The Ethical Challenges of the Market

October 5-6, 2017 – Ithaca, NY

05 October 2017, 9:30 
Cornell University, NY 
The Ethical Challenges of the Market

 

Cornell Law School – The Edmond J. Safra Center for Ethics, Tel Aviv University

 

October 5th, 2017

 

9:30-10:00   Introduction – Eduardo Peñalver, Allan R. Tessler Dean and Professor of Law, Cornell University

 

10:00- 12:00 Foundations – Chair: Jeff Rachlinski, Cornell Law School

 

 

12:00-13:00 Lunch

 

13:30- 15:30 The Market and the State – Chair: Bradley Wendel, Cornell Law School

 

 

15:30- 16:00 Coffee 

 

16:00- 18:00 Markets and Families – Chair: Cynthia Bowman, Cornell Law School

 

 

 

October 6th, 2017

 

9:30- 12:00  Financial Markets – Chair: Michael Dorf, Cornell Law School

           

  • Just Prices/ Robert Hockett, Cornell Law School & Roy Kreitner, Buchmann Faculty of Law, TAU

 

12:00- 13:30  Lunch & Farwell

 

 

Abstarcts

 

 

The Rationality of Promising

Emily Sherwin

Various theories of the bindingness of promises converge on the proposition that promisors must treat their promises as exclusionary reasons for action, providing not only a first order reason for action but also a second-order reason not to consider a range of contrary reasons for action at the time for performance.  I will argue that, under theories that take a temporally extended theory of practical rationality, treating promises as exclusionary reasons for action may be rational.  The best theories of temporally extended practical rationality, however, conflict with highly plausible requirements of epistemic rationality.  Ultimately, therefore, exclusionary promissory obligations require a sacrifice of epistemic rationality.  

 

 

Against Market Insularity: Markets, Morality and Law

Avihay Dorfman

In this paper, I take stock of three leading attempts to drive a wedge between distinctively market reasoning and practical (or moral) reasoning.  Although these three attempts focus on different normative foundations—the epistemology of market interactions, personal autonomy, and democracy, respectively—they are of a piece insofar as they seek to marginalize the place of private responsibility for realizing the demands of justice in market settings.  Essentially, they seek to insulate, at least to some extent, the market practice of doing well from the demands of doing right.  I argue that they each fail, and that their respective failures motivate the pursuit of a more successful account of the interaction between markets and morality. I then argue that the key to developing this account is law and, in particular, the legal forms of interaction that lie at the center of economic markets.    

 

 

Markets for Self-Authorship

Hanoch Dagan

Markets are said to serve goals such as efficiently allocating resources and entitlements, rewarding desert, inculcating virtues, and spreading power. This Essay focuses on another – arguably the most fundamental – goal: markets can serve our right to self-authorship (or self-determination). The aim of this Essay is to study the market’s autonomy-enhancing telos.

     Markets are potentially conducive to people’s self-determination because alienating resources and entitlements enables geographical, social, familial, professional, and political mobility, which is often a prerequisite of meaningful autonomy. Markets are also important to self-authorship because they facilitate people’s ability to legitimately enlist one another in the pursuit of private goals and purposes – both material and social – thus enhancing our ability to be the authors of our own lives.

     Appreciating these two autonomy-enhancing roles of the market entails important lessons for liberal law, because a liberal polity is expected to found its major institutions on this commitment. Most of these lessons take the form of interpretive recommendations regarding the market’s desirable design as well as instructions as per the background regime it requires. But the status of self-authorship as the ultimate commitment of liberal law suggests that some lessons may go further than that. It implies that at times autonomy may function as a constraint that trumps the market’s other goals when they conflict. 

     Autonomy-enhancing markets must allow universal participation since exclusion and discrimination would undermine their raison d’être. They should also set limits on the power to alienate whenever it erodes our ability to rewrite our life-story and start anew. Such markets should proactively ensure meaningful choices in each major sphere of human action and interaction; but this injunction of intra-sphere multiplicity must be curtailed where cognitive, behavioral, structural, and political economy reasons imply that more choice may actually reduce autonomy. Moreover, when markets are structured to serve autonomy, market relationships are governed by rules that comply with the prescription of reciprocal respect for self-determination, meaning that the baseline of the parties’ interaction abides by the maxim of relational justice. Finally, since utility is understood to be instrumental to the markets’ ultimate value, which is autonomy, the law of the market must avoid the commodification of people and interpersonal relationships. It should thus employ, in some subsets of the settings it governs, techniques of incomplete commodification ensuring that, while entitlements are exchanged, interactions retain a personal aspect.

 

 

Captured by Evil? Markets, Morals and the Rule of Law

Laura Underkuffler

Links between corruption and political instability /regime change have been drawn by many observers.  This has been true even when the ultimate governmental outcome is transition to a democratic system. Typical explanations for this phenomenon are generally structural ones such as the weakening of political and legal institutions, the removal of authoritarian controls, the suspension of resources for corruption-fighting efforts, and others.  This paper will advance a different thesis: that the move to a market economy, which is often a part of such regime change, aggravates the growth of corruption.

   

 

The Right to Destroy and the Duty to Preserve

Gregory S. Alexander

The right to destroy is one of the least discussed twigs in the proverbial bundle of rights constituting ownership. Yet if we take the right in its broader sense, to include not simply the Hohfeldian privilege to destroy but also the privilege to use and its correlative duty to preserve and maintain, the right implicates some of the most contentious and difficult issues in property law and cognate areas today, including historic preservation, the right of artists to alter or even destroy their work, and the right to destroy frozen sperm, embryos and other human tissue. This is reason enough to discuss how the right to destroy fits within a human flourishing theory of ownership.

     Another reason to discuss the right to destroy is the centrality of the right’s role in mapping the terrain of ownership. It defines the outer boundaries of the right to use, marking the point at which the useful life of an asset ends. Its exercise represents a form of asset-euthanasia.

     More immediately related to the topic of this conference, the right to destroy holds an ambiguous relationship to markets. On the one hand, restrictions on the right, often imposed for ex post reasons, may inhibit ex ante incentives to produce new assets that a robust market demands. They frustrate what Schumpeter famously called “creative destruction.” On the other hand, destruction may remove from the market assets that are unique or otherwise irreplaceable, thereby frustrating downstream market demand. Finally, even where market logic supports destruction, there may be strong moral reasons to require that the asset be preserved.

     I will discuss three controversies in which the related questions whether owners have a right to destroy what they own and whether they have obligations to preserve their property. The settings that I will examine, albeit briefly, are historic preservation, artists’ destruction of their own work, and destruction of frozen sperm. My aim is to show how the human-flourishing theory provides an illuminating framework for analyzing what is at stake in disputes over an owner’s asserted right to destroy something that he owns. This framework provides a more satisfying, analytically and morally, means of resolving such disputes than some recent assessments of the right to destroy have allowed.

 

 

State Inc.

Tsilly Dagan and Talia Fisher

Conventional wisdom holds that citizenship is not a consumer good and that the goods that the state confers upon its constituents – e.g., economic and social rights, access to its publicly provided goods, political voice and identity – are not for sale. In fact, the relationships between states and actual or potential citizens is ideally conceptualized as standing in stark contrast to a seller-buyer relationship. The ideal type of state-citizen relationship is based in an entirely political sphere disconnected from the market. In accordance with this ideal conceptualization, the state is depicted as the legal guardian of citizenship entrusted with the authority to determine who its members are and to exercise its powers in a manner that is compatible with the underlying normative values shared by its political members. It has an obligation to reinforce and represent the politically pronounced collective will.  Being a citizen, according to this view, translates into being a member of a political community, participating in its deliberative process and as such bearing rights vis-a-vis the state and being entitled to the benefits it confers.

     This ideal depiction of the relationship between the state and its actual or potential citizens is not fully aligned with current reality of the gradual erosion of various dimensions of state-citizen relationship and the infiltration of market logic into this interaction. States desert their role as trustees of citizenship and assume a market player position, recruiting human capital and investments by putting their real and political assets up for grabs. They engage in the sale and barter of various aspects of membership in their polities, and at times even in the sale or barter of full-fledged citizenship. Individuals as well shop for citizenship, residency, work, and other permits as well as for additional goods that states provide.

     We argue that in order to fully account for this process of market infiltration into the realm of citizenship – both on a descriptive and a normative level – one needs to widen the perspective through which state-citizen interaction is viewed. The ideal depiction noted above fails to take into account the fact that the state-citizen relationship does not stand in a vacuum. Rather, it is situated within a greater order plagued with democratic and political deficits. In this decentralized global order states inevitably participate and function as market players vis-a-vis other states. They compete for capital and human resources by offering their public goods and political participation for sale. This market thus conflates monetary and political currency, and puts a price tag on political membership. At the same time, individuals and corporations compete for state-provided membership, rights, and public goods.

     Competition does not only change the strategic positions of states and citizens in pursuing their goals. It percolates into the interaction between states and their subjects (their current citizenry as well as potential constituents) altering traditional roles of both states and citizens; it changes the kinds and quantities of public goods and entitlements being offered; and it alters modes of democratic participation, schemes of distribution, and the meanings and values underlying the state-citizen interaction. 

     The purpose of this Article is twofold: first, on a descriptive level we wish to uncover existing manifestations of the market infiltration into the state-citizen interaction. We will discuss how globalization reshapes this interaction as well as the strategic goals of both states and citizens. Second, on the normative plane we explore and evaluate the marketization and fragmentation of the state-citizen relationship in light of central normative criteria: efficiency, distributive justice, autonomy, personhood and political participation. 

     Part I will focus on the descriptive dimension and unravel real world practices where state-citizen relationships are being marketized in full or in part. These examples of selling citizenship a-la carte will demonstrate the infiltration of the market into the political sphere and show how market forces shape both the identity of the polity and the formation of the collective will. Against the backdrop of these markets for citizenship induced by state competition, part II will turn to the normative discussion evaluating the desirability of markets for citizenship.

 

 

The Problem With Altrustic Surrogacy Contracts

Sital Kalantry

Those countries that have legislated surrogacy either ban surrogacy, permit surrogacy, or prohibit compensated surrogacy while at the same time permitting uncompensated surrogacy (which is often referred to as “altruistic” surrogacy). I focus on the later types of countries (as well as the states in the U.S. that follow that regulatory model). Most of the legal, feminist, and other scholarship have defined the debate as one between permitting surrogacy and prohibiting surrogacy and have limited their theoretical and moral discussions within that framework. Even feminist authors have largely been uncritical of “altruistic surrogacy” while strongly objecting to compensated surrogacy. While I believe all surrogacy arrangements should be permitted (with different levels of regulations depending on the country they are undertaken in), I focus exclusively on those countries and U.S. states that permit uncompensated surrogacy and prohibit compensated surrogacy to argue why this type of model is problematic from a contract theory, feminist, and practical perspective. 

     Utilizing the key precepts of “choice theory,” I argue that arrangements like surrogacy that enhance choice and autonomy should be permitted.  Using field work research from India and the United States, I also point out the line between regulation and “freedom of contract” must be drawn different depending on the context. While in India, I suggest the state should be more involved in heavily regulating these arrangements, in the United States state governments can allow for more space for private bargaining. From a feminist perspective, I argue that jurisdictions that permit uncompensated surrogacy but prohibit compensated surrogacy reinforce negative stereotypes about de-value women’s labor.  Finally, in practice, I point out that from field research in the U.S. states that even where states prohibit compensated surrogacy but permit uncompensated surrogacy, lawyers have constructed “work arounds” which allow the parties to contract without contracting.

     l discuss three controversies in which the related questions whether owners have a right to destroy what they own and whether they have obligations to preserve their property. The settings that I will examine, albeit briefly, are historic preservation, artists’ destruction of their own work, and destruction of frozen sperm. My aim is to show how the human-flourishing theory provides an illuminating framework for analyzing what is at stake in disputes over an owner’s asserted right to destroy something that he owns. This framework provides a more satisfying, analytically and morally, means of resolving such disputes than some recent assessments of the right to destroy have allowed.

 

 

Questioning Market Aversion in Gender Equality Strategies: Designing Legal Mechanisms For the Promotion of Gender Equality in the Family and the Market

Tsilly Dagan, Hila Shamir, and Ayelet Carmeli

Post-industrial economies are at a crossroads. On the one hand countries are dealing with the crisis of unemployment and underemployment, developing strategies to increase labor market participation of all adults as well as productivity. On the other hand, the same countries are responding to demographic concerns regarding an aging population and decreasing birth rates. These concerns, coupled with a growing demand for gender equality in the labor market, and better work/family balance, lead to the development of tax and welfare policies around child care, as well as workplace restructuring to fit the needs of workers with familial care obligations. A storm of new legislation, regulation and voluntary initiatives attempting to address child care, parental leaves, and the structure of the work day, are sweeping through developed economies, with significant innovation, variation, and experimentation. Feminist policy makers and the scholarly debate around such policies seem to presume that market based mechanisms for the promotion of gender equality are inferior to state based mechanisms, and that generally, those who care about gender equality should be suspicious of turning to the market for solutions. The premise of these arguments is that the market is an institution that tends to replicate rather than ameliorate gender inequality.

     In this paper we seek to question market aversion within the debates around familial care policies for the promotion of gender equality. In particular, we ask whether the theoretical premise of the discussion - the harsh dichotomy between market and state - is plausible at all, and particularly at the current moment in the development of the regulatory state. Using examples from the fields of welfare, tax and employment law from a variety of post-industrial economies, we seek to destabilize the dichotomy and explore the wide array of policy tools on the spectrum between pure market-based policies and strictly state provided benefits. We offer a systemic analysis that exposes the myriad possible legal and institutional configuration available to policy makers.

     Our analysis is grounded in an explicit and multifaceted  discussion  of the normative  considerations that underlie policies  aimed as regulating both the labor market and care work: namely, Distributive Justice (including gender equality);  Efficiency; and  Autonomy  (including  personhood  and  community).  Part I of the article offers an account of each of these normative considerations and explains the complex - positive and negative - effects of both market and state-governed mechanisms on promoting them. Good policy, we argue, should not sweepingly reject market mechanisms nor should it abandon state governed instruments but rather mix and match the advantages of both state and market mechanisms focusing on their potential real-life consequences. We use some examples in order to illustrate the potential for such hybrid mechanisms. We model the complex implications, seemingly technical legal mechanisms entail, and explain the unique mix of normative goals supported by each mechanism.

     In part II, building on the previous part, we offer a framework to analyze and develop policy that promotes gender equality in the family and the market, in the fields of tax, welfare and employment. In order to methodically decipher the different mechanisms available, and to be able  to  match  them with the  normative  goals,  as  well  as  creatively  think  about possible institutional  options, we build on existing literature to offer a typology of policy solutions along four mechanism-design criteria: (1) universal v. selective (2) fixed sum v. income dependent (3) cash transfers v. in kind services (4) which institution provides the service (family, state, market, civil society). (5) effect on the intra-household division of labor.  Each of these criteria reflect tensions between the underlying normative goals, and each represents a distinction between ideal type mechanisms that can, and we argue that should be, broken up and understood as a spectrum of modular tools to be mixed and matched in order to support varying combinations of normative ends. Finally, based on this analysis we use the policy area of child care for children ages 0-5 in four countries – Sweden, U.S., Netherlands and Israel – in order to demonstrate the potential as well as challenges in the construction of such instrument.

 

 

Families and the Ethics of the Globordered Market

Daphna Hacker

In this paper I will focus on the familial ethics of what I term globordered markets, i.e. the markets created by the intense interactions between national borders and globalization. While the familial dimensions of the ethics of the market are recognized ever since Engels pointed at the connection between private property and the patriarchal family, and more recently by the rich discussions over work-family balance, much more is to be explored in this moral domain. In particular, very little attention has been given to impact of the global market and of global human rights discourse on local markets - on families, and at the ethical concerns this impact raises.

     I will use two examples to demonstrate my argument that the discussion over the ethical challenges of the market must include deep empirical understanding and complex normative contemplation over the impact of bordered globalization on families. The two examples are related to the question of securing the basic needs of the millions of children who live in our world at risk of hunger and sever depravation. The first example is the phenomenon, relatively new in its scope and intensity, of parents who leave to another country and send remittances back home. The second example is child labor, common in many parts of the world. While the first is constructed by international law, as well as by scholastic and broader discourses, as ethically unproblematic, the second is conceived and fought against by the international community as pure evil that must be eliminated. By looking at empirical studies of both, through the familial prism, I would like to reverse the judgmental gaze, and suggest that parental remittances are very problematic while child labor should be a tolerated, allowed, and even encouraged, both in developing and developed countries. These examples highlight the centrality of families in the construction and operation of local and global markets, as well as the impact of these markets on families, hence the necessity to take familiarity seriously when contemplating on their ethical dimensions.  

 

 

Just Prices

Robert Hockett & Roy Kreitner

In what sense do market prices represent or convey value? At first glance, such prices might look like the upshot of spontaneous social aggregation without exogenously imposed order: uncoordinated individual trading decisions yield 'price information' that is said both to induce socially efficient productive decisions and to set a framework that facilitates coherent consumer choice. But while trading decisions might well be uncoordinated, the rules  within which trade is conducted are the product of social choice. And when we recognize that these rules of trade affect the terms of trade, we cannot but ask whether the rules, and the prices they partly produce, can underwrite just social arrangements. The shorthand rendition of this question is when are market prices just? In this paper we set to untangle some of the economic and philosophic questions implicated by this loaded question, and to propose a set of considerations that can aid evaluation of the justice (or otherwise) of market prices.

 

 

The Morals of the Financial Marketplace: Risk, Culture and Structure

Saule Omarova

In the aftermath of the global financial crisis of 2008-09, there has been no shortage of scandals involving fraudulent, predatory, and otherwise ethically unacceptable behavior on the part of large U.S. and non-U.S. financial institutions. So-called "reverse redlining" and targeting of racial minorities and other vulnerable segments of population for subprime mortgages, collusive price-fixing in the world's most important interbank lending and trading markets, and fraudulent creation of client accounts by bank employees pressured to generate fees for the bank are only some of the recent examples of such blatantly unethical behavior.

     Not surprisingly, numerous industry regulators and scholars of financial markets have been increasingly vocal in their criticisms of the financial industry's systematic failure to maintain high ethical standards of business conduct. Much of the regulators' and academics' attention in this area is focused on individual financial institutions' apparent inability to foster a strong internal "culture" of pursuing market objectives through ethical means. Accordingly, the potential remedy for this problem is often seen as a matter of improving the firms' culture of risk-taking, so that they develop a genuine commitment to seek private gains without abusing the trust or endangering the well-being of their clients, creditors, and the rest of the society.

     This paper examines recent proposals on how to reshape large financial firms' institutional culture in ways that would encourage more ethical behavior on the part of such firms and their employees. The paper argues that the principal flaw in the current debate is that it tends to ignore the critical role of industry-wide structural factors in shaping individual firms' internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current debate on institutional culture, the paper discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market could also profoundly alter individuals' and firms' normative choices and attitudes. The key to making financeethically sound, therefore, is to make it structurally sound.

 

 

Toward a More Democratic Capitalism: the Universal Fund

Lynn Stout and Sergio Gramitto

Business corporations are legal persons that can aggregate enormous resources, rival nation-states in power, and live in perpetuity. They have been essential to creating railroads, the electric grid, antibiotics, and the internet, and are currently developing self-driving cars and cures for cancer. They provide enormous benefits to humanity, including investment returns, employment opportunities, tax payments, useful goods and services, and transformative innovations. They are capable of serving not only past and present, but also future generations.

     Yet today, business corporations often seem to serve the interests of a few to the exclusion, and sometimes the detriment, of the many. Stock ownership is becoming concentrated in the hands of the ultra-wealthy, contributing to rising wealth and income inequality and allowing powerful individuals to exercise outsized political influence. Demands for greater shareholder returns are driving corporations to neglect and exploit stakeholders like employees, customers, creditors, and communities, reducing employment and social welfare. Limited liability invites them to ignore the external costs of their activities, while a focus on immediate financial results reduces corporate reinvestment and research and development.

     These are not inevitable consequences of the corporate form, but the result of relatively recent changes in the investment sector that keep corporations from realizing their full potential to benefit humanity. Reduced transactions costs and federal tax rules have created massive institutional intermediaries that supposedly serve long-term investors, but hold shares for short periods and seek immediate returns. They have also encouraged diversification that discourages most investors from exercising an active role in corporate governance. Securities Exchange Commission (SEC) regulations have empowered powerful hedge funds that relentlessly push companies for short-term share price increases, driving many firms to “go private” and discouraging others from going public in the first place.  Other SEC rules have created an unaccountable “proxy advisory” industry that shares the hedge funds’ short-term focus. Meanwhile, disclosure and executive compensation rules that emphasize financial results have encouraged firms to ignore external costs and to minimize “expenses” like payroll, tax payments, customer support, pollution abatement, and research and development—“expenses” that generate substantial social benefits.

     We offer a utopian--but feasible--proposal to better align the operations of business corporations with the interests of a broader range of humanity. The heart of the proposal is the creation of a Universal Fund into which individuals, corporations, and state entities could donate shares of public and private corporations. The Universal Fund would then distribute a proportionate interest in the Fund--a Universal Share--to all members of a class of eligible individuals (for example, all citizens over the age of 18), who would then become Universal Shareholders.  Like a typical mutual fund, the Universal Fund would “pass through” to its Shareholders all income on its equity portfolio, including dividends and payments for involuntary share repurchases. Unlike a typical mutual fund, however, the Universal Fund would follow an “acquire and hold” strategy and could not sell or otherwise voluntarily dispose of its portfolio interests.  Similarly, Universal Shareholders could not sell, bequeath, or hypothecate their Shares. Upon the death of a Universal Shareholder, that individual’s Share would revert to the Fund.

     A Universal Fund would temper the political power of the ultra-wealthy and  redistribute income and wealth more equally. It would also allow average investors to play a larger role in corporate governance and in setting corporate priorities. This could be done by requiring the Universal Fund’s managers to vote the shares of companies held in the Universal Portfolio as Universal Shareholders direct, at the Fund’s expense. This would create incentives for new proxy advisory firms to enter the market. These new proxy advisory firms would cater to and aggregate the votes of Universal Shareholders, who would be more long-term, more diversified, and more concerned about the external costs and benefits of corporate activity than short-term institutional investors or undiversified hedge funds.

     The outcome would be a corporate sector that promotes greater income and wealth equality; reinvests and innovates more; is more sensitive to external costs imposed on employees, customers, and taxpayers; is more sustainable and socially responsible; contributes less to political corruption and rent-seeking; and allows average citizens to feel invested in, and supportive of, the capitalist system and the business sector. The Universal Fund would integrate the interests of natural persons and corporate legal persons in a manner far more symbiotic and mutually beneficial than is possible today.

 

 

The Changing politics of Central Banking

Annelise Riles

Government bailouts.  Negative interest rates and markets that do not behave as economic models tell us they should. Bitcoin, cell phone banking, and other new forms of money and payment systems. Public skepticism about the “science” of monetary policy and suspicion that central bankers serve the interests of a few at the expense of the rest. Malaise and unease among central bankers themselves about the limits of their tools and the double binds that define their work.

     These dramatic changes seem to cry out for new ways of understanding the purposes and roles of central banks. Since the financial crisis of 2008, existing intellectual paradigms for understanding the role of the central bank in the economy and the polity no longer seem adequate to address the current challenges facing central banks. The problem is not just that the neoclassical models that dominated prior to 2008 fail to explain the current predicament. The problem is also that existing frameworks are far too narrow to take into account the broader political, social and cultural implications of the work of central bankers on local, national, regional and global scales. The unfinished agenda of the post-2008 reforms, arguably, is an intellectual one: how to understand the place of the state in the market and, in particular the place of the central bank in relationship to politics in all the senses of the term.

     Drawing on examples from three recent cases--Abenomics, Brexit and populist critiques of the Federal Reserve in the US, this project frames an overtly political conversation about what central banks do, as an empirical matter, what they should do, as a normative matter, and what each of our responsibilities for the politics of the economy might be--whether we are academics, policy-makers, or citizen-consumers.

     Uncoordinated, the rules  within which trade is conducted are the product of social choice. And when we recognize that these rules of trade affect the terms of trade, we cannot but ask whether the rules, and the prices they partly produce, can underwrite just social arrangements. The shorthand rendition of this question is when are market prices just? In this paper we set to untangle some of the economic and philosophic questions implicated by this loaded question, and to propose a set of considerations that can aid evaluation of the justice (or otherwise) of market prices.

 

 

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