Hale’s course, book and research

His course

In the mid-1920s, Hale began experimenting with and developing what may best be termed a legal-economics course for the law school. In 1935, the course - ‘Legal factors in economic society’ - was formally incorporated into the curriculum at Columbia.

His book

The evolution of Hale’s brand of legal economics is most fully spelled out in his classic book entitled Freedom Through Law, which was published in 1952, approximately three years after his retirement from Columbia. As described in the book’s Preface, the text of the book ‘follows a line of thought which I have been pursuing ever since my graduation from the Harvard Law School in 1910’ (Hale, 1952, pp. x-xi). Indeed, much of the book is drawn from the many articles he had previously published and from the Course Materials for Legal Factors (Hale, 1935-47).

His research

In this limited overview of Hale’s research interests, we shall briefly review the three major elements of his research: (i) his paradigm of the economy as a system of mutual coercion/compulsion, (ii) in that context, his idea of ‘pri­vate government’, and (iii) his writings on the regulation of public utilities.

Hale’s paradigm of the economy as a system of mutual coercion/compulsion

In order to appreciate Hale’s theory, one must be familiar with his use of certain terms - in particular, the non-pejorative use of the words ‘coercion’ or ‘compulsion’.⁵ The most important elements of his theory are the following:

1. voluntary freedom, meaning completely autonomous and unconstrained by others with regard to one’s behaviour/choices;

2.

3. coercion, meaning the impact of the behaviour/choices of other(s) (an individual or a group) in limiting one’s freedom - that is, reducing one’s voluntary choice to volitional choice - which also includes the (un)conditional withholding of alternatives;

4. power, meaning the capacity to coerce (which may be concentrated or diffused); and

5. government, meaning those with the capacity to coerce, that is, to impose constraints on behaviour/choice.

For Hale, voluntary freedom connotes ‘the absence of any coercion which keeps you from doing the one [thing] or compels you to do the other’ (Hale, 1923a, p. 475). In this context, the concept of voluntary freedom is not a norm by which real-world restrictions on freedom are to be judged; rather, since real-world restrictions are inevitable, the focus is on volitional freedom, which enables real-world restrictions to be seen and analysed. Clearly, for Hale coercion is the means by which voluntary freedom is transformed into volitional freedom by restricting one’s behaviour/choice. The restrictions upon choice are of two types: complete and conditional.

One class of actions which constitute a restriction on choice includes those actions that unconditionally constrain the range of alternatives: where the individual or group being constrained has no recourse or control against those coercive impacts. The second class is composed of those actions which conditionally constrain the range of alternatives: where the individual or group being constrained has some control by being able to alter the structure of alternative consequences and tradeoffs. That is, the coercive effects of others’ behaviour/choices which are imposed conditionally may be avoided by the affected party by the latter’s agreeing to the conditions imposed (implying withholding or the threat of withholding).

In Hale’s terms, individuals and groups in a society are subject to a com­plex structure of governance, a system in which power or the capacity to exert impact - that is, coercion - exists throughout.

Much of Hale’s writing developed and expanded upon the theme that virtually all legal transactions, including those involving individuals, corpor­ate bodies or the state, constitute and channel compulsion or coercion and thereby reinforce the economic bargaining power of one party vis-a-vis an­other throughout the government and the economy. In Hale’s paradigm, legal and economic processes were viewed as inseparable. He described the economy as a structure of coercive power arrangements and relationships, which necessitated an understanding of the formation and structure of the underly­ing distribution of that economic power. As such, the economy was seen as a system of power operating through a system of coercion, and thus the eco­nomic freedom expressed by the courts of the day was merely freedom to engage in economic coercion. Hale did not view this coercion as something to be condemned, but, rather, as a basic fact of economic life. As such, he argued that if, for example, income is in fact the fruit of coercion, abetted actively or passively by government, it cannot be said that overt coercive redistributions of income by government are inherently wrong (Dorfman, 1969, pp. 162-3).

Following Hohfeld’s perspective on rights, Hale viewed nearly every stat­ute with economic implications as impacting negatively upon someone’s liberty or property. Likewise, following Holmes, Hale believed that the pres­ence of choice within an economy does not necessarily entail the absence of duress.

Private government As noted above, for Hale, the concept of government involved the capacity to coerce; that is, to impose constraints on the behav- iour/choices and thus the volitional freedom of others. Thus government is at once both a private and a public phenomenon. In this context, private govern­ment is the bargaining power that each individual exercises while engaging in the economy as a system of mutual coercion. Government is intrinsically involved in all economic affairs - in the public sphere of course, but no less in the private sphere. Thus Hale writes often of ‘the all-pervading role of privately instituted government in the economic sphere’ (Samuels, 1973, p. 296). To Hale, what makes private government ‘government’ is that it has the same effects on volitional freedom as does ‘public’, or official, govern­ment. In both cases, one’s alternative courses of action are subject to the coercive impacts of others. That is, it is through the holding of private property (and other relevant factors) that we are able to exercise private governing power by setting the terms according to which we will allow someone else to acquire or enjoy that which we currently own and control.

[T]hose who own economic goods exercise a kind of governmental power. Being entitled to restrain their property or part with it as they choose, the owners like petty sovereigns can dictate terms and conditions their neighbors must perform in order to have access to the property. In this sense every lawful economic power becomes a type of political power, and every economic inequality poses a ques­tion of political inequality. Property so viewed is ‘private government’. (Cahn, 1953, p. 14)

For Hale, the so-called ‘authoritarian’ or ‘coercive’ aspects of government (conventionally perceived) are everywhere at work and hence are relevant as much within the private sphere as they are alleged to be within the public sphere, where their presence is often castigated.⁶ Hale stated the matter clearly:

We live... under two governments, ‘economic’ and ‘political’. In many matters of everyday life our liberty is restricted by requirements laid down by those who have superior economic power. These stronger persons are not called rulers, or governors, nor are their dictates known as laws or ordinances, however great the pressure which forces obedience. The sway of economic superiors is not thought to be ‘government’ at all, nor is ‘liberty’ thought to be curtailed by it. (Quoted in Duxbury, 1990, p. 435)

Finally, the positive facet of Hale’s position is simply that volitional free­dom is as much a function of private mutual coercion - private government - as it is a function of governmental coercion - public government. In the normative realm, Hale promoted a rough equality of power, coercion and freedom. He recognizes that private and public governing power may be abused and stifle what some may think essential, merely to gratify the whims of those who exert it.

Public utility regulation Hale wrote extensively on the legal and economic theory of rate-base valuation, as well as on the regulation of rate structure and level, and his writings were instrumental in the adoption by the courts of the ‘prudent investment’ doctrine of valuation for public utilities (Dorfman, 1969, p. 161). His research centred on the ‘fair value fallacy’ in regulatory law as articulated in Smyth v. Ames (169 U.S. 466, 1898), where the Supreme Court held that the regulated rates of a public authority were valid if, and only if, they allowed a public service company to earn ‘a fair rate of return’ on the ‘fair value’ of its property.

The inherent circularity of the court’s reasoning prompted Hale to observe that: ‘We can thus find what rates are reasonable by first acertaining the value of the property, and we can ascertain the value of the property only by first finding what rates are reasonable’ (Hale, 1939a, p. 517). Hale showed that the court, in relying on the state’s power of eminent domain and the Fifth Amend­ment’s just compensation requirement, employed the fair value principle in assessing whether the rates set by public authorities were constitutionally justified. At the same time, the court essentially invoked the state’s police power to allow public authorities to reduce rates in the interests of the consumers - which were heretofore ‘correct’. As observed by Duxbury, this conflating of the two separate powers resulted in the court allowing the state to both ‘constrict the economic initiatives of public utility owners who endeavored to yield as high a profit as feasible from their services’, and, at the same time, ‘to appropriate the private property of those owners in the form of “excess value” accrued from setting exorbitant rates and prices’ (Duxbury, 1990, pp. 426-7).

Having concluded that rates of return cannot be properly calculated inde­pendently of value (since value tends to be the capitalization of returns), Hale argued that regulated rates ought to approximate, as nearly as possible, the original costs. However, he recognized that existing conditions - for exam­ple, the element of risk, the needed incentive to promote efficient service for consumers, and competition from non-regulated industry for investor funds - might require an allowed rate of return in excess of that justified solely under the original cost (Dorfman, 1969, pp. 161-2).