Remarks from North

November 30, 2009 - Leave a Response

HT: Peter Klein

Back to the Future of L&E

November 7, 2009 - Leave a Response

I have only just read Henry Manne and Josh Wright’s superlative assessment of the future of law and economics. The progressive complexity of research within the discipline has generated a disparity between those who model and theorize and those that prosecute and adjudicate–a gap which the subject first victoriously merged. Manne sagaciously describes the original amalgamation as having removed legal education “out of the doldrums of anti-intellectualism and mechanical thinking about law” by harnessing “the power of economics …to resolve what appeared to be purely normative issues in a positive way.”

Director, Alchian, Coase, Williamson, Posner, Easterbrook, Calabresi, Stigler, and Demsetz corroborated the crossroads of legal and economic research, elevating the convergence to a level of respect and consequence. But now new challenges arise. Wright anticipates three possible results:

(1) Economists will do work that is detached from legal institutions and law and therefore less relevant (the “detachment” problem);

(2) L&E scholars will do work that is very relevant, and maybe even very good, but legal scholars won’t know about it or care about it because of the “translation” issues associated with the formal mathematics will prevent it from being retailed to broader audiences, (the “retail” problem);

(3) Informal L&E will be “crowded out” of the law school landscape as it declines in value, (the “crowding out” problem) and as formal scholarship moves away from law schools toward economics departments, traditional subjects of L&E scholarship will be left to less qualified scholars (the “I know STATA and can get any regression through law review editors with a catchy enough title” problem).

From my perspective, the most pressing of these problems is #2, what I’ve described here as the “the retail problem.” The problem of economists ignoring the law and legal institutions is no doubt real and significant, as is the problem of legal scholars without sufficient training publishing empirical work (there is more “bad” empirical scholarship than modeling as statistical software packages lower the cost of entry for empirics but less so for modeling). Bad work will always be a problem and I suspect always has been and always will be. Perhaps the increase in formalization has made bad work of both types more or less likely. I suspect it has allowed room for more bad empirical work than would exist otherwise, but I’m not sure how large this effect is.

Given such qualified predictions, what does this mean for new institutional economics & its sphere of influence? Will the recent acknowledgment of Williamson and Ostrom change the scope of the aforementioned outcomes in any significant way so as to redirect the subject’s course?

Victory for New Institutionalism

October 17, 2009 - Leave a Response

Much of the ‘blogosphere’ erupted with praise at the announcement of this year’s Nobel Laureates for economics, & rightly so! Elinor Ostrom & Oliver Williamson are much-deserving recipients. From the excitement, outstanding commentary has emerged, shining new light on the subdiscipline of new institutional economics. Mario Rizzo appropriately stated earlier this week:

In this case the Nobel Committee has brought extraordinary work to the attention of an economics discipline that has become excessively specialized and, perhaps increasingly irrelevant to the real world.

As for explanations regarding the new laureates’ distinct works, Organization and Markets has, in essence, devoted the week to blogging on such affairs, & Alex Tabarrok of Marginal Revolution added an especially thoughtful post on Williamson’s contributions.

Here’s Ostrom, via Free Exchange, delivering a short lecture on the power of institutions & economic governance:

On the future of new institutionalism, Josh Wright noted that there are still others entitled to honorary recognition. I am hopeful their moments will come, & for the time being, delighted for the ambition acknowledgment of Ostrom & Williamson might inspire.

A Stunning Paradox

October 9, 2009 - One Response

Five days ago, Roger Koppl shared his Politics in One Lesson:

It is better to signal goodness than to do good. That’s it. That’s the lesson. Democratic politics is mostly about signals not substance.

Barack Obama, a dedicated student, has executed this lesson masterfully–proving himself to be “temperamentally but not substantively different from his predecessor.” It’s a stunning paradox that obtaining a monopoly on violence can merit an award for peace.

The pronouncement is also ironic given that, in 1986, James Buchanan received the Nobel Prize in economics for “his development of the contractual & constitutional bases for the theory of economic & political decision making,” work which he considered “Politics without romance.”

From Myth to Fact in Legal History

August 29, 2009 - Leave a Response

With vivid detail, Mark Weiner of the Legal History Blog recounts his discussion with Chair of the Institute of Archeology in Reykjavík, Adolf Fri∂rickson. Weiner’s entry is a superb reminder of the importance of legal scholars interacting with others outside the discipline to gain insights that they might otherwise miss.

As Douglass North insists, “Incorporating institutions into history allows us to tell a much better story than we otherwise could.” Indeed, one can hardly understand the past without being sensitive to its guiding institutions, & necessary to achieve such understanding is cross-disciplinary study & participation. The following passage reveals how valuable this interaction can be toward comprehending the path dependent character of societies:

Science historicizes with a hammer. …In time, that hammer will fundamentally transform the landscape of legal memory here, perhaps severing many of the bands of vernacular legal remembrance which for generations have linked Icelanders to their environment. The landscape of Iceland will be emptied of ancient legal memories, to be replaced by facts ascertained by specialists. Icelanders’ relation to their land will be mediated by the knowledge of an international class of academic historians & social scientists. There is no need to be nostalgic for the world of popular legal history that will vanish. But it will be important in the distant future to remember that it has. It also will be important to understand that science is not acting in an intellectual vacuum. Just as today we view the work of the nineteenth-century Archeological Society within the context of an Icelandic nationalism that partook of a larger European moment, so too the transformation of popular legal memory in Iceland is but one component of the engine of economic & political integration of contemporary Europe.

A Reading List on NIE

August 16, 2009 - Leave a Response

The Ronald Coase Institute has a fine list of readings on new institutional economics. Among its suggestions are works of Alchian, Coase, North, Olson, & Williamson. The index also includes Hayek’s “The Use of Knowledge in Society” & Tullock’s “The Transitional Gains Trap.” Interestingly, however, it omits The Rise & Decline of Nations, a critical title from Mancur Olson, as well as much of the literature distinctly relevant for law & economics, such as that presented by Gary Becker.

UPDATE: The International Society for New Institutional Economics has another comprehensive list on the subject.

With All Due Respect

August 14, 2009 - One Response

Greg Mankiw agrees with Hal Varian that “the sexy job in the next 10 years will be statisticians.” It’s difficult not to snicker that two economists are speculating the most lucrative profession a decade in advance. All the more difficult is the suppression of laughter as one acknowledges the comical irony of their consensus–that of statistics.

With all due respect to Varian & Mankiw for their monumental contributions to economics, Robert Kaplan makes a far more compelling case, suggesting the single most essential job for the future will culminate in the discipline of geopolitics. If Kaplan is correct, it will be especially interesting to see how law & economics recognizes this shift.

Venture Law

July 30, 2009 - Leave a Response

At Let A Thousand Nations Bloom, Mike Gibson writes a perfect sentence:

Rules are a form of technology. But unlike iPhones, a set of rules is not subject to the constraints of scarcity. In fact, they break them. So not only should we aim to spread superior rule sets–since we lose nothing in the spreading–we should also try to innovate better rule sets. & faster. We need a Silicon Valley for innovating rules.

Monitoring as a Virtue

July 27, 2009 - Leave a Response

Through a public choice approach to authoritarian law, Bruce Benson emphasizes the hazards that may result from inappropriately structured monitoring systems, particularly those defined by high cohesiveness & low norms:

Peers can be a source of monitoring. Most governmental institutions have established self-monitoring systems & have actually discouraged (& in some cases even prevented) monitoring from external sources. Police departments have their internal affairs divisions, for example, & court systems have judicial review boards. But such monitoring is not likely to be very effective. No matter what the goal of a government official might be, he has strong incentives not to expose corruption or inefficiencies within his governmental unit.

Today at Unclaimed Territory, Glenn Greenwald befittingly examines recent interaction between TARP’s Special Inspector General, Neil Barofsky, & officials in the Treasury Department. Since Barofsky issued an approximation of the risk inherent in bank bailouts for taxpayers, officials are disgruntled by Barofsky’s unfettered commitment for his duty, despite whether it is politically affable.

Continuing from the previous excerpt, Bruce Benson recognizes:

It is not surprising, therefore, to find that in the few instances in which an official has reported corruption he has generally been ostracized by his colleagues & superiors, denied promotions, & ultimately forced to resign.

Indeed, in the same post, Greenwald points to an article indicating that officials have withheld documents from Barofsky & sought a ruling from the Justice Department to restrict his independence.

Barofsky’s obstinacy is an exception to the rule, but the recent petition submitted by economists in support of preserving the independence of the Federal Reserve suggests there are some who believe otherwise. Nevertheless, clinging to autonomy as a sufficient mechanism for objective decision making is futile in a politicized framework. There is simply too much impetus for collusion. Without reserve, Robert Higgs properly exposes the petitioners’ wishful thinking:

All in all, the economists’ petition reflects the astonishing political naïvité & historical myopia that now characterize the top echelon of the mainstream economics profession.

In the face of great adversity, Barofsky’s devotion to transparency & accountability is admirable precisely because it cannot be expected. Rather than signing perfunctory requests for unrealizable independence, economists would do well to redirect their attention toward principal-agent models — seeking to understand functions that facilitate the disclosure &, most importantly, prevention of misconduct.

Paul Romer Supports a Cambrian Explosion in Government

July 23, 2009 - Leave a Response

Paul Romer begins with fundamental questions, such as:

What’s the underlining dynamic of rules? Why do rules sometimes get better in a way that makes everyone better off, & why do rules sometimes trap us in a way that seems so harmful to all?

He acknowledges the crucial requirements for growth in markets, including new entry, copying, & reallocation, then contends that the same conditions must exist in government in order that society may progress. Of course, these ideas are not new (see here, here, & here), but Romer is merely remaining true to the theory by “entering, copying, & reallocating” the concepts offered by the aforementioned advocates.

The talk is profoundly interesting throughout, but the most vital insights can be seen in this clip:

(access the full presentation here)

What’s more, it appears The Economist recognizes the merits of these proposals. As it recently reminisced:

There is no perfect model of government: it is America’s genius to have 50 public-policy laboratories competing to find out what works best—just as it is the relentless competition of clever new firms from Portland to Pittsburgh that will pull the country out of its current gloom.

It is extremely unfortunate that policymakers no longer approach decision making in this manner (consider the aggressive actions of the Obama administration to implement nationwide health care reform & its absolute lack of regard for experimentation at the state level). It makes little sense to push a “one size fits all” agenda in such a diverse & dynamic world.

Unfavorably, the theory does include an element of social engineering, & history has displayed grievous consequences for such a fragile process when accessed by evildoers. Therefore, careful consideration of implementation will involve an extensive analysis of citizens’ ability to exit.

With all this said, it is a pleasure to see such ideas reaching larger audiences. Romer has considerable influence in the field of economics; only time will tell if people accept his reasoning as luminary or reject it as lunacy–even as pundits claim that the world is on the verge of global governance, I certainly have great hope for the former.

UPDATE: Romer is so confident in his ideas that he has resigned from his academic position at Stanford & will proceed to persuade nations to adopt this process of innovation.