ESSAYS ON THE ECONOMIC ROLE OF GOVERNMENT Volume 1: Fundamentals

ESSAYS ON THE ECONOMIC ROLE OF GOVERNMENT Volume 1: Fundamentals

Also by Warren 1. Samuels and published Palgrave Macmillan ESSAYS ON THE ECONOMIC ROLE OF GOVERNMENT Volume 2: Applications ESSAYS IN THE HISTORY OF HETERODOX POLITICAL ECONOMY ESSAYS IN THE HISTORY OF MAINSTREAM POLITICAL ECONOMY ESSAYS ON THE METHODOLOGY AND DISCOURSE OF ECONOMICS

Essays on the Economic Role of Government Volume 1: Fundamentals Warren J. Samuels Professor of Economics Michigan State University M MACMILLAN

Warren J. Samuels 1992 Softcover reprint of the hardcover lst edition 1992 978-0-333-55174-5 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1992 by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG2l 2XS and London Companies and representatives throughout the world ISBN 978-1-349-12376-6 ISBN 978-1-349-12374-2 (ebook) DOI 10.1007/978-1-349-12374-2 A catalogue record for this book is available from the British Library

To those who primarily constituted the University of Wisconsin institutionalist tradition in the study of the economic role of government: Richard T. Ely, John R. Commons, Edwin E. Witte, Martin Glaeser, Harold M. Groves

Contents Acknowledgements Introduction viii x PART I FUNDAMENTAL CONCEPTIONS 1 The Nature and Scope of Economic Policy 2 Welfare Economics, Power and Property 3 Interrelations between Legal and Economic Processes 139 4 Some Fundamentals of the Economic Role of Government 156 5 The Legal-Economic Nexus 162 PART II THE THEORY OF REGULATION 187 6 Normative Premises in Regulatory Theory 189 7 Regulation and Regulatory Reform: Some Fundamental Conceptions (with A. Allan Schmid and James D. Shaffer) 206 8 Deregulation: The Principal Inconclusive Arguments (with James D. Shaffer) 9 Ecosystem Policy and the Problem of Power PART III THE COMPENSATION PROBLEM 245 10 An Economic Perspective on the Compensation Problem 247 11 The Role and Resolution of the Compensation Principle in Society: Part One - The Role (with Nicholas Mercuro) 267 12 The Role and Resolution of the Compensation Principle in Society: Part Two - The Resolution (with Nicholas Mercuro) 307 1 3 56 220 229 Name Index 337 Subject Index 339 vii

Acknow ledgements The author and publishers wish to express their gratitude to the respective publishers and/or copyright-holders and co-authors for pennission to reprint the following: 'The Nature and Scope of Economic Policy', in The Classical Theory of Economic Policy (Cleveland: World, 1966) pp. 237-309. Excerpts from The Classical Theory of Economic Policy by Warren Samuels. Copyright 1966 by Warren Samuels. Reprinted by pennission of HarperCollins Publishers. 'Welfare Economics, Power and Property', in G. Wunderlich and W. L. Gibson, Jr. (eds), Perspectives of Property (University Park: Institute for Research on Land and Water Resources, Pennsylvania State University, 1972) pp. 61-148. 'Interrelations Between Legal and Economic Processes', Journal of Law and Economics, vol. 14 (October 1971) pp. 435-50. Copyright 1971 by the University of Chicago. 'Some Fundamentals of the Economic Role of Government', Journal of Economic Issues, vol. 23 (June 1989) pp. 427-33; and Fundamentals of the Economic Role of Government (Westport: Greenwood Press, 1989) pp. 167-72. Reprinted by pennission of Greenwood Press. Reprinted from the Journal of Economic Issues by special pennission of the copyright holder, the Association For Evolutionary Economics. 'The Legal-Economic Nexus', George Washington Law Review, vol. 57 (August 1989) pp. 1556-78. Reprinted with the pennission of The George Washington Law Review 1989. 'Nonnative Premises in Regulatory Theory', Journal of Post Keynesian Economics, vol. 1 (Fall 1978) pp. 100--14. With A. Allan Schmid and James D. Shaffer, 'Regulation and Regulatory Refonn: Some Fundamental Conceptions', in Warren J. Samuels and A. Allan Schmid (eds), Law and Economics: An Institutional Perspective (Boston: Martinus Nijhoff, 1981) pp. 248-66. viii

Acknowledgements ix With James D. Shaffer, 'Deregulation: The Principal Inconclusive Arguments', Policy Studies Review, vol. 1 (February 1982) pp. 463-9. 'Ecosystem Policy and the Problem of Power', Environmental Affairs, vol. 2 (Winter 1972) pp. 580-96. 'An Economic Perspective on the Compensation Problem', Wayne Law Review, vol. 21 (November 1974) pp. 113-34. With Nicholas Mercuro, 'The Role and Resolution of the Compensation Principle in Society: Part One - The Role', Research in Law and Economics, vol. 1 (1979) pp. 157-94. With Nicholas Mercuro, 'The Role and Resolution of the Compensation Principle in Society: Part Two - The Resolution', Research in Law and Economics, vol. 2 (1980) pp. 103-28. Note: the reprinted materials appear as in the original publications except for minor alterations to style and presentation for the purpose of making these collections of readings into a book.

Introduction Much of the history of economic thought and, indeed, much of modern thought as a whole, has been driven by an uncertain combination of implicit and explicit compulsion to define and channel the economic role of government. And many of these efforts have been channelled by misleading or incomplete ideological and theoretical formulations: theories and models have been valued more for their role in the manipulation of political psychology than for their usefulness in enabling us to understand what is actually going on and how results are actually worked out in matters of the economic role of government. The fundamental ironies are, first, that government is often denigrated in theories and ideologies whose gravamen is the construction of a particular agenda for government, and second, that government is often treated in a deterministic manner by people whose motivation is to participate in and indeed to channel what is essentially a policy- or decision-making process producing the social (re)construction of economic reality. Economists in particular tend to analyse government in search of determinate, optimal, equilibrium solutions to 'policy' problems and to do so in such a way as to foreclose the operation of process, of policy making, and to substitute their own definitions of reality and preferences for those of economic actors. They do this in part by making implicit assumptions as to whose interests are to count, whereas in the actual economy such determinations have to be worked out. With very few exceptions, much of my work on the economic role of government has been directed to the creation of an essentially positive, that is, non-normative and non-ideological, alternative to conventional welfare economics as a foundation for analysing the economic role of government. This has meant, for example, emphasis not solely on the Pareto-optimizing processes of exchange between economic actors, each with their own given entitlements. It has meant also and especially (because of its neglect or its narrow or ideological treatment in the mainstream literature) emphasis on the correlative process through which the definitions and assignments of rights, including the creation of new rights, change. This has also meant attention to the larger processes with respect to which market and politicallegal processes have meaning. Several distinctive and controversial themes pervade my work in law and economics. These include: the dual nature of rights; the reciprocal nature of externalities; the fundamental ambiguity of such distinctions as x

Introduction private and public, freedom and control, and continuity and change; rights understood as the protection of interests and as relative to both each other and government; regulation and deregulation as functional equivalents and as equally functional with regard to rights; the fundamental questions of the economic role of government are neither government versus no government nor large versus minimum government, which are substantially meaningless, but are which interest is government to promote and legal change of legal rights; economic performance as derivative of and specific to legal rights; the role of selective perception; the existence and fundamental importance of the contest to control and use government, certain ideological pretensions notwithstanding; and the derivation of both economy and polity from a common legal-economic nexus. Of truly ubiquitous and fundamental importance are selective perception and the processes of working things out. Apropos of the latter, legal-economic details have to be worked out, and are neither determined nor set in concrete through the use of abstract formulae. The various essays in these two volumes which gather together some of my work in law and economics both develop these themes and show what difference it makes to understand the economic role of government (or the legal-economic nexus) in those terms. The essays comprising this first volume are divided into three groups: fundamental conceptions, the theory of regulation and the compensation problem. Pervading all three groups, and the essays in the second volume as well, is a theory of rights in general and of private property rights in particular. The principal dimensions of that theory are, first, the dual nature of rights: that for some Alpha to have a right is for some Beta to have a nonright); and second, that solutions to economic problems, for example resource allocation, are generated by and specific to the structure of rights which produce them. That is, the reader should be aware, a very different and much more open-ended approach than the usual notion of efficiency, for example that of the Coase theorem, discussed in Volume 2, in which the allocative neutrality of rights is affirmed on the basis of finessing all the factors which in the real world mean that rights are not allocatively neutral. The first group of essays commences with a lengthy examination of the nature and scope of economic policy. Policy is said to be ubiquitous and fundamentally characterized by choice, incremental decision-making. It is ultimately a matter of the nature and structure of the decision-making process itself. Policy is also said to be a matter of power (participation in decision making and the bases thereof) and to involve the exercise of choice with regard to control and change. Private property is said both to constitute a decision-making and policy process and itself to be the product of deci- xi

xii Introduction sion-making and policy. The most fundamental process is said to be that producing order, defined as the continuing reconciliations of freedom versus control, continuity versus change, and hierarchy versus equality. Closely involved with the problem of order is that of authority and absolutist formulation, or the legitimation of the relative as absolute. The fundamental questions of policy are said therefore to be: Whose interests? Whose freedom? Whose capacity to coerce? Who may injure whom? Whose rights? When is a rose a rose, or the problem of adducing specific content to general propositions in a world of selective perception and attribution. And who decides? In a sense, all of my subsequent work is a series of efforts to expand upon and make further sense of the themes presented in this essay. Yet, in a sense, too, all of my work seeks to identify and give effect to the implications of the fundamental notion of scarcity: scarcity implies the necessity of choice, the necessity of a choosing process, and conflict over choice and choosing. The second essay presents the restatement of welfare economics to which the considerations of the first essay give rise and which form the basis of the analysis of the third essay. The second essay presents a precise but general and open-ended positive paradigm of choice, power and mutual coercion; identifies the nature and limits of Pareto-optimality in the context of that paradigm; applies the paradigm in constructing a general theory of externalities; and concludes with a critique of the Coase theorem based upon the general paradigm and its general theory of externalities. Pervading the discussion is the question of the definition and identification of rights, injuries, benefits and costs, but completely absent is any pretence of reaching, on the basis of the theory alone, determinate, optimal, equilibrium solutions; indeed, the proposed reconstruction of welfare economics (including the application of economic theory to the economic role of government) is intended to provide an alternative to conventional practice, an alternative which is not driven by the selective and typically implicit premises of the economic analyst as to whose interests are to count. The third essay examines a particular Supreme Court case in order to identify both certain fundamental legal-economic interrelationships and what actually is going on in and produced by the political-legal process with respect to which nominally market processes are both inputs and outputs. The focus here is on the dual nature of rights, the reciprocal nature of externalities, the difference between volitional and voluntary freedom, the economy (market) as a system of mutual coercion, the process through which property rights conflicts are resolved, the broader range of forces affecting the allocation of resources and distributions of income and wealth,

Introduction Xlll and the meaning of the much-abused term 'intervention' - all in the context of the problem of choice both within and of decision-making structures. The fourth essay was my contribution to a collection I edited in which several dozen authors from a variety of disciplines attempted, within a severe page constraint, to answer the question, 'What are the most fundamental things that can be said about the economic role of government?' My answer has four parts: (1) government is deeply involved in the definition and in the creation of the economy; (2) people try to obfuscate that role of government so as, as part of the process itself, to selectively channel the definition and (re)creation of the economy; (3) the critical issue is almost always legal change of law; and (4) although both the economy and polity are typically comprehended as essentially self-subsistent and independentalbeit interacting - spheres or processes, there is a 'legal--economic nexus' in which both originate in an ongoing manner. The concluding essay of this section comprises an attempt to articulate the nature of that 'legal--economic nexus'. The immediate technical problem is one of discourse: our language predicates and gives effect to notions that economy and polity are essentially self-subsistent and independent and it is difficult to use words in their ordinary meaning to discuss something which argues the opposite. The astute reader will already sense that both the logic, although not the technical analysis, of the third essay (,interrelations between legal and economic processes') and the title of this book ('economic role of government') are relatively imperfect in the light of the notion of a legal--economic nexus: the former seems to affirm that legal and economic processes are essentially self-subsistent and independent, albeit interacting, and the latter seems to treat government as something exogenous to the economy - whereas the argument in this essay is that both economy and polity derive from a common legal--economic nexus, that the two grow up together. The second group of essays presents various aspects of a theory of regulation. The first e~say establishes the diverse and subtle ways in which assumptions in economic analysis give effect to selective, typically implicit antecedent premises as to whose interest is to count. One example is the definition of output. It also argues that efficiency is a function of rights and regulation, and rejects the view that rights and regulation can be a function of efficiency. This is because efficient, or optimal, results are specific to the structure of rights regulation which give rise to them. All four essays discuss various aspects of the relation of regulation to rights: that rights function to protect interests; that regulation is a mode through which rights (interests) are defined and redefined; that regulation is the functional

xiv Introduction equivalent of rights in protecting interests; that deregulation (or regulatory refonn) is simply another fonn of regulation in detennining whose interests (rights) are to be protected. The nature of rights and regulation-deregulation is the detennination of whose interests will be a cost to whom. All of this is predicated upon the above-noted dual nature of rights - which is also critical to any complete and meaningful theory of externalities. To speak, then, of rights is to speak, typically, of regulation; to speak of rights is always to speak of government. And underlying everything, as established in the first group of essays, is the question of power, in detennining whose interest will count and the process through which that is detennined. The third and final group of essays in this volume constitutes a complex but positive analysis of the principle of compensation consequent to the so-called 'taking clause' of the Fifth Amendment to the United States Constitution. The great bulk of the literature in this field, which is primarily and understandably in the law journals, attempts to articulate rules by which compensable and non-compensable takings may be differentiated. The present essays attempt no such thing, but do place such efforts in perspective. The compensation problem is examined in the context of the theory of power, rights and opportunity sets developed in the preceding sections. The compensation problem is seen to be a fundamental aspect of the process through which rights are detennined and redetennined, in which it is literally impossible to protect all rights in a Lockean manner. Critical to the operation of this process is the selective perception of interests and injuries (cost) and the presence of joint rights-ioss-compensation detennination. In other words, compensation discourse is part of the rights (re)detennining process. In addition the compensation principle is shown to be, first, dominated by the operation of selective perception and, second, functional with regard to our psychic balm confrontation with radical indetenninacy in society; the working out (rather than the simple protection) of the problem of order, the matrix of legal principles, the matrix of legal rights, and specific substance of property itself; and the control but also legitimation of the use of government as a mode of social change. Finally a demand and supply model is used to organize knowledge of the factors and forces which influence when the compensation question arises and when it does not, and when compensation is granted and when it is not - all of which, together with the operation of selective perception, in a context of the impossibility to protect (through compensation or otherwise) all interests, explains the confusing, inconsistent, and helter-skelter results of the use of the compensation principle of the Fifth Amendment.