Justifying (Some) Coercion
I have just had the pleasure of reading Daniel Klein’s provocative essay that seeks to unpack economics from the tradition of classical legal philosophy. He starts with the fundamental distinction between coercion and voluntary transactions, and investigates the extent to which it can explain the attitude that economists take toward the minimum wage in particular, and the overall question of regulation more generally. In my view, his instincts are sound, but I think that his overall exposition could be more coherent and compelling if he took into account the traditional legal analysis of coercion that has fallen somewhat beside the way.
On the first question, Klein is right to be puzzled with the common response of economists that the minimum wage is not coercive in any significant sense. It is not, I might add, an answer to say, with Liam Murphy, that the question is odd because “the entire set of institutions that support market interaction is coercive; criminal prohibitions on theft, for example, are coercive, as is taxation.” The reason Murphy misfires is that the initial inquiry only concerns what kinds of actions are coercive by individuals in nature. We can easily concede that some sort of state coercion should be used in civil society, which Edward Glaeser rightly stresses in his response to Klein. Ultimately, the question at hand concerns the ends to which coercion may be put, and that inquiry can only come after we have a coherent theory of the uses and limits of state power.
Common contemporary responses to that question indicate a profound shift in how economists, and often philosophers, think about the world. The classical liberal tradition started from the naïve libertarian view that the sole function of government should be to control the operation of force and fraud, and to enforce voluntary agreements. Given this mindset, a concern with the definition of coercion proves central to, for example, the question of whether we can make sense of the Millian proposition that the sole end of the use of public force is the prevention of harm to others. The difficulty with this view is that an analysis of the meaning of the term “coercion” will not settle the question of what forms of legal arrangements are appropriate, for there are, as Klein notes and Murphy and Glaeser echo, a wide range of circumstances in which the use of coercion, either public or private, could be allowed.
The fuller analysis, which requires some retreat from the hard-line libertarian position, identifies the cases of what might be termed “justified coercion.” The unmistakable import of that position is that the use of coercion is something that needs to be justified, usually by some fairly convincing claim. The presumption in favor of liberty of action replaces the sacredness of liberty as the starting point of analysis. The loss of some sense of absolutism carries with it an increased complexity which always proves uneasy to someone like me, who believes in “Simple Rules for a Complex World.” But this sort of complexity has to be accepted to make sense out of a social reality that has never (even at the height of laissez-faire) treated the line between voluntary and coercive action as the one true litmus test for all occasions.
From Liberty to Utility
Modern economists do not start typically from the presumption of liberty. Rather, they are usually self-conscious welfarists who seek to maximize social utility by the use of a variety of policy instruments that include various forms of taxes, regulations, and subsidies. It is the rare economist today who would give some special pride of place to autonomy or liberty. It is not that economists as a group do not care about people. It is that they model people as arguments in a (collective) utility function that should be maximized subject to some constraint. On this view, a preference for markets or freedom might fall out of the equations, but it is not at the center of their intellectual universe. Hence, the methodology of economics has, in my view, led to a gradual separation of the field from its traditional pro-market roots. The technology has taken over the discourse.
With that said, we should ask how the minimum wage question should be approached if we wish to blend the best of the classical liberal approach, which sets the presumption of liberty against state intervention, and the modern economic approach, which starts with social maximization models. Here is one way this could be done.
First, we have to think of what coercion means in the easy case. A first approximation might be that the use of force against another individual always counts as coercion. There is much truth in this proposition, but it is a bit too broad, as there are all sorts of cases where force accidentally causes harm to others. Such conduct might be subject to legal sanctions, typically not in the criminal law, but the actions so sanctioned are not coercive. What marks off coercion is that it involves the threat to use force in order to achieve some conscious end. The most powerful forms of coercion are often those that require no actual use of force because the threat is so powerful that compliance is the norm.
Using this definition of coercion is meant to remove from the picture other kinds of threats that do not involve the use of force, of which the most common is the refusal to deal with individuals who do not do what you want. Many people have insisted that coercion does go this far, so that virtually all market behavior counts as coercive. However, when stretched this thin, the term loses its meaning. The refusal to deal with others in thick markets is what makes competition possible, and this broad definition of coercion does not see any difference between the various devices of persuasion at hand. This position has got to be a nonstarter: for if true, the class of voluntary transactions would be empty. If rejecting an offer is coercive, then negotiation itself becomes a dubious activity.
The intuition behind this notion of coercion does have some bite in other areas, however. The threat of a monopolist not to deal with others is more potent than it would be under conditions of competition – under conditions where alternatives abound. These complications have led to an enormous body of law dealing with common carriers and other “natural” monopolies. But this is not relevant to the minimum wage question as such; most labor markets are intensely competitive, with lots of players on both sides of the employer/employee divide.
The Coercive Nature of the Minimum Wage
The task is now to show why the minimum wage law is coercive, even if we reject the broader definitions of coercion. In the case of the minimum wage, the law governs a relationship between two parties, an employer and an employee, but the sanctions it imposes are directed only to one side of that relationship: the employer’s. It is easy to see why conduct is coercive when the threat of force is directed to only one person to get him to do a particular act. But in the case of the minimum wage, the broad regulation covers all employers, and is ostensibly (don’t believe it!) intended to protect people on the employee side of the relationship. Defenders of the minimum wage could offer three obvious grounds on which to distinguish this regulatory command from the core case of coercion — the threat of force made by one private person to another.
The first of these grounds is that the law is the result of democratic processes, so it does not represent the unbridled preferences of one person.
True enough. But this point is not decisive. If it was, no law supported by the political process could ever be coercive. Democratic support might justify legal coercion, but it hardly establishes that there is none.
The second ground is that the law is general in its impact while ordinary private coercion is directed against one individual or a small number of individuals.
Again, the point is hardly decisive. The broader sweep of the law suggests that it involves coercion against many, not that it involves no coercion. This still leaves open the insistent question of justification, at least within the classical liberal framework.
The third ground is that the use of state force is directed only against one side of the relationship, but since this benefits persons on the other side, it cannot be regarded as coercive.
Again, this cannot be correct. If I threaten A against doing business with B, then I have limited B’s options as well, even if I purport to protect him. Indeed, an old precedent says that if a gun-wielding competitor scares off the pupils of an “antient school,” the schoolmaster can sue for the loss of his customers, even though the gun was not pointed at him. The same rule should surely apply here. One limits the choices of employees by directing force against the employer. The more effective the sanctions against employers, the less willing they will be to extend offers to workers. The law necessarily limits choices on both sides of the relationship. Its actual benefits most likely go to outsiders who face reduced competition from firms hobbled by the minimum wage law.
The Presumption of Liberty Applied
Within the classical liberal framework, therefore, there is no way to escape the conclusion that the minimum wage law is coercive. From that conclusion follows the presumption that it should be repealed. The prohibition of certain contracts limits voluntary actions and hence the gains from trade to both employers and employees. The winners are not the parties to the transaction, but those who face less competition from the regulated firm.
It is quite possible that some firms will see their employment levels rise in consequence of the statute, namely those firms that depend less on minimum wage workers and more on other inputs unaffected by the regulation. But that shift in balance is not to the overall good. The standard economic models show that competition produces net gains to the participants of exchange, and these in turn generate further gains to third persons. Coercion destroys all those gains, such that a party to a potential transaction withdraws because the restriction has raised his costs above his expected gains. In general, coercion yields negative sum games. That troublesome proposition should be the working premise of any social welfarist, even if, sadly, today it is not.
So what is stage two of the argument? Here it can only be said that cases in which we can find external gains that justify the losses are special ones, and that the minimum wage isn’t one of them. We know that the floor on legal wages leads (if there is no strategic behavior) to supplies that consistently outstrip demand, with no way to figure out how to handle the excess. That disequilibrium either eliminates gains from trade or it induces individuals to use various inefficient devices to escape or minimize the law. Administrative costs go up. Selective enforcement is likely in practice. Legitimacy is undermined.
The situation with the minimum wage is not like one in which the limitation on the ability of competitors to cartelize an industry is (or may be) justified by the higher overall levels of output that come with the return to competition. Nor is it justified on the grounds that small people cannot defend themselves in the marketplace, given the wide range of choices that are left open by free entry of other potential employers who will bid up wages if the current set of employers are garnering supracompetitive returns.
When Then Coercion?
Thus far I have applied the classical liberal model to only one case. But clearly in other situations there have to be some justifications for the use of coercion, and the question is how to frame them. Here, look back at the list of necessarily coercive state functions that were identified by Murphy and see how they relate to each other and the minimum wage. The prohibition against theft is the use of state coercion to prevent the private threat of or use of force. To the extent that it reinforces libertarian norms, it is just the kind of rule that every state should put in place. And, notwithstanding the vagaries of modern welfare economics, that is exactly what happens. Murphy next mentions the use of coercion to support market institutions, and notes that this is also coercive. True enough, but coercion here is justified because it expands the envelope for gains from trade through voluntary exchange, especially in sequential exchanges that take place over time, for which legal enforcement is critical. And where exchange does not serve that end — as with contracts to achieve murder or theft — then we outlaw these contracts as a form of conspiracy. We fear conspiracy precisely because it allows two individuals together to wreak more misery than they could alone. But with most contracts for the sale of goods and services, the social externality is positive, which is why they are enforced.
Last, there is taxation, which is a form of coercion: hand over some sum of money or we shall seize your property. And the justification of taxation is surely more nuanced because there is little doubt that it can be used as an instrument of theft, as libertarians are fond of saying. But they typically overstate their categorical case against taxation, because they refuse to look at the benefit side of the equation. At one extreme we should condemn those forms of taxation that allow a despot to enrich his private coffers at the expense of the public at large. At the other extreme, we understand that the prevention of theft and the enforcement of contracts requires social institutions strong enough to stop private coercion, but not so strong as to put illicit state coercion in its place. Therefore, if a tax is designed to provide some public good, and we can say all persons who pay some tax receive a benefit that they value in excess of the amount of the tax, then the arrangement is a form of justified coercion, as long as coordination problems make it impossible to achieve that same favorable distribution of cost and benefits through voluntary means.
This approach can be applied to other arrangements. Klein quotes Walter Block who protests, “Coase, get your cattle off my land!” The clear implication of Block’s position is that the Coasean framework will undermine the system of property rights by introducing a level of relativism into causation so that no one knows who is responsible for what. The system of property has as one of its key components the right to exclude, which the Coasean analysis of reciprocal causation tends to undermine, if not used very carefully. But Klein is right to note that systems of open range have been used, whereby the owner is under a duty to fence out cattle. But he does not ask this follow-up question: does the open range system produce gains to all landowners exceeding the value of the right to exclude and compensating for its loss? Oddly enough, if land is cheap, extensive and arid, and suitable only for a single use, then a system that allows everyone to let cattle roam could well make each landowner better off than before. But once multiple uses become feasible for land of increased value, this system will die, because no one will make investments if he must first get the consent of all. So what we need is an equilibrium analysis which shows when such open-access systems are likely to emerge and survive.
None of this is new. No less a figure than Adam Smith noted that once all the world was a commons for nomads and cattle, until the rise of agriculture made the right to exclude highly valuable to cultivation and long-term use. In a sense, Smith answered a question — the mirror image of Block’s — normally associated with Pierre-Joseph Proudhon, who famously said “property is theft.” Proudhon would ask this question of Block: How dare you make this property, which has always been common, private? And the answer, in all cases, is: because it is to the long-term advantage of all. Understanding property rights, in fine, does not lead us away from understanding utility. It allows us a principled approach to understanding how they operate, why they are needed, and why they incorporate into the analysis a distinction between coercion and voluntariness that the skeptics on the minimum wage law ignore.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Stanford University.