that there is no way once you need public intervention that you could build a system that operates without some degree of public discretion. Taxation doesn't tell you how much you can tax. Eminent domain doesn't tell you what parts of land that you have to deal with. What it does in effect is it sets an institutional framework so that when responsible political actors have to decide what to do there's likely to be less error than if you had greater discretion in the operation of the system. Now one last point which is the sort of seventh rule having to do not with eminent domain or with essentially the operation of taxation is the question which is extremely important today which has to do with the issue of how it is you understand and treat the question of income inequality. If one goes back to the kinds of rules that I've talked about what becomes very clear is that people have different natural endowments on the one hand or if in fact they are different degrees of luck in the voluntary bargains they enter into or the land for example that they're able to claim by first possession generally speaking things will start to get better across the board but they may get better on even rates so that some persons have far greater wealth than others. And the issue then is does one want to deal with the question of redistribution that is taking from those who are more fortunate and giving it to those who are less. And there are multiple answers to this which sort of indicates why it is that this is both a necessary operation on the one hand and an extremely dangerous one on the other. And the first of the solutions which I still think is the best is the voluntary solutions. You develop a set of social institutions through religious and charitable institutions which sort of say to those people who are very well off the last dollar to you means a lot less than it means to somebody else. You may pick to whom you wish to give it and the kinds of works that you wish to furnish but let it be understood that in a decent society we don't only look at libertarian rules we don't only look at eminent domain we don't only look at taxation we try to create institutions that facilitate benevolence. And in a modern society where there are high degrees of taxes one of the ways you can do this is through a charitable deduction such that in effect is like a matching grant from the government if you can find as an organization somebody who's willing to give you X thousands of dollars the government will kick in 40% of that by virtue of a tax break that is given to the owner. And you want to do that rather than direct government funding because once it's 100% within the political process you have no private monitoring on the way in which the giving is going to take place. It turns out however that some people would start to say that this may not be enough that the enormities that exist at the bottom of the income distribution is so great that some mandated state intervention is needed. And on that this is the way in which I would put it it's a maxim that I've developed not so much in the book but afterwards but it captures the general sentiment and it's called redistribution last. And what it means is if in fact you look at a current society what's in all what you will discover is that throughout its operation there are systematic and massive violations of all the six simple rules that I've talked about before. Taxes are highly progressive eminent domain is not always paid when government imposes extensive regulation on land use freedom of contract is systematically frustrated the ability to acquire property through natural labor and first possession is compromised for no good reason the tort law becomes wildly intrusive and essentially stops legitimate as well as illegitimate operations. Well all of these things turn out to go to the bottom line and to hurt the way in which the society is altered. So what you have to do under these circumstances is to make the decision that first you try to unravel the mistakes that have been made to further increase the size of the pie. What one has to understand is every time you engage in liberalization people who are thought to be beyond hope and redemption those at the bottom of the distribution will start to do better for themselves. If in fact you have a coherent way in funding public goods what it turns out is that the poor benefit disproportionately relative to the rich from public funding. So there's no way to build a sewer system unless you take care of the entire water supply in the city. Most of that's going to be funded by taxes which will be levied upon the rich and it turns out that the poor will benefit from the clean water maybe not quite as much as everybody else but very close to it. So if you can create a sound system of public goods and a sound system of voluntary markets you can reduce the redistribution problem to a mere shadow of what it's for the self is so that you're not so concerned as to whether or not you're gonna do this through compulsion on the one hand through volunteerism on the other because instead of having a problem that consumes a huge fraction 10, 20% of your society you have one which is down to two, three or 4% of your society which is much more manageable no matter what the techniques. This is not an idle pipe dream after the book was written there was systematic welfare reform in the latter years of the Clinton administration and the dramatic effect in terms of the number of people who were taken off the rolls was quite striking even though that was a relatively modest system to the kinds of structural reforms that I'm talking about here. So the point is as follows the paradox is this if in fact you have small intimate systems you can have huge complicated set of rules to govern very tiny populations because everybody's more or less in a position to monitor everybody else people know what their preferences turn out to be so they can figure out how to allocate goods there's often a common interest by blood and marriage and those systematic arrangements tend to work which is why it is as our good friend Tolstoy said every marriage is different from every other marriage precisely because these personality traits shape the operation but when you're talking about large anonymous population the rule of thumb is standardized rules with very simple characteristics unnecessary to secure the velocity of transactions that make things go so just let me end up with a homie example which shows you how this works suppose it turns out that you took as for example people like John Dewey took the position that you don't have a real bargain unless there's some give and take with respect to negotiations so that what happens is you think of the market as being two farmers bargaining over a farm fenced between them as to the price of a cap and then what you do is say okay we're now at Walmart and it turns out there are 14 people online ahead of you each of having 10 things in their basket and the way in which it goes is take the first thing I say I see you listed $1.39 for this bottle of mayonnaise will you take $1.25 thank you and you start looking at this and you're going to have to imagine the world in which every one of these customers in front of you are going to engage in these negotiations and you typically realize it can't work so that what is often thought to be villainy i.e. take it or leave it transaction is in fact the perfect transaction because the institution knows that if it sets the prices too hard everybody will leave it and by making them sensible you could roll with a cost by reducing the transactions cost and get those people through in record time and so this is the common mistake of many regulators on this one point they think that high transactions cost and few transactions actually are a sensible world in the tradition of the progressives like John Dewey whereas folks like myself think that large numbers of transactions with a minimum of transactions cost is a much better solution and it's simple rules for a complex world that get you into that favorable equilibrium thank you