To the William and Mary Community:

The Faculty Assembly of the College of William and Mary strongly endorses the March 9 statement by President Taylor Reveley concerning the College’s nondiscrimination policies. We are deeply troubled by the Attorney General’s recent attempt to change these policies, particularly those banning discrimination based on sexual orientation. Non-discrimination policies flow from the fundamental principle of merit-based judgment that informs every aspect of the work of the Faculty.  This principle governs how we teach, how we appoint and promote, how [...]]]> A quick follow up on my post last week on the Virginia Attorney General’s claim that all anti-discrimination policies adopted by state schools that included sexual orientation were void (and the Governor’s repudiation of that position).   The William & Mary Faculty Assembly adopted the following statement in response to events:

To the William and Mary Community:

The Faculty Assembly of the College of William and Mary strongly endorses the March 9 statement by President Taylor Reveley concerning the College’s nondiscrimination policies. We are deeply troubled by the Attorney General’s recent attempt to change these policies, particularly those banning discrimination based on sexual orientation. Non-discrimination policies flow from the fundamental principle of merit-based judgment that informs every aspect of the work of the Faculty.  This principle governs how we teach, how we appoint and promote, how we conduct our research and scholarship, and how we evaluate each other’s contributions to the College and the wider community.  We are irrevocably committed to the ideal that these judgments must always be based upon the merits of the case, and that
they must reflect our integrity as a community of teachers and scholars.  We applaud Governor McDonnell’s recent Executive Directive which we understand as committing his administration to safeguarding similar merit-based principles in the Commonwealth.

The lack of a clear — and fully articulated — commitment to non-discrimination would erode our ability to attract the very best faculty, staff and students. Without such a commitment to a merit-based ethos, where individuals are evaluated on their work and accomplishments but no other personal characteristics, the College has no plausible claim to being a leader among American institutions of higher education.

The Faculty Assembly

This Article considers the legal implications of perhaps the most important disaster myth: the myth that natural disasters produce widespread looting and violence. The Article examines a number of unfortunate legal consequences of the myth, including deployment of military troops in a law enforcement, rather than humanitarian, capacity; distortion of response priorities outlined in disaster plans; and imposition of restrictions on freedom of movement [...]]]> Awhile back we had a guest post from Lisa Grow Sun (BYU) on the various myths surrounding disasters and the challenges that they pose for policy makers who are grappling with events such as we’re seeing in Haiti and Chile.  For those who are interested, Lisa has now put her most recent paper on the topic up on SSRN.  Here’s the abstract

This Article considers the legal implications of perhaps the most important disaster myth: the myth that natural disasters produce widespread looting and violence. The Article examines a number of unfortunate legal consequences of the myth, including deployment of military troops in a law enforcement, rather than humanitarian, capacity; distortion of response priorities outlined in disaster plans; and imposition of restrictions on freedom of movement and other basic rights. Ultimately, the Article concludes that the deleterious effects of the myth on our disaster laws can best be countered by constraining official discretion to overemphasize security risks in immediate response decisions, rejecting calls to pass broad looting laws that can reflect and perpetuate the myth, and reforming the structure of federal disaster agencies by removing the Federal Emergency Management Agency from the Department of Homeland Security and reestablishing it as a cabinet-level agency.

As they say, download it while its hot!

World War I caused the Great Depression, or at least it caused the financial crises that accompanied the Great Depression. In particular, World War I created three huge problems for the international financial system. First, during the course of [...]]]> I recently read Liaquat Ahamed’s The Lord’s of Finance: The Bankers Who Broke the World, which is basically a collective biography of the world’s top central bankers in the 1920s and early 1930s. It is a good read, especially if you want to understand what Ben Berneke is terrified of becoming. Ahmad, however, doesn’t quite deliver on his central thesis, which is that bad monetary policy by central bankers caused the Great Depression. Here is what I think the book actually shows:

World War I caused the Great Depression, or at least it caused the financial crises that accompanied the Great Depression. In particular, World War I created three huge problems for the international financial system. First, during the course of the war the United States built up huge gold reserves and the gold reserves of the major European economies contracted massively. Second, it created huge debts owed by the Allies to the United States. Third, the system of reparations created by the Treaty of Versailles created a huge debt burden for Germany. These three economic forces ultimately lay behind the enormous pressures placed on the world’s financial system in the 1920s and 1930s.

The book also shows that the gold standard was a really bad idea, especially for Britain. After the war, Germany, the UK, and France all pursued different monetary policies. The Weimar Republic, which lacked broad political legitimacy, decided to spend money hog wild on various forms of government benefits as a way of buying the loyalty of key constituencies. As a result it ran huge budget deficits, which it filled by printing money on a gargantuan scale.

Britain went to the opposite extreme, returning to the gold standard at pre-war levels. This was catastrophic. The government debt of the war years had fueled inflation, and the only way to peg sterling at pre-war levels was to massively contract the monetary supply. In effect, the Bank of England deliberately caused recessions and unemployment for the sake of the gold standard. The sinister reading of this is that the Bank pursued this policy to protect the City of London’s dominant position as a financial center. The loss of gold to the U.S. during the war, however, meant that it could only protect the City by pushing up the value of the currency at the expense of the rest of the country. A less sinister – and ultimately more plausible explanation – is that the Bank of England had an arational faith in the power of the gold standard and was convinced that national honor and prestige was at stake in pegging sterling at the pre-war level.

Finally there were France and the United States. France opted for a moderate devaluation of the franc, returning to the gold standard but not at the prewar levels. This gave them monetary stability (avoiding the German problem) while avoiding tight-money induced recession and unemployment (Britain). Furthermore, as the French economy rebounded after the war, gold flowed in allowing French banks to supply credit without threatening the franc. In the United States, in contrast, the vast store of gold built up during the war meant that American banks could expand credit enormously without placing pressure on the dollar. Furthermore, there was European pressure on the United States to pursue loose money policies because Germany was dependent on borrowing from America to meet its reparation obligations, France and Britain, in turn, looked to revenue from reparations to repay their debts to the United States. The problem, of course, is that loose money in the United States helped to fuel bubbles in residential real estate and stock prices.
At the bottom of these monetary decisions was the gold standard, which demanded that the supply of money in the economy be based not on the demand for credit, the business cycle, the growth rate, or any other measure of economic reality. Rather, money supply grew or contracted based on how much shinny metal a central bank happened to hold it is vault.

If the financial consequences of World War I and the gold standard were the underlying factors driving financial crisis, the book shows that policy makers reacted badly to those crises. The lead villain, I think, was Calvin Coolidge and the general unwillingness of the United States to forgive European war debts. The bottom line was that World War I bankrupted the Allied powers in Europe. Rather than sitting down and working out reasonable reorgization plan, the United States acted like the idiot creditor who blithely demands payment in full as the debtor’s business implodes. Following closely behind the American refusal to renegotiate come the central bankers and their missteps. For the Bank of England, the gold standard became an idée fixe, a way of recapturing lost Edwardian glory. The over-valuation of sterling then placed huge pressures on the British economy, as well as pressures on other central banks to make loans to the Bank of England to retain their gold reserves. The Americans were willing to do so, at least for a time. The French were not. Indeed, French central bankers seem to have seen France’s accumulated gold reserves as a political weapon to be used to chasten an overweening Britain or else to threaten Germany with financial catastrophe at will, by using French gold to lure depositors out of the German banking system. Finally, the Fed found itself trying to do several things at once. First, they kept interest rates down, mainly so that over extended Europeans – in particular the Bank of England and the German government – could borrow the money they needed in large part to repay war debts to the United States. Second, at the same time there was also European pressure for the United States to raise rates. The low rates fueled a bubble in American stock market, whose returns sucked in huge amounts of European capital. Needless to say, these pressures pointed in diametrically opposite directions.

Finally, the book shows the extent to which John Maynard Keynes was right. I am not a big fan of Keynsianism. I learned to think about his theories through the prism of the late 1970s, when they broke down so spectacularly. Furthermore, I think that Keynes was terribly naive about political economy, a fact testified to by the way in which his theories are used to justify an expanded state. Strictly speaking, it doesn’t seem to me that Keynes tells us much about whether the state should constitute say about 35 percent of GDP (roughly the level in the US) of 57 percent of GDP (roughly the level in France). Keynes simply says that we should engage in counter-cyclical government spending. Nevertheless, Keynes is often invoked to expand the size of the state.

That said, seeing Keynes from 1919 to 1933, it is hard not to appreciate the iconoclastic brilliance of the man. He was right about the insanity of reparations. (As he predicted, they weren’t ultimately paid and they were politically poisonous.) He was right about the insanity of the United States’ refusal to renegotiate war debts (or its refusal to renegotiate them more quickly and more generously). Finally, he was spectacularly right about the insanity of the gold standard. Not a bad accomplishment that, even when one throws the pathos of the Carter Administration into the scales on the other side.

CDSs on government bonds provide insurance against sovereign default. Accordingly, their prices are a barometer the market’s assessment of a country’s fiscal risk. They are particularly important indicators when countries structure their debts such that other [...]]]> The European Commission has decided that it is going to investigate the market in credit default swaps (CDSs) on sovereign debt. There is some concern that speculation in these markets is creating problems for Greece and other fiscally rickety European countries such as Spain, Portugal, and Ireland. The move in Brussels isn’t as crass as the accusations in the Greek press that their sovereign debt crisis is being driven a sinister cabal of “Anglo-Saxon speculators,” but it seems to partake of some of the same spirit.

CDSs on government bonds provide insurance against sovereign default. Accordingly, their prices are a barometer the market’s assessment of a country’s fiscal risk. They are particularly important indicators when countries structure their debts such that other indicators of market confidence, like the spread between short term and long term interest rates on government bonds are not available. Accordingly, they are a favorite target of politicians, who rightly point out that the holder of such contracts make money when a country’s finances deteriorate. Evil speculators! Of course, the CDS market also tells politicians when they are doing their jobs badly. In effect, the effort to regulate such markets amounts to politicians telling some of their most important — and informed — critics to shut up.

We saw the same thing in 2008, when the SEC banned short selling of the stocks of financial companies. Dick Fuld insisted that Lehman Brother’s stock was being pummeled by malicious, short-selling hedge funds. Look, he insisted, our stock price cannot reflect real value because our books show that we have all these really valuable assets. The shorts are just trying to manipulate the price as part of a nefarious plot! The shorts, however, didn’t believe Fuld’s accounting. They thought the stock price would fall in the future because they thought that Lehman was in effect lying to the market about its real value. They were right.

In the current political climate in the United States and Europe it is easy to demonize derivatives, and heaven knows that they were used to cause enough havoc. But it is important to remember that they perform a very important function by allowing the market to tell important men in expensive suits when they are full of crap, whether the important men are heads of state or CEOs. It’s hardly surprising that both the pols and the executives would rather that derivatives just went away.

In the ancient Near East, contracts were often solemnized by hacking up a goat. The ritual was in effect an enacted penalty clause: “If I breach this contract, let it be done to me as we are doing to the goat.” This Article argues that we are not so far removed from our goat-hacking forbearers. Legal scholars have argued that contractual liability is best explained by the morality of promising or the need to create optimal incentives in contractual performance. In contrast, [...]]]> My latest offering is now up on SSRN for your enjoyment. This particular paper began with a simple question: “Why did people in the ancient world formalize their contracts by hacking up a goat?” Here’s the abstract for the paper that resulted:

In the ancient Near East, contracts were often solemnized by hacking up a goat. The ritual was in effect an enacted penalty clause: “If I breach this contract, let it be done to me as we are doing to the goat.” This Article argues that we are not so far removed from our goat-hacking forbearers. Legal scholars have argued that contractual liability is best explained by the morality of promising or the need to create optimal incentives in contractual performance. In contrast, this Article argues for the simpler, rawer claim that contractual liability consists of consent to retaliation in the event of breach. In the ancient ritual with the goat, the retaliation consented to consisted of self-help violence against life and limb. The private law in effect domesticates and civilizes retaliation by replacing private warfare with civil recourse through the courts. It thus facilitates the social cooperation made possible by the ancient threats of retaliation while avoiding the danger of escalation and violence that such private violence presented. This civil recourse theory of contractual liability provides an explanation for a number remedial doctrines that have proven difficult for rival interpretations of contract law to explain, including the penalty clause doctrine, limitations on expectation damages, and the basic private law structure of contractual liability. Finally, this Article responds to some of the most powerful objections that might be made against a civil recourse theory of contractual liability.

The article, “Consent to Retaliation: A Civil Recourse Theory of Contractual Liability,” is, to my knowledge, the first full-length article on civil a recourse theory and contract. Civil recourse, of course, has been a much discussed topic in the philosophy of tort law, where it has been championed by John Goldberg and Benjamin Zipursky. My take on the normative foundations of civil recourse, however, is a bit different than theirs. Hence, in addition to illuminating the mystery of the hacked up goats, my hope is that the article will contribute to debates in the philosophy of contract law and the philosophy of private law more generally. Enjoy!

At the outset, I’ll stipulate that I am no expert in health care but that my biases are strongly against the expansion of government entitlements in this or other areas. Discount my meanderings as you see fit. My understanding, however, is that a large part of the problem in health care costs comes in the way in which we price the system. We pay for services rather than outcomes. [...]]]> One of the joys of being a contracts prof is that you get to teach Hawkins v. McGee, the hairy-hand case of Paper Chase fame. Reading this week’s Economist briefing on health care has got me thinking about the meaning of the holding in that case for the current health care debates.

At the outset, I’ll stipulate that I am no expert in health care but that my biases are strongly against the expansion of government entitlements in this or other areas. Discount my meanderings as you see fit. My understanding, however, is that a large part of the problem in health care costs comes in the way in which we price the system. We pay for services rather than outcomes. This creates an incentive for providers to create a system structured around providing expensive procedures rather than providing positive health outcomes. I wonder, however, if Hawkins v. McGee doesn’t provide a way forward.

The case is normally presented as being about the proper measure of damages. Hawkins had a badly burned hand, and McGee promised that if he could perform an experimental skin graft Hawkin’s hand would be a “one hundred percent good hand.” The operation was a horrible failure, leaving Hawkins with a maimed and hairy hand. The court awarded expectation damages, namely the difference between what was promised — a good hand — and what was delivered — a maimed and hairy hand. (It turns out that a hand wasn’t worth much in New Hampshire in 1929; Hawkins got a couple of hundred bucks.) The case is odd because it presents what would ordinarily be a malpractice claim as a contract claim precisely because McGee did more than simply promise to perform services for a fee. He promised an outcome.

Suppose that we replaced the ordinary healthcare contract with the Hawkins v. McGee contract, namely that hospitals promised to deliver healthcare outcomes rather than healthcare services. First, it would align the incentives of health care providers much more closely with patients. Second, it would inject a lot of uncertainty into health care providers liabilities. After all, in many cases they will not be able to deliver particular outcomes, causing a breach of their contracts. This second issue could be controlled in two ways. First, health care providers could specify the amount they would pay in the event of unsuccessful treatment in a liquidated damages clause. Provided the courts enforced these clauses, they would diminish the unpredictability of payouts. Second, and perhaps more importantly, a fee-for-outcome contract would create a powerful incentive for healthcare providers to actuarialize the effectiveness of treatments, carefully compiling data on how likely successful outcomes actually are.

Were this contract adopted, going to the doctor would involve the purchase of a very different bundle of rights. Rather than buying services on the advice of a conflicted expert advisor, one would in effect purchase a form of insurance. In return for a fee, you would be promised a favorable outcome or the payment of some sum of money. The hospitals would then, in effect, be in the position of making bets on the effectiveness of their own treatments, bets that would become more profitable the better the outcomes were.

(And don’t forget to read “The Best Puffery Article Ever”)

You may not use or otherwise export or re-export the Licensed Application except as authorized by United States law and the laws of the jurisdiction in which the Licensed Application was obtained. In particular, but without limitation, the Licensed Application may not be exported or re-exported (a) into any U.S. embargoed countries or (b) to anyone on the U.S. Treasury Department’s list of Specially Designated Nationals or [...]]]> Today in my contracts call we were looking at boilerplate and the problems of contracts of adhesion.  After class one of my students pointed out to me that buried in the fine print of its iTunes Store Terms and Conditions is a clause where Apple is doing its bit to foster non-proliferation.  Clause 34(g) declares in part

You may not use or otherwise export or re-export the Licensed Application except as authorized by United States law and the laws of the jurisdiction in which the Licensed Application was obtained. In particular, but without limitation, the Licensed Application may not be exported or re-exported (a) into any U.S. embargoed countries or (b) to anyone on the U.S. Treasury Department’s list of Specially Designated Nationals or the U.S. Department of Commerce Denied Person’s List or Entity List. By using the Licensed Application, you represent and warrant that you are not located in any such country or on any such list. You also agree that you will not use these products for any purposes prohibited by United States law, including, without limitation, the development, design, manufacture or production of nuclear, missiles, or chemical or biological weapons.

Notice, as I read this clause not only are terrorists — or at least those on terrorist watch lists — prohibited from using iTunes to manufacture WMD, they are also prohibited from even downloading and using iTunes.  So all the Al-Qaeda operatives holed up in the Northwest Frontier Provinces of Pakistan, dodging drone attacks while listening to Britney Spears songs downloaded with iTunes  are in violation of the terms and conditions, even if they paid for the music!

That’ll show ‘em…

(Unless, of course, they can argue that the clause violates the reasonable expectations doctrine.  I mean, don’t we assume that when we download iTunes that we’ll be able to use it construct a nuclear missile?)

Dear Sir,

In your most recent Lexington column you reiterated the Economist’s long standing preference for a carbon tax rather than a cap-and-trade system for dealing with global warming.  Your preference has always puzzled me.  The Economist is quite right to insist that providing market incentives is a better way of controlling carbon emissions than command-and-control style regulations.  However, I have yet to see you make the case for carbon taxes.

A cap-and-trade system assumes that the government can set the optimal level of emissions and then lets the market determine the price of carbon.  A carbon tax assumes that the government can determine the costs that emissions impose [...]]]> I recently sent the following letter to the editor of the Economist magazine:

Dear Sir,

In your most recent Lexington column you reiterated the Economist’s long standing preference for a carbon tax rather than a cap-and-trade system for dealing with global warming.  Your preference has always puzzled me.  The Economist is quite right to insist that providing market incentives is a better way of controlling carbon emissions than command-and-control style regulations.  However, I have yet to see you make the case for carbon taxes.

A cap-and-trade system assumes that the government can set the optimal level of emissions and then lets the market determine the price of carbon.  A carbon tax assumes that the government can determine the costs that emissions impose on society, price those through a tax and then lets the market determine the overall level of emissions.  Another way of putting this, is that a cap-and-trade system assumes that scientists can determine the optimal level of carbon given the mosterously complex phenomena of the global climate.  A carbon tax, in contrast, assumes that economists can determine the costs that carbon imposes on society given the monsterously complex phenomena of the climate’s effect on the economy.

Other than your publication’s name, I am at a loss as to why you believe that the scientists are at a disadvantage to the economists.  Indeed, given the heroic intellectual feats that either policy demands, I’m at a loss as to which group of scholars has the edge.  Sadly, I suspect that we actually don’t know.

Nathan Oman

The bulk of Bernstein’s discussion focuses on the history of long distance trade between Europe and the Far East from Roman times through the nineteenth century.  He [...]]]> I just finished reading William Bernstein’s A Splendid Exchange: How Trade Shaped the World.  The goal of the book is to provide a global history of international trade from ancient times to the present.  The book doesn’t quite deliver on this promise.  For example, trade within Africa and the Americas prior to the age of discovery is almost completely ignored.  Likewise, for those who know their international economic history, the book isn’t likely to contain anything new.  Still it’s a good read, and there is something to be said for seeing huge swaths of history in a single view.

The bulk of Bernstein’s discussion focuses on the history of long distance trade between Europe and the Far East from Roman times through the nineteenth century.  He tells how this trade was dominated successively by Greeks, Arabs, Portuguese, Dutch, and finally the English.  One of the striking themes is how little there was in the West that the Chinese or Indians actually wanted.  Another theme is the often symbiotic relationship between trade and violence, most dramatically illustrated by the Opium Wars between Britain and China in the nineteenth century.

After recounting the Opium Wars, Bernstein’s focus shifts to the politics of free trade and protectionism.  Bernstein clearly believes that the free traders have the better of this argument (which, of course, is true) but he is sensitive to the way in which trade can hurt particular groups even if its benefits ultimately outweigh its costs.  He also has a good nose for stories of how protectionism has backfired in the past.  For example, in the first part of the eighteenth century English weavers rioted repeatedly, placing pressure on Parliament to exclude cheaper (and higher quality) cotton textiles from India.  Shielded from low wage Indian labor, English weavers claimed victory.  The tariff, however, also gave manufacturers and incentive to find some other way of avoiding high-wage English weavers.  The result was the mechanization of cloth production in the late eighteenth century, which ultimately displaced more high-wage weavers than the India trade ever did.

Perhaps my favorite story from the book has to do with the rise of containerization.  Over the course of the nineteenth century the cost of shipping fell dramatically.  Indeed, it fell so dramatically that prices for internationally traded goods continued to fall even after the onset of protectionist politics in the 1880s.  Technological innovation simply swamped the effects of legal policy.  By the early twentieth century, shipping costs were so low that the vast majority of the cost of moving goods around the world was incurred in the short trip from ship to wharf.    The solution to this problem is containerization, an idea that had been around since the first half of the nineteenth century.  It didn’t catch on, however.  The Interstate Commerce Commission early on took jurisdiction over the matter and at the behest of longshoremen’s unions squelched containerization, insuring that goods had to be unpacked and then repacked at the water’s edge.  The racket was finally brought to an end in the 1950s when a federal court declared that the regulation of shipping containers was beyond the jurisdiction of the ICC.

UPDATE: William Bernstein has also twice been a guest on Russ Roberts’s excellent EconTalk podcast.  You can check out the interviews here and here.

News reports emerging from the devastation of the 7.0 earthquake that struck Haiti last Tuesday suggest that street violence is growing and that local and international officials fear widespread looting, rioting, and the breakdown of civil order.  For example, the U.K. Telegraph reported on Saturday that  “[a]s anger and fears of violence grew amid desperate shortages of food, water, and medical supplies, bands of machete-wielding earthquake survivor [stet] yesterday roamed through the ruins of Port-au-Prince.”  The paper likewise reported incidents of violence against rescuers.

These media reports evoke similar reporting about [...]]]> This is a guest post from Professor Lisa Sun at BYU Law School.  She is the author, along with Daniel Farber, Jim Chen, and Robert Verchick, of Disaster Law and Policy, from Wolters Kluwer.  Lisa writes:

News reports emerging from the devastation of the 7.0 earthquake that struck Haiti last Tuesday suggest that street violence is growing and that local and international officials fear widespread looting, rioting, and the breakdown of civil order.  For example, the U.K. Telegraph reported on Saturday that  “[a]s anger and fears of violence grew amid desperate shortages of food, water, and medical supplies, bands of machete-wielding earthquake survivor [stet] yesterday roamed through the ruins of Port-au-Prince.”  The paper likewise reported incidents of violence against rescuers.

These media reports evoke similar reporting about New Orleans in the aftermath of Hurricane Katrina in fall 2005.   Feverish reports of widespread looting and violence painted a picture of a city sinking, not only into the sea, but also into the depths of anarchy.  The New Orleans Police Chief told Oprah Winfrey that “little babies [were] getting raped” in the Superdome.  Numerous media outlets reported that Katrina survivors were firing on their would-be rescuers.   Widespread looting was reported with headlines such as “The looters, They’re Like Cockroaches.”

Eventually, most of this early reporting of widespread violence and lawlessness was discredited.  The New Orleans Time Picayune and other leading newspapers eventually concluded that most of the worst reported violence never occurred.  Most sociologists likewise believe that reports of violence were grossly overstated and that reports of looting were also overblown and failed to distinguish between “prosocial looting” – survivors scavenging needed food, water, and other critical supplies – and “antisocial looting” – survivors engaged in opportunistic crime.

Early, inflated reports of violence and looting often reflect a mythology about human behavior in the aftermath of disasters.  Most of us believe that humans faced with disaster devolve into their worst selves.   However, available sociological evidence suggests that antisocial behavior in the aftermath of disasters is the exception, rather than the rule.  What implications might this have for the current crisis unfolding in Haiti?

It is clear that the disaster myth of antisocial behavior contributed to inflated reporting of looting and violence in New Orleans, and that the inaccurate reporting distorted response priorities and delayed humanitarian relief from reaching Katrina’s survivors.  Mayor Ray Nagin, for instance, diverted what remained of the New Orleans police force from search-and-rescue to looting patrol, potentially costing more lives.  Delivery of food, water, and sanitary supplies to survivors who took refuge in the Superdome was similarly delayed while military escorts were assembled, based on fears that the food convoy would be met with gunfire (which never materialized).

The lessons of Katrina suggest that officials should be cautious about overemphasizing security at the expense of humanitarian relief.  The central insight of the disaster sociological research is that average citizens do not turn to opportunistic criminal behavior in the aftermath of most disasters, and that most looting that does occur is driven by desperation (and perhaps, eventually, anger in the face of perceived or real abandonment).   Moreover, looting is not necessarily a harbinger of more serious crime:  even in St. Croix after Hurricane Hugo where widespread looting occurred, that looting was not accompanied by extensive violence.

Yet, as with the Katrina response, some reporting already suggests that fear of looting, violence, and riots is limiting the speed and adequacy of humanitarian response in Haiti.  For example, U.S. Secretary of Defense Robert Gates said that emergency air drops of food and water were not employed because an “air drop is simply going to lead to riots as people go after that stuff.”  A Belgian medical team apparently evacuated one hospital, overflowing with injured earthquake survivors, based on security concerns.

Of course, the sociological evidence isn’t perfect, and most of it comes from smaller disasters in developed countries.  The existing body of sociological evidence is focused on the developed world, and does not speak clearly to a country in which 80% of people already lived in desperate poverty.  Widespread looting in developing countries has sometimes been observed.  Indeed, Haiti today obviously differs from post-Katrina New Orleans in several salient ways.  First, although Katrina wreaked horrific damage on the Gulf Coast, the damage only directly affected a small proportion of the U.S. in terms of both population and geographic scope.  In Haiti, estimates are that the earthquake has devastated at least one-third of the population (some three million people), left tens of thousands dead, and completely destroyed or heavily damaged the vast majority of the country’s infrastructure.  Second, while New Orleans had high levels of crime and street violence prior to Katrina, law and order has had a much more tenuous grasp on Haiti in recent decades.  Civil unrest is common and gangs run rampant on Haiti’s streets, frequently terrorizing citizens.   Third, reports suggest that thousands of prisoners incarcerated in Port-au-Prince’s main prison have escaped in the earthquake’s aftermath, which obviously substantially increases the risk of crime on Haiti’s streets.

Even in Katrina, more looting likely occurred than sociologists would have predicted.  Some sociologists have suggested that Katrina should be viewed as a catastrophe, rather than “merely” a disaster, and that in certain unique circumstances – total devastation of infrastructure, survivors’ lack of knowledge about when help will arrive, and preexisting class and racial tensions – looting may be more widespread.  One prior example was the widespread looting that engulfed St. Croix in Hurricane Hugo’s wake.  Haiti, of course, may eventually fit this mold.

While international responders should certainly be cognizant of security concerns, those concerns should not be allowed to cripple humanitarian response, particularly since past experience suggests that security concerns are often overblown and that delays in aid are likely both to deepen the desperation that may set the stage for looting and – more importantly – to deepen a humanitarian crisis of epic proportions.

But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.

Yes and no. I don’t deny that law plays a role in the quality of the institutions that resolve disputes. I also don’t deny that the overall quality of dispute resolving institutions is effected by the substantive law that the institutions apply. On the other hand, legal institutions are the result of much more than either the legal rules that define [...]]]> There is an interesting exchange in the comments of my last post between Dan Cole,Jeff Lipshaw, and Michael Froomkin about institutions and the limits of substantive law. Dan Cole writes:

But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.

Yes and no. I don’t deny that law plays a role in the quality of the institutions that resolve disputes. I also don’t deny that the overall quality of dispute resolving institutions is effected by the substantive law that the institutions apply. On the other hand, legal institutions are the result of much more than either the legal rules that define their workings or the legal rules that they apply. They are also the result of things like allocation of resources and informal social practices.

I was once at a panel that brought this point home forcefully. It was on comparativecommercial law and that perennial chestnut, which is better the common law or the civil law.  The partisans of the common law were laboring hard to establish the virtues of its flexibility and respect for freedom of contract.   (I’ve labored over these virtues myself on occasion.)  At this point, a long-time commercial practitioner on the panel interjected remarks to this effect:

At the margins, I suppose that the common law is slightly more friendly to commercial innovation than is the civil law. When I go to a civil law jurisdiction I often learn that there are certain transactions I simply can’t run or are more complicated to structure. On the other hand, when I am assessing the economic prospects in any particular country, my main question isn’t “Is this a civil law or a common law jurisdiction?” Rather, my main question is whether or not the fact that the lawyer on the other said is the judge’s cousin will effect the outcome of the case.

That is what I mean when I say that institutions matter more than substantive law.

Now consider prison sentences. Here, it seems to me, that the situation is reversed. Even [...]]]> Consider the following argument: The same punishment for different people is not in fact the same. Thinking of a criminal fine is the easiest example. A $1000 fine levied on an offender who is a millionaire is simply not as serious of a sanction as a $1000 fine leveled against a poor criminal. The millionaire can pay the fine without noticing it, while the poor criminal may be subjected to considerable economic hardship. The result is that the $1000 fine will not have much deterrent effect against the millionaire. To get his attention we require a much harsher punishment. So far so good.

Now consider prison sentences. Here, it seems to me, that the situation is reversed. Even a modest prison sentence — say of six months to a year — could have a devastating effect on an upper class defendant. The opportunity costs of foregone income will be substantial. Furthermore, there may be far more ancillary consequences in the form of foregone opportunities, and the like. A lawyer, for example, might lose the ability to practice law in the future. In contrast, a poor criminal with few opportunities faces fewer costs from the same length of time in prison. The opportunity costs in terms of foregone income will be much lower, and if the criminal really has few opportunities to begin with then the prison term may have a relatively small impact on one’s future prospects.

If the analysis in the above paragraph is correct it suggests that those in poor communities receive dramatically less protection than those in richer communities. This is not simply because those in richer communities tend to have more resources lavished upon them in the form of protection and law enforcement. It is also that — to the extent that the population of potential criminals who might victimize them are also wealthy — they are protected by larger sanctions against criminals. In contrast, so long as prison sentences are insensitive to the wealth of the criminal, those in poorer neighborhoods are protected by comparatively weaker deterrents for wrong doers. (Again, assuming that the population of criminals likely to victimize poor communities is also poor.)

In order to achieve equal levels of deterrence across communities using incarceration, it seems to me that we must punish poor criminals with longer prison sentences than comparable rich criminals. It is not that poor criminals are more deserving of punishment, although my initial intuition is that that those who prey on the poor are more culpable than those who prey on the rich. Rather, the argument for punishing poor criminals more harshly is to equalize the level of deterrence provided to all citizens. A regime of equal incarceration, in contrast, creates dramatic inequalities in the level of protection provided to citizens of different socio-economic status.

Of course, another solution would be to adopt a method of punishment where the cost imposed on the criminal is less sensitive to the criminal’s wealth. The stocks or publish whippings come to mind…