Coase, Smith, Justice, and Liberty

The Smithian and classically liberal conception of justice, as explained by Dr. Dan Klein, is, to put it succinctly: don’t mess with other people’s stuff.  The flipside of justice, liberty, is consequently other people not messing with your stuff.  On the surface, this seems like a rather simple ethical basis.  The rule is very clear: if you mess with other people’s stuff, you are committing an injustice and violating their liberty.  But an ethical rule is not valued in its simplicity, but rather its robustness to the real world.

While Smith does regard justice as a sacred virtue, he does carve out exceptions to its enforcement.  There may be times when the strict rules of justice may not or cannot be enforced without a detriment to overall liberty.  In these cases, someone’s stuff has to be messed with.  While this statement may be jarring to the classical liberal, let’s consider an example from modern law and economics.

Let’s consider Ronald Coase’s famous example of the farmer and the rancher.  The farmer raises crops on his land.  The rancher grazes cows nearby.  The rancher’s cows sometimes, accidentally, graze the farmer’s crops that are too close to the fence, either the crops hang over the fence for the cows to eat or the cows stick their heads through the fence (that is, the farmer’s “stuff” is being messed with).  However, if there are restrictions on where the cows can graze, then those restrictions are messing with the rancher’s “stuff” (they are limiting the rancher’s use of his cows).  So now we have a conflict: the use of each person’s “stuff” may conflict with each other, resulting in mutual messing with each other’s stuff.

Who is in the right?  Who is in the wrong?  A simple appeal to the rules of justice cannot solve this: the farmer’s crops are being messed with, yes, but so are the rancher’s cows.  Some rule would be required to address this matter.  That rule would, necessarily, violate the strict rules of justice.

Let’s take, for example, a rule that the farmer has the property right to his crops and any damage must be compensated to him by the rancher.  The rancher’s “stuff” is now being messed with.  He’d need to figure out some way to corral the cows, or limit their grazing, or negotiate some kind of bargain with the farmer…some solution would be acquired.  However, this bargain would constitute a “messing” with the rancher’s stuff since he now has to alter his behavior beyond what he ordinarily would have chosen to do.  Some use of his property is now beyond his control.  We can make a similar argument by giving the property right to the rancher, or even if we say “caveat emptor” and say any crops that spill over the fence can be eaten and any cow over the fence can be shooed away.

While one person’s individual liberty may be decreased (ie, someone is messing with his stuff), overall liberty may increase (ie, there is generally less messing with stuff).  Rules, laws, customs, etc are necessary because they create reliability.  If we reasonably believe a given rule will be enforced, then we can act in a given manner.  If I believe my ownership of my car will be enforced should someone steal it, I am more likely to buy a car.  If I do not believe the ownership would be enforced, I’d be less likely to purchase a car (and/or spend more resources to ensure it doesn’t get stolen).  Just as stable rules can grow the economic pie, stable rules can grow the liberty pie.  Rules that develop to make virtues like justice predictable by all and create stability that allows exchange, production, and general improvement to flourish.  Without predictable rules, the concept of justice may simply become ad hoc and something of a Hobbesian jungle may arise as the costs of production/protection rise and the costs of predation fall.

Some libertarians/anarcho-capitalists get nervous about the implications of Smith’s comments regarding sacrificing individual liberty for overall liberty.  The primary concern I hear is such an argument can be used for an expansion of the state into all manner of things.  While a naive interpretation of Smith could justify such an expansion, I think a closer reading of Smith, especially in the context of his overall writings, suggests that the “overall liberty” criteria are a conflict resolution tool rather than a “behavioral control” tool.

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.

Different Rules for Different Worlds

It’s Christmas Time.  That magical time of year where friends get together, families visit, and, for a little while, all seems well.

But, as sure as Christmas time comes around, we also get economic defenses of Scrooge and calls for cash to be given rather than gifts.  From a mainstream economic point of view, there’s nothing inherently wrong with these articles.  However, they miss a larger point, a point once known to economists, but have since been forgotten (or trivialized): moral rules matter.

Humans, as social creatures, live in two worlds at once (to paraphrase Hayek).  We live in our personal worlds, which have their rules, and we live in the commercial/interpersonal world, which has its own set of rules.  We must move in between these worlds constantly and manage the two rule regimes.  What is appropriate in one world may not be appropriate in the other.

By way of example, imagine if a friend asked you for a ride somewhere.  It’d be frowned upon if you asked him for money (outside gas money or maybe tolls). However, for a taxi to do the same thing, you’d expect to pay and there’d be no impropriety. No one would accuse the taxi driver of inappropriate behavior and no disapprobation levied on him. However, for a friend to make a profit, it’d be inappropriate and he would be saddled with disapprobation (considered a bad friend, etc).  Asking for money would violate the rules in the personal world but not the interpersonal world.  To try to apply the rules of one to the other would be problematic.

We expect people to behave in certain ways.  The cold indifference Scrooge shows toward Cratchit elicits feelings of disapprobation, especially during Christmas.  We expect this time of year to bring about beneficence and we expect employers to treat their employees a certain way.  When the interpersonal rules are applied in this situation, they appear wholly inappropriate, at least within a certain level of propriety.   Further, Scrooge’s transformation at the end of A Christmas Carol is itself praiseworthy.  He becomes benevolent, which is virturous.

I hasten to point out that nothing Scrooge does, either before or after his transformation, is unjust.  Scrooge, at no time, violates any rules of justice: he does no harm to anyone.  But simply because an act is just does not mean it is praiseworthy.  As Adam Smith says, the rules of justice can be obeyed by sitting still and doing nothing; but that behavior is hardly grounds for any approbation.  Justice is a negative virtue; it only affects other people when ignored.  Benevolence and the other virtues are positive, and they can do real good through acting.  While Scrooge was surely just, he was hardly praiseworthy.

Another example of the difference between these two worlds is from cash as a Christmas gift.  Again, from a purely economic point of view, there is hardly anything to object to.  But we are not in the interpersonal world of economics, but rather the personal world, where different rules exist.  One of those rules is: you give gifts to those you love.  Money is unacceptable according to these rules.  Loved ones are expected to exchange thoughtful gifts, not cash.  Violations of those expectations lead to hurt feelings and disapprobation.

One of the things these economic models of gift-giving do not take into account is the moral currency from obeying the rules.  This is likely why an institution that is so inefficient on its face (gift-giving) has remained a tradition for centuries.

Humans are social creatures and we live in multiple worlds at once.  Using a set of behavior from one world as a role-model for the other is a poor choice.  We must consider what makes a person good and just.  And that is the role of moral philosophy.

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.

A Smithian Look at Price-Gouging

As Hurricane Harvey hits Houston, Texas has invoked its price-gouging legislation, preventing prices from rising to meet the new levels of supply and demand.  As usual, lots of ink has been spilled by economists denouncing this legislation (for example, see here, here, and here).  On a recent post, Mark Perry asks: “It’s really not that complicated is it, to understand the adverse consequences of anti-price-gouging laws?”

Part of the issue is the price theory arguments against price-gouging are not complicated, but they are subtle.

I think the other issue is people take the positive analysis of economics and try to impute normative analysis onto it. That prices rise when demand rises/supply falls is neither good nor bad. It just is. Just like the sun rising in the East and setting in the West is neither good nor bad. It just is.

However, people will take this positive and try to make it normative. It is “bad” prices rise and people profit off of the suffering of others. Or it is “good” prices rise and lure in profit-seeking individuals and that increases supply.

These normative imputations get problematic because it is trying to answer a different question than the one originally posted. The question is not “how should people act when disaster strikes” (the normative) but rather “how to allocate needed resources to disaster areas” (the positive). Giving a normative answer to a positive question is neither helpful or insightful.

This is not to say that there is no room for the normative. I think that is an important aspect. Should people raise prices during disasters? Should there be discounts for those in absolute need? I think the answers to these two question is “yes.” I think Adam Smith’s “impartial spectator”  would be pleased to see prices rise in order to attract more goods/services to where they are needed, but also to see prices not rise (a discount) to those in absolute need. Indeed, the impartial spectator may frown if prices are “gouged” for those in the most need.

But does the disapproval of the impartial spectator, (“The heart of every impartial spectator rejects all fellow-feeling with the selfishness of his [the price-gouger’s, in this case] motives,” to use Smith’s words [The Theory of Moral Sentiments, page 78.3]), necessarily imply the need to anti-gouging laws? I’d argue “no.” Punitive legislation, Smith (and I) argue exists to serve justice:

“Resentment seems to have been given us by nature for defense, and for defense only.  It is the safeguard of justice and the security of innocence.  It prompts us to beat off the mischief which is attempted to be done to us, and to retaliate that which is already done; that the offender may be made to repent of his injustice, and that others, through fear of the like punishment, may be terrified from being guilty of the like offense.  It must be reserved therefore for these purposes, nor can the spectator ever go along with it when it is exerted for any other.  But the mere want of the beneficent virtues, though it may disappoint us of the good which might reasonably be expected, neither does, nor attempts to do, any mischief from which we may have occasion to defend ourselves (page 79.4).”

And the violation of justice is injury, that is: “it does real and positive hurt to some particular persons, from motives which are naturally disapproved of (page 79.5).” Since the price-gouger’s actions do no real and positive harm or a person, he cannot be punished: “To oblige him by force [ie, by legislation] to perform what in gratitude he ought to perform, and what every impartial spectator would approve of him performing, would, if possible, be still more improper than his neglecting him to perform it (page 78.3-79.3).”*

In short, the anti-gouging legislation both cause economic problems by creating shortages of much-needed supplies when they are already extremely scarce, but also invoke an injustice upon the society by punishing people, by inflicting harm on people, when no real and positive harm has been done.

*Nota bene: This conversation here revolves around price-gouging in general.  We could carve out all kinds of exceptions here that would allow for punitive legislation, but we are discussing the general case, not specifics.