Wednesday, 28 April, 2010

Everyone but right-wing economists are wrong

In Law’s Order, David D. Friedman writes (while discussing contracts), “...consider a case that has recently been in the newspapers—the attempt by a Spanish judge to extradite Augusto Pinochet from England in order to try him in Spain for crimes he is accused of committing while dictator of Chile. Legal rules that immunize ex-dictators make it less expensive for them to commit crimes while in power. But legal rules that hold ex-dictators liable for such crimes make it more expensive for dictators to give up power. Pinochet is one of the rare examples of a dictator who voluntarily relinquished power to an elected government. If he ends up in a Spanish jail as a result, the next dictator may not make that mistake.”

Q 1.1.  Besides applying economics to a criminal case (which deals with irrational man), perhaps the argument stops short of good economics? Would the extradition not have deterred dictators in power and those with dictatorial ambitions from doing wrong?

Without the extradition, the logic runs thus: “I will torture to my heart’s content. When I am done with it, I’ll give some off some of my ill-gotten gains to the corrupt official of a democratic country, arrange for my exile, and ‘voluntarily relinquish power to an elected government’. History shows nothing will happen to me, because the reward for that is immunity from persecution.”
Extradition would change that, wouldn’t it?

Q 1.2.  On the other hand, when a smaller criminal gives himself up to the police and confesses, he is dealt with leniently. So is there a question of scale (unjustifiable extrapolation) here too?

In Monsieur Verdoux, Chaplin says, “Wars, conflict, it's all business. ‘One murder makes a villain. Millions a hero.’ Numbers sanctify.” By not applying the rules for common criminals to ex-dictators, we can prevent exactly that. (Anyway, voluntarily relinquishment is no more than a euphemism for being sacked by Uncle Sam.)

In The Economics of Law, Cento Veljanovski (while discussing adaptive responses to regulation) says, “There is now fairly conclusive evidence that seat-belt laws have not had a significant impact on road safety. This is not because they are ineffective in protecting vehicle occupants but because they encourage risk-taking and accidents by drivers. Road accidents are the result of the interaction of roads (their construction, topography, lighting and safety features), car design and use, and driver and pedestrian actions. As the roads and vehicles are made safer there is a natural inclination for drivers to take more risks by driving faster and less carefully, and braking too late. They substitute free, publicly provided road safety for costly, privately produced safety.

In the economic literature this effect was first recognised by Sam Peltzman in his work on the impact of compulsory seat-belt legislation in the USA. He argued that because seat belts reduced driver risks and injuries, drivers adjusted their behaviour by driving faster and with less care. This led to fewer driver fatalities and more pedestrian fatalities and injuries, and damage to vehicles, thus increasing accident costs. The economics of the drivers’ decision is simple to explain. A compulsory seat-belt requirement decreases the expected loss of an accident, and leads to offsetting risk-taking by more aggressive driving.

Peltzman tested this simple economic proposition using the US National Traffic and Motor Vehicle Safety Act 1966, which made the wearing of seat belts compulsory. Using statistical analysis, he found that occupant deaths per accident fell substantially as expected, but this reduction was entirely offset by more accidents to those not protected by seat belts, i.e. pedestrians and cyclists. While this finding was ridiculed at the time as fanciful, subsequent research by economists and traffic safety engineers has confirmed that compulsory seat-belt legislation has not resulted in a measurable decline in road fatalities.

Indeed, Peltzman18 has revisited his original research to note that the annual rate of decline in highway deaths in the USA was 3.5 per cent from 1925 to 1960, before the legislation was enacted and at the height of Naderism; and between 1960 and 2004 it was also 3.5 per cent!”

2.1.  Again, this analysis may be inadequate. First, distasteful as it may seem, the lives of people in automobiles may be more valuable (i.e., contributing more to the eonomy). Hence, the law does net good.

2.2.   Second, Peltzman didn’t check crippling injuries. Such injuries may be far costlier than deaths, more so if the latter is instantaneous (in which case the accident merely pre-pones the inevitable funeral).

2.3. Mental gymnastics apart, safety belts may have led to saving time (the most precious resource?) for motorists and their passengers, thus enriching the world. Shouldn’t he have looked into average speeds (assuming time saved is directly proportionate to that)? 

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