Bonbright, James C.

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[ Valuation of Property : A Review]: A Reply

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THE UNIVERSITY OF CHICAGO LAW REVIEWerty we are to maintain. Associated with this process are the same sortof valuation problems the economists deal with when they study thefunctioning of the economic system as a connected whole and perhaps anattempt should be made, therefore, to solve these problems along the samelines economists have been using in investigating the forces that determineprices of commodities and of capital. Professor Knight's suggestions re-garding the treatment of economic data in general, above mentioned, areobviously along these lines.Aside from the fact that this treatise is abundantly full of significantideas and case material that will be exceptionally useful in developing atheory of property valuation, it also shows how the broad general eco-nomic tendencies influencing property valuation (whatever they may be)have been modified by the courts and the various experts that have ap-peared before the courts both at certain times and historically.A REPLYJAmAs C. BoNmEanr*OF ALL the reviews of our treatise on Valuation that have cometo my attention, the one by Professor Nerlove interests me theYmost. Previous reviewers have discussed the specific conclusionsand recommendations of our case studies, expressing sometimes agree-ment, sometimes dissent. So far as I am aware, however, none of themhas taken issue with our general method of approach. But Professor Ner-love strikes at the very heart of the treatise by challenging its whole"functional" method of analysis. Since his position has broad implica-tions for legal economics, and indeed for the social sciences in general,I gladly add these comments at the invitation of the editors.Let me confess, however, that Professor Nerlove has expressed hiscriticisms in a form that makes an effective answer very difficult. In thefirst place, instead of furnishing a "bill of particulars," he presents ablanket indictment of the methodology of the treatise and of the resultsobtained therefrom, citing no case discussions in support of the countsof the indictment. In the second place, he declines to commit himselfby affirmative or negative answers to the basic questions that he raises,even though most of these questions have already been raised and dis-cussed at length in the treatise and in the supplementary publishedstudies noted in our preface. He therefore throws back upon the author* Professor of Finance, Columbia University. It should be noted that Professor Nerlove'sfootnotes were added after Professor Bonbright had written his reply. (Editor).VALUATION OF PROPERTYthe burden of reestablishing, within a short reply, proof which the authorand his collaborators attempted to adduce in a book of eleven hundredpages fortified by three special monographs and twenty-odd articles inthe law reviews.For example, we accept the position, expressed by Justice Brandeisin the case to which Professor Nerlove refers, that "value is a word ofmany meanings" and that the appropriate meaning cannot be selectedwithout reference to the particular social purpose that the valuation isdesigned to serve. Does the reviewer deny this thesis? By implicationhe seems to do so; yet he avoids a denial in so many words. To be sure,he insists that "value" cannot be defined by sole reference to the purposeor objective of the law suit. But no sane man would take a contrary posi-tion-not even the author of this treatise!Writing under these limitations, which threaten to turn the discussioninto mere shadow boxing, I may now take up Professor Nerlove's pointsin the order in which he raises them.We are first reproached for a failure fully to recognize the need of"logically differentiating" between three divisions of economics distin-guished by Professor Frank H. Knight-divisions which presumablyshould have been set off by separate portions of the treatise. Had wefollowed this methodology, the reviewer believes that we would not havebeen led to expect as much as we seem to have expected from orthodoxeconomic theory; and we would then have been "adequately aware" ofthe limitations of this type of theory. I wonder what parts of the treatisereveal to the reviewer any inadequate awareness of the limitations ofstandard theory as a guide to the solution of the problems of valuationfaced by the courts. In fact, it was our very conviction of these limita-tions that led us to redefine the problems in terms of a so-called "func-tional approach."In the next paragraph, Professor Nerlove regrets that our "thoughts"on the proper definition of the word, "value," do not "seem sufficientlyprecise to afford a useful body of standards." This is indeed a seriousindictment; for it indicates either that our whole methodology is unsoundor else that our applications of the method are inept. In the absence ofspecific references to our actual treatment of the litigated cases, I canhardly answer so broad a charge. But since the reviewer implies that thebasic trouble is with our faulty, "functional" approach, let me suggestthat he put the point to the test by applying one or all of his three pro-posed alternative methods to a few of the cases discussed in the treatise-for example, to the Southwestern Bell Telephone rate case, the StandardTHE UNIVERSITY OF CHICAGO LAW REVIEWOil-Southern Pacific damage case, and the recent New Jersey RailroadTax cases. While I feel sure that with adequate study Professor Nerlovecould offer more acceptable solutions than we have been able to offer(especially so since for some situations we have been content to raiseissues without offering any positive solutions whatever), I suspect thathe would be led to take essentially the same "functional approach" thatis taken in our treatise.The reviewer devotes his next few paragraphs to an exposition of themain viewpoint of our study. With qualifications his exposition is correct;but these qualifications are serious. We by no means assert that a con-sistent body of thought dealing with property valuation cannot be de-veloped by identifying "value" with current market price. On the con-trary, we indicate that such a body of thought not only can be, but hasbeen, developed., Our point was simply that the resulting theory, byvirtue of its limited objectives, offers no solution to one of the mostcritical questions presented in a legal valuation-the question as to how"value" should be defined and measured in the light of the special objec-tive of the appraisal.Again, we do not contend that "value" should be defined as "anattribute of the particular purpose" of the valuation, since such a con-tention would make no more sense to us than it does to Professor Nerlove.In measuring the length of my bedroom for the purpose of guiding me inthe choice of a rug of suitable size, I would not construe "length" as anattribute of this purpose. But in interpreting the ambiguous phrase "lengthof my room," as well as in deciding what tools of measurement to use,I would certainly be influenced by the specific objective that led me totake this special interest in cameral dimensions.The core of Professor Nerlove's adverse attitude toward our "methodof approach" is to be found, I surmise, in the paragraph introducing hisquotation from Professor Bridgeman. By questions rather than by affirm-ative statements he implies that the concept of property value should be"solely associated with the operation involved in" the measurement ofits quantitative amount rather than "with the purpose for which a particularvaluation is being made." Already our treatise gives much attention to"operational" value definitions.2 To be sure, the courts, by expressingdistrust of appraisal formulas and by their liberal rulings on the admis-sibility of conflicting types of offered "evidence," have not often beenfriendly to operational definitions; and I think the recent trend of theP P. 1166.' E.g., pp. ii8o-ix8i and index references under "Formulas v. judgment, use of."VALUATION OF PROPERTYcases, with a few partial exceptions, has been in the other direction. Incertain types of litigation, notably in tax valuations of highly marketablesecurities and other property, we ourselves have defended what is ineffect an operational definition of value.3 Indeed, a strong, though not aconclusive, case could be made for bolder extensions of this practice.What surprises me, however, is the reviewer's suggestion of a falseantithesis between operational definitions, and definitions chosen withexpress reference to the objectives of the valuation. For, even if thecourts were invariably to define "value" to mean whatever figure, ex-pressed in monetary terms, is reached by the correct application of aspecific technique of appraisal, they would still face the necessity of choos-ing that technique, and hence that definition, which is best calculated toserve the social objectives of the particular law under which some kindof an appraisal is required. Does Professor Nerlove mean to imply thata single, definitive, method of appraisal should serve all legal purposes,or even that it is applicable to all types of property when valued for thesame purpose? The acceptance of such a contention would revolutionizethe whole theory and practice of appraisal, not only for the courts but alsofor the professional appraisers. I can hardly believe that the reviewerholds any such view. Yet, if he does not hold it, I fail to see the signifi-cance of his proposal to adopt an operational definition of value instead ofa functional definition.In a later paragraph, the reviewer takes us to task for our "objection"to justice Brandeis' prudent investment standard of rate making-anobjection that he thinks we would have found "not wholly justified" hadwe only given adequate answers to the questions posed in his review.So far from objecting to this proposed standard, we warmly defended itnot only in the treatise but, in extenso, by a whole monograph written asa supplement to our basic study.4 Indeed, the very position taken by thejustice in the opinion which Professor Nerlove cites is the position ofour treatise from which the reviewer appears to dissent. Incidentally,the "prudent investment" standard as expounded by justice Brandeisdoes not invoke an operational concept of value, although an operationaldefinition, consistent with the justice's basic principle, might well be de-vised.Professor Nerlove raises the question as to whether we contend that"a property has as many different values as there are legal purposes forvaluing it." Construing this question to ask whether the same propertyat the same time must be assigned a different value for every different3 P. 1075. 4 Bauer and Gold, Public Utility Valvation.THE UNIVERSITY OF CHICAGO LAW REVIEWlegal purpose, I think the answer should be dearly in the negative. Asindicated on page 1167 of the treatise, several of the current definitionsof value can be put to a variety of uses, and the acceptance of one defini-tion, for example in a particular type of damage case, does not precludethe acceptance of the same definition, for instance in a particular typeof tax case. On the other hand, different definitions of value may be re-quired for various types of property that are to be valued for the samepurpose; and they may even be required for the same type of propertyvalued for the same purpose but held by different types of individuals5Hence, my answer to the above question will afford small comfort to thosewho seek a solution for the terribly complex problems of modern legal valu-ation in the development of some great, consistent system of value theory.With the last part of the review, which suggests three other methods ofapproach to a theory of valuation, I have no quarrel. Already the firstof these methods has long been accepted by economic theorists and is nowbeing applied to great advantage by appraisal experts, such as F. M.Babcock. As the review indicates, our own study tries to interrelate allthree of them, although I dare say that our attempt has been crude andfaulty. To be sure, none of these three methods of approach will supplyanswers to the types of questions emphasized in our book. But this state-ment is not meant to condemn them or to belittle their usefulness. Prac-tical problems in the social sciences must be attacked from many differentangles and by many cross-classifications of the issues involved.A CONSTITUTIONAL RATE BASEJAMES BARCLAY SM=*IOR many years valuation has been a contentious subject. The tre-mendous importance of the existence of effective regulatory powerto the citizen at his fireside and to government in action has beenattached in some way to valuation for purposes of discussion. The vari-eties of the adhesions are as numerous as the expressions. While legalrestraints are involved, necessarily the subject value carries economic fea-tures. Great names have imposed stifling effect on refutation by thoseoften characterized as lawyer-trained. Because, it is said, legal rules can-not equate economic balances. But the true economic standard does nots Pp. 291-318.* Professor of Law, University of Kansas.

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