fbpx

How “Second-Best” Arguments Can Make Things Worse

James Rogers has argued that private-sector unions may be justified because they help compensate for some of the costs of crony capitalism. He acknowledges that the unions are not the first-best solution to crony capitalism, which would be the elimination of government structures that allow some companies to obtain rents. But he argues that in the United States today, many companies exist in imperfect markets in which they earn excessive rates of return. Unions at least can help assure that these excessive profits are more diffusely distributed.

My response here is not so much to disagree directly with my esteemed colleague (although I am not generally persuaded by his case for unions) than to note the problems with this general type of argument, which goes under the name of the “second best.” Second-best claims purport to show that if the social baseline is already distorted, further departures from an optimal baseline may improve the situation rather than worsen it. But such arguments face two very substantial counterarguments: First, it is hard to figure out even in the short-term whether further departures will make things better. And second, in the long-term, introducing more social distortions will make it harder to rely on principled arguments and rally coalitions to move toward the first-best world.

The argument for the second best got its start in economics. A paradigm example from economics comes from the ideal of efficient markets. In general, it is well settled that cartels—firms that do not compete but instead agree on a common price for their products—distort efficient markets. That is why antitrust law makes them illegal. But consider a hypothetical case where a smelter of iron ore is the only smelter for miles around. That monopsony would already distort the efficient sales price for iron ore. If the miners then created a cartel, it is conceivable that their joint action would move the price toward a more efficient equilibrium.

But the argument for the second best is not limited to economics; it can be applied more generally to argue for compensating adjustments that may be suboptimal considered on their own terms but which move an already suboptimal system to a better state. Let’s assume for instance, as I believe, that the best interpretive theory for the Constitution is to follow its original meaning. But further assume that the Supreme Court has already misinterpreted the Constitution when it upheld Congress’ delegations of its legislative power to administrative agencies and, further, that this precedent is too entrenched to be overruled without throwing modern government into chaos.

By providing an alternative to overruling precedents, the possibility of compensating adjustments reduces the pressure to reconsider them and therefore frustrates efforts to revive the Constitution’s original meaning.

It might then be argued that further departures from the original meaning of the Constitution would bring us closer to the values encoded in the Constitution. For instance, if delegations of legislative power provide excessive power to the executive, Congress could impose greater constraints on that power by retaining a legislative veto by which it could disapprove administrative regulations after they are promulgated. To be sure, a legislative veto violates the formal, original meaning of the Constitution by changing the law without presenting a bill for the President’s signature or veto. Nevertheless, despite its unconstitutionality as a matter of original meaning, the legislative veto might be upheld under the theory of the second best as a compensating adjustment for delegations that were themselves excessive, thus returning us closer to the balance of powers contemplated by the original Constitution.

But both these economic and legal examples also illustrate the perils of second-best arguments. There is no certainty that a cartel would move us toward the efficient price. Depending on supply and demand for iron ore, legalizing a cartel may raise the price of ore farther above the competitive price than the monopsony had lowered it. Moreover, even without permitting an otherwise illegal cartel, normal market forces would encourage other companies to enter the smelter market because they would benefit from the low price, ultimately moving the market to equilibrium.

The legislative veto example also illustrates some of the costs of second-best arguments, as Mike Rappaport and I have shown elsewhere. First, allowing a legislative veto would encourage additional and broader delegations because the legislative veto allows members of Congress more power to control such delegations. As a result, it is difficult to know whether the legislative veto would increase or decrease the overall amount of executive discretion.

Moreover, updating through compensatory adjustments ensures that every nonoriginalist precedent has potential ripple effects, greatly magnifying the distortions that such precedent has on the Constitution’s original meaning. Each new nonoriginalist resolution can form the basis for more compensatory adjustments in favor of further nonoriginalist decisions. In the real world, second-best originalism becomes the first best recipe for a feast of nonoriginalism. Finally, by providing an alternative to overruling incorrect precedents, the possibility of making compensating adjustments reduces the pressure to reconsider them and therefore frustrates efforts to revive the Constitution’s original meaning. This latter point underscores a general problem with the second-best argument: it may diminish the power of the ideal of the first best.

Rogers’ argument for labor unions has some of the same problems. It is not clear, even statically, that unions get us to a better world. First, in the short run, the higher-than-efficient wages that unions prompt have ripple effects: they would draw people from other jobs where they would add more to the overall productivity of the nation. Over time these ripple effects would increase: they would also make it less important to acquire relevant skills because one could get high-wage, but relatively non-productive jobs protected by the union.

Moreover, crony capitalism is not the only reason that companies earn above-market rates of return. Super-competitive profits earned for a period reward and encourage innovation in technology and business methods that make a firm the market leader. As a result, it is not even clear to me whether crony capitalism is currently the largest cause of higher-than-market returns. But unionization is likely to cut into both kinds of returns and thereby diminish incentives for market-changing innovation.

Even more troubling are the long-run effects on reform of crony capitalism. Unions are likely to impede that effort because they are getting a share of the rents. Worse, they will also tend to increase the scope of crony capitalism. Take the issue of free trade. Domestic manufacturers would like to prevent competition from abroad. They are a concentrated interest group that can often defeat the diffuse interests of consumers and get higher tariff barriers. But they will be even more likely to succeed if they are joined in their efforts by a union that cannot only lobby but also get out the votes of its members. And this power becomes disheartening to those who want to press for the free trade ideal. They are then likely to make less of an effort to realize it.

This analysis does not rule out the possibility that the second best can be better in some circumstances. But the departure from ideals has very substantial costs that create at least a presumption against it in the absence of compelling evidence of its necessity. It is hard to be sure second-best arguments create benefits even in the short run. And in the long run, they sap the vitality of our ideals.

Reader Discussion

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.

on March 26, 2020 at 08:21:22 am

Professor McGinnis says of choosing the second best originalism:
"Finally, by providing an alternative to overruling incorrect precedents, the possibility of making compensating adjustments reduces the pressure to reconsider them and therefore frustrates efforts to revive the Constitution’s original meaning. This latter point underscores a general problem with the second-best argument: it may diminish the power of the ideal of the first best."

I agree with him (although I doubt he cares about that,) but think it only a nice legal theory that lacks support in Supreme Court fact. So I ask, "Is there corroborating evidence of this "theory of the diminished ideal" in the history of the constitution in the Supreme Court?"

Speaking not about originalism but even more generally, McGinnis says:
"This analysis does not rule out the possibility that the second best can be better in some circumstances. But the departure from ideals has very substantial costs that create at least a presumption against it in the absence of compelling evidence of its necessity. It is hard to be sure second-best arguments create benefits even in the short run. And in the long run they sap the vitality of our ideals."

I disagree with that. It seems that choosing second best is always with us, and that the Court, the Congress, the President and, indeed, every other final decision-maker in law, politics and life must choose second best far more often than not if we are to alter the status quo. History shows that even a dictator can't have everything his way. Plato's experience advising a philosopher king shows as much. And Popper thought pursuit of the ideal led to totalitarianism. (I would cite the French and Russian Revolutions and the rise of the modern Democrat Party as evidence of Popper's thesis.)

I can think of no 5-4 Supreme Court decision and no major Congressional decision in public law which does not entail "compelling evidence of (the) necessity" of second best in pursuit of "short term" benefits which are perceived, rightly or wrongly, as the best that can be done under the particular circumstances and arguably (by their proponents) as the best for all circumstances.

Further, I strongly suspect (but obviously cannot now prove) that a detailed empirical study of major decisions in the history of the constitution in the Supreme Court and of major decisions in the history of law in Congress would belie McGinnis' assertion that second best produces short term benefits which are dubious even in the short run.

One need only look to the constitution's founding in which the short term benefit of adoption necessitated the second best constitution which allowed slavery to live on despite the Declaration's ideal.

But there is at least one Supreme Court example of McGinnis' theory in action, albeit it hardly involves the matter of "second best originalism,"

In the Spring of 1992 the Supreme Court held its conference on Planned Parenthood vs. Casey and decided 5-4 to overturn Roe v. Wade, "when what to (Justice Kennedy's) wondering eyes should appear" but "the mystery of life" resurrecting the dead Lazarus of Roe but with a new brain ("Abby Normal''.) Justice Scalia screamed, "It's alive!" and the monster lives on as "second best" of the very worst.

read full comment
Image of Paladin
Paladin
on March 26, 2020 at 11:15:42 am

I find Prof. McGinnis' argument the stronger one, and have been discussed this problem of the second-best with my economics students for years. However, Prof. Rogers makes some interesting points that I would like to elaborate on. The free-market faction within economics has generally been against unions since they act as labor cartels, and cartel theory along with monopoly theory explain why unions (or any monopoly) are detrimental. Prof. McGinnis does a good job of explaining them.
There are however, other models of unionism that have not been tried int the U.S. that could get the benefits Rogers sees and avoids the pitfalls that McGinnis sees. If unions were not exempt from anti-trust law and could only organize at the firm level (or even plant level) and not at the industry level, we might be able to get the best of both worlds. Volkswagen at their plant in Tennessee actually wanted a union to have someone to negotiate with! Do any of the readers of Law and Liberty have expertise in labor law who could comment on this?
Thanks to both Profs. Rogers and McGinnis for such illuminating discussions.

read full comment
Image of Michael Patrono
Michael Patrono
on March 26, 2020 at 19:36:04 pm

Second-best claims purport to show that if the social baseline is already distorted, further departures from an optimal baseline may improve the situation rather than worsen it. But such arguments face two very substantial counterarguments: First, it is hard to figure out even in the short-term whether further departures will make things better.

For what it’s worth, there’s already a body of literature on this question—for example, identifying circumstances when marginal cost pricing leads to sub-optimal results, and policies for adopting substitute pricing.
The term “second best” arguably reflects a simplistic way of thinking. It acknowledges that some outcome produces a “second best” relative to a simplified, idealized model. When we adjust our model to make it better conform to the world we observe, we adopt first-best strategies for that model—which may appear “second-best” within the frame of reference of the simplified model.
Econ professors regularly encounter this dynamic. “Well, of course I’m right; it’s just Econ 101!” The statement may well be justified by the framework taught in Econ 101—but if the person had managed to stick around for Econ 102, he might have gained some additional perspective. Alas, instead people declaim confidently on the basis of their simplistic model; thus is the nature of fundamentalism.
As John Maynard Keynes observed, “[T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

read full comment
Image of nobody.really
nobody.really
on March 27, 2020 at 11:57:11 am

Yep!
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”
One need NOT imagine the damages caused by the same "Econ 101" mentality when applied to the political realm, as history provides innumerable examples of "straightforward" Philosophy 101" travesties.

As Paladin alludes to in his earlier post, (my edit here) "How the hell do you think the constitution was crafted, anyway?"

Gawd, it must be this Wuhan thingy that cuases me to be in agreement with you TWICE in one post.
Back to my Hobbit hole now before the Pooolice come and round me up.

read full comment
Image of gabe
gabe
on March 26, 2020 at 20:03:37 pm

[I]f delegations of legislative power provide excessive power to the executive, Congress could impose greater constraints on that power by retaining a legislative veto by which it could disapprove administrative regulations after they are promulgated. To be sure, a legislative veto violates the formal, original meaning of the Constitution by changing the law without presenting a bill for the President’s signature or veto. Nevertheless, despite its unconstitutionality as a matter of original meaning, the legislative veto might be upheld under the theory of the second best as a compensating adjustment for delegations that were themselves excessive, thus returning us closer to the balance of powers contemplated by the original Constitution.

This topic arguably warrants its own discussion. What evidence is there that the framers oppose legislative vetoes?
Regarding Immigration and Naturalization Service v. Chadha, I share the view of Congress and Rehnquist:
First, if the statute creating an agency or delegating authority provides for a legislative veto, then there is no “change in law” triggering the Presentment Clause. Rather, the law itself provides for the legislative veto. If an executive disapproves of a legislative veto policy, that executive may veto the bill creating the agency or the delegation.
Second, if a court WERE to find a legislative veto unconstitutional, then it should strike down the entire piece of legislation, not sever the legislative veto. To sever the legislative veto, while leaving the agency creation/delegation in place—THAT would be an act changing the law without submitting the bill to the executive. Thus, SCOTUS’s ruling was absurd, in that it created the very problem it claimed to be fixing.

read full comment
Image of nobody.really
nobody.really
on March 27, 2020 at 11:50:15 am

nobody:
Agreed!

"To be sure, a legislative veto violates the formal, original meaning of the Constitution by changing the law without presenting a bill for the President’s signature or veto."
I find the above to be neither persuasive nor correct. The law is NOT being changed, especially if a law properly crafted details certain limits on the grant of legislative powers therein delegated to the Executive. This seems straightforward and non-controversial to all but (apparently) certain ideologues who simultaneously bemoan the rise of the Fed Admin State and its' incessant aggrandizing tendencies.

And you are absotively correct regarding the non-severability. If ANYTHING would properly be deemed as a "change' to the law, severing the last remaining Legislative check upon the Executive, THIS would be it.

read full comment
Image of gabe
gabe

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.