George Mason Law and Economics
Center
PPE Program, June 2007
Second Three Hours:
19 June 2007
Eric Rasmusen,
erasmuse@indiana.edu
For institute materials: http://rasmusen.org/special/ppe-institute
1
The value of the economic approach
“One of the attractions of the economic
analysis of law is that it provides a way of
answering questions about what the law out to
be, what rights we ought to have.
It starts with what looks like a
very weak premise--- that one should design
legal rules to maximize the size of the pie.
It assumes nothing at all about the
sorts of things we expect legal and ethical rules
to be based on: desert, rights, justice, fairness.”
(David Friedman,
http://www.daviddfriedman.com/Academic/Course_Pages/L_and_E_LS_98/Why_Is_L
aw/Why_Is_Law_Chapter_15/Why_Is_Law_Chapter_15.html)
2
From one ethical principle, we get
Theft and murder should be punished, but only if there is
mens rea.
More harmful offenses should be punished more heavily.
Contracts should be enforced, and with expectation
damages.
Criminal penalties should require higher standards of proof
than civil penalties.
Procedures should try hard not to punish the innocent.
Torts should be punished by fines, not prison, but only if
there is negligence.
Negligence should be defined as omitting precautions
whose cost is greater than their benefit.
3
Hour 1: Big Ideas
• Modelling
• Market Failure- Market Power, Asymmetric
Information, Externalities
• Government Failure— Governments as
collections of individuals
• Marginalism
• Opportunity Cost
• Incentives (no detail on this)
4
MAKING MODELS:
Good theory of any kind uses:
Occam’s razor, which cuts out superfluous explanations,
and the ceteris paribus assumption, which restricts attention to one issue at a
time.
Hourglass Approach:
First, a broad and important problem is introduced.
Second, it is reduced to a very special but tractable model that hopes to capture its
essence.
Third, in the most perilous part of the process, the results are expanded to apply to
the original problem.
Mahabharata Story of the Arrow
Law, modern philosophy: hypotheticals. “Don’t fight the hypothetical”
5
MAKING MODELS
1. Logical Positivism, Popper, M. Friedman: A theory should
have testable implications and be falsifiable. Assumptions can
be totally unrealistic.
2. Paradigm Shifts, Kuhn. Theories last till something else fits
better. It takes a theory to beat a theory.
3. Theorems are Processes, Lakatos. People don’t state a
hypothesis and then test it or prove it: they figure out the
hypothesis along the way as they test and prove. Economists
implicitly accepts Lakatos, though M. Friedman’s theory is
what they’ll tell you (because they don’t know the other two)
6
Making Models: Lachman I
A map is an abstraction of the world, and its use requires a theory by
which one can link the abstraction with the world. Before this linkage is
established, however, one needs to know the questions the map should
answer.
Humbug. A map is a map is a map, you say?
Then, by all means, help yourself to a soundscape map of Boston:
“A composite view of the variety of city sounds s perceived along a sequence
of streets . . . [in which symbols represent qualities of sounds . . ., for
example, soft, intense, roaring, muted, sharp, echoing, expansive.”
Or if that's not quite what you had in mind, how about an Eskimo
Coastline Relief Carving (yes, you read that correctly), convenient for
carrying on and around your ship?
Or a color-coded map showing “The Percent of [the U.S]
Population Unchurched . . . 1971?” And so on.
http://homepage.mac.com/brettbecker/soundscape/pugetsoundscape.html7
Making Models: Lachman II
“Somehow, these maps offer little help in getting from
Madison to Chicago. Instead I want a road map, and a certain
kind at that: I need to be given the details of the street plan for
the cities at each end, but not such details for everywhere in
between.
I need to know about the roads, and seasonal
temperature and precipitation indicators would be nice. What
about cloud movements, wind direction and color-keyed info on
vegetation? National and local parks, population centers, and
Howard Johnson restaurants?
The map darkens progressively with colors and symbols,
and darkens still some more until . . . until I notice that even as I
gave free rein to my desire to know more, I consigned
8
myself to a map from which I could only know less.”
Making Models: Lachman III
“Now, within this budget, as in any other, there are allocative
choices to be made. If I spend most of the available complexity showing
parks and schools, there will not be much left for depicting the alternative
street routes that can take me to my destination.
So among the details of which the world is so rich, one must
discern those details most important for the purpose at hand, and in the
austerity that is the elegance of abstraction, select only the highest in
priority from among these…
The best abstraction, or even the better one, cannot be
determined without reference to the abstraction's purpose. In order to
judge the better map from the worse, a critic must know these goals --must
even, for purposes of judging, accept them -- and carry on the criticism from
there.”
9
Making Models: Lachman IV
Differing senses of “like” are what distinguish one
discipline from another, one form of answer from another.
To my amazement in the first few days of law school, I learned
that water can be like cows.
When is water like cows?
Answer: When it's escaping from land.
A lawyer might be equally surprised to find that hay-bailing
wire can be like San Francisco housing.
When is this so? When both are in short supply due to price
controls.
Judith Lachman, ``Knowing and Showing Economics and Law, '' (A review of An
Introduction to Law and Economics, A. Mitchell Polinsky (1983)) Yale Law Journal,
93: 1587, 1598-1605 (July 1984).
10
Models: ALFRED MARSHALL
(1) Use mathematics as a short-hand language, rather than
as an engine of inquiry.
(2) Keep to them till you have done.
(3) Translate into English.
(4) Then illustrate by examples that are important in real life.
(5) Burn the mathematics. [BAD]
(6) If you can't succeed in 4, burn 3.
This last I did often.
11
Market Failure: When Do Markets
not Maximize Surplus?
A. Poorly defined or defended property
rights
B. Poor enforcement of contracts
1. Market power (monopoly)
2. Externalities (spillovers)
3. Asymmetric Information
12
Sen 1970 The Impossibility of a Paretian Liberal (Externalities)
Prude and Lewd. (1) Prude reads the dirty book and
Lewd does not. (2) Lewd reads the dirty book and Prude
does not. Both prefer (2). That requires regulation, forced
behavior.
Mental externalities: If other people would pay $200 to
me to paint my walls white instead of pink, and I would
accept as little as $30, then surplus maximization requires
that the walls be white.
The idea is generalized in:
Kaplow, Louis & Steven Shavell (2002a) Fairness versus Welfare (Cambridge, Mass:
Harvard University Press, 2002).
(2002b) “Human Nature and the Best Consequentialist Moral System,” Harvard Center
for Law, Economics, and Business Discussion Paper No. 349.
(2001a) “Moral Rules and the Moral Sentiments: Toward a Theory of an Optimal Moral
System,” Harvard Law and Economics Discussion Paper No. 342,http://ssrn.com/abstract=293906
(November 2001)..
(2001b) “Any Non-Welfarist Method of Policy Assessment Violates the Pareto
13
Principle,”Journal of Political Economy, 109: 281-286 (April 2001).
Vice as Pollution (externalities)
“ … the analogy between health and disease and virtue
and vice.
They differ in several essential respects, but they
resemble each other in several leading points. Vice is as
infectious as disease, and happily virtue is infectious, though
health is not. Both vice and virtue are transmissible, and, to a
considerable extent, hereditary.
Virtue and vice resemble health and disease in being
dependent upon broad general causes which, though always
present, and capable of being greatly modified by human
efforts, do not always force themselves on our attention.
14
Government Failure
Two problems of governments:
1. They make dumb mistakes
2. They purposely choose not to do what a social
planner would have them do.
Reason: Governments are collections of people,
each with their own objectives, which may or
may not include the Public Good, and rarely
include ONLY the Public Good.
15
Problems for the Social Planner (government
failure)
Is there market failure?
If so, do we have to worry about government
failure if we try to impose regulation?
Easterly review of Sachs book on development aid:
http://www.washingtonpost.com/wpdyn/articles/A25562-2005Mar10.html,
http://www.time.com/time/magazine/article/0,9171,10347
38-11,00.html
16
Marginalism
Let’s have a vote. Which is more important:
Trees, or lumberjack jobs?
Childseat safety, or convenience?
A small budget deficit, or a strong army?
Guns, or butter?
These questions may be fun, but they’re stupid.
17
Marginalism
Figure 8
18
Details here (Marginalism)
19
The Paradox of Value (marginalism)
Water and Diamonds. Which is more
valuable?
20
Opportunity Cost
What would be the cost for you to get a J.D.
in law?
21
The Parable of the Talents (KJV) (opportunity cost)
Matthew 25: 14 For the kingdom of heaven is as a man travelling into a far country, who called his
own servants, and delivered unto them his goods.
15 And unto one he gave five talents, to another two, and to another one; to every man according
to his several ability; and straightway took his journey.
16 Then he that had received the five talents went and traded with the same, and made them
other five talents.
17 And likewise he that had received two, he also gained other two.
18 But he that had received one went and digged in the earth, and hid his lord's money.
19 After a long time the lord of those servants cometh, and reckoneth with them.
20 And so he that had received five talents came and brought other five talents, saying, Lord, thou
deliveredst unto me five talents: behold, I have gained beside them five talents more.
21 His lord said unto him, Well done, thou good and faithful servant: thou hast been faithful over a
few things, I will make thee ruler over many things: enter thou into the joy of thy lord.
22 He also that had received two talents came and said, Lord, thou deliveredst unto me two
talents: behold, I have gained two other talents beside them.
23 His lord said unto him, Well done, good and faithful servant; thou hast been faithful over a few
things, I will make thee ruler over many things: enter thou into the joy of thy lord.
24 Then he which had received the one talent came and said, Lord, I knew thee that thou art an
hard man, reaping where thou hast not sown, and gathering where thou hast not strawed:
25 And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that is thine.
26 His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I
reap where I sowed not, and gather where I have not strawed:
27 Thou oughtest therefore to have put my money to the exchangers, and then at my coming I
should have received mine own with usury.
28 Take therefore the talent from him, and give it unto him which hath ten talents.
29 For unto every one that hath shall be given, and he shall have abundance: but from him that
hath not shall be taken away even that which he hath.
22
30 And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing
of teeth.
(opportunity cost)
You and your wife bought two tickets to the
opera for $100. When you arrive, you
find you left the tickets at home.
The box office, though, says you can buy
two new tickets just as good at the
reduced price of $80.
(a) Should you buy them?
23
(opportunity cost)
Daniel Kahneman asked 200 people to imagine they were
going to a movie. Upon arrival, half discover they've
lost their tickets, while the other half discover they've
lost $10 in cash. A new ticket costs $10.
Only 12 percent of the participants who lost tickets said
they'd buy replacements, compared with 54 percent of
the cash losers.
The tickets were regarded as an entertainment expense;
but the cash had yet to be entered in any spreadsheet.
(Michael Munger’s discussion is here)
You can fool all of the people some of time…
24
Schumpeter: “The Process of
Creative Destruction” (opportunity cost(
When the government subsidizes
companies like Lockheed or Chrysler
or bans outsourcing of phone
answering, “preserving jobs”, what is
the cost?
--The software industry doesn’t get the capital and
labor it otherwise would.
But nobody notices the “lost new jobs”– just the
“preserved old jobs”.
Roughly speaking: for one industry to grow,
another industry must shrink.
25
Mankiw's 10 Principles (big ideas generally)
1. People Face Tradeoffs.
To get one thing, you have to give up something else.
Making decisions requires trading off one goal against
another.
2. The Cost of Something Is What You Give Up to Get It.
Decision-makers have to consider both the obvious and
implicit costs of their actions. (opportunity cost)
3. Rational People Think at the Margin. (Marginalism; Think
about small changes)
A rational decision-maker takes action if and only if the
marginal benefit of the action exceeds the marginal cost.
4. People Respond to Incentives.
Behavior changes when costs or benefits change.
26
Mankiw's 10 Principles (big ideas generally)
5. Trade Can Make Everyone Better Off. Trade Raises
Surplus
Trade allows each person to specialize in the activities he or she does best. By
trading with others, people can buy a greater variety of goods or services.
6. Markets Are Usually a Good Way to Organize Economic
Activity. Start by Assuming that Markets Work
Households and firms that interact in market economies act as if they are guided
by an "invisible hand" that leads the market to allocate resources efficiently.
The opposite of this is economic activity that is organized by a central planner
within the government.
7. Governments Can Sometimes Improve Market Outcomes.
Governments Can Help in Certain Situations: Market
Power, Asymmetric Info, Spillovers
When a market fails to allocate resources efficiently, the government can
change the outcome through public policy. Examples are regulations against
monopolies and pollution.
27
Mankiw's 10 Principles (big ideas generally)
8. A Country's Standard of Living Depends on Its Ability to
Produce Goods and Services.DROP THIS ONE.
Countries whose workers produce a large quantity of goods and services per unit
of time enjoy a high standard of living. Similarly, as a nation's productivity
grows, so does its average income.
9. Prices Rise When the Government Prints Too Much
Money.
When a government creates large quantities of the nation's money, the value of
the money falls. As a result, prices increase, requiring more of the same money
to buy goods and services.
10. Society Faces a Short-Run Tradeoff Between Inflation
and Unemployment. DROP THIS ONE.
Reducing inflation often causes a temporary rise in unemployment. This tradeoff
is crucial for understanding the short-run effects of changes in
taxes,government spending and monetary policy.
(http://www.swlearning.com/economics/mankiw/principles2e/principles.html)
28
Mankiw's 10 Principles: Rasmusen substitutes (big ideas generally)
8’. Government Decisions Are Made by People with
Personal Motivations, not by Gods (government
failure)
Governments act to advance people’s personal goals, not social ideals. As a
result, governments often make wrong decisions, on purpose or through
incompetence.
10’. Consumption Is the Goal, not Production.
A country or person which produces more without consuming more is no better
off, and is worse off if it has to work harder.
Yoram Bauman, "Mankiw’s Ten Principles of Economics, Translated for the
Uninitiated"
•
For a different sort of list of big ideas: George Stigler, ``The Conference
Handbook,'' Journal of Political Economy, 85: 441-443 (April 1977)
29
HOUR 2: Indifference Curves
30
HOUR 2: Indiffrence Curves
Figure 9
31
HOUR 2: Indifference Curves
Figure 10
32
maps detail readability
self-other
speed safety ALchian dagger too.
33
HOUR 2: Indifference Curves
Figure 11
34
Hour 3: Crime
35
Six Approaches to Punishment
1. Economic, Surplus-Maximizing
2. Kantian, Authority protecting Dignity
3. Divine Law, revelation, tradition
4. Natural Law, what anyone can deduce
from studying the world
5. Formalist, consistency, precedent
6. Power, Marxian, Thrasymichus: benefit
your own group
36
The Criminal’s Demand Curve for
Beef
$14
Price
per
Demand by the
criminal
pound
Supply by the
store
$4
0
Figure 12
200
pounds
of beef
per year
37
The Criminal’s Demand Curve for
Larceny
14 days in jail
Price
per
Demand by the
criminal
larceny
Supply by
victims
4 days
in jail
0
Figure 13
200
larcenies
per year
38
What’s Wrong with Theft?
If Smith values his car at $20,000, and Jones
values it at $5,000, Smith should keep the car.
How do we know the current owner (Smith) values
the car most?
We don’t. But if we prohibit stealing, and Jones
actually values the car the most, we’ve done no harm.
Jones can pay money for the car.
If we allow stealing, what do people do that reduces
total surplus?
39
The Implication:
Prohibit as crimes activities which reduce surplus.
Owners value their goods more than thieves do.
Victims value their lives more than murderers do.
Other drivers lose more from drunk driving than the
drunk drivers gain in convenience.
Sellers gain less from a cartel than consumers lose.
Child-abusers benefit less from the abuse than the
children lose.
40
Three Questions
1. Why make the penalty proportional to the
crime, if we want to deter all crime?
Why not make life imprisonment the penalty for both
burglary and murder?
2. Why punish recidivists more?
Fairness is one answer, but that begs the question. Why
do we think some things are fair and not others?
3. Why are some evil deeds not punished as
crimes?
Most wives would prefer to have their husband hit them
physically than with news of an adulterous affair, yet
41
adultery is not (in most states) a crime. Why?
Why not make life
imprisonment the penalty for
both burglary and murder?
1. Marginal deterrence– otherwise a
criminal has “nothing to lose” by doing
even worse
2. Some crimes actually increase
surplus
3. Punishment is costly
(we don’t need fairness as an answer)
42
Efficient Crime: The Cabin
A hunter, lost in the woods and starving,
stumbles across a locked cabin containing food.
He breaks in and feeds himself.
His gain is more than the owner's loss, so his
crime is efficient.
Solution 1: It’s not a crime (defense of necessity)
Solution 2: Prosecutorial discretion (policeman
escorting a mother about to give birth to the
hospital at 70 mph)
43
“Zero Tolerance”
f you attend school in the Los Angeles Unified School District,
don't carry a toy key fob like this one in your pocket. A 7-yearold boy was suspended in school for carrying one of these
because it violates the district's "zero tolerance" policy on
"weapon possession".
44
Judicial Discretion
“If there be a controversy between men, and they
come unto judgment, and [the judges] judge them;
then they shall justify the righteous, and condemn
the wicked;
and it shall be, if the wicked man be worthy to be
beaten, that the judge shall cause him to lie down,
and to be beaten before his face, according to his
wickedness, by number.
Forty stripes he may give him, he shall not
exceed;…” (Deuteronomy 25)
45
Optimal Costly Penalties
If all burglaries would be deterred by having a
30-year sentence, then that would be a good
idea--- a costless punishment.
If some people will still offend, then it
becomes a costly punishment.
Thus, we need to balance extra deterrence
against extra cost. More harmful crimes should
have higher penalties, to deter more.
46
Fines: Low-Cost Penalties
Suppose we have a 20% probability of a
ten thousand dollar punishment for some crime.
Why not switch to a 10% probability of a twenty
thousand dollar punishment?
We will only have to catch and try half as
many criminals so we can save money by firing
some police, judges and prosecutors.
How about a 5% chance of a $40,000 penalty?
How about a 1% chance of a $200,000 penalty?
47
Expected Penalties
“If a man shall steal an ox, or a sheep,
and kill it, or sell it; he shall pay five oxen for
an ox, and four sheep for a sheep.
If the thief be found breaking in, and be
smitten so that he dieth, there shall be no
bloodguiltiness for him.
If the sun be risen upon him, there shall be
bloodguiltiness for him;
he shall make restitution: if he have nothing,
then he shall be sold for his theft.”
(Exodus 22)
48
2. Why Aren’t Lying and Adultery Crimes?
“Before an act can be treated as a crime, it ought to be
capable of distinct definition and of specific proof, and it ought
also to be of such a nature that it is worth while to prevent it at
the risk of inflicting great damage, direct and indirect, upon those
who commit it. These conditions are seldom, if ever, fulfilled by
mere vices.
It would obviously be impossible to indict a man for
ingratitude or perfidy. Such charges are too vague for specific
discussion and distinct proof on the one side, and disproof on the
other.
Moreover, the expense of the investigations necessary for the
legal punishment of such conduct would be enormous.
It would be necessary to go into an infinite number of
delicate and subtle inquiries which would tear off all privacy from
49
the lives of a large number of persons.” (Stephen)
3. Why penalize recidivism?
Recidivists have shown that the experience of
a 1-year penalty will not deter them.
Rather than giving them a series of 30 1-year
terms, we could give them a single 30-year term.
Another consideration: After three trials, we
are more sure that they are truly guilty.
50
Crime
Public enforcement
Penalty unequal to harm
(prison=greater,
probation=smaller)
Tort
Private enforcement
Penalty equal to harm
(caveats: punitive damages,
disgorgement)
Penalty doesn’t aid the victim
Penalty aids the victim
Penalty bigger for recidivists
Penalty same for recidivists
Jury unanimity
(just a judge, in most
countries)
Jury majority
51
6
4
murder
8
10
The Murder Rate over Time
1960
1970
1980
1990
2000
2010
year
http://www.albany.edu/sourcebook/wk1/t31062005.wk1
Figure 14
52
Figure 14a
53
Prisoners per Capita
600
500
400
300
200
100
0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
http://sun.soci.niu.edu/~critcrim/prisons/pris.pop
http://www.albany.edu/sourcebook/wk1/t612005.wk1
Figure 15
54
55
http://www.ojp.usdoj.gov/bjs/pub/pdf/cnscj.pdf
Figure 16
Public Order Crimes Are Common
Arrests in thousands (14 million total)
Murder
14
Rape
26
Robbery
109
Agg. Assault 440
Burglary
294
Larceny
1,191
Car theft
147
Oth. Assault 1,285
Fraud
282
Drugs
1,745
Dr. driving 1,432
Liquor laws
613
Drunkenness 550
Dis. Conduct 683
Lots of “victimless” crimes
56
Public Order Crimes
Prostitution?
Heroin use?
Cruelty to animals?
Cannibalism?
-----these reduce surplus if they
bother people enough. If 10,000 people would
each pay $1 to make prostitution illegal, and 50
people would each pay $100 to make it legal, the
score is $10,000 to $5,000, and it should be
illegal.
57
Mill and Stephen: Mixing Morality and the
Economic Method
Mill: "The object of this essay is to assert one very simple
principle as entitled to govern absolutely all the dealings of
society with the individual in the way of compulsion and control,
whether the means used be physical force or the moral coercion
of public opinion. That principle is, that the sole end for which
mankind are warranted, individually or collectively, in
interfering with the liberty of action of any of their number is
self-protection." (On Liberty, 1879,
http://oll.libertyfund.org/Home3/BookToCPage.php?recordID=0159)
Stephen: “How can the State or the public be
competent to determine any question whatever if it is not
competent to decide that gross vice is a bad thing?”
58
Mill: “…that it is the absolute social right of every individual that
every other individual should act in every respect precisely as he
ought, that whosoever fails thereof in the smallest violates my
social right and entitles me to demand from the Legislature the
removal of the grievance….
The doctrine ascribes to all mankind a vested interest in each
other's moral, intellectual, and even physical perfection, to be
defined by each according to his own standard.”
Stephen:
“It is surely a simple matter of fact that every
human creature is deeply interested not only in the conduct,
but in the thoughts, feelings, and opinions of millions of
persons who stand in no other assignable relation to him than
that of being his fellow-creatures.”
59
Vice as Pollution
“ … the analogy between health and disease and virtue
and vice.
They differ in several essential respects, but they
resemble each other in several leading points. Vice is as
infectious as disease, and happily virtue is infectious, though
health is not. Both vice and virtue are transmissible, and, to a
considerable extent, hereditary.
Virtue and vice resemble health and disease in being
dependent upon broad general causes which, though always
present, and capable of being greatly modified by human
efforts, do not always force themselves on our attention.
60
Purposes of Punishment
1. Deterrence
2. Incapacitation
3. Rehabilitation
4. Retribution
5. Stigmatization
61
Stigma: Different from Morality
Fines are a zero-cost penalty.
Jail is a positive-cost penalty.
Stigma is a negative-cost penalty.
The Embezzler and the Accounting Firm
The Speeder and the Insurance Company.
Courts are useful to make stigma accurate. An acquittal
may or may not leave stigma--- but the trial has
improved our information.
62
Extra Materials
63
Mr. Doolittle in My Fair Lady
DOOLITTLE: She ought to be good for 'alf a crown for a father that loves 'er.
FRIEND: That's a laugh. You ain't been near 'er for months.
DOOLITTLE: What's that got to do with it? What's 'alf a crown after all I've give
'er?
FRIEND: When did you ever give 'er anythin'? Anythin'?
DOOLITTLE: I give 'er everythin'. I give 'er the greatest gift any human being
can give to another: Life! I introduced 'er to this here planet, I did, with all its
wonders and marvels. The sun that shines, the moon that glows. Hyde Park
to walk through on a fine spring night. The 'ole ruddy city o' London to roam
around in sellin' 'er bloomin' flow'rs. I give 'er all that. Then I disappears and
leaves 'er on 'er own to enjoy it. If that ain't worth 'alf a crown now and
again...
http://www.script-o-rama.com/movie_scripts/m/my-fair-lady-script-transcript.html
64
65
66
67
68
Asking what maximizes surplus-Law
Efficient breach of contract: If Smith could gain $3,000 by
breaking his contract with Jones, and Jones would only lose
$1,000 as a result, break the contract.
The Hand Rule in tort: If Tom could spend $200 on
precautions and reduce the probability of a $1,000 accident
by 50%, he should take the precautions.
Illegality of murder, etc.: Don’t murder, rob, rape, or steal.
Incomplete Policing: If it would cost $40,000 in extra police
time to prevent a burglary costing the victim $9,000 in
property and worry, don’t prevent the burglary.
69
Boulding on Optimization
"No one in his senses would want his
daughter to marry an economic man, one who
counted every cost and asked for every reward,
was never afflicted by mad generosity or
uncalculating love.”
(Confucius on the question of mothers and
wives in the water)
70
SEN 1970, JPE, The Impossibility of a Paretian Liberal
Prude and Lewd. (1) Prude reads the dirty book and Lewd does not. (2)
Lewd reads the dirty book and Prude does not. Both prefer (2). That requires
regulation, forced behavior.
Mental externalities: If other people would pay $200 to me to paint my walls
white instead of pink, and I would accept as little as $30, then surplus
maximization requires that the walls be white.
The idea is generalized in:
Kaplow, Louis & Steven Shavell (2002a) Fairness versus Welfare (Cambridge, Mass:
Harvard University Press, 2002).
(2002b) “Human Nature and the Best Consequentialist Moral System,” Harvard Center
for Law, Economics, and Business Discussion Paper No. 349.
(2001a) “Moral Rules and the Moral Sentiments: Toward a Theory of an Optimal Moral
System,” Harvard Law and Economics Discussion Paper No. 342,http://ssrn.com/abstract=293906
(November 2001)..
(2001b) “Any Non-Welfarist Method of Policy Assessment Violates the Pareto
Principle,”Journal of Political Economy, 109: 281-286 (April 2001).
71
Prude and Lewd
X: Prude reads the book and Lewd does not.
Y: Lewd reads the book and Prude does not.
Z: Nobody reads the book.
W: Both Prude and Lewd read the book.
Prude’s ranking from best to worst:
Lewd’s ranking from best to worst:
Z ($0), X (-$20), Y (-$30), W ( -$50)
W ($100), X ($60), Y ($25), Z ($0)
The figures in parentheses are utility levels, with Z chosen
as the baseline of zero.
In a liberal society, the outcome is Y.
But both people prefer outcome X.
72
Prude and Lewd and Coase
X: Prude reads the book and Lewd does not.
Y: Lewd reads the book and Prude does not.
Z: Nobody reads the book.
W: Both Prude and Lewd read the book.
Prude’s ranking from best to worst: Z ($0), X (-$20), Y (-$30), W ( -$50)
Lewd’s ranking from best to worst: W ($100), X ($60), Y ($25), Z ($0)
With no trade, the outcome is Y. But both people prefer outcome X.
Voluntary trade would shift to that.
With side payments, we will maximize surplus. Total surplus is
W ($50), X ($40), Z ($0), Y (-$5)
Prude would pay Lewd to read the book. How much?
-- between $20 and $75.
73
More Broadly: The Prisoner’s Dilemma
Smith and Jones have houses next to each other. Each would
like to leave an old car on his front law, to save the trouble of having it
junked and in case he needs spare parts. But each hates looking next
door and seeing somebody else’s junked car.
Thus, the rankings are (0=bad, 5=good)
Smith leaves car, Jones leaves car:
1,1
Smith leaves car, Jones takes his away:
5, 0
Jones leaves car, Smith takes his away:
0, 5
Both take away their cars:
4, 4
The liberal state results in both leaving their car. They would both
prefer to be required to both take away their cars.
74
Mami-hlapin-ata-pai
In Fuegian this means
“looking at each other hoping that either
will offer to do something which both
parties desire but are unwilling to do.’’
(Guinness Book of World Records, 1991 edition, p. 367)
75
A Solution (Coase)
By Thomas Hobbes’s report
Life is Nasty and Brutish and Short,
But Contracts once made
Will come to our aid,
And Men will be Civil-- in Court.
76
Generalizations and Solutions
The liberal state results in both leaving their car. They
would both prefer to be required to both take away their cars.
Instead of “junky car”, we could have “smoke marijuana”, or
“torture dogs”, or “not vote”.
Different ways to get these results are:
zoning laws,
contracts,
real-estate covenants (subdivision agreements),
criminal law,
regulations,
tort liability
nuisance law
77
Wordsworth: Inside of King's College Chapel, Cambridge
Tax not the royal Saint with vain expense,
With ill-matched aims the Architect who planned—
Albeit labouring for a scanty band
Of white-robed Scholars only--this immense
And glorious Work of fine intelligence!
Give all thou canst; high Heaven rejects the lore
Of nicely-calculated less or more;
So deemed the man who fashioned for the sense
These lofty pillars, spread that branching roof
Self-poised, and scooped into ten thousand cells,
Where light and shade repose, where music dwells
Lingering--and wandering on as loth to die;
Like thoughts whose very sweetness yieldeth proof
That they were born for immortality.
78
Wordsworth: Nuns Fret Not...
Nuns fret not at their convent's narrow room
And hermits are contented with their cells;
And students with their pensive citadels;
Maids at the wheel, the weaver at his loom,
Sit blithe and happy; bees that soar for bloom,
High as the highest Peak of Furness-fells,
Will murmur by the hour in foxglove bells:
In truth the prison, into which we doom
Ourselves, no prison is: and hence for me,
In sundry moods, 'twas pastime to be bound
Within the Sonnet's scanty plot of ground;
Pleased if some Souls
(for such there needs must be)
Who have felt the weight of too much liberty,
Should find brief solace there, as I have found.
79
THREE VERSIONS OF ONE PROBLEM
1. Choose your actions to maximize your wealth (the
corporation’s problem)
2. Choose your actions to maximize your happiness (the
selfish human’s problem)
3. Choose your actions to maximize your fitness (the
evolutionary problem)
4. Choose your actions to maximize God’s pleasure in your
actions (the Calvinist’s problem)
The logic and math are identical for all of these. All require
tradeoffs, comparison of costs and benefits, marginalism.80
Example: Charles
Finney
“DOUBTFUL ACTIONS ARE SINFUL”
(True Saints, 1836)
http://www.gospeltruth.net/1836LTPC/indexltpc.htm
A version of Pascal’s wager:
“A man may have equal doubts whether he is bound to do a
thing or not to do it. Then all that can be said is, that he must
act according to the best light he can get.
But where he doubts the lawfulness of the act,
but has no cause to doubt the lawfulness of the omission,
and yet does it,
he sins and is condemned before God, and must repent or be81
damned. “
Finney on Sunday Preaching
“…where a minister is so situated that it is necessary for him
to go a distance on the Sabbath to preach, as where he
preaches to two congregations, and the like. Here he may
honestly doubt what is his duty, on both hands. If he goes,
he appears to strangers to disregard the Sabbath. If he
does not go, the people will have no preaching.
The direction is, let him search the scriptures, and get the
best light he can, make it a subject of prayer, weigh it
thoroughly, and act according to his best judgment.”
82
Finney on Slavery
Who in all these United States can say, that he has no doubt of the
lawfulness of slavery? Yet the great body of the people will not hear
any thing on the subject, and they go into a passion if you name it, and
it is even seriously proposed, both at the north and at the south, to
pass laws forbidding inquiry and discussion on the subject. …
It is amazing to see the foolishness of people on this subject--as if by
refusing to get clear of their doubts they could get clear of their sin. …
We may suppose a case, and perhaps there may be some such in the
southern country, where a man doubts the lawfulness of holding
slaves and equally doubts the lawfulness of emancipating them in
their present state of ignorance and dependence. In that case he
comes under Pres. Edward's rule, and it is his duty, not to fly in a
passion with those who would call his attention to it, not to send back
newspapers and refuse to read, but to inquire on all hands for light,
and examine the question honestly in the light of the word of God, till
his doubts are cleared up.
83
Mill and Stephen: Liberty, Equality,
Fraternity
John Stuart Mill wrote the standard economics text of the 19th
century. He also wrote On Liberty, the classic book on the idea that
society should not restrict individual behavior just because it offends other
people. James Stephen wrote his book in reply to On Liberty, arguing
that Mill’s politics is inconsistent with his economics.
Mill:
"The object of this essay is to assert one very simple
principle as entitled to govern absolutely all the dealings of society with
the individual in the way of compulsion and control, whether the means
used be physical force or the moral coercion of public opinion. That
principle is, that the sole end for which mankind are warranted,
individually or collectively, in interfering with the liberty of action of
any of their number is self-protection."
Stephen: “How can the State or the public be competent to determine
any question whatever if it is not competent to decide that gross vice is a
bad thing?”
84
More Mill and Stephen
Mill:
…that it is the absolute social right of every individual that every other
individual should act in every respect precisely as he ought, that
whosoever fails thereof in the smallest violates my social right and
entitles me to demand from the Legislature the removal of the
grievance….
The doctrine ascribes to all mankind a vested interest in each
other's moral, intellectual, and even physical perfection, to be defined by
each according to his own standard.
Stephen:
At the risk of appearing paradoxical, I own that the theory which
appears to Mr. Mill so monstrous appears to me defective only in its
language about rights and legislation…
It is surely a simple matter of fact that every human creature is
deeply interested not only in the conduct, but in the thoughts, feelings,
and opinions of millions of persons who stand in no other assignable
relation to him than that of being his fellow-creatures. …
A man would no more be a man if he was alone in the world than a
hand would be a hand without the rest of the body.
85
Stephen on Vice
“ It is easy to ride to death the analogy between health and disease
and virtue and vice.
They differ in several essential respects, but they resemble each
other in several leading points. Vice is as infectious as disease, and
happily virtue is infectious, though health is not. Both vice and virtue are
transmissible, and, to a considerable extent, hereditary. Virtue and vice
resemble health and disease in being dependent upon broad general
causes which, though always present, and capable of being greatly
modified by human efforts, do not always force themselves on our
attention.
Good air, clean water, and good food are now coming to be
recognized as the great conditions of health. The maintenance of a high
moral standard, the admiration and honour of virtue and the
condemnation of vice, what is called in a school or a regiment a good
moral tone, is the great condition of virtue.”
86
Criminal Law (Stephen)
“…criminal law is at once by far the most powerful and by far the roughest
engine which society can use for any purpose.
Before an act can be treated as a crime, it ought to be capable of distinct
definition and of specific proof, and it ought also to be of such a nature that it
is worth while to prevent it at the risk of inflicting great damage, direct and
indirect, upon those who commit it. These conditions are seldom, if ever,
fulfilled by mere vices.
It would obviously be impossible to indict a man for ingratitude or perfidy.
Such charges are too vague for specific discussion and distinct proof
on the one side, and disproof on the other.
Moreover, the expense of the investigations necessary for the legal
punishment of such conduct would be enormous.
It would be necessary to go into an infinite number of delicate and subtle
inquiries which would tear off all privacy from the lives of a large number of
87
persons.”
The Two Prisoners (Stephen)
“A judge has before him two criminals,
one of whom appears, from the circumstances of the case,
to be ignorant and depraved, and to have given way to very
strong temptation, under the influence of
the other, who is a man of rank and education, and who
committed the offence of which both are convicted under
comparatively slight temptation. “
88
The Limits of Law (Stephen)
“The inference which I draw from this illustration is that
there is a sphere, none the less real because it is impossible
to define its limits, within which law and public opinion are
intruders likely to do more harm than good.
To try to regulate the internal affairs of a family, the
relations of love or friendship, or many other things of the
same sort, by law or by the coercion of public opinion is like
trying to pull an eyelash out of a man's eye with a pair of
tongs.
They may put out the eye, but they will never get hold of
the eyelash.”
89
Does U.S. Ban On E-Gambling Violate WTO?
JAY COHEN quit his job as an options trader in 1996 and headed for
Antigua and started an online sports-betting site.
He knew the site would challenge U.S. laws against online
gambling, but he was so confident his foreign-based operation was legal
he agreed to turn himself over to U.S. authorities to prove his case in
court.
Mr. Cohen lost, and he is now completing a 21-month prison sentence.
This week the World Trade Organization is hearing arguments
in a case brought by Antigua that charges that the U.S. is violating its
global trade agreements by prohibiting Internet gambling.
The European Union, Japan and Canada are supporting Antigua's
complaint. The court may also weigh in on other issues, including
whether the WTO can, as Antigua requests, compel the U.S. to change
gambling laws that reflect its moral values.
90
More on E-Gambling
Antigua argues that the U.S. should allow access
because of a 1991 United Nations list of service-sector
industries deemed open to free trade, including recreation and
entertainment. By keeping Antigua out, yet allowing a huge
gambling industry of its own, the U.S. is guilty of discriminating
against foreign companies, the Caribbean nation says.
the U.S. argues, there are substantial differences
between Web and casino gambling, including the ability to
prevent betting by minors, so it's well within its rights to
prohibit one form of gambling while allowing others.
…total revenue at Internet gambling companies world-wide last year was
about $6 billion, up from $651 million in 1998.
By contrast, all other forms of betting have grown slowly to $68.69
91
billion from $55.06 billion over the same period.
London Call Girls I
Kit Malthouse, deputy leader of Westminster City Council, the
government body that runs the schools and cleans the streets in the
neighborhood, wants phone companies to strangle the prostitution trade
by refusing to put calls through to the numbers on the cards.
The United Kingdom's landline phone companies have gone
along.
But most cellphone companies have balked -- even after the
council staff handed out 20,000 mock prostitute cards with the names
and phone numbers of cellphone chief executives on them.
The cellphone companies claim it isn't their job to interfere with
a customer's service. "We are not content to play the role of moral
arbiter,"
Vodafone doesn't want to set any precedents for helping the
government act against customers accused of being a social nuisance.
92
London Call Girls II
T-Mobile, which is owned by Deutsche Telekom AG, refused to
block calls, too.
It doesn't want to be sued by customers.
It added, in its own e-mail to the council, that blocking calls
could jeopardize the safety of prostitutes, which is an argument also
made by advocates for prostitutes' rights.
Prostitution itself is not illegal here, though soliciting for
business on the street and keeping a brothel are. The trade has relied
heavily on posting cards in phone booths to advertise to tourists and
business travelers.
The English Collective of Prostitutes, says that women who are
unable to advertise in phone booths may be forced to walk the streets,
which is more dangerous than operating from an apartment that has a
telephone.
93
London Call Girls III
BT owns and cleans most of the telephone booths in London.
In 1996, BT began blocking calls to numbers on the cards and got other
phone companies to go along.
But the London Committee of Call Girls, a defunct group that
represented prostitutes, complained to the government's Office of Fair
Trading that the telephone companies were colluding to restrain trade.
BT was forced to put its plan on hold, while it wrote to other phone
companies to make it clear that it wasn't trying to establish a formal
agreement on call barring. Confident that it had done enough to satisfy the
Office of Fair Trading, BT in 1997 began issuing warnings to people posting
unauthorized advertising in its phone booths. If the ads persist, it stops
incoming calls to the numbers in the ads. In the two years ended last July,
BT says, it sent out 444 warning letters and cut off calls to 84 phone
numbers.
"We clean every box on busy sites, five or six days a week," says
94
BT's Mr. King. "We take out more than a million cards . . . each year."
London Call Girls IV
Over the years, Mr. Malthouse tried unsuccessfully to persuade
the cellphone companies to block calls.
Last summer, he decided to make a nuisance of himself.
He designed and had printed up 20,000 mock prostitute cards
with pictures of women -- and the names, numbers and business
addresses of the CEOs of the biggest cellphone companies.
The cards urged people to write to the CEOs and tell them to
block calls to prostitutes' numbers.
Council staff handed out the mock cards on Oxford Street,
London's busiest shopping street.
Carrying 6-by-10-foot placards designed to look like giant
prostitute cards, they also picketed the shops of the cellphone
companies.
95
Social Security: Compulsory Thrift
Suppose that a "retirement genie" alighted on your doorstep and
informed you that he had just taken the liberty of reorganizing your finances.
To ensure your future safety, the genie transferred all of your savings into a
special account with a number of features.
First, you cannot touch the monies in the account until you retire.
Second, if you and your spouse die, the money is lost unless you have
school-aged children.
Third, the minute that you retire you will be forced to convert your entire
accumulation into an annuity that dribbles the cash out at a low monthly rate.
Fourth, the account funds cannot be invested in a well-diversified portfolio of
stocks and bonds, but must be parked in a single low-yield government
instrument.
Finally, you must contribute 12.4% of your earnings into the account every96
year.
Dutch Euthanasia I
Currently, Dutch law permits doctors to administer
a lethal dose of muscle relaxants and sedatives to
terminally ill patients, at their request.
The Groningen Protocol would permit doctors to
euthanize patients who, according to the opinion of
doctors and other medical experts, lack "free will." This
category of unfortunate individuals would include newborn
babies, persons in irreversible comas and persons with
severe mental retardation.
Worse, the Groningen hospital, after which the protocol
is named, has already begun to administer the procedure,
even without formal legal sanction. To date, Dutch
97
prosecutors have refused to step in.
Dutch Euthanasia II
… more than 80% favor "voluntary euthanasia," according
to recent polls. The Dutch Parliament recently passed a
measure completely decriminalizing euthanasia and doctorassisted suicide. The Netherlands is now the first
democratic nation on earth to permit, under law, doctors to
kill their patients.
And they may be accustomed to doing so. Of the
130,000 Dutchmen who died in 1990, some 11,800 were
killed or helped to die by their doctors, according to a
1991 report by the attorney general of the High Council of
the Netherlands.
An estimated 5,981 people--an average of 16 per day-were killed by their doctors without their consent, 98
according to the Dutch government report.
Dutch Euthanasia III
And these numbers do not measure several other groups that
are put to death involuntarily: disabled infants, terminally ill children and
mental patients. Some 8% of all infants who die in the Netherlands
are killed by their doctors, according to a 1997 study published in the
Lancet, a British medical journal.
Consider the case of Dr. Henk Prins, who killed--with her
parents' consent--a three-day old girl with spina bifida and an open
wound at the base of her spine. Dr. Prins never made any attempt to
treat the wound, according to Wesley J. Smith, author of the book
"Culture of Death." The treatment was death.
Many old people now fear Dutch hospitals. More than 10% of
senior citizens who responded to a recent survey, which did not
mention euthanasia, volunteered that they feared being killed by
their doctors without their consent. One senior-citizen group printed
up wallet cards that tell doctors that the cardholder opposes euthanasia.
99
Does U.S. Ban On E-Gambling Violate WTO?
JAY COHEN quit his job as an options trader in 1996 and headed for
Antigua and started an online sports-betting site.
He knew the site would challenge U.S. laws against online
gambling, but he was so confident his foreign-based operation was legal
he agreed to turn himself over to U.S. authorities to prove his case in
court.
Mr. Cohen lost, and he is now completing a 21-month prison sentence.
This week the World Trade Organization is hearing arguments
in a case brought by Antigua that charges that the U.S. is violating its
global trade agreements by prohibiting Internet gambling.
The European Union, Japan and Canada are supporting Antigua's
complaint. The court may also weigh in on other issues, including
whether the WTO can, as Antigua requests, compel the U.S. to change
gambling laws that reflect its moral values.
100
More on E-Gambling
Antigua argues that the U.S. should allow access
because of a 1991 United Nations list of service-sector
industries deemed open to free trade, including recreation and
entertainment. By keeping Antigua out, yet allowing a huge
gambling industry of its own, the U.S. is guilty of discriminating
against foreign companies, the Caribbean nation says.
the U.S. argues, there are substantial differences
between Web and casino gambling, including the ability to
prevent betting by minors, so it's well within its rights to
prohibit one form of gambling while allowing others.
…total revenue at Internet gambling companies world-wide last year was
about $6 billion, up from $651 million in 1998.
By contrast, all other forms of betting have grown slowly to $68.69
101
billion from $55.06 billion over the same period.
Dutch Euthanasia I
Currently, Dutch law permits doctors to administer
a lethal dose of muscle relaxants and sedatives to
terminally ill patients, at their request.
The Groningen Protocol would permit doctors to
euthanize patients who, according to the opinion of
doctors and other medical experts, lack "free will." This
category of unfortunate individuals would include newborn
babies, persons in irreversible comas and persons with
severe mental retardation.
Worse, the Groningen hospital, after which the protocol
is named, has already begun to administer the procedure,
even without formal legal sanction. To date, Dutch
102
prosecutors have refused to step in.
Dutch Euthanasia II
… more than 80% favor "voluntary euthanasia," according
to recent polls. The Dutch Parliament recently passed a
measure completely decriminalizing euthanasia and doctorassisted suicide. The Netherlands is now the first
democratic nation on earth to permit, under law, doctors to
kill their patients.
And they may be accustomed to doing so. Of the
130,000 Dutchmen who died in 1990, some 11,800 were
killed or helped to die by their doctors, according to a
1991 report by the attorney general of the High Council of
the Netherlands.
An estimated 5,981 people--an average of 16 per day-were killed by their doctors without their consent, 103
according to the Dutch government report.
Dutch Euthanasia III
And these numbers do not measure several other groups that
are put to death involuntarily: disabled infants, terminally ill children and
mental patients. Some 8% of all infants who die in the Netherlands
are killed by their doctors, according to a 1997 study published in the
Lancet, a British medical journal.
Consider the case of Dr. Henk Prins, who killed--with her
parents' consent--a three-day old girl with spina bifida and an open
wound at the base of her spine. Dr. Prins never made any attempt to
treat the wound, according to Wesley J. Smith, author of the book
"Culture of Death." The treatment was death.
Many old people now fear Dutch hospitals. More than 10% of
senior citizens who responded to a recent survey, which did not
mention euthanasia, volunteered that they feared being killed by
their doctors without their consent. One senior-citizen group printed
up wallet cards that tell doctors that the cardholder opposes euthanasia.
104