Search Results For coase

Big is bad, part 1: Kafka, Coase, and Brandeis walk into a bar … There’s a quip in a well-known textbook that Nobel laureate Ronald Coase said he’d grown weary of antitrust because when prices went up, the judges said it was monopoly; when the prices went down, they said it was predatory pricing; and when they stayed the same, they said it was tacit collusion. ICLE’s Geoffrey Manne and Gus Hurwitz worry that with the rise of the neo-Brandeisians, not much has changed since Coase’s time:

[C]ompetition, on its face, is virtually indistinguishable from anticompetitive behavior. Every firm strives to undercut its rivals, to put its rivals out of business, to increase its rivals’ costs, or to steal its rivals’ customers. The consumer welfare standard provides courts with a concrete mechanism for distinguishing between good and bad conduct, based not on the effect on rival firms but on the effect on consumers. Absent such a standard, any firm could potentially be deemed to violate the antitrust laws for any act it undertakes that could impede its competitors.

Big is bad, part 2. A working paper published by researchers from Denmark and the University of California at Berkeley suggest that companies such as Google, Apple, Facebook, and Nike are taking advantage of so-called “tax havens” to cause billions of dollars of income go “missing.” There’s a lot of mumbo jumbo in this one, but it’s getting lots of attention.

We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places—in effect stealing revenue from each other.

Big is bad, part 3: Can any country survive with debt-to-GDP of more than 100 percent? Apparently, the answer is “yes.” The U.K. went 80 years, from 1779 to 1858. Then, it went 47 years from 1916 to 1962. Tim Harford has a fascinating story about an effort to clear the country’s debt in that second run.

In 1928, an anonymous donor resolved to clear the UK’s national debt and gave £500,000 with that end in mind. It was a tidy sum — almost £30m at today’s prices — but not nearly enough to pay off the debt. So it sat in trust, accumulating interest, for nearly a century.

How do you make a small fortune? Begin with a big one. A lesson from Johnny Depp.

Will we ever stop debating the Trolley Problem? Apparently the answer is “no.” Also, TIL there’s a field of research that relies on “notions.”

For so long, moral psychology has relied on the notion that you can extrapolate from people’s decisions in hypothetical thought experiments to infer something meaningful about how they would behave morally in the real world. These new findings challenge that core assumption of the field.

 

The week that was on Truth on the Market

LabMD.

[T]argets of complaints settle for myriad reasons, and no outside authority need review the sufficiency of a complaint as part of a settlement. And the consent orders themselves are largely devoid of legal and even factual specificity. As a result, the FTC’s authority to initiate an enforcement action  is effectively based on an ill-defined series of hunches — hardly a sufficient basis for defining a clear legal standard.

Google Android.

Thus, had Google opted instead to create a separate walled garden of its own on the Apple model, everything it had done would have otherwise been fine. This means that Google is now subject to an antitrust investigation for attempting to develop a more open platform.

AT&T-Time Warner. First this:

The government’s contention that, after the merger, AT&T and rival Comcast could coordinate to restrict access to popular Time Warner and NBC content to harm emerging competitors was always a weak argument.

Then this:

Doing no favors to its case, the government turned to a seemingly contradictory argument that AT&T and Comcast would coordinate to demand virtual providers take too much content.

 

 

Zoom, one of Silicon Valley’s lesser-known unicorns, has just gone public. At the time of writing, its shares are trading at about $65.70, placing the company’s value at $16.84 billion. There are good reasons for this success. According to its Form S-1, Zoom’s revenue rose from about $60 million in 2017 to a projected $330 million in 2019, and the company has already surpassed break-even . This growth was notably fueled by a thriving community of users who collectively spend approximately 5 billion minutes per month in Zoom meetings.

To get to where it is today, Zoom had to compete against long-established firms with vast client bases and far deeper pockets. These include the likes of Microsoft, Cisco, and Google. Further complicating matters, the video communications market exhibits some prima facie traits that are typically associated with the existence of network effects. For instance, the value of Skype to one user depends – at least to some extent – on the number of other people that might be willing to use the network. In these settings, it is often said that positive feedback loops may cause the market to tip in favor of a single firm that is then left with an unassailable market position. Although Zoom still faces significant competitive challenges, it has nonetheless established a strong position in a market previously dominated by powerful incumbents who could theoretically count on network effects to stymie its growth.

Further complicating matters, Zoom chose to compete head-on with these incumbents. It did not create a new market or a highly differentiated product. Zoom’s Form S-1 is quite revealing. The company cites the quality of its product as its most important competitive strength. Similarly, when listing the main benefits of its platform, Zoom emphasizes that its software is “easy to use”, “easy to deploy and manage”, “reliable”, etc. In its own words, Zoom has thus gained a foothold by offering an existing service that works better than that of its competitors.

And yet, this is precisely the type of story that a literal reading of the network effects literature would suggest is impossible, or at least highly unlikely. For instance, the foundational papers on network effects often cite the example of the DVORAK keyboard (David, 1985; and Farrell & Saloner, 1985). These early scholars argued that, despite it being the superior standard, the DVORAK layout failed to gain traction because of the network effects protecting the QWERTY standard. In other words, consumers failed to adopt the superior DVORAK layout because they were unable to coordinate on their preferred option. It must be noted, however, that the conventional telling of this story was forcefully criticized by Liebowitz & Margolis in their classic 1995 article, The Fable of the Keys.

Despite Liebowitz & Margolis’ critique, the dominance of the underlying network effects story persists in many respects. And in that respect, the emergence of Zoom is something of a cautionary tale. As influential as it may be, the network effects literature has tended to overlook a number of factors that may mitigate, or even eliminate, the likelihood of problematic outcomes. Zoom is yet another illustration that policymakers should be careful when they make normative inferences from positive economics.

A Coasian perspective

It is now widely accepted that multi-homing and the absence of switching costs can significantly curtail the potentially undesirable outcomes that are sometimes associated with network effects. But other possibilities are often overlooked. For instance, almost none of the foundational network effects papers pay any notice to the application of the Coase theorem (though it has been well-recognized in the two-sided markets literature).

Take a purported market failure that is commonly associated with network effects: an installed base of users prevents the market from switching towards a new standard, even if it is superior (this is broadly referred to as “excess inertia,” while the opposite scenario is referred to as “excess momentum”). DVORAK’s failure is often cited as an example.

Astute readers will quickly recognize that this externality problem is not fundamentally different from those discussed in Ronald Coase’s masterpiece, “The Problem of Social Cost,” or Steven Cheung’s “The Fable of the Bees” (to which Liebowitz & Margolis paid homage in their article’s title). In the case at hand, there are at least two sets of externalities at play. First, early adopters of the new technology impose a negative externality on the old network’s installed base (by reducing its network effects), and a positive externality on other early adopters (by growing the new network). Conversely, installed base users impose a negative externality on early adopters and a positive externality on other remaining users.

Describing these situations (with a haughty confidence reminiscent of Paul Samuelson and Arthur Cecil Pigou), Joseph Farrell and Garth Saloner conclude that:

In general, he or she [i.e. the user exerting these externalities] does not appropriately take this into account.

Similarly, Michael Katz and Carl Shapiro assert that:

In terms of the Coase theorem, it is very difficult to design a contract where, say, the (potential) future users of HDTV agree to subsidize today’s buyers of television sets to stop buying NTSC sets and start buying HDTV sets, thereby stimulating the supply of HDTV programming.

And yet it is far from clear that consumers and firms can never come up with solutions that mitigate these problems. As Daniel Spulber has suggested, referral programs offer a case in point. These programs usually allow early adopters to receive rewards in exchange for bringing new users to a network. One salient feature of these programs is that they do not simply charge a lower price to early adopters; instead, in order to obtain a referral fee, there must be some agreement between the early adopter and the user who is referred to the platform. This leaves ample room for the reallocation of rewards. Users might, for instance, choose to split the referral fee. Alternatively, the early adopter might invest time to familiarize the switching user with the new platform, hoping to earn money when the user jumps ship. Both of these arrangements may reduce switching costs and mitigate externalities.

Danial Spulber also argues that users may coordinate spontaneously. For instance, social groups often decide upon the medium they will use to communicate. Families might choose to stay on the same mobile phone network. And larger groups (such as an incoming class of students) may agree upon a social network to share necessary information, etc. In these contexts, there is at least some room to pressure peers into adopting a new platform.

Finally, firms and other forms of governance may also play a significant role. For instance, employees are routinely required to use a series of networked goods. Common examples include office suites, email clients, social media platforms (such as Slack), or video communications applications (Zoom, Skype, Google Hangouts, etc.). In doing so, firms presumably act as islands of top-down decision-making and impose those products that maximize the collective preferences of employers and employees. Similarly, a single firm choosing to join a network (notably by adopting a standard) may generate enough momentum for a network to gain critical mass. Apple’s decisions to adopt USB-C connectors on its laptops and to ditch headphone jacks on its iPhones both spring to mind. Likewise, it has been suggested that distributed ledger technology and initial coin offerings may facilitate the creation of new networks. The intuition is that so-called “utility tokens” may incentivize early adopters to join a platform, despite initially weak network effects, because they expect these tokens to increase in value as the network expands.

A combination of these arrangements might explain how Zoom managed to grow so rapidly, despite the presence of powerful incumbents. In its own words:

Our rapid adoption is driven by a virtuous cycle of positive user experiences. Individuals typically begin using our platform when a colleague or associate invites them to a Zoom meeting. When attendees experience our platform and realize the benefits, they often become paying customers to unlock additional functionality.

All of this is not to say that network effects will always be internalized through private arrangements, but rather that it is equally wrong to assume that transaction costs systematically prevent efficient coordination among users.

Misguided regulatory responses

Over the past couple of months, several antitrust authorities around the globe have released reports concerning competition in digital markets (UK, EU, Australia), or held hearings on this topic (US). A recurring theme throughout their published reports is that network effects almost inevitably weaken competition in digital markets.

For instance, the report commissioned by the European Commission mentions that:

Because of very strong network externalities (especially in multi-sided platforms), incumbency advantage is important and strict scrutiny is appropriate. We believe that any practice aimed at protecting the investment of a dominant platform should be minimal and well targeted.

The Australian Competition & Consumer Commission concludes that:

There are considerable barriers to entry and expansion for search platforms and social media platforms that reinforce and entrench Google and Facebook’s market power. These include barriers arising from same-side and cross-side network effects, branding, consumer inertia and switching costs, economies of scale and sunk costs.

Finally, a panel of experts in the United Kingdom found that:

Today, network effects and returns to scale of data appear to be even more entrenched and the market seems to have stabilised quickly compared to the much larger degree of churn in the early days of the World Wide Web.

To address these issues, these reports suggest far-reaching policy changes. These include shifting the burden of proof in competition cases from authorities to defendants, establishing specialized units to oversee digital markets, and imposing special obligations upon digital platforms.

The story of Zoom’s emergence and the important insights that can be derived from the Coase theorem both suggest that these fears may be somewhat overblown.

Rivals do indeed find ways to overthrow entrenched incumbents with some regularity, even when these incumbents are shielded by network effects. Of course, critics may retort that this is not enough, that competition may sometimes arrive too late (excess inertia, i.e., “ a socially excessive reluctance to switch to a superior new standard”) or too fast (excess momentum, i.e., “the inefficient adoption of a new technology”), and that the problem is not just one of network effects, but also one of economies of scale, information asymmetry, etc. But this comes dangerously close to the Nirvana fallacy. To begin, it assumes that regulators are able to reliably navigate markets toward these optimal outcomes — which is questionable, at best. Moreover, the regulatory cost of imposing perfect competition in every digital market (even if it were possible) may well outweigh the benefits that this achieves. Mandating far-reaching policy changes in order to address sporadic and heterogeneous problems is thus unlikely to be the best solution.

Instead, the optimal policy notably depends on whether, in a given case, users and firms can coordinate their decisions without intervention in order to avoid problematic outcomes. A case-by-case approach thus seems by far the best solution.

And competition authorities need look no further than their own decisional practice. The European Commission’s decision in the Facebook/Whatsapp merger offers a good example (this was before Margrethe Vestager’s appointment at DG Competition). In its decision, the Commission concluded that the fast-moving nature of the social network industry, widespread multi-homing, and the fact that neither Facebook nor Whatsapp controlled any essential infrastructure, prevented network effects from acting as a barrier to entry. Regardless of its ultimate position, this seems like a vastly superior approach to competition issues in digital markets. The Commission adopted a similar reasoning in the Microsoft/Skype merger. Unfortunately, the Commission seems to have departed from this measured attitude in more recent decisions. In the Google Search case, for example, the Commission assumes that the mere existence of network effects necessarily increases barriers to entry:

The existence of positive feedback effects on both sides of the two-sided platform formed by general search services and online search advertising creates an additional barrier to entry.

A better way forward

Although the positive economics of network effects are generally correct and most definitely useful, some of the normative implications that have been derived from them are deeply flawed. Too often, policymakers and commentators conclude that these potential externalities inevitably lead to stagnant markets where competition is unable to flourish. But this does not have to be the case. The emergence of Zoom shows that superior products may prosper despite the presence of strong incumbents and network effects.

Basing antitrust policies on sweeping presumptions about digital competition – such as the idea that network effects are rampant or the suggestion that online platforms necessarily imply “extreme returns to scale” – is thus likely to do more harm than good. Instead, Antitrust authorities should take a leaf out of Ronald Coase’s book, and avoid blackboard economics in favor of a more granular approach.

Writing in the New York Times, journalist E. Tammy Kim recently called for Seattle and other pricey, high-tech hubs to impose a special tax on Microsoft and other large employers of high-paid workers. Efficiency demands such a tax, she says, because those companies are imposing a negative externality: By driving up demand for housing, they are causing rents and home prices to rise, which adversely affects city residents.

Arguing that her proposal is “akin to a pollution tax,” Ms. Kim writes:

A half-century ago, it seemed inconceivable that factories, smelters or power plants should have to account for the toxins they released into the air.  But we have since accepted the idea that businesses should have to pay the public for the negative externalities they cause.

It is true that negative externalities—costs imposed on people who are “external” to the process creating those costs (as when a factory belches rancid smoke on its neighbors)—are often taxed. One justification for such a tax is fairness: It seems inequitable that one party would impose costs on another; justice may demand that the victimizer pay. The justification cited by the economist who first proposed such taxes, though, was something different. In his 1920 opus, The Economics of Welfare, British economist A.C. Pigou proposed taxing behavior involving negative externalities in order to achieve efficiency—an increase in overall social welfare.   

With respect to the proposed tax on Microsoft and other high-tech employers, the fairness argument seems a stretch, and the efficiency argument outright fails. Let’s consider each.

To achieve fairness by forcing a victimizer to pay for imposing costs on a victim, one must determine who is the victimizer. Ms. Kim’s view is that Microsoft and its high-paid employees are victimizing (imposing costs on) incumbent renters and lower-paid homebuyers. But is that so clear?

Microsoft’s desire to employ high-skilled workers, and those employees’ desire to live near their work, conflicts with incumbent renters’ desire for low rent and lower paid homebuyers’ desire for cheaper home prices. If Microsoft got its way, incumbent renters and lower paid homebuyers would be worse off.

But incumbent renters’ and lower-paid homebuyers’ insistence on low rents and home prices conflicts with the desires of Microsoft, the high-skilled workers it would like to hire, and local homeowners. If incumbent renters and lower paid homebuyers got their way and prevented Microsoft from employing high-wage workers, Microsoft, its potential employees, and local homeowners would be worse off. Who is the victim here?

As Nobel laureate Ronald Coase famously observed, in most cases involving negative externalities, there is a reciprocal harm: Each party is a victim of the other party’s demands and a victimizer with respect to its own. When both parties are victimizing each other, it’s hard to “do justice” by taxing “the” victimizer.

A desire to achieve efficiency provides a sounder basis for many so-called Pigouvian taxes. With respect to Ms. Kim’s proposed tax, however, the efficiency justification fails. To see why that is so, first consider how it is that Pigouvian taxes may enhance social welfare.

When a business engages in some productive activity, it uses resources (labor, materials, etc.) to produce some sort of valuable output (e.g., a good or service). In determining what level of productive activity to engage in (e.g., how many hours to run the factory, etc.), it compares its cost of engaging in one more unit of activity to the added benefit (revenue) it will receive from doing so. If its so-called “marginal cost” from the additional activity is less than or equal to the “marginal benefit” it will receive, it will engage in the activity; otherwise, it won’t.  

When the business is bearing all the costs and benefits of its actions, this outcome is efficient. The cost of the inputs used in production are determined by the value they could generate in alternative uses. (For example, if a flidget producer could create $4 of value from an ounce of tin, a widget-maker would have to bid at least $4 to win that tin from the flidget-maker.) If a business finds that continued production generates additional revenue (reflective of consumers’ subjective valuation of the business’s additional product) in excess of its added cost (reflective of the value its inputs could create if deployed toward their next-best use), then making more moves productive resources to their highest and best uses, enhancing social welfare. This outcome is “allocatively efficient,” meaning that productive resources have been allocated in a manner that wrings the greatest possible value from them.

Allocative efficiency may not result, though, if the producer is able to foist some of its costs onto others.  Suppose that it costs a producer $4.50 to make an additional widget that he could sell for $5.00. He’d make the widget. But what if producing the widget created pollution that imposed $1 of cost on the producer’s neighbors? In that case, it could be inefficient to produce the widget; the total marginal cost of doing so, $5.50, might well exceed the marginal benefit produced, which could be as low as $5.00. Negative externalities, then, may result in an allocative inefficiency—i.e., a use of resources that produces less total value than some alternative use.

Pigou’s idea was to use taxes to prevent such inefficiencies. If the government were to charge the producer a tax equal to the cost his activity imposed on others ($1 in the above example), then he would capture all the marginal benefit and bear all the marginal cost of his activity. He would thus be motivated to continue his activity only to the point at which its total marginal benefit equaled its total marginal cost. The point of a Pigouvian tax, then, is to achieve allocative efficiency—i.e., to channel productive resources toward their highest and best ends.

When it comes to the negative externality Ms. Kim has identified—an increase in housing prices occasioned by high-tech companies’ hiring of skilled workers—the efficiency case for a Pigouvian tax crumbles. That is because the external cost at issue here is a “pecuniary” externality, a special sort of externality that does not generate inefficiency.

A pecuniary externality is one where the adverse third-party effect consists of an increase in market prices. If that’s the case, the allocative inefficiency that may justify Pigouvian taxes does not exist. There’s no inefficiency from the mere fact that buyers pay more.  Their loss is perfectly offset by a gain to sellers, and—here’s the crucial part—the higher prices channel productive resources toward, not away from, their highest and best ends. High rent levels, for example, signal to real estate developers that more resources should be devoted to creating living spaces within the city. That’s allocatively efficient.

Now, it may well be the case that government policies thwart developers from responding to those salutary price signals. The cities that Ms. Kim says should impose a tax on high-tech employers—Seattle, San Francisco, Austin, New York, and Boulder—have some of the nation’s most restrictive real estate development rules. But that’s a government failure, not a market failure.

In the end, Ms. Kim’s pollution tax analogy fails. The efficiency case for a Pigouvian tax to remedy negative externalities does not apply when, as here, the externality at issue is pecuniary.

For more on pecuniary versus “technological” (non-pecuniary) externalities and appropriate responses thereto, check out Chapter 4 of my recent book, How to Regulate: A Guide for Policymakers.

Today would have been Henry Manne’s 90th birthday. When he passed away in 2015 he left behind an immense and impressive legacy. In 1991, at the inaugural meeting of the American Law & Economics Association (ALEA), Manne was named a Life Member of ALEA and, along with Nobel Laureate Ronald Coase, and federal appeals court judges Richard Posner and Guido Calabresi, one of the four Founders of Law and Economics. The organization I founded, the International Center for Law & Economics is dedicated to his memory, along with that of his great friend and mentor, UCLA economist Armen Alchian.

Manne is best known for his work in corporate governance and securities law and regulation, of course. But sometimes forgotten is that his work on the market for corporate control was motivated by concerns about analytical flaws in merger enforcement. As former FTC commissioners Maureen Ohlhausen and Joshua Wright noted in a 2015 dissenting statement:

The notion that the threat of takeover would induce current managers to improve firm performance to the benefit of shareholders was first developed by Henry Manne. Manne’s pathbreaking work on the market for corporate control arose out of a concern that antitrust constraints on horizontal mergers would distort its functioning. See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110 (1965).

But Manne’s focus on antitrust didn’t end in 1965. Moreover, throughout his life he was a staunch critic of misguided efforts to expand the power of government, especially when these efforts claimed to have their roots in economic reasoning — which, invariably, was hopelessly flawed. As his obituary notes:

In his teaching, his academic writing, his frequent op-eds and essays, and his work with organizations like the Cato Institute, the Liberty Fund, the Institute for Humane Studies, and the Mont Pèlerin Society, among others, Manne advocated tirelessly for a clearer understanding of the power of markets and competition and the importance of limited government and economically sensible regulation.

Thus it came to be, in 1974, that Manne was called to testify before the Senate Judiciary Committee, Subcommittee on Antitrust and Monopoly, on Michigan Senator Philip A. Hart’s proposed Industrial Reorganization Act. His testimony is a tour de force, and a prescient rejoinder to the faddish advocates of today’s “hipster antitrust”— many of whom hearken longingly back to the antitrust of the 1960s and its misguided “gurus.”

Henry Manne’s trenchant testimony critiquing the Industrial Reorganization Act and its (ostensible) underpinnings is reprinted in full in this newly released ICLE white paper (with introductory material by Geoffrey Manne):

Henry G. Manne: Testimony on the Proposed Industrial Reorganization Act of 1973 — What’s Hip (in Antitrust) Today Should Stay Passé

Sen. Hart proposed the Industrial Reorganization Act in order to address perceived problems arising from industrial concentration. The bill was rooted in the belief that industry concentration led inexorably to monopoly power; that monopoly power, however obtained, posed an inexorable threat to freedom and prosperity; and that the antitrust laws (i.e., the Sherman and Clayton Acts) were insufficient to address the purported problems.

That sentiment — rooted in the reflexive application of the (largely-discredited structure-conduct-performance (SCP) paradigm) — had already become largely passé among economists in the 70s, but it has resurfaced today as the asserted justification for similar (although less onerous) antitrust reform legislation and the general approach to antitrust analysis commonly known as “hipster antitrust.”

The critiques leveled against the asserted economic underpinnings of efforts like the Industrial Reorganization Act are as relevant today as they were then. As Henry Manne notes in his testimony:

To be successful in this stated aim [“getting the government out of the market”] the following dreams would have to come true: The members of both the special commission and the court established by the bill would have to be satisfied merely to complete their assigned task and then abdicate their tremendous power and authority; they would have to know how to satisfactorily define and identify the limits of the industries to be restructured; the Government’s regulation would not sacrifice significant efficiencies or economies of scale; and the incentive for new firms to enter an industry would not be diminished by the threat of a punitive response to success.

The lessons of history, economic theory, and practical politics argue overwhelmingly against every one of these assumptions.

Both the subject matter of and impetus for the proposed bill (as well as Manne’s testimony explaining its economic and political failings) are eerily familiar. The preamble to the Industrial Reorganization Act asserts that

competition… preserves a democratic society, and provides an opportunity for a more equitable distribution of wealth while avoiding the undue concentration of economic, social, and political power; [and] the decline of competition in industries with oligopoly or monopoly power has contributed to unemployment, inflation, inefficiency, an underutilization of economic capacity, and the decline of exports….

The echoes in today’s efforts to rein in corporate power by adopting structural presumptions are unmistakable. Compare, for example, this language from Sen. Klobuchar’s Consolidation Prevention and Competition Promotion Act of 2017:

[C]oncentration that leads to market power and anticompetitive conduct makes it more difficult for people in the United States to start their own businesses, depresses wages, and increases economic inequality;

undue market concentration also contributes to the consolidation of political power, undermining the health of democracy in the United States; [and]

the anticompetitive effects of market power created by concentration include higher prices, lower quality, significantly less choice, reduced innovation, foreclosure of competitors, increased entry barriers, and monopsony power.

Remarkably, Sen. Hart introduced his bill as “an alternative to government regulation and control.” Somehow, it was the antithesis of “government control” to introduce legislation that, in Sen. Hart’s words,

involves changing the life styles of many of our largest corporations, even to the point of restructuring whole industries. It involves positive government action, not to control industry but to restore competition and freedom of enterprise in the economy

Like today’s advocates of increased government intervention to design the structure of the economy, Sen. Hart sought — without a trace of irony — to “cure” the problem of politicized, ineffective enforcement by doubling down on the power of the enforcers.

Henry Manne was having none of it. As he pointedly notes in his testimony, the worst problems of monopoly power are of the government’s own making. The real threat to democracy, freedom, and prosperity is the political power amassed in the bureaucratic apparatus that frequently confers monopoly, at least as much as the monopoly power it spawns:

[I]t takes two to make that bargain [political protection and subsidies in exchange for lobbying]. And as we look around at various industries we are constrained to ask who has not done this. And more to the point, who has not succeeded?

It is unhappily almost impossible to name a significant industry in the United States that has not gained some degree of protection from the rigors of competition from Federal, State or local governments.

* * *

But the solution to inefficiencies created by Government controls cannot lie in still more controls. The politically responsible task ahead for Congress is to dismantle our existing regulatory monster before it strangles us.

We have spawned a gigantic bureaucracy whose own political power threatens the democratic legitimacy of government.

We are rapidly moving toward the worst features of a centrally planned economy with none of the redeeming political, economic, or ethical features usually claimed for such systems.

The new white paper includes Manne’s testimony in full, including his exchange with Sen. Hart and committee staffers following his prepared remarks.

It is, sadly, nearly as germane today as it was then.

One final note: The subtitle for the paper is a reference to the song “What Is Hip?” by Tower of Power. Its lyrics are decidedly apt:

You done went and found you a guru,

In your effort to find you a new you,

And maybe even managed

To raise your conscious level.

While you’re striving to find the right road,

There’s one thing you should know:

What’s hip today

Might become passé.

— Tower of Power, What Is Hip? (Emilio Castillo, John David Garibaldi & Stephen M. Kupka, What Is Hip? (Bob-A-Lew Songs 1973), from the album TOWER OF POWER (Warner Bros. 1973))

And here’s the song, in all its glory:

 

I received word today that Douglass North passed away yesterday at the age of 95 (obit here). Professor North shared the Nobel Prize in Economic with Robert Fogel in 1993 for his work in economic history on the role of institutions in shaping economic development and performance.

Doug was one of my first professors in graduate school at Washington University. Many of us in our first year crammed into Doug’s economic history class for fear that he might retire and we not get the chance to study under him. Little did we expect that he would continue teaching into his DoughNorth_color_300-doc80s. The text for our class was the pre-publication manuscript of his book, Institutions, Institutional Change and Economic Performance. Doug’s course offered an interesting juxtaposition to the traditional neoclassical microeconomics course for first-year PhD students. His work challenged the simplifying assumptions of the neoclassical system and shed a whole new light on understanding economic history, development and performance. I still remember that day in October 1993 when the department was abuzz with the announcement that Doug had received the Nobel Prize. It was affirming and inspiring.

As I started work on my dissertation, I had hoped to incorporate a historical component on the early development of crude oil futures trading in the 1930s so I could get Doug involved on my committee. Unfortunately, there was not enough information still available to provide any analysis (there was one news reference to a new crude futures exchange, but nothing more–and the historical records of the NY Mercantile Exchange had been lost in a fire).and I had to focus solely on the deregulatory period of the late 1970s and early 1980s. I remember joking at one of our economic history workshops that I wasn’t sure if it counted as economic history since it happened during Doug’s lifetime.

Doug was one of the founding conspirators for the International Society for New Institutional Economics (now the Society for Institutional & Organizational Economics) in 1997, along with Ronald Coase and Oliver Williamson. Although the three had strong differences of opinions concerning certain aspects of their respective theoretical approaches, they understood the generally complementary nature of their work and its importance not just for the economic profession, but for understanding how societies and organizations perform and evolve and the role institutions play in that process.

The opportunity to work around these individuals, particularly with North and Coase, strongly shaped and influenced my understanding not only of economics, but of why a broader perspective of economics is so important for understanding the world around us. That experience profoundly affected my own research interests and my teaching of economics. Some of Doug’s papers continue to play an important role in courses I teach on economic policy. Students, especially international students, continue to be inspired by his explanation of the roles of institutions, how they affect markets and societies, and the forces that lead to institutional change.

As we prepare to celebrate Thanksgiving in the States, Doug’s passing is a reminder of how much I have to be thankful for over my career. I’m grateful for having had the opportunity to know and to work with Doug. I’m grateful that we had an opportunity to bring him to Mizzou in 2003 for our CORI Seminar series, at which he spoke on Understanding the Process of Economic Change (the title of his next book at the time). And I’m especially thankful for the influence he had on my understanding of economics and that his ideas will continue to shape economic thinking and economic policy for years to come.

Following is the second in a series of posts on my forthcoming book, How to Regulate: A Guide for Policy Makers (Cambridge Univ. Press 2017).  The initial post is here.

As I mentioned in my first post, How to Regulate examines the market failures (and other private ordering defects) that have traditionally been invoked as grounds for government regulation.  For each such defect, the book details the adverse “symptoms” produced, the underlying “disease” (i.e., why those symptoms emerge), the range of available “remedies,” and the “side effects” each remedy tends to generate.  The first private ordering defect the book addresses is the externality.

I’ll never forget my introduction to the concept of externalities.  P.J. Hill, my much-beloved economics professor at Wheaton College, sauntered into the classroom eating a giant, juicy apple.  As he lectured, he meandered through the rows of seats, continuing to chomp on that enormous piece of fruit.  Every time he took a bite, juice droplets and bits of apple fell onto students’ desks.  Speaking with his mouth full, he propelled fruit flesh onto students’ class notes.  It was disgusting.

It was also quite effective.  Professor Hill was making the point (vividly!) that some activities impose significant effects on bystanders.  We call those effects “externalities,” he explained, because they are experienced by people who are outside the process that creates them.  When the spillover effects are adverse—costs—we call them “negative” externalities.  “Positive” externalities are spillovers of benefits.  Air pollution is a classic example of a negative externality.  Landscaping one’s yard, an activity that benefits one’s neighbors, generates a positive externality.

An obvious adverse effect (“symptom”) of externalities is unfairness.  It’s not fair for a factory owner to capture the benefits of its production while foisting some of the cost onto others.  Nor is it fair for a homeowner’s neighbors to enjoy her spectacular flower beds without contributing to their creation or maintenance.

A graver symptom of externalities is “allocative inefficiency,” a failure to channel productive resources toward the uses that will wring the greatest possible value from them.  When an activity involves negative externalities, people tend to do too much of it—i.e., to devote an inefficiently high level of productive resources to the activity.  That’s because a person deciding how much of the conduct at issue to engage in accounts for all of his conduct’s benefits, which ultimately inure to him, but only a portion of his conduct’s costs, some of which are borne by others.  Conversely, when an activity involves positive externalities, people tend to do too little of it.  In that case, they must bear all of the cost of their conduct but can capture only a portion of the benefit it produces.

Because most government interventions addressing externalities have been concerned with negative externalities (and because How to Regulate includes a separate chapter on public goods, which entail positive externalities), the book’s externalities chapter focuses on potential remedies for cost spillovers.  There are three main options, which are discussed below the fold. Continue Reading…

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.

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.

 

Ronald Coase on regulation

Geoffrey Manne —  2 September 2013

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.

The famous epitaph that adorns Sir Christopher Wren’s tomb in St. Paul’s Cathedral – Si monumentum requiris, circumspice (“if you seek his monument, look around you”) – applies equally well to Henry Manne, who passed away on January 17.  Wren left a living memorial to his work in St. Paul’s and the many other churches he designed in the City of London.  Manne’s living memorial consists in the law and economics institutions which he created and nurtured during a long and productive career.

Manne is justly deemed one of the three founders of the law and economics movement, along with Guido Calabresi and the late Ronald Coase.  Manne’s original work on the theory of the firm and the efficiency justifications for insider trading was brilliant and provocative.  Of greatest lasting significance, however, was his seminal role in creating and overseeing institutions designed to propagate law and economics throughout the legal profession – such as the Law and Economics Institutes for Professors, Judges and Economists, and the Center for Law and Economics at Emory University (later moved to George Mason University).  Furthermore, with the expansion of law and economics programs to include foreign participants, law and economics insights are influencing litigation, transactions, and regulatory analysis in many countries.  Manne’s initiative and entrepreneurial spirit were a critical catalyst in helping trigger this transformation.

The one institution that is perhaps most intimately associated with Manne and his philosophy – Manne’s St. Paul’s Cathedral, if you will – is George Mason Law School in Arlington, Virginia.  When Manne became George Mason’s Dean in 1986, he arrived at a fledgling school of no particular distinction, which was overshadowed by major long-established Washington D.C. law schools.  Manne immediately went about overhauling the faculty, bringing in scholars with a strong law and economics orientation, and reinstituting the Center for Law and Economics at Mason.  Within a few years Mason Law became a magnet for first rate young law and economics scholars of a free market bent who found a uniquely collegial atmosphere at Mason.  Mason retained its law and economics orientation under subsequent deans.  Today its faculty is not only a source of pathbreaking scholarship, it is a fount of wisdom that provides innovative (and highly needed) advice to help inform and improve Washington D.C. policy debates.  This would not have been possible without Henry Manne’s academic leadership and foresight.  (Full disclosure – I have been an adjunct professor at George Mason Law School since 1991.)

Finally, I should mention that those of us who write for Truth on the Market (TOTM), not to mention countless other websites that share TOTM’s philosophical orientation, are indebted to Henry Manne for his seminal role in the law and economics movement.  I am sure that I speak for many in offering my heartfelt condolences to Henry’s son, Geoffrey Manne, the driving force behind TOTM.  Geoff, like the visitors to Christopher Wren’s masterwork, we look around us and delight in your father’s accomplishments.

As the organizer of this retrospective on Josh Wright’s tenure as FTC Commissioner, I have the (self-conferred) honor of closing out the symposium.

When Josh was confirmed I wrote that:

The FTC will benefit enormously from Josh’s expertise and his error cost approach to antitrust and consumer protection law will be a tremendous asset to the Commission — particularly as it delves further into the regulation of data and privacy. His work is rigorous, empirically grounded, and ever-mindful of the complexities of both business and regulation…. The Commissioners and staff at the FTC will surely… profit from his time there.

Whether others at the Commission have really learned from Josh is an open question, but there’s no doubt that Josh offered an enormous amount from which they could learn. As Tim Muris said, Josh “did not disappoint, having one of the most important and memorable tenures of any non-Chair” at the agency.

Within a month of his arrival at the Commission, in fact, Josh “laid down the cost-benefit-analysis gauntlet” in a little-noticed concurring statement regarding a proposed amendment to the Hart-Scott-Rodino Rules. The technical details of the proposed rule don’t matter for these purposes, but, as Josh noted in his statement, the situation intended to be avoided by the rule had never arisen:

The proposed rulemaking appears to be a solution in search of a problem. The Federal Register notice states that the proposed rules are necessary to prevent the FTC and DOJ from “expend[ing] scarce resources on hypothetical transactions.” Yet, I have not to date been presented with evidence that any of the over 68,000 transactions notified under the HSR rules have required Commission resources to be allocated to a truly hypothetical transaction.

What Josh asked for in his statement was not that the rule be scrapped, but simply that, before adopting the rule, the FTC weigh its costs and benefits.

As I noted at the time:

[I]t is the Commission’s responsibility to ensure that the rules it enacts will actually be beneficial (it is a consumer protection agency, after all). The staff, presumably, did a perfectly fine job writing the rule they were asked to write. Josh’s point is simply that it isn’t clear the rule should be adopted because it isn’t clear that the benefits of doing so would outweigh the costs.

As essentially everyone who has contributed to this symposium has noted, Josh was singularly focused on the rigorous application of the deceptively simple concept that the FTC should ensure that the benefits of any rule or enforcement action it adopts outweigh the costs. The rest, as they say, is commentary.

For Josh, this basic principle should permeate every aspect of the agency, and permeate the way it thinks about everything it does. Only an entirely new mindset can ensure that outcomes, from the most significant enforcement actions to the most trivial rule amendments, actually serve consumers.

While the FTC has a strong tradition of incorporating economic analysis in its antitrust decision-making, its record in using economics in other areas is decidedly mixed, as Berin points out. But even in competition policy, the Commission frequently uses economics — but it’s not clear it entirely understands economics. The approach that others have lauded Josh for is powerful, but it’s also subtle.

Inherent limitations on anyone’s knowledge about the future of technology, business and social norms caution skepticism, as regulators attempt to predict whether any given business conduct will, on net, improve or harm consumer welfare. In fact, a host of factors suggests that even the best-intentioned regulators tend toward overconfidence and the erroneous condemnation of novel conduct that benefits consumers in ways that are difficult for regulators to understand. Coase’s famous admonition in a 1972 paper has been quoted here before (frequently), but bears quoting again:

If an economist finds something – a business practice of one sort or another – 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 very large, and the reliance on a monopoly explanation, frequent.

Simply “knowing” economics, and knowing that it is important to antitrust enforcement, aren’t enough. Reliance on economic formulae and theoretical models alone — to say nothing of “evidence-based” analysis that doesn’t or can’t differentiate between probative and prejudicial facts — doesn’t resolve the key limitations on regulatory decisionmaking that threaten consumer welfare, particularly when it comes to the modern, innovative economy.

As Josh and I have written:

[O]ur theoretical knowledge cannot yet confidently predict the direction of the impact of additional product market competition on innovation, much less the magnitude. Additionally, the multi-dimensional nature of competition implies that the magnitude of these impacts will be important as innovation and other forms of competition will frequently be inversely correlated as they relate to consumer welfare. Thus, weighing the magnitudes of opposing effects will be essential to most policy decisions relating to innovation. Again, at this stage, economic theory does not provide a reliable basis for predicting the conditions under which welfare gains associated with greater product market competition resulting from some regulatory intervention will outweigh losses associated with reduced innovation.

* * *

In sum, the theoretical and empirical literature reveals an undeniably complex interaction between product market competition, patent rules, innovation, and consumer welfare. While these complexities are well understood, in our view, their implications for the debate about the appropriate scale and form of regulation of innovation are not.

Along the most important dimensions, while our knowledge has expanded since 1972, the problem has not disappeared — and it may only have magnified. As Tim Muris noted in 2005,

[A] visitor from Mars who reads only the mathematical IO literature could mistakenly conclude that the U.S. economy is rife with monopoly power…. [Meanwhile, Section 2’s] history has mostly been one of mistaken enforcement.

It may not sound like much, but what is needed, what Josh brought to the agency, and what turns out to be absolutely essential to getting it right, is unflagging awareness of and attention to the institutional, political and microeconomic relationships that shape regulatory institutions and regulatory outcomes.

Regulators must do their best to constantly grapple with uncertainty, problems of operationalizing useful theory, and, perhaps most important, the social losses associated with error costs. It is not (just) technicians that the FTC needs; it’s regulators imbued with the “Economic Way of Thinking.” In short, what is needed, and what Josh brought to the Commission, is humility — the belief that, as Coase also wrote, sometimes the best answer is to “do nothing at all.”

The technocratic model of regulation is inconsistent with the regulatory humility required in the face of fast-changing, unexpected — and immeasurably valuable — technological advance. As Virginia Postrel warns in The Future and Its Enemies:

Technocrats are “for the future,” but only if someone is in charge of making it turn out according to plan. They greet every new idea with a “yes, but,” followed by legislation, regulation, and litigation…. By design, technocrats pick winners, establish standards, and impose a single set of values on the future.

For Josh, the first JD/Econ PhD appointed to the FTC,

economics provides a framework to organize the way I think about issues beyond analyzing the competitive effects in a particular case, including, for example, rulemaking, the various policy issues facing the Commission, and how I weigh evidence relative to the burdens of proof and production. Almost all the decisions I make as a Commissioner are made through the lens of economics and marginal analysis because that is the way I have been taught to think.

A representative example will serve to illuminate the distinction between merely using economics and evidence and understanding them — and their limitations.

In his Nielson/Arbitron dissent Josh wrote:

The Commission thus challenges the proposed transaction based upon what must be acknowledged as a novel theory—that is, that the merger will substantially lessen competition in a market that does not today exist.

[W]e… do not know how the market will evolve, what other potential competitors might exist, and whether and to what extent these competitors might impose competitive constraints upon the parties.

Josh’s straightforward statement of the basis for restraint stands in marked contrast to the majority’s decision to impose antitrust-based limits on economic activity that hasn’t even yet been contemplated. Such conduct is directly at odds with a sensible, evidence-based approach to enforcement, and the economic problems with it are considerable, as Josh also notes:

[I]t is an exceedingly difficult task to predict the competitive effects of a transaction where there is insufficient evidence to reliably answer the[] basic questions upon which proper merger analysis is based.

When the Commission’s antitrust analysis comes unmoored from such fact-based inquiry, tethered tightly to robust economic theory, there is a more significant risk that non-economic considerations, intuition, and policy preferences influence the outcome of cases.

Compare in this regard Josh’s words about Nielsen with Deborah Feinstein’s defense of the majority from such charges:

The Commission based its decision not on crystal-ball gazing about what might happen, but on evidence from the merging firms about what they were doing and from customers about their expectations of those development plans. From this fact-based analysis, the Commission concluded that each company could be considered a likely future entrant, and that the elimination of the future offering of one would likely result in a lessening of competition.

Instead of requiring rigorous economic analysis of the facts, couched in an acute awareness of our necessary ignorance about the future, for Feinstein the FTC fulfilled its obligation in Nielsen by considering the “facts” alone (not economic evidence, mind you, but customer statements and expressions of intent by the parties) and then, at best, casually applying to them the simplistic, outdated structural presumption – the conclusion that increased concentration would lead inexorably to anticompetitive harm. Her implicit claim is that all the Commission needed to know about the future was what the parties thought about what they were doing and what (hardy disinterested) customers thought they were doing. This shouldn’t be nearly enough.

Worst of all, Nielsen was “decided” with a consent order. As Josh wrote, strongly reflecting the essential awareness of the broader institutional environment that he brought to the Commission:

[w]here the Commission has endorsed by way of consent a willingness to challenge transactions where it might not be able to meet its burden of proving harm to competition, and which therefore at best are competitively innocuous, the Commission’s actions may alter private parties’ behavior in a manner that does not enhance consumer welfare.

Obviously in this regard his successful effort to get the Commission to adopt a UMC enforcement policy statement is a most welcome development.

In short, Josh is to be applauded not because he brought economics to the Commission, but because he brought the economic way of thinking. Such a thing is entirely too rare in the modern administrative state. Josh’s tenure at the FTC was relatively short, but he used every moment of it to assiduously advance his singular, and essential, mission. And, to paraphrase the last line of the movie The Right Stuff (it helps to have the rousing film score playing in the background as you read this): “for a brief moment, [Josh Wright] became the greatest [regulator] anyone had ever seen.”

I would like to extend my thanks to everyone who participated in this symposium. The contributions here will stand as a fitting and lasting tribute to Josh and his legacy at the Commission. And, of course, I’d also like to thank Josh for a tenure at the FTC very much worth honoring.

Henry Manne was a great man, and a great father. He was, for me as for many others, one of the most important intellectual influences in my life. I will miss him dearly.

Following is his official obituary. RIP, dad.

Henry Girard Manne died on January 17, 2015 at the age of 86. A towering figure in legal education, Manne was one of the founders of the Law and Economics movement, the 20th century’s most important and influential legal academic discipline.

Manne is survived by his wife, Bobbie Manne; his children, Emily and Geoffrey Manne; two grandchildren, Annabelle and Lily Manne; and two nephews, Neal and Burton Manne. He was preceded in death by his parents, Geoffrey and Eva Manne, and his brother, Richard Manne.

Henry Manne was born on May 10, 1928, in New Orleans. The son of merchant parents, he was raised in Memphis, Tennessee. He attended Central High School in Memphis, and graduated with a BA in economics from Vanderbilt University in 1950. Manne received a JD from the University of Chicago in 1952, and a doctorate in law (SJD) from Yale University in 1966. He also held honorary degrees from Seattle University, Universidad Francesco Marroquin in Guatemala and George Mason University.

Following law school Manne served in the Air Force JAG Corps, stationed at Chanute Air Force Base in Illinois and McGuire Air Force Base in New Jersey. He practiced law briefly in Chicago before beginning his teaching career at St. Louis University in 1956. In subsequent years he also taught at the University of Wisconsin, George Washington University, the University of Rochester, Stanford University, the University of Miami, Emory University, George Mason University, the University of Chicago, and Northwestern University.

Throughout his career Henry Manne ’s writings originated, developed or anticipated an extraordinary range of ideas and themes that have animated the past forty years of law and economics scholarship. For his work, Manne was named a Life Member of the American Law and Economics Association and, along with Nobel Laureate Ronald Coase, and federal appeals court judges Richard Posner and Guido Calabresi, one of the four Founders of Law and Economics.

In the 1950s and 60s Manne pioneered the application of economic principles to the study of corporations and corporate law, authoring seminal articles that transformed the field. His article, “Mergers and the Market for Corporate Control,” published in 1965, is credited with opening the field of corporate law to economic analysis and with anticipating what has come to be known as the Efficient Market Hypothesis (for which economist Eugene Fama was awarded the Nobel Prize in 2013). Manne’s 1966 book, Insider Trading and the Stock Market was the first scholarly work to challenge the logic of insider trading laws, and remains the most influential book on the subject today.

In 1968 Manne moved to the University of Rochester with the aim of starting a new law school. Manne anticipated many of the current criticisms that have been aimed at legal education in recent years, and proposed a law school that would provide rigorous training in the economic analysis of law as well as specialized training in specific areas of law that would prepare graduates for practice immediately out of law school. Manne’s proposal for a new law school, however, drew the ire of incumbent law schools in upstate New York, which lobbied against accreditation of the new program.

While at Rochester, in 1971, Manne created the “Economics Institute for Law Professors,” in which, for the first time, law professors were offered intensive instruction in microeconomics with the aim of incorporating economics into legal analysis and theory. The Economics Institute was later moved to the University of Miami when Manne founded the Law &Economics Center there in 1974. While at Miami, Manne also began the John M. Olin Fellows Program in Law and Economics, which provided generous scholarships for professional economists to earn a law degree. That program (and its subsequent iterations) has gone on to produce dozens of professors of law and economics, as well as leading lawyers and influential government officials.

The creation of the Law & Economics Center (which subsequently moved to Emory University and then to George Mason Law School, where it continues today), was one of the foundational events in the Law and Economics Movement. Of particular importance to the development of US jurisprudence, its offerings were expanded to include economics courses for federal judges. At its peak a third of the federal bench and four members of the Supreme Court had attended at least one of its programs, and every major law school in the country today counts at least one law and economics scholar among its faculty. Nearly every legal field has been influenced by its scholarship and teaching.

When Manne became Dean of George Mason Law School in Arlington, Virginia, in 1986, he finally had the opportunity to implement the ideas he had originally developed at Rochester. Manne’s move to George Mason united him with economist James Buchanan, who was awarded the Nobel Prize for Economics in 1986 for his path-breaking work in the field of Public Choice economics, and turned George Mason University into a global leader in law and economics. His tenure as dean of George Mason, where he served as dean until 1997 and George Mason University Foundation Professor until 1999, transformed legal education by integrating a rigorous economic curriculum into the law school, and he remade George Mason Law School into one of the most important law schools in the country. The school’s Henry G. Manne Moot Court Competition for Law & Economics and the Henry G. Manne Program in Law and Economics Studies are named for him.

Manne was celebrated for his independence of mind and respect for sound reasoning and intellectual rigor, instead of academic pedigree. Soon after he left Rochester to start the Law and Economics Center, he received a call from Yale faculty member Ralph Winter (who later became a celebrated judge on the United States Court of Appeals) offering Manne a faculty position. As he recounted in an interview several years later, Manne told Winter, “Ralph, you’re two weeks and five years too late.” When Winter asked Manne what he meant, Manne responded, “Well, two weeks ago, I agreed that I would start this new center on law and economics.” When Winter asked, “And five years?” Manne responded, “And you’re five years too late for me to give a damn.”

The academic establishment’s slow and skeptical response to the ideas of law and economics eventually persuaded Manne that reform of legal education was unlikely to come from within the established order and that it would be necessary to challenge the established order from without. Upon assuming the helm at George Mason, Dean Manne immediately drew to the school faculty members laboring at less-celebrated law schools whom Manne had identified through his economics training seminars for law professors, including several alumni of his Olin Fellows programs. Today the law school is recognized as one of the world’s leading centers of law and economics.

Throughout his career, Manne was an outspoken champion of free markets and liberty. His intellectual heroes and intellectual peers were classical liberal economists like Friedrich Hayek, Ludwig Mises, Armen Alchian and Harold Demsetz, and these scholars deeply influenced his thinking. As economist Donald Boudreax said of Dean Manne, “I think what Henry saw in Alchian – and what Henry’s own admirers saw in Henry – was the reality that each unfailingly understood that competition in human affairs is an intrepid force…”

In his teaching, his academic writing, his frequent op-eds and essays, and his work with organizations like the Cato Institute, the Liberty Fund, the Institute for Humane Studies, and the Mont Pelerin Society, among others, Manne advocated tirelessly for a clearer understanding of the power of markets and competition and the importance of limited government and economically sensible regulation.

After leaving George Mason in 1999, Manne remained an active scholar and commenter on public affairs as a frequent contributor to the Wall Street Journal. He continued to provide novel insights on corporate law, securities law, and the reform of legal education. Following his retirement Manne became a Distinguished Visiting Professor at Ave Maria Law School in Naples, Florida. The Liberty Fund, of Indianapolis, Indiana, recently published The Collected Works of Henry G. Manne in three volumes.

For some, perhaps more than for all of his intellectual accomplishments Manne will be remembered as a generous bon vivant who reveled in the company of family and friends. He was an avid golfer (who never scheduled a conference far from a top-notch golf course), a curious traveler, a student of culture, a passionate eater (especially of ice cream and Peruvian rotisserie chicken from El Pollo Rico restaurant in Arlington, Virginia), and a gregarious debater (who rarely suffered fools gladly). As economist Peter Klein aptly remarked: “He was a charming companion and correspondent — clever, witty, erudite, and a great social and cultural critic, especially of the strange world of academia, where he plied his trade for five decades but always as a slight outsider.”

Scholar, intellectual leader, champion of individual liberty and free markets, and builder of a great law school—Manne’s influence on law and legal education in the Twentieth Century may be unrivaled. Today, the institutions he built and the intellectual movement he led continue to thrive and to draw sustenance from his intellect and imagination.

There will be a memorial service at George Mason University School of Law in Arlington, Virginia on Friday, February 13, at 4:00 pm. In lieu of flowers the family requests that donations be made in his honor to the Law & Economics Center at George Mason University School of Law, 3301 Fairfax Drive, Arlington, VA 22201 or online at www.masonlec.org.