This Car Needs Polished, Let's Junk It
...or, Typical Austro-Chicago Logic.
This is cross-posted from a discussion at Credit Slips.
Omri Ben-Shahar of the University of Chicago Law School has fired the latest round in the US class wars in a paper alleging that clauses in consumer sales contracts mandating arbitration (usually in a distant jurisdiction) and barring class action suits are good for consumers because litigation costs are actually regressive taxes that are passed along to consumers whether the consumers reap any benefits or not. Looks like more of the Austro-Chicago rubbish that got us into this mess.
1. A firm can't pass litigation costs through if its competitors don't have them. It would put the firm at a competitive disadvantage. Given that, how can litigation costs become a tax, as opposed to an expense incurred by firms that do shoddy work? Are the shoddy firms to be shielded from these expenses to the detriment of not only consumers, but competitors? Further, if it isn't just a firm but an industry that is engaged in bad practice, regulation is warranted, but the Austro-Chicagoans can't have that. So they come up with the oh-so-logical proposal that shoddy firms be allowed to externalize their costs on consumers and competitors, which frankly is par for their course.
2. Markets aren't a unified mass, even for a particular product. They are segmented, and you can't identify market forces and effects if you don't bother to properly map the market you're examining. Ben-Shahar ignores this little nicety. In other words, Ben-Shahar has created a model that doesn't reflect reality terribly well but does deliver the results he wants. Quelle surprise.
3. Contrary to Ben-Shahar's version of reality, arbitration routinely costs more than litigation, especially if proceeding under panel rules and a choice of forum clause. Couple such clauses with a loss of class action rights, and the average consumer has zero access to justice. And if you couple that with nonregulation, shoddy operators have carte blanche.
4. And contrary to the slack Adam Levitin gives him, Ben-Shahar knows full well that this piece will be used as a pseudo-intellectual foundation for anti-consumer legislation similar to how Reinhart and Rogoff were used to justify austerity.
Ben-Shahar has identified, at most, minor problems that need minor corrections. In other words, the car needs polished. But since the car is counter to the Austro-Chicago faux pure market dogma, it must be junked. The Austro-Chicagoans love to preach about "rights," but I'm compelled to quote "The Princess Bride": You keep using that word; I do not think it means what you think it means. Were the Austro-Chicagoans to have their way, rights would be nothing more than what the holders can afford to enforce. Rights would be something only the rich could afford. To paraphrase "Lord of the Rings": The way is shut. It was made by 1%ers, and 1%ers keep it. The way is shut.