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1 1 George Mason Law and Economics Center PPE Program, June 2007 Second Three Hours: 19 June 2007 Eric Rasmusen, For institute materials:

2 2 The value of the economic approach One of the attractions of the economic analysis of law is that it provides a way of answering questions about what the law out to be, what rights we ought to have. It starts with what looks like a very weak premise--- that one should design legal rules to maximize the size of the pie. It assumes nothing at all about the sorts of things we expect legal and ethical rules to be based on: desert, rights, justice, fairness. (David Friedman, Law/Why_Is_Law_Chapter_15/Why_Is_Law_Chapter_15.html) Law/Why_Is_Law_Chapter_15/Why_Is_Law_Chapter_15.html

3 3 From one ethical principle, we get Theft and murder should be punished, but only if there is mens rea. More harmful offenses should be punished more heavily. Contracts should be enforced, and with expectation damages. Criminal penalties should require higher standards of proof than civil penalties. Procedures should try hard not to punish the innocent. Torts should be punished by fines, not prison, but only if there is negligence. Negligence should be defined as omitting precautions whose cost is greater than their benefit.

4 4 Hour 1: Big Ideas Modelling Market Failure- Market Power, Asymmetric Information, Externalities Government Failure Governments as collections of individuals Marginalism Opportunity Cost Incentives (no detail on this)

5 5 MAKING MODELS: Good theory of any kind uses: Occams razor, which cuts out superfluous explanations, and the ceteris paribus assumption, which restricts attention to one issue at a time. Hourglass Approach: First, a broad and important problem is introduced. Second, it is reduced to a very special but tractable model that hopes to capture its essence. Third, in the most perilous part of the process, the results are expanded to apply to the original problem. Mahabharata Story of the Arrow Law, modern philosophy: hypotheticals. Dont fight the hypothetical

6 6 MAKING MODELS 1. Logical Positivism, Popper, M. Friedman: A theory should have testable implications and be falsifiable. Assumptions can be totally unrealistic. 2. Paradigm Shifts, Kuhn. Theories last till something else fits better. It takes a theory to beat a theory. 3. Theorems are Processes, Lakatos. People dont state a hypothesis and then test it or prove it: they figure out the hypothesis along the way as they test and prove. Economists implicitly accepts Lakatos, though M. Friedmans theory is what theyll tell you (because they dont know the other two)

7 7 Making Models: Lachman I A map is an abstraction of the world, and its use requires a theory by which one can link the abstraction with the world. Before this linkage is established, however, one needs to know the questions the map should answer. Humbug. A map is a map is a map, you say? Then, by all means, help yourself to a soundscape map of Boston: A composite view of the variety of city sounds s perceived along a sequence of streets... [in which symbols represent qualities of sounds..., for example, soft, intense, roaring, muted, sharp, echoing, expansive. Or if that's not quite what you had in mind, how about an Eskimo Coastline Relief Carving (yes, you read that correctly), convenient for carrying on and around your ship? Or a color-coded map showing The Percent of [the U.S] Population Unchurched ? And so on.

8 8 Making Models: Lachman II Somehow, these maps offer little help in getting from Madison to Chicago. Instead I want a road map, and a certain kind at that: I need to be given the details of the street plan for the cities at each end, but not such details for everywhere in between. I need to know about the roads, and seasonal temperature and precipitation indicators would be nice. What about cloud movements, wind direction and color-keyed info on vegetation? National and local parks, population centers, and Howard Johnson restaurants? The map darkens progressively with colors and symbols, and darkens still some more until... until I notice that even as I gave free rein to my desire to know more, I consigned myself to a map from which I could only know less.

9 9 Making Models: Lachman III Now, within this budget, as in any other, there are allocative choices to be made. If I spend most of the available complexity showing parks and schools, there will not be much left for depicting the alternative street routes that can take me to my destination. So among the details of which the world is so rich, one must discern those details most important for the purpose at hand, and in the austerity that is the elegance of abstraction, select only the highest in priority from among these… The best abstraction, or even the better one, cannot be determined without reference to the abstraction's purpose. In order to judge the better map from the worse, a critic must know these goals --must even, for purposes of judging, accept them -- and carry on the criticism from there.

10 10 Making Models: Lachman IV Differing senses of like are what distinguish one discipline from another, one form of answer from another. To my amazement in the first few days of law school, I learned that water can be like cows. When is water like cows? Answer: When it's escaping from land. A lawyer might be equally surprised to find that hay-bailing wire can be like San Francisco housing. When is this so? When both are in short supply due to price controls. Judith Lachman, ``Knowing and Showing Economics and Law, '' (A review of An Introduction to Law and Economics, A. Mitchell Polinsky (1983)) Yale Law Journal, 93: 1587, (July 1984).1587,

11 11 Models: ALFRED MARSHALL (1) Use mathematics as a short-hand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. [BAD] (6) If you can't succeed in 4, burn 3. This last I did often.

12 12 Market Failure: When Do Markets not Maximize Surplus? A. Poorly defined or defended property rights B. Poor enforcement of contracts 1. Market power (monopoly) 2. Externalities (spillovers) 3. Asymmetric Information

13 13 Sen 1970 The Impossibility of a Paretian Liberal (Externalities) Prude and Lewd. (1) Prude reads the dirty book and Lewd does not. (2) Lewd reads the dirty book and Prude does not. Both prefer (2). That requires regulation, forced behavior. Mental externalities: If other people would pay $200 to me to paint my walls white instead of pink, and I would accept as little as $30, then surplus maximization requires that the walls be white. The idea is generalized in: Kaplow, Louis & Steven Shavell (2002a) Fairness versus Welfare (Cambridge, Mass: Harvard University Press, 2002). (2002b) Human Nature and the Best Consequentialist Moral System, Harvard Center for Law, Economics, and Business Discussion Paper No (2001a) Moral Rules and the Moral Sentiments: Toward a Theory of an Optimal Moral System, Harvard Law and Economics Discussion Paper No. 342,http://ssrn.com/abstract= (November 2001).. (2001b) Any Non-Welfarist Method of Policy Assessment Violates the Pareto Principle,Journal of Political Economy, 109: (April 2001).

14 14 Vice as Pollution (externalities) … the analogy between health and disease and virtue and vice. They differ in several essential respects, but they resemble each other in several leading points. Vice is as infectious as disease, and happily virtue is infectious, though health is not. Both vice and virtue are transmissible, and, to a considerable extent, hereditary. Virtue and vice resemble health and disease in being dependent upon broad general causes which, though always present, and capable of being greatly modified by human efforts, do not always force themselves on our attention.

15 15 Government Failure Two problems of governments: 1. They make dumb mistakes 2. They purposely choose not to do what a social planner would have them do. Reason: Governments are collections of people, each with their own objectives, which may or may not include the Public Good, and rarely include ONLY the Public Good.

16 16 Problems for the Social Planner (government failure) Is there market failure? If so, do we have to worry about government failure if we try to impose regulation? Easterly review of Sachs book on development aid: dyn/articles/A Mar10.html, dyn/articles/A Mar10.html ,00.html

17 17 Marginalism Lets have a vote. Which is more important: Trees, or lumberjack jobs? Childseat safety, or convenience? A small budget deficit, or a strong army? Guns, or butter? These questions may be fun, but theyre stupid.

18 18 Marginalism Figure 8

19 19 Details here (Marginalism)here

20 20 The Paradox of Value (marginalism) Water and Diamonds. Which is more valuable?

21 21 Opportunity Cost What would be the cost for you to get a J.D. in law?

22 22 The Parable of the Talents (KJV) (opportunity cost) Matthew 25: 14 For the kingdom of heaven is as a man travelling into a far country, who called his own servants, and delivered unto them his goods. 15 And unto one he gave five talents, to another two, and to another one; to every man according to his several ability; and straightway took his journey. 16 Then he that had received the five talents went and traded with the same, and made them other five talents. 17 And likewise he that had received two, he also gained other two. 18 But he that had received one went and digged in the earth, and hid his lord's money. 19 After a long time the lord of those servants cometh, and reckoneth with them. 20 And so he that had received five talents came and brought other five talents, saying, Lord, thou deliveredst unto me five talents: behold, I have gained beside them five talents more. 21 His lord said unto him, Well done, thou good and faithful servant: thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord. 22 He also that had received two talents came and said, Lord, thou deliveredst unto me two talents: behold, I have gained two other talents beside them. 23 His lord said unto him, Well done, good and faithful servant; thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord. 24 Then he which had received the one talent came and said, Lord, I knew thee that thou art an hard man, reaping where thou hast not sown, and gathering where thou hast not strawed: 25 And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that is thine. 26 His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed: 27 Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury. 28 Take therefore the talent from him, and give it unto him which hath ten talents. 29 For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath. 30 And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth.

23 23 (opportunity cost) You and your wife bought two tickets to the opera for $100. When you arrive, you find you left the tickets at home. The box office, though, says you can buy two new tickets just as good at the reduced price of $80. (a)Should you buy them?

24 24 (opportunity cost) Daniel Kahneman asked 200 people to imagine they were going to a movie. Upon arrival, half discover they've lost their tickets, while the other half discover they've lost $10 in cash. A new ticket costs $10. Only 12 percent of the participants who lost tickets said they'd buy replacements, compared with 54 percent of the cash losers. The tickets were regarded as an entertainment expense; but the cash had yet to be entered in any spreadsheet. (Michael Mungers discussion is here)here You can fool all of the people some of time…

25 25 Schumpeter: The Process of Creative Destruction (opportunity cost( When the government subsidizes companies like Lockheed or Chrysler or bans outsourcing of phone answering, preserving jobs, what is the cost? --The software industry doesnt get the capital and labor it otherwise would. But nobody notices the lost new jobs– just the preserved old jobs. Roughly speaking: for one industry to grow, another industry must shrink.

26 26 Mankiw's 10 Principles (big ideas generally) 1. People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another. 2. The Cost of Something Is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions. (opportunity cost) 3. Rational People Think at the Margin. (Marginalism; Think about small changes) A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. 4. People Respond to Incentives. Behavior changes when costs or benefits change.

27 27 Mankiw's 10 Principles (big ideas generally) 5. Trade Can Make Everyone Better Off. Trade Raises Surplus Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services. 6. Markets Are Usually a Good Way to Organize Economic Activity. Start by Assuming that Markets Work Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government. 7. Governments Can Sometimes Improve Market Outcomes. Governments Can Help in Certain Situations: Market Power, Asymmetric Info, Spillovers When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution.

28 28 Mankiw's 10 Principles (big ideas generally) 8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.DROP THIS ONE. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income. 9. Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. 10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. DROP THIS ONE. Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes,government spending and monetary policy. (http://www.swlearning.com/economics/mankiw/principles2e/principles.html)http://www.swlearning.com/economics/mankiw/principles2e/principles.html

29 29 Mankiw's 10 Principles : Rasmusen substitutes (big ideas generally) 8. Government Decisions Are Made by People with Personal Motivations, not by Gods (government failure) Governments act to advance peoples personal goals, not social ideals. As a result, governments often make wrong decisions, on purpose or through incompetence. 10. Consumption Is the Goal, not Production. A country or person which produces more without consuming more is no better off, and is worse off if it has to work harder. Yoram Bauman, "Mankiws Ten Principles of Economics, Translated for the Uninitiated"Yoram Bauman,"Mankiws Ten Principles of Economics, Translated for the Uninitiated" For a different sort of list of big ideas: George Stigler, ``The Conference Handbook,'' Journal of Political Economy, 85: (April 1977)

30 30 HOUR 2: Indifference Curves

31 31 HOUR 2: Indiffrence Curves Figure 9

32 32 HOUR 2: Indifference Curves Figure 10

33 33 maps detail readability self-other speed safety ALchian dagger too.

34 34 HOUR 2: Indifference Curves Figure 11

35 35 Hour 3: Crime

36 36 Six Approaches to Punishment 1. Economic, Surplus-Maximizing 2. Kantian, Authority protecting Dignity 3. Divine Law, revelation, tradition 4. Natural Law, what anyone can deduce from studying the world 5. Formalist, consistency, precedent 6. Power, Marxian, Thrasymichus: benefit your own group

37 37 The Criminals Demand Curve for Beef pounds of beef per year Price per pound Demand by the criminal Supply by the store $4 $14 Figure 12

38 38 The Criminals Demand Curve for Larceny larcenies per year Demand by the criminal Supply by victims 4 days in jail 14 days in jail Price per larceny Figure 13

39 39 Whats Wrong with Theft? If Smith values his car at $20,000, and Jones values it at $5,000, Smith should keep the car. How do we know the current owner (Smith) values the car most? We dont. But if we prohibit stealing, and Jones actually values the car the most, weve done no harm. Jones can pay money for the car. If we allow stealing, what do people do that reduces total surplus?

40 40 The Implication: Prohibit as crimes activities which reduce surplus. Owners value their goods more than thieves do. Victims value their lives more than murderers do. Other drivers lose more from drunk driving than the drunk drivers gain in convenience. Sellers gain less from a cartel than consumers lose. Child-abusers benefit less from the abuse than the children lose.

41 41 1. Why make the penalty proportional to the crime, if we want to deter all crime? Why not make life imprisonment the penalty for both burglary and murder? 2. Why punish recidivists more? Fairness is one answer, but that begs the question. Why do we think some things are fair and not others? 3. Why are some evil deeds not punished as crimes? Most wives would prefer to have their husband hit them physically than with news of an adulterous affair, yet adultery is not (in most states) a crime. Why? Three Questions

42 42 1. Marginal deterrence– otherwise a criminal has nothing to lose by doing even worse 2. Some crimes actually increase surplus 3. Punishment is costly (we dont need fairness as an answer) Why not make life imprisonment the penalty for both burglary and murder?

43 43 Efficient Crime: The Cabin A hunter, lost in the woods and starving, stumbles across a locked cabin containing food. He breaks in and feeds himself. His gain is more than the owner's loss, so his crime is efficient. Solution 1: Its not a crime (defense of necessity) Solution 2: Prosecutorial discretion (policeman escorting a mother about to give birth to the hospital at 70 mph)

44 44 Zero Tolerance f you attend school in the Los Angeles Unified School District, don't carry a toy key fob like this one in your pocket. A 7-year- old boy was suspended in school for carrying one of these because it violates the district's "zero tolerance" policy on "weapon possession".

45 45 Judicial Discretion If there be a controversy between men, and they come unto judgment, and [the judges] judge them; then they shall justify the righteous, and condemn the wicked; and it shall be, if the wicked man be worthy to be beaten, that the judge shall cause him to lie down, and to be beaten before his face, according to his wickedness, by number. Forty stripes he may give him, he shall not exceed;… (Deuteronomy 25)

46 46 Optimal Costly Penalties If all burglaries would be deterred by having a 30-year sentence, then that would be a good idea--- a costless punishment. If some people will still offend, then it becomes a costly punishment. Thus, we need to balance extra deterrence against extra cost. More harmful crimes should have higher penalties, to deter more.

47 47 Fines: Low-Cost Penalties Suppose we have a 20% probability of a ten thousand dollar punishment for some crime. Why not switch to a 10% probability of a twenty thousand dollar punishment? We will only have to catch and try half as many criminals so we can save money by firing some police, judges and prosecutors. How about a 5% chance of a $40,000 penalty? How about a 1% chance of a $200,000 penalty?

48 48 Expected Penalties If a man shall steal an ox, or a sheep, and kill it, or sell it; he shall pay five oxen for an ox, and four sheep for a sheep. If the thief be found breaking in, and be smitten so that he dieth, there shall be no bloodguiltiness for him. If the sun be risen upon him, there shall be bloodguiltiness for him; he shall make restitution: if he have nothing, then he shall be sold for his theft. (Exodus 22)

49 49 Before an act can be treated as a crime, it ought to be capable of distinct definition and of specific proof, and it ought also to be of such a nature that it is worth while to prevent it at the risk of inflicting great damage, direct and indirect, upon those who commit it. These conditions are seldom, if ever, fulfilled by mere vices. It would obviously be impossible to indict a man for ingratitude or perfidy. Such charges are too vague for specific discussion and distinct proof on the one side, and disproof on the other. Moreover, the expense of the investigations necessary for the legal punishment of such conduct would be enormous. It would be necessary to go into an infinite number of delicate and subtle inquiries which would tear off all privacy from the lives of a large number of persons. (Stephen) 2. Why Arent Lying and Adultery Crimes?

50 50 3. Why penalize recidivism? Recidivists have shown that the experience of a 1-year penalty will not deter them. Rather than giving them a series of 30 1-year terms, we could give them a single 30-year term. Another consideration: After three trials, we are more sure that they are truly guilty.

51 51 Crime Tort Public enforcement Private enforcement Penalty unequal to harm Penalty equal to harm (prison=greater, (caveats: punitive damages, probation=smaller) disgorgement) Penalty doesnt aid the victim Penalty aids the victim Penalty bigger for recidivists Penalty same for recidivists Jury unanimity Jury majority (just a judge, in most countries)

52 52 Figure 14

53 53 Figure 14a

54 54 Figure 15

55 55 Figure 16

56 56 Arrests in thousands (14 million total) Murder 14 Oth. Assault 1,285 Rape 26Fraud 282 Robbery 109Drugs 1,745 Agg. Assault 440 Dr. driving 1,432 Burglary 294Liquor laws 613 Larceny 1,191Drunkenness 550 Car theft 147Dis. Conduct 683 Lots of victimless crimes Public Order Crimes Are Common

57 57 Public Order Crimes Prostitution? Heroin use? Cruelty to animals? Cannibalism? -----these reduce surplus if they bother people enough. If 10,000 people would each pay $1 to make prostitution illegal, and 50 people would each pay $100 to make it legal, the score is $10,000 to $5,000, and it should be illegal.

58 58 Mill and Stephen: Mixing Morality and the Economic Method Mill: "The object of this essay is to assert one very simple principle as entitled to govern absolutely all the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection." ( On Liberty, 1879, Stephen: How can the State or the public be competent to determine any question whatever if it is not competent to decide that gross vice is a bad thing?

59 59 Mill: …that it is the absolute social right of every individual that every other individual should act in every respect precisely as he ought, that whosoever fails thereof in the smallest violates my social right and entitles me to demand from the Legislature the removal of the grievance…. The doctrine ascribes to all mankind a vested interest in each other's moral, intellectual, and even physical perfection, to be defined by each according to his own standard. Stephen: It is surely a simple matter of fact that every human creature is deeply interested not only in the conduct, but in the thoughts, feelings, and opinions of millions of persons who stand in no other assignable relation to him than that of being his fellow-creatures.

60 60 Vice as Pollution … the analogy between health and disease and virtue and vice. They differ in several essential respects, but they resemble each other in several leading points. Vice is as infectious as disease, and happily virtue is infectious, though health is not. Both vice and virtue are transmissible, and, to a considerable extent, hereditary. Virtue and vice resemble health and disease in being dependent upon broad general causes which, though always present, and capable of being greatly modified by human efforts, do not always force themselves on our attention.

61 61 Purposes of Punishment 1. Deterrence 2. Incapacitation 3. Rehabilitation 4. Retribution 5. Stigmatization

62 62 Stigma: Different from Morality Fines are a zero-cost penalty. Jail is a positive-cost penalty. Stigma is a negative-cost penalty. The Embezzler and the Accounting Firm The Speeder and the Insurance Company. Courts are useful to make stigma accurate. An acquittal may or may not leave stigma--- but the trial has improved our information.

63 63 Extra Materials

64 64 Mr. Doolittle in My Fair Lady DOOLITTLE: She ought to be good for 'alf a crown for a father that loves 'er. FRIEND: That's a laugh. You ain't been near 'er for months. DOOLITTLE: What's that got to do with it? What's 'alf a crown after all I've give 'er? FRIEND: When did you ever give 'er anythin'? Anythin'? DOOLITTLE: I give 'er everythin'. I give 'er the greatest gift any human being can give to another: Life! I introduced 'er to this here planet, I did, with all its wonders and marvels. The sun that shines, the moon that glows. Hyde Park to walk through on a fine spring night. The 'ole ruddy city o' London to roam around in sellin' 'er bloomin' flow'rs. I give 'er all that. Then I disappears and leaves 'er on 'er own to enjoy it. If that ain't worth 'alf a crown now and again...

65 65

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68 68

69 69 Asking what maximizes surplus-Law Efficient breach of contract: If Smith could gain $3,000 by breaking his contract with Jones, and Jones would only lose $1,000 as a result, break the contract. The Hand Rule in tort: If Tom could spend $200 on precautions and reduce the probability of a $1,000 accident by 50%, he should take the precautions. Illegality of murder, etc.: Dont murder, rob, rape, or steal. Incomplete Policing: If it would cost $40,000 in extra police time to prevent a burglary costing the victim $9,000 in property and worry, dont prevent the burglary.

70 70 Boulding on Optimization "No one in his senses would want his daughter to marry an economic man, one who counted every cost and asked for every reward, was never afflicted by mad generosity or uncalculating love. (Confucius on the question of mothers and wives in the water)

71 71 SEN 1970, JPE, The Impossibility of a Paretian Liberal Prude and Lewd. (1) Prude reads the dirty book and Lewd does not. (2) Lewd reads the dirty book and Prude does not. Both prefer (2). That requires regulation, forced behavior. Mental externalities: If other people would pay $200 to me to paint my walls white instead of pink, and I would accept as little as $30, then surplus maximization requires that the walls be white. The idea is generalized in: Kaplow, Louis & Steven Shavell (2002a) Fairness versus Welfare (Cambridge, Mass: Harvard University Press, 2002). (2002b) Human Nature and the Best Consequentialist Moral System, Harvard Center for Law, Economics, and Business Discussion Paper No (2001a) Moral Rules and the Moral Sentiments: Toward a Theory of an Optimal Moral System, Harvard Law and Economics Discussion Paper No. 342,http://ssrn.com/abstract= (November 2001).. (2001b) Any Non-Welfarist Method of Policy Assessment Violates the Pareto Principle,Journal of Political Economy, 109: (April 2001).

72 72 Prude and Lewd X: Prude reads the book and Lewd does not. Y: Lewd reads the book and Prude does not. Z: Nobody reads the book. W: Both Prude and Lewd read the book. Prudes ranking from best to worst: Z ($0), X (-$20), Y (-$30), W ( -$50) Lewds ranking from best to worst: W ($100), X ($60), Y ($25), Z ($0) The figures in parentheses are utility levels, with Z chosen as the baseline of zero. In a liberal society, the outcome is Y. But both people prefer outcome X.

73 73 Prude and Lewd and Coase X: Prude reads the book and Lewd does not. Y: Lewd reads the book and Prude does not. Z: Nobody reads the book. W: Both Prude and Lewd read the book. Prudes ranking from best to worst: Z ($0), X (-$20), Y (-$30), W ( -$50) Lewds ranking from best to worst: W ($100), X ($60), Y ($25), Z ($0) With no trade, the outcome is Y. But both people prefer outcome X. Voluntary trade would shift to that. With side payments, we will maximize surplus. Total surplus is W ($50), X ($40), Z ($0), Y (-$5) Prude would pay Lewd to read the book. How much? -- between $20 and $75.

74 74 More Broadly: The Prisoners Dilemma Smith and Jones have houses next to each other. Each would like to leave an old car on his front law, to save the trouble of having it junked and in case he needs spare parts. But each hates looking next door and seeing somebody elses junked car. Thus, the rankings are (0=bad, 5=good) Smith leaves car, Jones leaves car: 1,1 Smith leaves car, Jones takes his away: 5, 0 Jones leaves car, Smith takes his away: 0, 5 Both take away their cars: 4, 4 The liberal state results in both leaving their car. They would both prefer to be required to both take away their cars.

75 75 Mami-hlapin-ata-pai In Fuegian this means looking at each other hoping that either will offer to do something which both parties desire but are unwilling to do. (Guinness Book of World Records, 1991 edition, p. 367)

76 76 A Solution (Coase) By Thomas Hobbess report Life is Nasty and Brutish and Short, But Contracts once made Will come to our aid, And Men will be Civil-- in Court.

77 77 Generalizations and Solutions The liberal state results in both leaving their car. They would both prefer to be required to both take away their cars. Instead of junky car, we could have smoke marijuana, or torture dogs, or not vote. Different ways to get these results are: zoning laws, contracts, real-estate covenants (subdivision agreements), criminal law, regulations, tort liability nuisance law

78 78 Wordsworth: Inside of King's College Chapel, Cambridge Tax not the royal Saint with vain expense, With ill-matched aims the Architect who planned Albeit labouring for a scanty band Of white-robed Scholars only--this immense And glorious Work of fine intelligence! Give all thou canst; high Heaven rejects the lore Of nicely-calculated less or more; So deemed the man who fashioned for the sense These lofty pillars, spread that branching roof Self-poised, and scooped into ten thousand cells, Where light and shade repose, where music dwells Lingering--and wandering on as loth to die; Like thoughts whose very sweetness yieldeth proof That they were born for immortality.

79 79 Wordsworth: Nuns Fret Not... Nuns fret not at their convent's narrow room And hermits are contented with their cells; And students with their pensive citadels; Maids at the wheel, the weaver at his loom, Sit blithe and happy; bees that soar for bloom, High as the highest Peak of Furness-fells, Will murmur by the hour in foxglove bells: In truth the prison, into which we doom Ourselves, no prison is: and hence for me, In sundry moods, 'twas pastime to be bound Within the Sonnet's scanty plot of ground; Pleased if some Souls (for such there needs must be) Who have felt the weight of too much liberty, Should find brief solace there, as I have found.

80 80 THREE VERSIONS OF ONE PROBLEM 1.Choose your actions to maximize your wealth (the corporations problem) 2. Choose your actions to maximize your happiness (the selfish humans problem) 3. Choose your actions to maximize your fitness (the evolutionary problem) 4. Choose your actions to maximize Gods pleasure in your actions (the Calvinists problem) The logic and math are identical for all of these. All require tradeoffs, comparison of costs and benefits, marginalism.

81 81 Example: Charles Finney DOUBTFUL ACTIONS ARE SINFUL (True Saints, 1836) A version of Pascals wager: A man may have equal doubts whether he is bound to do a thing or not to do it. Then all that can be said is, that he must act according to the best light he can get. But where he doubts the lawfulness of the act, but has no cause to doubt the lawfulness of the omission, and yet does it, he sins and is condemned before God, and must repent or be damned.

82 82 Finney on Sunday Preaching …where a minister is so situated that it is necessary for him to go a distance on the Sabbath to preach, as where he preaches to two congregations, and the like. Here he may honestly doubt what is his duty, on both hands. If he goes, he appears to strangers to disregard the Sabbath. If he does not go, the people will have no preaching. The direction is, let him search the scriptures, and get the best light he can, make it a subject of prayer, weigh it thoroughly, and act according to his best judgment.

83 83 Finney on Slavery Who in all these United States can say, that he has no doubt of the lawfulness of slavery? Yet the great body of the people will not hear any thing on the subject, and they go into a passion if you name it, and it is even seriously proposed, both at the north and at the south, to pass laws forbidding inquiry and discussion on the subject. … It is amazing to see the foolishness of people on this subject--as if by refusing to get clear of their doubts they could get clear of their sin. … We may suppose a case, and perhaps there may be some such in the southern country, where a man doubts the lawfulness of holding slaves and equally doubts the lawfulness of emancipating them in their present state of ignorance and dependence. In that case he comes under Pres. Edward's rule, and it is his duty, not to fly in a passion with those who would call his attention to it, not to send back newspapers and refuse to read, but to inquire on all hands for light, and examine the question honestly in the light of the word of God, till his doubts are cleared up.

84 84 Mill and Stephen: Liberty, Equality, Fraternity John Stuart Mill wrote the standard economics text of the 19 th century. He also wrote On Liberty, the classic book on the idea that society should not restrict individual behavior just because it offends other people. James Stephen wrote his book in reply to On Liberty, arguing that Mills politics is inconsistent with his economics. Mill: "The object of this essay is to assert one very simple principle as entitled to govern absolutely all the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection." Stephen: How can the State or the public be competent to determine any question whatever if it is not competent to decide that gross vice is a bad thing?

85 85 More Mill and Stephen Mill: …that it is the absolute social right of every individual that every other individual should act in every respect precisely as he ought, that whosoever fails thereof in the smallest violates my social right and entitles me to demand from the Legislature the removal of the grievance…. The doctrine ascribes to all mankind a vested interest in each other's moral, intellectual, and even physical perfection, to be defined by each according to his own standard. Stephen: At the risk of appearing paradoxical, I own that the theory which appears to Mr. Mill so monstrous appears to me defective only in its language about rights and legislation… It is surely a simple matter of fact that every human creature is deeply interested not only in the conduct, but in the thoughts, feelings, and opinions of millions of persons who stand in no other assignable relation to him than that of being his fellow-creatures. … A man would no more be a man if he was alone in the world than a hand would be a hand without the rest of the body.

86 86 Stephen on Vice It is easy to ride to death the analogy between health and disease and virtue and vice. They differ in several essential respects, but they resemble each other in several leading points. Vice is as infectious as disease, and happily virtue is infectious, though health is not. Both vice and virtue are transmissible, and, to a considerable extent, hereditary. Virtue and vice resemble health and disease in being dependent upon broad general causes which, though always present, and capable of being greatly modified by human efforts, do not always force themselves on our attention. Good air, clean water, and good food are now coming to be recognized as the great conditions of health. The maintenance of a high moral standard, the admiration and honour of virtue and the condemnation of vice, what is called in a school or a regiment a good moral tone, is the great condition of virtue.

87 87 Criminal Law (Stephen) …criminal law is at once by far the most powerful and by far the roughest engine which society can use for any purpose. Before an act can be treated as a crime, it ought to be capable of distinct definition and of specific proof, and it ought also to be of such a nature that it is worth while to prevent it at the risk of inflicting great damage, direct and indirect, upon those who commit it. These conditions are seldom, if ever, fulfilled by mere vices. It would obviously be impossible to indict a man for ingratitude or perfidy. Such charges are too vague for specific discussion and distinct proof on the one side, and disproof on the other. Moreover, the expense of the investigations necessary for the legal punishment of such conduct would be enormous. It would be necessary to go into an infinite number of delicate and subtle inquiries which would tear off all privacy from the lives of a large number of persons.

88 88 The Two Prisoners (Stephen) A judge has before him two criminals, one of whom appears, from the circumstances of the case, to be ignorant and depraved, and to have given way to very strong temptation, under the influence of the other, who is a man of rank and education, and who committed the offence of which both are convicted under comparatively slight temptation.

89 89 The Limits of Law (Stephen) The inference which I draw from this illustration is that there is a sphere, none the less real because it is impossible to define its limits, within which law and public opinion are intruders likely to do more harm than good. To try to regulate the internal affairs of a family, the relations of love or friendship, or many other things of the same sort, by law or by the coercion of public opinion is like trying to pull an eyelash out of a man's eye with a pair of tongs. They may put out the eye, but they will never get hold of the eyelash.

90 90 Does U.S. Ban On E-Gambling Violate WTO? JAY COHEN quit his job as an options trader in 1996 and headed for Antigua and started an online sports-betting site. He knew the site would challenge U.S. laws against online gambling, but he was so confident his foreign-based operation was legal he agreed to turn himself over to U.S. authorities to prove his case in court. Mr. Cohen lost, and he is now completing a 21-month prison sentence. This week the World Trade Organization is hearing arguments in a case brought by Antigua that charges that the U.S. is violating its global trade agreements by prohibiting Internet gambling. The European Union, Japan and Canada are supporting Antigua's complaint. The court may also weigh in on other issues, including whether the WTO can, as Antigua requests, compel the U.S. to change gambling laws that reflect its moral values.

91 91 More on E-Gambling Antigua argues that the U.S. should allow access because of a 1991 United Nations list of service-sector industries deemed open to free trade, including recreation and entertainment. By keeping Antigua out, yet allowing a huge gambling industry of its own, the U.S. is guilty of discriminating against foreign companies, the Caribbean nation says. the U.S. argues, there are substantial differences between Web and casino gambling, including the ability to prevent betting by minors, so it's well within its rights to prohibit one form of gambling while allowing others. …total revenue at Internet gambling companies world-wide last year was about $6 billion, up from $651 million in By contrast, all other forms of betting have grown slowly to $68.69 billion from $55.06 billion over the same period.

92 92 London Call Girls I Kit Malthouse, deputy leader of Westminster City Council, the government body that runs the schools and cleans the streets in the neighborhood, wants phone companies to strangle the prostitution trade by refusing to put calls through to the numbers on the cards. The United Kingdom's landline phone companies have gone along. But most cellphone companies have balked -- even after the council staff handed out 20,000 mock prostitute cards with the names and phone numbers of cellphone chief executives on them. The cellphone companies claim it isn't their job to interfere with a customer's service. "We are not content to play the role of moral arbiter," Vodafone doesn't want to set any precedents for helping the government act against customers accused of being a social nuisance.

93 93 London Call Girls II T-Mobile, which is owned by Deutsche Telekom AG, refused to block calls, too. It doesn't want to be sued by customers. It added, in its own to the council, that blocking calls could jeopardize the safety of prostitutes, which is an argument also made by advocates for prostitutes' rights. Prostitution itself is not illegal here, though soliciting for business on the street and keeping a brothel are. The trade has relied heavily on posting cards in phone booths to advertise to tourists and business travelers. The English Collective of Prostitutes, says that women who are unable to advertise in phone booths may be forced to walk the streets, which is more dangerous than operating from an apartment that has a telephone.

94 94 London Call Girls III BT owns and cleans most of the telephone booths in London. In 1996, BT began blocking calls to numbers on the cards and got other phone companies to go along. But the London Committee of Call Girls, a defunct group that represented prostitutes, complained to the government's Office of Fair Trading that the telephone companies were colluding to restrain trade. BT was forced to put its plan on hold, while it wrote to other phone companies to make it clear that it wasn't trying to establish a formal agreement on call barring. Confident that it had done enough to satisfy the Office of Fair Trading, BT in 1997 began issuing warnings to people posting unauthorized advertising in its phone booths. If the ads persist, it stops incoming calls to the numbers in the ads. In the two years ended last July, BT says, it sent out 444 warning letters and cut off calls to 84 phone numbers. "We clean every box on busy sites, five or six days a week," says BT's Mr. King. "We take out more than a million cards... each year."

95 95 London Call Girls IV Over the years, Mr. Malthouse tried unsuccessfully to persuade the cellphone companies to block calls. Last summer, he decided to make a nuisance of himself. He designed and had printed up 20,000 mock prostitute cards with pictures of women -- and the names, numbers and business addresses of the CEOs of the biggest cellphone companies. The cards urged people to write to the CEOs and tell them to block calls to prostitutes' numbers. Council staff handed out the mock cards on Oxford Street, London's busiest shopping street. Carrying 6-by-10-foot placards designed to look like giant prostitute cards, they also picketed the shops of the cellphone companies.

96 96 Social Security: Compulsory Thrift Suppose that a "retirement genie" alighted on your doorstep and informed you that he had just taken the liberty of reorganizing your finances. To ensure your future safety, the genie transferred all of your savings into a special account with a number of features. First, you cannot touch the monies in the account until you retire. Second, if you and your spouse die, the money is lost unless you have school-aged children. Third, the minute that you retire you will be forced to convert your entire accumulation into an annuity that dribbles the cash out at a low monthly rate. Fourth, the account funds cannot be invested in a well-diversified portfolio of stocks and bonds, but must be parked in a single low-yield government instrument. Finally, you must contribute 12.4% of your earnings into the account every year.

97 97 Dutch Euthanasia I Currently, Dutch law permits doctors to administer a lethal dose of muscle relaxants and sedatives to terminally ill patients, at their request. The Groningen Protocol would permit doctors to euthanize patients who, according to the opinion of doctors and other medical experts, lack "free will." This category of unfortunate individuals would include newborn babies, persons in irreversible comas and persons with severe mental retardation. Worse, the Groningen hospital, after which the protocol is named, has already begun to administer the procedure, even without formal legal sanction. To date, Dutch prosecutors have refused to step in.

98 98 Dutch Euthanasia II … more than 80% favor "voluntary euthanasia," according to recent polls. The Dutch Parliament recently passed a measure completely decriminalizing euthanasia and doctor- assisted suicide. The Netherlands is now the first democratic nation on earth to permit, under law, doctors to kill their patients. And they may be accustomed to doing so. Of the 130,000 Dutchmen who died in 1990, some 11,800 were killed or helped to die by their doctors, according to a 1991 report by the attorney general of the High Council of the Netherlands. An estimated 5,981 people--an average of 16 per day-- were killed by their doctors without their consent, according to the Dutch government report.

99 99 Dutch Euthanasia III And these numbers do not measure several other groups that are put to death involuntarily: disabled infants, terminally ill children and mental patients. Some 8% of all infants who die in the Netherlands are killed by their doctors, according to a 1997 study published in the Lancet, a British medical journal. Consider the case of Dr. Henk Prins, who killed--with her parents' consent--a three-day old girl with spina bifida and an open wound at the base of her spine. Dr. Prins never made any attempt to treat the wound, according to Wesley J. Smith, author of the book "Culture of Death." The treatment was death. Many old people now fear Dutch hospitals. More than 10% of senior citizens who responded to a recent survey, which did not mention euthanasia, volunteered that they feared being killed by their doctors without their consent. One senior-citizen group printed up wallet cards that tell doctors that the cardholder opposes euthanasia.

100 100 Does U.S. Ban On E-Gambling Violate WTO? JAY COHEN quit his job as an options trader in 1996 and headed for Antigua and started an online sports-betting site. He knew the site would challenge U.S. laws against online gambling, but he was so confident his foreign-based operation was legal he agreed to turn himself over to U.S. authorities to prove his case in court. Mr. Cohen lost, and he is now completing a 21-month prison sentence. This week the World Trade Organization is hearing arguments in a case brought by Antigua that charges that the U.S. is violating its global trade agreements by prohibiting Internet gambling. The European Union, Japan and Canada are supporting Antigua's complaint. The court may also weigh in on other issues, including whether the WTO can, as Antigua requests, compel the U.S. to change gambling laws that reflect its moral values.

101 101 More on E-Gambling Antigua argues that the U.S. should allow access because of a 1991 United Nations list of service-sector industries deemed open to free trade, including recreation and entertainment. By keeping Antigua out, yet allowing a huge gambling industry of its own, the U.S. is guilty of discriminating against foreign companies, the Caribbean nation says. the U.S. argues, there are substantial differences between Web and casino gambling, including the ability to prevent betting by minors, so it's well within its rights to prohibit one form of gambling while allowing others. …total revenue at Internet gambling companies world-wide last year was about $6 billion, up from $651 million in By contrast, all other forms of betting have grown slowly to $68.69 billion from $55.06 billion over the same period.

102 102 Dutch Euthanasia I Currently, Dutch law permits doctors to administer a lethal dose of muscle relaxants and sedatives to terminally ill patients, at their request. The Groningen Protocol would permit doctors to euthanize patients who, according to the opinion of doctors and other medical experts, lack "free will." This category of unfortunate individuals would include newborn babies, persons in irreversible comas and persons with severe mental retardation. Worse, the Groningen hospital, after which the protocol is named, has already begun to administer the procedure, even without formal legal sanction. To date, Dutch prosecutors have refused to step in.

103 103 Dutch Euthanasia II … more than 80% favor "voluntary euthanasia," according to recent polls. The Dutch Parliament recently passed a measure completely decriminalizing euthanasia and doctor- assisted suicide. The Netherlands is now the first democratic nation on earth to permit, under law, doctors to kill their patients. And they may be accustomed to doing so. Of the 130,000 Dutchmen who died in 1990, some 11,800 were killed or helped to die by their doctors, according to a 1991 report by the attorney general of the High Council of the Netherlands. An estimated 5,981 people--an average of 16 per day-- were killed by their doctors without their consent, according to the Dutch government report.

104 104 Dutch Euthanasia III And these numbers do not measure several other groups that are put to death involuntarily: disabled infants, terminally ill children and mental patients. Some 8% of all infants who die in the Netherlands are killed by their doctors, according to a 1997 study published in the Lancet, a British medical journal. Consider the case of Dr. Henk Prins, who killed--with her parents' consent--a three-day old girl with spina bifida and an open wound at the base of her spine. Dr. Prins never made any attempt to treat the wound, according to Wesley J. Smith, author of the book "Culture of Death." The treatment was death. Many old people now fear Dutch hospitals. More than 10% of senior citizens who responded to a recent survey, which did not mention euthanasia, volunteered that they feared being killed by their doctors without their consent. One senior-citizen group printed up wallet cards that tell doctors that the cardholder opposes euthanasia.


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