 Hi, Professor Gerald Friedman, Department of Economics, University of Massachusetts, Amherst. And we're here today to talk about the way economic growth was, in effect, subsidized through the legal system in the early American Republic. That is the years from 1820 to 1860. And later, up to the present day, we're still finding about some of these issues. Okay, we have to step back for a second and talk about externalities. Those of you who have had much economics know that externalities are when bad things happen to third parties. Technically, they can be good externalities, and then it would be a good thing happening to a third party. But it amounts to, I have an arrangement with Dan over there, where we're going to, I'm going to use Dan to make a video. The course of making this video, we've rearranged the furniture. People come in this room, they want to sit on the chairs. They can't, because we, in the course of our bargaining relationship, where I give Dan money so that he'll make the video, for me, we have imposed externalities on them. Negative things have happened to them. They can be positive things if they enjoy watching us videoing. You can have other types of externalities. You fly an airplane over the town of Amherst, as is happening right now, and it makes noise that interferes with our video. So somebody's paying for that airplane. Some company is providing the airplane, and we suffer. Your cars produce carbon dioxide. The country of Tuvalo is going to go underwater and disappear because of your carbon dioxide and the oil companies and car companies' sale of gasoline and internal combustion engines. Externalities can be suffered by non-human people. Polar bears are going to go extinct because of the melting of the polar ice caps in the north, in the Arctic, because of our cars, gasoline, the oil burned to make the electricity to power my computer and our video camera. These are all externalities, things that happen to other people because of market transactions that we have. In the time that we're talking about the early 19th century, there were externalities from the burning of coal to make iron. So people's laundry hanging out to dry would get dirty because of coal dust. There were externalities when mill owners would build dams to block streams so that they could use the water to power their mills, their looms, power looms, or perhaps flour grinding, grinding of grain to make flour. Sometimes people would be building houses. They'd dig a foundation in the process. The next door neighbor's house would start to slide. So the neighbor didn't know the person, had no business with them, but all of a sudden, the neighbor's house is being damaged because they're building a foundation for their house. You dig coal and you undermine the soil over above the coal seam, more externalities. Now, we care about the externalities because people benefit or suffer from them. Ronald Coase, a British economist, about 50 years ago argued that the issue for externalities was not necessarily the efficiency, whether the externalities should or should not be produced but rather a distributional one, who's going to pay for it. This was a great insight. Coase argued that if your neighbors have a clear legal right, let's say, to irrigation water and you want to build a dam, if your dam is really worthwhile to you, then you'll make enough money that you can pay them for the irrigation water. Similarly, if you have a legal right to build a dam, to get water for your mill and your neighbors find the irrigation water really, really valuable, they will be able to pay you to not build the dam so that they can have the irrigation water. So whatever's efficient, irrigation or dam, will happen, but depending on the legal rights, one side or the other will benefit. Now, this is not always going to work out so cleanly because there may be a whole lot of people involved in the irrigation, and one person involved in the dam building, and that one person will find it easy to bargain with all the rest, with all those neighbors. The neighbors may find it very difficult to all get together. You have a lot of people affected by that plane that flies over Amherst. It's hard for us to all get together and chip in money to pay the plane to stop flying or to bring legal case if we have a legal right to quiet. I'm not sure whether we do. But the point is, COS highlights the distributional effects of the change in property rights. Mill owners benefit if they have a right to dam the water. Farmers benefit if they have a right to irrigation. A property rights system that favors established producers, farmers, people who are using the water now, will discourage industrial growth because anybody who's thinking of coming in and building a factory will have to pay off all sorts of people before they can even start operation. On the other hand, if you have a property rights system that allows you to just do whatever you want, that favors new economic activity. In the case of the early 19th century America, if you have a property rights system that favors established rights, farmers can block the dams and can block the railroads and can block the mills and mining. If you have a property rights system that allows people to do whatever they want, regardless of the effects on others, something that requires the farmers to pay off the mill owners, then it will be easier for new manufacturing and other activities to get going. The period that we're talking about had a change in the law. There's a book by a Harvard Professor of Law, Morton Horwitz, The Transformation of American Law that describes this change. We went from a system that was characterized by the legal maxim, sic uter tuo ut alienum non latus. I'm mispronouncing the Latin, I'm sure. Use your own so as not to disturb others. That's the legal maximum. It's still a legal maximum. If you can pronounce it right, you can take it to your lawyer. But how it's interpreted, use your own so as not to disturb others. In the 18th century and under British law, this was interpreted as meaning you are not allowed to disturb somebody else by what you do. The emphasis was on not to disturb others. So if you wanna build a dam that blocks the irrigation water, you're gonna have to pay them off. Favored established property rights. Well, we were no longer part of Britain. And a new generation of American judges and lawyers came along in the early 19th century, often associated with the Jacksonian Revolution, people around Andrew Jackson who was elected president in 1828. And in 1834, he appointed a new chief judge of the Supreme Court, his friend and attorney general and sometimes treasury secretary, Roger Taney. Taney was part of this group of entrepreneurial minded politicians, Democrats with a small d, who thought everybody should be able to just do what they want. Taney and people like him transformed Sikutea, the Sikutea doctrine, instead of emphasizing not to disturb others, they emphasized use your own. And the disturbance came to be not the mill owner disturbing the irrigation water, but the farmers who were getting in the way of the mill owner. I have land, I should be able to put a dam on it. And nobody should be allowed to stop me. Taney was also associated with, for those of us in Massachusetts, a very important case because it was, as far as I know, the only time Harvard ever lost. Yes, Harvard had a bridge over the Charles River. And that Harvard claimed that they had an exclusive monopoly on bridges over the Charles. Taney in the Charles River Bridge decision ruled no. No monopoly should be allowed if it interferes with the rights of new entrepreneurs to do new things. We need to allow change. And that's what the new legal doctrine was all about, change. In practice, change often meant the right to pollute, the right to disturb the water, the right to slaughter animals, the right to slaughter Native Americans. You know, all these changes were promoted by the people around Jackson. The results were the expansion of the economy and often a whole lot of problems. But we'll talk about those more later. Thank you, have a good day.