ProfessorBainbridge.com

Complexity of legislation

Calpundit Kevin Drum rebuts a conspiracy theory explanation for complex leislation:

[L]egislation has been getting increasingly complex for a long time, and it seems to be a bipartisan failing. In fact, one of my political science professors, Morris Fiorina, wrote a book a few decades ago theorizing that there was a cycle that went like this:

• Congress passes complex legislation.
• Constituents get confused and irate.
• Constituents call their local congress critter.
• Congressional staff gets on the horn with offending agency and clears up the problem.
• Grateful constituents reelect congressman.
• Repeat as necessary.

In other words, whether consciously or not, congressmen like complex legislation because it gives them a chance to help out their constituents. This book was written 30 years ago, and I don't know if Fiorina himself still supports this theory, but I've always thought it was pretty clever.

I keep fairly close track of the public choice literature and my sense is that this is still a widely accepted exlanation for statutory complexity. (Poliblogger Steven Taylor apparently agrees, as does Outside the Beltway.) Yet, it is not the only explanation.

Statutory complexity has at least two additional sources besides those Kevin et al. identified. One follows from transaction costs. Any longrange planner faces the problem of uncertainty. As the time horizon with which onedeals extends towards the indefinite future and the number of variables one must accounts for increases, one must anticipate an ever-growing number of contingencies. Attempting to deal with multiple contingencies ex ante necessarily results in complexity. You need a lot of detail to deal with all sorts of "if this happens, then do that" commands. Congress could (and often does) deal with complexity by leaving the problem of future contingencies to the courts and regulatory agencies to be addressed ex post. Yet, Congress may not wish to give up control to those other bodies. A Congress controlled by Democrats, for example, may not want to give regulatory gap-filling powers to a Republican administration. Hence, you're going to get many cases in which Congress will try to fill as many gaps as possible in the regulatory scheme ex ante, which leads to complexity.

A second source of complexity arises where there are multiple interest groups involved in the legislative process. One way of looking at legislation is to think of Congress as a referee between competing interest groups. In the legislative process, the interest groups eventually strike a bargain. Congress then ratifies that bargain and gives it teeth by passing a statute. Sometimes striking a bargain among multiple interest groups, especially in an area where there are many variables for which to account, requires a highly complex contract.

Bottom line? Sometimes complexity in statutes exists solely for the sake of complexity. But sometimes it has a real - and arguably even legitmate – purpose.

Stock ownership guidelines for corporate directors

A growing number of US public corporations require that directors own stock in the corporation in order to serve on the board. In theory, such requirements align director incentives with those of shareholders. In practice, however, some of these plans may have an exclusionary effect by limiting the pool of potential candidates to those with the means to acquire the requisite amount of stock. Consider, for example, the plan adopted by Praxair:

The board has adopted a policy whereby directors must acquire and hold during their service as a Praxair board member shares of the company's stock equal in value to at least five times the base cash retainer for directors. Directors have five years from their initial election to meet this guideline (or, for incumbent directors, until October 2007). As shown in the stock ownership table, all directors have met this guideline or are within the compliance period; and most substantially exceed the guideline. In addition, any new director elected after October 2002 must, no later than the date of his/her election, acquire, using his/her own personal resources, shares of the company's stock equal in value to the base cash retainer. [Emphasis supplied -- ed.]

In order to join Praxair's board, you'd thus have to pony up $55,000 (the amount of the annual retainer) before joining the board and out of your own personal resources. Requiring such a substantial investment would discourage a lot of capable folks (guess who?). Granted, one could probably borrow against receipt of the retainer, but persons with a modest portfolio still might be reluctant to make such a sizeable investment if doing so left their portfolio substantially less diversified. As we strive to get rid of crony and ceremonial directors, the question must be asked whether it makes sense to limit the pool of plausible candidates to the very wealthy. [Update: Thanks to an alert reader who caught an error in the first version of this post.]

Getting rid of crony and ceremonial directors

The WSJ has a major report today on Dick Grasso's tenure as NYSE CEO. It reminds us that one of the key problems with Grasso was his ability to stack the NYSE board with nominally independent directors who were in fact Grasso cronies and/or ceremonial figureheads who knew nothing but had a lustrous resume. Eliminating crony and ceremonial directors would be a major step towards undoing the imperial CEO of the management-captured corporation and restoring the primacy of the board of directors. But how?

Requiring that the corporation have a majority of independent directors, as the NYSE listing standards now do, is not enough. The Grasso story confirms that a CEO can still stack the board while complying with a director independence requirement.

Instead, the key is control of the nominating process. As boards become stronger and more independent of top management, the process builds momentum. For example, Westphal and Zajac have demonstrated that in CEO-dominated boards, newly appointed board members tend to demographically resemble the CEO. In contrast, as board power increases relative to the CEO - measured by such factors as the percentage of insiders and whether the CEO also served as chairman - newly appointed directors demographically resemble the board rather than the CEO. The NYSE and NASDAQ listing standards now require that the corporation have a separate nominating committee comprised solely of independent directors, which is a major step in the right direction. Additional transparency, so that the markets can verify that the nominating committee itself is not stacked with cronies or figureheads would help too (although I still share Mike O'Sullivan's skepticism of the SEC's new rules, even though some of the concerns he raised were resolved in the final rule). Only when boards truly wrest control of the levers of nominating power from the CEO will director primacy triumph over managerialism.

Parmalat as a Corporate Governance Scandal

The Parmalat situation started out as a fairly standard - if stunningly large - accounting fraud. Managers allegedly used various accounting tricks to avoid disclosing sizeable losses, possibly with the collusion of at least some auditors and lawyers. According to this morning's WSJ, however:

As the probe advances, one of the chief questions remains: Where did the money go? Much of the alleged fakery appears to have been aimed at hiding losses, according to a person familiar with the matter. But prosecutors also say they now suspect that individuals were siphoning off some cash for themselves, this person said. ...

Prosecutors looking into Parmalat are alleging Mr. Tanzi, who stepped down this month, misappropriated at least $600 million from the business over the years, according to a person familiar with the widening probe at the Italian dairy conglomerate.

In other words, the Parmalat problem has expanded from "mere" accounting fraud into a classic example of the corporate governance problems associated with large publicly held corporations. I thought it might be useful to spend a few minutes explaining how the corporate governance problem at Parmalat differs from that at, say, Enron.

My professional career has been devoted to the study of large publicly held corporations. The key governance problem in such firms, of course, is the separation of ownership and control. The firm’s nominal owners, the shareholders, exercise virtually no control over either day to day operations or long-term policy. Instead, control is vested in the hands of professional managers, who typically owned only a small portion of the firm’s shares.

Separation of ownership and control occurs in its purest form in the truly public corporation in which stock ownership is dispersed amongst many shareholders, no one of whom owns enough shares to materially affect the corporation’s management. As Professors Berle and Means famously explained: “The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge ....” Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property 6 (1932). Preventing such divergences, or at least minimizing their effects, has been the primary concern of scholars and regulators. Enron stands as a classic example that, despite all our work, unscrupulous managers can still - and always will - use their control over such corporations to benefit themselves at the expense of their shareholders (not to mention creditors, employees, and other stakeholders).

Yet, not all publicly held corporations exhibit a complete separation of ownership and control. Some public corporations have a single shareholder (or a small cohesive group of shareholders acting together) who own a majority of the voting stock of the corporation. Many more have a single shareholder or group who owns less than a majority but nevertheless ows a sufficiently large block to give it effective voting control. (The classic example is John D. Rockefeller, Jr.’s struggle to oust the chairman of the board of Standard Oil of Indiana. Rockefeller controlled only 14.9% of Standard Oil’s stock. After an admittedly long and difficult contest, however, Rockefeller ultimately prevailed in attracting enough support from other shareholders to ust the chairman.)

The presence of a controlling shareholder solves the classic separation of ownership and control agency problem. Managers who pursue their own self-interest will be displaced by the controlling shareholder.

Yet, the presence of a controlling shareholder introduces a new divergence of interest; namely, that between the majority shareholder and the minority shareholders. Precisely because of the power exercised by a controlling shareholder over management, it is very easy for the controlling shareholder to extract non-pro rata benefits for itself at the expense of the minority. At Hollinger, for example, Lord Conrad Black allegedly not only caused the corporation to pay large management fees to companies controlled by hom or his cronies, but also caused the company to spend $8 million of its own money to buy FDR historical papers Black then used in writing his FDR biography. If the prosecutors are right, Parmalat controlling shareholder and CEO Tanzi joined that club sometime ago.

Because of the potshots some European comentators took at Anglo-Saxon capitalism after Enron, it is tempting to make much of the Parmalat scandal (even for me). Yet, in truth, there is no room for jingoism in this context. The problem of majority shareholder abuses is no respecter of national boundaries. In juxtaposition to Parmalat, for example, one could cite the Anglo-US example of Hollinger, or the domestic US example of Adelphia.

There are no easy solutions to the problem of dealing with a controlling shareholder. Forcing a majority shareholder to give up control is no answer, both because of the enfringement on contract and property rights and because it solves one governance problem by restoring the agency problem associated with dispersed ownership. Transparent accounting rules is key, but enforcement is a problem. Accounting fraud will be with us as long as there are unscrupulous businessmen and dishonest or incompetent lawyers and auditors. Attempts to drive out every last residue of fraud are more likely to burden honest corporations with undue regulations than to prevent bad actors from acting badly. Instead, what we should strive for is a cost-effect system of better accounting rules and responsible enforcement that strives only to reduce the problem to manageable proportions.

Parmalat as an Accounting Scandal and European Self-Satisfaction

Back when the Enron scandal broke, there was a lot of self-satisfied commentary in Europe about the evils of unregulated Anglo-Saxon capitalism (written in what Samizdata.net accurately calls a "smug tone"). The difficulty with the European line of reasoning, however, was that Enron was basically an accounting fraud (as have been most of the other major corporate scandals). Nobody who knew anything about European accounting standards was surprised when it turned out that Europe had its own share of Enrons just waiting to be discovered.

As I explained in my article Mandatory Disclosure: A Behavioral Analysis:

[M]any international issuers have voluntarily adopted U.S.-style accounting standards that promote transparency. One study of the German disclosure regime found, for example:

German managers have had difficulty explaining their (German GAAP) financial results to foreign investors and have claimed that a lack of international acceptance of German financial statements has led to disadvantages for firms seeking to raise capital abroad. In response to these problems and their financial needs, many German firms have increased their disclosure voluntarily and have adopted reporting strategies that bring them closer to international practice. [Christian Leuz and Robert E. Verrechchia, The Economic Consequences of Increased Disclosure (July 1999).]

Those chickens came home to first with Dutch retailer Ahold and now with a vengeance with Parmalat. As it turns out, neither the US nor Europe has any shortage of accounting loopholes or of businessmen eager to cease upon them to conceal losses or of lawyers and auditors prepared to assist.

Mike O'Sullivan Compares the SEC and Spitzer

Over at Corp Law Blog, Mike observes:

Spitzer feels free to use New York's Martin Act to attack anything that strikes him as abusive, regardless of whether it's clearly illegal. The SEC has in its arsenal nothing as open-ended as the Martin Act, and that's a good thing for US markets. The Martin Act is, as one commentator called it (PDF), a "fierce sword" of uncertainty, permitting prosecutors to stretch the definition of crimes and then engage in extensive discovery to compel their targets to capitulate. This makes the Martin Act a very useful tool for a prosecutor looking to make his mark, and a nearly useless guide to a person looking to avoid becoming the target of a prosecutor looking to make his mark.

Beyond creating uncertainty, another interesting consequence of open-ended criminal statutes like the Martin Act is the freedom they give prosecutors the freedom to legislate on the fly. The SEC cannot adopt rules without first notifying the public of its intended rule, accepting and evaluating comments, publishing a final rule and waiting a certain period of time following publication before it can enforce the new rule. None of these protections apply to prosecutors like Spitzer. ...

Eliot Spitzer may measure his success by the number of perp walks he orchestrates. The SEC must measure its success first and foremost by the vitality and strength of the securities markets it regulates. Markets need clearly enunciated and consistently enforced standards. In order to achieve this, a responsible regulatory agency has to be somewhat legalistic, enforcing the four corners of the law and avoiding the desire to make it up as it goes along. Otherwise the regulator would be opportunistic, unbound by laws and, in a word, unpredictable -- the ultimate enemy of the markets it's supposed to protect.

I haven't bothered to replicate the many links in Mike's analysis, because you should go read the whole thing at the source.

Charles Elson on Related Party Transactions in the Boardroom

My friend and law school classmate Charles Elson is a leading expert on corporate governance. Although we have much in common, including membership in the Federalist Society, we often do not see eye-to-eye on corporate governance issues. A case in point is offered by today's major WSJ article on related party transactions between directors or officers and the corporations they serve. Elson favors banning such transactions:

All these deals present the risk of conflicts between a company official's two roles: representative of the shareholder and individual seeking to get the best deal for himself. Some argue that the risks outweigh any potential benefits of such arrangements. "I think we should just have a blanket prohibition on any significant related-party transactions," says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Only minor deals would escape Mr. Elson's ban, such as the director of a bank having a checking account at the institution.

In contrast, I think a complete ban would be overkill. At an abstract level, prohibiting conflicted interest transactions fails to give due deference to the principles of party autonomy and freedom of contract, which are important values both in themselves and because they promote efficient transactions. At a practical level, many transactions between the corporation and a director prove beneficial to both sides. If a director owns a valuable piece of property, which would be useful to the corporation, should not the director be allowed to sell it to the firm? As the WSJ observed, I think correctly:

[M]any public companies began as family enterprises and employment and business relationships involving family members arose as a natural part of the company's growth. Likewise, a company might want the head of a key supplier as a director in order to get that person's business insights. As more and more women have been employed at all levels of corporations, the workplace has become a much more common place to meet one's spouse.

All in all, some argue, a ban on related-party dealings could deprive a company of talented employees or beneficial business arrangements.

In sum, it's worth remembering that a conflict of interest is just a state of affairs, not a crime to which we should ascribe moral blameworthiness. Corporate law has a long tradition of policing rather than prohibiting conflicts of interest, including related party transactions. Because of the potential conflict of interest, such transactions indeed should be policed quite closely, being subjected to exacting scrutiny under the duty of loyalty's entire fairness standard, but not banned.

Wine Note Terminology: Why Jargon?

Calpundit Kevin Drum quotes a couple of my wine reviews and asks:

Last night I had dinner with one of Marian's cousins, who has recently started up a boutique winery in Arcata (Merlot, Cabernet Sauvignon, Cabernet Franc, and Syrah, in case this stuff means anything to you), and I asked him about this style of wine description. If you had two or three experts taste the same wine, would they all agree on what the various flavor components were? Or would one of them claim it tasted of peanut butter and elderberries while the other detected hints of shoe polish and rainbow trout?

Assuming I understood correctly — not a sure thing — he said that different people would detect different flavors. Fine. But if that's the case, why bother describing wines this way? It's not very helpful to tell me about the caramel and rising bread if I'm going to taste something entirely different, is it?

There are a couple of ways I could try answering this question. First, I actually don't think there is going to be quite as much variation as Kevin suggests. There is a fairly standard tasting language based (at least in my case) on the wine aroma wheel whose stated purpose is "to facilitate communication about wine flavor by providing a standard terminology." As one wine tasting site explains:

Smell the wine and try to identify the very first thing you think of. Pumpkin pie? Freshly mowed grass? A cigar box? Leather? Strawberries? These associations make wine tasting fun, and can be a very valuable tool in remembering wines and communicating about them. Because we all bring different associations to what we smell, the Wine Aroma Wheel is a chart that provides a common vocabulary for identification.

Second, I keep track of my wine tasting notes because I enjoy keeping being able to remember the wines I've tried and liked (or disliked). The flavor references help me recall something more specific than "I liked it." Also, specific flavor references permit me to compare wines both vertically and horizontally. It's particularly helpful to have such records when I buy several bottles of a particular wine to cellar over a period of years. Although my wine notes are thus mainly for my own records, I decided to post them just for fun. (And, frankly, because I suspected they would generate traffic, which turned out to be correct. If you Google "wine tasting notes" you'll see I'm in the top 10 results.) Third, if you read one of my reviews and then try one of the wines, you can decide for yourself if you tasted anything remotely like what I got out of the wine. Either way, the process of thinking about what you're tasting - and trying to articulate it - might enhance the experience (it does for me). Fourth, I aspire to true wine snobbery, which according to Leonard Bernstein's classic text The Official Guide to Wine Snobbery requires the use of jargon: "Just as tennis fanatics talk of topspin lobs and compare Addidas to Nike, so must the wine snob cultivate his own exclusivity." [Ed.: He's thinks he's being funny now.]

Spitzer Claus

Sometimes I worry that I'm becoming a bit monomaniacal about Eliot Spitzer, but as somebody whose professional career has been devoted to the study of US capital markets it annoys me to no end to see him running amok in them. Every week seems to bring some new outrage to light. Here's the latest, hot off the WSJ's presses:

[T]o a host of Empire State charities and well-connected law-school deans, the crusading New York attorney general is acting a lot ... like Santa Claus.

Three civil settlements he struck in an unusual case against wealthy telecom executives and IPOs have allowed him to bestow more than $5 million in largess over the past several months to dozens of community groups across New York state. The recipients are intended as a sort of proxy for individual investors who allegedly suffered from the actions of the defendants, who were accused of profiting from undisclosed awards of sought-after initial public offerings from investment bankers seeking their business. ... But the groups receiving the windfall also represent voter constituencies that could be key to Mr. Spitzer's widely expected Democratic run for governor in 2006.

Once again, we see Spitzer abusing his prosecutorial powers for personal political gain. Once again, it is time for the feds to step in to keep Spitzer from getting elected governor on the backs of our capital markets.

Kerkorian v. DaimlerChrysler

The legal kerfuffle in Kerkorian's suit against DaimlerChrysler over former Chrysler exec Gary Valade's late disclosed notes has pretty much confirmed my impression that the deal never was a true merger of equals. Instead, it was a de facto acquisition of Chrysler by Daimler-Benz from the beginning. The WSJ reports, for example:

The prospect of a takeover by Germany's Daimler-Benz AG worried top executives at Chrysler Corp. almost from the start of the merger talks that led to the 1998 combination that created DaimlerChrysler AG, according to notes revealed Monday in Kirk Kerkorian's lawsuit against the German auto maker.

But so what? Even if Dailer and Chrysler did misrepresent the nature of the deal, Kerkorian still has to prove, among other things, that he was (a) misled and (b) suffered monetary damages caused by that misrepresentation. I'm skeptical he can do so. As for being misled, the deal was otherwise fully spelled out in the merger documents and proxy statement. Kerkorian, moreover, had a representative on Crysler's board. Even if management misrepresented the name of the deal, it's hard to believe that Kerkorian was really misled. As for valuation, I think he's got a tough job there too. Although the deal was billed as a merger of equals, an acquisition type in which neither side usually pays or receives a control premium, the Chrysler shareholders in fact got a 28% premium for their shares. Kerkorian must prove they would have gotten even more if the deal had been billed as a takeover by Daimler. Would they? It's hard to know without access to valuation data, but I havew my doubts. Granted, Chrysler was profitable when the deal was done. The market for control of a large automaker is a thin one - few potential bidders with sufficiently deep pockets - and thin markets lead to low premiums. The auto industry generally was plagued by overcapacity and the US manufacturers burdened by goldplated union contracts. As Automobile magazine observed, "it has been clear for some time that Daimler-Benz was the healthier and better run of the two companies, and that Chrysler, with runaway costs and bloated payroll, was likely headed for bankruptcy court or a fire sale without Daimler's deep pockets." This impression is confirmed by comments made by the plaintiff's lawyer in the course of settling a suit by other Chrysler shareholders raising most of the same issues as the Kerkorian suit (via 10b-5 Daily): "The biggest problem for us was that the Chrysler division post-merger performance was horrific." That settlement reportedly brought the plaintiff shareholders a mere 43 cents a share, minus attorneys' fees. So count me as a skeptic on the ultimate merits of Kerkorian's suit.

Michael Novak, Toward a Theology of the Corporation

Michael Novak is probably the foremost Christian thinker on the economy. His Toward a Theology of the Corporation is an under-appreciated classic that succinctly, yet powerfully, sets out a theologically sound analysis of the modern corporation and its role in society. In this slender but well-written volume, Novak joins issue with theologians like Paul Tillich who contend that "any serious Christian must be a socialist."

THEOLOGY has two principal themes. First, it is addressed to those who work for corporations. Many Christians have been taught to feel, at best, "faint disdain" for corporations and those who manage them. In contrast, Novak knows that many (most) business men and women are ethical people who yearn for moral guidance and advice. Consequently, THEOLOGY tackles a basic moral question: "Can a Christian Work for a Corporation." Novak's answer? "Yes!" (Those wishing more detailed discussion of practical business ethics ought also read Novak's Business as Calling.)

Second, Novak recognized that anyone who purported to think about practical business ethics needed to understand the predominant form of business organization-the public corporation. Much of THEOLOGY is thus devoted to an analysis of the corporation: Is the firm's structure as a bureaucratic hierarchy consistent with human dignity? What social responsibility, if any, does the corporation have? And so forth.

Thinking about those questions naturally lead Novak to broader issues, such as the consistency of capitalism with church teachings on wealth. In THEOLOGY, therefore, Novak began working out the line of argument that was later developed more fully in his magisterial The Spirit of Democratic Capitalism. Novak recognizes that church teaching has been hostile to capitalism, as with much else of modernity. Yet, Novak contends that arguments against capitalism serve mainly to give aid and comfort to the Leviathan state.

In the most controversial portions of THEOLOGY, Novak attributes Christian opposition to capitalism to two main sources: ignorance and antique world views. Church leaders and theologians tend to be poorly trained in economics and inexperienced with the world of economic reality. Many believers (again, this is especially true of theologians) "are likely to inherit either a pre-capitalist or a frankly socialist set of ideals about political economy." As a result, "Church leaders are more likely to err in this territory [i.e., economic justice] than in most others." (p. 59.)

To be clear, Novak does not believe that faith should be subordinated to capitalism. To the contrary, he recognizes that the divine plan was that we should enjoy the fruits of the earth and of our own industry. He simply contends that capitalism is the best way Fallen humans have yet devised to obey the Biblical command that we are to be stewards of God's world. Novak never loses sight of the basic proposition that it was equally the divine plan that God should be worshiped, obeyed, and feared. The fear of the Lord, he would argue, is the beginning of capitalist wisdom, just as it is of any other kind of wisdom. Not surprisingly, therefore, Novak's analysis has begun to impact the way the church thinks about capitalism. Pope John Paul II's most recent encyclicals on work and the economy, for example, such as Centesimus Annus, contain obvious marks of Novak's influence. In sum, THEOLOGY is very highly recommended for any Christian interested in corporations.

David Frum on Conrad Black

On NRO, David Frum offers up an interview with Conrad Black - ex-CEO of Hollinger International and still its majority shareholder and chairman of the board - prefaced by these remarks:

Black is right now at the center of a furious controversy over his business dealings. This is not the venue to discuss the rights and wrongs of that controversy, and I am not the person to do it. What I can say, as someone who has worked at various times for Conrad Black, is that he has been a delightful publisher: creative, encouraging, civilized, fun. I mentioned above that the Spectator published a review in many ways critical of Black’s book. As it happens, Black owns the Spectator. Can you think of any other proprietor who would permit such criticism? And whose staff would understand that he would permit it? That one fact says more about him than I could say in a thousand times the space.

I emphasized the line "Black owns the Spectator" because it reflects a fundamental error. Black does not own the Spectator. He owns a majority of the stock of a company that owns a company that owns the Spectator. Being a majority stockholder gives him a ton of control, making it difficult to dislodge him, as I have explained before. Being a majority shareholder does not entitle Black to run the Spectator as a personal soapbox. Being a majority shareholder does not entitle Black to use $8 million of Hollinger's money to buy up FDR papers so that Black can write a better biography of FDR, as has been alleged. Being a majority shareholder does not entitle him to take 19 million pounds in unauthorized payments from the corporation, as has also been alleged. Why? Because there are minority shareholders to whom he owes fiduciary duties! Black's apparent inability to understand the difference between being an owner and a majority shareholder is precisely what landed him in his present pickle. Being treated like an owner by his syncophants probably didn't help.

Mark Noll's Scandal of the Evangelical Mind

Mark Noll is a chaired professor of "christian thought," at Wheaton College - one of the great Evangelical liberal arts colleges, as well as being one of the leading church historians of our time. Noll is also one of the leading public intellectuals within the Evangelical movement. (By public intellectual, I mean an academic whose is grounded in rigorous scholarship but who also writes - at a high level - for the general public. Stephen Carter of Yale is another good example of a Christian public intellectual.)

In the Scandal of the Evangelical Mind, Noll issues a wake-up call for a renewed commitment to the life of the mind on the part of Evangelicals. Noll begins by persuasively demonstrating the existence of an intellectual deficit among Evangelicals. In contrast to the Catholic-leaning journals like First Things or the New Oxford review, there is no real Evangelical journal of public thought. There are few scholarly journals focusing on Evangelical perspectives. Evangelical colleges emphasize teaching at the expense of scholarly research, despite decades of proof that the good teaching and good scholarship goes hand in hand.

Noll then traces the historical roots of this scandal, showing that there was a time when Evangelicals dominated top institutions of learning. What caused the decline? In what must surely be the most controversial portion of the book, Noll lays the blame on an anti-intellectual strain of populist fundamentalism. As someone who grew up with many working class fundamentalist relatives, I am more sympathetic towards that world view than Noll seems to be. Indeed, Noll candidly admits that his thesis rests in part on his theological disputes with fundamentalism. Yet, as an adult convert to Catholicism from Evangelicanism, I have no doubt that the life of the mind is more highly regarded in Catholicism than in fundamentalist protestantism. Unfortunately, the fundamentalists' rejection of modernity and secular humanism painted with too broad a brush.

Noll concludes with a slightly self-serving call to action. I say "slightly self-serving" because Noll's call to action includes the idea that Evangelical colleges ought to pay more attention to scholarship. As a top-notch scholar at a leading Evangelical college, Noll probably would benefit from such a shift in emphasis. Yet, as Adam Smith pointed out centuries ago, there is no more powerful engine for the public good than enlightened self-interest. Noll's call to action deserves to be heeded. All Christians, including all evangelicals, are called to serve God not only with our heats but also with our minds.

Chomsky

I usually don't get involved in the Chomsky kerfuffles that periodically roil the blogosphere, but I do think more attention should be paid to this transcript. Personally, I am appalled.

Economics and Morality

Tyler Cowen blogged some interesting thoughts about the relationship of economics and morality this morning over at the Volokh Conspiracy:

I would defend economics as providing a good analysis of rules of the game. It can tell us which rules make it easier for people to be moral, and thus offer some good social advice. ... I find it much harder to defend educating individuals in economics as a tool of moral improvement.

As someone whose scholarship operates at the intersection of law, economic analysis, and Catholic social thought, this is a problem in which I have considerable interest. A couple of years ago I published an essay entitled Law and Economics: An Apologia in Christian Perspectives on Legal Thought, an anthology I would recommend wholeheartedly even if my essay were not in it. A very restrictive copyright agreement prevents me from making the essay available online, but I suspect excerpting the key passage would qualify as fair use.

Consider a restaurant located on one side of a busy street. Although crossing the street is dangerous, some people will nonetheless do so in order to eat at the restaurant. Basic economic theory, however, tells us some things about the likelihood that people will do so. The more dangerous the crossing becomes, the less likely people are to venture across. Conversely, the more attractive the restaurant becomes, the more risk people are willing to bear. And so forth. All of which seems quite obvious, but these predictions about human behavior, when extrapolated and generalized, become the foundation for price theory. Here’s the kicker: price theory tells us how people will choose, but “it does not tell us why people choose as they do. Why a man will take a risk of being killed in order to obtain a sandwich is hidden from [economists] even though we know that, if the risk is increased sufficiently, he will forego seeking that pleasure.” R.H. Coase, The Firm, The Market and The Law 5 (1988). In other words, economics has no good account of the character or origins of human preferences.

As a Christian practicing law and economics, however, my faith brings something to the table in grappling with the question of preference formation. Christianity is not a utopian faith, but rather is quite realistic about human beings. In particular, our central doctrine of the Fall of Man tells a coherent story about the nature and origins of human preferences in an unredeemed world. In my view, the assumptions about human behavior made by economists are largely congruent with the fallen state of man. If Economic Man is a fair description of Adam after the Fall, the rational choice model used in economics is not a bad model for predicting the behavior of fallen men. At the same time, however, because Christianity’s account of how man fell and the consequences of that Fall provide an answer to Coase’s question, our faith gives Christian practitioners of economic analysis a more fully realized account of human behavior.

To be sure, Christians are called to a higher standard of behavior than that of fallen man. If the purpose of economic analysis is to predict how people will respond to changes in legal rules, however, can we assume Christian behavior by the masses of a secular and God-less society? No realistic social order can assume heroic or even consistently virtuous behavior by its citizens. A realistic social order therefore must be designed around principles that fall short of Christian ideals. In particular, the rules must not be defined in ways that effectively require every citizen to be a practicing Christian. Christian visions of Justice therefore cannot determine the rules of economic order. Instead, legal rules and predictions about human behavior must assume the fallen state of Man, which is precisely what I have tried to suggest Economic Man permits us to do.