The Chronicles of a Capitalist Lawyer

Around two weeks ago, I had an opportunity to attend a debate on Neoliberalism Thought at the University of Chicago between Gary Becker (Professor of Economics at the University of Chicago), Bernard Harcourt (Professor of Law and Chair of the Political Science Department at the University of Chicago) and François Ewald (former assistant to Michael Foucault and Professor of Insurance at Conservatoire National des Arts et Métiers, Paris). I think the quality of the debate is very good and it would be a pity if I don't share the ideas raised in such debate in this blog.

First of all, the debate spins on the idea of Homo Economicus or the Economic Rational Men by Gary Becker. Michael Foucault, a famous French philosopher and historians, believe that Gary Becker's idea on economics rationality provides the necessary theoretical foundation of Neoliberalism. This is interesting because usually Neoliberalism is more associated with political economic thoughts rather than pure theoretical economic thought.

I think even most of the time, when Indonesian people talk about Neoliberalism, they think about the idea of excessive free market, non governmental intervention, injustices by corporations and dictators, etc. Of course, I heavily doubt that this is the correct interpretation of Neoliberalism since pure Capitalism does not support any crony capitalism, dictatorism, business without liabilities, and so on. See my previous post on this issue here.

For now, let us return to Foucault ideas. He is a proponent of the idea that history is determined by the power relationship that controls men. Law and morality are things that are defined by those who have power and authority, and therefore they might be simply an illusion for the society. However, Foucault finds some consolations in Gary Becker's concept of Homo Economicus, which according to him is liberating.

Gary Becker, which is also a Nobel Laureate, is the proponent of idea that the science of economics can be used as a powerful tool to analyze almost all, if not all, of human behavior and activities. He introduces the use of economic analysis on crime, family and discrimination and is also considered as a part of Law and Economics development at the University of Chicago.

Within Becker's theory, human is viewed as a rational being that always wants to maximize his own interest. It does not mean that human has a perfect capacity of calculating the entire costs and benefits of his action. It simply means that when they are making their decision, they pay attention and respond to incentives, and thus, to certain extent, human behaviors are predictable.

A separate note though, even Becker agrees with Foucault that a perfect rational men is a fictional concept. What matters is that the theory is useful to understand the world in an insightful way by taking certain aspects of human behavior and make a simple model. After all, all theories are fictions, and a good theory of fiction is the one that works the best among many other fictions.

Then, why this kind of theory is liberating? According to Foucault, economists are seekers of truth, their analysis is not based on moral or legal issues, rather they focus on human behavior and incentives, and they also prioritize liberty (through free market concept). This is important for Foucault who sees the possibility of maintaining order without any coercion or doctrine as presupposed by laws and morality.

But the Neoliberalism view of Gary Becker is not totally free from any problem. Although it may be a liberating theory it can also be used to suppress the people and here we are moving to Gary Becker theory of Human Capital which is an essential part of Neoliberalism. Becker believes that human capital is very important, i.e. investing in people, making them to be a better and more productive person which will contribute to the welfare of the society.

The problem with that view, at least according to Harcourt and Foucault, is that once human is viewed as a part of capital, the government may favor certain group above other groups, discriminating and investing only in people who will produce the highest benefits and left the ones who are bad to suffer in the slumps. An example would be the case of mass incarcerations in the United States that target most of African Americans and poor people based on various criminal actions. Eugenics can also be a problem here since there was a time where the Government of US actually allow the sterilization of imbeciles and people with mental disorders.

Furthermore, viewing human as only a part of capital production could be degrading, i.e. human is viewed like a machine with the sole purpose of producing more capital and whose value is solely determined on how much capital will be produced and accumulated by him in the long run. I take this as the modern critics of Neoliberalism and Capitalism in general.

Becker's response was simple. His theory on human capital is established to liberate the people and while he agree that some aspects of economics theory on production and capital can be used to analyze issues on human capital, human capital is still a separate subject (and thus the reason why he makes a separate class on human capital in the University of Chicago).

From any point of view, human cannot be fully compared with machines. We can put machine in the warehouses and easily disassemble them whenever we want, we can't do that with human. Furthermore, the theory put a lot of stress in building human capital so that everyone may reap the benefit of social welfare. It includes investment in education, on the job training, health, etc.

The most interesting response from Becker is that his theory of human capital focuses on efficiency, but most of the time, things that are efficient, are also equitable. Through his theory, Becker want to show that human is the most important part of our capital. By investing in people, we hope that they can develop themselves and free to make their own life decisions without any interference. He also notes that there is an underinvestment in poor people and that is actually an inefficient thing to do, since better human capital always lead to better welfare maximization.

I completely agree with Becker's notion. This is indeed the main purpose of introducing the concept of human capital, preserving freedom and reducing paternalism, finding the most efficient way to allocate resources among the people. And I think this should be the main idea of Neoliberalism. It is just too bad that politicians and even some academics are using this concept in such a misleading way that they confuse the original concept of Neoliberalism that focuses on liberation and freedom of the people with crony capitalism, dictatorism, and the freedom to do anything without any legal liabilities which are not even parts of original concept of Neoliberalism.

Let me start this post with the claim that I am a legal positivist, meaning that philosophically, I believe that the existence of law is based solely on social facts and that a legal system can validly exist without any moral basis. Note this, it doesn’t mean that the law cannot contain any moral values, it simply means that law can be separated from morality issues in order to exist.

This separation is crucial to understand why I take the position that pure moral enforcement would be an impossible attempt. I will also use the concept of separation of moral and legal issues in Islamic law to support my argument in this post.

As you may be aware, this world is full with people who believe that the morality of a society must be upheld and enforced even when there is no legal rules relating to such matter. Take the example of Lady Gaga’s concert in Jakarta.

I am not talking about the thugs who demand the concert to be cancelled since based on the facts on their usual practices, I don’t think that they are motivated by morality issues. It would be more accurate if we explain their motivation from pure economics issues.

What I am talking here are people who take the issue at face value and believe from an internal point of view that Lady Gaga’s concert adversely affects the morality of our nation and thus encourage the legal authorities to conduct morality enforcement by prohibiting the concert even when the legal basis is ambiguous or even non existent.

Suppose that no legal rules exist concerning such matter. Can morality be simply enforced within such condition? The answer would be no.

First, different with legal rules which are usually accessible to the public and have more certainties with respect to their contents, moral rules do not have clear standards and authorities to which one can ask for a final judgment.

Second, legal rules exist in order to coordinate the behavior of the people. They exist as a response to social net loss caused by certain actions. While morality rules deal with decencies, things that are good to be followed by a person, where breaching such rules might cause disagreement from other people but not strong enough to justify enforcement (which would always involve costs).

Here are some examples from Islamic law provisions. Eating pork and drinking alcoholic drinks are both prohibited, yet penal sanctions exist only for being drunk. Why?

A simplified explanation would be: Because the net social loss of eating pork is questionable and might only affect people in a personal level while drinking problem creates social loss, especially in terms of accidents. Even the United States admits that drinking is indeed a social problem.

Another example would be the law on adultery. To accuse someone for adultery, you must provide 4 male witnesses with the highest standard of human being. Failure to do this would cause the other witnesses to be deemed of giving false testimony and there is a harsh penalty for that action.

Interestingly, the privacy rule in Islamic law is also very tight. Not only that you are forbidden to enter into someone’s private property, you are also forbidden to even spying at someone’s house. Breaching such rule will allow the home owner to hit you in the eyes.

In other words, the entire legal rules on adultery is structured to deal with adultery cases practiced in the public and those that fall under the scope of privacy will be considered as a moral issue. Notice this: Islamic morality will never deem adultery as a permissible act (you are still responsible to God for your personal action), but legal enforcement will only be conducted when clear social loss is established, say due to the public act.

This brings us to the third issue. It is possible that moral enforcers might still argue that although breach of moral rules do not cause clear social losses, it still causes losses, at least to the people whose moral values are being harassed by such act.

I agree, this can be considered as a loss. But since the losses are pretty much subjective and solely related to the moral enforcer’s taste of decency, it is absolutely necessary that these moral enforcers adhere to the strictest standards of good human being. Why?

You can’t claim that you experience losses because some people are breaching the values that you perceive so highly when you don’t take such values seriously either. So this is a completely different issue with legal enforcement where such standard is not necessary as I argued in my previous article.

Now the final question for these moral enforcers is: Can you really adhere to your own principles?

Remember, God hates hypocrites more than people who consciously breach moral rules and admit that they are wrong.

A recent blog post has caught my attention. It describes another usual day in Jakarta, complete with major traffic jams and motorcycle drivers using the curb lane. The writer, a pedestrian, says he was in a fight with a motorcycle driver who wanted to pass him and kept asking him to step aside.

Of course, the request was ridiculous. The lane has always been reserved for pedestrians, and they don’t have any legal obligation to let motorcycle drivers use it. Just when the fight was about to turn physical, a police officer came to break things up.

At first the officer scolded the driver, saying he was violating the law and could be fined. The driver simply replied that he would accept the punishment as long as the officer also fined other motorcycle drivers using the curb lane, and there are many of them.

Upon hearing that, the officer turned and instead scolded the pedestrian for his refusal to let the driver use the lane. It was a perverse result, showing that the officer was regrettably taken by the driver’s misleading argument.

We hear this kind of argument for fairness all the time. If you want to punish me, you should also punish the other people who are involved in the same crime. Or if you want to punish me, you should show that you’ve never done the same thing yourself. Is this argument valid when we’re talking about law enforcement?

The answer is no. From a legal perspective, I’ve never seen any serious legal philosophers who support the idea that in order to make a valid legal enforcement, legal enforcers must be saints and ensure that all people who commit the same crime will be punished at the same time.

From an economics point of view, it would simply be inefficient to have that kind of rule. Imagine the costs if we had to ensure that all legal enforcers possessed the moral capacities of a prophet, being a perfect person who absolutely adheres to the highest standard of moral and religious principles. Where can we find such a great person?

Pakistan would be good case study. Pakistani legal officials, who believe they act in accordance with the correct version of Islamic law (unfortunately, it’s not correct), have established a strict rule for becoming a witness in homicide cases. People can only be witnesses if they have certain moral qualities, which include, among others, praying five times a day, never lying and maintaining good hygiene.

The result? No one has ever been punished for murder under Pakistani Islamic law. Thankfully, that does not mean murderers can run away from their liabilities, because Pakistani legal officials still use the witness standards established under the English law, which is also applicable in Pakistan. But you see the point.

When police officers are dealing with cases like the one I describe above, they should realize that they can in fact punish a motorcycle driver even if they don’t do the same to other violators. By punishing one driver, they can set an example that they’re going to enforce the law, even if it’s in a random or selective way.

And such enforcement would be efficient. There are costs for law enforcement, and the optimum crime level might not actually be zero because at certain point, the cost for law enforcement might outweigh the benefits that we expect from reduced crime. This is called diminishing marginal returns.

Of course, there are situations where we might be required to increase the law enforcement costs for specific crimes (say, corruption). But for traffic violations? Having random or selective enforcement in this case would be sufficient to give the correct signal to violators.

Sometimes, uncertainty is effective to deter crimes. If you don’t enforce the law at all for traffic violators, they’ll think it’s fine to commit a violation as long as everyone else does, too. But if they know they might be punished, even if it’s just a possibility and not 100 percent guaranteed, they will think again.

Such uncertain law enforcement will increase the costs of violation and make people more likely to comply with the rules. That’s why law enforcement is still necessary, even when the process is random or selective. So next time a police officer faces a similar case, he should just fine the guy and say to him: “Well, tough luck, sir!”

Discussion on labor welfare and how capitalism abuses them is always a controversial issue. Some people argue that the existence of capitalism has usurped the quality of labor life, forcing them to live below standards, all for the sake of maximizing the profits. But is this claim correct? Does free market economy impose a significant burden to labor? My answer is no and we can explain this problem though the lens of the Law of Supply and Demand.

The basic economic concept that we must understand here is that whenever the supply of a product is rising but the demand is stagnant or cannot follow such supply, price tends to fall. The reason is simple, if we have a oversupply of products in the market while the demand is minimum, the seller will be pushed to reduce the products price in order to induce more buyers to purchase the products. Similar thing is happening in Indonesia when we talk about the supply of labor, especially the blue collar workers having low education level.

Consider this fact, Indonesia is the fourth largest country in the world in terms of population. From such a huge amount of population, how many people had the opportunity to get high education? How many industries that can absorb a huge numbers of population as their labor? Theoretically, if the number of labor intensive industries are not big enough, assuming that the amount of blue collar workers are huge, the labor salaries will be pushed down.

From the industry perspective, why bother paying the labor much as long as they can find easy replacement of the labor and to the extent that they can find many workers who are willing to work for a cheap cost in the market. Consider the example in the market for lawyers in big corporate law firms. This line of job offers a lot of compensation (of course in accordance with the level of work difficulties and intensity).

How could that happen? First, the resources for high quality lawyers are limited. Second, there is a huge competition between big law firms to get and retain the best talent. Since the demand is high while the supply is limited, we can easily conclude that the price of the product, i.e. the salary of corporate lawyers will increase substantially.

Now we turn to the main problem in this article. How could we increase the welfare of the labor? The short term solutions have already been done in Indonesia through its labor regulations. We have minimum wage laws and our labor position is quite protected in a sense that companies cannot fire their employees easily. Such policy limits the ability of the companies to find new cheap talents and will force them to invest more in the existing workers.

But such policy is not without any consequences. The fact that there are minimum wages and job protection is good for people who have secured a job. For people who have not secure a job, these so called "protections" will turn out to be problematic for them. Forcing a minimum wage might not be in line with the companies budget and they may compensate such problem by taking less workers. Furthermore, since they cannot easily fire a worker and find a replacement, they have more incentives to ensure that the current worker will stay with them, decreasing the level of taking new labors unless the companies are planning to increase their output by making new investments.

That is why we need a long term policy that will work for the future. There are two ways to affect the price of a product. We can adjust the demand side, or we can adjust the supply side. In terms of supply, it is imperative that we pursue the policy of having an effective birth control. Like it or not, birth control is very important. If we talk about mere products, we can simply put the excess products in the warehouse, but we can't do that with human.

Another thing that can be done is of course to invest more in human capital, increasing the education level of the population with a hope that this policy will reduce the number of cheap labors in the long run. I will not discuss though in this article what would be the best way to increase investment in human capital and how to finance the education costs as I already write the basic ideas here.

From the demand side, we can try to give more incentives to entrepreneurs and capital owners to invest in labor-intensive industries (at least in the short run). This brings us to the idea that the government should invest more in building infrastructure and reduce the costs of doing business in Indonesia. Through this policy, we hope that the level of demand can be increased to absorb the labors up to a level where companies are competing to get talents. As I discussed in the case of corporate lawyers, competition of getting the best talents will be beneficial for labor. But this will not happen if the education level is low and the industries scale is not big enough.

I believe that the most efficient way to improve the labor welfare is through the free market process. Government can surely help us in achieving that goal, but in order to do so, it should use the correct method and policy. Asking companies to pay more without any justification is simply a bad idea. It gives the wrong incentives and we cannot expect that such policy will actually improve the welfare of the society in the long run. Instead, we should pursue a policy that will work well with the Law of Supply and Demand. So the final question is: what will we choose?

The idea of impoverishing corruptors is not a new one. In fact our Anti-Corruption Law allows the state to confiscate the assets of convicted corruptors and requires them to prove that their assets are not the product of corruption in order to get them back. But this idea has been generally accepted with mixed feelings.

Some people believe that seizing the assets of corrupt individuals that were not actually acquired through corruption is a violation of human rights, especially when the state takes those assets for good. For them, the state should only take assets of corruption. I think this is a ridiculous idea, and I will tell you why.

Sanctions are sanctions. Why do we have sanctions? Because we want to impose costs on the criminals, we want to let them fully understand the notion that crime does not pay. Because if crime pays, people will have more incentive to commit crimes.

To achieve that, we must ensure that whatever benefits criminals receive, the state will take it back, and impose additional costs on them, making clear that the costs of criminal activities will always outweigh the benefits.

Furthermore, the lower the probability of getting caught, the higher the sanctions should be. Why? This is to compensate for the fact that some people might not get caught and therefore will suffer no costs for their crimes. Of course, we need to take into account this probability and let people know that if they get caught they will receive a higher punishment.

Having said that, I will argue that a prison sentence is not a cost-efficient type of sanction. The benefits of sending criminals to prison are highly questionable. The costs are very clear. First, taxpayer money is being used to pay for these criminal lives in the prisons. Second, there is no guarantee that prisons will change them into better people (at least in the current conditions in Indonesia). Third, there is always a possibility that richer inmates can bribe prison guards for their own benefit, simply because being a prison guard is not a well-paid job.

People should also understand that sending people to prison is actually a violation of human rights; you restrict the freedom of the criminals. Now if you can agree with prison sanctions, how could you say that taking the assets of criminals is against human rights? That does not make any sense.

I think this is the right time to think carefully about what type of sanctions we should develop in Indonesia and how we can utilize each type of sanction to deal with various types of crimes. Using prison and fines as the main sanctions is no longer enough. After all, all crimes have their own characteristics and underlying incentives.

The incentives that lead people to corruption might be entirely different from the incentives that lead people to, say, murder or rape. Understanding the incentives of these different crimes will help us in designing effective and efficient sanctions.

So let us return to the case of impoverishing corruptors. Money and other types of valuable assets are the bloodline of corruptions. Based on a simple economic analysis, we can say that people engage in corruption because they perceive that the benefits of doing so will be higher than the costs.

Suppose the value of your corruption assets is $20 million. Assuming that the costs of the sanctions multiplied by the probability of being caught is still lower than $20 million, economic analysis dictates that rational bad men will engage in corruption. This means that even getting back the whole $20 million would not be enough!

In addition, the people who argue against impoverishing corruptors say that the state should just recover the stolen assets. Again, this is clearly not enough. For each batch of stolen assets there are various opportunity costs for the government where the government could have invested those assets to generate more revenue. There are also costs for recovering those stolen assets. The law enforcement system is not free.

Thus, it makes sense that the state should not only recover the stolen assets, but also the expected profits and interest that it would have received if those assets could have been used by the government in the first place, plus the whole cost of the criminal proceedings. Meaning that if a corruptor takes $20 million, he must be required to repay a lot more than that.

I do not see any good reason why we should not impoverish corruptors. Sending them to prison without taking their assets would only add a burden to the state budget, and is not efficient or maximizing welfare. It’s time to think like economists when dealing with pricey legal issues.