Recent coverage of the A&P bankruptcy has alluded to its era of “dominance” in grocery retail, describing it as “the Wal-Mart of its day.”   See this earlier post on the unconvincing antitrust case against Wal-Mart.  However, what the A&P bankruptcy brings to mind for me is Justice Stewart’s famous dissent in Von’s Grocery.  The famous line from Stewart’s powerful dissent objecting to the majority’s analysis, devoid of economic analysis and full of now well known contradictions, is his description of the merger law: “the only consistency is that the government always wins.”

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I have now had a chance to read through the contributions to this event and have a few thoughts to share.  I cannot, of course, reply to everything that has been said here, and in any case, most of what I would say already appears in print.  Before getting into specifics let me say one thing up front:  take a deep breath!  These posts have a lot of emotion.  I am not sure why.

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Tiffany Joslyn provides a useful summary of the criminal provisions of the Dodd-Frank Act at the Federalist Society National Federal Initiatives Project.  One of the things Joslyn points out is that the Act includes new criminal consumer protection liability…

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In the brave new world contemplated by the advocates of government policies informed by behavioral law and economics, many more aspects of each individual’s life will be regulated, or more stringently regulated, than at present.  Within the legal academy, the growth of the behavioral law and economics movement has been dramatic.  Surveying all legal publications from 1980 through 1984 reveals that only a single article made mention of the phrase “behavioral economics.”  In 2005 through 2009, however, there were 917 such articles.  What, we must ask, accounts for the great and increasing attraction of the subject to legal academics?

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The behavioral economics research agenda is an ambitious one for several reasons.  The first reason is that behavioral economics requires a theory “true” preferences aside from – and in opposition to — the “revealed” preferences of the decision maker.  A second reason is that while collecting and documenting individual biases in an ad hoc fashion can generate interesting results, policy relevance requires an integrative theory of errors that can predict the sufficient and necessary conditions under which cognitive biases will hamper the decision-making of economic agents.  A third is not unique to behavioral economics but is nonetheless significant: demonstrating that behavioral economics improves predictive power.  The core methodological commitment of the behavioral economics enterprise — as with economics generally at least since Friedman (1953) —  is an empirical one: predictive power.  Indeed, no less than  Christine Jolls, Cass Sunstein and Richard Thaler have described the behavioralist research program as the economic analysis of law “with a higher R-squared,” that is, “a greater power to explain the observed data.”

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Professors Henderson and Ribstein touch on two theoretical failures of the behavioralist movement which both reveal the prematurity of ‘behaviorally-informed’ regulatory proposals: the behavioralist assumptions that (1) behavioral biases theoretically necessitate, or at least enable, public intervention, and (2) governmental entities can net improve individual outcomes over the status quo of unfettered, if limited, human capabilities.  I think both of these observations highlight the shocking dearth of theoretical exploration amongst behavioralists thus far.  I want to focus on connecting these assumptions to the connection between behavioral economics and administrative regulation.

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At the outset let me thank our hosts for inviting me to participate in what I have come to think of as Truth On The Markets’ annual symposium on topics of particular interest to me. Last year at roughly this same time, TOTM sponsored a symposium on what many surely regarded as an obscure topic, but this year’s subject—the role, if any behavioral economics should play in regulatory policy—should be of much wider interest. Although this topic has a connection to the consumer credit industry (a connection that I plan to explore in a comment on Richard’s post from yesterday), I want to start with the more general question of whether we should be concerned about any effort on the part of the Obama Administration to incorporate the lessons of behavioral economics in regulatory policy. Recognizing that I may be putting invitations to future TOTM symposia at risk by saying so, I think that the answer to this question is no.

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Behavioral law and economics (“BLE”) can influence legal policy analysis and regulation in many ways.  On balance, it is not at all clear that this new paradigm undermines a policy commitment to markets.  From one vantage point, the BLE movement can be said to help preserve markets. Importantly, those using the paradigm often start with an underlying assumption that markets are good and that regulations are appropriate only to help correct market defects.  Of course, if “defects” are defined too broadly, the default state of market activity is indeed threatened.  However, the idea that the behavioral movement threatens to erode the primacy of markets that would be achieved without the paradigm erroneously assumes that a government would ever sign onto completely unfettered market behavior.  However desirable a free market state of the world might be, the unfettered markets baseline fails to comport with political realities.  Even setting aside insights from public choice theory (which predicts policy interference with markets), there is always the sense that people aren’t the purely informed rational actors that law and economics models might assume.  Too many people we know and love—our parents, kids, cousins, even ourselves—suffer harm from their decisions as a consequence of a failure to investigate, overcome biases, properly value options etc.  Most people carry an intuition that some market taming/correcting mechanisms are appropriate, and BLE at least helps that discussion proceed rigorously. If so, behavioral law and economics might help to ensure that regulatory actions are market preserving relative to the state of government without those insights.

Read the full piece here.