Categories
Antitrust Monopolization Regulation Tax

Wealth and Happiness

In a new paper, Glick, Lozada, and Bush have done both antimonopolism and the antitrust academy a service by making the first real attempt to put the movement in direct conversation with contemporary antitrust method.

GLB have a simple message: welfare economics long ago stopped using willingness to pay to measure consumer welfare, and antitrust should too.

What is more, welfare economics today pursues an eclectic set of approaches to measuring welfare. Some of them suggest that the dispersal of economic power and the availability of small businesses can make people happy.

It follows, argue GLB, that it is entirely consistent with contemporary welfare economics to take these things into account in evaluating mergers or prosecuting monopolies.

The Social Welfare Function

GLB start with the problem that welfare economists faced at the beginning of the 20th century: how to compare the value that different people—say a producer and a consumer—obtain from a transaction in the absence of some universal measure of value.

If the producer gets a profit of $2 and the consumer pays $5 for a bag of apples, did the transaction confer the same amount of value on the two? Are $2 worth the same to the producer as a-bag-of-apples-for-$5 is worth to the consumer?

If there were some universal measure of happiness—denominated in, say, “utils”—then we could answer that question.

We would look up the consumer’s change in pleasure associated with swapping $5 for apples and compare it to the producer’s change in pleasure associated with making a $2 profit. If the former were 50 utils and the latter 30 utils, then we could say that the transaction did not confer the same benefit on both parties.

Pareto

Economists eventually decided that they would not be able to find a universal metric of happiness. But they hoped that they might be able to glean some information about happiness from the behavior of economic actors.

The first approach that they hit upon was the pareto criterion. It said: the only bad transactions are those into which the parties do not enter voluntarily, because those must make at least one party worse off (the party who would not voluntarily enter into the transaction).

Any transaction the parties do enter into voluntarily is, in contrast, good, because they wouldn’t be willing to enter into it unless the transaction made neither worse off.

It followed that voluntary transactions could be treated as welfare improving—or at least not welfare reducing. The parties were signalling, through their willingness to enter into them, that the transactions were at least not undesirable.

If the producer and consumer voluntarily transact in apples at $5, then welfare could be said not to have been reduced and indeed potentially to have increased. That was the pareto criterion.

It helped welfare economics a bit. But it also failed to answer an important question: what about people who are affected by a transaction but who are not entering into it themselves?

If, for example, two producers merge, and, as a result of the merger, they are able to charge a higher price, consumers are affected. But consumers have no choice over whether the merger takes place.

The pareto criterion tells us that the merger does not make the merging parties worse off. But it tells us nothing about whether the merger makes consumers worse off.

Some way of comparing the costs of the transaction to consumers with the benefits to the merging producers is needed, but the pareto criterion cannot provide it.

Willingness to Pay and Potential Pareto

The solution proposed by some economists in the early 20th century was to use willingness to pay as a measure of happiness.

The idea was that if a consumer would be willing to pay $10 for an apple, then that would be a measure of the pleasure the consumer would get from consuming the apple. By noting that a person should be willing to pay cash for cash on a dollar-for-dollar basis, one could proceed to do with dollars what economists had originally hoped to do with utils.

To return to our example of an apple purchased for $5, if the consumer were in fact willing to pay $10 for the apple, then the value to the consumer of the transaction would be the $10 the consumer would be willing to pay less the $5 price that the consumer actually paid for it.

And the value of the transaction to the producer would be the producer’s $2 profit. It would then follow that the consumer did better than the producer in the transaction because the consumer generated a “surplus” of $5 whereas the producer generated a profit (“producer’s surplus”) of only $2.

This willingness-to-pay approach made it possible to evaluate a merger of producers.

If producers were to merge and drive the price up to $7, then the producers (who, if their costs are as before, would now make a $4 profit) would end up better off than the consumers (who would now enjoy a surplus of $10 less $7, or $3). The merger would reduce the welfare of the consumer by $3.

If antitrust were to adhere to a consumer welfare standard—the rule that mergers that reduce consumer surplus are to be rejected—then this merger would fail the test and be rejected.

As GLB note, the willingness to pay concept made it possible to consider tradeoffs as well.

The merger might, for example, also reduce the costs of production of the merged firms from $3 to $0.50, thereby increasing the merging firms’ profits on the transaction from $4 to $6.50.

If one were to view the goal of the antitrust laws as the maximization of total welfare—meaning the maximization of the combined surplus of producers and consumers, however that surplus may be distributed between them—this cost reduction would justify the merger. It would expand the sum of producer and consumer surplus from $7 ($2 for the producers and $5 for the consumer) to $9.50 ($6.50 for the producers and $3 for the consumer).

Moreover, the merger might even be said to satisfy the consumer welfare standard if one were to adhere to the peculiar sophistry that any increase in total welfare should count as an increase in consumer welfare because the increase in total welfare could be redistributed to consumers.

Because the merged producers could be forced to pay the $2.50 increase in total welfare to the consumer, leaving the consumer with $5.50, which is more than the $5 he would have without the merger, the deal could, according to this peculiar sophistry, be classified as consumer welfare enhancing.

At least in potential. And if such a transfer were made, then the consumer and the producers alike would welcome the deal (the producers would be left with $4, which is more than the $3 in profit earned without the deal). Hence GLB refer to this as the “potential pareto criterion”. It is also called the Kaldor-Hicks efficiency criterion.

Wealth Effects

Economists should have, and, indeed, did, realize from the start that willingness to pay was a doomed approach because a person’s willingness to pay changes with his budget.

Between People

Two people who would be willing to pay the same amount for an apple if they had the same wealth would likely be willing to pay vastly different amounts if one were poor and the other rich. The rich person might be willing to pay much more for the apple than would a cash-strapped poor person.

One can avoid this problem by supposing that the poor man is willing to pay less for an apple because he in fact would derive less pleasure from it. He might have to deny his child meat in order to be able to afford the apple, and that might ruin his meal.

But viewing actual pleasure as perfectly consonant with willingness to pay amounts to shoehorning subjective feelings into budget constraints.

It is just as likely that the poor man who did make such a substitution would feel a great deal of guilty pleasure. His rational faculties might enable him to forego that pleasure and give his child meat. But that does not mean that his pleasure centers would not be the worse for it. They would be.

If wealth effects matter, however, then one cannot compare producer and consumer surpluses—or indeed the surpluses generated by any two people.

One cannot say, for example, that a merger that decreases cost by $2.50 is on net a good thing if it results in a price increase of only $2 because $2.50 is more than $2, so the total amount of pleasure generated by the economy has gone up. For if the producers are rich but the consumer poor, then the $2 cost to the consumer might inflict more pain on him than the $2.50 increase in profits for the producers.

Redistribution of those $2.50 in benefits to the consumer is now required for efficiency and not just to achieve distributive justice. If efficiency is about increasing the total amount of happiness generated by the economy, and those $2.50 make the consumer happier than the producers, then efficiency requires that the $2.50 go to the consumer.

If the only implication of wealth effects were that redistribution from rich to poor is required for efficiency, then wealth effects would not be particularly problematic for progressives.

But very often a policy change not only creates a benefit and raises a price, as in our merger example, but also inflicts an economic cost in the sense of precluding some production—or aspect thereof—that consumers value.

The merger might, for example, not only reduce apple production costs by $2.50 but also lead to slightly less tasty apples. Perhaps the merger saves on costs by enabling the sale of an orchard that produced particularly tasty apples but was also relatively costly to maintain.

If the consumer’s maximum willingness to pay falls by $2 because the apple is less tasty, then the willingness to pay measure suggests that the merger should go ahead. The benefits in terms of a reduction in costs of $2.50 exceed the costs in terms of a reduction in the value of the apple to consumers of $2. There is a net gain of $0.50.

To be sure, if the price again rises to $7 as a result of the merger, consumers find themselves even worse off than before. Their surplus falls to $1 (a maximum willingness to pay of $8 less a price of $7).

But the merging producers can, at least in theory, make up for this by transferring $2 to the consumer to offset the price increase and by transferring at least $2 of the cost reduction they enjoy as well, ensuring that the consumer ends up with at least the $5.00 in surplus the consumer would have enjoyed without the deal.

And the producers, who initially enjoyed an increase in profits of $5.50 ($2.50 in cost reductions plus $2.00 from the increase in price) end up better off so long as they do not pay more than $5.50 to the consumer.

So all parties can, in theory, end up better off.

That’s because the benefits created by the merger exceed the costs by $0.50. Once one uses transfers to correct for the resulting price increase and to compensate the consumer for his loss, which is smaller than the producers’ gains, there is necessarily some net gain left over that producers and consumer can divide up, leaving them all better off.

The potential pareto criterion is satisfied and, if the transfers are actually made, so is the consumer welfare standard.

If wealth effects matter, however, then one cannot reliably compare the $2.50 benefit in terms of production cost savings to the $2 loss associated with the reduced tastiness of the apple. If the consumer is poor, then the consumer may place a dollar value on the reduction in tastiness of the apple that is far below the actual loss of pleasure the consumer would suffer in consuming a less tasty apple.

If there were utils and we could compare the value of the production cost savings to the producers to the reduction in the consumer’s happiness associated with the less tasty apple, we might find that the producers’ gain is 100 utils and the consumer’s loss is 1000 utils, resulting in a net reduction in happiness due to the merger.

Wealth effects prevent the consumer from registering his dissatisfaction in terms of willingness to pay, however, and so the merger appears to offer a net gain when in fact it does not.

It follows that the producers will never be able fully to compensate the consumer for the loss without incurring a loss themselves, and so according to the potential pareto criterion the merger should be blocked.

If we nevertheless treat willingness to pay as a measure of welfare, however, the deal will appear to be welfare increasing and the deal will go through, reducing overall happiness.

Wealth effects cause willingness to pay to lead to bad policymaking.

Within People

Wealth effects also undermine the commensurability of values with respect to the same person.

To see why, let’s go back to the example in which the merger raises prices but doesn’t reduce the tastiness of apples.

If unwinding the merger would reduce the price of an apple from $7 to $5, it is clear that the consumer becomes $2 richer. He saves $2, which he can now spend on other things.

In order for willingness to pay to be a useful proxy for welfare, one would, then, like to be able to say that the consumer is made just as well off by the price reduction as he would have been had he been given $2 in cash in lieu of the price increase.

But if willingness to pay depends on wealth, we cannot say that a $2 cash payment would leave the consumer in the same position as the consumer would be had price fallen by $2.

If a consumer cares more for apples the richer that he is, then the consumer will prefer a $2 cut in the price of apples to a $2 cash payment. Given his stronger preference for apples, the consumer might want to plow the $2 savings on apples into buying more apples, and that money would buy more apples at the lower apple price than would a $2 cash payment used to purchase more apples at the higher price.

It follows that the consumer would require a cash payment in excess of $2 in order to be made as happy as he would be if the price of apples were reduced by $2.

Similarly, we might ask whether taxing away $2 from the consumer when prices are low would leave the consumer just as happy as the consumer would be were he to experience a $2 price increase.

Again the answer would be “no.”

When the price of apples increases, it is clear that the consumer becomes poorer; his wealth buys him less. If the consumer’s taste for apples decreases with poverty, however, then the consumer will prefer a $2 increase in the price of apples to having $2 of cash taxed away from him.

Because he prefers other things to apples as he becomes poorer, the consumer will place a higher value on cash, which he can use to buy things other than apples, than he places on the price of apples.

But if a tax of $2 makes him less happy than he would be under an increase in the price of apples of $2, then a tax of less than $2 is equivalent, from his perspective, to an increase in the price of apples of $2.

So, overall, we have the peculiar result that a $2 price reduction is equivalent to a cash payment of more than $2 but a $2 price increase is equivalent to a cash reduction of less than $2.

Commensurability would, of course, require that all these things be equal.

And so we see that wealth effects not only prevent us from saying that a $2 gain to the producers creates the same amount of pleasure as a $2 gain to a consumer, but also that a $2 gain to the consumer via a price reduction creates the same amount of pleasure as a $2 cash payment. And the same can be said of losses.

GLB don’t acknowledge that between- and within-person incommensurability both stem from the same problem of wealth effects. But they do a good job of discussing both.

They also spend considerable time refuting the arguments of mainstream economists that within-person incommensurability is small and can be ignored.

But even if it were small, and indeed, even if wealth effects were not a problem for commensurability between persons either, willingness to pay would remain a highly problematic measure of value.

There is no basis for supposing that, just because two people having the same wealth level are willing to pay the same amount for a particular good, they will get the same level of pleasure from it.

Indeed, it is possible that two people who place the same relative values on all goods, and so are willing to pay the exact same amount for each good, might experience very different levels of pleasure from consuming them.

One person might take almost no pleasure from any good. Another might be sent into fits of ecstasy by the smallest purchase.

So long as the relative pleasure conferred by each good vis a vis the other goods is the same for both people, each will be willing to pay the same amount for each good. They will divide their budgets between goods in exactly the same way despite deriving very different levels of pleasure from them.

The Return to the Social Welfare Function

As GLB relate, welfare economists responded to these limitations by giving up on what might be called the overall “revealed value” approach to measuring welfare embodied in the pareto criterion and potential pareto (i.e., willingness-to-pay-based) criterion.

These criteria took a common revealed value approach because they both tried to read value from the actions of economic agents.

Whether a transaction satisfied the pareto criterion could be determined by checking to see whether the parties entered into it voluntarily. If they did, then it followed that neither party was made worse off.

And if a consumer purchased an apple at $10 but not at $11, one could infer that the maximum the consumer was willing to pay for apples was $10 and use that number to determine by how much the consumer could be compensated, pursuant to the potential pareto criterion, for the loss of an apple.

Under both approaches, economic agents were assumed to reveal the pleasure they take in goods via their actions, enabling economists to identify changes in welfare associated with various policies without needing direct access to the pleasure centers in consumers’ brains in order to make those determinations.

With the demise of willingness to pay, welfare economists would no longer try to find a way to read the pleasure and pain of consumers through their economic behavior.

Instead, they would return to the direct approach that they had abandoned more than fifty years before; they would try to measure happiness directly.

They took a variety of approaches to this problem. They would ask people if they are happy or not in various situations; they would study health indicators such as longevity, freedom from disease, and so on, in various situations; they would consult psychologists and neurologists.

Based on the results of these inquiries, they would identify the material circumstances most likely to be conducive to happiness and recommend economic policies (such as antitrust cases) that produce those circumstances.

Medical inquiry might determine, for example, that spinach is good for consumers. Welfare economists would then respond by ranking policy choices that lead to more spinach consumption higher than those that lead to less.

This was a departure from the willingness to pay approach, according to which welfare economists would have given spinach consumption the ranking implied by the dollar value that consumers revealed themselves to be willing to pay for spinach relative to what they would pay for other things.

Now other branches of science, and not revealed preference, determined the ranking.

This takes us up to the present state of welfare economics.

And for GLB, this completes the argument for taking political power and small businesses into account in doing antitrust.

According to GLB, one can no longer argue that, because consumers are manifestly willing to pay high prices charged by dominant firms, consumers like big firms and like the influence they have over politics.

Consumers’ willingness to pay is no reliable measure of the pleasure they get from buying the products of politically influential, small-business-destroying monopolists.

Instead, as already mentioned, GLB point to studies that suggest that consumers are happier in democratic environments free of concentrations of economic power. And that consumers are happier when they have access to small businesses.

It follows, argue GLB, that it is perfectly reasonable, per current practice in welfare economics, to argue that mergers that increase consumer surplus in the willingness-to-pay sense nevertheless make consumers unhappy, and should therefore be targeted for antitrust enforcement.

The Willingness to Pay Measure Is about Choice, Not Happiness

GLB’s paper presents a powerful rejoinder to any antitruster who might have been under the misapprehension that willingness to pay is a good measure of happiness. There are surely some out there.

But I suspect that the paper will not win too many converts, because what attracts people to willingness to pay is not that it is a good measure of happiness, but instead that it is the best way of doing justice to consumer choice that we have.

Welfare economics embodies a tension felt throughout the modern human rights project regarding who decides what happiness means.

Do we study human beings as if they were complex robots, figure out what makes these machines happiest, and impose those conditions on them? Or do we let the machines decide what makes them happiest?

GLB tell the story of welfare economics as if the field has always been interested only in the first option: to figure out what makes people happy and then impose those conditions upon their economic lives.

Under this assumption, GLB’s conclusion follows immediately from the arc of welfare economics. Willingness to pay is not a good measure. Others must be found.

But, as GLB acknowledge, economists have known almost from the inception of the willingness to pay approach in the 1940s that it was unsound. Why hasn’t the field moved on?

GLB chalk it up to “zombie economics.”

The real reason is that many people want to preserve a space in which consumers can vote for what they want through their purchase decisions.

That is, these people don’t view economics as a descriptive science but rather as a democratic project. It is the project of empowering consumers to vote on the character and magnitude of production through their purchase decisions.

The willingness to pay measure is ultimately built upon such a foundation, because willingness to pay is measured by observing the prices at which consumers do and do not buy.

The measure is highly imperfect, even incoherent, but it is the only way economics knows to recommend policy changes that account for the votes consumers have cast in markets. It honors their choices.

Happiness surveys, public health information, and the like are based on consumer input, but they are not based on purchase decisions—they are not based on circumstances in which consumers are forced to put their money where their mouths are.

Of course, the question whether consumers should take direction from experts regarding what to buy, or make those choices themselves, has already been resolved in favor of consumer choice.

Neither GLB nor anyone else will be able to impose purchases on consumers unless consumers vote to elect political leaders who take the GLB approach.

If antitrust enforcers decide to follow GLB’s paper, but consumers don’t like it, consumers can always vote political leaders into office who will sack those enforcers or give them new legislative commands to follow.

The premise of the economic project of enabling consumers to vote through their purchase decisions is, however, that the electoral process is defective.

The assumption is that, at least with respect to industrial production, consumers are better able to choose by voting through purchase decisions than by voting for elected representatives to direct production.

That is the subject of public choice theory. It is the view that, at least with respect to some matters, markets are more democratic than democracy.

People who hold this view won’t be swayed by GLB. In their view, markets are most likely to maximize happiness if they are structured to read it in consumers’ purchase decisions, not if they are structured by consumers’ elected representatives to achieve happiness according to any other measure.

Ultimately, the battle in antitrust over the consumer welfare standard, is, like all battles over regulation, a battle over the legitimacy of the electoral process.

And yet progressives have spent remarkably little time contesting the public choice view of the electoral process and government regulation as inherently vulnerable to capture.

I suspect that is in part because many progressives share the public choice intuition.

Indeed, distrust of government seems to be one of the major reasons for which some progressives have focused in recent years on strengthening antitrust instead of pursuing the projects that earlier generations of progressives thought were more likely to be effective, such as price regulation and taxation.

Even an antitrust that imposes an external standard of happiness on markets instead of trying to read a standard from consumer purchase decisions pays a certain amount of respect to those purchase decisions. It is oriented toward preserving markets and empowering consumer choice within them.

In contrast, taxation and price regulation are relatively indifferent to those goals. They represent a pure privileging of choice via the electoral process over choice via markets.

And to many people from both left and right operating in an essentially anti-statist culture, that’s scary.

The irony, then, may be that the worldview required to overturn the consumer welfare standard in antitrust is undermined by progressives’ own attraction to antitrust as a vehicle for progressive change.

Categories
Regulation

Second Thoughts about Government as the Origin of Property

It has been a common progressive move for more than a century to argue that property rights are not sacrosanct because the government creates them. Government creates them and government can take them away. I heard this in seminars in law school. And I recall Elizabeth Warren making this argument on the campaign trail in 2020. And Morris Cohen said it in 1927.

But I do not understand why this argument has so much appeal to progressives, because it does nothing more than assert a contrary position to that taken by libertarians. It does not prove anything in favor of government intervention.

The question, after all, is how the government should use its power. Should the government use it to protect and expand property rights? Or should the government use it to dissolve and restrict property rights?

The libertarian asserts that the government should protect property rights because these are in some sense prior or fundamental.

And the progressive, in arguing that the government giveth and so can taketh away, asserts no more than that government action—regulation—is in some sense prior or fundamental.

There is no more substance than that to the government-giveth argument.

It resolves nothing, just as libertarians’ assertion that property rights are prior and fundamental resolves nothing. It merely asserts the opposite of what the libertarians assert.

The fact that government is needed to enforce property rights does not in itself imply that government need not enforce them. It does not imply that property rights are not in some sense prior or fundamental. It may well be that property rights guaranteed by government are prior and fundamental in relation to all things. And that government elimination of property rights is posterior. I do not personally believe this to be so, but I do not see why the fact that government is needed to guarantee property rights implies that property rights need not be fully and absolutely guaranteed.

And that is before we even get to social contractarian arguments that claim that government is no more than a mutual defense pact between prior possessors of things that come to be called property under the terms of the social contract.

Moreover, as a historical matter, it is not clear to me which side has the better of the argument. On the one hand, government enforcement does reduce outside interference with one’s possessions, and one cannot speak of property in the legal sense without assuming the existence of a legal authority committed at least in principle to recording and enforcing such rights.

On the other hand, it is the case that people living in places that have no central government possess things and enjoy them quietly for long periods of time, so long as they are individually powerful enough or in sufficient harmony with their neighbors to protect their possession of the things.

The only thing that progressives’ assertion that the government giveth really does is to demonstrate to progressives that there is an alternative to the view that property is fundamental—namely, that government regulation is fundamental.

But it does not answer the question how much to protect property and it does not even establish that the libertarian view is necessarily wrong.

Categories
Regulation

Democracy as the Heart of Debates about Regulation

There is a tendency among free marketers to say: “if markets are bringing it about, it is necessary.” And the big insight on the left for at least the past fifty years has been to say: “ah, but the market is shaped by the law, so if we pass a law preventing it from happening, then markets won’t bring it about after all.”

So, in the context of the influx of American digital nomads to Mexico City, and the opposition to gentrification they have aroused, the free marketer says: “locals are getting rich selling to the Americans, and the Americans clearly believe they are getting something of value, so this is natural; it’s going to happen; if you try to stop it you might as well try to use your pinky to dam the Nile.” And the left winger replies: “the only reason the Americans can move here is that Mexico permits them to stay for six months without a visa. Change the rule, and this goes away. Mexico has a choice.”

The free marketer seems to espouse market naturalism: society is self-organizing and policymakers have little choice regarding outcomes. The most they can do is create a temporary disequilibrium—a dam that will break. By his reply, the left winger restores the policymaker’s freedom to decide social outcomes.

Both the free marketer and the left winger miss the point.

The proper argument for free markets is not that market outcomes are natural. The left winger has the better of the debate on that score: the state does in fact come first, then the market. That is why free marketers fear Communism. Because the state really can shut down the market—and, by extension, use a lighter touch to shape the social outcomes to which the market leads.

A proper free market argument accepts that policymakers can channel or override market outcomes but the argument holds that policymakers shouldn’t do that, because the people speak clearest through markets. That is, the only really coherent argument for free markets is that markets are more democratic than the electoral process. When people buy and sell, they vote, and the free market position is that un- or lightly-regulated markets process those votes in a way that is more faithful to the preferences of the voters than are the institutions of representative democracy that process the votes that people cast in electing the policymakers who would otherwise regulate market outcomes.

So, the argument would go, while activists might not like the fact that Americans are moving to Mexico City, the fact that Mexicans themselves are willing to rent them places to live and sell them tacos is the clearest possible indicator that Mexicans want the Americans to come.

The left winger’s response that the state comes first is not a good rejoinder to this proper form of the free market argument. For the free marketer can argue that the state ought to embrace the system that most faithfully reflects the will of the people, and that markets, in his view, are that system. The only way for the left winger to strike back is to argue that the electoral process, through which people can choose to alter market outcomes, does an even better job of reflecting the will of the people.

That might be true—and I tend to think that it is. But unlike the question whether the law is prior to the market and can influence market outcomes, the answer is easier to contest, as several generations of public choice theorists have done.

In the market, one’s ability to speak is mediated by wealth—more money and more ownership means more votes. But even were it possible to keep money out of politics—and if not, then elections are mediated by money, too—elections would still be prone to distortion by small, highly-organized interest groups. Many voters don’t show up to the polls, and their representatives don’t always do what they want even when they do.

Indeed, it is difficult even to compare outcomes under these approaches because they represent, in effect, different social welfare functions. Are the sale decisions of landlords and street food vendors a more accurate expression of the abstraction that is the “will of the people” than the decisions of representatives elected by the subset of the population that showed up to vote in the last election?

The debate over regulation of markets is really a debate over norms—and specifically democratic legitimacy—not market naturalism.

It won’t be resolved until both sides start acting that way.

Categories
Meta Regulation

The Other Conflict of Interest and the Root of Inequality

It is common in the study of corporate governance to worry about the conflict of interest between shareholders and managers. Managers are supposed to run the firm to maximize shareholder value, but because they run the firm on a day-to-day basis, not the shareholders, they have plenty of opportunity to enrich themselves are shareholder expense. Others worry that the power of shareholders and managers over firm governance enables them to cheat creditors, workers, and sometimes even suppliers.

But there is another interest that no one ever talks about, and which is even less able to defend itself than are shareholders against managers, or creditors, workers, or suppliers against shareholders and managers.

That is the firm itself.

The firm is not its shareholders. It is not its managers. It is not its workers, creditors, or suppliers.

It is a fiction in the sense that a firm always is a fiction, a thing that exists only because shareholders, managers, workers, creditors, suppliers, and the government act like it exists. It has no flesh and no blood. It cannot be found anywhere; or, rather, it is located wherever the law says that it is located rather than where the laws of physics place it.

But it has a name: the name of the business.

It can open bank accounts.

It can own property.

It can sue.

It even has a right not to be deprived of life, liberty, or property without due process of law.

The firm exists in the way that the mime’s wall exists. There is nothing there, but his hand stops as if it were there.

Just so, the corporation exists because we speak as if it exists. Because we find all of our legal institutions bending around its form as if there were something there to bend them.

And yet, despite all the care that we take to act as if there really were an independent, living, breathing thing that is the firm, when it comes time to count up conflicts of interest, we never talk about the conflict between the interests of shareholders, managers, workers, creditors, and suppliers—and the firm itself.

We recognize that there must be such a conflict, and we even have an entire body of law—agency law—devoted to protecting the firm itself against managers and employees who put their interests before the firm’s. We say that managers and employees have duties of loyalty and care to the firm.

And yet we seem hardly able to take such duties seriously, or, at any rate, fully to appreciate that they are owed to the firm—to the mystery, to the fiction, to the hollowness beneath the mime’s hand.

We say that the board of directors owes a duty to the firm, but we think that the duty is really owed to the firm’s shareholders, or to its workers, or to whatever set of actual, living, breathing persons are ultimately harmed by the cupidity of the firm’s agents.

We comply with the fiction that managers and employees owe their duties to the firm by describing the shareholders who sue careless or disloyal managers as filing a “derivative” lawsuit on behalf of the firm. The shareholders have no direct claim against the wrongdoers, we say, because the wrong was done to the firm and not directly to the shareholders.

And we comply further by asking that any recovery be paid first to the firm as compensation for harm to the firm and only thence to shareholders.

But we experience this part of the fiction of the corporate person as unnecessary. Nothing would be lost were shareholders to be permitted to sue managers directly.

We are wrong to do that.

If we were actually to take conflicts with the firm seriously, we would come to a very troubling thought indeed: that the mute, defenseless fiction that is the firm is surely the worst victim of self-interested behavior of all.

Conflicts run deepest not between shareholders and managers, or even between managers and workers, but between all of these groups and the firm, because of all of these groups only the firm lacks a physical presence and hence even the slightest semblance of autonomy. The firm exists entirely in the unseen world behind the world, and speaks only through the very groups—the shareholders, managers, workers, and so on—from which the firm needs protection.

And the firm does need protection because the firm’s interests are necessarily always in conflict with those of shareholders, managers, workers, and all the other counterparties of the firm.

Because the firm never dies. It alone is in business for the long term and the long term interest is almost always in conflict with the short term interests of mere mortals.

Imagine that a firm generates a billion dollars in net income and that maximizing the long-term—as in over the course of the next two centuries—profits of the firm can be achieved only by investing that billion in clean energy technology.

It is easy to imagine that no flesh and blood humans associated with the firm might be interested in actually investing the money. The shareholders might want it paid out as dividends (they want to party). The managers might want it paid out in executive compensation (they want to party). The workers might want it paid out in retirement benefits (they want to party). The creditors want their debts paid. The suppliers want higher contract prices.

The the profit-maximizing firm—yes, the firm, that metaphysical life force, that abstract interest—would want the money invested and, if all the assumptions of general equilibrium theory hold, the fact that the profit-maximizing firm would want the money invested implies that investing it is necessary for the efficient operation of the economy. It is required to maximize economic growth and otherwise to launch society forward to the greatest extent possible.

But the firm with not invest the money. Because the flesh and blood humans who control what the firm does, who are agents to the firm’s fiction, mimes to its hollowness, don’t want that to happen. The door might want to be opened, but the mime will shut it.

The money will be spent instead on shareholders, managers, workers, creditors or suppliers, and both the firm and the economy will be smaller for it in the long run.

What’s more—and this is important—legal duties will have been breached by this failure to invest. Management will have violated the duty of care, which requires managers to operate the firm with a view to maximizing the firm’s long-term profits.[1]

But no one will sue.

Shareholders will not bring a derivative suit on behalf of the corporation—they wanted to be paid.

Competition will not force the firm’s agents to behave—lest competitors take the firm’s market share and put the agents out of their jobs—because the consequences of a failure to invest for the long term manifest in the long term.

One can only imagine how much bigger the economy would be, and how much more successful the firms in it, if the conflict of interest between the firm itself and its agents were not to exist. Or if there were some way of protecting firms against it.

Imagine all the investments that have not been made throughout history because those in control of firms preferred consumption to saving.

One gets the barest hint of how bad the problem must be in the hysterical objection of business elites to mid-20th-century price regulation in industries such as telecommunications, air transport, and energy distribution. Or the hysterical objection of business elites today to attempts to limit the scope of patent grants in order to prevent windfall gains from intellectual property.

The government, businessmen argue, systematically sets prices—or, in the intellectual property context, rewards—too low, because it fails to take into account all of the investment that must be made in the future of a business.

Firms must invest in research and development.

They must insure against risk.

And so, businessmen argue, what looks like profit really is not profit, but rather a cost of long-term survival and flourishing of the firm.

Ah, but if that is the case, if we cannot trust rate regulators adequately to determine how much must be spent for a firm to flourish, why should we be able to trust shareholders or managers to do that either?

It is not, after all, in their interest to carry out that analysis faithfully, for they can never have an outlook quite as long as the firm’s.

If we think that rate regulation was bad for American business in the mid-20th century, or that stinginess with the patent grant is a big problem for the dynamism of the American economy, we must—must, must—wonder just how bad the totally unaccountable dominance of flesh and blood over fiction, of the agents over their dumb master, must be for American business.

How much less is invested than optimally should be?

This, it seems to me, explains much—not just about a structural inefficiency in the economy but also about the structural maldistribution of wealth.

Why is it that the captains of industry are so rich? Is it just that they control scarce resources? Or that they have some monopoly power? Those are, to be sure, causes.

But I wonder whether the most important is not, quite simply, that they underinvest—and keep the difference for themselves.

When I was in high school, I ran an assassin game with a classmate. I ordered some very cheap waterguns direct from China. We asked every student to pay $30 to participate in the game. We gave each student a cheap water gun and the winner $200 as reward.

There were perhaps thirty participants, which made the game very profitable.

I was so embarrassed about this windfall that I let my surprised coventurer keep all of the profits, which he used to take a trip to Europe.

I was afraid to profit and he rejoiced in it. But the point is that both of us thought of the windfall as profit.

But was it? Neither he nor I thought for minute about the interests of the business.

Perhaps the best thing for our assassin business would have been for us to invest that money in the following year’s game. We could have increased the reward, attracting more participants. We could have ordered better guns. We could have organized a joint game with another school. Whatever.

But while these were the interests of the business, they were not our interests. The business was mute; and so we ignored it.

One sees this also, I think, in how homeowners treat their houses. It is very often the case that a person will buy a house that he would not be willing to rent because the rent would be too high.

Perhaps the house is very large, or there is a shortage of rental units in the area. Whatever the case, when a person owns and lives in a house that he would not be willing to pay to rent, he is putting his own interests as a customer and indeed shareholder (i.e., owner) of the space-selling business that is his home before the interests of the business itself.

His home could generate greater profits by being rented out and indeed those profits could be invested to improve the home or expand the business to include other properties, making the business and the economy better off.

But none of this happens because the flesh and blood person who controls the business would rather forego (read: consume) the profits that could otherwise be generated by renting to others—and which would lead to long-run profits—in order to enjoy the pleasure of living in a big house, or in the right neighborhood, or what have you, right now.

Once you understand the problem, you see it everywhere.

The owner of my car repair shop was kind enough to give me a lift in his personal, very expensive vehicle while I was getting my oil changed. What portion of the purchase price of that car should he have reinvested in his business? We will never know.

Indeed, one wonders what proportion of all the executive compensation, all the share buybacks, and all the dividends paid out to owners over the past few decades—payouts that turned an L-shaped postwar inequality curve into the U-shape of Piketty fame—should optimally have been reinvested in the firms themselves.

That is, one wonders whether, if the fiction that is the firm were real and could defend itself, captains of industry would be no richer than the rest of us, and the economy a whole lot larger.

One might think that the solution is for the state to step in to protect business fictions against their flesh and blood agents.

And perhaps that is right. We need regulation not just to protect consumers against grasping firms, or shareholders against grasping managers, but to protect firms—those helpless fictions—and indeed the economy entire, against all of the grasping human agents that constitute the sum total of a firm’s human capital.

But it might just as easily be right to say that unregulated firms produce more even after taking into account how much less they produce than they might thanks to the cupidity of their agents and the helplessness of the firm.

Regardless, we must see firms as almost always victims of their human controllers. And the wealth of those controllers as almost always funded in part not just by rents—revenues in excess of costs—but by theft in the form of underinvestment in their businesses.

It might well be that, in an optimally efficient world, every businessman would eat one meal a day and darn his own socks, for that is the real minimum that a businessman would accept in exchange for doing business.

And the profits that remain are best reinvested by firms in their own futures.

Notes

[1] Yes, the duty of care is subject to the business judgment rule, which means that courts defer to the judgment of managers regarding what actions will maximize profits, and so, in practice, even were shareholders to sue, it would be very difficult for them to win such a case. But the business judgment rule is meant only to give managers the benefit of the doubt. It does not make legal actions that are known in advance to fail to maximize profits. Indeed, in a world in which there were never any doubt regarding what course of action would maximize profits, the business judgment rule would count for nothing and a manager’s failure to take the known profit-maximizing course of action would give rise to immediate liability.

Categories
Antitrust Inframarginalism Monopolization Regulation

Competition Trumps Information

Scholarly interest in personalized pricing is growing, and with it confusion about what, exactly, empowers a firm to personalize prices to its customers. You might think that the key is information. So long as you know enough about your customers, you can tailor prices to each. That is, however, incorrect.

No matter how much you happen to know about your customers—indeed, even were you to have a god’s total information awareness regarding each of them—you would not be able to charge personalized prices if you were to operate in a perfectly competitive market. Competition trumps information.

That is because in a perfectly competitive market there are always other sellers available who are willing to charge a price just sufficient to make the marginal buyer in the market willing to stay in the market and make a purchase. If there weren’t, then there would be a chance that the marginal buyer would not be able to find a price that he is willing to pay, and so would not buy, and then the market would no longer be perfectly competitive. For the perfectly competitive market is one in which competition leads to a price at which the marginal buyer and seller are willing to transact.

And so any attempt you may make to personalize a higher price to your inframarginal customers—the ones who are in principle willing to pay a higher price than the marginal buyer—will be met with scorn. Your customers will find those other sellers offering prices keyed to the willingness to pay of the marginal buyer and will purchase from those sellers instead at that marginal-buyer-tailored price.

Thanks to this effect, all buyers will transact at the same, marginal-buyer-tailored price, and so we can conclude that in a perfectly competitive market, price will always be uniform—and uniformly equal to the price at which the marginal buyer and seller transact. (More here.)

It follows that while information is a necessary condition for the personalizing of prices, it is not a sufficient condition.

You also need a departure from perfect competition, which is to say, you need: monopoly. Or at least a hint thereof.

I have argued that personalized pricing is one way to break the iron link between redistribution and inefficiency. When you personalize prices, you can personalize one price to the marginal buyer, ensuring that he stays in the market and the market is efficient, and whatever other prices you wish (within limits) to inframarginal buyers, enabling the redistribution of wealth. But it is important to remember that information on buyers is not alone enough to make this possible. The seller must be a monopolist, too.

Thus the use of personalized pricing as a tool of social justice directly conflicts with the mindless “big is bad” rhetoric that one finds today in certain corners of the progressive movement.

To redistribute wealth at the market level you need to start with big.

And then discipline big’s pricing behavior.

Categories
Miscellany Regulation

Central Planning Over a Distributed Network

Distributed network architectures and distributed political decisionmaking are not the same thing. The Department of Defense may be glad we communicate over a distributed network architecture, but Americans love their centrally-planned communications, thank you very much.

We all know that the Internet was designed to resist nuclear attack by being distributed. The idea was that if you have multiple nodes, and connections between each node and other nearby nodes, and the nodes all relay messages to all of their local nodes, then you end up with lots and lots of pathways from any one node to any other.

And so you would have to do a lot of nuking to eliminate all of the routes from any one node to any other, thereby making it rather difficult to cut off communications.

This is in an important sense a physical system.

It does not imply anything at all about governance of the nodes. A centralized one-party state, indeed, a dictatorship run by one man, can run an internet and enjoy all of its benefits.

So long as the nukes don’t knock the dictator himself out, he can be confident that from whatever node he happens to occupy on the network he will be able to bark orders to his minions on any other part of the network, because, again, will be very difficult for the nukes to wipe out all possible routes through the network from the dictator’s node to any other node.

The notion that the Internet is a politically free place is at best a misunderstanding of the implications of a physically-distributed architecture for how human communities who use that architecture make decisions. Just because you have a lot of nodes that communicate with each other rather than only with a central authority does not in the least imply that the humans who use the nodes need to be free creatures unaccountable to any central authority. Or that they must be free creatures who work together only by consensus.

The early web did in some cases happen to have this free and ungoverned political character. People proposed standards of communication of various kinds—for example, standards for how email should be sent and received—and people voluntarily followed them. And it kind of worked, although some message features were only supported by some message readers, and so on.

But by the 2000s it became clear that much more, and more interesting, kinds of communication could be run over the network if you had a central political authority that dictated the terms of communication. Now, the central political authorities that arose to provide these communications were not the government. They were private corporations (e.g., Facebook). And they didn’t dictate in the sense that everyone on the Internet had to communicate their way as a matter of law. Instead, they dictated market-style, which is to say that they set up systems on the Internet that did it their way and let you join if you wanted to join.

And so many people did want to join that before you knew it, these corporate systems were the only way to communicate (more or less). And so by private means they had achieved centralized political control over the Internet (more or less).

The people in effect voted to give these companies centralized political control when they decided that their products were better, and so used them.

And they were better.

Instead of downloading a software client—like an email reader—you went to a website and you logged in and henceforth, during your stay on that website, you were locked into the rules of communication enforced by the private enterprise that ran that website. Before, you had used Eudora to write email, and hoped that the voluntarily protocols of email were followed by the email reader used by your recipient, and that your recipient wasn’t so awash in spam that he would accidentally delete your email along with the rest, or that his server would crash. Now you logged into Facebook and sent a message there, or made a post, or sent a chat, and it just worked because Facebook controlled everyone’s inboxes and all the code governing communication between them.

Now, it would be a mistake to suppose that because Facebook is, you know, one website, that it cannot benefit from the distributed character of the Internet.

There is no reason why, in a nuclear war, you should be forced to do without Facebook anymore than you might escape Internet communications from a political dictator during nuclear war. The distributed nature of the Internet as a physical matter means that it will be very hard to sever all of the connections between any two points, including all of the connections between you and Facebook. (Nuking Facebook won’t work either, because Facebook isn’t a bunch of computers at a particular geographic location; it is itself a network of data centers all over the world, one that can hop onto the Internet whenever it likes through any surviving Internet node.)

And when you do pull up Facebook in the midst of the nuclear storm, you will nevertheless be subject to Facebook’s central planning, to its central political authority.

The placement of the like button on your screen will still have been decided by Facebook. The chat interface will be Facebook’s. What you can say on the system without getting blocked will still be decided by Facebook.

Is this a good thing? This is really the question whether we want our communications technologies to be decided by consensus based on the promulgation of voluntary protocols, or whether we prefer our communications technologies to be determined by individuals—or individual corporations—and then supplied to us on a take-it-or-leave-it basis.

It seems obvious to me that we prefer the latter. That is what the netizens voted for in the 2000s when they gave up their email readers and went in for Gmail.

That is what they voted for when they gave up their IRC chat clients and RSS readers and went in for Facebook.

By logging in before communicating, they submitted to these centralized political authorities because they felt that they got a better product out of it.

Communication was more reliable and it was richer; more could be shared and more easily, than had been possible with the tools of the old way.

The web voted for central planning; because sometimes planning is better.

Categories
Civilization Despair Regulation World

The Free-Market-Will-Save-Us Theory of Great Power Competition

First it was: China cannot succeed because she does not have a free market.

Then it was: China is going to be our friend because she has embraced the free market.

Now it is: China is secretly going into decline because she has turned away from the free market.

Maybe that’s right.

Or maybe we are just very, very high on our own supply.

I do not recall that German markets were free in 1939. I do not recall that German markets were free in 1914. I do not recall that Japanese markets were free in 1931.

In fact, I do not recall that American markets were free in 1941. One quarter of the American economy by GDP was subject to price regulation as a result of the New Deal and decades of progressive activism.

And that was before we entered the war and FDR imposed wage and price controls.

And, you know, we won.

But not alone. Russia did most of the fighting.

And Russia had a command economy.

The free market does have its charms. But please, enough of the you-can’t-be-a-great-power-unless-you-run-on-Reaganomics.

That’s a great way to underestimate your adversaries.

And get killed.

Categories
Philoeconomica Regulation World

Magic Markets: Looking Down on China for the Wrong Reasons Edition

Foreign Policy’s normally pretty good China Brief has this bit of magical thinking about markets today:

But clashing economic and governmental incentives, not generator capacity, are causing the problems [with China’s electricity supply]. Fifty-six percent of China’s power comes from coal, and thermal coal prices have more than doubled around the world after the initial shock of the pandemic. . . . In most countries, these prices would be passed on to consumers, but Beijing tightly limits the maximum price of electricity—causing generators to reduce their supply or shut down rather than lose money.

Palmer J., China Faces an Electricity Crisis. Foreign Policy. September 30, 2021.

Um, if there’s not enough low-cost electricity capacity in China then there’s not enough low-cost electricity capacity in China. Raising prices won’t make the blackouts stop, unless you happen to consider “blackout” too ugly a term to use for having your electricity cut off because you missed your payment. All raising prices will do is ensure that the rich get more of a limited electricity supply, and the poor less. But you don’t need to take my word for it. Just ask Texas.

It’s hard to believe that in 2021 Foreign Policy is still trying to teach China lessons about the virtues of unregulated markets. I mean, this is a country that went from nothing in 1980 to having an economy that’s 20% larger than ours today by purchasing power parity, nationwide blackouts due to the country’s resource poverty notwithstanding. It might be time for us to learn a thing or two from China about how to handle resource constraints equitably.

Or at least to put down our market fetish and actually study a bit of basic economics.

Categories
Antitrust Monopolization Regulation

Biden Antitrust Policy and the Fall of Kabul

The election of a longtime Washington insider to the presidency was, if anything, supposed to mark a return to competent, reality-based government. The astonishing failure of the administration to predict—or adequately plan for—the rapid collapse of the Afghan government this summer is hinting that the new administration is not all that much more competent than the last.

There are warning signs in Biden’s antitrust policy as well. His executive order on competition, for example, misleadingly cited as authority academic sources that either didn’t support the order, or suggested it would fail. And now we learn that the administration actually thinks it can use antitrust action to reduce inflation caused by pandemic-induced supply chain disruption. Oh my.

Antitrust won’t stop inflation caused by supply chain disruption because the profits that firms generate from supply chain disruptions are scarcity profits, not monopoly profits. They are the product of actual scarcity, not the artificial scarcity that antitrust can alleviate by promoting more competition. Only an administration that doesn’t know its Antitrust 101 would miss this.

Indeed, competent progressivism doesn’t make these kinds of mistakes. Take John Maynard Keynes. He was all for killing off the rentier—the earner of the kind of economic profits that supply-chain-induced inflation is dealing to many corporations these days—but he never thought antitrust would do the trick.

Because, like most progressives of his generation—and the competent progressives in ours—he understood that rent is a problem of competition, not monopoly.

The rentier doesn’t need to smash his competitors; he just lies on his fainting couch and watches the numbers tick up in his bank account because he happens to own a uniquely productive resource, one that competitors can’t beat, even if competitors are allowed to try their hardest.

Similarly, the big corporations charging high prices today don’t need to smash their competitors to charge those prices, because their competitors don’t have access to better sources of supply either. No matter how hard these firms compete with each other, there is just not enough production capacity in the supply chain to enable them to ramp up output and therefore no firm has an incentive to reduce prices and increase profits through increased market share.

That is not to say that these corporations are not earning rents, meaning profits in excess of what they need to be ready, willing, and able to produce and sell their wares on the market. They are. Rental car companies, for example, are charging multiples of what they used to charge for a car, while at the same time facing much lower costs than they ever did, because they are unable to expand their fleets. It follows that the price premia rental companies are charging are pure profits that the rental companies do not strictly need in order to remain in business.

But the profits are not a result of anticompetitive conduct. They are due, instead, to shortage. The rental car companies are not expanding their fleets, because a microchip shortage means there aren’t any cars available for them to buy. So, while they wait, the companies ration access to the cars that they do have by charging high prices for them, ensuring that those consumers with the largest pocketbooks get access to cars, and those with less means have to sit on the sidelines and wait for the shortage to end.

Unless it is reformed to adopt pricing remedies—and there is no indication the Biden Administration is seeking to do that—Antitrust has nothing to bring to this situation but trouble. To the extent that Biden’s antitrust initiatives translate into actual cases and the imposition of actual antitrust remedies, we can expect costs that will be passed on to consumers in every competitive market that the Administration mistakenly targets. The costs will be legal costs and also those associated with unnecessary remedies—the firm that actually worked better when it was whole hacked to peaces to please the angry antitrust god.

But the biggest danger posed by the use of antitrust to deal with supply chain disruption is that antitrust will be completely ineffective at actually getting prices down.

Smash three big rental car companies into twenty small ones, but you still won’t increase the number of available cars, and so you won’t, actually, increase competition, or bring prices down. Each of the smaller companies will know that it can raise prices without losing market share to the other nineteen, because the other nineteen don’t have any additional cars to rent out to customers either.

Failing to get prices down would be bad, however, because prices can and should be made to come down. For, as noted above, the fact that prices are currently high due to shortage does not imply that they must be high in order to induce firms to continue to compete and produce as best they can. The rental car companies could just as easily cover their costs by charging the rock bottom prices they charged last summer because the companies are, after all, still fielding the same fleets they fielded last summer. They are charging higher prices because the shortage (but not their own anticompetitive conduct) shields them from additional competition.

How, then to get prices down without antitrust? Keynes’s elegant solution was the euthanasia of the rentier. This was understood by Keynes to mean that the central bank could use monetary policy to drive down interest rates, thereby depriving the rentier of the ability to earn a fat return on his investments.

But the euthanasia of the rentier actually has a deeper meaning. For an actual rentier could always respond to low interest rates in financial markets by using his money to invest directly in actual businesses, especially businesses earning large rents due to shortages. What makes this impossible, and really does euthanize the rentier, is that the lower interest rates created by monetary policy induce large numbers of businesspeople to borrow money and invest it in new businesses, and this investment ultimately eliminates shortages across the economy, driving rents down and killing off the rentier.

But it takes time for money invested in new businesses to eliminate shortages and drive prices down. To get prices down now, before supply-chain disruptions can be eliminated, there are two other options.

The first is direct price regulation. Government could impose price controls in industries subject to pandemic-driven supply chain disruptions. President Biden could order rental car companies to revert to charging their low summer 2020 prices, for example. President Nixon imposed price controls in the 1970s; it can be done.

The second is taxation. Congress could vote a special corporate tax aimed at hoovering up the rents generated by firms enjoying pandemic-driven shortages. That would not bring respite directly to consumers, who would continue to pay high prices, but Congress could vote to redistribute the proceeds of the tax to deserving groups, or spend the money on projects like infrastructure that benefit everyone, rather than leaving it to firms to pay the proceeds out to wealthy shareholders to stimulate the market for yachts.

I am having trouble deciding whether the Biden Administration’s obsession with antitrust as cure-all is the legacy of President Biden’s long career as a centrist Democrat or a result of the meathead radicalism that the Trump Administration inspired in some progressives.

Either way, like relying on the Afghan government to defend Kabul, he can’t say no one warned him it wasn’t going to work.

Categories
Regulation

The Airplane Seat as Liberal Dilemma

People are fighting on airplanes because seats are too small.

The seats are not too small because airlines are forcing passengers to fly on small seats.

They are too small because most passengers do not insist on larger seats—they are willing to fly without them—but at the same time most passengers find the way they are packed into airplanes intolerable.

What gives?

There can be two explanations. The first is that passengers are in denial about their own preferences. They say they hate being packed in, but they still fly packed in, which means they can’t really hate it that much.

The second is that people don’t do a good job of protecting their own dignity. They would never, ever, let a guy come up to them on the street and rub their forearm and thigh for two hours. But it turns out that’s just because they don’t get anything out of the bargain. When that visit to grandma is at stake, by contrast, they acquiesce. People make deals with the devil all the time. They indenture themselves. They abase, and grovel, and beg, and they do it all for things, like getting home for the holidays.

The question is, then: should we respect them when they don’t respect themselves?

The airline seat size question gets to the heart of consumer sovereigntist market ideology.

What could possibly be wrong about letting consumers decide for themselves what they want out of air travel?

That was the question that destroyed the Civil Aeronautics Board, the federal agency that once ran the American airline industry, dictating the number of airlines in the market, the prices that airlines could charge, and, indirectly, the quality of service that they could provide. Before the Carter Administration killed the CAB, it was piano bars all the way up.

In the small seat you have your answer to the question.

The mob voted, overwhelmingly, for cheap at any cost, including to their own dignity.

In a world in which the only value is the democratic value, in which all that matters is what the people want, you are stuck here. You must leave the airlines to torture their passengers; they accept abuse.

If instead you believe in your heart that government should do something about it, that there should be a federally-mandated larger minimum seat size, then you must accept that you are not, in fact a democrat. Not really.

Passengers have voted, already. They prefer cheap. And they have voted far, far more directly than they will have if some elected representative, who ran on a dozen other issues not involving airlines, happens to vote in their name for a larger minimum. Whatever minimum is imposed will drive up the price of a seat, and whether passengers pay the higher prices or not (I think they will), four decades of consumer voting in deregulated airline markets says that they do not actually prefer to pay it.

If you want to impose a minimum seat size, you must accept that you worship at a different altar from that of democracy. Perhaps you worship at the altar of human dignity—of the human form divine. But you must accept what that makes you: a paternalist, a scold, a schoolmarm.

Do not tell me that you think we need minimum seat sizes to forestall violence, that the skies have become a battleground and that is unsafe. For anyone who has suffered through two hours in a packed plane knows just what primeval brain centers are thereby stimulated. But they fly anyway, and when they do, they always go for the cheapest tickets! They accept the risk.

One way out of this cul-de-sac is to say that there is not, in fact, any tradeoff between price and seat size: passengers want bigger seats at the same prices (who wouldn’t?) and airlines could give them to passengers, but they don’t because they have monopoly power.

This helps because it means that passengers aren’t choosing smaller seats—smaller seats are being forced on them.

It follows immediately that if someone is going to do some forcing, it might as well be the government, which can act as medium, divine what consumers would want (larger seats), and dictate them.

While there is almost certainly some power there, seat size hasn’t fallen by half since deregulation, whereas prices have. That’s hard to square with a narrative of oppression.

And anyway, even a monopolist can’t make a passenger accept a smaller seat if the passenger won’t accept a smaller seat; the problem here is that consumer demand is extraordinarily inelastic in price—inelastic unto indignity.

In other words, the demand curve, of a self-respecting public, for today’s super small economy class airplane seats should look like this:

Self-respecting consumers should have perfectly elastic demand at a price equal to zero for very small airplane seats. That would prevent airlines from turning a profit on these seats, forcing airlines to offer bigger economy class seats.

Instead, it looks like this:

Consumers actually have relatively inelastic demand for very small economy class seats (that is, their demand line is relatively steep). To the extent that airlines have monopoly power, it is the inelasticity of consumer demand for these seats that allows airlines to use their power to charge high prices for these seats and thereby to generate monopoly profits on them. The inelasticity of consumer demand here is an embarrassing measure of consumers’ tolerance for indignity.

It is sometimes said that flying was better under regulation because, by setting fares, the CAB forced airlines to compete on quality. But that absolves the passenger of too much. It would be better to say that in setting fares, the CAB prevented consumers from cheerfully trading away their dignity for a discount.

Passengers want lower fares; airlines need to pack in more seats to provide them (whether that need is driven by a need to earn a monopoly profit or not); and airlines oblige.

Should the airlines not offer passengers this devil’s bargain? We have told them: serve you.

And they do.

In the old days, prices were higher, fewer people flew, and flying was dignified.

That was not a democratic world.

But it was better.