Archives: September, 2013

Ronald Coase, 1910-2013

The immensely influential scholar and winner of the 1991 Nobel Prize for Economics was 102 years of age and a productive scholar to the end. An excellent short introduction to Coase’s work is found in the Concise Encyclopedia of Economics, edited by David Henderson.

Coase’s famous, seminal article “The Problem of Social Cost,” while the most widely cited in the law and economics canon, is also persistently misunderstood and misrepresented by both friends and foes, as Robert Ellickson shows devastatingly in this essay (h/t Jonathan Adler). Many, even most popular attempts to formulate the “Coase Theorem” veer far from what Coase intended and sometimes into the reverse, above all when they idealize the power of negotiation to overcome the problems of externalities in a highly fictional world that assumes away transactions costs.

As Coase himself pointed out: “The world of zero transactions costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave.” Precisely because across a wide range of circumstances the transactions costs of negotiation are too high to permit reallocations of rights between parties, some initial assignments of liability or property rights do impair real output compared with others.

The University of Chicago’s well-meaning notice, I fear, is among those that misstate the Coase Theorem. “Coase believed the incentives of private parties to resolve disputes in their own best interests, even if there needs to be adjudication by courts, should result in an efficient, mutually beneficial solution that is always preferable to government intervention.” (No, that’s not at all what he wrote, even if one succeeds in disentangling the court adjudication from the “government intervention.”) Likewise, Bloomberg: “Holding the [polluting] company liable and ordering it to pay money to an affected property holder is less likely to yield an optimal result than having the parties negotiate, he wrote.” (No, that’s not it at all either. At most, his theory implies that the optimal liability rule is fact-contingent and should not invariably be assumed to be the one that makes the smokestack owner pay.)

On Syria, Attention Shifts to Congress

President Obama’s abrupt decision to seek authorization from Congress before ordering attacks on Syria has elicited speculation about what motivated this apparent change of heart. After all, the president didn’t seek Congress’s approval before ordering attacks against Muammar Qaddafi’s forces in Libya in March 2011. Back then, members of the administration claimederroneously, as Louis Fisher points out here (.pdf)that they had all the authority they needed from UN Security Council resolution 1973It was a very thin reed on which to build a case for war, but administration officials teamed up with hawks on both the left and right to turn aside the objections of dovish Democrats and “Kucinich Republicans,” as the Wall Street Journal’s editors called them.

Obama couldn’t shelter behind the UN this time around, and Congressional opposition arose much faster and stronger than I anticipated as recently as last week. Even some Democrats, most notably Virginia’s Sen. Tim Kaine, voiced concern about the president’s apparent intention to circumvent the people’s elected representatives. The British Parliament’s rejection of Prime Minister David Cameron’s call for air strikes was a further blow, both in that it denied the United States a credible ally (only France remains), and highlighted the uncomfortable fact that most democracies have a debate before going to war. 

So now the attention turns to Congress, with many members still on recess, but a number returning early to Capitol Hill for briefings and hearings. Those handicapping the sentiment in Congress claim that the president lacks the votes today to secure a victory, but he has a full week to change minds and twist arms. Some of the 190+ members who signed at least one of two letters, or issued a statement, calling on the president to go to Congress before launching an attack will be satisfied to have been included in the process. Sen. Kaine expressed this sentiment today. Party leaders may not whip the vote, but Obama will be assisted by the pro-intervention chorus, led by Sens. John McCain (R-AZ) and Lindsey Graham (R-SC), and by the signatories to this letter issued last week by the Foreign Policy Initiative. The pro-Obama team will include an unlikely ally: Weekly Standard editor William Kristol, who declared last night on CNN’s Anderson Cooper 360 that a vote against Obama would be effectively a vote for Assad. There will be more of this in the week ahead.

It will be hard for the opponents of intervention in Syria to prevail given that many Democrats can be expected to side with the president, and a number of Republicans still prefer the interventionists’ talking points, even if they know they are unpopular back home. 

Politics and Politicians

The New York Times, which wants politicians to run everything from our schools to our health care to our retirement, has lately been telling us just what kind of people it wants us to trust with our lives. People like mayoral candidate Bill Thompson:

As a first-time candidate for New York City comptroller, William C. Thompson Jr. was feted at a downtown fund-raiser in 2001 by two luminaries of the black business world: the hip-hop mogul Russell Simmons and Mr. Simmons’s money manager, a veteran Wall Street financier who made his fortune promoting hybrid securities known as convertible bonds.

Speaking in between rap and poetry-slam performances, the financier, Tracy V. Maitland, made clear why he had taken an interest in the little-watched race for comptroller. “When you control $85 billion,” he told 200 guests crowded into a popular art gallery, “you get a lot of attention.”

Over the last 12 years, Mr. Thompson has repeatedly gotten Mr. Maitland’s attention.

After that fund-raiser, Mr. Maitland became a regular contributor to the campaigns of Mr. Thompson, a Democrat who is now running for mayor. Later, he pushed unsuccessfully for Mr. Thompson’s wife to be hired as president of the American Society for the Prevention of Cruelty to Animals, where he is a trustee.

Mr. Maitland’s attention was not unrequited. In 2006, Mr. Thompson honored him at a Black History Month observance. And in 2008, his office for the first time began investing city pension assets in convertible bonds, pouring $324 million into Advent Capital Management, the firm Mr. Maitland founded. By the time Mr. Thompson left office, in 2009, Advent was earning $2 million a year in fees on those investments.

Mr. Thompson’s ties to Mr. Maitland reflect a pattern that emerges from an examination of Mr. Thompson’s stewardship of the pension funds and, more broadly, the comptroller’s office: Again and again, Mr. Thompson reaped political gains from those he awarded city business.

As he oversaw the city’s $85 billion pension system, Mr. Thompson steered the funds into a diverse range of new investment categories, expanding from heavy concentrations in stocks and bonds into private equity, real estate and niche funds. Yet performance was lackluster: nationwide, more than half of large public pension funds outperformed the five city funds’ combined 4.84 percent return from 2002 through 2009, according to a widely used yardstick compiled by Wilshire Associates, an investment advisory firm. Meanwhile, the city’s roster of fund managers, and their fees, tripled — and Mr. Thompson collected more than $500,000 in campaign donations from them.

Mr. Thompson’s credentials as comptroller and a seasoned manager are central to his mayoral campaign, in which he has portrayed himself as the grown-up in the Democratic field — less liberal, strident and showy, but best prepared for the sober task of managing an unruly city.

But interviews and a review of thousands of pages of records — schedules, e-mails, pension statements and campaign finance reports — suggest frequent overlap of Mr. Thompson’s political ambitions and the comptroller’s operation, and that like many pension overseers at the time, he raised campaign money aggressively from those seeking business from his office.

And his opponent Bill DeBlasio: