Richard Epstein’s Takings Theory of the State

by Stephan Kinsella on July 6, 2025

My prompt, to Grok and ChatCPT. Answers below.

Provide a summary (up to 2 pages) of Epstein’s argument for the state provided in his book, namely, his argument that state takings of property–in eminent domain and also in the form of taxes–is justified because of the existence of public good and market failure caused by the phenomenon of holdouts and freeriders, and thus certain takings such as eminent domain and taxes, are justified because they address these market failures and thus “grow the size of the pie” thus leading to a surplus from which particular victims of eminent domain can be compensated, and other takings victims such as taxpayers are compensated by in-kind restitution since the regulations or taxes address market failures and thus make society better off in general, in other words taxpayers and those burdened by regulation are compensated by the in-kind restitution of more overall wealth that results from the “taking.” And thus, that only state laws — mostly those of the minimal state or night-watchman state–are justified and most laws and regulations and taxes engaged in by the US federal government are illegitimate, because they do not actually fix a real market failure and grow the pie so that the takings can be compensated, at least by in-kind compensation, but instead destroy wealth and make us all worse off, and at the same time redistributes wealth from the shrinking economy from A to B.

Also consider Richard Epstein’s Takings Political Theory versus Epstein’s Intellectual Property Views and explain Kinsella’s critique of Epstein’s argument from an anarchist libertarian point of view and also Kinsella’s critique of Epstein’s pro-IP views and arguments which do not even pass the test of his own takings-based theory of the minimal state.

Grok:

Summary of Richard Epstein’s Argument in Takings: Private Property and the Power of Eminent Domain and Kinsella’s Critique

Summary of Epstein’s Argument

Richard Epstein’s book Takings: Private Property and the Power of Eminent Domain articulates a theory of the state’s role in relation to private property, grounded in the U.S. Constitution’s Takings Clause: “nor shall private property be taken for public use, without just compensation.” Epstein argues that state interventions, such as eminent domain and taxation, are justified only when they address specific market failures—namely, those caused by holdouts and free-riders—that impede efficient resource allocation and societal wealth creation. These interventions, when properly executed, “grow the size of the pie,” producing a surplus that enables compensation for those whose property is taken, either directly or indirectly, thereby legitimizing the state’s actions within a minimal framework.

The Role of the State and Market Failures

Epstein begins with a natural rights perspective, asserting that individuals possess inherent rights to their labor and property in a state of nature. However, these rights are vulnerable without a centralized authority to enforce them. The state’s formation is thus justified to secure these rights and enhance their value through cooperation, increasing overall societal wealth. Yet, Epstein insists that the state’s power must be strictly limited to prevent it from undermining the very rights it exists to protect.

Holdouts: In scenarios requiring collective agreement (e.g., land assembly for a highway), a single property owner’s refusal to sell can halt the project, extracting disproportionate value and blocking wealth creation. Eminent domain overcomes this by compelling the sale, enabling the project to proceed.
Free-riders: Public goods like national defense benefit all, but individuals may avoid contributing if they can enjoy the benefits without cost. Taxation addresses this by mandating contributions, ensuring the good’s provision.

Epstein posits that these market failures justify state takings, as they facilitate transactions or provisions that markets alone cannot efficiently achieve, thereby generating a surplus of wealth.

Eminent Domain and Compensation

For eminent domain, Epstein argues that the state may take property for public use, but the Takings Clause mandates “just compensation.” This ensures the property owner is not worse off, either through direct payment (e.g., market value) or indirect benefits (e.g., economic gains from a highway). The surplus created by the public use—such as increased economic activity—provides the resources for this compensation, aligning the taking with the goal of enhancing societal wealth.

Taxation and In-Kind Restitution

Epstein extends this logic to taxation, viewing it as a taking of property (income or wealth). Taxes are legitimate when they fund public goods that address market failures, like defense or infrastructure, which increase societal wealth. Taxpayers receive in-kind compensation through the benefits of these goods—e.g., protection from threats or improved economic conditions—making them better off overall despite the initial loss. This surplus, or “growth of the pie,” justifies the taking by ensuring no net harm to individuals.

The Minimal State and Illegitimate Takings

Epstein advocates for a minimal state (or “night-watchman state”), limited to protecting rights, enforcing contracts, and providing essential public goods that markets cannot supply. He argues that most modern U.S. federal interventions—such as extensive regulation, redistribution, and welfare programs—exceed this scope. These actions, he contends, do not address genuine market failures and instead destroy wealth by shrinking the economic pie. Without a surplus to compensate those affected, such takings lack justification and merely redistribute wealth from one group (A) to another (B), violating the Takings Clause’s principles. For example, progressive taxation or zoning laws often fail to “grow the pie” and thus cannot offset losses with benefits, rendering them illegitimate in Epstein’s framework.

Kinsella’s Critique from an Anarchist Libertarian Perspective

Stephan Kinsella, an anarchist libertarian, critiques Epstein’s argument in his article at c4sif.org (November 2011), challenging both its reliance on the state and its application to intellectual property (IP).

Critique of Epstein’s Justification of the State

From an anarchist perspective, Kinsella rejects Epstein’s premise that the state is necessary to resolve market failures like holdouts and free-riders:

State as a Greater Threat: Kinsella argues that the state itself is the primary violator of rights and source of inefficiency, worse than the market failures it aims to correct. Voluntary institutions—e.g., private arbitration or cooperative agreements—could address these issues without coercion.
Subjectivity of Compensation: Epstein’s notion of “just compensation,” especially in-kind, is subjective and hard to quantify. Individuals may not value state-provided benefits (e.g., a highway) as equal to their lost property, undermining the claim of no net harm.
Risk of State Overreach: While Epstein seeks to limit the state, Kinsella warns that his framework could justify broader interventions if deemed to address market failures, potentially expanding state power beyond the minimal state Epstein envisions.

Kinsella thus advocates for market-based solutions over any state, minimal or otherwise, asserting that Epstein’s theory still endorses coercion where none is needed.

Critique of Epstein’s Pro-IP Views

Kinsella also targets Epstein’s support for IP rights (e.g., patents, copyrights), arguing it contradicts his own takings-based theory:

IP as an Uncompensated Taking: IP restricts others’ use of their own physical property (e.g., preventing someone from producing a patented item). This constitutes a taking without direct compensation, violating Epstein’s requirement that takings leave owners no worse off.
No Market Failure Justification: Unlike eminent domain or taxation, IP does not address a clear market failure. Kinsella contends that innovation occurs without IP, and its artificial monopolies reduce wealth by creating scarcity, not growing the pie as Epstein’s theory demands.
Inconsistency with Property Rights: IP clashes with traditional property rights, granting state-enforced control over ideas rather than tangible assets. This redistribution from non-IP holders to IP owners lacks the surplus Epstein requires for legitimacy, making it an unjustified taking even by his own standards.

Conclusion

Epstein’s argument justifies state takings like eminent domain and taxation when they address market failures, create a surplus, and compensate affected parties, aligning with a minimal state. However, he deems most modern U.S. policies illegitimate for failing these criteria, instead shrinking wealth and redistributing it arbitrarily. Kinsella’s anarchist critique rejects the state entirely, favoring voluntary solutions, and highlights Epstein’s IP stance as inconsistent with his takings framework, exposing a tension between Epstein’s minimalism and his broader property views.

Chat GPT:

Summary of Richard Epstein’s Argument in Takings: Private Property and the Power of Eminent Domain, and Kinsella’s Critique

I. Epstein’s Justification for State Takings: Market Failures and Public Goods

In Takings, Richard A. Epstein develops a theoretical framework to justify certain forms of government takings—especially eminent domain and taxation—on the basis of classical liberal principles. Though critical of the modern regulatory state, Epstein argues that limited state action is justified where it remedies fundamental market failures, particularly those involving public goods and transaction costs like holdout and free rider problems.

1. The Two Pies Analogy

At the heart of Epstein’s argument is the metaphor of the “two pies” (Chapter 1):

The first pie represents a state of nature where individuals hold natural rights (e.g., labor, private property), but the pie is smaller due to the chaos of unregulated interactions—violence, insecurity, and uncertainty stifle economic productivity.
The second, larger pie symbolizes a post-state world where government, through limited coercion (e.g., taxation, eminent domain), enables cooperation, investment, and social peace, thereby expanding total wealth.

The state is justified insofar as it increases the size of the pie—that is, enables greater overall social wealth—and does not unfairly alter the relative shares (i.e., entitlements) of individuals. State action is permissible when:

It cures coordination problems (e.g., assembling land for roads or parks),
It mitigates externalities,
And it enables public goods (defense, legal order, etc.) that markets cannot provide efficiently due to high transaction costs.

2. Takings with Just and In-Kind Compensation

Epstein argues that coercive takings are justified only when they produce net social gains large enough to compensate those burdened—either:

Explicitly (e.g., market-value compensation for eminent domain), or
Implicitly/in-kind (e.g., taxpayers receive increased social services, infrastructure, or security in exchange for taxation).

If these conditions are met, even forced exchanges (such as taxation and regulatory takings) are legitimate, because they make everyone better off—or at least not worse off—compared to the state of nature.

3. Public Use and Proportionality

The “public use” requirement in the Fifth Amendment, for Epstein, is tied to proportionality and distribution of benefit: if a taking benefits the general public rather than a narrow group, and victims are compensated in proportion to their losses, it meets constitutional and moral muster.

Epstein insists that only certain “night-watchman state” functions (e.g., courts, police, defense, infrastructure) pass this test. Redistributive programs, rent controls, price regulations, and modern welfare state interventions fail because they:

Do not solve market failures,
Shrink the pie by distorting markets,
And redistribute wealth without compensating victims, violating property rights.

II. Kinsella’s Critique from an Anarcho-Libertarian Perspective

In “Richard Epstein’s Takings: Political Theory versus Epstein’s Intellectual Property Views” (C4SIF.org, 2011), Stephan Kinsella criticizes Epstein on two main fronts:

A. Epstein’s Statist Assumptions

Kinsella acknowledges Epstein’s rigor in applying a quasi-libertarian framework to takings law but faults him for stopping short of a fully libertarian (or anarchist) conclusion. Specifically:

Epstein assumes the state’s legitimacy (e.g., minimal state functions), but for Kinsella, no state can legitimately engage in taxation or forced takings—even for “public goods.”
The very notion of in-kind compensation or growing the pie, to Kinsella, masks the injustice of coercion: taxation is theft, regardless of net benefit, and even compensating a victim doesn’t make aggression non-aggressive.
Epstein’s logic leads to an incoherent compromise between natural rights and utilitarianism: if the state can take property when it “improves outcomes,” then property rights are not truly inalienable.

B. Inconsistency with Intellectual Property (IP)

Kinsella also criticizes Epstein’s pro-IP stance as inconsistent with the takings framework:

Epstein supports intellectual property rights (e.g., patents, copyrights) on utilitarian grounds, claiming they incentivize innovation and grow the pie.
But Kinsella argues that IP law fails Epstein’s own test: it does not solve a market failure and instead imposes enormous costs—restraining real property, contract, and innovation.
IP grants artificial monopolies that shrink the pie, are not compensable takings, and violate the Lockean baseline of scarce resource allocation.

Hence, Epstein’s pro-IP stance contradicts his takings philosophy, which demands that coercion be justified only when it fixes a clear failure and allows full compensation.

Conclusion: Minimal State or Internal Contradiction?

Epstein’s Takings is a principled effort to ground government coercion within a natural rights/minimalist framework. His defense of eminent domain and taxation relies on the notion that the state is necessary to correct certain collective action problems and that so long as it compensates for takings—either explicitly or in-kind—its coercion is morally permissible.

Kinsella’s anarchist-libertarian critique, however, challenges this by questioning the moral legitimacy of the state itself, and by showing that even Epstein’s own standards are violated in his defense of intellectual property and certain public interventions. For Kinsella, property rights are absolute, and no state function that requires coercion—however efficient—is morally justified.

Thus, while Epstein tries to thread the needle between classical liberalism and modern public policy, Kinsella argues that his framework collapses under its own logic—revealing the need to abandon not just the welfare state, but the state altogether.

***

The point is that the expropriate landowner has been compensated already, at least partly, but the taxpayer has not so that’s the bulk of the claim against the land. In special cases you could say the compensation is way out of wack and it’s just mostly pure theft. But that’s not the main problem with eminent domain: it’s the UNCOMPENSATED TAKING of the TAXPAYER. AT LEAST the landowner is paid something. The taxpayer experiences pure robbery. That’s why Epstein, who is a minarchist, bends over backwards in his Takings theory, to say that the state — which engages in takings— is justified if and when and to the extent its takings solve market failures (holdouts and free riders) and thus make us richer on average so that the “size of the pie” grows enough so that there is a surplus from which you can compensate the expropriated person—in the case of a land taking, but fair compensation; in the case of a taxpayer, by the increase in his liberty and well-being by the public provision of public services paid for with his taxes that are otherwise impossible without tax funded public provision of services (because market failure, public goods problems, free rider and holdout problems make it impossible). His argument is intricate and careful and brilliant, but wrong b/c it relies on utilitarian assumptions And as I’ve noted he doesn’t even stick to his own theory when it comes to IP since he has no proof IP law do grow the size of the pie so IP law instead of being a taking that is compensated by in-kind “restitution” (more innovation that benefits us all), it’s purely destructive an only shrinks the size of the pie and to add insult to injury, redistributes property from A (property owners, competitors) to B (patent holders). See https://c4sif.org/2011/11/richard-epsteins-takings-political-theory-versus-epsteins-intellectual-property-views/; Richard Epstein’s Takings Theory of the State.

Ultimately compensation paid is inadequate because value is subjective.

Not only that, in addition to compensated takings where the compensation is inadequate in special cases, taxpayers are never compensated unless you buy Epstein’s minarchist argument. Which I had Grok and ChatGPT summarize: See Richard Epstein’s Takings Theory of the State.

But how is someone who is in prison because he sold drugs compensated? Or someone conscripted? That’s why a volunteer army where you pay for soldiers by taxing the general public, is better, on the assumption that the taxpayers receive in-kind restitution for the theft of their money, by getting an army out of it.

Keep in mind that many regulatory takings where you are prevented from using your land are not considered takings at all so there is no explicit compensation paid, though the argument is that there is in-kind restitution “paid”

Also keep in mind that there are two related reasons why compensation of expropriated landowners (expropriation by the way is just another term for condemnation, taking, or eminent domain) and other victims of state “takings” are not fully compensated. The first is that value is subjective. The second is that for most takings, it does not grow the size of the pie so there is no surplus out of which to compensate the victims with in-kind restitution. This is Epstein’s razor—why he argues night-watchman state style takings, taxes, regulations are justified but not anything beyond that. I think he’s wrong that the pie ever grows because I’m not a utilitarian and don’t believe in public goods or market failure just as I don’t believe there is property right in value but only in physical integrity (meaning there is only physical aggression against physical things, meaning there are no property rights in value). Meaning that contra David Friedman “Von Neumann” did not in fact prove that cardinal interpersonal utility comparisons are possible; it’s all nonsense. Friedman in invoking von neuman here (https://c4sif.org/2022/05/against-intellectual-property-after-twenty-years-looking-back-and-looking-forward/#_ftnref35) reminds me of the idiot socialists in the socialist calculation debate with Mises who argued you could use computers to calculate the equations necessary to efficiently plan the economy!

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Richard Epstein’s Takings Political Theory versus Epstein’s Intellectual Property Views:

Professor Epstein’s entire case relies on the fallacious notion of public goods, and flies in the face of Austrian insights into the nature of value and utility. (See Murray N. Rothbard, “Toward a Reconstruction of Utility and Welfare Economics“; Hans-Hermann Hoppe, “Fallacies of the Public Goods Theory & the Production of Security,” in The Economics and Ethics of Private Property: Studies in Political Economy and Philosophy.)

In any case, in Takings, Epstein argues that a given state law or policy is justified only if we have good reason to think that it does make the pie bigger, i.e. that it increases social welfare. If it does not, there is no surplus left over to compensate the expropriated victim, and society is made worse overall. In other words, there is a presumption against state laws unless it is shown that it generates social surplus. The burden of proof is on someone who supports a given law or policy to demonstrate this. In the book Epstein then analyzes a number of laws and shows that a small number of them appear to increase the size of the pie, and should be permitted (e.g. national defense), but that most modern policies of the federal government clearly do not make the pie bigger, and so have to be rejected as illegitimate. So even though his utilitarian and positivist argument is flawed from the point of view of Austrians and anarchists, at least he applies a very strict filter to scrutinize state law, and most of it fails Epstein’s razor.

What I find interesting is that in his arguments for intellectual property, namely patent and copyright, Professor Epstein appears not to abide by his own normative theory in Takings. So far as I can tell, when he argues in favor of IP, he argues that IP is justified because it creates social surplus (say, by inducing valuable net innovation or artistic creation that would not exist without such laws). (See Richard Epstein on “The Structural Unity of Real and Intellectual Property”.) But he presents (so far as I can tell) no evidence for this assumption. In fact, the vast bulk of empirical studies seem to conclude that we simply cannot determine this, or that it appears that innovation is harmed by IP (see the references in The Economist on the American Patent System). In other words, the available evidence and studies indicate that IP makes the pie smaller. Epstein, it seems to me, should use an “if” instead of a “because”: IP is justified, according to his Takings theory, if it makes the pie bigger; but since we have no good reason to think that it does, and in fact good reason to think it makes the pie bigger, IP law is in fact not justified, by Epstein’s Takings test.

(Professor Epstein also argues that IP “can” be treated by the law like a form of property, as I note in Classifying Patent and Copyright Law as “Property”: So What?, but I don’t see how this means it’s justified, or that it does grow the pie higher.)

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Richard Epstein’s Takings Theory of the State

Summary of Richard Epstein’s Argument in Takings: Private Property and the Power of Eminent Domain and Kinsella’s Critique

Summary of Epstein’s Argument