Securities Mosaic is a fantastic resource for anyone working in the securities field. It provides comprehensive information in six key areas: disclosure, laws, rules, guidance, news, and compliance centers. In addition, the site features SM Blogwatch, which republishes posts from various securities-related blogs, including this one.
Yesterday, I was formally welcomed to the SM Blogwatch family by Peter Schwartz, a smart, swell guy. My welcome, although warm, included a few remarks that I just can’t let lie. The comments concern the Law and Economics “movement,” which we at TOTM purportedly represent.
I first take issue with the claim that the TOTM bloggers “preach from the pulpit of Law and Economics.” That comment suggests that we all believe that efficiency should be the goal of the law. Among folks who find economic analysis to be a useful tool for analyzing legal rules (and my guess is that all the TOTM bloggers would put themselves in that category), there’s a good deal of disagreement over whether efficiency should always be our goal. Personally, I embrace “positive L&E” (I think the common law is generally efficient and that economic analysis is a useful tool for analyzing legal rules), but I eschew “normative L&E,” which posits that efficiency is a sufficient condition for favoring a legal rule. I don’t know what my co-bloggers think about normative L&E, but I think a person “preach[ing] from the pulpit of Law and Economics” would have to place a higher value on efficiency than I personally am willing to do.
Now don’t get me wrong. I think positive L&E is incredibly useful, and, all else being equal, I’d always prefer the efficient rule over the inefficient one. I should therefore defend L&E against a couple of other slams in the SM Blogwatch welcome.
First, Peter contends that “[a]t its foundation, the Law and Economics movement has no framework for addressing the concept and reality of power.” I honestly don’t know what that means. If Peter’s claiming that L&E has nothing to say about market power, I’d suggest that he thumb through practically any contemporary antitrust treatise. Economic analysis has lots to say about how market power emerges, what problems it causes, the conditions under which it is self-correcting, and when government intervention is appropriate. If he’s talking about political power (i.e., the power to wield state-sanctioned coercion), I’d say that L&E folks — at least the market liberals among us — are highly attuned to the dangers such power poses and offer the best possible policy prescription for minimizing those dangers: laissez faire.
Peter goes on to criticize the “Law and Economics movement” for
inspir[ing] amongst its members an overpowering zeal and certitude (the Truth be Mine and it can be Thine) that often crosses the line into realms of faith, evangelism, and judgment (if you are not with me, you may also not be against me, but you are probably a liberal and so, by definition, not terribly bright, you poor unwashed soul).
With respect to the Austrian-inspired economic analysis that I personally find persuasive, that characterization is exactly backward.
A fundamental and profound insight of the Austrians (e.g., F.A. Hayek) was that the information necessary to determine how resources ought to be allocated to maximize social welfare is not given to anyone in its entirety. (See, e.g., here.) It is because I am so remarkably uncertain about how production and consumption decisions should be made that I advocate taking the maximally modest position: that which leaves resource allocation decisions to those closest to the action, most aware of their own preferences, etc.
Saying â€˜Let the market handle itâ€™ is to reject a one-size-fits-all, centralized rule of experts. It is to endorse an unfathomably complex arrangement for dealing with the issue at hand. Recommending the market over government intervention is to recognize that neither he who recommends the market nor anyone else possesses sufficient information and knowledge to determine, or even to foresee, what particular methods are best for dealing with the problem.
To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances . . . .
While declaring â€˜Let the government handle itâ€™ comes across as a solution, itâ€™s no such thing. Instead, it is merely a sign of a simple and baseless faith â€” a simple and baseless faith that people invested with power will not abuse it; that political appointees possess or will find better answers than will millions of people pursuing solutions in their own ways, and staking their own resources and reputations on their efforts; that only those â€™solutionsâ€™ that are spelled out in statutes and regulations and that have officials paid to implement them are true solutions.