Author: Todd Tucker

Ontario’s green energy policies violate WTO rules, found a three-person panel just in time for the holidays.

Last week, the WTO released a panel report by Thomas Cottier (Swiss), Alexander Erwin (South African) and Daniel Moulis (Australian) that held the Canadian federal government responsible for the attempts of a single Canadian province to jump-start a clean energy transition. The decision cuts to the heart of federalism and of environmental governance in the 21st century – neither of which the WTO is proving itself very capable of accommodating.

The trade challenge was brought by the EU and Japan, with a nod of support from the Obama administration. Because only federal governments are represented at the WTO, the progressive government of Ontario had to have its policy defended by the anti-environmental Harper administration.

The basic thrust of Ontario’s policy is two-fold.

Continue reading “Noelectric” →

Let’s treat the rich as accidents, says Hayek, in our ongoing exploration of Austrian thought.

While Hayek admits that property as a concept did “not fall ready made from heaven”,[i] he nonetheless takes issue with the “socialist” conception that it was “invented.” He argues that “the recognition of property preceded even the most primitive cultures, and that certainly all that we call civilization has grown up on the basis of that spontaneous order of actions which is made possible by the delimitation of protected domains of individuals or groups” (italics added). (2590-2614)

In a long set of volumes complete with soaring paeans to liberty and other abstractions, this reference to fences is a rare moment when Hayek lands on terrestrial planes to actually explain what he is on about. Amidst such beautiful prose, the reference to vulgar property as the fount of “all” civilization seems like a sharp reduction of what constitutes the good life – sharply at odds with the complex views of Adam Smith (1759) and even Menger. It seems difficult to put property at the center of one’s value system without being seen as an apologist for the current distribution of property in society. Hayek maintains that he is not defending outcomes, only whether certain behaviors can lead us to believe that certain limits between individuals exist. (2614) Nonetheless, elsewhere, he argues that “it will generally be impracticable to correct” injustices created by circumstances of birth or initial distributions. “It will on the whole seem preferable to accept the given position as due to accident and simply from the present onwards refrain from any measures aiming at benefiting particular individuals or groups.” (6841)

But by what mechanism would the now powerful be unilaterally disarmed from exercising their disproportionate power?

Continue reading “Accidental one percent” →

Today, we continue to examine the sometimes mystical approach that Austrian thinkers take towards the law.

Much like Menger, Hayek placed the origin of law before recorded history, and indeed even before language: “one might say that the development of universal rules of conduct did not begin within the organized community of the tribe but rather with the first instance of silent barter when a savage” placed a gift at the border of his territory in expectation of reciprocation. (2085)

Also like Menger, Hayek writes that law predates state enforcement, but can be established by “the factual observance” of rules. (2369)  While law can be observed through the actions of individuals, “it is the efficiency of the resulting order of actions which will determine whether groups whose members observe certain rules of conduct will prevail.” (1930) In primate societies, “the process of selective evolution has produced highly ritualized forms of behavior governed by rules of conduct which have the effect of reducing violence and other wasteful modes of adaptation and thus secure an order of peace.” (1949) Likewise, in more developed societies, some laws are better than others because they create “an effective order” even among people who do not know one another. (2428) Language becomes a mechanism for teaching and transmitting the rules, which are still only abstract propensities to act or not act in certain ways that compete with impulses to guide behavior.

As chiefs emerge, they attempt to teach the rules – both those that they inherited, and those that they create in order to carry out purposive action. People would debate the existence of the former type, while the existence of the latter is evidenced by the presence of a command. The need to verbalize the content of the inherited law would arise in dispute settlement, and would be a means of developing consent about its content. (1970-2001) Hayek notes that early attempts to codify law (Hammurabi and the authors of the Roman Twelve Tables) were represented as mere statement of what the law had always been. (2064) In the Middle Ages, even novel disputes were resolved by reference to laws that were said to have always existed.[i] This did not mean that there was no development: market law, merchant law and the ius gentium continued to change law, but not through some leader’s intention or design. (2086) Hayek sees England as the only country that maintained this non-purposive approach to law, which is not of the king but equally binds the king; where “general principles” are derived from the existing stock of cases (2153, 2174)[ii]

Continue reading “Judges are tools” →

Today, we continue in our exploration of what key classical, neoclassical, behavioralist and Austrian economists have to say about social institutions in general, and judicial processes specifically.

Friedrich Hayek (1899-1992) is perhaps the preeminent modern Austrian economist. His Law, Liberty and Legislation built on many of the themes in Menger’s work, and was published in three installments in 1973, 1976 and 1979. (Page numbers here refer to the Kindle edition’s position, sorry.)

Rationalists since Descartes had held that nothing is true unless it could be derived from explicit premises. In Hayek’s view, this line of thought led to an

anthropomorphizing of social institutions, so that any social body that exists was said to have been designed or contracted for, with a specific purpose in mind. Hayek calls this tendency constructivist rationalism or intentionalism. While man could always strive “to make reason as effective as possible,” many actions do not derive from conscious thought. The mind uses “abstractions” as shortcuts to understand complex phenomena. These abstractions can discipline emotion, not by telling us what to do (which is difficult given the lack of adequate knowledge about the world), but by telling us what not to do. He observed that “man is as much a rule-following animal as a purpose-seeking one.” In sum, individuals lack all the facts to attain Cartesian rationality, and in fact thrive because of it – relying on a wide dispersion of knowledge throughout society. (Hayek, 2012, at 660-817, 1057, 1078, 1100, 1120)[i]

For Hayek, social order can come through taxis (i.e. “made order) or cosmos (i.e. “spontaneous order”). The latter type “will often consist of a system of abstract relations between elements which are also defined only by abstract properties, and for this reason will not be intuitively perceptible and not recognizable except on the basis of a theory accounting for their character.” While the elements in the system will change, their structure of relationships will not.

Continue reading “Rollin’ in my catallax” →

What behavioralism lacks, on its own, is a theory of politics and power.

For instance, Sunstein posits that exogenous crises help explain the emergence of legislation and the overcoming of bounded rationality problems. (But where do the crises come from?) Specifically, “outrage” or “availability” entrepreneurs stoke the cognitive fires and convince lawmakers to take action. This can lead to policy solutions that are tailored more or less well to correct probabilities. (But what motivates these entrepreneurs?) He notes that culture can also play a role in attitudes towards risk. Societies (and groups and individuals within society) can be individualist, hierarchist, egalitarian or solidaristic. The latter groups may be more likely to embrace costly climate change policies that will benefit others more than themselves, while strongly individualist cultures may be less likely if the benefits and risks accrue elsewhere.  (Sunstein, 2009, at 57, 66) (But who shapes these cultures?)

Without a theory of how groups and cultures are formed and shaped, behavioralism cannot direct its sophisticated (even arguably prediction-capable) view of economic agents’ internal environment to a view of how agents’ perceptions are structured by the external environment, and how their actions play out in the external environment.

Continue reading “Your brain on politics” →

Cass Sunstein believes judges can nudge.

Using statistical analogies, “behavioral law and economics” claims to improve on neoclassical law and economics by having a higher R squared, and to make predictions with fewer unrealistic restrictions (i.e. fewer degrees of freedom). (Jolls et al., 1998, at 1487, 1489) [i]

The widespread existence of laws that are neither efficient nor an obvious result of rent-seeking by powerful groups is difficult to explain within the neoclassical framework. Behavioralists supplement this account with reference to bounded rationality and bounded self-interest (in the form of fairness norms). Inefficient bans on ticket scalping, for instance, exist because of fairness norms, and most people judge fairness by how closely it corresponds to a non-scalped price.

While undoubtedly filling in key details of economic agents’ internal environment, behavioralists end up having to create a whole host of exogenous events. From Austrian thinking, behavioralists emphasize that fairness norms must be examined before the law came into being, since the existence of law itself shapes fairness norms. As in Austrian thought, however, this is difficult to falsify or investigate. Following neoclassical thought, Sunstein and colleagues assume that legislators are maximizers interested in their own reelection, and so respond to voter fairness concerns. They also assume the presence of “availability entrepreneurs” that manipulate cognitive biases by reminding voters or legislators of catastrophes they wish to regulate. (What motivates these entrepreneurs is not explored.) So the mechanisms causing shifts in cognition and translating those shifts into policy are left outside of the theory. (Jolls et al., 1998, at 1508-1519)

Given the role played to exogenous forces, it is curious that Sunstein and colleagues choose to examine Superfund toxic waste dump legislation as a case study. The authors maintain that the legislation is not justifiable on cost-benefit grounds, and outside interest groups weren’t even advocating for it. Instead, it was solely because availability entrepreneurs within the Environmental Protection Agency attempted to make the issue more salient with the public. This example raises more questions than it answers. What were these government bureaucrats attempting to maximize? The authors suggest that they were “concerned about an apparent gap in federal law and eager to consolidate their authority over issues of public health.” (Jolls et al., 1998, at 1520-22) But how do state agents develop autonomous interpretations of social reality? What are they influenced by or attempting to maximize? To answer these questions, you would need a theory of the state. (Evans, 2011) (Chang, 2002)

Likewise, the behavioral account leaves unclear what exactly judges do, and what they maximize.

Continue reading “Nudge the judge” →

Behavioralists question three “fundamental principles” of the neoclassical account.

The first, downward sloping demand curves (i.e. price responsiveness) can hold true without the stronger version that this is an optimal behavior. Indeed, even “stupid” buyers and sellers can clear markets. (Simon, 1996, at 33) The second, that opportunity costs are equal to out-of-pocket costs (and sunk costs are ignored), is belied by research that shows that people are unwilling to buy Super Bowl tickets at the market price, but would also be unwilling to sell them (if they had them) at the market price. In other words, people set their own idiosyncratic values in markets that don’t have obvious cash prices defined. (Jolls et al., 1998, at 1482, 1484) The third, that resources tend to flow to their most valuable uses, is undermined by observation of the endowment effect.

Behavioralists have considered four of the “well-known successes of economics”: (1) the inverse correlation between price ceilings and queues; (2) the inverse correlation between rent control and the stock of housing; (3) the positive correlation in financial markets between risk and expected return; and (4) the relation between futures prices and spot-market prices. They note that the first three simply predict the direction but not the magnitude of change. For instance, the third example notes that stocks tend to be riskier and thus have higher prices than relatively riskless bonds. Yet the theory says little about the impressive magnitude of this difference, or the equity premium puzzle. As for the fourth example, the neoclassicals’ prediction of the magnitude of the relationship between futures prices and spot-market prices is more accurate, but this market is characterized by arbitrage, reputation effects, and learning effects – which are not generally applicable to human behavior.[i] (Jolls et al., 1998, at 1485-1486)

Continue reading “Locally awesome” →

Behavioral economics gets inside your brain.

As we explored in earlier posts, the individual in neoclassical thought is a fairly limited creature. Even the most distinguished of individuals in society (i.e. judges) can be reduced to self-interested, utility maximizing beings. (Posner, 2010) In classical thought, in contrast, individuals are complicated units that want to improve not only their own happiness and enjoyment, but also that of others around them. But the attainment of these virtues varies by time, place, civilization and institutional development. (Smith, 1759, at VII.IV.36)

Behavioral economics – perhaps the newest school of economic thought – falls somewhere in between these two poles. Like Smith, individuals have a value set that extends beyond selfishness. Like the neoclassical conception of a time-transcendent homo economicus that maximizes utility, behavioralists outline a time-transcendent homo behavioralis that is subject to cognitive and computational problems that can be modeled. Unlike Marxist or institutional perspectives (which go deep into social context), the behavioralist school goes deep into the individual.

Essence of Behavioral Model

Individuals are not perfectly rational: our preferences are not always well-ordered, and our cognition and calculation abilities are limited (Simon, 1996, at 26-30) – which in turn limits our ability to correctly assign probabilities to events. (Jolls et al., 1998, at 1477)

Simon utilizes the concepts of the internal versus the external environment, and procedural versus substantive rationality. In neoclassical economics, the economic actor’s inner environment does nothing but define an economic goal (i.e. profit or utility maximization, which is in turn determined by rationality and optimizing postulates), and then it adapts to the outer environment (i.e. competitor firms, the government, etc.), which is characterized by cost and revenue curves.

The behavioral account differs from this account, and notes that the external environment is incredibly complex. Humans confront the complexity of the world by structuring their inner environment. They use lists and rules of thumb to make “good enough” decisions – i.e. decisions that may not optimize utility functions in the rational choice / perfect information senses, but which satisfice. Firms, for their part, use cost accounting and management science (such as inventory control) to deal with complexity, including simply defining for productive units what they should seek to maximize (Simon, 1996, at 27-32) These “good enough” decisions are useful on average, but err much of the time. (Jolls et al., 1998, at 1477) In sum, the external environment makes true substantive rationality difficult, so individuals structure their inner environment to be as procedurally rational as possible.

Continue reading “Brain journey” →

To wrap up our little analysis on the neoclassical view of judging, let’s look at Posner’s theories of the emergence of law.

Adam Smith saw estate rights as emergent from the collective, which then instituted publicly coordinated dispute settlement procedures to adjudicate between competing claims. Even in hunter and shepherd civilizations, group-coordinated powers of exile existed. The quality and quantity of judicial institutions could vary due to institutional features and the extent of democracy, neither of which moved forward in deterministic fashion.

Neoclassicals instead promote individual rationality as a permanent feature of human life. In primitive societies, retaliation was the norm. How is this rational? The costs of retaliation, on the surface, would appear to outweigh the benefits. Yet, for primitive man, it was a rational response to the high information costs inherent in adjudging whether aggression was accidental, or the result of recklessness or negligence. In addition, retaliation (as applied) worked by targeting not just the aggressor but also the aggressor’s family, which reduced retaliation costs by multiplying available targets, and also created incentives for family members to control potential aggressors in their ranks, thereby further lowering the retaliators’ outlays of effort. (Posner, 2010, at 329-333)

Landes and Posner also explored a case study of the Yurok Indians of California. In this society, a Yurok could prosecute a legal claim by hiring two, three or four nonrelatives from outside his community (known as “crossers”) to hear his claim, and the defendant would do the same with an equal number. The crossers would be paid in shell currency by the parties.

Even in the “absence of public coercive authority,” these rules emerged and damages were paid by the losing party. Why? The rules were enforceable because, if the payment did not occur, the losing party could be made a wage slave or killed. The rules emerge because societies that have no dispute settlement and therefore kill one another are dead societies.

The only faults that the authors find is the system was theoretically open to corruption and that is was overly case-specific, and did not create generalized norms. The former problem they discount as “a general threat to judicial integrity rather than a special problem of primitive society.” The latter problem is a result of the aforementioned positive externality of precedent production. Landes and Posner argue that the problem is diminished with societies where the chief is the settler of disputes, since he is able to internalize the positive externality since he values societal effectiveness and stability. (Landes and Posner, 1979, at 243-245)  This again advances that the only reason for the public nature of judiciaries is to resolve a market failure.

There are several weaknesses in this case. First of all, it is unclear why the Yurok example (assuming it is accurately described) should be described as wholly pre-state. There are collective rules and collective punishment even in this example. Second, it is unclear from the description whether these were disputes over property, or other forms of rights. As such, the neoclassical account does not appear to account for Smith’s distinction between natural and collectively created rights.

Finally, it is difficult for the neoclassicals to explain the evolution of institutions without reference to some exogenous force outside of the neoclassical framework of self-interest. The explanation of the Yurok as creating dispute settlement in order to outcompete rivals suggest some type of collective optimization that cannot be neatly explained at the individual level. Likewise, the account of the chieftain as resolving the market failure because of his internalization of social interests seems to individualize the collective and make him special – a problem that Posner also has in explaining the motivations of judges as unique in their value-imposition preference.[i]

  Continue reading “…And then there was Yurok” →

As Posner and Landes note in their article, adjudication is not only about precedent production (which is characterized by market failure) but also dispute resolution. Couldn’t the latter be

ized, such as through private arbitration? The authors see arguments for and against the proposition.

On the “pro-arbitration” side, they argue that, so long as parties could agree on a judge, the judges that were most competent and impartial would receive higher fees,[i] and competition between arbitral centers and judges would ensure optimum levels of judging at minimum costs. Lay judges with expertise might also yield superior factual findings than lay juries without the expertise. (Landes and Posner, 1979, at 252)

The problem with this view is that public intervention would probably still be necessary to enforce the arbitral agreement, and to ensure both parties appoint arbitrators (and don’t drag their feet). Indeed, the problem of foot-dragging makes “arbitration a virtually unusable method of dispute resolution where there is no preexisting contractual or other relationship between the disputants.” (Landes and Posner, 1979, at 246)

The problem could be partially attenuated through randomization of judicial selection or membership in a group with ongoing benefits. In the first case, however, even sub-par judges would be assured an income, so would not maximize output. The latter case is unlikely to characterize all disputes.[ii]

In any case, Landes and Posner seem to ultimately suggest that justice could not be privatized, because of economies of scope in having legal systems that provide both precedent and dispute resolution. (Landes and Posner, 1979, at 240)

Continue reading “Privatize it?” →