Thoughts on the Authority of Law

Precious little thought of law & economics is spent focusing on where the authority of law and legislation comes from.  Most economists just assume it to be given: Coase with his “bargaining in the shadow of the law” and even Ostrom with her Commons problem-solving.*  This post serves as a method to get some of my thoughts down.  This is hardly complete or refined.  Therefore, any questions, comments, helpful critiques (especially if sources are attached) are welcomed.

However, there are exceptions to my above criticism.  Three of the best examples of economists exploring this problem are James Buchanan in Limits of Liberty, Adam Smith in Lectures on Jurisprudence, and Frederic Bastiat in The Law.  All three tend to get at the root of the problem: the authority of law and legislation rests on its moral foundations.  As Buchanan writes (page 97-98, emphasis added):

Under what conditions are individuals most likely to adhere to the inherited rules of order, most likely to respect and to honor the assignment of individual rights in being?

This question can only be answered through an evaluation of the existing structure, as if it were the outcome of a current contract, or one that is continuously negotiated. Individuals must ask themselves how their own positions compare with those that they might have expected to secure in a renegotiated contractual settlement. If they accept that their defined positions fall within the limits, they are more likely to comply with existing rules, even in the acknowledged absence of any historical participation. 

Bastiat puts it more succinctly (page 111 of the Liberty Fund edition):

When law and morality contradict each other, the citizen has the cruel alternative of either losing his moral sense or losing his respect for the law. These two evils are of equal consequence, and it would be difficult for a person to choose between them.

In other words, people will respect the law and respect legislation to the extent they comply with morality.  When the law and morality are in conflict, then one has to lose respect for either one or the other.  This would suggest to me that the law’s authority comes from its alignment with morals.

We also tend to see the morality language in the way we discuss legislation.  Unfavorable legislation is often described as “unjust.”  The entire system of police (ie policy enforcement) is called the “justice system.”  These words smack of morality.  We expect legislation (ie policy) to comply with moral preconceptions.  When they do not, we are faced with the Bastiatian conundrum.

Where, then, do morals come from?  I contend, as does Adam Smith in Theory of Moral Sentiments, that morality comes from our interaction with one another (see, for example, Part III).  This is implied in the word “moral,” with its origins coming from the Latin word “mos,” or “custom.”  Morality deals with the rules of human interaction, either in a negative sense (mere justice) or a positive sense (ethics) (for a more in-depth discussion on this point, see Dan Klein’s paper on Smithian justice or Smith’s discussion in Part VII of TMS).  Therefore our sense of morality must come from interacting with one another.

If morality develops from our interactions with one another, and law is the set of rules developed to facilitate dealings, this suggests a tight connection between law and morality.  But how tight?  Can morality and law deviate?  I think the answer is “yes.”  Traditions and superstitions develop in law as a way to enforce and perpetuate morals (Dr Peter Leeson does a lot of interesting research in this field, as does Adam Smith in his Essay on Astronomy).  However, traditions and superstitions tend to be difficult to change when they have cultural inertia behind them (which is a good thing).  Even if there may be some scientific reason to change the transition and superstition, ie the law, it may be difficult to do precisely that (I am reminded of the line by Rick Sanchez in Rick and Morty: “Scientifically, traditions are a stupid thing, Morty!”).  The traditions/superstitions will change once the critical threshold of departure in morality from law occurs.

Turning to the question of incentive and punishment, if my above reasoning is correct, it’d explain why some legislation requires little enforcement/punishment but others require lots of punishment.  For example, a traffic ticket.  Many people complain about traffic tickets but still pay the fine.  And while there is always some violation of the limit (people going 70 in a 65), there are few major offenders.  Low fines are able to deter behavior because there is a strong moral presumption against speeding (ever been cut off in traffic?  How does one react?).  Conversely, something like drug prohibition requires heavy fines and penalties probably because there is a strong moral presumption against drug prohibition (especially in the case of marijuana).  When heavy punishment is required to enforce legislation, it may be a sign of a moral presumption against the legislation.**

What does all this mean?  I don’t know.  It may explain why some legislation/regulation is effective and others are not.  It may explain why development aid never accomplishes its goals.  It may explain, or suppliment, why optimal tariffs, taxation, and the like are impossible to calculate.  Lots of things to consider and feedback is appreciated.

*This comment is in no way a slight upon either economist.  I love and respect both Coase and Ostrom very much.  Their contributions to economic thought are extraordinarily valuable and their respective Nobel Prizes were well-deserved.

**Another possible reason is the natural desire for revenge/recompense from the violation.  For example, punishment of a murderer may be strong because of a large natural desire for revenge for the violation of justice.  However, this is a conversation for jurisprudence, which I will have to pick up at a different time.

Law Written By Experts Is No Law

In a discussion on jurisprudence and hate speech legislation on Facebook, commentator David Benson wrote:

[The arbitrary nature of defining hate speech] why I didn’t trust a novice like myself to come up with the wording. I DO, however, think this issue has gotten to the point where some steps need to be taken.

To understand the difficulty with this statement, we must first understand what, exactly, law’s purpose is.

The purpose of law is to govern human behavior.  This purpose appears to me to be so self-evident and to hardly require evidence.  However, I will explain further.  Any form of law, whether it be issues of justice (ie “don’t mess with other people’s stuff,”) or matters of ethics, seeks to govern human behavior: how we act in given situations, how we interact with each other, how we resolve conflicts, etc.  For example, there is law regarding behavior at a funeral: it is proper to cry or be sad/somber.  To laugh or be merry is generally considered inappropriate.  This is an example of an ethical law governing human behavior.

If the purpose of law is to govern human behavior, it follows that law should be simple.  Complex or complicated law cannot govern as effectively as simple law.  With simple law, it is easy to determine when violations happen, and more importantly, it is easy to determine how to behave.  If law is complicated, then such determinations are far more difficult to make.  And this matter is doubly important for matters of jurisprudence and legislation, where breaking the rule leads to a loss of liberty.  This is why the rules of mere justice, the fundamental arena of jurisprudence and legislation, are the most simple.

Which brings us back to David’s comment I highlighted at the beginning.  If legislation defining hate speech cannot be defined by novices, then it is destined to be bad legislation.  If it cannot be defined by novices, it cannot be understood by novices, and thus it cannot be practiced by novices.  This would leave a wide area of grey between what is punishable and what is not, determined by experts but not by novices.  And, since the vast majority of people are novices in matters of legislation and jurisprudence, such complicated law would naturally harm the vast majority of people, even if it exists for nominally virtuous reasons.

 

Punative Tariffs Are Manifestly Unjust

President Trump likes to call for tariffs to punish foreigners who sell goods to Americans cheaply.  Let’s assume, for the moment, that having American workers work fewer hours for the same standard of living is, indeed, bad; there is real injury caused by this action.  If the goal of a policy is to punish the guilty, tariffs are the exact opposite of what one should do.

As Adam Smith says (Theory of Moral Sentiments, Page 155):

That the innocent, though they may have some connexion or dependency upon the guilty (which, perhaps, they themselves cannot help), should not, upon that account, suffer or be punished for the guilty, is one of the plainest and most obvious rules of justice.

The people buying the goods/services offered cheaply are not the guilty ones.  The foreigners who are offering said products are.  Therefore, to punish buyers through tariffs (which, outside extremely strong assumptions, fall at least partially on buyers) is a violation of “one of the plainest and most obvious rules of justice.”

Protectionism is unjust; plain and simple.

What, Exactly, is Free Trade?

Calls for government intervention into the economy usually focus on some supposed deviation in the free market system: currency manipulation, tariffs by trading partners, taxation, etc.  As the argument goes, because these things deviate from the ideal assumptions of the model, some government intervention (usually in the form of retaliatory or punitive actions against their citizens) becomes necessary.

However, this form of argumentation represents a fundamental misunderstanding on what free trade is and is not, and more importantly the uses of economic models.  This post is an effort to clear up these misconceptions.

Free Trade is Not a Policy

The language surrounding is misleading, both by its advocates and its opponents.  Both coach free trade in terms of policy: “Government needs to do laissez-faire!” or “Government needs to reign in free trade!” or something like that.  Free trade, however, is not a policy.  One does not implement free trade.  A government can take action to promote free trade (reducing tariffs, cutting regulations, etc), but it cannot adopt a free trade policy per se.

Free trade is nothing more than allowing peaceful interactions between consenting individuals.  It requires no active government policy.  In a free trade society, any governmental role would be naturally be limited to a passive role of enforcing contracts and protecting rights (what Jim Buchanan calls the “Protective State“).

Furthermore, since free trade is no policy, it is not dependent upon the assumptions of the economic models to function (I will return to this point in the next section).  None of the arguments for free trade require perfect information, identical principles between buyers and sellers, known utility functions and universal preferences, etc.  Free trade is robust to deviations from the ideal; the system still works because it is a process, not a policy.  Deviations from the ideal, movements away from equilibrium, present opportunities for entrepreneurs to correct issues; the many plan for the many and do not require the guiding hand of government to correct for deviations.

Models as Analysis and as Policy Tools

Models serve two roles: first as a means of analysis and second as a means of directing policy.  In these two roles, the characteristics of the model matter.

An analytical model, which is the proper use of economic models, involve simplifying assumptions in order to explore (or “analyze”) a particular question.  By way of example, let’s look at minimum wage.  The question is: “What effects will minimum wage have?”  Through a set of assumptions contained in the supply and demand price theory model, we can make a pattern prediction: a binding minimum wage will cause a surplus of labor in the market.  We can make this pattern prediction because our model reasonably reflects reality, even though it has many simplifying assumptions which are, to be frank, unrealistic (for example, the model contains the assumption of “all else held equal,” a condition which never happens).  Our analytical models give us the tools to analyze.

Where the problem comes in is using an analytical model to guide policy (both free-market supporters and opponents make this mistake).  To guide policy, you need a descriptive model, not an analytical model.  In other words, you need a model that is descrptive of reality, not one that reflects reality.  When attempting to guide policy, this is where the assumptions of the model become important.  To impose an “optimal tariff,” you need to know the demand and supply curves (something which is unknowable), you need to know indifference curves and von Neumann-Morgenstern utility functions (which are unknowable), true relative prices and equilibrium, etc etc.  To paraphrase Hayek, to use these models to guide policy, you need to assume knowledge that the price system alone can actually give you!  When using models to guide policy, deviations from the model’s assumptions become critical!

Conclusion

Any good scientist needs to know the limitations of the tools he uses.  Price theory models are extremely helpful in providing a lens through which to analyze the world.  They allow us to make pattern predictions and conduct analysis.  What they do not allow us to do is to make point predictions and guide policy with any level of accuracy needed.  Anyone who pretends otherwise is operating under the pretense of knowledge; he is not acting as a scientist, but rather as a charlatan or a fool: a charlatan if he deliberately knows the limits of his models but pretends they are more accurate than they are and a fool is he believes his own models give him the ability to shape policy.

Today’s Quote of the Day…

…is from Page 31 of the Liberty Fund edition of James Buchanan’s 1975 book The Limits of Liberty: Between Anarchy and Leviathan:

In a world without interpersonal conflict, potential or actual, there would, of course, be no need to delineate, to define, to enforce, any set of individual (family) rights, either in the ownership and use of physical things or in terms of behavior with respect to other persons.  I use “conflict” rather than “scarcity” here, because even if all “goods” that might be “economic” should be avaliable in superabundence, conflicts among persons might still arise.  Social strife might still arise in paradise.  Total absense of conflict would seem to be possible only in a setting where individuals are wholly isolated from one another, or in a social setting where no goods are scarce and where all persons agree on the precise set of behavior norms to be adopted and followed by everyone.  In any world that we can imagine, potential interpersonal conflict will be present, and, hence, the need to define and enforce individual rights will exist.

 

Taking Models Too Literally

At Cafe Hayek, Don Boudreaux points us to a wise quote from Milton Friedman.  Below is a comment I left on that post, expanded:

 

In the highly stylized world of models, where information is perfect, markets are costless, where all preferences are known, where government is costless, and things never change, it is trivially easy to come up with exceptions to free trade and free enterprise. Shift a curve here, refuse to count costs there, and boom! a theoretical reason why tariffs or export subsidies can be beneficial.

However, when those stylized assumptions are relaxed, in other words in a more realistic world where information is imperfect, markets have transaction costs, where preferences are revealed, where governments have administration and operation costs, and where things change, these theoretical reasons disappear like a shadow in the sun. Conversely, the case for unilateral free trade becomes stronger, since it is not dependent upon those assumptions the way the other theoretical cases are; free trade is formulated under those assumptions, yes, but it is robust to movements away. Things like optimal tariffs are formulated under those assumptions but are not robust to movements away from those assumptions.

The true test of any theory is not how well it holds up in perfect conditions, or how well does it perform in the circumstances in which it was conceived, but how robust it is to movements away from those idealized conditions.  Economists from Adam Smith to Harold Demsetz and beyond have warned us against these nirvana fallacies.  True knowledge is gained when we stress-test our models and see how robust they are.  Testing this robustness gave us such fields as Public Choice, Law & Economics, Political Economy, Money and Banking, and the like.

Economic models serve a purpose: they are ways of thinking, methods of analyzing phenomena. However, they are not descriptive of reality. They were never meant to be. When basing policy off of those models, the policy-proponents are making a grave mistake: they are moving their models away from the abstract and into the descriptive. In other words, they are taking their models too literally. This literal interpretation of models can be extremely dangerous.

Hard Coase, Soft Coase

Over the course of this semester, I have been working on two research projects which parallel each other very closely.  Both look at water market exchanges (ie, people who buy and sell water), one from a Coasian perspective (ie, how changes in legislation affect markets), and the other from an Ostrom/Ellickson perspective (ie, how social norms and mores affect markets).  Both these papers are being finished up and I will post links to them here, but there is an interesting connection between the two: both forms of bargaining are “bargaining under the shadow of the law.”

“Bargaining under the shadow of the law” typically refers to working within a framework established by a court (eg, how a court determines property rights).  This is the “hard Coase” theorem.  However, “law” need not apply to just courts; indeed, it does not.  There are general rules, or laws, that develop “[From] our continual observations upon the conduct of others,” to help us “form to ourselves certain general rules concerning what is fit and proper either to be done or to be avoided,” (Adam Smith, The Theory of Moral Sentiments, Section III, Chapter IV, Paragraph 9).  These rules are the social norms and customs, what the Romans called mos, or “a guiding rule of life” (see On Duty by Cicero, translated by Benjamin Newton, specifically Newton’s glossary at the end of the book).  These rules, customs, laws govern our behavior and our interactions just as much as legislation does (perhaps even more so) since we face not jail or prison if we violate these rules, but censure, disapprobation, and demerit from our fellow man; extreme cases could result in isolation from the community, a terrible punishment, indeed, given that man is a social creature.  It is these rules, this law, that I refer to as “soft Coase.”

In both the hard Coase and the soft Coase situations, Coase’s arguments about bargaining hold generally true: changes in the law affect how we behave and interact with one another.  This, in turn, affects how we address externalities and other economic behavior.

The Coase/Ostrom/Ellickson look at collective behavior, sprinkled liberally with Alchian/Demsetz insight and Tulluck/Buchanan public choice theory, is an important way of exploring the market process.