The Foundation for Economic Education recently invited me to join its flagship publication, The Freeman, as a regular contributor. It just published my first article, No Exit: Are Honduran Free Cities DOA? Here's an excerpt:
Eager to bring Hong Kong-style growth to their beleaguered Central American country, Honduras amended its constitution in 2011. The new provisions allowed the creation of quasi-sovereign special development regions. Libertarians thrilled at the prospect.
By making it easier to escape from bad government to better government, the Honduran plan would put the forces of competition and choice in the service of the Honduran people. Formerly, Hondurans who voted with their feet had to flee their homeland. Now, they could stay and wait for good government to come to them--at least to the neighborhood.
Those grand visions came to nothing, however. Instead, the Honduran Supreme Court struck down the constitutional amendments as ... unconstitutional. Does that spell the end of the Honduran experiment in newer, freer cities?
Tuesday, November 27, 2012
The Freeman on Free Cities
Saturday, April 23, 2011
The Power of Property Rights
Why have property rights? This brief video, which I wrote and narrated for LearnLiberty, explains. Set in my hometown of San Clemente, the video co-stars some of the most lovely scenery that SoCal can offer.
Friday, February 18, 2011
Condoms, Cheap Pizza, Beer, and . . . the Rule of Law
Condoms, cheap pizza, beer, lotto tickets, bongs, military gear . . . what have they got to do with the rule of law? LearnLiberty, a project sponsored by the the Institute for Humane Studies, recently aired a video that I wrote and narrated on the question. Enjoy!
Wednesday, March 18, 2009
A Call for Citizen Courts
It stands as a fundamental principle of justice that we cannot entrust one party to unilaterally judge its disputes with other parties. This poses a problem for the resolution of disputes between a State and those subjected to its legal jurisdiction. How impartially can agents of the State, acting as the judges of its courts, decide such disputes? "Not well enough," citizens and residents might worry. It thus looks at least unwise, and arguably unjust, to give federal authorities exclusive jurisdiction over disputes that call for applying the U.S. Constitution.
If we view the U.S. Constitution as a contact—a standard form agreement offered on a take-it-or-leave-it basis by an awesomely powerful government to a comparatively powerless individual—we cannot help but note the glaring inequity of letting only federal authorities decide questions of federal power. No just court would enforce a standard form agreement between grossly unequal parties, imposed by one on the other under conditions that raise serious doubts about the offeree's consent, that lets the all-powerful offeror alone decide disputes arising under the agreement. A clause reading, "I have the sole power to interpret this agreement," reeks too much of substantive unconscionability to win a court's approval. Indeed, the patent unfairness of such a clause cannot help but raise procedural doubts about whether the parties bargained for an exchange at all, undermining the enforceability of the entire agreement.
Happily, we can easily read the U.S. Constitution to avoid the vice of self-judgment. Its plain text by no means mandates that only federally employed judges can decide the scope of federal power. . . . We thus remain at complete liberty to adopt this remedy for self-judgment: Decide disputes between the federal government and other parties under the same arbitration procedures that private parties customarily use in deciding their contractual disputes. In other words, we should establish Citizen Courts.
A Citizen Court would arise at the option of any party to a legal dispute with the federal government being heard by a federal court. Each party—including the federal one—would choose one judge. Those two judges would then agree on a third. Together, the panel of three judges would decide the parties' dispute. Rather than leaving questions about the power of the federal government solely in the hands of federal agents, therefore, a Citizen Court would rely on judges to which the disputants have consented. A Citizen Court would help to remedy the partiality of federal courts and, thus, would offer more justifiable judgments.
[NB: The foregoing comes, after various edits, from Part III.B.3.c. of Graduated Consent Theory, Explained and Applied, Chapman University School of Law, Legal Studies Research Paper Series, Paper No. 09-13 (March 2009) [PDF].]
Sunday, November 16, 2008
The Mathematics of the Blame Game
I recently received a survey of economists on the subject of the financial crisis. The primary goal is to find out what economists believe caused the crisis. The various contributing factors fall into two basic categories, which I will call “government failure” and “market failure.” (Those aren’t the terms used in the survey, but that’s essentially what they are.) At one point, the survey asks the respondent to assign each category a percentage score for its contribution to the crisis, with the percentages adding up to 100%. For instance, you could say government factors were responsible for 60%, market factors for 40%.
The thing is, it should be possible for the percentages to add up to more than 100%. Why? Because some part of the crisis cannot be attributed to one category or the other; it can only be attributed to both.
An analogy. Say your spending on Coke has risen from $20/month to $45/month. This is because the price has risen (from $2 to $3) and also because your consumption has gone up (from 10 to 15 bottles). The total change is $25/month. How much of the increase is attributable to higher price, and how much to higher quantity? Well, if the price hadn’t increased, you’d be spending $15/month less. If the quantity hadn’t increased, you’d be spending $15/month less. As a percentage of the total $25 increase, each factor is responsible for 60% of the total effect, for a combined percentage of 120%. How is that possible? Because $5 of the increase resulted from both price and quantity having gone up; that is, $1 more per bottle multiplied by 5 more bottles.
Okay, so that example was probably too obvious. But I think that’s exactly what we have in the financial crisis. Some amount of the crisis is attributable solely to bad government behavior (like the Community Reinvestment Act and easy credit from the Fed). Some is attributable solely to bad market behavior (like excessive optimism and lying on credit applications). And some portion of the crisis is attributable to bad government policies having exacerbated bad market behavior. For instance, Fannie Mae and Freddie Mac – government-created entities with implicit government backing – helped to inflate the housing bubble.
No, I don’t know what percentage should be attributed to both categories. But I think it’s probably large.
If we must lump the combined effect into one of the other two for “blame game” purposes, there is an interesting philosophical question about where to put it. It depends a lot on what you take as given. My instinct, for instance, is to lump the combined effect into the government failure effect. Why? Because I largely take the propensities of market actors as given. Yes, people are greedy and overoptimistic and dishonest. But it was always thus. I don’t see basic human nature as fundamentally alterable. What matters, then, is whether government policy channels human nature in good or bad directions. On the other hand, if you start with government policy as given, then you’ll end up lumping the combined effect into the market failure effect. Which is the more reasonable assumption?
In addition, at least in the government category, there are two kinds of potential failure – broadly, “too much government” and “too little government.” And that’s actually where a lot of the debate is taking place, since liberals seem to think the main problem was that we needed more regulations, while market-types (like me) think a large part of the problem was too many (bad) regulations in the first place. Should lack-of-regulations be considered a market failure because regulations are supposed to rein in the market, or a government failure because government actors failed to enact them? (For what it’s worth, the survey includes “regulatory and surveillance policy” in what I’ve called the government category.)
Thursday, July 03, 2008
Let's Tell the CFTC Where to Go
Update: I've extended the deadline for signing up until 7 p.m. Pacific, Sunday, July 6. Also, I fixed a typo in paragraph 3, changing "denying" to "giving." (Thanks, Gil!)
The deadline looms for interested parties to respond to the Commodity Futures Trading Commission's request for comments about regulating prediction markets ("event markets" in the CFTC's usage). I may or may not get around to a detailed, point-by-point response to the CFTC's many questions. In the meantime, though, I've drafted a general statement that many of you might agree with. I invite you to sign it with me, so that together we might tell the CFTC where to go. Please see below for details on how to sign on. Here is the draft statement:
What regulatory treatment should the Commodities Futures Trading Commission ("CFTC") apply to event markets? We the undersigned, who represent a wide range of viewpoints, agree on three general observations. First and foremost, the CFTC should do no harm. Second, at a minimum, the CFTC should make more general the sort of "no action" status enjoyed by the Iowa Electronic Markets ("IEM"). Third, if the CFTC decides to regulate event markets more substantively, it should adopt clear and limited jurisdictional boundaries and allow affected parties to step outside of them.
First, do no harm: Many sorts of event markets—including public ones, private ones, ones that offer only play-money trading, and ones that offer real-money trading—already thrive in the U.S. They have provided a rich array of benefits without evidently harming anyone. The CFTC could help event markets achieve still greater success by clarifying their legality. Instituting the wrong sort of regulations could suffocate event markets in their cradle, however. The CFTC should exercise a light hand, taking care to do no more than offer qualifying event markets the shelter of federal preemption and freeing them to continue operating under the extant legal regime.
Second, open up the "no action" option: Thanks in part to the "no action" letters that the CFTC has issued to it, the IEM has for many years benefited the public by offering real-money event markets. No sound reason precludes the CFTC from giving similar treatment to other institutions that, like the IEM, offer event markets solely for academic and experimental purposes and without imposing trading commissions.
Although the CFTC's "no action" letters do not specify the exact criteria the IEM had to satisfy, they took favorable note of the IEM's account limits. Those account limits effectively prevent the IEM from supporting significant hedging functions. If the CFTC builds a similar requirement into any general "no action" guidelines, it should adopt limits considerably more generous than the meager $500/trader limit adopted decades ago by the IEM. Even a limit ten times that amount would still effectively preclude hedging.
The CFTC should not limit "no action" status to markets run by tax-exempt organizations. The no-action letters that the CFTC issued to the IEM emphasized not the nature of the hosting institution, the University of Iowa, but rather the business model adopted by the IEM itself. Profitability could not have mattered, as tax-exempt organizations can and do earn profits (indeed, as their burgeoning endowments demonstrate, many universities earn immense profits). The CFTC apparently cared only that the IEM did not plan to profit from charging traders commissions. A tax-paying organization could satisfy that condition just as easily as a tax-exempt organization could. In either event, price discovery would flourish and consumers would win a safeguard against getting fleeced.
Third, preserve regulatory exit options: If the CFTC decides to write substantive regulations for event markets, it should recognize and guard against the risk of overregulation. Even well-intentioned and well-informed regulators remain human and, thus, all too apt to make mistakes. They run an especially large risk of making mistakes when they first attempt to regulate new institutions, such as event markets. To make matters worse, regulators typically lack reliable signals to determine when they have gone too far. Industries wither away for many reasons, after all.
The CFTC's approach to regulating event markets should accommodate these policy considerations by establishing clear jurisdictional boundaries and preserving regulatory exit options. Thus, for instance, the CFTC might specify that it has no jurisdiction over event markets that offer trading only to members of a particular firm, over markets that offer only spot trading in negotiable conditional notes, or over markets that do not support significant hedging functions.
The CFTC's approach to regulating event markets should accommodate these policy considerations by establishing clear jurisdictional boundaries and opening exit options. Thus, for instance, the CFTC might specify that it has no jurisdiction over event markets that offer trading only to members of a particular firm, over markets that offer only spot trading in negotiable conditional notes, or over markets that do not support significant hedging functions. Then, if the CFTC enacts unduly burdensome regulations, an event market could opt out of them by changing its business model. So long as markets publicly announce that they operate outside the CFTC's purview, allowing them that freedom of exit would harm nobody. To the contrary, it would help the CFTC gauge the suitability of its regulations and serve the public by protecting the continued viability of event markets.
Interested in signing on? Please drop me a private email (tbell at chapman dot edu) with your name, institutional affiliation, and snailmail address. I welcome your comments—I'm sure a typo or two persists in my draft—but I of course cannot revamp the entire statement without mucking up the entire process. To leave me time to get everything together and out the door before the July 7 deadline, you'll have to contact me before noon Pacific time on Sunday, July 6.
[Crossposted at Agoraphilia and Midas Oracle.]
Monday, May 19, 2008
Building Exits into CFTC Regulation
Much of my draft paper, Private Prediction Markets and the Law, focuses on nuts-and-bolts fixes for the legal uncertainty that currently afflicts private prediction markets under U.S. law. I'll say more about those in later posts to Agoraphilia and Midas Oracle. The paper also dicusses a more theoretical and general issue, though: The benefits of designing regulatory schemes to include exit options.
The Commodity Futures Trading Commission recently issued a request for comments about whether and how it should regulate prediction markets. In earlier papers, I explained why the CFTC cannot rightly claim jurisdiction over many types of prediction markets. I recap that view in my most recent paper, but add some suggestions about how the CFTC might properly regulate some types of prediction markets. In brief, I suggest that the CFTC build exit options into any regulations it writes for prediction markets, allowing those who run such markets the same sort of freedom of choice that U.S. consumers already enjoy, thanks to internet access to overseas markets like Intrade, with regard to using prediction markets. Here's an excerpt from the paper:
Those practical limits on the CFTC's power should encourage it to write any new regulations so as to allow qualifying prediction markets to operate legally, and fairly freely, under U.S. law. . . . Ideally, the CFTC would offer prediction markets something like these three tiers, each divided from the next with clear boundaries.
- Designated Contract Markets. Regulations designed for designated contract markets, such as the HedgeStreet Exchange, would apply to retail prediction markets that offer trading in binary option contracts and significant hedging functions.
- Exempt Markets. Regulations for "exempt" markets, which impose only limited anti-fraud and manipulation rules, would apply to prediction markets that:
- offer trading in binary option contracts;
- thanks to market capitalization limits or other CFTC-defined safe harbor provisions do not primarily support significant hedging functions; and
- offer retail trading on a for-profit basis.
- No Action Markets. A general "no action" classification, similar to the one now enjoyed by the Iowa Electronic Markets, would apply to any market that duly notifies traders of its legal status and that is either:
- a public prediction market run by a tax-exempt organization offering trading in binary option contracts but not offering significant hedging functions;
- a private prediction market offering trading in binary option contracts, but not significant hedging functions, only to members of a particular firm; or
- any prediction market that offers only spot trading in conditional negotiable notes.
Notably, regulation under either of the first two regimes would definitely afford a prediction market the benefit of the CFTC's power to preempt state laws. It remains rather less clear whether the third and lightest regulatory regime would offer the same protection, though the cover afforded by its two "no action" letters has allowed the Iowa Electronic Markets to fend off state regulators. Markets that by default qualify for the third regulatory tier described above thus might want to opt into the second tier, so as to win a guarantee against state anti-gambling laws and the like. So long as they satisfy the first two conditions for such an "exempt market" status, public prediction markets run by non-profit organizations or private prediction markets that offer trading only to members of a particular firm should have that right. Why offer this sort of domestic exit option? Because it would, like the exit option already open to U.S. residents who opt to trade on overseas prediction markets, have the salutatory effect of curbing the CFTC's regulatory zeal.
The footnotes omitted from the above text includes this observation: "Because they fall outside the CFTC's jurisdiction, markets offering only spot trading in conditional negotiable notes could not opt into the second regulatory tier."
Please feel free to download the draft paper and offer me your coments.
[Crossposted at Agoraphilia, Technology Liberation Front, and Midas Oracle.]
Saturday, April 19, 2008
Amsterdam on the Reservation
I'm currently attending a Liberty Fund conference on, "Liberty, Property, and Native America." The assigned readings, drawn largely from Self-Determination: The Other Path for Native Americans (2008), have exposed me to a wonderful range of new ideas. The chapter written by Ronald N. Johnson, for instance, "Indian Casinos: Another Tragedy of the Commons," opened my eyes to a way by which Native Americans might both radically increase their fortunes and our liberties. The idea, in brief: The same loophole that allows them to run casinos might also allow Indians to offer legal access to recreational drugs, prostitution, and extreme fighting.
Native Americans won the right to run casinos thanks to cases like California v. Cabazon Band of Indians, 480 U.S. 202 (1987), and Seminole Tribe of Florida v. Butterworth, 658 F.2d 310 (5th Cir. 1981), and the Indian Gaming Regulatory Act ("IGRA") that such cases inspired. To generalize, U.S. law allows sovereign tribes to offer gaming services on their reservations, subject to three conditions:
- First and foremost, a reservation's host state must permit the particular sort of activities in question, even if under a very restrictive regulatory regime, rather than prohibiting and criminalizing them. In Seminole Tribe of Florida, for instance, the tribe successfully relied on the claim that Florida law allowed certain forms of bingo.
- Second, to judge from cases forbidding the sale of fireworks on reservations, and the illegality of Indians offering Internet gaming to off-reservation customers, a tribe must not exercise its sovereign powers so as to gut the effect of its host state's regulations. What happens on the reservation must, in other words, stay there.
- Third, as a matter of rhetoric if not hard law, it helps a tribe to emphasize that it has a long history of enjoying the same amusements that it offers its guests. Indian casinos thus often emphasize the role that games of chance traditionally played in the host tribe's culture.
Depending on the state and tribe, those three conditions might apply to a tribe offering recreational drugs, prostitution, and extreme fighting on its reservation. Thanks to Employment Division v. Smith, 494 U.S. 872 (1990), and 42 U.S.C. 1996a, for instance, states must permit the religious use of peyote, a traditional practice among some Native Americans. So long as a tribe administers that sacrament under controlled conditions, rather than by selling it for off-reservation use off, offering peyote would arguably qualify for the same sort of legal protections that have allow Indian casinos to thrive. Similar arguments might well apply to marijuana in many states (though here the case for traditional Indian use appears weaker than with regard to peyote), prostitution in Nevada and Rhode Island (though, again, the alleged "wife sharing" customs of some tribes do not quite equate to the same practice), and violent or even deadly sports among consenting adults.
According to Ambrose L. Lane, Sr.'s book, Return of the Buffalo: The Story Behind America's Indian Gaming Explosion 44 (1995), in 1979, California's Cabazon Band of Mission Indians considered cultivating marijuana and jimson week (a traditional Native American hallucinagen), only to set the idea aside. Beyond that, I've found no evidence that any tribe has considered pursuing the sort of legal strategy I've described. Given the large profits that offering drugs, sex, or extreme martial arts might garner tribes, however, and the competition that increasingly cuts into their gambling businesses, we might soon see many Native American Amsterdams.
Tuesday, August 21, 2007
Spinning Good News Into Bad
Via Radley, I find a USA Today article about trends in drunk-driving accidents. As Radley notes, the number of drunk-driving-related deaths fell nationwide from 2005 to 2006, and it also fell in 28 states. Yet the headline reads, “Drunken driving deaths up in 22 states.” Talk about seeing the glass half-empty.
Even more statistical deception lies within the article. While the number of traffic fatalities involving drivers with BAC of 0.08 or above dropped (from 13,582 in 2005 to 13,470 in 2006), the number of fatalities involving drivers with any alcohol at all their systems rose slightly (from 17,590 in 2005 to 17,602 in 2006). Guess which statistic the Secretary of Transportation decided to focus on?
"The number of people who died on the nation's roads actually fell last year," U.S. Transportation Secretary Mary Peters said at a news conference in this Washington suburb. "However the trend did not extend to alcohol-related crashes."Naturally, these statistics are being used to promote an expanded campaign against drunk driving, with the slogan, “Drunk Driving. Over The limit. Under Arrest.” But wait a minute – the number of fatalities involving drivers over the legal limit went down!
Even if we focus on fatalities involving drivers with any alcohol at all in their systems, we should still adjust for population growth. By my calculations, the number of such fatalities per 100,000 fell slightly, from 5.93 in 2005 to 5.88 in 2006.
And, as Radley observes, all statistics of this nature are based on the underlying assumption that alcohol was the cause of every accident in which one of the drivers had alcohol in his system – whether or not that driver was deemed at fault.
Friday, August 10, 2007
Rodrik vs. Tabarrok on Interventionism
Dani Rodrik makes an argument that is straight-up bizarre; Alex Tabarrok thinks it might be the worst argument ever. Interestingly, it’s Rodrik himself (in responding to Alex) who puts the libertarian response in its pithiest form: “ok, now that we have shot ourselves in one foot, you think we should shoot the other foot as well?” Indeed.
And then, after aptly summarizing the libertarian position, Rodrik doesn’t try to refute it; he just lets loose with another round of “libertarians are simplistic and dogmatic while the rest of us are sophisticated and empirical.” See Alex’s dead-on response.
It’s really mind-boggling. Essentially Rodrik starts off by saying that government interventions in healthcare, education, macroeconomic stabilization, ad infinitum, are desirable despite the fact that the problems justifying such interventions are “rarely documented with any precision,” and despite that fact that “empirical evidence on these market imperfections is sketchy, to say the least” (Rodrik’s own words). And then he turns around and accuses libertarians of being dismissive of empirical evidence!
He also adds, “[T]here are really deep philosophical differences here [between libertarians and interventionists] that have nothing to do with economics per se. Most importantly, I believe government can be a force for good; they do not.” Of course, most libertarians do admit some role for government, such as in enforcing rights of person and property, so it’s a strawman to imply that libertarians don’t think government can ever be a force for good. But set that aside. What’s really interesting here is the self-proclaimed empiricist trying to shunt real economic issues into the realm of untestable philosophical differences. There are pure philosophical differences, to be sure. But whether government is likely to produce effective and efficient policies is assuredly an economic question that can be addressed both theoretically and empirically. Public choice economics has shown in theory why politicians, voters, and bureaucrats face systematically poor incentives to adopt good policies, and the evidence amply demonstrates that government agents often do behave in a manner inconsistent with the interests of the public. So who is ignoring the evidence here?
Sunday, July 29, 2007
Driving Miss Dangerously
California’s new law, which prohibits talking on the cell phone while driving unless the cell phone is hands-free, went into effect earlier this month.* I am relatively certain that I am now a more dangerous driver.
I’m not saying it’s totally safe to talk on the phone while driving. But for me, talking on the phone is no more distracting – indeed, probably less distracting – than talking with someone in the passenger seat. And driving with one hand? I often do that when I’m not on the phone. I know this is a self-assessment and therefore possibly biased, but I think – for me at least – there are only two dangerous phases of talking on the phone while driving: (1) before the conversation, when I’m fumbling to find the phone and either dial a number or answer before the call gets shunted to voicemail, and (2) after the conversation, when I’m hanging up and stowing the phone somewhere. These are the phases when I’m most likely to take my eyes off the road.
The new cell phone law has increased the inconvenience of phase 1. Now I have to pick up the phone, locate the earphone hanging at the end of a cord somewhere, stick it in my ear, and finally answer or dial. (Phase 2 is also slightly more inconvenient, though it’s not too hard to pull the earphone out.) The end result is that I spend more time distracted from my driving than if there were no law.
This development reminded me of an episode of “Mythbusters” I happened to catch about a week ago. “Mythbusters” is a reality show where they use “science” to test popular empirical claims. This episode’s claim was that using a cell phone while driving is more dangerous than driving while intoxicated. The testers ended up concluding that the claim had been confirmed by their experiments. Now, the testing method suffered from a problem that afflicts all episodes of this show, namely that they reach conclusions based on sample sizes of just one or two. But setting that objection aside, the testing method suffered in a couple of other ways as well. First, it’s apparently illegal in California to drive drunk even for experimental purposes on a closed course. So for the test of driving while intoxicated, they had the two drivers drink enough alcohol to reach a BAC almost 0.08. This necessarily biased the test in the direction of saying that cell phone usage is more dangerous. Second, the test for driving while on the phone was really hard. The person on the other end of the conversation was, among other things, giving the drivers word problems that involved geometrical visualization (e.g., “You have three shapes, a circle, a square, and a triangle. The triangle is to the right of the square, and the square is above the circle. Is the circle (a) left of the triangle, (b) above and to the right of the triangle…” etc.). It was not clear whether getting the wrong answers to these questions hurt the driver’s score. But even if not, it seems they chose exactly the sort of conversation that is most likely to distract the driver and least like real-life phone conversations, thereby again biasing the test toward saying cell phone use is more dangerous.
Supposedly there are some serious studies that have found cell-phone-driving to be dangerous. I’m too lazy to look them up right now, but I believe they exist. What I wonder, however, is what the studies have used as the relevant control group. If they’re composed of drivers who are not distracted in other typical ways – by talk radio, by conversation with other people in the vehicle, etc. – then the control group could be too ideal to provide a relevant point of comparison. And the experimental group’s performance will also depend, I suspect crucially, on the type and intensity of conversation they are expected to carry on.
* UPDATE: Apparently I was mistaken about the implementation date; the law doesn't go into effect until July 1, 2008.
Monday, June 04, 2007
Kidney Exchange for Central Planners
One of my students sent me this article about Tuomas Sandholm, a Carnegie Mellon computer scientist who is using game theory to facilitate kidney donations. The article reports on the increasing popularity of paired kidney exchanges, “in which one kidney patient's relative or friend will donate an organ to another patient, whose own relative or friend will donate his organ to the first patient.” Such exchanges are limited by the fact that it’s not always easy to find patient pairs with relatives or friends who happen to be compatible matches.
Sandholm’s contribution was, first, to recognize the possibility of multi-party exchanges (e.g., A donates to B’s relative, B donates to C’s relative, and C donates to A’s relative); and second, to devise a computer algorithm that will allow multi-party exchanges with (almost?) any number of parties (e.g., A donates to B’s relative, B donates to C’s relative, C donates to D’s relative, ... , and Z donates to A’s relative).
Now, this is all great, and Sandholm is doing admirable work. But as I read the article, I couldn’t help lamenting that our current system of organ donation has reduced us to the use of barter. What Sandholm has done, quite simply, is to increase the efficiency of barter. Using his algorithm, we could presumably arrange other kinds of transactions as well: a baker gives some bread to a doctor, who provides medical care to a carpenter, who fixes a cabinet for the baker. Fortunately, we don’t need Sandstrom’s method for that, because we already have a venerable institution that coordinates these magnificently complex trades with remarkable efficiency and without the need for central organization. We call it money. Unfortunately, this mechanism has been outlawed for human organs, thereby forcing us to rely on the far more primitive mechanism of barter.
Tuesday, May 29, 2007
Supply and Demand of Government qua Natural Monopoly
In an earlier post, I described a scalar model of consent. I here use that model to analyze the supply and demand of government services. Specifically, I explore the origin and development of government qua natural monopoly. I plan in a later post to apply a similar analysis to government qua provider of public goods.
A government that enjoys a natural monopoly on satisfying the express demand for its services will have the power, and incentive, to expand to meet non-express demand. The result: a supply of more government services, at a higher price, than citizens in fact want. In an extreme case, satisfying the implied or hypothetical demand for government services may result in an oversupply so gross that consumers expressly assign it a negative price. In other words, consumers of government services may actually object to what they supposedlywant.
Government represents a sort of service industry, albeit one marked by some peculiar features. For one thing, governments can often lay plausible claim to qualifying as natural monopolies. (Perhaps that is not so peculiar; David Friedman convincingly argues that natural monopolies pervade sufficiently small markets.) Figure 1, below, offers a fairly conventional graph of the economic features of government qua natural monopoly.
(In figure 1, "MC" stands for "marginal costs of production"; "ATC" for "average total costs of production"; and "D" for "aggregate demand." Because we here portray a monopoly aggregate demand equates to "AR," or "average revenue." The various uses of "P" mark prices; "Q" of quantities. The lowercase "m," as in "Pm," designates the monopoly price. "Qm" of course corresponds to the monopoly quantity. In like fashion, "r" designates the regulated price and quantity, and "c" the competitive ones.)
So it goes, at least, in the standard economic view, which concerns only expressly consensual transactions. But as I noted earlier,, we might do well to also consider transactions marked by less than express consent. Government monopolies, for instance, typically claim to respond to implied and hypothetical consent. What does a market based on non-express consent look like? Figure 2, below, illustrates.
Figure 2 shows the non-express demand, marginal revenue, monopoly price, and monopoly supply of government services. All those non-express measures come marked with "(n)" suffixes. The express measures from figure 1 remain, but now carry "(e)" suffixes to distinguish them from the newly added material. (For the sake of clarity, I've dropped from figure 2 some of the information offered in figure 1.)
Figure 2 illustrates three interesting results. First, non-express demand, because it includes transactions beyond those expressly agreed to, traces a curve to the right of typical (i.e., express) demand. Second, due to its speculative nature, non-express demand of necessity charts a somewhat more fuzzy line than express demand does. Figure 2 thus draws the non-express demand and marginal revenue curves as relatively imprecise blobs.
Third, and most crucially, figure 2 illustrates that a government monopoly meeting non-express demand may provide more services, at a higher price, than consumers in fact demand. How can government agents get away with thereby supplying and getting paid for grossly inefficient level of services? Recall that we charitably but reasonably supposed that in a market based on expressly consensual transactions, government will enjoy a natural monopoly. Government agents can thereby lay claim to a monopoly on the initiation of coercion. They can all too easily wield that power to expand their market share, claiming a mandate to satisfy implied or hypothetical consent. And, given the super-monopoly profits thereby afforded, they have powerful incentives to do so.
Figure 2 only hints at something that figure 3, below, makes explicit: Government based on non-express consent may supply—"oversupply," really—a level of service that consumers expressly value at less than zero. That result follows quite directly from the simple, if somewhat unusual, expedient of following the express demand curve even as it plunges below the x-axis. Economists do not generally explore that region of "negative demand," granted, but they seldom have reason to do so. Figure 3, because it tracks both express and non-express transactions, gives us good reason to spell out what happens when a supposedly justified supply meets actual consumer demand.
What, in sum, does this application of "consent theory" (as I style it) teach? Government services, because they have power and incentives to expand from natural monopolies based on express consent to coercive monopolies based on implied or hypothetical consent, threaten to provide more government than consumers really want. In some cases, consumers may afford negative value to the resulting oversupply of government services. We thus might say that figure 3 illustrates, in the iconography of economics, the causes and effects of tyranny.
That paints a rather grim—but, I would argue, accurate—picture of how government can grow from a natural monopoly into an artificial, and unwelcome, one. Note, however, that I have not yet invoked the public goods justification for government power. I'll take that up my next post on consent theory, explaining why a government that aims to meet the hypothetical demand for public goods runs a reduced risk of supplying services to which that consumers assign negative value. In other words, governments based on the hypothetical demand for public goods tend to become bloated but not monstrous.
[NB: I edited this post, some weeks after originally publishing it, to have it speak not specifically of hypothetical consent, but rather more generally of non-express consent. The latter comprises both implied consent and hypothetical consent.]
Monday, May 21, 2007
On "Codifying Copyright's Misuse Defense"
I recently posted on SSRN a draft paper, "Codifying Copyright's Misuse Defense," Codifying Copyright's Misuse Defense, 2007 Utah L. Rev. __ (2007) (invited) (forthcoming). Herewith, the abstract:
Although courts have found a misuse defense to copyright infringement, lawmakers have not yet codified it. To clarify the doctrine, and to bring the Copyright Act up-to-date with the law, this paper proposes adding a new § 107(b):It constitutes copyright misuse to contractually limit any use of a copyrighted work if that use would qualify as noninfringing under § 107(a). No party misusing a work has rights to it under § 106 or § 106A during that misuse. A court may, however, remedy breach of any contract the limitations of which constitute copyright misuse under this section.
The present paper documents § 107(b)'s codification of the judicial precedents, offers legislative history explaining the proposed statute, and discusses how the new law would work in the real world. Although the proposed codification of copyright misuse would in large part simply rationalize what courts have already said, it would also promote the salutary policy goal of encouraging the owners of expressive works to forego copyright rights in lieu of common law ones.
[Crossposted to The Technology Liberation Front.]
Friday, February 09, 2007
Minimum Wage Symbolism
The minimum wage is in the news once again. Despite having taken sides on this issue (I’m opposed), I’m increasingly of the opinion that the minimum wage is an almost entirely symbolic matter for both sides.
The minimum wage is obviously symbolic for its advocates, especially the politicians who back minimum wage hikes. It’s a relatively cheap way for them to say, “I’m on the side of the poor and downtrodden.” But informed advocates almost certainly know that the minimum wage is a lousy way to help the poor even if the disemployment effect is small or nonexistent. It’s simply not well targeted to help who it’s supposed to help. Many of the beneficiaries are teenagers, sometimes from reasonably well-to-do households, not single moms trying to support families. It doesn’t distinguish between sole wage earners and members of multi-income households. If you really wanted a policy that helps those who need it, you’d create a means-tested transfer program or expand the EITC, not go mucking around with market wages. But the minimum wage is appealing politically because it’s easy to understand (let’s pay people more!), and to the public at large – which doesn’t see or understand the trade-offs – it sounds like either a pure free lunch or a simple transfer from rich firms to poor employees.
But the minimum wage is also symbolic for its opponents, myself included. The best evidence indicates that the disemployment effects of the minimum wage, while real, are probably small. Since most people already earn more than the minimum wage, not that many people are actually affected. Apparently the demand for labor is relatively inelastic, since a 10% increase in the minimum wage results in a decrease in employment (of the relevant group) of only 1% to 3%. One likely reason for the small impact is that employers probably adjust other aspects of the job package, such as cutting free meals or requiring employees to clean their own uniforms. This is not great news, but it’s not terrible, either; it means that most affected workers are probably just getting a slightly less desirable compensation package, trading away some small benefits for a modest increase in pay. As bad policies go, my guess is the minimum wage is one of the more innocuous. Our efforts would be better spent fighting more disastrous policies. So why do we spend so much time on this one? Because the minimum wage is a classic, straightforward example of how ham-handed government intervention in the free market yields unintended and harmful results. Government-set wages cause unemployment! Yeah yeah, the harms (and benefits) are probably small, but that’s not the point. The point is that if we can get people to see how even this very popular policy is crummy, maybe they’ll begin to question the wisdom of other interventions whose bad consequences are more difficult to grasp. So the issue is just as symbolic for free marketeers as it is for the interventionists.
That said, I should note that large increases in the minimum wage will of course produce worse consequences, and the currently proposed increase from $5.15/hour to $7.25/hour – a more than 40% increase – might therefore be cause for real concern. So maybe this time around the debate is more than symbolic.
