Sometimes, one gets the impression that knowledge of economics has progressed. It can be guessed that proportionately fewer people than in the 17th century now think that trade wars are good (except within some backward governments). At other times, it seems that knowledge has not progressed much: take “price-gouging” laws, whose effects the California power blackouts illustrate again.
In rich California, the preventive power blackouts created many shortages, in the proper sense of non-availability of goods at current, legal prices:
Within the Bay Area blackout zones, residents were rushing Tuesday to buy food, water and electric generators–almost as if a hurricane were approaching. Stores including Rite Aid and Target across Oakland had run out of flashlights and most batteries. (Providence Journal, October 9)
Lines for gas snaked around the block … When Costco opened Wednesday morning, the rush immediately began anew. The store had 20 generators for sale. “They were gone in five minutes,” Mr. Bohn said. (Wall Street Journal, October 10)
By sunset, the house was getting cold as the outdoor temperature dropped into the 40s. She took her 2-year-old son, Hunter, out to get food at Toni’s, one of the local restaurants running on a generator. She found the place mobbed; the wait for a cheeseburger was 90 minutes. (Wall Street Journal, October 10)
Mairie Raxakoul was trying to keep her inventory of cheeses cool with dry ice at Raxakoul Coffee and Cheese. She tried to rent a generator, but none was available, she said. (Wall Street Journal, October 10)
During the blackouts, Californians waited in long lines for essentials like gasoline, batteries and ice. (Wall Street Journal, October 13)
Why didn’t entrepreneurial suppliers rush in from Arizona, Nevada or Oregon with goods that were not in short supply in their states?
Consider what happened a 1996 hurricane that hit Raleigh (North Carolina) hard. A hundred miles away from Raleigh, four young entrepreneurs thought that they could make some money by selling ice there. They rented two small freezer trucks, bought 500 bags of ice at $1.70 each, and drove to Raleigh’s downtown area, chopping fallen trees in their way. They set up to sell their ice for perhaps $8.00 a bag, adding supply where there was none.
It did not work for long. North Carolina’s price-gouging laws rapidly stopped the useful price gougers. In my review of an anthology of Philosophy, Politics, and Economics, I summarized Michael Munger’s description of the outcome:
Enterprising ice sellers were arrested as they sold at higher prices something that hurricane victims could not otherwise obtain and for which they were obviously happy to pay more. These same customers applauded when their suppliers were led away by police before their eyes! “They clapped,” Munger writes in disbelief.
The problem does not seem to be very complicated. It is better to have something available and more choice than nothing and no choice. Expanding supply would gradually push prices down until the normal supply chain can be reestablished.
This sort of entrepreneurial relief is also banned in California, as in two-thirds of American states. It is instructive to read Section 396 of Title 10 (interestingly titled “Of Crimes Against the Public Health and Safety”) of the California Penal Code; a few quotes:
Upon the proclamation of a state of emergency declared by the President of the United States or the Governor, or upon the declaration of a local emergency by an official, board, or other governing body vested with authority to make that declaration in any county, city, or city and county, and for a period of 30 days following that proclamation or declaration, it is unlawful for a person, contractor, business, or other entity to sell or offer to sell any consumer food items or goods, goods or services used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building materials, housing, transportation, freight, and storage services, or gasoline or other motor fuels for a price of more than 10 percent greater than the price charged by that person for those goods or services immediately prior to the proclamation or declaration of emergency.
It is unlawful for an owner or operator of a hotel or motel to increase the hotel or motel’s regular rates, as advertised immediately prior to the proclamation or declaration of emergency, by more than 10 percent.
A violation of this section is a misdemeanor punishable by imprisonment in a county jail for a period not exceeding one year, or by a fine of not more than ten thousand dollars ($10,000), or by both that fine and imprisonment.
A violation of this section shall constitute an unlawful business practice and an act of unfair competition within the meaning of Section 17200 of the Business and Professions Code. The remedies and penalties provided by this section are cumulative to each other, the remedies under Section 17200 of the Business and Professions Code, and the remedies or penalties available under all other laws of this state.
Many local governments rapidly proclaimed states of emergency, such as Santa Clara County, Sonoma County, the City of San Jose, and the City of Santa Rosa. A bit later, on October 11, the governor of California also proclaimed a state of emergency in Los Angeles and Riverside counties.
One thing is important to understand. Each time somebody pays a market price, he wins a bidding competition in an invisible auction. This is why the rich own the vast majority of Porche, but also why even anti-Second-Amendment billionaires cannot bid away all private guns or all the steel. This is why mothers can buy milk for their children instead of all the milk-making resources moving to the beer and wine industries. Every time you buy or sell something, there is so-called “price-gouging,” and you are very happy that there is.
It’s nice to have altruism and benevolence around, but only up to a certain point. Suppose that, during an emergency, you want to give away your generator and that every household in your family already has one. How do you know who needs it most? How many hours or days are you willing to spend finding out? Self-interest generally works better for prosperity and human flourishing.
Perhaps it is not as much ignorance that has persisted, as coercive values that have advanced. If more people believe it is better that nobody gets something if not everybody can have it, or that goods would be better morally allocated by queues or by lottery than by willingness to pay, then price-gouging laws become acceptable—to those people.
READER COMMENTS
Phil
Oct 14 2019 at 12:11pm
“Suppose that, during an emergency, you want to give away your generator and that every household in your family already has one. How do you know who needs it most?”
The person who needs it most is the person who cannot afford to replace all the food in their freezer every time the spiteful and capricious power company decides to turn off the electricity. Or maybe it is the fixed income invalid who loses air conditioning and life-supporting medical equipment. But those people cannot pay the market price.
The person who needs it most will not get it under either market prices or under price-gouging laws. Removing the law helps only those who can afford the generator, but will not help those who need it most.
Jon Murphy
Oct 14 2019 at 12:39pm
Why do you assume that?
Walter Boggs
Oct 14 2019 at 2:18pm
“Removing the law helps only those who can afford the generator, but will not help those who need it most.”
Not the case. Suppose I wanted to buy a generator and give it to the person you identify as the most needy. The anti-gouging law means I cannot buy the machine. Removing the law means I can, benefitting those who need it most.
J Mann
Oct 14 2019 at 2:35pm
From everything I read, the power isn’t off because of spite and caprice. (It would be surprising if it were, since PG&E earns money by selling power, not by not selling it).
It sounds like it’s driven by concern over possible wildfires, which is particularly concerning to PG&E while it’s in bankruptcy reorganization.
https://www.wired.com/story/californias-power-outages-are-about-wildfiresbut-also-money/
Nick
Oct 16 2019 at 7:33am
_Even_ after pretending that your assumptions are true, which they mostly are not, at least in developed countries, this is _all the more reason_ to have a robust market order!
At equilibrium profits tend to zero and the supplier/producer is forced to innovate. This usually results in reduced costs of production, which pushes everyone’s living standards up by a bit. _That_ is the source of prosperity, not coerced altruism.
Will you be able to find exceptions to this general statement? Of course you will, a significant chunk of the econ profession has (sadly) dedicated itself to finding scenarios where this doesn’t apply in order to mock the market proponents instead of proposing real solutions that _don’t_ rely on utopian conditions to occur (governments suddenly start becoming wise and benevolent, all people suddenly turning wise altruistic and egalitarian, etc etc).
Dylan
Oct 14 2019 at 12:29pm
This doesn’t seem all that surprising or controversial. People have egalitarian impulses, which are particularly acute during times of emergency. We have a strong desire to feel like we’re all in this together, and that rich and poor have to stand in line together for things like water or food. There may even be a practical benefit to this impulse, in that if the rich are in the same boat as the poor during a disaster, relief efforts may be more forthcoming?
Jon Murphy
Oct 14 2019 at 12:40pm
Then why the need for the legislation at all? Why not merely rely on the kindness of strangers?
Dylan
Oct 14 2019 at 1:25pm
I’m not sure how that follows from my statement? The idea being just what Pierre wrote, which is that some people feel it’s better if no one can have something if not everyone can have it. There is a feeling of shared camaraderie during emergency situations, and that can be easily broken if there is a perception that some people are able to use their resources so as to not have the same level of suffering as the rest of us. It’s definitely not a rational reaction, since economists can easily show how the bringing in of new supplies makes even those that can’t afford the inflated prices better off, by increasing total supply and reducing shortages more quickly, therefor bringing things back to normal more quickly. But, that doesn’t seem to matter if the perception is that a rich person has ice available for their party, while the pensioner can’t get any to keep her food from spoiling.
Jon Murphy
Oct 14 2019 at 1:39pm
Forgive me: my comment was too brief and poorly worded.
If there is this shared camaraderie and if the feeling is as strong as you suggest, I posit that price-gouging legislation wouldn’t be necessary at all since people would not partake, either in buying or selling. Sure, people may come by and offer generators for high prices, but if folks have this “we’re all in this together” mentality and it is strong, then those sellers would have no (or extremely few) buyers.
Dylan
Oct 14 2019 at 2:40pm
Thanks for clarifying. I’ll admit I’ve got no special insight here or data to rely on, so this is all just from what I think I’ve observed about how humans behave in these types of situations. With that disclaimer out of the way, my thinking is it is precisely the lack of other options that provide that sense of community and shared suffering. The moment there are other options, then some will opt to take them, which destroys the sense of community for all.
I should be clear that I don’t support anti-gouging laws, but am trying to understand the emotional reaction that makes them popular. One thing that occurs to me is that I have a similar reaction to programs like TSA pre-check. From a purely pragmatic point of view, I should be in favor of these, because by having frequent travelers pre-screened they make the lines shorter for the rest of us, but that’s not the reaction I have. I hate the security that comes with flying these days and the civil liberty impositions that entails. I want everyone to be as angry as I am when they have to fly, and letting rich or frequent travelers mostly opt out of that experience just makes me more annoyed at the whole process, even while knowing it makes me better off. That’s not a perfect analogy with anti-gouging sentiment, but I think it comes from the same kind of place.
Jon Murphy
Oct 14 2019 at 3:07pm
Ok yes, I see what you are saying. I don’t disagree per se. The analogy to TSA-pre check made your point much clearer (BTW, I use TSA-pre check. Don’t hold it against me 😉 ).
Let me try to put your argument in a different way and you can tell me if I am right or wrong in my understanding:
Because of a shared sense of suffering, there becomes a community feeling like “we’re all in this together.” If price gouging is allowed that sense disappears and can lead to some resentment because there is a question of “he got his, but why not me?”.
Am I understanding you correctly?
Dylan
Oct 14 2019 at 3:35pm
I think you understood perfectly. Like I said, I’m not really sure that’s what’s going on, but it’s my working hypothesis.
Pierre Lemieux
Oct 14 2019 at 3:54pm
Dylan (and Jon):
You write:
I share your sentiment on this. Indeed, the idea of equal laws was meant to prevent the state from imposing overly burdensome ones; with equal laws, there would be no constituency for harming others.
But as you suggest yourself, the analogy of pre-check with “price gouging” is far from perfect. In the former case, the government itself creates a hurdle and then excludes from it the part of the population who would raise hell. In the latter case, there was no hurdle, except for the consequences of everybody equally at liberty to bid on ice or generators. It’s like if a mysterious disease led all babies born in the winter to be one-armed, and the government decided (in its benevolent desire to create an equal playing field) to mandate the chopping of one arm for all other babies.
Jon Murphy
Oct 14 2019 at 5:30pm
Dylan-
Ok, so I understand you. Let’s try a little reductio ad absurdum here:
If the availability of some a good to some people and not others in a disaster undermines the community spirit, then the government should forbid not price gouging, but quantity availability!
Price gouging guarantee more of Good X is in the disaster area than would be there with price gouging legislation. In other words, price gouging legislation reduces the quantity supplied, and thus the quantity available to buy. Fewer people would have Good X under the legislation, but since more people “are in it together,” there is a greater sense of community. Therefore, one could create the greatest sense of community by simply forbidding Good X at all. After all, then everyone, rich, poor, etc would be in the exact same boat. There would be no “why did he get his but not me?”
Dylan
Oct 14 2019 at 8:35pm
@Pierre, thanks for the response. I agree that there is a significant difference in the two, and you put your finger on the why. However, I think that distinction is primarily relevant to those of us that share certain priors, many (most?) don’t seem to see that factor as particularly relevant. My anecdotal observation is that plenty of people complained quite loudly about security theater for years, but reacted with something close to joy with the introduction of programs that let you pay to get around it, and without much more than a shrug of indifference at the government policies that made such a situation possible. Indeed, even among those with libertarian sympathies, pre-check is typically seen as a great thing (see Tyler Cowen in his last appearance on EconTalk for one explicit example, and possibly Jon for another?)
@Jon, your post does do a good job of showing the absurdity of price-gouging regulation, since it has the same basic result as limiting quantity provided. However, as in many cases, the public can greatly approve of one government measure and be outraged by another that has the same outcome, based on the perceived intentions behind it.
Phil H
Oct 15 2019 at 4:45am
Jon: Reductio is a good technique in mathematics, which aims for absolute proofs; it’s less effective in economics, because human beings aren’t eternal and linear. No one expects *any* economic rule to hold if pushed to the limit.
I think Dylan’s point is apt, and the responses, from both Jon and Pierre, while accurate, kinda miss the point. Which is that this is what people are like. If you design systems that work perfectly for perfectly logical beings, they aren’t going to work perfectly for people, because we have all sorts of biases and misconceptions. Those people who applauded the arrest of the price gougers – they may be wrong in perfect economic theory, but if theory can’t help people who are wrong sometimes, then theory is no good at all.
The 10% limit imposed by the California law quoted does seem like too small a margin to allow. And I concede that in theory, there is no rigorous definition for “gouging”. But some application of a simple “Cost +” rule could assuage consumers’ fears that they are being taken advantage of, and could still allow room for market incentives. And yes, I realise that my simple cost+ rule would inevitably lead to some absurdities in its application – every law does. The question is whether these absurdities would cancel out its positive effects, and whether they would be worse than the absurdities associated with any other rules, or no rules.
Josh
Oct 14 2019 at 12:46pm
There’s a very common – but strange – cognitive bias many people have where they regard Pareto improvements as immoral. Ie, doing something that makes some people better off while making no one worse off is actually worse than doing nothing.
Your ice example is one good case. I’ve also seen it a lot in medicine. Like if Pfizer comes out with a drug that suddenly cures a disease, but it’s too expensive for many people who suffer from it. People who can’t afford it are no worse off – they can’t cure the disease regardless – but many of their fellow humans are much better off.
What’s particularly strange (at least to me) is that this seems like it can only be driven by some sort of selfishness. But actually it’s people who feel this way that are seen as the caring ones. While those of us who argue that it’s better for the ice (or medicine) to be available for some rather than available for none, we are the cruel, heartless ones.
J Mann
Oct 14 2019 at 2:38pm
Chaining off Phil’s comment at the top of the thread, would removing price controls really be Pareto-efficient.
In the story, Home Depot had a few generators that flew off the shelves in five minutes. Presumably, the box stores will try to get more into stock if they can predict these runs, although not as many more as if they could charge market prices.
So allowing the price to float makes most people better off, but the several people who got to Home Depot first would be worse off, if we assume Home Depot would raise their prices after announcement of a shutoff.
Pierre Lemieux
Oct 14 2019 at 3:37pm
@J Mann: Two points:
First, you are right that removing a government intervention is not always Pareto-efficient (compared with the post-government-intervention situation, that is, but not compared with the pre-intervention situation), because the intervention has created a privileged constituency. If the government had mandated that all individuals born in even months (February, April, etc.) have one arm chopped off when they reach their 18th birthday, stopping that intervention would harm the odd-month individuals, who had gained income on the labor market because of their relatively higher productivity.
Second, who is benefited from government intervention–especially when they accumulate–is often not clear. The first ones in the queue may have been there by chance. Sometimes, like in Venezuela, they have to physically fight to get at the top of the queue. Think of people waiting in line for cheap bread in communist countries. The most likely people in the queue may be people who are already privileged–individuals living off the dole, for example, as opposed to the working poor who have no time to wait in line. Some higher-income individuals will pay people to stand in line for them. Moreover, the value of time spent in queues is seldom zero, so queuing people may be theoretically willing to accept a side-payment in exchange for market pricing, side-payment which the individuals who have no time to stand in queues may be willing to make: in other words, queue allocation is very inefficient in the most basic sense of economic efficiency.
Pierre Lemieux
Oct 14 2019 at 4:10pm
Well put, @Josh: The envious are the most selfish.
nobody.really
Oct 14 2019 at 4:10pm
‘Fess up: How many people read the headline “Emergency and Shortages in Altruistic California” as “Emergency and Shortages in Autistic California”?
(Maybe I was just primed by stuff I had been reading earlier….)
Pierre Lemieux
Oct 14 2019 at 4:12pm
@nobody.really: I am certainly happy that this is all you can say against my post!
nobody.really
Oct 14 2019 at 5:12pm
Oh, I’m just getting warmed up…. : – )
nobody.really
Oct 14 2019 at 5:09pm
Thoughts on authorities that grant privileges to some people at the expense of everyone else…..
1: Yes, TSA Pre-Check allows people who pay a premium to receive premium service–apparently at the expense of everyone else. This violates an expectation of equitable treatment–and this expectation is especially acute where government is concerned. What right do people have to do this?
2: Universal Theme Parks offer an “express pass” which, for an additional fee, lets visitors jump to the head of lines for various rides. In other words, the authorities benefit from grant privileges at the expense of everyone else. (Disney does this to a lesser extent. While all park attendees get a FastPass, Disney grants early FastPass benefits to customers who rent a room in a Disney hotel.) This practice violates general expectations of equitable treatment. What right do people have to do this?3: Government grants/records property rights. But government also intrudes upon these property rights via taxation, granting easements, regulating land uses, etc. Many of these intrusions appear designed to benefit some parties (e.g., society) at the expense of the landowners. What right do people have to do this?
4. Government grants corporate status to businesses and not-for-profit organizations. If I donate my car to a business, and one of the employees negligently runs you over, what remedies do you have? If the business is a sole proprietorship or partnership, you can sue me for all I own. But if the business is a corporation, government has declared that you can sue only the corporation and its responsible agents, not the investors as such. And the corporation and its agents might be broke, or in a jurisdiction that is beyond the scope of your local courts. In other words, government has granted a kind of subsidy to corporate investors at the expense of the rest of everyone else. What right do people have to do this?
Jon Murphy
Oct 14 2019 at 5:23pm
You’re kind of doing a scattershot here. There’s not really any running theme with your four examples.
The first is legislation. Legislation is supposed to treat everyone equally. That some folks have to obey and other do not simply because those others paid the government some money undermines the idea of “equal under the law.”
The second is private property. The expectation of equal treatment does not hold.
The third is taxation. Taxation, for better or for worse, is a special power granted to government. They have the right to coerce. It may be unfair, yes, but it is the special power of a government.
The forth is tort. You want to draw a conclusion that the difference between LLC and sole ownership is a fairness question, but that’s incorrect: tort would apply equally to the SP and the LLC. The same law is being applied: the responsible entity(ies) is being sued. Shareholders are limited in their culpability because they are limited in their ownership. SP is not limited in their culpability because they are not limited in their ownership.
nobody.really
Oct 14 2019 at 5:32pm
So a shareholder who owns 100% of the stock no longer gets the benefit of limited liability?
And a partner who has six other partners would be liable for only one-seventh of the damages?
Pierre Lemieux
Oct 14 2019 at 6:41pm
I would think that a shareholder who owns 100% of the stock still benefits from his company’s limited liability (although I am not sure how this is expressed in correct legalese). His liability is limited to the value of his shares. And a partner who owns 1/6 of the shares is going to have his profits (or share values if the impact is multiperiod) reduced by 1/6 like any of the other 5 owners (I assume all shares are all common shares).
nobody.really
Oct 14 2019 at 11:50pm
This conforms to my understanding as well. Which is to say, we disagree with Jon Murphy’s thesis that liability is somehow proportionate to ownership. You can have 100% ownership, and yet still have limited liability.
Yes. But that’s beside the point.
In a partnership, each partner may be held liable for 100% of the partnership’s debts–debts that may well exceed the value of any investment. Again, this undermines Murphy’s thesis that liability is somehow proportionate to share of ownership.
You may begin to see why businesses prefer to organize as limited liability organizations rather than partnerships. Specifically, they prefer having their liability limited. And specifically, this means they prefer taking away YOUR RIGHT to get redress for THEIR WRONGS. It’s a straightforward transfer of wealth to investors–from wrongfully harmed parties.
Yet, in all the times I’ve heard libertarians whining about how government has taken things from them, I rarely hear them complaining about government authorizing limited liability companies. Golly, it’s almost as if protestations about government takings is just a pretext for favoring the wealthy over the poor….
(Is this more what you were expecting, Lemieux?)
Pierre Lemieux
Oct 15 2019 at 3:36pm
@nobody.really: Have a look at Robert Hessen’s In Defense of the Corporation. Although libertarian opinion is not unanimous on this topic, Robert Nozick gives what seems to me is the main principle in a paragraph on pp. 133-134 of Anarchy, State, and Utopia. Little exercise: Is this principle compatible with Hessen?
Pierre Lemieux
Oct 14 2019 at 6:36pm
Good reply, Jon!
nobody.really
Oct 15 2019 at 12:46am
>The first [example] is legislation. Legislation is supposed to treat everyone equally.
Should we expect the law to authorize drivers’ licenses for everyone, regardless of age? I suspect you mean that we expect legislation (among other government actions) to accord equal treatment to people who are similarly situated with respect to bona fide governmental purposes. Government has a bona fide governmental purpose in maintaining order on the public streets–and with respect to that purpose, government does not regard three-year-olds and 16-year-olds to be similarly situated, and thus does NOT treat them equally.
In the case of TSA Pre-Check, we can imagine that government has an interest in checking passengers, and in getting this done quickly. If a minority of flyers take a disproportionate share of the flights, it may make sense to target express services on those flyers. Moreover, evidence may suggest that frequent flyers are disproportionately likely to be wealthier than the average flyers. Thus, all parties may benefit from permitting frequent flyers to move through screening quicker—and these flyers may be disproportionately likely to be willing to pay a premium for this privilege. In this respect, frequent flyers are not similarly situated to occasional flyers, and so government may seek to accord them different treatment.
>The second [example] is private property. The expectation of equal treatment does not hold.
Well, kinda. I would regard it as contract law: Management and participants enter into a contract (license), wherein management grants a participant certain rights in exchange for money. But, as is often the case, the terms of the contract are vague. Imagine you paid to enter Disneyworld, and were then issued into an empty room with an exit to the parking lot. You might well argue that Disney had violated an implied contract, but you might well have difficulty demonstrating that you had ever received a written document or oral commitment establishing in detail the specific services you were entitled to receive. I would argue that Disney made an implied contract, where the terms of that contract are roughly established by the ads presented by the Disney Corporation enticing people to buy a ticket for admission.
This is the nature of contracts for services: They are hard to define and enforce. Construction contracts and international trade deals typically provide for some kind of binding arbitration by a technical expert in lieu of trying to spell out all the details.
But yes, in general, the public has no basis to expect equal treatment.
>The third is taxation.
Taxation distinct from legislation … how?
>The forth is tort.
Nope. I described identical torts committed by the driver of a partnership’s car and the driver of a limited liability entity. The difference in outcome does not arise from difference in tort law, but in corporate law. In the absence of an explicit government grant of limited liability, courts treat enterprises as sole proprietorships or partnerships. I am unaware of any “common law” limited liability entities.
But in general, Examples 1, 3, and 4 reflect public policy. We could change those policies if we chose to do so.
nobody.really
Oct 15 2019 at 5:31pm
In Defense of the Corporation (1979?), by Robert Hessen, pp. 20-22:
True—but when the general partner is NOT broke, the tort victim WOULD benefit. This is akin to arguing that segregated schools did not necessarily hurt black people because some all-white schools were bad. Probably true—and kinda irrelevant.
Uh … yeah. This isn’t a qualification; it’s a concession.
Tell that to all the people with loved ones who died from fires caused by the (now bankrupt) PG&E, or people harmed by pedophile priests supervised by (now bankrupt) archdiocese. Shareholders from British American Tobacco were happy to make a fortune selling cigarettes to Canadians, knowing all the time that their product was lethal—and then to walk away with all that money when the $9.2 billion bill came due.
Moreover, we’re simply talking about torts. What about fraud? I expect that Enron, MCI, Arthur Anderson, etc., ended up leaving plenty of employees without the pensions they were promised because collapsed after corporate frauds—yet (as far as I know) investors retained all of their fraudulently-derived dividends.
What about toxic waste? Investors in W.R. Grace & Co. pocketed a handsome sum in dividends from asbestos mines—and left the communities to bear the environmental catastrophes alone when the firm went bankrupt.
Today, plenty of people are making money from fossil fuel stocks. These people can read the paper and know about the consequences of greenhouse gas emissions. They know these firms face potentially huge liability in the future. And they don’t care. They know that they’ll be shielded from any liability beyond the value of their shares, so why not keep voting in management that will keep the gravy train running for as far as it will go?
Indeed, you as a shareholder can appear at the shareholder meeting and exhort your fellow shareholders to support a specific candidate for board president and CEO specifically because he’s reckless, and will squeeze every last dime out of the business and funneling the revenues out in dividends just before filing bankruptcy—leaving injured people, unpaid pensions, toxic sludge, and unemployment claims in its wake—and you will bear no liability for your actions. I mean, no one believes that those who benefit should bear a corresponding burden, right? Burdens are for little people—and government.
Don’t know who this Hessen is or was, but I can’t say I’m impressed with this part of the book.
nobody.really
Oct 15 2019 at 11:25pm
Anarchy, State, and Utopia, by Robert Nozick, pp. 133-34:
This statement responds to the concerns I have raised. And as regards government agents, I think this makes sense. But as regard corporations, I think this has practical problems which will demonstrate why we have instead gone the route of limited liability entities.
Specifically, what does it mean to say that a corporation’s liability is “unlimited”? In the case of partnerships, we say that each “partner” may be sued for everything he owns to cover the partnership’s debts. This then begs the question, who is a partner?
If I and five other people each invest $10,000 in an partnership, and the partnership buys equipment which then hurts you, you could sue each partner for all we have. So what if instead I give my 6-yr-old $10,000 to invest in the partnership. You can now sue my 6-yr-old–but since she doesn’t own anything other than this partnership interest, that won’t do you much good. Have I now re-created limited liability?
And unlike becoming a shareholder, you can become a partner through your conduct. The point at which a person has achieved the status of “partner” is a question of fact for the jury. Imagine somebody makes objects in my garage, and one of these objects hurts you. Am I his partner, such that you could sue me? What if I also provide electricity? Heat? Insurance? Materials? A logo? Advertising? What if he pays me rent? What if the rent is calculated as 50% of the profits of his operation? What if we regularly hold meetings about his operations? Etc. Etc.
There’s a lot of ambiguity. And given this ambiguity, we need to fear a reverse Good Samaritan effect: Would you donate your used car to a charity if you thought that you might thereby risk acquiring liability as a “partner” in the charity?
People want to be able to make investments without incurring unbounded liabilities. And generally, society WANTS people to make such investments. Alas, this beneficial policy also creates a moral hazard: Investors who knowingly/negligently finance harmful enterprises with impunity. I suspect the social benefits of liquid capital markets outweigh the social costs–but this statement reflects a social calculus, which libertarians such as Nozick generally reject. Moreover, this assessment is part of a larger thesis that society is awash in externalities, positive and negative–a thesis that challenges the atomistic premise upon which libertarianism is built.
Nick
Oct 16 2019 at 7:41am
I don’t know why you assume that this immediately challeneges the premises of libertarianism.
People _already_ accept and behave in a libertarian manner. Very few go around and behave the same way as governments do. In a sense, in the private spheres of life, there is largely already a libertarian’ order.
It seems to me that you have invested your time in to finding sticky spots that law and contract theories deal with. Yeah those are sticky spots, they present no more challenge to libertarianism than they present to standard contract theory that applies to everyone everyday.
General rule of thumb, if you find yourself “gotcha-ing” libertarians, you should assume that whatever political theory you advocate shall also face the same problem, if anything, worse.
Pierre Lemieux
Oct 19 2019 at 9:25pm
Some of your points seem to piggy-back on Nozick and are interesting. However, what do you mean by “society WANTS people to make such investments.” “Society” cannot want anything: see my “The Vacuity of the Political We” summarizing related arguments. It seems pretty obvious that the “social calculus” can only have a scientific meaning in the context of a unanimous social contract (see Buchanan) or the rule of conventions (see de Jasay).
nobody.really
Oct 22 2019 at 9:53am
Do you recognize the benefits of publicly enforcing autonomy/property rights?
Imagine a thief opposes autonomy/property rights enforcement (e.g., opposes police and courts, and favors Might makes Right). Ergo, no unanimous social contract.
That leaves “rule of convention.” Can you reconcile such a system of public property rights enforcement with the “rule of convention”? And if so, what would the rule of convention NOT permit?
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