Saturday, December 21, 2002


Mark Kleiman describes a very common type of situation:
Sometimes people do damage to themselves, or incur the risk of doing so, at the (often not disinterested) prompting of others. Call this pattern "temptation," and the parties the tempted and the tempter. The tempted, and their friends, often blame the tempters for the bad results, and sometimes sue them or demand that the activity of temptation be constrained by law. The tempters, and their friends, always respond that the tempted need to start taking personal responsibility for their actions, and that the tempters can't be held accountable for the foolish acts of others.
Mark considers the proposition that "the blamelessness of the tempter follows from the responsibility of the tempted" to be self-evidently fallacious. But he also observes that "many other people" (I am one of them) think this proposition true. So Mark sets out to explain why we think so, and he settles on the idea that we have fallaciously equated moral responsibility with a probability density function, thus concluding that all moral responsibilities must sum to one.

Mark is correct that moral responsibilities need not sum to one. If John shoots Bill while Eric stabs Bill, both are 100% guilty of murder, after all. But disproval of a fallacious argument in favor of a proposition does not disprove the proposition itself, as there may exist other, valid arguments for the proposition. I wish to make one of them.

In involuntary cases like murder and rape, there is little question that a harm has been done, and the main question is one of apportioning punishment. But in voluntary situations - presumably those Mark has in mind, though he declines to name them - the whole issue is whether a harm has actually been done. If I choose to smoke cigarettes, and later I develop lung cancer, this may seem to be, factually speaking, a harm; clearly I'd rather not have cancer. But we must take an all-things-considered perspective, as the risk of lung cancer might have been a cost I was willing to bear because of the perceived advantages of smoking. Likewise for other risky activities, like snow skiing and eating high-cholesterol foods. For there to have been a harm *on net*, the subjective value of costs must have exceeded the subjective value of the benefits - and the only person who is in a position to know is the person who actually experiences them. What we want is a set of legal and moral rules that encourage people to do things that affect their well-being when, and only when, the expected benefits exceed the expected costs. When an individual is held personally responsible for his own voluntary choices that affect his well-being, the costs and benefits are concentrated in one place (his mind), and he thus has an incentive to make the correct choice.

Since moral responsibilities need not sum to one, Mark might argue that we could punish the tempter as well as the tempted when bad results occur. But placing responsibility on the tempter creates a doubly bad incentive: First, if the individual whose well-being is affected is compensated by the other party (as occurs when the damage payments are awarded to the "victim"), his *perceived* costs from the activity are reduced, and as a result he will be more inclined to engage in activities whose costs exceed the benefits. This is the moral hazard problem. Second, the tempter may be deterred from providing opportunities to engage in the activity even when the activity is on net desirable. (This argument holds even if damages are not awarded to the victim.)

There is an exception to the general rule I've stated here, and that occurs when the tempter possesses but withholds information that *might* be relevant to the tempted's decision. If we want to encourage decisions that take into account all costs and benefits, then we need legal and moral rules that encourage disclosure of cost- and benefit-relevant information. This is the source of the one quasi-plausible argument against the tobacco companies in the recent lawsuits: that old enough smokers might have chosen not to smoke if the tobacco companies had been more forthcoming with information they had (and that was not available from other sources) about the health consequences of smoking. (I say "quasi-plausible" because I'm not convinced that potential smokers were really that clueless about the likely effects of smoking, nor that it would have made a difference if they had been informed. But at least the form of the argument is right.)

In short, when the very desirability of an activity is in question, simple causality (in the sense of necessary conditions) is not the relevant issue. It's true that the tempter's offer may be a necessary condition for the outcome to occur - but in order to know whether the outcome is a "harm," it is necessary to consult the preferences of the tempted. Placing moral and legal responsibility on the tempted creates the appropriate incentives to encourage value-increasing and discourage value-decreasing activities, and placing responsibility elsewhere mucks up the decision calculus unless it encourages the dissemination of relevant information.

One final caveat: I am thinking primarily in legal terms, because I'm concerned about how issues like this should be treated as a matter of policy. It's possible Mark wished to restrict his comments to the moral realm only. If so, I might concede that the tempter should "feel bad" and is thus not "blameless." But as soon as we start talking about meting out reward and punishment, whether in the legal realm or otherwise, I fall back on the arguments above.


Thursday, December 19, 2002

Teachers Fight for Lower Wages!

"Public school systems in Nebraska are prohibited from offering signing bonuses or other incentives to attract or retain qualified teachers because doing so violates collective bargaining agreements with teacher unions, the Nebraska Supreme Court ruled Friday." This is a perfect example of how the teachers unions' stranglehold on the public schools stifles attempts to improve the quality of education. It is also yet another argument for a school choice program that does not exclude private schools.

What's especially ironic about this situation is that the teachers unions constantly complain that teachers don't get paid enough. Their solution for every failing public school is to increase budgets and pay teachers more. But when a school actually tries to pay a teacher more money, the unions oppose it unless the pay raise is across the board. Aside from putting a cap on salaries, the across-the-board policy also prevents schools from paying the wage premiums required to attract teachers - specifically, math and science teachers - who have lucrative opportunities outside the teaching profession. (The case at hand involved an industrial arts teacher, but the principle is the same.) Unless schools start offering more for teachers with a higher opportunity cost, they will continue to produce students with inadequate quantitative skills.


Tuesday, December 17, 2002

Tort-uous Economic Logic

Sasha's recent post on the subject of tort liability prompted to Mark to make a thoughtful reply. I'm too lazy to summarize the whole interchange, so I'll just let you follow the links. However, I had to respond to the following passage in Mark's post:
"[Sasha] says that ideally an entrepreneur would get all the benefits and pay all the costs of his innovation, and argues that tort damages are part of 'all the costs.' But -- putting aside the external-benefit point, which Sasha makes -- the only entrepreneur who gets all the benefits of his innovation is the hypothetical price-discriminating monopolist. In the more usual case, there are consumers' surpluses. (Being forbidden to buy a vaccine at the market price would leave the consumer worse off.)
"So if we stick manufacturers with all the costs, but can't secure for them all the benefits, then the overall level of market activity will be suboptimally low."
I was about to reply by saying that Mark is looking at total costs and benefits, whereas marginal costs and benefits are the relevant parameters. A firm doesn't have to be a perfect price discriminator to face the full *marginal* benefit of his production decision, because the valuation of the marginal consumer is generally reflected in the maket price (unless this is a good whose production creates external benefits).

But Mark is one smart guy, and he seems to know something about economics, so I figured he probably wasn't making that mistake. Then I realized he might be talking about a different problem: external costs that are fixed costs, incurred as a one-time result of innovation (the word he used in his post) or business start-up. If so, then his argument goes through, albeit as a special case. The problem is not that any existing firm underproduces, but that there are not enough firms producing in the first place. The threat of liability prevents them from opening, even though the total benefits of the activity (as measured by consumer surplus) exceed the total costs.

I was going to post that instead, and then I realized Mark might be talking about yet another issue: the general theory of the second-best, which implies (among many other things) that some amount of monopoly power can be desirable in the presence of externalities, and vice versa, because the underproduction attributable to monopoly power can counteract the overproduction attributable to negative externalities. As a result, imposing liability for negative externalities can result in underproduction.

So now I'm really unsure what exact point Mark was making. I guess I'll email him, point him to this post, and ask him to let me know. For now, I will just make the general (and vague) observation that all of this analysis is conducted without any reference to the Coase Theorem, whose main lesson is that external costs are not *necessarily* ignored by decision-makers; whether they are considered adequately will depend on both transaction costs and the institutional structure.

UPDATE: Mark informs me that my interpretation #2 (external costs that are fixed) was what he meant.


The Joy of Commerce

As anyone who has visited my apartment and seen my two Christmas trees can attest, I love this time of year. And why do I love it so much? Well, the decorations are pretty, and (some of) the music is nice, but what I really like is… the commercialism.

It probably sounds like I'm trying to be a contrarian, bucking the traditionalists who are fond of reminding us that "Jesus is the Reason for the Season" and that all this crass materialism degrades the holiday. But actually, despite my atheism, I think I'm the truer traditionalist here. As modern-day pagans and some very fundamentalist Christians love to remind us, the origins of Christmas stretch back to the ancient pagan rituals like Saturnalia and Alban Arthuan that were celebrated long before the time of Christ. But this point has been made so often that it's become hackneyed (just do a Google search on "Christmas origin pagan festival"), so let me try to say something slightly different.

The old pagan rituals were, for the most part, harvest festivals. They celebrated the abundance of the food available after the harvest. There was much feasting and gift-giving during this time of plenty. Even in years when the harvest was poor, the holiday was celebrated in the hope of a better harvest the next year -- and because, well, any harvest is better than no harvest at all. In modern times, of course, society is no longer focused on agriculture, so the "harvest" part of the story has naturally faded. But I think it can be interpreted more broadly to mean any abundance of material production. In the modern capitalist era, we celebrate the astounding harvest of goods and services that are available to us. In good years, we splurge with our Christmas bonuses. In not-so-good years, we still celebrate (if a bit more frugally) because we realize -- or at least we should realize -- that we still live in one of the most comfortable and abundant times and places in history. Throughout the ages, poverty has been the norm for the vast majority of people; in modern Western societies, poverty is the exception. That's something truly worth celebrating, even as we try to deal with the poverty that remains.

And that's why I love the commercialism of Christmas. Even when I see the bits of commercialism that irk me -- like those damnable dancing-singing Santas -- I rejoice that I live in a society that can afford such frivolities. Commercialism is the visible manifestation of commerce, the production and trade of goods and services. It is a reminder of how rich we are.


Monday, December 16, 2002

Pro Bono by Proxy

Sasha Volokh observes that most lawyers at big law firms still perform fewer than the recommended 50 hours of pro bono legal work each year, despite recent gains. The problem, of course, is that performing pro bono work can entail a considerable opportunity cost in terms of the forgone revenues the lawyers could have generated during those hours. In order to encourage greater provision of legal services to the poor, some law schools are now encouraging their graduates to start "neighborhood law practices" whose purpose is to provide low-cost legal services, a.k.a. "low bono" work. But this approach doesn't eliminate the opportunity cost problem - it just concentrates it on a smaller number of individuals, the attorneys who practice at such firms. As Sasha says, "Trying to get many lawyers to do a few pro bono cases may be a better strategy than convincing more people to take a very substantial salary cut to provide services to the poor."

I wonder if there's a potential third way here. If big-firm lawyers wish to "do the right thing," but the opportunity cost is simply too high, then perhaps they should make contributions to lawyers or firms that specialize in pro bono work. Say I'm a corporate lawyer who contributes 40 pro bono hours per year, but the cost of contributing another 10 (to reach the recommended 50) is just too high. Then I do my corporate work instead, and then contribute part of my earnings to pay someone else to do another 10 on my behalf. This strategy could lead to just as much or more pro bono work getting done at lower cost, because the hours would be shifted from attorneys with higher opportunity cost to lawyers with lower opportunity cost.

The potential downside is that the high-octane corporate lawyers might be *better* lawyers, in which case the transfer of hours to other lawyers could lower the quality of service rendered to the poor. But I think this problem is likely to be slight, for at least three reasons. First, I suspect the biggest problem for many poor people is not having representation *at all*, and this plan would likely increase the number of service hours provided. Second, there are presumably gains from specialization in the legal profession. Some lawyers are better at corporate work, while others are more talented at providing the kind of services most often required by the poor. This proposal would tend to shift the pro bono work to those most skilled at it. Third, if corporate lawyers really are better, the main reason is the higher compensation they receive. The contribution of funds to firms that specialize in pro bono would attract higher quality attorneys to those positions, at least on the margin.

I suspect the main hurdle for this proposal would be opposition to the idea of discharging one's ethical duties with personal checks instead of effort. If so, I think our ethical standards need revising. The duty to help others does not imply a duty to help them in a more costly fashion simply because it's more "personal." Personal contact can be valuable for the practitioner in terms of moral growth and development of character, but perhaps something less than 50 hours a year is sufficient to achieve that benefit. Why not satisfy the rest of one's ethical obligations with cash?

ADDENDUM: If no one's coined it yet, I hereby lay claim to authorship of the label "proxy bono."