July 31, 2005

Islamist Violence and Immigration Policy--Posner

A long article by Robert S. Leiken, "Europe's Angry Muslims," in the July/August 2005 issue of Foreign Affairs, written before the recent London bombings, when it is read in conjunction with the economist-columnist Paul Krugman's column in the New York Times this past Friday (July 29), entitled "French Family Values," brings into focus important issues of immigration policy, and, more fundamentally, of the different economic and cultural models of the United States and Western Europe.

Leiken points out the strong appeal of Islamic extremism to the large Muslim minorities in countries such as France, Spain, the United Kingdom, and the Netherlands (in France, the Muslim population is approaching 10 percent of the total population; in Netherlands, 6 percent), including many second-generation Muslims--Muslims who were born in these countries but have not adopted their political or cultural values. The widespread penetration of these nations by Islamic extremists lies behind political murder in the Netherlands, bombings in the United Kingdom and Spain, and widespread anti-Semitic vandalism in France. The nations of Western Europe appear to be riddled with Islamist terrorist cells that also incubate plots to attack the United States. The non-Muslim populations of Western Europe are increasingly and in some instants lethally hostile to their Muslim minorities. In contrast, although there are several million Muslims in the United States (more than in the U.K., for example, though constituting a smaller percentage--about 1 percent versus almost 3 percent), most of them, like their counterparts in Europe, of Middle Eastern or Central Asian heritage, the American Muslim community is well integrated. It is prosperous (with a median income actually slightly above the national average), so far unthreatening (though security officials believe there are some terrorist cells; and heavy-handed tactics by the FBI since the 9/11 attacks have caused some disaffection among American Muslims), and not objects of significant hostility by non-Muslim Americans.

Krugman's column does not mention Europe's Muslims, but in defense of the French (more broadly, the European) model, argues that the French have made a good trade--their average incomes are significantly lower than those of Americans, but they work a good deal less. This is partly because of a much higher unemployment rate than in the United States (Krugman's complacency about high unemployment is notable), but mainly because Western Europeans work fewer hours per week, take much longer vacations, and retire earlier. In effect they trade material goods for leisure, a trade that Krugman regards as a sign of high civilization. Krugman (here relying on a recent working paper by the economists Alberto Alesina, Edward Glaeser, and Bruce Sacerdote) recognizes that the greater leisure of the French and other Europeans is, as it were, forced, because it is the product of laws that restrict labor mobility and hence work opportunities, make it difficult to fire lazy workers, provide a variety of economic benefits uncoupled from work, and even restrict the number of hours a week a person can work. But, further relying on the working paper, Krugman argues that without compulsion, workers could not get the amount of leisure they really want, because leisure is not worth as much if other people don't have it, assuming leisure has a strong social component--that you engage in leisure activities with other people, and therefore suffer a loss if they don't have leisure time to spend with you.

Krugman's failure to relate the European model to Europe's Muslim problem is telling. To point to the upside of Europe's social model without mentioning the most serious downside is to provide bad advice to our own policymakers. The assimilation of immigrants by the United States, compared to the inability of the European nations to assimilate them--with potentially catastrophic results for those nations--is not unrelated to the differences between economic regulation in the United States and Europe. Because the U.S. does not have a generous safety net--because it is still a nation in which the risk of economic failure is significant--it tends to attract immigrants who have values conducive to upward economic mobility, including a willingness to conform to the customs and attitudes of their new country. And because the U.S. does not have employment laws that discourage new hiring or restrict labor mobility (geographical or occupational), immigrants can compete for jobs on terms of substantial equality with the existing population. Given the highly competitive character of the U.S. economy, in contrast to the economies of Europe, employers cannot afford to discriminate against able workers merely because they are foreign and perhaps do not yet have a good command of English. By the second generation, most immigrant families are fully assimilated, whatever their religious beliefs or ethnic origins.

In contrast, even in a country such as France that has a declared policy of requiring all immigrants to assimilate, immigrants from alien cultures, such as that of the Islamic world, tend to be marginalized and isolated, even in the second and later generations. European unfriendliness to immigrants might be thought a cultural rather than an economic phenomenon, but the paper by Alesina, Glaeser, and Sacerdote on which Krugman relies argues that the European preference for leisure, also supposedly cultural, rests on policy, specifically the employment laws. So too in all likelihood is the difficulty European nations have in assimilating immigrants. The less fluid, less competitive, less market-oriented, and indeed less materialistic (the only color important to businessmen is green) a national economy is, the less opportunity it will provide to alien entrants.

Advocates of the European model point to the pockets of poverty in the United States, but may not realize that poverty cannot be abolished without recourse to measures that produce the social pathologies that we observe in Europe. Social mobility implies the opportunity to fail. If society protects jobs, the employment opportunities of ambitious newcomers are reduced and they may end up at the embittered margin of society. Thus, it is not poverty that breeds extremism; it is social policies intended in part to eradicate poverty that do so, by obstructing exit from minority subcultures. If Muslims in European societies do not feel a part of those societies because public policy does not enable them to compete for the jobs held by non-Muslims--if instead, excluded from identifying with the culture of the nation in which they reside they perforce identify with the worldwide Muslim culture--some of them are bound to adopt the extremist views that are common in that culture. The resulting danger to Europe and to the world is not offset by long vacations.

Posted by posner at 09:09 PM | Comments (97) | TrackBack

COMMENT ON IMMIGRATION POLICY-BECKER

Krugman’s recent New York Times article on French "family values" cited by Posner is the latest of many attempts during the past decade to justify, high labor taxes, restrictions on the ability of companies to shed employees, a French law that restricts work to no more than 35 hours per week, and various other restrictive labor-market legislation in continental countries. They supposedly lead to more civilized goals than are obtained in the freer Anglo-Saxon markets. That this leads to very high unemployment rates and limited job opportunities, especially for immigrants and young low skilled native-born men and women, and a shortage of part-time work for mothers and others, is the price that apparently has to be paid for these advantages.

But are any advantages of this system worth such a high price? Clearly, the European system of employment helps the "insiders" with good jobs, and works against "immigrants" and other newcomers ,or "outsiders" in labor markets. It is claimed that the European system promotes "family values" over individualistic ones. Yet the data do not support this contention since marriage rates are lower in Europe than in America, and not a single European country has birth rates that are high enough to maintain their populations without continued immigration. The French birth rates are somewhat higher than their neighbors only because of massive subsidies to having children. Yet even the French rates are way below replacement levels and those in the United States.

Workers in France, Germany and other continental European nations are also said to gain more leisure hours that they want and yet are unable to obtain in freer labor markets of the Anglo-Saxon type since each work decision there is made more individualistically rather than collectively. But there is no evidence that these regulations are the result of a strong demand to consume leisure jointly with other families. As Robert Putnam, the author of "Bowling Alone", and others have pointed out, the trend has been just the opposite: sharply away from joint consumption of leisure in clubs or bars, and more consumption through individualistic activities like television and computer games. Is there pleasure in the traffic jams that develop as virtually all the French, Italians, and German families that can afford it go on their August vacations to the same limited number of beach and mountain resorts?

The prospects of declining population and the heavy financial burden from the payments needed to provide generous retirement income and health benefits to older persons would seem to lead European countries to try to attract young immigrants who would pay taxes on their earnings to help finance the cost of these entitlements. The labor market restrictions, however, make it hard for immigrants to obtain jobs in the legal economy, so either they are unemployed, or they work in the flourishing underground economies of Europe, where they avoid paying taxes. Apparently, the French intentionally do not collect data on unemployment rates of their Muslim population, but economists there tell me they believe it is more than double the official overall French rate of over 10 per cent unemployed.

Given the poor work prospects of Muslim immigrants, and the fact that the German, French, Dutch, and other European populations do not generally like their Muslim minorities, it is no wonder that Muslims there feel alienated from the general society. As a result, some of them become bitter, and develop hatred of the West and the fanaticism that leads to radicalism and terrorism. That only feeds greater opposition from the general population, which helps explain why the French and Dutch strongly voted against approving the new European Constitution.

There is an ongoing debate among economists over whether social mobility is greater in the United States or Europe. The general evidence on this does not offer a definitive answer, but there is little doubt that most immigrants believe opportunities for themselves and their children are greater in the United States. This is why America is the first choice of most immigrants whenever they can choose where to go, and it also explains the different attitudes of immigrants in Europe and America. As Posner emphasizes, most immigrants, non-Muslim as well as Muslim, feel far more accepted in the United States than in Europe, are less segregated here in both their living arrangements and employment, and appear to advance more easily toward higher level jobs. As a result, they are less promising material for radical Islam, although clearly radicals are operating and planning in the United States as well as in Europe.

However, the British experience is somewhat disturbing to this thesis, for Great Britain is at least a partial counter example to our analysis. For British labor markets are very much like those in the United States; in fact, Britain has lower unemployment rates than the U.S., has equal labor market flexibility, and provides above ground jobs for Muslims and other immigrants.

I believe the main reason for the difference with the United States is that new immigrants are easily accepted in this country since it is a nation of present or past immigrants. Foreigners of all kinds have never been so welcome in Britain, and are even less welcome in continental Europe. So even under the best of economic conditions, immigrants in Europe do not easily integrate into the general society. Still I confess these vicious attacks on London subways and buses are not only awful, but I also find them difficult to understand.

Posted by Gary Becker at 09:02 PM | Comments (24) | TrackBack

Response on Social Responsibilities of Corporations-BECKER

A large number of mainly interesting comments. I shall try to respond and clarify my position.

I believe corporations have as much right to lobby for laws as other interest groups, and should not be under any obligation to ignore the laws that are passed, even those that favor them. To take an example from the non-corporate world, the most powerful interest group in the United States is probably the AARP, the association of older, and mainly retired, men and women. They have managed to pass many laws dealing with social security and medicare that are too generous to richer retirees, and are on balance harmful to the general welfare. But I do not hear many people argue that rich persons should refuse the social security checks that they receive because in a better system that money and perhaps still more resources would go to poorer persons.

Some of the comments claim that since stockholders often cannot get rid of their top management, they cannot get their views known other than by selling their stock. I dealt with that case in my comment. The market for top management is indeed not perfect, and that means entrenched management gets greater compensation then they would receive in a more competitive market for managers. Entrenched managers do not have to fully consider stockholder interests in their decisions, and can take higher compensation, and have the corporations they manage engage in various actions. Perhaps they will be “socially responsible”, but surely we do not want to rely on entrenched management to set the standards for corporate behavior? Entrenched and powerful management was the heart of the problem with World Com, Enron, and most other companies that had corrupt leadership.

I said several times in my entry that if stockholders of a company are willing to pay for various “socially responsible “ non-profit maximizing actions of the company, then the company should indeed deviate from pure profit maximizing behavior to cater to the stockholder interests. But such a company would still be maximizing stockholder value, including the values of stockholders about pollution behavior, employee compensation, and charitable giving of the corporation. But we know from the relatively small number of funds that claim to invest only in socially responsible companies that the vast majority of owners of stock do not want their companies to deviate much from profit and value maximization.

Of course, if corporations can find charities better than stockholders can, then my criteria imply that corporation should do that. I even gave the example of fair trade coffee. But that is hardly the most common situation.

Some hard questions were raised about whether corporations should knowingly pollute, encourage use of unhealthy milk formula, and the like. Some of these cases would be consistent with my criteria because corporations might be sued if they knowingly encouraged behavior that would poison water, or stockholders would not hold stock in companies that they knew used slave labor, and so forth. However, I do not believe corporations have the obligation in the pollution case to go beyond their legal and contractual requirements. For example, corporations should not follow the Kyoto Agreement with regard to their production in the United States. I take this position because it is impossible to know where to draw the line. Why stop at the reduction in emissions called for by Kyoto? After all, many environmentalists believe Kyoto is far too limited. Pollution standards should be set by legislation and judicial decisions. Corporations should obey those standards, not lie about what they are doing, and follow the environmental wishes of their stockholders, but not try to be substitutes for voters and legislators.

Someone remarked on the death of Jack Hirshleifer. Not directly relevant to our subject, but he was an outstanding and creative economist, and a good friend since my graduate student days. I believe he would have adopted a position on this subject similar to mine; perhaps he has written on corporate goals.

Posted by Gary Becker at 11:28 AM | Comments (4) | TrackBack

July 30, 2005

Social Responsibility: Posner's Response to Comments

These were, as usual, very interesting comments. The most common was that corporate CEOs are overpaid, and this is argued to contradict concerns expressed by Becker and me with corporations' conceiving their role as that of charitable, or "socially responsible," enterprises, rather than as pure profit maximizers--if they are really maximizing profits, why are they overpaying their CEOS?

I don't know whether CEOs are in general overpaid, but let's assume they are. This would imply that the shareholders, who are the nominal owners of the corporation, are incapable of controlling management--in other words, that there is a problem of what economists call "agency costs." (The term signifies the costs resulting from the principal's inability to constrain his agents to serve his goals exclusively.) If so, we certainly would not want the management to make gifts to charity, because that would exacerbate the problem of agency costs. Managers who are not controlled by shareholders can't be presumed to make charitable gifts that will promote the shareholders' welfare, rather than the managers' own. So, paradoxically, liberals who believe that CEOs are not honest agents of the shareholders should be more critical of corporate "social responsibility" than conservatives!

One comment that I am quite sympathetic to is that the social return to profit-maximizing activities may actually be higher than the social return to corporate philanthropy, when "corporate philanthropy" isn't just a fancy name for public relations. As I argued in an earlier post, philanthropy directed at poor countries may actually reduce the welfare of those countries, and the same is probably true to an extent of purely domestic charity. The general effect of charity is to postpone the making of difficult decisions. For example, philanthropic gifts, private or public, to the arts retard serious efforts by artists and artistic organizations to create work for which there is a genuine interest on the part of the public, and philanthropic gifts to universities help to shield them from competitive pressures. Also, the agency costs problem is particularly acute in the charitable arena, as donors to charitable enterprises have even less control over the enterprises than shareholders do over their corporations.

This is not to suggest that the net benefit of charitable giving is negative, but only to raise a question whether the net benefit of the expenditures devoted to charity might be greater if directed to commercial or other private ends instead.

Let me respond finally to two comments about the issue of criminal liability of corporations. One comment suggested that as long as individual managers are liable for crimes committed by them on the corporation's behalf, there is no reason to impose liability on the corporation as well, and therefore no need to place a duty of law-abidingness on the corporation. But imposing criminal liability on errant managers is insufficient. If their crimes benefit the corporation (though imposing, as I assumed in my original posting, greater costs on society as a whole), then their salaries will be set by a rational corporation at a level that will compensate them for assuming the risk of criminal punishment.

The other comment pointed out correctly that corporate criminal liability is not an either-or thing. Often it will be unclear whether a proposed course of action will violate criminal laws applicable to the corporation. There is no reason the corporation should be thought under a duty to avoid all risk of legal liability; that would be paralyzing, and also would discourage socially worthwhile tests through litigation of the outer bounds of liability. Rather, the duty should be to avoid conduct known to carry a very high probability of being deemed criminal.

With respect to many civil as distinct from laws, it is unclear whether they should be thought to impose a duty of compliance, or merely to impose a price (in the form of an expected liability cost) for engaging in particular activity. If the law imposes only damages liability for a particular unlawful act, and the damages are fully compensatory, then a corporation that commits the act is not imposing net social costs; it would not engage in the act unless the expected benefits exceeded the exepected costs to any victim of the act, as measured by the damages that the victim would be entitled to recover.

Posted by posner at 05:48 PM | Comments (10) | TrackBack

July 24, 2005

Do Corporations Have a Social Responsibility Beyond Stockholder Value? BECKER

Do corporations have any responsibilities beyond trying to maximize stockholder value, adhering to contracts, implicit as well as explicit, and obeying the laws of the different countries where they operate? My answer is "no", although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be "socially responsible" by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes. Still, laws and contracts, and individual use of their own resources, rather than corporate behavior, should be the way to implement various social goals.

References to the behavior of corporations really mean the behavior of top management who are in essence employed by stockholders through their representatives-boards of directors. In most cases, it is rather obvious that management should try to increase stockholder value through their pricing policies, the products they offer, where they locate plants, and so forth. CEO's who fail to do this are subject to termination either through takeovers or by being fired. In fact, the tenure of corporate heads seems to have become shorter over time.

In many other situations, apparent conflicts between maximizing stockholder value and social goals disappear on closer examination. A corporation may give money to local charities, play up its contributions to the environment, and do other things that appear to reduce shareholder value because that sufficiently improves the government regulations that affect their profitability. Or a company may give to various public causes, like Ben and Jerry’s ice cream company did in the past, because this attracts customers who want to support these causes partly by buying the products of companies that make contribute to these causes.

Treatment of employees that on the surface appear to reduce profitability often are in fact consistent with the criteria of maximizing stockholder value while respecting laws and contract. For example, a company may raise the value to shareholders by keeping on older workers beyond the age where their productivity is sufficiently high to justify their earnings because that attracts younger workers at lower wages since they expect too that they will not be let go when they get older. Or employees may invest in their on the job training because of an explicit contract or implicit agreement with their employers that their earnings will rise with their tenure as their productivity rises because of their investments. It would be inconsistent with my criteria if a company did not raise wages appropriately of some employees when their tenure and productivity increased because the company realized that these employees did not have good opportunities at other companies. This behavior would violate my recommendation that a company maximize stockholder value, subject to obeying all laws and contracts, implicit as well as explicit.

To take an example of what I do not believe companies should do, a global company operating in a poor country should not pay higher wages for either adult or child labor, adjusted for the quality of the labor, than is the prevailing standard in the labor market of this country, as long as higher wages would lower the profits of the company. I am assuming the wages they pay do not violate any laws or contracts of the countries where they operate, and that they are not subject to such bad publicity that their profits actually would increase if they paid more. I should add that pressure to pay much higher wages in labor markets of developing nations reduces the number employed there by international companies, and would tend to worsen, not improve, the plight of the poor populations of these countries.

Even in cases where this does not contribute to profitability, top management may want to use company resources to promote environmental ends that are not required by law, give to local symphonies, promote fair trade coffee or other fair trade products, and engage in other acts that increase the managers' utility, prestige and standing in their communities. In a competitive market for managers, management would have to take sufficiently lower earnings, bonuses, and options to in effect pay for the company assets and profits they use to boost their own welfare and community standing. So in such a competitive management market, management essentially engages in "socially responsible" behavior out of their own earnings. This would not lower stockholder value, and is consistent with my criteria.

If the management is entrenched, they might be able to give away resources to environmental and other groups without lowering their own earnings, but by lowering instead dividends and other payments to stockholders. Even this, however, would not affect stockholder returns if instead management could have taken higher earnings, bonuses, or stock options for themselves. Depending on what they would have done with their higher earnings, the use of company profits for particular social causes may or may not lead to better overall outcomes. But surely an important goal of any reform in corporate management is to reduce the entrenchment of management, and inject more competition into the market for CEO's and other top corporate leaders.

Whatever the degree of competition in the market for top management, the market for stock ownership is highly competitive. Those stockholders that want companies to use potential profits for environmental or other social causes might be willing to buy the stocks of companies that do this, even if that means lower monetary rate of return on their investments. If there are enough of these stockholders, then companies that engage in these practices would be maximizing stockholder values, and their behavior would be consistent with the criteria for corporate behavior that I advocate.

But such socially conscious stockholders are a small fraction of all owners of stocks, especially of large institutional funds and investors. These funds would avoid companies that are "socially responsible" until prices of the stock of these companies fell sufficiently to give the same risk-adjusted monetary rate of return provided by companies that do not engage in social behavior. This implies that new companies that are expected to contribute to various social goals beyond making profits, and respecting laws and contracts, will have lower IPO prices if they issue stock than they otherwise would have. In that case, the founders of socially-minded companies will bear the cost of their social responsibility. That is appropriate and is not objectionable. I am bothered only when managers, founders, or others in control of corporations that behave in a "socially responsible" manner try to pass the cost of behaving in this way on to others rather than bearing the costs themselves.

Posted by Gary Becker at 07:43 PM | Comments (67) | TrackBack

The Social Responsibility of Corporations--Posner’s Comment

I agree with almost everything that Becker says, but will suggest a few qualifications. I can think of one situation in which "pure" charitable donations by corporations, i.e., donations that do not increase profitability, could benefit shareholders. Assuming that most shareholders make some charitable donations, they might want the corporations they invest in to make modest charitable donations on the theory that a corporation will have more information about what are worthwhile charitable enterprises than an individual does. For example, charities differ greatly in the amount of money that they spend on their own administration, including salaries and perquisites for the employees of the charity, relative to the amount they give to the actual objects of charity. Presumably corporations are in a better position to determine which charities are efficient than individuals are; if so, then shareholders may impliedly consent to some amount of charitable giving by their corporations. But not much. The reason is that one person's charity is another person's deviltry: a shareholder who is opposed to abortion on religious grounds would be offended if his corporation contributed to Planned Parenthood. The practical significance of this point is that corporations avoid controversial charities, so that the issue of implied consent becomes whether the shareholder would like his corporation to make a modest contribution to some set of uncontroversial charities.

For the reason suggested above, the answer may be "yes"--and for the additional reason that there is a tax angle. If the shareholder receives a dividend, the corporation will have paid corporate income tax on the income from which the dividend is paid. Suppose the corporation and the shareholder are both in the 20 percent bracket. The corporation earns $10, pays $2 in tax, and gives the shareholder $8. The shareholder gives the $8 to charity, which costs him $6.40, since he gets a 20 percent tax deduction. If the shareholder wants the charity to have $10, it has to dig into his pockets for another $2, which costs him $1.60 (because of the 20 percent deduction), and so the total cost to him of giving the charity $10 is $8. Now suppose that, instead, the corporation gives the $10 to charity, a deductible expense, at a cost to it therefore of $8. Then the charity receives $10 rather than, as before, only $8. The shareholder loses his $2 deduction, which means that the total cost to him of the transfer is, as before, $8. But the corporation is better off to the tune of $2, since it avoids the corporate income tax on the $10 in income that it gave the charity. And anything that benefits the corporation benefits the shareholder.

Given product market as well as capital market competitive pressures, charitable spending that is not profit-maximizing because the cost exceeds the private benefits that Becker lists (public relations, advertising, government relations, and so forth) is unlikely to be significant. Even if corporate managers are not effectively constrained to profit maximization by their shareholders, expenditures that do not reduce the cost or increase the quality of the corporation's products will place it a competitive disadvantage with firms that do not make such expenditures.

A more difficult question has to do with a corporation's policy on obeying laws. From a strict shareholder standpoint, it might seem that corporate managers should obey the law only when the expected costs of violating it would exceed the expected benefits, so that managers would have a duty to their shareholders to disobey the law, perhaps especially in countries in which law enforcement is very weak, a country for example which had a law against child labor but was unable to enforce the law. This would be a case of a pure clash between ethical and profit-maximization duties. My view is that, given external (i.e., social as distinct from private) benefits of compliance with law, the ethical argument should prevail, so that a shareholder would be precluded from complaining that corporate management, by failing to violate the law even when it could get away with it, was violating its fiduciary duty to shareholders.

Another argument based on an externality, an argument that lies behind the law that forbids U.S. firms to engage in bribery abroad, even in countries where bribery is extremely common, is that reducing the amount of bribery in those countries will benefit U.S. firms in the long run by making the markets in these countries more open, to the advantage of efficient firms.

The fact that it will sometimes be in the shareholder interest for management to violate the law provides, moreover, a ground for punishing corporate managers sufficiently severely for corporate crimes that the punishment is not offset by shareholder gains for which the managers could be expected to be rewarded.

Posted by posner at 07:35 PM | Comments (42) | TrackBack

Response on Same Sex Marriage-BECKER

Some really fine comments. I neither have the time nor knowledge to answer all of them, but let me respond to some that I consider more important.

The evidence is increasing that being raised by a single parent has negative effects on children, although there is debate over how big these effects are. Being raised in an orphanage is obviously not helpful either. I do not know if being raised by same sex parents would be worse than being raised by a single parent, but I believe that it will usually be worse. But one of my main points was that since we allow gays to have children one way or another-increasingly not through adoption- then whether they can call themselves “married” seems like a minor consideration.

More than one study shows that breakups among homosexual couples is much greater than among heterosexual couples. Some limited data was included in the first edition of my book A Treatise on the Family, and other studies have been published since then.

Allowing homosexual marriage will discourage some gays or lesbians from entering heterosexual marriages that they later dissolve. But that effect is likely to be very small. If allowing same sex marriage reduced the number of partners among homosexuals, that is likely to reduce the incidence of Aids. That would certainly count as a plus, although I doubt if allowing same sex marriage would reduce turnover of gay relations much more than giving them full and complete access to civil contracts that are fully enforceable in courts.

It is true that informal unions tend to dissolve in very high number, including those among heterosexuals, and in Scandinavia as well as Anglo-Saxon countries. So allowing official “marriage of gays might greatly reduce their turnover rates, but that is still unknown and I believe unlikely.

Some have criticized my claim that children raised by gay couples will tend to be at a disadvantage, partly because they have same sex parents, and partly because they would differ so much from their peers. One person asserts that evidence indicates that diversity is beneficial in schools and other organizations. I believe there is no credible evidence showing that for schools. African-American children, for example, do well in school when they have good teachers, and principals who enforce high and tough standards-just read Thomas Sowell on this subject.

I do not believe it would be difficult to have a civil contract in place of legal and legislative control of marriage and divorce. Most couples would start with a standard form, and only add to that form clauses that deal with special aspects of their relation. I would make such contracts compulsory, partly to remove the bad “signal” about lack of commitment when a person asks for a contract.

Posted by Gary Becker at 02:32 PM | Comments (4) | TrackBack

Gay Marriage--Posner's Response to Comments

These were fascinating comments, to which I cannot do full justice.

One issue that a number of comments raise is whether honosexuality is truly genetic or otherwise innate, or is a choice. Some distinctions will help to focus the issue. First, there is a fundamental difference between homosexual behavior and homosexual orientation. Many heterosexuals engage in homosexual behavior when there is no heterosexual alternative open to them--e.g., men in prisons or on naval vessels (before they were integrated), teenage boys in all-male boarding schools, and young men in Mediterranean cultures where marriage is late and women are largely unavailable for sex outside of marriage. I discuss this "opportunistic" homosexuality at length in my 1995 book Sex and Reason. There is also opportunistic heterosexuality--notably, men and women who enter heterosexual marriages to have children and/or conceal their homosexuality. I can't see a good reason for encouraging either kind of behavior.

Concerning homosexual orientation as distinct from behavior, there is an important distinction between genetic and innate determinants. One could be born possessing a particular trait because of one's genes, or because of some accident during pregnancy. In either case, the trait would not be "chosen." In the case of homosexual orientation, there is a fair amount of evidence that it is genetic; I discuss this in my book; also, a recent study reported in the New York Times actually found a gene that causes homosexual behavior in fruit flies. The evidence that homosexual orientation is, if not genetic, certainly innate is more diffuse but cumulatively persuasive, and includes the fact that homosexuality seems to crop up in all human cultures, including ones that reprobate it, and the almost complete failure of efforts to "cure" homosexuality despite the strong incentives of those who submit to such treatments. The "cure" when successful consists not of acquiring heterosexual orientation but of suppressing homosexual behavior. If homosexual orientation were simply a "bad habit," it could be broken more easily than cigarette smoking, an addiction that has a physical as well as a psychological dimension; no one thinks it can be.

Once the innate character of homosexual orientation is accepted, the way is paved for analogizing, as a number of the comments do, the claim of equality for homosexuals to the claim of equality for members of racial minorities--the latter a claim almost universally accepted in this society. I accept the analogy, and of course also accept that the Supreme Court in Loving v. Virginia held that it is unconstitutonal for government to forbid interracial marriage. My reasons for nevertheless opposing courts' ruling that it is unconstitutional to forbid gay marriage are twofold. First, the courts would benefit from a period in which experience with gay marriage in one or more states and several foreign nations, together with growing experience with civil unions, would lay a solider empirical basis than exists now for assessing the consequences of gay marriage. There is value in social experiments, and hence in not terminating them prematurely. (Compare the bad practice of terminating clinical drug trials as soon as there is some, but often incomplete and inconclusive, evidence that the drug being tested does have some therapeutic value, which the placebo administered to the control group does not.)

Second, and at the risk of seeming to take a Realpolitik approach to constitutional law, I don't think it's the business of the courts to buck public opinion that is as strong as the current tide of public opinion running against gay marriage. That is the lesson of the response to Roe v. Wade, even though there is far more public support for abortion rights than for gay marriage. Because the basis in conventional legal materials for creating a constitutional right either to abortion or to gay marriage is extremely thin, opponents cannot be persuaded that the creation of these rights by courts is anything other than a political act by a tiny, unelected, unrepresentative, elite committee of lawyers.

It is true of course, as one of the comments pointed out, that Brown v. Board of Education, in declaring racial segregation in public schools illegal, outraged many Southerners, but this was understood to be the reaction of a national minority (Southern whites) selfishly motivated by a desire to maintain black people in a politically and economically subordinate, dependent position. Brown would have been unthinkable--and in my pragmatic view unsound--had the case arisen in 1900 rather than the 1950s, because in 1900 the vast majority of the American population would have considered compelled racial integration of public schools improper. Moreover, I do not think the opposition to gay marriage is primarily motivated by a desire, even an unconscious one, to subordinate homosexuals to heterosexuals, or by a fear of homosexual recruitment--though that is a factor, as I mentioned in my original posting. I think the main basis for the opposition is religious and (responding to another comment) that such opposition is different from opposition based on a scientific error. Religion is not scientific, but there is a difference between a belief that is demonstrably based on error and a belief based on a system of thought that science neither supports nor refutes. (Science cannot refute the existence of the soul, for example, because there is no scientific test that could refute it. Sophisticated religions are careful to place their key claims beyond the possibility of scientific falsification.) In a democratic society, one has to respect religious beliefs; and no reasonable theory of the meaning of the religion clauses of the First Amendment permits one to argue that religious belief cannot be permitted to influence secular law. No one supposes that punishing murder is an establishment of religion just because the Ten Commandments--a religious code--states "Thou shalt not kill."

Although I don't think that courts should force gay marriage on the society, the arguments against gay marriage do not strike me as compelling. For example, it is true that the institution of marriage is oriented toward the production and rearing of children, but there are so many childless marriages, including second or third marriages of divorcees or widows or widowers, that it would be arbitrary to forbid gay marriage on the ground that, on average, such marriages produce fewer children. And indeed, if it is correct that most gay marriages will be between lesbians, the average number of children in gay marriages may not be significantly below the norm, since most lesbians, like other women, I imagine want to have children. Nor am I aware of evidence that children raised in homosexual households are on average more maladjusted, unhappy, antisocial, etc. than the rest of us; the evidence I reviewed in Sex and Reasondid not support such a hypothesis, though the book was published a decade ago and perhaps there is now some evidence to support it. Finally, it is unclear to me that marriage is any longer heavily subsidized--there is after all the "marriage tax" to consider.

One last point. One of the comments points out correctly that civil unions do not give homosexuals the full equivalent of marriage because the federal government refuses to recognize them as marriage equivalents for purposes of social security and other federal benefits. But that is equally true of gay marriages contracted in Massachusetts: the federal government does not recognize these as "marriage" for federal-law purposes. I believe that the prospects for federal recognition of civil unions would be greater if the homosexual-rights movement dropped gay marriage and focused entirely on civil unions. Gay marriage is the red flag before the bull.

Posted by posner at 10:42 AM | Comments (22) | TrackBack

July 17, 2005

The Law and Economics of Gay Marriage—Posner

The surprising decision of Spain, once the most Catholic country in Europe (except for Ireland), to recognize gay marriage—a decision that comes in the wake of a similar decision by Canada and, of course, by the Supreme Judicial Court of Massachusetts—presents an appropriate occasion on which to consider what light economic analysis might shed on the issue.

Economics focuses on the consequences of social action. One clear negative consequence is the outrage felt by opponents of gay marriage and of homosexual rights in general. Philosophers like John Stuart Mill would not consider that such outrage should figure in the social-welfare calculus; Mill famously argued in On Liberty that an individual has no valid interest in the activities of other people that don't affect him except psychologically. (Mill had in mind the indignation felt by English people at Mormon polygamy occurring thousands of miles away in Utah.) But that is not a good economic argument because there is no difference from an economic standpoint between physical and emotional harm; either one lowers the utility of the harmed person.

The issue is more complicated to the extent that some of the outrage is based on fear that making homosexual relationships respectable by permitting homosexual marriage will encourage homosexuality. Most people don't want their children to become homosexuals, and this aversion is a factor in the utility calculus. However, they are probably mistaken in thinking that homosexuality is chosen; there is compelling evidence that sexual orientation is an innate (probably genetic) rather than acquired characteristic. It is not clear what weight, if any, society should give to opinions formed on the basis of scientific error.

Obviously there are benefits to homosexual couples from marriage—otherwise there would be no pressure to extend marriage rights to them. (Whether, given the alternative of civil unions, there are incremental benefits to marriage is a separate question that I discuss later.) Some of these benefits appear to impose no significant costs on others and thus are clear social gains: an example is that a married person does not have to have a will in order to bequeath his property at death to his spouse. Unless "outrage" costs are high, such benefits would, in an economic analysis, warrant recognizing gay marriage.

However, other benefits to married couples impose costs on third parties; an example is social security spousal and survivor benefits, to the extent they are not (and usually they are not) fully financed by the social security taxes paid by the person bestowing or obtaining the benefits. But such redistributive effects are equally imposed by heterosexual marriage, so they don't make a strong argument against homosexual marriage, especially since homosexual marriages are unlikely to be a significant fraction of all marriages. Only 2 to 3 percent of the population is homosexual and, judging from experience thus far, lesbians, who are far outnumbered by male homosexuals, seem much more interested in homosexual marriage than men are. Although I am not able to verify this figure, I believe that about two-thirds of gay marriages are lesbian, even though only about a third of homosexuals are lesbian. If this pattern persists, the total number of gay marriages will probably be very small relative to the number of heterosexual marriages.

The more fundamental economic question is why marriage is a legal status. One can imagine an approach whereby marriage would be a purely religious or ceremonial status having no legal consequences at all, so that couples, married or not, who wanted their relationship legally defined would make contracts on whatever terms they preferred. There could be five-year marriages, "open" marriages, marriages that could be dissolved at will (like employment at will), marriages that couldn't be dissolved at all, and so forth, and alimony and property settlement would be freely negotiable as well. The analogy would be to partnership law, which allows the partners to define the terms of their relationship, including the terms of dissolution. As with all contracts, the law would impose limits to protect third-party interests, notably those of children.

If outrage costs are set to one side, a purely contractual approach to (or replacement for) marriage makes sense from an economic standpoint because it would permit people to define their legal relationships in accordance with their particular preferences and needs. For those who did not want to bother to negotiate a "marriage" contract, the law could provide a default, one-size-fits-all solution—the conventional marital status embodied in state marriage statutes. That would reduce transaction costs for those people content with the standard "form contract." The law would, however, have to decide what contractual relationships qualified for social security and other public benefits to which spouses are entitled under current law.

The contract approach to marriage may seem radical, but that is because of a lack of historical perspective. Marriage has changed enormously over the course of history. In many cultures, it has signified the purchase of a woman by a man's family. In other cultures, instead of brideprice, there is dowry (an approximation to the purchase price for a husband, paid by the wife's family.). Arranged marriages, often of children, have been common. Divorce at will by the man only has been common; likewise, of course, polygamous marriage (including in the Old Testament). Trial marriages, defeasible if the wife fails to become pregnant, were a Scandinavian institution. Shia law recognizes temporary marriages. "Companionate" marriage, in which husband and wife are expected to be best friends, is a modern institution. In short, marriage has changed greatly in history, and it would be foolish to think that the current marriage conventions will remain fixed for all time. With the rise of no-fault divorce, the enforcement of prenuptial agreements, and the decline of alimony, marriage is evolving in the direction of contract. That evolution has contributed to the movement for gay marriage. For, as marriage becomes more like a contract, it becomes harder to see why homosexuals—who as I say are free to form other contracts—should be excluded from its benefits.

Under a contractual approach, gay marriage as an issue would disappear, because the state would not be being asked to "recognize" gay marriage and by doing so offend people who are distressed by homosexuality. No one thinks that homosexuals should be forbidden to make contracts, and marriage would be just a contract so far as any legal consequences were concerned. It would be left to individual religious sects to decide whether to permit church marriages of homosexuals.

The most remarkable aspect of the current controversy is that it is mainly about a word—"marriage." The reason is that although most Americans still oppose civil unions (among American states, only Vermont and Connecticut authorize civil unions, though New Jersey authorizes a related arrangement called domestic partnership; a number of foreign nations now authorize civil unions, some under the name "registered partnership"), I imagine that if the homosexual-rights lobby dropped marriage from its agenda and put all its effort into lobbying for civil unions, many states would soon recognize them, and eventually the federal government would follow suit and grant parties to such unions the legal status of spouses for purposes of social security and other federal laws; when that happened, there would be no practical difference between civil unions and marriage. Why so much passion is expended over the word "marriage" baffles me. After all, even today, and even more so if civil unions were officially recognized, homosexual couples can call themselves "married" if they want to. And this brings to the fore the disadvantage of treating marriage as a legal status. Were it just a contract, government would have no role in deciding what word the parties could use to describe the relationship created by it.

Although personally I would not be upset if Illinois (where I live) or any other state decided to recognize homosexual marriage, I disagree with contentions that the Constitution should be interpreted to require state recognition of homosexual marriage on the ground that it is a violation of equal protection of the laws to discriminate against homosexuals by denying them that right. Given civil unions, and contractual substitutes for marriage even short of civil unions, the discrimination involved in denying the right of homosexual marriage seems to me too slight (though I would not call it trivial) to warrant the courts in bucking strong public opinion; and here it should be noted that although the margin in the polls by which homosexual marriage is opposed is not great, the opponents tend to feel more strongly than the supporters. Most supporters of homosexual marriage, apart from homosexuals themselves (not all of whom favor homosexual marriage, however), and some (not all) of their parents, support it out of a belief in tolerance rather than because of a strong personal stake, whereas many of the opponents are passionately opposed, some because they fear homosexual recruitment, contagion, etc., but more I think because they believe that official recognition of homosexual marriage would disvalue their own, heterosexual marriages.

Of course it is often the duty of courts to buck public opinion; many constitutional rights are designed for the protection of minorities. But when, as in this case, there is no strong basis in the text or accepted meaning of the Constitution for the recognition of a new right, and that recognition would cause a powerful public backlash against the courts, the counsel of prudence is to withhold recognition. Doing so would have the additional advantage of allowing a period of social experimentation from which we might learn more about the consequences of homosexual marriage. One state, Massachusetts, already recognizes homosexual marriage, as do a small but growing number of foreign nations (Spain, Canada, Belgium, and the Netherlands). Perhaps without judicial intervention gay marriage will in the relatively near future sweep the world—and if not it may be for reasons that reveal unexpected wisdom in the passionate public opposition to the measure.

Posted by posner at 07:19 PM | Comments (122) | TrackBack

On Gay Marriage-BECKER

When I have discussed gay marriage with some conservatives, they strongly opposed using the word marriage for gays. Yet many of them accepted that gay partners should have the right to sign contracts that determine the inheritance of their property, provide various stipulations about living arrangement, the disposition of assets in case they breakup, and many other conditions. Most of these persons might accept, I believe, that a gay partner can qualify for the social security benefits that spouses get, can be covered under employment medical plans of their partner, and so forth.

But to call these contracts "marriage" makes them see red. It is not that they believe (and I agree with them) that allowing the word marriage will significantly increase the extent of homosexuality. Whether homosexuality is due to genes or environment, allowing the term gay marriage to be used is likely to be a very small factor in determining the number of men and women who become gay.

The objections to gay marriage seem even stranger when one recognizes that gay couples have been allowed for a while to engage in much more significant behavior that has been associated throughout history with heterosexual couples. I am referring to the rights that gay couples already possess to adopt children, or to have one lesbian partner use sperm from a male to become pregnant, bring a fetus to term, and have a baby that the lesbian partners raise together, or the right of one gay male partner to impregnate a woman who bears a child that is raised by the two gay partners.

No one knows yet what is the effect on children of being raised by a gay couple. Yet it is a far more important departure from how children have been raised throughout history, with potentially much greater consequences, than using the word marriage to describe a gay union. I believe, although there is little evidence yet, that the effects on children raised by gay couples will usually be quite negative, in part because fathers and mothers have distinct but important roles, in part because their family structures will differ so greatly from that of their classmates and other peers. Another reason is that gay couples tend to have much less stable relations than heterosexual couples, although the data that demonstrate this is mainly from gay couples without children. To the extent the greater turnover extends to gay couples with children, which I believe it will, then greater turnover adds a further complication and difficulty for the children raised by gay couples.

So given this radical change when children are conceived and raised by gay couples, I find the furor stemming from the desire to use the term "marriage" to describe a union between two gays to be quaint and incomprehensible. But as Posner says there is commotion and anger about gay marriage, both pro and con. and whether justified or not. Given the strength of these convictions, it is better to have the issue of gay marriage resolved by the legislative process of different states rather than by largely arbitrary judicial decisions that may support or oppose the use of the word marriage to describe unions of homosexuals.

Whatever the outcome of such legislation, gay couples should have the right to contracts that specify their desired asset allocation, conditions, if any, under which they can break-up, visitation rights if they have children and break-up, and any other aspects of their relation that they consider relevant. With the enforcement of these contracts, they would have practically all the rights that married heterosexual couples have, even when they cannot call their relation marriage.

Indeed, I have long argued (see, for example, my 1985 Business Week column reprinted in G. S. Becker and G. N. Becker, The Economics of Life) that heterosexual unions should be based on contract rather than judicial decisions or legislative actions. Contracts are more flexible instruments than laws since they allow the terms of a marriage to fit the special needs of particular couples. The courts would become involved only in seeing that the contract is being enforced when one party believes it is not, and in insuring that adequate provision is made for any children if a marriage dissolves.

If married heterosexual couples also had to base their relations mainly on contract, as I continue to advocate, gay couples may not feel strongly that they suffer from discrimination if they cannot be considered legally "married". I agree with Posner that the contractual approach is not likely to be adopted in the foreseeable future. However, it does suggest that gay couples might actually be in a better position than heterosexual couples if gay couples could use contracts to define their rights and obligations, while heterosexual couples were mainly subject to less flexible judicial and legislative law. In fact, courts frequently override the provisions of marital contracts among heterosexuals, which they may be less likely to do when dealing with contracts between gays.

Posted by Gary Becker at 06:18 PM | Comments (44) | TrackBack

Response to Africa-Aid Comments--Posner

Great comments!

But let me start with clearing up a misunderstanding. Two consecutive comments read: "I would like everyone to know that I wrote a comment critical of Posner's view on AIDS treatment that was apparently censored from the blog." "My last comment was intercepted with a message that a feature had been enabled to allow Posner to approve posters. The comment has yet to appear." There is no censorship of our blog. There is a feature that enables us to disable comments, but we have never used it and do not plan to use it. Also, we don't read comments as they come in, but only en masse when we are ready to respond to them at the end of the week. So there is no screening.

On to substance: here is a thoughtful blog with which however I disagree. After quoting my statement that "Pending development of a vaccine (still not in sight), the only effective way of dealing with the African AIDS epidemic is adoption of safe sex. The AIDS drugs will retard that adoption by reducing the benefits," the comment states: "So then subsidize safe sex too! Pay for condoms and for non-catholic, realistic sex-ed. No rational human being who understands the disease and the possibilities for free prevention will decide to have unprotected sex in Africa just because new AIDS drugs will prolong certain death by 4 years. That is absurd. I agree that education and legal/political reform are the highest priorities, but you MUST treat the sick and the dying. What kind of respect for the rule of law will people develop when they are told that they can't have AIDS drugs for their sick child because the G8 is trying to teach Africans personal responsibility!"

True, no one who has a keen understanding of AIDS, the side effects of the antiretroviral drugs, etc., will deliberately engage in unprotected sex, unless perhaps he thinks the risk of infection very slight although not zero (at that margin, the availability of the drugs might sway choice). But as another comment points out, there is enormous misunderstanding of AIDS in Africa, and learning that a "cure" is available could have significant behavioral consequences. Another comment points out correctly that even if there is no misunderstanding about the limited efficacy of the drugs, just the fact that they increase longevity means that there will be more living people with AIDS, and they will infect others. As for the issue of denying health care to sick and dying people, no one is suggesting that. The question is whether the United States and other nations should subsidize the treatment of a particular illness in another group of nations. There is no moral duty to do this if, on balance, the effects of the subsidy on the people of the donee nations are likely to be negative.

I agree with the comments that point to constructive investments for foreign aid funds, such as birth control and education. The problem is getting the funds invested productively in such programs without the donee nation's simply reducing its own investment in them, thus in effect diverting the foreign aid funds to unauthorized uses. Will the donor nations employ enough auditors to detect such diversions, and if such diversions are detected will the donors actually withhold the aid? I am skeptical.

One comment usefully invokes the concept of "resource curse," observing that countries rich in natural resources seem not to benefit on balance from the wealth that the revenue from the export of such resources generates. A major reason is that a source of money that does not require an educated, hard-working population, the development of commercial values, a rational legal system, and other prerequisites to economic development reduces the pressure for developing the necessary framework for development. Foreign aid, as the comment points out, has the same characteristics. Money flows in without need to develop the proper legal, attitudinal, and institutional framework for sustained development, and thus enables national leaders to defer the often painful construction of such a framework. The analogy to the debilitating effects of welfare, and the benefits from Clinton's reform of the welfare system, is evident. Foreign aid is welfare writ large.

Posted by posner at 09:40 AM | Comments (5) | TrackBack

July 16, 2005

Response on Aid to Africa-BECKER

I enjoyed and benefited from many comments. The discussion helped to resolve a number of issues. Let me add to a few that were not resolved.

Remittances to India and China were not of great importance during their 40 years of slow growth. Nor did farmers in either country do well during this period, except for a few areas in India where the green revolution took hold. In China farmers suffered badly under Mao’s misguided policies. Indian farmers have participated less in the economic gains since 1991 than urban workers. However, many young persons born on Indian farms are now moving to urban areas to take advantage of the better opportunities there.

Neither China nor even India built up its education structure while they were growing very slowly. China almost ruined its education system during the cultural revolution since most universities and many secondary schools were closed. And despite the high quality of India’s IIT’s, the vast majority of Indians get very little education, and what they get is of low quality.

Opening the markets of the rich countries to the mainly agricultural goods from Africa is surely desirable. That is one of the proposals at Gleneagles that can be supported strongly. But opening markets alone will not stimulate rapid growth.

For good economic reasons, I agree with the person who said that low cost Aids drugs if widely available in Africa would tend to both increase infection rates and increase life expectancy. The puzzling aspect of the Aids epidemic in Africa is that the many persons who have not had access to the cheap new drugs have not taken more steps to reduce their likelihood of infection. Studies indicate, however, that more educated Africans adjusted their behavior more than the less educated. By contrast, prior to the development of the Aids drugs, vulnerable Americans did take many steps to reduce HIV infections, including greater use of condoms, less risky types of sex, and still other responses.

Someone gave examples of crises that did not stimulate beneficial economic reforms. I have only argued that serious crises are often necessary to generate such reforms, but I agree that crises are not sufficient.

Foreign investment in Africa will both stimulate economic growth and raise the earnings of many workers. With the right economic and political conditions, international companies will invest in Africa either in low skilled-labor-intensive industries or in mining. Multinationals pay higher wages than local labor, so as a result, they select better and more reliable workers.

Of course, valuable infrastructure can help in speeding up economic development, but just building roads, airports, etc. may do little good, as in the airport example I gave in my posting. India managed rapid growth since 1991 with bad roads and embarrassingly rundown airports. I do not believe, however, that large infrastructure projects is a good way to give aid since it is an invitation to theft and corruption. Instead, if aid is to be given, it should concentrate on small and very specific projects unlikely to be undertaken by African governments. There are not a lot of these that are feasible, but I gave some examples in my posting, and some of you gave other examples.

Posted by Gary Becker at 07:21 PM | Comments (0) | TrackBack

July 11, 2005

Aid to Africa: Will it Help? BECKER

Accompanied by rock concerts in different countries and a push from activist rock stars like Bono and Bob Geldof, the world's richest democracies, called the G8 nations, met this past week in Gleneagles Scotland to decide how to help African nations. The publicity surrounding their meeting was reduced by the terrorist attacks in London, but they still managed to get considerable newspaper coverage. They committed to $25 billion in extra annual aid to Africa by the year 2010, sizeable debt relief for Africa, trade talks to eliminate agricultural support in the rich nations, and a promise to make low cost AIDS treatment widely available in Africa.

The G8 nations are rich enough to easily afford the increased aid committed to Africa. Perhaps for this reason, some of the activists denounced the aid as too small and miserly. But that these countries can certainly "afford" to spend more does not mean that much greater aid will help the millions of poor Africans. Indeed, it is doubtful whether more aid will speed up economic growth, given both Africa's experience with aid during the past half century, and the evidence from other poor nations that internal reforms that produce sizeable and persistent growth are the only really effective way to reduce a nation's poverty.

Despite receiving cumulative aid of more than $500 billion during the past several decades from rich countries and international organizations like the World Bank, Africa has had the slowest growth in per capita income of any continent. Slow growth is not the inevitable result of being poor since the per capita incomes of poor nations grew since 1960 about as fast, and perhaps a little faster, that the per capita incomes of rich countries. Obviously, the abundant aid to Africa in the past did not guarantee rapid growth, This aid may even have made growth harder by encouraging greater corruption, by reducing the need to consider drastic economic reforms toward freer economies, and by making it easier to waste resources on grandiose and unproductive projects, such as the Eldoret International Airport in Kenya that almost nobody uses.

India is a good example to consider in evaluating the respective roles of aid and self-generated reforms. India probably received more economic aid from international organizations than any other nation during the 40 years from its independence to the mid-1980's. Yet this large and complicated democracy experienced only a slow growth in per capita income during this period-sometimes referred to as the "Hindu" rate of growth, as if Hinduism was an inevitable drag on economic progress. However, a serious macro-economic crisis around 1990 forced India to change its ways, and brought in a reform-minded economist as finance minister, Dr. Manoman Singh. He introduced a series of simple but basic economic reforms during the early 1990's that included sharp lowering of very high tariffs and quotas, substantially reduced regulation of private domestic investments, a little encouragement to foreign direct investment, and the opening of more sectors to private enterprise. With no increase in foreign aid, and very likely a decrease, India's rate of economic growth sky-rocketed after these reforms to above 6 per cent per year, second highest only to China, and a pace of growth that would be the envy of African nations.

India and other examples of poor countries that managed to grow rapidly indicate that large scale and general foreign economic aid is not the solution to slow growth. Indeed, general aid might delay the reforms necessary for growth because it can take away the crisis mentality that appears crucial to galvanizing the political will necessary to implement radical economic reforms.

I am not denying that Africa has some special and serious problems that may make growth more difficult there, and perhaps provide room for aid for specific projects. Many African countries are located around the equator, and have climates that breed diseases that are highly debilitating and have not yet been conquered. Deadly tribal and ethnic civil wars have ravished many countries and certainly discouraged long-term investments. The AIDS epidemic has been particularly deadly there, with many millions infected, although it is puzzling why more precautions are not being taken by the African men and women at risk.

So it is easy to sympathize with the desire to provide aid to reduce some of this misery. As the Indian example (and Chinese example as well) indicates, sustained growth requires economic reforms toward freer markets in a political environment that is not clouded by civil wars and uncertain property and legal rights. However, aid might be helpful if directed toward better health and education-improving projects that would be neglected by African governments. Some examples include vaccination programs of the type favored by the Gates Foundation, the support of elementary schools in rural areas primarily devoted to the education of girls, and subsidizing research in G8 nations on diseases most common in Africa, such as malaria, sleeping sickness, and of course AIDS.

If these kinds of projects are politically feasible, they might more than repay the additional investment called for by the Gleneagles Meeting. But these and other projects promoted by aid from rich countries will not stimulate rapid economic growth and widespread reduction of poverty. Rapid growth can only come from major additional internal changes within Africa.

Posted by posner at 11:13 PM | Comments (43) | TrackBack

Foreign Aid to Sub-Saharan Africa--Posner Comment

I do not favor foreign aid, debt relief (which is simply another form of such aid), or other financial transfers to poor countries, in Africa or anywhere else. Countries that are not corrupt do not require foreign aid, and foreign aid to corrupt countries entrenches corruption by increasing the gains to corruption. Foreign aid to Zimbabwe, for example, will simply prop up dictator Mugabe.

Foreign aid makes people in wealthy countries feel generous, but retards reform in those countries as well as in the donee countries. Obviously from a world welfare as well as African welfare standpoint Europe and the United States should not impose tariffs on agricultural imports in order to protect their rich farmers. Eliminating tariffs would do more for Africa than giving them an extra $25 billion a year to squander. (It would also increase the wealth of the countries that eliminated their tariffs.) Since there are 650 million people in Sub-Saharan Africa, the extra $25 billion will increase per capita annual income (assuming it isn't squirreled away by corrupt elites) by only $40. Not that such an increase is wholly trivial in relative terms—Nigeria, for example, has an annual per capita income of only about $300, and it is not the poorest country in Africa. But it is unlikely that the poorest people in these countries will benefit from the extra money; even if most of it isn't skimmed off by corrupt officials or squandered on dumb projects, it is likely to stave off fundamental political and economic reforms. (The G8 nations at Gleneagles also agreed to forgive some $50 in African debts to them, but that is a one-time event and its annualized value is therefore much less than $25 billion a year.)

Controls over how the money is spent will be difficult to implement. Earmarking donated money is especially difficult to enforce because the donee country can use the money to replace funds that it is already spending on the activity that the donation is earmarked for. So, for example, if money is earmarked for girls' education, the donee country can reduce the money that it appropriates out of its own funds for such education; such an evasion would be very difficult to prevent without intrusive monitoring of the country's finances that its leaders would resist vigorously and effectively in the name of anticolonialism.

The highest priority for—and it should be a condition for receiving any—foreign aid should be a nation's agreeing to the establishment under the auspices of the G8 nations an independent, professional, and competent judiciary and police, well paid and well supported with staff and with computer and other necessary equipment, to enforce contracts, property rights, and personal rights. Without such a framework for the protection of economic activity, the African nations are unlikely to progress. The cost of such a framework would be quite modest—far less than $25 billion a year for the entire region.

Another priority is, as Becker notes, girls' education, probably the surest route to reducing population growth. But, although heartless, I do not agree that African nations should receive anti-AIDS drugs on a subsidized basis. Drugs that reduce the severity of an infectious disease can actually foster the spread of the disease by making the disease less costly to people who contract it. Pending development of a vaccine (still not in sight), the only effective way of dealing with the African AIDS epidemic is adoption of safe sex. The AIDS drugs will retard that adoption by reducing the benefits. Girls' education, quite apart from its other benefits, will combat the epidemic because the more secure women are economically, the less they will be inclined to yield to men's demands for risky sex.

Posted by posner at 11:05 PM | Comments (28) | TrackBack

July 10, 2005

Announcement

Owing to travel, we will not be doing our next posting until tomorrow (Monday).

Posted by posner at 03:27 PM | Comments (5) | TrackBack

Posner Reply to Grokster Comments

These were stimulating comments.

Several pointed out correctly that tags on software files, indicating that the file is copyrighted, can probably be removed; and this suggests that only encryption, preventing copying, is likely to be effective in protecting the intellectual property rights of the owner of the copyright. But this in turn presents the spectre of overprotection of those rights. Copyright is limited in term and, more important (given the length of the term), is limited in other ways as well, such as by the right to make one copy for personal use and, in particular, the right of "fair use," which permits a significant degree of unauthorized copying. To the extent that encryption creates an impenetrable wall to copying, it eliminates these limitations on copyright. In addition, encryption efforts generate countervailing circumvention efforts, touching off an arms race that may create more costs than benefits.

When these points are combined with the undoubted fact that many millions of Americans simply do not see anything wrong with the copying of copyrighted music and film, so that legal restrictions on copying will not be reinforced by a strong moral norm, alternatives to lawsuits against direct and contributory infringers must be considered both by industry and lawmakers. Industry can reduce copying by reducing the price of the originals and by providing value added that is difficult to copy, such as attractive packaging. Congress could elide the problem by curtailing copyright protection for readily copiable work and substituting a tax on computers the proceeds of which would be distributed to the owners of copyrighted works.

Several commenters wondered about the limitations of contributory or indirect liability. What about companies that manufacture guns that they know to be particularly suitable for and used in criminal activity? There is no general answer; it all depends on how specialized a particular good is to illegal activity and how serious that illegal activity is. So the sale of burglar tools provides a good example; also the fencing of stolen goods. Most guns are sold for lawful uses, and since the desired characteristics of a gun (weight, accuracy, killing power, price, reliability, speed of action, and number of rounds) are generally independent of whether the gun is to be used legally or illegally, the analogy to burglar tools may fail; but this is not a subject about which I know enough to speak with assurance.

Posted by posner at 11:37 AM | Comments (6) | TrackBack

July 03, 2005

Grokster, File Sharing, and Contributory Infringement--Posner

On the last day of its term (June 27), the Supreme Court decided the Grokster case, holding that the court of appeals had erred in affirming summary judgment for Grokster, a company that distributes free of charge software that enables computer owners to form "peer-to-peer" networks whereby a copy of a file in one computer can be transmitted to another computer. (There was another defendant as well, but I'll ignore that detail.) As explained in the Court’s majority opinion, "On the FastTrack network opened by the Grokster software, the user's request goes to a computer given an indexing capacity by the software and designated a supernode, or to some other computer with comparable power and capacity to collect temporary indexes of the files available on the computers of users connected to it. The supernode (or indexing computer) searches its own index and may communicate the search request to other supernodes. If the file is found, the supernode discloses its location to the computer requesting it, and the requesting user can download the file directly from the computer located. The copied file is placed in a designated sharing folder on the requesting user's computer, where it is available for other users to download in turn, along with any other file in that folder."

Grokster was sued by owners of music and film copyrights, who complained that Grokster was facilitating the infringement of their copyrights. Instead of buying a CD or DVD, the owner of Grokster software could search the network composed of other owners of the software for a computer file containing the copyrighted music or film and if he found it copy the file. This would be infringement, and the Supreme Court ruled that there was enough evidence of "contributory infringement" by Grokster to warrant a trial. The Court was unanimous, but there are several opinions, and they are long and labored. The basic principles are simple, however, and a single, much shorter opinion would have sufficed.

A contributory infringer is someone who facilitates infringement. By making the contributory infringer liable, the law reduces the cost of enforcing copyright, since it would be very costly for copyright owners to sue every person who is engaged in file sharing.

The general approach is not limited to copyright law. For example, someone who sells burglar tools to a burglar is guilty of aiding and abetting if the burglar uses the tools to commit a burglary. And someone who induces a breach of contract is liable to the victim of the breach, even though the victim could just have sued the other party to the contract for breach of contract.

But difficulties arise when a product has both lawful and unlawful uses. It would be ridiculous to hold sellers of butcher knives liable civilly or criminally if a purchaser used the knife to commit a murder, unless the seller knew that that was the intended use. And even when the seller knows that the use will be illegal, he may not be liable. A standard example is the dress shop that sells a dress to a woman whom the shop knows to be a prostitute planning to wear the dress in soliciting customers. The idea is that at least in the case of minor crimes, we don't want to put sellers at risk of civil or criminal liability for aiding and abetting because it would make them too careful about inquiring into the uses of their wares; the added transaction costs would exceed the benefits in reduced social costs of crime.

In the case of Grokster and other companies that offer file-sharing services (or, in Grokster's case, just software, for unlike earlier file-sharing facilitators, such as Napster, Grokster does not copy files onto its own servers or use its servers to facilitate file sharing--it merely provides the software that enables computer owners to establish a network among themselves for sharing), there are potential lawful uses. This possibility was enough to convince the lower courts that Grokster was not a contributory infringer. Not all musical recordings or films are copyrighted (the copyrights might have expired); and in addition some producers of copyrighted works, especially if the producers are new and trying to establish a reputation (a new rock and roll band, for example), may want their works distributed as rapidly and as far as possible even at the sacrifice of royalties. In effect, these producers are willing to grant royalty-free licenses to the users of Grokster software.

Nevertheless, the Court cited evidence indicating that most of the file sharing enabled by Grokster's software is, as Grokster well knew, infringing, just as most sales of burglar tools are to burglars, though some are to people who want to be able to break into their own house if they lock themselves out and others are to the police, or to the curious, or to would-be burglars who get cold feet before they commit their first burglary with the new tools. Contributory infringement would be an empty box if any lawful uses, however trivial in relation to the unlawful, enabled the contributory infringer to get off the hook on all uses of his product even though he knew that the vast majority were infringing.

But that is not the end of the analysis. Some infringements, paradoxically, may actually benefit a copyright holder yet he may refuse to grant a royalty-free license because he thinks he can extract a royalty and thus have his cake and eat it too. People will pay more for a CD if they think they can share it with others over a peer-to-peer network, because then the CD becomes a form of currency for arranging advantageous swaps and even "buying" new friends. Then too, if you travel a lot and bring your computer with you, with file sharing you don't have to drag your favorite CDs along; file sharing in such a situation merely gives you better access to a product that you paid for--and you will pay more, if you have that better access, just as you would pay more for a cellphone that you could use in any country in the world. In addition, through file sharing you might develop a taste for a particular band or composer whose recordings you wouldn't have bought without the free exposure to them; this is file sharing as advertising of copyrighted recordings that is free to the copyright owner.

But again, the mere possibility that infringement may confer benefits on copyright owners can't suffice to defeat a suit for contributory infringement any more than it could defeat a suit for direct infringement, as it is always possible to conjure up such possibilities. If the Grokster case is tried, the trial will provide an opportunity to compare the revenue loss to the copyright owners against the possible gains that I have listed. Unfortunately, subjecting providers of file-sharing software to the threat of trial places them at substantial risk, which may drive many of them from the market.

The final argument against imposing liability on Grokster and similar enterprises without bothering with a trial is a kind of "infant industry" argument. The software industry is dynamic and there is concern that imposing liability on software producers may retard innovation, since even if the only or major current use of some type of software is to facilitate copyright infringement, the software may turn out to have important lawful uses if only it isn't strangled in the cradle. This is hard to credit in the case of file-sharing services and software, however, since there is an immense lawful demand. File sharing of noncopyrighted materials is fundamental to the Internet, and for that matter to the intelligence system--the Intelligence Reform Act passed last fall ordains the creation of an "Information Sharing Environment" to facilitate the sharing of data across the many databases used by federal intelligence agencies. Also, any diminished innovation due to contributory-infringement liability must be traded off against the enhanced innovation that can be expected if intellectual-property rights are strongly protected by the law.

Grokster relied heavily on a case that the Supreme Court had decided many years ago involving Betamax, a predecessor to the VCR. At the time, the principal use of Betamax was to record television programs for later viewing. Insofar as the recording merely shifted the program to a more convenient viewing time, it clearly benefited the owners of the copyrights on the programs; but insofar as it enabled the viewer to erase the commercials, it hurt the copyright owners, whose remuneration depended on advertising revenues. The Supreme Court held that, given this dual-use situation, Sony, the manufacturer of the Betamax, was not a contributory infringer. The decision turned out to be fortunate for the film industry, because within a few years the sale and rental of home video recordings became a major channel of film distribution, which the studios had not anticipated. And so it is argued that file sharing of copyrighted music and film may also turn out to have unexpected benefits for the copyright owners themselves (beyond the modest benefits suggested earlier). But the logic of this argument is that there can never be liability for contributory infringement because the possibility can never be excluded that the product or service offered by the alleged contributory infringer, even if it is used exclusively by infringers, will turn out in the future to have substantial noninfringing uses.

There is a possible middle way that should be considered, and that is to provide a safe harbor to potential contributory infringers who take all reasonable (cost-justified) measures to prevent the use of their product or service by infringers. The measures might be joint with the copyright owners. For example, copyright owners who wanted to be able to sue for contributory infringement might be required, as a condition of being permitted to sue, to place a nonremovable electronic tag on their CDs that a computer would read, identifying the CD or a file downloaded from it as containing copyrighted material. Software producers would be excused from liability for contributory infringement if they designed their software to prevent the copying of a tagged file. This seems a preferable approach to using the judicial system to make a case by case assessment of whether to impose liability for contributory infringement on Grokster-like enterprises.

Posted by posner at 10:15 PM | Comments (25) | TrackBack

Grokster and the Scope of Judicial Power-BECKER

Grokster is a company that distributes software free of charge that enables copies of files on one computer to be transferred to another computer. Grokster was sued by MGM and other owners of copyrighted music and films with the claim that Grokster was facilitating the infringement of their copyrights. The Supreme Court decided unanimously that the evidence of contributory infringement by Grokster was sufficient to warrant a trial.

I do believe the case deserves a trial, and primarily for this reason I signed (without any compensation) an Amici Curiae brief submitted by several economists to the Supreme Court against Grokster. The arguments about infringement are set out in that brief and in Posner’s discussion. This software has few other uses so far other than to copy files from one computer to another, which often is a violation of copyright protection on the files copied. Although Grokster is not per se violating any copyright by producing this software, its software unquestionably facilitates these violations. It is also much more efficient to litigate against the contributory infringement of Grokster than to litigate against every college student and other individuals who are actually engaged in transferring files illegally.

The courts have held in the past that it is not contributory infringement if a company produces a product with sufficient sales for legitimate uses, even though it is sometimes used to violate either copyright or other laws. For example, it is legal to produce box-cutters, even though they have been used to commit terrorist acts. Posner gives other examples along similar lines.

But several things concern me about the issues raised by this and related court decisions. I basically do not trust the ability of judges, even those with the best of intentions and competence, to decide the economic future of an industry. Do we really want the courts determining when the fraction of the total value due to legal sales is high enough to exonerate manufacturers from contributory infringement? Neither the wisest courts nor wisest economists have enough knowledge to make that decision in a way that is likely to produce more benefits than harm. Does the fraction of legitimate value have to be higher than 50 per cent, 75 per cent, 10 per cent, or some other number? Courts should consider past trends in these percentages because new uses for say a software-legal or illegal- inevitably emerge over time as users become more familiar with its potential. Must courts have to speculate about future uses of software or other products, speculation likely to be dominated by dreams and hopes rather than firm knowledge?

Posner suggests requiring software producers to prevent the copying of CDs or other files with non-removable electronic tags placed on them by copyright owners. Unfortunately, this suggestion merely shifts the problem one stage backwards by providing incentives to other innovators to produce software that removes such tags!

My other concern is more strictly economic. The burglar using tools to prey open doors, safes, or windows, the good example Posner uses, is almost invariably producing harm through his activities. It is much less clear that the harm exceeds the benefits when someone buy files and then shares them with friends, and in many similar violations of intellectual property. A person might pay more for files that he expects to share with friends partly because to gain their goodwill, or partly because he can then share their files. Individuals may jointly pay for files if there is software that can be used to share them. In addition, free use of some files due to copying may encourage purchase of additional ones because the music or film copied whets the appetite for certain types of music, films, or other copyrighted material.

These points are not simply intellectual exercises, for at least some of the serious studies of the effects of copying and other apparent violations of intellectual property on sales do not show any strong negative effects, and sometimes even claim to find positive effects. Posner gives the example of Betamax, a losing competitor to the VCR. The movie industry opposed Betamax because they thought it would help destroy the sale of movies, but it failed to appreciate the eventual importance of videos to their overall market. There may also be conflicts among companies with copyrights, so that the majority might gain from a freer market and prefer to do nothing, while a few companies sue because the copying of their materials hurts them.

Experience and theory tells us that it is best to let markets rather than courts determine the evolution of industries-just remember the mess made of the telephone industry by Judge Greene. I increasingly believe that this principle applies also to alleged violations of intellectual property through contributory infringement. This form of legal remedy should be used but rarely.

Posted by becker at 09:49 PM | Comments (5) | TrackBack

Posner Response to Comments on Eminent Domain

Let me note just a few points:

1. "Holdout" doesn't mean "stubborn." A stubborn homeowner is simply someone who places a high idiosyncratic value on his home. A holdout is someone who may value his home at little more than the market value, but who sees an opportunity to obtain a much higher price by exploiting his strategic position vis-a-vis the developer. If the developer has sunk heavy costs in acquiring adjacent property, and would have to write off those costs if he can't acquire the remaining lot, then he will have to pay a high price to the owner of that lot.

2. The holdout issue is discussed at some length in several of the briefs in the Kelo case, so it's surprising that it didn't receive attention in the Court's opinions. It is unclear whether the plaintiffs were holdouts, and, as Becker mentions, even if they were there are ways of foiling holdouts without resorting to eminent domain. The simplest is to conceal the developer's project, as by using straw purchasers, so that the owners of the property that he is seeking to acquire don't know that someone is trying to put together an assemblage of contiguous lots. That is deception, but deception in a good cause, as it were, since it is countering the exploitation of a form of monopoly power.

3. I mentioned that in the absence of holding out, eminent domain operates as a form of arbitrary taxation (i.e., of idiosyncratic values). However, much taxation is arbitrary, and so the question presented by the use of eminent domain in situations not involving holding out is whether it is more arbitrary than the taxation that will be used in its stead. That is, if government land-acquisition costs are raised by limiting eminent domain, other taxes will have to be levied to pay for the higher costs.

Posted by posner at 09:07 AM | Comments (7) | TrackBack

July 02, 2005

Response to Comments on Eminent Domain-BECKER

Some good comments that deserve at least a brief reply. I am sorry I cannot do justice to all of them.

It is not satisfactory to define”public use” as some facility or activity available to everyone. For does that mean it is free? If so, that rules out government-owned toll roads. Government activities that charge a fee are not much different in this regard than private goods, such as privately owned stadiums, even when they receive government subsidies.

I do believe the right to own land is as fundamental as the right to own any other property, although the importance of land in an economy declines sharply with economic development. This is one of two major reasons why Henry George’s single tax is not attractive. The second reason is that such a tax discourages improvements in land since it is virtually impossible to get a “pure” land tax. So a land tax affects incentives, just like taxes on other capital.

Some stressed the distinction between local government activities that net create jobs and other economic benefits from local governments that simply transfer jobs, etc from elsewhere. In a depressed community with heavy unemployment, some net benefit may be achievable. However, in the vast majority of cases, it is mainly a transfer either from other communities, or from other sectors in the same community. This is the source of the basic flaw in claims that government-financed stadiums, for example, will create jobs and other benefits. Virtually all the benefits are transfers from elsewhere in the community, although some are transfers from other communities, as when out of towners come to games or watch them on television.

I stressed that there may be “hold up” problems where some property owners try to capture most of the surplus from a larger project. I also indicated that is mitigated, often crucially, by the fact that different potential sites can be used for a stadium, new road, power plant, etc. The many private projects that combine separately owned properties to build shopping centers, etc proves that hold outs can often be overcome without invoking eminent domain. The right to eminent domain simply eliminates the need to think creatively about how to do this.

Some of you questioned whether it is possible to determine the minimum price that people would accept for their properties. But the market does this all the time since that is what voluntary property transactions are all about. Hold out problems aside, no new problems are raised by assessing the values people attach to their properties. If the 87 year old woman who lived in her house since birth did not want to sell at the government’s price, why should the government have the right to force her to accept their offer, and perhaps make her miserable and destroy her happiness? They should have to do what private business must do all the time: either offer her a price that she accepts, or alter their plans to avoid the need to get her property.

Posted by becker at 10:18 PM | Comments (5) | TrackBack