Archives For henry g. manne

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:

 

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.

Dear Gene and Ken:

I must say that I was totally flabbergasted when I read your recent blog posting on insider trading.  I know that your usual posts on investments, which I often cite to friends, are well-informed and empirically-supported; your work over the years on these topics is important and influential—and rightly so.  Unfortunately, in this post, you have deviated from your usual high quality.  Anyone current on the topic of insider trading will recognize that you have been careless in your selection of anti-insider-trading arguments and that you omitted from your brief note the major part of the argument about insider trading: whether and how much it contributes to market efficiency.  To say this is a strange omission coming from Fama and French would be an understatement.

Your first error is to assume that the insider trading debate is about informed trading only by “top management”.  I suspect that this error may flow from my original argument for using insider trading to compensate for entrepreneurial services in a publicly held company, a matter you do not mention and which I will not pursue here except to note that “entrepreneurial services” does not equate to top management.  Strangely no one seems to notice that most of the celebrated cases on the subject have not involved corporate personnel at all (a printer, a financial analyst, a lawyer and Martha Stewart).

I was more surprised, however, to see you repeating the oldest myth in the whole field, one that even the SEC gave up on as wrong many years ago and which frankly is no longer a part of the respectable debate on this topic: that a trade by an insider “disadvantages” the party on the other side.  (I will let pass the peculiar mistake of relating this by inference to a duty owed to existing shareholders when insiders are selling—how about insider sales to perfect strangers to the corporation?  Is there an inchoate fiduciary duty?).  I challenge you to show me any way in which the anonymous buyer or seller in an exchange transaction is harmed because that transaction just happens to involve an insider on the other side.  In fact, you cannot.  The specialist might be assumed to be vulnerable to losses from insiders’ being in the market, but careful research has shown that even they are totally unconcerned about the presence of insiders (other than as usurpers of their rents, and disclosure laws from the ’33 Act to Regulation FD have ensured that the specialists’ sphere of operation is well-protected) and that this so-called “moral hazard” argument is simply insignificant in the real world

Then you repeat another of the old myths surrounding the topic of insider trading:  that allowing it will create a further managerial moral hazard since it will give an incentive to top managers (who I presume are supposed to be able to manage this mischief without anyone else knowing about it—weird) to produce bad news rather than good news.  There is not, in the entire enormous literature on the topic, one iota of evidence for this statement, although some law professors, who are generally better at making arguments for a legal brief than they are at doing rigorous economics, may still mouth it. True, there could indeed be a small end-period problem with trading on bad news.  But, even if there is, it must be of little significance compared to the benefits to shareholders and other investors of allowing insider trading.  There are many forces, including reputation and market competition, operating to induce managers to produce good news, and there is no limit on the amount of this the market will continue to reward them for.  But there are no incentives other than this highly theoretical one encouraging managers to produce bad news.  A bit too much of this and the manager is ruined, while the possibility of making a gigantic killing to justify some once-in-a-lifetime malfeasance with inside information is all but non-existent.  This would be a very foolish bet for any corporate manager to make, and not surprisingly there is no evidence that they do so.

As for the idea that they will delay disclosure (a special form of the bad news/moral hazard argument), as Harold Demsetz pointed out over 40 years ago, the insider will have every incentive not to delay but to speed up disclosure so he can get the highest rate of return on his transaction.  Again there is not one bit of evidence suggesting that this delay ever occurs in the real world and some very strong evidence (the best is by Lisa Meulbroek) that insider trading of the illegal variety quickly moves stock price in the appropriate direction.

On this point, I can’t help but ask what is your theory of how stock market pricing came to be so efficient?  Surely it is not a result of the SEC and disclosure laws—a joke if it were not all so expensive (on which see, among other things, my son’s Hydraulic Theory of Disclosure article).  The studies that have looked have found a mixed result, at best, and the best of these (starting with Stigler’s in 1964 and Benston’s in 1973) find that the market was just as efficient before the SEC and the ’33 and ’34 Acts as it was after.  Gilson and Kraakman certainly did not supply a satisfactory answer to this question that they addressed many years ago, even though they were trying desperately to prove that something besides insider trading was making the market so efficient.

Obviously this is a much larger topic than I can address here, but I must admit to being most dismayed by your implication that the goal of instantaneous communication of new information to all market participants is a worthy ideal that in some way might be aided by disclosure regulation or a ban on insider trading.  We know very well who was pushing all along for a ban on insider trading: the market professionals who stood next in line for new information if they could just get those pesky insiders out of the picture.  They certainly were not interested in universal, equal access to information, nor was the SEC who aided and abetted them in this project.  Given this well-known history, do you really mean to stand with those rent seekers?

I have greatly admired your work for many years, as you know, and I hope I may have missed something in your short blog post.  But precisely because I admire your work—and because many others do, too—I felt an obligation to respond to your problematic comments on this point.  I look forward to your thoughts in response.

Yours cordially,

Henry Manne