Ideoblog

Who will defend markets?

Henry Manne comments in Forbes, "A Voice From The Friedmanite Wilderness."

The political direction of the country is now determined for a long time to come, and it is inevitably leftward. Politicians would never resist a popular but massive demand for more government regulation . . . The business community has never been a strong supporter of free market capitalism, and it certainly cannot be counted on to change its stance this time around. The media, the various leftist trend-setting elites and university faculties have been waiting a long time for an opportunity just like this, and we can be sure that they won't squander it. The shrillness of their attacks on free markets will reach new heights of righteous indignation and assumed moral and intellectual superiority.

But still, Henry sees "a glimmer of hope": 

This time around, unlike during the New Deal, there is a substantial intellectual establishment to ride herd on leftist proclivities. There are numerous free market blog sites, which, for instance, can be properly credited with forcing modification of the recent short-sale ban. There are countless free market think tanks in Washington and all around the country exerting considerable influence on government policies. Libertarians are a small but growing political factor, and there are even a few university economics departments and law schools where sanity prevails or is at least occasionally evident. Like it or not, these few intellectual bastions of freedom philosophy will be about the only thing that keeps these ideals alive in the coming years.

And, as I've discussed, Henry Manne himself can claim some of the credit for these "intellectual bastions."

Friends as fiduciaries?

In my article, Are Partners Fiduciaries? I make a rather simple point: that a fiduciary duty of unselfishness does, and should, apply only in the narrow situation in which one party delegates full control over her property to another. In support, I drew partly on my earlier article, Law v. Trust, in which I argued that imposing stringent legal duties in order to encourage one party to trust another can, in some situations, actually interfere with the establishment of trust. A main goal of my fiduciary article was to use legal and economic analysis to rescue fiduciary law from the murk of centuries of colorful dicta.

Had I been more creative, I might have tried to make my argument more persuasive by showing the dangers of rejecting my approach. I might have shown what can happen when one wants to make her case for liability by diving back into the murk of dicta and pulling out a wet glob of fiduciary lingo. For example, I might have shown that, eschewing the clarity of my approach, one could even argue that a friend is a fiduciary.

Of course you can’t very well say that a person has a legal duty of unselfishness just because she is your friend. You’d find people opting for the safer territory of acquaintanceship. Or maybe it would be more accurate to say that with that legal duty you'd find yourself with a whole lot more friends than you thought you had.

Maybe you could say that one who poses as your friend has a duty to keep your information confidential, or not to use it for his own benefit. As I show in my article, that wouldn’t be a fiduciary relationship in my definition, though it would be under some dicta. However, once you’ve dredged up the fiduciary lingo, maybe you could paste it into an argument for imposing a duty of unselfishness. At least you might get past a motion to dismiss. And that would certainly be horrid.

Alas, I wasn’t creative enough to make that sort of argument. But Ethan Leib has, and it's the subject of a lively debate over at the Glom.

Leib's good enough to cite me a few times and even to refute the argument he imagines I would make against his position. It would be churlish of me to point out that he’s not really talking about my argument. I was talking about a legal duty of unselfishness. Leib refers to the duty of unselfishness, but never shows that the courts do, or even should, recognize this duty based on friendship.

Rather than being churlish, I will be gracious in acknowledging that I couldn’t have shown the mischief of not being precise about fiduciary duties as convincingly as Ethan Leib has.

More Wright on the future of law and economics

Josh Wright has another installment in his useful series on the future of law and economics, this time focusing on law and economics scholarship and whether it will happen in law schools.

He comes out at about the same place I have: the future lies in collaboration between legal and economics scholars. Let me reiterate: the economists bring a lot to the table, but the lawyers provide the institutional background that is essential for good law and economics.

The concern, of course, is that both types of scholars have at least short-term incentives to try to capture all of the rents, and in the process sacrifice quality. I’m hoping, and expecting, that the market for academic work is efficient enough to ultimately get the incentives right.

So I think good law and economics will continue to come simultaneously out of law schools and economics departments, as long as both types of experts understand and play their proper roles.

More on the future of law and economics

I mentioned that Josh Wright is starting a valuable new series on the future of law and economics. Josh mentioned that one jumping off point for his project is my post from a couple of years ago. This, in turn, responded to this comment from Kate Litvak:

You can't do serious law-econ work today without either really, really knowing math, or really really knowing statistics, or really really knowing micro. If you can’t do serious regressions, you must model. If you can’t model, you must do serious regressions. If you make the tiniest noise about “excessive fees” or “bargaining power,” be prepared to either model them in excruciating detail or show original data. Chatter on a vague subject of “markets” and “efficiency” is basically ignored. People who tell you otherwise are, hmm, not quite the laughing stock of the field, but asymptotically approaching that status. They are in their last years of wishful thinking. Just take a look at the papers from the annual meeting of the American Law and Economics Association.

I responded in part:

[F]or law and economics to be successful at any level, it has to be accessible to both economists and legal academics. Just as there is a lot of bad law & ec being done by lawyers, so there is a lot of bad law & ec being done by economists because of their ignorance of the law and legal institutions. Careful law & ec lawyers can communicate with both the economists and the lawyers at the "retail" level. Forcing the work into math is going to create a “language” barrier that could seriously impede the intellectual development of the field. The field will stagnate, and become as marginalized as the study of, say, literature has become. Coase himself criticized "blackboard" economics that relied too heavily on formal models and not enough on a study of the relevant institutions. He also made an effort to understand the relevant regulatory and agency law to make his work relevant to law. * * *

One solution to the problem Kate mentions is collaboration. “Serious” work – say of the sort that Kate does – takes specialization and high-level skill, even if not a formal degree. When I do this kind of work, I do it with Bruce Kobayashi, an economist who is a lot better at it than most of the straight law professors who dabble in it. I doubt Kate would disagree. But I don't think that collaboration should be required for all law and economics articles written by law professors.

My colleague, Larry Solum, has jumped in by suggesting three models for law schools:

• An “interdisciplinary” model in which law schools are staffed by people trained in other disciplines.
• A “multidisciplinary” model in which law schools create PhD programs that introduce “future legal academics to empirical legal studies, positive legal theory, formal legal models, normative legal theory, advanced doctrinal methods, and so forth.”
• And a “professional school model” focusing on “the traditional academic-lawyer generalist, whose only rigorous skill sets are case crunching, code crunching, and clause crunching. Such generalists translate the work of other disciplines (sometimes with egregious errors), but they do not generate new interdisciplinary knowledge. If this path is taken, then interdisciplinarity will gradually fade into the background, with legal philosophers, empiricists, and economists slowly disappearing from legal academia as they migrate to other departments or retire.”

Not surprisingly in view of my comments above about collaboration, I favor the interdisciplinary model. I’m also sympathetic with the multidisciplinary model, as long as the products of this training are appropriately modest about their limitations.

Coincidentally, Alex Tabarrok of Marginal Revolution has provided a good example of what I think the problems are of leaving law and economics to the economists. He’s posted eight paragraphs, plus a couple of quotes, on the question of "What's up with limited liability corporations?" I basically agree with his analysis and conclusions, as far as they go. But I wonder if he really believes that’s all there is, or even a fair summary of the enormous literature on this subject. There’s an awful lot of nuance missing. For example (to name just one), consider the role of default rules and specific business associations.

I think that nuance is best supplied by legal and economic scholars working together. The economists do the modeling and the econometrics, while the legal scholars get enough training to understand the modeling and econometrics and then add the rich institutional environment that makes it all work and relate to the real world.

Without this collaboration, we're going to end up with a lot of silly economic models that assume the proverbial can opener, while we get a lot of dippy law review articles that ignore the shape of the can.

Wright on the future of law and economics

Over at TOTM, Josh Wright is beginning a series of what looks to be a very interesting discussion of the future of law and economics.

Josh addresses the potential costs of the increasing sophistication and formalization of law and economics. He summarizes these costs as (1) economists doing work “that is detached from legal institutions and law and therefore less relevant;” (2) that legal scholars won’t know or care even about the good law and economics work that’s being done “because of the ‘translation’ issues;” and (3) that the qualified scholars will migrate from law to economics departments, leaving law schools to do lower quality work.

Josh concludes that the second problem – what he calls the “retail” problem -- is the most important, and promises to address all of the problems in future posts. I'm looking forward to, and expect to comment on, the discussion as it develops.

Manne, Easterbrook & Fischel

A couple of days ago I noted Kate Litvak's analysis of Easterbrook & Fischel for the volume on Pioneers of Law and Economics. Now I've posted my study of Henry Manne. Here's the abstract:

This Chapter in the book Pioneers of Law and Economics discusses the remarkable career of Henry Manne. Writing when there was a theory vacuum in legal academia, Manne breathed life into corporate law by using economic principles to formulate a sweeping new theory of the corporation. Then he took his show on the road with seminars, programs and ultimately a law school to create a market for his ideas. The Chapter shows that Manne was an entrepreneur not only in bringing people and ideas together, but also in the Schumpeterian sense Manne discussed in his work on insider trading – an active participant in the creative destruction of the existing paradigm rather than merely a manager of existing ideas. Manne's career demonstrates that, under the right conditions, a single scholar can leave noticeable ripples in the stream of intellectual history. By demonstrating that corporations, and by inference other important institutions, are best analyzed in market terms, and by creating an intellectual market for these and other economic ideas, Manne changed the way scholars, judges, regulators and others think about the role of law in society.

In doing the paper I was struck by the extent to which Manne anticipated later work, particularly including that of Easterbrook & Fischel. My paper discusses the world before Manne, while Litvak does more than I do on the post-Easterbrook-Fischel work. So if you want the last 40 years of corporate law and economics in a nutshell, read both.

Studying business: from cars to cheese

Ronald Coase studied automobile manufacturers (among other things), Bob Ellickson studied ranchers (Order Without Law: How Neighbors Settle Disputes), and Lisa Bernstein studied diamond merchants (Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 21 J. Legal Stud. 115 (1992)). Now Gordon Smith is studying cheesemakers. , 207-29 (1991).

I love these projects that try to understand what business people actually do, rather than just getting ammunition for particular conclusions, though of course you have to start with some kind of a theory to guide the research.

One of these days I plan to augment my film project with interviews of filmmakers. In my dreams I'm going to start with the Coen brothers and Woody Allen and work up to studio and conglomerate heads. Cheese is less glamorous, but somehow I think more doable.

Litvak on Easterbrook & Fischel

Kate Litvak discusses Frank Easterbrook & Dan Fischel. Here's the abstract:

This chapter in the book PIONEERS OF LAW AND ECONOMICS summarizes the role of Frank Easterbrook and Daniel Fischel in the development of modern law and economics. I first summarize their conceptual, methodological, and substantive innovations. I then discuss details of their work on hostile takeovers, disclosure regulation, and limited liability, and place their contribution in a broader context of prior and contemporaneous work. Finally, I discuss what we've learned about those subjects in more than 20 years since the publication of Easterbrook and Fischel's pioneering work; the areas where they turned out to be right or wrong; and the areas on which we still know very little.

My own paper on Henry Manne is appearing in the same volume, and I'll be posting it soon. At that time I plan to comment on Litvak's paper in light of my own. Obviously there are important connections, since Easterbrook & Fischel relied on and developed Manne's ideas.

Warren on fact, law and theory

Harvard's Elizabeth Warren has an interesting post over at Credit Slips. It caught my attention because I’m currently working on a project about jurisdictional competition to which it directly relates. But my thoughts, like Professor Warren’s, go beyond that project. 

First annual empirical legal studies conference

This program, in Austin, October 27-28, not only has a large number of interesting-looking papers, but promises to be an extremely valuable look at the state of the art in empirical legal studies.  I'm going to try to catch up with some of the papers I haven't already seen and comment here (though unfortunately I can't make it to the conference).