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Archive for January 12th, 2011

What About Justice?

It would seem to me that if John (the John in Alfred Marshell’s example) really wanted to act in his own self interest he would simply steal the apple from Mary.  Friedman acknowledges this, yet all he says about it is that it is efficient because John gains one dollar and Mary loses 50 cents.  Net gain of 50 cents is all Friedman acknowledges.  I am not saying that he is an immoral man who would approve of John’s actions in this case.  What I am trying to point out that all of us at sometime must submit to rules or laws even if it means sacrificing our own best interests.  What is efficient may not always be the right or just thing to do.

Justice has its place in society and sometimes justice must be served.  I would be nervous living in a world where everyone acted in accordance to economic principles, like rational self interest or did what ever was most efficient.  In that world we have people who steal because the chances of getting caught are fairly small if you are good at it.  We have justices and legislatures who pass laws to benefit them and their companies (even more so than what we already see).  Justice in these cases can act as a deterrent to future crooks who know that there is this thing that acts independently of economics what will serve them what they deserve.

Sometimes you may have to be the on the bad side of the deal in order for what is best for the population at large, and trust that eventually you will be on the upside.  Justice, if not meddled with, will balance out the “losses” sustained by economic efficiency.

Friedman’s thoughts on Economics and Law

My father is a corporate bankruptcy attorney in Las Vegas and much of Friedman spoke about in the first 2 chapters of his book have been things that my father has taught me and discussed with me since I was a freshman in high school, (I myself have plans to go to law school once I am done studying here), especially the point he makes about tenants, landlords, and the laws that are supposedly in place to ‘protect’ the tenants.  As Friedman points out, the laws actually have the capacity to hurt some tenants by placing an unwanted financial burden on them.  Studying economics as well has made me thing that the more laws we have, the worse off everyone else is.  Sure it may sound nice to require landlords to supply heating, air conditioning and other amenities, but if the tenant does not want that then they are forced to spend that money.  And especially, as Friedman pointed out so clearly at the beginning of the book, if robbing and not killing the victim carries the same punishment as robbing AND killing, then why not just kill the victim?  You are less likely of getting caught.  To the average American this law may sound like a good way to deter robberies and especially robberies with weapons, but in economic terms it does not pan out well.  I am looking forward to learning more from Friedman about how Economists look at the law

Is it just me, or is it foggy in here?

Friedman, Stearns, and Zywicki all mention the Coase Theorem in one way or another, and it would be a shame to not have at least one person mention the theorem that provides the name of this blog. So, for the first, and most likely not the last, time, I want to talk about the Coase Theorem.

As far as I can tell, the Coase Theorem assumes that with no transaction costs, the market will work toward equilibrium from any starting point. Essentially, one party pays the other to absorb its externalities. Problems could arise when the person absorbing the externalities finds their costs to be higher than the amount paid to absorb them, but then that would just leave both parties at equilibrium. I hope I would be correct in saying that the scenario would boil down to how badly, or how much someone is willing to rationalize, an action. If I want to build an addition to my house that will partially block my neighbor’s view, and my neighbor refuses to accept my offer to pay for infringing on his view, then we are at equilibrium. However, if I still really want my addition, and believe that the costs are justified, I will most likely give in and pay my neighbor enough to cover how much he thinks his view is worth. Raising my initial payment may seem irrational to some (depending on how much I end up paying), but to me the cost would be worth it. We can assume that individuals are rational beings, but this scenario raises the question of just how much humans will rationalize an action. I have a feeling that may be one of the key questions later on, but time will have to tell.

Pirates…not what you’d expect

After reading through the sections required for each book, I have realized one thing. I get pirates. Economics, on the other hand, is a little difficult to grasp. It is causing my hair to blow in the wind; the problem is there is no wind. Okay, I am being a little hard on myself. I understand the concept of the higher the risk, the greater the potential reward should be to compensate for the risk/potential for loss. For example, the pirates would not risk lives – their own or the lives of their crew – for measly loot. Lives would only be given up for something that would allow them to gain enough to live in life-long comfort. They were pragmatists. Even more interesting was the fact that the pirates and their support staff lived by what may be surprisingly strict codes. Even more surprising was the number of the crews who lived by codes that supported equal rights. Initially I mused that they may have been progressive or even visionary, but they were not. They were all self-interested. It made no sense for their interests to treat others like scum because they looked different. It is a strictly pragmatic or utilitarian way; every individual was evaluated on his or her value to the mission at hand – obtaining something of value. Loot! If anyone or anything was overlooked or not used in the most effective way, it would make it harder for the crew to obtain their final goal of the loot. In this way, the absence of equal rights may scuttle opportunities or, worse, create so many obstacles that the risk of failure would overcome the perceived benefit of the mission. Although the pirates may have failed in terms of behaving in a way that would be accepted by their contemporary society, they live in my mind as shrewd analysts cost/benefit scenarios on par with successful businesspeople of any era.

Piracy and Indentured Servitude

I used to be a history major.  In one class, we spent a day discussing pirates and their behavior, much like Leeson describes in The Invisible Hook.  Although we focused on the ideas of justice and of the pirates’ democratic structure more than the economics, it was an eye-opening discussion.  In another class we talked about indentured servitude.  Indentured servants and pirates were two brands, if you will, of people about which I had misconceptions.  For obvious reasons, I guess.  I learned that most indentured servants became “indentured” of their own volition and signed a contract.  They did it for free passage to the Americas and for the hope of a better life when their term of servitude ended.  The American dream, right?  Sure.

To apply economics to the pirate business, as Leeson does, I think is interesting, if nothing else.  And it’s enormously applicable in a class focused on “What economics has to do with law and why it matters.”  I believe economics can also be applied to indentured servitude; and comparing the economics of piracy with that of said servitude provides an interesting framework for the application of economics to law.  In the case of a pirate, we have a man who has considered his future options and decides that the life of a criminal is in his own best interest.  He’ll be more fairly treated, and has a greater chance of getting some cold hard cash.  The indentured servant, on the other hand, submits himself completely to the law.  He gives away his liberty, essentially volunteering for slavery.  He does so for the same reason the other man turns to piracy–rational self-interest.  Here, applying economics to law gives us two basically opposite behaviors.  One rational self-interested man chooses piracy and lives in open rebellion to law; the other surrenders his freedoms and submits himself absolutely to law.  Both are acting rationally to get ahead and make a buck.

So, in applying economics to law, as David Friedman puts forth in Law’s Order, laws ought to be created on the basis of “incentives they establish and the consequences of people altering their behavior in response to those incentives” (11).  Which is reasonably difficult to do, but is a good springboard, I guess.

Comparing Apples to Apples: Lost in Transactions.

Getting through the first two chapters of Friedman’s book, Law’s Order is an overwhelming feeling of what is to come through the rest of the book.  Looking through the eyes of the author is in a sense confusing but yet again leaves me asking many questions, perhaps too many.  Using the example as brought up in class about a person committing armed robbery with results of being caught life in prison; the same as if a person had committed murder.  What is the incentive not to pull the trigger?  This analogy makes perfect sense, but I fear that it also barely cracks the shell of this author’s framework for economics in law.

Two people bargaining for an apple, Mary and John.  John is willing to pay one dollar and Mary is willing to sell for 50 cents.  If they both settle at 75 cents, the both retain a profit of 25 cents, totaling 50 cents in profit.  If John buys it for a dollar, Mary has net gain of 50 cents; if Mary sells it for 50 cents, John has net gain of 50 cents.  If John steals the apple or if Mary losses the apple and John finds it Mary is minus the 50 cents compared to Johns one dollar and still there is a total gain of 50 cents.  But I would only have to ask questions of emotional gain through transaction like this.  This has all been a monetary value placed on an item, surely an emotional strain of being robbed or losing an object places a value in someway.  Or on the other hand finding an unforeseen fortune is an emotional gain.  You could argue that in the end the same value trade-offs are placed on emotions, but people being completely different from each other makes me question that only one punishment fits a crime.

Why Try?

It’s really hard to guess what people are going to do.  Why try?  My incentive to be lazy is almost enough to let people do what they want, and take no thought of it.  To try to create rules and laws that guide others actions, and models to interpret their behavior is (to me) nearly impossible.  Stearns and Zywicki say in Public Choice Concepts and Applications in Law that economics is not trying to do this.  Economic models are not made to capture every situation.  Models are guides that allow students of human kind to test and draw conclusions about behavior.  So again, Why should I try to use economic models?  The answer is that it is in my best interest.  I can have the best future possible if I know the way things work.  The system can benefit me, and I won’t have to work against it. Having a vague map is a lot easier than winging it.

On a grand scale, people who want the best chance in life to succeed decided there should be laws to protect them from others.  These people know they have to work with others, so they try to understand the way they act.  As time goes on, laws are broken, or evaded.  The laws can be changed, and the behavior of offenders can be noted.  Actions can be taken to prevent detrimental behavior.  As Friedman says in Law’s Orders, that an economist, after a murder, will look forward to how to prevent the crime, not back at what happened. The incentives that the law provides must prevent murder and other offenses.  That is the safest and most rational action to have a successful future.

Why should I try to understand law and it’s relationship to economic models?  I’ll have the best chance at success when I know the rules, consequences, and reactions of my actions.

If only I was a Pirate economist blogging about Connecting the two.

Rational self-interest.  When I took Econ 1500 last year I heard the term several times and spent a few class periods even talking about Adam Smith and the “invisible hand” that drives us all.  I must admit that even I, myself, a self-proclaimed “smart person,” never put the term anywhere near the idea of Piracy.  How’s that for divergent thinking? or a lack thereof.  I personally blame it on the public school systems in the U.S. ruining our creativity.  Thankfully Prof. Leesom of George Mason University is one of those “special” someones that makes it out alive and creative.

Nonetheless I love the connection between the two.  I can’t imagine a better mix to help me understand these ideas.  While reading I couldn’t help but think about how governments sometimes (or much of the time) makes it very easy for people to see that there may be no other way to a comfortable life but through the life of crime.  Think It seemed like for so many of the pirates that piracy was their last option.  It struck me as interesting, also the portion in the book where they were talking about the last words of the pirates that were hung.  They wanted to make sure that the captains of the more autocratic ships new and understood that they were the reason for these men turning to piracy.  Being sodomized, beaten to near death, having my wages lowered, or going out to places I originally never contracted to visit would be more than enough for me to go to piracy.  And through it all, they understood that by keeping together they would be able to accomplish much more.  I think the author may be turning me into a Pirate apologetic.

I find myself very excited for the Democracy section of this book.

The opportunity cost

In reading Friedman’s Law’s Order I think that there is one major part of his argument that he talks about, but fails to state in the opening chapter, this is opportunity cost. When considering the field of economics we are trying to efficiently solve the problem of scarcity. Which is people unlimited wants with limited resources. This is not how I perceive the relationship between economics and law. The way that I perceive that relationship, is dealing with the opportunity cost of the crime verse punishment relationship. This is something the Friedman hinted to in his statement of logic on page 11. When he talks about letting the nephew go, they are looking at the cost of doing so. To me the only thing people look at is cost. And the cost are not necessarily money, they can be the value of the human life, the cost of having a loss of production, the cost of keeping him imprisoned among other things. Some of those cost can be very high, but when economist deal with rational individuals, we know that they are putting a higher cost on letting a murderer go free then the cost of keeping him imprisoned. What are they giving up to choose this course of action? The cost of not doing the other thing, this is what opportunity cost is. What is the Opportunity cost of creating and enforcing laws? If we figure that out then I think we will gain an insight into why law are created, and the economic benefits of having these laws.

Does irrational self-interest exist?

I am not a mathematician, logician, or philosopher, and frankly, I’m far from being an economist despite my chosen field of study. Therefore, the following claims I make are based deeply upon what may be my own ignorance of the above specified schools of thought. And finally, is what I am about to explore even applicable or useful to economists? Keep that question in mind throughout my post, because it is one I cannot yet answer.

I am always bothered by assumptions in economic models. I am much more interested in the exceptions to the rules. One assumption I often like to puzzle over is the idea that everyone acts according to his or her own rational self-interest. For me, when I consider a friend who has committed suicide, I view their behavior as completely irrational. Yet to the said individual, I am sure that their choice was absolutely rational, given their set of premises upon which the action was based. If this case can be applied generally, despite society’s perception of irrational behavior in whatever the situation may be, I would argue that there is no such thing as an irrational self-interested act. I believe that people act according to their given set of premises and information, and if there is something society views as irrational behavior, it is probably the premises upon which the behavior is based that are actually irrational.

But what is the definition of rational? A quick look in the New Oxford American Dictionary tells us that rationality is based in logic. Because I understand nothing of formal logic, this is where my thoughts on rationality may be far off the mark, because it is highly likely that my ideas concerning formal logic are misguided and uninformed.

While I, and probably most others, have no formal training in logic, I believe that acting logically is nevertheless programmed into human beings. Again, if someone appears to be acting irrationally, I assert it is more a problem with their premises than with their logic. I tend to always feel like I am acting rationally. One minute or five years later I may look back and realize how irrationally I behaved in a given situation, but in the moment, I was acting rationally. It was only when the factuality of my premises was questioned that I realized I had behaved irrationally.

The only way in which a person could act irrationally is if he knew one of the premises on which his behavior was based to be factually incorrect. Surely this happens, so what prompts the behavior anyway? Are humans irrational? Must there be another premise overriding the false premise? And who ultimately determines what is fact? Aren’t many facts based on value judgments?

Now returning to my initial question. Is a discussion this particular concerning rationality something that can contribute to the field of economics, or is it only useful as a personal attempt at justifying the assumption of rational self-interest in my own mind?