Category: Economic Analysis of Law

Interview on The Black Box Society

BBSBalkinization just published an interview on my forthcoming book, The Black Box Society. Law profs may be interested in our dialogue on methodology—particularly, what the unique role of the legal scholar is in the midst of increasing academic specialization. I’ve tried to surface several strands of inspiration for the book.

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Knee Defender, Barro’s error, and Surprise Norms

Being a believer in Coase’s irrelevance “theorem” (see corresponding CALI lesson by me), I bring you a peeve springing from a podcast’s discussion of knee defender (a product that prevents the airline seat in front of you from reclining, which led to a recent fight on a plane, the plane’s diverted landing, and the arrest of the fighting passengers), which referenced a pundit’s (Barro‘s) quip that since nobody has offered to bribe him not to recline, little demand for no reclining exists. The podcast was also critical of reclining generally (as it is of warning motorists about speed traps), which raises the issue of hidden, surprise norms.

First on Coase. Bribing someone not to do something that annoys you is completely counterintuitive and counterproductive. It sounds and feels like extortion and perhaps we have an innate intuition against extortion. Maybe a jurisdiction existed, in the history of human development, where it was acceptable and habitual for some to pay others not to engage in annoying activities. However, nobody lives there any more because it got too annoying, since this functioned as an incentive for annoying behavior. How do we get from this point (my anti-extortion exception to acceptable Coasean bargaining) to worlds where ranchers bargain with farmers or quiescent spas with percussionists? I think social interaction follows the golden rule of do unto others as you would have done unto you (I accept gradual moderate reclining especially while napping and am very thankful indeed for speed trap warnings) and polite counterrequests not to recline are easy and possible (and we luckily have judges to protect us against oversensitive cops). Farmer-rancher and spa-percussionist interactions are different in that they happen at the professional level. Ranchers and farmers do not know eachother’s cost-benefit calculus making bargaining acceptable, as I think it is between neighbors with different attitudes about noise or lawn care. That having been said, my sense is that airline seat design seems to be sensitive to the various concerns because it seems to have shifted to minimal reclining in short flights or cramped rows and more reclining in transoceanic flights, where, also, the flight attendants do ask passengers to lift their seats for meals. So, anti-reclining demand seems to be producing results, consistent with Coasean reasoning and contrary to the intuition of Barro. Notice the unusual power of Coase here, since two of his conditions, the clarity of rights and enforceability of bargains, seem to be lacking in the social context of seat reclining (but not in neighborhood lawn care? Or is that why people pay a premium to live in associations? Coase all the way! Is it Lee Fennell or Jay Weiser who discuss premiums paid for association houses? Maybe both.). Perhaps I am wrong on reclining and it is clearly a right, not only because the button is on the handrest of the recliner (rather than the seat back, as the podcast points out) but also and especially since the airlines have banned knee-defender. The airlines also offer some seats with protection against reclining, the bulkhead and the exit row seats (maybe airlines could increase the number of non-reclined-against seats or charge the knee-defender premium for them). Thus, those seeking no reclining can obtain it by taking such seats instead of bribing Barro, buying knee defender, or trying to create a norm against it.

Second on surprise norms. No no no no, thou shalt not spring your righteous surprise norms on me. Western legal and social arrangement rests on the foundation that what is not prohibited is allowed. I can press my recline button and I can blink my brights to oncoming motorists at the cost of flying next to crying babies and driving behind those doing under the speed limit. (But in Sunday’s NY Times magazine, in Branson’s interview, he mentioned that he wants or tried to have his airline move toward children’s cabins, a development for which my ears are praying albeit from behind BOSE noise-cancelling headphones). To my reasoning, a necessary corollary of the rule of law is the non-rule of non-legal norms. When a need for a rule has enough thrust that it alters the law, then we have some warning about it and perhaps the chance to object against its creation. Holding people to a standard of conduct they do not know and to which they may object seems the height of (righteous, meddlesome, antiliberal, puritanical, strike four words) unfairness. (BTW, strike is obsolete litigator legalese for delete, dating from the days where the transcriber would back up the typewriter carriage and type XXXX or dashes over the, thus, struck text. That I could perfectly easily delete the words reveals my affectation here, but ignore that.) I have a sense that when I lived in the east coast a lot more of these surprise norms seemed to exist than here in the midwest and it grated. Or I am a rude boor who belongs in that extinct society above.

So, what is the norm in this blogo-podcast-sphere? Should I reveal that I am commenting on Oral Argument of Joe Miller and Christian Turner or should I leave the podcast nameless because I criticize it somewhat? Since law professors thrive on citation counts, I will presume that they would prefer attribution to marginalization despite that I am not in full agreement with everything they say (and who could possibly expect complete agreement in our milieu of professional debaters of trivialities?). I am very thankful for their podcast adding interest to my driving time and for triggering this post.

I hope no norm against run-on sentences and parentheticals exists in the blogosphere, or I am toast! In my defense, please notice that I could not instead drop notes. BTW, drop a [foot]note is legalese for removing from the main text a diversion or interjection and placing it in a footnote, which reminds me…

Digital Labor & Rethinking Economics

LaborDayIt’s easy to document the degradation of work conditions in the wake of capital’s ascendance. I’ve done so for years, fully expecting that globalization would push the downward convergence of non-college-educated American workers’ living standards to that of the 73% of the global work force now living in the developing world. But I think we are in the midst of a sea change of resistance. Just listen to Belabored, an extraordinary series of podcasts on labor struggles (with plenty of print/web sources accompanying each broadcast). Or, if you’re in, or can visit, New York City, try to attend the following two conferences:

Rethinking Economics: A student-led movement, this group has an all-star line-up for a conference on Sept. 12-14. I’m particularly happy to see Philip Mirowski in the mix, as his Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown was one of my most enjoyable (and illuminating) reads this summer.

Digital Labor: This November conference will “will bring together designers, labor organizers, theorists, social entrepreneurs, historians, legal scholars, independent researchers, cultural producers and perspectives from workers themselves to discuss emerging forms of mutual aid and solidarity.” I attended the first iteration in 2009, and am on the Advisory Board for this one. It should be a fascinating event, particularly as forms of exploitation common in the “gig economy” influence large corporations.

Photo Credit: Karen Horton.

A Pithy Rendering of the New Political Economy

I remember reading Raymond Geuss’s The Idea of a Critical Theory in graduate school and finding it a clear, compelling work. Geuss reflects on the book in a recent essay, offering the following summation of our economic predicament:

What the 1980s and 1990s had in store for us. . . was the successive implementation of a series of financial gimmicks which created financial bubbles and allowed the illusion of increasing growth for the majority of the population to be maintained for a while. . . . [T]he system began to collapse in 2007 and 2008. Catastrophe was averted only by a bizarre . . . set of political interventions in the Western economies–interventions that have correctly been described as “socialism for the rich”: defaulting banks and failing industries were propped up by huge public subsidies, private debts were taken over by the state and profits continued to flow to private investors. This structure, which certainly bears no similarity whatsoever to the ways in which proponents of “capitalism” have described their favored arrangements, seems to give us the worst of all available worlds. . . .

[T]he forms of economic regulation that had been introduced during the Great Depression of the 1930s and had stood the West in good stead for over forty years were gradually relaxed or abolished during the 1980s. Social welfare systems that had gradually been developed came under pressure and began to be dismantled; public services were reduced or “privatized”; infrastructure began to crumble. Inequality, poverty and homelessness grew.

Thus the current trend of corporate profits without widespread prosperity.

One of the very few contemporary economists up to responding to these trends is Mariana Mazzucato, who teaches that any account of value extraction has to be premised on an account of value creation. I’ll be blogging on her work’s relevance to IP, tax, and other policy over the rest of the month. For now, I highly recommend her contribution to the panel “How to Change the Post-Crash Economy,” at the RSA.

A More Nuanced View of Legal Automation

A Guardian writer has updated Farhad Manjoo’s classic report, “Will a Robot Steal Your Job?” Of course, lawyers are in the crosshairs. As Julius Stone noted in The Legal System and Lawyers’ Reasoning, scholars have addressed the automation of legal processes since at least the 1960s. Al Gore now says that a “new algorithm . . . makes it possible for one first year lawyer to do the same amount of legal research that used to require 500.”* But when one actually reads the studies trumpeted by the prophets of disruption, a more nuanced perspective emerges.

Let’s start with the experts cited first in the article:

Oxford academics Carl Benedikt Frey and Michael A Osborne have predicted computerisation could make nearly half of jobs redundant within 10 to 20 years. Office work and service roles, they wrote, were particularly at risk. But almost nothing is impervious to automation.

The idea of “computing” a legal obligation may seem strange at the outset, but we already enjoy—-or endure-—it daily. For example, a DVD may only be licensed for play in the US and Europe, and then be “coded” so it can only play in those regions and not others. Were a human playing the DVD for you, he might demand a copy of the DVD’s terms of use and receipt, to see if it was authorized for playing in a given area. Computers need such a term translated into a language they can “understand.” More precisely, the legal terms embedded in the DVD must lead to predictable reactions from the hardware that encounters them. From Lessig to Virilio, the lesson is clear: “architectural regimes become computational, and vice versa.”

So certainly, to the extent lawyers are presently doing rather simple tasks, computation can replace them. But Frey & Osborne also identify barriers to successful automation:

1. Perception and manipulation tasks. Robots are still unable to match the depth and breadth of human perception.
2. Creative intelligence tasks. The psychological processes underlying human creativity are difficult to specify.
3. Social intelligence tasks. Human social intelligence is important in a wide range of work tasks, such as those involving negotiation, persuasion and care. (26)

Frey & Osborne only explicitly discuss legal research and document review (for example, identification and isolation among mass document collections) as easily automatable. They concede that “the computerisation of legal research will complement the work of lawyers” (17). They acknowledge that “for the work of lawyers to be fully automated, engineering bottlenecks to creative and social intelligence will need to be overcome.” In the end, they actually categorize “legal” careers as having a “low risk” of “computerization” (37).

The View from AI & Labor Economics

Those familiar with the smarter voices on this topic, like our guest blogger Harry Surden, would not be surprised. There is a world of difference between computation as substitution for attorneys, and computation as complement. The latter increases lawyers’ private income and (if properly deployed) contribution to society. That’s one reason I helped devise the course Health Data and Advocacy at Seton Hall (co-taught with a statistician and data visualization expert), and why I continue to teach (and research) the law of electronic health records in my seminar Health Information, Privacy, and Innovation, now that I’m at Maryland. As Surden observes, “many of the tasks performed by attorneys do appear to require the type of higher order intellectual skills that are beyond the capability of current techniques.” But they can be complemented by an awareness of rapid advances in software, apps, and data analysis.
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Disruption: A Tarnished Brand

I’ve been hearing for years that law needs to be “disrupted.” “Legal rebels” and “reinventors” of law may want to take a look at Jill Lepore’s devastating account of Clay Christensen’s development of that buzzword. Lepore surfaces the ideology behind it, and suggests some shoddy research:

Christensen’s sources are often dubious and his logic questionable. His single citation for his investigation of the “disruptive transition from mechanical to electronic motor controls,” in which he identifies the Allen-Bradley Company as triumphing over four rivals, is a book called “The Bradley Legacy,” an account published by a foundation established by the company’s founders. This is akin to calling an actor the greatest talent in a generation after interviewing his publicist.

Critiques of Christensen’s forays into health and education are common, but Lepore takes the battle to his home territory of manufacturing, debunking “success stories” trumpeted by Christensen. She also exposes the continuing health of firms the Christensenites deemed doomed. For Lepore, disruption is less a scientific theory of management than a thin ideological veneer for pushing short-sighted, immature, and venal business models onto startups:

They are told that they should be reckless and ruthless. Their investors . . . tell them that the world is a terrifying place, moving at a devastating pace. “Today I run a venture capital firm and back the next generation of innovators who are, as I was throughout my earlier career, dead-focused on eating your lunch,” [one] writes. His job appears to be to convince a generation of people who want to do good and do well to learn, instead, remorselessness. Forget rules, obligations, your conscience, loyalty, a sense of the commonweal. . . . Don’t look back. Never pause. Disrupt or be disrupted.

In other words, disruption is a slick rebranding of the B-School Machiavellianism that brought us “systemic deregulation and financialization.” If you’re wondering why many top business scholars went from “higher aims to hired hands,” Lepore’s essay is a great place to start.
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The Logic of Extraction

Despite happy talk from corporate chieftains (and their friends in government), deep flaws in the American economy are becoming harder to ignore. Two recent articles have been particularly insightful.

First, despite America’s self-image as a crucible of cutthroat competition, our top businesses specialize in eliminating rivals. As Lina Khan and Sandeep Vaheesan observe,

Since the early 1980s, executives and financiers have consolidated control over dozens of industries across the U.S. economy. . . . [This strategy] has even become a basic formula for successful investing. Goldman Sachs in February published a research memo advising investors to seek out “oligopolistic market structure[s]” in which “a smaller set of relevant peers faces lower competitive intensity, greater stickiness and pricing power with customers due to reduced choice, scale cost benefits including stronger leverage over suppliers, and higher barriers to new entrants all at once.” Goldman went on to highlight a few markets, including beer, where dramatic consolidation over the past decade has enabled dominant companies to use their market power to extract more from suppliers and consumers — and thereby enrich investors.

Of course, Goldman had its own angle on the beer—a commodities shuffle to make money off the 90 billion aluminum cans consumed in the US each year.

Khan & Vaheesan are right to focus on finance as the key driver in the transformation. Gautam Mukanda has explored how leaders in the sector have enforced a short-term, extractionist mindset on US industry:

Pressure to reduce assets made Sara Lee, for example, shift from manufacturing clothing and food to brand management. Sara Lee’s CEO explained, “Wall Street can wipe you out. They are the rule-setters…and they have decided to give premiums to companies that harbor the most profits for the least assets.” In the pursuit of higher stock returns, many electronics companies have, like Boeing and Sara Lee, outsourced their manufacturing, even though tightly integrating R&D and manufacturing is crucial to innovation.

Clayton Christensen argues that management’s adoption of Wall Street’s preferred metrics has hindered innovation. Scholars and executives alike have criticized Wall Street not only for promoting short-term thinking but for sacrificing the interests of employees and customers to benefit shareholders and for encouraging dishonesty from executives who feel they’re being asked to meet impossible demands.

Considered in this light, it’s no wonder Wall Street & its enablers are trying so hard to hide the terms of its deals with states. We’ll need to look elsewhere for economic leadership.

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Thoughts on Driesen’s The Economic Dynamics of Law

David Driesen’s book, The Economic Dynamics of Law, offers a powerful new approach to law and policy analysis.  Like many others, Professor Driesen critiques neoclassical law and economics and the application of conventional cost-benefit analysis (CBA) to various areas of law and policy.  Unlike most others, however, Professor Driesen develops an alternative.

Professor Driesen emphasizes a host of broad framing points, the implications of which are not fully understood, generally and especially within conventional law and economics.  I take the following points to be, for the most part, uncontroversial (even if their implications are not fully understood).  Most people will agree that we live in an incredibly complex, dynamic world consisting of many interdependent, complex evolving systems; that law shapes these systems and critically how these systems change or evolve over time; that path dependencies make some changes irreversible and others incredibly costly to unwind; that law is necessarily normative as are the path setting consequences of law; that law operates as a framework that shapes but does not fully determine what people do.

The implications of these framing points demand serious attention, however, because they are too easily misunderstood or simply assumed away to make analysis tractable.  For example, the implications of the fact that preferences are endogenous and that law and the systems structured by law shape preferences are not fully accounted for in law and economics.  It is admittedly difficult to take such complications into account, and so the more tractable move is to assume preferences are exogenous and that law’s objective is efficient satisfaction of existing preferences.  Professor Driesen explains the errors in such a move.  Tractability is a poor excuse for failing to engage with reality and the normative stakes of law’s dynamics.  The fact that law shapes preferences and beliefs means that we cannot avoid confronting questions about how law shapes who we are and who we can even contemplate being.

Professor Driesen thus places analytical emphasis on law’s role in setting paths or choosing directions for society rather than determining outcomes or optimizing resource allocations.  He advances two broad normative commitments — avoiding systemic risk and providing opportunities for economic development.  He defines each and develops means for analyzing them that goes beyond conventional CBA.  As others have commented on the relationship of his approach and CBA, I’ll leave that aside.  With regard to systemic risk, I had two questions for Professor Driesen:  First, how would he deal with intergenerational issues?  He touches on CBA’s use of discount rates in the climate change context and how “CBA’s results depend on the policy views of the economist conducting the analysis,” but I didn’t fully understand what alternative he offered.  Second, what about systemic benefits?  Simply put, I wondered whether there is a symmetrical point to be made about systemic benefits.  I discuss related issues in my book, Infrastructure:  The Social Value of Shared Resources (Co-Op symposium), and connect the commitment to the idea of a social option, but it also ties into North’s adaptive efficiency argument, which Professor Driesen discusses.  Systemic benefits may be a broader way to think about his second normative commitment concerning opportunities for economic development, but it is hard to say because that commitment gets much less attention in the book.  Perhaps opportunities for economic development should be extended to include human development and Driesen’s approach could incorporate some of the ideas and lessons from Sen’s Capabilities Approach.  Certainly, many of the framing points noted above are also central to the CA project.

I was a little disappointed that the second normative commitment received less attention.  Much of the law is focused on opportunities for (human and) economic development.  Many of the applied chapters (e.g., contract, property, IP) seem to focus on it, but those chapters seemed mostly descriptive and backwards looking, with Professor Driesen saying something like, “Hey, wait a minute!  What’s really happening in these areas is dynamic change over time, with bounded rationality, …, it’s not classic law and econ!”  I would like to see more analysis of how Professor Driesen’s approach could better reconcile these areas of law with the second normative commitment he identified.

On IP, let me just say that I agree with Professor Driesen – IP scholars certainly think a lot about dynamic change.  He is right that we need to pay much more attention to path setting and how IP laws, for better or worse, shape the paths available and the paths taken.  This was a theme I explored in Intellectual Infrastructure, chapter 12 of my book.  In fact, many IP scholars are now working on this subject.

Let me end with a brief cautionary note on Professor Driesen’s appeal to macroeconomics.  I agree with him that legal scholars who employ economics tend to rely heavily on microeconomics and ignore macroeconomics.  He is also correct, in my view, when he suggest that overreliance on microeconomics, or at least certain aspects of it, has often sustained unrealistic assumptions, ideological commitments (sometimes hidden beneath the veneer of objectivity), and bad results.  I would only caution Professor Driesen that the same might be said of macroeconomics.

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Economic Dynamics and Economic Justice: Making Law Catastrophic, Middling, or Better?

Contrary to Livermore,’s post,  in my view Driesen’s book is particularly powerful as a window into the  profound absurdity and destructiveness of the neoclassical economic framework, rather than as a middle-ground tweaking some of its techniques.  Driesen’s economic dynamics lens makes a more important contribution than many contemporary legal variations on neoclassical economic themes by shifting some major assumptions, though this book does not explore that altered terrain as far as it might.

At first glance, Driesen’s foregrounding of the “dynamic” question of change over time may, as Livermore suggests, seem to be consistent with the basic premise of neoclassical law and economics:   that incentives matter, and that law should focus ex ante, looking forward at those effects.   A closer look through Driesen’s economic dynamics lens reveals how law and economics tends to instead take a covert ex post view that enshrines some snapshots of the status quo as a neutral baseline.  The focus on “efficiency” – on maximizing an abstract pie of “welfare”  given existing constraints —  constructs the consequences of law as essentially fixed by other people’s private choices, beyond the power and politics of the policy analyst and government, without consideration of how past and present and future rights or wrongs constrain or enable those choices.  In this neoclassical view, the job of law is narrowed to the technical task of measuring some imagined sum of these individual preferences shaped through rational microeconomic bargains that represent a middling stasis of existing values and resources, reached through tough tradeoffs that nonetheless promise to constantly bring us toward that glimmering goal of maximizing overall societal gain (“welfare”) from scarce resources.

Driesen reverses that frame by focusing on complex change over time as the main thing we can know with certainty.  In the economic dynamic vision, “law creates a temporally extended commitment to a better future.” (Driesen p. 52). Read More

Book Symposium: Driesen’s The Economic Dynamics of Law

Next week, we will be hosting a symposium on David Driesen’s book The Economic Dynamics of Law (Cambridge University Press, 2013). The symposium will be held from Mar. 31 to Apr. 3, 2014. As the press’s webpage explains,

This book offers a dynamic theory of law and economics focused on change over time, aimed at avoiding significant systemic risks (like financial crises and climate disruption), and implemented through a systematic analysis of law’s economic incentives and how people actually respond to them. This theory offers a new vision of law as fundamentally a macro-level enterprise establishing normative commitments and a framework for numerous private transactions, rather than as an analogue to a market transaction. It explains how neoclassical law and economics sparked decades of deregulation culminating in the 2008 financial collapse. It then shows how economic dynamic theory helps scholars and policymakers make wise choices about how to avoid future catastrophes while keeping open a robust set of economic opportunities, with individual chapters addressing the law and economics of financial regulation, contract, property, intellectual property, antitrust, national security, and climate disruption.

Our terrific line-up of commenters will include:

Sanja Bogojevic
Brett Frischmann
James Hackney
Michael Livermore
Martha McCluskey
Uma Outka
Arden Rowell
Jennifer Taub

Thanks to them, and to David, for being part of the symposium—we all look forward to the event. Given the topic of the 2014 Phillips Lecture, it’s clear that “avoiding future catastrophes while keeping open a robust set of economic opportunities” is a critical issue for our times.