Epstein Conference – Panel 4: Administrative Law/Regulatory State
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Epstein Conference – Panel 4: Administrative Law/Regulatory State

Richard’s been, as has come up over the
course of the day, very generous to many of us here
with his time, advice, comments on manuscripts, all of that. I can’t imagine how many
times I’ve called him about a potential clerk. Sometimes somebody has not
listed him as a reference, and I want to know from
Richard why that is. He’s been helpful to me on
many occasions [INAUDIBLE].. I remember once when I
was teaching labor law for five or six years, my first
five or six years at Harvard. And I wanted to get out of
it after a couple of years, but it wasn’t possible. Then Archie Cox came
back from Washington and decided he didn’t want
to resume teaching it. And I asked him why. I was amused by his answer. He said, well,
it’s like tax law. The big questions
have been answered. So I passed it on to
Richard, I thought maybe he’d find it amusing. And he posted, “Answered? They haven’t even been asked!” So it’s been an
inspiring day already, just to be back in the presence. We’re going to hear from– we have three papers
that are nominally about administrative
law and regulation. And they all are within
that broad conception, but they are also
each very distinctive and could have fit into a
number of different categories. We’re going to hear first
from Jennifer Nou, who’s here in Chicago as a Neubauer
Family Assistant Professor. She was at ORIA, the Office
of Information and Regulatory Affairs, where I spent
some time as well. That was after Yale
College and Law School, and after clerking for Judge
Posner and for Justice Breyer. Then we’ll hear from
Shruti Rajagopalan, who is an assistant professor of
economics at SUNY Purchase, and a fellow with the
Classical Liberal Institute. In fact, this particular
panel will be the majority affiliated with the Classical
Liberal institute at NYU, as is Richard. And our speakers following
Shruti, who will be– if I get them in the correct
order, which I’m trying to do– Malte Dold, a
postdoc in economics at NYU at the Classical
Liberal Institute. Also an Adam Smith fellow
at the Mercatus Institute, which is about, I don’t know,
70 or 80 feet from my office at George Mason. You ought to come
around some time. And he has his
doctorate from Freiburg. And then finally from Mario
Rizzo, at the Classical Liberal Institute, and at the
economics department at NYU. I was particularly interested
to see in his bio, which you all have your program, about his
forthcoming book with Gerald O’Driscoll on Austrian
economics– pardon me, not that one, the one after. He’s got two coming. This one’s with Glen Whitman– Puppets and Puppet
Masters: Rationality, Behavioral Economics,
and the New Paternalism. I think the book is
already overdue, in that it was needed a few years ago. But it’ll be most welcome now. So we’ll start– Jennifer? Where are you? Oh. JENNIFER NOU: So at lunch,
Richard referred to his time as interim dean of
our law school here. But some of you may
not know that Richard has much more experience
in the administration of the University of
Chicago, including serving in the University’s
Faculty Senate. I’ve also the privilege of
being on multiple committees here at the law
school with Richard. And on a more
personal note, I think Richard is somewhat
responsible for my decision to move into academia. So when I was in
Washington DC and had been offered this incredible
opportunity to come to this law school and do a fellowship
and make the transition, I was told by my husband and
sister-in-law that both of them had attended the [INAUDIBLE]
school with Richard Epstein’s children. And the memories that they have
are very ornate dining room settings, and Richard’s
encyclopedic knowledge shared at the dinner table. And they were very excited
and thrilled that I’d get to be in the same
faculty at the same law school as Richard Epstein. And in addition to being
familiar with his work, I was very thrilled to have
that opportunity as well, and indeed have
benefited enormously as a colleague of his and
in sharing that knowledge. In many of these
administrative roles, Richard has certainly
observed many different forms of organizational
governance and structure that undoubtedly have
influenced, as he has told me, his thoughts on the organization
of the executive branch and our organizations
in general. So the conference organizers
generously and graciously allowed me when agreeing to
be a panelist here to present a piece of a larger
work in progress on these themes, which
has been immensely influenced by Richard’s work. And my hope in
doing so was really to have it serve as
a springboard to talk about Richard’s influence
on administrative law and the separation of
powers more generally. So in my time here, first I’ll
just say just a little bit about the larger project,
just to contextualize, Richard’s insights
on the intersection between executive
and corporate power, in order to, three,
suggest that while Richard has many reservations about
the administrative state, I suspect he would agree that
properly designed constraints on agency executives may
help alleviate many of them. So just first about
this larger project. It’s currently titled
Agency Constitutions. And the basic claim is that
administrative agencies, like state governments,
like corporations and corporate charters, operate
under their own constitutions. These constitutions are
distinct in form and substance from the federal constitution. Well, they similarly
regulate relationships between their
respective members. So specifically, these
administrative constitutions, they really exhibit
divergent ideas about how to constrain executive
power and agency executives. And here, I’m referring to the
chairs, the administrators, the directors, and
the secretaries of the administrative state. These constitutions,
I claim, are often found in the subconstitutional
Administrative Procedure Act, reorganization acts, and
most commonly in the agency’s own organic statutes. And the project
basically applies what loosely might be described
as a comparative constitutional law lens to taxonimize
these various constitutions, and problematize these
distinctions that are drawn in the case law simply
between single member and multi member commissions. And accordingly,
the project focuses in particular on these
multi member commissions, because these are where the
internal separations of power disputes most often arise. OK, so what I’ve done is I’ve
collected all these agency constitutions, and I’m trying
to categorize them and reflect more on different
choices that have been made in terms of the
separation of powers internally to the agency. So to illustrate and
motivate, consider a dispute that arose with the now defunct
Interstate Commerce Commission, where basically the duly
appointed and confirmed commissioners wanted to have
the agency’s bureaus and offices report to them, rather than just
to the chair of the Interstate Commerce Commission. And the chairman took
umbrage and said, look, I am the statutory
executive of the ICC, and all these reports
should come to me. That is my executive authority. In rejecting this claim,
the comptroller general cited the intent of the
ICC’s governing constitution. Basically, it was to abolish the
inefficient plural executive, inform in which the statutory
authority was dispersed, and to replace it instead
with a more unitary executive in the form of the chair. So hopefully we’re
already thinking of the analogies in the federal
context, in the state context, to plural executives
vs. unitary executives. And with that
rationale, basically the comptroller general
says, therefore, this move by the commissioner
as to try and centralize reporting authority is illegal. My term’s unconstitutional. I want to say I use
it more as a metaphor, really, as staking a ground. Of course, there’s
huge literature about what is and
is not constitution. But it was unconstitutional
in one understanding of the idea of what it
means to be a constitution. By contrast, consider
another controversy– and this is going to be my
main motivating example– that erupted between the
members of the Chemical Safety and Hazard Investigation Board. This is an agency charged
with investigating hazardous chemical releases. And here the new
chair came to power, and he unilaterally decided
that the board should not engage in any new investigation. And he alone would submit
the budget to Congress, effectively setting
the board’s priorities without consulting any of
his fellow commissioners. At issue, then,
was how extensively to interpret the
agency’s organic statute and its so-called constitution. And then that constitution
states, well look, the chairperson shall be
the chief executive officer of the board, and shall exercise
executive and administrative functions of that board. The interpretive
questions are, well, what does it mean to be a chief
executive officer of the board? What are executive or
administrative authorities? Do they imply exclusive budget
setting and investigatory powers? And so these internal
separation of powers disputes helped to motivate these
larger interpretive questions that Richard’s work can
help to shed light upon. Again, what are the inherent
executive authorities in the so-called chief executive
officer of these boards? And are these powers
the same for the chairs of other agencies with
similar constitutions? So for example, the Federal
Communications Commission also says that the chair shall
be the chief executive officer of the commission. By contrast– and you’re not
meant to be able to read this, it’s just showing you these
different constitutional [INAUDIBLE] provisions. And these are
[INAUDIBLE] statutes, including the general
authority, the appointment power of the chair, the removal
power of the chair, the extent to which you
can delegate the power, budgetary and
spending authorities. Suffice, simply to say, that
there is a lot of variation. So for example, the Securities
and Exchange Commission chair is not a chief
executive officer. He is simply
authorized to exercise the so-called executive and
administrative functions of the commission. And then I have lots
more examples of these. By contrast, the Commodities
Future Trading Commission chair is the so-called chief
administrative officer of the commission. Is that different? Is that the same as a
chief executive officer? Is that exclusive? Is that meant to say something
different about executive power within an agency? So Richard has written
extensively and eloquently on the need to understand public
law doctrines and interpretive moves against the backdrop
of the common law, as we have heard
throughout the day. And one of the many
contributions of his work has been to remind us not only
the limits of the public law, given the robustness
of private orderings, but also how to explain
how the private law should inform public law as well. And because he’s written about
everything under the sun, Richard, of course,
has thoughtfully extended this premise
to the question of how to understand
constitutional executive power by reference to corporate
executive power. And I’m going to focus on two
of his works in particular. One is aptly titled,
“Executive Power in Political and Corporate
Contexts,” published in the University
of Pennsylvania Journal of Constitutional Law. And Optimal
Constitutional Structure, which is a chapter in the Oxford
Handbook of Law and Economics. Of course, he draws
on many of these ideas as well in many of
his other works, including the Classical
Liberal Constitution. Yes, last year. So in executive power and
political and corporate contexts, Richard reflects
upon the similarities and differences
between corporations and the executive branch. What are some of
the similarities? Well– the executive
branch’s separation of powers more generally. So as for similarities, he
notes that boards of directors, like Congress, are responsible
for setting policy. Like Congress,
these boards do not need to be in constant
session to do their work. CEOs, like presidents, are
responsible for carrying out the directives of the board. And CEOs, like presidents,
must handle the day to day execution
of board policies and take direct responsibility
for the persons who administer those policies. At the same time, in Optimal
Constitutional Structure, Epstein points out the
relevant differences between these organizations. He notes, for example,
that corporations have more internal coherence
and less diversity. Political organizations,
in his words, must include diverse
territories and groups, which means on average to higher
levels of heterogeneity in preferences, and there are
also less costly exit rights in the corporate context. If you’re unhappy, you
can just sell your shares. Whereas emigrating from other
countries is much more costly. What are the implications
of these differences? Richard says, when these
exit rights are weak, substitute procedures
and protections have to be strengthened. So he approvingly notes that
we have one person, one vote, rather than more property-based
notions of one share, one vote in the corporate context. And he also notes,
very interestingly, that chief executive officers,
unlike the presidents, serve at the will of a
legislature-like board of directors, and in this
sense, corporate governance is more parliamentarian than
the American presidency. Thus inspiring this idea that
comparative constitutional law might have something to tell
us about agency constitutions. And then importantly,
Richard also notes that optimal
constitutional structure depends heavily on
the size and the shape of a particular polity. In his words, “As internal
disagreement in that polity and the scale of that polity
increases, the more important it is for a governing
organizational constitution to be classically liberal.” So how might we apply
Richard’s insights to this interpretive
conundrum in when I’m on the intra-agency
separation of powers? Well, it’s first worth
observing, perhaps, administrative
agencies share features of both public
and organizations, at least as I’ve described them. On the one hand, of course
they exercise public power. Of course they are
governmental entities. But at the same time, they
are more internally coherent. Their mission,
statutory missions, are much narrower
than the project of trying to design
a constitution for an entire nation. And the first implication
and insight from Richard is to apply general
corporate common law principles under these chief
executive officer statutes. So what would that look like? Well, the majority of the
board should have the final say in resolving disputes over the
scope of their own oversight authority, just as it does
in the corporate context. In other words,
the chairman should be subordinate to the
board, just as CEOs are subordinate to their boards. And the chair here, therefore,
did not have the ability unilaterally to set
the agency’s budget, or make investigations
decisions, because when the chair and the
commissioners disagree, the chair must be subject to
the board’s final decision. And in a nod to
Richard’s invitation to get out of our
silos, that basically exhausts my knowledge
of corporate common law. But as a result,
Tony Casey and I here are organizing a
conference next fall about this intersection
between corporate and political executive power, where I
hope to learn more, and hope to help foster more discourse
across these disciplines. Finally, I will puzzle
about this other category of what might be
inherent executive or administrative
authority for these chairs in these chief executive
officer positions, with reference to
Richard’s insights. So the first is, because the
more internal disagreement and the larger the scale the
enterprise, the more important it is for the
organizational constitution to be classically liberal. Perhaps agencies with partisan
balancing requirements or greater powers, let’s say
they have more rule-making authority under broader
statutory authorities– like the FCC, which is famously
often in Richard’s lights– might imply that chairs
should be more, not less, constrained by their boards. This constraint would serve
to prevent these agencies from entrenching
on property rights. And secondly, on the classical
liberal constitution, Richard is very skeptical of
the constitutional provenance of these independent
agencies in the first place. He says, Humphrey’s
executor quasi-legislative, quasi-judicial. These his made up words. Whenever we have made up words,
something funny is afoot. And these are not
[INAUDIBLE] the constitution, so he therefore
proposes to strip independent agencies of
their adjudicatory functions. In other words,
whatever you want to say about rule-making
post New Deal, certainly when we’re
talking about adjudication, particularly of historically
protected common law rights, we don’t want independent
agencies doing that. So accordingly, another
implication of that could be that, indeed,
when you have an agency unlike the Chemical Safety
and Hazardous Investigation Board that does engage in
adjudicatory functions, there, too, we might want to
constrain the executive more by the board. And then finally I’ll just
end with this observation that Richard makes about the
debate in the corporate context as to whether to fuse the
chief executive officers with the chairs of the board. So the idea as I
understand it is, you usually want
chairs of boards to serve a more
conciliatory function, and try to get consensus
from the board. Whereas if you have a separate
chief executive officer, you can maintain
that separation. But of course, if you fuse those
in a more unitary executive, then you can have more
energetic action, right, more quick implementation,
and all the other ideas that usually associate
with a unitary executive. So to conclude by
taking a step back, in observing Richard’s
just remarkable ability to generalize across
law and institutions, I’ll go out on a limb,
because after all, it’s always dangerous to interpret
anybody’s texts through authoritative
biography, but I also say that I suspect that
many of Richard’s instincts stem, at root, from his own
intellectual humility and some of his experiences as
an organizational leader and executive. Indeed, as we heard
Richard say at lunch, often the best
institutional leaders are those that recognize the
limits of their own knowledge and experience. And when decision
making power is coupled with coercive
governmental power, well, it’s little
surprise that he thinks that the kinds of rights
that the Constitution must protect should be in the
classically liberal form. Thanks. AUDIENCE: [APPLAUSE] SHRUTI RAJAGOPALAN:
Good evening. Thank you all for being here. If I get this right
the first time, they might deny me tenure. AUDIENCE: [LAUGHTER] SHRUTI RAJAGOPALAN: Oh, well. There we go. AUDIENCE: Start
talking a little bit. [INAUDIBLE] SHRUTI RAJAGOPALAN: It’s
so great to be here. It’s an honor, and
thank you, Richard. Like most others
in the room, I’m also here because of
Richard’s tremendous kindness and generosity. Also, I have a
slightly different take on Richard’s work. I think he’s one of the
most keen sort of scholars of constitutional change. But I would also add that he’s
an excellent public choice theorist. So we’ve all been talking
about how prolific Richard is and how many different areas
of law he’s written about, but he definitely has a
public choice analytical lens. And that’s been a big
influence in my work, and that’s what I’m going
to talk about today. I’m going to specifically talk
about a peculiar provision of the Indian constitution
called the Ninth Schedule. I chose this for a
couple of reasons. One, to just show how
universally applicable the Epstein school of law is. And it’s not just about
the American constitutional theories of law
right here in the US, but a lot of these
principles can be used to design and better
other systems across the world. The second is this is
that kind of annoying rule that is subject to
drive Richard crazy. And one should never
waste that opportunity. AUDIENCE: [LAUGHTER] SHRUTI RAJAGOPALAN: So– do I– OK. Richard, through his
book, has demonstrated in various iterations how
the independent judiciary in the United States has failed
to block a lot of rent-seeking and interest group activity. So I want to sort of flip
the question on its head and ask what would happen in
the ideal Epsteinian world. So what would the
world look like if interest groups
were actually blocked by an independent judiciary? How would interest
groups respond if an independent judiciary
successfully blocked their rent-seeking attempts? So that’s the starting
point of my analysis. And most economists
don’t ask this question, because they tend to assume
constitutional rules as given. They don’t think to keenly
about constitutional change, so the question is sort of moot. This activity
wouldn’t take place once this kind of
interest group activity is blocked and called
unconstitutional. It just wouldn’t happen. Lawyers have studied this
in much greater detail, and they understand that it
sort of vaguely looks like this. So if interest groups efforts
are deemed unconstitutional, they have a few choices. One, they can abandon the
legislation or the effort. Or they can actually try to
change the Constitution, which we see rather frequently. And how can one change
the Constitution? You can go for a legislative
amendment, where you actually change the text of
the Constitution, or you can change the
meaning of the Constitution, usually through
judicial interpretation. And Richard’s work has focused
a fair bit on the latter. Now just to give a very
typical Richard example, take the Takings Clause. The phrase public use has been
reinterpreted and broadened over the years, and Richard has
written a great deal about it. Another way to deal with
it is the way it played out in India, which is
they actually formally changed the text
of the constitution to deal with takings problems. So in 1950, when India got
a newly minted constitution, India also wanted to do a large
scale socialist land reform. And in the process, not pay
just and equal compensation. So consequently, they ran into a
lot of trouble with the courts. The courts, says
Richard, would be happy to not actually
actively block this kind of
rent-seeking and wealth transferring legislation. So what was the outcome? In this particular
instance in India, they decided that instead of
abandoning the legislation, they would actually abandon the
constitution, or rather, change the constitution. So they created one of the
most remarkable provisions that I have seen in
any constitution. This particular provision is
called the Ninth Schedule. It took place in the
First Amendment in 1951. This is the headnote
before the amendment, and it says the validity of
these land reform measures have been delayed due to
litigation, so it is essential to amend the
constitution for securing the constitutional validity. So it’s unconstitutional, so
let’s change the constitution and make this constitutional, is
what they’re saying in effect. There weren’t too many limits. So this particular provision,
the Ninth Schedule, it’s a list of statutes. Any law that is added
to the Ninth Schedule is completely protected
from judicial review, even if it violates the
fundamental rights, which is sort of like the Bill
of Rights of the American Constitution. Legislation can be added to this
particular draconian Schedule to a constitutional amendment,
but more than one law can be added in an amendment. So sometimes you
have 64 laws added in a single
constitutional amendment. And it’s kind of unique. I think the only
other parallel I have seen in any
other constitution is the Notwithstanding
Clause, clause 33 of the Canadian constitution,
which Richard has obviously written about it. The original
intention was to limit this particular provision. And this is Prime
Minister Nehru, who was the architect of
this particular amendment, and he recognizes that it’s a
very, very broad power that’s been given to Parliament
to sort of override independent judicial review. He says it’s not with
any great satisfaction we produce this list. We don’t want to make it long. In the First
Amendment, they only added seven individual
statutes, and we would like to keep it that way
and only deal with land reform problems. As you can imagine, since this
is the University of Chicago, there are many, many public
choice theorists here. Everything and the kitchen
sink landed in the Schedule. Today, there are 282 individual
pieces of legislation that are protected from
independent judicial review, specifically for violating
fundamental rights, because nothing ever
gets added when it didn’t violate fundamental rights. So this is the situation
that we’re in with respect to the Ninth Schedule. Now just to give you
some detail on what is actually in the Schedule– so a big chunk of it is land. So all the columns reflect what
kind of statutes were added. So there are basically two broad
kinds– wealth transferring, which is the land redistribution
and the nationalization of various sectors
and firms; and rent seeking laws, which is
basically tenancy and rent regulation and all kinds of
price and quantity controls. So there were lots
and lots of statutes, because during
this period, India was a mixed economy,
mostly socialist leaning. So you have a lot of
tenancy regulation reform, price control, so on, so forth. If you look at this
table a little carefully, you will see that
there are three trends. First, that the Ninth
Schedule expanded well beyond Prime Minister
Nehru’s original vision to included 282 individual laws. Second, that it sort of
slows down post-1978. And third, no laws have
been added since 1995. So this is a little peculiar. If this provision is
as broad as it is, why didn’t it just
endlessly expand? Why is there a slowdown
and an eventual dormancy with respect to
the Ninth Schedule? So to answer this
question, I essentially– this is the perfect
place, because the rest of the analysis is a
rational choice analysis, so the Chicago School of
Law is the perfect place to talk about this. What I create is a decision
theoretic framework from the point of view
of an interest group. So what is an individual
interest group or a political
entrepreneur thinking, or what are they analyzing in
terms of costs and benefits, when they try to figure out
whether they should pursue unconstitutional legislation, or
whether they should abandon it? The advantage of doing this
with the Ninth Schedule as opposed to any garden
variety constitutional amendment is that those tend
to be complicated with various interests. The Ninth Schedule is simple. You can look at one
legislation at a time. So there are 282 individual
pieces of rent-seeking attempts that landed in this
particular Schedule. So that makes it particularly
good for this kind of analysis. So this is just a
simple decision tree for an interest group. So an interest group that’s
been blocked by a lower court– it’s statute or a particular
provision of the statute has been deemed
unconstitutional– has three choices. They can either abandon the
unconstitutional legislation and walk away from
the sunk costs. Second, they can amend
the constitution. And third, they can
appeal to a higher court. For the sake of
simplicity, where I assume this is the final appeal. But if you wanted to include
more levels of appeals, you could just make this
tree a little bit longer, and it’s the same result. So if they do appeal
to the judiciary, there’s a probability
r that the judiciary will hold that particular
statute constitutional, and therefore a
probability 1 minus r that the judiciary would strike
down that particular statute. If they uphold it, then
the payoff is delta, and all is well for
the interest group. If they actually strike it down,
once again, the interest group has two choices. It can, at the second stage,
abandon the benefits arising from this particular
unconstitutional statute, or it can then pursue
constitutional amendment. So this is just generally,
all the Greek letters are describing the net present
value of the expected benefits, or the payoffs for
each of these options. So now, in this
particular instance, everything sort of depends on
what the interest group thinks is the probability of
upholding or striking down the constitution. So to couch it in those terms,
I’m describing a threshold at this point. So we just defined
the threshold. It’s an arbitrary definition. So we just say r star, which is
the probability that the court will uphold the law, is this. What we find is for any
r greater than r star, it is beneficial for
the interest group to appeal the legislation,
and actually go to court and try to reinterpret
the constitution. For any r less than r
star, it should either amend the constitution
formally, or it should abandon. And the choice to amend or
abandon depends on the payoffs. If gamma is greater than
beta, you should amend. It gamma is less than
beta, you should abandon. Which you see,
the gamma and beta are the payoffs for
abandon and amend. So now, what about
the Ninth Schedule? In the Ninth Schedule, we can
think about, especially when we’re trying to
describe the slowdown and the eventual dormancy
of the Ninth Schedule, we need to think
about, what is r? Is r changing? Is the probability of holding
the law constitutional or striking it down, is that
changing over those five decades? The second thing
to think about is, are there any additional
costs and benefits imposed on interest groups for
amending the constitution or abandoning the legislation? And define both of these
to play an important role. So one of the important
factors is, in 1978, parliament decides to just
delete the Takings Clause. And so a lot of the
property rights problems are resolved right there. Consequently, r will increase. That is, the probability of any
law being held constitutional immediately goes up. So post 1978, you should see a
slowdown in the Ninth Schedule, because now there is a greater
probability that laws will be held constitutional,
so you don’t need to put it in the Ninth
Schedule in the first place. But they only deleted the
Takings Clause, thankfully. Some of the other fundamental
rights were still intact. However, in 1981, you find
in a particular case called the Waman Rao case,
and I’m happy to talk about this more in Q&A.
In that particular case, they find that Ninth
Schedule can actually be open to judicial scrutiny. So in 1973, there was a
very important doctrine in Indian constitutional law
called the basic structure doctrine. And Tom Ginsburg
is here, and he’s written about this and
the Ninth Schedule. Which it actually
it talks about how the Supreme Court can invalidate
constitutional amendments. So in 1981, they actually
applied the basic structure doctrine to the Ninth
Schedule, and said, you know what, we can invalidate
constitutional amendments, including amendments where the
Ninth Schedule is involved. So what we find is, the
procedural costs of amending the constitution go
up, which means gamma, the net payoff should
go down, and r goes up. Between these two,
what you would expect is fewer and fewer additions
to the Ninth Schedule. Now, the 1981 case was
incidentally upheld in 2007, in a case called I.R. Coehlo. So by 2007, you should
expect a complete slowdown of these cases. So now, it’s almost as if
you would write it this way. That’s the exact trend that
you find with Ninth Schedule legislation. So the blue bubbles are all
constitutional amendments where laws are added to the
Ninth Schedule before 1981. The green bubbles
are after 1981. The size of the bubble
depends on how many laws were added in a particular
constitutional amendment. So one particular
amendment added 64 laws. One of them added only two laws. So the size of the
bubble tells you that. And the brown line
is the fitted values, non-native fitted values,
for the overall trend. So what you see is,
from 1950 to 1981, there is an increasing
trend in adding laws to the Ninth Schedule,
exactly as you would predict based on the
case law and how it played out. From 1981 to 2007– rather
1997 and eventually 2007, because the case went
on for 10 years– you would expect a slowdown. Which is what you see
with the green line. And the good news is that the
line is slightly decreasing. So overall, there are
fewer and fewer additions to the Ninth Schedule
as time goes by. So what does this tell us? There’s some good news,
and there’s some bad news. The bad news is that even
if an independent judiciary successfully checks of
rent-seeking efforts by interest groups,
they will just switch the forum where they lobby. So if the judiciary
is particularly strict in its scrutiny,
and very costly, you just switch the forum to
constitutional amendments. And that’s bad news. Similarly, if you have
very strong entrenchment of constitutions– that is, you
make it very difficult to amend the procedure, as you have
with the federal constitution of the United States– all the lobbying efforts
will switch the switch to the judiciary to amend the
constitution by interpretation. Which is exactly
what you expect. And in an ideal world, you
would want interest groups to abandon their efforts. And the only way to do that is
to make it procedurally costly, to impose procedural
costs, that it actually makes it useful for them
to abandon those efforts. And this brings me to the
very end, and the second theme that you see in
Richard Epstein’s work. This, I think, is
extremely understudied, because Richard points
out in various books, including the latest one–
you know, the Oxford Handbook, chapter on optimal
constitutional structures– of how important
the architecture of these structures is. And I think the Ninth Schedule
really illustrates that. We need a particular kind
of constitutional structure where the relative costs
for interest groups, or the relative benefits for
interest groups from forum shopping between the
legislature and the judiciary for constitutional amendments or
constitutional interpretation, should not be too different. Because if it is,
then you just divert the rent-seeking activity. You don’t actually limit it. So I think I’m out of time. And that’s where I’ll end. AUDIENCE: [APPLAUSE] MALTE F. DOLD: Hey, so far
out, some of the presenters have shown us how your work,
Richard, influenced their work. Others have slightly
disagreed with you. We will do neither,
Mario and I. We will try to offer you
new arguments, actually, for your distaste of
behavioral law and economics. Let’s see how that plays out. And then Mario and I have
the wonderful privilege to close day one with
the presentation right before the reception. So in order to keep
the opportunity costs low for
everybody in the room, we will try to be concise, but
also a little bit provocative. So Richard has written
a number of articles on methodological and
normative questions of behavioral economics. And just last week, he presented
a very insightful paper at a conference on
behavioral paternalism, and the whole nudging
debate in New York. And the title was,
“Missing in Action: the Limited Role of Behavioral
Economics in the Legislative and Judicial Arenas.” And the title gives
you a slight idea of what Richard’s
opinion on the matter is. And for many years, I
would say Richard has now defended the idea of
constant preferences against behavior attacks. And this is, of course,
one of the core assumptions in neoclassical economics. In his articles on
behavioral economics, Richard has defended
neoclassical classical economics against
several of these attacks. Richard argues in favor
of a rational choice account that is
supplemented by insights from evolutionary biology. And he’s a big fan,
if I’m not mistaken, of the principle of
inclusive fitness. This leads me to
our provocation. In our paper, we gently
challenge Richard’s belief in constant preferences,
at least to some degree. As we will see, it is
only to some degree, since any answer to the
question of the true nature of preferences
depends on the level of abstraction one chooses. If one defines
preferences broadly enough, and for
instance, equates them with our innate
biological desires, then it’s quite hard to question
their inherent stability. However, if one takes
a more granular view and considers the instrumental
level of human problem solving, then preferences might be quite
unstable, evolving, and open to trial and error learning. And indeed, Richard
seems to acknowledge that instrumental
preferences are a function of the individual’s
evolving stock of knowledge. Moreover, while
Richard points out that individuals’
dispositions and character traits are stable
in the short term, they can vary with age and
changes in life circumstances. This more dynamic understanding
of instrumental preferences is also the view of the old
Chicago School of Economics that we will present
in this paper. It is, we believe,
a more nuanced view than the pure neoclassical
understanding, and it is also much more
nuanced than the one portrayed and behavior
economics, especially in its normative variant, called
behavioral wealth economics. So let’s begin with a
brief recapitalization of the Stigler-Becker model,
[INAUDIBLE] in Chicago. So in this model,
preferences are considered to be
stable, largely context independent, and to a
large extent, invariant across people. And in their seminal
paper of 1977, De Gustibus, Stigler and Becker
argued that the simple model is actually a very powerful model. Why? It allows economists
to explain any changes in individual behavior by
changes in observable prices or income without any recourse
to unobservable, slight preferences. So over the last three
decades, behavioral economics has opened the black box
of the utility function and studied the nature of
individual preferences. Based on experimental
findings, behavioral economists argued that the Stigler Becker
model of stable and invariant preferences is simplistic. For one, behavioral evidence
suggests that preferences can differ across people. For example, you might observe
substantial interpersonal variance with regard to
self-interested motives, social motivation, or
procedural concerns. Moreover, behavioral economists
argued that our decision making is often impaired by all kinds
of psychological or contextual factors that produce
inconsistent choice patterns. And those findings, especially
about the inconsistent choice patterns, those findings
pose a serious methodological challenge to the
Stigler Becker model. If different frames that convey
largely the same objective message to the decision maker– that is, choice options,
prices, and income are equivalent for all frames– if these frames produce
different behavioral responses, it is not any more self-evident
that an individual’s behavioral changes are actually
rational responses to changes in the constraints the
decision maker faces. And this particular challenge
that resulted, or stimulated, the emergence of a new field at
the intersection of philosophy and economics and law called
behavioral welfare economics. And Cass Sunstein is, in
law, the biggest proponent of that account with
his nudging agenda. And behavioral welfarists
and Cass Sunstein seem to believe that it
is possible to classify particular types of choices
as decision mistakes when they do not reflect an
agent’s true preferences. And true preferences
are those preferences that the agent
would have acted on, had her reasoning
not been impaired by [INAUDIBLE] or
emotional biases. And at the core of
this program lies the idea that it’s the
task of the lawyer, the politician, or the
economist to reconstruct the coherent subset
of true preferences whose satisfaction is considered
to be welfare increasing. And this approach
has been endorsed by many prominent behavioral
economists, Richard Thaler, amongst others, and the overall
policy program of nudging, as I mentioned. And in order to reconstruct
those true preferences, behavioral welfarists take
preference consistency as a normative criterion. So preferences that
are intransitive do not belong to the
set of true preferences. So while challenging
the empirical validity of rationality axioms in
describing human behavior, behavioral welfare
economists takes these axioms as the knowledge of
benchmark for good behavior. And this, what we
call welfarists turn in behavioral economics
over the last 20 years, or 15 years, has been
widely criticized. And here we don’t want to
provide an overly overview of the critique. Rather, we would
like to illustrate how a reassessment of the
insights of the old Chicago School of Economics
can provide us with actually quite
good arguments against this welfarists turns. Frank Knight and
James Buchanan– so Frank Knight, a teacher
here, professor here, in the econ department, and
James Buchanan as his student, whom we regard as the
most important proponents of old Chicago, who sent
an original understanding of choice that circles around
the notion of individuals as aspiring and becoming beings. Knight and Buchanan seek to
investigate the consequence of individuals’ inbuilt desire
to modify their own preference sets. And I quote Buchanan,
“That’s man’s tendency to want to become a better man.” This inbuilt decide to
strive for better wants leads to an unsettled mess
in human conduct. An end, once attained,
becomes the basis for further, better ends. In addition to this
intentional dynamism, Knight and Buchanan emphasized
the element of uncertainty in the preference
formation process. They argue that
individuals form beliefs, not only about future
stages of the world, but also about their
own preferences. And in light of
this uncertainty, individuals act exploratively– they often don’t know
yet what they want– and experimentally– they mostly
learn through trial and error. And Knight and
Buchanan both developed a multi-layered understanding
of the individual. According to them, we are
biologically constrained beings who solve problems
on two levels. At the level of needs
and calculation, they call that the economic man. And that the higher
level of values, where individuals critically
reason about their ends, that’s the artifactual man. And at the moment of choice,
the economic man uses means deliberately
to realize ends, which are given
to the individual at that particular
moment in time. However, before and after
the moment of choice, individuals constantly
regenerate new ends. And ultimately, individuals
look beyond their preferences to purposes or values, and
these are neither truly fixed, but the outcome of thinking
and social interactions. Values and purposes are
not preferences, or even meta preferences. They are pro or con attitudes. They are neither stable,
nor defined at the margin– at least, not as long as
they remain pure values. They can conflict
with each other. Individuals
continuously struggle to translate their
messy set of values into realizable preferences. So this understanding
of decision making also casts doubt on the basic premise
of behavior welfare economics, that deep within, we all
have these allegedly true preferences. If we accept that
revealed preferences at the moment of choice are
the result, and not the input, of decision making
processes, then the notion of true preferences seems to
be ontologically questionable. According to Knight
and Buchanan, preferences do not
exist independently from decision making processes. Rather, they are the outcome
of transient reflective equilibrium, of cognitive
processes of mutual adjustment among the general, often
conflicting, values, economic practical reasoning,
and local circumstances at discrete moments in time. MARIO J. RIZZO: Thank you. Well, Malte did
such a wonderful job that I’m not going
to say too much. I don’t want to ruin the points. I have to say that– if you might give me Richard’s
paper from the seminar? The [INAUDIBLE]– So Richard said,
the limited role of behavioral economics in the
legislative and judicial areas. And then he ends up by
saying that the reason why most debates over
litigation regulation ignore the subject of
behavioral economics is that the domain
has nothing to add. So I guess, then, the answer is,
the limited domain is nothing. And I think we’re not
quite saying that. But we’re saying almost that. I think the big point
that, if I would add, that we’re trying to make,
is that the preferences are always in the process. The creation, the construction,
the discovery of preferences is always in process. And that really, then, the
place to look for rationality is not in consistency
of preferences, or transitivity of preferences,
as behavioral economists view as the normative ideal. But really, to look
at things as if they were in the process of becoming. There is plenty of
evidence now being collected that this is true. Stigler once said
of Frank Knight that he made a lot of
empirical assumptions for which he didn’t even
have a cup full of evidence. So our second part of the paper
is the cup full of evidence. But let me just say
briefly that there is a important literature
on preference construction and preference discovery. The idea simply is, in
the more moderate version, people are reflecting and
discovering their preferences, which they only come to a
stable understanding over time, and with experience of
trying various lower level instrumental preferences. The constructed preference
idea is more radical and says, in effect, there aren’t
necessarily preference down deep in a person that
he’s trying to discover, but acting in the
world, we really construct our preferences. And they tend to be temporary,
at least at certain levels, and therefore not
to be expected to be immune from affect being
effected by elicitation processes, or influence
of other people, or of various kinds of
framing or structures. And that doesn’t
mean that any of them are not true preferences. It just means that preferences
aren’t this thing that has this immutable quality that
we’re all seeking to somehow manifest in the world. That further doesn’t mean that
they ought not to be respected, because human beings are really
the sum of all the influences that they have,
internal and external. And part of autonomy is to
respect real world individuals in the process of becoming. And finally, I would like
to say about errors– behavioral economics
like to say that people are subject to all sorts
of systematic errors. But what Knight said, and what
I think is absolutely true, is that errors are really
crucial to learning. And simply because
we make errors doesn’t mean that nothing
good is coming from it. In fact, there
are, in psychology, certain experiments known
as blocking experiments that indicate that the less
people’s expectations are disappointed, they tend
not to learn at all. And so the systematic, or
persistent, nature of errors may be in the case
in aggregate data. But on an individual basis, and
the experiments of John Bliss seem to indicate this, people
do learn from their experience. Finally, a point that Richard
has made a number of times, is that people
oftentimes make decisions not as individuals, the
atomistic individuals, but in groups. And sometimes these groups
are corporate groups, or groups of friends, or
actually family situations. And the evidence so far is
rather impressive that group decision making, smaller
group decision making– either unrelated people
in groups or families– in almost all cases where
they test for these biases, group decision makers
make these biases in far lower numbers
than individuals alone in an
experimental setting. So I think there’s
a lot to be learned about the dynamic
view of preferences that old Chicago had. And I think this would be
perfectly consistent with many of Richard’s suspicions
about behavioral economics. AUDIENCE: [APPLAUSE] RICHARD EPSTEIN: This is the
final lap in what we hope that I don’t lapse in the time. First of all, I
want to thank people for three very different
kinds of speeches. 10 minutes? No, 12. Thank you. With this paper, I
mean, the heterogeneity means you need more time
than you do for the others. But they all, in some sense,
actually relate to one another. The question, the
fundamental question, that every legal
system tries to ask, is given what we know
about human nature, what kind of legal rules, what
kind of institutions, what kinds of practices we have,
which allow us to essentially make sure that the
action one person takes will not systematically
result in greater harms to other individuals. And this is an extremely
complicated thing to do, and it depends on the fact
that when people engage in their individual
self-interest, the moral constraint
against trespass by others is, to put it mildly, imperfect,
and not evenly distributed. So there are some
people who, I think, would go out of their way to
be kind, and nice, and decent to other individuals. And if you get 10
of them, it’s fine. But if you get somebody
on the other side who’s apt to do other
people in, the damage that one person can cause is far
greater than the amount of good than any other individual
can do, given the ability to take over the reins
of power and to use force one way or another. So everything that
we’re trying to do is to figure out how you set
up a series of institutions to deal with the kinds
of people we have. And in a sense,
the papers sort of go in the opposite
direction of standard phenomenology and so
forth, in the sense that when Malte and
Mario do, they’re talking about the stuff of individuals. And it’s when you look at
that stuff of individuals, then you have to ask
the question, what kind of institutions do
you want to take? And so on an immediate
whim, what I going to do is talk about the paper in
a slightly different order, and begin with the
preference structure, rather than the
institutional arrangement. And I’m got to prove the
constancy of preferences in terms of taste by noting
that my tie is half adjusted, and the top button is open. You can see pictures of Richard
Epstein going back to the point when he was about 12 years old,
and the tie is slightly akimbo, and the top button
is always open. And no matter how many
times my elegant wife, who’s now in the room, has tried
to correct me about this, this form of preference
systematically reasserts itself. And it has done
so over 50 years. If you want to look at
other things in my deeply introspective self, my
preferences for Mozart, say, over Bruckmann have
been consistent from the time I was very young. My preferences for staying
away from asparagus, which by my count, my wife has
something like about 13,000 times, and I’ve eaten
a total of zero times– you roll with the situation– it shows a remarkable
stability in the world of taste on these things. And in fact, I
think that’s true– There are a lot of
people I know here for a very long period of time,
and some for shorter time. And the thing in
terms of preferences, dispositions, and so
forth in the taste regime, is that the remarkable
constancy of people is this thing that
you know, rather than this constant situation. There is no question
that there is certainly going to be change
through learning and so forth, which is things
to which they referred. But in many cases, it
turns out that this is sort of means-ends
adjustment, knowing what your tastes are and knowing
what your competencies are, what do you want to do. And it’s also, when
you’re doing this, nobody wants to work this off
of an individual-less model, because it simply does not
comport parts of the way you begin or carry on life. When you’re a child,
they’re always influences from your
parents and so forth. And sometimes they nudge
you in the nudge sense. But if you come from
a Jewish family, that nudge in the other sense
of the word, in which they kind of push you a little bit
too far one way or the other. And in fact, figuring
out which kinds of nudges you want or are appropriate. The process of socialization
does not only involve nudges, it also involves certain
cases, brute force, against certain
kinds of activities that children are willing to
commit against their neighbors. But this process
of socialization is always going
to be cooperative. And the old Freudian theory,
which I’ve always loved, is what parents try to
do is to internalize a set of viable norms
in their children, so when they’re no longer
subject to external constraint by a family, they
internalize the norm and they behave in a
perfectly appropriate fashion. So when I hear about
people’s changing preferences and all the rest
of this stuff, this is the way in which
I think about it. I think individual tastes
tend to be remarkably constant in that sense. But the learning tends
to take place more on the means-ends question. And then, as new
opportunities open up, the ends themselves
come into play. But what I really kind of fight
up against is, to some extent, I’m saying, well, I’m not
just the person that I was, and there’s no relationship
between the Epstein of 2018 and the Epstein in 1950. I think these are much
tighter connections. And it’s only if you have
that continuity of personality that you can actually
have a sensible theory of responsibility. Oh, it’s somebody else who
did that 40 minutes ago. It’s not me. Well, you can’t
punish the guy who’s disappeared into cyberspace. And you can’t punish me. We don’t believe that. What we do is we
think that there’s enough continuity of personality
that allows us to talk about stability, and then when
the changes start to come, it turns out that
it has something to do with taste, more
to do with learning, and things of that
particular sort. And so a model which
essentially tries to make these things
more capricious is a model which,
essentially, I think is false to the way
in which folks go. Now as I’ve mentioned, I think
this is awfully important, because if you have a very gooey
view of the way personalities run, it becomes very
difficult to know how you get a stable
set of legal rules for a set of unstable people. And the two
alternatives– one is that you can’t do
it, at which point you degenerate into the
law of all against all. Well, the other
thing, which I think is deeply troublesome
about behavioral economics, is somehow the guys who
talk about the frailties of everybody else seem to
think that in large part, they’re immune
from those things, so that they are
folks who are to take the exalted position in telling
other people how they ought to run their lives. And in fact, Richard Thaler, in
one of the dumbest statements ever made on this particular
subject, when he’s defining paternalism, says,
if you seek advice, essentially you can see
that paternalism is there. That’s not true. Parents exercise
force over people. Advice people don’t do it. And as Mario and Malta
said, taking advice is an essential part, not
of a paternalist regime, but of a [INAUDIBLE]
socialization regime. And indeed, one of the
reasons why the world works as well as it does, most people
learn in some way or another to do what we call,
listen to reason, i.e. they can be persuaded that
particular forms of action are nutty. So I certainly believe that
there are [INAUDIBLE] people who cannot listen to anything. But socialization is, I
think, a powerful force. And if you look at
behavioral economics, there’s no discussion of
that in any serious way. It’s just a bunch of strange
tests about mugs and softballs and temporal preferences
without talking about that. Now when you do this, you then
have two kinds of restraints that you have to deal with. And one of them is the
Jennifer Nou restraints, and the other is the
Shruti Rajagopalan– I can pronounce it
after eight years. And one of them is how
you organize institutions, and the other is how you
organize fundamental rights. And both of them are
essentially asking the fundamental
question, of how it is when we deal with individual
behaviors and choices, that we try to align the
behavior of any given individual in any position with
the social welfare of a larger community, which they’re a part. And government structures
and private corporations start with the assumption
that there’s always conflicts of interest that
take place between a CEO, a board of directors,
shareholders, and so forth. And then the question is, what
kinds of devices do we use? One of them, which
was not mentioned, is if you try to create
identical share interests that are perfectly fungible
one to another, it turns out it’s a lot
easier to organize voting and collective mechanism than
if every person has a discrete and separate interest, which
cannot be weighed and counted. So fungibility is an extremely
important device for control. You then have to have
voting rules and so forth. And there is always
the great trade-off as to how these ought to run. And it turns out,
generally speaking, for fundamental decisions,
majority rule is too weak, but unanimity is too strong. And so we tend to develop a
tradition of super majorities. The question as to
what thing is done by a boards and administrators,
the basic rule, which I think Jennifer referred
to, which is surely correct, is the CEO, in
effect, can make day to day decisions, but
structural change– selling the company, getting
rid of a major distribution, and so forth– are generally done
by larger amounts. There are other
constraints on boards. The doctrine of
[INAUDIBLE] says, we limit the kinds of
things that you can do, because when investors
decide to invest in you, they want to have some
sense of the sort of space in which you’re going to occupy. It makes it easier to
figure out the one company. And look, she didn’t
mention it, corporations are easier also because you
can diversify a portfolio. I can’t diversify a portfolio. People who govern
my particular life. And so the theory that
she said is exactly right, is that when you start looking
at these governance structures, to the extent that
exit rights are cheap and a form of discipline,
you can be a little bit more relaxed with respect to the
voting rights and the property protection rights. To the extent that exit
rights are not that way, you need a much stronger
seats of protection. So Vikki Beam wrote a
very famous paper in 1991 about exit rights as
protecting property rights. And I just asked her the
question, I said two things. One, you can’t
exit with land, so is the exit right theory
going to work for them? It might work for
the developers. And also, if in fact
you do run an exit right and there’s no
kind of protection, you protect the exit right. Well, is that going to be
subject to various kinds of limitations? And on the current law,
the answer to that question seems to be no. You could
constitutionally squash the exit right, at which
point the mechanism starts to break down. And that sort of gets
us to the other part of this thing, which is how the
taking stuff starts to work. Now it works both within
organizations on the one hand, and across organizations
on the other. So if you start to look at
every kind of private governance structure, what you
do is you discover, invariably, two kinds of rules–
a business judgment rule, and a fair value rule. And the basic line between them
is, on business judgment cases, there’s no conflict of interest. If you make sure
that people are only going to be protected when
they make the right decisions, nobody is going to take the job. And so you’re going
to find yourself in just a terrible mess of
getting good people to serve. On the other hand, if you follow
an anything goes structure, things are going to be
very, very terrible. So what you do is
you put into place various kinds of processes and
procedures, which are designed, essentially, to improve the
odds that these people are going to make the right
kind of decision. And these tend to be
procedurally based– got to have some degree of
deliberation and so forth– and substantively
based to the extent that you at least
require people who are in favor of a
particular program to indicate why
they’re in favor of it and forget something else. What you don’t do in this
system is that they put things on both sides of the scale. You, as a judge,
do not try to weigh the strength of those particular
instances on the grounds that they have better
information about this choice than you do, and other
informal constraints will work. So this is certainly
a constraint, but it’s not a powerful one. Introduce a conflict
of interest, and it turns out that you
get yourself into exactly the opposite position. And now you know that the
way in which you could profit is to dump corporate
assets into the hands of some private individual. And so the scrutiny
is far higher, and we start talking
about fair value. It turns out that this
is exactly what we do with the public trust
doctrine, when it turns out you have to have management
responsibilities with respect to various kinds of
governing behaviors. And so if you put a
river in public trust– Bill Prior had to
leave, because he didn’t want to hear anything
more about Roman law– what essentially
happens is, there are two kinds of
duties that emerge, and Tom has traced this out. You have duties of loyalty
that you have to do. You can’t basically
treat your public trust as a benefit for
some side situation. And you have to show some
moderate degree of competence. And then the real
question is, do you have a prohibition
on alienation? And probably that’s going to
be a mistake, if, in fact, you could have a fair
value rule when there are conflicts of interest. So these things
essentially kind of emerge. And the takings law
that Shruti referred to gives you exactly
the same thing. The general proposition,
before I stop, is as follows. If you want to figure
out what the per se say no-no is with respect
to takings, is thou shalt not, as a government,
convert a competitive market into a monopolistic one. We don’t under
these circumstances have to figure out
exactly who’s going to win and who’s going to
lose, because what we know is, as we
shrink the pie, there are necessarily going to
be some losers whose losses are going to exceed the gains
from other individuals, if the regulation is, as
I believe it is generally a taking when it
limits your right to dispose and to use
beyond the law of nuisance, then we know what the
property has lost, and we know that the
compensation is insufficient. So why does this render the
New Deal unconstitutional? Well, I mean, this is not just
a kind of idle speculation. It’s that the entire
system is essentially one which was
designed to displace competitive institutions
with monopolistic ones. That was with respect to the
Agricultural Adjustment Act, which Michael talked
about this morning. It’s certainly true of
the Motor Vehicle Act, with the Civil Aeronautics
Act, with the National Labor Relations Board. All of the kinds of
exemptions from cartelization are easy things to strike down. On the other hand,
if you’re trying to figure out what you do when
you have a natural monopoly, and to figure out
how you regulate it, then you can have genuine
disagreements of opinion that really matter. Do we use one standard, i.e. the standard of
Smyth v Ames, that it has to be used and
usable, or do we use Hope Natural Gas, where
you don’t care how they use it, you just care about the
amount of investment. There’s much more
discretion in there. And essentially, what Shruti
has been able to point out, I think, in this paper, is that
the reason you’re so worried about this, is bad
guys don’t rest, just as good guys don’t rest. If you try to shut them off
from one way of doing business, they will happily find another
way in which to do this stuff. So the bottom line
with respect to this is, that you divide the world
into two classes of cases– those which essentially, with
regulation, or common law rules are designed to
control force for a monopoly, and you sort of worry
about whether or not the means are
adjusted to the ends. And then you look at the
modern progressive issue, which I’ve been fighting for my
entire academic career, and you never let a system
decide to run it in reverse, and find funny
regulations to say, we’re going to justify
monopolization, given the fact that there
is a systematic welfare law. Unless you can find something
which is [INAUDIBLE].. Diane, when she talked
about this in the last time, she said, “One thing to talk
about a patent, which gives you a monopoly over a piece
of paper or something. And it’s another
thing to control a monopoly over a market.” So when you’re looking at
patent laws and so forth, it turns out the
right result is, when people start
to combine patents, if it’s vertical
integration, generally good. Horizontal integration,
generally bad. And at one time, we actually
reached that result. And on that optimistic
note, I’m going to sit down. Thank you. AUDIENCE: [APPLAUSE] DOUGLAS H. GINSBURG: Jennifer,
do you want to respond to– elaborate? JENNIFER NOU: No. DOUGLAS H. GINSBURG: No? Shruti? SHRUTI RAJAGOPALAN: No. RICHARD EPSTEIN: Open the floor. DOUGLAS H. GINSBURG: All
right, it’s open floor. Floor is open. Yes? AUDIENCE: So my
question, I guess, is about the chair model. Which is really
interesting to think about the internal agencies. And I guess for either of you. But the idea would
be thinking about, who’s the principal
for the agency overall, whether it’s the president
or whether it’s Congress? Because I can imagine
conceptualizing that question and saying, OK,
we’ll give the chair more power, if we really think
the principal is the president. Because we know the president
is picking the chair, and that allows the president
to get his preferences enacted, and that brings
accountability to the people. On the other hand, if you
think the agency is really supposed to be
answering to Congress, you might want it to be
a full board decision, because both parties
are going to have their signalers in the agency. And so I’m just kind of curious
how you conceptualize this, as opposed to the corporate
context, where you have two potential principals
there, and they might not have the same interests. JENNIFER NOU: Yeah, so looking
at the legislative history of some of these
statutes, a lot of them came out of
presidential efforts. So I’m thinking, for example,
of the Hoover commission, the Brownlow commission. And these statutes, particularly
the reorganization acts, were really a product of a
strong president attempting to centralize
authority in the chair and resulting in these kinds
of unitary executive kinds of clauses in these
constitutions. So one way to think about
it is, without taking it too seriously, an
originalist understanding of this constitution. It is that the chairs are meant
to be agents of the president. And the framers very
much had that in mind. And it was a sense that
the independent agencies had gone awry, and
were too untethered from the executive
branch that they really tried to empower the chairs. AUDIENCE: I mean, who’s
the agency an agent of? So the chair is an
agent of the president, but the agency, the
whole commission, who are they supposed
to be serving? The president? JENNIFER NOU: Yeah,
well, I mean– [INAUDIBLE] I mean, I think– DOUGLAS H. GINSBURG:
Well, typically it’s a public interest
mandate they’re supposed to be pursuing. JENNIFER NOU: Well, yeah,
but the question is, who is the right agent of the public? And so of course,
traditionally, the easy answer is to say is a doctrinal. Now, I think a lot
of people do think of the independent agencies
as more serving Congress, and therefore I think that
is, in part, what motivated, again, the unitary
executive models. Because there was an
effort to pull that effort back from Congress into
the hands of the president. And I think that’s right. I mean, I think that’s why these
independent agencies are often structured the way they are. RICHARD EPSTEIN: [INAUDIBLE]
different answer. This relates to some of the
discussions from this morning. I think when you actually create
a genuine, independent agency where people serve fixed
terms, and they can only be [INAUDIBLE],, that agency
is answerable to no one, essentially. And so what you’re
trying to do, then, is to treat it like
a corporation which is formed by shareholders,
and figuring out what goes on. If there is an independent
agency like that, and neither the president
nor the Congress can exercise any
effective control over it, you then have the choice
of the parliamentary model or the presidential model. If you take a
presidential model, and teach the CEO outside
of the organization, you necessarily have to limit
the scope of the activities. You can’t get rid of that
guy by a vote of confidence, so it’s going to be impeachment. On the other hand, if you take
the parliamentary model, which we projected, the way in which
the system gets put together, the prime minister is
exactly what the word said. Prime, first, right? Primus [INAUDIBLE]. First among his people. And so at that point, he has a
more distributed set of powers. He’s not subject to
impeachment, but he is subject to be
removed, to some extent, by a vote of confidence
of one kind or another. That’s on the private side. The difficulty on
the public side, is that these characters may
well be entrenched in a way that they’re not, and they’re
also divided politically along very sharp lines. And so the idea
that each of them is an independent fiduciary
is compromised by the fact that each of them is a
member of a particular party. So one of the
suggestions that came out this morning, which
I strongly endorse, is I don’t think the difference
between independent and non-independent agencies
matters that much on rule-breaking and
stuff, but boy oh boy, I think it is flatly wrong to
ever allow an organization which is appointed by
political affiliation to be given an
adjudicative function. And I don’t see there’s
any real retrospective problem that prevents
that from being reversed. So [INAUDIBLE] is
split the functions up. And when you do that,
have rotating judges, say, on specialized courts,
one way or another– even with life tenure,
I don’t care about that, if you rotate them in and out– I think, in effect, you
get a huge improvement over the system. And that what we’ve really
done in the current system is we have too much
amalgamation of powers in these kinds of
agencies, and the danger of the word “quasi” when
it was used by [INAUDIBLE],, is that it essentially got
ourselves into the position where these things
became 900 pounds of [INAUDIBLE],, and nothing
should be that [INAUDIBLE].. That’s my response. AUDIENCE: Just to make a
follow-up to Rachel’s question. So I think you mentioned that
when these disputes arise between the chair and the
board, that some of them are easily resolved by
the comptroller general. Well, my question
is, who is supposed to resolve these disputes? So the comptroller
general is [INAUDIBLE] a legislative officer. I’m sure the
unitarians would say the Office of Legal
Counsel is [INAUDIBLE] And if it’s true that the board
perspective is pro-Congress and the chair perspective
is pro-executive, the decision about
who resolves the issue may determine the outcome. JENNIFER NOU: Yeah, that’s
a great question, one I try to address in the paper. So I think the answer is
the Office of Legal Counsel for the following reason. Because of this
initial instinct that I had about the mandate,
the legislative history, of these chair provisions. But more importantly, just our
understanding of the agencies traditionally as
executive entities. Now I have to think
more about it. I will say that in the context
of the Chemical Safety Board, as a matter of
agency socialization, they certainly thought
that OLC was the right body to resolve the question. And that’s what
happened in the case. The OLC did issue an
opinion, basically adopting many of these
corporate common law principles. And that’s where they side. One thing I will
add is that whatever we think the right answer is, it
is almost never an Article III court. AUDIENCE: Yes, of course not. JENNIFER NOU: Right. Well, no, but you could
imagine a different situation where some third
party [INAUDIBLE],, and they try to
bring these suits. And there have been some
attempts to do that, but they’ve been rejected. RICHARD EPSTEIN: That’s
exactly the problem. What happens is the reason
that there is no Article III court, is because the
Constitution standing provisions have been mangled. We now have standing
in cases of law. We do not have standing
in cases of equity. Essentially, the law
side is [INAUDIBLE] to a particular person, and
nobody has that in these cases. But if you go back to the early
history of equity [INAUDIBLE],, one of the things that
they were supposed to do was to govern to
collective organizations. And [INAUDIBLE]
shareholders and members could sue an action on
the grounds that it was [INAUDIBLE]. If they won, they
could enjoin it. And since we vote
for [INAUDIBLE],, this is not a question
of majority vote of the people willing to
vote, then, on the ballot. This is a vested
individual right. If you basically
reverse [INAUDIBLE] on this particular point,
and then if the charge is one that’s
[INAUDIBLE],, you would get a judicial resolution. If the charge is one of the
merits of a particular dispute, it would immediately flip over
to a business judgment rule type situation, where I think
that the judicial [INAUDIBLE].. And so I think, in
effect, the reason that we’re doing
this the wrong way, is that we have the wrong
constitutional framework on this particular question. And starting with Vollingham and
Von Wallmar through the Scalia type opinions, we get
standing systematically wrong. Then it means that under
the current condition, we’ve rules out Article III. But for [INAUDIBLE] claims,
I would move back into power. And we would then have the
structure where these agencies are subject to that, and you
[INAUDIBLE] off of the agency all of the
adjudicative functions. And you do trim them back to
size in two important ways. But you still allow
them to do their work. And I think the mistakes
in constitutional documents on both of these points. That’s what we mean by
thinking [INAUDIBLE].. And if you remember
in [INAUDIBLE],, what justice Sutherland
said, is, well, I know municipal corporations
are subject to open biases. But they’re small. And we’re large. And he says, corporations
are subject to open biases. Why it is that the size of an
organization determine whether or not and individual member
of that organization– citizen, shareholder, whatever
[INAUDIBLE]—- is something which
he never explains. If anything, the bigger
the organization, the more the
coordination problems, and the more important
that is to allow [INAUDIBLE] by just one person. But you got to be right. And then you have a hearing,
in which everybody can come in, [INAUDIBLE],, if in
fact they disagree. So all the stuff on
adjudication which is built into standing
incorrectly now is built into the law of
necessary and indispensable parties, which is
exactly the way it was done in English
equity courts in 1787. All that history has been
completely forgotten. JENNIFER NOU: Can I just make
one quick last observation to [INAUDIBLE]? It’s just that I think that the
constitutional metaphor helps to draw these analogies,
in so far as it imports all these debates
about departmentalism, like who has the final say. I think that there are fights
about whether it should be comptroller general,
obviously, that are evocative and reflect the fights in the
federal constitutional context. DOUGLAS H. GINSBURG:
We have 10 minutes. I want to make sure we address
some of the other papers. Any other papers? AUDIENCE: I’m on the paper
from Malte and Mario. DOUGLAS H. GINSBURG:
That’s good. OK. AUDIENCE: Yeah. None of you have come to–
at the end of the first day, there was a common thing
I noticed two times. And the last time, [INAUDIBLE]. Professor Epstein is a very
consistent man in the sense that if I have
your readings, they make me think of have you talk. There is some sort of
symmetry between your reading and your speaking. Just the symmetry, also,
between your opinions over time. And apparently your preferences
are also very consistent. So in that sense,
my advice, I thought your defense did the
thesis of Dold-Rizzo was quite convincing. However, maybe if you
want to attack the view that preferences
are not stable, you don’t want to take the most
consistent man in the room. You want to take the least
consistent man in the room. RICHARD EPSTEIN: Yes, of course. AUDIENCE: If your
thesis works then, then you certainly have
an argument, right? RICHARD EPSTEIN: I’ll take
this with respect to everybody. I mean, let me just tell you
the story of my engagement, [INAUDIBLE] In
which we had a bunch of people who came to the party
who we’ve known for 40 years. We were talking about constancy. So I gave Max Spitzer an
award for being the person who was most well known by
Ivy and me independently for the longest period of time. She knew him from [INAUDIBLE]. I knew him from 16. Got less hair now. Same guy. AUDIENCE: [INAUDIBLE] RICHARD EPSTEIN: It’s a really
important geopolitical event in our family life which
is deeply remembered. But since you’re in the
room now, I [INAUDIBLE].. I think that’s true. I’ve known people in
this room for 40 years. And basically, I would say,
with respect to everybody here, continuity is essentially
the dominant mode with organized,
systematic change. SHRUTI RAJAGOPALAN:
Can I jump in on that? I think– RICHARD EPSTEIN: I’ve only
known you for three years, so you can’t [INAUDIBLE]. SHRUTI RAJAGOPALAN:
I think the question is if law professors at
the University of Chicago are representative of
the sample population. DOUGLAS H. GINSBURG: We have
some other universities here. SHRUTI RAJAGOPALAN:
And I think you might be an exceptional
group on many margins. And Richard, you yourself
is a singular, singular man. So I’m not sure how much of the
personal experience you can– RICHARD EPSTEIN:
[INAUDIBLE] for 40 years. You haven’t changed my mind. AUDIENCE: That was
exactly my point. When you do the perfect
statistical test to develop the [INAUDIBLE]. MARIO J. RIZZO: We’re not
addressing anecdotal evidence. There is plenty of evidence
behavioral economists have produced
about inconsistency and changes of preferences. Let me just mention three. One is that people sometimes
make commitments to diet, or whatever. And then when it
comes time to diet, they drop their commitment. They make the commitment again,
they drop the commitment. That’s one of the evidences
of changing preferences. Another evidence is
that if we change the frame in which
the decision is made, people will make
different decisions. At some times, for
near-term decisions, people can be very impatient. For far term decisions,
they can be very patient. These are the kinds of
instabilities or preferences and all that which
behavioral economists, in their experiments, have
allegedly, or supposedly, demonstrated. What we’re trying to say
is, that can be expected, because there is a
certain dynamic quality to people’s preferences. And that’s what
we’re getting at. I don’t know how to fit in the
tie business in all of this. But we’re just addressing
a particular scientific literature that indicates
instability of preferences. And saying that it’s not bad. That’s all I’m saying. AUDIENCE: If you integrate
this within the model, that wouldn’t be a
deviation from the model, so these guys wouldn’t go
so crazy to regulate them. RICHARD EPSTEIN: Essentially
what happens with [INAUDIBLE] the early days. You go a little bit further,
you get less of a return, and all of a sudden,
it’s [INAUDIBLE].. The lines cross, and you switch. And then [INAUDIBLE],, and you
go through the cycle again. I don’t think there’s
anything about that which is extraordinary. I mean, in the Epstien
household, [INAUDIBLE] But there is an
evolutionary piece which is extremely
important, which is if the body feels that
the [INAUDIBLE] is going to be reached, what you do
is change the metabolism rate and slow it down. So it’s systematically
harder to adjust. And that is one of
the reasons why, when you’re actually
doing this stuff, there are biological
constraints– AUDIENCE: Which help
explain the cycle. RICHARD EPSTEIN: This
is using the evolution to help [INAUDIBLE]. DOUGLAS H. GINSBURG:
In the back. Yes? AUDIENCE: I was
just going to ask a quick question for Richard. If I consistently break
my dieting commitment, does that made me a
consistent person? [LAUGHTER] RICHARD EPSTEIN:
[INAUDIBLE] consistency is being inconsistent. AUDIENCE: Just kidding! RICHARD EPSTEIN:
It’s exactly right. I mean, that’s why what happens
is, you don’t need paternalism. You go to Weight Watchers
or some other thing. And you start to see the
number of diets that fail. You think start to believe, and
I think it’s quite accurate, that what’s happened is you
have an internal clock– everybody does about weight– which starts with run. It then gets to the government. And one of the
things that they do, they do the BMIs, the
body mass indicators. One of the dumbest
things that they do is they assume that you should
be constantly [INAUDIBLE].. Which cannot be– you can’t
think of a stupider thing. Because essentially,
generally speaking, as people start to get
older, the metabolism starts to change. The ratios then start to change. So what you want
to do, is you want to normalize these things
with respect to ages. You could call this
consistency, [INAUDIBLE].. But the point about
behavioral economics is that– I’m just going to
mention one thing. [INAUDIBLE] at the center of
Advanced Studies in Behavioral Sciences in 1977, ’78, and when
they were doing all this work on prospectors,
we had these epic struggles going back
and forth about how all of these things
[INAUDIBLE] work. There was a session
on sociobiology going on [INAUDIBLE]. And they never once attended
any one of these sessions to figure out what
[INAUDIBLE] do. And then when Thaler and
Sunstein wrote something about [INAUDIBLE] eulogies
in the New Yorker, they quoted Tversky. Unfortunately, he was a
great man, died in 1996. And what Tversky said about
the evolutionary biologist, if after you talk
to him for awhile, you don’t believe in evolution. AUDIENCE: [LAUGHTER] RICHARD EPSTEIN: [INAUDIBLE]
and the problem is, at no point did they incorporate
any of that. So there’s the simple thing. We’re not going to talk
about any of these biases. You’re going to treat
everybody in the same way, you’re ignoring a
fundamental feature about population biology,
which is every trait you can imagine has got distribution. And then what you do
is when you specialize, essentially you
trade off what you want on the distribution with
respect to the [INAUDIBLE].. And that’s a serious problem. And they’re not
making that mistake. DOUGLAS H. GINSBURG: Mostly. MALTE F. DOLD: That’s exactly– I think that the mistake
the nudging program does is they don’t accept that we
have that distribution, right? It basically assumes we’re
all system two decision makers with similar
types of preferences, and they don’t allow
for that variation. RICHARD EPSTEIN: It doesn’t
help that they don’t know what system one and system two are. That’s the difference. DOUGLAS H. GINSBURG:
Sunstein’s on both sides of this, because on the
one side, there’s nudge, but he’s also got this
literature on decision making and groups and how
it has improved. And that’s inconsistent. Yes. AUDIENCE: I’m an optimist
[INAUDIBLE] choices and preferences. I mean, it is a
fundamental truth that great investors
have this trait that when faced with
new information, they will revise their choices. This is one of the
ways that hedge funds will screen for who will
be a good trader or not. So the quality of being able to
adjust your output in response to new inputs is fundamentally
critical to successful decision making. Now, on the other hand,
does that mean that you’re an inconsistent person? Not necessarily at all. People will have
internal algorithms of choice, through which they
decide the answer to any given question. And so while we make
different answers in response to a situation, that
doesn’t necessarily mean [INAUDIBLE] is coming
up with different preferences at the end of the day. Figuring out what
those preferences are would be part of mapping
someone’s internal algorithm of hierarchical choices. And that’s just
extremely complex, and I don’t think that anyone’s
really done that very well. But what my take away
from all that is, never listen to what
people say they want, only listen to the choices they
make, what they actually do. And I think that
[INAUDIBLE] can be very helpful in trying to figure
out how to make use of the fact that people come to different
answers to different questions, and [INAUDIBLE] what they reveal
as their preferences or not. DOUGLAS H. GINSBURG: Amen. One more? AUDIENCE: So just a
couple of suggestions with respect to
behavioral economics. With respect to
framing, there have now been some new works published. Particularly Plot and
Zeiler have a very good pair of pieces, basically
showing the great fragility of some of the
willingness to pay versus willing to accept stuff. Betsy Hoffman with
some co-authors has published a piece showing
that the classic preference reversal stuff turns out
to be a lack of training and a lack of understanding
on the part of subjects. And third, with respect
to the Knightian, if you will, model of
preferences and choice, there is now a
substantial literature by psychobiologists using fMRI
studies, in which the blood flow results turns out to
track closely certain types of statistical probability
functions, particularly logistic functions. And so it looks like
we have something that looks like a logistic
function inside our heads. And so if that’s true, that
would be the preference, if you will. But the choices you
shouldn’t expect to be completely consistent. And when the options get
close enough together, you should flip almost
to the 50% range. RICHARD EPSTEIN:
There’s also, one of the papers that was given
at [INAUDIBLE] conference by a fellow named
Mackenzie and company. And what he said is, oftentimes,
if you take two things which look to be directly
equivalent, they are, given the social context,
actually distinguishable. So the example he gave
is you talk about a glass being half full or half empty. A lot of it depends upon what
the glass was before it was either one of these two states. And you will look at
it in a different way if you’re trying to figure
out how rapidly people drink. And you’re willing to look at
it the other way if it turns [INAUDIBLE] how rapidly
some [INAUDIBLE] going to go in there. So it turns out that these
things are not equivalent. What happens is
they’re eliciting different stresses and
different kinds of information, so that when people respond
to differences in frames, the implication is,
it’s not that there is an intellectual
equivalence, so to speak– AUDIENCE: You’re giving
them different information. RICHARD EPSTEIN: Is it turns
out that this [INAUDIBLE] information. But the single biggest argument
in this silly stuff on default, is when the university gives
you a default, [INAUDIBLE] a recommendation,
and you don’t just treat it as a random number. And so therefore, you
tend to follow it, particularly when you’re
a low information person. And what happens is,
one of the other things is, that if you look at rules,
the problem about disclosure rules, is they give
you a general tendency, but they don’t tailor
to the individual. And so any effective program
will combine a disclosure rule with an advice function,
where the former sets out the basic parameters,
and then the latter, essentially, starts to allow
to individually tailor. That’s exactly, for
example, what you want to do with medical [INAUDIBLE]. This is the basic
frame, and you’d better speak to your physician. And so if you think of these
as two stage processes, a lot of quoted
irrationality is spurious. DOUGLAS H. GINSBURG: Guess
spurious as the last word. AUDIENCE: [LAUGHTER] DOUGLAS H. GINSBURG:
[INAUDIBLE],, as far as the reception? AUDIENCE: The reception is
in the library upstairs. You can reach the
library by taking the stairs past
the reception desk, or there’s an elevator upstairs. DOUGLAS H. GINSBURG: OK. Before we do that,
let’s thank this panel. AUDIENCE: [APPLAUSE]

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