For more than a century, economists have explored ways to make the law more effective. While i Journal of Law & Economics (the first field journal) was not established until 1958, at the beginning of the 20th centuryth turn-of-the-century economists such as Alfred Marshall, AC Pigou, John Maynard Keynes, and many others were busy studying how economics could inform law to improve outcomes.
However, moving from the “blackboard” economy to the real world is a difficult endeavor. We have repeatedly seen economic policies fail to achieve their stated goals, from central planning in the USSR to “market reforms,” such as carbon taxes. There is an extensive literature on this failure, which readers of this blog are surely familiar with: the information problem highlighted by Hayek, social choice issues such as rent seeking and other collective decision making problems, and so on. But there is also the problem of translating theory into reality. Economic theory uses many terms that are slightly different from the way they are commonly used. Translating these principles into law is difficult. An example of dumping will illustrate this point.
A little business before I begin: I assume here that the purpose of law is to improve economic outcomes as defined in the neoclassical sense: to maximize total welfare. My general point about the difficulty of aligning rules and regulations will not change if this assumption does not hold, although the examples will.
Dumping is a process where a company sells below cost to try to gain market share by driving out competitors. There is an argument that such behavior is anti-competitive and will lead to serious economic consequences. Economists generally reject this argument (indeed, one of the first papers of Journal of Law & Economics an ancient passage that disproves this myth), although it may still be considered invalid and not welfare-enhancing. To that end, legislation exists both at the US federal government level and at the international level (World Trade Organization) that prohibits dumping by domestic and international companies.
But there is a big difference in between economic abandonment (ie, dumping as defined in economics) and legal abandonment (ie, disposal as defined in the law). In economics, dumping is when goods are sold below Average Total Cost. For economists, “cost” includes both tangible (money) and intangible (opportunity) costs. Implicit costs are easy to see, but implicit costs are more difficult. Despite the clear definition, economic abandonment is difficult to see. Therefore, when legislation is written to try to improve economic outcomes, legislators must use something measurable. Hence, the legal definition of abandonment.
Legal abandonment is a completely different matter. A legal disposal is a good sale for less than “fair value.” But what is the right price? The Department of Commerce and the US International Trade Commission (the two bodies charged with investigating unfair international trade practices) have three methods for determining fair value: 1) what is the value of the goods in the home country, 2) the price of the goods. good for others 3rd country, 3) what is the “constructed” price of the good (the cost of making the good, and the markup determined by the Department of Commerce).
Note that the legal definition of dumping is very different from the economic definition. Indeed, the two describe very different practices! From an economic perspective, departure from any of the three definitions of “fair value” does not constitute unfair or anti-competitive behavior. Indeed, traveling can be a competition again welfare development! We should expect prices to vary in different markets (supply and demand are local). Furthermore, where economics treats the price of goods as arising depending on marginal profit and marginal cost, the legal definition of dumping considers price as known in advance and just a function of implicit costs.
Because of the vagueness of the official image that is being thrown away, it is prone to being forgotten. Firms often use dumping as a hammer to exploit competition, in particular for home competition. A tool that aims to prevent bad habits ends up encouraging bad habits. In short, by trying to translate economic theory into law to direct outcomes, the law produces the very outcomes it is trying to prevent! (For a full discussion of the literature on the anticompetitive nature of antidumping law, see Free Trade Under FireChapter 5.)
One might reply, “But Jon, you cunning and handsome devil, that shows that the law can be further improved. There is no difficulty here.” But I don’t agree. A good scientist is comfortable with the fact that there are many factors that influence our behavior that cannot be measured. In economics, cost is one such thing: cost is ephemeral, psychological, and subjective. Costs, and their interpretation, will vary from person to person, and circumstances. It doesn’t happen to an outside observer ex ante knowing what someone else’s expenses are. Indeed, the decision maker may not even know the costs they are facing. The law it should rely on proxies, such as accounting costs, that do not interpret information in the same way. Therefore, translating economic theory into practical law faces an uphill battle.
Abandonment is one obvious example of the difficulty of translating theory into law. But even when things go well, there are always unintended consequences. Along with trade, Trump and Biden’s clear intentions with their tariffs were to raise domestic prices of goods to discourage imports. That worked as intended. But the unintended consequence of reduce exports and it happened. Let me conclude with what I call Jordan’s Law of Unintended Consequences (named after fiction writer Robert Jordan): “The Law of Unintended Consequences, is stronger than any written law.” Whether what you do has the desired effect or not, there will be at least three that you never expected, and one of these is usually unpleasant” (from Foam Line by Robert Jordan, page 334).
Jon Murphy is an assistant professor of economics at Nicholls State University.
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