Categories
Backwardness of law Civilization

Realism in Action

A surprising number of Medals of Honor have been awarded for disobeying an order. For example:

The President of the United States of America, in the name of Congress, takes pride in presenting the Medal of Honor (Posthumously) to Technician Fifth Grade Lewis R. Hall, United States Army, for gallantry and intrepidity above and beyond the call of duty on 10 January 1943, while serving with Company M, 35th Infantry Regiment, 25th Infantry Division, in action at Mount Austen, Guadalcanal, Solomon Islands. As leader of a machinegun squad charged with the protection of other battalion units, Technician Fifth Grade Hall’s group was attacked by a superior number of Japanese, his gunner killed, his assistant gunner wounded, and an adjoining guncrew put out of action. Ordered to withdraw from his hazardous position, he refused to retire but rushed forward to the idle gun and with the aid of another soldier who joined him and held up the machinegun by the tripod to increase its field of action he opened fire and inflicted heavy casualties upon the enemy. While so engaged both these gallant soldiers were killed, but their sturdy defense was a decisive factor in the following success of the attacking battalion.

War Department, General Orders No. 28 (June 5, 1943).

The contrast, incidentally, between this sort of disobedience, and the disobedience that involves killing a child so that you can brag falsely to your friend back home that you used your knife in action, is rather stark. What matters for the realist project is that we can tell the difference.

Categories
Backwardness of law Civilization Legal education

The Chain of Judicial Command

Legal education typically assumes that in a world in which laws are clear, laws must be followed. If you don’t like the law, t’row de bums out. If a judge does not like the law, the same: the judge must still obey, until the people t’row de bums out. The legislative process is the only socially healthy way to change the law.

And yet, one finds in that most authoritarian, rule-bound of all cultures, the military, an understanding of the importance of having people not follow the rules, even in combat situations in which you might think that the chain of command would be most important.

I have:

Colonel Edson D. Raff was the kind of midlevel combat commander who saw what needed to be done and went ahead and did it without waiting for orders, the kind of innovative, aggressive commander any general would give a million dollars for — if he didn’t have him court-martialed and shot.

Orr Kelly, Meeting the Fox: The Allied Invasion of Africa, From Operation Torch, to Kasserine Pass, to Victory in Tunisia 113 (2002).

And:

The company commander contacted the battalion commander by radio and asked for instructions. As he did so, his company spontaneously rose up, as one man, and assaulted the hill. The assault was such a surprise — as much to the American commanders as to the Italians — that the hill fell to the Americans almost immediately. The spontaneous assault was one of those rare battlefield phenomena where soldiers, acting without orders, see what needs to be done and do it.

Orr Kelly, Meeting the Fox: The Allied Invasion of Africa, From Operation Torch, to Kasserine Pass, to Victory in Tunisia 271 (2002).

I have never read anything like this written of a judge taking orders from a legislature. It is never said. But do judges in fact go ahead and do “it without waiting for orders?” Why, yes, they do. All the time. There is a culture of silence about this, as if judicial disobedience were a more worrisome thing than a lack of discipline on the battlefield. I would have thought, given the stakes, that it would be the other way around.

When judges do “it without waiting for orders” in the right way, and help us win the battle for justice thereby, they make a valuable contribution to our society, a contribution that makes them worth at least $900,000, if not the million that should go to the maverick who through inspired disobedience helps us to succeed on the battlefield. If we can talk about the fact and contribution of disobedience at war, we ought to be able to talk about the fact and contribution of disobedience in adjudication.

In other words, the law in action quite often fails to reflect the law on the books, not only because the law may have gaps, conflicts, and ambiguities, but because judges flout it. And that’s not necessarily a bad thing.

Categories
Antitrust Civilization Deliberate acts against interest Monopolization Regulation World

Facebook’s Refusal to Deal in Excellence

The emails released last week by a British parliamentary committee, in which Mark Zuckerberg can be read snooping on WhatsApp and approving a policy designed to cripple competition from Twitter, tell much about the shortcomings of antitrust policy today.

The emails show that in 2013 Facebook cut off Twitter’s access to its users’ Facebook friend lists to cripple the growth of Twitter’s once-popular short-form video sharing service, Vine, which Twitter shuttered in 2016. The emails also show that Facebook used acquisition of the startup Onavo to spy on users, identifying WhatsApp as a serious threat in the process, and later acquiring that company, presumably to eliminate it as a competitor.

Both of these actions harmed competition, by eliminating what antitrust lawyers call “nascent competitors,” firms that could have matured into serious competitive threats to Facebook. Vine might have helped Twitter develop out of its microblogging niche into a full-fledged social media platform in direct competition with Facebook. And the same might have been true for WhatsApp, which could have leveraged its huge user base and privacy commitment to expand beyond chat into Facebook’s social media heartland.

But most antitrust policymakers today are unlikely to see either Facebook’s calculated crippling of Vine, or the company’s snooping on nascent competitor WhatsApp, as problematic. For antitrust policymakers today, refusing to share and espionage are examples of the kind of no-holds-barred striving to win that ensures that competition yields results for consumers. As the greatest living antitrust scholar today, Herbert Hovenkamp, put it in a recent treatise, making firms share with competitors — which is what Facebook refused to do when it cut Vine’s access to friend lists —

is manifestly hostile toward the general goal of the antitrust laws. It serves to undermine rather than encourage rivals to develop alternative[s] . . . of their own.

Fortunately, there is actually a strong case to be made that Facebook’s treatment of Vine, at least, violated existing antitrust laws. But before getting to that case, let’s look more closely at exactly what Facebook did to Vine and what’s wrong with antitrust’s prevailing approach to that kind of conduct.

Refusals to Deal

Facebook’s cutting off of friend list access to Vine is what antitrust lawyers call a “refusal to deal”: the denial of an essential input to a competitor.

It’s clear that access to Facebook friend lists was key to Vine’s growth, because that allowed users in effect to port part of their existing social network from Facebook over to Vine, and then to use it to do something — post short-form videos — that Facebook at the time did not yet allow users to do.

Without the ability to port social networks, users are unlikely to try new — and better — social media platforms, because they have to waste time rebuilding their networks on every new platform they try. That’s why the E.U. has moved aggressively in recent years to require data portability, and the U.S. should too.

By in effect preventing users from porting their network to Vine, Facebook denied Vine an essential input — the infrastructure to port the Facebook network into Vine — that was key to allowing Vine to break into the social media market.

Two Minds About Sharing

Refusals to deal have long vexed antitrust enforcers because they appear to be at once good and bad for competition.

They are bad for competition because if the input is truly essential, then the refusal to supply it to a competitor is fatal to the competitor. Indeed, if “input” is defined broadly enough, all anticompetitive behavior amounts to a denial of access to an essential input of one kind or another. You cannot harm competition any other way.

Even price fixing, which seems to have no connection to inputs, cannot be profitable unless the price fixers collectively are able to keep competitors who would undersell the fixed prices out of the market. But price fixers can do that only by denying competitors access to some input that the competitors would need in order to be there.

At the same time that refusals to deal appear bad for competition, however, they also appear to be good for competition, albeit competition of the bare-knuckle sort.

The toughest races are those in which you can expect no help from the other participants. The refusal of a firm to deal with competitors just creates an incentive for those competitors to go beyond the withheld input in question to find a new way to survive, to innovate, to create, to surpass.

That is Hovenkamp’s point when he argues that “sharing is inimical to general antitrust goals.” Starfleet Academy may have produced many great commanders, the argument goes, but none were as great as Captain Kirk, who was the only cadet ever to pass the final exam, because he cheated, earning a commendation for “original thinking.”

This view of the virtues of no-holds-barred competition serves as the basis for the current ascendancy of the “Colgate Doctrine,” the antitrust rule that a firm has no general duty to deal with competitors. The doctrine takes its name from a 1919 case in which the U.S. Supreme Court permitted Colgate, charmingly described by Justice McReynolds as “a corporation engaged in manufacturing soap and toilet articles and selling them throughout the Union,” to refuse to sell its products to discounters.

In reaching that conclusion, Justice McReynolds opined that

[i]n the absence of any purpose to create or maintain a monopoly, the [antitrust laws do] not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.

 For most of the century during which this language has been on the books, antitrust enforcers quite reasonably read the paean to business freedom in the second clause in conjunction with the first — “[i]n the absence of any purpose to create or maintain a monopoly” — to mean that the right to refuse to deal, whatever its extent, has no purchase whatsoever on the antitrust laws, which are dedicated to preventing the creation and maintenance of monopoly.

The courts accordingly busied themselves insisting that firms share whenever doing so would improve competition. The earliest and most famous example, which even predated Colgate, is the 1912 Terminal Railroad case, in which the court condemned a cartel that owned all of the rail bridges into St. Louis for denying use of the bridges to firms that wanted to offer competing train service into the city. Over the years, the courts also sanctioned an electric power company for refusing to let a competitor deliver power to customers over the power company’s transmission lines, and the old Chicago Stadium for refusing a lease to the Chicago Bulls, among many other cases.

But in recent decades, the courts have preferred to drop the qualification contained in the first clause altogether, and to recognize a general right to refuse to deal even when the creation and maintenance of monopoly are rather baldly at stake. As Justice Scalia put it in an infamous 2007 opinion,

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.

This notion that triumph of any kind in the free market is a necessary incentive for progress filters our understanding of competition through the fearsome metaphor of natural selection, survival of the fittest, the war of all against all, the Origin of Species.

According to this view, the lion did not need antitrust restrictions on refusals to deal to evolve out of the primordial soup, and if the lion goes extinct because humans fail to share habitat, that represents a triumph of competition, because the lion will then be replaced with a creature that obviously represents an evolutionary advance: us. Moreover, the argument goes, if the lion had been forced to share with the ape back when the lion was the king of beasts, the ape likely would never have needed to learn to walk upright, to heave javelins at passing herds, and eventually to invent the computer.

Unnatural Selection

The natural selection metaphor is a big mistake, because the apparent virtues of natural selection are subject to severe survivorship bias.  We’re here, and living and thinking, so our evolution must have been a success. But all those creatures who never came to exist — imagine whatever god or fairy you wish, so long as the creature is better than us according to whatever metric you prefer — aren’t here to observe the failure of their natural selection, because they never came to be.

The only thing we can say for sure about natural selection is that it selects; we cannot say that it selects well, for the criteria according to which it selects are unregulated. Natural selection is undirected, and therefore unreliable, selection. The rumpled paper airplane that is natural selection spirals off in whatever random direction the environment happens to impose upon it, with no guarantee that the direction is good, let alone the best, according to any metric we as human beings might hope to use as measure. Climate change, and the very real prospect of the imminent termination of life on earth, is a convenient reminder that the direction of evolution — evolution that has led to us — may be very bad indeed.

It follows that to consign our markets to the same law of the jungle that has produced us is a big mistake. Indeed, it is the sort of mistake that would scandalize our forebears, who, living closer to that state of nature themselves, understood our human advantage to be our capacity to choose the criteria according to which selection proceeds, rather than to submit to the random criteria of the jungle. Our talent for directing our own selection, not to mention the selection of other creatures (think of your dog) is our great advantage. (Indeed, our forebears understood this perhaps too well, leading to an excessive affection for absolute monarchy and planned economies. Ancient Egypt springs to mind, with its conscious glorying in divine kingship as antidote to the chaos of the natural world.)

The jungle, you see, could give a creature eyes and hands, and the ability to learn from parents how to crack open nuts with rocks. But only civilization could make a man’s ability to reproduce depend on whether he could read and write, and write well at that, or calculate the area of a circle, or drive an arrow clean through three inches of copper from the deck of a careening chariot. Only civilization selects in a focused way, and from focus comes division of labor, from division of labor bounty, and from bounty us today. The evolutionary advantage of human beings is their ability to impose an unnatural selection upon themselves. Which is to say that regulation of markets is not just a policy choice, but survival.

To continue to escape nature, we must continue to choose the criteria according to which we select ourselves, and that is as true when we structure our markets as when we design our education system. Markets are themselves just machines for the selection of the things we want the economy to produce, with profitability determining winners and bankruptcy determining losers. These machines are useful to us only to the extent that they select for the characteristics that are most helpful to us. A market that selects for sloth, or for behavior designed to take wealth from others without providing a quality product in exchange, is not a useful market. The way to make markets select for desirable characteristics is to ensure that the undesirable characteristics provide no advantage.

Thus we must build our markets in the same way that the artificial intelligence researcher builds a learning algorithm, calibrating it to ensure that once the algorithm is unleashed it will select for the desired traits.  Markets are machine learning, with the software antitrust, and the hardware human life. Genes evolve, but genetic algorithms solve. And markets exist to solve our economic problems.

The question that refusals to deal really pose is whether permitting firms to horde essential inputs selects for characteristics that are good for the economy. And here the answer must be no. If the input denied to competitors is truly essential, then there is no obvious way to invent around it, and so the characteristic that legalizing such refusals selects is talent for identifying and appropriating essential inputs that deliver the firm from having to compete hard on all the other characteristics that we really value, such as good management, incessant innovation, quality, distribution, and low costs. Allowing refusals to deal unlevels the field.

Selecting for skill at destroying competition may of course incidentally sweep in some characteristics that we care about — ambition, of course, and innovativeness aimed at finding or creating the essential inputs — but the presence of this anticompetitive selector pulls the market out of focus, sapping competitive energies away from the things we care about — low prices and high quality — and toward monopoly. 

Sometimes the question is muddied by the need to ensure that innovative firms are able to cover the costs of research and development before competitors appropriate their innovations, pile into the market, and erode profit margins. In these cases, it is the refusal to deal that keeps the playing field level, instead of skewing it, by ensuring that innovators get the proper rewards. But true refusal to deal cases are different. True refusal to deal cases involve a refusal to supply an essential input when doing so facilitates supracompetitive profit taking, a dominance of markets that is not necessary to help firms cover their costs. Antitrust policymakers today would treat every refusal to deal as if it were necessary for firms to cover research and development costs, a conceit that is necessary only because the reality of almost never condemning a refusal to deal is so unjustifiable.

The Surprisingly Apt Sports Metaphor

Ensuring that undesirable characteristics provide no advantage is just what we do when we level a playing field in sports. Take a soccer game played on a hillside, for example. The inclined field gives one side — the side with the higher goal — an advantage based on luck, or the ability to strong arm the other team when sides are chosen before play, instead of based on characteristics that we want to promote, such as training, endurance, and the ability to bend a football into a net from twenty yards out.

To avoid this sort of adulteration of play, we insist on level playing fields in sports. It’s the reason we recoiled from steroids in baseball, for example, because all those home runs created an advantage that made for boring, uni-dimensional, play. Indeed, we feel the same way about all doping, because it leads to selection based on chemistry, rather than on the endurance and coordination that we value in sports. Only the level playing field produces the fittest players, just as it produces the fittest firms.

Just as we expect opposing players to help each other up off the ground when they have fallen — because losing a player makes for less satisfying play — we should expect firms to help each other to enter markets, when that would make for tougher, and therefore more productive, competition.

Success and Excellence

The individual firm must therefore be governed by an ethic of excellence, rather than an ethic of success. For only the pursuit of excellence causes firms to affirmatively seek to bring competition upon themselves, whereas an ethic of success causes firms to seek only to win, rather than to win by being the best. We want the great athlete, who wants to run the hardest race against the toughest competitors, not the slouch or the crook, who celebrates when the going gets easiest.

This distinction, between the pursuit of success and the pursuit of excellence, may be loosely, and probably unfairly, associated with the divergent outlooks of the two great civilizations of European antiquity, the Romans and the Greeks. Ancient Greek culture focused on the struggle with the self, the desire to go beyond mortal limits through exposure to competition of the highest order, a desire reflected in the tradition of the Olympic Games.

Rome represents something quite different: the urge to dominate at all costs, summed up by the city’s founding sin, in which the band of male outcasts who were the city’s founders obtained wives, and therefore a future for their polity, by inviting their neighbors to a feast and then carrying off their women.

Arnold Paul, Florence Rape of the Sabine Women 3, CC BY-SA 3.0.
Giambologna’s The Rape of the Sabine Women, on display in Florence. Michelangelo’s David, reflecting the pursuit of excellence, is conveniently pictured in the background. Photo credit: Arnold Paul, Florence Rape of the Sabine Women 3, CC BY-SA 3.0.

We must insist on Grecian firms.

The pursuit of success over excellence is a recipe for long-term failure of industry, and a threat to American national security in a world in which America is no longer clearly the most technologically advanced nation or the strongest economy, a world in which the failure to demand that our firms strive to be the best, even when they could succeed with less, could well mean the difference between victory and defeat in the next war. (True, Rome built a more enduring empire than did the Greeks, but that is only because internally, in their training and organization, the Romans were Greek.)

The irony of the decline in antitrust enforcement that started four decades ago is that it was in part justified on the ground that stiff competition from Japanese businesses demanded that government give American businesses a free hand to compete. But those same Japanese businesses had grown strong not from laissez faire, but from intense government oversight aimed at shuttering plants that failed to meet international standards of excellence, which is to say, from a directed selection. The effects of dismantling our own approach to directed selection — the antitrust laws — are evident forty years on to anyone who has recently done time in a General Motors automobile.

Which takes us back to what Facebook did to Vine. By killing Vine off via refusal to deal, Facebook prevented Vine, and Twitter, from morphing into genuine challenges to Facebook’s dominance as all-purpose social media platform.

That means that today Facebook doesn’t face the kind of competition it needs to continually improve, the competition on everything from likes to privacy that can come only from doing battle with other firms on an equal playing field, the competition that affects characteristics that matter. Instead, Facebook competed on one characteristic alone — the ability to build the largest network first — and used that high ground to defeat a more tech-savvy competitor.

That’s a recipe for the long-term decline of American social media, and of American tech savvy more generally.

The Antitrust Case against Facebook’s Treatment of Vine

Facebook’s killing of Vine should be the easiest of antitrust violations to prove, but instead the case can be made only through the luckiest of coincidences. Luck is needed because of the current ascendancy of the Colgate Doctrine: the right of any business to refuse to deal, even if that would create a monopoly.

Under the influence of economists and lawyers associated with the Chicago School, the courts have all but eliminated any liability for refusal to deal, allowing it only when the refusal represents the termination of a prior profitable course of dealing. The idea behind narrowing liability to this unusual set of facts is that only when the refusal to deal amounts to a choice to forego a current profitable relationship can enforcers be absolutely certain that the motivation for the refusal is to earn even greater profits from the destruction of competition. As Justice Scalia put it in that 2007 case

The unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggest[s] a willingness to forsake short-term profits to achieve an anticompetitive end.

Motivation should have no place in the resolution of antitrust cases, because the antitrust laws are not about policing morality, but about guaranteeing the vigor of the economy. What matters in antitrust are outcomes, not whether businesspeople act with virtuous or heinous intent. But this perversion of the law is of no consequence in the case of Facebook’s treatment of Vine. Miraculously, the question of Facebook’s motivation is subject to no doubt here because the British have provided us with emails pregnant with anticompetitive intent:

Justin Osofsky — Twitter launched Vine today which lets you shoot multiple short video segments to make one single, 6-second video. As part of their NUX, you can find friends via FB. Unless anyone raises objections, we will shut down their friends API access today. We’ve prepared reactive PR, and I will let Jana know our decision.

MZ – “Yup, go for it.”

But even if there were no such evidence of intent, Facebook’s actions meet the prior profitable course of dealing standard imposed today by the courts.

To see why, consider that profits are not always paid in U.S. dollars. They can be paid in Euros, Pesos, or Renminbi, or not paid in cash form at all, but in commodities, lean hogs, frozen concentrated orange juice, adzuki beans, or, as relevant here, in personal data. Lawyers and economists have understood for several years now that Facebook’s services are not in fact free. Consumers pay with their personal data, which, once resold to retailers in the refined form of targeted advertising, ultimately is used to extract cash from them in the form of purchases of advertised products.

Facebook’s sharing of friend lists with Vine allowed Facebook to collect valuable data about which Facebook users were using Vine. Facebook’s termination of that sharing therefore represented the termination of a prior profitable — in data-denominated terms — course of dealing, the unmistakable sign the court demands that the motivation was to earn even greater profits — here in the form of monopoly-level access to users’ social networking data — that come from squelching competition in the market.

So as luck would have it the case against Facebook fits squarely within the sliver of an exception to the Colgate Doctrine currently tolerated by the courts. But the fact that we need to fit the case into that sliver tells much about the extent to which antitrust has been failing in recent decades in its duty to ensure level competitive playing fields.

Integrating into Espionage

The situation is even worse when it comes to Facebook’s snooping on, and eventual gobbling up of, WhatsApp.

Facebook was able to snoop on its users’ WhatsApp usage by purchasing Onavo, an analytics startup that provided Facebook with a privacy app to market to Facebook users. That app disabled snooping on users by others, but enabled snooping by Facebook, which used it to gather data on its users’ usage of rival social media apps. The emails released by the British parliamentary committee show that Onavo data reported a surge in WhatsApp popularity among Facebook users shortly before Facebook acquired WhatsApp.

The story of global merger enforcers’ disastrous failure to block the WhatsApp acquisition due to a failure to appreciate that consumers pay for both Facebook and WhatsApp in data, making the two companies rivals, and the merger the brazen elimination of a nascent competitor, has already been told. But Onavo’s role in helping Facebook identify WhatsApp for acquisition points to another failure in contemporary antitrust: the death of vertical merger enforcement.

Onavo’s app is properly understood as a component of the social media product offered by Facebook , one that includes not just liking and photo sharing, but also privacy services. As such, Onavo and Facebook stood in what antitrust lawyers call a “vertical” or supply-chain relationship, producing components of a common end product — the social media experience — that is sold to consumers. And Facebook’s acquisition of Onavo was therefore a vertical merger.

Antitrust scholars long ago recognized that one of the anticompetitive consequences of vertical mergers is that they allow firms to spy on their competitors, and spying can either facilitate collusion, by making competitors less likely to grant covert discounts to consumers, or, the case here, by helping the merged firm identify and gobble up nascent competitors.

But in the 1980s antitrust enforcers abandoned vertical merger enforcement entirely, on the assumption that innovation and efficiency always result when businesses in a vertical relationship work together to serve consumers. The district court’s stinging and misguided rebuke of the Justice Department’s recent attempt to revive vertical merger enforcement by challenging AT&T’s acquisition of TimeWarner shows how alien the old learning regarding the threat of vertical mergers has become to the courts in recent decades.

There might well have been some synergies between Onavo’s analytics services and Facebook’s social media platform, but the role the acquisition played in enabling anticompetitive snooping makes clear that the dogma that vertical mergers are always good for the economy must go.

Categories
Antitrust Civilization Despair Monopolization

Arteriosclerosis

Some thoughts on one of Brian L. Frye’s Ipse Dixits, devoted to the art market. In the podcast, Tim Schneider explains that high-end galleries won’t even quote prices to wealthy buyers unless the buyers have standing in the social network that is the art market, because who buys now affects the prices that galleries and their artists can demand in the future. In fact, Tim observes, buyers who have the highest art market status often pay the lowest prices for art, because the implicit endorsement created by a purchase is so important to galleries.

The Peculiarity of the Art Market

Brian suggests that there is something odd about this situation, because in a well-functioning market you would typically want price fully to reflect the value that is being exchanged. But I wonder if this is just an illusion created by the way prices are charged in the art market. Price there is denominated in multiple currencies, one being dollars, and the other being prestige. Imagine that a high-profile buyer were to tell a gallery in advance that the buyer will announce at the time of purchase that the buyer believes the artwork to be horrifically bad, that the artist is trash, the gallery worse, and the buyer will liquidate the object itself posthaste upon taking title.

To the extent that this would diminish the prestige of the sale, you would expect the gallery to raise its price, and whatever that higher price would be, less the original prestige-weighted price, would be the dollar value of the prestige itself that the buyer would normally pay for the artwork along with the work’s dollar-denominated sticker price. If the gallery charges $1 million for the work, but would raise that to $1.5 million were the buyer to declare the work trash, then the value of the prestige earned by the sale of the work to the buyer absent the trash talk is $500,000.

Regardless whether the artwork is sold for a price denominated in two currencies ($1 million plus prestige) or one ($1.5 million), however, the artwork is still being sold for a price, and that price represents the total value of the work. The price of the work is always $1.5 million whether $500,000 of that price is paid in prestige or in dollars. The fact that galleries vary their dollar-denominated sticker prices based on buyer identity suggests that they know the prestige value that each buyer can convey and alter their sticker prices accordingly to maintain a constant overall (dollar plus prestige) price. That overall price is doing the job that prices are supposed to do, by representing the total value of the exchange.

One problem with this line of thought, however, is that Tim suggests that there are plenty of wealthy buyers out there who could afford to pay just about any price for art, but can’t even obtain a price quote, let alone a sale, from a high-end gallery unless these buyers belong to the art market network. If dollar-denominated sticker prices for art just represent the true price of the art less the dollar value of the prestige generated by the identity of the buyer, and non-members of the art market network simply have no prestige, then you would expect galleries to be willing to quote prices to them, albeit higher prices that reflect the absence of a prestige offset. That sort of thing happens all the time in consumer markets — a brand might charge one price to the average consumer but give a discount to a celebrity, because association of the product with the celebrity makes it easier to sell the product to others.

The fact that galleries won’t even quote prices to average customers can therefore mean only one thing: that the prestige offset is so high that no one can pay the true, full, prestige-value-inclusive, dollar-denominated price of high-end art. The losses to the galleries from selling to just anyone are so large that no buyer, however wealthy, would be able to compensate the galleries for what they would lose from democratizing the art market.

How can that possibly be so? (And at this point Brian’s intuition that there is something strange about the art market starts to make sense to me.)

Perhaps galleries don’t want just any buyer because modern art is junk, valuable only for the social significance of ownership, and not because it conveys any consumption value at all to its owners in the form of enlightenment, edification, catharsis, or what have you, and in this sense is the purest of Veblen goods. Modern art is junk because anything can be modern art (a point that modern artists admirably concede when they are not, Jeckyll-and-Hyde-like, running about pretending to see greatness in some spatters of paint but not others), and therefore the supply of modern art is infinite. Economists are fond of saying that scarcity is an iron law (there’s no free lunch), but in point of fact modern art, in virtue of the fact that everything counts, is the quintessential unscarce good, the only free lunch, the cornucopia, the bounty unique.

To put a finer point on it, there are about 10 to the 80 atoms in the visible universe. If anything can be modern art, then any of these atoms, plus any combination thereof, can be modern art, which is to say that the available supply of modern art in the visible universe is the power set of all the atoms in the visible universe, or 2 to the power of 10 to the power of 80. The reader might object that surely a hydrogen atom in some distant corner of the universe could never be modern art, or could never be bought or sold as modern art. And perhaps this is true, if we at least require that art be objects here and now on earth. But there are about 10 to the 34 atoms on the surface of the earth, and the power set thereof even larger, and the bounty no less mind-bogglingly great.

That modern art is junk and unlimited in supply explains why galleries cannot sell to just anyone, because things in unlimited supply have a market price of zero. It follows that in order for modern art to have a non-zero price, some method must be found to limit supply. When a firm like DeBeers wants to limit the supply of diamonds, it simply keeps them in the ground, or warehouses them. Supply can here be limited because supply is in a sense already limited. Diamonds are plentiful, but they can in fact run out, and so if DeBeers can own all the diamonds in their plenty, DeBeers can restrict access and in this way make diamonds genuinely scarce. Not so for modern art, however, because the supply of modern art is quite unlimited. To do to modern art what DeBeers does to diamonds, the galleries would need to buy up all the atoms in the universe (or at least on the surface of the earth) and horde them, which of course the galleries can never do.

If the standard method of limiting supply to support price — hording — cannot work for the galleries, then what? Another approach would be to impose standards of quality on art. But in the debased cultural environment in which we live today, there is no agreement about what constitutes good art and bad art. One man’s David is another’s toilet bowl, and vice versa. Were the galleries to impose standards, they would immediately become the old guard, the target of a million culture warriors, and their inventories not long after consigned to the fire sales of bankruptcy.

No. The only solution for the galleries was to tie art to the only thing in its universe that in the modern age remains in truly fixed supply, and that is prestige. Sell membership in an exclusive club. Make the ability to keep up with a constantly changing art market the ultimate secret handshake. Make the art market a luxury market — no different from the market for fancy handbags or sportscars — only more so, governed not just by wealth but by a willingness to adhere to a whole set of social rules. Make it the aristocracy to Prada’s bourgeoisie.

It should come as no surprise that one of the social rules that distinguish the art market from mere luxury markets, a rule Tim describes, is that art buyers must resell art only through the high-end galleries, rather than on secondary markets. Reselling on the secondary market gives any member of the club the right to admit new members, and that is a recipe for disaster, because it increases membership and allows in buyers not vetted by the galleries, buyers who may be equally willing to violate the rules of membership, accelerating damage to the club. Membership increases make the club less elite, which in turn reduces the value of membership to all other members, making each less willing to pay the high prices for art that are a necessary, though not sufficient, condition for membership.

 In the rule against resale on the secondary market one sees particularly starkly that what is sold in the art market is prestige and not art. If what is sold were art, then expanding the market — allowing more people to bid on art — would be desirable for the galleries, because increases in demand increase profits, all else equal. But prestige behaves like a commons — let more people in and everyone suffers — which is why the number one club rule must be to leave it to some governing authority to police access. The galleries are that authority.

Antitrust Issues

This brings me to the antitrust question that Brian poses in the podcast: Is there something wrong with the unwillingness of galleries to do business with buyers who violate club rules by reselling on the secondary market? If what the galleries are selling is art, rather than prestige, then there might be an antitrust case to be made against the galleries, but only if one of two crucial conditions holds.

Either any one art gallery refusing to do business with a reselling buyer must have at least a 75% share or so of the art market (or, more generally, power to profitably raise art prices above the levels that other galleries can charge in the art market). Or there must be some at least circumstantial evidence that galleries have explicitly agreed among themselves not to do business with resellers, and the group of explicitly colluding galleries must collectively have at least a 35% or so market share in the art market (or, more generally, some at least very weak power profitably to raise price). If the former holds — the gallery has a 75% market share or substantial power over price — then a claim for monopolization under Section 2 of the Sherman Act would lie. If the latter holds — a group of galleries with a 35% market share or some at least small amount of power over price have agreed not to do business with resellers — then a claim for concerted refusal to deal under Section 1 of the Sherman Act would lie.

The key to both claims would be recognizing that the buyer becomes a competitor of the galleries when the buyer starts to resell artwork. I have made much of this competitor status of resellers in the context of data-driven price discrimination, although it should be noted that the antitrust case against the art market could not successfully turn on a charge of price discrimination. Price discrimination is emphatically legal under current law in antitrust, unless it consist of volume discounts, something that appears hardly to be the rage in the art market. And even then, there has been almost no enforcement of cases of that kind since the early 1990s. The art market reseller is a competitor, but the antitrust case against the galleries is not that the galleries punish the reseller because the reseller is selling at a discount to buyers who might otherwise receive discriminatory prices from the galleries, since such discriminatory pricing is legal outside of the data-driven pricing context. Rather, the antitrust case is that the galleries punish the reseller because the reseller is competing the price of all art down by democratizing access to the art club.

Both claims require proof of “exclusionary conduct.” The refusal of the gallery (in the Section 2 claim) or the galleries (in the Section 1 claim) to deal with the reseller amounts to an attempt to exclude the reseller from the market by drying up the reseller’s source of supply, satisfying this requirement. (Because the galleries once did do business with the reseller, before the reseller resold, any requirement that the refusal to deal represent termination of a prior profitable course of dealing is also met.)

Harm to consumers is also required by these claims, and here the antitrust case becomes potentially unwinnable. At first glance there does appear to be consumer harm, because all the rich social outcasts suffer from not being able to buy in to the club. But at second glance the harm falls away. For the value of the product is tied to membership, and therefore any attempts by the galleries to exclude competitors who want to undermine membership genuinely count as attempts to maintain the value of the product not just to the galleries but also to the other members, the in-group of buyers who play by the unwritten rules. If the art market democratizes, the value of the art to everyone falls to zero, the club is destroyed, the prestige is destroyed, and all art owners are left with is the junk that once was their scroll and key. So the exclusionary conduct protects the value enjoyed by consumers — indeed, gives the unlimited resource that is modern art its scarcity value — instead of harming consumers.

Antitrust has long distinguished between product-improving conduct that incidentally harms competitors and conduct that serves only to harm competitors, generally exempting product-improving conduct from censure and condemning only conduct that has no such redeeming feature.

A classic example of exempt conduct would be Apple’s introduction of the iPhone into the cell phone market in 2007. Any Apple refusal to license iPhone technology to Nokia may well have been the proximate cause of Nokia’s demise, but that refusal would be no antitrust violation, because the refusal would presumably be necessary to protect the value of the iPhone to consumers. If, the argument goes, Steve Jobs knew in 2005 that he would be forced to share iPhone technology with Nokia, destroying his competitive advantage and thereby his ability to recoup his costs through higher prices, then Steven Jobs would never have bothered to invent the iPhone and consumers would have ended up with nothing. (The intellectual property context is not unique here. Supermarkets would not trouble to exercise the foresight needed to build on land most convenient to consumers, the argument goes, if they could expect to be forced to share access to their real property with competing supermarkets.) 

Similarly, the refusal of the galleries to do business with resellers is key to the ability of modern art to maintain its value as a signifier of elite club membership. The product is social prestige, and denying others the ability to sell access to that prestige is key to maintaining the value of the product. The galleries are harming competitors when they harm resellers, but they are not really harming consumers.

Rich social outcasts might think they would benefit as a group from an end to resale restrictions, but the benefits would be fleeting. The value of the artwork these losers buy, not to mention the social status it confers, would evaporate as more and more losers were to pour into the market, just as the marginal fishing boat destroys the fishery, or the marginal cow destroys the commons. Indeed, the destruction incident to a failure to police entry to the art market is worse — in fact, total — because unlike in fisheries or on town commons, for which the cost of a boat or a cow places a natural limit even on unregulated entry, the near-infinite abundance of modern art means that once the club doors are open the cost of entering can be driven all the way down to zero.

The only thing that could therefore prevent the galleries from winning the antitrust case is shame — the shame of raising as a defense the fact that modern art is junk and that they deal instead in prestige. I suspect that such an admission would have no material effect on galleries’ business. If buyers really are there for the prestige and not the art, as I think is the case, then acknowledging that fact deprives buyers of nothing, and so should have no effect on art prices. But such an admission could have an effect on pride. The galleries do claim to sell art; all really good sellers believe their pitches.

Categories
Civilization Deliberate acts against interest Regulation

The Importance of Education

Education, or perhaps the better word is training, is the most important method of good governance in the unitary state because there is no market or public to discipline administration. Control of the mind is not just about dissent but about performance. Free speech rights undermine the unitary state as an effective organ by making it impossible for the state to perform. By contrast, market economies function well on very little organizational education — training — because of the discipline of the market and the voting of feet.

What I mean by training is the altering of human preferences to ensure that the trainee makes the most efficient set of credible threats.

Categories
Civilization Regulation

The Irrelevance of Manipulation

It is not freedom, but coherence, that we seek. I do not mind my role, if you can convince me that it matters.

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Civilization Meta World

Nature Is Dead Because We Have Killed Her

Nietzsche said that we feel guilty because we killed God. We feel this same guilt today over the killing of Nature, which gave us our earliest gods. The guilt is expressed in hand-wringing over climate change, the polar bears, meat-eating, and so on. We feel the profoundest self-loathing in the creeping realization that all life on earth has become servilely dependent upon us. The beasts stripped of their nobility and humiliated in parks, or as the subjects of conservation efforts.

Maybe the birth of the gods itself was an expression of this guilt. The Bering Straiters knew what they had wrought when they wiped out the mammoths. The islanders the elephant birds.

Categories
Civilization

The Economics of Civilization

I sometimes hear that new buildings no longer are made with beautiful decoration because decoration is expensive, as if in the past somehow builders were richer, and could afford such things. Of course, it’s not about price, but taste. Civilization is a good, and you generally have to pay for goods. If you’re not willing to pay, then you aren’t interested.

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Civilization World

Shambles

I do not know which is more telling of American decline, the fact that China is willing to invest in bridges, while we are not, or that, rather than marvel and praise, we comfort ourselves with the notion that only a third are really being used, and all the building could lead to a financial crisis. The books in the dark ages were balanced. Indeed, there were none.

Categories
Civilization Despair World

Left Nowhere

The opposition Labour Party is riven by its own divisions. Its leader, Jeremy Corbyn, tends to be skeptical toward Britain’s global role.

The transatlantic left’s isolationism is a huge problem. And uncharacteristic. But that’s what happens when you make everything a matter of principle.