Ideoblog

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Is vertical integration back?

An article in today's WSJ thinks so. As Steve Bainbridge notes, this is, and always has been, a matter of comparing the cost of market transactions to those of firms (see Coase).

If vertical integration is back, I may have to tweak some of my theories.

For example, I note in my Rise of the Uncorporation (see p. 235) that the uncorporation is rising in part because the benefits of corporate-type capital lock-in are declining with outsourcing. If that's not true, maybe corporations will be with us awhile longer.

And in my Death of Big Law I argue that legal outsourcing is part of what's making big law firms less necessary. But here the implications of vertical integration for my theory are less clear, because corporations can vertically integrate legal services, too (but see Beardslee, Nanda, Wilkins & Coates on that point).

Obama’s winners

During the presidential campaign we heard a lot about change and special interests. Well, the campaign has delivered on its promises. We got a change in the special interests that are collecting the rents, and with the vast increase in government they have an opportunity to get a lot richer. This is a price we pay for dismantling capitalism and substituting government for markets.

For some examples, see John Carney's list of the "the top 8 winners of Obamanomics" and Tim Carney's book.

As John Carney says:

Whether he likes it or not, President Barack Obama's policies on finance, the economy, technology, the environment, and even health care are turning out to be boons to the most entrenched special interests. Meanwhile, smaller businesses, taxpayers, and some disfavored industries are bearing the burden. Our President believes in a "mixed economy" in which private enterprise and the profit motive are still alive and well, but government gets to pick the winners and losers.

A public choice theory of Genesis

Geoffrey Miller (NYU) writes about the Origin of Obligation: Genesis 2:4b-3:24:

This paper analyzes the Eden narrative (Genesis 2:4b-3:24) as a philosophical account of the origins and extent of political obligation and the consequences of its breach. The strong (but not unlimited) form of obligation identified in the text would have been congenial to the interests of the leaders under whose auspices the narrative appears to have been compiled and preserved.

Here's more:

[T]he message of the text is straightforward. A citizen's job is to work hard and appreciate the manifold benefits he receives from the king: peace, security, and the opportunity for a fulfilling life. Citizens should not concern themselves with questions of policy, which are properly reserved for the king and his ministers. Moreover, they are not supposed to break the rules imposed on them by their governments. Even if the ruler is absent the citizen's duty is to obey. But merely breaking a rule is far less dangerous than the more fundamental transgression of subversion, an offense deserving of the most severe punishment. Such a doctrine of breach would have been appealing to rulers in Ancient Israel because it encouraged unquestioning disobedience to the laws, and more particularly because it strictly and unequivocally condemned the type of breach that would be most dangerous to a ruler – subversion or rebellion from within.

Why artists should love capitalism

I have often written (most recently) about why artists in general, and particularly filmmakers, dislike capitalists. But it turns out that artists are major beneficiaries of capitalism, with all of its associated wealth disparity. That's the lesson of Goetzmann, Renneboog & Spaenjers, Art and Money. Here's the abstract:

This paper investigates the impact of equity markets and top incomes on art prices. Using a long-term art market index that incorporates information on repeated sales since the eighteenth century, we demonstrate that both same-year and lagged equity market returns have a significant impact on the price level in the art market. Over a shorter time frame, we also find empirical evidence that an increase in income inequality may lead to higher prices for art, in line with the results of a numerical simulation analysis. Finally, the results of Johansen cointegration tests strongly suggest the existence of a long-term relation between top incomes and art prices

Why CELS?

I have some thoughts on CELS on my return from LA (as well as a picture).

There's so much stuff at this conference that one might wonder if it's a granfalloon. David Zaring thinks so:

[I]t strikes me that ELS has a number of different constituencies, and the common cause among them is not always obvious. 

I sympathize with David's observation. There's not a lot linking, say, survey data on how people feel about being cheated with a study crunching CRSP data on a corporate governance issue.

On the other hand, I think CELS has an important role to play in inserting some discipline into what I've referred to in private conversations as the empirical legal scholarship "bubble."

Legal scholars once decried too much untested theorizing. That time is long gone. Legal academics' discovery of empirical research has given rise to the greatest explosion of intellectual entrepreneurship since Al Gore created the Internet. Now instead of untested hypotheses we get unhypothesized tests. We also get some tests that could be characterized as the intellectual equivalent of pets.com (although thankfully little of this bad stuff at CELS itself).

Ted Eisenberg's keynote address attacking the Chamber of Commerce's court ranking highlighted the need for discipline. But data distortion by interest groups is not exactly a new thing. And something like the truth is likely to emerge even without CELS from interest group competition and robust media.

I think the greater need is self-discipline in a community of scholars that is becoming rapidly more diverse as folks trained in all kinds of disciplines mingle with legal scholars like me. That, I think, is CELS's "common cause." It is furthered by bringing scholars together once a year to focus on methodology and to weed out the bad methods from the good ones. One of CELS's key contributions to discipline is assigning a discussant to each talk. The discussants I saw were well-prepared, and many (including me) brought slides. I hope CELS continues to thrive, and that its emphasis on rigor helps to tame the empirical bubble.

I would like to see two other developments. First, the data is starting to outstrip the theory. The empirical bubble has encouraged scholars to go right to the data, sometimes without developing the theory adequately for a good empirical test.

One problem here is that the good theory people are not always good empiricists. This leads to my second wish: more humility by both empiricists and theoreticians, and more co-authorship. The empirical bubble has made empirical articles more publishable, which tempts theory people into empirical territory they're not ready to navigate. And of course empirical scholars may be tempted to collect all of the rents. CELS can help bring the two types of specialists together, and to persuade them that they need each other.

As Key said in Hustle and Flow:

There are two types of people: those that talk the talk and those that walk the walk. People who walk the walk sometimes talk the talk but most times they don't talk at all, 'cause they walkin'. Now, people who talk the talk, when it comes time for them to walk the walk, you know what they do? They talk people like me into walkin' for them.

Which I think is a good thing.

Update:  Josh Wright responds, suggesting more collaborations of a slightly different type. 

Disney Hall

From my hotel room, with my iPhone.

Jurisdictional competition for LLCs at CELS

This Saturday morning at 9:00 A.M. PST Bruce Kobayashi and I will be presenting our paper Jurisdictional Competition for LLCs at the Conference for Empirical Legal Studies. If you're at the conference, then be there! If not, then watch the webcast.  Here's the abstract:

Most of the work on jurisdictional competition for business associations has focused on publicly held corporations and the factors that have led to Delaware's dominant position in attracting out of state firms. Is there an analogous jurisdictional competition to attract formations by closely held firms? Limited liability companies (LLCs) offer a good opportunity to examine this question. Most LLC statutes have been adopted and changed rapidly during the past 20 years. Unlike general and limited partnerships, which have been shaped by uniform laws, LLC statutes vary significantly, and states have devoted a lot of effort to drafting their individual statues. This variation provides an opportunity to test the statutory provisions and other factors that influence LLC's choice of where to organize. We find little evidence that firms choose to form outside their home state in order to take advantage of variations in statutory provisions. Instead, we find evidence that large LLCs, like large corporations, tend to form in Delaware, and that they do so for the many of the same reasons – that is, for the quality of Delaware's legal system.

Obviously this relates to both of my recent books, The Law Market and The Rise of the Uncorporation.

Tune in and find out how LLCs fit into the market for "corporate" governance.

Buying the moon

There's water on the moon. Per the WSJ, "[w]ater's availability would . . . make further human exploration of the moon possible, since the water could be used to generate oxygen, as well as to make rocket fuel."

But who owns it?

This matters, because as lawyer Timothy Nelson told the WSJ blog:

Of course, getting resources from the moon will take an enormous capital investment, and the trick in setting up a treaty will be to make it feasible to get private capital involved. If you don't do that; if it's something that's overly regulated by a centralized U.N. framework, it won't work. You have to make it such that private investors could sensibly commit the funds to go ahead and do the exploitation.

Now, would you make an investment that's subject to a treaty providing

The exploration and use of the moon shall be the province of all mankind and shall be carried out for the benefit and in the interests of all countries, irrespective of their degree of economic or scientific development. Due regard shall be paid to the interests of present and future generations as well as to the need to promote higher standards of living and conditions of economic and social progress and development in accordance with the Charter of the United Nations [?]

Probably not. What would Coase do? We'll need to define property rights up there to encourage investment. But based on what?

Maybe we could get some guidance from the Man Who Sold the Moon, who bought up the parts of earth whose air rights include the moon. Of course he needed to raise a lot of money, so he had to hope his property rights theory actually worked. Bit of a jurisdictional tangle here.

Then he had to use a corporation to raise the money. Unfortunately he got squeezed out before he could make it to the moon. Maybe he should have used an uncorporation (Rise of the Uncorporation indeed).

Anyway, it's comforting to know that when we do go into outer space my books will still be relevant.

Meet the new law school: same as the old law school?

Here's the discussion so far. More in this vein from Erik Gerding:

[T]he changing and increasingly ruthless economics of legal education will place faculty governance under incredible stress. Law schools that cannot react nimbly to changing economic circumstances have everything to lose. Consensus-based decision-making by faculties is already being challenged. At the same time, more hierarchical, corporate-type models for university governance do not sit well with professors. * * *

Where does that leave law schools? With some potentially nasty Darwinian outcomes if faculty governance can't negotiate these various tensions while adapting to the more ruthless economics of education. * * *

But will law schools finally get the guts and foresight to change their century-old model to cope with the vastly different economics of the law business?

Consider this (citing significantly increased LSAT-test-taking):

This doesn't seem surprising. When employment markets constrict, people seek other options, including additional schooling. Moreover, it's not clear to me that the death of Big Law or the death of the Big Law School would have much of an effect on the demand for legal education * * *

And this:

Do we need as many law schools as we have?  Absolutely not.  Will we see, as a result of this downturn, any massive changes in curriculum?  We just don't think so.  The ships of big firms and big-name schools take too long to turn in any groundbreaking way.  And by the time they do, we'll be on to the next disaster.

As those applications flood in, expect to see champagne corks popping on the decks of the Law School Titanic.

Upate:  Erik Gerding says law schools are in for a correction if the job market doesn't improve.  I agree -- which is why I think they should put away the champagne bottles.