WEBVTT NOTE The Contributions of Henry Manne 1 00:00:00.000 --> 00:00:06.000 Welcome to our session on a group of visions of Henry G. Manning. 2 00:00:06.000 --> 00:00:10.000 It's a great pleasure to have Henry here to participate in the festivities. 3 00:00:10.000 --> 00:00:16.000 Of course, that limits what we can say, but we'll be as direct and blunt as we usually are. 4 00:00:16.000 --> 00:00:20.000 The idea behind the session was a couple of things. 5 00:00:20.000 --> 00:00:24.000 In some conversations that Henry and I had had in recent months, 6 00:00:24.000 --> 00:00:30.000 He had on more than one occasion expressed, kind of, called them latent Austrian tendencies. 7 00:00:30.000 --> 00:00:34.000 And I thought, well, it might be a good idea to encourage these. 8 00:00:34.000 --> 00:00:38.000 And some of the work that he's done, well, in fact, as you'll see going back to his earliest work, 9 00:00:38.000 --> 00:00:43.000 there are strong Austrian themes running through many of his contributions to economics and law. 10 00:00:43.000 --> 00:00:48.000 And so, I think I had the idea, I said, well, what if you come to the Austrian Scholars' Conference, 11 00:00:48.000 --> 00:00:52.000 we have a discussion of some of your contributions from an Austrian perspective, 12 00:00:52.000 --> 00:00:55.000 and you can find out just how Austrian you really are. 13 00:00:55.000 --> 00:01:02.000 So we'll see at the end of the session if you consider that an honor or a curse. 14 00:01:02.000 --> 00:01:07.000 We have four distinguished, well, several distinguished panelists. 15 00:01:07.000 --> 00:01:13.000 Not myself, but I try to count who better. 16 00:01:13.000 --> 00:01:20.000 So we have myself, Alex Padilla, Rich Vedder, Tom DiLorenzo, and then Henry himself. 17 00:01:20.000 --> 00:01:28.500 Another reason for doing this session is that Liberty Fund has just put out a free volume set called The Collected Works of Henry Manning. 18 00:01:28.500 --> 00:01:38.500 I understand we have copies of these in the bookstore downstairs. If you're interested in buying one, I think you can probably arrange to get an autographed copy for the right price. 19 00:01:38.500 --> 00:01:56.500 And in honor of the publication of these volumes, we thought that would be another good reason, it's a good time for us to do sort of an assessment of some of Henry's contributions to economics and to law, and to think about them, think about their relationship to Austrian themes. 20 00:01:56.500 --> 00:02:04.380 Very briefly, Henry was educated at Vanderbilt as an undergraduate at University of Chicago 21 00:02:04.380 --> 00:02:09.380 Law School, where I understand the Hayek was teaching at Chicago at that time, and I understand 22 00:02:09.380 --> 00:02:14.900 you attended some classes or seminars from Hayek, and then later received a doctorate 23 00:02:14.900 --> 00:02:16.900 degree from Yale in law. 24 00:02:16.900 --> 00:02:22.900 He has taught at a number of academic institutions, St. Louis University, Wisconsin, George Washington, 25 00:02:22.900 --> 00:02:45.900 to Rochester, Miami, Emory and then at George Mason Law School where he was the Dean of the law school from 1986 to 1996 and remained as a professor for a few years after that and after spending some happy years in retirement, Florida has decided to start teaching again at Ave Maria Law School in Florida. 26 00:02:45.900 --> 00:02:58.900 I don't know if you can see the slides at the bottom or in the back there, but we'll have some discussion of work that Henry has done, not only in pure scholarship, but also in institution building. 27 00:02:58.900 --> 00:03:12.900 And he was responsible for setting up the first formalized program, programs in the economic analysis of law, both research programs and also teaching training programs as well. 28 00:03:12.900 --> 00:03:20.000 So he established an economic institute for law professors in 1971, and then the first 29 00:03:20.000 --> 00:03:25.300 law and economics center, originally at the University of Miami in the mid-70s, it was 30 00:03:25.300 --> 00:03:31.460 then moved to Emory University in the early 80s, where one of Henry's interviews was a 31 00:03:31.460 --> 00:03:38.580 certain Lew Rockwell, he moved the center to George Mason when he went there in 1986. 32 00:03:38.580 --> 00:03:43.580 Also since the mid-70s has been running the Economics Institute for Federal Judges, so 33 00:03:43.580 --> 00:03:48.580 these are programs that I think Tom will talk a little bit more about that are involved in 34 00:03:48.580 --> 00:03:55.580 training lawyers and judges in economic principles. 35 00:03:55.580 --> 00:03:59.580 The way we've organized the sessions, I've asked each of the panelists, each of the four 36 00:03:59.580 --> 00:04:04.580 commentators to focus on a specific area of contribution. 37 00:04:04.580 --> 00:04:08.260 Contribution. I'll speak a little bit about the theory of the corporation, focusing in 38 00:04:08.260 --> 00:04:13.540 particular on Henry's extremely influential work on the market for corporate control. 39 00:04:13.540 --> 00:04:20.180 His 1965 article on the internal political economy is still the landmark, still the classic 40 00:04:20.180 --> 00:04:25.380 reading on the market for corporate control. I was just looking on Google Scholar yesterday. 41 00:04:25.380 --> 00:04:32.820 I don't think this is right. It has 1,971 sites, but I think that's low. Should be quite a few 42 00:04:32.820 --> 00:04:42.260 It's one of the most heavily cited articles in this area. 43 00:04:42.260 --> 00:04:48.420 In fact, one of the first papers that I had published was a chapter in the Elgar Companion 44 00:04:48.420 --> 00:04:51.060 to Austrian Economics dealing with these same themes. 45 00:04:51.060 --> 00:04:55.700 I titled it Mergers in the Market for Corporate Control in Professor Manning's honor. 46 00:04:55.700 --> 00:05:00.580 You can see it has slightly fewer citations than the original article. 47 00:05:00.580 --> 00:05:06.340 I'll talk a little bit about that and make a few remarks about economics and politics 48 00:05:06.340 --> 00:05:09.240 of corporate law and a little bit on regulation. 49 00:05:09.240 --> 00:05:16.700 Alex Padilla will make some remarks on insider trading, Rich Vedder will talk about education, 50 00:05:16.700 --> 00:05:21.540 higher education, the economic organization of higher ed, and Tom DiLorenzo will focus 51 00:05:21.540 --> 00:05:24.980 on Henry's activities as an academic entrepreneur. 52 00:05:24.980 --> 00:05:27.980 So I'll go first and talk a little bit about the corporation. 53 00:05:27.980 --> 00:05:37.980 I'm sorry, before I do that, some general characteristics of what you might call the Manny's style, which I think are interesting, 54 00:05:37.980 --> 00:05:48.980 whereas most academics, not only in law or economics, but in almost every field, tend to focus on very narrow technical details, 55 00:05:48.980 --> 00:05:53.980 partly for reasons of professional advancement, partly because of other institutional pressures, 56 00:05:53.980 --> 00:06:03.980 Henry Manning is one of those, like Mises, Rothbard, and so on, with an interest and willingness to tackle really big fundamental issues. 57 00:06:03.980 --> 00:06:08.980 In one of his newer papers, called Free Market Model of a Large Corporation System, 58 00:06:08.980 --> 00:06:13.980 I think is a good example of this, where he proceeds through the thought experiment, 59 00:06:13.980 --> 00:06:19.980 imagine a world in which there was no business or corporate regulation, 60 00:06:19.980 --> 00:06:25.980 A world in which there is only common law, provisions against fraud, and so on. 61 00:06:25.980 --> 00:06:33.980 What kind of companies, what kind of organizations would emerge and thrive in a system like that? 62 00:06:33.980 --> 00:06:38.980 It's a thought experiment that most scholars in economics and law don't have much interest in. 63 00:06:38.980 --> 00:06:43.980 But it's something that's very powerful and important for understanding what we have today and why we have it. 64 00:06:43.980 --> 00:07:13.980 He's always had strong interdisciplinary interests as one of the founders of the field of law and economics, that much is obvious, but in his programs, in his writings, excuse me, and also his academic programs to teach lawyers and judges how to think like economists, but also to get economists thinking about the role of the law, corporate law in particular, he has always worked on the boundaries of the disciplines of economics and law in ways that are very important. 65 00:07:13.980 --> 00:07:31.980 He's an original thinker, and many of his insights have a character, much like for example Mises' insight on the impossibility of economic calculation or rational economic planning under socialism, when all factors of production are commonly owned by the state. 66 00:07:31.980 --> 00:07:36.980 An insight, these kinds of insights, they often seem obvious once you state them. 67 00:07:36.980 --> 00:07:48.980 So Henry's insight that the market for ownership and control of companies places limits on the behavior of corporate managers seems obvious, almost trivial in retrospect, but it was great. 68 00:07:48.980 --> 00:07:56.980 No one had thought of it or written it down before his early work, and it was much resisted even at that time. 69 00:07:56.980 --> 00:07:59.980 Harold Dempsetz has said the following, 70 00:07:59.980 --> 00:08:04.980 A few scholars can lay claim to a discovery of the workings of unsuspected economic forces, 71 00:08:04.980 --> 00:08:07.980 referring here to the forces in the market for corporate control. 72 00:08:07.980 --> 00:08:15.980 Even fewer scholars have the words by which they identify their discovery become an indelible part of the language of a field of investigation. 73 00:08:15.980 --> 00:08:20.980 Manny's market for corporate control is just such a discovery. 74 00:08:20.980 --> 00:08:24.980 His work is also, I think, pretty accessible. 75 00:08:24.980 --> 00:08:36.980 He avoids hyper-specialized technical jargon that one finds in some legal scholarship and even in financial economics and so on, corporate law, 76 00:08:36.980 --> 00:08:45.980 and has always written not only for a scholarly audience, but has been interested in communicating to the general public as well. I think that's very important. 77 00:08:45.980 --> 00:08:53.980 What is the theory of the firm? What is his contribution to our understanding of the firm? 78 00:08:53.980 --> 00:09:09.980 Well, it's important to remember that in the late 50s and early 60s, when Henry began writing on these topics, the dominant view of the corporation was the one that came out of Burley and Means' famous book from the 1930s called The Modern Corporation and Property, 79 00:09:09.980 --> 00:09:17.820 which argued or popularized the importance of this alleged separation between ownership and control. 80 00:09:17.820 --> 00:09:26.300 The idea that owners of a corporation of small, dispersed shareholders were not in a position to exercise control over the assets that they owned. 81 00:09:26.300 --> 00:09:33.340 The control was delegated to hired managers who would operate the firm to their own benefit in whatever ways they wished. 82 00:09:33.340 --> 00:09:47.340 Burleigh, in particular, thought that the corporation should be viewed as a kind of political entity, that because shareholders were unable to exercise a tad much authority over managers, 83 00:09:47.340 --> 00:09:58.340 firms should operate like political entities where their objects, instead of pursuing profit maximization, they should be pursuing broader social goals, 84 00:09:58.340 --> 00:10:01.880 Shareholders should be treated like voters in a democracy. 85 00:10:01.880 --> 00:10:04.740 So a lot of the modern literature on so-called stakeholder 86 00:10:04.740 --> 00:10:08.020 approaches to corporate governance is really a rehash 87 00:10:08.020 --> 00:10:11.540 of these ideas that were very popular from the Depression 88 00:10:11.540 --> 00:10:14.260 until the early 1960s. 89 00:10:14.260 --> 00:10:18.140 And so one of Henry's contributions in this area 90 00:10:18.140 --> 00:10:20.500 was to remind us that the corporation, 91 00:10:20.500 --> 00:10:22.820 the firm in general, the corporation in particular, 92 00:10:22.820 --> 00:10:25.500 is fundamentally an economic institution, 93 00:10:25.500 --> 00:10:28.500 not a political institution. 94 00:10:28.500 --> 00:10:32.380 In other words, the behavior of firms is guided, is governed, 95 00:10:32.380 --> 00:10:36.340 is constrained in fundamental ways by markets, 96 00:10:36.340 --> 00:10:39.220 by the voluntary actions of market participants. 97 00:10:39.220 --> 00:10:46.900 For example, managers, managerial positions 98 00:10:46.900 --> 00:10:48.460 are open for competition. 99 00:10:48.460 --> 00:10:52.060 So firms hire managers, they fire managers. 100 00:10:52.060 --> 00:11:03.060 Shareholders are not, unlike citizens who are born into a particular nation, shareholders don't just wake up one day and find that they're owners of IBM, right? 101 00:11:03.060 --> 00:11:12.060 They make decisions to become owners or non-owners in their choices to acquire or to buy and sell equities in financial markets. 102 00:11:12.060 --> 00:11:22.020 Many shareholders choose not to exercise all of their governance and control rights, because it's in their interest to delegate some of these rights to others, 103 00:11:22.020 --> 00:11:34.020 Small shareholders can free-ride, so to speak, on the decisions of better-informed large blockholders and so on, and that this is in the interest of small shareholders. 104 00:11:34.020 --> 00:11:42.020 His work on the market for corporate control, most famously articulated in the 65th article, 105 00:11:42.020 --> 00:11:54.020 explains how financial markets, how asset markets, equity markets place very strong constraints on the discretionary activities of corporate managers. 106 00:11:54.020 --> 00:12:02.020 And he was one of the first to provide an economic rationale for financial market participants that are, you know, 107 00:12:02.020 --> 00:12:30.020 and so on, figures like this even in the 1950s were widely reviled as sort of rapacious, greedy people who were harming the widows and orphans and firing the workers and so on. 108 00:12:30.020 --> 00:12:40.020 Henry's work on the role that these market participants play shows that they do have a very important and sort of social welfare enhancing purpose. 109 00:12:40.020 --> 00:12:48.020 It's also famous for, in this context, for the role of trading by informed insiders, and Alex will tell us more about that. 110 00:12:48.020 --> 00:13:01.020 Also did some very important work comparing different organizational forms, the diffusely held public corporation compared to the more closely held privately owned firm. 111 00:13:01.020 --> 00:13:09.020 What are some of the Austrian themes in Manny's work on the firm, on the corporation? 112 00:13:09.020 --> 00:13:39.020 Well, I've always placed emphasis on a quote from Mises in Human Action where Mises is discussing socialism and this is the part where he's addressing some of the critics of his original arguments published in the 1920s in the 1920 article in the 1922 book about the impossibility of rational resource allocation under socialism and the market socialist had proposed a number of means of addressing this problem trying to come up 113 00:13:39.020 --> 00:13:48.020 What sort of fake markets or pseudo markets for some factors, for consumer goods and so on to try to simulate the workings of a market economy. 114 00:13:48.020 --> 00:13:56.020 And many of these market socialists argued that, well, in an advanced industrial economy, firms aren't run by entrepreneurs. 115 00:13:56.020 --> 00:14:02.020 They're run by salary managers who don't own the firms that they operate, who don't have big equity stakes. 116 00:14:02.020 --> 00:14:07.020 Why would it be any different for the manager of a socialist factory? 117 00:14:07.020 --> 00:14:12.020 Why don't you just tell him to arrange things in a certain way to try to equate marginal revenue and marginal cost? 118 00:14:12.020 --> 00:14:14.020 Isn't that just what corporate managers do? 119 00:14:14.020 --> 00:14:20.020 Why would market socialism of that type be any worse than capitalism under the corporate form? 120 00:14:20.020 --> 00:14:27.020 And Mises argues, I think quite persuasively, that this argument, the market socialist argument, 121 00:14:27.020 --> 00:14:32.020 completely overlooks the role of financial markets, of capital markets, 122 00:14:32.020 --> 00:14:52.020 In other words, Mises argues that, given that we have a plant or a factory set up and it has a certain amount of capital allocated to it, how do you get the manager to direct the employees so that they can produce the right amount of output? 123 00:14:52.020 --> 00:14:58.020 Mises says that is a second order problem. That's a minor problem in a market economy. 124 00:14:58.020 --> 00:15:04.020 The real problem that is solved under capitalism addresses how did that plant come to be there in the first place? 125 00:15:04.020 --> 00:15:09.020 Why is there a firm in this location producing these outputs and not some other outputs? 126 00:15:09.020 --> 00:15:12.020 Why does it use this technology and not that technology? 127 00:15:12.020 --> 00:15:14.020 Why is it this size and not that size? 128 00:15:14.020 --> 00:15:17.020 Why is it here and not there? Why does it exist at all? 129 00:15:17.020 --> 00:15:24.020 Those functions, even under these market socialist proposals, would have to be performed by some kind of central planning board 130 00:15:24.020 --> 00:15:27.020 that would be unable to use market signals to make these decisions effectively. 131 00:15:27.020 --> 00:15:51.380 The changes in the prices of common and preferred stock and of corporate bonds are the means 132 00:15:51.380 --> 00:15:56.500 applied by the capitalists for the supreme control of the flow of capital. 133 00:15:56.500 --> 00:16:00.740 The price structure as determined by speculations on the capital and money markets and on the 134 00:16:00.740 --> 00:16:06.260 big commodity markets, big commodity exchanges, not only decides how much capital is available 135 00:16:06.260 --> 00:16:11.060 for the conduct of each corporation's business, it creates a state of affairs to which the 136 00:16:11.060 --> 00:16:15.780 managers must adjust their operations in detail. 137 00:16:15.780 --> 00:16:20.900 In other words, it is the actions of these capitalists in financial markets, in capital 138 00:16:20.900 --> 00:16:27.500 and Money Markets that create the environment within which managers manage their enterprises. 139 00:16:27.500 --> 00:16:32.700 And that critical function cannot be duplicated in a centrally planned economy, according 140 00:16:32.700 --> 00:16:33.700 to Mises. 141 00:16:33.700 --> 00:16:38.820 He actually remarks that no economy can be considered truly a market economy unless it 142 00:16:38.820 --> 00:16:39.820 has a stock market. 143 00:16:39.820 --> 00:16:45.700 No matter how many pseudo markets for labor or consumer goods there may be, the real action, 144 00:16:45.700 --> 00:16:48.260 according to Mises, is in the financial markets. 145 00:16:48.260 --> 00:16:54.260 The real capitalist actions in the financial markets, not the product market, not the market for labor, and so on. 146 00:16:54.260 --> 00:16:59.260 That's a very manny-ish insight. 147 00:16:59.260 --> 00:17:07.260 Henry has also written on Hayekian themes, the importance of tacit, dispersed knowledge, 148 00:17:07.260 --> 00:17:12.260 particularly where Hayek, as Hayek in use of knowledge in society, for example, 149 00:17:12.260 --> 00:17:18.820 characterizes market prices as embodying information about relative scarcities and so on. 150 00:17:18.820 --> 00:17:27.620 This notion of market prices as signals, Henry has built this into his understanding of share prices 151 00:17:27.620 --> 00:17:35.300 and written on the role of prices of shares of companies as being signals about embodying 152 00:17:35.300 --> 00:17:53.300 So, financial market participants who are evaluating various corporate activities need not know all of the tacit knowledge inside a particular enterprise to the extent that that is encapsulated in the prices of the equities. 153 00:17:53.300 --> 00:17:56.300 It's an explicitly Hayekian theme. 154 00:17:56.300 --> 00:18:03.300 Just a few other things, Mises' book on bureaucracy, I think is one of Mises' least appreciated books, 155 00:18:03.300 --> 00:18:09.300 has a lot of insight on the political economy of business law and business structure, 156 00:18:09.300 --> 00:18:15.300 which themes that you see echo in many of Henry's writings. 157 00:18:15.300 --> 00:18:22.300 You reminded me of this, I didn't remember, but even in his 1966 book on insider trading, 158 00:18:22.300 --> 00:18:31.940 There's some discussion of the role of insider, of the profits from insider trading as a reward for entrepreneurial action. 159 00:18:31.940 --> 00:18:38.860 So before economists, even Austrian economists, began to emphasize entrepreneurship as they did, for example, 160 00:18:38.860 --> 00:18:43.460 after Kirzner's highly influential 1973 book on the entrepreneur, 161 00:18:43.460 --> 00:18:51.180 Henry was writing about the gains from insider trading being a compensation scheme for entrepreneurial 162 00:18:51.180 --> 00:18:54.460 services in large corporations. 163 00:18:54.460 --> 00:19:00.660 Also found interesting a very Hayekian sort of evolutionary account of corporate structure 164 00:19:00.660 --> 00:19:06.580 in a 1982 paper that's included in the collected works where Henry says the following, he says 165 00:19:06.580 --> 00:19:10.820 the lesson, he's talking about Hayek's law, legislation and liberty, he says the lesson 166 00:19:10.820 --> 00:19:20.820 The most important lesson from Hayek's account is that we should always proceed very cautiously before meddling with complex institutions that represent the outcome of long periods of evolution. 167 00:19:20.820 --> 00:19:28.820 The list of institutions Hayek described, the family, law and language, did not include the corporation, though it might well have. 168 00:19:28.820 --> 00:19:31.820 Here's the key Hayekian insight. 169 00:19:31.820 --> 00:19:43.820 There is rationality in these institutions, but it is not the rationality of invention or positive planning by identifiable individuals in order to design the corporate system in a top-down fashion. 170 00:19:43.820 --> 00:19:52.820 Rather, these institutions are the result of innumerable individuals, each with specialized information, acting as best he can to better himself. 171 00:19:52.820 --> 00:20:06.820 So this is a very sort of Hayekian notion of spontaneous order, so the nature of the corporation, the form of the corporation, meaning the outcome of the kind of spontaneous order processes about which Hayek wrote. 172 00:20:06.820 --> 00:20:17.820 Our speakers will not only summarize the work, but also maybe push it in some new directions and maybe offer some critiques from an Austrian perspective. 173 00:20:17.820 --> 00:20:30.820 Just a few things that I suspect, though I haven't seen much of this in print, but some things that Austrians, and maybe some libertarians or classical liberals, questions or challenges they might have in some of Henry's writing. 174 00:20:30.820 --> 00:20:37.820 Is there more of a distinction between risk and uncertainty than one finds in most of the discussion of insider trading? 175 00:20:37.820 --> 00:21:07.820 training. Mises in particular seemed to place a lot of emphasis on, though he didn't use exactly this terminology, on what Frank Knight describes as judgment, judgmental decision making by entrepreneurs. It's different from sort of rational utility maximization under conditions of probabilistic risk. Maybe a little bit more attention to the distinction between risk and uncertainty might be useful here. There are some Austrian writers on organizations who have taken a very strong line that 176 00:21:07.820 --> 00:21:12.820 The corporate hierarchy itself is akin to a kind of central planning. 177 00:21:12.820 --> 00:21:24.820 The modern corporation with its central staff and its directives and so on is a very old fashioned, highly bureaucratic structure by nature. 178 00:21:24.820 --> 00:21:34.820 And that Austrian economist would claim that we would expect to see much more decentralized, flatter so to speak, organizations, 179 00:21:34.820 --> 00:21:45.320 Small networks of independent producers, things like open-source communities in the software world, maybe worker-owned cooperatives and so on. 180 00:21:45.320 --> 00:21:50.820 Those are more consistent with our beliefs about the importance of decentralization and so on. 181 00:21:50.820 --> 00:21:59.820 I happen not to share that with you. I think that view is misguided, but I think you see it quite often in the Austrian community and that might be something that you want to make a remark about. 182 00:21:59.820 --> 00:22:10.820 I guess I'm taking more time than I wanted. I'll close with some critiques that have been offered within some libertarian circles about the legal status of the corporation. 183 00:22:10.820 --> 00:22:27.820 And it is commonly argued by libertarians that the sort of enabling of statutes, that the idea of the corporation as a legal fiction, as a legal person, is in fact a kind of a grant of state privilege. 184 00:22:27.820 --> 00:22:35.820 And they focus in particular on limited liability, not so much limited liability in the creditor's sense, but limited liability for torts. 185 00:22:35.820 --> 00:22:41.820 Playing it well, in a truly free market society, there would be no limited liability for corporate entities. 186 00:22:41.820 --> 00:22:51.820 And that the reason the corporation is the dominant form of organization today is because it enjoys a host of special privileges, such as legal personhood status, limited liability. 187 00:22:51.820 --> 00:22:58.540 People like Kevin Carson claim that government subsidies of infrastructure and transportation 188 00:22:58.540 --> 00:23:05.460 has sort of artificially benefited large organizations that have economies of scale and so on. 189 00:23:05.460 --> 00:23:11.420 That in the absence of subsidies for transportation and infrastructure, the optimal size of the 190 00:23:11.420 --> 00:23:16.740 organization would be much smaller than it is under our sort of mixed economy kind of system.