Reviewing The Progressive Assualt on Laissez Faire: Robert Hale and the First Law and Economics Movement. By Barbara H. Fried. Cambridge: Harvard University Press. 1998. X + 338 PP. $55.00

September 11, 1998 (5:16PM)

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*William K. Townsend Professor of Law, Yale Law School. Jennifer Brown provided helpful comments.

Introduction 1

I. Central Halean Insights 4

II. The Imperfect Lockean 11

A. Can Reservation Prices Measure Lockean Sacrifice? 12

B. Expropriating Consumer Surplus 15

III. The Imperfect Policy Wonk 21

IV. The First Law and Economics Movement 24

Conclusion 29

The free market has considerable appeal. Freedom of contract maximizes liberty and free competition maximizes efficiency. So the story goes. Barbara Fried, however, has written a masterful book which reminds us that these a priori defenses of the free market were long ago demolished.⁽¹⁾ A small band of progressives - led by Robert Hale, an economist teaching at Columbia Law School -- developed an especially piercing critique of standard justifications for libertarian market policies. Fried's book has rediscovered this critique and has made it available for a modern readership.⁽²⁾

Intellectual histories often raises two related questions concerning authorship. First, "who is the author of particular ideas?" Fried is particularly sensitive to the possibility that she may have attributed to Hale the contributions of his predecessors and contemporaries. For example, Fried writes:

There is a perhaps irresistible temptation in writing on one person's work to exaggerate his singular contribution. Like a light shining on a polished surface which creates the optical illusion that random scratches on the surface are arranged in concentric circles around it . . . one is inevitably tempted to cast one's subject as the source of ideas that swirl around and through him.⁽³⁾

I am not qualified to directly assess whether Fried has fairly represented Hale's specific contributions to the "Progressive Assault,"⁽⁴⁾ but the book displays meticulous research and Fried is careful to locate Hale's thought in context of not only the contemporary debate but also in terms classical political economy. I instead worry that Fried's own contemporary views may be influencing her portrayal of Hale. There is the worry that Fried in excavating the gems from the past may have polished them beyond their original luster. This is a particular possibility because Fried is so sympathetic to Hale's thought. If we globally replaced "Fried" for every instance of "Hale" we would produce a series of statements that often would capture Fried's own position. Fried, the biographer, all too often does not tell us what she feels about Hale's arguments preferring instead to faithfully report Hale's ideas. This narrative choice is especially lamentable because the few times when Fried, the theorist, does come forward and set out her own views, they are stunningly acute.⁽⁵⁾

Indeed, the quality of Fried's own analysis raises a second question about intellectual histories: "Why should we care about authorship?" We should certainly care about whether a particular argument is compelling, but it is far less clear that we should care about whether Hale was the true originator of the idea itself. Beyond the incentive effects that the "proper citation" norm gives for scholarly innovation, it is often unclear what the payoff of intellectual history should be. Indeed, it is unlikely that Hale himself would have written such a book,⁽⁶⁾ because it might have been too disconnected from the core realist questions of describing what the law is and what it should be.⁽⁷⁾ Fried explicitly responds to this concern:

The book is primarily a work of intellectual history -- an attempt to excavate and restore in its historical context an elaborate and (in its time) seditious argument about the nature of law and legal rights. At the same time the excavation was motivated in part by the conviction that Hale's argument retains force in the political and intellectual debates of our own day, particularly those concerning the proper role of government in economic redistribution.⁽⁸⁾

It still may have been more useful, however, to have had Fried use Hale to confront current libertarian thinking -- say, to directly interrogate Nozick's or Epstein's most recent arguments.⁽⁹⁾

The thesis of this review is that Hale -- in a sustained argument running through several publications -- successfully demolished several standard a priori libertarian arguments, but that Hale's affirmative policy agenda was much less successful. In particular, much of Hale's constitutional analysis is innocent of even rudimentary forms of textualism or originalism. Nonetheless, Hale should rightfully be remembered for discrediting simplistic laissez-faire justifications. Hale showed that government regulations do not, as a formal matter, interject coercion into our world but rather (re-)distribute the coercion that unavoidable inheres in any system of private property.

This review is divided into four sections. The first assesses Hale central contributions, his most salient criticisms of laissez faire as well as his affirmative Lockean proposals to extract producers' infra-marginal rents. The second section argues that Hale at times did not follow his professed Lockean convictions to their natural conclusions. Section three criticizes Hale's applied policy agenda. The last section assesses the suggestion in Fried's subtitle that Hale was part of "the first law and economics movement."

Freedom is merely privilege extended unless enjoyed by one and all.⁽¹⁰⁾

Hale's analysis of liberty and its opposite, coercion, form a central pillar of his thinking. At the beginning of the century (and continuing to this day) many judges and scholars -- including progressives -- believed that government regulations were necessarily coercive restriction of private liberty.⁽¹¹⁾ Progressives argued that certain redistributive restrictions on liberty nonetheless furthered the public good. But Hale, following Hohfeld, argued instead that, as a formal matter, the total amount of legal freedoms must remain constant across different possible regimes. Property rights impose (through the agency of the state) correlative restraints on nonowners. Expanding one person's freedom of choice necessarily restricts other people's ability to choose. If the law gives me the right to my body, it necessarily denies others this right. Liberty in Fried's phrasing is an "empty idea" because it is impossible for law to maximize freedom from interference with choice.⁽¹²⁾ The formal and necessary conservation of total freedom suggests that the function of law instead is to distribute a fixed quantum of formal liberty. The implication of Hale's analysis is that in any legal system that distributes rights the notion of true laissez faire - i.e. no government interference with individual rights - was not even a logical possibility.⁽¹³⁾

Hale adumbrated this startling distributive view of liberty by developing a sophisticated conception of what should constitute coercion. As with liberty, Hale argued that government should be seen as a distributor of legal coercion. Fried writes:

[W]hen the government intervened in private market relations to curb the use of certain private bargaining power, it did not inject coercion for the first time into those relations; it merely changed the relative distribution of coercive power.⁽¹⁴⁾

For Hale, all contracts were as a formal matter mutually coerced: "[E]ach party to a contract, by the threat to call on the government to enforce his power over the liberty of the other imposes the terms of the contract on the other."⁽¹⁵⁾ Government restrictions on freedom of contract cannot be rejected therefore merely because the government's action coerces one side or other of the agreement. Fried explains:

[Voluntary market exchanges are] in fact coerced by the common-law right of property owners and would be laborers to withhold their property and labor respectively except on such terms of exchange as they demanded. That state of affairs meant that in intervening in private contracts to limit one side's right to dictate the terms of exchange, the government was indeed constraining that sides liberty, as laissez-faire proponents had argued. But it was simultaneously enlarging the sphere of choices, and hence liberty of the other side.⁽¹⁶⁾

For Hale, government is the source of all legal coercion because of the way that the law defines property rights.⁽¹⁷⁾

A particularly important aspect of Hale's contribution to coercion theory concerns his expansion of what constitutes coercion. Following Holmes,⁽¹⁸⁾ Hale rejected the notion that the term should only apply to instances where the coerced party lacks volition -- that is, the ability to make a choice.⁽¹⁹⁾ For example, in discussing the poverty of the pure volitional definition of coercion, Rodbertus observed: "although the contract of labourer and employer has taken the place of slavery, the contract is only formally and not actually free, and Hunger makes a good substitute for the whip."⁽²⁰⁾ Hale instead wanted any pejorative use of the term to grow out of some independent baseline of what is an illegitimate threat. As Fried describes Hale's position:

[F]inding an offer coercive is always parasitic on a prior, implicit determination either that the coerced party had a baseline entitlement to be free of such pressure or that the coercer had a baseline duty not to impose it.⁽²¹⁾

The recognition of this "baseline" problem is probably Hale's most lasting, acknowledged contribution to contemporary legal scholarship -- at least judging by continuing citations.⁽²²⁾ Of course, this broader conception of coercion raises the important issue of what are non-coercive baselines for threatening, say, not to contract.

Hale's response to the baseline problem seems to a form of egalitarianism that is constrained by a mixture of utilitarian incentives and Lockean notions that individuals are morally entitled to property for which they have sacrificed. For example, the egalitarian/utilitarian strain in Hale's thinking can be seen in his "tentative" view that property rights should be distributed "so as to maximize the aggregate real (positive) freedom enjoyed by society as a whole. The most likely means to that end, he argued . . . was to increase the options available to the least well-off people in society, subject only to preserving adequate incentives for the richer members of society to be productive."⁽²³⁾ As this quotation shows, the utilitarian notion of preserving adequate incentives exerted a strong pull on Hale.

But Hale also strongly believed in an expansive notion of Lockean desert -- which held that private property rights should be commensurate with "the sacrifice actually incurred."⁽²⁴⁾ While Locke's original theory turned on the labor sacrifice of a particular owner, the progressive rent theorists acknowledged other sacrifices -- including the deferred consumption of capitalists.

Hale's notion of Lockean sacrificed undergirded not only his theory of what constitutes just factor prices (wages, interest, etc.) but also provided a normative baseline for delineating the pejorative contours of coercion in bilateral exchange. Hale and other progressives repeatedly referred to Jacob's unfair bargain with Esau:

When Jacob made his tired and hungry brother Esau sell his birthright to get some pottage that stood steaming and savory before him, he charged what the market could bear, but he did a shabby thing.⁽²⁵⁾

Jacob's meager sacrifice of pottage was in no way commensurate with his return and thus unjustifiable to a Lockean like Hale.⁽²⁶⁾

Hale also argued that "existing property arrangements that laissez-faire advocates sought to protect were not deducible from, and in some instances wholly irreconcilable with, Lockean premises."⁽²⁷⁾ In particular, Hale argued that the emerging "marginalist" analysis did not provide a moral justification for laissez-faire policies. The marginalist revolution in economics showed that in a competitive market, "the price of each factor [of production] is determined by its contribution to value for the marginal purchaser (its so-called "marginal productivity")."⁽²⁸⁾ Laissez-faire champion, John Bates Clark, eagerly gave a normative spin to this result arguing that "the market automatically distributes income to factors in accordance with the ordinary (Lockean) intuition of justice "to each what he creates."⁽²⁹⁾

The response of Hale and other progressives to the marginalists' defense of laissez faire was twofold. First and foremost, rent theorists focused on the possibility of supra-competitive returns -not just in uncompetitive markets, but in competitive markets with regard to "infra-marginal" producers. Even though price tends toward marginal cost in a competitive equilibrium, producers could earn profits on infra-marginal units of production. Rent theorists were preoccupied with the "unearned surplus" going to infra-marginal factors of production ⁽³⁰⁾

[I]nframarginal and monopoly rents could, in theory, accrue to any factor of production, labor as well as land and other forms of capital. . . [L]abor had no more right to the surplus value that it generated over its own sacrifice than did capital. . . . If anyone had a right to surplus value, the progressives argued, it was not any particular factor, but rather society at large . . . .⁽³¹⁾

Secondly Hale criticized Clark's marginalism analysis as inconsistent with any Lockean notion of sacrifice:

The "marginal product," Hale argued, formally measured the value to the purchaser of a given input, not the cost to the supplier of providing it. In fact, Clark's marginal productivity theory contained no theory of costs at all. As Hale remarked, "the basis of distribution on this theory has shifted from the earlier basis of "sacrifice" to that of imputed productivity" a basis which Clark expressly approves as "ethical,' but without any discussion of the grounds.⁽³²⁾

For a Lockean, giving "to each what he creates" is not a defensible distributional criterion. For example, applying Clark's theory to the story of Esau's bargain might suggest that Jacob deserved to gain a birthright if the marginal product of his sacrifice was sustaining Esau's life.⁽³³⁾ Justifying this high "price," however, in terms of the pottage's productivity was for Hale, the Lockean, "shabby."

So far so good. I agree with Fried that Hale's primary contributions were to discredit any a priori belief in laissez faire. Hale's analysis demolished as an analytic matter the old notion that the free market maximized liberty from government interference.⁽³⁴⁾ Likewise, Hale's conclusion is compelling that coercion is an inevitable byproduct of private property means that government redistributes -- rather than interjects -- coercive power when it regulates. Finally, the theoretical possibility that free market competition could drive factor prices (such as wages and interest rates) to equal marginal productivity, does not -- contrary to naive arguments of Clark -- provide an adequate grounds for accepting the distributive effects of laissez faire regimes.

Hale conceded that as a pragmatic matter laissez-faire policies may, by and large, still be appropriate:

Utilitarian consideration might still counsel against widespread intervention in market-based distribution, if the government could not deprive inframarginal producers of rents without disrupting the return to marginal producers as well..... "In orthodox economics, the only intelligent excuse for the profit system is not that it results in a fair distribution of wealth -- for no sane modern economist could maintain that absurd thesis -- but rather that profits furnish an incentive necessary to get the work of the world accomplished."⁽³⁵⁾

After Hale, laissez-faire defenders would need to descend from a priori arguments to messy empirical issues concerning the likely real world response to particular market interventions. This is a terrain where progressive realists were happy to duke it out.

While Hale used Lockean desert theory to criticize Clark and other marginalists, Hale's own distributional theory suffered from two analogous Lockean flaws in not being sufficiently based on sacrifice. First, Hale settled for using"reservation prices" as a weak measure of Lockean sacrifice. And second, Hale (and other progressives) showed insufficient interest in extracting the "unearned surplus" of consumers.

A. Can Reservation Prices Measure Lockean Sacrifice?

As mentioned above,⁽³⁶⁾ Hale believed that the law in distributing wealth should presumptively foster equality but that this presumption was constrained both by the Lockean notion of desert ⁽³⁷⁾ and by the caveat that certain inequalities "must be tolerated to the extent that they functioned as a necessary spur to productivity."⁽³⁸⁾ The problem of course is that these two constraints are not identical. Hale, however, "argued at length in developing his rent-theory version of distributive justice [that] both objectives would be satisfied if individuals were allowed to benefit from any disproportionate coercive power that they possessed only to the extent of a just reward for the sacrifice their efforts entailed."⁽³⁹⁾ This formulation seems to say that focusing on Lockean "sacrifice" will also give sufficient incentives to produce.

But in practice, most progressives took the opposite tack - proposing regimes which focused on giving productivity incentives and then arguing that doing so would be coincident with Lockean morality. As Fried notes:

[M]ost progressive economists, including Hale, generally accepted that the minimum price that workers demanded for forgoing leisure should be equated with their relevant sacrifice for moral (Lockean) purposes.⁽⁴⁰⁾

Hale had criticized Clark's "marginal productivity" analysis for having no theory of sacrifice, but somewhat startlingly Hale, the Lockean, had no workable theory of Lockean sacrifice himself:

[The question of "what ought to count as a Lockean sacrifice"] received surprising little attention. Most commentators simply assumed without discussion that "costs" for these purposes ought to be equated with incentive-based costs. That is to say, costs should be measured by the minimal price (the so-called "reservation price") that a would-be worker or saver would demand for forgoing leisure or present consumption.⁽⁴¹⁾

Establishing laws that give individuals their "reservation price" is well tailored to assure the productivity constraint. This would assure that individuals received at least their "threat point," the minimum return that an individual demands in order not to credibly threaten to withhold her input.⁽⁴²⁾ But "reservation prices" are poor proxies for Lockean desert.

In a stunning set of pages, Fried levels three devastating criticisms against the proposition "to each her reservation price" -- showing that these measures may diverge substantially from any reasonable sacrificial theory of desert. First, updating the views of Herbert Davenport, Fried shows why reservation prices of workers are distinct from reasonable measures of sacrifice:

The price that a worker demands for forgoing a marginal hour of leisure, Davenport argued, measures only the relative preferences such worker has for leisure and money (what modern economists would describe as the "marginal rate of substitution" between the two goods). It says nothing about the absolute pleasure or pain associated with either choice. For the artist who "may have enjoyed every hour of his productive activity, and may leave it . . . [only] at the call of some greater alternative pleasure awaiting him," the choice may be "between pleasant productive activity on the one hand, and pleasant leisure on the other; [so that] even at the margin . . . there is no necessity of pain cost." Moreover, for those workers for whom work may be unpleasant, one cannot deduce the degree of unpleasantness from the price that they demand for enduring it, as that price reflects only the relative values that they place on avoiding work and obtaining money.⁽⁴³⁾

Davenport's point was not just that reservation prices are poor proxies for Lockean sacrifice, but that they are likely to systematically overstate the supposed sacrifice of the rich. "Accepting the general (post-Edgeworthian) view that the utility of money declines with increasing wealth, Davenport argued that the relative reservation prices placed on work were therefore likely systematically to understate the relative pain that work entailed for the poor as compared with the rich."⁽⁴⁴⁾

Second, Fried shows why short-run reservation prices may substantially diverge from notions of Lockean sacrifice. As Marshall noted, "[a] great part of a worker's earnings are of the nature of a deferred return to the trouble and expense of preparing him for his work."⁽⁴⁵⁾ But because these prior sacrifices of education and preparation are already sunk costs, they will not influence "the price actually demanded at any time for forgoing leisure (that is, . . . the short-run supply curve)."⁽⁴⁶⁾ The minimum price that a skilled craftsperson demands in exchange for her work during an unexpected economic downturn may not have much to do with the "true" sacrifice entailed in becoming skilled in the first place.

Finally, Fried points out that any concept of sacrifice must at bottom be parasitic on some belief that an individual initially owns the item being sacrificed. Ownership is key, for the simple reason that one cannot sacrifice something that one does not own. As Fried puts it:

[T]he notion that people are entitled to what they earn by the sacrifice entailed in their labor rests on the premise that people "own" the right not to work at all. One need not go so far as to advocate slavery to question that premise. One could, for example believe that there exists a moral obligation on every citizen to contribute some amount of labor to society in accordance with her ability, in exchange for support from the state determined solely by her needs.⁽⁴⁷⁾

Together these three criticisms suggest that reservation prices are poor proxies for Lockean desert. While Hale was right to criticize "marginal product" based theories of sacrifice, equating "marginal cost" or reservation price with sacrifice may not provide a firmer Lockean foundation for distributing social wealth.

B. Expropriating Consumer Surplus

Even accepting for the moment the use of reservation prices (or threat points) as proxies for Lockean sacrifice, Hale and other progressives were still surprisingly unwilling to go after an incredibly important source of "unearned surplus." Fried repeatedly describes Hale as an extremist who had an "inclination to push a point to its logical extreme"⁽⁴⁸⁾ but in at least one respect Hale and other progressives were willing to leave a lot of unearned dollars untouched. The "law of three rents" maintained that in an unregulated market labor, land or capital could each earn returns on infra-marginal production that were disproportionate to their sacrifice - that is, far exceeding their reservation price. But pushed to its logical extreme rent theory should have taken aim at a fourth rent, the unearned surplus accruing to consumers. If the Lockean theory of moral desert only justifies "ownership of that portion of exchange value that represented a fair price for the sacrifice actually incurred" then consumers should not gain some right that they greatly value for a mere pittance. Consumers underpaying should be as much of a concern for rent theorists as sellers overcharging. To put it most provocatively, Jacob may have done a shabby thing to charge Esau a great deal for saving his life, but Esau was by the same argument would be doing a shabby thing if he had to sacrifice a small amount for such a benefit.

To be sure, neither Fried nor Hale are blind to this argument. For example, in considering optimal utility regulations, progressives debated the merits of two alternatives (a)setting prices based on the costs of the individual utility and (b) setting price "based on the costs to the high-cost producers . . . and to expropriate the surplus paid to low-cost producers by an excess profits tax":⁽⁴⁹⁾

Either solution . . . would limit the utilities roughly to a fair return on their actual investment. But the two solutions had quite different distributive implications. A cost rate base transferred any surplus value generated by the exchange to consumers, in the form of lower rates; an excess profits tax transferred it to the government. That most progressives, including Hale, saw the two solutions as morally interchangeable underscores their belief that the core injustice to be corrected by regulation was not exorbitant charges but exorbitant profits.⁽⁵⁰⁾

Hale, however, did ultimately prefer the high-price-cum-excess-profits-tax alternative and explicitly defended the higher prices to consumers by arguing that "the appropriation would take away 'nothing which equitably belongs either' to the buyer or the seller."⁽⁵¹⁾

But at other times progressives were reluctant to extract unearned surplus from either consumers or workers. Hale at least partially recognized this inconsistency with his more general Lockean morals and attempted a limited defense. In an illuminating passage, Fried writes:

[B]y altering the exchange value of goods or services, the government did not expropriate surplus value; it merely transferred it from one side of the transaction to the other. If as rent theorists argued, value in excess of cost was a social and not an individual product, why should the government intervene merely to reallocate the surplus from one undeserving party to another, rather than to appropriate it for public use? Where (as in public utilities rate regulation) the beneficiaries were consumers at large, the transfer might be defended as reasonably approximating the results that would be obtained by the more cumbersome route of taxing the utilities' gain and then redistributing the proceeds to the community. But with programs designed to increase wages to the lowest-paid laborers in society, that defense was not available. . . .Why wasn't the appropriate remedy -- as Shaw had asked of Marxian economics -- simply to expropriate the employer's surplus through taxation for the benefit of the public? Why should it go to labor? To the extent that the community would have redistributed the proceeds of taxation to the neediest members of society in which group the lowest-paid laborers were disproportionately represented, Hale suggested, one could defend the result as appropriating what a system of pure rent theory taxation followed by socialist welfarist redistributive transfers would have accomplished.⁽⁵²⁾

Hale thus suggested that one could allow consumers or workers to retain unearned surplus, if they would have regained such money anyway from "socialist welfarist redistributive transfers" under a purer Lockean system of "tax (unearned surplus) and spend (redistribute)." Of course, to test whether a particular group would have regained the resources anyway, one needs a theory for how public funds should be allocated. Rent theory defines the amount of resources that are available for public redistribution, but not how those funds should be redistributed.⁽⁵³⁾ And on this point, Hale (or at least Hale as we know him through Fried) did not have much to say beyond generalized notion of promoting equality in wealth.

Still, Hale's foregoing rationales for not invading consumer (or worker) surplus are not completely satisfying. While Hale repeatedly analyzed Jacob's bargain with Esau (or the analogous negotiation with a drowning man) as a motivating case, there is no sensitivity to what extent Esau had a Lockean right to his unearned surplus. The drowning or starving man receives a great benefit in continued life, but Hale seems to think that it is just for him to sacrifice a very small price for this great benefit. Why does this comport with Lockean desert?

Hale again could try to answer that society under a mandated low-price regime would merely be letting Esau retain what society would have given back to him under a purer Lockean system. But why do we think that society would give back to Esau all the perquisites of being a first born son? Hale might reasonably argue that redistributive policy would have an insurance component that would make sure that Esau was not left destitute after yielding his consumer's surplus from this lifesaving bargain. But an egalitarian insurance program would not insure wealth acquisition far exceeding others in society. Egalitarian redistribution would instead tend to equalize wealth in society or at least within Isaac's family. The general point is that there is no compelling reason to think that consumers (or workers) are the neediest or most worthy recipients of resources which from Lockean perspective should be socially available. The purer Lockean system would be to force each side to the transaction to pay his or her reservation price. Under this system all of the unearned producer and consumer surplus would revert to the state.

Indeed, Hale seems to have ignored the fact that there are infra-marginal consumers. The possibility of infra-marginal producers is so central to rent theory, because it allows for low-cost producers to earn rents even in a competitive market. But Hale overlooks the Lockean implications of infra-marginal consumers -- that is, consumers that would have paid much more than the competitive price for the product. The negative slope of demand curves suggests that the value of at least some consumers for at least some small qualities of goods may be substantially greater than the equilibrium price. Even though the marginal consumer may only be willing to pay $30 to see Michael Jordan play, I am acquainted with some infra-marginal consumers who would be willing to pay if need be much, much more. Appreciating the importance of infra-marginal consumers highlights why we not expect society to roughly give back the highly varying amounts of unearned surplus that different consumers of the same product receive in the free market. Why would the marginal consumer of Kathleen Battle CD's receive nothing back from society while the true enthusiast would be entitled to thousands of dollars?

Hale in his most Lockean moments was willing to allow a high consumer price and then tax away the excess profits, but he only contemplates changing a single, uniform price to all consumers.⁽⁵⁴⁾ The purest Lockean system would ask each consumer to pay her reservation price for each unit of consumption. Hale might have responded that such an idealized system is unachievable in the real world. True, but we could come much closer to this ideal than Hale seemed willing to go. It seemed to me that a true Lockean would want government to actively facilitate price discrimination by producers -- in order to extract as much of the infra-marginal consumers' unearned surplus -- and then to tax away the producers' excess profits. An inventive Lockean could dream up several programs to allow manufacturers to charge consumers different prices. Besides repealing the Robinson-Patman act, government might prohibit resale of products to stop arbitrage sales from low-price to high-price consumers. Hale, however, disliked price discrimination without ever confronting its appealing Lockean properties.⁽⁵⁵⁾

Fried insightfully notes the parallels between Hale's brand of rent theory and so-called Ramsey (or optimal) taxes:

In order to minimize the efficiency loss from tax-induced distortions in people's behavior, a Ramsey tax sets tax rates on different commodities inversely proportional to the elasticity of demand. That is to say, the less price-sensitive (or elastic) the demand for a good, the higher the rate at which it is taxed. The now-familiar efficiency justification for this scheme is apparent: the less price-sensitive one's desire is for a given good, the less likely one is to be deterred from purchasing it if the price is raised by a tax. Thus, ideally, the effect of the tax is to reduce consumer surplus from a given purchase, without deterring the purchase entirely.⁽⁵⁶⁾

Fried sees that "a rent-theory tax is in effect, a Ramsey tax placed on producer (worker's or saver's) surplus rather on consumer surplus."⁽⁵⁷⁾ But I have argued that a true Lockean should want to combine both a Ramsey and a rent-theory tax in order to extract for public purposes both the producer and consumer surplus. The theory of Ramsey taxation as well as the forgoing discussion of government's role in facilitating price discrimination suggests that these are endeavors within the purview of implementable regulation.⁽⁵⁸⁾

At first, it is somewhat surprising that Hale often choose not to put forward specific policy recommendation. Fried notes:

Hale, with the exception of his work on public utilities regulation, was somewhat vague on the shape that legislative reform should take. That omission will no doubt strike many readers as a serious limitation to his work.⁽⁵⁹⁾

Here was a realist fellow traveler who was more often comfortable engaging abstract hypotheticals concerning Esau and drowning men rather than concrete, salient issues of the day. But on reflection, I believe this may indicate that Hale understood where his analytic strengths lay. I find his applied policy proposals - and forays into analyzing particular constitutional issues - to be much less worthy of continued attention

On constitutional matters, Hale seemed to care little about either original intent or the text of the constitution itself. For example, Hale adopted a "radical interpretation of the state action doctrine" in essence deconstructing the public private distinction to make all private acts public. His analysis was precocious with regard to Hale's analysis of private discrimination - leading him to condemn private refusals to sell or rent housing.⁽⁶⁰⁾ But his theory seems to be devoid of any interest in what the original framers might have meant by drafting the Fourteenth Amendment's equal protection clause to apply to states and not individuals. An even more blatant example concerns his silence concerning the appropriate meaning of the takings clause. Hale, the progressive, wanted to use regulation to extract substantial unearned income from producers but Hale never confronted whether such a redistributive program would run afoul of the takings clause.⁽⁶¹⁾

In the area of utility regulation, Hale fiercely advocated for limited judicial review of government regulation:

Hale's primary articulated goal, and the one that accounted for the bulk of his writing in the public utilities field, was thus a negative one: to get the courts out of the rate regulation business entirely, by forcing them to recognize that the property interests at state were not constitutionally protected.⁽⁶²⁾

After reading Fried's book, it is abundantly clear that this was Hale's goal -- and Hale does level some persuasive criticism against the standards that the Supreme Court used to review regulated rates -- but for the life of me I can't understand the constitutional basis for Hale's preference of unreviewable Congressional takings.

Even on non-constitutional issues, Hale's affirmative policy agenda has not aged well. For example, his preference for unreviewable agency decisionmaking is innocent of any concern with regulatory capture. He seems to agree with the sentiments of T.H. Green that "[t]he popular jealousy of law, once justifiable enough, is . . . out of date."⁽⁶³⁾ Fried also makes the excellent observation that Hale in proposing cost-based rate regulation ignored modern issues of risk:

[P]rogressive rent theory, at least as applied to financial investments, appeared to be largely an attack on returns to risk. Hale and other proponents of a historic cost rate base for public utilities took as given the investors' right to a return equal to the normal rate of return on investments. [But] Hale seemed to define "normal" as the expected return on relatively riskless investments.⁽⁶⁴⁾

Hale cannot be taken to tasks for not having independently developed such things as the Capital Asset Pricing Model. But suffice it to say that ignoring issues of risk would likely set prices far below investors true reservation prices and hence be inconsistent with Hale's own stated purpose of providing adequate productivity incentives. Optimal rate regulation has moved far beyond Hale's understanding. It would be folly to base current policy on the details of his thinking.

Hale's theory of private coercion (being often avoidably based on government allocation of private property) did provide an important new basis for expanding what constitutes "state action." But all in all, his constitutional theory and his affirmative reform proposals were substantially weaker than his more abstract criticisms of laissez faire. If not for the latter, I doubt whether Hale would have continuing interest for us today.

The section takes up an assertion suggested by the book's subtitle - but rarely alluded to in the text - namely, that Hale was part of "the first law and economics movement." My purpose here is not to prove the truth value of the statement, but instead simply to ruminate on the connections between Hale and those lawyer/economists who have followed him. I embarrassed to say that we finally come to an issue about which I'm marginally competent to comment.

Of course, the reason Fried chose to include the reference in her title is that it is provocative to think that the first law-and-economics movement was "an assault on laissez faire." In making this assault, Hale is certainly not a very recognizable forefather of the Chicago school. At least with regard to his relative receptivity to government regulation, Hale's analysis is closer to more recent law-and-economic contributions that stress game-theoretic rationales for public market intervention.⁽⁶⁵⁾ On the broad questions of policy, many readers will think that Hale's sympathies are one that skipped at least a generation or two.⁽⁶⁶⁾

Methodologically, Hale is categorized by Fried as an institutionalist and a realist, but for me what was striking was the central role that neoclassical marginalism played in Hale's thinking. I don't normally think of either realists or institutionalists of this period as focusing on the possibility that in equilibrium various marginal whatnots will tend to equal one another. On a personal level, how exciting it is for me to learn about a progressive who wasn't afraid to take a derivative.⁽⁶⁷⁾ Gear-head roots that I never knew I had.

While Hale's normative conclusions are sharply distinguishable from the generally free market inclination of the Chicago school, Fried shows that Hale's thinking presaged several core contributions of later law-and-economic scholars. This is not to say (and Fried is careful not to overclaim) that Hale deserves credit for the Coase theorem or the liability/property rule distinction of Calabresi and Melamed.⁽⁶⁸⁾ But in both of these areas, Hale's analysis was certainly sympathetic to the "theorems" that were to follow.

Like Coase, Hale understood that "any workable scheme of property rights had to accommodate conflicting uses of other property."⁽⁶⁹⁾ Fried notes this connection explicitly:

[I]n a nascent Coasian analysis that took its cue from Holmes, Hale argued that as a result of increased economic development, many of the uses of property traditionally thought to be protected now conflicted with each other.⁽⁷⁰⁾

Given his focus on rivalrous uses, Hale not surprisingly seized upon Miller v Schoene⁽⁷¹⁾ - the stark property conflict between the owners of apple and cedar trees which proved "the impossibility of government nonfeasance in the face of any set of conflicting rights."⁽⁷²⁾

Hale's approach to Miller highlights his interest in noncompatible uses, but still is far from Coasean insight that parties might be able to bargain around any particular rights regime to the efficient result. However, in a prosaic example about passengers taking vacant seats on a train, Hale comes closer to recognizing how people will bargain in the shadow of different possible laws:

At the beginning of the journey there are less than a quarter as many passengers as there are seats. At that time a rule which permitted each passenger to reverse the back of the seat in front of him and occupy both seats to the exclusion of other passengers would operate equally. Any passenger excluded from the seats I occupy suffers no hardship; he can occupy two seats by himself. If the early arrivals are still permitted to exclude others from the extra seats that are occupied, the latter will either have to stand up, or pay the first passengers for the privilege of occupying even one seat. And such payments, even though no greater than the value of sitting down, would not reward the recipients for any affirmative act of service, but simply for not forcing the person who pays to stand up.⁽⁷³⁾

This passage reveals that Hale, unlike most other legal scholars of his day, contemplated the ability of others to contract for rights not initially given -- but Hale being true to his nature focused on whether the resulting distributional effects of the law would accord with Lockean desert.

One also sees in Hale's analysis the antecedents of Calabresi and Melamed's cathedral. As Fried describes:

Hale examined . . . the effect of liability rules on market prices in involuntary exchanges. The argument is a familiar one to contemporary legal audiences, in the context of differential effects of so-called "property" versus "liability rules of tort damages. Anticipating that analysis in its broad outlines by several decades, Hale argued that the price at which a nonowner is allowed by law to liquidate a property interest without the consent of the owner (i.e., in an involuntary exchange) sets the outer limit on its voluntary exchange value.⁽⁷⁴⁾

Protecting entitlements with property rules had an obvious attraction for Hale because it could limit the ability of property owners to extract unreasonable prices. Esau would never have had to yield his birthright if Jacob's pottage were protected by a mere liability rule - at least against the claims of a necessitous man. Indeed, since Hale saw as "coercive" the property-rule right to withhold one's property from exchange, he was inclined to be sympathetic to liability rules which fostered involuntary exchanges. If the liability rule damages were set at an amount set equal to the initial owners Lockean sacrifice (which as noted before progressives would imperfectly equate to the initial owners reservation price), then liability rules could further Hale's vision of the social good.

Hale was naturally drawn to those liability rules that already exist in the law - as in his early interest in the classic necessity case, Vincent v. Lake Erie Transp. Co.⁽⁷⁵⁾ where a dock owner's property interest was ultimately protected by what we now think of as a liability rule. Hale understood the import of the decision:

As Hale, noted, . . . this decision not only deprived plaintiff of the absolute right to exclude the defendant but also deprived plaintiff of the right to exact whatever defendant would have paid for the right not to be excluded. "The abrogation of the absolute power to exclude in view of the emergency abrogates likewise the power to take advantage of the shipowner's special needs, just as the power to appropriate property by eminent domain denies the owner the opportunity to take advantage of the taker's special needs."⁽⁷⁶⁾

Hale played out the implication of liability rules in a number of context. But as the foregoing quotation shows, his interest seems always motivated by what for him are the appealing distributional qualities of the rules.

Finally, I also found Hale's analysis to presage one of the important insights of Michael Spence. Spence has shown that when firms incur fixed costs of producing different types of products, competitors will be led to produce the type or quality that is valued most by the marginal consumer -- in an effort to induce these almost indifferent consumers to buy -- and ignore the quality preferences of the infra-marginal consumers.⁽⁷⁷⁾ Hale, whose thought as a rent-theorist focused so much on the possibility of infra-marginal actors, was naturally led to an analogous conclusion:

In an unpublished manuscript written around 1915 entitled "Defects of the Marginal Utility Measure of Service," [Hale] explored the possibility that the government could increase aggregate consumer surplus over the results of the unregulated market by rechanneling resources from goods that generated low consumer surplus to inframarginal purchasers.⁽⁷⁸⁾

Long before Spence, Hale understood that free market forces may not drive firms to produce the assortment of product attributes that would maximize social welfare once we take into the preferences of "inframarginal purchasers." Since most consumers are by definition infra-marginal, this insight has important implications for public policy.⁽⁷⁹⁾

Keynes long ago noted that "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."⁽⁸⁰⁾ Barbara Fried's meticulously researched book certainly shows that Halean thinking has had an unnoticed impact on certain areas of current legal thought. This, for example, is particularly true of Hale's piercing insights about what constitutes legal coercion. However, merely pointing out that Robert Lee Hale deserves more citations than he currently receives would provide a rather lackluster rationale for undertaking such painstaking labors. And Fried indeed has larger fish to fry. A larger goal of the book is to point out the disturbing extent to which practical men are not sufficiently "slaves" to this defunct economist. Although she does not explicitly use Halean thought to take on modern laissez-faire extremists, this is the book's presentist value. Hale did not undermine the possibility that free markets could often or even normally foster the social good, but he persuasively showed that simple a priori arguments that the free market was necessarily better than redistributive regulation could not withstand scrutiny. In Hale's own words: "[t]here may be sound reasons of economic policy to justify all the economic inequalities that flow from unequal rights. [But if so] these reasons must be more specific than a broad policy of private property and freedom of contract."⁽⁸¹⁾ This is a lesson that bears repeating.

Filename: E:\Zip\Hale\hale.author.wpd

1. I should disclose that Professor Fried is a close friend. Readers may reasonably question whether I have suitable objectivity to critique her writing.

2. Cite Robert Gordon's book blurb.

3. Fried, at 213.

4. This is in part because some of Fried's analysis turns on materials that Hale developed for his Columbia Law School "Legal Factors" course and other unpublished sources.

5. See, e.g., Fried's analysis of optimal taxation, Fried, at 203, discussed infra at 20 and Fried's analysis of reservation prices, Fried, at 134, discussed infra at 12.

6. Perhaps Hale did engage in intellectual biography. A small shortcoming of the book is that it does not include a bibliography of Hale's work.

7. Fried at 13. (Quoting Felix Cohen).

8. Fried at 28.

9. Fried herself has done this in separate writing. Barbara Fried, Wilt Chamberlain Revisited: Nozick's "Justice in Transfer" and the Problem of Market-Based Distribution, 24 Phil. & Pub. Aff. 226 (1995).

10. Billy Bragg's version of the Internationale.

11. See Fried at 17 ("Hale argued that traditional liberal thought had erroneously assumed that government was the source of all legal coercion . . .")

12. Fried, at 52.

13. Fried, at 21.

14. Fried at 18.

15. Fried at 55-56 quoting Robert L. Hale, Law Making by Unofficial Minorities, 20 Colum. L. Rev. 451, 452 (1920).

16. Fried at 46.

17. See Fried at 83 ("Hale by redefining the market as a system of mutual coercion, hoped to show that the ability to extract any price for one goods or services depended upon the legal right to withhold them from others."). Of course, but-for property rights some property would not exist, but Hale believed that a large number of property regimes could still give adequate incentives to produce property. See infra at 12.

18. Fried at 48 and see Holmes' discussion of duress in Union Pac. R.R. Co. v. Pub. Serv. Comm., 248 U.S. 67, 70 (1918).

19. "The notion lingers on that coercion necessarily implies that the party to whom it is applied has no volition as does the converse notion that where he has volition or the ability to make a choice, there is no coercion or duress. The assumption was simply wrong." Fried at 48.

20. Fried at 47, quoting Rodbertus from Eugen V. Bohm-Bawerk, Capital and Interest: A Critical History of Economical Theory [sic] [18840, 332 (William Smart, trans., 1890).

21. Fried, at 59.

22. A Westlaw search, for example, uncovered more than 200 citations to Robert L. Hale, Coercion and Distribution in a Supposedly Non- Coercive State, 38 Pol. Sci. Q. 470 (1923) and Robert L. Hale, Bargaining, Duress, and Economic Liberty, 43 Colum. L. Rev. 603 (1943).

23. Fried at 46.

24. Fried, at 111.

25. Fried at 62, quoting Walter Rauschenbusch, Christianizing The Social Order 233 (1912); see also Fried at 57.

26. As Fried notes: "Lockean theory (taken seriously) suggested that sellers were entitled only to that portion that compensated them for the cost of supplying the goods or services." Fried at 74.

27. Fried at 73. See also p. 19 (enumerating "especially law of inheritence, land grants, and government grants of monopoly privilege") and id at 90 ("Mill was the first to argue that existing property rights are none deducible from Lockean principles").

28. Fried at 126. Fried somewhat surprisingly claims that "[b]y the 1890's marginal analysis had established complete dominance in economic analysis." Id. at 127. This assertion is creates an interesting tension with Robert Lande's analysis of the legislative intent behind the Sherman antitrust act also passed in 1890. Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 Hastings L.J. 65, 88 (1982) (no evidence has ever been found to suggest that any legislator understood that monopoly pricing causes allocative inefficiency").

29. Fried at 24 and quoting Clark. Fried argues that "Clark's particular brand of naive apologetics was a source of embarrassment for the mainstream economists," id at 132, but apparently this embarrassment was not sufficient to keep the American economics profession from naming its most prestigious prize -- awarded every two years to the most distinguished American economist under 40 -- after one John Bastes Clark.

30. Fried at 26.

31. Id at 27.

32. Fried at 133 quoting Hale.

33. Other readings are possible. For example, if Esau's capacity to consent was diminished by his hunger, he may have been able to survive with out the food - and hence the marginal product would be less.

34. Fried, at 46.

35. Fried at 114 quoting Bonbright.

36. See supra at 7.

37. Fried at 69.

38. Id.

39. Id.

40. Fried at 136.

41. Fried at 134.

42. See Jennifer G. Brown & Ian Ayres, Economic Rationales for Mediation, 80 Va. L. Rev. 323 (1994) (discussing relationship between reservation prices, threat points and BATNAs (best alternatives to negotiated agreements)).

43. Fried at 135.

44. Id.

45. Fried at 135 and quoting Marshall.

46. Id.

47. Id.

48. Fried at 19.

49. Fried at 196.

50. Id.

51. Id. and quoting Hale.

52. Fried at 151-52.

53. See Fried at 299 note 251.

54. In his less Lockean moment, Hale merely strived for lower consumer prices:

Of the various means available for appropriating unearned incomes, the most obvious one was to alter the exchange value of goods and services to eliminate the surplus value. The goal could be accomplished either by altering the background conditions to exchange in order to equalize the bargaining positions of the parties or by setting the exchange price to mimic what would be the maret price would have been had the parties faced each other with equal bargaining power.

Fried at 150. But contrary the opening assertion, these strategies did not appropriate unearned incomes, but merely redistributed them from producers to consumers.

55. Fried at 196 (listing price discrimination as an unwanted effect of a particular regulation); see also Fried at 111 ("the value of the marginal pruchaser put a ceiling on the exchange price" but this is only true if Hale is implicitly excluding the possibility of price discrimination).

56. Fried at 203.

57. Fried at 204.

58. And as discussed above, a true Lockean might want to develop a richer theory of sacrifice than the flawed "reservation price" or "threat point" approach. In describing the failings of a reservation price approach, Fried argues that:

[R]ent theory replicates the distributive embarrassments of Ramsey taxation, when (for example) it taxes the $1 surplus value accruing to the worker paid $3/hour, who being destitute would work for $2 if necessary, but leaves untouchable the $1000 an hour paid to a millionaire , who (little valuing additional money) would not work for a penny less.

Fried at 204. A true Lockean might want to have government extract the surplus between the buyer's and seller's true "sacrifice" points which as the foregoing examples suggest might be above or below their threat points.

59. Fried at 22.

60. Fried at 209.

61. Fried at 208.

62. Fried at 163.

63. Fried at 38.

64. Fried at 202.

65. Cite Ayres, Playing Games with the Law. Baird, Gertner and Picker.

66. However, to be fair, there have been liberal law and economic practitioners from the beginning of the Chicago school. Guido Calabresi in particular comes to mind. Cite the Costs of Accidents.

67. Fried's book also taught me that the Fabians - including George Bernard Shaw were "Jevonian marginalists". Fried at 145.

68. Cite to Guido's Yale L. J. retrospective claiming the Coase theorem.

69. Fried at 100.

70. Fried at 101. See also at 103 ("Holmes had pointed out that every tort case . . . presented a problem of conflicting property and liberty interest").

71. Miller v. Schoene, 276 U.S. 272 (1928). In Miller, apple and cedar trees were growing on two neighboring parcels. The cedars began to harbor a fungus that endangers the apple trees. The law faced a stark either-or choice of noncompatible uses - it could allow the cedar trees to grow and sacrifice the apple trees or it could sacrifice the cedar trees to allow the apples to grow. The state ultimately decided to preserve the more valuable apple crop and ordered destruction of the cedar trees.

72. Fried at 102.

73. Fried at 92-93.

74. Fried at 84.

75. Cite vincent. For the unitiated: the defendant in Vincent had damaged plaintiff's dock after tying his boat to it during a storm without plaintiff's permission. Finding that necessity justified the defendant's mooring his boat to the dock without the owner's consent, the court nonetheless held the defendant liable for the loss in value to the dock.

76. Fried at 85 and quoting Hale.

77. A. Michael Spence, Monopoly, Quality, and Regulation, 6 Bell J. Econ. 417, 417 (1975). See, e.g., Ian Ayres, Supply-Side Inefficiencies in Corporate Charter Competition:Lessons from Patents, Yachting and Bluebooks, 43 U. Kan. L. Rev. 541

(1995); an Ayres & John Braithwaite, Partial-Industry Regulation: A Monopsony

Standard for Consumer Protection, 80 Cal. L. Rev. 13, 40 (1992).

78. Fried at 130.

79. See, e.g., Ian Ayres, Supply-Side Inefficiencies in Corporate Charter Competition: Lessons from Patents, Yachting and Bluebooks, 43 U. Kan. L. Rev. 541 (1995); Ian Ayres & John Braithwaite, Partial-Industry Regulation: A Monopsony Standard for Consumer Protection, 80 Cal. L. Rev. 13, 40 (1992).

Other aspects of Hale's thought have a strikingly modern quality. For example in a 1931 article discussing how courts should determine market value in emminent domain cases, Hale identified the following difficulty:

The problem, is that the market price of any piece of property depends on the pool of potential buyers which in turns depends on the extent of potential buyers' legal rights to circumvent the market. The court must implicitly decide whether to include the taker in the hypothetical market of potential buyers, and if so whether to endow the taker with the power of eminent domain. If the taker is excluded from the hypothetical market entirely or is included but given the power of taking by eminent domain at a market value determined without regard to the taker's presence in the market, the market-clearing price should reflect none of the property's idiosyncratic value to the taker.

Fried at 84. This quotation in a nascent form seems to identify the fixed point problem that can arise when the law seeks to determine a market value which in turn is a function of the law itself..

80. J. Keynes, General Theory of Employment, Interest and Money 383 (1936).

81. Fried at xxx, quoting Hale.