Today, Carolina Journal’s Mitch Kokai discusses our increasingly complex world with University of Chicago law professor, Richard Epstein, author of the book Simple Rules for a Complex World. The interview aired on Carolina Journal Radio. (Go to http://carolinajournal.com/cjradio/ to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: You recently discussed the “simple rules” concept for a North Carolina audience and I was fascinated with the analogy to sports.
Epstein: When you are trying to figure out how you organize interactions in life, one of the easiest things to do is to look at games that succeed because all of these games have to have two components. One of them is rules, and the other is strategy. As a lawyer, I tend to focus more on the rules, and one set of good rules are those rules which essentially reward good strategies. And if you look at all of the games, what you discover is, essentially, they are specialized by very powerful and clear boundary conditions with respect to both space and time. And then they have very good scoring rules, at least if they are done well. And if they are not done well, they do not have good scoring rules and that is itself another story.
For example, if you are starting to talk about basketball, everybody knows where the foul line is, everybody knows where the boundary line is, everybody knows where the half-court line is, everybody knows where the three-point line is. We tend not to think of them as lines, which is the feature that they all have in common. What happens is, we decide to make a very conscious situation in which, if you are on one side of the line, it is this. And if you are on the other side of the line, it is that. We do not care how you got to the side of the line you are on. They only thing that we pay you off on is the performance that matters.
Kokai: And this concept of simple rules can extend to other areas as well?
Epstein: When you try to run systems that are very complicated for large numbers of people — like highways and so forth — we also use lines, and they are also bright lines. That is the way we decide which of the persons who are involved in an accident is at fault. Essentially, the way in which the system has been organized is that if everybody follows the rules, then nobody is ever going to get hurt. But if somebody deviates from the rules and somebody else does not, then in effect what happens is, we know that there is an accident and it is easy to point the finger at the party who is responsible. What happens is, the hard cases arise when everybody messes up simultaneously, and at that point you have to hire me. That is essentially what the world is like with respect to automobile accidents. And if you start going into other kinds of arrangements, sometimes the lines are not there and you have to make them up.
So, if you are going to try to explain to people why it is that intellectual property — which is trying to create boundary lines around inventions and writings — is more difficult than is the law of property associated with land, it is because there is no way to draw a line around an invention which has the clarity of the fence that you put around a piece of real property. So what the Simple Rules for a Complex World in many ways is designed to do, is to point out those kinds of very simple practices that we adopt without reflection, which allow us to organize our physical space, and through that, our social lives.
Kokai: So what about the world of government?
Epstein: When it comes to government and collective decision-makings, lines are not going to work. You are now talking about coalitions of political blocks, and here the objective is somewhat different. You would like to be able to get people who are making their collective decisions have some degree of incentive to get the right things on the scale, and that is much more difficult to do than it is to resolve the dispute once the lines have been drawn on the highway. There we work on different devices, and I think the major feature of American political life is the simple design feature that we have — is we never trust simple majorities to make decisions. That is why we have two houses in the state legislature and in the Congress. That is why we have presidential vetoes. That is why we have Congressional overrides. That is why we have constitutional stuff.
The explanation for all of this is when there are no bright lines and you are worried about faction and intrigue, what you do is, you extend and make more complicated processes so that political process takes the place of the line. It turns out it is extremely difficult to do this well. What you would like to do is to figure out how to get various kinds of rules in place, which limit political discretion without incapacitating government, which is a very difficult task. Now John Locke actually was one of the founders of this, and he himself was always a friend of the proportionate tax, and one reason why Locke was right about this, in my judgment, is that with a flat tax, you have eliminated one degree of government discretion, which is to decide how much various people are going to pay as a function of income. People will say, what is wrong with the progressive tax? The rich do not need the money as much as the poor. It is probably true that they don’t, which is why we would hope they would give more to charity in virtue of the fact of their far greater wealth.
But a flat tax is perfectly uniform. There is only one way in which it could be drawn. The progressive tax could have any degree of slope associated with it. It could be the bottom rank is 15 percent and the top bracket is 17 percent. That makes it a progressive tax not worth having at that level, but if you do not know what the level of progressivity is, and if you are going to have political battles over it, and if you are going to basically tax your most productive individuals at the highest level, what will happen is, you will have two effects you really do not want. One is a lot more political intrigue over the tax brackets, which wastes a lot of money and produces absolutely nothing for it. And also, the unhappy feature that the people who are most able in society receive the least reward for their efforts. Which means that they are likely to switch a little bit of their labor into non-taxable activities or into leisure, which will not work well for the rest of us.
So essentially what you want is a flat tax because you know if you understand how production and exchange works, that if one person becomes prosperous, the only way you can do so is to make somebody else prosperous, i.e., through voluntary exchange. So the secret of a system of bright line rules is essentially one of a relatively neutral tax base, which does not distort you from one activity to another. Try to keep it as low as possible and on top of the sort of social platform of public roads and public enforcement of agreements and so forth, to let voluntary contracts then take over. If you keep looking back and saying, “Well the distribution we get from voluntary exchange is not the one that we like,” that process is so complicated that your effort to sort of redo the distribution of the size and the slices of the pie after the pie has been baked, will make sure that the next pie that comes out of the oven will be smaller than the first one that you had.
Kokai: If simple rules make so much sense, why are so many rules so complicated?
Epstein: What happens is, there is a constant opposition that one sees. Somebody comes up with a very simple rule that seems to work and somebody else tries to come up with a very clever exception that will help him and will hurt everybody else. One of the things that you have to constantly do is to be aware of the fact that special pleading is almost invariably unsound. If somebody walks into the room and starts to say the following market will fail for special reasons, your reaction should always be to disbelieve. If you think of the markets that are said to fail, often they are the ones that work the best.
Kokai: Your book has been out for more than 10 years. Do you think people get the idea of simple rules?
Epstein: If you ask me or any sane person whether or not life is easier and more prosperous now than it was 40 years ago, all I say to do is to pull out your cell phone and ask the question, “What did you have to do in order to make a long distance call 40 years ago?” and you will realize that on balance, we are in better shape than we were in previous days. But, if you ask me to what extent has intelligent government regulation contributed to the improvement of overall life, I think there are a few things like keeping water clean, which may have been done tolerably well, but for the most part, essentially the way in which I would describe human progress is as follows: To what extent can our technological innovations, which is a positive, outstrip our tendency to meddle collectively, which is a negative? I think we have been a little bit ahead of the game. But, if we did a little less meddling and a little bit more producing, we would be that much better off.