prior probability

Alternative Title: Preview of Class #8 (Part 2)

In my previous post, I referred to Ronald Coase’s classic paper “The Problem of Social Cost” and introduced the nucleus of the so-called “Coase Theorem.” Here, I will discuss its philosophical implications. To begin with, when Coase is saying that the problem of harmful effects is a reciprocal one what he means is that in any legal dispute one side to the dispute will suffer “harmful effects” no matter how their dispute is decided. On the one hand, if we permit the owner of the factory to continue to emit smoke (to borrow Coase’s own example), the neighbors will be harmed. If, however, we rule in favor of the neighbors, then the owner of the factory will be harmed. (In the latter case, by the way, it is not just the owner of the factory who will be harmed but also all consumers who wish to purchase the products produced by the factory.)

On one level, then, Coase is simply making a practical point about trade-offs. One must weigh and balance (a) the cost to the neighbors caused by the emission of smoke versus (b) the cost to the factory owner and to consumers that will be caused by preventing the emission of smoke. But at a much deeper level, Coase, perhaps unwittingly, discloses a profound and counter-intuitive insight, for his approach implies that neither party to the dispute has an ex ante right to be free from harmful effects. To say, for example, that the owner of the factory has a right to use the factors of production free from legal or government intervention is not dispositive because one could argue that the neighbors have a right to clean air or to good health. In other words, however we frame the problem–as one involving property rights in the factors of production or moral rights to good health–the problem remains reciprocal. One of the parties will suffer harmful effects however the dispute between them is resolved!

For Coase, then, the key question is not, Who is harmed? Both sides are! Nor is it, How do we avoid harm? For harm is unavoidable. The key question, then, is, How do we decide which side to harm? Now that we have stated the key question in terms of choosing the lesser harm, allow me to conclude with a brief digression regarding John Stuart Mill’s famous “harm principle.” In Mill’s immortal words in his essay “On Liberty”: “The only purpose for which power [i.e. law] can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.” But in reality, Mill’s harm principle is incoherent. It is just empty rhetoric, meaningless banter. Why? Because as Coase has taught us, harm is unavoidable. So, to say “do no harm” or “your right to swing your fist ends where my nose begins” is totally unhelpful. Instead, we should ask, what legal rule or course of action produces less harm …

Let’s take a break from the mystery of Adam Smith’s love life in order to preview our next “Advanced Topics” class (BUL5332), which is devoted to something called “the Coase theorem”–named after the late great English economist and legal theorist Ronald H. Coase (b. 1910, d. 2013), who is pictured below. (Rest assured, friends, we will return to Adam Smith next week.) As an aside, one of the most remarkable aspects of Coase’s work is the absence of any advanced mathematics or inscrutable formulas. Instead, Coase relies on logic, plain English, and simple illustrations taken from the common law, such as pollution (the factory smoke example on page 1 of his social cost paper), nuisance (Sturges v. Bridgman or the case of the noisy confectioner on page 2), and cattle trespass (pp. 2-8).

In any case, Professor Coase’s theorem is so central to the field of “law and economics” that I will divide my preview into two parts. Here, I will first describe what Coase did and how he did it. In his 1960 paper on “The Problem of Social Cost,” Professor Coase begins by introducing the problem of “harmful effects,” or what is more commonly called “negative externalities” in economics textbooks. “The standard example,” Coase writes, “is that of a factory, the smoke from which has harmful effects on those occupying neighbouring properties.” In a now-famous passage, Coase makes the following poignant observations:

“The traditional approach has tended to obscure the nature of the choice that has to be made [i.e. the legal choice between A, the owner of the factory, and B, the neighbors]. The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is, How should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. The real question that has to be decided is, Should A be allowed to harm B or should B be allowed to harm A? The [correct solution] is to avoid the more serious harm.”

Coase’s irreverent utterance – “But this is wrong. [This is wrong!] We are dealing with a problem of a reciprocal nature” – is to me the single-most powerful and revolutionary statement in the annals of Anglo-American legal history since the great Oliver Wendell Holmes uttered his famous maxim, “The life of the law has not been logic; it has been experience.” For Coase is not just repeating the old saw that there are two sides to every dispute; he is saying something much more significant and original and insightful than that. Stay tuned …

Note: This blog post is from my latest paper/work-in-progress: “A Short History of Adam Smith in Love.”

There is yet another significant clue regarding Adam Smith’s love life, a third piece of primary evidence. The source of this particular piece of proof is Henry Mackenzie, a distinguished Scottish lawyer and novelist who, as I mentioned in a previous post, had co-founded–along with Professor Dugald Stewart–the Royal Society of Edinburgh. (For your reference, here is Mackenzie’s Wikipedia page.) It also worth noting that, according to Ian Simpson Ross (2010, p. 227), Mackenzie knew Adam Smith personally and “was much in Smith’s company when he [Smith] lived in Edinburgh in the last twelve years of his life.”

Toward the end of his life, Henry Mackenzie jotted down a series of personal recollections and memorable anecdotes from his lifetime, hoping to have these memories published in a book of “anecdotes and egotisms,” as Mackenzie himself referred to them. Mackenzie’s collection of anecdotes were eventually assembled by Harold William Thompson and published by Oxford University Press in 1927. Among other things, Henry Mackenzie recounts this brief recollection with the tantalizing title of “Smith and Hume in Love”:

This first sentence of Mackenzie’s fragmentary anecdote raises so many intriguing questions! Who is this mysterious “Miss Campbell of ________,” and when exactly did Adam Smith fall in love with her, and what, if anything, became of this romance? More specifically, could “Miss Campbell” be the same “young lady of great beauty and accomplishment” that Professor Dugald Stewart enigmatically refers to in “Note K” of his biography of Adam Smith? Or could she be the same “English lady” referred to in James Currie’s letter of July 1784, the woman that Adam Smith allegedly fell in love with during his visit to Abbeville? Or could she be an entirely different woman; could she be Adam Smith’s third love? Together, these three pieces of proof–Professor Dugald Stewart’s original obscure footnote and personal recollection of Adam Smith’s first love; Dr. James Currie’s hearsay report in his July 1794 letter to Prof. Stewart; and Henry Mackenzie’s brief and incomplete anecdote–point to an inescapable conclusion: Adam Smith had fallen madly in love on at least two occasions during his remarkable life.

In addition to Professor Dugald Stewart’s footnote, which we saw in our previous post, the next piece of relevant evidence relating to Adam Smith’s love life consists of a private letter dated July 14, 1794. This letter is addressed to Professor Stewart himself and is signed by one James Currie (pictured below), a noted medical doctor who was then residing in Liverpool. (For your reference, here is James Currie’s Wikipedia page.) This piece of evidence is important because it contains a second-hand account of a second(!) Adam Smith love affair. Currie’s letter is reproduced in relevant part below the fold:

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Note: This blog post is from my most recent work-in-progress “A Short History of Adam Smith in Love.”

The earliest published account of Adam Smith’s love life appears in Smith’s first biography, which was written by his academic colleague and friend Dugald Stewart (b. 1753, d. 1828), a noted Scottish philosopher and mathematician in his own right, shortly after Smith’s death in 1790. More specifically, this intriguing account appears in an obscure footnote in Professor Dugald Stewart’s 1793/1794 biography of Adam Smith, which he read to the Royal Society of Edinburgh in January of 1793 and which he subsequently published in 1794. Below the fold is Professor Stewart’s full report of Adam Smith’s love life:

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Have you ever wondered why the great Adam Smith never married or if he ever fell in love? I shared the abstract of my lastest paper about this enigma in my previous post. In fact, the available evidence, though meager, suggests that Smith did fall in love, at least twice in his life! I will carefully review this historical record and evidence piece by piece in my next few posts; in the meantime, below the fold is the full introduction to my “Adam Smith in love” paper (no indentations):

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That is the subject of my latest paper, the full title of which is “A Footnote to the History of Sublimation? A Short History of Adam Smith in Love.” Update (10/29): I once again made additional revisions to my abstract and uploaded a revised and corrected version of my paper to SSRN. Below the fold is my re-revised abstract:

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For your viewing pleasure, pictured below are two sample screenshots taken from 100,000 Stars, a simple but sophisticated website containing a comprehensive and interactive three-dimensional visualization of our nearest 119,617 stars! More details about this beautiful galactic project are available here. Hat tip: @kottke.

Shout out to my colleague and friend Michael Conklin (Angelo State), who inspired the topic of Class #7 of my Advanced Topics in Law class and who is one of the most (if not the most) innovative and entertaining business law professors I have ever had the pleasure of meeting. But why does this question matter? For two reasons: (1) business firms are generally liable for the torts of their employees but not for those of their contractors, and (2) the business models of more and more new economy firms (like Uber and AirBnB) are built on independent contractors. Here are Professor Conklin’s thoughts about this matter, and here are my own previous thoughts on this important question.