How Should We Think About Democracy?

Samuel Bagg—

The concept of democracy is critical to the Law and Political Economy approach, yet its precise meaning is not always clear. On the left, “democracy” often functions as shorthand for the opposite of whatever has most recently earned our wrath: be it oligarchy or neoliberalism, marketization or regulatory capture, technocracy or inequality. Even when the culprit seems to be democracy itself—as per the adage penned by Jane Addams—the solution is still more democracy. But what might this ambiguous demand really mean? This post surveys developments in my own field—democratic theory—in hopes of sharpening LPE thinking about this question. Continue reading

Reclaiming Public Fiscal Power for Transforming Precarity

Reclaiming Public Fiscal Power for Transforming Precarity

NB: This post is part of the “Piercing the Monetary Veil” symposium. Other contributions can be found here.

Martha T. McCluskey–

Basic legal ideas about taxation stand in the way of proposals for ambitious fiscal policies to address pervasive economic insecurity among both middle class and lower income households.

The conventional legal framework posits two primary functions for taxation. First, taxes raise revenue to finance government goods and services. Second, taxes redistribute resources, transferring money from some private interests to others based on ideas about distributional equity. Taxes also regulate private economic behavior, but this third function is generally treated as supplementary and subordinate, with economic ordering mainly directed by basic legal rules and the administrative state.

In orthodox law and economics, “optimal” tax policy achieves the two primary goals with the least “distortion” of private value-maximizing decisions in a presumed efficient and equitable market unsullied by taxes. This optimal tax theory aims to replicate a mythical market where money passively realizes and measures an underlying value fixed by barter-like exchanges of real goods, and services.

This seemingly benign conceptual frame implicitly locates economic productivity in a distinct and underlying private market sphere, with government taxing and spending cast as taking value from those who have created it. From this starting point, households can receive public support either as beneficiaries of forced public charity or as responsible consumers willing and able to pay an equivalent amount in taxes. If progressive taxing and spending programs are construed as involuntary, inherently inefficient, transfers of money from productive market winners to support less capable market losers, then that public support will tend to appear to generally inscribe rather than relieve conditions of precarity and powerlessness.

This conventional frame obscures how taxation creates money as a means for generating and distributing economic power and insecurity. Tax theory tends to ignore how law constructs and governs money, treating money as a neutral measure of social contribution.

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Law as the Code of Inequality and Wealth

Samuel Moyn –

pistor coverKatharina Pistor’s new book, The Code of Capital: How the Law Creates Wealth and Inequality, deserves to be the essential text of any movement today that concerns itself with law and political economy. It establishes, as its central topic, how fundamental law is to political economy, in the tradition of classical social theory but with a considerable update in light of contemporary affairs. And, more fully than anything else I know, it vindicates the LPE intuition that legal intellectuals have something essential to bring to the current and ongoing debate about markets and injustice.

This is not because Pistor has detailed prescriptions for an emerging movement for reform of this or that area of law, but rather because she offers such a breakthrough set of theoretically-inflected descriptions of how law serves “capital,” and so often fulfills the interests of the rich rather than the rest. It has always done so, of course, but the current moment of extreme inequality requires a considerable effort to collect and synthesize the workings of law that prior generations already detailed. It also demands careful descriptions of the new forms of legal protection on a global scale that recent generations have failed to offer in one place and as part of a general account. Pistor even claims to offer a novel definition of “capitalism” that makes law central, insofar as law not only has a role to play in the creation of property, but also ensures its durability and convertibility.

To exist at all, and to be insulated and multiplied and transformed, wealth requires law and therefore state power to create it and protect it. Even land, the ur-form of wealth, is valueless except to the extent that law “coded” it, Pistor says, and the same is even more true of successor forms of mobile property down to the fancy inventions of contemporary finance that have successful allocated so much of what there is to own at the top of many societies. But creation is not the end of it. For Pistor, the additional key to understanding how law performs a constant and definitional function in the life of capital lays in tracing the ways that law secures capital’s endurance and allows for its transformation into new asset forms.

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Central Banking and Finance—The Franchise View

Robert Hockett & Saule Omarova—

It is common to claim that finance is about ‘credit-intermediation,’ a matter of channeling funds from virtuous savers to needful end-users. The picture behind this assertion is that of a gargantuan broker—the financial system as ‘go-between.’ But modern financial systems are much more about credit-generation than intermediation. We need a new metaphor.

In our view, a modern financial system is best modeled as a public-private franchise arrangement. The franchisor is the sovereign public, acting through its central bank or monetary authority. The franchised good is the monetized full faith and credit of the sovereign—its ‘money.’ And the franchisees are those private sector institutions that are licensed by the public to dispense, in the form of spendable credit, the franchised good.

Like any good franchisor, a public acting through its central bank works to maintain the ‘quality’ of the good that its franchisees distribute. In the contemporary ‘developed’ world, the quality in question has been understood primarily in terms of over-issuance.

The central bank’s task has been understood, that is to say, in modulatory terms, the primary objective being to prevent consumer and, in some enlightened jurisdictions, asset price inflations and hyperinflations. Allocative decisions, for their part, are thought best left to the market, on the putative ground that the public’s ‘picking winners and losers’ is apt to be ‘politically arbitrary’ rather than ‘financially sound.’

Two conceptual errors, one of them partly corrected since 2008, seem to have hampered the ‘quality control’ efficacy of many central banks and monetary authorities in the pre-2008 period.

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Techno-utopian, Cyclical, Political: Reconsidering the Path of Legal Employment

Frank Pasquale –

About a decade ago, when legal employment dipped sharply, there was a raging debate on the future of the legal profession. Some said the drop reflected a permanent decrease in legal work. The logic here was simple: computers were increasingly capable of completing more sophisticated projects. Having eclipsed paralegals in some document review tasks, they would, we were assured, soon supplant attorneys at writing briefs. These techno-utopians also evoked (what they called) a market logic: the more competition pressed firms to become more efficient, the more software they would deploy.*

Others saw the dip in employment as cyclical. It wasn’t just lawyers who suffered in the wake of the global financial crisis; employment in many fields fell. A drop in effective demand was shrinking the economy as a whole. The cyclical school predicted that when the economy rebounded, jobs for attorneys would also recover.

I will not attempt to adjudicate the dispute here. The most vehement techno-utopians, who predicted mass closures of law schools, the “end of BigLaw,” and obsolescence for attorneys, have ended up looking silly. The legal profession did not become the modern-day equivalent of buggy-whip manufacture. Even paralegal employment has been on the rise. In the broader economy, the techno-utopian story has fared even worse. One of its prime policy ideas—the notion of a “skills gap” crippling the economy thanks to workers’ lack of education—has been widely debunked. On the other hand, fewer persons are becoming lawyers today—an indication that the field is shrinking in some areas, to the chagrin of cyclical-ists.

Each approach is performative, in the sense that it not merely describes the world, but also prescribes future action. From a techno-utopian perspective, it is good to see fewer Americans becoming attorneys, because so many are performing roles that can be automated. From a cyclical perspective, growth in the number of lawyers is a positive trend, since it both reflects and manifests more economic growth generally. But it is possible that each of these economics-driven schools of thought is missing a bigger picture issue: namely, the political and social valence of legal work and its fair compensation. That is where discussions of the legal profession need a political economy perspective, rather than a merely economic one.

This political economy perspective should encompass many concerns. This post focuses on two: the beneficiaries of legal work, and its nature. My main point is that then trends which both techno-utopians and cyclical-ists celebrate as vindicating their own points of view, are ambiguous as to their effects on society generally.

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Lawyering and Political Economy: The Clinical Wing of LPE

Charles Du-

What does an LPE perspective imply for the practice of law? In other words, what is the “clinical wing” of LPE? My recently published essay, “Securing Public Interest Law’s Commitment to Left Politics,” seeks to denaturalize and politicize “public interest law,” arguing for a public interest law focused chiefly on building left political power by supporting movements and organizing. In its current popular usage, public interest law mostly refers to the wide variety of legal practices that are motivated by “progressive” political commitments on the part of the lawyer. (It also increasingly includes conservative causes, especially in the official, institutional definitions of some law schools, which serve as a sort of concession to right-wing students in the name of “intellectual diversity.”) Yet despite its vagueness, public interest law is highly institutionalized, with curricular offerings, scholarships, and fellowships devoted to it. The set of opportunities for each new cohort of progressive lawyers is essentially identical to the contemporary institutional forms of public interest law. This, at bottom, is why it matters to contest the meaning of the term.

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Libertarian Doublespeak: Obscuring Distributional Struggles Under the Banner of “Economic Liberty”

Jamee K. Moudud

The expression “economic liberty” is a form of conceptual doublespeak. The word doublespeak refers to a kind of “language used to deceive usually through concealment or misrepresentation of truth.” This strategy of redefining reality with the clever use of language is central to the way in which power is exercised in Orwell’s dystopian novel 1984. But it also applies to the Public Choice Economics literature. It requires obeisance to the rule of law and “economic liberty,” while ensuring that the majority of the population cannot reduce the wealth of the richest few. This effect evokes a1984-like dynamic, well described in Nancy MacLean’s Democracy in Chains. MacLean describes how Public Choice’s libertarian ideology aims to restrain society’s ability to regulate the controllers of capital under the guise of “economic liberty.” And of course, a crucial goal is to contain the power of labor. The ideological justification as MacLean put it is that “[I]n a true, undistorted market society, wages should only rise with increases in productivity.”

One could rephrase MacLean’s conclusion a little by saying that in the neoclassical paradigm, wages will rise with productivity under “free markets.” This conclusion follows from marginal productivity theory (MPT). In MPT, production and distribution occur in a context devoid of politics, in which output arises from a technological relationship called the production functionvia the inputs of the capital stock and labor. Given perfectly competitive markets (meaning those populated by small firms without any ability to set prices of their products or influence wages), each firm chooses that level of employment in which the additional cost of hiring one more worker equals the revenue that the output produced by that worker generates. This ensures the condition that real wages equal the marginal product (additional product) produced by each worker, in line with the Lockean view that each person should live by the fruits of their labor. The supplies and demands for the aggregate labor and capital stocks, respectively, determine wages and profits, i.e. the economy’s endowment structure determines the distribution of the output that arises from the production function.

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Economic Human Rights, Not Tough Policy Tradeoffs

Martha McCluskey —

According to conventional law and economics wisdom, problems of economic inequality are best solved with targeted redistributive spending, not universal human economic rights. A political economy perspective suggests the opposite: that legal rights are crucial for economic justice.

Orthodox law and economics tellsus: all rights have a cost.  Law allocates economic gain, but cannot generate it, in this view.  From this premise, any new economic rights aimed at supporting those who are disadvantaged must come at the expense of some other economic gain.  For example, a universal right to affordable health care would simply mask an inevitable tradeoff in public and private spending:  fewer resources for education or jobs.  In addition, in this logic, an economic entitlement to receive basic human support will replace market discipline with incentives for waste, reducing economic resources overall.

What orthodox law and economics doesn’t tell us:  all costs have a right.  That is, any costs associated with new economic rights arise not from essential economics, but instead from contingent legal and political arrangements. Particular legal and political regimes produce, organize and limit access to human needs like education or health care. Law itself shapes the economic forces that appear to be disrupted when law re-allocates rights to advance general human needs.

On the question of health care, for example, a complex system of legal rights and institutions already protects economic gain for some at the expense of health and economic security for others.  Legal systems distributing risks and rewards in health care include patent rights, insurance regulation, corporate governance rules, antitrust law, criminal law, and tax policy. Moreover, these legal rights are not firmly settled or self-evident, but instead are continually questioned and modified, especially in response to lobbying, litigation, and advocacy by industry interests.  New rights to egalitarian economic support can similarly re-arrange economic gain and loss as a legitimate and beneficial function of democracy.

Further, we should not presume human economic rights amount to zero sum transfers or costly economic distortions.  That conventional law and economics thinking rests on the myth of an essential market order that transcends law and politics, thereby closing off analysis of how re-structuring the market could generate far better economic conditions.  But a more complete law and political economy view recognizes that entitlements do not come at the expense of naturally productive market activity; instead, entitlements generate and govern market production. New legal rights can give people new power to resist existing market constraints, and that transformative power can lead the economy to new levels of prosperity and stability. Continue reading

Free Trade Free for All: Market Romanticism Versus Reality

Jamee K. Moudud – 

The drama surrounding President Trump’s decision to impose import tariffs on steel and aluminum has roiled the Republican Party and wide swathes of the corporate elite. The tariff decision comes on the heels of political bluster about the US being treated “unfairly” by other countries. This accusation of “unfairness” when it comes to US trade deficits is well worn. In a previous era, Japan was the alleged culprit of “unfair” trade practices because of its persistent trade surpluses with the U.S.

This type of political theater draws on a romanticized view of international trade and its persistent conflict with empirical reality. As an explanation of global trade relations,  the Heckscher-Ohlin-Samuelson (HOS) model of foreign trade relies on both of the standard neoclassical assumptions about “efficient” markets. First, it assumes perfectly competitive markets, composed of many, small firms, each without any  ability to set prices. Second, it assumes that there are zero externalities to economic transactions, meaning that transactions do not have any un-priced, third-party effects. And of course, the model assumes the economy  is fundamentally based on barter, according  no roles for money, credit, and effective demand. The absence of money implies that there is no possibility of an increase in liquidity preference (a term coined by Keynes to describe the desire to hold cash rather than illiquid assets) in uncertain times and thus no possibility of shortfalls of effective demand. Together, these propositions of the HOS model predict that a legal framework of “free trade” will produce balanced trading relationships on the international level and full employment in each domestic economy. Significantly, assuming that there is perfect competition implies that firms in each country, regardless of its level of industrialization, have access to the same technology needed to produce goods for the international market. Perfect competition implies that no firm injures others, a point of view that has been challenged by many authors. (See the edited volume by Moudud, Bina, and Mason Alternative Theories of Competition: Challenges to the Orthodoxy). The core aspect of the broad alternative perspectives is that firms do seek to damage each other by attempting to take away market shares via price-setting and cost-adjusting processes. This has nothing to do with either “perfect” or “imperfect” markets.

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Whatever Happened to “Just Prices?”

Robert Hockett – 

Are prices the sort of thing that can be fair or unfair? It seems to be common to assume so. Health care is said to cost too much, unhealthy foodstuffs to cost too little. Air and water, we say, should be free. Maybe college and health insurance should be as well?

Yet while we frequently hear and say such things in informal settings, many in more ‘serious’ company appear to concede that prices can no more be fair or unfair than the number seven can be yellow or green. There are only individual preferences – my wish to pay less, your willingness to pay more – and market prices that all of us ‘take’ and don’t ‘make.’ In this foundationally critical matter, so closely bound up with the way we meet needs in a market economy, it seems we are most (if not all) of us neoclassical economists now.

But do we really have to give up the idea of fair prices? In a forthcoming paper, Roy Kreitner and I say, Not so fast. We interrogate and rehabilitate the idea of fair prices in part through a critical look at its recent history, and in part through a look at the ways in which prices are actually determined in contemporary economies. We abjure, however, any attempt to link this inquiry with ‘just price’ theory of the sort that flourished, in a number of forms, before the so-called ‘marginalist revolution’ of the late 19th century – the revolution that purported to slay what we used to call ‘political economy’ and birthed ‘economics.’

In this post I aim to fill-in that gulf and trace some connecting lines. For it turns out that our attempt at a ‘just price’ revival has a venerable and unjustly forgotten pedigree in hardcore just price theory of the pre-marginalist variety.

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