ECO 481: Public Choice Theory Week 6: In Praise of Markets; The Law Dr. Dennis Foster

Simple Observations Economic benefits to Capitalism irrefutable. Gov’t. cannot replicate the level of information that prices convey to economic actors. Free markets are better at coordination. Since 1930s, we’ve seen the substitution of the political process for the market process. More recently - interest in privatization.

The Nature of the Market Hayek - redefining competition. Disequilibrium process. “Capitalism produces a kind of partially ordered chaos . . . Everything is in transition and doubt: knowledge, opportunities, and above all, expectations.” Imperfect characteristics? No, dynamic!

Monopoly Reconsidered Unlikely to last even in the extreme. --Railroads can’t control trucking! --Only the government can perpetuate. Most dramatic case is the “government mandated labor union.” The gov’t. as a “cartel manager.” --quotas, licenses, allotments. --consider milk pricing . . .

Basic Formula Price (BFP) Dairy Price Supports Basic Formula Price (BFP) = last month's average price paid for manufacturing grade milk in Minnesota and Wisconsin + [current grade AA butter price X 4.27 + current non-dry milk price X 8.07 - current dry-buttermilk price X 0.42] + [current cheddar cheese price X 9.87 + current grade A butter price X 0.238] - [last month's grade A butter price X 4.27 + last month's nondry-milk price X 8.07 + last month's dry-buttermilk price X 0.42] - [last month's cheddar cheese price X 9.87 + last month's grade A butter price X 0.238] + (present butter fat - 3.5) X [current month's butter price X 1.38] - [last month's price of manufacturing grade milk in Minnesota-Wisconsin X 0.028].

Rethinking the firm An empty box? Coase - Why? Answer - Costs! Price takers & price searchers. “Life on the supply side is never dull.” Growth/concentration is not some plot. --Ford to GM to Toyota --Woolworth’s to Kmart to Wal-Mart Advertising is imperative! What would a Socialist do?

The Virtues of the Market Trial and error achieves rational outcome. Even imperfect markets are remarkably efficient. Markets penalize incompetence & miscalculation. Markets reward ability & foresight. Markets encourage innovation. Can the government plan the “discovery” process?

What Government can’t do: Can’t achieve “perfect market” outcomes. Can’t use “technical expertise” to guide economy. Can’t guarantee good results even with good intentions. Can’t ignore incentives and compatible processes. Can’t be benign nor efficient.

Public Choice & the Law Purpose of law – to alter incentives. Assume that participants are rational. e.g. Three Strikes Rules Legal rules – lower transaction costs. Liability issues – who pays? Deep pockets? Becker – How many should go free? Type I and Type II errors. Posner – Objective of efficiency. Reasonable doubt vs. preponderance of evidence. The lawyer vs. the economist.

Common v. Statutory Law Attributes of common law: Keeping it simple. Over time, aligning incentives with outcomes. Inefficiencies disappear over time. Hayek (spontaneous order) & Roberts (emergent order). Attributes of statutory law: Much more subjective. Shifts over time in arbitrary fashion. Subject to more influence by vested interests. Environmental laws/rules/regulations (Yandle). Safety laws as distortions. The disingenuous search for “legislative intent.”

Judges & Lawyers Judges Lawyers Pomp & trappings of the office … Are they political actors? Yes! Roberts & Health Care. Job conditions may make analysis convoluted. Pursue income? Power? Esteem? Influence? They play a “mixed motive” game. West Virginia case. Of those elected, where do contributions come from? Lawyers More likely to be seeking more income. Promote S and D Should lawyers be allowed to serve as judges? Should lawyers be allowed to serve as legislators?

ECO 481: Public Choice Theory Week 6: In Praise of Markets; The Law Dr. Dennis Foster