Category: Economic Analysis of Law

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Corporate Political Speech, Rent-Seeking, and Political Extortion

Before I sign off, I’d like to thank Danielle et al. for their hospitality.  I’m very glad to have had this opportunity to share some of my thoughts, and to get some great feedback.  Let me finish up by offering an alternative rationale – grounded in public choice theory – for limited shareholder authority over corporate political spending.

Shareholder regulation of corporate political activity may not only decrease agency costs within the firm, it may improve overall societal welfare.  First, diversified shareholders might be able to constrain the costs of rent-seeking behavior that merely redistributes wealth between portfolio firms. Second, all shareholders may want to reduce the possibility of political extortion by removing from management the final say on certain kinds of political expenditures.  Allowing shareholders to regulate corporate political activity could limit these social welfare-decreasing activities, and channel corporate resources to more productive uses.  I sketch these arguments in more detail below. Read More

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The Efficiency of Corporate Political Speech Bylaws

Nearly half a century ago, Albert Hirschman formalized two ways in which members of organizations could express their displeasure: exit and voice.  Exit is market-based expression, and is typically quiet, impersonal and cheap.  Voice, by contrast, is political expression — it is usually loud, messy, and expensive.  From an efficiency perspective, exit is thus generally favored as a matter of institutional design.

Corporate law largely track Hirschman’s theory.  Shareholders’ voice rights are, by default, quite constricted, and the business judgment rule imposes an important limitation on seeking judicial remedies.  In most cases, unhappy shareholders’ only practical method of expressing their discontent is to exit the firm by selling their shares.

But Hirschman warns that in certain circumstances, such as where the barriers to exit are sufficiently high, it is preferable to adjust institutional design to facilitate or strengthen members’ voice rights.  Corporate political activity presents exactly such a case, because the standard shareholder remedies – suing, voting for the board of directors, and selling their shares – are either unavailing or exceptionally costly.  I treat this range of options in more detail elsewhere, but below I will briefly describe these problems with a focus one key area in which corporate political activity differs markedly from other types of corporate action, and then turn to an important objection. Read More

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Judge Posner’s Surveillance Argument Would Not Withstand An Economic Analysis

Judge Richard Posner took the occasion of the Boston bombing to remind us of his view that privacy should lose out to other values.  Privacy, argues Judge Posner, is largely about concealing truths “that, if known, would make it more difficult for us to achieve our personal goals.”  For instance: privacy helps the victims of domestic violence achieve their personal goal of living free from fear; it helps the elderly achieve their personal goal of staying off of marketing “sucker lists;” and it helps children achieve their personal goal of avoiding sexual predators online.

To be fair, Judge Posner acknowledges that some concealment is fine and that privacy laws may even “do some good.”  He worries rather about civil libertarians who would limit the expansion of surveillance to the point that we can neither deter, nor apprehend terrorists like the men responsible for bombing the marathon.  “There is a tendency to exaggerate the social value of privacy,” Judge Posner believes, and it just might get us killed.

Judge Posner is a founding member of the law and economics movement and, as such, it would seem fair to analyze his claim from the perspective of incentives.  Does video surveillance deter crime in general?  Empirical evidence suggests that cameras merely displace crime, and Judge Posner concedes that picking terrorists out of a crowd before they act is impracticable.  Does video surveillance help with identification?   Sure.  But the quick identification of the Boston bombers from private footage suggests we have enough surveillance.   Moreover, hardened terrorists have proven willing to die in an attack, making identification moot.

Then there are the unintended consequences—a mainstay of economic analyses of the law.  The fact that an act of terrorism will be caught on video and spread to every screen in America greatly enhances its intended impact, which in turn makes the option more attractive to our enemies.

One can quibble with my data points.  But any honest, empirically-informed cost-benefit analysis of additional surveillance will yield at best a mixed picture.  I submit that Judge Posner’s argument yesterday is dead wrong by the terms of the very movement he founded.

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Stand-ins for Justice?

The original title for this post was The People’s Supreme Court? because it was triggered by an article in last week’s New York Times about the increased use by law firms of place-holders (paid stand-ins) for seats at the United States Supreme Court.  According to the article, “place holding is common at Congressional hearings and is on the rise at the Supreme Court, where seats for last month’s arguments went for as much as $6,000.”  An earlier piece, published around the time the same-sex marriage cases were argued, noted that the practice has its detractors, including former Congressman Barney Frank, whose proffered remedy is televised Supreme Court arguments.

I changed the title of this post after an incident on Friday.  While returning to my law school midday I passed a scraggly group picketing in front of a neighboring Marriott Hotel.  The signs said that the protesters were picketing because the Carpenters Union had a beef with the management.  As my very general description suggestions, I did not look at the signs too closely.  I was distracted because many of the protests were so drunk or drugged that they could not walk in a circle.  A colleague with whom I was walking informed me that some labor unions now hire homeless people to walk picket lines for them.  Surely the Union did not think that the picketing would be effective.  I was astonished that actual Union members were shirking their membership responsibilities, but did I have a right to be appalled?

Hiring stand-ins for pay is a very American institution.  Read More

Addictive by Design

I was honored to see Prof. John Banzhaf weigh in on a recent post on wellness programs. That post suggested parallels between the addictiveness of tobacco, and that of many food products. Little did I know the NYT was about to publish a blockbuster article on exactly that issue:

[In a 1999 meeting of food industry leaders,] [t]he first speaker was a vice president of Kraft named Michael Mudd. . . . As he spoke, Mudd clicked through a deck of slides — 114 in all — projected on a large screen behind him. The figures were staggering. More than half of American adults were now considered overweight, with nearly one-quarter of the adult population — 40 million people — clinically defined as obese. Among children, the rates had more than doubled since 1980.

Mudd then did the unthinkable. He drew a connection to the last thing in the world the C.E.O.’s wanted linked to their products: cigarettes. First came a quote from a Yale University professor of psychology and public health, Kelly Brownell, who was an especially vocal proponent of the view that the processed-food industry should be seen as a public health menace: “As a culture, we’ve become upset by the tobacco companies advertising to children, but we sit idly by while the food companies do the very same thing. And we could make a claim that the toll taken on the public health by a poor diet rivals that taken by tobacco.”

Fast food lawsuits are looking more prescient by the day.

Illustration: Via Engadget article on interactive ad patents.

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Bye, Bye Big Brands, Twinkie, Ding Dong: Hostess Brands, Inc. Liquidating

Ghostbusters, Die Hard, my lunch in grade school all had Twinkies (OK my lunch also alternated with Ding Dongs). In Ghostbusters the Twinkie symbolized psychokinetic energy, in Die Hard it substituted for a cop’s doughnuts, in my lunch it was I guess dessert but substituted for real food. The Wall Street Journal reports, however, that the era is over. Hostess Brands, Inc. is seeking permission to liquidate the company. It’s attempt at reorganization has failed. According to WSJ, “A victim of changing consumer tastes, high commodity costs and, most importantly, strained labor relations, Hostess ultimately was brought to its knees by a national strike orchestrated by its second-largest union.”

There are real people, places, and assets behind these brands. 18,000 workers will lose their jobs. 36 plants will close. The facilities and land will be sold. There is product inventory too. “Loaves of bread and plastic packages of icing-filled desserts” need to go. WSJ suggested that big box stores will be where the food stuff ends up. I remember when Coke changed its formula and folks hoarded the original Real Thing. I wonder whether that will happen with Twinkies. (Given the supposed shelf-life of a Twinkie, a strange pastry cellar built for and owned by some fanatic seems plausible to me).

And, Hostess Brands will sell…its brands. That is where the most money may be made. As I point out in From Trademarks to Brands, brands are not the same thing as trademarks. In the early days of trademarks, one could not sell a brand without the facilities. Today the brand as assest is a given. Selling it as thing is sanctioned by the law even though such practices do not do well within the law economics explanations for trademarks. I argue that a way to understand the move from direct competition to anonymous source, the growth of goodwill, and the expansive view of merchandising and licensing can be explained by brand practices much more than Landes and Posner’s law and economics view. (64 Florida L. Rev. 981, 1009-1019).

I wonder how folks will perceive the sale. If a company buys the name Twinkie or Ding Dong and then makes the cakes with different ingredients or sources for the ingredients, will that matter? What if the taste varies? What if in a year people think Hostess still makes Twinkies and buys the brand based on that error? Is that confusion we care about? Maybe we should not care about any of these. Then again if someone buys Twinkie and uses a new recipe, and then someone makes Twinkies with the original recipe, should that be allowed? Probably not but why is unclear. A healthy market that assumes rational consumers should be able to let information about such variances drive the market, right? Of course we don’t do that in trademark law.

Hmm, perhaps some sugar will help fuel thinking through these points. Better get Twinkies and Ding Dongs before this incarnation is gone.

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The Correct Word is Desource, Not Outsource.

Everyone thinks jobs are being outsourced; they are, in fact, being desourced. When Mitt Romney claims he will create jobs, when Barak Obama claims the same, when Google, Apple, or Amazon assert they build out the economy, they all overstate. Worse, they ignore the reality that both manufacturing and service jobs are dying. Robots, artificial intelligence, and the new information-at-scale industries all but assure that outcome. The ability to build and sell without humans is already here. I am not saying that these shifts are inherently bad. They may even be inevitable. What we do next is the question. To answer that question, we need to understand the ways humans will be eliminated from manufacturing and service jobs. We need to understand what I call desourcing.

Focus on manufacturing is a distraction, a sideshow; so too is faith in service jobs. A recent New York Times article about Apple, noted that manufacturing accounts for only about eight percent of the U.S. labor force. And, The Atlantic’s Making It in America piece shows how manufacturing is being changed by robots and other automation. According to some, the real engine is service labor “and any recovery with real legs, labor experts say, will be powered and sustained by this segment of the economy.” That is where desourcing comes in. Many talk about the non-career path of service sector jobs. A future of jobs that have low pay and little room to rise is scary and a problem. Amazon explains why that world might be heaven.

The world of low wage, high stress service work is being replaced by automation. Amazon gave up its fight against state taxes, because it is moving to a model of local distribution centers so that it can deliver same-day delivery of goods. According to Slate, Amazon will spend more than $1 billion to build centers all over the U.S. and hire thousands of people for those centers. The real story is that like any company Amazon wants to reduce operation costs; it must automate or perish as Technology Review put it. It will do that, in part, by using robots to handle the goods. Self-driving cars and autonomous stocking clerks are the logical steps after ATMs and self-serve kiosks at movie theaters and grocery stores. I am always amazed at the folks who line up at movie theater ticket windows rather than use the kiosks. A friend said to me that we should walk up to the window to keep those jobs. It is a nice idea, but I think untenable. We all want to move faster and pay less. Welcome to desourcing.

Desourcing means reducing or eliminating humans from the production or service equation. Humans are friction points. More and more we can reduce those points of contact. We no longer need to send work to other humans.

There are many economic questions that are beyond what can be addressed in a short piece. But here are some ideas on which to chew. The returns from this approach are tremendous for the companies that desource. For example, by one account, Apple makes $473,000 per employee; yet “About 30,000 of the 43,000 Apple employees in this country work in Apple Stores, as members of the service economy, and many of them earn about $25,000 a year.” So we may satisfy our need for instant gratification as companies reduce their costs, but that money will go to corporate bottom lines. Whether it will really reach the rest of the economy is not so clear precisely because a smart company will invest in desourcing. I suppose at some point companies will have to realize that they need masses who can buy stuff. Yet I think some studies indicate that serving the upper end of the economy works better than serving the masses. In theory, a company may offer goods at lower prices but to do that, it will need lower production costs. And less workers means lower costs.

I am not saying I know what will solve this riddle. I offer desourcing, because I have not seen a satisfying answer to the issue. There may not be one; for we may be stil sorting what to do as the digital age takes full hold. As the computer science folks say in early training, “Hello world.”

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On Information Justice

Like the other commenters on From Goods to a Good Life, I also enjoyed the book and applaud Professor Sunder’s initiative in engaging more explicitly in the values conversation than has been conventionally done in IP scholarship. I also agree with most of what the other commenters have said.  I want to offer plaudits, a few challenges, and some suggestions about future directions for this conversation.

Read More

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The Penn State Disaster Pool

So this is interesting:

“The mediator who managed the Sept. 11 victims-compensation fund and settlements with those affected by the 2010 BP Gulf oil spill has been hired by Pennsylvania State University in the hope of settling the civil claims of Jerry Sandusky’s victims.

The university announced Thursday that it had hired Kenneth R. Feinberg to facilitate negotiations for the four current lawsuits and more expected to be filed by those sexually abused by the former assistant football coach.”

One way to read this is that PSU is going to make available a large pool of money to a diverse victim class, and has hired Feinberg for his expertise dividing complex pies in ways that leave most folks relatively satisfied.  But there’s another reading that seems at least plausible.  Associating with Feinberg transmutes the human errors which enabled Sandusky’s crimes into a “disaster”, implying less particularized responsibility.  Plaintiffs refusing to partake in the common pool can potentially be framed as selfish, grasping, etc.  That so even though almost by definition, these disaster pools allocate less money to every plaintiff than their individual claims are “worth”.

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What Is IP Good For? Madhavi Sunder Has an Answer: The Good Life

Why bother to have intellectual property rights? That question is the question for IP. Madhavi Sunder has answers. Some excellent work on the subject has looked at whether economics has new answers about IP rights and their structure. Others have taken a hard look at whether any economic argument works. Like books by James Boyle, Brett Frischmann, and Julie Cohen, Sunder’s book runs right at intellectual property law and tackles the hard question. Sunder proposes that we have left off asking what is the good; not just the good produced but the good for all of us. In the tradition of critique she asks about power dynamics and whether free culture is also fair culture. She forces us to consider the realities of exchange culture and rules that bind our ability to engage and thus limit our freedom to author ourselves. In my work on trademarks, brands, and culture, I looked at specific ways we have moved from one-way mass market systems to two-way interactive ones as I questioned whether trademark rules make sense and improve society. I love this book because Sunder takes this point and drills into local, national, and global levels. She challenges current narratives about how and why we create with concrete examples of overflowing creation, unfair results, and troubling societal outcomes all of which abound despite claims about incentives and social welfare creation in IP law. Still, she believes the law has the foundations for “plural values at stake in cultural production.” Her prescription is that we should be “ripping, mixing, and burning” law to get to the world where we have not only goods, but a good life. I recommend the book and look forward to our discussion here at Concurring Opinions.