Gillian Hadfield on Private Law and Private Regulation

One of the issues of central concern to libertarians is whether to have a state.  Some libertarians are anarcho-captialist libertarians, who reject the state, while others are minimal state libertarians, who favor a limited state.

While the anarcho libertarians have thought a fair bit about how a stateless world would work, there has been relatively limited thinking, among both libertarians and nonlibertarians, about specific institutions that might replace government regulation within a world that includes a state.  In my view, two significant examples are arbitration and where businesses supply some of the rules (such as the rules that a mall might impose on its visitors).

But what of other institutions that substitute for the state, and in particular for law?  In a new book, Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy, Gillian Hadfield discusses these matters.  I haven’t read the book yet, but I did listen to this Econtalk podcast with Russ Roberts and Hadfield, which I strongly recommend.

Hadfield is concerned with using markets to develop law and alternative legal institutions.  Her concern is that the production of law is too tightly controlled by lawyers and that insufficient innovation is occurring in this area.

Hadfield writes:

Restrictions on legal markets in the UK and Australia have already been loosened, inspiring new business models for law to emerge. This has allowed for the diversification of legal service providers ranging from supermarkets to banks and insurance companies. LegalZoom, a US company, has also been licensed in the UK to contract lawyers to provide services through its advice website.

Yet, too few people are thinking about how to evolve our legal and regulatory systems themselves—and too many are steeped in existing legal approaches. More diverse and responsive solutions to legal challenges are possible with a more bottom-up, market-based approach that can attract the research and investment needed for new ideas to manage the complexities we face.

She gives an example in her Econtalk interview:

And, what I’m saying is, we already know we need the private sector much more heavily engaged in the problem-solving of figuring out better regulatory regimes. How can we bring that within a public-law framework that says: Okay, you can figure out how to regulate; but here are the publicly determined, accountable criteria that that regulation has to achieve. So, very simplistically, in the case of the self-driving car, there’s a tolerable level of accidents on the road, and congestion levels; and you’ve got to hit those publicly-determined outcome criteria; but we’re not going to tell anybody how they achieve those outcomes. We’re going to let private regulators who develop systems that then private companies have to purchase into—we’re going to let those private regulators figure out better ways to achieve those, those objectives.

Roberts adds:

What you have in mind is sort of a middleman of regulation, that would, as you say, attract investment, charge for its services, and be competitive. It’s not like a private version of the EPA. It’s one of many monitoring or regulating bodies that would be distinct from the corporate world but also not governmental, that the governmental process would oversee.

This type of government regulated private agencies – which sound like competing private regulators that are subject to government performance standards – won’t be attractive to many libertarians.  But they are another model and in many ways a step in the right direction (irrespective of how far in that direction one wants to go).

Reader Discussion

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on October 19, 2017 at 12:44:34 pm

Okay, you can figure out how to regulate; but here are the publicly determined, accountable criteria that that regulation has to achieve.

I’m totally into this.

1. EXAMPLES: Consider education and electricity.

A. K-12 Education: Ideally, society (school boards?) would articulate what we want education to accomplish, and issue a Request for Proposal for accomplishing the goal—complete with provisions for testing that the goals had been achieved, and enforceable sanctions against the providers for breech—and then pick one or more providers who offer the best (cheapest?) proposals that fulfill the RFP’s terms. But there are many practical challenges in implementing this policy. Most immediately, we’d need to articulate (with real, measurable specificity) what we want education to achieve. And that would truly be the mother of all battles.

B. Electricity: Consider Regional Transmission Organizations (RTOs)/Independent [transmission] System Operators (ISOs).

Historically, electric utilities built their own generators to generate electricity, then built their own transmission lines to ship the power to cities, and then build their own distribution networks to distribute the power to customers. Competition has come to each of these areas (albeit least regarding the distribution network). In particular, in the US many electric utilities have ceded control of their transmission network to a regional organization, which then strives to optimize how the lines are used for the benefit of all concerned. Because these regional organizations generally extend beyond state boundaries, they are regulated at the federal level. The feds establish minimum standards (generally related to avoiding undue discrimination against other market participants), but otherwise leave a lot of details to the regional organizations themselves.

2. REGULATORY COMPLEXITY. Sure, libertarians will gaze upon the degree of regulatory detail required to implement these policies and vomit. But this reaction reflects two failures of insight. First, voluminous regulation is not necessarily the sign of excessive state control. (After all, dictatorships don’t require voluminous regulation; it’s well understood that you must defer to the government in everything.) Second, neither the education nor the electric transmission markets were very accommodating to private actors previously. Pretty much any change could be understood as a step toward a freer market.

3. CHANGE: That said, how should public policy confront the challenges of “changing the rules in the middle of the game”?

Under the status quo, society is constantly changing its focus in big and small ways. These changes can be expensive: ask any K-12 teacher about the hassles of shifting lesson plans to comply with the education-theory-of-the-month. But we rationalize this by saying that 1) we value the ability to direct institutions to focus on what society values, even as that focus changes, and 2) the people implementing these policies are public (or at least heavily regulated) employees; in effect, we PAY them to put up with these changes.

But can we be so cavalier when the affected parties are PRIVATE actors? If we ask market participants to design their strategies based on one set of detailed rules, and then later determine that society would benefit from a different set of rules (to address changed circumstances—for example, a kind of externality that we had failed to appreciate before), then private actors who have relied to their detriment on the existing rules get screwed.

I feel conflicted about Uber/Lyft: Prior to these firms’ arrival, private actors would invest heavily in providing regulated taxi services. Thanks to changed circumstances related to social media, we have discovered that there are cheaper ways to provide taxi-type services. But Uber/Lyft can only function to the extent that cities decline to enforce their old rules regarding the provision of taxi services. Taxis find that they have relied on government regulation to their own detriment.

So what should happen if, after an education provider wins a bid to provide education services, society determines that it requires all kids to learn Mandarin by the time they graduate? What should happen if society designs a system to reward the provision of cheap power—but we then realize that we undervalued reliable power, and now we want to shift the incentives to focus on that? Should society compensate firms that relied to their detriment on the old regulatory regime? Should we compensate the taxi drivers and the slave owners?

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on October 19, 2017 at 13:20:06 pm

Good thoughts on this! I tend to agree - especially if your questions, i.e., compensation for externalities, is directed toward the "formal" system of regulation. Let us not forget, however, that much of the finally enacted regulations / guidance, etc has in fact been proposed, negotiated, advanced by many of the same actors ultimately shorted by changes to those regulations. Oftentimes, it is evidence of one BIG player / actor holding sway over the process and causing a smaller player to lose either favor or market position due to new regulations (see GE and the incandescent light bulb thingy, for one example).

This is less clear with the case of the taxi drivers, where we find that the local municipalities actually dictated the level of competition, in the form of taxi medallions, thus driving up the price of such medallions to $1,000,000+. But here again, the corporate taxi fleets DID NOT object to the constant increase in their asset value (rising medallion values) while it is clear that the independent taxi operators, and certainly those seeking to enter the trade, were less welcoming of million dollar entry fees.

But should they be compensated as you ask?
Lincoln did propose to do just that for the wretched buggers of the South (primarily southern) - but it did not come to pass.
Proposals have been made in New York city (and elsewhere) to provide some monetary compensation to the medallion owners for their expected loss of assets (and revenue).

That is a tough one. Were the markets purely unregulated (OK, safety regs, etc) then there should be no need to provide any compensation. This is the case with slavery - and good for the nasty buggers - they received, and deserved nothing.
But it is not the case for the taxi industry. Anyone wishing to engage in that trade had, first, to accumulate a large amount of capital in order to gain entry, then had to endure the tender adminstrations of the Taxi Commission which set rates, terms, conditions, etc. - all the while ignoring its own policy of limiting the amount of for hire taxis by permitting *gypsy* cabs (unlicensed, unregulated) to ply their trade initially in outlying areas and ultimately even in downtown. Even exiting the trade (selling the medallion) was subject to Commission oversight.

In a nutshell, I find myself quite sympathetic to my old cabbie friends.


One correction: Uber ?Lyft are NOT cheaper, especially when one considers that Uber / Lyft are permitted to use dynamic pricing (Hey, Sir, it is a little busy outhere -SO I AM GOING TO CHARGE YOU TEN TIMES THE USUAL RATE. How about that - ain't that just great) Medallion driver attempting such a service would likely lose his license - if not be jailed).

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on October 19, 2017 at 19:38:18 pm

Interesting, but any system that can be characterized as, "middleman" sets off alarm bells to me; but interesting none the less.

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Paul Binotto
on October 19, 2017 at 22:52:35 pm

One correction: Uber ?Lyft are NOT cheaper, especially when one considers that Uber / Lyft are permitted to use dynamic pricing (Hey, Sir, it is a little busy outhere -SO I AM GOING TO CHARGE YOU TEN TIMES THE USUAL RATE. How about that – ain’t that just great)

Good point; the services aren't quite comparable.

That said, they may be more comparable than you acknowledge; and Uber/Lyft may be cheaper than you appreciate. If you don't want to pay a dynamic pricing surcharge, you have a simple alternative: take a cab instead. And given that people have this alternative, no one ever pays the surcharge, right?

Wrong. Consider: what does "a little busy out here" mean in practice? For cabs, it means that you can't get a cab. And that's a cabbie's "surcharge": He won't charge you more, but he will simply not serve you ('cuz he's serving someone else). In contrast, Uber/Lyft offer you options. You can pay the surcharge and receive service. Or you can refuse, and not receive service--which is the same deal you're getting from the cabs. (How do I know? If you were getting served by the cabs, then you wouldn't be bothering with Uber/Lyft.) And by charging a surcharge, Uber/Lyft can induce more people to offer service during precisely the periods when it's "a little busy out here," thereby increasing your access to transportation precisely when that access would otherwise be most constricted.

{On the subject of price controls: I heard a woman asking a former Soviet cabbie about how they conducted business under Soviet price controls. The cabbie explained that people would hold up a finger to hail a cab. But given the low fares, cabbies would opt to simply drive by without picking people up. Under these circumstances, the cabbie explained, people would then gesture with two fingers--clearly offering to pay double the fare. The woman responded that New Yorkers did the same thing--but there, the two-fingered gesture simply meant "UP YOURS.")

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on October 22, 2017 at 12:26:14 pm

[…] Reprinted from the Library of Law and Liberty. […]

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