Intuitive Medieval Libertarians

In his latest Forbes column, the ever insightful Richard Epstein uses the medieval town of Bergen, Norway, as a case study in law and economics. It’s a great example of how efficiency can guide rule creation. Because Bergen was built on a sliver of land between mountains and the sea, and because stone was not available for construction, the closely packed, wood buildings created a tinderbox of a town. Epstein writes:

Risks this large required firm collective action. From earliest times, Bergen was subject to strong laws that regulated every aspect of its operation. The most obvious laws were those which specified what kinds of wood and other materials should be used in construction of roofs and walls. Those rules were not enough. Other regulations dug far more deeply. Most strikingly, the risk of fire forced a mandated partial conversion from private to common ownership. Kitchens were much too dangerous to have in large numbers, so all the cooking was concentrated in a single communal location, tightly watched and inspected. Other heating was concentrated in large assembly rooms. Lamps were forbidden in dark corridors during long and cold winters. Certain businesses, like gold smelting were only allowed on dirt floors in order to further minimize the risks of combustion.

And it all made sense. One prediction of modern economic theory is that ex ante regulations against compensable losses will be less pervasive in circumstances where ex post compensation is possible through the tort system. But the tort law–even the criminal law–could not provide deterrence equal to the risk at hand. Who knew who started a fire, or who contributed to its acceleration? Even if the wrongdoer could be identified, he could not pay for the losses imposed, assuming he survived the catastrophe.

Similarly, a fire insurance market was not viable because the high correlation of risk negated any possibility of loss spreading. The only legal rule that had real traction was the rule of public necessity that required the compensation of anyone whose home was consciously burned to protect the other properties from destruction. And that rule was only applied when the other homes were saved, where the limited burden was divided among others. But for the most part, it was either land-use regulation or nothing.

Fortunately, none of the imagined designs for Seasteads rely on wood. But it’s interesting to see how circumstances can push rules to their most efficient application. (Especially when transaction costs are low.) This is why it’s more important to create a system for rule innovation, where rules organically evolve to respond to local needs, rather than a system with one single rule set. Anyhow, Epstein goes on to lament the current malaise in land-use regulation:

Zoning is no longer plausibly connected to harm prevention, but has a more insidious purpose: to shift the competitive balance by keeping out some businesses and residences in order to create economic rents for others, all under the lazy eye of courts who don’t see how the risks to private property endanger the economic system as a whole.