Please join me in welcoming
professor Richard Epstein to Clemson University.
Why don't you guys in the
back sort of come forward okay?
We'll make-believe this is an intermission at
the opera.
The microphone which is already on so I will not
engage in such a futile act and turn the
darn thing off but anyhow it really is a
very great pleasure to be here and I
have to say that I think there's been
something of a plot what they did is
they scheduled a lecture in the
afternoon and had me going nonstop from
the morning all the way through to the
present time with a to broadcast type
things at breakfast or lunch in a
workshop and the effort is to try and
slow down my speech so that it comes to
a manageable levels and I'm not sure
whether or not they'll succeed because
as I get tired towards the end of the
day I only tend to speed up the way in
which I talk but I will try to overcome
whatever disabilities I have on these
scores and to talk about this problem
and I'm not quite sure what the title of
my talk was but I do think I know what I
want to say so I am going to talk
somewhat about the relationship of
capitalism on the one hand and these
sort of the entrepreneurial spirit and
the structure of legal rules putting all
these things together but as is my habit
in talking about these various kinds of
relationships I think it's often times
good to begin with a question about the
choice of terminologies and I have to
confess that I've never been a
particular fan of the word capitalism
describe the sorts of institutions of
which I'm in favor and the explanation
in effect goes to the question of well
who was the guy who invented this
particular term and it was the same guy
who I think was responsible for the
creation of the term socialism and that
would be somebody like Karl Marx and if
you ask yourself when you look at the
terms whether or not he's going to give
a term which is favorable to the
institution that he likes relatives are
the one that he doesn't like you could
say I think that there's going to be a
certain kind of inclination to pick the
terms that favor the institution's that
you in fact are support give them
positive connotations so when we start
to think about capitalism one of the
obvious questions is what does it mean
and in fact if you were very literal
with respect to its definition what you
would say is that capitalism is that
form of institution which says that
either all or the lion's share of wealth
creation belongs to those people who
supply the capital and so essentially
what happens is you can think of the
relationship between capital and labor
is the two major inputs and the
capitalist one who thinks that labor
should be reduced to the marginal level
of subsistence and
put a lot to keep everything that's
going along and the moment you reflect
about that it turns out that that kind
of an imbalance could not survive in any
kind of a competitive situation so
surely when we speaking about capitalism
we don't want to give it that kind of a
connotation well what then is the
competition that we do want to give to
it and I think it's exactly one that
takes a somewhat different view which
says certainly and correctly that those
people who supply capital so that other
kinds of investments in operations can
go forward are entitled to adjust return
on their capital and also we would want
to say about them that the capital in
effect should not be the exclusive
source of wealth that labor manages a
great deal and in fact if we want to put
labor into the capitalist tradition what
we could do is describe it not as labor
but as a fancier term known as human
capital and in effect tried to figure
out a set of institutions that bring out
the best from the natural capital that
we have the internet intellectual
capital that people are able to create
through the creation of ideas and the
human capital that people have to create
all of the above and it seems to me once
you understand that you're talking about
capitalism as a system which tends to in
effect favor various kinds of voluntary
institutions
well what about socialism my own view
about that is a term is that it is
simply far too favorable with respect to
the coercive institutions that it's
designed to describe and so when one
starts to think of socialism you start
thinking about people who are social the
moment you start taking about people who
are social you think about people who
are willing to take into account the
welfare of other individuals to share
and to be cooperative with one another
and in fact you might make recourse to
such expressions as man as a social
animal which requires certain degree of
empathy and so forth ironically
socialism is a political system has none
of these particular characteristics and
I think it's important to explain one
the technical definition of socialism in
effect is the collective ownership of
the means of production and the moment
you start hearing a question about
everybody owning something what you then
have to do is to ask the Orwellian
question which of these owners are more
equal than the other than the other
owners that is there's no way you could
actually have an effective system of
governance with respect to any kind of
resources
in fact what you do is you have
everybody inside a common pool having to
share things and to do so essentially in
sort of equal terms every time you want
to make some kind of decision
so what socialism does is it starts to
create powerful hierarchies of people
are going to be a top and other people
are just going to force to take whatever
it is that the Socialists are prepared
to survive you so that essentially any
system which tries to create a
centralized form of governance is going
to be more hierarchical than a system
which essentially allows each person to
owners capital in his labor and to do
with that what they will with respect to
various kinds of market connotations so
if you want to talk about the socialist
side essentially instead of thinking of
it as a kind of a virtuous sort of moral
characteristic you really want to use
the term like collectivism where in
effect the very notion of that word
suggests that there going to be some
people in the collective who have more
power relative to those of others there
is a real tension between socialism and
democracy under these circumstances and
in fact that manifests itself even in
the United States when one starts to
think of the enormous power that are
given to administrative agencies
relative to ordinary individuals in the
control of various kinds of resources so
when we start to talk about capitalism
therefore I do want to preserve its
favorable connotations and the kind of
thing that I think that is associated
with it is a decentralized system of
control which at least at the start has
three kind of fundamental
characteristics about whose moral common
content we have to speak because that's
after all part of the mission that's
associated with this institute and when
we start to think of what it is
basically you start as a capitalist or a
marketeer and you seem to think that
there are three kinds of premises that
sort of organize and shape the way in
which you look at the world and the
first of these premises is the
importance of promise keeping and what
that means in effect is when you say
you're going to do something then by gum
you really ought to do this kind of
thing and the reason why we like to have
promises is because to the extent that
people can rely on the promises that
other makes they are now free to
organize their lives with a certain kind
of certainty that's created which was
not presents in the absence of that
promise so that promises essentially
become the building blocks for voluntary
cooperation and the thing to understand
about the way in which promises work is
you never want to think of them in
isolation the way lawyers do when a is
suing B for breach of contract what you
want to think about promises is being
imaged in very complicated social
relationships where there are a large
number of promises that are made going
back and forth across multiple people
and the thing that you most worried
about the promise is in fact that
everybody understands what they are and
everybody is willing to do so on a more
or less voluntary basis so the question
of legal enforcement with respect to
promises is in fact something which is
at the back of everybody's month the
theory here is to use promises as a
device to create the stability of
expectations that allow people to engage
in cooperative behavior now sometimes
lawyers like myself actually mess this
up very bad when it comes to figuring
out what it is that we mean when we
start to talk about promises and their
role and they've tried out a theory
which dates back to a noted realist
sometimes cynic sometimes sceptic
sometimes Supreme Court justice Oliver
Wendell Holmes and his definition of a
promise was as follows he says that a
promise is simply an option to perform
it to pay promise to pay damages in the
event of a breach and this then became
talked about in certain kinds of modern
economic circles as the theory of
efficient breach and the logic of this
particular theory to an economist starts
as follows but I don't think it plays
out at the end the argument here is I
made a promise to you and that promise
is going to be worth a certain value so
if it turns out that it's worth my while
to breach this promise what I will do in
effect is to pay you the amount of value
that you would have received with
performance and go off and use the
resource in some other way it means that
you're no worse off than you were before
and I'm better off so we have a social
improvement by virtue of the fact that
we Beach promises it is interesting that
only a few lawyers actually give this
particular theory of promise any kind of
credence whatsoever because for most
people the moment you start treating
promises as options to breach what they
do is they start having a very strong
set of moral reservations about the
in which the entire system is going to
operate they don't want to deal with
people who are going to treat them in a
trifling fashion and to say I could
either honor it or breach this
particular promise and the question is
why do they do that and I think it goes
back to the problems that we've talked
about before that promises should not be
seen in isolation but should be part of
a social network and so what happens is
you get a negative cascade that takes
place I don't perform my promise to you
well if it turns out I don't perform it
you may have an action for damages and
it may take you three years to figure
out how to bring it if you're gonna be
lucky in the meantime since you don't
get what you expected to get from me you
can't do your job to somebody else and
after a while the entire system falls
apart because the consequences of one
breach radiates and create all sorts of
others so that what you really want to
do when you're talking about these kinds
of promises is to make sure that
everybody stays on the same page and
goes forward with them and one of the
reasons why we know that the theory of
inefficient of efficient breach rather
is really quite inefficient is that when
you work for all of these intermediate
associations which are characteristic of
a kind of a capitalist type of system in
which people in effect have trade
associations of one sort or another to
resolve sort of various kinds of
problems people engage in efficient
breaching are always expelled from the
association's because they're no longer
reliable trading partners so one of the
things that we can say in effect about a
system of capitalism if we want to use
that term is to the extent that it
treats promise keeping is an important
kind of value what it does is it imposes
and creates an environment in which
powerful forms of sociability will turn
out to be forged into advanced and
cooperative behavior necessarily depends
upon this simple kind of moral intuition
about the importance of promises there's
also an economic explanation that can be
given for this which i think is equally
important and reinforces the first one
people don't make promises at random
they try to figure out why they're doing
it and what they're getting in return
and the basic intuition you have is that
you could increase the velocity of
reciprocal promises I do something for
you and you do something for me
if both sides benefit the faster and the
more
that you could disseminate mutual
benefits through multiple transactions
the wealthier and half of your society
is going to be so if you have any kind
of a reluctance about the performance of
promises you're going to create a
greater reluctance to enter into these
kinds of arrangements and so you'll see
a general slow up for the lack of trust
that is necessary in one of these
institutions and the lesson that you
learn from this of course is that to the
extent that these institutions do depend
upon trust and do depend on customary
mores it would be a mistake in thinking
about the system of promises to think of
them only in terms of the illegal
enforcement it becomes absolutely vital
to think of them in terms of their moral
content and the way in which you oblige
yourself and have to respect what it is
that you do now the other two parts of a
basic system of capitalism in a sort of
simplest form as a legal matter are
those kinds of things that deal with the
sorts of conduct that you cannot do if
promising and cooperation is the kind of
conduct that you can do and for lawyers
in effect the way in which we capture
this is with the following kind of
libertarian maxim which says that no
individual is allowed to engage in the
use of force of fraud in order to
achieve particular goals that he or she
happens to desire so cooperation yes
aggression no is about ninety-five
percent of what you need to know if
you're going to try and figure out how
to live and to thrive in any kind of a
complex sort of commercial environment
but I think it takes a little bit of
care when you're dealing with these
terms to make sure that you understand
them correctly and don't get yourself
going down the wrong path and having
yourself engaged in definitions of fraud
on the one hand or force on the other
hand that are so broad that what happens
is that the ability to work through
promising are entirely destroyed so
let's start a little bit with the idea
of force and see why this is so
important and then slowly start moving
on and see if we can understand
something that's associated with the
ideas of misrepresentation or fraud well
the question is what counts is force and
the obvious in the clear sense of this
is the use of physical power by one
person against another to overwhelm
their will and if we don't believe that
force is bad under these
we don't have any conception of what it
means to be voluntary and if we do allow
it for one person we have to allow it
for all persons so that in the end what
happens is all social interactions are
essentially armbands taking issue with
one another and using force to resolve
their differences and the ability to
create production in that kind of
environment turns out to be absolutely
impossible and the thing here of course
to remember is that the reason that the
force norm is so strong in every form of
civilized society is that if you have
any generalization requirement so that a
norm which is good for one is good for
all then when you start to think about
the way in which force is interrupted
and used if it's going to be used for
one person it's going to be used for all
persons and the war of all against all
to quote harms is guaranteed to be a
long term loser with respect to the way
things come now that's true about force
it's also true about the threat of force
because one of the things that we know
if the only reason you promised to give
me something is I promise to do
something to you which is going to be
violent or otherwise then in effect what
you are doing is trading off the risk of
certain home or the prospect of certain
home against surrendering to and
disadvantageous transaction and by the
time you're done all of these
transactions will again be completely
socially destructive so if you're going
to prevent the use of force you have to
prevent the threat of force in order to
keep the system in balance well once you
say all of this it then becomes
extremely important to understand what
it is that we mean by force so as to not
let the system to generate at the signs
and so for example if you look at many
of the critics of a capitalist system
what they will constantly say is it's
not just physical force it's not just
the threat of force that really matters
under these circumstances rather what it
is is that the use of overwhelming
economic forces every bit as dangerous
and every bit as perilous to a society
as the use of physical force well what
then counts is the use of economic force
and sure enough if you start looking you
will find that one of the ways in which
you can start to use economic force is
to sell a good for a price lower than
that of a competitor and therefore you
force him out of business in virtue of
the fact that you've taken away his
customers and if you are quite literal
about the use force and the use of the
word take what happens is
looks as though you've kidnapped
somebody and forced them to do business
with you but what's wrong about the
analogy of force in this particular
context is that the physical force
reduces the options of third person
whereas the competitive force by giving
lower prices and greater choices
increases the options of third persons
so you have to do is to abstract away
from the particular dispute between me
and my competitor and ask about the
overall social consequences if the one
set of practices followed relative to
the other and the way in which an
economist might describe this or at
least this lawyer would describe this is
when you start dealing with the use of
physical force everything turns out to
be a negative sum game the more moves
you see in the game the worse everything
gets if you on the other hand they're
talking about competitive forces you
don't want to be misled by the language
because under those circumstances the
games that are created will be
systematic the higher the velocity of
transactions the better off it turns out
that pretty much everybody will be when
you start looking about the next portion
of this situation which is the norms
with respect to misrepresentation and so
forth they're every bit as important but
not quite as important the reason
they're not quite as important is that
if somebody lies to you and you're on to
it you could walk away if somebody holds
a gun at your head and you're onto the
fact the option of retreat is much more
perilous but nonetheless if this stuff
is insidious and if information isn't
perfect what happens is some kind of
misrepresentation can always induce
people to engage in the kinds of
contract they would not engage in if
they had full information so if
something is really worth 10 to you and
the other fellow in effect that makes
you believe that it's going to be worth
15 you'll pay 12 for it which is a
losing transaction because you think
you're getting 15 but you're only
getting 10 out of the particular
arrangement so it's extremely important
when you start looking at these kinds of
things to recognize that the reason why
we're so upset about fraud is that it
changes the relative value of goods that
are exchanged or services that are
exchanged in voluntary markets and no
longer guarantees that you're going to
get mutual improvement through voluntary
exchange now the question you then ask
is whether this concept in fact can be
actually expanded to the point where
it's becomes non recognizable
let me explain to you you've got this
danger to worry about so one of the
issues about fraud is you have to say
something in order to be a liar or can
you just kind of hint at it and then in
effect is concealment the form of fraud
to which the answer is in some cases in
most cases yes but what about
non-disclosure so am i lying to you if I
don't tell you that I have a
particularly valuable use of your
particular piece of property if I do
disclose that purpose to you you're not
going to sell it except at a very
elevated price so generally speaking I
have to make sure that the definitions
of fraud don't become so strong that
they take individuals who acquire
information at positive costs to
themselves and force them to share it
voluntarily or involuntarily with other
individuals with whom they want to
transact and if you actually look at the
operation of modern securities laws
sometimes the disclosure requirements
become so prohibitive that it turns out
far from aiding voluntary transactions
they impose heavy costs that block now
if you start to look at this situation
and think about it for a second what
does it tell you about morality well
oddly enough it tells you something
about the capitalist morality which for
the most part is a pretty good thing if
you're going to ask yourself what kinds
of individuals can survive in a market
economy which has all of these rules
keeping promises avoiding the use of
coercion avoiding the use of
misrepresentations what you've done in
effect is you've asked of individuals
that they be honorable that they not lie
that they not cheat that they not
confined and you know people will say
well what's the big deal about that all
these negative kinds of virtues well for
the first thing of all it's big enough
in effect to understand that it's part
of the Ten Commandments and similar
situation if it were easy not to kill
not to lie not to steal not to bear
false witness against your neighbor you
would not have to have all of the
terribly strong prohibitions that
religious and social signals create and
why does it turn out that you need to
have these kinds of social reinforcement
because given that individuals are
self-interested if they can achieve
something through illicit means that
what will cost them they can through
voluntary exchange they may be willing
to do it
and they have I set their own welfare up
against anybody else's so in effect the
strict kind of commercial morality that
puts these prohibitions in
place is an effort to make sure that you
can bolster up the legal system without
having to rely on the law at every given
turn and as I always like to say with
99% of the transactions that you and I
do today we are still in the state of
nature that as we know when we have
arrangements to meet somebody for dinner
or to share a carpool or to go to a game
and to go out on a date or to do some
homework together there's gonna be no
legal enforcement than the event of non
performance so that what you have to do
is to rely on the social stuff to keep
things together and in fact any decent
capitalist society understands full well
that if the only thing that stands
between the defendant and
non-performance is a legal threat the
whole system will fall to pieces you
must be able to develop a culture in
which these kinds of prohibitions are in
fact going to be sufficiently well
honored that the social norms will prove
stable over time and this is not an idle
thing to do the ability to achieve this
in a large commercial society is often
extremely difficult small closed
communities can do this but when you're
working in a very large and impersonal
system like a modern American economy
you must be able to develop methods of
kind of trust and confidence that can
apply to strangers as well as to friends
so there you have an effect I think the
starts of immorality and then the next
question you have to ask is where does
the system go wrong what is it about
this particular system that we have to
be careful about and one of the things
that you must worry about is as follows
there's a great temptation when you
start dealing with various questions of
morality of one sort or another to say
well it's just perfectly self-evident
prima facie evidence intuitively evident
that everybody ought to keep their
promises unless induced by force or by
fraud and the answer you then ask is
like why is that the case and people
kind of give you the sort of analysis
that I've given before we just can't
conceive of how society would go on
unless this happen but it turns out that
there's a kind of a trap that's engaged
in this type of situation and the trap
arises for the following reasons do we
think that all promises are equal and
there's no question that when you start
dealing with the base
in most forms of commercial morality
there is a really good sense to say that
the whole doctrine of freedom of
contract starts with the kind of
proposition that if I'm selling you a
dozen eggs and you are buying them what
happens is you guys should figure out
what the price is and the last thing we
want the state to do is to come in with
a system of price controls minimum or
maximum which is essentially going to
disrupt the organization of voluntary
transactions but does it follow from
that that every contract should be
enforced and it turns out you can go far
back into English and American history
and you will always come up with the
same somewhat in coherence which is to
the extent as monopoly power which is
held by a single individual then you
start to think maybe something else is
at stake and how do we start to deal
with that well there's several different
expressions of the same idea and let me
mention them to you right now and then
when we start to do them you could see
the way in which the game gets played
the first one in effect is suppose it
turns out that my promise is a promise
to my worthy friend Brad over here and
what I say to him if you don't sell your
goods in my territory in my hometown I
won't sell my goods in your hometown and
you'll look at this and this is a
contract for the division of market
between two people there's an author
there's an acceptance
there's voluntary consideration there's
mutual gayness between the parties
there's no force there's no coercion he
sits there and he's a smart businessman
he nods and I nod and what we've done is
we've had a contract for the division of
markets in restraint of trade and so the
question is is that agreement to be one
that ought to be enforced when there is
no question if you simply concentrated
your attention on the relationships
between the parties and about the
importance of promising you could say
just as there's honor amongst thieves
there ought to be honor amongst those
individuals who try to divide markets
between themselves in fact it's this
very strong condition of a position of
commercial morality which may mean that
even though there's no enforceable
agreement Brad will be an honorable guy
and I will be an honorable guy and each
of us won't sell in the territory of the
others and so now the antitrust law
comes along and it says no you're
missing something here that when we
start talking about the morale
promising what happens is we are
concentrating exclusively on the
relationship between the promise saw and
the promise II the two fellows who
engaged in this agreement and what we
really do is have an implicit assumption
that the third-party effects of these
particular kinds of arrangements are
going to be beneficial well that's a
perfectly sensible assumption most of
the time if it turns out that I sell
somebody in the audience at dozen eggs
he's richer by having the eggs I'm
richer by having the money each of us
being better off is now in a better
position to do transactions with third
persons so what we can say of ordinary
voluntary exchanges is it's not that
they don't have any externalities it's
that the externalities that they have is
systematically positive so in fact if
the two of us are creating gains for
each other and gains for the rest of the
world it's a very good reason why we
want to enforce these things and for the
most part when you're dealing in
competitive industries and you're having
voluntary exchanges between buyers and
sellers the uniform direction of the
externalities will be positive you tend
to ignore them because there's nothing
you have to do to enforce them but now
let's look at us two guys and we get
together and he says no Epstein around I
could raise my prices by 15% I take a
10% cut and customers that I'm still
making more money I look around I make
exactly the same kind of calculation and
what you could then conclude is if you
look at the externalities here all of a
sudden they turn from positive to
negative it's not quite as dramatic as a
contract between the two of us to kill
everybody in this room but nonetheless
it's the kind of situation where one
instinctively fears the danger and so
what you have to do when you start
talking about various kinds of promises
is to understand that the kind of
embedded judgments you make about
ordinary simple transactions in your
everyday life do not necessarily
generalize to all the kinds of
transactions that you can make anywhere
at anytime with any sort of individuals
just is not going to happen that way
well once you start opening this thing
up it turns out it's not real easy
because it may well be when we start
looking at this kind of an arrangement
that there's some hidden benefit that we
didn't know and that each of us can
shorten his distribution system so that
the cost that you will get by the market
division will be cheaper than if we each
tried to invade each
this territory or it could be even if we
didn't have the agreement we would have
still decided to sell locally for that
particular kind of reason so the
antitrust law forces you to abandon the
idea that this sort of capitalist notion
of always respect your promises is to be
good right
this place is a massive degree of
uncertainty because once you start
taking seriously the notion that
systematic negative economic effects the
third persons are a reason to limit
contractual freedom the body of law that
you develop is just huge and so there's
now a huge question which is not a moral
question but one of technique like what
do we do in the battle in the antitrust
law is always between rules of reasons
which sound reasonable and often or not
and rules that are called per se
necessarily in itself which sound clear
but are often anything but and the kind
of arguments that you have to make is
some kinds of arrangements are sort of
naked and so we never allow them and we
don't look at their adverse effects on
an individual cases and at other times
it turns out that we have to look at
these things and the variation in
Arrangements is so complicated that
sorting these things out is very
difficult now this is not a place when
you're talking about moral foundations
of capitalism to spend your time going
into the ins and outs of the antitrust
law which could easily take a lifetime
to do but it is to give you a cautionary
note that once this particular problem
comes up what you do is in certain kinds
of arrangements have a much more
difficult kind of technique and
essentially when you're trying to take
into account the adverse effects on
third parties the moral intuitions
become weaker and that the need to rely
on more explicit economic tools become
stronger and for the most part when I
look at the antitrust situation I become
something of a minimalist I'm generally
not going to enforce cartels between the
two of us but beyond that it's not clear
how much further I'm going to go that is
to put the point back in the opposite
direction once you start to leave the
moral intuition behind promises many
people think you have to go the whole
way and invalidate all sorts of
contractual arrangements on the grounds
of public policy I'm much more skeptical
about that and so for me the issue is
how do I make sure that you go a little
bit beyond these sort of simple moral
framework but don't allow it to go so
far as to consume what happens let me
give you but one example one of the
things that antitrust law often deals
with is the law of predation and this is
an effect selling below cost in a
ruinous circumstances so to drive people
out of business the hope being once this
thing is done you could raise your
prices to
monopoly levels and make a fortune well
nobody's ever found a real case of
predation that has actually worked and
there all sorts of technical reasons why
it won't and one of the reasons you're
uneasy about the antitrust law is that
people start getting predation into
their blood they're gonna start to
punish very effective competitive
activities so a body of law which is
designed to make things competitive
turns out to make them anti-competitive
so when you leave your moral intuitions
in this area but where the fact you're
entering into quicksand and it's easy to
take the first step take two or three
you may be into a very long bog now the
second version of this which is of
course of immense importance has to do
with the issue of common carriers and
regulated industries and networks and it
turns out that if you look at many
industries like for example the
telephone industry it's very difficult
to organize this along competitive lines
the explanation is really quite simple a
network is only valuable to the extent
that you have lots of people who
participate in it
and so if you have two rivals telephone
companies the Thompson company and the
Epstein company and people who are on my
company can't get onto his company what
happens is the value of each Network
necessarily declines by virtue of our
inability to create this sort of
universal system so the question then is
how is it that we managed to make sure
that these networks work and there are a
couple of things that go on one of them
is that neither of us can exclude people
within their territories from joining
the network because if there's a sole
supplier the right to refuse to deal is
extremely deadly and so therefore you
have to figure out what's the terms
under which you're gonna let them in and
for doing this almost invariably you end
up getting yourself into some kind of
regulated rate situation which is a mess
to work out but almost impossible to
avoid and so the entire theory of rate
regulation is that develop them these
network industries began is in fact
another mess equal in complexity to that
associated with the antitrust law once
you deviate from the leave the
libertarian model nothing is easy the
second thing is well we got people into
my network we get people into Brad's
Network how do we make sure that the two
of us could connect and one thing you
could do is to form a single urban
network which sort of takes everybody
into account and I have created a real
monopoly or you can have into
connections between the two of us or we
can allow people to steal up to buy
elements from one to the other the 1996
Telecommunications Act in a sense allow
people to buy what they called unbundled
Network elements from other people which
meant in effect that new and new
carriers could come in and buy
components of the old system at a
fraction of that cost and it probably
led through that system design to maybe
a trillion dollars worth of social
losses as the whole system became
completely whacked up so you've got to
be aware when you're trying to forge
networks out of separate people how you
do it and as simple as somewhat
duplicitous system is to say if I've got
my network and he's got his network we
have to agree to interconnect on neutral
terms so that anybody from his side he'd
get to my side it's not cheap but it's a
lot cheaper than the other thing so
again the basic point that you're trying
to deal with when you're looking at
these kinds of systems is that you
abandon the simple view that everybody
has a right to deal and not to deal with
anyone else
because you're in this nether land where
it turns out you have a single supplier
of goods the ability to counteract the
power of that monopoly is extremely
difficult
so what moral would you want to develop
in the long run well the first best
solution it turns out is neither
antitrust regulation nor is it rate
regulation the first system is to try to
develop a system of rights and duties
and obligations so you could get new
forms of technology in that break the
old monopoly positions down and so for
example when you talked about
telecommunications people were deeply
preoccupied about the monopoly that
every local exchange carrier had over
the last mile of wire that went back and
forth between places which is a
perfectly sensible thing to be worried
about and they drafted rule after rule
to do it and sure enough within a matter
of three years this thing became as
cheap as the landlines and all of a
sudden that local monopoly problem
disappeared by virtue of the creation of
cell phones so in 1996 when I worked on
some of these cases the confident
prediction was that cell phones would be
a kind of an exotic extra which people
would turn on in emergencies nobody ever
thought that the number of landlines
would go down by thirty five percent
which is pretty much what has happened
or that the number of cellphones would
exceed the number of landlines which is
also true today but that's exactly what
happened when I think of our own
household at the Epstein's we used to
have two landlines and our kids go off
to college my wife says why are you
keeping that second line when it turns
out we both have cell phones so out it
went and all of a sudden you could see
the way in which slowly surely in an
extra blade a system of technology took
an industry that was relatively
monopolistic and converted it into one
that was much more competitive and one
of the things that one likes about the
dynamics of a capitalist system is if
you constantly try to facilitate ways to
create new entry what you are going to
be able to do quite happily and quite
fortunately under the circumstances is
to beat the monopolies problem without
having to engage in any kind of a system
of regulation so I was taking a leaf
from Hayek and similar thinkers free
entry is essentially the single most
important disciplinary feature and in
order to have that you must develop the
moral frame of montt that when the new
entrant comes in and takes business away
from established firms we do not treat
that as a form of objectionable behavior
of ruinous competition or whatever we
treat it as a benevolent thing it is
extremely difficult in a political
society to get disappointed competitors
who've lost in the marketplace to say
that they're not entitled to go to the
one form or another against anybody else
and the real moral component in all of
this is that losers have to be made to
understand that they should take their
resources and redeploy them rather than
trying to create this impossible
situations against voluntary exchange by
the creation of various entry barriers
whether it be the requirement that you
get a permission in order to run a truck
from here to there or a plane from this
Airport to that Airport and the amount
of destruction in the United States that
is taking place under the ruinous
competition banner is so great and so
legion that unless you capture this
particular error and internalize it you
are going to watch the same thing take
place as we go forward into new markets
whether it be through net neutrality or
sort of state provision of health care
or a thousand other things that take
place now I was talking about innovation
and thus for the arguments that I made
is that innovation means in effect that
we are resistant to monopolies but the
world is sufficiently complicated that
in some cases the only way you get
information you get innovation is to
create monopolies so one of the things
that one has to sort of figure about if
you're talking about the moral
foundations of capitalism is to figure
out what's the status of various forms
of intellectual property in your society
what are you gonna do with patents in
particular what are you gonna do with
copyrights what are you gonna do with
trade secrets to take only the big three
and I have to say that this is a topic
which has been subject to an immense
amount of dispossession this mutation in
the last five or six years and there's a
peculiar socialist libertarian kind of
alliance that has taken place both of
which have said we are really very
suspicious of intellectual property the
socialist objection you could kind of
understand intellectual property is a
form of monopoly yes and it creates some
powerful enterprises and if you want to
have all the means of production covered
by social institutions you're unhappy
about having a Microsoft or an Intel or
a Google out there and you want to
figure out what you could do to reign to
me but the real opposition often comes
from the libertarian side in which they
say every time you create a patent what
you're doing is you're limiting the
freedom of individuals to use certain
kinds of inventions every time you
create a copyright you're making it
impossible for me to the benefit of
you all I might add to sing an aria from
Don Giovanni if you'd like I'll try but
I think I've talked enough that you
don't want to hear me sing so we put
that as son and the issue is how do you
justify these monopolies and the
explanation for the most part is
relatively simple is that it's one thing
to redistribute benefits that you don't
have and it's another thing to have
benefits to redistribute and that the
law of intellectual property has always
been one which says we have to give a
return to the inventor in order to
stimulate the production but we don't
want it to be in perpetuity because
essentially that's too large a reward
and the basic battle and intellectual
property has always been how much do you
push it how much not and the key thing
to understand about this battle again is
a moral intuition about promises a moral
intuition about the use of fraud a moral
intuition about force doesn't let you
understand the way in which these
systems have put together what you have
to do is to move from the sort of
individual morality of individual
transactions to a morality which
essentially is much more efficiency
oriented to see an way in which these
large structures are organized so the
first portion of the difficulty with
respect to our capitalist system is it
really doesn't come to grips in a
coherent fashion with the monopolies
cases that we don't like or the monopoly
cases that we do like there's also
another element which i think is very
important what else is there about this
particular legal system which isn't
going to do the job and I'll finish up
with a few minutes on this particular
point and here one of the things that
you have to note is that all of the
prohibitions or all the moral
injunctions that I've spoken about thus
far with respect to the creation of
morality have been of the Ten
Commandment varieties thou shalt not
steal thou shalt not lie thou shalt keep
your promises and then you have to ask
yourself this question to what extent
will we see any kind of entrepreneurial
behavior if the only thing that we had
were people who managed to follow and to
keep up with these injunctions and to do
nothing else and what's wrong with this
is a total analysis of capitalism of any
social system is what it does is it
tells you what the rules of engagement
are but it doesn't tell you how to play
the game
so if you want to think of a homely
sports sort of analogy anybody who wants
to compete in sports has to know not to
commit fouls not to yell at the referees
not to pull at somebody's pants when
they're going up for a jump shot or a
thousand things like that but if you're
trying to t be a coach the last thing
that you would want to do is to say
alright this team is now ready to go out
there and to win the South East
Conference because it knows all the
rules of basketball and so then somebody
will come along I said well coach I mean
how do we run our inbounds plays do we
set screens do we set picks um what do
we do and it turns out that what happens
for entrepreneurial activity is you must
always figure out ways and strategies to
organize yourself within the framework
of the legal rules as they have been
created and there's absolutely nothing
about the morality of law which tells
you about them and how morality of
innovation so you do is you go out and
you hire yourself a coach you call Phil
Jackson you guys a guy named Michael
Jackson Jordan I guess was his name
comes from the other state around here
and you know what it turns out they
create a triangle up offense and all of
a sudden its history and essentially
entrepreneurial activity has to take
place within the framework of these
established legal rules and you don't
understand the morality of capitalism
where morality really matters if you
understand the rules and you don't
understand the moves that you make
within the game so now what kind of
personalities does it take in order to
engage in these sorts of rules and here
I want to basically say one of the
hidden advantages of capitalism by
giving an old joke which everybody used
to tell about school every kid who wants
to apply to a certain College announces
his great leadership skills and so the
Dean of admission looks around and he
says I got 10,000 leaders coming into
this place next year
I got no followers what are we going to
do well I mean it's a joke but it
basically has an extremely important
joke because one of the features that
you want to understand about a
capitalist system is we all don't have
to be entrepreneurs we all don't have to
be heroes what happens is if it turns
out that we have some people who are
risk takers one of the ways in which you
could magnify the risk that you're
willing to take is the hire or worker
you take the random flow associated with
ups and downs in the business and
take the relatively fixed return
associated with the salary and so
essentially is one of the geniuses the
capitalist system is that it can adjust
for people who have all sorts of tastes
for risk all sorts of tastes with
respect to responsibilities and it
doesn't demand of everybody that they
read Ayn Rand's book and decide that yes
I'm going to be the God who made out
with shrug or whatever else you want to
say about it has quite the opposite sort
of features it allows people to be
followers it allows people to take
part-time jobs it allows people to do
whatever they want including to engage
in idleness so long as they don't
require others to support their peculiar
habits so essentially the system in
effect permits multiple types of talents
to develop and this becomes extremely
important because we recognize a the
difference in sort of attitudes towards
risk and be the difference in skills
that people bring when they have a
constant level of risk what the system
does is to miss cooperation through the
division of labour which is an extremely
powerful way to increase the overall
production well then where do we want to
pace our attention and I think this is
always a complicated question because if
you're in a firm and you're actually
managing the firm the first rule that
you have is a manager I know this sounds
odd coming from a law professor but I've
done a little bit of this in my time is
that there's no individual in this firm
who don't want to treat as a person to
bring the best out of it so you're going
from the top of this organisation to the
bottom and your basic message is
everybody no matter how big or how might
a smaller cog you are in this place the
impressions that you create the work
that you do will redound to the
successive failure of this institution
and we don't want you to think that if
you're indifferent we will be
indifferent to what it is that you've
done you really have to develop some
sense of esprit de corps camaraderie
willingness to cooperate all these kinds
of team spirit activities have to come
through and you know that's management
style but you know for the most part
when people want to talk about
capitalism they don't want to speak
about the rank and file what they tend
to speak about are the entrepreneurs and
I remember sitting with one of my very
successful graduates from law school who
thirty years afterwards has done
extremely well and he told me something
which I will really Pete to you he says
Richard he says you know I would rank
intelligence
he looked at me with a kind of a
slightly I would write about 11th on the
list of virtues that you need to be a
successful businessman I said what do
you mean he says well look we think of
the kinds of things that come before you
have to have a sense of market
opportunities you have to have a sense
of judgment you have to have an
infectious sense of enthusiasm you have
to have a huge amount of curiosity you
have to have a tremendous amount of
persistence and you just kept on going
on to all the kinds of attitudes that it
took in order to create a successful
entrepreneur and intelligence was
somewhere on that particular list but
Edison may have had a point when he said
it's 99% perspiration and 1% inspiration
yeah half the house as I mentioned to
some of the students at lunch today are
real kind of passion for what it is that
you do and so what is it that capitalism
in effect can do by giving all of these
kinds of alternatives about how it is
that you organize and structure these
kinds of arrangements what it does in
effect is it gives freedom for all kinds
of personalities to work together in
relative harmony with one another in
large firms and in small firms and in
different kinds of organizations it
means that those people have genuine
entrepreneurial skills can put them to
work and sure enough thirty thousand
other people who don't have the same
kind of inclination could be in that
kinds of businesses if in fact you start
off on a launch firm and you don't like
that you can go off and start your own
business you can leave businesses
entirely it's amazing how little people
appreciate the importance of
Occupational mobility and occupational
freedom but the essential feature of it
is it allows for individual self
fulfillment in ways that you can never
achieve if you've got a rigid system
which announces oh you did very well on
the math test you will be an engineer
and send somebody to school that way in
fact this tells us something about the
success of the American educational
system and let me sort of end on this
note because we're coming to the end of
this thing you know I teach in a law
school and you have the American style
wall school and you've got the French
style law school and if you go into the
French style law school it's got this
military fatlings quality about it
they've all had exactly the same
education they started in a khole and
everybody in France takes the same
lesson on the same day and they go up
and then they go into judges school at
the time of 18 and they go through a
certain apprenticeship and they become
judges
you go to an American school how do you
become a judge well you know I went to
college I don't know what I majored in
but I may have done drama and then I go
out and I kind of work in a firm too as
a startup company and then it turns out
I decided to take two years off into
drill oil somewhere I come back to law
school and I'm in a classroom with a
bunch of people none of whom have
exactly the same kind of education
because they've all had very wayward
careers one way or not and you'll look
at this motley crew and they can't put
one foot ahead of the other in synchrony
with everybody else but you will always
create better judges and better lawyers
and better doctors and better anybody if
in fact you have this form of hybrid
vigor
because what essentially happens is out
of that chaos and confusion two people
get together it turns out their skills
are not perfectly identical so now they
turn out to be complementary you learn
from him she learns from you on and on
and on it goes so that in the end when
some of these people become judges after
being commercial lawyers after being
big-time litigators after being senators
after being poor small-time politicians
or whatever it is you get hybrid vigor
on the bench and you will come up with a
stronger judiciary than you will in the
French system where everything is
completely monochromatic and so what
happens is our educational system
insofar as it's somewhat decentralized
and somewhat chaotic in effect has a
hidden strengths that you don't get when
you have strong forms of centralized
planning and one of the things that you
are aware of in a capitalist system is
that central planning is the kiss of
death and decentralization will get you
more economically but it will also get
you more moral vigor as well so I do
think in the end that the economic
justifications for capitalism the moral
justifications for capitalism are not
perfect there are certainly things that
can be said against it but a lot of
things that are said against it are said
against it by people who say look at all
these capitalists they cheat and that's
not an argument against capitalism it's
an argument against a system which
allows people to get away with blue
murder because cheating of course is
against one of the fundamental norms
that we've talked about and so what I
would urge you to do is you start
thinking about these things going
forward in your future is to critically
ask the question of what's wrong with
this sort of system that I've talked
about and for example before I was on
tape and students asked me one question
or another about how this thing is gonna
break them and there are some counter
punches that you have to deal with but
if you're trying to figure out in
general the way in which you organize
the social situation this is the basic
rule that I would start with you start
with the very naive presumptions about
force and fraud and cooperation you'll
worry a little bit about the monopoly
question and it's from that base what
you do is figure out what kinds of
adjustments you have to make in systems
of tax regulation health care or
whatever you never want to start from
the opposite assumption which assumes
that this model is broken and you begin
from a system which prizes the
collective ownership of the means of
production because what happens when you
do that is you turn out standardized
people and standardized people and
either good leaders no good followers no
good citizens and to some extent that's
what it is that we're trying to create
in the formation of our social and legal
institutions thank you
[Applause]
