I have talked before about principles-based regulation. I think that one advantage of this approach is that we could get rid of the “fourth branch of government” consisting of regulatory agencies. Instead, regulatory issues would be settled in courts, allowing common law to develop. Violations of the law against taking advantage of consumer ignorance would be punished on the basis of clarity of the violation, severity of the violation, and systematic nature of the violation.
For example, consumer protection could be embodied in a law that says “It is a crime to take advantage of the ignorance of the consumer.”
Let us use as an example a consumer who is obtaining a mortgage. It is easy for the consumer to get ripped off. It is almost impossible to write precise regulations that keep a consumer from getting ripped off. Here is how the law would apply.
How clear is the violation? Ask a juror to say, “If someone I cared about were offered this mortgage, would I want them to take it?” If the answer is “definitely yes,” then there is no violation. If the answer is “definitely no,” than there is a clear violation. If the answer is “maybe, depending on circumstances” or “not too unreasonable” then there is at most a slight violation. And yes, lawyers for each side would be trying to explain to jurors what is or what is not unfair or inappropriate about the mortgage.
How severe is the violation? Back in the day, loan officers would steer a borrower to take a mortgage with an interest rate slightly above what the best rate, because the loan officer would pocket some of the “yield-spread premium.” While this would violate the law, it is not a severe violation, in that it does not cost the borrower much. It is not as bad as foisting a pay-option ARM on someone who only understands the initial monthly payment and does not foresee the future jump in monthly payments. Another measure of severity concerns the vulnerability of the consumer. If we are talking about a financially savvy affluent individual, the violation is less severe than if we are talking about the proverbial poor, trusting widow.
How systematic is the violation? Was pocketing the yield-spread premium an exception to a well-articulated corporate policy. Or were you loan officers trained to extract the maximum yield-spread premium?
What I would like to see happen under principles-based consumer protection is that firms decide to set up internal policies and procedures for designing and marketing products in a fair manner. Instead, under rules-based regulation, the firm focuses on following the rules. This can and does generate a mismatch between the intent of the regulation and the outcome of the regulation.
Comments welcome. I would prefer that you not compare principles-based regulation to rules-based regulation that is perfect in theory. Instead, compare it to rules-based regulation.
I am confused. Are you not aware that we already have principle-based regulation this in a variety of settings especially when it comes to false and misleading commercial activity.
First, we have the FTC act which prohibits “false and misleading” advertising. So the FTC can bring charges against anyone who is acting in a false and misleading way.
Second, we have the Lanham Act which also prohibits “false and misleading” competition so competitors can bring charges against a competitor for false and misleading activities.
Third, we have very state statutes that allow for prohibition of “false and misleading” advertisements so that State AGs can bring suits against companies with fraudulent ads.
Fourth, we have private AG statutes that allow for individual citizens to bring lawsuits based on false and misleading advertisements. These are mainly in California and New Jersey.
So I feel like the system you want is one that we already have, especially in commercial advertising. This system does not abolish the 4 branch of government. In fact, the FTC uses most of its time on the consumer protection side just dealing with things it classifies as “false and misleading” advertising and these cases are brought to court creating common law on what qualifies as “false and misleading.”
The disadvantage of this system is that there is no specific statement on what is clearly not false or misleading under all of these various laws. So counseling clients regarding “what is legal’ is very difficult because there is no bright line rule in most cases that would apply to ensure that you were not “false and misleading” under each of your duties. That is the benefit of precise regulations. They give you a safe harbor (and thus arguably reduce litigation).
If you did know about this situation, then how is what you are proposing different? If you didn’t know that this situation existed, then are we currently living under the system you want?
“… Instead, regulatory issues would be settled in courts, allowing common law to develop. … What I would like to see happen under principles-based consumer protection is that firms decide to set up internal policies and procedures for designing and marketing products in a fair manner. Instead, under rules-based regulation, the firm focuses on following the rules.”
But once a common law of consumer protection develops, there will be rules.
Of course, the lack of “expertise” on the part of courts may make the rules less complex and/or comprehensive. But courts may respond by changing their procedures to become more “regulatory” or legislatures may do it for them. Or perhaps set up specialized courts like the housing and drug courts in some jurisdictions, or the U.S. Bankruptcy Courts, U.S. Tax Court, U.S. Court of Federal Claims, and U.S. Court of International Trade, or the Court of Appeals for the Federal Circuit.
You can’t simultaneously want a new common law to develop and want all these cases decided by juries. Juries make case-by-case findings of fact, not generally applicable rules of law. In other words, any questions you leave to juries are questions you will never have a clear-cut rule for. Common law is judge-made law.
I think you are also vastly underestimating how long a “simple” legal rule can stay simple, at least in a society that wants consistency from ruling to ruling. Life is complicated, complex cases are going to come before courts, judges are going to make rules based on them, and the whole thing will get more and more byzantine. We know this because, as another poster pointed out, we already have extremely general consumer protection laws and that is exactly what happened with them The complexity will always be there, it’s just a question of whether you will try to make rules that predictably capture that complexity or whether you will wing it on a case-by-case basis. As such, I think you should see what you are calling for less as a shift from complexity to simplicity and more as a shift from a relatively high-cost, high-predictability legal regime to a relatively low-cost, low-predictability legal regime.
Lastly, I think you might be underestimating the extent to which regulatory capture can happen in a common law system. Blackstone has a whole chapter on the BS protectionist laws enshrined in then English law, many of them from the common law (IE owling, the “crime” of transporting wool out of England). More generally, academic scholarship is at best mixed on the idea that the common law inherently tends towards economically efficient outcomes. At least in the field of American legal history, which is all I’m really competent to talk about, I think the vast majority of scholars have a relatively low estimate of the historical common law, believing it (often) served as a tool for regulatory capture, class interest, and racism. Morton Horowitz is thought to be more right than Richard Posner.
For that reason, I really think libertarians need to ditch their “common law is great” attitude. I get why Hayek liked it, but Hayek was not sensitive to public choice theory. The question can’t just be “which system of laws is the most decentralized and emergent,” it also has to be “which system of laws is most resistant to regulatory capture.” To legal historians, it is not obvious that the answer to that question is “something like the common law.” I will admit that most of those historians have not been free market types, but their criticisms (namely that special and class interests are able to easily capture judges, often even more easily than they could capture legislatures) should still appeal to people who are.
More generally, good law seems to be some ineffable mix of top-down and bottom-up, of complex and simple, of rules-based and case-by-case, of expert-driven and popular, of local and universal. Roman jurists make case-by-case law that a Roman emperor simplifies and codifies that medieval monks study and update for the modern world that gets taught to the most educated lawyers so that the Holy Roman Empire’s high court uses it which semi-popularizes it and then it seems like an attractive alternative to German litigants dealing with a mess of local laws so it starts getting used in local German courts where it mixes with local and church law and that makes the German version of the Ius Commune. Not a simple story! Successful legal systems are a mess of contingent historical factors, not a tale of “bottom up and emergent is always better.” Hayek was a bad legal historian, and libertarians should stick to making issue-by-issue cases for marginally better laws, not seeking utopian solutions to the problem of bad law.
Just an observation, in this day and age consumers are far better protected than any other point in history and it has little to do with consumer protection laws. When I buy something expensive on eBay, I know from their rating that the seller is trustworthy. I can also use one of many price comparison tools to figure out if the price is fair. I made one recent purchase from a “Google Trusted Seller”, meaning now the mega-giant Google is repping some relatively small seller of electronic instruments. And if all else fails, I can dispute the charge with my credit card company.
In short, people (buyers and sellers) are basically honest, and modern information exchange allows the 98% of honest people to almost *trivially* filter out the noise of the 2% of fraudsters. As we get more and more connected, it’s hard for me to envision any effective government role in consumer protection, either principle-based or regulation-based
I’ve heard that it’s easier for a business to comply with the law in Europe than in the US because they have more and predictable regulations and leave a lot less up to the courts, where anything could happen. If this is true, then your proposal will be economically quite inefficient?
Many contracts rule out going to court but instead require arbitration. How would that be dealt with?
That’s for civil claims – breaches of contract and torts related to contracts – not for crimes.
And really, the common law of torts is kind of the ultimate principles-based regulation. “Whenever A, intentionally or negligently, wrongfully harms B then B can sue A to recover compensation in the amount of his damages (and sometimes more with punitive damages).” There is some back and forth between courts and legislatures when it comes to changing the rules of what harms count as valid claims.
But crime is (usually) prosecuted and regulations enforced under very different rules and standards.
What our host seems to advocate is some kind of new combination of elements of tort, contract, regulatory, and criminal law.
One advantage of regulatory administrative courts and arbitration is the avoidance of juries, which introduce a lot of chaos and unpredictability into the system. Our host recently said, ” I really do not understand why people think that democracy is so great.” I would response, ” I really do not understand why he thinks that juries are so great.” The pros and cons and quality of decisions aren’t much different.
One (clever but sneaky) possibility is that the chaos and uncertainty resulting from juries is the point because it is so high that the risk-management office of a corporation’s general counsel will advise that their client stay miles away from ‘the line’, because of unacceptable and unavoidable criminal and liability risks and the prospect of countless lawsuits that cannot be quashed via mere paperwork and motions for summary judgment.
In other words between clearly acceptable and clearly unacceptable behavior, you create this giant buffer-zone which is a minefield. There are diamonds in that patch of earth, but there are also hidden mines, and do you really want to go out there? Maybe rarely, close to your own border, if the diamond is big and the mine is small and the change worth taking, but usually people will stay away. It would create a whole ‘demilitarized zone’ covering the arguably sketchy commercial tactics.
But that seems pretty unrealistic. Corporations are going to take the expected profits from diamond extraction and use them to lobby the legislature to override the courts and then mark as many mines as clearly as possible. That’s ‘rules-based regulation’ all over again.
There are three practical problems with litigation made rules in the US.
1. It may be that for sensible business to function, some degree of “rule made” safe haven certainty is required. That is, without regulation and regulators which can at least part of the time build a strong case for “this is legal” many businesses will simply give up, move off shore, etc. We already see a fair amount of this.
2. There are at least 51 jurisdictions, and in practice there would be 51 different sets of laws. So “is that a fraudulent mortgage contract” might be “yes” in Kentucky but “no” in Arizona. As trade within as well as without the US becomes more “globalized” (non-local) this becomes more and more of a problem. Do we really want a world where the vendor of some product refuses to sell it in NY or IL out of fear of their juries? A related not-very-good side effect is to strongly favor very large organizations that can manage and absorb these risks.
3. The debate over imperfect-principals rules versus imperfect-details-regulations ignores a poltical reality – when a large scale “badness” occurs, there will be large scale blow back. So even if firm Z always offers mortgages that every Judge and even Jury agree are fully and realistically disclosed and fair, if 100% of their borrowers default, the feces will hit the fan. There is no way out of this. “society” (well, the emergent expressed will of the population) will insist on some kind of “retaliation”. That is, if a lot of mortgages go into default, REGARDLESS OF WHY there will be retaliation against lenders, period. It does not matter if they followed all the rules, it does not matter if they were shiny clean upstanding examplars of virtue, the large scale bad economic result will lead directly to large scale hostility.
I was thinking along the lines of Bryan’s #2 as well. With multiple jurisdictions, there is a lot of “forum” shopping now for sympathetic judges/juries for product liability, etc., litigation. How do you control for that? Multiple jurisdictions leads to multiple & disparate results, resolution of which is what feeds the maw of SCOTUS. A further problem is the time delay (not to mention the cost) in litigating a matter to its ultimate appellate level. Some of these cases take years to ultimately resolve. What does commerce do during the pendency of a court case? Stop?
It sounds like this would enshrine “let them eat cake” into law. Why would anybody ever take a low-paying job, a payday loan, an internship in an unglamourous field? *I* certainly wouldn’t, so it ought to be illegal?
You make a strong case against regulators. Following principles makes sense, but I am not keen on the implementation. To adapt the markets-government adage, it sounds like “Technocrats fail. Use lawyers.” Really? It looks to me like an expensive way to introduce additional variance in enforcement.
I read this and think of product liability lawsuits, where the jury awards the moon to someone they sympathize with. Not a good idea.
And what about extremely technical parts of the law, or extremely technical cases? I seem to remember some case decades ago between electronics companies. The issue was so technical the judge wrote some opinion despairing of any layman ever figuring it out.
Wouldn’t stronger consumer protection laws disincentivize consumer education? Which then, ironically, creates a greater problem of consumer ignorance.
Back in the day, loan officers would steer a borrower to take a mortgage with an interest rate slightly above what the best rate, because the loan officer would pocket some of the “yield-spread premium.”
Well — yes. And lots of sales people enjoy greater commissions if they can sell to customers at more than rock bottom. Maybe I’m missing something here, but wouldn’t it be a disaster if law firms could specialize in bringing class-action lawsuits against businesses that knowingly and systematically charged more than their lowest priced competitors?