• Two primary questions of this course:• 1. How does the law effect incentives?

Under different arrangements of the law, given the economic assumptions about how people choose, what results do different legal structures achieve?

• 2. Which structure of the law is efficient, i.e., maximizes the combined gain to all parties?

Three fundamental ideas of economics• Scarcity: Resources have conflicting uses. To use them

for one purpose is to forego using them for another. All societies at all times have had to solve this problem one way or another.

• Optimization: Economists assume that people have well-defined goals, and that they rationally seek to do as well as they can given the resource constraints (what resources they control, the competing demands for them) they face.

• Equilibrium: At both the individual and social levels, there is a well-defined outcome in which everyone is doing the best they can given that everyone else is also doing the best they can. This outcome is called the equilibrium. (Example: Supply/demand intersection)

Markets are one of many possible problem-solving devices – a way to resolve conflicting desires over how scarce resources should be used. The presumption is that markets generally succeed in creating the most value – i.e., the most gain for the most people.

But how and why does the law help markets work?• First, property rights must be meaningful,

i.e. they must be credibly enforced. Here law is a complement to mutually beneficial trade.

• Second, some property rights cannot be enforced. Here, law is a substitute for trade.

The two sources of Anglo-American law

• Common law is created when new issues or situations not addressed by statutory law are litigated via the court system. The basic unit of common-law creation is the case. When a dispute not subject to existing precedents occurs, it works its way through the system until the high court (e.g., U.S. Supreme Court) adjudicates it. The common law is thus often evolutionary in nature.

• Statutory law (including the U.S. and state constitutions) is drafted by the legislative and executive branches. It is the product of the ordinary political process.

Two basic questions about property law

• What can be owned?

• What rights does ownership convey?

Benefits of well-defined property law• Prevents the deadweight loss of predatory

behavior.• Makes transfer of property to higher-

valued uses easier.• Avoids the tragedy of the commons.• Makes it easier to cope with complexity

and unintended consequences. (Example: highly planned cities become very child-unfriendly.)

Trust, property and contract: how commerce fails to happen without property and contract rights.

“My friend goes very happily to his home and sees his wife. She says, ‘Now wait a second. Think it over. This fellow, De Soto, you barely know him. This fellow, De Soto, after a year will know who your clients are, whom to sell to, when to sell, and how to sell to them. After a year, he won’t need you. He will no longer keep on giving you 40% of the business…As a result, my friend will choose instead to associate with a relative – someone in his extended family. And that person won’t produce buttons as good as mine. So they will have a little company that isn’t going to be very prosperous. I’ll have to do the same. I’ll find someone to sell buttons who trusts me because he happens to be family of mine. But he just doesn’t sell buttons the way my friend can sell buttons. And, therefore, the two talents that were required to make a successful industry in Lima will not be able to merge. Then some anthropologists from Cornell University will come to Peru and say, “Look at Peruvians. They like to work in small family units.”

- Hernando DeSoto, “What’s Wrong with Latin American Economies,” Reason (October 1989), pp. 39-40.

A negative externality is costs imposed by a particular economic activity or transaction on parties external to that activity or transaction.

Different legal rules under property law for deciding a dispute over a negative externality

• (1) In a property rule, one party is awarded an absolute property right.

• (1a) With a “no liability” finding, the defendant has the absolute right to continue imposing the externality.

• (1b) With an injunction, the plaintiff wins the absolute property right, in that the defendant is forbidden to impose the externality.

• (2) In a liability rule, the defendant may continue imposing the externality but if he does he must pay the plaintiff damages for the harm the externality causes.

The Coase Theorem (Coase, 1960): In a world of zero transaction costs, both property remedies yield the same result, in that the property ends up being used in whatever way creates the most value under a no liability finding or injunction.

But if transaction costs are high, the initial allocation of the property right is fully determinative. A liability rule is thus preferable, particularly if there is great uncertainty about which side deserves the property right.

Source: Edward L. Glaeser, Joseph Gyourko, and Raven Saks, “Why Is Manhattan so Expensive? Regulation and the Rising Housing Prices,” Journal of Law and Economics , October 2005.

Source: Randal O’Toole, “The Planning Penalty: How Smart Growth Makes Housing Unaffordable,” http://www.independent.org/pdf/policy_reports/2006-04-03-housing.pdf

Types of intellectual property• Patents are given for inventions. In exchange for limited monopoly

rights, inventors must reveal knowledge.• Copyrights are limited monopoly rights given for works created by

the mind, in the arts, literature, the sciences, etc.• Trademarks are potentially permanent monopoly rights given to

symbols or other widely known representations of a particular firm.• Trade secrets are knowledge created by a producer that are not

revealed through patenting. If competitors acquire the knowledge in violation of common-law principles (e.g., by an employee quitting and bringing it to the competitor in violation of his previous contractual obligation), they must pay damages. But if they discover it independently, they may use it freely.

• The Congress shall have power…To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.

- U.S. Constitution, Article I, Section 8

The limits of patent law?

• Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefore, subject to the conditions and requirements of this title. – “Patentability of Inventions,” 35 U.S.C. § 101 (1994)

Adverse possession – the common-law doctrine stating that property rights that are not periodically asserted can be lost.

Requirements for a successful adverse-possession claim• The property must be in actual, exclusive

use by the potential new owner.

• This fact must be open and known.

• The use must be continuous.

• The proposed transfer must be for a use that is against the owner’s interest.

Under the principle of eminent domain, private property cannot be taken except for “public use” and with “just compensation” (Amendment V, U.S. Constitution).

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.

- U.S. Constitution, Amendment V

The defendant-appellees contend, on the other hand, that the controlling public purpose in taking this land is to create an industrial site which will be used to alleviate and prevent conditions of unemployment and fiscal distress. The fact that it will be conveyed to and ultimately used by a private manufacturer does not defeat this predominant public purpose…The power of eminent domain is to be used in this instance primarily to accomplish the essential public purposes of alleviating unemployment and revitalizing the economic base of the community. The benefit to a private interest is merely incidental…If the public benefit was not so clear and significant, we would hesitate to sanction approval of such a project.- Poletown Neighborhood Council v. City of Detroit (1981)

Every business, every productive unit in society, does, as Justice Cooley noted, contribute in some way to thecommonweal. To justify the exercise of eminent domain solely on the basis of the fact that the use of that property by a private entity seeking its own profit might contribute to the economy’s health is to render impotent our constitutional limitations on the government’s power of eminent domain. Poletown’s “economic benefit” rationale would validate practically any exercise of the power of eminent domain on behalf of a private entity. After all, if one’s ownership of private property is forever subject to the government’s determination that another private party would put one’s land to better use, then the ownership of real property is perpetually threatened by the expansion plans of any large discount retailer, “megastore,” or the like.- County of Wayne v. Hathcock, July 30, 2004.

The Pinnacle Project’s business and technology park is certainly not an enterprise “whose very existence depends on the use of land that can be assembled only by the coordination central government alone is capable ofachieving.” To the contrary, the landscape of our country is flecked with shopping centers, office parks, clusters of hotels, and centers of entertainment and commerce. We do not believe, and plaintiff does not contend, that these constellations required the exercise of eminent domain or any other form of collective public action for their formation…Finally, there is nothing about the act of condemning defendants’ properties that serves the public good in this case. The only public benefits cited by plaintiff arise after the lands are acquired by the government and put to private use…Every business, every productive unit in society, does, as Justice COOLEY noted, contribute in some way to the commonweal.89 To justify the exercise of eminent domain solely on the basis of the fact that the use of that property by a private entity seeking its own profit mightcontribute to the economy’s health is to render impotent our constitutional limitations on the government’s power of eminent domain. Poletown’s “economic benefit” rationale would validate practically any exercise of the power of eminent domain on behalf of a private entity.

- County of Wayne v. Hathcock, 471 Mich. 445, 2004.

Promoting economic development is a traditional and long accepted function of government. There is, moreover, no principled way of distinguishing economic development from the other public purposes that we have recognized...Clearly, there is no basis for exempting economic development from our traditionally broad understanding of public purpose.Petitioners contend that using eminent domain for economic development impermissibly blurs the boundary between public and private takings. Again, our cases foreclose this objection. Quite simply, the government’s pursuit of a public purpose will often benefit individual private parties...It is further argued that without a bright-line rule nothing would stop a city from transferring citizen A’s property to citizen B for the sole reason that citizen B will put the property to a more productive use and thus pay more taxes. Such a one-to-one transfer of property, executed outside the confines of an integrated development plan, is not presented in this case. While such an unusual exercise of government power would certainly raise a suspicion that a private purpose was afoot, the hypothetical cases posited by petitioners can be confronted if and when they arise. They do not warrant the crafting of an artificial restriction on the concept of public use.- Susette Kelo, et al. v. City of New London, et al., 125 S. Ct. 2655 (2005)

A radical re-interpretation: for eminent-domain purposes, interpret “public use” as a “public good.”

• Public goods have two features:• (1) They are nonrivalrous, meaning that my consumption doesn’t

limit the amount available for you. (Example, up to a point: this lecture).

• (2) They are nonexcludable, meaning that nonpayers can’t be prevented from consuming the good.

• The public-good requirement prevents powerful private interests from benefiting from coercive transfer from less powerful ones.

• While enabling the use of eminent domain to achieve the construction of roads, utility equipment, schools and other goods with some public-goods features, it does not solve the hold-up problem.

• But in fact, historically eminent domain was not about solving the holdup problem, but of protecting property owners from rapacious behavior by the sovereign.

What makes a valid contract?

• Traditional legal view: a contract requires consideration, an explicit promise of exchange of one thing for another that occurs after contemplation. There must be an offer, consideration, and acceptance. A remedy for a breached contract should make the party as well off as if the breach did not occur.

• Economic view: Contracts facilitate resource movement to higher-valued uses. To achieve this they must pass standard economic assumptions that are required for exchange to create value.

The legal view: example of lack of consideration• This electronic message contains information

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The economic view: a hypothetical perfect contract:• Complete information

• No third-party effects

• Offered under conditions of perfect competition

• Negotiated between rational decision-makers

Two types of defense to breach of contract• Formation defenses: the contract was

never validly formed, so a legitimate obligation was never created.

• Performance defenses: unanticipated events make it unreasonable to require that the contractual obligation be discharged.

Some formation defenses:

• Contract formed with minors;

• Duress;

• Fraud;

• Mutual Mistake;

• Unconscionability

The most common performance defense is impossibility, which argues that an unexpected contingency was so unlikely and its consequences so severe that it is impossible to reasonably expect that the contractual obligation be carried out.

Two types of relief for breach of contract• Legal relief: monetary damages

• Equitable or performance relief: insistence that the contracted promise be carried out.

Two types of legal relief – what does it mean to “make the party as well off as if the breach did not occur?”

• Expectations damages make the promisee as well off as if the contracted promise had been carried out.

• Reliance damages make the promisee as well off as if the bargain had never been agreed to. (Note that nonperformance makes the promisee worse off than if contract had not been agreed to.)

The economics of legal relief

• Each party can take precautions against nonperformance:

• Promisor can invest in precaution. More investment in precaution means a lower probability of inability to perform.

• Promisee can invest in reliance. The more investment in reliance, the worse the consequences in the event of nonperformance.

Torts as lawyers see them

• To the lawyer, a tort is a breach of a duty owed to a fellow citizen. Examples: Careless driving, negligent care (malpractice) by a professional, manufacture of a defective product. This is often phrased as a question of the level of “care” the defendant takes in his interaction with the plaintiff.

• The question to be asked is whether the defendant’s care fell short of the legal standard. This standard can be set at several levels.

Torts as economists see them

• To the economist the goal of tort law is to minimize the sum of accident and accident- prevention costs.

• Care is costly, but lowers the chances of an accident, which is also costly.

• The function of tort damages is to give potential defendants an incentive to internalize the external costs of their actions.

Differing standards of tort liability

• Under negligence, the defendant’s conduct is measured against the legal standard. If it is found to fall below that, he is liable.

• Under contributory negligence the decision requires that two things be true and the decision is all or nothing – i.e., the defendant is liable if his care level is below the legal standard and the plaintiff’s is above his own separate legal standard.

• Under comparative negligence the damages the defendant must pay are awarded according to the relative extent to which his and the plaintiff’s conduct falls short of the legal standard.

• Under strict liability whenever an accident occurs and the defendant’s action brings it about the defendant is liable.

Two questions to ask about the appropriate tort-liability standard• Is precaution bilateral? In other words,

could both litigants have made meaningful contributions to reducing the probability of an accident?

• Is the level of activity that leads to the possibility of an accident adjustable? For example, can people drive more or less? (Yes.)

U.S. v. Carroll Towing Co.

• An important case for its mathematical explanation of when a defendant should be held liable.

• Court adopted formula of B < pL, where B is burden (i.e. cost) of taking precaution, p is probability of accident if precaution not taken, and L is loss if accident happens. If inequality holds, defendant should be required to take precaution.

Vicarious liability

• Legal issue: Can an overseeing party – a parent, an employer – be held liable for a tort committed by an underling – a child, an employee?

• Economic issue – How can deterrence be provided most efficiently? By giving each underling an incentive not to commit tort, or by giving overseer an incentive to monitor the underlings?

Joint and several liability

• Legal and economic issue: With multiple contributors to an accident (two, say), can either party alone completely prevent the accident? If so, each party’s “marginal product” in producing the accident is 100%, and the plaintiff should be permitted to sue either of them.

Duty to rescue

• In a rescue situation (drowning, say), L is very high, p is very high, transaction costs for an agreement between rescuer and rescuee are very high. Absent extremely high B (risking one’s life, for example), efficiency indicates that those who refuse to rescue should be held liable.

Probabilistic causation

• Problem: Tort is committed, but only probabilistically. (Example: toxic chemicals or drug side effects.) Some people will be hurt in the future, but at present it is impossible to say who, and it may not be possible to trace a specific injury to a specific tort by a specific defendant.

• Why? Because evidence depreciates, and other possible causes may intervene in the meantime.

• Solution: For each potential victim, award damages discounted by probability of occurrence, and converted to present value.

Defamation (libel and slander) – private figures• Any false and damaging statement is

actionable. In general, the defendant’s care level is not a defense (i.e., the liability standard is strict liability).

• False statements harm the plaintiff’s ability to trade, and force him to incur costs of re-establishing his reputation. The more widely spread the false statement, the greater these costs.

Economics of defamation – public figures• An exception is made for speech about public

figures, those involved in government policy, those (e.g., celebrities) already widely known, or those who inject themselves into a public controversy.

• In that case, according to Sullivan v. New York Times, the plaintiff must show falsity, damage, and a “reckless disregard for the truth” by the defendant – a negligence standard (with a very low level of x*).

Why the relaxed standard in Sullivan?• Because information is partly a public good, in

that it is nonrivalrous and easily copied. Producers are inclined to under-produce it.

• In the case of politicians their decisions affect all citizens simultaneously, and therefore the value of information about them is even greater.

• Public figures have access to communications technology, allowing them to defend themselves at lower cost.

Weaknesses of the Sullivan standard• It can give media organizations an incentive to under-invest in

verification. Many false stories may be published, at great harm not just to public figures but to society. (False information is a “public bad.”)

• This in turn may lower the quality of public officials. A tougher standard for liability for libel means that media can show less care. For example, lower-quality organizations can now begin to more aggressively and carelessly cover politicians’ “character” issues – e.g., wild rumors about Presidents Clinton and Bush. Particularly if high-quality politicians have high valuations of privacy or they value their reputations highly, they may be deterred from going into politics. Paradoxically, Sullivan can cause a selection effect for who gets into politics that makes governance worse.

• The definition of public figures is too broad.

Two types of legal fees in tort lawsuits (for plaintiffs’ attorneys)• With hourly fees, plaintiff’s attorney is paid

by time worked.

• With contingent fees, plaintiff’s attorney is paid with a predetermined share of the recovery. If recovery is zero, attorney gets nothing.

Two theories of contingent fees

• The risk preference theory: plaintiffs are unwilling to risk paying huge fees if they recover little or nothing.

• The moral hazard theory: unless the attorney has a stake in the case, he has an incentive to shirk, e.g. by running up the bill for little work.

The evolution of product-liability law

• Mass manufacturing and standardized products permanently changed the relation between buyers and sellers.

• Initially damage from product use governed by privity of contract.

• Subsequently, a negligence standard took hold.• Finally, strict liability became the norm in the US

over the course of the 20th century.

Is strict liability in products cases efficient?• Richard Posner – Yes; mass manufacturing means that

manufacturers are efficient risk bearers because they can spread risk out over many sales, and because modern products are too complex for consumers to thoroughly understand.

• George Priest – No; courts adopted a mistaken model of manufacturer market power in trying to explain the standardized contracts that govern many product purchases. In fact such contracts are also efficient, and should be generally enforced. The revolution in products liability is mostly rent-seeking by consumer groups.

How lawyers view crime

• Intention is required: “mens rea,” the guilty mind.

• The plaintiff is not an individual, but the state. Inference: some uniquely public purpose must be served by criminal prosecution.

• The burden of proof is higher than in a tort.

How economists view crime

• The criminal law should provide optimal deterrence, not moral punishment or rehabilitation (unless rehabilitation lowers the probability of future offenses).

• While there can be efficient torts and efficient breach of contract, crime is coercive despite low transaction costs and is thus never efficient.

• But incomplete deterrence can be efficient. As with torts, we wish to minimize the costs of crime and the costs of deterring crime.

What are the “costs” of crime?

• The damage to the victim.

• The costs of private deterrence – burglar bars, private security services.

• The opportunities for exchange that are foregone because of the unwillingness to do business in high-crime areas.

The tradeoffs of criminal-law enforcement• Probability vs. severity of punishment: Criminals will

respond both to an increased probability of being punished as well as harsher punishment, although not necessarily to the same degree. The marginal costs of further deterrence will differ for each type. Efficient deterrence is achieved by equating the marginal benefit of increasing the probability to the marginal benefit of increasing the severity.

• Fines vs. imprisonment: Fines are administratively cheaper than imprisonment, but for some crimes solvency constraints prevent them from being used. A given amount of deterrence may unavoidable have to be achieved in higher-cost ways.

Why punish second attempts more severely than first ones?• The marginal stigma cost of crime declines

as the number of convictions increases. This has to be offset by harsher penalties to achieve the same deterrence.

• Criminals get better at crime (i.e., they add to their human capital) the more crimes they commit. The chances they will be caught therefore decline, and must be offset with harsher penalties.

The punishment of unsuccessful criminal attempts• Punishment for success should be higher,

because the criminal will have acquired human capital as a result of his failure the first time.

• Success imposes more social costs, and so marginal deterrence also requires that it be punished more harshly.

• Lesser punishment gives the criminal a chance to change his mind before the crime is completed.

• If he fails the chances are higher that he is ultimately not very dangerous.

The economics of criminal organizations• Large criminal organizations, like any large

organizations, benefit from division of labor.• Thus criminal conspiracy is often included as an

extra offense to achieve more deterrence.• But, like all large organizations, they also suffer

from moral hazard problems.• Finally, their compensation structures are a

striking confirmation of winner-take-all economics (i.e., tournament theory) and, at some levels, of competition.

Crime in developed countries, 2000

• Country Overall Homicide Assault Burglary• Canada 8117.75 1.59 758.17 952.65• Denmark 9449.78 1.09 183.98 1865.97• Eng. & Wales 9766.73 1.61 851.60 1579.10• France 6403.82 1.78 180.79 629.87• Germany 7621.32 1.17 142.23 -• Japan 1923.99 0.50 34.04 233.43• Netherlands 8211.54 1.15 277.54 573.25• New Zealand 11152.50 1.17 787.75 1714.39• U.S. 8517.79 4.55 805.21 755.29

Data represent crimes/100,000 population.Source: United Nations Surveys on Crime Trends and the Operations of

Criminal Justice Systems, 2000

Source: Peter Baldwin, “A Narrower Atlantic,” Prospect, May 2009.

Source: Bureau of Justice Statistics, http://www.ojp.usdoj.gov/bjs/glance/cv2.htm

Source: BJS, http://www.ojp.usdoj.gov/bjs/glance/viort.htm

Source: BJS, http://www.ojp.usdoj.gov/bjs/glance/hmrt.htm

Source: BJS, http://www.ojp.usdoj.gov/bjs/glance/mvt.htm

Source: BJS, http://www.ojp.usdoj.gov/bjs/glance/burg.htm

Why did crime decline so much in the 1990s?(John Donohue III and Steven Levitt)

• A great economy? It rose dramatically during the 1960s boom; crime fall in 1990s was far greater than historical relation to unemployment changes; violent crime, which might be less affected by the economy, also fell dramatically.

• Tougher sentencing: In 1972, 500,000 Americans in prison; by 2000, 2 million were.

• More and better police.• Decline of the crack epidemic.• Population aging – a factor, but not enough to

explain sudden sharp decline

Legalized abortion?• The decline appears to correlate closely with the period 17-30 years after

Roe v. Wade. Roe may have generated a selection effect – the children who otherwise would’ve been born would’ve had, on average, high propensities for crime.

• States that legalized abortion before Roe saw crime rates go down earlier.• But:• The actual rate of homicide among the first post-Roe generation is actually

higher than the generations prior.• Such research as exists suggests that women who have abortions

disproportionately come from backgrounds where children are less likely to have criminal propensities.

• Many states enacted life/health-of-the-mother exceptions before 1973 that led to many abortions being performed, and fail to show the later crime drop.

• In the U.K., where abortion data are better, the relationship of abortion legalization and crime decline fails to hold. In particular, crime declined during roughly the same time as in the U.S., but abortion was legalized earlier in the U.K.

Source: BJS, http://www.ojp.usdoj.gov/bjs/homicide/teens.htm

Source: Kahane, Leo, David Paton and Rob Simmons (2008), ‘The Abortion-Crime Link: evidence from England and Wales’, Economica, 75(297): 1-21.

Key principles of the Constitution

• Limited popular sovereignty

• Separation of powers/checks and balances

• Federalism

• Protection of rights (in the old “negative liberty” sense)

Negative v. positive liberty (Isaiah Berlin)• Negative liberty refers to the right not to be

constrained by the state – the right to say what you wish, to contract as you wish, etc.

• Positive liberty refers to the right to have a particular set of opportunities – to a certain level of education or health care, for example.

Limited popular sovereignty (Congress)• House. I.2. The House of Representatives shall be

composed of members chosen every second year by the people of the several states, and the electors of each state shall have the qualifications requisite for electors of the most numerous branch of the state legislature...

• Senate. I.3. The Senate of the United States shall be composed of two senators from each state chosen by the legislature thereof, for six years and each senator shall have one vote.

• Amendment 17. The Senate of the United States shall be composed of two Senators from each state, elected by the people thereof, for six years; and each Senator shall have one vote.

Limited popular sovereignty (President)• President. Sec. II.1. Each state shall

appoint, in such manner as the legislature thereof may direct, a number of electors, equal to the whole number of senators and representatives to which the state may be entitled in the Congress; but no senator or representative, or person holding an office of trust or profit under the United States, shall be appointed an elector.

Examples of checks and balances and separation of powers• The presidential veto and the two-thirds

override.

• Requirement that spending bills start in the House.

• Requirement that judges (including Supreme Court justices) be nominated by President and confirmed by Senate.

Federalism – explicit central government powers• I.8. The Congress shall have power • To lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the

common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States.

• To borrow money on the credit of the United States; • To regulate commerce with foreign nations, and among the several states, and with the Indian

tribes; • To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies

throughout the United States; • To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights

and measures; • …• To establish post offices and post roads; • To promote the progress of science and useful arts, by securing for limited times to authors and

inventors the exclusive right to their respective writings and discoveries; • The migration or importation of such persons as any of the states now existing shall think proper

to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a tax or duty may be imposed on such importation, not exceeding ten dollars for each person.

• …• No tax or duty shall be laid on articles exported from any state. No preference shall be given by

any regulation of commerce or revenue to the ports of one state over those of another: nor shall vessels bound to, or from, one state, be obliged to enter, clear, or pay duties in another.

Federalism – limits on the powers of the states• I.10. No state shall enter into any treaty, alliance, or

confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

• No state shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws; and the net produce of all duties and imposts, laid by any state on imports or exports, shall be for the use of the Treasury of the United States; all such laws shall be subject to the revision and control of the Congress.

Federalism – requirements of states• IV.1. Full faith and credit shall be given in each State to

the public act, records, and judicial proceedings of every other State. And the Congress may, by general laws, prescribe the manner in which such acts, records, and proceedings shall be proved, and the effect thereof.

• IV.2. The citizens of each State shall be entitled to all privileges and immunities of citizens in the several States.

• IV.2.3. No person held to service or labor in one State, under the laws thereof, escaping into another, shall, in consequence of any law or regulation therein, be discharged from such service or labor, but shall be delivered up on claim of the party to whom such service or labor may be due.

The economics of federalism

• It makes gaining control of the full government harder, lessening the government-monopoly problem (also included in discussion of rights below).

• It promotes jurisdictional competition.

• But it also promotes inflicting negative legal externalities on residents of other jurisdictions.

"As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone's else money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me....It should be obvious that the instate local plaintiff, his witnesses and his friends, can all vote for the judge, while the out-of-state defendants can't even be relied upon to send a campaign donation."

- West Virginia Supreme Court Richard Neely

The economics of rights

• Rights restrict the power of the government to intimidate its opponents, forcing greater political competition.

• They also make redistributive activity harder.

“The focus of my work as a domestic mediator is meeting the needs of the children that I work with…and not the wants of their parents. And I ask the three of you, how can we, as symbolically the children of the future president, expect the three of you to meet our needs, the needs in housing and in crime and you name it.”

- Denton Walthall, social worker, in question to George H.W. Bush, Ross Perot and Bill Clinton, during presidential debate, 1992.

Questions asked of Pres. Obama at appearance, Ft. Meyers, FL, Feb. 10, 2009 (Source: http://www.realclearpolitics.com/articles/2009/02/obamas_townhall_in_fort_myers.html)

• “And, OK, I've been at the same job, which is McDonald's, for four-and-a-half years because of the fact that I can't find another job. Now, with the fact that I've been there for as long as I've been there, do you have any plan or any idea of making one that has been there for a long time receive any better benefits than what they've already received?”

• I have an urgent need, unemployment and homelessness, a very small vehicle for my family and I to live in. We need urgent. And the housing authority has two years' waiting lists, and we need something more than the vehicle and the parks to go to. We need our own kitchen and our own bathroom. Please help.

• My name is Andy Irvin. I'm a local commercial contractor here in town. We have been building and remodeling schools for the last 10 years or so. How in your stimulus plan do you get money down to the states and down to the counties to continue that program?

• And my question to you today is, as you stated earlier, there are many of us here in the area that are unemployed and have been unemployed for some time, and probably some people here have large families. And we have had the opportunity to receive unemployment, but yet we have not been able to get any other type of governmental assistance to help us during this crisis so that we can kind of be able to take the funds that we do have from unemployment to pay our bills. Usually what happens is, is when you apply for governmental assistance, they say, "Well, you make too much money." How -- if you go from making $3,000 a year -- a month to $1,100 a month, how are you able to take care of your families? Why can't we have that to be automatic, that goes along with your unemployment tenure, that you can get government assistance, that's an automatic for you?

• “America needs positive, optimistic leadership to kind of turn this country around, to see a revival of our national soul.” Mike Huckabee, 2008.

• [I will work to] “rid the world of evil.” George W. Bush, Sept. 16, 2001.

• “Because if we are willing to work for it, and fight for it, and believe in it, then I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal; this was the moment when we ended a war and secured our nation and restored our image as the last, best hope on Earth.” Barack Obama, June 18, 2008.

• "I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States.“ – The Presidential Oath of Office.

Presidential speechmaking

• From George Washington to Andrew Jackson, presidents gave on average 3 speeches a year.

• Bill Clinton gave 600 in his first year in office.• From Washington through William Howard Taft,

State of the Union remarks given only in writing. Wilson delivered it in person to enhance its (and his) importance, a tradition continued by every president after Harding and Coolidge.

In the State of the Union and inaugural remarks, presidents:• Never used the word “help” before 1859; used it

110 times 1859-1932, 784 1932-2000.• Used the word “poverty” 17 times before 1932,

95 times 1932-2000.• Gradually ceased speaking of “providence” and

“fate,” and replaced it with language like “I assume unhesitatingly the leadership of this great army of our people.” (FDR, 1932)

What about the right to commerce? In traditional common law a right to earn a living was recognized, but this right was restricted beginning in the late 1800s.

• “Individual liberty cannot be preserved if the majority’s will must always triumph.”

- Janice Rogers Brown, then Justice, California Supreme Court and now judge, U.S. Court of Appeals, D.C. Circuit.

• "I do not count the Supreme Court decisions defending contract or property rights from state regulations as Bill of Rights decisions. None of these cases represents a defense of civil liberties. The Court merely used libertarian philosophy to protect the wealthy from progressive legislation. The Court eventually rejected these economic liberty decisions because they were not connected with the text of the Constitution or any philosophy with roots in the history and tradition of our nation and its democratic processes. - John Nowak, "Essay on the bill of Rights: The 'Sixty-Something' Anniversary of the Bill of Rights," U. of Illinois Law Review, Vol. 20 , 1992, p. 452

• “Legislators have great difficulty in restraining freedom of speech, and almost none in curtailing freedom of enterprise.” – Bernard H. Siegan, “The Supreme Court as Final Arbiter” (1985)

Property rights in Anglo-American law• All merchants are to be safe and secure in

leaving and entering England, and in staying and traveling in England…to buy and sell from all maletotes by the ancient and rightful customs, except, in time of war, such as come from an enemy country [who] shall be detained without damage to their persons or goods, until we or our chief justiciar know how the merchants of our land are treated in the enemy country; and if ours are safe there, the others shall be safe in our land.

- Magna Carta, Sec. 41.

• “At common law, every man might use what trade he pleased.” – from Blackstone’s Commentaries on the Common Law.

.

Property rights in Anglo-American law• "…at the common law, no man could be

prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil . . . especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade." (The Case of the Tailors, 77 Eng. Rep. 1218 [1615], at 1218)

Property rights in Anglo-American law

• “[E]very many has a ‘property’ in his own ‘person.’ This nobody has any right to but himself. The ‘labour’ of his body and the ‘work’ of his hands, we may say, are properly his.”

- John Locke, Two Treatises of Government.

Property rights in Anglo-American law• "That is not a just government, nor is property secure

under it, where arbitrary restrictions, exemptions, and monopolies deny to part of its citizens that free use of their faculties, and free choice of their occupations, which not only constitute their property in the general sense of the word; but are the means of acquiring property strictly so called. What must be the spirit of legislation where a manufacturer of linen cloth is forbidden to bury his own child in a linen shroud, in order to favor his neighbour who manufactures woolen cloth; where the manufacturer and wearer of woolen cloth are again forbidden the oeconomical use of buttons of that material, in favor of the manufacturer of buttons of other materials!" - James Madison, "Property"

Property rights in Anglo-American law• “[These privileges include] the enjoyment of life

and liberty, with the right to acquire and possess property of every kind, subject only to such restraints as the government may justly prescribe for the general good of the whole. The right of a citizen…to take, hold and dispose of property, either real or personal; and an exemption from higher taxes or impositions than are paid by the other citizens of the state.”

- Corfield v. Coryell, 6 F. Cas. 546 (1823), 551-2.

Due process of law.Amendment XIV. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law, nor deny any person within its jurisdiction the equal protection of the laws.

Property rights in Anglo-American law?

Property rights in Anglo-American law• “[All] citizens, of every race and color,” it held,

without regard to any previous condition of slavery or involuntary servitude . . . shall have the same right . . .to make and enforce contracts, to sue, be parties, and give evidence, to inherit, purchase, lease, sell, hold, and convey real and personal property, and to full and equal benefit of all laws and proceedings for the security of person and property, as is enjoyed by white citizens.”

- Constitutionalized Civil Rights Act of 1866.

A brief history of contract rights

• English law of exchange traditionally had dealt primarily with property. Contract law did not emerge as a separate field until perhaps the mid-18th century. The law began to take account of intention, rather than mere possession, consent rather than status (the latter a vestige of feudal law) as a cornerstone of rights. According to legal historian William Maine, “The movement of progressive societies has hitherto been a movement from Status to Contract.” (emphasis added)

• In Champion v. Casey (Cir. Ct. R.I. 1792), US district court invalidated a Rhode Island statute providing relief to debtors, on grounds that legislature had no authority to annul valid contracts.

• In Fletcher v. Peck 10 U.S. 87 (1810), Supreme Court annulled decision by Georgia legislature to respond to outrage against corruption by the legislature and cancel land sales of territory of what would become Alabama and Mississippi. Chief Justice Marshall held the Constitutional contracts clause applied to “contracts of every description,” including contracts by the government. Dartmouth v. Woodward, 17 U.S. (4 Wheat.) 518 (1819), similarly annulled an attempt by the state of New Hampshire to alter the governance of Dartmouth University.

• Many other cases upheld the principle that the government could not rewrite the terms of existing contracts.

• No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility. - U.S. Constitution, I.10 (emphasis added).

But what about contracts yet to be written? Could their terms be limited through, e.g., minimum-wage laws?• The legislature was always allowed to limit contracting rights in the name of

the “police power” – the need to regulate public health, safety and morals.

• The doctrines limited the scope of this power – a prohibition against “class legislation,” i.e. laws targeting only particular groups in society, and, later, the the 14th Amendment’s “privileges and immunities” and “equal protection” clauses. Congressional debate on ratification indicated that contract/property rights were central to the meaning of the first phrase.

14th Amendment, Sec. 1

• “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person

within its jurisdiction the equal protection of the laws. “

Landmarks on the road to the modern regulatory state (pre-New Deal)• Slaughter House Cases (83 U.S. 36 [1872]): Held that granting a regional monopoly

to a New Orleans slaughterhouse on safety grounds was justifiable. The “police power” exception to the “privileges and immunities” clause was defined to include forcing all butcher work through one firm. Occupational licensing, and other regulations of trade boomed afterward.

• Still, the police power was generally presumed to be an invalid rationale for preventing freedom of contract: ”Such legislation [banning cigar manufacturing in New York] may invade one class of rights today and another tomorrow, and if it can be sanctioned under the Constitution, while far removed in time we will not be far away in practical statesmanship from those ages when government prefects supervised the building of houses, the rearing of cattle, the sowing of seed and the reaping of grain, and governmental ordinances regulated the movements and labor of artisans, the rate of wages, the price of food, the diet and clothing of the people, and a large range of other affairs long since in all civilized lands regarded as outside of government functions. – New York Court of Appeals, Tenement House Cigar Cases.

Upholding contract rights within the bounds of the

police-power exception.• Allgeyer v. Louisiana, 165 U.S. 578 (1897) overturned a Lousiana requiring insurers

to be licensed, ruling it violated right of plaintiff to do business with unlicensed New York firm.

• Lochner v. New York (198 U.S. 45 [1905]): A New York law limiting hours bakers could work was overturned as a restriction on the freedom to contract.

• Truax v. Raich (239 U.S. 33 [1915]): An Arizona law requiring that noncitizens be no more than 20% of an employer’s workforce was overturned, again on freedom grounds.

• Adkins v. Children’s Hospital (261 U.S. 525 [1923]): A minimum-wage law for women only allegedly designed to preserve their “safety and morals” killed many of their jobs. Court held that the women themselves were the best judges of their own contractual terms.

• Meyer v. Nebraska, 262 U.S. 390 (1923) overturned Nebraska law requiring that children, even in private schools, be taught in English, on grounds that the teacher and parents had a right to contract as they liked. Similarly, Pierce v. Society of Sisters () 100 U.S. 1 296 Fed. 928, overtuned an Oregon law passed at the instigation of the Klan that required all children to go to public schools.

• New State Ice Co. v. Liebmann, 285 U.S. 262 (1932) held that due-process clause prevented Oklahoma from controlling number of firms selling ice out of desire to prevent “cutthroat competition.”

Landmarks on the road to the modern regulatory state (post-New Deal)

• Under crush of Depression-era inflation, court in Nebbia v. New York, 291 U.S. 502 (1934) allowed New York o set minimum prices for milk, and in Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934) let Minnesota provide debtor relief.

• U.S. v. Carolene Products (304 U.S. 144 [1937]): Milk products containing oil had been federally outlawed on safety grounds. Court upheld regulations, distinguishing between “economic” and “fundamental” rights.

• West Coast Hotel Co. v. Parrish (300 U.S. 379 [1937]): Upheld a minimum-wage law on grounds that the justification for the law, that its absence would cause poverty and taxpayer obligations, was “rational.” The “due process” rationale for freedom of contract was jettisoned.

Freedom to contract and segregation• Plessy v. Ferguson (1896) upheld a Louisiana statute against a

claim by a private rail line. The law prohibited the rail line from selling first-class tickets to black customers, as it wanted to do for profit-maximizing reasons.

• In Buchanan v. Warley (1917), Supreme Court invalidated law requiring that Louisville blocks be segregated. The primary reasoning: “This attempt to prevent the alienation of the property in question to a person of color…is in direct violation of the fundamental law enacted in the Fourteenth Amendment of the Constitution preventing state interference with property rights except by due process of law…[The Amendment] operate[s] to qualify and entitle a colored man to acquire property without state legislation discriminating against him solely because of color.”

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The economics of search and seizure• Amendment IV: The right of the people to

be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.

The economics of search and seizure (continued)• But what should be done if an illegal search

occurs?• An illegal search is arguably a tort by law

enforcement officials; suing them is satisfactory in analogous situations in the private sector.

• American law has since 1914 (Weeks v. U.S.) promoted the exclusionary rule: any illegally obtained evidence must be omitted from trial. Its use in a trial is grounds for overturning a conviction.

But the exclusionary rule is inefficient for at least two reasons:• It does not penalize the person who

committed the violation. The problem therefore is not over-deterrence of law enforcement but under-deterrence.

• It lowers the chances of a correct verdict by removing information (evidence) from the decision-maker (the jury).

Free markets in ideas: the First Amendment• Amendment I: Congress shall make no

law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or of the right of the people peaceably to assemble, and to petition the government for a redress of grievances.

Separation of church and state• The prevailing legal standard is that of Lemon v. Kurtzman,

403 U.S. 602 [1971], which requires that any church/state mix pass three tests: 1) it must have a secular purpose; (2) it must have a primary secular effect; and (3) it must not involve the government in an excessive entanglement with religion.

• But what does this mean? Open access or no access?• No access may be a subsidy of anti-religious belief.

Economically, the goal should be to subsidize no particular religious belief. This requires open access, not complete divorce, if secularism is itself a belief.

• In countries with subsidized state churches and French-style sterilization of religion from all “public space,” religious observance is lower and less diverse.

Students don't understand First Amendment; 1 in 3 say it 'goes too far'By The Associated Press

WASHINGTON -- The way many high school students see it, government censorship of newspapers may not be a bad thing, and flag burning is hardly protected free speech. It turns out the First Amendment is a second-rate issue to many of those nearing their own adult independence, according to a study of high school attitudes released today....

Yet, when told of the exact text of the First Amendment, more than one in three high school students said it goes "too far" in the rights it guarantees. Only half of the students said newspapers should be allowed to publish freely without government approval of stories.…Three in four students said flag burning is illegal. It's not. About half the students said the government can restrict any indecent material on the Internet. It can't.

- Associated Press, Jan. 31, 2005.

Is commercial speech different from any other kind of speech?• Businesses are not allowed to make fraudulent

statements about their products (“false advertising”). The presumption in favor of speech for such claims is much less than in other forms of speech.

• In general, if a state has a “substantial interest” in whatever objective the regulation is supposed to control, and if the regulation “directly advances” the objective, the control is acceptable.

• But if an activist group claims a business runs “sweatshops,” and in a PR campaign the business says it doesn’t, is that “fraud”? Can it be sued under false-advertising statutes?

“…because the messages in question were directed by a commercial speaker to a commercial audience, and because they made representations of fact about the speaker ’s own business operations for the purpose of promoting sales of its products,...[the ] messages are commercial speech.”

- Nike, Inc. v. Kasky, 27 Cal.4th 939,946,45 P.3d 243, 247 (2002). (Appeal to US Supreme Court denied in 2003.)

“Hate speech,” obscenity, etc.: Can or should speech be restricted on the grounds that it is dramatically offensive?• Longstanding legal doctrine forbids imminently dangerous speech – “fire in a crowded

theater,” “fighting words.”• But American law in particular places a high priority on vigorous clashes of ideas.

- “Error of opinion may be tolerated where reason is left free to combat it.” – Jefferson- "But when men have realized that time has upset many fighting faiths, they may come to believe even more than they believe the very foundations of their own conduct that the ultimate good desired is better reached by free trade in ideas -- that the best test of truth is the power of the thought to get itself accepted in the competition of the market ... . That at any rate is the theory of our Constitution.” – Oliver Wendell Holmes, in dissenting opinion in Abrams v. U.S.

$ “Freedom of expression is not the freedom to insult or offend. Hate speech is always abhorrent.” – Benito Ferrero-Waldner, European Union Commissioner for External Relations and European Neighborhood Policy (2008)

• The economic model of free speech – as guaranteeing a more competitive market for ideas – sets the bar very high for restricting speech, which is analogous to restricting competition.

Example 1: The WSU flag display

Prof. Robert Sumser’s office, Millett Hall.

Example 2: Comedian makes idiotic remarks about gays on a public campus, and makes them specifically to a gay student who has challenged him:

Whereas, on the evening of August 26, 2004, at a performance on campus to which the public was invited, a comedian hired by The University of Alabama used against a University student statements which were, and were intended to be, derogatory of gay persons, harassing and insulting both the student and all gay persons;

…Whereas, it is never appropriate to demean or reduce an individual based on group affiliation or personal characteristics;

Whereas, it is never appropriate to promote hate or discrimination;…Be it further resolved, that University officials in charge of student programming develop clear policies restricting any behavior which demeans or reduces an individual based on group affiliation or personal characteristics, or which promotes hate or discrimination, in any approved University program or activity, and that these policies be incorporated into any contract entered into by the University regarding participation in formal University programs;

(University of Alabama Faculty Senate Resolution, Nov. 11, 2004)

Example 2 (continued):

WHEREAS, The right to free speech is an inalienable human and civil right that is protected by the United States Constitution and the Constitution of Alabama;WHEREAS, Free speech is absolutely vital to the mission of any university, where new and often controversial ideas must be discussed openly and rationally in order to make advances in knowledge;…WHEREAS, Speech codes have been used by other colleges and universities to silence dissenting speech, not merely so-called “hate speech”, and to persecute those with unpopular opinions; …THEREFORE BE IT RESOLVED THAT The University of Alabama Student Senate most strongly urges the Administration and the Faculty Senate of the University of Alabama to refrain from adopting any form of speech code, even one that purports to ban only so-called “hate speech”;

University of Alabama Student Senate resolution, Feb. 2005.

Example 2a: Anti-gay hate speech in Sweden

Sweden's Supreme Court has said it will review the acquittal of a Pentecostal pastor who denounced homosexuality as "a deep cancer" in a sermon. Ake Green was convicted of hate crimes in June 2004 and given a 30-day suspended prison sentence. But then an appeals court in February threw out the case, saying it was not illegal to offer an interpretation of the Bible and urge others to follow it. Mr Green was the first priest convicted under Sweden's new hate crimes law.

‘Hate speech'

Passed in 2003, the legislation covers attacks against homosexuals. Sweden's chief prosecutor said that in his view, Mr Green's comments did amount to hate speech, and so he was seeking a review.

In a sermon, Mr Green told a congregation on the small south-eastern island of Oland that homosexuals were "a deep cancer tumour on all of society". He warned that Sweden risked a natural disaster because of its tolerance of homosexuality. "Homosexuality is something sick," Mr Green said, comparing it to paedophilia and bestiality. He said gays were likely to rape children and animals.

The Supreme Court has not yet given any date for the new trial.

Source: http://news.bbc.co.uk/2/hi/europe/4530209.stm

Example 3: The anti-affirmative action bake sale

SEATTLE, Washington (AP) -- Campus bake sales by conservatives who oppose affirmative-action are cooking up discord -- and complaints about restrictions on free speech. Organizers charge white students $1 for a cookie, while blacks and other minorities pay 25 to 95 cents. Doughnuts are available for 50 cents to everyone except Asian Americans and whites, who cannot purchase them. Unfair? So is affirmative action, organizers contend. "It's a good example of what affirmative action does, judging people based on race," said Jason Chambers, president of the University of Washington College Republicans, which held a sale in October that shut down when some students began attacking the booth. "People were upset. People did feel offended," said Anthony Rose, president of the UW Black Student Union. "You see something like that, you feel itemized." …"They cannot defend in public what they have done to the First Amendment at the University of Washington," said Thor Halvorssen, CEO of the Foundation for Individual Rights in Education. "There is no question that the administration would never censor a group of students holding a peaceful protest in favor of affirmative action." Source: http://www.cnn.com/2003/US/West/12/24/affirmative.bake.sale.ap/

Hate speech – Is the remedy for hate speech more speech or less?• Or perhaps Ms. Bailey's preferred type of Muslim immigrant is a chap like Sir Iqbal

Sacranie, a Muslim of such exemplary "moderation" he's been knighted by the Queen. Sir Iqbal, head of the Muslim Council of Britain, was on the BBC the other day and expressed the view that homosexuality was "immoral," "not acceptable," "spreads disease" and "damaged the very foundations of society." A gay group complained and Sir Iqbal was investigated by Scotland Yard's "community safety unit" which deals with "hate crimes" and "homophobia."

Independently but simultaneously, the magazine of GALHA (the Gay And Lesbian Humanist Association) called Islam a "barmy doctrine" growing "like a canker" and deeply "homophobic." In return, the London Race Hate Crime Forum asked Scotland Yard to investigate GALHA for "Islamophobia."

Got that? If a Muslim says that Islam is opposed to homosexuality, he can be investigated for homophobia; but if a gay says that Islam is opposed to homosexuality, he can be investigated for Islamophobia…"Hate crimes" are thought crimes, a concept more pernicious and harmful than whatever offence is caused by any particular statement. So I'm in favour of everybody suing everybody else over every imaginable phobia until the whole system collapses. - Mark Steyn, “History Swings Both Ways – Islamists and Brokeback,” The Western Standard (Canada), Feb. 27, 2006.

Since about 1930 everyone describable as an “intellectual” has lived in a state of chronic discontent with the existing order. Necessarily so, because society as it was constituted had no room for him . . . The intellectuals could find a function for themselves only in the literary reviews and the left-wing political parties.

The mentality of the English left-wing intelligentsia can be studied in half a dozen weekly and monthly papers. The immediately striking thing about all these papers is their generally negative, querulous attitude, their complete lack at all times of any constructive suggestion. There is little in them except the irresponsible carping of people who have never been and never expect to be in a position of power. Another marked characteristic is the emotional shallowness of people who live in a world of ideas and have little contact with physical reality . . . And underlying this is the really important fact about so many of the English intelligentsia—their severance from the common culture of the country.

- George Orwell, The Lion and the Unicorn: Socialism and the English Genius (1941).

Example 4: The Academic Bill of Rights (Source: http://www.studentsforacademicfreedom.org/)

• 1.  All faculty shall be hired, fired, promoted and granted tenure on the basis of their competence and appropriate knowledge in the field of their expertise and, in the humanities, the social sciences, and the arts, with a view toward fostering a plurality of methodologies and perspectives. No faculty shall be hired or fired or denied promotion or tenure on the basis of his or her political or religious beliefs.

• 2.  No faculty member will be excluded from tenure, search and hiring committees on the basis of their political or religious beliefs.

• 3.  Students will be graded solely on the basis of their reasoned answers and appropriate knowledge of the subjects and disciplines they study, not on the basis of their political or religious beliefs.

• 4.  Curricula and reading lists in the humanities and social sciences should reflect the uncertainty and unsettled character of all human knowledge in these areas by providing students with dissenting sources and viewpoints where appropriate. While teachers are and should be free to pursue their own findings and perspectives in presenting their views, they should consider and make their students aware of other viewpoints. Academic disciplines should welcome a diversity of approaches to unsettled questions.

• 5.  Exposing students to the spectrum of significant scholarly viewpoints on the subjects examined in their courses is a major responsibility of faculty. Faculty will not use their courses for the purpose of political, ideological, religious or anti-religious indoctrination.

The Academic Bill of Rights (continued)• 6.  Selection of speakers, allocation of funds for speakers programs and

other student activities will observe the principles of academic freedom and promote intellectual pluralism.

• 7.  An environment conducive to the civil exchange of ideas being an essential component of a free university, the obstruction of invited campus speakers, destruction of campus literature or other effort to obstruct this exchange will not be tolerated.

• 8.  Knowledge advances when individual scholars are left free to reach their own conclusions about which methods, facts, and theories have been validated by research. Academic institutions and professional societies formed to advance knowledge within an area of research, maintain the integrity of the research process, and organize the professional lives of related researchers serve as indispensable venues within which scholars circulate research findings and debate their interpretation. To perform these functions adequately, academic institutions and professional societies should maintain a posture of organizational neutrality with respect to the substantive disagreements that divide researchers on questions within, or outside, their fields of inquiry.

The economics of negative externalities revisited• Negative externalities lead to inefficiency,

relative to an ideal world.

• But it is impossible to adequately address all of them.

• This leads to the problem of when to use negotiation (i.e., commerce) and when to use coercion (i.e., government).

Negotiations, coercion and property rights• When transaction costs are low, negotiation is

generally preferable to coercion.• The function of the state in economic theory is to

make transaction costs low, in part by consistently enforcing property rights – the rules of exchange. Consistent interpretations of such rights decrease uncertainty, and therefore promote greater wealth.

Change, expectations, and property rights• The law should generally be predisposed

not to upset expectations.

• But radical social change sometimes requires radical rethinking or even initial thinking of where people’s property rights begin and end. Examples: mass manufacturing, the photocopier, Internet music downloading.

The division of labor between the judiciary and the legislature• In all government arenas, interest-group rent-seeking is

a problem. Rent-seeking is costly, especially if the bargains made are unreliable.

• This suggests that there are gains to be made by limiting the amount of rent-seeking via channeling it into one arena, and by making rent-seeking bargains relatively durable, preventing endless “cycling.”

• Therefore, there are gains to be made from an independent judiciary that can reliably enforce legislative rent-seeking bargains. Independence comes from long (even life) terms, insulation from elections, etc.

The comparative advantage of the legislature in making deals, and of the judiciary in enforcing them.

• The common law is a very inefficient way to redistribute income.

• Such devices as lifetime tenure and lack of judicial elections make it easy to insulate judges.

The economics of judicial precedent (“stare decisis”)• In a common-law system, previous judicial decisions are used to

justify outcomes in a particular case. • Precedent thus allows for more certainty in planning – the beginning

and end of your property rights are well-defined.• Adherence to precedent also reduces litigation costs by reducing

uncertainty.• But as the society around a precedent changes, the value of that

precedent is likely to decline – precedent as a capital stock.• Thus, the more rapidly a society advances technologically, the more

rapidly precedents should depreciate. To be too obedient to precedent would cause path dependence – an inferior result specifically linked to an arbitrary starting point. (Supposed examples: Microsoft Windows, college football’s Bowl Championship Series, QWERTY typewriter.)

The efficiency of the common law – how the common law evolves• The common law is evolutionary. It

responds to its environment, just like biological organisms do.

• But what does “environment” mean?• The efficiency theory says that over time

the legal rules that courts produce tend toward efficient legal arrangements.

• Note that common-law rules are different from statutory interpretation.

Why does the common law evolve toward efficiency?• It is easier for judges to base their decisions on actions

rather than the merits or moral claims of litigants.• The standing requirement limits litigation to those parties

who are directly affected, rather than interest groups. • With low transaction costs, parties will ignore or get

around inefficient rules, by contracting around them or resorting to private arbitration.

• Even with high transaction costs, inefficient rules may be more likely to be litigated, and hence statistically more likely to be overturned (George Priest).

• The above argument depends on whether or not one views court decisions as vulnerable to rent-seeking or not (Hirsch/Osborne).

The efficiency of the common law – the rule of law• The judiciary insures that statutes are consistent with the

rule of law. This means that:• (1) People in similar circumstances are always treated

similarly. In other words, the law is not used to arbitrarily frustrate the goals of particular groups.

• (2) The law must be capable of being complied with.• (3) There must be a procedure by which the facts

required to determine how the law is to be complied with can be determined.

• The rule of law provides predictability, with the associated benefits for entrepreneurial creativity.

The Rule of Law

“Stripped of all technicalities, this means that government is bound in all its actions by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge…While every law restricts individual freedom to some extent by altering the means which people may use in pursuit of their aims, under the Rule of law the government is prevented from stultifying individual efforts by ad hoc action. Within the rules of the game the individual is free to pursue his personal ends and desires, certain that the powers of the government will not be used deliberately to frustrate his efforts.…

“The idea that there is no limit to the powers of the legislator is in part a result of popular sovereignty and democratic government. It has been strengthened by the belief that, so long as all actions of the state are duly authorized by legislation, the Rule of Law will be preserved. But this is completely to misconceive the meaning of the Rule of Law. This rule has little to do with the question whether all acts are legal in the juridical sense. They may well be and yet not conform to the Rule of Law. The fact that someone has full legal authority to act in the way he does gives no answer to the question whether the law gives him power to act arbitrarily or whether the law prescribes unequivocally how he has to act.”

- Friedrich Hayek, The Road to Serfdom (1942)

“The rule of law differs from using the law to rule.”

- Liu Junning, Chinese political scientist.