The Contributions of Henry Manne

0:00Welcome to our session on a group of visions of Henry G. Manning. It's a great pleasure to have Henry here to participate in the festivities. Of course, that limits what we can say, but we'll be as direct and blunt as we usually are. The idea behind the session was a couple of things. In some conversations that Henry and I had had in recent months, He had on more than one occasion expressed, kind of, called them latent Austrian tendencies. And I thought, well, it might be a good idea to encourage these. And some of the work that he's done, well, in fact, as you'll see going back to his earliest work, there are strong Austrian themes running through many of his contributions to economics and law. And so, I think I had the idea, I said, well, what if you come to the Austrian Scholars' Conference, we have a discussion of some of your contributions from an Austrian perspective, and you can find out just how Austrian you really are.

0:55So we'll see at the end of the session if you consider that an honor or a curse. We have four distinguished, well, several distinguished panelists. Not myself, but I try to count who better. So we have myself, Alex Padilla, Rich Vedder, Tom DiLorenzo, and then Henry himself. 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. 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. 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.

1:56Very briefly, Henry was educated at Vanderbilt as an undergraduate at University of Chicago Law School, where I understand the Hayek was teaching at Chicago at that time, and I understand you attended some classes or seminars from Hayek, and then later received a doctorate degree from Yale in law. He has taught at a number of academic institutions, St. Louis University, Wisconsin, George Washington, 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.

2:45I 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. 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. So he established an economic institute for law professors in 1971, and then the first law and economics center, originally at the University of Miami in the mid-70s, it was then moved to Emory University in the early 80s, where one of Henry's interviews was a certain Lew Rockwell, he moved the center to George Mason when he went there in 1986.

3:38Also since the mid-70s has been running the Economics Institute for Federal Judges, so these are programs that I think Tom will talk a little bit more about that are involved in training lawyers and judges in economic principles. The way we've organized the sessions, I've asked each of the panelists, each of the four commentators to focus on a specific area of contribution. Contribution. I'll speak a little bit about the theory of the corporation, focusing in particular on Henry's extremely influential work on the market for corporate control. His 1965 article on the internal political economy is still the landmark, still the classic reading on the market for corporate control. I was just looking on Google Scholar yesterday.

4:25I don't think this is right. It has 1,971 sites, but I think that's low. Should be quite a few It's one of the most heavily cited articles in this area. In fact, one of the first papers that I had published was a chapter in the Elgar Companion to Austrian Economics dealing with these same themes. I titled it Mergers in the Market for Corporate Control in Professor Manning's honor. You can see it has slightly fewer citations than the original article. I'll talk a little bit about that and make a few remarks about economics and politics of corporate law and a little bit on regulation. Alex Padilla will make some remarks on insider trading, Rich Vedder will talk about education, higher education, the economic organization of higher ed, and Tom DiLorenzo will focus on Henry's activities as an academic entrepreneur.

5:24So I'll go first and talk a little bit about the corporation. I'm sorry, before I do that, some general characteristics of what you might call the Manny's style, which I think are interesting, whereas most academics, not only in law or economics, but in almost every field, tend to focus on very narrow technical details, partly for reasons of professional advancement, partly because of other institutional pressures, Henry Manning is one of those, like Mises, Rothbard, and so on, with an interest and willingness to tackle really big fundamental issues. In one of his newer papers, called Free Market Model of a Large Corporation System, I think is a good example of this, where he proceeds through the thought experiment, imagine a world in which there was no business or corporate regulation, A world in which there is only common law, provisions against fraud, and so on.

6:25What kind of companies, what kind of organizations would emerge and thrive in a system like that? It's a thought experiment that most scholars in economics and law don't have much interest in. But it's something that's very powerful and important for understanding what we have today and why we have it. 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.

7:13He'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. An insight, these kinds of insights, they often seem obvious once you state them. 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. No one had thought of it or written it down before his early work, and it was much resisted even at that time. Harold Dempsetz has said the following, A few scholars can lay claim to a discovery of the workings of unsuspected economic forces, referring here to the forces in the market for corporate control.

8:07Even fewer scholars have the words by which they identify their discovery become an indelible part of the language of a field of investigation. Manny's market for corporate control is just such a discovery. His work is also, I think, pretty accessible. He avoids hyper-specialized technical jargon that one finds in some legal scholarship and even in financial economics and so on, corporate law, 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. What is the theory of the firm? What is his contribution to our understanding of the firm?

8:53Well, 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, which argued or popularized the importance of this alleged separation between ownership and control. 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. The control was delegated to hired managers who would operate the firm to their own benefit in whatever ways they wished. 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, firms should operate like political entities where their objects, instead of pursuing profit maximization, they should be pursuing broader social goals, Shareholders should be treated like voters in a democracy.

10:01So a lot of the modern literature on so-called stakeholder approaches to corporate governance is really a rehash of these ideas that were very popular from the Depression until the early 1960s. And so one of Henry's contributions in this area was to remind us that the corporation, the firm in general, the corporation in particular, is fundamentally an economic institution, not a political institution. In other words, the behavior of firms is guided, is governed, is constrained in fundamental ways by markets, by the voluntary actions of market participants. For example, managers, managerial positions are open for competition.

10:48So firms hire managers, they fire managers. 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? They make decisions to become owners or non-owners in their choices to acquire or to buy and sell equities in financial markets. 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, 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.

11:34His work on the market for corporate control, most famously articulated in the 65th article, explains how financial markets, how asset markets, equity markets place very strong constraints on the discretionary activities of corporate managers. And he was one of the first to provide an economic rationale for financial market participants that are, you know, 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.

12:30Henry'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. It's also famous for, in this context, for the role of trading by informed insiders, and Alex will tell us more about that. Also did some very important work comparing different organizational forms, the diffusely held public corporation compared to the more closely held privately owned firm. What are some of the Austrian themes in Manny's work on the firm, on the corporation? 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 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.

13:48And many of these market socialists argued that, well, in an advanced industrial economy, firms aren't run by entrepreneurs. They're run by salary managers who don't own the firms that they operate, who don't have big equity stakes. Why would it be any different for the manager of a socialist factory? Why don't you just tell him to arrange things in a certain way to try to equate marginal revenue and marginal cost? Isn't that just what corporate managers do? Why would market socialism of that type be any worse than capitalism under the corporate form? And Mises argues, I think quite persuasively, that this argument, the market socialist argument, completely overlooks the role of financial markets, of capital markets, 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?

14:52Mises says that is a second order problem. That's a minor problem in a market economy. The real problem that is solved under capitalism addresses how did that plant come to be there in the first place? Why is there a firm in this location producing these outputs and not some other outputs? Why does it use this technology and not that technology? Why is it this size and not that size? Why is it here and not there? Why does it exist at all? Those functions, even under these market socialist proposals, would have to be performed by some kind of central planning board that would be unable to use market signals to make these decisions effectively. The changes in the prices of common and preferred stock and of corporate bonds are the means applied by the capitalists for the supreme control of the flow of capital.

15:56The price structure as determined by speculations on the capital and money markets and on the big commodity markets, big commodity exchanges, not only decides how much capital is available for the conduct of each corporation's business, it creates a state of affairs to which the managers must adjust their operations in detail. In other words, it is the actions of these capitalists in financial markets, in capital and Money Markets that create the environment within which managers manage their enterprises. And that critical function cannot be duplicated in a centrally planned economy, according to Mises. He actually remarks that no economy can be considered truly a market economy unless it has a stock market. No matter how many pseudo markets for labor or consumer goods there may be, the real action, according to Mises, is in the financial markets.

16:48The real capitalist actions in the financial markets, not the product market, not the market for labor, and so on. That's a very manny-ish insight. Henry has also written on Hayekian themes, the importance of tacit, dispersed knowledge, particularly where Hayek, as Hayek in use of knowledge in society, for example, characterizes market prices as embodying information about relative scarcities and so on. This notion of market prices as signals, Henry has built this into his understanding of share prices and written on the role of prices of shares of companies as being signals about embodying 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.

17:53It's an explicitly Hayekian theme. Just a few other things, Mises' book on bureaucracy, I think is one of Mises' least appreciated books, has a lot of insight on the political economy of business law and business structure, which themes that you see echo in many of Henry's writings. You reminded me of this, I didn't remember, but even in his 1966 book on insider trading, There's some discussion of the role of insider, of the profits from insider trading as a reward for entrepreneurial action. So before economists, even Austrian economists, began to emphasize entrepreneurship as they did, for example, after Kirzner's highly influential 1973 book on the entrepreneur, Henry was writing about the gains from insider trading being a compensation scheme for entrepreneurial services in large corporations.

18:54Also found interesting a very Hayekian sort of evolutionary account of corporate structure in a 1982 paper that's included in the collected works where Henry says the following, he says the lesson, he's talking about Hayek's law, legislation and liberty, he says the lesson 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. The list of institutions Hayek described, the family, law and language, did not include the corporation, though it might well have. Here's the key Hayekian insight. 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.

19:43Rather, these institutions are the result of innumerable individuals, each with specialized information, acting as best he can to better himself. 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. 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. 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.

20:30Is there more of a distinction between risk and uncertainty than one finds in most of the discussion of insider trading? 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 The corporate hierarchy itself is akin to a kind of central planning. The modern corporation with its central staff and its directives and so on is a very old fashioned, highly bureaucratic structure by nature.

21:24And that Austrian economist would claim that we would expect to see much more decentralized, flatter so to speak, organizations, Small networks of independent producers, things like open-source communities in the software world, maybe worker-owned cooperatives and so on. Those are more consistent with our beliefs about the importance of decentralization and so on. 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. 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.

22:10And 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. And they focus in particular on limited liability, not so much limited liability in the creditor's sense, but limited liability for torts. Playing it well, in a truly free market society, there would be no limited liability for corporate entities. 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. People like Kevin Carson claim that government subsidies of infrastructure and transportation has sort of artificially benefited large organizations that have economies of scale and so on.

23:05That in the absence of subsidies for transportation and infrastructure, the optimal size of the organization would be much smaller than it is under our sort of mixed economy kind of system.