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{\large {\bf Economic Regulation and Social Regulation, 1. INTRO } }


\bigskip

23 October 2007 \\[0pt]

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{\large {\bf  } }

\bigskip

Eric Rasmusen \\[0pt]

\bigskip

{\it Abstract}

\end{center}

``Health, safety, morals, and the general welfare'' are the traditional
subjects of the police power of the state. When we think of government
regulation we usually think of economic regulation, which  is generally
efficient only for a narrow range of activities and is subject to abuse
by private parties who can profit from it. Laissez faire is the
economist's default rule, subject to important exceptions.  Social
regulation is another
area of government regulation,   and one where the presumptive
efficiency of laissez faire disappears, because market imperfections are
more common and capture by special interests  less profitable.
 That the government should engage in social
engineering does not follow immediately, because our current knowledge
of social processes is
primitive.  Libertarianism, however, is less likely to lead to social
efficiency, leaving a place for tradition and for careful design of
regulation.

\noindent
 {\small \hspace*{20pt}  Dan R. and Catherine M. Dalton Professor,
Department of Business
Economics and Public Policy, Kelley School of
Business, Indiana University. visitor (07/08), Nuffield College, Oxford
University.  Office: 011-44-1865 554-163 or (01865) 554-163. Nuffield
College,
Room C3, New Road, Oxford, England, OX1 1NF. E-mail:
Erasmuse@indiana.edu. Web: \url{http://www.rasmusen.org},
 \url{http://www.rasmusen.org/social/social.htm}.
  }

{\small I thank Lucien Bebchuk, George Bentson, Robert Ellickson, and
David Westfall and participants in seminars at George Mason, Harvard,
Michigan, Vanderbilt, and Yale Law Schools and the Emory Department of
Economics for comments. My thanks does not imply their agreement with
what I write. Footnotes starting with xxx are notes to myself for future
drafts. }

%----------------------------

\newpage

\begin{center}

{\small TABLE OF CONTENTS }

 \end{center}

\begin{small}


\bigskip

 \noindent
 {\bf  1.Introduction} \dotfill \pageref{intro}


\bigskip

 \noindent
 {\bf 2 Surplus Maximization} \dotfill \pageref{surplus}  \\
 \hspace*{36pt} {1 A Single Market Transaction} \dotfill \pageref
{single} \\
\hspace*{36pt} {2 An Entire Market} \dotfill \pageref{entire}\\
\hspace*{36pt} {3 Product Quality} \dotfill \pageref{quality}\\
\hspace*{36pt} {4 Innovation} \dotfill \pageref{innovation}

\bigskip

 \noindent
  {\bf 3 Market Failure and Economic Regulation} \dotfill \pageref{
failure} \\
 \hspace*{36pt} {1  Property Rights} \dotfill \pageref{
enforcing}\\
 \hspace*{36pt} {2  Contract Enforcement} \dotfill
\pageref{property}\\
\hspace*{36pt} {3  Market Power} \dotfill \pageref{market}\\
 \hspace*{36pt} {4 Imperfect Information} \dotfill \pageref{
imperfect}\\
 \hspace*{36pt} {5 Externalities} \dotfill \pageref
{externalities}\\
 \hspace*{36pt} {6 Coordination Problems} \dotfill \pageref{
coordination}

\bigskip



\noindent
 {\bf 4 Government Failure and Economic Regulation} \dotfill \pageref{
government}


\bigskip

\noindent
 {\bf 5. Applying the Test to Actual Regulation} \dotfill \pageref{
applying}



\bigskip

\noindent
   {\bf 6   Mental Externalities } \dotfill  \pageref{blank}  \\
 \hspace*{36pt} {1 Social Regulation Generally}  \dotfill  \pageref{
blank} \\
\hspace*{36pt}  {2 Mental Externalities} \dotfill  \pageref{blank}\\
\hspace*{36pt}  {3  Education, Altruism, Malice, and Guilt  } \dotfill
\pageref{blank}\\
\hspace*{36pt}  {4  Coordination  } \dotfill  \pageref{blank}



\bigskip

\noindent
   {\bf 7  Failures of Decisionmaking  } \dotfill  \pageref{blank}  \\
\hspace*{36pt}  {1  Failures of Decisionmaking:  Information }
\dotfill  \pageref{blank}\\
 \hspace*{36pt}  {2  Failures of Decisionmaking:   Systematic Mistakes
Due to Bad Priors} \dotfill  \pageref{blank}\\
 \hspace*{36pt}  {3  Failures of Decisionmaking:  Lack of Self Control
(Multiple Selves) } \dotfill  \pageref{blank}\\
\hspace*{36pt}  {4 Poor Judgement and Rule Rationality}   \dotfill
\pageref{blank}\\
\hspace*{36pt}  {5 Impatience and Lack of  Self Control}   \dotfill
\pageref{blank}



\bigskip

\noindent
  {\bf 8 Alternative Justifications for Social Regulation}   \dotfill
\pageref{blank} \\
\hspace*{36pt}  {1 Religious Reasons} \dotfill \pageref{blank} \\
\hspace*{36pt}  {2 Imposition of the Policymaker's Desires} \dotfill
\pageref{blank}

 \bigskip

\noindent
  {\bf 9 Government Failure in  Social Regulation}   \dotfill \pageref{
blank}\\
\hspace*{36pt}  {1 Rentseeking} \dotfill \pageref{blank} \\
\hspace*{36pt}  {2 Shortsightedness} \dotfill \pageref{blank} \\
 \hspace*{36pt}  {3 Mistakes} \dotfill \pageref{blank} \\
\hspace*{36pt}  {4 Social Ecology} \dotfill \pageref{blank} \\
\hspace*{36pt}  {5 The Usefulness of Tradition} \dotfill \pageref{
blank} \\
 \hspace*{36pt}  {6 Explaining Historical Instances of
Social Regulation} \dotfill \pageref{blank}


\bigskip

\noindent
 {\bf 10 Federalism and Libertarianism}   \dotfill  \pageref{blank}

\bigskip

\noindent
 {\bf 11 Conclusion}   \dotfill  \pageref{blank}



\bigskip

\noindent
  {\bf  12   References} \dotfill  \pageref{blank}

\end{small}

 %----------------------------



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\begin{raggedright}

\parindent 24pt

\parskip 10pt

\begin{center} {\bf 1. Introduction} \label{intro} \end{center}

\begin{quotation}

{\small``What you say is very fine indeed, Cephalus,'' I said. ``But as
to this very thing, justice, shall we so simply assert that it is the
truth and giving back what a man has taken from another, or is to do
these very things sometimes just and sometimes unjust? Take this case as
an example of what I mean: everyone would surely say that if a man takes
weapons from a friend when the latter is of sound mind, and the friend
demands them back when he is mad, one shouldn't give back such things,
and the man who gave them back would not be just, and moreover, one
should not be willing to tell someone in this state the whole truth.'' }

{\small ``What you say is right,'' he said. }

{\small ``Then this isn't the definition of justice, speaking the truth
and giving back what one takes.''\footnote{{\small \label{Plato} Plato,
{\it The Republic}, translated by Allan Bloom, Basic Books, (1968) at
331c.}} } \end{quotation}




Maintaining contracts and property rights---- ``speaking the truth and
giving back what one takes''--- are important functions of government.
It is as appealing to modern Americans as to ancient Greeks that people
should be free to do what they want with their property, so long as they
respect other people's property rights. There exists, at the same time,
a strong feeling that the economy would work better if the government
intervened in it to control the prices people charged when selling their
property or the kinds of property they are allowed to sell, but this
feeling diminished sharply from the 1930's to the 1990's. After
experiencing deregulation of industries such as air travel, trucking,
and telephone sales, both the educated and the uneducated public seem to
be less interested in government regulation of prices. The virtues of
laissez faire have come to be part of the conventional wisdom.

Not all life is monetized, even in America. Political issues are
conventionally divided into the Economic, the Social, and Foreign
Affairs. Of Foreign Affairs we will say nothing, but in the Social as in
the Economic spheres, there is intense controversy over not only what
the government should make people do, but whether it should intervene at
all. Table 1 lists a number of issues in each sphere that have been
controversial in America in the past decade, whether in political
campaigns or in the courts.


\newpage

\begin{center}

{Table 1: SOCIAL ISSUES AND ECONOMIC ISSUES}

\begin{tabular}{  l l | ll   }
 \hline
 & & &\\
Social Issues &  \hspace*{56pt} &  \hspace*{56pt}  &Economic Issues \\
 & & &\\
\hline
 & & &\\
Abortion & &&The minimum wage \\
 Legalizing marijuana && &Outsourcing \\
 Homosexuality &&& National health insurance\\
 Gun control && &Social
Security privatization\\
 Pornography && &Medicare drug benefits for the
elderly\\
 Gambling && & Living wage  ordinances\\
 & & &\\
 \hline
\end{tabular}

\end{center}

Most of the issues here are not what is conventionally called
regulation, but they all involve using the   power of the State to
restrict people's behavior, rather than simply to raise money for public
goods.

 The idea of social insurance-- whether it be national health insurance,
Social Security, or Medicare-- is to require people to buy insurance,
and whether they are required to buy it from the government or from
private companies is  secondary.

It is not entirely clear how these are divided into the social and the
economic, of course. Marijuana sales are  market transactions, so why
not call the ban on marijuana economic regulation? The reason, I think,
is that although the market for marijuana is monetized, the aim of the
regulation is not to improve the workings of the market, but to
eliminate marijuana, to remove it from the economy rather than to
enhance its role. Whether the marijuana passes through the market or
whether someone grows it in his own hydroponic tank, the case for
regulation is equally strong.

In America there is a curious difference between liberals and
conservatives in their positions on the role of government. On social
issues, conservatives tend to support heavier government regulation.
This is only a tendency, of course-- it is liberals who want stricter
regulation of guns, for example-- but it is a tendency nonetheless. On
economic issues, liberals tend to support heavier government regulation.
Libertarians, who would like to restrict government impositions on
freedom in both the economic and social spheres, enjoy criticizing
liberals and conservatives alike for inconsistency.

      Table 2 lays out these tendencies in a two-by-two grid.\footnote{
``Neoconservatives'' are perhaps defined by their foreign policy
attitudes than anything else, but they have been an important
libertarian strand in American thought. Classic liberals might belong
either with American conservatives or libertarians, since most
Victorians (e.g., Macaulay, Gladstone, Disraeli) favored free trade but
not free love, but \label{Mill59} John Stuart Mill is an important
exception, who led the way for modern liberalism-- he opposed
Sabbatarian legislation and prohibition of strong drink, bigamy, and
opium; John Stuart Mill, {\it On Liberty}, 194, 196, 198, 203 (1859), in
{\it Utilitarianism, Liberty, and Representative Government}, E.P.
Dutton and Co., Inc., 1951. } There are four possible combinations of
attitudes towards regulation. I have mentioned those occupied by
conservatives, liberals, and libertarians already; what remains is the
attitude that the government ought to regulate both social and economic
behavior. This is less prominent in America, but is common in the rest
of the world  on both left and right. I have put ``European
conservatives'' and ``Marxists'' in that box, two groups that are
hostile to each other as to particular regulations but which agree that
people behavior ought to be restricted. In Anglo-American thought, this
attitude might be labelled ``Tory'', with the idea that the slowing of
change in all spheres of life is an important function of government.


\bigskip


\begin{center}

{\bf Table 2: POLITICAL ATTITUDES}\\

 \vspace*{16pt}

\begin{tabular}{ l r|c c } \multicolumn{2}{ c}{} & \multicolumn{2}{c
} {
\bf Social Regulation} \\
\multicolumn{4}{ c } {} \\
 \multicolumn{2}{
c|}{} &  \multicolumn{1}{|c  }  {FOR} & AGAINST \\
 \multicolumn{2}{
c|}{} & \multicolumn{1}{c  }{} & \multicolumn{1}{c  }{}\\
 \hline
\multicolumn{2}{ c|}{} & \multicolumn{1}{c  }{} & \multicolumn{1}{c  }{}
\\ & FOR & European conservatives (``Tories'')& American liberals \\
  & &
Marxists & \\ {\bf Economic Regulation} & & & \\ & & American
conservatives & Libertarians \\
 & AGAINST & Classic liberals (``Whigs'')
& Neoconservatives \\
 \multicolumn{2}{ c| }{} & \multicolumn{1}{c  }{} &
\multicolumn{1}{c  }{}\\
 \hline

\end{tabular}

\end{center}

\bigskip

   Libertarians can claim human freedom as their highest good. Liberals
put emphasis on a variety of rights to decide behavior for oneself, most
of which fall in the social sphere rather than the economic. The
European conservatives, Tories, and Marxists who support government
intervention broadly each have their own visions of the nations they are
trying to construct. But what of the Whigs? Is there a way to make their
position consistent? We shall return to that question later.

    In both the economic and social spheres, deregulation has existed
simultaneously with new regulation. The general picture is one of
increased tolerance, with libertarianism on the rise in both the
economic and social spheres among intellectuals, but with growing
acceptance, also, of government environmental, safety, and quality
regulations. The success of the has been parallelled by the success of
the law-and-economics movement, many of whose adherents have a strong
tendency towards libertarianism. The economic approach to law has been
applied in great detail to economic regulation and deregulation, to the
point where knowing some economics is indispensable for anyone trying to
do serious policy research in the area. It has been much less applied to
social regulation, although by 1992 it seems clear that in comparison
with other developed countries, the social problems of the United States
are much more severe than the economic problems.

     Is this simply because economics has nothing to say about
nonmonetary problems? No. The two driving ideas of economics are that of
the rational maximizing individual, who chooses actions depending on
costs and benefits; and that of the competitive marketplace, which
generates predictable collective consequences from the independent
actions of many individuals. These ideas have been applied to many
topics traditionally allocated to other disciplines such as political
science, law, sociology, and biology.\footnote{ Gary Becker is the best
known imperialist, e.g., Gary Becker(1974), ``A Theory of Social
Interactions,'' {\it Journal of Political Economy}, 82: 1063-1093 (
November/December 1974); Gary Becker(1981), {\it A Treatise on the
Family}, Harvard University Press, 1981. He has been joined by many
other scholars using ``rational choice'' analysis in: law, Richard
Posner(1998) {\it Economic Analysis of Law}, 802 pp., 5th edition (1st
edition, 1972), Aspen Law and Business, 1998; sociology, James Coleman,
{\it Foundations of Social Theory} (1990); political science, Peter
Ordeshook, {\it Game Theory and Political Theory: An Introduction } (
1986); biology, John Maynard-Smith(1982) {\it Evolution and the Theory
of Games}, 224 pp., Cambridge University Press, 1982. } The economic
approach seems to explain behavior in a variety of cultural and
historical settings, and even the behavior of animals in laboratory
experiments.\footnote{Raymond Battalio, John Kagel, Howard Rachlin \&
Leonard Green (1981) ``Commodity-Choice Behavior with Pigeons as
Subjects,'' {\it The Journal of Political Economy}, 89:67-91 (February
1981).} Social interactions call for somewhat different tools of
analysis than economic interactions, even starting from the base of
maximization and markets, but the rise of game theory and information
economics in the 1980's has vastly expanded the number of tools at our
disposal, and we can expect continued progress.

     In the traditional interactions studied by economics, individually
rational behavior tends towards collectively optimal consequences.
Smith's famed Invisible Hand guides property to be traded until no one
can benefit from future voluntary trades. At that point, almost by
definition, no intervention can make any one person better off without
making someone else worse off. Economists therefore favor the
libertarian view that government regulation is unnecessary and
pernicious if society is to reach results that are optimal given the
constraints of resources and biology. People are often surprised by
economists' policy conclusions, because economists they thought were
liberal turn out to oppose the minimum wage and rent control, and
economists they thought were conservative turn out to favor legalization
of marijuana and homosexuality. The explanation is that in each case,
the economist supports legalization of voluntary interactions between
consenting adults, which makes both parties to the transaction better
off.



         Government plays a role in recognizing and protecting property
rights, but it decentralizes authority by allocating those property
rights to individuals. A property right is effectively the right to take
some action. If the horse, Dobbins, is allocated to $A$, $A$ is allowed
to take a number of actions with respect to Dobbins--- to ride him,
drown him, eat him, or sell him--- but $B$ cannot do any of those things
without $A$'s permission. In the economic world of perfect competition,
every action is under the control of someone; there are no actions which
a person cannot undertake if he is willing to pay someone else enough to
do so. In addition, the action is an {\it alienable} property right; $A$
can either ride Dobbins himself or sell that right to $B$. A government
regulation or a social custom that forbade the riding of Dobbins by
anyone, or made the right inalienable by allowing only $A$ to ride him
would reduce welfare, because nobody would get the benefit of the ride,
or the benefit would go to $A$ rather than to someone else that valued
it more.

    Economists are like Cephalus in {\it The Republic}: they view the
role of government as to define and protect property rights and to make
people keep their promises. But Socrates dismisses Cephalus and the
economist's definition of justice, only seven pages into the three
hundred and three pages of {\it The Republic}. He does not scoff; this
is the first definition of justice, and Cephalus is the paradigmatic
solid citizen, the pillar of society. Yet something is missing. This
article will try to determine whether given the assumptions of the
economic approach the government does serve any purpose other than to
set property rights and settle contract disputes.

        To these two functions, economists, and, I expect, Cephalus,
would add the provision of public goods such as national defense. Since
the provision of public goods is independent of regulation, in the sense
that it imposes no constraints on individual behavior beyond requiring
that someone pay taxes, I will not discuss it further, except to briefly
distinguish taxation from regulation. Taxation is the use of government
force to acquire funds with which to buy things. Regulation is the use
of government force to change people's behavior. In both cases,
governmention force is used, but the purposes differ. A pollution
``tax'' is really regulation, since its primary purpose is to change
behavior and only incidentally does it raise revenue. A requirement that
private employers provide health insurance is a tax since the end there
is to buy things for people that the government could pay for itself.
This distinction has even been recognized in law, as the celebrated
Nollan case illustrates ({\it Nollan v. California Coastal Com.}, 483
U.S. 825 (1987)). The State of California would not let Mr. Nollan build
a house unless he built a public path. The U.S. Supreme Court ruled that
this was not regulation, since the path did not solve any problem
created by building the house, but simply a tax, and a tax specific to
the individual. This made California's requirement a taking without
compensation. Since such takings are forbidden in the U.S. Constitution,
California was required to allow Nollan to build or else compensate him
for not building. In this paper, we will be concerned with regulation,
not taxation.

There is a fine shading from human interactions we call  economic in our speech to those we call  social. At the one end  is the highly competitive market in which a standardized good is bought and sold for private uses of no concern to anyone but the user.    At the other end is the relationship between husband and wife, two people who exchange favors but who care deeply about each other and whose actions affect their children as well as themselves.   The two extremes shade into each other gradually. The essence of what we call economic is not dollar prices; barter is just as economic. It is not the  competition of large numbers of people for something; sporting events and courtship are that. Rather,  in subject matter what is economics and what is sociology is demarked by clusters of characteristics. The economic is monetized, competitive, selfish,  and self-centered. The social leaves prices unstated, is full of special bilateral relationships, and  is full of concern for other people's welfare and for what they think and do.  ``A definition may be
very exact, and yet go but a very little way towards informing us of the
nature of the thing defined; but let the virtue of a definition be what
it will, in the order of things, it seems rather to follow than to
precede our inquiry, of which it ought to be considered as the result.''
(Edmund Burke, {\it On the Sublime and the Beautiful}, p. 13).  So we shall see here. 

I will argue that while the method of economics is useful for analyzing
human interactions beyond the traditional economic markets, the default
policy recommendation of laissez faire becomes dubious if one goes too
far afield. The old recommendation does not match local circumstances in
the newer provinces of economics' empire. The analyst can still usefully
assume that the individual acts rationally, but he cannot deduce that
this leads to efficiency in the absence of government regulation and
social custom. The positive predictions of economics will still be
valid, but not the usual normative conclusions. A presumption of the
optimality of laissez faire is not a bad thing for economic regulation,
but for social regulation a better presumption is that the status quo
should be left untouched. 
 


       This conclusion is important for law because it implies that
judges should not invalidate statutes merely because they do not make
sense on purely economic grounds. Judges who pronounce on the
``reasonableness'' or ``rational basis'' of statutes and private
covenants are too self-confident, and they should be more deferential to
the status quo of customary law and practice. The burden should be on
those opposing the rules to show that they have a bad purpose, not on
those who support them to show that they have a good purpose. The
argument will not be based on making tradeoffs between standard economic
goals and other values, as in discussions that trade off efficiency and
equality. Here, efficiency-- in the economist's sense-- will be the only
goal, so the conclusions will be based on the utilitarian premises
standard in economics, not on religious or liberal premises. This
requires some preliminary discussion to clarify society's objectives.
The objective, surplus maximization, will be to maximize utility by
making the appropriate tradeoffs. This is different from trying to
reconcile absolute rules that conflict with each other or from trying to
discover the will of God. My hope is that by starting from the generally
accepted premise that it is better to make people happier, the analyst
can come to useful conclusions about how the government should restrict
behavior. If it turns out that the resulting government regulation
offends an ethical or religious principle of the analyst, the analysis
is nonetheless useful, in showing that the principle cannot be imposed
without reducing human happiness.

Even in a utilitarian framework, the individuals under analysis may have
religious and ideological beliefs, and these will affect policy under
surplus maximization. If some people believe that God forbids people to
work on Sunday or others believe that Kant forbids people to ban
pornography, the feelings of those people must be taken into account.
The analysis will neither ignore such beliefs nor take them as final:
rather, they are data on utility to be fed into the utilitarian
calculus. If enough people are enough upset by Sunday work or
pornography bans, those things will be restricted.\footnote{\label{
Posner1} In law and economics, this approach is best known from the work
of Richard Posner. See Michael McConnell \& Richard Posner (1989) ``An
Economic Approach to the Issues of Religious Freedom,'' {\it University
of Chicago Law Review}, 56: 1, Posner, Richard (1992) {\it Sex and
Reason}, 458 pp., Harvard University Press, 1992. I will not be
addressing the concerns of those who object to ``universal
commodification'' of relationships or ``incommensurability'' of values.
See Joseph Cropsey (1955) ``What is Welfare Economics,'' {\it Ethics},
65: 116-125 (1955). Reprinted in {\it Political Philosophy and the
Issues of Politics}, University of Chicago Press, 1977; or, for an
overview, Matthew Adler, ``Law and Incommensurability: Introduction,'' {
\it University of Pennsylvania Law Review,} 146: 1169 (1998). The
utilitarian framework leaves considerable room for analysis and is less
liable to the criticism of assuming its conclusions than many other
approaches, as is evidenced by the differences between Posner's
conclusions and my own.} In evaluating both economic and social
regulation, the objective will be to examine taboos as means to
increasing human happiness rather than as ends in themselves; the
Sabbath will be for man, not man for the Sabbath.\footnote{The
intellectual ancestor of this approach is David Hume: ``But there is
this material difference between {\it superstition} and {\it justice},
that the former is frivolous, useless, and burdensome; the latter is
absolutely requisite to the well- being of mankind and existence of
society.... Were the interests of society nowise concerned, it is as
unintelligible why another's articulating certain sounds, implying
consent, should change the nature of my actions with respect to a
particular object, as why the reciting of a liturgy by a priest, in a
certain habit and posture, should dedicate a heap of brick and timber
and render it thenceforth and forever sacred.'' \label{Hume51} David
Hume (1751) {\it An Inquiry Concerning the Principles of Morals}, p. 29,
Bobbs- Merrill Co. Inc. 1957.}

      The thrust of this book will be that laissez faire is the
presumptive best policy in the economic sphere, with, of course, many
exceptions and special cases, but tradition is the presumptive best
policy in the social sphere. This is a modernized version of the
argument of the English jurist James Fitzjames Stephen.\footnote{\label{
Stephen1} James Stephen, {\it A History of the Criminal Law of England}
(1883)} In {\it Liberty, Equality, Fraternity}, Stephen admires John
Stuart Mill's {\it Principles of Political Economy}, with its careful
explanations of the workings of the Invisible Hand in economic markets,
but he attacks Mill's {\it On Liberty} as a confused muddling of

utilitarian principles. Mill, Stephen says, is willing to create human
unhappiness merely for the sake of abstract ideals (liberty, equality,
and fraternity) that benefit no one and lack a rational basis.\footnote{
\label{Stephen} James Stephen, {\it Liberty, Equality, Fraternity,} 2nd
edition (1874), page numbers from Chicago University Press edition,
Richard Posner, ed.(1992).} That was a dispute between two Liberals,
each claiming to start from the same premises of maximization of human
happiness as the goal of society. I will start from the same
premises, with the difference that I will update the discussion using
twentieth century economic theory.

       We thus will end up providing a justification for the attitude of
the Whigs in Table 2, who tend to favor social regulation and oppose
economic regulation. The justification will be a utilitarian one: that
these tendencies will, if properly used, result in the greatest amount
of human happiness.

  I will start out, in Chapter 2,  with a lengthy discussion of value
maximization, also called ``efficiency'' or ``wealth maximization,''
which is   the economist's criterion for goodness.  In the context of
perfect competition, laissez faire maximizes value, but as Chapter 3
shows, market failures of various standard types make government
regulation useful. Regulation brings up the possibility of government
failure even worse than market failure, however which is the topic of
Chapter 4.  Chapter 5 will apply these ideas to various government
policies: pollution regulation, mandatory recycling, bicycle helmet
laws, labor union laws, and so forth.  This first part of the book is a
reprise of standard economic theory, the necessary grounding for looking
at social regulation.

  I will then proceed to the heart of the book: the application of value
maximization to social interactions not traditionally considered
economic.   Chapter 6 will elaborate on the concept of externalities,
with emphasis on mental externalities--- what happens when Smith's
conduct displeases Jones even without any physical interaction or effect
on Jones's material wealth.  Chapter 7 elaborates on failure of
decisionmaking, whether due to poor information, poor information
processing, or disregard for the future.

  The analysis of social regulation will bring up several topics which
will benefit from their own chapters. Chapter 8 will contrast value
maximization with other justifications for regulation based on religion,
fairness, or self-centeredness. Chapter 9 will address the issue of
whether government failure is as big a problem for social regulation as
for economic, and will look at how social regulation actually comes
about. Chapter 10 will relate the book's pro-regulation conclusions to
libertarianism and will discuss issues of federalism and pluralism.



  The book's argument,  put simply, is this.  (i) Laissez faire works
well in
economic interactions, with certain exceptions, and regulation is apt to
be misused by the government  (ii) In social interactions,  where the
exceptions dominate, the case for laissez faire is much less compelling.
  (iii) Government officials face less temptation to use social
regulation contrary to the public good, but since it is difficult to
predict the effects of social innovation, the best strategy is to
vary the status quo only slowly cautiously.

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