November 2, 1997 Eric Rasmusen LAW-AND-ECONOMICS AND SOCIAL CONSERVATISM (Footnotes omitted) (Forthcoming, Harv. J. Law and Pub. Policy) The economic approach to law is usually associated in people's minds not with conservatism per se, but with a libertarian approach to public policy, the idea that each person's conduct is his own affair and not that of his fellow citizens. Libertarianism and traditional Anglo-Saxon conservatism agree in being skeptical of economic regulation, but they differ completely when in their attitude towards social regulation. Indeed, using the taxonomy of Table 1, one might argue that libertarians have as much in common with liberals as with conservative. TABLE 1: ATTITUDES TOWARDS REGULATION SOCIAL REGULATION FOR AGAINST FOR European conservatives Modern liberals ECONOMIC REGULATION AGAINST Anglo-Saxon conservatives Libertarians But law and economics, though often associated with libertarianism, is an analytic approach, not a political position. It does not automatically imply that laissez faire is the best economic policy, nor that regulation of vice and virtue is outside of the scope of government. The approach is based on the idea that people respond to incentives, balancing costs against benefits, and that the law should aim for efficient outcomes, where ``efficient'' means that there is no change that would help the winners more than it would hurt the losers. ``Win'' and ``Lose'' are defined in terms of people's own preferences, rather than any higher taste or morality, so the ultimate aim is to satisfy people's desires. "If it feels good, do it". Usually, efficiency implies minimal government involvement. If Rasmusen pays 40 dollars for Epstein's 1995 book, Simple Rules for a Complex World, it must be that Rasmusen and Epstein both benefit, or they wouldn't both agree to the transaction. Rasmusen values that copy of the book at more than 40 dollars, and Epstein at less. The efficient outcome is for Rasmusen to have the book. The situation will not be improved if the government picks the price, or decides whether Rasmusen really will like the book or not. The Invisible Hand does a fine job, and laissez faire is optimal. Notice, by the way, that if the government did allocate the book, it should give it to Rasmusen, since he values it more. But we don't need government action to get that result. The government does play a role in allocating property rights. It decides in the first place that Epstein owns the book, and Rasmusen must pay for it. Alternatively, the government could have decided that the book was Rasmusen's, and Epstein would have to pay if he wanted it. Or, the government could claim the book itself, and ask Epstein and Rasmusen both to bid in an auction to buy it. However the government allocates the property right, though, the book will end up in Rasmusen's hands, because he is willing to pay the most for it. Epstein would only bid 35 dollars, and Rasmusen would bid up to 45. Rasmusen would become the owner of the book, and that is the efficient result. As long as market transactions are allowed, property ends up in the hands of whoever values it most. Laissez faire working out so well does depend on certain conditions. The parties to the transaction must have good information, and realize what they are buying and selling. Property rights must be clearly defined. Monopoly and strategic behavior can cause problems, though in this example, Epstein's copyright monopoly on his book is probably a necessary evil to give him an incentive to write more books. And there must not be what economists call externalities-- spillover effects on third parties. All these, illustrated in Table 2, are reasonably valid for conventional markets. 1. Asymmetric Information: Some people know things about product quality, likelihood of events, etc. that others do not. 2. Imperfect Competition: Some buyers or sellers are large in the market and can influence prices by how much they buy or sell. 3. Externalities: Some activities help or harm other people without the actor being able to charge them or having to pay them. 4. Incomplete markets: Some potential products cannot be bought or sold. TABLE 2: VARIETIES OF MARKET FAILURE The intellectual imperialism of economics has led it far beyond conventional markets. James Buchanan and Gordon Tullock have applied economics to politics. Eric Posner has applied it to social norms. Gary Becker has appplied it to crime, race discrimination, and child rearing. Richard Posner has applied it to law, aging, and sex, and even, I think, to all three in combination. That is quite appropriate. Costs and benefits matter everywhere, markets of a sort operate, and efficiency is always a worthy goal. The problem is that when it comes to these new domains of economics, the economist's instinct is still laissez faire and libertarian. Apparently conservative economists, for example, often surprise people by supporting abortion and drug legalization. This instinct is, I think, mistaken. The method of economics can certainly be transplanted to the social arena, but it does not necessarily reach the same laissez faire conclusions. Economics does not assume that laissez faire is best--- it shows that laissez faire is best under certain common conditions. Government coercion is not bad in itself, but only because it's usually inefficient . Virtue is not directly a consideration, which may dismay social conservatives. But neither is the personal autonomy of the libertarians and liberals. And, in fact, I believe the efficiency criterion lends support to traditionalist moral positions. That is because the standard assumptions needed for the optimality of laissez faire often fail when transactions are not in dollars. Indeed, the social arena is almost defined by the failure of those assumptions. When two people think about getting divorced, for example, their information is poor, their behavior strategic, their property rights are ill-defined, and there are externalities on their families, friends, and society. We cannot expect the Invisible Hand to operate as well under such handicaps. I would like to concentrate on one of these handicaps: externalities. Any time person A would be willing to pay to stop person B's action, there is what economists call an ``externality''--- B's action has spilled over onto A, a party external to B's business. Externalities justify government regulations such as rules restricting air pollution. Under laissez faire, a factory might try to save 1 million dollars by inflicting 10 million dollars of air pollution damage on its neighbors. That would be an inefficient outcome, quite apart from whether it is immoral to hurt one's neighbors. The Coase Theorem tells us that the allocation of rights does not matter if it is easy for the parties affected to make bargains with each other. Even if the government gives the factory the right to pollute, the neighbors could conceivably get together and pay the factory not to pollute. The efficient result would be obtained, just as when Rasmusen buys the book from Epstein because Rasmusen values it more but Epstein has the initial right to the book. Indeed, if there was just one neighbor, buying the pollution right would be quite feasible. But if there are 100 neighbors, the bargaining breaks down because each neighbor would like to free ride and have the other 99 pay. It's better not to give the right to pollute to the factory in the first place. Externalities do not, however, have to be physical effects such as neighborhood trees dying from air pollution. . In particular, there can ``mental externalities'' which are purely states of mind. Consider cigarette smoke. Common justifications for banning smoking in elevators are (a) it might cause a fire, and (b) it causes lung cancer in nonsmokers. But the real reason is different. The real reason is that nonsmokers don't like the smell of smoke, regardless of the possible health effects. And this is, to the economist, if not to the liberal, a fully legitimate reason, if smoking bothers the nonsmokers more than it helps the smoker. We can also apply the idea to illegal drugs. If 10 people would each pay 100 dollars to prevent Jim from injecting heroin, and he would only pay 400 dollars for the right to do so, it is efficient for him to be stopped. That is the efficient outcome, even without any considerations of morality. As is usual in economics, we take tastes as given. We don't need to ask why the 10 people have this particular preference. It could be that they are friends of Jim, and care about his health. It could be they are friends of Jim who care selfishly about his being available to go bowling with them instead of injecting heroin. It could be that they don't even know Jim personally, but have moral beliefs that it is bad for him to use heroin. Economists are not, contrary to common belief, materialists. The value of something is what people are willing to pay for it, and if people are willing to pay for something abstract like a heroin-free society, then efficiency demands that they be given the right to purchase that society. You can look on Jim's being prevented from using heroin as an infringement on his freedom, but so is Jim's being prevented from punching somebody else in the nose or stealing a wallet. The efficiency argument won't take the social conservative as far as he might like. It is not an argument for the government to make people more virtuous against their will-- there are other arguments for that. But it is an argument for letting people stay as virtuous as they are already, and for allowing them to indulge their taste for a virtuous society. Mental externalities do not have many implications in the purely economic sphere. I may not like it that you listen to rock music, but I'm not willing to pay much to stop you. And I don't care at all if you eat cheddar cheese, even though I don't care for it myself--- unless, that is, I'm in an elevator with you. But in the social sphere, relatives and friends care a lot about each other, and we care what our neighbors do even in the privacy of their homes. The idea of mental externalities allows a fresh look at many social issues from pornography and flag desecration to blasphemy and abortion. It's often said that a person should be able to do anything he likes, so long as he doesn't hurt anybody else. In fancier language, ``Sic utere tuo ut alienum non laedas''. But if somebody else is bothered by a person's actions, he is hurting them. The only question is how much. Law and economics scholars already recognize that much of traditional criminal law is justified on efficiency grounds. Stealing is inefficient, because the thief does not value the stolen goods as much as the owner did. Rape and murder generally help the criminal less than they hurt the victim. Should we not suspect that traditional laws against victimless crimes were also efficient? Drunkenness, prostitution, adultery, pornography, sodomy, and blasphemy have all been banned. Why would they have been banned unless many people felt harmed by them? One must balance up whether the willingness to pay to commit these actions exceeds the willingness of others to pay to prevent them. If it does, then efficiency justifies a rule against sodomy just as much as a rule against theft. It comes down to the empirical question of whose desires sum to the greater amount: the person who wants to engage in vice, or the people who want to stop him. Which is greater, Jim's desire to use heroin, or his friends' desire that he not use it? When I said that the efficiency criterion says, " If it Feels Good, Do It," I exaggerated. You have to look at external effects too. Your favorite vice may feel good, but don't do it--- it feels bad to someone else, and economics gives as much weight to moral principles as to immoral pleasures. Eric Rasmusen November 2, 1997 A Response to Richard Epstein, David Bernstein, and Eric Posne In our discussion at Duke University, Professors Richard Epstein, David Bernstein, and Eric Posner came up with a number of objections to the argument from mental externalities for social regulation . I will try to address them here. Richard Epstein and I are in agreement on one important point: that efficiency can justify some forms of social regulation, and that it is not enough just to say that. Regulation's proponents must also show that efficiency does justify social regulation in the particular context being discussed. Negative externalities can undisputably regulation of air pollution, but knowing that does not end the policy debate-- it is just the starting point for scientists and economists to thrash out how much regulation is needed. The articles by Goodman and Kindt that Professor Epstein cites in his article are good examples of this more pinpointed policy research. We must, however, keep in mind that although the magnitudes of mental externalities must are crucial, and some evidence is required of their size, they do not require any physical effects. The externalities of venereal disease are one argument for regulation of homosexuality, but simple repugnance is another. The point is that both arguments require evidence. How much disease is associated with the practice to be regulated, and not only how much repugnance, but how much pleasure does it generate? Professor Epstein is also right that political and legal argument often skips this step, and that appeals to "symbolic" effects are particularly suspect. It is not enough to cite individual cases of disease or repugnance. That merely shows that negative externalities exist, not that they outweigh the positive benefits. Nor is it enough to say that a certain regulation is symbolic of something that citizens care very much about. We cannot infer that they care anything at all about the symbol, as opposed to the "something". Magnitudes matter. So, we agree in principle, and call for further research. A boring outcome, perhaps, for such exciting issues, but a good sign, I think, for the scientific method in law and economics. Professor David Bernstein suggested that public choice actually operates exactly the opposite way from what I suggested. The legalizing of homosexual activity, he said, is not an example of a special interest group gaining favor where the overall efficiency balance went the other way. Rather, a very small group was not organized for a long time, and its preferences therefore did not show up in the political process. Other people who were against their behavior for moral and other reasons might not have been willing to pay an economic price to stop it, as with a boycott, but could pay for restrictions with a vote. Similarly, blacks in the South could not vote at all. Whites might say, ``I won't pay extra to ride in a segregated car, but---hey-- I'll vote for someone who supports a segregation law, because what does that cost me? Nothing.'' S But politics is not just a matter of casting one's vote on one particular issue. There is a great deal of evidence in American politics that the tyranny of the majority does not operate all the time, and more often it seems we have a tyranny of the minority-- the group that benefits from legislation and lobbies harder because the benefit is concentrated and the cost is diffused. Moreover, even a vote is not free. If a citizen casts his vote for a candidate on the basis of a homosexuality issue, he loses his chance to cast it on the basis of a tax issue. . We do have to distinguish between a minority that can vote and one that cannot. If a group of people cannot be part of the process, the political market is not going to work. Blacks in the South couldn't vote, and so their preferences were omitted from political decisions. If people can vote, though, then the smaller the group, the easier it is to organize, and the more intense its preferences, the more willing each member of the group will be to engage in political action. Professor Eric Posner made two objections. The first was that using efficiency as the basis for moral regulation is peculiar. Consider a child who says to his parents, ``I am trying to decide whether I approve of pornography or not. What should I think about?" The efficiency argument seems to suggest that the parent should go out, survey people, and ask how much they would be willing to pay to have pornography, reporting back to the child, ``Well, there's $100 million pro and $10 billion con, so pornography is immoral.'' Can that be right? It's circular. The child is trying to decide what his preference is supposed to be in the first place and we are telling him to decide his preference by going out and surveying other people. The real issue-- the moral question-- is whether or not other people's preferences are morally correct in the first place. My response to this concern is that I am taking the raw preferences of the individual as data for social decisions, rather than showing what preference he should have. I am doing politics, not ethics. In this, I am following economics generally. Consider Michael Jackson's music. The real question in deciding whether we should regulate the price of his recordings is not economic efficiency, but how good the music is. We don't take that tack, however, even though aesthetics can have as sound philosophic underpinnings as as ethics or politics. Instead, economists are content to say that based on people's willingness to pay, restricting sale of his records is a bad thing because it creates inefficiency. It is possible to justify social regulation on moral grounds, but my purpose here is to show that social regulation should, when appropriate, be supported even by a law and economics extremist, unwilling to impose his morality or religion, but willing to take the moral preferences of the citizens as data, just as he takes their musical preferences as data. Professor Posner's second argument was that efficiency is suspect because it relies on willingness to pay, which in turn depends on the distribution of wealth. Suppose our hypothetical parent doing the pornography survey found ninety thousand people who were willing to pay ten or fifteen dollars to keep pornography legal, but then ran into Bill Gates, who said, "Oh, I'd pay $2 billion to make it illegal." Should Bill Gates's willingness to pay trump everybody else's? Efficiency says that it should-- he is willing to pay more than the people on other side of the issue. This is an old and important criticism of laissez faire in the economic sphere. A house exists, and society must decide who gets to live in it. We let Bill Gates have it because he is willing to pay the most, and that is the efficient outcome. Some people will complain that Bill Gates is rich, and why should he have house merely because he is willing to pay more? The economist's reply is that if one believes inequality of wealth to be a bad thing, the solution is to tax it away rather than to use inefficient regulation or have the laws apply differently to rich people and poor people. Something similar happens in the political market. Bill Gates has more influence than Eric Rasmusen. Maybe that is not fair, but probably the best way to resolve it would be to tax Bill Gates so he is not so wealthy rather than to say that nobody can spend more if he feels strongly about an issue. Whether we use a social planner or a political process, however , it is unclear which way income distribution cuts when it comes to social regulation. To the extent that poor people are more supportive of morals regulation than rich people, as many people believe, then efficiency analysis would lead to too great a reluctance to regulate morality, not too little. Indeed, one explanation for the decline of social regulation is the increased importance of the courts, which give greater weight to wealth and education than does the electoral process. All three of these objections--- the workings of the political process, the basis for fundamental moral preferences, and the problem of income distribution-- are extremely interesting topics for study. It is not clear, however, that further analysis of them might not strengthen my argument for social regulation rather than weakening it.