Bill Black — Who Said This?

I cannot write many blogs during the fall semesters because I teach four classes (I co-teach one of them). The fall term of instruction at UMKC is now over so I am writing one piece before turning to grading. I have recently done additional research on a topic I know is of great interest – the prosecution of elite white-collar criminals. I have organized it in the form of a game in which the reader guesses who authored the quoted passage.

New Economic Perspectives
Who Said This?
William K. Black | Associate Professor of Economics and Law, UMKC

Henry Farrell — Law and Economics

I’ve been waiting for this paper to drop, ever since Suresh told me about it last year. It’s groundbreaking. What it does is to take Steve Teles’ qualitative work on the conservative legal movement, and then ask a simple question: if we start with the qualitative evidence about the program’s intentions, then FOIA the hell out of George Mason University to find out which judges attended the Manne seminars, and then apply cutting edge econometrics and natural language processing to their decisions, what are we going to find out?….

Crooked Timber
Law and Economics

Henry Farrell

Peter Radford on corporations

Most theories of the firm within economics pick up the narrative with the existence of the corporation as a given. They then bend over backwards to retro-fit this highly centralized pseudo economy into the larger free market narrative preferred in all major textbooks. In so doing they blithely ignore Alfred Chandler’s famous explanation for the rise of modern business organization, which he argued became possible “only when the hand of management proved be more efficient than the invisible hand of market forces”.

Chandler, being a historian rather than an economist, was more interested in reality than in hypotheticals. He understood and tried to explain the actual landscape of large-scale business. I have always wondered what would have happened to economics had it absorbed the true gist of the challenge issued by Coase in 1937. The impudence of that challenge has never been fully understood. Coase asked simply: “why do firms exist?”. After all if market forces are as supreme as the textbooks tell us, there is no room for business organization at all. We ought be able to accomplish all our transacting through a web of contracts in the open marketplace.

Indeed the most common response of economists to the challenge represented by business organization is to argue that a business organization is simply such a web of contracts. In this view we can continue to ignore any oddities of business organization since it is indistinguishable from the market. In this view the firm exists at a “nexus of contracts” and has no special attributes that cannot be negotiated and contracted for in the marketplace.

Except this is not true....

The key to understanding corporations is to separate the economics from everything else. We need to do this because the economics, as expressed in various theories of the firm, are usually entirely idealized and bear no resemblance to reality. Economists, as usual, love to theorize about things that don’t exist but which they wished did exist....

Corporations, far from being products of the free market, are actually franchises of the state. They are sub-contracted jurisdictions.

To be a corporation is to possess a charter from the state. That charter brings privileges not available to non-corporations. The most notable privilege is that the corporation is recognized as a distinct legal entity separate from any “natural” person who may be associated with it. And because the corporation is brought into existence prior to it being populated or animated by any natural person, it is not owned by any of them. It is unowned. In this sense it is akin to a nation state, the church, most universities, and, at least here in the US, most towns, It would be odd to describe any of those bodies as being owned by the people who animate them. Yet we routinely talk of firms being owned by stockholders. It is this misattribution of ownership that leads most economists astray in their theorizing...

Peter Radford explain why this is important and what problems misunderstanding engenders.

The Radford Free Press
Who “Owns” a Corporation?
Corporations Cont’dPeter Radford

Kate Bahn — Understanding the importance of monopsony power in the U.S. labor market

With the launch of our new website, we are reintroducing visitors to our policy issue areas. Informed by the academic research we fund, these issue areas are critical to our mission of advancing evidence-based ideas that promote strong, stable, and broad-based economic growth. Through June and continuing in July, expert staff have been publishing posts on our Value Added blog about each of these issue areas, describing the work we do and the issues we seek to address. The following post is about Wages. For previous posts on other issue areas, please go to our Value Added home.

WCEG — The Equitablog
Understanding the importance of monopsony power in the U.S. labor market

Kate Bahn

Sputnik — Transnational Networks are 'Disempowering Parliaments' - 'Shadow Powers' Author

Does a country like Germany actually need a real government and a proper parliament? For global business, at least, the answer is no. Transnational structures have long taken over the tasks of parliaments and governments, telling them what they should do. Politicians, who are officially responsible, are no more than discussion partners and implementers.
This is the situation described by commentator Fritz R. Glunk in his new book, "Shadow Powers: How transnational networks determine the rules of our world" (Schattenmächte: Wie transnationale Netzwerke die Regeln unserer Welt bestimmen).

Sputnik International

Transnational Networks are 'Disempowering Parliaments' - 'Shadow Powers' Author

Sputnik Deutschland interviews Fritz R. Glunk, author of Shadow Powers: How transnational networks determine the rules of our world

Rohan Grey and Nathan Tankus — Corporate Taxation in a Modern Monetary Economy: Legal History, Theory, Prospects

Abstract

Corporate taxation is a perennially controversial topic in American politics. In fact, it may be the tax policy controversy that most Americans are aware of and even have an opinion about. Nevertheless, the purpose of corporate taxation is unclear in popular, or even for that matter, academic, discourse. In this paper we lay out and critically evaluate contemporary and historical corporate tax policy debates based on three common justifications for taxation: the “revenue” justification, the “distribution” justification, and the “behavior” justification. The revenue theory argues that the purpose of taxes is to raise the money required to finance expenditures. The distribution theory argues that certain taxes are required to produce desirable distributional outcomes. The behavior theory argues that certain taxes are required to change organizational and individual behavior in ways that benefit society.

This paper will trace the application of these justifications in American corporate tax law debates from the late nineteenth century through to the present, and analyze the implications of these debates to the contemporary corporate income tax debate. In particular, we argue that: a) following the observation made in 1946 by former President of the New York Federal Reserve Beardsley Ruml that, in the context of a modern government with a non-convertible currency, a floating exchange-rate, and its own central bank, “taxes for revenue are obsolete,” the revenue theory is empirically false; b) The distribution theory case for the modern corporate income tax is weak; and c) from the perspective of the behavior theory, the modern corporate income tax has strongly perverse impacts on corporate behavior.

Binzagr Institute for Sustainable Prosperity
Corporate Taxation in a Modern Monetary Economy: Legal History, Theory, Prospects
Rohan Grey and Nathan Tankus

Raúl Carrillo — Hy Minsky, Low Finance: Modern Money, Civil Rights, and Consumer Debt

Lawyer and Monder Money Network director Raúl Carrillo's presentation at the MMT conference. Must-read for all interested in MMT.

(1) First, I’d like to impress upon folks a theme that I’ll be stressing throughout the conference: when it comes to the economy, law is not merely a governing force (as many on the right would have economists believe) nor a reflective force (as many on the left are inclined to think). It is also a constitutive force. What I mean by that is that the law doesn’t just intervene into the economy on the back end, and it doesn’t merely reflect deeper forces in the economy either. Rather, a lot of the economic concepts we talk about not only have a particular meaning in the context of specific legal parameters, but they only exist given the deeper architecture of legal regimes, in the sense of systems design. I’m going to do my best to articulate what that means and what that looks like when it comes to consumer finance.

(2) Second, I’m going to talk about how people actually experience the government’s failure to sufficiently spend money for public purpose. People don’t experience the absence of MMT-insights as policy failures in a grand sense. They experience it as personal pain. Over time, that pain can become chronic, but at first, it’s acute. For some of us, it’s devalued assets, houses, cars, etc., but most people in this country live paycheck-to-paycheck — or no-paycheck-to-no-paycheck — and thus experience the survival constraint pain on the liability side, where their debt is expounded, compounded, and sometimes straight-up fabricated. And within this group…there is what we call “disparate impact” in the legal world. As Sandy Darity, Darrick Hamilton, and other fellow travelers consistently point out, for many folks on the periphery, especially people of color who lack intergenerational wealth, the lack of MMT informed-policy means permanent austerity and perpetual depression.

With that in mind, we must cultivate a way to talk about Modern Money from the bottom-up and from the outside-in. We have to draw maps from people’s suffering to the macro failures. I personally think we can do this best by talking about (1) consumer debt, (2) criminal justice debt (which Prof. Harris is going to cover), and (3) taxes (which Prof. McCluskey will discuss).…

Modern money is a legal institution first and foremost, as chartalism, or the theory of state money, makes clear. There is no "natural money." Money-use, initially as credit, grew out of informal custom and was later was institutionalized formally in law. and The constitution and operation of this now highly formalized legal institution has vast social, political, and economic implications, especially considering that it can be captured by special interests through a political process involving asymmetric power.

New Economic Perspectives
Hy Minsky, Low Finance: Modern Money, Civil Rights, and Consumer Debt
Raúl Carrillo, staff attorney at New Economy Project, an economic justice non-profit in New York City

Brett Heino — The Great Leveler: Capitalism and Competition in the Court of Law

There are few components of a capitalist society that penetrate as deeply and pro-foundly into the lives of the people as law. Whole swathes of social life, ranging from the labour–capital relationship, the make-up of the family, the regulation of crime and the relationship of citizens to one another and the state (to name a few) are structured and governed by the legal form. Capitalism is, in short, legalized to a degree that is historically unprecedented. Given this reality, it is both surprising and disappointing that sophisticated Marxist analyses of law are uncommon. Many attempts fall apart in the always-difficult exercise of articulating theoretical rigour with empirical sensitivity. Against this backdrop, Brett Christophers’ The Great Leveler: Capitalism and Competition in the Court of Law stands out as a fine example of both the method and the fruits of a successful effort at such an articulation....

As world capitalism continues to change and evolve, we must understand the roles played in this process by the full gamut of economic, political and cultural institutions, including the law. The Great Leveler stands as a beacon for those of us who have been arguing for law to be taken to the heart of political-economic study.

Neoliberalism, which promotes privatization and deregulation, is very much engaged with law and law-making as a political theory based chiefly on economic liberalism and political conservatism. Economic liberalism holes that property relations should be free of government intrusion, and political conservatism holds that ownership of property is evidence of the ability to govern, which President Trump just affirmed in his appointing billionaires to cabinet level positions. Also strong features of this are lobbying and the revolving door.

Progress in Political Economy

The Great Leveler: Capitalism and Competition in the Court of Law

Brett Heino

Bill Black — Regulatory Capture is Not “Inevitable”

Federal regulators were captured by their ideological biases, created by economists and writers who constructed a fantasy world in which top bankers would never engage in fraud or rig the system against the customer. The regulator’s proper function under this fantasy was to get out of the CEO’s way and let him work his genius. The CEOs knew how easy it was to “game” any “accounting residual” such as capital or income—and they gamed them massively in the savings and loan (S&L) debacle, the Enron-era frauds, and the most recent crisis in order to optimize their looting. People in the grips of ideological nostrums are most likely to implicitly assume out of existence such an “obvious” point as the bank CEO’s ability and perverse incentive to game reported capital and income. “Capture” has become a self-fulfilling prophecy of economists who turn their students into sure-to-fail regulators crippled by their ideological economic fantasies.
But capture is not inevitable. The reason that the S&L debacle was contained and did not produce a financial crisis is that the ideological economist Richard Pratt, who deregulated and desupervised the industry, was replaced by a non-economist, Edwin Gray, who actually listened to the examiners in the field and to the findings in their “autopsies,” which demonstrated that the problem was looting led by the CEOs….

Pro-Market
Regulatory Capture is Not “Inevitable”

William K. Black | Associate Professor of Economics and Law, UMKC

Reuters — Europe's robots to become 'electronic persons' under draft plan

Europe's growing army of robot workers could be classed as "electronic persons" and their owners liable to paying social security for them if the European Union adopts a draft plan to address the realities of a new industrial revolution.…

The report added that robotics and artificial intelligence may result in a large part of the work now done by humans being taken over by robots, raising concerns about the future of employment and the viability of social security systems.

The draft motion, drawn up by the European parliament's committee on legal affairs also said organizations should have to declare savings they made in social security contributions by using robotics instead of people, for tax purposes.

Needless to say, capital is vehemently opposed to this.

Reuters
Europe's robots to become 'electronic persons' under draft plan

Georgina Prodhan

Bill Black — White-Collar Criminologists Answer the call of Conventional Macroeconomists: An Open Letter to Dr. Kartik Athreya, Research Director of the Richmond Fed

I want to thank two prominent “freshwater” macroeconomists, Dr. Narayana Kocherlakota (until recently the President of the Minneapolis Fed and previously the Chair of the University of Minnesota’s economics department) and Dr. Kartik Athreya (Research Director of the Richmond Fed) for their article (2010) and book (2013) , respectively, designed to convey the current status of macroeconomics. Reading their descriptions, and reviewing the work of Oliver Williamson, Roger Myerson, and Leonid Hurwicz in light of the discussion of macroeconomics has made it clear to me that the central difficulties in micro and macroeconomics are with concepts that are the core of what we study as white-collar criminologists and what I dealt with as a financial regulator. There is, therefore, an opportunity for substantial advances should economics draw on the findings of the discipline (white-collar criminology) and the insights of the professionals (successful financial regulators) with the preeminent expertise in these problem areas. Athreya also stresses the key role of law and how the effort to contain fraud explains significant portions of the legal rules for commerce. I also have expertise in law.

Since I combine those three forms of expertise and teach various microeconomics courses, I thought I would write this open letter to orthodox macroeconomists and macroeconomists. For reasons that I will discuss, the perfect person to address is Athreya, with a “cc” to Kocherlakota.

Where economists have drawn on our insights, the results have proven successful. Indeed, I will show that one of the greatest opportunities for the advancement of “modern” macro (and micro) economics would be to cease ignoring George Akerlof and Paul Romer’s 1993 article “Looting: The Economic Underworld of Bankruptcy for Profit.” I can think of no other field in which a Nobel Laureate, writing in his area of greatest expertise (fraud is the most damaging form of “asymmetrical information”), who proved correct and explicitly warned his field about the need to focus on “looting” (via “accounting control fraud”) would be religiously ignored by scholars in his or her discipline.…

Absolutely must-read.

New Economic Perspectives
White-Collar Criminologists Answer the call of Conventional Macroeconomists: An Open Letter to Dr. Kartik Athreya, Research Director of the Richmond Fed
William K. Black | Associate Professor of Economics and Law, UMKC

Diane Coyle — Coase in theory and Coase in practice

Diane Coyle reviews Forever Contemporary - The Economics of Ronald Coase, edited by Cento Veljanovksi.

It starts with the Coase theorem: that when property rights are clearly assigned and there are no transactions costs (such as those involved in acquiring information, negotiating, monitoring compliance etc), then there are no externalities leading to a divergence between private and social costs: the parties involved will negotiate their way to the efficient outcome. ‘Externalities’ are symmetric, he argued: if you claim a right to clean air, you are costing me the opportunity to pollute. Who compensates whom will depend how the property rights are assigned. If you indeed have your clean air right, I will have to bargain with you to pay you for the pollution; if I have the right to produce emissions, you will have to pay me to desist.

Coase made it clear he took the existence of transaction costs very seriously, and argued that every situation had to be carefully assessed to determine the most welfare-enhancing course of action.…

Download free PDF.

The useful bibliography of Coase’s work shows how seriously he took his own conclusion that you have to look in detail at each industry, its history and specificities before pontificating; as is well known, he described anything else as ‘blackboard economics’...

Case method instead of formal theory.

The Enlightened Economist
Coase in theory and Coase in practice
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Dirk Ehnts — Money – a legal, not an economic thing

I have recently read a paper by Christine Desan that is titled Money as a legal institution. The author argues that money is a legal thing, that it is defined by laws and that the law is changed in times of crisis. I very much agree with that. Economists have been so bad at understanding money because it is not their field of comparative advantage. Anthropologists have long doubted that money arose from “coincidence of wants”, and David Graebers 5,000 year history of debt has been read by so many economists that nobody can deny anymore that the story that modern textbooks tell us is wrong. Money is a legal entity. Bill Mitchell writes about money:…

Short and to the point. Read it all. What economics is missing.

econoblog 101
Money – a legal, not an economic thing
Dirk Ehnts | Berlin School for Economics and Law

Sara Mayeux — Three Ways of Explaining the Rise of “Law and Economics,” and Also, One Way

Weekend reading. Short summary of the shift in thinking about the relationship of economics and law that led to the conservative legal revolution that has shaped American law and its friendliness to economics interests. No it wasn't only the appointment of conservative judges, but a shift in legal theory based on activism on the part of the Chicago School of neoliberalism. This legal theory is now a cornerstone of US insitutional neoliberalism.

Today it can be hard to understand why applying economics to law could be controversial, both because of the cultural prominence of economics generally and because it has become so commonplace to talk about law in economic terms: to question how regulations affect the efficiency of a particular market, for instance, or to accuse some statutory regime of enacting perverse incentives, or to suggest that some policy has been pushed past the point of diminishing returns.… 

And yet, this particular economic mode of thinking and talking about the law only dates to about 1960, and only became widely influential in the 1970s and ’80s.… 

Between the 1960s and 2014, then, what changed? At the basic level of events and chronology, it is not hard to trace the rise of law and economics. Scholars typically identify the University of Chicago as the relevant holy land, Ronald Coase’s 1960 article, “The Problem of Social Cost,” as the gospel of modern law and economics, and Richard Posner’s 1973 book Economic Analysis of Law, which synthesized and riffed on the burgeoning literature for a wide audience, as its letters from Paul. But to name the key texts and figures in a school of thought is one thing; it’s another to explain how and why those texts and figures gained influence—why anyone read them, much less took them seriously. 

Summary of how we got here.

The cleanest way I can see to synthesize these three accounts would go something like this: [Brad] Snyder’s tale of generational rebellion explains the motivation that drove leading figures like Posner to want to chart a new path in legal thought away from legal process theory. [Daniel] Rodgers’s big-picture intellectual context explains why this particular new path was among the routes visible to them at the moment they began looking (and perhaps why it was among the more attractive such paths). And finally, [Steven] Teles’s nuts-and-bolts account explains why so many others followed down the path, once it had been marked—it reconstructs the vectors of institutional support and funding that brought these ideas into contact with judges, lawyers, legal scholars, and other interested observers of law who might not have had any particular generational motivation to worry about process theory, and who might not have had any particularly systematic exposure to the welter of market concepts that Rodgers discusses, but who, once they encountered law and economics in its various vernacular iterations, decided it sounded plausible enough to them (and/or that it served other interests they had) that they became converts. 

Now maybe that’s not right because there’s some deep flaw with one or more of these accounts that I’m overlooking, or because it’s not the best calibration among the three accounts; and of course it’s too schematic, insofar as it implies that phenomena such as motivation, mindsets, and institutional support operate independently and on entirely different levels from one another. But it strikes me as one plausible enough way to explain the rise of law and economics.

Neoliberalism is basically the application of classical economic liberalism to law and politics. It was spawned by the Chicago School and its spread was funded by wealthy donors.

The trend has been away from traditional thinking toward rational choice theory and the assumptions of neoclassical economics, that is economic liberalism at the expense of social liberalism and its focus on human rights and civil liberties.

U. S. Intellectual History Blog

Three Ways of Explaining the Rise of “Law and Economics,” and Also, One Way
Guest Post by Sara Mayeux, a Sharswood Fellow at the University of Pennsylvania Law School and a PhD candidate in history at Stanford

Ha-Joon Chang — Economics Is A Political Argument

Rockin' the boat.

Seung-Yoon Lee: One of many things that sets your new book apart from others is that you devote a whole chapter to different schools of thought in economics. Why is that so important?

Ha-Joon Chang: I’m sure it’s similar in many other fields, but especially in economics there is no single economic theory that can explain everything. To make that point, I talk about Singapore in the book. If you read the standard account of Singapore’s economic success in The Economist, The Wall Street Journal, or some textbook, you only learn about Singapore’s free trade and welcoming attitude towards foreign investment. But you will never be told that all the land in Singapore is owned by the government, and 85 percent of housing is supplied by the government’s own housing corporation. 22 percent of GDP is produced by state-owned enterprises (including Singapore Airlines), when the world average in that respect is only about 9 percent.

So I challenge my students to tell me one economic theory, Neo-Classical or Marxist or whatever, that can explain Singapore’s success. There is no such theory because Singaporean reality combines extreme elements of capitalism and socialism. The point that I’m trying to make as an example is that all theories are partial.

The WorldPost
Ha-Joon Chang: Economics Is A Political Argument
Seung-yoon Lee interviews Ha-Joon Chang, Professor of Economics, University of Cambridge

Ha-Joon Chang and Mariana Mazzucato: Rethinking the State

Chang, who has written best sellers including Kicking Away the Ladder and 23 Things They Don’t Tell You About Economics, debunks the notion that politics and economics can be separated. The state and markets are inherently intertwined.The problem is, that while “there is no scientifically defined boundary of the market, economists have been convincing people that they know where the boundary should be,” Chang says. 

Defining the boundaries of markets within economic systems is impossible because of the variety of the systems themselves, especially between nations. The American capitalist system is fundamentally different from other capitalist systems, Chang says. Each system is “propped up” by its own network of regulations, participants, and currencies. With such variety, it is impossible to define a true market boundary.

...political arguments are being passed off as objective truths....

INET — The Institute Blog
Ha-Joon Chang and Mariana Mazzucato: Rethinking the State

Ha-Joon Chang, Reader in the Political Economy of Development at the University of Cambridge, and Mariana Mazzucato, RM Phillips Professor of Science and Technology at the University of Sussex

I think it is clearer to say that economics and law are inherently entwined rather than economics and the state. From a broader perspective, it is more correct to say that economies are inherently entwined with institutional arrangements of which government is a major one in that so many institutional arrangements are grounded in law and legal agreements, and carry legal implications.

Frank S. Dohen — Transcendental Nonsense And The Functional Approach - Columbia Law Review

Rohan Grey: I have probably shared this before, but I highly recommend this legal paper for those who haven't read it - it's the legal functionalist response to Lerner's functional finance.

Frank S. Dohen

Transcendental Nonsense And The Functional Approach

Columbia  Law  Review  Vol. XXXV  June, 1935  No.  6