prior probability

From a recent blog post on my favorite blog, Marginal Revolution:

“Much of my writing time is devoted to laying out points of view which are not my own. I recommend this for most of you.”

Professor Cowen’s approach to writing reminds me of Bryan Caplan’s Ideological Turing Test (ITT), something we have blogged about before. You can read more about Caplan’s ITT here.

https://twitter.com/pwafork/status/1150142459193593856

Although we did not read a single page of Infinite Jest during the month of June, we have now resumed our reading of this massive tome and are up to page 638, or about two-thirds of the way through …

Gary Leff explains why here. The key question, however, is whether such fees should be declared illegal or should be otherwise regulated. That is, what is the optimal level of regulation in this case. (Put another way, what would the late Ronald Coase say?)

We recently learned of the death of the great João Gilberto, one of our favorite musicians of all time. Here is an obituary (NYT). Referring to Mr Gilberto’s masterpiece “Chega de Saudade,” the Times quotes the singer Gal Costa, who was just 12 years old when that iconic song was recorded: “it changed my life, and not only my life but the lives of everyone in my generation.”

This is our third and last post (for now) regarding Facebook’s new proposed crypto-currency, called Libra. We have already replied to various criticisms of Facebook’s proposed currency in our previous two posts. Here, however, I will switch gears and make an affirmative case in favor of Libra. My pro-Libra economic argument boils down to just two words: transaction costs. Simply put, if, as Facebook promises, making a payment or transferring funds with Libra will be as easy as sending a text message–if, in short, Libra will reduce “transaction costs” or friction in the current economic system–, how could one not support Libra? There are two main reasons, in turn, why lowering transaction costs is a massive slam dunk, to borrow a basketball metaphor.

First and foremost, as the late great Ronald Coase would often remind us, transactions costs matter. Many otherwise mutually-beneficial or value-creating activities go unperformed when transaction costs are too high relative to the value of the underlying good or service that would have been traded or exchanged in the absence of transaction costs. Secondly, even when transaction costs are low relative to the value of the underlying good or service to be traded, zero transactions costs are to be preferred to low transactions costs (with one caveat), just as low transactions costs are to be preferred over high transaction costs. So, what’s the caveat? The caveat is that the up front costs of eliminating or lowering transactions costs must themselves be worth the resulting benefits. On this score, I am still agnostic with respect to Libra, since this currency doesn’t exist yet, but if Facebook is willing to assume these up front costs by setting up an easy payment/money transfer system for its users, we should all be cheering Facebook on and hoping that it succeeds. This is a no-brainer, right?

Artist credit: Dan Sproul

Thus far, we have defended Facebook’s new cryptocurrency Libra against the vague and specious charge that it is somehow undemocratic–vague because democracy is open to many different definitions; specious because existing currencies are not responsive to majority rule in any meaningful sense. What about the other objections to Libra we identified in our previous post?

1. Money laundering, tax evasion, and other financial evils. To begin with, critics like Matt Stoller allege that Facebook’s new currency could facilitate money-laundering, terrorist financing, tax avoidance, and counterfeiting. But this has to be the worst possible argument against Libra, for the same technology that makes these sundry financial evils possible also make it possible to detect (and punish) such evils in the first place!
2. National security concerns. Matt Stoller also alleges–without any evidence, I might add–that the success of a private parallel currency like Libra could undermine the current system of economic sanctions that the U.S. and other countries have imposed on bad actors like Russian oligarchs and rogue nations like Cuba and North Korea. I would make two replies to this argument. For starters, even if this allegation were true, it’s not clear whether economic sanctions really work to begin with. Secondly, I would reiterate my technology argument above: a well-designed electronic currency might actually make it easier to uncover the clandestine efforts of rogue actors to get around economic sanctions.
3. Hacking threats. In his op-ed, Mr Stoller asks, “what happens if there is a theft or penetration of the [Libra] system?” In reply, I would make two points. First, I would concede that hacking no doubt poses a serious risk but that this risk is not unique to Facebook’s new currency–all Internet platforms are susceptible to this risk. But more importantly, I would also argue that Facebook has a strong incentive to protect its currency from hacking. In fact, if any business firm is in the best position to develop new solutions to hacking threats, it is probably Facebook and other Big Tech firms like Google, Amazon, etc.
4. Conflicts of interest. In his anti-Libra op-ed, Stoller writes: “It’s also possible that insiders belonging to the Libra cartel could exploit their access to information, business relationships or technology to give themselves advantages …. For instance, one of the incentives being discussed to get people to use the currency is discounts on Uber rides; if this happens, Facebook would be giving an advantage to Uber instead of other ride-sharing businesses.” Alas, the problem with this line of reasoning is that it ignores the basic risk-reward calculus that spurs economic progress and positive-sum games. To borrow Stoller’s same example, if a startup like Uber is willing to take a risk backing Facebook’s new currency, then Uber deserves the economic rewards that go with taking this risk.

To sum up, the myriad arguments against Facebook’s new currency are weak and unpersuasive. But we still haven’t made an affirmative case for Libra. We will do so in our next blog post.

Illustration by William Joel for The Verge

We turn now from jurisprudence to cyberspace. Did you know Facebook is developing a new cryptocurrency called Libra? Some critics, however, are not having it. For example, Matt Stoller, a fellow at the Open Markets Institute (oh, the irony!), recently wrote this op-ed bashing Facebook’s “undemocratic currency.” In summary, Mr Stoller presents five arguments against Facebook’s new cryptocurrency: (1) Libra is undemocratic, since it is being issued by a private company; (2) Libra will make it more difficult for governments to enforce economic sanctions against rogue actors; (3) Libra could be hacked by black hat hackers; (4) Libra will be plagued by conflicts of interest between its private backers and consumers; and (5) Libra will make it harder to detect money laundering and tax evasion and will make it easier for extremist groups to finance their operations. Is this the best Mr Stoller could do? All of these anti-Libra arguments are either weak or false or irrelevant.

Let’s begin with Mr Stoller’s most emotional argument first, his claim that Libra is undemocratic. My initial reply is, so what? Since when has “democracy,” however this vague term is defined, been the arbiter of a product’s moral legitimacy? Of course, one could object to my reply by noting that Libra is not just a product–it is a currency. But again, so what? Whether a currency is backed by a gold standard or by government fiat, there is no logical relationship between a currency’s soundness as a medium of exchange and the level of democracy of the government that is printing the currency. If anything, the reverse is true! That is probably why the most successful currencies of our times–like the U.S. Dollar, the British Pound, and the Euro–are now issued by independent institutions like central banks that are designed to be insulated from politics and the changing winds of popular will.

So, what about Mr Stoller’s remaining four concerns, i.e. hacking threats, conflicts of interest, national security, and illegal behavior? I will address these criticisms in my next post.

Illustration by William Joel for The Verge

This is the last of our series of posts about the prediction theory of law (PTL), and we may now sum up our negative assessment of the prediction theory as follows: although we concede the prediction theory cannot explain the law from Hart’s internal point of view, at the same time we must concede that other major theories of law also do a bad descriptive job of explaining how judges decide cases. (More simply put: the prediction theory sucks, but so too does every other theory of law!) Given this theoretical stalemate, what is to be done?

There are two possibilities. We could either try to formulate an entirely new and improved theory of law à la Hart, Dworkin, or Posner, or we could just “satisfice” and move on, i.e. try to figure out which theory of law is “less wrong.” In the remainder of this post, I will explain why I believe the prediction theory to be less wrong. Now, if all we want to do is figure out which theory of law is less wrong, we still need to state up front what our criteria of theory choice are and how those criteria are going to be weighted. Here, I will follow Brian Leiter’s lead by using the following three criteria: simplicity, scope or “consilience,” and coherence. (Prof Leiter identifies these criteria in his thoughtful paper “Explaining Theoretical Disagreement.” Although Leiter himself does not explicitly assign any specific weights to these criteria, for simplicity we will weigh them equally.) Next, let’s evaluate the prediction theory of law and its competitors in light of these criteria:

1. Simplicity. Leiter’s first criterion is simplicity, i.e. we usually prefer simpler explanations to more complex ones. Here, however, it’s hard to say which theory of law is the simplest one, since all of these theories can be summed up in a single sentence or phrase, such as Dworkin’s normative notion of law as integrity, Hart’s influential concept of law as the union of primary and secondary rules, or Holmes’s simple idea of law as a prediction of what courts will do, so let’s move on.
2. Scope. As Leiter correctly notes, we usually prefer more comprehensive or “consilient” explanations–i.e. theories that explain different kinds of things–to explanations that are too narrowly tailored to one kind of datum. Here, the prediction theory wins hands down. Why? Because the prediction theory is based on probability theory, and probability theory can be used to make predictions in a wide variety of domains. Competing theories of law, by contrast, are limited to the domain of law. (In fact, competing theories of law are even more limited than that–limited to the behavior of appellate courts.)
3. Coherence. Lastly, Leiter notes that we usually prefer explanations that leave more of our other well-confirmed beliefs and theories intact to those that do not. Again, the prediction theory of law wins hands down. After all, as we have already noted, the prediction theory is based on probability theory, and the axioms of probability theory are already well-established and beyond dispute. (Although there are some fundamental disputes at the margins of probability theory, such as the controversy between frequentists and Bayesians, these theoretical disputes pale in comparison to the disputes about the nature of law among legal philosophers.)

There is a fourth reason why I prefer PTL to other theories of law: the prediction theory is a purely descriptive or non-normative theory of law. Dworkin and Posner’s theories of law, by contrast, are normative ones, since their theories ultimately rest on a single master value–in Dworkin’s case it is integrity, while in Posner’s, it is some ill-defined form of pragmatism or consequentialism. For his part, although Hart’s theory of law purports to be a descriptive one, normative values can slip in through the back door of Hart’s theory. In short, the prediction theory wins by default–or in boxing terms, by technical knockout (TKO). Where have I gone wrong?

In our previous post we acknowledged the main problem with Oliver Wendell Holmes’s prediction theory of law (PTL): its inability to explain how judges actually go about deciding cases–or in Hartian terms, its inability to explain the law from an internal point of view. That said, my initial reply to this critique is, so what? Yes, there is no denying the prediction theory’s limitation, but if what we want to know is how judges decide cases–i.e. if what we want to know is what the law is from an internal point of view–, then the other main theories of law do not fare much better, whether it be the legal realist’s “judicial hunch” theory, H.L.A. Hart’s legal positivist or “mental construct” theory, Ronald Dworkin’s “integrity” theory, or Richard Posner’s “pragmatist” (i.e. consequentialist) theory of judging. To see why, let’s take a look at each one of these competing theories of law:

1. Judicial hunches. The judicial hunch theory of law is that judges decide cases based on their moral intuitions, or in the eloquent words of one realist judge, “the vital, motivating impulse for [a] decision is an intuitive sense of what is right or wrong for that cause.” (See Joseph C. Hutcheson, Jr., “The Judgment Intuitive: The Function of the ‘Hunch’ in Judicial Decision,” Cornell Law Quarterly, Vol. 14 (1929), p. 285, available here, quoted in Brian Leiter, “Toward a Naturalized Jurisprudence,” Texas Law Review, Vol. 76 (1997), p. 276, available here.) This description of judging might be true as an empirical matter, but instead of solving the demarcation problem in law, this approach openly conflates law with morality.
2. Hart’s legal positivism. H.L.A. Hart attempts to solve the demarcation problem in law by emphasizing convergence or regularity of judicial behavior. According to Hart, for a judicial decision to be a legally valid one, it is not enough for the decision to be based on the judge’s moral intuitions about right and wrong; the decision must also conform to what most judges in the legal system would do or are doing. Notice, however, that Hart’s theory does not remove the subjective or moral aspect of judging, so it is still open to the same objection as the hunch theory is: it still conflates law with morality.
3. Dworkin’s Hercules. We need not exert much effort to dispatch Ronald Dworkin’s integrity theory of judging, for the main problem with his elaborate theory is that it does not even pretend to be descriptive. Dworkin may provide an attractive normative theory of what judges ought to do, but his integrity theory comes nowhere close to describing what judges actually do. Next!
4. Posner’s pragmatist judge. Last but not least is Richard Posner’s legal-realist-inspired pragmatic theory of judging. Although I am a huge fan of Posner’s work, there are two big problems with Posner’s theory of judging. One problem is definitional: the precise meaning of “pragmatism” is hard to pin down. The other problem is the “conflational” one that all theories of judging seem to suffer from. It turns out that Posnerian pragmatism is just a fancy form of the hunch theory–judicial hunches in window dressing, so to speak. Pragmatism still conflates law with morality; it just substitutes a traditional Kantian view morality with a consequentialist view.

Given that all these main theories of law have a tough time describing what judges actually do without resorting to mental constructs or moral intuitions or other normative values (e.g. integrity, consequences), the prediction theory’s weakness on this ground should not come as shocking news to anyone. But why do I prefer Holmes’s prediction theory to these other theories of law. I will explain why in my next post.