The Knowledge Problem in Firms

Micromanagement and many of the coordination and alignment problems within firms are actually manifestations of what Hayek characterized as the knowledge problem and was his major and most damning criticism of socialism. It's a limitation of planning and bureaucracy in general and applies to both profit and non-profit organizations. You could characterize Hayek's concept of firms as being 'little islands of socialism in a sea of markets.' The only saving grace for firms is that because bureaucracy and management don't scale so well in the long run the limits of irrationally are eventually tested by the external pressures of the price system which in a capitalist economy results in profit and loss, reorganizations, mergers, or bankruptcies. Creative destruction. Non-profits and government institutions have to rely on other kinds of institutional arrangements to work through these frictions. Better leadership and institutional arrangements can make things better but will ever only go so far solving the knowledge problem. 

Going to Bat for the Constitution

 In the Feb 4, 2013 EconTalk podcast Russ Roberts discusses the constitution with Louis Michael Seidman. Both agree on a really important observation about how we approach the constitution and originalism in practice in the United States:

"if you look at how the Supreme Court settles disputes about political morality in our country today, there's very little that ties that, or nothing that ties that to the Constitution. So, really, the important decisions, like the decision outlawing segregated schools or creating an abortion right or limiting affirmative action or protecting the rights of gay men and lesbians, those decisions have basically no grounding in the Constitution. They are some combination of the Justices' views of political morality, their views of our traditions, their interpretation of their own prior precedents; and if we are going to have a body act like that, I think we need to be honest with the American people and come clean and make clear that that's what it's doing."

That is a good point. Originalism in general is based on the idea that the constitution sets a floor or boundary around the powers of the government. Laws should be interpreted and applied under this view based on the the meaning of the text, as understood by the authors when discernible. Seidman argues in so many ways that this is moot, we aren't doing this now and never strictly did so from the very beginning, so why should we begin to do so today? Why should we pretend to hold ourselves to limits set by our founders some 250 years ago who would have known little about the world we live in today?

At risk of oversimplifying both an originalist view and Siedman's position I'll propose a fable. Suppose in a simple world a government writes a constitution and they only a few clauses. One clause relates to a single law. It states that they will have a speed limit set at 25 miles per hour. The second clause states that this law can be changed with a 4/5 majority of the legislative body or something like that. Now suppose over time it was largely ignored and was never really enforced, no fines no penalties etc.  People just drove at their own whim as fast or slow as they wanted. This seems to parallel loosely the world both Russ Roberts and Seidman agree exists today. 

Now suppose the day comes when a new regime starts a new initiative clocking speeders. A law enforcement officer tickets someone at 70 mph and they end up in court. The textual originalists might argue that according to our written law, this was a clear violation and the speeder should pay the fine. 

However, the legal advocates for the speeder argue that when that law was written few people owned automobiles and most cars were not capable of such excessive speeds on a normal basis especially given the state of the roads at the time. Their argument is that the case should be dismissed based on the view that laws should be interpreted with a more expansive, dynamic, evolving perspective and interpreted in light of changing social and political circumstances. The originalists push back in their opinion, recognizing that society has changed, and maybe 25 mph is no longer a reasonable standard, but it is the role of policy makers, not the court to update this law through the appropriate governing channels (the 2nd clause in our fictional constitution). 

Suppose the defendant wins and in its ruling the court states that speeds up to 70 mph are okay. The government could then post new signs with new speed limits. Citizens and law enforcement can be confident about the laws new meaning and the penalties involved.

Suppose the prosecution wins, and maintains the 25 mph speed limit. After much debate and pressure from voters policy makers go through the channels necessary to vote to change the law so that the new speed limit is 70 mph. 

One might argue, what's the difference if we get the same result? Critics of originalism might argue that its much more pragmatic and expedient to change outdated laws through the court system, because going through the necessary channels may be too time consuming and intensive. Going through the proper channels creates a sluggish and nonreactive government artificially constrained by ideals that may be outdated and irrelevant to current circumstances. 

But this oversimplified fable illustrates perfectly that focusing on the policy outcome completely misses  a much more important question. The most important question is not about policy, or about how time consuming or difficult it is to make policy. Or how much society has or has not changed. And while it is absolutely important to think about the incentives created by decisions and the consequences, there is still a more important question. The most important question is about who makes these decisions. Who is in the better position to recognize that society has changed and we need new laws? Is it the role of unelected judges to make these decisions? Do we send our judges to the bench to go to bat for the policies we like and pitch against the policies we find appalling? Do we really want to leave such important decisions up to an elite bench of unelected jurors that will always have a much more limited pool of knowledge and preferences than the population at large? Or do we send judges to the bench to go to bat for the constitution? 

In Judicial Activism Reconsidered, Economist Thomas Sowell describes our Constitution this way:

“The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority.Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky.”

Letting judges decide policy represents a transfer of power away from the people. It is undeniably undemocratic. It may certainly seem more expedient to bring about change through the courts but this does not come without serous tradeoffs. Once we start making heroic interpretations of the meanings of words in the constitution it is weakened, and minorities are forced to give up their liberties to whatever transient majority takes power (either in the legislature or as appointed to the court). The short term gain from being able to bypass the amendment process (and shunning consent of the governed) in order to pass some much needed legislation to help some worthy cause comes at a long term cost to our liberty and national well being. This increases the incentives and opens the door for large corporations and special interests to influence our lawmakers, and provides the means for ever more concentration of power and the entrenchment of social classes. While the incentives created by an individual decision are important, we must think more globally about the incentives created when the courts are governed by a philosophy that favors policy making. Elections and politics become more divisive as more and more social norms are being set  by policy at the federal level by both 'conservatives' and 'progressives.' As Pierre Lemieux states in his article The Public Choice Revolution:

“The entire federal budget,” writes Mueller, “can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle.”

Letting judges 'decide' also makes supreme court nominations the circus they have become. Hearings become opportunities to score political points as each party sends their nominees to bat for the policies most aligned with their base. Letting judges decide based on the whims of an ever changing political climate can further lead to bad precedent challenging the doctrine of stare decisis when questions of constitutionality would require overturning previous decisions.

Reforming the Way We View the Courts

We may hear a lot about judicial reform but just as important is reforming the way the public actually views the courts. One of the greatest mistakes by the left and the right is attempting to set social norms at the national level instead of local levels of government where consent is more easily ascertained. The constitution represents the social compact that we as a society agree to live by until it is changed. Until we are able to give it proper deference with regard to policy and our view of the role of the courts, we will not be able to achieve any meaningful reform and the courts as well as the judicial nomination process itself will remain in chaos subject to the changing whims of political climate.

Viewing the constitution as a 'living' document makes supreme court nominations and elections much more contentious and contributes to the increasingly divisive climate we have seen in society over the years. When circumstances arise, we can always escalate policy decisions to the federal level via the amendment process. This allows ultimate flexibility and breathes new life into the constitution. In this sense, it can be viewed as a living document. 

Perhaps there is an argument to be made about having justices on the benches with a diversity of philosophies. Doug Linder makes the point that a court without dissenters is a Court that will not adequately inform us of the costs of and consequences of different rulings. This would certainly be an argument against extreme measures like court packing. If there is an argument for expanding the number of seats on the court, then we should do it in a way that in a worst case achieves some sort of balance of judicial philosophies and possibly a larger pool of justices that rotate on and off the bench in a way to maintain balance.

Finally, we should stop referring to justices as either 'conservative' or 'liberal.' While used in their proper context these terms are meant to refer to an originalist or non-originalist judicial philosophy. But more commonly they give the impression that a justice will decide cases based on the political philosophy closely related to that of the president that may have nominated her. Continuing to refer to justices as 'conservative' or 'liberal' perpetuates the misunderstanding that judges are in a position to make policy decisions and not interpret statute or apply the constitution.

References:

Regulation, vol. 27, no. 3, The Public Choice Revolution. Pierre Lemieux.

Judicial Activism Reconsidered. Thomas Sowell. 1989