Econ 200 law and economics, Foldvary, SJSU

Tuesdays, 6:30 pm to 9:15 pm, DMH 163

Lecture 1

Law and economics: the application of economic theory to the consequences of laws.

I assume you have a knowledge of basic economic theory, such as supply and demand,

and that you understand graphs.

The most important reason for learning economics:

to understand the implicit reality beneath superficial appearances.

Examples: real and nominal interest.

Example of impact of law: price controls.

Market price: equilibrium, market clearing, information, efficiency.


Price floor, ceiling.

Minimum wage, plus taxes. Min wage is equivalent to a tax.

Laws, regulations, a substitute for taxation. An implicit tax.

rent control. Controls not rent but who receives the rent.

An analysis of the effects of price controls has to go beyond the narrow impact

to analyze alternative ways of achieving the result.

Ten axioms of economics

1. human desires are unlimited

2. scarcity

3. diminishing returns

4. diminishing marginal utility

5. subjective values

6. economizing

7. consistency

8. motivations and incentives: self interest and sympathy

9. time preference

10. uncertainty

We can divide economics into normative and positive economics.

Normative: judgment, improvement.

Involves ethics as well as economics.

Three criteria: efficiency, equity, sustainability.

Efficiency: ratio of output to inputs. Minimizing waste.

Sustainability: economic and environmental.

Equity: fairness, justice. How to judge? Which ethic?

But positive economics also involves ethics.

The concept of the pure market.

An economy in which all activity is voluntary.

What is voluntary action?

Requires an ethic.

If economics is universal, so is the concept of the market,

so is the meaning of what is voluntary,

and also the ethic that determines what is voluntary,

hence a universal ethic, natural moral law.

PPT u.e.

property rights

Framework for economic analysis:

pure market, then governmental intervention.

We can use the u.e. to judge the equity of law.

Laws: market enhancing, market hampering.

Market enhancing: minimize harm to others.

Market hampering: prohibit and restrict voluntary action.

Trade with Cuba. Prohibition of medical marijuana.

Laws prohibiting fraud. Price controls.

Law and economics presumes the presence of law enacted by government.

Government vs. governance.

Governance is the adoption and enforcement of rules regarding property and conduct.

Government is imposed governance:

force is imposed on peaceful and honest acts,

and the rulers are imposed on everybody by force.

Voluntary governance consists of an agreement on the constitutional rules.

Law and economics presumes the existence of government

because that is the status quo.

But we can ask the deeper law-and-economic question of whether government is necessary.

Anarchism is the political theory that a pure voluntary society can function well,

and that an imposed governance is morally wrong,

because it is not consistent with human equality.

Thus anarchists such as Lysander Spooner reject the authority of any imposed constitution.

He wrote the booklet “The Constitution of No Authority”.

He said, “The Constitution has no inherent authority or obligation.

All laws of the US federal government obtain their legal authority from the constitution,

and each state’s laws also are based on their constitutions.

But what is the moral authority for a governing constitution in the first place?

Spooner wrote:

“It has no authority or obligation at all, unless as a contract between man and man.

And it does not so much as even purport to be a contract between persons now existing.”

Even if ‘We the people’ applies to U.S. citizens today, there is no unanimous agreement.

Spooner then says,

“It is a general principle of law and reason, that a written instrument binds no one until he has signed it. This principle is so inflexible a one, that even though a man is unable to write his name, he must still “make his mark,” before he is bound by a written contract.”

“Neither law nor reason requires or expects a man to agree to an instrument, until it is written; for until it is written, he cannot know its precise legal meaning. And when it is written, and he has had the opportunity to satisfy himself of its precise legal meaning, he is then expected to decide, and not before, whether he will agree to it or not. And if he do not then sign it, his reason is supposed to be, that he does not choose to enter into such a contract.”

Spooner makes an important moral and legal proposition: “all ... important contracts, especially those of a permanent nature, should be both written and signed.”

This principle is recognized today in real estate law. Spooner continues:

“since 1677—there has been on the statute book of England, and the same, in substance, if not precisely in letter, has been re-enacted, and is now in force, in nearly or quite all the States of this Union, a statute, the general object of which is to declare that no action shall be brought to enforce contracts of the more important class, unless they are put in writing, and signed by the parties to be held chargeable upon them.”

“The principle of the statute, be it observed, is, not merely that written contracts shall be signed, but also that all contracts, except those specially exempted—generally those that are for small amounts, and are to remain in force but for a short time—shall be both written and signed.”

There can be implicit contracts, if they are clear and obvious, and if they have actual agreement.

Why do classes in this university have syllabi?

Because a syllabus is a contract, along with other university contracts.

Students don’t sign them, but agreement is implicit.

If you don’t approve of the syllabus, seek to change it, or don’t take the class.

But if you move into a city, does that imply agreement on all its rules?

In private communities such as a homeowners association, the agreement is explicit.

My house is served by a private road, managed by a road association.

When I bought my house, I signed a contract with the road association.

I pay dues for the road, by contract.

Why don’t city governments require a signed contract?

Spooner asks,

“On what ground can those who pretend to administer [the Constitution], claim the right to seize men’s property, to restrain them of their natural liberty of action, industry, and trade?”

“The most they can say, in answer to this question, is, that some half, two-thirds, or three-fourths of the ... adults of the country have a tacit understanding that they will maintain a government under the Constitution; that they will select, by ballot, the persons to administer it; and that those persons who may receive a majority, or a plurality, of their ballots, shall act as their representatives, and administer the Constitution in their name, and by their authority.”

But even if it exists, a tacit understanding cannot bind those who disagree.

Nevertheless, policy analysis is conditional.

So regardless of the moral authority of the current constitutions,

we can accept the reality of today’s constitutional authority

and analyze whether legislation is in accord with a Constitution,

and the consequences of laws not based on the Constitution.

Indeed, the usual complaint is not about the Constitution’s authority,

but that many laws violate Constitutional constraints.

The economics of secession

Secession is a withdrawal of persons, space, and goods from the jurisdiction of the original governing unit, which we can call the "old realm."

Moral equality implies that all persons are equal self-owners. 

Imposed rule makes the ruler master and the ruled, to some degree, a slave, in contrast to the equality premise from with the universal ethic derives.

Only if a person commits an act of coercive harm does he legitimately fall within the jurisdiction of others, and even then, only to the degree necessary to obtain restitution and to protect society from threats from this person.

All associations must therefore have an exit option in order to be morally ethical, i.e. not evil. The laws of marriage must allow for divorce. The laws of employment must allow employees to leave and employers to terminate employees. And, the laws of community must allow members to have one or more exit options.

As the late economist James Buchanan stated, the availability of the exit option limits the ability of governments to exploit residents, and the internal and external exit options also induce more efficient governance and public finances.

Except in totalitarian states, people have been free to emigrate and change citizenship, the external exit option.

The USA, however, imposes a tax on those who renounce their citizenship.

A second option, the internal exit, is to withdraw from the jurisdiction of an association or government without moving out.

If Quebec secedes from Canada, some of the residents would prefer to remain Canadian.

So an ethical secession has to be voluntary and not force other to change jurisdictions.

Those who secede are morally entitled to their share of joint assets,

but also obligate themselves a share of the joint liabilities, such as a government debt.

Secession can be partial.

For example, parents who send their children to private schools in effect secede from the government schools. The law could facilitate this secession by providing a tax credit for those who save the government the expense of educating their children.

In St. Louis, neighborhoods can privatize their streets, seceding from government ownership.

Such service substitution would be accompanied by tax substitution.

Such substitutive secession would promote more efficient and less interventionist government, as residents would be more able to choose their governance, promoting competition among governments for residents and their tax monies.