Getting Incentives Right by Cooter and Porat

This is a very good book, which milks insights out of two dead-ish fields–torts and contracts–and one that has never come to life–restitution. I’m impressed by the creativity of the authors. My favorite of their many ideas is “anti-insurance”–where two contract parties agree that if the promisor breaches, he must pay damages to a third party (who pays for the privilege) rather than to the promisee. This mechanism prevents the promisee from relying excessively on performance while preserving the promisor’s incentive not to breach unless efficient to do so. It’s called anti-insurance because it eliminates the promisee’s right to damages (a kind of insurance) in case of breach.

Originalism class 8: accounting for change

Will argues that the distinction between sense and reference rescues originalism from the charge that it can’t account for change. This strikes me as an interesting but odd argument. Odd because some defenders of originalism tout it precisely because it cannot account for change. If change is necessary, then Article V (or, as Will cheerfully observes, revolution) provides the mechanism.

Moreover, one of the chief normative justifications for originalism is that it binds judges. In making this argument, Scalia cites the “reference” of the cruel and unusual punishment clause–the practice of capital punishment at the time shows that the ratifiers could not have been thinking about (“referring to”) the death penalty when they wrote down that clause. Thus, we know that the death penalty is not cruel and unusual. I don’t think Scalia made a philosophical mistake: the reference is obviously relevant when we are trying to figure out sense (or the “test,” as Will puts it) even if it does not exhaust the meaning. If following Will, we agree that reference should be discounted or ignored, then originalism loses some of its determinateness. Indeed, I don’t see the founding-era “sense” of “cruel and unusual” as being any different from what non-originalists think it should mean.

Well maybe this doesn’t matter, and if it doesn’t, the dispute between originalists and non-originalists reduces almost to a question of what rhetorical flourishes we should ask supreme court justices to attach to their opinions. I say “almost” because some modern constitutional rights (for example, abortion rights) are impossible to reconcile with the sense of any provision in the Constitution. Or take the commerce clause. So, in the end, I don’t think the sense/reference argument–which is really just an argument that we give less weight to founding-era understandings than we might otherwise–saves originalism from its inability to account for change. I think Will’s argument is rather simply that originalism requires interpreters to interpret reasonably rather than unreasonably, and at least on that issue we find common ground. But I remain puzzled why, if Will believes that constitutional change can occur through revolution, it can’t occur through “mini-revolutions,” like Ackerman’s moments or even ordinary political evolution that results in new constitutional norms but does not repudiate the existing system altogether.

 

The bitcoin paradox

The implosion of Mt. Gox exposes a paradox about bitcoin, which I have been groping for in some writings. Assume that the bitcoin software works perfectly (though there is some question about this) or can be made to work perfectly (as advocates argue). Bitcoin still has a problem with the “joints”–the gap between the network itself and the ordinary (non-expert) users without which it could never be more than a marginal phenomenon. Ordinary people will need to rely on institutions–exchanges like Mt. Gox and other services–and they will not rely on them unless they can trust them. But, unlike bitcoin itself, these institutions are run by human beings who can make mistakes or engage in fraud. Hence the need for regulation. Thus, bitcoin will prosper only if it is integrated into the regulatory infrastructure, but that means that it cannot operate as a decentralized currency outside of government control. Yet it is that feature that makes bitcoin so attractive to its most ardent supporters. I expect that legitimate investors and merchants who may benefit from it will push the government to normalize bitcoin by regulating the intermediary bitcoin institutions, at which point it will no longer be an autonomous currency but just a useful piece of software.

N.B.: journalists reflexively describe bitcoin as a means of transferring value without using an intermediary, but for ordinary consumers that is the case only in the sense that it is true for currency as well. You could put a bunch of dollars into a wheelbarrow and wheel them to the store. Banks exist because this is impractical, and in the same way bitcoin intermediaries like Mt. Gox exist because it is impractical for most people to wheel around bitcoins on their own.

Ted Eisenberg

Some revolutions take place with a bang. The empirical revolution in legal studies–and by this I mean rigorous data analysis–was hardly perceptible at first but now empirical work is everywhere. Much of the most interesting work being done right now in the legal academy–in such diverse fields as civil procedure, bankruptcy, international law, and constitutional law– reflects the rigorous statistical methods that Ted championed. At least 5 members of my faculty are trained in statistical methods, and several others do statistical work via collaborations. Twenty years ago hardly anyone did. Ted provided important institutional support for empirical legal scholarship but, most important, served as a model for those who followed him. I’m not sure he received sufficient recognition for his important methodological contributions to legal scholarship in his lifetime. Our paths crossed only a few times but each time it was terrifically rewarding for me. He will be sorely missed.

The Empty Call for Benefit-Cost Analysis in Financial Regulation by Jeffrey Gordon

Jeffrey Gordon has posted a paper arguing that applying cost-benefit analysis to financial regulation is a “serious category mistake.” He makes the arresting claim that CBA works best for the real economy, which is governed by the laws of chemistry and physics, but not for the financial economy, which is a “constructed system.” The bulk of the paper is devoted to showing the law of unintended consequences in action. Rules developed in the 1970s to permit money market mutual funds ended up harming S&Ls, which could not compete for funds, with the result that they were deregulated, whereupon they self-destructed. Etc.

Gordon is strongest in showing the sheer unpredictability of financial regulation. But is this problem worse than in other areas of regulation? Perhaps. Possibly connected to the idea that the financial economy is a “constructed system,” arbitrage seems to be a great deal easier in the financial world–limited only by imagination and computer power–than in the real world, where it can be hard to retool factories and move power plants. Still, I remain optimistic. Gordon’s is a nice companion piece to Coates’ paper, which I discussed here.

Law professor mentions in the New York Times

law prof mentionsAt The Monkey Cage, James Fearon checked to see whether political science has become increasingly relevant to public debate, as measured by the number of mentions in the New York Times. It has. The trend for law professors (I searched for “law professor” or “professor of law”, but the trend is similar for “law professor”-only searches as well) is even stronger. You can read his post for the various caveats–he’s the social scientist, not me.

What Courses Should Law Students* Take?

harvard pollThis image is from a paper by Fried, Coates, and Spier. They surveyed employers of Harvard Law School alumni, and found that employers believe law students should take accounting and corporate finance above all (5 is extremely useful for an associate to have taken; 1 is not at all useful)–even students who go into litigation. This chimes with my experience. I tell students that they should take as many finance-related courses as possible, including advanced courses in the business school. Math-anxious law students normally shy away from classes like these, only to find that they are expected to understand what a collateralized debt obligation or credit default swap is on the first day of practice. And, unlike the case of, say, antitrust, a good understanding of finance is not something one can pick up from practice. One might learn to fake it, but one needs a deep understanding. Every other big case these days seems to have a large finance component, and lawyers who are comfortable with finance can contribute more than those who aren’t.

*As several people rightly pointed out, law students who plan to practice in a large law firm in New York, Chicago, or other big city.

 

Originalism class 7: the evolving constitution

We read papers by Bruce Ackerman, David Strauss, and Jeremy Waldron. I was familiar with this work, but rereading these articles after the originalism pieces, it was easier to appreciate Ackerman’s argument that common-law constitutionalism doesn’t come to terms with the role of popular sovereignty in American political culture. Who ever talks about the common law anymore? Or of great common-law judges? But then Ackerman’s “originalism,” according to which public deliberation takes the place of the Article V process, founders on ambiguity as to what counts as an amendment. I tend to think that the justices implement their ideological preferences subject to some real but hard-to-specify institutional constraints about which they are (sometimes) willing to hear argument, above all precedent. If that is common-law constitutionalism, I suppose I’m on board.

But I prefer Waldron’s view that judicial review should be junked altogether, a view that has the happy consequence of making it unnecessary to take an interpretive stance toward the text. Some students thought that under such an approach, rights would no longer be protected, but it is plain that Congress and state legislatures do far more to protect rights than the Court does. Alas, Waldron’s position is as remote from American reality as Mars. For we could add to the four empirical premises of his argument (1–democracy, 2–responsible judiciary, 3–people care about rights, 4–people have good faith disagreements about rights), a fifth: 5–people think courts should resolve those disagreements.

Offsetting Benefits

Ariel Porat and I have posted a new paper to SSRN, which discusses how courts should determine damages when a wrongful act that harms someone also creates a benefit. Consider two examples:

  • A driver causes an accident that injures a pedestrian who then writes a bestseller that details her recovery.  Should damages equal medical  expenses and the like, or should the court offset the royalties, which, after all, would not have been generated but for the accident?
  • A driver causes an accident in the course of swerving to avoid another pedestrian or while rushing an injured person to the hospital. Should the gains to the third party be offset from the damages the driver owes to the victim?

These are not easy questions, and courts give inconsistent answers. We argue that if one focuses on the social costs of the behavior in question, it will often be appropriate to net out the benefits. However, complex problems of causation, measurement, and related issues often suggest that the general bias against offsetting benefits in the law is justified.

Voting Squared: Quadratic Voting in Democratic Politics

squareGlen Weyl and I have posted a revised draft of Voting Squared on SSRN. We argue that quadratic voting can and should play a role in democratic decisionmaking.

Quadratic voting is a voting procedure where people are allowed to buy votes for or against a proposal (or candidate) by paying the square of the number of votes they cast (e.g., 3 votes cost $9). The votes are totaled up and the majority prevails. Quadratic voting enables people with strong interests in an outcome to exert influence in proportion to the strength of their interest, so a passionate numerical minority of voters may be able to outvote an indifferent majority. Weyl shows  in another paper that with a sufficiently large population (say, a few dozen), a proposal will win a quadratic vote if and only if the aggregate gains to the winners exceed the aggregate losses to the losers in willingness-to-pay terms.

The main point of our joint paper is that conventional voting rules (for example, one-person-one-vote with majority rule) do a very bad job because they provide people with no way to exert influence on outcomes in proportion to the intensity of the effect of those outcomes on their well-being. This leads to the familiar tyranny-of-the-majority problem. We then discuss all the ways that have been developed to address this problem–judicial review, cost-benefit analysis, supermajority rule, and so on–and show that they do worse than quadratic voting would if it were implemented.

Finally, we address the objections to quadratic voting for democratic politics, including:

  • It would favor the rich.
  • It would violate a taboo against vote-buying.
  • It would lead to political instability.

We show that these objections are mistaken.

Does Regulation Kill Jobs?

This book, edited by Cary Coglianese, Adam Finkel, and Christopher Carrigan, is out. My copy arrived and I have been paging through it. I became interested in this topic several years ago, and wrote a paper with Jonathan Masur arguing that regulators should monetize the expected costs from job loss caused by proposed regulations when they conduct cost-benefit analyses. Agencies have never done this, perhaps because in standard economic models, a job loss is not actually a social cost–the unemployed worker just gets another job, or capital shifts to a less regulated sector of the economy where new people are hired. But recent empirical work suggested that the social costs of a job loss could be high–in the neighborhood of $100,000–because human capital is destroyed, among other effects.

So we wrote this paper and were subsequently invited to participate in this conference, where a very strong group of people delivered papers collected in this book. Many papers dealt with the important but age-old question of whether regulation itself destroys jobs (maybe). I was more interested in whether people thought it would make sense for regulators to treat job loss as a cost in cost-benefit analysis . It looks like a maybe-to-yes with a great deal of cautious skepticism. One worry, which is a real one, is that agencies just can’t handle it. Agencies aren’t very rigorous in their existing cost-benefit methodology, and requiring them to look at job-loss effects may be too much. Still, I hope to see some experimentation in government. OIRA asked for comments on this topic a while back; I don’t know if anything came of it. There will be resistance from people who fear that our approach would reduce the amount of regulation.

Class 6: reasons for being an originalist

Will’s position on the role of normative arguments in the debate is unclear. He seems to think that they play some role, but what exactly? If the “conceptual” argument for originalism is strong, are the normative issues irrelevant? Are they some kind of tie-breaker? I would like to know more.

Let us turn to the conceptual argument. Will likes Alexander’s and Lawson’s argument that courts are supposed to enforce the Constitution, and so they need to interpret the Constitution so that they know what they are trying to enforce, and interpreting the Constitution means figuring out what the original understanding was. But this is merely a semantic argument. Alexander, Lawson, and Will just define “Constitution” to mean “the text” rather than the set of norms that structure and restrict the government. That’s like saying that antitrust law is the Sherman Act rather than the body of norms that courts have created under the authority of that Act. This statement is either plainly wrong or based on idiosyncratic definitions.

Steve Sachs’ argument is more sophisticated. Sachs is a positivist and he believes that, as a purely empirical matter, we Americans believe that our constitutional law consists of the original understanding, and any legal norms that appear to deviate it are invalid unless they can be derived from continuity rules that existed at the founding. If that’s what we believe, that’s the law, and if the justices have a duty to obey the law, then they should be originalists.

Sachs does not actually cite any evidence about Americans’ beliefs, and for this reason stops short of claiming that originalism is right. Will does think that such evidence exists. Yet Americans seem to think that they have constitutional rights that protect all sorts of things that are not part of the original understanding. Will thinks that if forced to confront these inconsistencies, people would choose the original understanding over their favorite rights, just as people accept legal judgments about statutes and common law that turn out to violate strongly held moral intuitions about what the law is or should be. My view is that people continue to accept the authority of the Constitution and the Supreme Court precisely because the Court has recognized popular rights. In Sachs’ terms, our “continuity rule” recognizes the power of the Supreme Court to effectuate “amendments” to the text under certain conditions. I would add that it recognizes the authority of the other branches to do so as well.

If Will’s position has any force, it derives from the fact that the public does seem to venerate the 1789 text and the founding generation; and, moreover, that Supreme Court justices do not openly acknowledge that they have the power to amend the text on their own. I have two responses:

First, there is an important ceremonial aspect to our political and legal culture. Common law judges also say that they “find” law rather than “make” law, even though all sophisticated observers know that the opposite is true. Justice Roberts says that he calls balls and strikes, and again no sophisticated person believes him. When Justice Breyer says that he enforces the “spirit” of the 1789 text rather than that he makes pragmatic judgments or enforces precedents (though he says that also), he is giving a ceremonial bow to the founders, and not committing himself to the original understanding. (The ceremony is a strong, persistent, but strange part of our political culture, and is temporarily suspended when we remember that many founders were slave owners but otherwise remains in full force.)

Second, I think Will gets our legal culture wrong. Originalism is a minority position supported by only two justices on the Supreme Court who practice it inconsistently, and hardly any others throughout our entire history. Continuity-to-the-last-generally-accepted-change-in-constitutional-norms is not the same thing as continuity-to-the-founding. Numerous justices and judges–Breyer is just one–have criticized originalism in the clearest of terms and have suffered no adverse consequences, no blast of public outrage of the sort that would occur if a justice said (to use Sachs’ examples) that we are bound by the French constitution or Klingon law or the Articles of Confederation. When President Obama said that he wanted an “empathetic” Supreme Court justice, everyone understood what he meant, and while plenty of people criticized him, his two choices have been confirmed.

My last point is if we really think that the case for originalism is empirical (I have my doubts, but for another time), then there must be an empirical way to test it. There are all kinds of confounding problems–who is the relevant audience, for example, and how much do they need to know, and how large does a consensus have to be. But a simple starting point is a survey question that forced the respondent to choose between an originalist outcome and a popular one. Here’s one.

In the course of searching a person’s home pursuant to a valid warrant, the police discover that the person owns birth control pills. The legislature of the state in which the search took place has recently passed a law making it a criminal offense to own birth control pills. This statute conflicts with Supreme Court precedent; however, the precedent itself is inconsistent with the original understanding of the Constitution in 1789, which does not mention contraception. Should the police arrest the owner of the birth control pills based on probable cause that she violated the statute? Should she be tried and convicted?

I realize that some originalists believe that precedent matters. But under the continuity version of originalism described by Sachs, this seems like a straightforward test case. Or if not, I’d be pleased to hear a better one.

 

Originalism, false dichotomies, and determinateness

Will accuses me of setting up a false dichotomy by focusing on two extreme versions of originalism–originalism that requires judges to ignore precedent and originalism that licenses living constitutionalism. His response:

Originalism sometimes produces living constitutionalism, depending on how abstract a provision is, how clearly its meaning is known, and how much that meaning was intended to evolve. Originalism sometimes permits precedent, depending on how clearly a precedent can be shown to conflict with original meaning, certain forms of reliance, etc. When originalism permits precedent, the original meaning sometimes “plays a role” by helping judges figure out whether the precedent should be extended or distinguished in future cases. In each of these cases, the originalist answer can only be figured out by actually doing the work.

Well, okay, but this pretty much eliminates one of the major defenses of originalism–advanced forcefully by Scalia among others–which is that it dictates determinate case outcomes. This is crucial for Scalia because he fears that otherwise judges will allow their ideological preferences to influence interpretive outcomes.

It is ironic that in the next paragraph Will argues precisely that what is distinctive about originalism is that the interpreter doesn’t always get what he wants. But if the decision to overturn precedent on originalist groups relies on judgment–a weighting of competing factors that are often elusive and difficult to articulate–then the kind of cognitive dissonance reduction that Scalia worries about will creep back in. We saw this with the Printz case. Scalia might have been right to dismiss originalist arguments because of the strength of precedent, but he certainly did not provide much of a defense. I suspect that this was because he did not want to acknowledge that this is what he was doing. (N.B.: Scalia’s statement in Originalism: The Lesser Evil that he would never hold that flogging is a constitutional punishment, regardless of the original understanding of the eighth amendment, is at variance with this idea that the interpreter doesn’t always get what he wants, isn’t it? [It was subsequently pointed out to me that Scalia revoked his earlier statement about flogging. Maybe that is tied to his statement in the same interview that he doesn’t care what his intellectual legacy is.])

Finally, Will says that his theory of originalism offers “safety valves,” including amendment and illegality. I hope to learn more about why one should think that the Article V procedure offers an acceptable safety valve. What are the criteria for determining whether a safety value is acceptable or not? His endorsement of “illegality”–presumably the idea that the justices or other political actors should simply disregard the original understanding when it produces unacceptable outcomes–suggests that Will doesn’t think that Article V is in fact adequate on its own. The illegality safety value raises anew the question of determinacy: how, except by falling back on discretionary and contestable judgments about moral and political values, can one justify ignoring the original understanding? How can originalism ever rule anything out if illegality remains a morally valid option for interpreters and other agents?

Originalism means not always getting what you want

That is, for Will Baude, one of the major virtues of originalism, which distinguishes it from other interpretive theories. And he says that this is the fundamental disagreement between him and me:

Originalism suggests that somebody other than the interpreter gets to make important policy decisions, even if that other somebody might sometimes choose to delegate back to the interpreter in the end. Hence, there is no guarantee the interpreter will like the answers, though it is also a mistake to assume that the interpreter will hate them.

He has made this argument before, and I’m afraid I disagree. All alternative interpretive methodologies I can think of provide no guarantee that the interpreter will like the answers. This was one of the points that Randy Barnett made in his debate with Sunstein, who was trying to debunk originalism by showing that it would permit racist and sexist laws. Barnett responded that Sunstein’s preferred approach, minimalism, also does not guarantee (for example) that the Supreme Court will order the government to provide welfare to poor people, an outcome that Sunstein presumably would approve of (according to Barnett). Another appealing interpretive methodology–Thayerianism–obviously would give the interpreter no recourse if Congress decided to abolish the national bureaucracy.

Originalism is itself a choice. Proponents of originalism must make arguments on behalf. And this creates a paradoxical problem for its defenders like Will, who says “if you are intellectually honest, signing on to originalism is signing on to a theory of authority where you can’t be guaranteed in advance that you’ll like what you find.” He’s right that originalism won’t get off the ground if it just advances the political preferences of a small group of people. As I said, the same is true for other methods. The question is what does it get us beyond that? And to answer that question, he must show that it is superior to other methods, presumably by advancing institutional values that everyone or nearly everyone shares. In this respect, originalism is no different from other methods.

Kirkland and Ellis Distinguished Service Professor, University of Chicago Law School