Archives For regulation

The FCC’s proposed “Open Internet Order,” which would impose heavy-handed “common carrier” regulation of Internet service providers (the Order is being appealed in federal court and there are good arguments for striking it down) in order to promote “net neutrality,” is fundamentally misconceived.  If upheld, it will slow innovation, impose substantial costs, and harm consumers (see Heritage Foundation commentaries on FCC Internet regulation here, here, here, and here).  What’s more, it is not needed to protect consumers and competition from potential future abuse by Internet firms.  As I explain in a Heritage Foundation Legal Memorandum published yesterday, should the Open Internet Order be struck down, the U.S. Federal Trade Commission (FTC) has ample authority under Section 5 of the Federal Trade Commission Act (FTC Act) to challenge any harmful conduct by entities involved in Internet broadband services markets when such conduct undermines competition or harms consumers.

Section 5 of the FTC Act authorizes the FTC to prevent persons, partnerships, or corporations from engaging in “unfair methods of competition” or “unfair or deceptive acts or practices” in or affecting commerce.  This gives it ample authority to challenge Internet abuses raising antitrust (unfair methods) and consumer protection (unfair acts or practices) issues.

On the antitrust side, in evaluating individual business restraints under a “rule of reason,” the FTC relies on objective fact-specific analyses of the actual economic and consumer protection implications of a particular restraint.  Thus, FTC evaluations of broadband industry restrictions are likely to be more objective and predictable than highly subjective “public interest” assessments by the FCC, leading to reduced error and lower planning costs for purveyors of broadband and related services.  Appropriate antitrust evaluation should accord broad leeway to most broadband contracts.  As FTC Commissioner Josh Wright put it in testifying before Congress, “fundamental observation and market experience [demonstrate] that the business practices at the heart of the net neutrality debate are generally procompetitive.”  This suggests application of a rule of reason that will fully weigh efficiencies but not shy away from challenging broadband-related contractual arrangements that undermine the competitive process.

On the consumer protection side, the FTC can attack statements made by businesses that mislead and thereby impose harm on consumers (including business purchasers) who are acting reasonably.  It can also challenge practices that, though not literally false or deceptive, impose substantial harm on consumers (including business purchasers) that they cannot reasonably avoid, assuming the harm is greater than any countervailing benefits.  These are carefully designed and cabined sources of authority that require the FTC to determine the presence of actual consumer harm before acting.  Application of the FTC’s unfairness and deception powers therefore lacks the uncertainty associated with the FCC’s uncabined and vague “public interest” standard of evaluation.  As in the case of antitrust, the existence of greater clarity and a well-defined analytic methodology suggests that reliance on FTC rather than FCC enforcement in this area is preferable from a policy standpoint.

Finally, arguments for relying on FTC Internet policing are based on experience as well – the FTC is no Internet policy novice.  It closely monitors Internet activity and, over the years, it has developed substantial expertise in Internet topics through research, hearings, and enforcement actions.

Most recently, for example, the FTC sued AT&T in federal court for allegedly slowing wireless customers’ Internet speeds, although the customers had subscribed to “unlimited” data usage plans.  The FTC asserted that in offering renewals to unlimited-plan customers, AT&T did not adequately inform them of a new policy to “throttle” (drastically reduce the speed of) customer data service once a certain monthly data usage cap was met. The direct harm of throttling was in addition to the high early termination fees that dissatisfied customers would face for early termination of their services.  The FTC characterized this behavior as both “unfair” and “deceptive.”  Moreover, the commission claimed that throttling-related speed reductions and data restrictions were not determined by real-time network congestion and thus did not even qualify as reasonable network management activity.  This case illustrates that the FTC is perfectly capable of challenging potential “network neutrality” violations that harm consumer welfare (since “throttled” customers are provided service that is inferior to the service afforded customers on “tiered” service plans) and thus FCC involvement is unwarranted.

In sum, if a court strikes down the latest FCC effort to regulate the Internet, the FTC has ample authority to address competition and consumer protection problems in the area of broadband, including questions related to net neutrality.  The FTC’s highly structured, analytic, fact-based approach to these issues is superior to FCC net neutrality regulation based on vague and unfocused notions of the public interest.  If a court does not act, Congress might wish to consider legislation to prohibit FCC Internet regulation and leave oversight of potential competitive and consumer abuses to the FTC.

Understanding the nature and extent of the growth of the federal regulatory state is vital to sound policymaking.  Taking that to heart, over the last decade the Heritage Foundation has issued a series of reports measuring trends in federal regulatory activity.  On May 11 of this year, Heritage released its most recent regulatory study, “Red Tape Rising: Six Years of Escalating Regulation Under Obama” (RTP).  RTP, as the title suggests, paints a grim picture of rapidly escalating federal regulation unmoored from sound cost-benefit analysis – regulatory policy that is detrimental to American economic health.  Fortunately, RTP also suggests potential prescriptions to tame the federal regulatory virus.  You should read the entire study, but a few key excerpts from RTP, highlighted below, merit particular attention:

“The number and cost of government regulations continued to climb in 2014, intensifying Washington’s control over the economy and Americans’ lives. The addition of 27 new major rules last year pushed the tally for the Obama Administration’s first six years to 184, with scores of other rules in the pipeline. The cost of just these 184 rules is estimated by regulators to be nearly $80 billion annually, although the actual cost of this massive expansion of the administrative state is obscured by the large number of rules for which costs have not been fully quantified. Absent substantial reform, economic growth and individual freedom will continue to suffer.”

“President Barack Obama has repeatedly demonstrated his willingness to act by regulatory fiat instead of executing laws as passed by Congress. But regulatory overreach by the executive branch is only part of the problem. A great deal of the excessive regulation in the past six years is the result of Congress granting broad powers to agencies through passage of vast and vaguely worded legislation. The misnamed Affordable Care Act and the Dodd–Frank financial-regulation law top the list.”

“Many more regulations are on the way, with another 126 economically significant rules on the Administration’s agenda, such as directives to farmers for growing and harvesting fruits and vegetables; strict limits on credit access for service members; and, yet another redesign of light bulbs.”

“In many respects, the need for reform of the regulatory system has never been greater. The White House, Congress, and federal agencies routinely ignore regulatory costs, exaggerate benefits, and breach legislative and constitutional boundaries. They also increasingly dictate lifestyle choices rather than focusing on public health and safety.”

“Immediate reforms should include requiring legislation to undergo an analysis of regulatory impacts before a floor vote in Congress, and requiring every major regulation to obtain congressional approval before taking effect. Sunset deadlines should be set in law for all major rules, and independent agencies should be subject—as are executive branch agencies—to the White House regulatory review process.”

In light of its findings, RTP makes eight specific recommendations:

  1. Require congressional approval of new major regulations issued by agencies.
  2. Require regulatory impact assessments of proposed legislation.
  3. Establish a sunset date for regulations.
  4. Subject “independent” agencies to executive branch regulatory review.
  5. Codify stricter information-quality standards for rulemaking.
  6. Reform “sue and settle” practices (under which regulators work in concert with advocacy groups to produce settlements to lawsuits that result in greater regulation).
  7. Increase professional staff levels within the Office of Information and Regulatory Affairs (OIRA) (the small White House agency charged with reviewing proposed regulations).
  8. Codify the requirement now imposed by Executive Order 12866 mandating agencies to assess the costs and benefits of proposed rules and to consider alternatives.

These excellent recommendations merit serious consideration by federal policymakers.

In short, all of this hand-wringing over privacy is largely a tempest in a teapot — especially when one considers the extent to which the White House and other government bodies have studiously ignored the real threat: government misuse of data à la the NSA. It’s almost as if the White House is deliberately shifting the public’s gaze from the reality of extensive government spying by directing it toward a fantasy world of nefarious corporations abusing private information….

The White House’s proposed bill is emblematic of many government “fixes” to largely non-existent privacy issues, and it exhibits the same core defects that undermine both its claims and its proposed solutions. As a result, the proposed bill vastly overemphasizes regulation to the dangerous detriment of the innovative benefits of Big Data for consumers and society at large.

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Earlier this week the New Jersey Assembly unanimously passed a bill to allow direct sales of Tesla cars in New Jersey. (H/T Marina Lao). The bill

Allows a manufacturer (“franchisor,” as defined in P.L.1985, c.361 (C.56:10-26 et seq.)) to directly buy from or sell to consumers a zero emission vehicle (ZEV) at a maximum of four locations in New Jersey.  In addition, the bill requires a manufacturer to own or operate at least one retail facility in New Jersey for the servicing of its vehicles. The manufacturer’s direct sale locations are not required to also serve as a retail service facility.

The bill amends current law to allow any ZEV manufacturer to directly or indirectly buy from and directly sell, offer to sell, or deal to a consumer a ZEV if the manufacturer was licensed by the New Jersey Motor Vehicle Commission (MVC) on or prior to January 1, 2014.  This bill provides that ZEVs may be directly sold by certain manufacturers, like Tesla Motors, and preempts any rule or regulation that restricts sales exclusively to franchised dealerships.  The provisions of the bill would not prevent a licensed franchisor from operating under an existing license issued by the MVC.

At first cut, it seems good that the legislature is responding to the lunacy of the Christie administration’s previous decision to enforce a rule prohibiting direct sales of automobiles in New Jersey. We have previously discussed that decision at length in previous posts here, here, here and here. And Thom and Mike have taken on a similar rule in their home state of Missouri here and here.

In response to New Jersey’s decision to prohibit direct sales, the International Center for Law & Economics organized an open letter to Governor Christie based in large part on Dan Crane’s writings on the topic here at TOTM and discussing the faulty economics of such a ban. The letter was signed by more than 70 law professors and economists.

But it turns out that the legislative response is nearly as bad as the underlying ban itself.

First, a quick recap.

In our letter we noted that

The Motor Vehicle Commission’s regulation was aimed specifically at stopping one company, Tesla Motors, from directly distributing its electric cars. But the regulation would apply equally to any other innovative manufacturer trying to bring a new automobile to market, as well. There is no justification on any rational economic or public policy grounds for such a restraint of commerce. Rather, the upshot of the regulation is to reduce competition in New Jersey’s automobile market for the benefit of its auto dealers and to the detriment of its consumers. It is protectionism for auto dealers, pure and simple.

While enforcement of the New Jersey ban was clearly aimed directly at Tesla, it has broader effects. And, of course, its underlying logic is simply indefensible, regardless of which particular manufacturer it affects. The letter explains at length the economics of retail distribution and the misguided, anti-consumer logic of the regulation, and concludes by noting that

In sum, we have not heard a single argument for a direct distribution ban that makes any sense. To the contrary, these arguments simply bolster our belief that the regulations in question are motivated by economic protectionism that favors dealers at the expense of consumers and innovative technologies. It is discouraging to see this ban being used to block a company that is bringing dynamic and environmentally friendly products to market. We strongly encourage you to repeal it, by new legislation if necessary.

Thus it seems heartening that the legislature did, indeed, take up our challenge to repeal the ban.

Except that, in doing so, the legislature managed to write a bill that reflects no understanding whatever of the underlying economic issues at stake. Instead, the legislative response appears largely to be the product of rent seeking,pure and simple, offering only a limited response to Tesla’s squeaky wheel (no pun intended) and leaving the core defects of the ban completely undisturbed.

Instead of acknowledging the underlying absurdity of the limit on direct sales, the bill keeps the ban in place and simply offers a limited exception for Tesla (or other zero emission cars). While the innovative and beneficial nature of Tesla’s cars was an additional reason to oppose banning their direct sale, the specific characteristics of the cars is a minor and ancillary reason to oppose the ban. But the New Jersey legislative response is all about the cars’ emissions characteristics, and in no way does it reflect an appreciation for the fundamental economic defects of the underlying rule.

Moreover, the bill permits direct sales at only four locations (why four? No good reason whatever — presumably it was a political compromise, never the stuff of economic reason) and requires Tesla to operate a service center for its cars in the state. In other words, the regulators are still arbitrarily dictating aspects of car manufacturers’ business organization from on high.

Even worse, however, the bill is constructed to be nothing more than a payoff for a specific firm’s lobbying efforts, thus ensuring that the next (non-zero-emission) Tesla to come along will have to undertake the same efforts to pander to the state.

Far from addressing the serious concerns with the direct sales ban, the bill just perpetuates the culture of political rent seeking such regulations create.

Perhaps it’s better than nothing. Certainly it’s better than nothing for Tesla. But overall, I’d say it’s about the worst possible sort of response, short of nothing.

On May 9, 2014, in Horne v. Department of Agriculture, the Ninth Circuit struck a blow against economic liberty by denying two California raisin growers’ efforts to recover penalties imposed against them by the U.S. Department of Agriculture (USDA).  The growers’ heinous offense was their refusal to continue participating in a highly anticompetitive cartel.  In order to understand this bizarre miscarriage of justice, which turns orthodox anti-cartel policy on its head, a bit of background is in order.  

Perhaps the most serious affront to a sound consumer welfare-based American antitrust policy is the persistence of federal government-sponsored agricultural cartels.  In a form of bureaucratic schizophrenia, while the Justice Department works hard to send private cartelists to jail, and grants leniency to informers who undermine cartels, the U.S. Agriculture Department (USDA) seeks to punish individuals who undercut USDA-sponsored cartels created pursuant to Agricultural Marketing Agreement Act marketing orders.  Those orders establish antitrust-exempt government-approved frameworks under which private industry members restrict output and raise the price of specific crops, in the name of ensuring “orderly” markets.  (Various scholars, such as Mario Loyola, have explored the public choice explanations for the private-public collusion that leads to marketing orders and other government-supported cartels.)    

A particularly notorious USDA cartel is the California Raisin Marketing Order (“Raisin Order”), in operation since 1949, which establishes a Raisin Administrative Committee (“RAC”).  The RAC is comprised almost entirely of self-interested raisin growers and packers (it is comprised of 47 growers and packers, plus a public member).  The RAC sets annual raisin “reserve tonnage” requirements as a percentage of the overall crop, with the remainder comprising “free raisins.”  “Reserve raisins” are diverted from the market but may be released when supplies are low.  Under the Raisin Order, raisin producers convey their entire crop to raisin packer-distributors known as “handlers,” with producers receiving a pre-negotiated price for the free tonnage.  Handlers sell free tonnage raisins on the open market, and divert the RAC-required percentage of each producer’s crop to the account of the RAC.  The RAC tracks how many raisins each producer contributes to the reserve pool, and has a regulatory duty to sell them in a way that maximizes producer returns.  The RAC finances its activities from reserve raisin sales proceeds, and disburses whatever net income remains to producers.  Reserve raisins are diverted to “low value” markets, such as the export sector, while American consumers typically buy free raisins.  The Raisin Order imposes substantial harm on American consumers:  for example, in 2001 free raisins sold for $877.50 per ton compared to $250 per ton for reserve raisins, and the free raisins/reserve raisins price ration approached 10/1 in 1984 and 1991

California raisin producers Marvin and Laura Horne sought to evade these cartel strictures by handling their own raisin crop, rather than selling it to traditional handlers, against whom the reserve requirement of the Raisin Order clearly operated.  Similarly, by buying and handling other producers’ raisins for a per-pound fee, the Hornes believed that they could avoid the Raisin Order’s definition of “handler” with respect to those purchased raisins.  A USDA judicial officer disagreed, finding the Hornes liable for numerous Order violations and fining them over $695,000, including an assessment of nearly $484,000 for the dollar value of the raisins not held in reserve. 

The Hornes challenged this USDA order in federal district court, arguing that they were not “handlers” within the meaning of the Raisin Order and that the order violated the Fifth Amendment’s Takings Clause and the Eighth Amendment’s prohibition against excessive fines.  The district court granted summary judgment for USDA on all counts.  On appeal, the Ninth Circuit affirmed the application of the Raisin Order and the denial of the Eighth Amendment claim, but held that the Court of Federal Claims rather than the district court had jurisdiction over the takings claim.  The U.S. Supreme Court granted certiorari on the jurisdictional issue only, holding that the Hornes could assert their takings claim in district court.  The Supreme Court remanded for a determination of the merits of the takings claim, and on May 9 the Ninth Circuit, applying de novo review, affirmed the district court’s rejection of that claim.

The Ninth Circuit acknowledged that USDA linked a monetary exaction (the penalty imposed for failure to comply with the Raisin Order) to specific property (the reserved raisins) and that the Hornes faced a choice – give the RAC the raisins or face a penalty.  Because the government did not literally seize raisins from the Holmes’ land or remove money from their bank account, the court held that the USDA’s action had to be analyzed as a potential regulatory taking.  The court then noted that the Takings Clause affords less protection to personal property than to real property, and that the Hornes did not lose all economically valuable use of their property.  The court asserted that the Hornes’ rights with respect to the reserved raisins were not extinguished because they retained a claim on certain future proceeds from reserved raisin sales (even though, as the Hornes pointed out, the “equitable distribution” of reserved sales might be zero).  The court reasoned that even though the Hornes might not receive cash distributions in some years, the reserved raisins were not “permanently occupied,” and that the RAC’s diversion of reserved raisins inured to the Hornes’ benefit by stabilizing raisin prices.  The court viewed the raisin diversion program as granting a conditional government benefit in exchange for an exaction.  In short, by smoothing price fluctuations in the raisin industry, the Raisin Order made “market conditions predictable” and thereby bore a “sufficient nexus” to a legitimate interest the government sought to protect.  (The court never asked why the reduction of consumer welfare and the imposition of deadweight losses through industry cartelization is a legitimate government interest.)  Moreover, the RAC’s imposition of a reserve requirement on all producers was roughly proportional to the USDA’s market stabilizing goal as reflected in the Raisin Order.  Thus, applying the nexus/proportionaliy test of Nollan v. California Coastal Commission and Dolan v. City of Tigard, the Ninth Circuit held that the application of the Marketing Order to the Hornes’ activities did not constitute a taking.

Stripped of its convoluted reasoning and highly selective application of Supreme Court precedents, the Ninth Circuit’s holding indicates that industrious and entrepreneurial individuals will not be allowed to avoid and thereby undermine agricultural cartels through creative commercial innovations.  It means that individuals engaging in a legitimate business activity who wish not to contribute their product to a cartel that is imposed on them may suffer loss of their property, merely because the government approves of the cartel and wishes to protect it by punishing “cheaters.”  But when the government is the ringmaster, odious cartels are miraculously transformed into praiseworthy citizens who promote the public interest by “stabilizing” markets. 

Whatever the ultimate outcome of the Hornes’ legal saga, the Ninth Circuit’s crabbed analysis highlights the absurdity of imposing government financial exactions on private commercial conduct that unequivocally raises consumer welfare and enhances competition.  The egregiousness of this conduct is amplified when the government penalizes a business for refusing to transfer some of its property to a third party (here, the RAC), without assurance of being compensated.  Whether the business chooses to incur the penalty or instead accedes to the transfer, basic logic demonstrates that its property is being taken.  Hopefully, future courts will keep this in mind and be willing to apply the Takings Clause to analogous scenarios. 

If faced by a serious possibility of having to pay “just compensation” under the Takings Clause, the USDA may become less willing to sanction cartel avoiders through overly expansive interpretations of its agricultural marketing orders.  That in turn could encourage additional businesses to seek creative ways to opt out of these arrangements.  The end result could be the gradual weakening and ultimate dismantling of the marketing order framework.  Even better, the USDA could choose to act unilaterally tomorrow and move to rescind marketing order regulations.  (That might be asking too much, of course.)

Our TOTM colleague Dan Crane has written a few posts here over the past year or so about attempts by the automobile dealers lobby (and General Motors itself) to restrict the ability of Tesla Motors to sell its vehicles directly to consumers (see here, here and here). Following New Jersey’s adoption of an anti-Tesla direct distribution ban, more than 70 lawyers and economists–including yours truly and several here at TOTM–submitted an open letter to Gov. Chris Christie explaining why the ban is bad policy.

Now it seems my own state of Missouri is getting caught up in the auto dealers’ ploy to thwart pro-consumer innovation and competition. Legislation (HB1124) that was intended to simply update statutes governing the definition, licensing and use of off-road and utility vehicles got co-opted at the last minute in the state Senate. Language was inserted to redefine the term “franchisor” to include any automobile manufacturer, regardless whether they have any franchise agreements–in direct contradiction to the definition used throughout the rest of the surrounding statues. The bill defines a “franchisor” as:

“any manufacturer of new motor vehicles which establishes any business location or facility within the state of Missouri, when such facilities are used by the manufacturer to inform, entice, or otherwise market to potential customers, or where customer orders for the manufacturer’s new motor vehicles are placed, received, or processed, whether or not any sales of such vehicles are finally consummated, and whether or not any such vehicles are actually delivered to the retail customer, at such business location or facility.”

In other words, it defines a franchisor as a company that chooses to open it’s own facility and not franchise. The bill then goes on to define any facility or business location meeting the above criteria as a “new motor vehicle dealership,” even though no sales or even distribution may actually take place there. Since “franchisors” are already forbidden from owning a “new motor vehicle dealership” in Missouri (a dubious restriction in itself), these perverted definitions effectively ban a company like Tesla from selling directly to consumers.

The bill still needs to go back to the Missouri House of Representatives, where it started out as addressing “laws regarding ‘all-terrain vehicles,’ ‘recreational off-highway vehicles,’ and ‘utility vehicles’.”

This is classic rent-seeking regulation at its finest, using contrived and contorted legislation–not to mention last-minute, underhanded legislative tactics–to prevent competition and innovation that, as General Motors itself pointed out, is based on a more economically efficient model of distribution that benefits consumers. Hopefully the State House…or the Governor…won’t be asleep at the wheel as this legislation speeds through the final days of the session.

On Debating Imaginary Felds

Gus Hurwitz —  18 September 2013

Harold Feld, in response to a recent Washington Post interview with AEI’s Jeff Eisenach about AEI’s new Center for Internet, Communications, and Technology Policy, accused “neo-conservative economists (or, as [Feld] might generalize, the ‘Right’)” of having “stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.”

(Full disclosure: The Center for Internet, Communications, and Technology Policy includes TechPolicyDaily.com, to which I am a contributor.)

Perhaps to the surprise of many, I’m going to agree with Feld. But in so doing, I’m going to expand upon his point: The problem with anti-economics social activists (or, as we might generalize, the ‘Left’)[*] is that they have stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.

I don’t mean this to be snarky. Rather, it is a very real problem throughout modern political discourse, and one that we participants in telecom and media debates frequently contribute to. One of the reasons that I love – and sometimes hate – researching and teaching in this area is that fundamental tensions between government and market regulation lie at its core. These tensions present challenging and engaging questions, making work in this field exciting, but are sometimes intractable and often evoke passion instead of analysis, making work in this field seem Sisyphean.

One of these tensions is how to secure for consumers those things which the market does not (appear to) do a good job of providing. For instance, those of us on both the left and right are almost universally agreed that universal service is a desirable goal. The question – for both sides – is how to provide it. Feld reminds us that “real world economics is painfully complicated.” I would respond to him that “real world regulation is painfully complicated.”

I would point at Feld, while jumping up and down shouting “J’accuse! Nirvana Fallacy!” – but I’m certain that Feld is aware of this fallacy, just as I hope he’s aware that those of us who have spent much of our lives studying economics are bitterly aware that economics and markets are complicated things. Indeed, I think those of us who study economics are even more aware of this than is Feld – it is, after all, one of our mantras that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” This mantra is particularly apt in telecommunications, where one of the most consistent and important lessons of the past century has been that the market tends to outperform regulation.

This isn’t because the market is perfect; it’s because regulation is less perfect. Geoff recently posted a salient excerpt from Tom Hazlett’s 1997 Reason interview of Ronald Coase, in which Coase recounted that “When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies – perhaps all the studies – suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been.”

I don’t want to get into a tit-for-tat over individual points that Feld makes. But I will look at one as an example: his citation to The Market for Lemons. This is a classic paper, in which Akerlof shows that information asymmetries can cause rational markets to unravel. But does it, as Feld says, show “market failure in the presence of robust competition?” That is a hotly debated point in the economics literature. One view – the dominant view, I believe – is that it does not. See, e.g., the EconLib discussion (“Akerlof did not conclude that the lemon problem necessarily implies a role for government”). Rather, the market has responded through the formation of firms that service and certify used cars, document car maintenance, repairs and accidents, warranty cars, and suffer reputational harms for selling lemons. Of course, folks argue, and have long argued, both sides. As Feld says, economics is painfully complicated – it’s a shame he draws a simple and reductionist conclusion from one of the seminal articles is modern economics, and a further shame he uses that conclusion to buttress his policy position. J’accuse!

I hope that this is in no way taken as an attack on Feld – and I wish his piece was less of an attack on Jeff. Fundamentally, he raises a very important point, that there is a real disconnect between the arguments used by the “left” and “right” and how those arguments are understood by the other. Indeed, some of my current work is exploring this very disconnect and how it affects telecom debates. I’m really quite thankful to Feld for highlighting his concern that at least one side is blind to the views of the other – I hope that he’ll be receptive to the idea that his side is subject to the same criticism.

[*] I do want to respond specifically to what I think is an important confusion in Feld piece, which motivated my admittedly snarky labelling of the “left.” I think that he means “neoclassical economics,” not “neo-conservative economics” (which he goes on to dub “Neocon economics”). Neoconservativism is a political and intellectual movement, focused primarily on US foreign policy – it is rarely thought of as a particular branch of economics. To the extent that it does hold to a view of economics, it is actually somewhat skeptical of free markets, especially of lack of moral grounding and propensity to forgo traditional values in favor of short-run, hedonistic, gains.

Not surprisingly, we’ve discussed Coase quite a bit here at Truth on the Market. Follow this link to see our collected thoughts on Coase over the years.

Probably my favorite, and certainly most frequently quoted, of Coase’s many wise words is this:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

Of course this, a more generalized statement of the above from The Problem of Social Cost, is the essence of his work:

All solutions have costs, and there is no reason to suppose that governmental regulation is called for simply because the problem is not well handled by the market or the firm. Satisfactory views on policy can only come from a patient study of how, in practice, the market, firms and governments handle the problem of harmful effects…. It is my belief that economists, and policy-makers generally, have tended to over-estimate the advantages which come from governmental regulation. But this belief, even if justified, does not do more than suggest that government regulation should be curtailed. It does not tell us where the boundary line should be drawn. This, it seems to me, has to come from a detailed investigation of the actual results of handling the problem in different ways.

 

As Gus said, there will be much more to say, and much more said by others, on Coase’s passing. For now, I offer this excerpt from a 1997 Reason interview he gave with Tom Hazlett:

Hazlett: You said you’re not a libertarian. What do you consider your politics to be?

Coase: I really don’t know. I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn’t like to say that all regulation would have this effect because one can think of circumstances in which it doesn’t.

Hazlett: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?

Coase: This is a very interesting question because one can’t give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies–perhaps all the studies–suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn’t mean that if we reduce the size of government considerably, we wouldn’t find then that there were some activities it did well. Until we reduce the size of government, we won’t know what they are.

Hazlett: What’s an example of bad regulation?

Coase: I can’t remember one that’s good. Regulation of transport, regulation of agriculture– agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.

Ronald Coase, 1910-2013

Gus Hurwitz —  2 September 2013

Many more, who will do far more justice than I can, will have much more to say on this, so I will only note it here. Ronald Coase has passed away. He was 102. The University of Chicago Law School has a notice here.

The first thing I wrote on the board for my students this semester was simply his name, “Coase.” I told them only on Friday that he was still an active scholar at 102.