Corneely, canals, and canalizing rules

Recent debate/discussion among some friends about what, if anything, is distinctive about the system, period(s), or state(s) of affairs often known as “capitalism,” led me to think further about canalizing rules. I’m quickly recording those thoughts here.

T.J. Stiles’ fantastic The First Tycoon, a gripping (and searching) life of Cornelius Vanderbilt, notes that as a child in still-largely Dutch Staten Island, he was called “Corneely” (ph.) by his mother — a lesser-known nickname than the later “Commodore.” (I listened to the book, so I may be spelling it differently than Stiles.) For Corneely to become the Commodore, and to put his personal imprint on the leading edge of the transformation of the American economy, he had to develop his apparently inborn thirst and capacity for navigating both rivers and competition.

I wrote recently about the importance of “canalizing rules,” as the New Deal and mid-century economist Gardiner Means dubbed them, for understanding economic competition as well as the function of competition law. Just as economic coordination is always present in the interstices of competition (and vice versa) so too competition is always canalized: always directed along certain dimensions or aspects of economic activity and away from others. The canalization of competition is not, as far as I can tell, well-captured by the perfect-competition framework that has become the North Star of competition law. (And again, no, it does not matter that most economic models used are imperfect competition models; for them to have any prescriptive force at all, perfect competition remains the normative benchmark.) This framework can talk about more or less competition, at best; it has no internal resources for distinguishing the qualitative dimensions of competition.

Law plays an indispensable, though by no means exclusive, role in shaping the directions that competition takes. And of course, the pathways of competition aren’t permanent; they come to be reshaped or redirected from time to time. That can be done by changing the rules of the game but also through the “disruptive” actions of market participants–which, though, are hardly independent from the actions of law (whether permissive, prohibitive, or impelling).

For someone whose life came to symbolize an epochal reshaping of the pathways of economic competition (and economic coordination – by helping to usher in the era of big business), it’s amazing how literally Vanderbilt embodied these metaphors. Initially, economic competition and the physical racing of boats were indistinguishable in the life of young Corneely as he plied both his trade and his boat between Staten Island and rapidly-developing Manhattan. He then played a material role in the challenge to a state steamboat monopoly that led to Gibbons v. Ogden.

Interestingly, Vanderbilt’s role in the controversy was as employee, not as owner or tycoon. Gibbons hired Vanderbilt for his craft capacity, but V. eagerly participated in the business and the legal dispute as well, personally incurring fines for evading the service of process, and involving himself in strategic discussions with Gibbons’ (his employer’s) lawyers.

The decision in Gibbons v. Ogden would eventually lead to the development of the idea of the ‘flow of commerce’ in constitutional doctrine (though it didn’t itself use that term), which also unified in one idea the physical flow of goods (often over water) with the flow of economic competition. By limiting the ability of states to ‘interfere’ with that flow through certain types of regulation, Gibbons v. Ogden –among other important instances of legal action and inaction– actively enabled and in some ways impelled the “disruptions” to existing market orders that Vanderbilt’s career came to symbolize. Those disruptions were achieved through and in the name of competition, yet led directly to the age of the robber barons, who controlled and shaped commerce as they wished–an irony woven throughout Stiles’ narrative.

Yet the irony largely dissolves in attending to the canalizing rules, and coordination mechanisms, that always shape and condition competition. What has perhaps been distinctive about the era that Vanderbilt helped to usher in is the frequency and speed with which new “disruptions” appear – a topic I’ll leave for another day.

On Merger Policy and Labor (presentation at Stigler Center antitrust conference)

I’m posting here a (very) lightly edited transcription of a presentation I gave last month at the Stigler Center conference on antitrust held at the University of Chicago. The goal of the panel I was on was to consider merger policy in relation to labor and labor issues. If you prefer to watch or listen, the entire panel (indeed, the entire conference) is available here, and my presentation starts at about 2:43 or so.

As a sidenote, this was one of those instances where the occasion and context generated the content of the presentation nearly as much as previous writings did–which is why I’m posting the presentation, and also why I’ve edited it very lightly. Here it is.


I want to first note: we’ve been talking about mergers at this conference nearly to the exclusion of other antitrust issues. When we talk about whether antitrust is an appropriate tool to deal with labor market harms, we shouldn’t just be thinking about mergers. We should also be thinking about other antitrust rules, notably those that govern vertical restraints. The treatment of vertical restraints has been really the biggest change worked by the Chicago School Revolution … and that has direct impacts on labor. I won’t talk about this too much, but there was a great New York Times article yesterday by Lydia DePillis on franchising and its effects on both labor and smaller firms. The article doesn’t talk directly about antitrust, but ultimately it’s these permissive vertical restraints rules that make the characteristic control without responsibility of the franchising business model –which labor advocates have targeted for decades now—possible. Those rules make the organizational arrangement of franchising possible, and they are of course an antitrust issue. The article notes that both the NLRB and the FTC are now interested in thinking seriously about franchising. So I think it’s important that we don’t just think about mergers here but also keep in mind other antitrust rules. In addition to vertical restraints and merger policy, I also think the rules on horizontal coordination have impacts on labor in a way that I think will become more clear in just a minute.

So, labor and mergers. Now, I’m going to suggest that we think about labor and merger policy, not just from the perspective of what the effect is that a specific merger or a set of mergers has on market concentration, and the effect that has on wages—although that is certainly important and I think all of the empirical and statistical evidence that the last speaker mentioned is very relevant … I think we should also think about the merger rules we adopt in terms of their systemic effects on labor, on labor unions, on workers. And so here I also suggest a more general shift in our thinking about all of these antitrust rules that we’ve been discussing: that we think about them not just in terms of how we would apply a given set of rules in a given adjudication, though that’s important, but also in terms of how they function prophylactically to create, or not create, the sorts of markets we want to see.

So specifically with respect to mergers, what is the effect of a permissive merger policy versus a quite stringent merger policy on the competitive and business strategies that executives, that boards are looking at, and that they may even be compelled into when everyone else is also pursuing them? What competitive strategies are open to firm controllers given a particular set of legal rules? In the context of a not very permissive merger policy, what would happen to business strategy? I’m just going to ask the question as a thought experiment: if we largely take mergers off the table as a competitive or business strategy, we make them the exception and not the rule … what would happen? What would be the implications for markets in general and for labor in particular? I’m not going to answer those questions exhaustively, but I’m going to suggest that we think about those questions.

We’ve also been having a kind of meta-debate here about what sorts of rules, standards, and goals are appropriate to consider. Something we’ve heard several times is that broadening the type of antitrust goals that are considered (from economic efficiency, or narrowly-defined economic welfare) will be intractable for decision-makers, will result in a confused antitrust policy that doesn’t do anything well, and will vest too much discretion in judges. And to address that, I want to to try to get us to at least agree on the subject matter that we’re discussing, even if there’s disagreement about those other things, the specific rules and standards and even what type of rules and standards antitrust should adopt. And I think that part of the subject matter we’re discussing when we’re discussing antitrust is: what kind of markets do we want to have in our society, and given that law inevitably shapes markets, what sorts of rules and processes should the law adopt?

And I want to distinguish here between considerations that may not be appropriate for individual judges or decision-makers, versus considerations are not appropriate for the law or policy as a whole to be oriented toward. Now, for individual judges in individual adjudications, I’m the last one to suggest that we increase the discretion that our federal judges have. I’ve argued against that in print. I think we should absolutely adopt bright line rules that constrain that discretion. But we should distinguish between the considerations that are appropriate for individual decision makers or for that matter, ALJs to consider in deciding individual cases that arise under the antitrust laws, versus the considerations that are appropriate for us at this conference or as academics, as advocates, as researchers, as legislators, to consider when we are talking about designing our antitrust laws. Because those are conceptually two completely separate questions. And if we’re not open to considering those questions systemically, then I don’t know what the point of having a conference like this actually is, or what the point of academic, at least legal, academic research is. That’s our job. I was a lawyer for many years: we are bound by the rules when we’re practicing lawyers, but that is not what we’re doing here. So, we do not have to entrust a judge with considering some of these bigger impacts that market concentration and permissive merger policy may have on the polity and on society – but it’s an appropriate thing for us to consider when we think about what type of rules to adopt.

And here again, a permissive or not-permissive merger policy is one of these rules that we can think about in this prophylactic way. As a quick aside, I think we should also think about FTC rule-making this way. Empowering and actually just allowing the FTC to do its job of engaging in competition rule-making is another way, a very important way, of consciously creating these prophylactic rules. I think that the authority they have to do this is extremely clear, given the statements of the Supreme Court and the evidence from the legislative history. The reason I’m bringing that up here is that it illustrates the more general point: the considerations the FTC should take into account when doing competition rule-making are different from how much discretion we’re going to give to individual decision makers. Okay, so I think I’ve made that point.

So, let’s come back to the main topic. What’s a merger? A merger is a specific method of expanding the scope of a particular form of economic coordination that has been authorized by law. There is nothing natural or necessary about firms as a compulsory form of economic coordination or organization. All throughout history, people have been innovating and creating and trading in all sort of organizational forms and economic institutions … through craft guilds, through mercantile guilds. There’s nothing compulsory or natural about the specific form of the modern firm—shareholder-driven and organized in the particular way that it is, with workers largely divorced from decision-making. There’s nothing natural about that. Now, I’m not suggesting that we go back to the guild system. I’m asking us to take a step back and think about what a firm is and what we’re doing when we say that the presumption should be that, in essence, firms or rather those that control them have the right to combine into still-larger and more powerful firms.

And I want to note that the firm is specifically an antitrust exception. It is a suspension of competition. You can say that it’s crazy to think about not allowing firm-based coordination; how would we produce? Well, there’s actually all kinds of ways. At the simplest level, if you were truly trying to maximize competition, you could take the output of a firm and divide it – you keep all the operational integration, but you could just divide control rights over that output among everyone who works for that firm and let them individually price their share of the output. That would be a more competitive outcome, and would potentially replicate the level of competition that the modern business firm displaced. I think it’s fine that we don’t do that, but I think we need to notice what is actually happening here. I’m not the first one to have this insight: Ronald Coase, most famously, had this insight, in essence. He didn’t talk about it in terms of antitrust, but he did talk about the firm as a suspension of competition and market exchange.

So that is what a merger is: expanding this particular way of suspending competition. We need to just be very clear about what we are actually doing and how we treat that form differently from other suspensions of competition … including labor unions, cooperatives, and yes, even looser horizontal coordination in the form of things like trade associations. (I’ll come back to that point.)

Okay, so mergers are an expansion of the scope of what is already the biggest and strongest antitrust exemption we have: the firm. So that’s one thing I want us to notice about mergers. The second point I want to make is about “efficiencies.” When when we talk about efficiencies that may be realized by a given merger, I think we need to consider two things. Which of them, first of all, actually are efficiencies versus something else? And secondly, we need to consider whether and how any genuine efficiencies could potentially be achieved through forms of coordination other than the expansion of the firm.

Now, taking the second point first, this idea of thinking about economic coordination broadly is not just an academic point. What could we do right now in terms of other forms of coordination that could realize some of the putative efficiencies that specific mergers may accomplish? For instance, could some of those genuine efficiencies –just considering the genuine efficiencies for a moment— could they be achieved through, for instance, industry-wide standards in various situations? Could they be achieved by a trade association? We have trade associations that do marketing for various industries. You’ve all seen the milk ads, California raisins, right? Are there, is there coordination through those types of mechanisms that could actually preserve more independent decision-making throughout the economy? That, by the way, is one of the goals of antitrust under settled law. That’s still good law, as far as I know: that dispersed decision-making is one of the goals of antitrust law. So, should we be considering those alternative forms of coordination … and indeed, should we, in any new merger guidelines, be considering a safe harbor for some of these alternative forms of coordination, potentially through dispersed coordination, through trade associations or industry-wide standards that could achieve some of the genuine efficiencies without the consolidation, and specifically without the consolidation in the form of the shareholder-driven firm that mergers currently signify? So I think we need to put that on the table and consider it.

And on the first point about efficiencies: we also have to ask, how many of these putative efficiencies are actually intensified forms of extraction versus actual efficiencies? And here, it’s important to first get conceptually clear about what we mean by “efficiency.” Do we mean allocative efficiency? Now, obviously that’s undermined by a corporate merger. I should say, I don’t find that concept actually terribly useful myself, but to the extent that we are adopting it, obviously a merger decreases allocative efficiency. Everyone has actually agreed on that: Bork, Williamson agree with me. Though somehow, we seem to sometimes forget this simple point.

So, allocative efficiency certainly isn’t an efficiency that’s contributed by a merger. It has to be a production efficiency. Then the question becomes: when are there true production efficiencies that are contributed by a given merger? In some cases, what we call a productive efficiency may actually be a form of extraction. I’m not saying they all are; I think there are genuine efficiencies. But I think that sometimes, specifically when we’re looking at price as an index of production efficiency—which is obviously a shorthand we use all the time—we mistake extraction, or just a transfer of benefits from one group to another, for efficiency. In other words, often low prices are not an indication of production efficiencies; they’re an indication of extraction. And I don’t mean that in just a moralizing, pejorative way; I think this has to be acknowledged regardless of your ultimate normative views.

Let me break it down. What is a production efficiency? A technical efficiency means you get more output for the same input. It is technical innovation. We have seen so much such technical innovation in history. We live at a time that we’re benefiting from it tremendously. But consider the difference between a machine that allows two workers to produce more (at the same quality) with the same effort, versus a new institutional or organizational arrangement that pays those two workers less to produce the same amount—or has them put in more effort for the same amount. Those are not the same thing. The second thing simply is not a technical efficiency. I’m not taking a normative position on that, right now. You can, I suppose, have the position that that’s a good thing and that we should drive wages down to subsistence levels. I do not think that—I do not think many people would admit that they think that even if they do—but I want us right now to notice conceptually there is a difference.

And the same thing applies when a merger leads to greater bargaining power with respect to other firms that are input suppliers or distributors, or whatever—firms in adjacent markets that you’re bargaining with. If you’re able to—if you ultimately even get lower prices, which we know we often don’t because instead those savings go up to shareholders— but even when you do get lower prices, to what extent is it coming from superior bargaining power with respect to suppliers, distributors, other trading partners versus true productive efficiencies? Because obviously if you now have—well, we should look at it in individual cases, but oftentimes, you now have more bargaining power with respect to trading partners in adjacent markets if you’re now a much bigger firm and you have a much bigger market share. So, again, we need to distinguish between true technical efficiency and extraction, both on the labor side and on the smaller firm side.

And by the way, that’s not mainly because we just care about small firms and we romanticize them, like that’s a nostalgic ideal as it’s often characterized. Those small firms have workers themselves. So even the supposed wage premium of large firms—we need to look very carefully at that, because to what extent is that a wealth transfer from the workers of other firms to the workers of large firms (to the extent there even is a wage premium)? Notably, aside from current harms, you don’t even maintain that benefit if you just get rid of small firms to extract from.

Right, so these are all things that I think we need to just take a step back and think about when we think about merger policy and workers. I suspect I’m over my time, but I also really want to include in things that are not efficiencies, the direct transfer that permissive merger policy may entail at a systemic level from, essentially, productive arms of the firm to non-productive arms, and therefore ultimately from workers to shareholders and deal-makers. If we talk about it in this individual way that sort of seems like we’re pointing fingers, but if we consider it systemically, we see how everyone including boards and executives are actually constrained by this.

So I just want to very briefly quote from Josh Mason, an economist who I think that maybe antitrust folks should pay more attention to. So, many social scientists and researchers have been talking about share buybacks as a form of this type of transfer from workers and from production in general to the financial and household sectors. Josh has this nice essay thinking about M&A itself as this same type of transfer. And he says that “when acquisitions are paid in stock, the total volume of shares doesn’t change. But when they are paid in cash, it does. In the aggregate, when publicly traded company A pays $1 billion to acquire publicly traded company B, that is just a payment from the corporate sector to the household sector of $1 billion, just as if the corporation were buying back its own stock.” So again, we are transferring from producers to savers at a systemic level. And again, you can have different views on the utility of that, but that is exactly what has been critiqued with respect to share buybacks. And whatever your opinion about it, it certainly isn’t a productive efficiency!

Finally, I just want to very, very briefly make the point I alluded to in the introduction: if you think about mergers and acquisitions in terms of this sense of merger policy, in terms of this sense of prophylactic rules, then you need to ask: what are the competitive strategies and tools that are on the table for a CEO, for a board, given a particular set of such rules? And sometimes—I mean, if you have taught business associations, as I have, then you read all kinds of cases with your students where the board doesn’t want to do the deal … no one who’s actually running the company wants to do this deal. Their hands are tied by the pressure that this set of rules creates, or at least their hands are strongly guided, toward doing deals that very few people actually want. And this is especially stark when we consider their primary job is to be a steward and a manager of certain productive assets. That’s the point of the firm: making the best use of productive assets. We’ve decided, as a society, that giving this job over to managers and CEOs and boards is the way we want to do that. So if that’s the goal, we must ask, with respect to merger policy: Wouldn’t it be useful to have prophylactic rules that actually channel their activity toward doing precisely that, rather than being forced to do deals that often do not benefit anyone [or benefit very few people]?

New (short) essay: “Methodological and Normative Elements of the New Antitrust”

Here is a draft of a new, short essay, for the Journal of Antitrust Enforcement‘s upcoming issue on “The U.S. Antitrust and Anti-Monopoly Realignment: Three Year Checkup.” The essay focuses on succinctly drawing out what I see as the two key analytic/methodological moves of ‘the new antitrust’: 1) a recognition of the pervasiveness of economic coordination in all markets and economies, and law’s role in shaping its character; 2) a focus on channeled competition, given its direction by what Gardiner Means called “canalizing rules,” rather than on perfect competition as an analytic framework for understanding competitive dynamics and as a normative benchmark for policy.

The one Road and its tributaries

Image by Matěj Čadil

He often used to say there was only one Road; that it was like a great river: its springs were at every doorstep and every path was its tributary. ‘It’s a dangerous business, Frodo, going out of your door,’ he used to say. ‘You step into the Road, and if you don’t keep your feet, there is no telling where you might be swept off to.’    –JRR Tolkien, The Fellowship of the Ring [Frodo recounting, to Sam and Pippin, a statement by Bilbo]

This post is inspired by a great thread I saw on Mastodon (which I just joined and so far love) explaining the concept and purpose of the “fediverse,” and specifically its potential promise for curtailing some of the most domineering behavior of more traditionally organized, corporate-run platforms. Since I am currently re-reading The Lord of the Rings, the thread of course also made me think of one of my favorite Tolkien quotes (above) … for I think fairly obvious reasons.

If there is one thing that is human and universal, it is the tendency to create and congregate in shires, through which we relate to the larger world. This isn’t the unique tendency of English country folk, or of white Americans. It’s universal. When people in big cities say ‘it feels like a small town after a while,’ this is what they mean. Even the largest global corporations try to recreate or simulate the shire within their firm boundaries–or sometimes within separate firms they dominate, thanks to lax antitrust law.

Opponents of antimonopoly, on the right and the center but also too often the left, sometimes dismiss the project as anachronistic nostalgia for the shire, at best, and as suspicious parochial attachment at worst. It’s funny because maybe the central motif of Lord of the Rings for me is, instead, this constant, iterative interaction between the shire and the world stage — the one great Road and its countless local tributaries, including even the path in front of one’s own hobbit hole (or dwarf cave, or big person town, or etc). And of course the central antagonist of Middle Earth is the one who sought total, centralized control (originally with good intentions!).

The point of the fediverse thread linked above is that coordination among many, locally controlled shires is much more robust in resisting the type of destructive meltdown currently unfolding on Musk’s Twitter — and more specifically, that it’s likely to force bigger and more powerful actors that *do* come into the space to preserve interoperability across platforms … which in turn acts as a check on the entrenchment of any single dominant actor. Etc.

Against this promise, some voices on the left are overly credulous of generic, overbroad efficiency claims made on behalf of large platforms and large firms generally — and also seem to believe that large, dominant corporate actors will somehow be easier to bring under collective labor or public control. It’s just one example, but Twitter going in the precise opposite direction–helped along by legal norms that supposedly enact these ideas of efficiency–is yet another point against this incredibly sticky idea.

Anyway, I’m really happy to be part of the fediverse. The vibes are good, as they say. But this is not just an online thing: We also need legal reforms in the near future that will allow us to support fediverse-like coordination structures across the economy.

Have y’ heard of him, lad? Have y’ heard of Sauron?*

Warning: spoilers for “The Rings of Power”

Patrick McKay and J.D. Payne’s Rings of Power is really, really good — as visual art, in weaving together strands of story, and in its sheer semantic depth. Not to be unnecessarily comparative, but I find it surprising that there’s even a live debate along these dimensions about whether the Peter Jackson films or the current series better capture the spirit of Tolkien. I have to confess I don’t like the Jackson films much at all–particularly the Lord of the Rings trilogy … and that’s not even on the grounds that Jackson weaponized New Zealand competition law against workers, leading to what came to be known as the anti-union “Hobbit Law.”

In Rings of Power, the central Sauron-Halbrand/Galadriel drama is especially well done. Tolkien is sometimes associated with a simplistic Battle of Good and Evil, and obviously that’s an important theme. But I think the show captures (and perhaps, highlights) the actual complexity of that vision — weaving it together with the equally Tolkienian theme of Large (the world-stage, the great wide beyond, the single road into which all roads converge) and Small (the local, the quirky hobbit neighbors, the homely hobbit hole). My reading of the plot is that Galadriel’s crusading zeal to eradicate evil, in which she enlists Halbrand, really does draw him back into his aspect as the Dark Lord … after he genuinely sought to leave the world stage behind by descending into his equally essential aspect as a metal craftsman (breaking into the Numenorian smiths’ guild using only minimal and mainly defensive violence).

Also, though, even after he re-embraces his “larger” identity as Sauron, the deal/marriage proposal that he offers to Galadriel in the finale is still pretty morally ambiguous, in my opinion. Remember that Sauron sought to “heal” Middle Earth after the defeat of Morgoth –maybe a false and insufficient (not to mention harmful, and dominating) penance … but it still came from, as far as we know, a genuine healing impulse. Now, he seems to be re-embracing that impulse, and it is Galadriel’s “light” that inspired him to do so. This alone indicates the complexity of the light-dark/good-evil relationship in the story (and, I think, in Tolkien’s vision). But while it may be wrong to try to “bind” the light to him in the first place, notice how he framed the other side of that quid pro quo: “You bind me to light. And I bind you to power.” Not “the dark”, not “evil” … but power.

A pretty straightforward interpretation of this statement is that Sauron seeks to empower the light (or good). (And as he rightly points out to Galadriel during this same dialogue, he has been truthful with her throughout their relationship so far.) Does empowering the light require a touch of the dark? Per the Tao Te Ching, “The brightness of the Tao seems like darkness, the advancement of the Tao seems like retreat, the level path seems rough, the superior path seem empty, the pure seems to be tarnished, and true virtue doesn’t seem to be enough.” One obvious way this theme appears in the fantasy genre is that characters must sometimes undertake morally complicated actions in order to achieve a necessary good. This doesn’t always go well, and it sometimes corrupts, but simply refusing to ‘get one’s hands dirty’ doesn’t seem like an option either.

Anyway, the basic idea that even the Dark Lord sought to heal Middle Earth –as twisted as that impulse became by the individual will to power– is an important idea in Tolkien. And it’s evident everywhere. Simple corrupt motives don’t entirely explain all of the battles we are called to fight. Most people, when motivated to concern themselves with things “out there” in the first place, think they are seeking the good on some level or another. Presumably Peter Jackson thought so in pursuing his anti-union campaign relating to The Hobbit. The problem is how often this impulse turns to domination and condescension, and how it often then seeks to justify domination on the ground that it will most efficiently bring about the ‘greater good’– even one in which too many are robbed of their agency, in which the small quirks of the shire are completely destroyed, and power ultimately becomes self-justifying. Galadriel is almost as much a cautionary tale as Sauron is.

*Waldreg says this to Theo in Episode 4 of Rings of Power

Encouraging chaos orc emperors

The chaos around our favorite online platform –Twitter– demonstrates an important (and under-appreciated) set of destructive dynamics ultimately set in motion by corporate law. This in turn provides an object lesson for some current debates on the legal left. To generalize a bit, I’ve found that discussion around Twitter/Musk chaos has tended toward three dimensions, all of which have real salience, and reside at different levels of abstraction: 1) the overall/underlying profit-seeking and greed consciousness of our current age; 2) the personal agency of Musk, an arrogant, amoral chaos orc who seems to be in over his head; and 3) technical details of corporate law (that largely take its basic direction and purpose for granted). But there is another, somewhat distinct dimension–about the overall direction of the law, as it shapes and constrains various actors’ agency–that I’ll try to elaborate briefly here.

Currently, most people are aware that Twitter has “liquidity problems” and that these problems are causing Musk to erratically enact, abort, and move between various cost-cutting (mass layoffs) and monetization strategies. Some of this is truly hilarious; some is serious in terms of its effects upon the public as well as employees/former employees, and may even call into question the ongoing viability of a platform with real public dimensions. And while the specific decisions, and in a sense the entire situation, are the result of Musk’s personal agency (which, as a separate point, has been given far too broad a scope by our system), the liquidity problems themselves are ultimately also the product of particular legal rules.

Most people are also aware, though more inchoately, that these liquidity problems are not the ongoing or natural consequence of Twitter’s business model, the current market environment, or external technological change. Rather, they are the direct consequence of the debt service obligations incurred by Musk’s acquisition of the company. But this itself can be un-intuitive to the uninitiated. How can one, even conditionally, incur debt on behalf of a company one doesn’t own, in order to effect one’s personal control over that company in the future? While analogous in some ways to using real or other property as collateral for one’s purchase of that property, the difference is that a company is not an inert thing; it is, ultimately, a social coordination network of people and ideas, as well as some physical assets. (This is especially true for a company like Twitter, isn’t it?) Anyway, the destructive consequences of allowing this practice to run amok have been very well-documented. To note, in some cases, such an arrangement actually can bring in financial investment that does lead to real investment–in research and product development, production, and hiring, for example. But too often, it leads to precisely the opposite: disinvestment in production in order to service financial extraction.

One mechanism of that financial extraction is of course the debt service itself. Equally importantly, though, another mechanism runs through the often-inflated stock prices that form the basis for corporate acquisitions or takeovers, and which result ultimately from an oppositional (to some degree or another) dynamic between the board of directors of the acquired company and the acquirer. So, one mechanism of the destructive, extractive dynamic benefits the target company’s shareholders. Now, superficial commentary often tends to focus on the takeover artists or the ‘vulture capitalists’ while glossing over this part a bit. But while the target’s shareholders may mostly resolve (in the case of a public company) into a mass of ordinary nice people who haven’t brought this situation about, that doesn’t mean the dynamic is a good or healthy or beneficial in economic terms–either in the short run or the long run. (Also, plenty of already very-to-extremely rich people are further enriched in this process, both shareholders and various intermediaries.)

The tricky part, though, is that share price is an essential element of a company’s available weapons to fight off an acquisition that it actually thinks will be destructive to the company if consummated. So a target board might conceivably up the ante on price, while wanting or at least partially wanting to preserve the status quo of the company culture–which might include not monetizing everything under the sun; keeping a stable workforce; and (related to the first two) fulfilling what it sees as its public purposes or duties. While I (and others) would argue there is in fact space even under current law to bargain for the second set of things directly, it is not really controversial that current corporate law dynamics (sometimes collected under the label of “the shareholder primacy norm”) largely push boards to emphasize share price. Though it did not occur in the context of question over control over a public company (as Twitter was until Musk took it over), a court has at least once stepped in to rein in managers who wanted to maintain a lightly-monetized, public-oriented platform (in the face of efforts by an expansion- and monetization-oriented investor looking to expand its role).

Anyway, the point is that this overall legal backdrop strongly shapes the dynamics we see at play in the Musk/Twitter drama–but also probably in public companies generally, which may not currently be facing an acquisition bid, but could conceivably face one at any time … and might especially invite one if they act too Craigslist-y (i.e., if they ‘leave [too much] money on the table’, according to some analyst somewhere).

The bigger lesson here, in my opinion, is that the more abstractly we discuss the economy, the more natural it is to fall into very general explanations like “capitalism” (which I am not saying is not explanatory at some level … though personally, I am most sympathetic to versions of that claim that actually have to do with some kind of personal and intersubjective [moral] consciousness, as opposed to appeals to “structure” and “logic” that are posited to be ultimately independent of the market rules–law–we have allowed to grow up in particular ways). We can see here that some of the dynamics that we might be inclined to attribute to “capitalism” generally are actually traceable to law.

It is true that corporate managers who take their non-maximizing proclivities to the degree of Jim and Craig are probably somewhat exceptional. Nevertheless, their situation helps to dramatize a point that is always at work more subtly, pushing managers in the direction of more monetization and more financial extraction. In this instance and others, we could have a different set of rules, and it seems like a stretch to assume that everything would turn out close to the same if we did.

Of course, you could now say that these rules are the way they are precisely because they serve financial extraction, etc. I certainly don’t think the rules we have just fell from the sky. Interested groups push for certain rules–and interested groups already invested with a greater share of coordination rights or scope of agency, under the working of prior rules, are likely to see their desires effectuated more often. That happened with the origins of our corporate law, by the way.

Maybe the debates we seem to be mired in, on parts of the legal left today, about whether legal reform projects are worthwhile, just resolve into how much play we think there is in the joints here. While I think prior allocations of coordination rights and agency (going back to what? an original allocation of rights, or an original power dynamic existing independently of law? at this level, does it matter to our current practical debates?) exert a powerful effect on current political and legal contestation, I don’t think they are determinative. (I wonder if any of us really do, when pushed?) See this excellent recent essay by Noah Zatz in the LPE Blog “rais[ing] uncomfortable questions about LPE analysis of democracy, law, and courts,” where that analysis falls into “law-is-just-politics views.” We can say very similar things about ‘law-is-just-economics views’. Pushing whatever play there is in the joints in a positive, egalitarian, democratic direction will require as many people as possible exercising the agency they currently have–whether that is by organizing, lawyering, or pushing super-agents (courts and legislators and agencies and even business actors) in the right directions. It seems to me that the role of legal academics and social scientists interested in this is to help make room for “the transracial working-class majority” to exercise more of its agency, by clearing away paralyzing ideas of economic determinism as well as by pushing super-agents in the direction of constructive reform. We intervene in the cycle where we are best positioned to do so, but it would be a real shame to effectively abdicate the critical intervention point that legal reform represents.

Efficiency and chokecherries

The Federal Trade Commission’s newest commissioner, Alvaro Bedoya, gave a speech this week pointing out that fairness, rather than “efficiency,” is the explicit goal of various provisions in federal antitrust law. This is clearly true. But even as the legal program associated with the “economic style” set out to systematically erase fairness from the administration and enforcement of the statutory framework, it also advanced a very specific (and not particularly well-defined) conception of efficiency. It isn’t just about whether fairness or efficiency (or both) are the right goals of law, but about what we mean by efficiency in the first place.

This week I also finished harvesting the berries from my choke cherry shrubs. I did this in a few half hour to 45 minute increments in recent late afternoons or evenings, each of them quite enjoyable on their own. The berries as well as other plants are also interesting to the kids on the block, who at least pretend to listen to my botanical mini-lectures. On the “classical theory” for understanding gains and losses, my labor costs were thus zero or negative. If I had to harvest berries for an eight hour (or longer) shift, and if I was poorly compensated in addition to my role not being socially valued, I imagine practically every hour of labor would instead be associated with “disutility.”

One point that follows from this is that various types of small-scale production with less division of labor often may actually be more efficient, at least where labor costs are concerned, on the terms of the classical theory itself (which defines labor costs in terms of subjective utility). But this is the opposite of what conventional applications of neoclassical analysis to competition law have recommended (and institutionalized) regarding “scale.” (There obviously are limits and countervailing considerations to this point — but I don’t see it discussed or acknowledged much at all.)

The berries made me think about something else regarding “efficiency” too. As a gardener you are always thinking about what goes in and what comes out–even when you’re harvesting “intermediate inputs,” like compost! And you are trying to be efficient (in a somewhat more objective sense than the terms of the classical theory truly allow) even though you enjoy time in the garden. The principles of permaculture are all about operational efficiency: employing methods like no-till, and generally setting up the garden to work on its own as much as possible without constant high-effort intervention from the gardener. (The principles are also about operational efficiency in the sense of setting up systems that keep carbon in the soil, where it is affirmatively useful, rather than in the atmosphere where it is the opposite!)

My point is that nature is all about efficiency. The idea of efficiency, properly understood, isn’t an alien invention by rationalistic economists, an imposition of the “homo economicus” vision. On the contrary, the rejection (or demotion) of efficiency talk as lesser to real morals (“only” an instrumental value, etc) seems like the alien, rationalistic abstraction from nature. We can only say that efficiency (in the physical, operational sense) is not an “intrinsic” value if we imagine ourselves unembodied, and unencumbered by finitude.

Notes on Keynes on distinction between “co-operative economy” and “entrepreneur economy,” part 2

I noted that I might have further thoughts on this text; here they are.

1. Just to put a finer point on something from the first post: the nub of the issue for Keynes, driving the divergence between profitability and technical efficiencies, is not “complex production” in general (nor is it money, nor is it the presence of an entrepreneur as such, which I already pointed out) but economic activity mediated by exchange. The “co-operative” unit in the co-operative economy can be large and complex in operational terms and in terms of the people and resources involved. His argument grants from the outset that there’s an agreement ensuring that each person contributes to the enterprise only if his share of the yield is greater than any loss associated with his contribution. (Obviously this isn’t always true. It’s worth bracketing that just for the moment, though.) Putting aside “miscalculation” or “stupid obstinacy” (again, this is worth doing even if it seems unrealistic), this means incentives to engage in production will generally aligned with technical efficiencies (measured in terms of preference satisfaction). The problem is that the moment you introduce exchange, there is no way to ensure that each factor of production receives a money payment equivalent to the share of output he would have received in the unified-production-unit-governed-by-agreement scenario. This is basically because when the activities of production and consumption are united in a single person (whether that is in a literal Robinson Crusoe scenario, or mediated by agreement in the “co-operative economy”), we can expect some convergence between incentives and technical efficiencies, at least as long as we are measuring the latter only in terms of subjective utilities (as the “classical theory” generally does, and which is worth entertaining as far as it goes). But the moment we introduce exchange of outputs (whether mediated by money or not), there is simply no reason to expect this alignment to persist for any given production unit in the economy. I think is the core argument Keynes is making, although he illustrates it in various specific ways. In essence, as soon as production and consumption are no longer directly weighed against each other, for any given instance of productive activity, by and within single persons, the entire rosy prediction of the classical theory — economy-wide efficient outcomes resulting from putatively uncoordinated economic activity — comes apart.

2. I think this argument is both powerful and important. It goes to the very heart of the “classical theory,” which largely forms the basis of the common-sense commitment to ‘free markets’ that so many reformers and activists are wrestling with today (on whatever level–whether they are trying to make policy or doing direct organizing, etc.) It also is worth putting aside the issue of unfair initial conditions, which is such a common point of criticism of market ideology (both in more technical debates and in broader public and political discourse) to consider what happens in Keynes’ picture. Because the point is that everything unfair about the economy need not be traced to unfair initial conditions. Instead, the inherent interruptability of the correspondence that exists in the simple, “co-operative economy” case in an economy governed in part by exchange means that there is potential for exploitation and power-perpetuation at almost every turn! That is on the one hand pessimistic compared to the rosy classical picture, but it simply means that our legal & social planning of markets and economic activity [which–separate point–is inevitable anyway] has to counteract these tendencies by channeling both economic coordination and competition in fair, egalitarian directions. But it’s helpful to eliminate the idea that doing so consciously will ipso facto lead us away from technically efficient outcomes.

3. I also think it’s worth putting aside temporarily the question of measuring technical efficiencies in subjective utility terms. We know that there is a frequent slippage from subjective utility to money/price when “the classical theory” is applied to policy discussion, and that this probably occurs selectively. (I think for example we should have a place for the objective costs of labor effort when we think about market governance.) But it is also worth really thinking about the limitations of the “classical theory” even when limited to its own terms (terms which are not irrelevant in thinking about things like fairness, either).

4. Finally, as a postscript, I think it’s unfortunate that a decent portion of the current dissatisfaction with the economic style as currently practiced seems to valorize earlier versions of the very “classical theory” (in, e.g., Smith) that Keynes trained his sights on in this text. The issue is not how formalized the idea of self-regulating markets has become since Smith and his immediate successors (though certainly, formalism serves to obscure the actual theory), but rather the idea itself. Indeed, the statistical methods used by many contemporary economists doing empirical research are innocuous or positively helpful compared to much of the rhetoric of classical political economy. Let’s not get distracted about what the problems are!

Notes on J.M. Keynes, “On the distinction between a co-operative economy and an entrepreneur economy”

These brief notes are preliminary and may be subject to later elaboration (in a new post). The referenced text is a short excerpt from The Collected Writings of John Maynard Keynes (Robinson and Moggridge, eds.), Vol. XXIX, Chapter 3. Thank you to Nathan Tankus for sending me the text, and for having several very helpful discussions in relation to it.

In this (draft) chapter fragment, Keynes explicates certain aspects of the “classical theory, as exemplified in the tradition from Ricardo to Marshall.” More than just prefatory to his discussion of ‘economy-wide’ conditions and dynamics, his argument goes to the basic suppositions of the classical and neoclassical theory of markets. In fact, the argument goes to the question whether–as the ‘classical theory’ generally claims–we can expect markets in the ordinary course to produce “the volume of output which will yield the maximum value of product in excess of real cost.” (67) Keynes concludes that we cannot.

The reason for this is not that real world markets contains various discrete “frictions,” “distortions,” or “imperfections,” but that the fundamental character of our “monetary economy,” according to Keynes, directly undermines the basis for the expectation of efficient outcomes. He explains that while in a “cooperative economy” (which he also calls a “barter economy”) we can expect this sort of real efficiency–in the sense that only “miscalculation or stupid obstinacy can stand in the way of production” (67) whose expected real yield exceeds its expected real cost, precisely the same production in our actual economy may be “unprofitable” (and thus will not be undertaken).

To see this, consider first why we would expect this alignment of motivations and efficient production in the “cooperative economy” in the first place. Keynes’ “cooperative economy” is actually, in the first instance, household production–i.e., where the production unit corresponds to the consumption unit, or in other words the production unit consumes (only) everything it produces. In this simple case, the unit will undertake production as long it values the yield more than it values whatever it loses in production — or equivalently, each factor of production will be willing to contribute to the joint effort so long as its own share of the yield exceeds whatever it loses through contributing. Keynes further generalizes from this simple case because “barter” or even money payment is still consistent with the expected outcome, so long as each factor of production receives a value that is equivalent to his or her “share” of the directly produced output (which s/he could exchange for the same).

The problem, he suggests, is that this is only a “limiting case” of a monetary economy; it is frequently true, in reality, that “the volume of employment, the marginal disutility of which is equal to the utility of its marginal product, is ‘unprofitable’ in terms of money” (79). In short, “money profit” diverges from technical efficiencies (themselves ultimately defined in subjective utility terms) while action predicated directly upon the existence or nonexistence of that technical efficiency (subject only to “miscalculation” or “stupid obstinacy”) does not.

While this then leads into a discussion of effective demand, the central monetary authority, and business cycles, the fundamental point and the reason for the basic divergence between profitability and real efficiency does not rely on any of these ideas and is prior to them. That basic divergence simply has to do with the difficulty of translating the underlying subjective utility assignments (which motivate the actors to produce/not produce in the simple case) across persons and goods in a complex system of production and consumption involving exchange. We should not, in other words, be at all surprised that such systems will fail to generate, absent conscious planning, the sorts of productive activity that people would, all told, collectively prefer. There may of course be all kinds of specific reasons and ways that things fall apart, but detailing those really isn’t the aim of Keynes’ argument here: instead, this argument is that the very specific reason why we would expect the correspondence (between efficient production & incentive to produce) in the first place is only present in settings where production and consumption are quite directly and organically linked. We simply cannot expect that correspondence to then be transmitted across the many overlapping social and operational chains and links that make up a complex economy.

The argument isn’t about money as such; in fact, this problem could arise in “barter” systems too … Keynes just defines his particular “barter economy” so that the value received by each factor corresponds to what he would receive in the simple, household production case where share of output is directly consumed. And while it may certainly be the case that a ‘central authority’ can take various actions bringing prouction and employment up to a socially desirable level, these actions do not somehow magically restore the (supposed) production decisions that would obtain in the “limting case.”

While Keynes also uses the term “entrepreneur economy” as a synonym for “monetary economy,” the key again is not the present of an “entrepreneur” (or enterprise coordinator, who “rents” both capital and labor). The role and motivations of the entreprenur just make the divergence of profitability and real efficiency easier to see — but the same point would apply in a complex system of exchange between cooperative enterprises, however internally organized. (The issue, at least on this account, is not that the entrepreneur extracts additional value, throwing off the comparison between yield and expenditure that would otherwise obtain.)

In short, Keynes argues that in normal conditions of economic exchange, we cannot expect apparently uncoordinated production and exchange to yield “efficient” outcomes–in the sense of encouraging production generally when it yields as much as it takes, and not otherwise. This would also imply that we should have no general expectation that production and exchange that has been consciously socially planned would be any less efficient (than apparently uncoordinated production and exchange) in real terms. (This whole discussion of course puts aside the point that production and exchange is always socially planned and channeled in various ways, even if this planning is not always acknowledged.)

We are us.

In the past week J.W. Mason and Marshall Steinbaum both published their reviews of Beth Popp Berman’s wonderful book, Thinking Like an Economist, and I have a few brief thoughts–not so much about the discussion of the book but about the broader themes raised in both essays.

Both Mason and Steinbaum urge a more direct analytical confrontation with the “economic style” that Popp Berman has set out in rich institutional and developmental detail. In one sense, the key point of both pieces is that when we confront the stream of thought that has so shaped law, policy, and administration in recent decades, we must not cede the territory of the pragmatist –the self-avowed domain of the economic style.

The pragmatist declares himself tasked with understanding the likely consequences of contemplated actions and then planning those actions with the common good in mind. Why, indeed, would we want to acquiesce in the idea that such pragmatism must be traded off against–and thus that it necessarily or even usually opposes–considerations such as democracy, dignity, equality, basic rights, or ecological concerns? Aren’t all of these things part of the common good? So shouldn’t we find and adopt a mode of pragmatism that incorporates them?

One of the characteristics of the “economic style” that is often rightly criticized is its predilection for selectively unearthing “unintended consequences” in order to undermine egalitarian or pro-democratic policies in particular. You want to raise the minimum wage? Better not; you’ll cause job loss. (Yet on the other hand, we must affirmatively undertake to cause job loss in order to stabilize prices.) Etc. But the main problem here is not that it’s bad to be concerned with consequences, but that these are really bad ways of understanding consequences and planning for them!

Similarly, the economist’s talk of “efficiency” evokes a common-sense concern with avoiding waste of resources. I used to live in Los Angeles, and had a mild obsession with taking the shortest route as the crow flies between any two locations. Yet as Josh points out in his piece, the appeal of this common sense idea of “efficiency” helps to get another, welfare-maximization sense of “efficiency” (one that we have no real way to operationalize) off the ground. In fact, the “economic style” as currently practiced in the policy sphere seems to trade between these senses of efficiency (and relatedly, between the common sense idea of economic rivalry and the totally fictional notion of perfect competition) in apparently selective ways, with hierarchy and power-perpetuation (almost) always winning out.

I think we should reclaim and refashion a sensible conception of efficiency, rather than ceding the very idea. We don’t want to waste our individual or collective resources, usually–but that doesn’t mean accepting the idea of “economies of scale” (often associated with the idea of productive efficiencies) as gospel. Instead we should be open to empirical evidence showing that smaller-scale and decentralized economic activity can actually promote productive efficiencies (aside from many other social benefits). And caring about efficiency certainly does not mean we ought to condemn democratic forms of economic coordination, whether between workers or small enterprise, as distorting price signals and thus leading to the mis-allocation of productive resources. (We may need to think about how to design modes of decision-making, however.)

So we don’t want to throw the baby of pragmatism out with the bathwater, but we also should notice the ways in which the economic style often relies on considerations that aren’t pragmatic at all. Often enough, the key disagreements about what kind of markets we are going to end up with revolve not around asserted consequences, but around bedrock assertions of rights. For instance, some of the objections to a potentially more robust regulatory stance toward corporate activity, including mergers and acquisitions, are based in part on the belief that “individuals and by extension firms have economic rights.” We see similar rhetoric suggesting that a corporate merger is akin to free association between natural persons, and a state actor stepping in is akin to kingly privilege. At least in the applied sphere of public and policy debate, the economic style seems to move between such assertions of (some) group rights on the one hand, and the tallying of intended and unintended consequences on the other.

Anyway, it can sometimes feel a bit odd making these sorts of points. One camp of people sees your points as obviously wrong, while another seems to see them as (too) obvious–perhaps even skating uncomfortably close to the economic style. At least in the realm of academic ideas, these camps have mostly not spoken to each very much; after all, they speak almost different languages. For those of us existing in this uncomfortable, not yet entirely defined middle, sometimes it seems unclear exactly which “camp” we belong in (even if our actual normative and methodological commitments are quite clear and unwavering).

“We are us” is what the young Hilda of Whitby (in a fictional account) said to her family members and other close associates in their early years in exile, when the social order of early medieval England and her position in it were both in chaotic flux. At least, that is how I remember the story.