law

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Book review: The Moral Economy: Why Good Incentives Are No Substitute for Good Citizens, by Samuel Bowles.

This book has a strange mixture of realism and idealism.

It focuses on two competing models: the standard economics model in which people act in purely self-interested ways, and a more complex model in which people are influenced by context to act either altruistically or selfishly.

The stereotypical example comes from the semi-famous Haifa daycare experiment, where daycare centers started fining parents for being late to pick up children, and the parents responded by being later.

The first half of the book is a somewhat tedious description of ideas that seem almost obvious enough to be classified as common sense. He points out that the economist’s model is a simplification that is useful for some purposes, yet it’s not too hard to find cases where it makes the wrong prediction about how people will respond to incentives.

That happens because society provides weak pressures that produce cooperation under some conditions, and because financial incentives send messages that influence whether people want to cooperate. I.e. the parents appear to have previously felt obligated to be somewhat punctual, but then inferred from the fines that it was ok to be late as long as they paid the price.[*].

The book advocates more realism on this specific issue. But it’s pretty jarring to compare that to the idealistic view the author takes on similar topics, such as acquiring evidence of how people react, or modeling politicians. He treats the Legislator (capitalized like that) as a very objective, well informed, and altruistic philosopher. That model may sometimes be useful, but I’ll bet that, on average, it produces worse predictions about legislators’ behavior than does the economist’s model of a self-interested legislator.

The book becomes more interesting around chapter V, when it analyzes the somewhat paradoxical conclusion that markets sometimes make people more selfish, yet cultures that have more experience with markets tend to cooperate more.

He isn’t able to fully explain that, but he makes some interesting progress. One factor that’s important to focus on is the difference between complete and incomplete contracts. Complete contracts describe everything a buyer might need to know about a product or service. An example of an incomplete contract would be an agreement to hire a lawyer to defend me – I don’t expect the lawyer to specify how good a defense to expect.

Complete contracts enable people to trade without needing to trust the seller, which can lead to highly selfish attitudes. Incomplete contracts lead to the creation of trust between participants, because having frequent transactions depends on some implicit cooperation.

The book ends by promoting the “new” idea that policy ought to aim for making people be good. But it’s unclear who disagrees with that idea. Economists sometimes sound like they disagree, because they often say that policy shouldn’t impose one group’s preferences on another group. But economists are quite willing to observe that people generally prefer cooperation over conflict, and that most people prefer institutions that facilitate cooperation. That’s what the book mostly urges.

The book occasionally hints at wanting governments to legislate preferences in ways that go beyond facilitating cooperation, but doesn’t have much of an argument for doing so.

[*] – The book implies that the increased lateness was an obviously bad result. This seems like a plausible guess. But I find it easy to imagine conditions where the reported results were good (i.e. the parents might benefit from being late more than it costs the teachers to accommodate them).

However, that scenario depends on the fines being high enough for the teachers to prefer the money over punctuality. They appear not to have been consulted, so success at that would have depended on luck. It’s unclear whether the teachers were getting overtime pay when parents were late, or whether the fines benefited only the daycare owner.

Book review: Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, by Charles W. Calomiris, and Stephen H. Haber.

This book start out with some fairly dull theory, then switches to specific histories of banking in several countries with moderately interesting claims about how differences in which interest groups acquired power influenced the stability of banks.

For much of U.S. history, banks were mostly constrained to a single location, due to farmers who feared banks with many branches would shift their lending elsewhere when local crop failures made local farms risky to loan to. Yet comparing to Canada, where seemingly small political differences led to banks with many branches, it seems clear that U.S. banks were more fragile because of those restrictions, and less competition in the U.S. left consumers with less desirable interest rates.

By the 1980s, improved communications eroded farmers’ ability to tie banks to one locale, so political opposition to multi-branch banks vanished, resulting in a big merger spree. The biggest problem with this merger spree was that the regulators who approved the mergers asked for more loans to risky low-income borrowers. As a result, banks (plus Fannie Mae and Freddie Mac) felt compelled to lower their standards for all borrowers (the book doesn’t explain what problems they would have faced if they had used different standards for loans the regulators pressured them to make).

These stories provide a clear and plausible explanation of why the U.S. has a pattern of banking crises that Canada and a few other well-run countries have almost entirely avoided over the past two centuries. But they suggest the U.S. banking crises should have been more unique among mature democracies than was actually the case.

The authors are overly dismissive of problems that don’t fit their narrative. Commenting on the failure of Citibank, Lehman, AIG, etc to sell more equity in early 2008, they say “Why go to the markets to raise new capital when you are confident that the government is going to bail you out?”. It seems likely bankers would have gotten better terms from the market as long as they didn’t wait until the worst part of the crisis. I’m pretty sure they gave little thought to bailouts, and relied instead on overly complacent expectations for housing prices.

The book has a number of asides that seem as important as their main points, such as claims that Britain’s greater ability to borrow money led to its military power, and its increased need for military manpower drove its expansion of the franchise.

Book review: The Rule of the Clan: What an Ancient Form of Social Organization Reveals About the Future of Individual Freedom by Mark S. Weiner.

This book does a good job of explaining how barbaric practices such as feuds and honor killings are integral parts of clan-based systems of dispute resolution, and can’t safely be suppressed without first developing something like the modern rule of law to remove the motives that perpetuate them.

He has a coherent theory of why societies with no effective courts and police need to have kin-based groups be accountable for the actions of their members, which precludes some of the individual rights that we take for granted.

He does a poor job of explaining how this is relevant to modern government. He writes as if anyone who wants governments to exert less power wants to weaken the rule of law and the ability of governments to stop violent disputes. (His comments about modern government are separate enough to not detract much from the rest of the book).

He implies that modern rule of law and rule by clans are the only stable possibilities. He convinced me that it would be hard to create good alternatives to those two options, but not that alternatives are impossible.

To better understand how modern individualism replaced clan-based society, read Fukuyama’s The Origins of Political Order together with this book.

Book review: The Origins of Political Order: From Prehuman Times to the French Revolution, by Francis Fukuyama.

This ambitious attempt to explain the rise of civilization (especially the rule of law) is partly successful.

The most important idea in the book is that the Catholic church (in the Gregorian Reforms) played a critical role in creating important institutions.

The church differed from religions in other cultures in that it was sufficiently organized to influence political policy, but not strong enough to become a state. This lead it to acquire resources by creating rules that enabled people to leave property to the church (often via wills, which hardly existed before then). This turned what had been resources belonging to some abstract group (families or ancestors) into things owned by individuals, and created rules for transferring those resources.

In the process, it also weakened the extended family, which was essential to having a state that impartially promoted the welfare of a society that was larger than a family.

He also provides a moderately good description of China’s earlier partial adoption of something similar in its merit-selected bureaucracy.

I recommend reading the first 7 chapters plus chapter 16. The rest of the book contains more ordinary history, including some not-too-convincing explanations of why northwest Europe did better than the rest of Christianity.

Book review: The Law Market by Erin A. O’Hara and Larry E. Ribstein.

This book describes why it has become easier for parties to a contract to choose which legal system will be applied to their contract, both in terms of the political forces that enabled choice and why it’s good that choice is possible.

The political forces include the ability of some parties to physically leave a jurisdiction if they have inadequate choices about what law will be applied to them. Often enough those parties are employers that legislators want to remain in their jurisdiction.

The benefits include simple things like predictability of contract interpretation when the contract covers things that involve physical locations associated with multiple jurisdictions where there otherwise would be no reliable way to predict which court would assert jurisdiction over disputes. They also include less direct effects of providing incentives for legal systems to improve so as to attract more customers.

The book mostly deals with contracts between corporations, and is much more tentative about advocating choice of law for individuals.

The book provides examples showing that as with most markets, competition for law produces better law. But is also mentions more questionable results, such as competition for most effective tax shelters or the easiest terms for divorce (for divorce, the book suggests those who want divorce to be hard should try to arrange contracts that allocate assets in a way that discourages divorce; it would be harder for easy-divorce states to justify ignoring those contracts). There’s also a risk that the competition will sometimes benefit lawyers rather than their clients, as clients often rely on lawyers to decide which legal system to use without having a practical way to check who benefits from some of those choices.

The book is often dull reading because it often describes case law to explain quirks of current law that will be of interest to few non-lawyers.

One part that disappointed me was the assumption that the choice of jurisdiction should dictate the physical location in which plaintiffs must argue their case (the travel costs can make some lawsuits unpractical to a consumer suing a company if the company decides the location at which a suit is argued). Why are we trapped in a set of rules that requires travel to a possibly distant court when we have technology that provides reasonable remote communications?

Jury Incentives

The jury system in the U.S. originated in times when most communities were small enough that jurors were likely to feel close enough to defendants to have tribal/friendship/etc desires not to convict someone without cause, and to be sufficiently at risk from a defendant’s future crimes to take some care not to acquit the guilty. But today, those motives have broken down in many urban and suburban places, and trials are often decided by those who are too dumb to get off jury duty.
I don’t have good ideas for ensuring that jurors are chosen so that they feel like they’re part of the same small community as the defendant, so I’m hoping instead to create new incentives for jurors to care about verdicts.
Simply increasing the pay for serving on a jury would help to avoid the problem of jurors being selected for low intelligence, but I can’t tell how much of the problem that would solve.
I propose a additional ways of rewarding jurors based on results. If the jurors acquit, the jurors could get some large payment in 5 or 10 years if the defendant commits no crimes during that time, but no further payment if the defendant commits a crime. If the jurors convict, the jurors could get some large payment in 5 or 10 years unless the defendant has been exonerated or the conviction reversed on appeal.
The size of the payments would need to be carefully calibrated so that the average award is the same for juries that convict as it is for those that acquit.
Since it would take forever for the government to work out all the details needed to translate these ideas into a fair and predictable system, I’m wondering whether a private charity could implement them. Presumably there are significant legal obstacles to many kinds of payments to jurors, since it’s easy for such payments to be intended to serve the interests of one party to the trial. I can’t tell whether the relevant laws are broad enough to prohibit desirable incentives, or if so whether it’s feasible to relax those restrictions.

Voluntary Slavery

Jeff Hummel recently gave an interesting talk on the subject of how the law should treat a contract that involves one person becoming enslaved to another. The title made the talk sound like a quaint subject of little importance to present day politics, and I attended because Hummel has a reputation for being interesting, not due to the title of the talk. But his arguments were designed to apply not just to the status that was outlawed by the 13th amendment, but also to military service (not just the draft, but any type where the soldier can’t quit at will) and marriage.
Hummel argues that instead of asking whether slavery ought to be illegal, we should ask what a legal system ought to do when presented with a dispute between two people over enforcement of a contract requiring slavery.
Some simplistic notions of contracts assume that valid contracts should always be honored and enforced at all costs, but the term efficient breach describes exceptions to that rule (if you’re unfamiliar with this subject, I recommend David Friedman’s book Law’s Order as valuable background to this post).
In the distant past, people who failed to fulfill contracts and had insufficient assets to compensate were often put in debtors prisons. That was generally abolished around the time that traditional slavery was abolished, and replaced with a more forgiving bankruptcy procedure. Hummel suggests that this wasn’t a random coincidence, and that a slave breaching his promise to his master ought to be treated like most other breaches of contracts. If bankruptcy is the appropriate worst case result of a breach of contract, then the same reasoning ought to imply that bankruptcy is the worst result a legal system should impose on a person who reneges on a promise to be a slave.
Hummel noted that the change from debtors prisons to bankruptcy happened around the time that the industrial revolution took off, and suggested that we should wonder whether the timing implies that we became wealthy enough that we could afford to abolish debtors prisons, and/or whether the change helped to cause the industrial revolution. Neither he nor I have a good argument for or against those possibilities.
If this rule were applied to military service, unpopular wars would become harder to fight, as many more soldiers would quit the military. As far as I can tell, peer pressure kept soldiers fighting in any war I think they ought to have fought, so I think this would be a clear improvement.
The talk ended with some disagreement between Hummel and some audience members about what should happen if people want to have a legal system that provides harsher penalties for breach of contract (assume for simplicity that they’re forming a new country in order to do this). Hummel disapproved of this, but it wasn’t clear whether he was doing more than just predicting nobody would want this. I think he should have once again rephrased the question in terms of what existing legal systems should do about such a new legal system. Military/police action to stop the new legal system seems excessive. Social pressure for it to change seems desirable. It was unclear whether anyone there had an opinion about intermediate responses such as economic boycotts, or whether the apparent disagreement was just posturing.

Shaming versus Prison

I’m wondering why the use of shame and humiliation isn’t used more often as an alternative to jail sentences.
The most plausible objection I’ve found seems to be that there are other alternatives that are better than those two choices. But even if that’s true, there are enough doubts about public acceptance of those possibly better alternatives that it seems odd not to give some encouragement to an alternative to prison that seems to have some political feasibility.

Book review: Synthetic Worlds: The Business and Culture of Online Games by Edward Castronova
Castranova is one of the first intellectuals to notice the importance of new societies that are being created in cyberspace. Much of this book is devoted to (sometimes redundant) explanations of why they are more than just games.
Around the middle of the book, he switches from describing a typical world for the benefit of those who doubt the importance of virtual worlds to describing how to design good worlds. This is where I started to find the book interesting and the questions thought-provoking, but the answers often unconvincing.
His most important discussion is about the near-anarchy that prevails in most virtual societies. He attributes this partly to the “Customer Service State” of for-profit world builders who are too cheap to pay for as much government as he assumes citizens want. But he seems to believe this is too inevitable to be worth much analysis. His more interesting question is why don’t the world’s citizens organize a government of their own? His answer is that citizens don’t have enough power over each other to enforce laws they might create. But he doesn’t convince me this is true (are boycotts useless? is repeatedly killing an outlaw not punishment?), nor does he explain why the designer face little pressure to change the design of the world to make it easier to enforce laws (what would happen if the world were designed to enable one person to effectively banish a person she doesn’t like from her view of the world?). I suspect part of the answer is that there’s less demand for government than he expects. I see some hints that his desire for government in cyberspace is a simple reflection of his desire for government in the real world. Yet I’d expect the analysis of whether government is desirable to be nontrivially affected by such differences as whether poverty and death cause much harm.
He claims “A fun economy should have property, theft, and jail too”, but only gives a few cryptic hints about what theft and jail add to an economy.
He claims “there should be no goods which never depreciate”, and partly justifies that by pointing to some benefits of a continuing need to produce new goods, but leaves me wondering why the rule should be universal or even close to universal.
He hints at the desirability of creating p2p virtual societies so that control over them can be decentralized instead of being determined by a corporate owner, but I’m disappointed that he fails to analyze whether this is practical.
One insight I liked was this description of how to deal with the desire for everyone to have high status: “How do you make a world in which everyone is in the top 10 percent? The answer: AI.”
He has a disturbing idea about the military uses of virtual worlds – an aggressor need not be hampered by unfamiliarity with the land he’s invading if he has unlimited ability to practice the invasion in simulation.
He has some ideas about how virtual worlds might help deal with threats such as grey goo, but doesn’t develop them as well as I would like. His ideas on using virtual worlds to make AIs more friendly appear to anthropomorphise AI in a rather naive and dangerous manner.

Net Neutrality

I’ve been wondering for a while whether I should blog about the net neutrality legislation that is being debated. At last, Brad Templeton has come up with a good analysis which covers much of what I wanted to say about why the belief that net neutrality is a good rule is not sufficient to tell us whether we should try to have that written into law.
Lessig’s book The Future of Ideas does a good job of explaining why net neutrality is a desirable rule – a commons can be a good thing, and net neutrality is a rule that’s important to keeping the internet functioning as a commons.
If we’re going to hope that legislation can be useful at protecting commons, then I suspect we need a concept of the commons that contains as much of a standardized bundle of rules as most versions of the concept of property rights contains. That way we could ask legislators to just apply this standardized bundle of rules to each new commons we want it to protect, without giving special interests much of a chance to write the details in such a way as to protect their special situation.
Unfortunately, I can’t think of a good set of rules which would be as intuitive as the rules which apply property rights to physical objects. I suspect that the best we can hope for is a set of rules like those describing what you own when you buy shares of corporate stock. We might even end up with rules as messy as those use for patents, in which case it’s unclear whether it would be worth the effort.