Archives For central planning

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Corbin Barthold, (Senior Litigation Counsel, Washington Legal Foundation).]

The pandemic is serious. COVID-19 will overwhelm our hospitals. It might break our entire healthcare system. To keep the number of deaths in the low hundreds of thousands, a study from Imperial College London finds, we will have to shutter much of our economy for months. Small wonder the markets have lost a third of their value in a relentless three-week plunge. Grievous and cruel will be the struggle to come.

“All men of sense will agree,” Hamilton wrote in Federalist No. 70, “in the necessity of an energetic Executive.” In an emergency, certainly, that is largely true. In the midst of this crisis even a staunch libertarian can applaud the government’s efforts to maintain liquidity, and can understand its urge to start dispersing helicopter money. By at least acting like it knows what it’s doing, the state can lessen many citizens’ sense of panic. Some of the emergency measures might even work.

Of course, many of them won’t. Even a trillion-dollar stimulus package might be too small, and too slowly dispersed, to do much good. What’s worse, that pernicious line, “Don’t let a crisis go to waste,” is in the air. Much as price gougers are trying to arbitrage Purell, political gougers, such as Senator Elizabeth Warren, are trying to cram woke diktats into disaster-relief bills. Even now, especially now, it is well to remember that government is not very good at what it does.

But dreams of dirigisme die hard, especially at the New York Times. “During the Great Depression,” Farhad Manjoo writes, “Franklin D. Roosevelt assembled a mighty apparatus to rebuild a broken economy.” Government was great at what it does, in Manjoo’s view, until neoliberalism arrived in the 1980s and ruined everything. “The incompetence we see now is by design. Over the last 40 years, America has been deliberately stripped of governmental expertise.” Manjoo implores us to restore the expansive state of yesteryear—“the sort of government that promised unprecedented achievement, and delivered.”

This is nonsense. Our government is not incompetent because Grover Norquist tried (and mostly failed) to strangle it. Our government is incompetent because, generally speaking, government is incompetent. The keystone of the New Deal, the National Industrial Recovery Act of 1933, was an incoherent mess. Its stated goals were at once to “reduce and relieve unemployment,” “improve standards of labor,” “avoid undue restriction of production,” “induce and maintain united action of labor and management,” “organiz[e] . . . co-operative action among trade groups,” and “otherwise rehabilitate industry.” The law empowered trade groups to create their own “codes of unfair competition,” a privilege they quite predictably used to form anticompetitive cartels.

At no point in American history has the state, with all its “governmental expertise,” been adept at spending money, stimulus or otherwise. A law supplying funds for the Transcontinental Railroad offered to pay builders more for track laid in the mountains, but failed to specify where those mountains begin. Leland Stanford commissioned a study finding that, lo and behold, the Sierra Nevada begins deep in the Sacramento Valley. When “the federal Interior Department initially challenged [his] innovative geology,” reports the historian H.W. Brands, Stanford sent an agent directly to President Lincoln, a politician who “didn’t know much geology” but “preferred to keep his allies happy.” “My pertinacity and Abraham’s faith moved mountains,” the triumphant lobbyist quipped after the meeting.

The supposed golden age of expert government, the time between the rise of FDR and the fall of LBJ, was no better. At the height of the Apollo program, it occurred to a physics professor at Princeton that if there were a small glass reflector on the Moon, scientists could use lasers to calculate the distance between it and Earth with great accuracy. The professor built the reflector for $5,000 and approached the government. NASA loved the idea, but insisted on building the reflector itself. This it proceeded to do, through its standard contracting process, for $3 million.

When the pandemic at last subsides, the government will still be incapable of setting prices, predicting industry trends, or adjusting to changed circumstances. What F.A. Hayek called the knowledge problem—the fact that useful information is dispersed throughout society—will be as entrenched and insurmountable as ever. Innovation will still have to come, if it is to come at all, overwhelmingly from extensive, vigorous, undirected trial and error in the private sector.

When New York Times columnists are not pining for the great government of the past, they are surmising that widespread trauma will bring about the great government of the future. “The outbreak,” Jamelle Bouie proposes in an article entitled “The Era of Small Government is Over,” has “made our mutual interdependence clear. This, in turn, has made it a powerful, real-life argument for the broadest forms of social insurance.” The pandemic is “an opportunity,” Bouie declares, to “embrace direct state action as a powerful tool.”

It’s a bit rich for someone to write about the coming sense of “mutual interdependence” in the pages of a publication so devoted to sowing grievance and discord. The New York Times is a totem of our divisions. When one of its progressive columnists uses the word “unity,” what he means is “submission to my goals.”

In any event, disunity in America is not a new, or even necessarily a bad, thing. We are a fractious, almost ungovernable people. The colonists rebelled against the British government because they didn’t want to pay it back for defending them from the French during the Seven Years’ War. When Hamilton, champion of the “energetic Executive,” pushed through a duty on liquor, the frontier settlers of western Pennsylvania tarred and feathered the tax collectors. In the Astor Place Riot of 1849, dozens of New Yorkers died in a brawl over which of two men was the better Shakespearean actor. Americans are not housetrained.

True enough, if the virus takes us to the kind of depths not seen in these parts since the Great Depression, all bets are off. Short of that, however, no one should lightly assume that Americans will long tolerate a statist revolution imposed on their fears. And thank goodness for that. Our unruliness, our unwillingness to do what we’re told, is part of what makes our society so dynamic and prosperous.

COVID-19 will shake the world. When it has gone, a new scene will open. We can say very little now about what is going to change. But we can hope that Americans will remain a creative, opinionated, fiercely independent lot. And we can be confident that, come what may, planned administration will remain a source of problems, while unplanned free enterprise will remain the surest source of solutions.

I remain deeply skeptical of any antitrust challenge to the AT&T/Time Warner merger.  Vertical mergers like this one between a content producer and a distributor are usually efficiency-enhancing.  The theories of anticompetitive harm here rely on a number of implausible assumptions — e.g., that the combined company would raise content prices (currently set at profit-maximizing levels so that any price increase would reduce profits on content) in order to impair rivals in the distribution market and enhance profits there.  So I’m troubled that DOJ seems poised to challenge the merger.

I am, however, heartened — I think — by a speech Assistant Attorney General Makan Delrahim recently delivered at the ABA’s Antitrust Fall Forum. The crux of the speech, which is worth reading in its entirety, was that behavioral remedies — effectively having the government regulate a merged company’s day-to-day business decisions — are almost always inappropriate in merger challenges.

That used to be DOJ’s official position.  The Antitrust Division’s 2004 Remedies Guide proclaimed that “[s]tructural remedies are preferred to conduct remedies in merger cases because they are relatively clean and certain, and generally avoid costly government entanglement in the market.”

During the Obama administration, DOJ changed its tune.  Its 2011 Remedies Guide removed the statement quoted above as well as an assertion that behavioral remedies would be appropriate only in limited circumstances.  The 2011 Guide instead remained neutral on the choice between structural and conduct remedies, explaining that “[i]n certain factual circumstances, structural relief may be the best choice to preserve competition.  In a different set of circumstances, behavioral relief may be the best choice.”  The 2011 Guide also deleted the older Guide’s discussion of the limitations of conduct remedies.

Not surprisingly in light of the altered guidance, several of the Obama DOJ’s merger challenges—Ticketmaster/Live Nation, Comcast/NBC Universal, and Google/ITA Software, for example—resulted in settlements involving detailed and significant regulation of the combined firm’s conduct.  The settlements included mandatory licensing requirements, price regulation, compulsory arbitration of pricing disputes with recipients of mandated licenses, obligations to continue to develop and support certain products, the establishment of informational firewalls between divisions of the merged companies, prohibitions on price and service discrimination among customers, and various reporting requirements.

Settlements of such sort move antitrust a long way from the state of affairs described by then-professor Stephen Breyer, who wrote in his classic book Regulation and Its Reform:

[I]n principle the antitrust laws differ from classical regulation both in their aims and in their methods.  The antitrust laws seek to create or maintain the conditions of a competitive marketplace rather than replicate the results of competition or correct for the defects of competitive markets.  In doing so, they act negatively, through a few highly general provisions prohibiting certain forms of private conduct.  They do not affirmatively order firms to behave in specified ways; for the most part, they tell private firms what not to do . . . .  Only rarely do the antitrust enforcement agencies create the detailed web of affirmative legal obligations that characterizes classical regulation.

I am pleased to see Delrahim signaling a move away from behavioral remedies.  As Alden Abbott and I explained in our article, Recognizing the Limits of Antitrust: The Roberts Court Versus the Enforcement Agencies,

[C]onduct remedies present at least four difficulties from a limits of antitrust perspective.  First, they may thwart procompetitive conduct by the regulated firm.  When it comes to regulating how a firm interacts with its customers and rivals, it is extremely difficult to craft rules that will ban the bad without also precluding the good.  For example, requiring a merged firm to charge all customers the same price, a commonly imposed conduct remedy, may make it hard for the firm to serve clients who impose higher costs and may thwart price discrimination that actually enhances overall market output.  Second, conduct remedies entail significant direct implementation costs.  They divert enforcers’ attention away from ferreting out anticompetitive conduct elsewhere in the economy and require managers of regulated firms to focus on appeasing regulators rather than on meeting their customers’ desires.  Third, conduct remedies tend to grow stale.  Because competitive conditions are constantly changing, a conduct remedy that seems sensible when initially crafted may soon turn out to preclude beneficial business behavior.  Finally, by transforming antitrust enforcers into regulatory agencies, conduct remedies invite wasteful lobbying and, ultimately, destructive agency capture.

The first three of these difficulties are really aspects of F.A. Hayek’s famous knowledge problem.  I was thus particularly heartened by this part of Delrahim’s speech:

The economic liberty approach to industrial organization is also good economic policy.  F. A. Hayek won the 1974 Nobel Prize in economics for his work on the problems of central planning and the benefits of a decentralized free market system.  The price system of the free market, he explained, operates as a mechanism for communicating disaggregated information.  “[T]he ultimate decisions must be left to the people who are familiar with the[] circumstances.”  Regulation, I humbly submit in contrast, involves an arbiter unfamiliar with the circumstances that cannot possibly account for the wealth of information and dynamism that the free market incorporates.

So why the reservation in my enthusiasm?  Because eschewing conduct remedies may result in barring procompetitive mergers that might have been allowed with behavioral restraints.  If antitrust enforcers are going to avoid conduct remedies on Hayekian and Public Choice grounds, then they should challenge a merger only if they are pretty darn sure it presents a substantial threat to competition.

Delrahim appears to understand the high stakes of a “no behavioral remedies” approach to merger review:  “To be crystal clear, [having a strong presumption against conduct remedies] cuts both ways—if a merger is illegal, we should only accept a clean and complete solution, but if the merger is legal we should not impose behavioral conditions just because we can do so to expand our power and because the merging parties are willing to agree to get their merger through.”

The big question is whether the Trump DOJ will refrain from challenging mergers that do not pose a clear and significant threat to competition and consumer welfare.  On that matter, the jury is out.

As everyone knows by now, AT&T’s proposed merger with T-Mobile has hit a bureaucratic snag at the FCC.  The remarkable decision to refer the merger to the Commission’s Administrative Law Judge (in an effort to derail the deal) and the public release of the FCC staff’s internal, draft report are problematic and poorly considered.  But far worse is the content of the report on which the decision to attempt to kill the deal was based.

With this report the FCC staff joins the exalted company of AT&T’s complaining competitors (surely the least reliable judges of the desirability of the proposed merger if ever there were any) and the antitrust policy scolds and consumer “advocates” who, quite literally, have never met a merger of which they approved.

In this post I’m going to hit a few of the most glaring problems in the staff’s report, and I hope to return again soon with further analysis.

As it happens, AT&T’s own response to the report is actually very good and it effectively highlights many of the key problems with the staff’s report.  While it might make sense to take AT&T’s own reply with a grain of salt, in this case the reply is, if anything, too tame.  No doubt the company wants to keep in the Commission’s good graces (it is the very definition of a repeat player at the agency, after all).  But I am not so constrained.  Using the company’s reply as a jumping off point, let me discuss a few of the problems with the staff report.

First, as the blog post (written by Jim Cicconi, Senior Vice President of External & Legislative Affairs) notes,

We expected that the AT&T-T-Mobile transaction would receive careful, considered, and fair analysis.   Unfortunately, the preliminary FCC Staff Analysis offers none of that.  The document is so obviously one-sided that any fair-minded person reading it is left with the clear impression that it is an advocacy piece, and not a considered analysis.

In our view, the report raises questions as to whether its authors were predisposed.  The report cherry-picks facts to support its views, and ignores facts that don’t.  Where facts were lacking, the report speculates, with no basis, and then treats its own speculations as if they were fact.  This is clearly not the fair and objective analysis to which any party is entitled, and which we have every right to expect.

OK, maybe they aren’t pulling punches.  The fact that this reply was written with such scathing language despite AT&T’s expectation to have to go right back to the FCC to get approval for this deal in some form or another itself speaks volumes about the undeniable shoddiness of the report.

Cicconi goes on to detail five areas where AT&T thinks the report went seriously awry:  “Expanding LTE to 97% of the U.S. Population,” “Job Gains Versus Losses,” “Deutsche Telekom, T-Mobile’s Parent, Has Serious Investment Constraints,” “Spectrum” and “Competition.”  I have dealt with a few of these issues at some length elsewhere, including most notably here (noting how the FCC’s own wireless competition report “supports what everyone already knows: falling prices, improved quality, dynamic competition and unflagging innovation have led to a golden age of mobile services”), and here (“It is troubling that critics–particularly those with little if any business experience–are so certain that even with no obvious source of additional spectrum suitable for LTE coming from the government any time soon, and even with exponential growth in broadband (including mobile) data use, AT&T’s current spectrum holdings are sufficient to satisfy its business plans”).

What is really galling about the staff report—and, frankly, the basic posture of the agency—is that its criticisms really boil down to one thing:  “We believe there is another way to accomplish (something like) what AT&T wants to do here, and we’d just prefer they do it that way.”  This is central planning at its most repugnant.  What is both assumed and what is lacking in this basic posture is beyond the pale for an allegedly independent government agency—and as Larry Downes notes in the linked article, the agency’s hubris and its politics may have real, costly consequences for all of us.


But procedure must be followed, and the staff thus musters a technical defense to support its basic position, starting with the claim that the merger will result in too much concentration.  Blinded by its new-found love for HHIs, the staff commits a few blunders.  First, it claims that concentration levels like those in this case “trigger a presumption of harm” to competition, citing the DOJ/FTC Merger Guidelines.  Alas, as even the report’s own footnotes reveal, the Merger Guidelines actually say that highly concentrated markets with HHI increases of 200 or more trigger a presumption that the merger will “enhance market power.”  This is not, in fact, the same thing as harm to competition.  Elsewhere the staff calls this—a merger that increases concentration and gives one firm an “undue” share of the market—“presumptively illegal.”  Perhaps the staff could use an antitrust refresher course.  I’d be happy to come teach it.

Not only is there no actual evidence of consumer harm resulting from the sort of increases in concentration that might result from the merger, but the staff seems to derive its negative conclusions despite the damning fact that the data shows that wireless markets have seen considerable increases in concentration along with considerable decreases in prices, rather than harm to competition, over the last decade.  While high and increasing HHIs might indicate a need for further investigation, when actual evidence refutes the connection between concentration and price, they simply lose their relevance.  Someone should tell the FCC staff.

This is a different Wireless Bureau than the one that wrote so much sensible material in the 15th Annual Wireless Competition Report.  That Bureau described a complex, dynamic, robust mobile “ecosystem” driven not by carrier market power and industrial structure, but by rapid evolution and technological disruptors.  The analysis here wishes away every important factor that every consumer knows to be the real drivers of price and innovation in the mobile marketplace, including, among other things:

  1. Local markets, where there are five, six, or more carriers to choose from;
  2. Non-contract/pre-paid providers, whose strength is rapidly growing;
  3. Technology that is making more bands of available spectrum useful for competitive offerings;
  4. The reality that LTE will make inter-modal competition a reality; and
  5. The reality that churn is rampant and consumer decision-making is driven today by devices, operating systems, applications and content – not networks.

The resulting analysis is stilted and stale, and describes a wireless industry that exists only in the agency’s collective imagination.

There is considerably more to say about the report’s tortured unilateral effects analysis, but it will have to wait for my next post.  Here I want to quickly touch on a two of the other issues called out by Cicconi’s blog post. Continue Reading…

Obama’s Fatal Conceit

Thom Lambert —  21 September 2011

From the beginning of his presidency, I’ve wanted President Obama to succeed.  He was my professor in law school, and while I frequently disagreed with his take on things, I liked him very much. 

On the eve of his inauguration, I wrote on TOTM that I hoped he would spend some time meditating on Hayek’s The Use of Knowledge in Society.  That article explains that the information required to allocate resources to their highest and best ends, and thereby maximize social welfare, is never given to any one mind but is instead dispersed widely to a great many “men on the spot.”  I worried that combining Mr. Obama’s native intelligence with the celebrity status he attained during the presidential campaign would create the sort of “unwise” leader described in Plato’s Apology:

I thought that he appeared wise to many people and especially to himself, but he was not. I then tried to show him that he thought himself wise, but that he was not. As a result, he came to dislike me, and so did many of the bystanders. So I withdrew and thought to myself: “I am wiser than this man; it is likely that neither of us knows anything worthwhile, but he thinks he knows something when he does not, whereas when I do not know, neither do I think I know; so I am likely to be wiser than he to this small extent, that I do not think I know what I do not know.”

I have now become convinced that President Obama’s biggest problem is that he believes — wrongly — that he (or his people) know better how to allocate resources than do the many millions of “men and women on the spot.”  This is the thing that keeps our very smart President from being a wise President.  It is killing economic expansion in this country, and it may well render him a one-term President.  It is, quite literally, a fatal conceit.

Put aside for a minute the first stimulus, the central planning in the health care legislation and Dodd-Frank, and the many recent instances of industrial policy (e.g., Solyndra).  Focus instead on just the latest proposal from our President.  He is insisting that Congress pass legislation (“Pass this bill!”) that directs a half-trillion dollars to ends he deems most valuable (e.g., employment of public school teachers and first responders, municipal infrastructure projects).  And he proposes to take those dollars from wealthier Americans by, among other things, limiting deductions for charitable giving, taxing interest on municipal bonds, and raising tax rates on investment income (via the “Buffet rule”).

Do you see what’s happening here?  The President is proposing to penalize private investment (where the investors themselves decide which projects deserve their money) in order to fund government investment.  He proposes to penalize charitable giving (where the givers themselves get to choose their beneficiaries) in order to fund government outlays to the needy.  He calls for impairing municipalities’ funding advantage (which permits them to raise money cheaply to fund the projects they deem most worthy) in order to fund municipal projects that the federal government deems worthy of funding.  (More on that here — and note that I agree with Golub that we should ditch the deduction for muni bond interest as part of a broader tax reform.)

In short, the President has wholly disregarded Hayek’s central point:  He believes that he and his people know better than the men and women on the spot how to allocate productive resources.  That conceit renders a very smart man very unwise.  Solyndra, I fear, is just the beginning.

Epstein on Obama at U of C

Thom Lambert —  29 January 2011

It’s pretty hard to cycle through the University of Chicago Law School (or at least it used to be back when I was a student) without gaining an appreciation for the extent to which markets, while subject to occasional failures, enhance human welfare by channeling resources to their highest and best ends. It’s also hard to spend much time at Chicago without coming to understand that government interventions, despite the best intentions of the planners, often fail, given planners’ limited knowledge (see, e.g., Hayek) and bureaucrats’ tendencies to act, like the rest of us, in a self-interested fashion (see, e.g., the public choice literature). Indeed, even left-leaning Chicagoans like Cass Sunstein, for whom I have tremendous respect, appreciate these ideas and therefore tend to advocate (somewhat) limited government interventions that are targeted at real market failures and that preserve space for private ordering. (See, e.g., Sunstein’s “libertarian paternalism,” which has occasionally been derided on this blog but is a far cry from the “paternalist paternalism” we’ve been seeing from the current Administration.)

When President Obama was elected, I hoped and expected that his time at Chicago would influence his policy prescriptions. It hasn’t done so. Not only did he push through two of the most market-insensitive and government-confident pieces of legislation in modern history (the stimulus and the health care law), but even his “move to the center” speech following a mid-term shellacking advocated central planning in the form of pick-the-winner “investments” in green technologies, high-speed rail, etc. His answer to economic stagnation isn’t sound money and the creation of institutions that permit entrepreneurs to flourish without fear of excessive regulation and confiscation. Instead, he wants government to step up and push America forward, as it did in the space race with the Russians: “This is our generation’s Sputnik moment!”

I’ve often wondered how Mr. Obama managed to spend so many years at Chicago without absorbing the ideas that seem to saturate the place. Richard Epstein offers an answer in today’s Wall Street Journal (which quotes an interview Epstein gave to Reason TV):

Reason: The economy has lost 3.3 million jobs, consumer confidence is half its historical average, and unemployment is 9 percent. To what extent is Obama responsible for this?

Richard Epstein: He’s not largely or exclusively responsible, but he’s certainly added another nail into the coffin. The early George Bush—I think he got a little bit better through his term—and Obama have a lot in common. Bush wanted a pint-sized stimulus program that failed and Obama wanted a giant-sized stimulus program that failed. Neither of them is a strong believer in laissez-faire principles. The difference between them, which is why Obama is the more dangerous man ultimately, is he has very little by way of a skill set to understand the complex problems he wants to address, but he has this unbounded confidence in himself.

Reason: So he’s the perfect Chicago faculty member.

Epstein: He was actually a bad Chicago faculty member in this sense: He was an adjunct, and we always hoped he’d participate in the general intellectual discourse, but he was always so busy with collateral adventures that he essentially kept to himself. The problem when you keep to yourself is you don’t get to hear strong ideas articulated by people who disagree with you. So he passed through Chicago without absorbing much of the internal culture.

So that’s it….

My Missouri colleague, Peter Klein, of Organizations and Markets fame (and, like Larry, a proud non-voter), has been asked to contribute a book chapter on the Austrian theory of the firm and the law. Peter, who has written extensively on the Austrian theory of the firm and maintains an online bibliography on the subject, is an expert on the economics. He asked me to give him some thoughts on the law — i.e., which business law doctrines cohere or conflict with Austrian insights on the nature of the firm.

I’m posting my initial thoughts on the matter in the hope that readers may enlighten us on additional business law doctrines that reflect or reject Austrian thinking. (And, of course, please let me know where I’m off base.) You can either respond to this post or email Peter or me directly.

Before I get into a discussion of specific business law doctrines, let me provide some (extremely cursory!) background on Austrian thought.


A hallmark of Austrian thinking, especially as articulated by F.A. Hayek, is the notion that the information required to allocate productive resources to their highest and best ends, and thereby to maximize wealth, is not readily available to any individual or central authority. Instead, it is widely dispersed among individuals throughout society. Accordingly, attempts to maximize value by allocating productive resources in a centralized fashion — i.e., according to the dictates of central planners — are destined to fail. Those planners lack access to important information (most notably, information about how individual consumers value competing uses of productive resources) and could not effectively process all that information, much of which is conflicting, even if it were accessible.

But, say the Austrians, there’s no need to despair. In a society with well-defined, freely transferable property rights, the impossibility of effective central planning presents little problem. As individuals engage in trades in an attempt to better themselves, prices for productive resources will emerge. Those prices incorporate all available information about the relative value of competing uses of a productive resource (i.e., the person willing to pay the highest price for something will create the most value from it and should possess it if the goal is to maximize wealth). They present that information in a simple, useful form (i.e., one need not worry about calculating the net effect of conflicting bits of information about a resource’s highest and best use; the price mechanism will do so). And they motivate economic actors to take precisely the steps that will maximize total wealth (i.e., relatively high prices for a resource induce producers to make more of it and consumers to substitute away from it; relatively low prices induce less production and more consumption of the resource). Thus, when property rights are well-defined and freely transferable, prices will create a spontaneous order that trumps anything achievable using central planning.

But wait a minute. Isn’t the business firm an instance of central planning?  Within a firm, productive resources are allocated according to the dictates of “central planners” — i.e., managers.  Indeed, Ronald Coase famously observed that the defining hallmark of the firm is “the supersession of the price mechanism.”  Does it even make sense, then, to talk about an Austrian theory of the firm? 

Well, yes, if one understands the business firm as an instance of spontaneous order.  In the so-called “socialist calculation debate,” in which the Austrians contended that economic welfare would be greater in a free economy than in a centrally planned one, the central planners were expected to have state power (legitimate power to coerce using force) and were not expected to face significant competition.  The “planners” within a firm, by contrast, cannot forcefully coerce their subjects (they must procure consent from resource providers), and they face significant competition from other business firms.  These two considerations constrain planning within a business firm so that it is used only when the benefits it generates — chiefly, a reduction in the costs of using the market (i.e., transaction costs) — exceed the losses it occasions in terms of allocative inefficiency (i.e., mistakes by planners attempting to allocate resources optimally) and agency costs (i.e., losses from planners’ opportunism and neglect).  Thus, in the sort of economic system advocated by the Austrians — one coupling well-defined, enforceable, and transferable property rights with broad freedom to contract — one would expect business firms to emerge spontaneously as entrepreneurs seek to minimize the sum of transaction costs, allocative inefficiencies, and agency costs.  One would also expect the boundaries of the firm to change (spontaneously) as technological and other developments alter the relative costs of bringing functions within the firm rather than procuring them on the market.  Such thinking coheres nicely with the Coasean understanding of the firm.

Before looking at specific business law doctrines that reflect or reject Austrian thinking, I should note one other Austrian (specifically, Hayekian) distinction, this one between types of legal rules.  Some legal rules are general in their application, are “purpose-independent” (meaning that the law-giver isn’t trying to achieve some specific social outcome but is instead trying to resolve a dispute in accordance with the parties’ settled expectations), and have the effect of setting clear expectations so that parties may confidently predict outcomes in structuring their affairs.  Hayek refers to these sorts of rules as nomos.  Other legal rules are more akin to specific orders from a central authority seeking to achieve some specific purpose.  Such “teleological” rules Hayek refers to as thesis

In light of their emphasis on the knowledge problem and the impossibility of effective central planning, the Austrians (most notably Hayek) contended that legitimate law is nomos.  Thesis is something other than genuine law.  The common law, for the most part, is nomos.  Most (but not all) legislation is thesis.  The characterization of any piece of legislation will depend on whether it amounts to specific orders aimed at achieving a set purpose (e.g., the new federal health care law), in which case it is thesis, or is instead simply seeking to codify purpose-independent rules that settle parties’ expectations and enable them to order their affairs in light of the information to which they alone are privy (e.g., the Uniform Commercial Code), in which case it is nomos.   

Below the fold, I discuss some business law doctrines that cohere with Austrian thinking and others that conflict.  Not surprisingly, the doctrines that are most consistent with the Austrian view of the firm are nomos-like; the inconsistent legal doctrines are thesis.
Continue Reading…

Coase and the 800 Pound Man

Thom Lambert —  15 September 2010

Ronald Coase has been on my mind quite a bit lately.  His ideas have made a couple of recent appearances in my business organizations class.  As I’ve explained before, we spend the first day of Bus Orgs contrasting F.A. Hayek’s The Use of Knowledge in Society, which argues that central planning is destined to fail because planners cannot gather and process all the information they need to allocate resources efficiently and that prices provide such information in a free market system, with Coase’s The Nature of the Firm, which observes that “the distinguishing mark of the firm is the supersession of the price mechanism.”  Last week, we discussed the Coase theorem in connection with our consideration of the disgorgement remedy for breach of fiduciary duty.  (Here’s a summary of that discussion.)  The Coase theorem also came up in a recent discussion I had with some friends about whether non-smokers were “victims” of smokers in the few restaurants and bars that still permit smoking.  (I discussed that issue here.)

I thought of Coase again when I read the op-ed by Arthur Brooks and Paul Ryan in Monday’s WSJ.  In recent months, Brooks and Ryan have been arguing that our government is too large for most Americans’ tastes.  New York Times columnist David Brooks summarizes their ideas as follows:

[Arthur] Brooks (no relation) argues [in his book, “The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future”] that Americans are a uniquely entrepreneurial people. A nation of immigrants, “America’s vast success might be explained in part by our genetic predisposition to embrace risks with potentially explosive rewards.”

Citing an array of polling data, Brooks argues that 70 percent of Americans embraces this free-market and entrepreneurial vision of their country. But 30 percent prefers a more government-centric, European-style vision. The battle, Brooks concludes, is between the 70 percent, trying to reclaim the country, and the 30 percent, which is now expanding the federal role on an array of fronts.

Paul Ryan, the most intellectually ambitious Republican in Congress, lavishly cites Brooks’s book. Over the past few years, Ryan has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale.

David Brooks is skeptical:

The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk-embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order. The economic debate is not as Manichaean as the culture war since most people are split down the middle and because it’s easier to compromise on money than on life.

In Monday’s op-ed, titled “The Size of Government and the Choice This Fall,” Brooks (Arthur) and Ryan respond to David Brooks’ suggestion that, for all their talk of the virtues of “freedom” and “entrepreneurship,” Americans really want a welfare state (albeit a capitalist one):

[T]hese claims miss the point. What we must choose is our aspiration, not whether we want to zero out the state. Nobody wants to privatize the Army or take away Grandma’s Social Security check. Even Friedrich Hayek in his famous book, “The Road to Serfdom,” reminded us that the state has legitimate — and critical — functions, from rectifying market failures to securing some minimum standard of living.

However, finding the right level of government for Americans is simply impossible unless we decide which ideal we prefer: a free enterprise society with a solid but limited safety net, or a cradle-to-grave, redistributive welfare state. Most Americans believe in assisting those temporarily down on their luck and those who cannot help themselves, as well as a public-private system of pensions for a secure retirement. But a clear majority believes that income redistribution and government care should be the exception and not the rule.

Brooks and Ryan then go on to assert that because our political leaders have “focus[ed] on individual spending issues and programs while ignoring the big picture of America’s free enterprise culture,” the free enterprise system most Americans prefer is on the verge of suffering death by a thousand cuts:

Why not lift the safety net a few rungs higher up the income ladder? Go ahead, slap a little tariff on some Chinese goods in the name of protecting a favored industry. More generous pensions for teachers? Hey, it’s only a few million tax dollars—and think of the kids, after all.

Individually, these things might sound fine. Multiply them and add them all up, though, and you have a system that most Americans manifestly oppose—one that creates a crushing burden of debt and teaches our children and grandchildren that government is the solution to all our problems. Seventy percent of us want stronger free enterprise, but the other 30% keep moving us closer toward an unacceptably statist America—one acceptable government program at a time.

Brooks’ and Ryan’s central point thus seems to be that our political leaders have grown government, one program at a time, to the point at which even those Americans who would not classify themselves as libertarians or classical liberals or “economic conservatives” — even David Brooks’ “heroic bourgeois families [?!] who want to thrive within a secure social order” — believe we’ve gone too far.  The 70% of Americans who generally favor an economic systemt that favors free enterprise and entrepreneurship need not settle on precise criteria for appropriate government intervention in order to agree that our government is currently too big. They can reach, as Cass Sunstein might put it, an “incompletely theorized agreement.”

So what does this have to do with Coase?

Before I went to law school, I had the pleasure of working as a research fellow at what was then called the Center for the Study of American Business (now the Murray Weidenbaum Center on the Economy, Government, and Public Policy) at Washington University in St. Louis.  Coase gave a talk at Wash U and then stopped by the Center for an informal brown bag with some Center staff.  The Nature of the Firm famously theorized about the optimal size of business firms, and one of my colleagues asked Coase if he any similar theories about the optimal size of government.

Coase responded:  “Your question is a bit like asking what is the optimal weight of an 800 pound man.  All one could say is, ‘less.'”

Well said, professor.

[Incidentally, I have shared this memory of Coase only one other time — in my admission essay to Yale Law School.  Didn’t get in.]

Justin Wolfers is one of my favorite economics bloggers in large part because of the empirical, evidence-based approach he takes to economics problems and policy issues.  As co-blogger Todd points out, Wolfers recently generated some data (JSTOR citation counts) that he argues supports the assertion that Hayek is out-classed by those mentioned in the title to this post.  Wolfers, who I think very highly of as an economist, seems to think so, and pointing out that Larry Summers (and presumably a ton of others) out-influence Hayek by this measure.  I thought the post was tongue-in-cheek, to be honest, before I saw the recent update where Wolfers sticks to his guns and cannot reject the hypothesis, therefore, that “insisting that high schools teach Hayek is a clear statement of ideology, not of economic science.”

Including Todd’s excellent post, and Bill Easterly’s response, much has already been said on this count. Todd really hammers at the key point, and the value of Hayek in the curriculum, when he writes:

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek. Hayek realized the fallacy of central planning and its inevitable failure decades before anyone else. His book “The Road to Serfdom” should be required reading for any literate American. His ideas about the decentralization of knowledge, the important role heterogeneous preferences would play in destabiling attempts at social planning, and the link between progressivism and totalitarianism are some of the most important contributions to human knowledge of the past 100 years.

Absolutely.  But I want to talk a bit more about the data.  Measuring citation counts between economists is probably not a good way to measure the sort of influence that we are talking about in terms of appropriateness for a high school economics curriculum.  I suspect White’s  (1980) “A Heteroskedasticity-Consistent Covariance-Matrix Estimator and a Direct Test for Heteroskedasticity” cites better than anything else since 1970, but I’m not sure I’d recommend it to a high school senior.   Influence is a tough concept to measure.  And Wolfers, to his credit, calls for alternative measures if they exist.  Well, Todd points to one potential measure, noting that Hayek ranks ninth among economists cited in law journals.   But if one restricts attention to Hayek’s influence with other Nobel Laureates, in which he ranks second only behind Ken Arrow.   That sounds pretty influential to me and with a measure that probably matters more for the relevant type of influence than a general JSTOR citation count.

No doubt that data are better than opinion and all of that.  Using data to find answers is a good thing — but we do want to be mindful that the data we are using are measuring the right thing.  Looking for keys under lampposts comes to mind.  I just don’t think that general citation counts are a very good measure of the sort of influence we are talking about when we are deciding the whether “Hayek belongs” in high schools, much less that the data can be used to support claims that insisting that Hayek be taught cannot be supported by the merits and must be the product of ideology (of course, I think everybody understands that in the particular case of the School Board here, there is plenty of ideology involved, but that is separate from the data claim being made).

UPDATE: I should make clear that I find the School Board’s decisions generally troubling, and am skeptical about the role of school boards in picking curriculum in economics as well as other topics.

The Texas Board of Education recently decided to add F.A. Hayek to the high school economics curriculum. The New York Times reports:

In economics, the revisions add Milton Friedman and Friedrich von Hayek, two champions of free-market economic theory, among the usual list of economists to be studied, like Adam Smith, Karl Marx and John Maynard Keynes.

To the Times, this is evidence of the Board’s desire to put a “conservative stamp on . . . economics textbooks.” As usual, the Times gets it wrong.

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek. Hayek realized the fallacy of central planning and its inevitable failure decades before anyone else. His book “The Road to Serfdom” should be required reading for any literate American. His ideas about the decentralization of knowledge, the important role heterogeneous preferences would play in destabiling attempts at social planning, and the link between progressivism and totalitarianism are some of the most important contributions to human knowledge of the past 100 years.

Economist, and my friend, Justin Wolfers disagrees. On the ever-interesting Freakonomics blog, Wolfers examines citations to Hayek in economics journals, and concludes the data “suggests that Hayek just doesn’t belong with Smith, Marx, Keynes, or Friedman.”

Others are coming to Hayek’s defense. See comments by William Easterly here.

I offered my own defense of sorts in a 2005 paper for the inaugural issue of the New York University Journal of Law & Liberty. I look at citations to Hayek and other famous “economists” in law journals and by judges. Hayek is the ninth most cited economist, behind only Mill, Smith, Coase, Becker, Stigler, Arrow, Marx, and Friedman. Hayek has been quite influential on law, and like Mill, Smith, and Friedman is accessible to high school students wrestling with big-picture ideas about economics and society.

I do agree with Wolfers’s skepticism about school boards generally and some of the specific decisions of the Texas Board. I also agree that Hayek would be skeptical about attempts to impose knowledge from above. But, since these decisions must be made, it is nice to see some balance being brought to economics education.

Of course, much of this shouldn’t matter. Education starts at home, and I can say that no matter what the high school curriuculum at the University of Chicago Laboratory Schools (where my kids will attend), they will learn about Hayek in the Henderson House.

What caused the crisis?

Todd Henderson —  13 February 2010

Writing in the Wall Street Journal, Alan Greenspan, who was at the helm of the Fed during the relevant time period, tells us (surprise!) it wasn’t the Fed’s fault. Greenspan notes that short-term interest rates, which the Fed controls, are only loosely correlated with long-term interest rates, which are most relevant to real estate investing (think, 30-year mortgages). Therefore, the Fed (read: Greenspan) can’t be to blame.

So what caused the drop in long-term interest rates? Greenspan blames, well, capitalism. He writes:

[T]he presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition.

In other words, China and others abandoned idiotic political control of markets, and the resulting flood of wealth created needed somewhere to go. It went to invest in US houses. Ergo, the lowering of rates and the rise in values.

This certainly sounds plausible, but why did China invest in my mortgage instead of Google? I’m not an economist, although sometimes I pretend, but it seems like Fed rates, which made T-bills less attractive on the margin, and silly policies about housing, such as forced lending to poor people and guarantees of Fannie and Freddie bonds, made the latter much more attractive. If Chinese investors could only get 2% return on T-bills (guaranteed by the full faith and credit of our government) but could get 8% return on investments in housing (guaranteed by the full faith and credit of our government), then why would they ever choose the former?

So I think it is probably unfair to blame the Fed or Mr. Greenspan for the crisis. It was not loose monetary policy alone that led to the state we are in. A combination of factors led to the boom and the bust. We will probably never know exactly what the relative weight of them was in causing the crisis, but they all have one thing in common — bad government policy. Sure the market acted greedily, selfishly, narrowly, and all the other ways that humans act, but that is to be expected in all states of the world. But for bad government policies, including Mr. Greenspan’s loose money policies, we wouldn’t be where we are today. The real trick is to find ways to harness the good and bad instincts of the market, something that we utterly failed to do given political pressures at home to force people to live a particular vision of the “American dream,” and given the fundamental changes in the global economy. Until we rethink the role of government in our lives, we are as likely to get this wrong as we are right.

As we reflect back on the remarkable events of twenty years ago, and as we witness more and more centralized economic planning in our own society, we should pause to remember what the fall of the wall revealed.

Consider Alan Greenspan’s account (The Age of Turbulence, pp. 131-32):

Controlled experiments almost never happen in economics. But you could not have created a better one than East and West Germany, even if you’d done it in a lab. Both countries started with the same culture, the same language, the same history, and the same value systems. Then for forty years they competed on opposite sides of a line, with very little commerce between them. The major difference subject to test was their political and economic systems: market capitalism versus central planning.

Many thought it was a close race. West Germany, of course, was the scene of the postwar economic miracle, rising from war’s ashes to become Europe’s most prosperous democracy. East Germany, meanwhile, became the powerhouse of the Eastern bloc; it was not only the Soviet Union’s biggest trading partner but also a country whose standard of living was seen to be only modestly short of West Germany’s. . . .

The fall of the wall exposed a degree of economic decay so devastating that it astonished even the skeptics. The East German workforce, it turned out, had little more than one-third of the productivity of its Western counterpart, nothing like 75 percent to 85 percent. The same applied to the population’s standard of living. . . . The extent of the devastation behind the iron curtain had been a well kept secret, but now the secret was out.

Hayek, it seems, was right. May we never forget.

Back during the days when socialism was all the rage among the intelligentsia, F.A. Hayek predicted that Soviet-style central planning was destined to fail because the central planners lacked access to, and couldn’t process, all the information needed to allocate productive resources efficiently. Optimal resource allocation can occur, Hayek contended, only if resources are allocated according to the prices that emerge as millions of people buy and sell on the information to which they alone are privy. Hayek maintained that market prices dictate the highest and best use of resources and that such prices cannot be produced by a single mind (i.e., the Soviet-style central planner) but can emerge only as millions of folks reveal their needs and desires by trading amongst themselves.

Today, the powers that be seem to think that some czars possess abilities their historical successors, the Soviet central planners, lacked. I’m speaking, of course, of our most esteemed Pay Czar, Kenneth Feinberg. In his near-infinite wisdom, Czar Kenneth has determined how labor resources should be allocated in seven disparate firms (two auto companies, two banks, two auto financing companies, and one insurance company).

Of course, the Czar — whose official title is the less dictatorial sounding (right?) “Special Master of Compensation” — isn’t directly allocating labor resources. (Remember, dear readers, your federal government is not going to run the business of its financial wards!) But, in setting labor prices by fiat, Czar Kenneth is inevitably channeling labor resources away from, toward, and/or within the firms at issue.

Consider, for example, last Saturday’s Wall Street Journal article, GM CFO Search Complicated By Pay Restrictions. According to the Journal, “The company is concerned that [Czar Kenneth’s] salary limit will make it tough to get qualified executives to move to Detroit [really? Detroit?!], especially given the uncertainty facing the company.” The upshot is that GM may end up with a less-than-optimal CFO, and the CFO it does end up with will not be able to work for the firm he or she would likely have gone to had bargaining been unfettered.

No matter, say Czar Kenneth and the Obama administration. The Czar’s salary dictates are necessary because “skewed compensation incentives were one cause of the financial crisis.” (It was, after all, GM’s lavish executive compensation that brought down the company — the company’s woes had nothing to do with improvident union contracts that gave its foreign-owned competitors a cost advantage of over $1000 per vehicle.) Czar Kenneth’s dictates, it seems, are necessary to protect the taxpayers’ equity investment in GM.

I’m just happy the Obama administration was able to find someone with Czar Kenneth’s smarts — someone able to come up with a single policy, applicable to seven companies in disparate industries, that will generate the optimal level of risk-taking (remember, equity investors like us taxpayers generally prefer a bit of risk-taking!) and will not drive talented employees to any of the scads of other firms (domestic and foreign) that are not subject to the Czar’s enlightened policies.


[More from Geoff here. And please note that the first WSJ article linked above (from today’s paper) quotes our new TOTM colleague, J.W. Verret. Welcome Jay!]