The Institutional Preconditions
of Capitalism

Respect for private property and a
willingness to abide by agreements

A system of a laws reflecting those
norms

Orderly and impartial enforcement of
those laws
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HOW THESE PRINCIPLES ARE
MANIFESTED IN U.S.
Self-Executing Regulation
State Enforced Regulation
Administratively Executed/State Enforced
Regulation
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Self-Executed Regulation
Defendant violates a duty harming Plaintiff
 Plaintiff brings civil action (takes the
offender to court)
 Seeks damages and/or a court order
 Court (judge & jury) decides on the basis
of adversarial process, court’s decision
enforced by state

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Examples
 Contract
 Misrepresentation
 Product
Liability
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State Enforced Regulation
Defendant violates duty laid out in statute
 State brings case (civil and/or criminal)
against Defendant
 Seeks penalties (fines, jail, corporal
punishment) and/or a court order
 Court (judge & jury) decides on the basis
of adversarial process, court’s decision
enforced by state

5
Examples
 Sherman
Act
 Fraud
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Administratively Executed/Federally
Enforced Regulation
An administrative agency requires permit to carry
out particular activity
 It grants the permit if (and only if) holder agrees
to abide by specified terms
 Prevents those lacking permit from performing
activity and enforces compliance with terms of
permits
 It sanctions violators -- imposes fines or, in
extreme cases, withdraws permit

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Examples
 Wheeler
Lea Act
 FDAct
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CONTRACT I
 The
basis of contract is free exchange of
property rights
 Ownership implies the right to buy and sell
 The law doesn’t generally interfere with or
constrain those rights
 People are expected to abide by their
agreements -- to be trustworthy
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CONTRACT II
 Paramount
Job of Courts: Enforcing
compliance with terms of voluntary agreements
 Courts rarely question the adequacy of
consideration
 Seller responsible for making terms of contract
clear
 If ambiguity nevertheless exists, construe
against drafter
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CONTRACT III
 Except
where contract stipulates otherwise,
usual remedy is termination of contract and
return of consideration
 Buyer is expected to make special
arrangements where failure on part of seller
would be especially costly
 Seller responsible for making terms of contract
clear
 If ambiguity nevertheless exists, the courts will
usually decide against drafter’s interpretation
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PRODUCT LIABILITY I
 Manufacturers
and retailers owe customers a
product that is effective for its stated purpose
and safe when properly used
 Product must be properly designed,
manufactured, and marketed to the consumer
– basis of the bargain damages -- i.e., the product or
service is not as represented and does not perform
as promised
– consequential damages -- use of the good in
question gives rise to damages
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PRODUCT LIABILITY II
 Personal
injury
– Anyone injured from use of product can sue
– Anyone in supply chain can be sued
– Often the one with the deepest pockets will be
targeted, but liability is often joint and several
– Plaintiff picks jurisdiction
– Can seek recovery for ‘actual’ damages, pain &
suffering, and punitive damages
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PRODUCT LIABILITY III
 Main
personal injury theories
– Strict liability: failure to warn of a defective design
(something that could be corrected -- i.e., exploding
dryer) or defective condition (ladder; hockey
puck?);
– Negligence: failure to: manufacture or handle the
good properly, adequately inspect the good, comply
with federal, state, or industry product standards.
(Violating law is usually proof of negligence per se)
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PRODUCT LIABILITY IV
 Defenses
– Abnormal use
– Contributory negligence
– Assumption of risk
 To
avoid LIABILITY under a strict liability
standard, the defendant must show that the
plaintiff "voluntarily and unreasonably
proceeded to encounter a known danger."
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FRAUD I
1. Misrepresentation (either by commission or
omission)
2. of a material fact
3. Knowledge of the misrepresentation
4. Intent to deceive
5. Reliance on the part of the victim
6. Damage to the victim
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FRAUD II
 Puffing
≠ fraud
– tampering with a used car's odometer is fraud;
– claiming that it is in great shape is not.
 Innocent
misrepresentation is not a crime --
– misrepresentation involves all the elements of fraud
but the middle two (except where the US government
is the customer)
– remedy for exchanges involving innocent
misrepresentation is rescission of the contract and
restitution of consideration.
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Sherman Act: Section 1
Per se violations: Agreements among
potential competitors at the same level
(Horizontal arrangements)
 to fix prices--explicit or implicit
to divide markets
group boycotts
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Sherman Act: Section 1 (cont.)

Rule of reason offenses: Vertical
arrangements)
Resale price maintenance agreements
Tying arrangements (may also violate
Clayton Act)
Exclusive dealing arrangements (ditto)
Requirements Contracts (ditto)

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Sherman Act: Section 2
Anti-monopoly Section (involves one legal
person and requires evidence of intent to
monopolize <anticompetitive acts> and
success <dominant market share>
 Drive competitors out of business
 Market definition
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Clayton Act
Enforced by DOJ and Federal Trade Commission
 Prohibits
price discrimination
 Sale of goods of like grade and quality in same
market at different price that injures
competition
 Defenses include: Cost justified, Meeting
competitors' price, Perishable goods, Unlike
grade or quality
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Clayton Act (cont.)
Section 7 prohibits mergers likely to injure competition
(HSR = not competitors = consumer welfare/efficiency)
 Defenses
– Failing company
– No substantial lessening of competition
 DOJ rules--horizontal mergers/market share, HHI
= sum of squared |shares|
– Prior approval, waiting period
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The Federal Trade Commission
Created in 1914 by FTC Act to protect the
consumer against “unfair methods of
competition"
 FTC Act amended by Wheeler-Lea Act "to cover
unfair or deceptive acts or practices” Gave FTC
broad latitude to define its responsibilities and the
power to regulate advertising to prevent 'false and
misleading claims'
 FTC also enforces Magnuson-Moss Warranty Act,
Truth in lending, Fair Credit Reporting, and Fair
Packaging and Labeling Acts

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