Ideas of the Marketplace II

What we can learn from thinking about the marketplace of ideas as a market

In a very interesting post over at EconLog, Bryan Caplan considers what he describes as the “dogmatic libertarian” claim that all markets work well, as it is applies ― or, rather, doesn’t apply ― to the marketplace of ideas. The marketplace seems to reject this claim, which suggests that it cannot be true. Prof. Caplan agrees that it is not, and makes two further observations. In reverse order, they are that “[t]ruth doesn’t largely win out in a well-functioning market for ideas, because consumers primarily seek not truth, but comfort and entertainment” (emphasis prof. Caplan’s), and that while “[m]ost markets work well … the market for ideas doesn’t … [b]ecause ideas have massive externalities. … The market for ideas … works poorly because strangers bear almost all the cost of your irrationality.” I think that’s largely right, but want to add a couple of additional points regarding prof. Caplan’s second observation.

First, while it is often true that we do not internalize the costs of our irrationality, this is less true in some contexts than in others. Most obviously ― this a point that Ilya Somin makes in his discussions of political ignorance ― we do internalize a much greater share of the costs of our bad decisions, and also of the rewards of the good ones, when deciding for ourselves, in our private lives, than when we vote or, more generally, act in the political sphere. Even in our private lives, we pass on some of the costs of our irrationality to family, friends, and sometimes the broader society as well, but we do absorb a much more substantial fraction of these costs. This is perhaps a trite point, and prof. Caplan might only have been referring to the marketplace for political ideas (political in a very broad sense), but I think it’s worth spelling it out.

More interestingly, I think, it is also the case that, even in politics, there is a way in which people can be a made to internalize at least a small fraction of the costs of their bad decisions in the marketplace of ideas: democracy. This, I think, is what H.L. Mencken’s famous quip that “[d]emocracy is the theory that the common people know what they want, and deserve to get it good and hard” means. The theory is only partly true, because as prof. Caplan says, in the political sphere “strangers bear almost all the cost of your irrationality,” but self-government ensures that you bear at least a little fraction of the cost of your opinions and decisions. When you vote for a lousy politician, or convince others to do so, you increase ― albeit usually by very little ― your odds having to reap the consequences of the lousy policies that that politician will implement. By contrast, in a dictatorship, the few who decide typically bear even less of the cost of their views than the voters in a democracy, because they are even better able to pass these costs on to others, while those who do not (which is to say, almost everyone) are even freer to know nothing and believe everything, since their ignorance, credulity, and irrationality have no impact whatever on anything. If you think that voters and politicians are bad in democratic countries, just compare them to the people and the rulers in authoritarian ones. Once again, Churchill was quite right to say that while democracy is a bad system of government, others are even worse.

The second point I wanted to make might be too obvious for an economist like prof. Caplan to discuss, but bears repetition by a lawyer writing for non-economists. That the marketplace of ideas may be malfunctioning as a result of massive externalities does not justify intervention by the state in order to make people internalize these externalities or prevent them from occurring. Market failure may be real, but so is government failure ― and there are situations in which government failure is more severe than the market failure government intervention purports to correct. Indeed, this point is, I think, more widely accepted (albeit not necessarily in these terms) with respect to the marketplace of ideas than for just about any other market. Distrust of, and opposition to, censorship, in the face of widespread evidence of malfunctions in the marketplace of ideas reflects, at least in part, an understanding that giving the state the power to rectify these malfunctions would be disastrous, both because the state is a bad judge of ideas and because this power would be abused in various self-interested ways be the people entrusted with wielding it. Unfortunately, people often fail to transpose this understanding to their analysis of other markets. Yet there is no reason why they should. The marketplace of ideas is just not that special.

Thinking of the marketplace of ideas in economic terms ― assuming, in other words, that it is a marketplace more or less like any other ― is, I think a useful exercise. (I attempted it here already.) It both allows both to sharpen our understanding of the marketplace of ideas itself (and of the related markets, such as the one for votes), and can serve as a reminder of some broader truths about markets and regulations that we intuitively sense when thinking about the marketplace of ideas, but forget in other contexts.

Law and Innovation, Again

In my July post for the National Magazine’s blog I wrote that the decision of Ontario’s Superior Court rejecting the attempt by the city of Toronto to stop Uber operating there without a “taxicab broker” license was a reminder of the fact that technological innovation often challenges the law not directly, but by enabling innovative business models. In a recent post for the Hoover Institution’s Defining Ideas, Richard Epstein offers a similar argument, and draws similar conclusions from it.

Prof. Epstein’s post, as it happens, was also prompted by litigation against Uber ― this time in California, where an administrative tribunal recently concluded that its drivers were “employees” and thus entitled to certain benefits. (It is worth noting that New York City’s authorities have since taken the contrary position.) Prof. Epstein points out that

There is no question that [“sharing economy”] platform systems require a contractual framework for a three-party relationship that is not found in the playbook of traditional industries, where there is a direct relationship between the party that supplies the goods and services and the party that requests them.

The law, says prof. Epstein, has a choice in how to respond to the situation. It can let the market work out new forms of contractual relations, which might combine elements of pre-existing standard arrangements (such as the employment contract) if the parties want it. Alternatively, it can try to simply fit new commercial relationships into the pre-existing forms.

For prof. Epstein, the choice is clear:

it is a hopeless task to apply traditional regulatory structures to modern arrangements, especially when they block the implementation of new business models. Indeed, it is necessary to go one step further: it makes no sense to apply these regulatory statutes to older businesses, too. Time after time, these statutes are drafted with some “typical” arrangement in mind, only for the drafters to discover that they must also try to apply the statutes to nonstandard transactions that do not fit within the mold.

No disagreement from me. Here’s what I had written last month:

[t]he law ― including the regulation of taxis ― is written with specific business models in mind. When the business models in question are no longer the only ones around, the legal rules based on the assumption that they are lose their efficacy.

We should, I said, resist “[t]he temptation to expand the scope of the existing regulations, to close the ‘loopholes’ opened up by innovation,” and take “the disruptions caused by innovation … as an opportunity to ask whether any of the arguments for the old rules … still apply.”

But if you didn’t want to take it from me then, you should take it from Prof. Epstein now.

The Uber Decision

Last week, Ontario’s Superior Court of Justice delivered a much noticed judgment rejecting Toronto’s claims that Uber could not operate there without registering and obtaining a license as a taxicab or limousine broker. Needless to say, the ruling is of great practical importance to Uber’s users, both passengers and drivers, as well as those who seek to regulate it out of existence. Legally, the decision, City of Toronto v Uber Canada Inc., 2015 ONSC 3572, is about a very narrow issue of statutory interpretation. Yet the recently-appointed Justice Dunphy’s thorough and well-written opinion provides us an opportunity to reflect on the importance of the Rule of Law and the processes of legal change.

The City of Toronto, like many others in Canada and elsewhere, has chosen to cartelize the transportation of persons by privately owned cars. All the cars used for that purpose are divided into the categories of “taxicabs” and “limousines.” The number of the former is fixed; the number of the latter is restricted indirectly, by imposing a variety of regulations on their owners and operators. In addition, the City requires “taxicab brokers” and “limousine service companies” to obtain licenses in order to operate within its limits. The City’s case against Uber was that Uber was acting as a “taxicab broker” or a “limousine service company,” without having done so. It asked the Court for both a declaration and an injunction that would have ordered Uber to stop its operations in Toronto. Uber, for its part, claimed that its operations were not covered by the City’s by-laws.

Justice Dunphy begins by determining whether Uber cars might be “taxicabs” or “limousines” within the meaning of the applicable by-law, chapter 545 of the City of Toronto Municipal Code. The definition if a “taxicab” is limited to categories defined by the various types of permits issued by the City. Since Uber cars lack such permits, they do not fall within this definition, reasons Justice Dunphy, and must be “limousines,” which include all cars “used for hire for the conveyance of passengers in the City of Toronto” other than “taxicabs.” To say that unlicensed cars used for that purpose are still “taxicabs” “would make nonsense of the definition of ‘limousine’ in the same enactment” [57] and thus cannot be the correct interpretation.

Having concluded that Uber cars are “limousines,” Justice Dunphy asks himself whether Uber ― or, more precisely, any one of the three members of the Uber group of companies actually sued by the City ― acted as a “limousine service company.” The by-law defines such a company as a “person or entity which accepts calls in any manner for booking, arranging or providing limousine transportation.” Uber, Justice Dunphy holds, does not “accept calls,” and thus is not covered by the definition. In Justice Dunphy’s view “accepting” a call or any sort of request “requires the intervention of some element of human discretion or judgment in the process and cannot be applied to a merely passive, mechanical role of receiving and relaying electronic messages.” [78] Yet that is precisely what Uber does.

Having provided prospective passengers and drivers with software that allows them to connect, often well in advance of any specific trip being envisioned by either party, it relays passengers’ requests for a ride to the nearest car available. Unlike a traditional taxi broker or limousine company, it cannot reject the request (for example if there are no cars available) or undertake to fulfill it. It is the driver who receives the request who takes the decision. Uber no more “accepts” requests for rides than does a phone company whose networks are used to transmit traditional calls for cabs, or automated services that connect a prospective rider with a broker. In Justice Dunphy’s view, it “is very likely” that “the by-law was drafted and the word ‘accepts’ was selected in lieu of the more generic ‘receives'” precisely in order “to exclude such businesses from the scope of the regulation.” [70]

Justice Dunphy also considers the meaning of the word “calls,” used in the definition of a “limousine service company” ― but not in that of a “taxicab broker” which, unlike the limousine company, can accept “requests.” This difference in wording, Justice Dunphy says, it must be given effect, so that “calls” cannot be taken to mean “requests.” Besides, the word “requests” is a recent innovation in the definition of a “taxicab broker,” and the City could have amended the definition of “limousine service company,” but has not done so. Online requests handled by Uber are not “calls” in any normal sense of the word, and this is an additional reason for concluding that it is not a “limousine service company.”

Although it might seem like excessive legalistic pedantry to some, I find Justice Dunphy’s analysis persuasive. Needless to say, it only applies to the specific legislative framework before him. Had the relevant definitions been drafted differently, his conclusions would presumably have been different too. But given the by-laws that were actually before him, I think that Justice Dunphy was quite right to distinguish the passive or mechanical functions of receiving or transmitting a communication and the (at least somewhat) discretionary function of accepting an order, as well as to give effect to the distinction between “calls” and “requests” which the City itself has created.

As I said in the beginning, beyond the narrow point about the meaning of the specific words used by Toronto’s city council to regulate its taxi industry, there is a broader one about the Rule of Law. As Justice Dunphy points out, “[t]he goal of statutory interpretation is not to start with the desired outcome that the regulator seeks in light of new developments to see what means can be found to stretch the words used to accomplish the goal,” [69] which as he says is what he would have had to do in order to rule for the City in this case. The Rule of Law requires, among other things, that legal rules be public and relatively stable. It also requires the government to be bound by the existing legal rules. A legal system where the meaning of the rules can change because the government wants it to, even though it cannot be bothered to follow the procedures available for legal change, is not one where the Rule of Law prevails.

It is often said that insisting on this “formal” sort of Rule of Law is not enough, because requirements as to the publicity and clarity of legislation and insistence on legal change following recognized procedures does not do much to constrain government. Government can still enact whatever rules it wants, so long as it goes about it the right way. But if it really were so easy for government to change the rules while following the applicable procedures, would it really be fighting so hard to avoid having to do so? As Justice Dunphy recognizes,

[t]he City finds itself caught between the Scylla of the existing regulatory system, with its numerous vested interests characterized by controlled supply and price, and the Charybdis of thousands of consumer/voters who do not wish to see the competition genie forced back into the bottle now that they have acquired a taste for it. [9]

Changing the rules, in this context, is not as easy as those who denigrate the formal understandings of the Rule of Law would have us believe. And so it matters a great whether

the City’s regulations, crafted in a different era, with different technologies in mind [have] created a flexible regulatory firewall around the taxi industry sufficient to resist the Uber challenge, or … instead [have] created the equivalent of a regulatory Maginot Line behind which it has retreated, neither confronting nor embracing the challenges of the new world of internet-enabled mobile communications. [12]

Justice Dunphy’s conclusion, of course, is that the City’s regulations have done the latter, and Uber is thus free to pursue its (charm) offensive. In theory, the regulatory troops can still be withdrawn from the useless, antiquated defences and thrown into the battle to stop the invaders. In practice, it may well be too late by the time they can be mobilized.

Justice Dunphy understands this, no doubt. Although he insists, as most judges not named Richard Posner are wont to do, that “[q]uestions of what policy choices the City should make or how the regulatory environment ought to respond to mobile communications technology changes are political ones” [13] and not for him to resolve, his awareness of, and willingness to mention, the conflict between “vested interests” and the “competition genie” suggest that he knows that his decision will influence the choices that will end up being made. Indeed, Justice Dunphy’s attention to the details of Uber’s technology and business model, as well as his awareness of the broader context in which the case before him fits, not to mention his rhetorical flourishes, have something at least vaguely Posnerian about them. The decision he has delivered is not only an Uber decision, meaning a decision about Uber. It’s also an über-decision ― one that is superior to what one usually sees.