Eurobonds, A Bridge Too Far
By Hans-Bernd Schäfer
The concept behind Eurobonds
Nowadays so called Eurobonds have been proposed as a solution to the current European debt crisis. Eurobonds would invoke joint liability among all member states of the European Monetary Union for a loan received by any member state. Thus the term “Eurobond” is surely misleading. It suggests the introduction of Euro denominated bonds whilst its actual purpose is the introduction of collective liability for government debt among all members of the Euro zone. Eurobonds should thus rather be called “joint liability bonds”.
What would be the consequence of converting all Euro zone public debt into Eurobonds? The interest rates for Greek, Irish, Portuguese, Spanish and Italian government bonds would fall dramatically as a result of a diminishing insolvency risk. However, the interest rates of German or Dutch bonds would rise for the exact opposite reason. Overall, this would imply a vast relief for the crisis struck countries. Those states which are currently paying between up to seven per cent interest on their new debt would perhaps manage to cope with three or four percent, probably with the exception of Greece. Proponents of the Eurobond suggest this as the ultimate liberation of the current crisis. Consequently the rich and solvent states would have to pay higher interest rates, since the additional risks would be priced into the new interest rates. For example, in the event that the introduction of Eurobonds were to raise interest rates on German government bonds by just one percentage point above the current level without Eurobonds, this would amount to 20 billion Euros per annum of additional debt financing. This amount is equivalent to 1 percent of the total German government debt at the end of 2010. It would certainly not place Germany in a precarious debt situation; however it is more than seven times the amount of combined federal and national spending on student loans in 2010 and it is equivalent to an increase of VAT taxes of 2 per cent points.
This is still a conservative estimate. The interest rates on the Eurobonds which were launched by the European Commission and for which all member states are liable, are currently 0.6 percent above interest rate levels on German government bonds. However, the risk on the part of the guaranteeing states would increase by a multiple in the event of converting all government debt within the Euro zone. Moreover, it is uncertain how financial markets would assess Germany’s insolvency risk once it accepts joint liability for the debt of other countries. Additionally, these estimates are based on the assumption that the interest rates on private loans remain constant, which is hardly reasonable. Private borrowers will certainly not be drawn into joint liability for the debts of other states. However, once the government assumes additional liability and thereby exposes the entire German economy to an additional country risk, this will lead to an increase of the interest rates on private loans. Therefore Eurobonds would burden both taxpayers and recipients of state benefits as well as private borrowers in Germany. The impact on German tax levels as well as the state's ability to maintain pension and other social benefits, are barely comprehendible once these risks are realized, as the combined public debt of Ireland, Portugal, Spain, Italy and Greece is now around 3.6 trillion Euros, about 150 per cent of Germany’s gross national product.
Would this save the Euro? It all depends on how much fiscal autonomy will remain with the member states within the Euro zone. If everything else remains unchanged, any state may go into debt to any desired extent. The European criteria for stability will not be met, because sanctions are unlikely to be upheld as witnessed in the past. This creates huge incentives in some countries to continue borrowing beyond any measure, because in the event of a state bankruptcy, the costs can be offloaded to the more solvent nations. In the short term Eurobonds would certainly bring relief, but in the long run this would lead to a financial chaos within the Euro zone, provided any member state is able to continue raising its budget deficits without being controlled by fellow member states.
Is this too pessimistic a viewpoint? Are we not simply observing a transposition of the homo economicus model of rational selfish people onto states, which are bound by bonds, contracts and multiple forms of cooperation, all of which is based in good faith? It would be grossly negligent to defend such a thought and it would certainly not be representative of what we have witnessed in Europe, ranging from the fate of the Stability and Growth Pact to the fraudulent misrepresentation in Greece.
The problems pertaining to uninhibited new loans by means of Eurobonds are also acknowledged by the proponents thereof. Many are therefore proposing the introduction of a common financial policy among the EU member states, which is to be lead by a European minister of finance. In essence, the aim is to abolish national autonomy in terms of public borrowing in member states. Hence any member state would not be granted additional debt without the consent of the other states of the Euro zone. In the event of deviation on the part of any member state, this would invoke the other member states to prevent it from doing so. If many states were to deviate, this would invoke the most creditworthy countries, i.e. especially Germany and the Netherlands to prevent the other states from increasing their debt. Hence Brussels would have to implement and maintain strict financial discipline among the member states in much the same way as a clan society maintains an iron mechanism in order to uphold conformism and group liability as a complement thereof. Germany, the largest and most creditworthy economy in Europe, would thus have to assume the role of a hegemonic preceptor. This role is neither sought within Germany nor outside Germany, yet such discipline would remain clearly inevitable similar to the laws of a clan. It would also result in a fundamental change of the underlying European treaties, all of which would have to be ratified by the member states, not to mention the possibility of referendums in some member states. The German chancellor Merkel has just launched a plan to amend the treaty of Lisbon and to impose strict financial discipline on all countries in the Eurozone. To avoid the problem of German political dominance she proposes theat the European court of justice and not the European council should dcide, whether a member state has breached the contract and about sanctions to the breaching country.
Juncker’s proposal
Most proponents of Eurobonds are wary of this consequence. Although they make specific proposals regarding Eurobonds, their suggestions remain very cloudy when it comes to sacrificing their national budgetary autonomy. Luxembourg’s prime minister and chairman of the Euro Group Jean-Claude Juncker proposed to convert all non-government debt into Eurobonds up to a volume of 60 per cent of a state’s national product. Hence a country which has e.g. 120 percent of state debt would be able to convert half of its debt into Eurobonds. The remaining half would continue to have the underlying state as sole debtor. According to this suggestion, creditors would then have to accept the default risk on the latter half of the debt in the event that it reaches an unsustainable level. Consequently, creditors would grant no further debt unless being compensated for the excessively high risk premium, thereby implementing an automatic debt brake mechanism. Arguably, Juncker’s proposal would create an incentive to the extent that half the debt of the highly indebted countries, namely Ireland, Portugal, Greece and Italy would be served at reduced interest rates whilst interest would only moderately rise in the credit-worthy countries. The burden on the German taxpayer would be less heavy than if all government debt within the Euro zone were converted into Eurobonds. Germany would nonetheless have to face higher payments.
Juncker’s proposal could indeed assist in resolving the crisis, provided that the Eurobond guaranteed debt is treated as preferred debt over the state guaranteed debt. Moreover, in the event of an insolvency of a member state, there should be no support mechanism. The debts of the insolvent state would have to be partially cut at the expense of its’ creditors and at the expense of the future creditworthiness of the debtor state.
Orderly insolvency criteria are needed
However, the above is an illusion within the institutional framework of the European Union, and thus continues to be the prime weakness of this proposal. In fact, it is rather to be feared that the troubled debtor states will continue to become excessively indebted whilst the underlying creditors, i.e. banks, hedge funds, pension funds and private investors will continue to serve these debt levels because they can rightly so speculate that the over-indebted state will be backed by the other member states, as witnessed in the past, to avoid conflagration. For the procedure of a state insolvency within the Euro zone is not performed by rules of law and legal principles of an independent tribunal. Instead, the decisions taken by finance ministers are highly political. Until the meeting of the EU heads of state on 26 October 2011, the troubled states have represented the majority and in conjunction with the financial lobby, they have successfully prevented any state bankruptcy with a debt cut on the part of the debtor states. The underlying costs and risks have been transferred by the creditors and debtor countries to the European Central Bank and the member states, thereby putting the citizens of the Euro zone at risk. There is no indication that this will be much different after the introduction of Eurobonds. Also, there is no evidence that the debtor nations would engage in orderly, non-politicized state insolvency proceedings, as a result of which creditors were to be assigned the liability for a risky expansion of the government debt. They are of course weary of losing their political leverage.
The European Central Bank has already jeopardized its reputation of independence and on the basis of political pressure has purchased government bonds which are not eligible as collateral. From May 2010 until mid-November 2011, these purchases have totalled more than 180 billion EUR. In the event of a write-off, this will be borne directly by the taxpayers as well as the recipients of state benefits because the member states will be restrained from the central bank’s profits, or even worse, would have put up money if the central bank were to face insolvency.
The European Stabilisation Mechanism (ESM) which was passed by the heads of state and government of the Euro zone during March and July 2011 added even more scepticism. The ESM does follow the proceedings of a state insolvency and also provides for loan assistance as well as allowing creditors to participate in sovereign bankruptcy cases, yet all decisions are left with the ministers of finance and therefore remain politicized. In fact, Germany does have a veto position in the decision on loans and could enforce the participation of creditors and the restructuring of sovereign loans. However, this power can only be used in exceptional cases, unless it wants to permanently isolate itself within Europe.
Moreover, the recently declared intentions on the Franco-German summit in Paris in August 2011 are not credible. They propose a debt brake by national constitutional law in the Member States of the Euro zone according to the German model. In the past, the German Federal Constitutional Court was unable to prevent the constant expansion of government debt in spite of the existing constitutional standards. The test is still pending as to whether this will be possible in the future, based on the newly introduced constitutional debt brake. At this stage, the only credible regulation would be to effectively withdraw the underlying nation’s free disposal with regard to their national budget deficits. What has been suggested to this date is merely a re-phrasing of the failed Stability and Growth Pact.
Solidarity of EU states
Solidarity among EU member states is certainly attainable without Eurobonds. In fact, solidarity is undisputed and has been enshrined as a legal principle in the European treaties. The EU structural funds and agricultural fund are examples of this principle. However, the European Treaties explicitly do not provide for group liability in favor of banks and other creditors.
Instead of jointly assuming national debt through group liability, the insolvent debtor countries should be motivated by the remaining EU states to openly declare their insolvency, to file for bankruptcy, and to engage in negotiations in order to reduce their debt burden to a sustainable level. According to the standards of a market economy, the underlying costs would have to be borne by the creditors, who ultimately accepted the associated risk. The respective debtor countries would certainly have to accept a significant burden during the process of restructuring their debt, not least because they would have to engage in a lengthy process of regaining their initial reputation. According to the solidarity principle, the insolvent states should certainly receive assistance by the remaining EU states. Should a state insolvency cause the collapse of financial institutions, the latter should also file for bankruptcy. If customers’ bank deposits could not otherwise be saved and if the money supply is at risk, European countries should jointly save such financial institutions by using taxpayers’ money, but they should not protect the bank’s shareholders. The decision to forgive Greece half of its debts is a step in the right direction.
Monday, November 21, 2011
Wednesday, April 13, 2011
Invited introduction to a New book on “Comparative Contract Law and Economics” by Mitja Kovač
‘May the Sun of Justice Enlighten Us,’ has been the motto of Utrecht University since its beginning in 1636, and indeed a passionate comparatist could not find a more suitable motto for his own research. The quest for a new, deeper understanding of the apparent similarities and differences between different legal systems, between their doctrines, rules and decisions presents the ultimate challenge for every comparatist. If one combines this sustained fascination with inspiration and encouragement from several outstanding scholars (to whom I owe everything what I know in the field of comparative contract law and economics) then an obvious result would be a search for a new multi-disciplinary international comparative law method which could form the basis of a universal legal science. Great comparatists like Lando, Markesinis, Hondius, Kötz and Zweigert have always instructed me that a true comparatist should strive for understanding, for the unraveling of seemingly widely accepted beliefs, follies and half-truths; he should, once he has isolated this quest from its national legal backgrounds, then bridge the apparent divisions; and he should fill in the gaps created by previous researches, where, indeed, the sun of justice should be the enlightening, inspiring motive. A traditional handbook on comparative contract law usually contains short summaries of different legal systems and tries to demonstrate significant differences between the compared legal systems, and especially between civil and common law. What surprised me, however, was the lack of any deeper, methodological framework for the evaluation of the differences or similarities. Being trained in law and economics, the benefits of an interdisciplinary approach, where an economically-inspired optimal model rule would serve as a uniform term of comparison, seemed clear. The more I analysed these differences from an economic perspective, the more I became convinced that many of them were matter-of-fact similarities. The question arose in my mind as to whether compared legal systems are, in the field of contract law, indeed as different as many comparatists tend to believe and if there is, apart from the simple borrowing of historical and cultural reasons, something more at stake explaining established legal changes, inconsistencies and similarities. Employing an economically-inspired optimal model rule as the uniform term of comparison, the presented essays assess some of the most controversial contractual issues, that is pre-contractual duties of disclosure, unforeseen contingencies and unilateral termination of contracts. In each of these essays, law and economics literature is surveyed and systematized into a coherent optimal model rule, which then serves as a uniform term of comparison. After each legal system is compared, it is followed by an examination of the current legal doctrine, and of the related law in action. The law and economics, and comparative contract law literature on all of these issues provide several striking insights. Following conclusions appear repeatedly in an unprecedented form: (1) All three assessments reveal that compared legal systems differ less than comparatists tend to believe. (2) Provided comparisons surprisingly reveal a growing trend from inefficient towards efficient legal practices. (3) All comparisons reveal wealth maximization as the main driving force behind the judicial decision making. (4) In all examinations economically inspired optimal model rule provides an objective framework for explaining inconsistencies or similarities, and an objective justification for certain statutory provisions or decisions, where doctrinal justification failed. (5) All assessments also offer path for statutory reform. In a quest for a truly international comparative contract law, these results appear rewarding and mutually beneficial. They may offer an additional explanation, justification and objective evaluation framework for traditional comparative contract law, as they may offer a pool of possible solutions and comparisons to legal and economic scholarship. In general, it is open to further investigation to confirm the observed pattern and to investigate even deeper into the real driving forces behind observed legal changes. This might lead to an improved understanding of all compared legal systems and may offer additional, welfare-maximizing propositions for statutory and judiciary reforms. The fruitfulness of further research along the same lines of analysis would provide ultimate recognition. This post is based on introductory part of my book: “Comparative Contract Law and Economics,” Edward Elgar Publishing, 2011. See: http://www.e-elgar.co.uk/bookentry_main.lasso?id=14286&breadcrumlink=&breadcrum=&sub_values=&site_Bus_Man=&site_dev=&site_eco=&site_env_eco=&site_inn_tech=&site_int_pol=&site_law=&site_pub_soc=
Monday, December 6, 2010
Conference in Tilburg on meta law and economics; Professor Peter Cserne's account
MetaLawEcon: a TILEC workshop on the foundations of law and economics (Friday, 26 Nov 2010, Tilburg University, The Netherlands)
Péter Cserne (peter.cserne@uvt.nl)
When a discipline grows and gets well-established, many researchers tend to think that its foundational problems have been solved. This misperception is related to the fact that researchers often do not bother themselves with meta-level problems of their scholarship. For good or bad, they “just do it”, without much reflection on what they are doing. Although methodological self-reflection in not a panacea and rarely a full-time job, time to time it is useful to look at one’s work in a more abstract way.
Law and economics scholars are no exception. Fifty years after Coase’s The problem of social cost, law and economics seems to have become the lingua franca of US legal scholarship. Compared to the 1970s and 1980s, the discipline has become more pluralistic in its methods, more self-critical about its normative assumptions, assertions and ambitions, and it is increasingly popular in Europe (and elsewhere in the world). Still, there are significant misunderstandings standing in the way of the reception of economic insights in European legal academia. It is often suggested that this is related to the unresolved foundational problems of the discipline. Certainly, the meta-level discussion has been going on in many ways: Kaplow and Shavell’s Fairness v Welfare (2002) has provoked dozens of critical reviews, symposia are held (e.g. “Law and Economics and Legal Scholarship”, Chicago-Kent Law Review 79 (2004)), PhD theses written (e.g. by Gerrit de Geest, Horst Eidenmüller, Anne van Aaken, Klaus Mathis), collective volumes published, e.g. The Theoretical Foundations of Law and Economics, ed. Mark D. White (Cambridge 2008), Foundations of Law and Economics ed. Cooter and Parisi (Elgar 2009).
The interdisciplinary character of law and economics research raises further questions about the possibilities and limits of intellectual integration. While economists are more or less aware of the foundational problems of economic theory, they are rarely confronted with jurisprudential concerns. Lawyers who are working on doctrinal or policy problems are often confused about what to expect from economics. Finally, jurisprudential critiques of law and economics often have a straw man as their target.
These considerations inspired the Tilburg Law and Economics Centre (TILEC) at Tilburg University, the Netherlands to organise a workshop on the foundations of law and economics. Economists, legal scholars and philosophers from numerous European countries attended the workshop, amongst them a large number of students of the Erasmus Programme in Law and Economics. The keynote speaker was Professor Lewis A. Kornhauser from New York University. A leading scholar in law and economics who has published path breaking papers in many legal areas and also plays an important role in the dialogue between law and economics, legal and political philosophy, and legal theory.
Altogether, the presentations and the discussions showed at least three directions where further theoretical research has to be done. First, the paper by Régis Lanneau (Université Paris Nanterre) has generated a vivid discussion about the methodological status of economic models. While in his keynote speech Lewis Kornhauser analysed the role of formal models both in the explanation of legal doctrine and legally relevant behaviour and in legal design, Stephan Tontrup (Max Planck Institute, Bonn–Jena) discussed through examples from laboratory and field experiments the methodological difficulties of integrating experimental insights in law and economics. Wojciech Zaluski (Jagellonian University, Kraków) showed the different ways the formal models of game theory can be useful in the explication of legal interpretation. These alternative methods also raised questions about the right balance between formal modelling and empirical research in understanding human behaviour and social interaction in legal settings. Discussing the impact of experimental methods on law and economics, Georg von Wangenheim (University of Kassel) argued that they cannot replace microeconomic theory in explaining behaviour but they can both improve the predictions and challenge the normative framework of welfare economics.
A second focus of the discussions reflected on the apparent tension that while law is local, economic theory claims to be universal. This raised the question about the various ways how theoretical insights and empirical findings can be integrated in legal theory, legal education and legal practice. Joining the workshop from Canada through video conference, Prof. Ejan Mackaay (University of Montréal) discussed the prospects and limits of law and economics in civil law countries and reflected on his ample experiences with introducing law and economics to the French speaking legal academia and education. As Pierre Larouche (Tilburg University) pointed out, the term civil law is often used ambiguously in legal literature, as it is sometimes opposed to statutory law, sometimes to common law. The second opposition also led the discussion into the recent controversies about the legal origins literature, and more fundamentally, raised questions about the interaction of economic and comparative analyses of law.
Third, somewhat surprisingly, the discussion showed that a few key concepts and theories of law and economics, such as transaction costs and the Coase theorem which are often thought to be uncontroversial cornerstones of the discipline, raise fundamental problems and misunderstandings. Giuseppe Dari-Mattiacci (University of Amsterdam) argued that the apparent tension between the Coase theorem and Calabresi and Melamed’s theory of legal remedies is linked to whether transaction costs are treated as exogenous or as endogenous variable. Mariusz Golecki (University of Łódź) showed that apart from the informal statement of a theorem, Coase’s ‘The Problem of Social Cost’ includes many pioneering insights about the functioning of the legal system which are directly relevant to legal scholarship.
This workshop marked the first step of MetaLawEcon, an initiative for concentrating forces and creating a network of lawyers, economists, and philosophers for reflection on the theoretical challenges of using economics in legal research. Those interested in the activities of MetaLawEcon should contact the organiser at peter.cserne@uvt.nl
Péter Cserne (peter.cserne@uvt.nl)
When a discipline grows and gets well-established, many researchers tend to think that its foundational problems have been solved. This misperception is related to the fact that researchers often do not bother themselves with meta-level problems of their scholarship. For good or bad, they “just do it”, without much reflection on what they are doing. Although methodological self-reflection in not a panacea and rarely a full-time job, time to time it is useful to look at one’s work in a more abstract way.
Law and economics scholars are no exception. Fifty years after Coase’s The problem of social cost, law and economics seems to have become the lingua franca of US legal scholarship. Compared to the 1970s and 1980s, the discipline has become more pluralistic in its methods, more self-critical about its normative assumptions, assertions and ambitions, and it is increasingly popular in Europe (and elsewhere in the world). Still, there are significant misunderstandings standing in the way of the reception of economic insights in European legal academia. It is often suggested that this is related to the unresolved foundational problems of the discipline. Certainly, the meta-level discussion has been going on in many ways: Kaplow and Shavell’s Fairness v Welfare (2002) has provoked dozens of critical reviews, symposia are held (e.g. “Law and Economics and Legal Scholarship”, Chicago-Kent Law Review 79 (2004)), PhD theses written (e.g. by Gerrit de Geest, Horst Eidenmüller, Anne van Aaken, Klaus Mathis), collective volumes published, e.g. The Theoretical Foundations of Law and Economics, ed. Mark D. White (Cambridge 2008), Foundations of Law and Economics ed. Cooter and Parisi (Elgar 2009).
The interdisciplinary character of law and economics research raises further questions about the possibilities and limits of intellectual integration. While economists are more or less aware of the foundational problems of economic theory, they are rarely confronted with jurisprudential concerns. Lawyers who are working on doctrinal or policy problems are often confused about what to expect from economics. Finally, jurisprudential critiques of law and economics often have a straw man as their target.
These considerations inspired the Tilburg Law and Economics Centre (TILEC) at Tilburg University, the Netherlands to organise a workshop on the foundations of law and economics. Economists, legal scholars and philosophers from numerous European countries attended the workshop, amongst them a large number of students of the Erasmus Programme in Law and Economics. The keynote speaker was Professor Lewis A. Kornhauser from New York University. A leading scholar in law and economics who has published path breaking papers in many legal areas and also plays an important role in the dialogue between law and economics, legal and political philosophy, and legal theory.
Altogether, the presentations and the discussions showed at least three directions where further theoretical research has to be done. First, the paper by Régis Lanneau (Université Paris Nanterre) has generated a vivid discussion about the methodological status of economic models. While in his keynote speech Lewis Kornhauser analysed the role of formal models both in the explanation of legal doctrine and legally relevant behaviour and in legal design, Stephan Tontrup (Max Planck Institute, Bonn–Jena) discussed through examples from laboratory and field experiments the methodological difficulties of integrating experimental insights in law and economics. Wojciech Zaluski (Jagellonian University, Kraków) showed the different ways the formal models of game theory can be useful in the explication of legal interpretation. These alternative methods also raised questions about the right balance between formal modelling and empirical research in understanding human behaviour and social interaction in legal settings. Discussing the impact of experimental methods on law and economics, Georg von Wangenheim (University of Kassel) argued that they cannot replace microeconomic theory in explaining behaviour but they can both improve the predictions and challenge the normative framework of welfare economics.
A second focus of the discussions reflected on the apparent tension that while law is local, economic theory claims to be universal. This raised the question about the various ways how theoretical insights and empirical findings can be integrated in legal theory, legal education and legal practice. Joining the workshop from Canada through video conference, Prof. Ejan Mackaay (University of Montréal) discussed the prospects and limits of law and economics in civil law countries and reflected on his ample experiences with introducing law and economics to the French speaking legal academia and education. As Pierre Larouche (Tilburg University) pointed out, the term civil law is often used ambiguously in legal literature, as it is sometimes opposed to statutory law, sometimes to common law. The second opposition also led the discussion into the recent controversies about the legal origins literature, and more fundamentally, raised questions about the interaction of economic and comparative analyses of law.
Third, somewhat surprisingly, the discussion showed that a few key concepts and theories of law and economics, such as transaction costs and the Coase theorem which are often thought to be uncontroversial cornerstones of the discipline, raise fundamental problems and misunderstandings. Giuseppe Dari-Mattiacci (University of Amsterdam) argued that the apparent tension between the Coase theorem and Calabresi and Melamed’s theory of legal remedies is linked to whether transaction costs are treated as exogenous or as endogenous variable. Mariusz Golecki (University of Łódź) showed that apart from the informal statement of a theorem, Coase’s ‘The Problem of Social Cost’ includes many pioneering insights about the functioning of the legal system which are directly relevant to legal scholarship.
This workshop marked the first step of MetaLawEcon, an initiative for concentrating forces and creating a network of lawyers, economists, and philosophers for reflection on the theoretical challenges of using economics in legal research. Those interested in the activities of MetaLawEcon should contact the organiser at peter.cserne@uvt.nl
Tuesday, September 21, 2010
Skogh's dinner speech and memoirs
Göran Skogh has been kind enough to allow us to post his dinner speech, including his vivid memoirs. Skogh held the speech after having been honored by EALE for his life-long commitment to law and economics and to EALE.
The 25th Anniversary of the European Association of Law and Economics
Dinner Speech 17 September 2009
Economics of Crime in the Past
and the Birth of EALE
A Personal view
Göran Skogh
Dear Friends of Law and Economics:
The European Association of Law and Economics, EALE, celebrates today its 25th anniver-sary. Its members can look back on a long row of successful research activities under the um-brella of the Association. Parallel to EALE there are independent international Law and Eco-nomics Masters and PhD programs. Bologna, Hamburg and Rotterdam run complete such educational programs. The Law and Economics movement flourish in many universities around the world. It is, therefore, a great pleasure for me to meet the many researchers here at the annual conference.
The annual conference of EALE is usually crowned with a gala dinner. Today’s dinner is unbeatable with delicious Italian food and an outstanding historical atmosphere; in a castle of marble; in the heart of Rome. We are grateful to Luissi University, to Roberto Pardolesi and his staff.
The current celebration is of special dignity for me personally. I just received a distinc-tion and an award from Eli Salzberger, President of EALE. The flattering description of my work requires responsive words of “Thanks”. I will, therefore, talk about some personal expe-riences during the years 1964-1984. Thus my story starts 20 years before EALE’s birth and 45 years back from now. I hope you will find it of interest to get some information about the old history of EALE. I will bring up three issues.
First, old friends in EALE kindly name me the “father” or/and the “mother” of EALE. At the annual dinner in Nancy 2003 I claimed that I am the mother, and that the father is still unknown. Of course, that was a joke. Now, I better tell more precisely what caused the birth. I will be as correct as possible, although my memory may fail in details.
Second, how could a poor and initially unmotivated person like me receive a PhD in “Economics of Crime” in 1974? There was no academic tradition in my family and Economics of Crime did not exist when my studies started in 1964.
Third, how was EALE’s birth related to my career, and how could the Association sur-vive?
1964-1968
In spring 1964 I finished a year of mandatory military service in the Swedish army. I returned home to the small Swedish town Värnamo, known for its furniture industry, glass products and design. It was nice to be home again, but I had a problem. I was 21 years old without any ideas on what to do in the future. Yet, I did not bother too much. The summer was wonderful in the family’s summer cottage at the Baltic Sea. In the middle of August, however, when the swimming and sailing season was over, I had to return home again because of lack of money.
The financial problem became acute. I had to decide what to do in life, i.e. to choose an education. There were various options. I left high-school with grades above average, but not good enough to be accepted as student of medicine or architecture, that were professions of high prestige in our family. There was no academic tradition in the family, and there was no strong pressure on me in that direction; my father was a furniture designer and my mother sculptured in clay and draw ornaments in glass. Both my sisters studied crafts and design. I showed no talent in that direction, they said.
I could get a job in town, or apply to one of many professional schools in the region. Finally, I had the option of free courses at one of the Swedish universities. I decided to go to the University of Lund that was rather close to home. Lund University had also a good and liberal reputation.
The academic term at Lund University started around September 1. Before that, I in-tended to stay home to save money. However, by mid August my father became irritated hav-ing me hanging around. He said to me to go to Lund and start at once.
We had in the family not discussed my economic situation before. My expectation was that my father should pay my studies. He made, to my knowledge, much money on furniture royalties. Later, I realised that he was good both in making and spending money. Anyway, he gave me a check on an amount that he expected to be enough for two quarters at the universi-ty. I was un-experienced and assumed it okey. I did not found the agreement binding, as he did.
Lund was an empty town when I arrived two weeks before school started. The excep-tion was the students’ pub “Atheneum”. It was full of students of all ages. They were arguing about everything. Most students showed to be radical and left wing. I got many new ideas and theories to think of. Macro economic theory and central planning, as an alternative to the market, were on the forefront. The free market economy that was appreciated by the entrepre-neurs in Värnamo had a bad reputation among the intellectuals in the pub.
I felt a need of more knowledge in political economy, and I wanted to post-phone the choice of profession. That made me sign up for the two first quarters of Economics.
Yet, I became disappointed and felt cheated. The first course was not in Economics. It was rather an introduction to elementary statistics, a description of “Business in Sweden” and one on “Social Welfare in Sweden”. I started to study. Statistics and Business were easy. A prob-lem was a book on Social Welfare. It was full of numbers on sick-payments, pensions, child support, etc. I found it boring, useless and seemingly politically biased in favour of the Swe-dish policy in power.
The exam came, and I failed on the Social Welfare part. I passed two weeks later. It is common that beginners fail at the first test. It was no big deal in the academy of Lund. How-ever, it was a chock coming home. I had failed and had no money left. I hoped for some mon-ey and sympathy from the family. But I received no understanding. My oldest sister was an exception. She knew the student-life by some own experience.
Most surprising to me was the reaction to my choice of topic. Politics had so far been taboo in the family discussions. “Economics” to my father now showed to be equivalent to “centralism”, “taxes” and in the end, “communism”. To my mother and sisters Economics was something evil that should be avoided. Technicians and economists use only one (the wrong) half of the brain and should, therefore, be encouraged to use the other part. Hence, I should study something nicer like Architecture, History of Arts or possibly Philosophy.
If I failed once more in Lund there was evidence enough, according to my father, that the best for me was to join the industry, e.g. the furniture industry there where they demanded labour. He wrote a check of the same amount as the first one. After that he pressed me towards the wall and shouted: “I will never pay anything more for your academic studies.” I believed him. He wanted to make me a craftsman as he was himself.
I continued with Economics the second quarter. Now the topic was “Micro Economics" based on a text-book by Richard Lipsey. This study opened a world to me. So far, learning was a matter of memorizing. Teachers taught how the world is. The testing and falsification of hypotheses, and the modern relativism was new to me. Lipsey´s introductory chapter on the scientific and elementary theory of science opened my eyes. Both the weakness and challenge of positive social science became apparent.
My father´s decision not to support my studies, and my unwillingness to remain dependent of him, made me run into financial problems again. The problem was, however, soon solved by a helping hand. 1965 there was a new study-financing system introduced by the Swedish Government. Earlier, students with wealthy parents received no support from the State. The students had to rely on the support from their families. After the study-loan reform loans with a State guarantee, and a low real interest rate, was offered to all students. The study-loan was important to me. It made me less dependent on my father, and I got time to study Economics that suddenly had become important to me. The studies went well and I received the level equivalent with a MA in 1968.
Doctorial studies
1968 was the year of student revolutions around the Western World. Lund was on the front. Most established authorities were questioned. The number of students also increased. Lund University was crowded and there was a shortage of teachers in Economics. This gave me and other un-experienced students an opportunity to earn money as temporary lecturer. The job was attractive to me, and I enrolled as a PhD student. As such I needed a theme of research. My choice of theme was “Straffrätt och Samhällsekonomi” (Economic Analysis of Criminal Law).”
That was an unconventional choice. Scientific treatment of crime and criminals was at that time a matter of Sociology, Medicine or Statistics, but not Economics. Criminal behaviour was assumed irrational and was treated as an illness of the criminal, or of Society. Radicals claimed, on the contrary, that criminals usually were rational and that punishments might be hard, but should be limited in time. Unlimited sentences and treatments had a tendency to become never ending and thus uncertain and arbitrary. Gunilla (psychologist, my girl-friend and soon my wife) was working with the treatment of criminals. She made me interested in the debate on rational criminality, with a start at a party 30 April 1969 where we first met.
Important for my choice of topic was also that my first students were students of Law. There was a tradition that students of Law should have some Economics as orientation. Espe-cially Tax Law and Competition Law were parts of the economic studies. Economic analysis of Criminal Law was not practiced.
The intension with my research was to examine how crime and criminals could be un-derstood by economic analysis. Welfare Economics was one possible approach. Here Gov-ernment maximizes total wealth or utility. This utilitarian approach got its modern, formalised version in the article “Crime and Punishment. An Economic Approach” by Gary Becker (1968). This article entered the Lund University Library just in time. It was very useful to me. The “benevolent dictator” balances and distributes the utility of the citizens. For instance, Brottsbalken (the Swedish Penal Code) could be understood as a balancing of costs of crime, policing costs and costs of penalties.
However, Government does not only calculate and distributes costs of crime. The role of the State is also to maintain Law and Order, which includes to limit private redistribution by monopoly, theft and rent seeking (Tullock, 1967, Buchanan 1975). The aim is to avoid disorder and anarchy. Hence, the role of the State needs to be analysed by other models.
A Hobbesian anarchy model seemed to me a more appropriate starting point when crime and legal order is in focus. A game theoretical model is, therefore, used in my dissertation (Skogh, 1973, and Skogh, and Stuart1982 a and b).
Our model has a given number of identical players (banana pickers) have in the model three strategies each. No property rights or Government protects the players. The players may; (a) search bananas to consume; (b) search for bananas that are hidden by others; (c) hide bananas collected by others. In a first non-cooperative Nash equilibrium all will be involved in searching and taking. If the game is co-operative and the contract is enforceable the players (Government) can collectively decide that: “A banana is owned by the player that has collected it.” Property rights are thereby introduced, and taking is an excluded strategy. Hiding and protection of bananas become unnecessary. The welfare increases because more resources can be used to enjoy time or bananas.
1974-1984
The development of Law and Economic in Lund was rapid. Professor of Law, Carl Martin Roos and I started in 1974 a joint Law and Economics seminar (Roos and Skogh 1975-1977). I finished my PhD (Skogh , 1973). “Priser, Skadestånd och Straff” (Prices, Torts and Pun-ishments) compares the different measures to control accidents. In the same year we arranged an international symposium in Lund. Leading scholars such as James Buchanan, Guido Cala-bresi, and Richard Posner contributed with comments and papers to a conference volume I edited (Skogh 1977 b).
The study-loan system mentioned above was invented by a young, smart and receptive economist, Ingemar Ståhl. He was employed professor 1968 at the Department of Economics where I studied. He became very interested in Law and Economics, and I was impressed by the new professor. It was also flattering that he was enthusiastic about my study of crime. We had lots of fun as well, both in class and private. He introduced me to persons in the Ministry of Finance. Soon I was working for a committee investigating crime forecasts in the budgeting process of the Ministry of Justice. A public investigation on minor thefts, especially shop-lifting, was started and I wrote an appendix on the social costs of shoplifting (SOU 1971:10. Appendix 9). These contacts speeded up the dissertation that was ready in 1973.
In the middle of the 1970s problems appeared. The good and open relation to Ingemar Ståhl became complicated. I was financially depending on him and felt unsecure. Maybe, I should go for another job, but I wanted for family reasons stay in Lund, and the University was the only employer for a Law and Economist. Hence, I was locked in, which made my international contacts important.
After my PhD I visited the US several times. First, I went to the University of Chicago. I had no invitation or recommendation letter so I feared entry problems. I was well received, anyway. Here is an example; the Journal of Political Economy published a paper by Richard Posner (1975). The paper’s main point was that the social cost of a monopoly exceeds the traditional deadweight loss. There may, in addition, be a loss due to unproductive rent-seeking. In my PhD I made a similar point by use of a labour union example. That is, the ben-efit of a union may be lost by costs of forming and maintaining a cartel. I sent my union chapter to Richard Posner, who quickly arranged a seminar in Chicago Law School. Gary Becker and some other famous scholars were present. I was very nervous. Before the seminar I exer-cised in front of a mirror. The presentation seemed all right - until the audience started to ask questions. Suddenly, I felt completely lost, and I thought that the seminar was a complete failure. Nevertheless, they liked the paper and I was recommended to submit it to the Journal of Political Economy. There it was soon published after some revisions (Skogh, 1976).
Another important place was the Public Choice Center, Blacksburg, VA were I met James Buchanan and Gordon Tullock. They missed my announcement and seemed a little confused, but the hesitation vanished when they understood that I know their work and that I carried own interesting work. Thereafter, I have met Professor Buchanan several times. My family was once invited to his farm. Another time he stayed with us in Sweden. We went for a sailing tour, but there was practically no wind. He was satisfied with the slow motion, but he seemed more interested in the wild blackberries on the shore. Later, just after he received the “Nobel Memorial Prize in Economic Sciences”, I had the pleasure to invite Professor Buchanan to a great dinner at Grand Hotel in Lund.
The Birth of EALE
In April 1982 Gunilla and I got our third child. The Swedish Welfare System admitted either one of the parents to take paid care of the baby during the first year. It was allowed to stay abroad. That made it possible for me and the family to go to the US again. We went to Uni-versity of California at Santa Barbara for half a year. There I taught Law and Economics and completed several papers together with my friend and co-writer Charles Stuart (1982 a and b).
In the US I got time to reconsider the situation home in Sweden. I did not get full credit for my work, I thought. The support of Ingemar Ståhl was gone. I was pessimistic and ex-pected no chair in the future, independent of quality and quantity of my Law and Economics production. An alternative was to start my own business. I started, therefore, a small founda-tion “Forum för Rättsekonomi” (Forum for Law and Economics) and “Rättsekonomi i Lund HB” (Law and Economics in Lund Company). All remained small, however, partly because the European Association of Law and Economics came in between.
An organisation taking care of the Law and Economics interests on a European level came to my mind when I visited the US. On my way back to Sweden in 1983 I paid a visit to the Law and Economics Center at Emory University, Atlanta. Emory published a Law and Economics newsletter. Its mailing list included Europeans that were strangers to me. I wanted to contact these persons that seemed to have similar interests. It was self-evident to me that economists in Law Schools and lawyers in Economics Departments needed to support each other both in teaching and research. The European Union law and legislation required, in addition, a large number of economic investigations.
It was natural for me to take the initiative to the European Association. I had experience of several European countries, and of travel and work in the US. The seminars at Lund Uni-versity, including the conference in the hotel Lundia 1977 (see further the conference volume, Skogh, 1978), were also important. We received necessary financial support from the Mari-anne and Marcus Wallenberg’s foundation .
The first EALE conference was held at the study-centre “Sparta” in Lund, 19-21 March 1984. I was elected the first chairman. Several participants declare an interest in taking over the leadership the second year. Nonetheless, soon after the first meeting EALE had no leader-ship and no place to go for the second annual meeting. Without a second meeting in 1985 the baby would die, I thought. In this moment I got contact with Matthias Graf von den Schulen-burg working at Wissenshaftscentrum, Berlin. He became interested and together we organ-ised the second conference. The conference was a success. The interest was great both among European and American scholars. The conference volume became a mile stone in the history of EALE (Schulenburg and Skogh 1985).
The third conference was held in Oxford and the forth in Betanzos, Spain. EALE re-ceived some continuity and I felt that it was time for me to leave the leadership. Fortunately, there were excellent candidates. I was delighted suggesting a new leadership:
Roger van den Bergh , Chairman and Michael Faure, Secretary.
They kept a successful leadership for more than a decade. My own research interest moved from “Crime” to “Transaction Costs and Insurance”. My private business remained small, because Academia, EALE included, came in between.
Concluding remarks
The reason why EALE was founded, and still develops, is a real demand for its services. Eco-nomic analysis of Law is a challenge to both lawyers and economists. EALE coordinates re-search and contributes to the internal and external discussion. Here informal meetings – the gala dinner included -- have an important role. Do not forget, it is important to get together and enjoy life. Teaching, friendship and research come together.
The growth of organisations like EALE is due to macro processes that the individual does not influence, but the outcome is also a result of individual vision, control and effort. My efforts organising the first annual conferences were necessary, but not sufficient, conditions for the start and survival of EALE. I also held a watching eye later on. In that sense you may call me a “founding father”. It may remind you that EALE has a history. On the other hand, you shall not forget that there are many actors behind a success like EALE.
References
Announcement: The European Association for Law and Economics. The International Review of Law and Economics, pp. 223-227, no. 4, 1984.
Becker, G. S., “Crime and Punishment: An Economic Approach”, Journal of Political Economy, 169-217, 1968.
Posner, R. A., "The Social Costs of Monopoly and Regulation", Journal of Political Economy, vol. 83, no. 4, 807-827, 1975.
Skogh, G. “Straffrätt och Samhällsekonomi” (Economic Analysis of Criminal Law) Dissertation. Lund Universi-ty. Liber, Lund 1973 a.
Skogh, G., "A Note on Gary Becker’s Crime and Punishment: an Economic Approach", Swedish Journal of Economics, vol. 57, 305-311, 1973 b.
Skogh, G., "The Social Costs of Monopoly and Regulation: Some Comments", Journal of Political Economy, vol. 84, no. 6, 1319-1323, 1976.
Skogh, G. Priser, Skadestånd och Straff. (Prices, Damages and Punishments) Liber. 1977a.
Skogh, G. Editor Rättsekonomiska seminarier I, II, III. (Law and Economics Seminars I, II, and , III.) Depart-ment of Economics, University of Lund. Memoranda 1975:12, 1976:27, 1977: 33.
Skogh, G. Editor. Law and Economics. Report from a symposium in Sweden. Juridiska föreningen i Lund, no 28, 1978.
Skogh, G., "Public Insurance and Accident Prevention", International Review of Law and Economics, 67-80, 1982 c.
Skogh, G. and Stuart, C., "An Economic Analysis of Crime Rates, Punishment and the Social Consequences of Crime", Public Choice, 171-179, 1982 a.
Skogh, G. and Stuart, C., "A Contractarian Theory of Property Rights and Crime", The Scandinavian Journal of Economics, no. 2, 1982 b.
Skogh, G. Editor ”Law and Economics and the Economics of Legal Regulation”. Co-edited with Schulenburg, Matthias, Graf von den. Martinus , Nijhoff, 1985.
Skogh, G. ”En samhällsekonomisk mål-medel-analys av butikssnatterier.” (A National Economic-Aims-Means-Analysis of Shoplifting). SOU 1971:10 appendix 9.
Tullock, G. “The Welfare Costs of Tariffs, Monopolies, and Thefts”, Western Economic Jounal no 5, 224-232, 1967.
The 25th Anniversary of the European Association of Law and Economics
Dinner Speech 17 September 2009
Economics of Crime in the Past
and the Birth of EALE
A Personal view
Göran Skogh
Dear Friends of Law and Economics:
The European Association of Law and Economics, EALE, celebrates today its 25th anniver-sary. Its members can look back on a long row of successful research activities under the um-brella of the Association. Parallel to EALE there are independent international Law and Eco-nomics Masters and PhD programs. Bologna, Hamburg and Rotterdam run complete such educational programs. The Law and Economics movement flourish in many universities around the world. It is, therefore, a great pleasure for me to meet the many researchers here at the annual conference.
The annual conference of EALE is usually crowned with a gala dinner. Today’s dinner is unbeatable with delicious Italian food and an outstanding historical atmosphere; in a castle of marble; in the heart of Rome. We are grateful to Luissi University, to Roberto Pardolesi and his staff.
The current celebration is of special dignity for me personally. I just received a distinc-tion and an award from Eli Salzberger, President of EALE. The flattering description of my work requires responsive words of “Thanks”. I will, therefore, talk about some personal expe-riences during the years 1964-1984. Thus my story starts 20 years before EALE’s birth and 45 years back from now. I hope you will find it of interest to get some information about the old history of EALE. I will bring up three issues.
First, old friends in EALE kindly name me the “father” or/and the “mother” of EALE. At the annual dinner in Nancy 2003 I claimed that I am the mother, and that the father is still unknown. Of course, that was a joke. Now, I better tell more precisely what caused the birth. I will be as correct as possible, although my memory may fail in details.
Second, how could a poor and initially unmotivated person like me receive a PhD in “Economics of Crime” in 1974? There was no academic tradition in my family and Economics of Crime did not exist when my studies started in 1964.
Third, how was EALE’s birth related to my career, and how could the Association sur-vive?
1964-1968
In spring 1964 I finished a year of mandatory military service in the Swedish army. I returned home to the small Swedish town Värnamo, known for its furniture industry, glass products and design. It was nice to be home again, but I had a problem. I was 21 years old without any ideas on what to do in the future. Yet, I did not bother too much. The summer was wonderful in the family’s summer cottage at the Baltic Sea. In the middle of August, however, when the swimming and sailing season was over, I had to return home again because of lack of money.
The financial problem became acute. I had to decide what to do in life, i.e. to choose an education. There were various options. I left high-school with grades above average, but not good enough to be accepted as student of medicine or architecture, that were professions of high prestige in our family. There was no academic tradition in the family, and there was no strong pressure on me in that direction; my father was a furniture designer and my mother sculptured in clay and draw ornaments in glass. Both my sisters studied crafts and design. I showed no talent in that direction, they said.
I could get a job in town, or apply to one of many professional schools in the region. Finally, I had the option of free courses at one of the Swedish universities. I decided to go to the University of Lund that was rather close to home. Lund University had also a good and liberal reputation.
The academic term at Lund University started around September 1. Before that, I in-tended to stay home to save money. However, by mid August my father became irritated hav-ing me hanging around. He said to me to go to Lund and start at once.
We had in the family not discussed my economic situation before. My expectation was that my father should pay my studies. He made, to my knowledge, much money on furniture royalties. Later, I realised that he was good both in making and spending money. Anyway, he gave me a check on an amount that he expected to be enough for two quarters at the universi-ty. I was un-experienced and assumed it okey. I did not found the agreement binding, as he did.
Lund was an empty town when I arrived two weeks before school started. The excep-tion was the students’ pub “Atheneum”. It was full of students of all ages. They were arguing about everything. Most students showed to be radical and left wing. I got many new ideas and theories to think of. Macro economic theory and central planning, as an alternative to the market, were on the forefront. The free market economy that was appreciated by the entrepre-neurs in Värnamo had a bad reputation among the intellectuals in the pub.
I felt a need of more knowledge in political economy, and I wanted to post-phone the choice of profession. That made me sign up for the two first quarters of Economics.
Yet, I became disappointed and felt cheated. The first course was not in Economics. It was rather an introduction to elementary statistics, a description of “Business in Sweden” and one on “Social Welfare in Sweden”. I started to study. Statistics and Business were easy. A prob-lem was a book on Social Welfare. It was full of numbers on sick-payments, pensions, child support, etc. I found it boring, useless and seemingly politically biased in favour of the Swe-dish policy in power.
The exam came, and I failed on the Social Welfare part. I passed two weeks later. It is common that beginners fail at the first test. It was no big deal in the academy of Lund. How-ever, it was a chock coming home. I had failed and had no money left. I hoped for some mon-ey and sympathy from the family. But I received no understanding. My oldest sister was an exception. She knew the student-life by some own experience.
Most surprising to me was the reaction to my choice of topic. Politics had so far been taboo in the family discussions. “Economics” to my father now showed to be equivalent to “centralism”, “taxes” and in the end, “communism”. To my mother and sisters Economics was something evil that should be avoided. Technicians and economists use only one (the wrong) half of the brain and should, therefore, be encouraged to use the other part. Hence, I should study something nicer like Architecture, History of Arts or possibly Philosophy.
If I failed once more in Lund there was evidence enough, according to my father, that the best for me was to join the industry, e.g. the furniture industry there where they demanded labour. He wrote a check of the same amount as the first one. After that he pressed me towards the wall and shouted: “I will never pay anything more for your academic studies.” I believed him. He wanted to make me a craftsman as he was himself.
I continued with Economics the second quarter. Now the topic was “Micro Economics" based on a text-book by Richard Lipsey. This study opened a world to me. So far, learning was a matter of memorizing. Teachers taught how the world is. The testing and falsification of hypotheses, and the modern relativism was new to me. Lipsey´s introductory chapter on the scientific and elementary theory of science opened my eyes. Both the weakness and challenge of positive social science became apparent.
My father´s decision not to support my studies, and my unwillingness to remain dependent of him, made me run into financial problems again. The problem was, however, soon solved by a helping hand. 1965 there was a new study-financing system introduced by the Swedish Government. Earlier, students with wealthy parents received no support from the State. The students had to rely on the support from their families. After the study-loan reform loans with a State guarantee, and a low real interest rate, was offered to all students. The study-loan was important to me. It made me less dependent on my father, and I got time to study Economics that suddenly had become important to me. The studies went well and I received the level equivalent with a MA in 1968.
Doctorial studies
1968 was the year of student revolutions around the Western World. Lund was on the front. Most established authorities were questioned. The number of students also increased. Lund University was crowded and there was a shortage of teachers in Economics. This gave me and other un-experienced students an opportunity to earn money as temporary lecturer. The job was attractive to me, and I enrolled as a PhD student. As such I needed a theme of research. My choice of theme was “Straffrätt och Samhällsekonomi” (Economic Analysis of Criminal Law).”
That was an unconventional choice. Scientific treatment of crime and criminals was at that time a matter of Sociology, Medicine or Statistics, but not Economics. Criminal behaviour was assumed irrational and was treated as an illness of the criminal, or of Society. Radicals claimed, on the contrary, that criminals usually were rational and that punishments might be hard, but should be limited in time. Unlimited sentences and treatments had a tendency to become never ending and thus uncertain and arbitrary. Gunilla (psychologist, my girl-friend and soon my wife) was working with the treatment of criminals. She made me interested in the debate on rational criminality, with a start at a party 30 April 1969 where we first met.
Important for my choice of topic was also that my first students were students of Law. There was a tradition that students of Law should have some Economics as orientation. Espe-cially Tax Law and Competition Law were parts of the economic studies. Economic analysis of Criminal Law was not practiced.
The intension with my research was to examine how crime and criminals could be un-derstood by economic analysis. Welfare Economics was one possible approach. Here Gov-ernment maximizes total wealth or utility. This utilitarian approach got its modern, formalised version in the article “Crime and Punishment. An Economic Approach” by Gary Becker (1968). This article entered the Lund University Library just in time. It was very useful to me. The “benevolent dictator” balances and distributes the utility of the citizens. For instance, Brottsbalken (the Swedish Penal Code) could be understood as a balancing of costs of crime, policing costs and costs of penalties.
However, Government does not only calculate and distributes costs of crime. The role of the State is also to maintain Law and Order, which includes to limit private redistribution by monopoly, theft and rent seeking (Tullock, 1967, Buchanan 1975). The aim is to avoid disorder and anarchy. Hence, the role of the State needs to be analysed by other models.
A Hobbesian anarchy model seemed to me a more appropriate starting point when crime and legal order is in focus. A game theoretical model is, therefore, used in my dissertation (Skogh, 1973, and Skogh, and Stuart1982 a and b).
Our model has a given number of identical players (banana pickers) have in the model three strategies each. No property rights or Government protects the players. The players may; (a) search bananas to consume; (b) search for bananas that are hidden by others; (c) hide bananas collected by others. In a first non-cooperative Nash equilibrium all will be involved in searching and taking. If the game is co-operative and the contract is enforceable the players (Government) can collectively decide that: “A banana is owned by the player that has collected it.” Property rights are thereby introduced, and taking is an excluded strategy. Hiding and protection of bananas become unnecessary. The welfare increases because more resources can be used to enjoy time or bananas.
1974-1984
The development of Law and Economic in Lund was rapid. Professor of Law, Carl Martin Roos and I started in 1974 a joint Law and Economics seminar (Roos and Skogh 1975-1977). I finished my PhD (Skogh , 1973). “Priser, Skadestånd och Straff” (Prices, Torts and Pun-ishments) compares the different measures to control accidents. In the same year we arranged an international symposium in Lund. Leading scholars such as James Buchanan, Guido Cala-bresi, and Richard Posner contributed with comments and papers to a conference volume I edited (Skogh 1977 b).
The study-loan system mentioned above was invented by a young, smart and receptive economist, Ingemar Ståhl. He was employed professor 1968 at the Department of Economics where I studied. He became very interested in Law and Economics, and I was impressed by the new professor. It was also flattering that he was enthusiastic about my study of crime. We had lots of fun as well, both in class and private. He introduced me to persons in the Ministry of Finance. Soon I was working for a committee investigating crime forecasts in the budgeting process of the Ministry of Justice. A public investigation on minor thefts, especially shop-lifting, was started and I wrote an appendix on the social costs of shoplifting (SOU 1971:10. Appendix 9). These contacts speeded up the dissertation that was ready in 1973.
In the middle of the 1970s problems appeared. The good and open relation to Ingemar Ståhl became complicated. I was financially depending on him and felt unsecure. Maybe, I should go for another job, but I wanted for family reasons stay in Lund, and the University was the only employer for a Law and Economist. Hence, I was locked in, which made my international contacts important.
After my PhD I visited the US several times. First, I went to the University of Chicago. I had no invitation or recommendation letter so I feared entry problems. I was well received, anyway. Here is an example; the Journal of Political Economy published a paper by Richard Posner (1975). The paper’s main point was that the social cost of a monopoly exceeds the traditional deadweight loss. There may, in addition, be a loss due to unproductive rent-seeking. In my PhD I made a similar point by use of a labour union example. That is, the ben-efit of a union may be lost by costs of forming and maintaining a cartel. I sent my union chapter to Richard Posner, who quickly arranged a seminar in Chicago Law School. Gary Becker and some other famous scholars were present. I was very nervous. Before the seminar I exer-cised in front of a mirror. The presentation seemed all right - until the audience started to ask questions. Suddenly, I felt completely lost, and I thought that the seminar was a complete failure. Nevertheless, they liked the paper and I was recommended to submit it to the Journal of Political Economy. There it was soon published after some revisions (Skogh, 1976).
Another important place was the Public Choice Center, Blacksburg, VA were I met James Buchanan and Gordon Tullock. They missed my announcement and seemed a little confused, but the hesitation vanished when they understood that I know their work and that I carried own interesting work. Thereafter, I have met Professor Buchanan several times. My family was once invited to his farm. Another time he stayed with us in Sweden. We went for a sailing tour, but there was practically no wind. He was satisfied with the slow motion, but he seemed more interested in the wild blackberries on the shore. Later, just after he received the “Nobel Memorial Prize in Economic Sciences”, I had the pleasure to invite Professor Buchanan to a great dinner at Grand Hotel in Lund.
The Birth of EALE
In April 1982 Gunilla and I got our third child. The Swedish Welfare System admitted either one of the parents to take paid care of the baby during the first year. It was allowed to stay abroad. That made it possible for me and the family to go to the US again. We went to Uni-versity of California at Santa Barbara for half a year. There I taught Law and Economics and completed several papers together with my friend and co-writer Charles Stuart (1982 a and b).
In the US I got time to reconsider the situation home in Sweden. I did not get full credit for my work, I thought. The support of Ingemar Ståhl was gone. I was pessimistic and ex-pected no chair in the future, independent of quality and quantity of my Law and Economics production. An alternative was to start my own business. I started, therefore, a small founda-tion “Forum för Rättsekonomi” (Forum for Law and Economics) and “Rättsekonomi i Lund HB” (Law and Economics in Lund Company). All remained small, however, partly because the European Association of Law and Economics came in between.
An organisation taking care of the Law and Economics interests on a European level came to my mind when I visited the US. On my way back to Sweden in 1983 I paid a visit to the Law and Economics Center at Emory University, Atlanta. Emory published a Law and Economics newsletter. Its mailing list included Europeans that were strangers to me. I wanted to contact these persons that seemed to have similar interests. It was self-evident to me that economists in Law Schools and lawyers in Economics Departments needed to support each other both in teaching and research. The European Union law and legislation required, in addition, a large number of economic investigations.
It was natural for me to take the initiative to the European Association. I had experience of several European countries, and of travel and work in the US. The seminars at Lund Uni-versity, including the conference in the hotel Lundia 1977 (see further the conference volume, Skogh, 1978), were also important. We received necessary financial support from the Mari-anne and Marcus Wallenberg’s foundation .
The first EALE conference was held at the study-centre “Sparta” in Lund, 19-21 March 1984. I was elected the first chairman. Several participants declare an interest in taking over the leadership the second year. Nonetheless, soon after the first meeting EALE had no leader-ship and no place to go for the second annual meeting. Without a second meeting in 1985 the baby would die, I thought. In this moment I got contact with Matthias Graf von den Schulen-burg working at Wissenshaftscentrum, Berlin. He became interested and together we organ-ised the second conference. The conference was a success. The interest was great both among European and American scholars. The conference volume became a mile stone in the history of EALE (Schulenburg and Skogh 1985).
The third conference was held in Oxford and the forth in Betanzos, Spain. EALE re-ceived some continuity and I felt that it was time for me to leave the leadership. Fortunately, there were excellent candidates. I was delighted suggesting a new leadership:
Roger van den Bergh , Chairman and Michael Faure, Secretary.
They kept a successful leadership for more than a decade. My own research interest moved from “Crime” to “Transaction Costs and Insurance”. My private business remained small, because Academia, EALE included, came in between.
Concluding remarks
The reason why EALE was founded, and still develops, is a real demand for its services. Eco-nomic analysis of Law is a challenge to both lawyers and economists. EALE coordinates re-search and contributes to the internal and external discussion. Here informal meetings – the gala dinner included -- have an important role. Do not forget, it is important to get together and enjoy life. Teaching, friendship and research come together.
The growth of organisations like EALE is due to macro processes that the individual does not influence, but the outcome is also a result of individual vision, control and effort. My efforts organising the first annual conferences were necessary, but not sufficient, conditions for the start and survival of EALE. I also held a watching eye later on. In that sense you may call me a “founding father”. It may remind you that EALE has a history. On the other hand, you shall not forget that there are many actors behind a success like EALE.
References
Announcement: The European Association for Law and Economics. The International Review of Law and Economics, pp. 223-227, no. 4, 1984.
Becker, G. S., “Crime and Punishment: An Economic Approach”, Journal of Political Economy, 169-217, 1968.
Posner, R. A., "The Social Costs of Monopoly and Regulation", Journal of Political Economy, vol. 83, no. 4, 807-827, 1975.
Skogh, G. “Straffrätt och Samhällsekonomi” (Economic Analysis of Criminal Law) Dissertation. Lund Universi-ty. Liber, Lund 1973 a.
Skogh, G., "A Note on Gary Becker’s Crime and Punishment: an Economic Approach", Swedish Journal of Economics, vol. 57, 305-311, 1973 b.
Skogh, G., "The Social Costs of Monopoly and Regulation: Some Comments", Journal of Political Economy, vol. 84, no. 6, 1319-1323, 1976.
Skogh, G. Priser, Skadestånd och Straff. (Prices, Damages and Punishments) Liber. 1977a.
Skogh, G. Editor Rättsekonomiska seminarier I, II, III. (Law and Economics Seminars I, II, and , III.) Depart-ment of Economics, University of Lund. Memoranda 1975:12, 1976:27, 1977: 33.
Skogh, G. Editor. Law and Economics. Report from a symposium in Sweden. Juridiska föreningen i Lund, no 28, 1978.
Skogh, G., "Public Insurance and Accident Prevention", International Review of Law and Economics, 67-80, 1982 c.
Skogh, G. and Stuart, C., "An Economic Analysis of Crime Rates, Punishment and the Social Consequences of Crime", Public Choice, 171-179, 1982 a.
Skogh, G. and Stuart, C., "A Contractarian Theory of Property Rights and Crime", The Scandinavian Journal of Economics, no. 2, 1982 b.
Skogh, G. Editor ”Law and Economics and the Economics of Legal Regulation”. Co-edited with Schulenburg, Matthias, Graf von den. Martinus , Nijhoff, 1985.
Skogh, G. ”En samhällsekonomisk mål-medel-analys av butikssnatterier.” (A National Economic-Aims-Means-Analysis of Shoplifting). SOU 1971:10 appendix 9.
Tullock, G. “The Welfare Costs of Tariffs, Monopolies, and Thefts”, Western Economic Jounal no 5, 224-232, 1967.
Wednesday, June 30, 2010
Benito Arrunada on the need to reform the Spanish labor market
This EALE blog invites many kinds of postings, concerning both theoretical and policy related issues. The idea is to become a forum for the exchange of wide-ranging ideas touching upon (European) law and economics. Here is a posting concerning the need for labor reforms in Spain. Please feel free to send me something. - Henrik (hl.ino@cbs.dk)
`Labor reform as an ethical imperative´
Prof. Benito Arrunada, Dept. of Economics & Business, Univ. Pompeu Fabra
Spain has the most restrictive labour law of all developed countries. As a result, it also has the highest unemployment.
The rules that weigh down industrial relations today stem from those laid down formulated under Franco. Why are they still alive 34 years after the death of the dictator?
Some people may think that the labour laws are wrong but well-intentioned. I do not believe this. The State, in its zeal to protect workers, is unlikely to have forgotten that a contract is only possible when all parties agree. The problem does not lie in the State’s paternalistic myopia but in the unequal way it treats its citizens.
In Spain, there are two types of worker. On the one hand, the élite which enjoys “placements” in the public sector and large corporations. On the other, temporary workers—mostly young people, women and immigrants—as well as marginal, self-employed workers.
This duality is apparent throughout the Spanish labour market, especially in access to long-term, stable jobs.
More than ever, we need stable jobs, in which workers can gain experience and accumulate knowledge. But stability is reserved for the labour élite. Today’s permanent contracts do not promote long-term relations because employers are obliged to continue paying their workers, whatever their productivity and attitude.
Obviously, employers take precautions. Firstly, they avoid long-term employment, replacing work by capital and long-term by short-term work. When they have no alternative and they have to hire long-term workers, they choose people they can trust, who will be productive even when they have a contract in which abuse is possible. So the people they hire are those able to signal that they will be cooperative in the future. And such signals, considering the calamitous state of education in Spain, are only within the reach of the well-off and the well-connected.
Entrepreneurs are being criticised for not hiring more workers. But it is no coincidence that there are few Spaniards who want to be entrepreneurs, and even fewer who want to be employers. This vocational crisis can be seen even in schools of Business Administration in regions that once proclaimed their entrepreneurial spirit. This is not just because entrepreneurs are viewed with suspicion: in a society that worships money, the fact that young people do not wish to be entrepreneurs suggests that business is not very profitable.
Temporary contracts are also a tool for inequality—not because they are temporary, but because they cannot be extended. This restriction prevents them from being used for long-term relations without the risk of opportunism. Long-term relations are thus reserved for the labour élite which is able to offer the right signals.
What’s more, there is tremendous hypocrisy regarding temporary contracts. Their fiercest critics are often the first to use them for their own employees, as has occurred with some trade unions.
And employers’ organisations are not free from blame. They say they are in favour of making contracts more flexible, but seem to be less than enthusiastic about an equally necessary measure, that of liberalising the negotiation of collective agreements. Perhaps they are afraid of undermining their raison d’être.
The crisis is exacerbating discontent, and these inequalities will end up being intolerable. The privileged half of the country cannot continue to live at the cost of the other half. If it wants to keep its standard of living, it will have to work for it. It is time for popular sovereignty to do away with privileges, and restore the forgotten values of justice and equality of opportunity. Labour reform is an essential first step to achieve the fair and open society that we all want.
`Labor reform as an ethical imperative´
Prof. Benito Arrunada, Dept. of Economics & Business, Univ. Pompeu Fabra
Spain has the most restrictive labour law of all developed countries. As a result, it also has the highest unemployment.
The rules that weigh down industrial relations today stem from those laid down formulated under Franco. Why are they still alive 34 years after the death of the dictator?
Some people may think that the labour laws are wrong but well-intentioned. I do not believe this. The State, in its zeal to protect workers, is unlikely to have forgotten that a contract is only possible when all parties agree. The problem does not lie in the State’s paternalistic myopia but in the unequal way it treats its citizens.
In Spain, there are two types of worker. On the one hand, the élite which enjoys “placements” in the public sector and large corporations. On the other, temporary workers—mostly young people, women and immigrants—as well as marginal, self-employed workers.
This duality is apparent throughout the Spanish labour market, especially in access to long-term, stable jobs.
More than ever, we need stable jobs, in which workers can gain experience and accumulate knowledge. But stability is reserved for the labour élite. Today’s permanent contracts do not promote long-term relations because employers are obliged to continue paying their workers, whatever their productivity and attitude.
Obviously, employers take precautions. Firstly, they avoid long-term employment, replacing work by capital and long-term by short-term work. When they have no alternative and they have to hire long-term workers, they choose people they can trust, who will be productive even when they have a contract in which abuse is possible. So the people they hire are those able to signal that they will be cooperative in the future. And such signals, considering the calamitous state of education in Spain, are only within the reach of the well-off and the well-connected.
Entrepreneurs are being criticised for not hiring more workers. But it is no coincidence that there are few Spaniards who want to be entrepreneurs, and even fewer who want to be employers. This vocational crisis can be seen even in schools of Business Administration in regions that once proclaimed their entrepreneurial spirit. This is not just because entrepreneurs are viewed with suspicion: in a society that worships money, the fact that young people do not wish to be entrepreneurs suggests that business is not very profitable.
Temporary contracts are also a tool for inequality—not because they are temporary, but because they cannot be extended. This restriction prevents them from being used for long-term relations without the risk of opportunism. Long-term relations are thus reserved for the labour élite which is able to offer the right signals.
What’s more, there is tremendous hypocrisy regarding temporary contracts. Their fiercest critics are often the first to use them for their own employees, as has occurred with some trade unions.
And employers’ organisations are not free from blame. They say they are in favour of making contracts more flexible, but seem to be less than enthusiastic about an equally necessary measure, that of liberalising the negotiation of collective agreements. Perhaps they are afraid of undermining their raison d’être.
The crisis is exacerbating discontent, and these inequalities will end up being intolerable. The privileged half of the country cannot continue to live at the cost of the other half. If it wants to keep its standard of living, it will have to work for it. It is time for popular sovereignty to do away with privileges, and restore the forgotten values of justice and equality of opportunity. Labour reform is an essential first step to achieve the fair and open society that we all want.
Sunday, June 13, 2010
Europe Needs A Sovereign Bankruptcy Procedure
By Hans-Bernd Schäfer
The bailout for Greece has spoiled the reputation of Chancellor Angela Merkel so much, that almost nobody in Germany wants her in charge when the next crisis unfolds. First she was not far sighted enough to see the upcoming danger and when the danger was clear and present she was not courageous enough to fight for the right decisions. First she subordinated the problem to internal affairs like a provincial election and insisted that this is only a problem between Greece and its creditors. Later she was overrun by coordinated efforts of banks and other creditors to grant a complete bailout.
What went wrong? The fathers and mothers of the EURO simply ruled out the possibility that a member of the Euro-Zone might default. Had they studied financial history they would have known that sovereign bankruptcies are in the long run as numerous as snowflakes. The Greek crisis would have been swiftly solved without any impact on the credibility of the Euro, had a sovereign bankruptcy procedure been in place, as it already exists for cities in the United States. When in the USA a large city goes bankrupt that does not even cause headlines around the world, let alone affects the strength of the dollar. Greece however, with an economic weight of 2.6% of the Euro area’s GNP could send the Euro into decline, because no orderly procedure existed to deal with the crisis.
A well-ordered method for sovereign bankruptcy should observe in particular the following four objectives, including the appropriate legal instruments. First of all, after the government of the debtor nation has declared sovereign bankruptcy, the creditors – just as with normal insolvency proceedings – should remain inactive to generally prevent the draining off of foreign currencies. This limits the effects of the crisis on the real economy. Secondly: the proceedings should create incentives for the debtors and creditors to keep from carelessly or even thoughtlessly increasing the foreign debt. These proceedings also allow outsiders to impose harsh terms and reforms on all offers of help to the nation whose debt is to be restructured. It includes prescribing a haircut for creditors by reducing interest payments or writing off a part of the debt and reduce it to a sustainable level. When this occurs, the insolvency proceedings cast a long shadow on the behavior of the creditors and debtors at the time the loan was given. It leads to ex ante efficiency of insolvency proceedings. Thirdly, the conditions of the economic policy in the debtor nation should ensure minimum standards for the maintenance of essential public services. Fourthly, an independent person or committee, who neither follows personal interests nor is dependent on the interests of third parties and is in the position to weigh the interests of all parties and make reasonable judgments, should coordinate the proceedings, for instance a European or International sovereign insolvency court.
If well-regulated insolvency proceedings had been established, Greece would have declared sovereign bankruptcy when mature bonds could no longer be refinanced. Greece could have then submitted an application to open proceeding to restructure its debt at an institution created for just this purpose. The application would have lead to a moratorium that would have prevented a sudden reduction of Greek debt by seizing foreign assets and the following notorious hemorrhaging. In official proceedings the application would have then been examined to determine which sanctions could be imposed on the nation. The state would receive a bridging loan or other help. The loan could either come from the IMF, other European countries or state banks. The holders of government bonds as well as bank loans would be called to pay for and receive a so-called haircut. If such a haircut would have endangered certain banks, which are too big to fail, the governments could have come to rescue the banks but not the equity capital of their owners. These proceeding would not have endangered the stability of the Euro. In fact, it would show that a difficult financial crises can be surmounted by the use of a well-ordered and legally conceived proceeding. The rules of crisis management would stem the danger of future crises and not expand them.
In the absence of any legal framework the governments of the Eurozone agreed on a complete bailout, which gives the wrong incentives to creditors. For a period of three years all Greek loans, which become due are replaced with credits from governments of the Euro Zone. After 3 years one third of all Greek debts will be shifted to the taxpayers in the Euro Zone without any burden to the creditors themselves. This is a bailout, giving creditors even more incentives to careless lending and spending resources to receive government support. And this is not even the end of the story. Even though Greece can replace all its due capital payments with new loans from the bailout package, the European Central Bank has started to buy huge amounts of Greek government bonds.
At best the bailout package has bought three years of time. After 3 years the Greek debt will be higher than today, then about 150 per cent of the national product. The huge reforms within Greece will have disrupted the economy, as the public sector will shrink and it takes more than three years for the private sector to provide almost a million of new jobs. To send Greece back to the capital markets after 3 years will most probably not work. Latest then a debt restructuring including a sizable haircut for Greek’s debtors will be unavoidable. It is to be hoped that the governments of the Euro zone come to realize this and invest their time into drafting a debt restructuring procedure which works and does not lay the foundations of more crises in the future.
Wednesday, June 9, 2010
Why is Law and Economics more influential in the US?
After reading the excellent article referred to below by Professors Martin Gelter and Kristoffel Grechenig on the reasons why European legal thought has embraced law and economics much less than American legal thought has, I asked them if they would write a posting about it.
Feel free to comment on this posting by Prof. Grechenig (you can comment, or send a longer posting to me at hl.ino@cbs.dk). - Henrik
Some History of Legal Thought and Its Influence on Law & Economics
by Kristoffel Grechenig, Dr., LL.M., University of St. Gallen, Switzerland & Max Planck Institute for Research on Collective Goods, Bonn, Germany
I widely agree with H.-B. Schäfer, when he says that the impact of law and economics on legal scholarship is increasing (blog post, 30/5/09). In order to understand why there are still differences between U.S. legal scholarship and German-tradition legal scholarship with regard to law and economics, it is essential to understand the historical development of German "legal science". I believe that there are two main factors for this transatlantic divergence: First, legal realism enjoyed great success in the U.S., whereas the German free-law movement failed to leave a lasting impression. While legal realism transformed American legal thought and opened up the discourse to policy arguments, the predominant German legal theory for a long time emphasized and still emphasizes the internal coherence of the legal system; it assigns only a limited role to external elements. Second, the different philosophical roots and attitude towards utilitarianism and consequentionalist thinking in general had an impact on legal scholarship such that a resistance to consequentialism in Europe implied a resistance to law and economics. To be clear, quite a bit has changed in the past due to the work of the people who have posted on this blog and many others. The point is that a general and widespread acceptance will depend, among other factors, on how well the historical basis of legal doctrine has been understood. For more on the historical development please see the article by Martin Gelter and myself published in the Hastings International and Comparative Law Review, Vol. 31, No. 1, 2008, http://ssrn.com/abstract=1161168).
Feel free to comment on this posting by Prof. Grechenig (you can comment, or send a longer posting to me at hl.ino@cbs.dk). - Henrik
Some History of Legal Thought and Its Influence on Law & Economics
by Kristoffel Grechenig, Dr., LL.M., University of St. Gallen, Switzerland & Max Planck Institute for Research on Collective Goods, Bonn, Germany
I widely agree with H.-B. Schäfer, when he says that the impact of law and economics on legal scholarship is increasing (blog post, 30/5/09). In order to understand why there are still differences between U.S. legal scholarship and German-tradition legal scholarship with regard to law and economics, it is essential to understand the historical development of German "legal science". I believe that there are two main factors for this transatlantic divergence: First, legal realism enjoyed great success in the U.S., whereas the German free-law movement failed to leave a lasting impression. While legal realism transformed American legal thought and opened up the discourse to policy arguments, the predominant German legal theory for a long time emphasized and still emphasizes the internal coherence of the legal system; it assigns only a limited role to external elements. Second, the different philosophical roots and attitude towards utilitarianism and consequentionalist thinking in general had an impact on legal scholarship such that a resistance to consequentialism in Europe implied a resistance to law and economics. To be clear, quite a bit has changed in the past due to the work of the people who have posted on this blog and many others. The point is that a general and widespread acceptance will depend, among other factors, on how well the historical basis of legal doctrine has been understood. For more on the historical development please see the article by Martin Gelter and myself published in the Hastings International and Comparative Law Review, Vol. 31, No. 1, 2008, http://ssrn.com/abstract=1161168).
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