By James Kwak
Bob Lawless points me to this 2006 blog post by Elizabeth Warren. Warren describes a first-year contracts class on the case that upheld a fine-print forum selection clause (a clause saying that if you want to sue us, you have to sue us in X jurisdiction–Florida, in this case) on the back of a cruise ship ticket.
Warren’s entire class (Harvard, let me say for the record) insists that, as a factual matter, this decision is good for consumers because . . . well, regular readers of this blog should be able to fill in stock Mickey Mouse economistic hand-waving as well as any first-year law school student. Of course! Forcing people to sue in Florida (or to accept binding arbitration in the forum of the company’s choice) deters frivolous lawsuits and lowers costs for the company, and it can pass those savings onto consumers. Why does it pass those savings onto consumers instead of putting them into shareholders’ (or managers’) pockets? Because in a perfect competitive market, if Alpha Cruise Lines doesn’t, then Beta Cruise Lines will, and Beta will underprice Alpha, . . . Consumers will read the fine print and can make an informed choice between the lower price with the forum selection clause and the higher price without the forum selection clause.
Anyway, this is what Warren’s post is about–how people think that logical inferences from unrealistic assumptions somehow produce “facts.” And it isn’t just first-year law students. I’m reminded of Frank Easterbrook of the Seventh Circuit asserting that sophisticated investors ensure that prices are set rationally, protecting unsophisticated investors–on the basis of a single, purely theoretical law review article (those in the legal world will appreciate the italics).
This is, in a nutshell, why the field of economics has been able to do so much damage in just a few decades–at the same time that economic thinking itself has become much richer (think Akerlof, Stiglitz, Kahneman and Tversky, Ariely, Levitt-Wolfers-Ayres-Donohue, Duflo, etc.) and probably better as well.
I’d like to say that Yale is better, but my contracts class had its own Mickey Mouse economics as well–which I felt compelled to respond to here. (Actually, Yale is better–just not along that particular dimension.)