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In Part One, I addressed the argument by some libertarians that so-called “traditional property rights in land” are based in inductive, ground-up “common law court decisions,” but that intellectual property (IP) rights are top-down, artificial statutory entitlements.  Thus, for instance, libertarian law professor, Tom Bell, has written in the University of Illinois Journal of Law, Technology & Policy: “With regard to our tangible rights to person and property, they’re customary and based in common law. Where do the copyrights and patents come from? From the legislative process.” 2006 Univ.Ill. J. L. Tech. & Pol’y 92, 110 (sorry, no link). 

I like Tom, but, as I detailed in Part One, he’s just wrong in his contrast here between the “customary” “common law” court decisions creating property versus the  “legislative process” creating IP rights. This is myth masquerading as history. As all first-year property students learn each year, the foundation of Anglo-American property law is based in a statute, and many property rights in land were created by statutes enacted by Parliament or early American state legislatures.  In fact, the first statute — the Statute Quai Empotores of 1290 — was enacted by Parliament to overrule feudal “custom” enforced by the “common law” decisions at that time, creating by statutory fiat the basic foundational rule of the Anglo-American property right that property rights are alieanable.

As an aside, Geoff Manne asked an excellent question in the comments to Part One: Who cares? My response is that in part it’s important to call out the use of a descriptive historical claim to bootstrap a normative argument. The question is not who cares, but rather the question is why does Tom, Jerry Brito and other libertarians care so much about creating this historical myth, and repeatedly asserting it in their writings and in their presentations? The reason is because this triggers a normative context for many libertarians steeped in Hayek’s theories about the virtues of disaggregated decision-making given dispersed or localized knowledge, as contrasted with the vices of centralized, top-down planning. Thus, by expressly contrasting as an alleged historical fact that property arises from “customary” “common law” court decisions versus the top-down “legislative processes” creating IP, this provides normative traction against IP rights without having to do the heavy lifting of actually proving this as a normative conclusion. Such is the rhetorical value of historical myths generally — they provide normative framings in the guise of a neutral, objective statement of historical fact — and this is why they are a common feature of policy debates, especially in patent law.

What’s even more interesting is that this is not just a historical myth about the source of property rights in land, which were created by both statutes and court decisions, but it’s also an historical myth about IP rights, which are also created by both statutes and court decisions. The institutional and doctrinal interplay between Parliament’s statutes and the application and extension of these statutes by English courts in creating and enforcing property rights in land was repeated in the creation and extension of the modern Anglo-American IP system.  Who would have thunk?

Although there are lots of historical nuances to the actual legal developments, a blog posting is ideal to point out the general institutional and systemic development that occurred with IP rights. It’s often remarked, for instance, that the birth of Anglo-American patent law is in Parliament’s Statute of Monopolies (1624).  Although it’s true (at least in a generalized sense), the actual development of modern patent law — the legal regime that secures a property right in a novel and useful invention — occurred entirely at the hands of the English common law courts in the eighteenth century, who (re)interpreted this statute and extended it far beyond its original text.  (I have extensively detailed this historical development here.)  Albeit with some differences, a similar institutional pattern occurred with Parliament enacting the first modern copyright statute in 1709, the Statute of Anne, which was then interpreted, applied and extended by the English common law courts.

This institutional and doctrinal pattern repeated in America. From the very first enactment of copyright and patent statutes by the states under the Articles of Confederation, and then by Congress enacting the first federal patent and copyright statutes in 1790, courts then interpreted, applied and extended these statutes in common law fashion.  In fact, it is a cliché in patent law that many patent doctrines today were created, not by Congress, but by two judges — Justice Joseph Story and Judge Learned Hand.  Famous patent law historian, Frank Prager, writes that it is “often said that Story was one of the architects of American patent law.”  There’s an entire book published of Judge Learned Hand’s decisions in patent law. That’s how important these two judges have been in creating patent law doctrines.

So, the pattern has been that Congress passes broadly framed statutes, and the federal courts then create doctrines within these statutory frameworks.  In patent law, for instance, courts created the exhaustion doctrine, secondary liability, the experimental use defense, the infringement doctrine of equivalents, and many others.  Beyond this “common law” creation of patent doctrines, courts have further created and defined the actual requirements set forth in the patent statutes for utility, written description, enablement, etc., creating legal phrases and tests that one would search in vain for in the text of the actual patent statutes. Interestingly, Congress sometimes has subsequently codified these judicially created doctrines and sometimes it has left them alone.  Sometimes, Congress even repeals the judicially created tests, as it did in expressly abrogating the judicially created “flash of genius” test in § 103 of the 1952 Patent Act.  All of this goes to show that, just as it’s wrong to say that property rights in land are based solely in custom and common law court decision, it’s equally wrong to say that IP rights are based solely in legislation.

Admittedly, the modern copyright statutes are far more specific and complex than the patent statutes, at least before Congress passed the American Invents Act of 2011 (AIA).  In comparison to the pre-AIA patent statutes, the copyright statutes appear to be excessively complicated with industry and work-specific regimes, such as licensing for cable (§ 111), licensing for satellite transmissions (§ 119), exemptions from liability for libraries (§ 108), and licensing of “phonorecords” (§ 109), among others.  These and other provisions have been cobbled together by repeated amendments and other statutory enactments over the past century or so.  This stands in stark contrast to the invention- and industry-neutral provisions that comprised much of the pre-AIA patent statutes.

So, this is a valid point of differentiation between patents and copyrights, at least as these respective IP rights have developed in the twentieth century.  And there’s certainly a valid argument that complexity in the copyright statutes arising from such attempts to legislate for very specific works and industries increases uncertainties, which in turn unnecessarily increases administration and other transaction costs in the operation of the legal system.

Yet, it bears emphasizing again that, before there arose heavy emphasis on legislation in copyright law, many primary copyright doctrines were in fact first created by courts.  This includes, for instance, fair use and exhaustion doctrines, which were later codified by Congress. Moreover, some very important copyright doctrines remain entirely in the domain of the courts, such as secondary liability. 

The judicially created doctrine of secondary liability in copyright is perhaps the most ironic, if only because it is the use of this doctrine on the Internet against P2P services, like Napster, Aimster, Grokster, and BitTorrent operators, that sends many libertarian IP skeptics and copyleft advocates into paroxysms of outrage about how rent-seeking owners of statutory entitlements are “forcing” companies out of business, shutting down technology and violating the right to liberty on the Internet. But secondary liability is a “customary” “common law” doctrine that developed out of similarly traditional “customary” doctrines in tort law, as further extended by courts to patent and copyright!

As with the historical myth about the origins of property rights in land, the actual facts about the source and nature of IP rights belies the claims by some libertarians that IP rights are congressional “welfare grants” or congressional subsidies for crony corporations. IP rights have developed in the same way as property rights in land with both legislatures and courts creating, repealing, and extending doctrines in an important institutional and doctrinal evolution of these property rights securing technological innovation and creative works.

As I said in Part One, I enjoy a good policy argument about the value of securing property rights in patented innovation or copyrighted works.  I often discuss on panels and in debates how IP rights make possible the private-ordering mechanisms necessary to convert inventions and creative works into real-world innovation and creative products sold to consumers in the marketplace. Economically speaking, as Henry Manne pointed out in a comment to Part One, defining a property right in an asset is what makes possible value-maximizing transactions, and, I would add, morally speaking, it is what secures to the creator of that asset the right to the fruits of his or her productive labors. Thus, I would be happy to debate Tom Bell, Jerry Brito or any other similarly-minded libertarian on these issues in innovation policy, but before we can do so, we must first agree to abandon historical myths and base our normative arguments on actual facts.

New York Times columnist Gretchen Morgenson is arguing for a “pre-clearance”  approach to regulating new financial products:

The Food and Drug Administration vets new drugs before they reach the market. But imagine if there were a Wall Street version of the F.D.A. — an agency that examined new financial instruments and ensured that they were safe and benefited society, not just bankers.  How different our economy might look today, given the damage done by complex instruments during the financial crisis.

The idea Morgenson is advocating was set forth by law professor Eric Posner (one of my former profs) and economist E. Glen Weyl in this paper.  According to Morgenson,

[Posner and Weyl] contend that new instruments should be approved by a “financial products agency” that would test them for social utility. Ideally, products deemed too costly to society over all — those that serve only to increase speculation, for example — would be rejected, the two professors say.

While I have not yet read the paper, I have some concerns about the proposal, at least as described by Morgenson.

First, there’s the knowledge problem.  Even if we assume that agents of a new “Financial Products Administration” (FPA) would be completely “other-regarding” (altruistic) in performing their duties, how are they to know whether a proposed financial instrument is, on balance, beneficial or detrimental to society?  Morgenson suggests that “financial instruments could be judged by whether they help people hedge risks — which is generally beneficial — or whether they simply allow gambling, which can be costly.”  But it’s certainly not the case that speculative (“gambling”) investments produce no social value.  They generate a tremendous amount of information because they reflect the expectations of hundreds, thousands, or millions of investors who are placing bets with their own money.  Even the much-maligned credit default swaps, instruments Morgenson and the paper authors suggest “have added little to society,” provide a great deal of information about the creditworthiness of insureds.  How is a regulator in the FPA to know whether the benefits a particular financial instrument creates justify its risks? 

When regulators have engaged in merits review of investment instruments — something the federal securities laws generally eschew — they’ve often screwed up.  State securities regulators in Massachusetts, for example, once banned sales of Apple’s IPO shares, claiming that the stock was priced too high.  Oops.

In addition to the knowledge problem, the proposed FPA would be subject to the same institutional maladies as its model, the FDA.  The fact is, individuals do not cease to be rational, self-interest maximizers when they step into the public arena.  Like their counterparts in the FDA, FPA officials will take into account the personal consequences of their decisions to grant or withhold approvals of new products.  They will know that if they approve a financial product that injures some investors, they’ll likely be blamed in the press, hauled before Congress, etc.  By contrast, if they withhold approval of a financial product that would be, on balance, socially beneficial, their improvident decision will attract little attention.  In short, they will share with their counterparts in the FDA a bias toward disapproval of novel products.

In highlighting these two concerns, I’m emphasizing a point I’ve made repeatedly on TOTM:  A defect in private ordering is not a sufficient condition for a regulatory fix.  One must always ask whether the proposed regulatory regime will actually leave the world a better place.  As the Austrians taught us, we can’t assume the regulators will have the information (and information-processing abilities) required to improve upon private ordering.  As Public Choice theorists taught us, we can’t assume that even perfectly informed (but still self-interested) regulators will make socially optimal decisions.  In light of Austrian and Public Choice insights, the Posner & Weyl proposal — at least as described by Morgenson — strikes me as problematic.  [An additional concern is that the proposed pre-clearance regime might just send financial activity offshore.  To their credit, the authors acknowledge and address that concern.]

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.

Arizona’s governor has proposed charging $50 to certain Medicaid beneficiaries who smoke or are obese.  As today’s Wall Street Journal reports, the point of the surcharge is to internalize the externalities smokers and snackers impose on their fellow citizens, who bear much of the cost of their unhealthful choices:

“If you want to smoke, go for it,” said Monica Coury, spokeswoman for Arizona’s Medicaid program.  “But understand you’re going to have to contribute something for the cost of your smoking.”  She said the proposal is a way to reward good behavior and raise awareness that certain conditions, including obesity, raise costs throughout the system.

That’s exactly the sort of Nannyism our former TOTM colleague, Todd Henderson, predicted.  Before Todd joined us at TOTM, I discussed his terrific article, The Nanny Corporation, on the blog:

In imposing Nanny rules, Todd argues, governments and firms are merely responding to the demands of, respectively, citizens and employees. Governments (through Medicare, Medicaid, etc.) pay many of the health care expenses of their citizens, and firms (through employer-provided insurance) usually pick up the tab for employees’ health care expenses. But, of course, the citizens and employees themselves ultimately bear these costs in the form of, respectively, higher taxes and lower wages. Thus, each citizen has an interest in reducing his co-citizens’ health care expenditures, and each employee has an interest in having safe and healthy co-employees. Nannyism, then, can be seen as a means by which governments and firms force individuals to internalize the costs of their risky behaviors. In imposing nanny rules, Todd argues, governments and businesses are merely responding to citizens’ and employees’ demands for cost-reducing paternalism. They are, in short, suppliers in a “market for paternalism.”

That raises the question: “Who is the more efficient provider of paternalistic rules?” There’s no clear answer to that question, Todd maintains, but there are reasons to believe that firms will often be the superior rule-providers. First, competition in the labor, product, and capital markets will constrain firms from overreaching (imposing liberty restrictions that are not cost-justified) and from diverting the benefits of nanny regulations. (This latter benefit results in a tighter “fit” between the rules and their cost-reducing rationale, thereby ensuring that only cost-justified rules are adopted.) In addition, firms may have an advantage in that they can adopt and enforce rules that would be difficult for governments to adopt. Obesity, for example, could be more easily regulated by an employer who regularly sees her employees than by the government. The government, on the other hand, “may have advantages both in the severity of the penalties that can be employed (and thus less need for enforcement costs) and in covering behaviors, such as consuming specific foods like trans fats, that may be difficult for firms to observe.” While the superiority of one nanny over another will depend on the liberty restriction at issue and other contextual matters, firms will likely be the better nannies in many situations.

Of course, as governments play a larger role in paying for citizens’ health care under Obamacare, demand for laws that encourage or mandate healthful conduct and discourage or ban unhealthful conduct will increase.  That’s a troubling development for a number of reasons.  First, there’s the inevitable knowledge problem: how is a lesiglator or regulator to quantify the external cost imposed by a particular lifestyle choice?  If the tax or surcharge is set too high, it will over-deter, destroying “citizen surplus.”  Second, it’s often difficult to enact a law or regulation that targets only those citizens who are capable of imposing external harm on other taxpayers.  Look for lots of Nannyisms that are promulgated in the name of protecting the public fisc but in fact apply to all citizens, not just participants in a publicly financed insurance program.  Third, the “we’re just trying to constrain public health care expenditures” rationale is so elastic that it will inevitably operate as a license to meddle. 

For example, while Governor Brewer’s $50 smoker surcharge to cut health care costs will likely resonate with her majority non-smoking constituency, discouraging smoking among Medicaid participants is probably not in the state’s fiscal interest in the long run.   In The Health Care Costs of Smoking, published in the New England Journal of Medicine in 1997, the authors “analyzed health care costs for smokers and nonsmokers and estimated the economic consequences of smoking cessation.”  They found that

Health care costs for smokers at a given age are as much as 40 percent higher than those for nonsmokers, but in a population in which no one smoked the costs would be 7 percent higher among men and 4 percent higher among women than the costs in the current mixed population of smokers and nonsmokers. If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.

The authors thus concluded that “[i]f people stopped smoking, there would be a savings in health care costs, but only in the short term. Eventually, smoking cessation would lead to increased health care costs.”

In any event, Nannyism seems to be the wave of the future.  Better stock up on junk food and booze!

There is an excellent interview of Ronald Coase conducted in honor of Coase’s 100th birthday and the creation of the Coase China Society.  Its an excellent interview (HT: Knowledge Problem).  Peter Klein offers some observations on the interview as well.  One part that caught my attention was Coase’s discussion of the role of the Journal of Law & Economics in advancing the law and economics movement:

RC (Ronald Coase): One way for the [Coase China] Society to advance the right kind of economics to China, and encourage Chinese economists to do the right kind of work, is to have a journal of its own. When I was editor of the Journal of Law and Economics, I was very active. I would attend seminars and conferences and talk to people to see what kind of research they were doing. I would solicit their articles if I thought they were good ones. And frequently, I would talk to people and encourage them to conduct certain studies with the promise to publish their article.

WN (Wang Ning): This is indeed very different from the way journals are run now.

RC: I do not believe any other journal was run the same way then. Most journal editors wait for submitted articles and use external reviewers to select the articles for publication. This was not the way I worked. I knew what kind of articles I would like to publish, and I went around to find people to write them.

I’ll give you an example. Bernard Siegan came to the University of Chicago Law School as a Fellow and proposed to write a paper on the pros and cons of zoning. I told him instead to find a place where zoning did not exist and to see what happened to land use in comparison to places with zoning. He wrote a great paper about land use in Houston which did not have zoning (The paper was published as “Non-Zoning in Houston, Journal of Law and Economics (1970)).

Another example is Steve’s article on bees. I knew there were contracts between beekeepers and orchard owners in Washington. I asked Steve to investigate it. He did a splendid study (The paper was published as “The Fable of Bees, in Journal of Law and Economics (1973)). …

WN: … But the opportunity cost was probably very high. At the prime time of your research, you devoted yourself to the Journal instead of your own research. You might have written another one or two articles as great as “The Nature of the Firm” or “The Problem of Social Cost.”

RC: I do not regret my decision at all. This was the main attraction for me to come to Chicago. I think this was the only way to develop a subject. If it were not for the Journal, many articles would not have been published or even written.

WN: Based on your experience, what should the Society do if it launches a new journal?

RC: You should have a clear view of what you want to accomplish, what articles you want to publish and what kind of research you want to encourage. You shall not worry about how other people think about your views. You cannot control what other people think. You will not monopolize the whole field. If you believe in your view, you have to be strong to defend it and promote it in the market for ideas until you are convinced that it is proved wrong. This is the only way to be independent.

WN: I totally agree. But I don’t think we have got the second Coase yet. When you started editing the Journal of Law and Economics, you were already well established in the profession. Your view, no matter whatever it was, would be considered seriously and readily command agreement.

RC: I do not think that was the case. I always find myself in disagreement with the prevailing view. Even today, my view of the subject is not accepted by the profession. …

Very interesting.  I cannot think of many examples of journals that take this approach, at least to the same degree as Coase’s JLE.  But that sort of focus was probably necessary to get the law and economics movement off the ground.  Are there examples of journals with this kind of agenda, i.e. where the editor “knew what kind of articles [they] would like to publish, and [] went around to find people to write them”?  Do any of the modern law and economics journals operate this way?  I don’t think so.  But maybe I’m wrong.  What about in empirical legal studies?  David Evans’ very successful Competition Policy International journal operates largely through soliciting articles on antitrust topics from specific authors — and so has some of this flavor, but (and I should disclose I am an editor of that journal) I do not think it has a “mission” in the same sense as Coase’s use of the term in describing the role of the JLE.

Check out the entire interview.

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.

AUSTRIAN THOUGHT ON ECONOMIC PLANNING, THE BUSINESS FIRM, AND THE LAW

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…

It turns out that the Girl Scouts price discriminate, i.e. they charge different prices for the same product in different parts of the country (HT: Knowledge Problem).   Rumor has it that demand for Thin Mints varies by region.  While the Girl Scouts concede that the introduction of the price discrimination scheme results, when coupled with  Girl Scout marketing efforts,  is tantamount to the evading pricing constraints imposed by current demand conditions.  No word on whether the Girl Scouts have hired antitrust counsel in light of the Commission’s pushing of this definition of actionable antitrust conduct in N-Data and Ovation (amongst other cases).  Of course, Girl Scout Cookie consumers need not fear Commission intervention because, at least under Section 5, the Girl Scouts will not also face private rights of action for treble damages all over the country, well, that is unless the plaintiffs bar figures out that it can use state consumer protection acts instead.   But that seems unlikely, right?  And really, the case for Commission action under Section 5 is fairly clear.   The welfare effects of price discrimination are notoriously difficult to measure empirically and, I mean, price discrimination sounds so bad doesn’t it?  This seems like the perfect case to rely on the Commission’s expertise in divining the anticompetitive effect imposed on consumers in the high demand regions and keep such a decision out of the hands of lay juries and generalist judges.  No doubt, the expertise will be required to interpret the “hot document” evidence like internal Girl Scout videos which teach the Scouts to sell more cookies and crush rivals with enthusiastic energy and persuasive sales techniques.  Antitrust experts are split on whether the scheme would also violate Section 2, but there is widespread consensus that a rumored sale of the Girl Scout Cookie business to a pharmaceutical firm would certainly violate Section 7.

A post that everybody should read over at Knowledge Problem in which Lynne Kiesling moves from behavioral economics to the design of fixed price default contracts in electricity markets to a Hayekian critique of the Sunstein-Thaler libertarian paternalist program to the following closing paragraph:

In devising OIRA policy I’d like to hear Sunstein invoke another of his former Chicago colleagues, Ronald Coase, and state that in promoting and facilitating open, transparent markets, the most important role of economic regulatory policy is to reduce the transaction costs that prevent private parties from engaging in mutually-beneficial exchange. That means using OIRA to evaluate the entry barriers and other transaction costs that federal regulation can create. OIRA does cover other areas of regulatory policy where the ideas of transaction costs are not as strictly relevant, but thinking in terms of reciprocal benefit, reducing transaction costs, and the alignment of, for example, environmental and economic incentives through the reduction of transaction costs and better-defined property rights transcends economic regulation.

Its a great post with a ton of food for thought.  Go read it.

At Knowledge Problem, Michael Giberson collects anecdotal evidence on New York’s zone pricing ban, i.e. a prohibition on price discrimination. While gasoline prices are falling all over the country, the anecdotal evidence is that New York’s zone pricing ban is resulting in higher profits for retailers at the expense of consumers. Former George Mason economist (now at Chapman with Vernon Smith) Bart Wilson and Cary Deck have a fascinating experimental paper on the impact of zone pricing which anticipates this result. Of course, most economists agree that zone pricing benefits consumers. Here’s Giberson summing up the literature in a earlier post:

  • Experimental economics work by Cary Deck and Bart Wilson, published this year in the Journal of Economic Behavior & Organization, finds that zone price bans tended to result in higher wholesale prices in what would otherwise be lower wholesale-price zones, but without leading to lower prices in the less competitive, high cost zones.
  • In a review of literature on “Retail Policies and Competition in the Gasoline Industry“, UC-Berkeley economists Severin Borenstein and Jim Bushnell suggest that zone pricing will lead to higher prices for some consumers and lower prices to others, overall “it is unclear whether it benefits or harms consumers.” They point out that price discrimination can lead to overall net benefits to consumers even if some consumers are paying higher prices.
  • A review of zone pricing by the Federal Trade Commission found the effects on consumers to be “ambiguous.” In 2007, the FTC told Connecticut that a bill similar to the new New York law would likely harm consumers because it would reduce incentives to supply gasoline in under served areas.
  • An article by Christopher Ball, Mark Gius, and Matthew Rafferty, in Regulation magazine, relied upon a earlier version of the Deck and Wilson research to estimate that with the Connecticut policy under consideration in 2007 “the average price at the pump increases and the burden of the increase falls disproportionately on those with the lowest incomes.” The Connecticut legislature did not pass the bill.

I wonder how much of economists’ failure to win these policy debates on points where this is much agreement is the result of bad marketing on our parts and how much can be explained by public choice.

Hotel owner to face $1000 fine and up to six months in jail after after enforcement of state price-gouging law (HT: Knowledge Problem).  Oh, and the AG would also like the power to declare a state of emergency for the sole purpose of enforcing the price-gouging law in response to some crafty business owners who weren’t waiting for the Governor to declare a state of emergency before responding to supply shocks.

Courtesy of Lynne Kiesling who supplies such insights regularly over at Knowledge Problem.  It’s about retail choice in electricity, but the general principles apply more broadly.  The whole thing is worth reading carefully:

There are, though, several ways that free choice and the removal of entry barriers into retail markets generates better outcomes than regulated monopoly service. When free choice allows consumers to choose among dynamic pricing options, they can face price signals and use technology to reduce their peak electricity use, leading to lower wholesale electricity prices and a reduced need to build costly infrastructure to meet peaks that just sits idle the rest of the time. 

Choice also encourages market entrants to bring differentiated products to market, to gain market share by appealing to different dimensions of consumer preferences and to reduce the extent of direct price-based competition. Product differentiation (and its associated price discrimination) benefits both consumers and producers (and thus creates surplus, or welfare, or value) in all cases except for some very special conditions. The connection between rivalry and product differentiation and economic value creation is one of the most unambiguous aspects of freedom of entry into retail markets. 

This potentially anticompetitive bundling alert comes courtesy of Lynne Kiesling at the always wonderful Knowledge Problem.  Kiesling observes that the Chicago foie gras ban has resulted in restaurants bundling salad with foie gras. I take it that the bundle circumvents the ban. Apparently, this means that consumers who want their foie gras are now coerced into eating salad! They are at least forced to purchase the salad. Surely, this is an attempt to monopolize the salad market. I feel an antitrust class action coming on. While their at it, the class might want to take a look at these onerous “no substitution” rules some restaurants impose for various specialty dishes rather than offering a full a la carte menu allowing consumers unfettered choice among all the possible combinations and permutations of ingredients. A serious analysis of these problems is well beyond the scope of this post.   But I do advise Chicago restauranteurs to seek antitrust counsel.

RELATED POST: See Thom’s earlier entry on What’s the Matter With Chicago?