The Answer Is Transaction Costs

From Law to Legislation: A Natural Process

• Michael Munger • Season 2 • Episode 12

Share episode

Send us a text

Have you ever wondered how common law rules and market prices both "emerge"? Inspired by the works of James Buchanan, F.A. Hayek, and Bruno Leoni, Donald Boudreaux explains how decentralized processes can lead to the emergence of effective norms, such as queuing and speeding rules, without the need for top-down legislation. We discuss the significance of individuals spending their own money versus others' and how these incentives impact societal outcomes, highlighting the deep wisdom embedded in traditionally evolved rules.

We also venture into the nuanced distinction between law and legislation, drawing on insights from Buchanan and Hayek. We elaborate on Buchanan's concept of "relatively absolute absolutes," and on Hayek’s emergence process, emphasizing the continuous generation of information through human action and preferences. Discover the natural process behind the emergence of common law, its role in establishing predictable rules, and the challenges presented by the unpredictable nature of parliamentary law.

Guest: Donald Boudreaux at George Mason University

Some Links: 

Book o’da’month: Bruno Leoni, FREEDOM AND THE LAW

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University. Today's guest is Donald Boudreau, one of my favorite economists and an expert on the problem of discovery in three domains Markets, politics and the law. A new twedge this month's letter, plus book it a month and more Straight out of Creedmooror.

Speaker 2:

This is tidy c. I thought they'd talk about a system where there were no transaction costs. It's an imaginary system. There always are transaction costs. When it is costly to transact, institutions matter and it is costly to transact, institutions matter and it is costly to transact.

Speaker 1:

My guest today is Donald Boudreau from the George Mason University. Donald is someone I have known for a long time, I think it's because he's old. We must have met when I was 11. A long time, I think it's because he's old. We must have met when I was 11. We actually were born in the same month, september of 1958, a great month in the history of the world, it seems. Donald has a PhD from Auburn University and a law degree from the University of Virginia, and for that reason is very well qualified to help us out on the discussion of a particular aspect of transaction costs that I find very interesting, and that is the process of discovery. Donald, if you could introduce yourself a bit, say where your academic career has taken you and how you became interested in the problem of discovery, that we'll then move on to some more specific questions.

Speaker 2:

Well, I'll try not to talk too long about myself, but I was fortunate, as an undergraduate at a place called Nichols State University, to have a professor named Bill Field who was very influenced by Hayek and he told me about Hayek. I was literally a sophomore, was very influenced by Hayek. He told me about Hayek, I was literally a sophomore and so he got me interested in Hayek very early on. Of course, if you start reading Hayek very early on, you very early on encounter Hayek's understanding of the incredible complexity of social and economic reality and of Hayek's understanding that good economic outcomes and good rules have to be discovered through a system of trial and error rather than just imposed from on top. And so, very early on, I was always suspicious of a neoclassical, mainstream textbook solution, so-called to externality problems and various other market imperfections, in which you know the, the, the wise economists just swept in, uh from above and imposed a solution. And all as well, if you have, if you, if you start as a 19 year old with a hayekian wisdom I think it is a wisdom, uh, that seems naive. Um, so you asked about my career. So I I went on as you said.

Speaker 2:

I had my PhD in economics from Auburn. I wrote my dissertation under Bob Eklund who was although not he wouldn't call himself an Austrian he was very sympathetic to Austrian ways of looking at the world. My first encounter with him was he reviewed Israel Kirzner's competition and entrepreneurship in the Southern Economic Journal. And then I got a job at George Mason. I was interested in antitrust and my friend, henry Butler, who was on the faculty at George Mason's law school back in the 80s, said yeah, you hate the Scalia law hat on. Henry said you know you got to go to law. If you can get into a good enough law school, it's worth your while to study law and you know that'll give you a new dimension in analyzing these problems.

Speaker 2:

And precisely because I was so influenced by Hayek early on and Hayek's greatest work in my view, which I read as an undergraduate first two volumes as an undergraduate the first two volumes as an undergraduate Law, legislation and Liberty. So he was into law. Hayek was very much into law and exploring the connections between the legal process, the common law process, and the market process in which prices and outputs are discovered. So it was natural for me to go to law school. I liked law school. I didn't love it in a way that I love studying economics, and so I taught for a while. After law school, went to Clemson, eventually found my way back to George Mason.

Speaker 1:

Well, thank you, there is, there are. I have claimed that in the study of transaction cost and economics there are three great categories of transactions cost, and I have called those triangulation, transfer and trust. That's a little bit different from the traditional approach to transaction cost. Ronald Coase basically refused to define transaction cost because it depends on the transaction. By giving it those categories, I have tried to make it a little easier for people who are encountering the concept for the first time. The big problem for what I've called triangulation is to get basic information about the location, value of resources and what the background rules are. And so, if we take another step back from that, you and I have both long been active in public choice. I actually am apostate from the path of true wisdom and although I was catechized as an economist, I've been in political science since 1986.

Speaker 1:

The background problem and I guess I would take this from a combination of James Buchanan and Austrian economics individuals, members of groups have conflicting plans and purposes and we have to have some way of reconciling those conflicting plans and purposes. At the worst case we use something like war We'll fight and whoever happens to be the strongest or luckiest to catch the other unaware will win. That's a terrible way to do things, and so groups fairly quickly, probably in human anthropological development, came up with and maybe not even as a matter of planning, but groups that managed to solve this problem, where they could decide things without fighting, had an evolutionary advantage because they were more likely to survive. And that's kind of implicit in Hayek's discussion of law, legislation and liberty. Is this group selection process that's operating in the background? Our group selection for a long time was in bad odor and biology. Now it has come back to something that is perceived as sensible. But that's kind of always been the Austrian approach and it also has been the Burkean approach. So there is a connection with political philosophy, where there is wisdom that has come down to us from the past that is embodied in institutions and rules embodied in institutions and rules, the origin and function of which we may not understand very well. But groups that follow good rules are more likely to survive.

Speaker 1:

It's really hard to diagnose that Now. There's a big problem with comparing institutions. Institutions have to be able to see with two eyes. I have often argued from a transactions cost perspective. We have to be able to see with two eyes. Those eyes are information and incentives. So with incentives, there's an obvious problem with choosing in groups, with dictatorship, because the dictator can make choices that serve only the dictator. But if you're not going to have dictatorship, how are we going to choose who the leader is? How are we going to decide what our rules are?

Speaker 1:

Now we also can use markets, which we use prices, to adjudicate disputes over who gets what. There's a parking lot. I want to build a restaurant. You want to build a hotel? Well, who gets it? Well, who's willing to pay more? In the sense they think they can produce more value that will accrue back to the more, in the sense they think they can produce more value that will accrue back to the maker in the form of profits. They may be mistaken about that. We have a bidding process.

Speaker 1:

In politics, we would use something like voting. So those are cumbersome, but each of those solve the information problem to some extent. In markets, we use prices. In politics we use voting. Groups need the information that is possessed in its entirety by no one. No one would know enough to decide how to use this resource, and so the discovery process is either prices or voting.

Speaker 1:

So now, by coincidence, on the Econ Talk this morning, my new talk with Russ Roberts on Bruno Leone came out today and I know you have thought about Bruno Leone also. There's a third domain and that is what should the law be about? Resources or what budgets are going to be, and in market terms we're deciding what the value of resources are going to be. Somehow we have to say we're going to have laws and rules that create expectations that allow us to coordinate our behavior. That's the basic thing that laws function. As there's a lot of interesting contributions that Bruno Leone made, one was to point out the parallels between prices for markets and common law or judge-made law.

Speaker 1:

So James Buchanan was interested in the circumstances where a group could use voting. He often would try to say unanimity or qualified unanimity, and it's not clear he really meant everything that he said in his more optimistic days. So you pointed out that Hayek's most important contribution here was law, legislation and liberty. He has an account about where laws come from. That was actually influenced by Leone, because those books were written between about 1971 and 1975 or 76. He was rejuvenated by getting the Nobel Prize, as I imagine one would be. It's only in my imagination, but that would be quite rejuvenating.

Speaker 1:

So a group can use unanimity to make choices. For Buchanan and he actually went so far as to characterize this because what we're trying to do is to capture gains from cooperation Buchanan actually characterized that as politics as exchange. Now I would say that's not really right. It's more like politics as cooperation, because what we're trying to do is to decide what the laws should be so that we can coordinate our expectations and behavior. So, to summarize, there's three great settings how to use resources, where we have to decide the opportunity cost of those resources.

Speaker 1:

What should the groups do? What will the budget be? How will we act? Will we build this here, will we build this there? Those things like public goods we decide by voting. And then there's what should the law be, and that's not really the same as politics as exchange, because there we have legislatures that are making choices. Leonie thought that was a terrible way to discover law. So what? I am interested? You are almost uniquely qualified to be able to talk about the discovery processes in these three domains. So, market choice, about resources, what should groups do and how much public good should we provide and what should the law be? I realize that's an enormous question, but I'm trying to take a step back from my usual micro level, focus on transactions cost and let's think about the problem of discovery process in those three domains, or anything else you'd like to talk about.

Speaker 2:

So let me start by making a simple point and something you know, but I think it's worth pointing out. In your remarks you mentioned that we use markets as well as voting to resolve conflicts. In the market, we have different entrepreneurs competing against each other to buy a piece of land on which to site their businesses, and then in politics, we use voting. Of course, there are lots of differences between markets and politics. There are some similarities, but there are lots of differences. I think one difference just worth putting on the table is that in markets people spend generally their own money and in politics they spend other people's money, and that creates a huge difference in incentives on what you're willing to do politically compared to what you're willing to do with your own private funds and own private resources.

Speaker 2:

So Hayek wrote the Constitution of Liberty in 1960. And somewhere he writes I forget just where he does note that in between writing the Constitution of Liberty and writing Law, legislation and Liberty the first volume of which came out in 73, he became much more influenced by Bruno Leone. And Bruno Leone, at the risk of simplifying too much, bruno Leone noticed that there is in the common law. There is a huge, there's a great similarity between the way common law rules emerge and the way market prices emerge. You and I bid on a piece of land. It's peaceful, the one who likes it, the one who is willing to pay the most gets it. And so the allocation of resources emerges from this decentralized process.

Speaker 2:

Leone said the same that common law rules emerge in the same way we human beings go about our business. We get into conflicts. But Leone said the same that common law rules emerge in the same way we human beings go about our business. We get into conflicts, and most conflicts are not good guy, bad guy, they're just legitimate conflicts. We have a dispute over where the losses of a contract are going to fall. We have a dispute over what is the best way to use a piece of land. It's not good guy, bad guy, it's good guys all around, good guys and gals all around who get into a conflict. And then Leone noted that people will stumble upon various rules for how to handle these conflicts. These might vary from society to society, but we generally don't like to beat each other over the head, particularly if we're normal, you know we have about the same level of of power. And so rules emerge about how to govern conflict, then, and when these rules become part of the expectation of the community, when a dispute arises, and a dispute that might go to court, a common law court doesn't create the rule. A common law court simply looks to the likely prevailing expectation in the community about what the rule should be and says, oh, the person who acted most consistently with the expectation, that's the person who wins the case. And so that expectation becomes more or less firmed up as part of the formal law.

Speaker 2:

The example I give my students, tons of examples. We follow law all the time without thinking of it. You know, you go at lunchtime into the crowded student union and you're really hungry and you have to get to your next class not too long for now, but there's a long line at the restaurant where you want to eat. Well, what do you do? You wait in the back of the line. There's no statute book that says when lots of people want to go to the restaurant form a queue. And if you get there, it's just a rule that emerged and we all recognize it and we generally all abide by it, even when it proves to be inconvenient to us. And so our lives are filled with these unnoticed, respected rules that we follow. That just emerged.

Speaker 2:

Another one that I'll mention is you know, I asked my students how many of you have ever knowingly driven faster than the posted speed limit and they all raised their hand and I said I do too. I said you know, lawyers have a concept called black letter law, meaning it's the simplest kind of law. There's no law more black letter than the speed limit sign. It's literally black letters on a white background. But we all know that if you drive assuming the driving conditions are normal you drive 58, 59 in a 55 mile an hour zone. You're not really breaking the law. The law really is you can drive a few miles faster than that. In fact, if a police officer pulls you over and you're driving 58 in the 55 mile an hour zone, your sense is that the lawbreaker is not you but the police officer.

Speaker 2:

Particularly in the first volume of Law Legislation and Liberty Hayek said that this decentralized way of making rules that smooth out the conflicts and settle conflicts, often before they actually emerge into something we recognize as a conflict, this decentralized way of stumbling upon rules, using these evolved rules. It's not perfect but, to allude to something you said earlier, mike, these rules do contain a kind of deep wisdom of the community, a kind of Burkean wisdom. We might not be able to identify it when we're consciously intellectually analyzing the rules. But if those kinds of rules have survived for a long time, the presumption should be strong not irrebuttable, but strong that those rules all in all solve conflicts in a way better than any other rule, for that community at that time could do.

Speaker 2:

The problem with legislation and as you know, hayek wasn't completely against legislation. But the danger of legislation is that it's a top-down imposition of a rule made consciously by human minds. And the human mind, no matter how intelligent, no matter how well-meaning the human mind, does not have the capacity to take account in most cases, of all the likely consequences of interfering in a system of rules. And so there's a danger in overriding community norms and community evolved law with consciously designed and imposed legislation. I'll just end on this. I have many peculiar ticks. One of them is I never, ever, ever use the word law when what's meant is legislation. So in my terminology, Congress never passes laws, it passes statutes or legislation.

Speaker 1:

So you went to Virginia and got a legislation degree.

Speaker 2:

Well, no, no, no. I got a law degree because much of what is studied at law school is, in fact, law. In fact, the core of what's studied in much of it is, of course, legislation. So it might be called a law and legislation degree.

Speaker 1:

Yeah, well, you raised a bunch of issues. I'd like to bring Buchanan up a little bit. Buchanan does sort of a half nod to this idea that wisdom has come down to us from the past but is not unassailable, and it was his very frustrating concept the relatively absolute absolutes. So these are things that we believe that we act on, but all of them are subject to question. And he was, I think, skeptical about the emergence process that Hayek talked about because he thought different. But they do their kind of codependency.

Speaker 1:

Austrians, by and large, focus on the information problem. Yeah, and that is. There is this difficulty, and I think it's a shame Mises, when he wrote about what's been called the calculation debate. If you look at the German that he used, what it really is is the economic calculus, the economic arithmetic, and it could have been the socialist generation debate. That is, we're generating information. It's not that all the information is out there and no human mind could comprehend it, because then maybe with good computers we could solve the problem. That's a misrepresentation. The information doesn't exist until people act on their preferences and it generates relative prices that turn out to tell us information that otherwise wouldn't exist. It's not that it couldn't be calculated, it's that no one could have access to all of the local knowledge that would be required to generate that information. Well, since prices do that, is there anything that would do that like law? And so Buchanan, in his interview with Jeffrey Brennan, accused Hayek of being a mystic, because he wants this emergence process to happen also in law.

Speaker 1:

And if the only thing that happens is tradition, we have no means of judging whether these things have come down to us from the past, are good or not. That's part of the reason that Hayek wrote and then Buchanan echoed rhymed, why I am not a conservative. Conservatism would accept the wisdom of the past per se. It is the wisdom of the past and therefore it is wise Somehow, we have to say. Sometimes the wisdom of the past is good, but sometimes it isn't. In markets, I knew how to tell the difference. How can I tell the difference in politics and law?

Speaker 2:

Yeah. So it's a great question. But before I answer I want to compliment you. You wrote somewhere, and not that long ago, and it's brilliant, this point. You made this distinction between the calculation problem and the generation problem. It's really a generation problem and that is a brilliant way to put it, and it's unfortunate that the term has come down to us since the 1930s as a socialist calculation debate. It's really the information generation debate. And once you understand that, all these claims that well, okay, now that we have artificial intelligence, we can do away with markets, no, you can't. You still have to generate the information that's dispersed and detailed and nuanced and ever-changing. So if anyone is domestic here, it's Buchanan.

Speaker 2:

The rules that Hayek and Leone observed emerge and Leone observed emerge. These rules emerge precisely because, for whatever reason, they happen, to minimize the conflict that might arise among people when they engage in various sorts of activities, contracting activities, activities that modern lawyer would call potentially tortious property disputes. It's not exactly a market process, but for Buchanan and you and I, off the air we were talking about, buchanan himself was, you know, he is hard to tell where he would come down on this guy, I think, because he was ultimately confused about it and I'm aware of the irony of someone like me calling Jim Buchanan confused but because he was a brilliant man. But Buchanan, one part of Buchanan, wanted to believe that reasonable human beings could get behind a veil of ignorance in a big room and have something close to a rule of unanimity and that would force them all to bargain in the same way that we might bargain over an automobile, you know, to purchase price of an automobile. And then, of course, we all come to agreement on the foundational rules. Then we have no business, once we agree upon these rules, complaining about them. We all agree, we all agreed to them.

Speaker 2:

And Buchanan failed, I think, to appreciate the Hayekian point that when people, when he's thinking of people, bargaining, he's forgetting that, that in the real world there are always behind us enormous numbers of, of, of, of, of that we're unaware of, largely of background norms and expectations that that govern our actual bargaining. We, we, we don't drop into the world, you know, tabula rasa, without, without having these things, buchanan, I fear, was too attached to his poker rule analogy. Countless times, as you know, mike, he said well, you know, lawmaking is like a poker game. Well, you know, we all agree ahead of time what the rules of poker are going to be. Are we going to play stud poker, draw poker? You know what's the maximum bet. You know OK. So you know. We all understand that if we all agree on the rules of the poker game, that if we all play by the rules and I lose, I have no right to complain. I've played by everybody, played by the rules and someone. You know. Some people are going to do better, some people will do worse under that.

Speaker 2:

But in the real world, when people get together to to or to think about rules of a poker game, there are all sorts of background conditions. You know what, what, what, what is money we mean? What do we mean by agreement? Making social rules is not as simple as making rules for a poker game. The human mind simply can't comprehend all the many different features of reality that would have to be consciously grasped in order for the kind of social contracting that Buchanan often spoke of as being possible. That you and I simply can't grasp all those things.

Speaker 2:

And so I have an essay somewhere titled there's no Escaping Hayek. It's an essay on Buchanan there's no escaping the need to rely upon these Hayekian evolved background rules as a basis for making the kinds of conscious rules that Jim Buchanan wanted to make At some level. Making conscious rules, of course, is possible and desirable, the US Constitution being, you know, perhaps the greatest example. But the framers of the US Constitution, they didn't think of themselves as making de novo rules completely for society. They were making rules to create a particular government it was 6,000 words or so to make a particular government, not to recreate society, and that's a huge, huge difference. So the framers had the common law rules in the background and these Hayekian evolved norms and expectations in the background when they went to Philadelphia in 1787.

Speaker 1:

Well, let's talk a little more about Buchanan. And then I want to turn to Leone, because that's something you've thought about a lot, and so I want to say more about Buchanan. And then I want to turn to Leone, because that's something you've thought about a lot, and so I want to say more about the emergence process. George Vanberg and I decide, both of us big admirers of Buchanan I mean, he is generationally a big admirer of Buchanan and I came to it we decided Buchanan can't be serious about this process of using that kind of deliberation to generate the fundamental rules of a society, of a constitution. What he must have meant was that he had a concept that he called the relatively absolute absolutes, the wisdom that has come down to us from the past, that we mostly accept. Van Bruggen and I argue that Buchanan must have been a contractarian at the margin that has given the existing rules. Those are internalized, they're priced in, as the Silicon Valley people would say, so that they're capitalized in current values and in people's expectations. So they are what they are. We will start from where we are and, to be fair, Buchanan often would say we should start from where we are. He privileged the status quo to an extent that some people have said morally puts a thumb on the scale. He just thought that the status quo has the unique property of being what is now people's expectations, and so we're going to use this public choice process, this deliberative process, and then voting, to justify change, and it's going to take something close to unanimity to justify the, and that probably is right as far as it would go. The frustrating thing is that he would never admit that, and so I think the strongest case that he can make about you and I are going to sit down and we'll make up some rules and follow them is his work on clubs. There's a lot of voluntary, private organizations that are not market processes, they are group processes. We will have a pool, we will have a tennis court. They are group processes. We will have a pool, we will have a tennis court. Here are the dues.

Speaker 1:

Exit is possible, which means that we can justify. You have to follow the rules or quit, because you can quit. You can't really do that in a nation, and so he was big on federalism. I think, once you start to think in terms of that contractarianism at the margin, it helps. In terms of that contractarianism at the margin, it helps, although, as you say, buchanan would never admit that it does reconcile these. I think it's not just confused, it's actually directly conflictual. He can't believe both of those things. So can we understand Buchanan, then, as arguing for we are going to have binding rules. Those rules are going to allow us to make changes in a way that's coherent, legitimate and widely accepted, and the privileging of the status quo is basically unavoidable. I think a lot of people that argue he overprivileged the status quo. I don't know what the alternative is.

Speaker 2:

Yeah Well, that's brilliant. I love that formulation and it makes explicit in my mind for the first time this contradiction in Buchanan. He does. He's very clear and, I think, for perfectly reasonable, good reasons. It's not privileging the status quo. He says it's a status quo, it just is. That's where we start. We don't have any choice but to start recognizing the validity of Hayek's point For reasons that have never been clear to me, buchanan. He explicitly said he disagreed with Hay about you know he calls him a mystic and and and this conversation, mike, is making me understand better that there was no need for Buchanan to do that. Buchanan could have accepted Hayek's and Leone's formulation of back of law as being evolved and still had his constitutional project go forward and not have that project diverted into the unproductive path of many people thinking that Buchanan wanted to have all rules consciously determined by the human mind in a vast social contracting process. It's unfortunate Buchanan didn't. I assume you and George wrote this paper after he died. It's unfortunate he didn't live to see it.

Speaker 1:

My guess is he would have said he would have patted you guys in the back and said that's it Now I see To Jim's credit, he would often say, okay, yeah, that's right, I'm going to abandon the the harshness of what I had said. The difficulty is that Buchanan's life story is that he is a Vixellian and that we're going to use unanimity to justify consent, and consent can justify actually almost literally anything. It's interesting that Buchanan I run a yearly Buchanan camp for a week for graduate students. This past year we met out on the Outer Banks in two adjacent mansions and we read Buchanan for a week and talk about him. A lot of people, when they read Buchanan for the first time, are surprised at the sort of extremism of his small d democracy in the sense that a group that unanimously agrees on something D democracy in the sense that a group that unanimously agrees on something.

Speaker 1:

That's it full stop. Values start with us. We don't need any other values. That's the Vixellian claim, and since that's the position that he had staked out and then elaborates it in calculus of consent, he was stuck. He couldn't give up the whole project, and so that means that he's always going to have to operate in two contradictory worlds. And it is interesting and again, I say this out of great respect, I'm a big fan of the Buchanan project.

Speaker 1:

I don't think that the Vixellian claim is sustainable at the level of fundamental social rules. Those emerge from something else. I agree. Again, I'm paraphrasing what you said, actually, but that brings us to Leone. What is this emergence process? Because his view of the law is actually odd to most people's ears. I think he thought of the law as just being a resource that was available for resolving conflicts or disputes, and these disputes were disagreements that you and I might have about the interpretation, the meaning or the. I am acting in a way that violates other people's expectations. We then go to a person who might be a judge, but it's someone who we agree is going to be, is going to have a binding resolution to our dispute. It is only if you and I agree that we will resort to this dispute resolution mechanism that the law even comes into play.

Speaker 2:

Yeah, so so I distinguish in my mind when I'm thinking of Leone and Hayek, because I think of Leone and Hayek, on law, as being identical now between little L law and capital L law. And the law you refer to is, I think, is what you mean, it's what I call capital L law, it's the legal system, it's the court system and that is for Leone and for Hayek, indeed a resource that, again, usually on all sides well-meaning people when they run into disputes, rather than banging each other over the head, they go to this resource and they say okay, resource, you tell us which of us is in the right and generally, that capital L law institution, the court almost always will look to. You know a lot of these cases have been written up, but basically what's going on is all the judges are looking to the expectations that have emerged in the community to decide which of the two litigants has the better case. The little L law is the, the are the expected, the community expectations that the courts look to. I have a very expansive view of law and I don't know if Hayek or Leone would agree with it, but in my view, law consists of all rules that govern human behavior, everything from rules of grammar. I think I would call that following law.

Speaker 2:

If I speak grammatically incorrectly. It's such a small offense. We're not going to do any formal effort, exert any formal effort to punish me, but you might not have me on your podcast in the future. My reputation might suffer, on the other hand, if I break into your house and steal as you have lots of books in the background, many of which I would like steal some of your books and you're going to call some formal agency to prevent me. But in all cases, I know what the rules are. I should speak grammatically correctly and I shouldn't break into your house to steal your books.

Speaker 2:

And none of these rules were designed by any human genius. It isn't as if there was some time in the human past where we could all just take people's things and some Solon came along and said hey, I got an idea. You know, we'll all be better off if we have this stuff called property and here are the rules of property. But these things just emerged and the nuances of them in the course of the many different ways in which we interact and the many different kinds of disputes that emerge, gave rise to law. Eventually, this little L law gets embodied in the system of cases that we call common. You know the common law.

Speaker 1:

Well, I'm a student of Douglas North and one of the frustrating things about North was his use of the word institutions. His definition of institutions was the set of humanly devised rules that shape and direct human behavior. That's pretty encompassing. The question do institutions matter? Is begged by the definition, because it's only the ones that shape and direct human behavior that count as institutions. So yes, they matter. We had an experience here at Duke a few years ago where we had a buffet and we invited members of the public and there were maybe 30 or 40 people that were there for the talk and one of the first people who went through the buffet was kind of an elderly woman. There was a big tray of shrimp. She took out a Ziploc bag and stuffed about two thirds of the shrimp into the Ziploc bag and put it in her purse. So that's something that's in between your grammatical mistake and stealing my books. We couldn't really call the police. But damn, what is that that is so wrong? That's many levels of violation.

Speaker 1:

She broke the law. She broke the law. It was such a big violation of expectations we had to kind of rethink what our rules were going to be, what our law was going to be, because who would do that? But that almost. The point is that that almost never happens because the social sanctions against doing that. I don't mean to stereotype. It happens that she was from another country and the when someone asked her, she said well, I didn't see anything wrong with it. Well, we believe that, but there is something wrong with that. And so when one of the one of the things that helps sustain rules is the temporal persistence of homogeneity in this kind of repeat business, it's almost a reputational problem. If you have a large group, they're just together once. These rules might not work very well, and that's one of the reasons we have problems with driving. I won't see you again, so you cut me off, I go nuts. We have trouble enforcing the small l laws when there's no repeat business.

Speaker 1:

When it comes to Leoni's discussion of the emergence of law, he talks about, as we said before, the processo di scoperta, which is literally a discovery process. Judges are looking for rules that solve disputes and maybe they're looking for a general principle. Maybe they're not. Leone differed from a lot of American English interpretations of the common law because for him it was who wins the dispute, not so much the reasoning. One of the things that happens in American and English law is that we look at the language that the judges uses in the opinion and it has almost the status of black letter law, big L law, because what the Supreme Court says about this Leone didn't attach that level of importance.

Speaker 1:

I've tried to explain Leone to law professors, and law professors in my experience at top law schools hate Leone. They've never heard of him, first of all, and they absolutely hate him because their claim is what really matters is how the judge resolves disputes. And I say no, what matters is that there are no disputes because the law is settled, the small law is settled. We all know how to act. No one violates those expectations, so it's not. We look to the legal decisions to see if the judge did the right thing. What matters is that judges are basically unemployed because we have a set of efficient rules that assign liability and ownership to those who can bear it, at least social cost. Now the system's going to fall short of that, but it moves towards that in an emergent way. No one's directing it, and so the genius of Leone is to and I know you know more about this than I do, so I was wondering if you could elaborate but that contribution that Leone has that really the role of the law is to create expectations.

Speaker 1:

He said what's really valuable is certainty. Yeah, and the reason that parliamentary law, as he called it, is bad is I can go look it up, it's black letter law, but it may be different tomorrow. Yeah, is I can go look it up, it's black letter law, but it may be different tomorrow. And so actually, buchanan and Congleton wrote a book called Politics by Principle, not Interest, in which they elevated this. What Leone wanted was a certainty of a kind of longer status. That means it's harder to change.

Speaker 2:

But he sees that as a feature, not a bug, absolutely. If we have known rules that everyone pretty much understands, those serve as the pick, your analogy, pick, your metaphor the guardrail. They serve as the infrastructure. But we can work to pursue our individual specific plans knowing these things exist. They don't have to be ideal, they can't be terribly obstructive, but as long as we know they exist, we as individuals can go about our business and create productive economies and the results of our activities can be, can be productive and and and promoting of human flourishing.

Speaker 2:

Um, but the, the one of the dangers and you're right to point out, correct to point out one of the, maybe the biggest danger of legislation is that it, it uh, creates uncertainty. So the, the law, the, the, the, the legal rules are one thing today, tomorrow they may be something else. One big fear I have now living in 2024, you know the possibility, the filibuster will be ended very soon is we're getting to an era of raw democracy, an era of raw democracy, raw majoritarian democracy. And so today, you know, let's say miraculously, all the candidates we love get elected to offices of libertarian paradise. That happens, and they write legislation that you and I approve of solely. But then, two years from now, something completely different is in place. That's not the way in which I want my ideal legal rules imposed and legislation is the way it's done now, increasingly done.

Speaker 2:

Now, legislation is simply too disruptive of expectations. But because it's called law and because the word law has a well-deserved majesty about it, so it's the law. Congress said do X or don't do Y, it's the law, and I think it's a mistake to give legislation the same sort of majesty that is given to the law. One final point in this you know we all heard the term and we all understand it ignorance of the law is no excuse. But that term only makes sense if we're talking about a kind of Hayekian Leone meaning of law. Of course it should be an excuse if today my top tax rate is 39% and then tomorrow Congress passes it, but I don't know and I underpay my taxes. Of course it's an excuse, a good excuse, and so, yes, that is a huge danger of legislation, in that it is disruptive of the kinds of stable expectations that any good society needs in order to thrive.

Speaker 1:

Well, let me ask one final question and we'll close. I appreciate your time. If someone wanted to learn more about discovery processes from your work, what should they look at?

Speaker 2:

Oh my gosh, Not my work. Well, I have a blog, cafe Hayek, and I do a quotation of the day every day. I've done it for 13 or 14 years now and I have lots of quotations from Bruno Leone's work Hayek and put in the search box Bruno Leone, and then click on that and come up with a bunch of different blog posts from the past, and that will lead you to many insightful Bruno Leone quotations, some of which I elaborate on, others of which I don't. So that's one way. Yeah, that's great that's one way.

Speaker 1:

Yeah, that's great. So so if, if you give the source and unfortunately we don't have much of leone's writings, but that that would be a quick way of getting a, a selected a, a budro curated list of some of the most important quotations liberty fun did a collection of his writings a number of years ago.

Speaker 2:

The title of it is not off the top of my head but it's still available from Liberty Fund and there's another collection by Carlos I can't remember his name. There's some overlap between the two, but they're different collections. Richard Epstein wrote the forward or preface to the latter book, but you're right, I mean, richard is one of the few people who, in law, who knows of Leone and much less, and certainly respects him. But it's brilliant stuff and it's a shame.

Speaker 2:

The reason law professors, by the way, don't like Leone is because most law professors today think of themselves as teaching rules for social engineering and law schools. Particularly after the first year, in which you get the common law introduction to common law courses, the second and third year of law school usually nothing but courses in how to do social engineering, and that's what too many law professors today think of themselves. As you know, we're teaching how to do social engineering. The law is that set of rules that we will devise in our genius and impose on society in order to bring about a society that looks like what we fancy society should look like.

Speaker 1:

And, of course, if you come from a Leone perspective, that's completely anathema and that's something that Hayek took and then elaborated from Leone, what Hayek called scientism, the idea of a progressive law project, where we will use science to discover what the law is, and it's by analogy to Newton, so we will use science to discover how gravity works.

Speaker 1:

It doesn't make sense that we'll do the same thing to discover what the social rules are. The problem is that social rules are not gravity. That discovery process requires something different, and so the processo de scoperta that Leone specifies is just not amenable to the scientistic treatment, and that is something that Haier took up. Yeah, that's exactly correct. Well, I very much appreciate your time today and thanks for being on. The Answer is Transaction Costs.

Speaker 2:

I am honored to be one of your guests, Mike Munger. The answer is transaction costs. I am honored to be one of your guests, Mike Munger.

Speaker 1:

Whoa. That sound means it's time for the twedge. The optimist thinks the glass is half full. The pessimist thinks the glass is half empty. The Austrian economist notes the malinvestment of the capital structure which has resulted in wasteful excess capacity of glassware.

Speaker 1:

This week's letter from CL Pertaining to the comments in the price gouging episode, in response to a listener mail relative to housing shortage in Canada and the difficulty of renting, what about claims that Airbnb-style renting are part of the problem? Airbnb initially allowed landowners to bypass the transaction cost regulation hurdles of traditionally regulated long-term rental. Surely this does not benefit the people who actually need long-term rental housing in their city. Airbnb rentals are usually targeted at tourists and well-off people, like higher-end hotels are. This kind of market is certainly more profitable to renters and distinguished from the market. Who complains of affordable housing shortage In the presence of Airbnb-style rental? Wouldn't long-term rentals always be less profitable and worthwhile because of inherent transaction cost or renter favorable regulation, whether they're sensible or excessive, unless rental was to be completely deregulated, which would surely end up revealing problems regulations were created to address. Where's the proper boundary between sensible housing regulations and market realism? End of letter. Well, cl thanks. That certainly is a good point, and it might be that it is necessary at some point to limit the amount of Airbnb rentals that are available for very short terms for the reasons you say. But as far as I can tell, all and I mean all of the problems that are being created by Airbnb right now are because of artificial restriction on building new housing. It's certainly true that if we have a dramatic shortage of the housing stock, it is better at the margin to allocate these rental properties to Airbnb, but if people were allowed to build, it is possible to have enough dense rental housing to serve both of these markets. It is profitable, after all, to have long-term rentals. Using Airbnb is expensive for Coasean reasons. It actually does take up quite a bit of time and money to process having one, two, three day rentals, and so the regulations that we see on Airbnb at this point are just knock-on solutions to the problem that's essentially created by overly restrictive limits on the ability to put up rental housing in the first place. If we get to the point where it's legal to build dense housing in urban areas, then I'm certainly willing to consider the possibility that Airbnb itself might be subjected to these regulations. But that should be the last thing you do not the first subjected to these regulations, but that should be the last thing you do not.

Speaker 1:

The first Book in a Month. This month's book is by Bruno Leone Freedom in the Law. It is an interesting discussion of the problem of discovery and of the origins of small l law. And of the origins of small l law. Well, the next episode will be released on Tuesday, october 28th. We'll have a new topic, some letters and, of course, a hilarious new twedge. All that and more next week on Tidy C.