Prohibition did a lot of damage by providing an enduring model of organized crime, but it also undermined Americans’ faith in the rule of law as such: Favoritism in enforcement, bribery, and institutional incapacity severely damaged the law’s prestige. We have never really quite recovered.
Justice Scalia’s Majoritarian Theocracy
In a recent speech to law students at Georgetown, he argued that there is no principled basis for distinguishing child molesters from homosexuals, since both are minorities and, further, that the protection of minorities should be the responsibility of legislatures, not courts. After all, he remarked sarcastically, child abusers are also a “deserving minority,” and added, “nobody loves them.”
.. In a speech at Rhodes College in Memphis, he said that the decision represents the “furthest imaginable extension of the Supreme Court doing whatever it wants,” and that “saying that the Constitution requires that practice” — same-sex marriage — “which is contrary to the religious beliefs of many of our citizens, I don’t know how you can get more extreme than that.” The decision, he said, “had nothing to do with the law.”
The suggestion that the Constitution cannot override the religious beliefs of many American citizens is radical. It would imply, contrary to the provision that forbids religious tests for public office, that religious majorities are special wards of the Constitution. Justice Scalia seems to want to turn the Constitution upside down when it comes to government and religion; his political ideal verges on majoritarian theocracy.
The Cure for Corporate Wrongdoing: Class Actions vs. Individual Prosecutions
But the story is not quite that simple. In most such class action suits, the monies awarded to the victim shareholders are paid not by the executives responsible for the frauds, but by the companies themselves—which means, in effect, by the current shareholders (or, if the company is in bankruptcy, by its secured creditors).
These current shareholders (or other stakeholders) are as blameless for the fraud as the shareholders they are paying. Indeed, in many instances they are classic small shareholders who purchased their shares before the fraud (and are therefore not part of the plaintiff class) and held on to their shares not only throughout the period of the fraud but thereafter. Unlike hedge funds, which are more adept at getting in and out of an investment, these “retail” investors are now punished twice for the fraud they had no role in committing, first by the decline in the value of their shares upon the fraud’s exposure and second by the large payments subsequently made by the company they own to settle the class action.
.. While there were vague precedents going back to medieval times, and more specific US provisions dating from 1842, a real need for class actions was not perceived until the rise of large corporations and mass production. A mass-produced product with a hidden defect, for example, might not be worth the price paid for it, but no reasonable purchaser was about to spend hundreds of dollars in legal fees to recover the few dollars she had been, in effect, overcharged. She had what Coffee terms a “negative value” claim. Yet if the defective product had been sold to several million purchasers, the collective economic injury was considerable.
.. The driving force was that most intractable of all US problems: combating racial prejudice. In particular, the civil rights movement of the 1960s, to the extent that it sought reform by means of judicial rulings, could be effective only if those rulings benefited similarly situated black persons, i.e., the class of those affected by the racism the litigation was intended to correct, such as segregation in schools or exclusion from obtaining mortgages.
.. For example, class actions against employment discrimination appear to have led to a considerable increase in minority hiring and promotion well beyond what would have likely occurred in their absence.
.. It is hard to believe that the settlements in such cases have much of a deterrent effect on the individual executives who actually committed the alleged misconduct. This is why, in my view, class actions are no real substitute for criminal and regulatory prosecution of the individuals actually responsible for corporate misconduct.
.. In Canada, if the plaintiff loses the case, he must pay the defendant’s often considerable legal fees. And in Australia—which has the most robust class action bar outside the US—contingent fees are prohibited, but private companies, though not themselves plaintiffs, are permitted to fund such actions and thereby absorb the risk.
What Was Gary Becker’s Biggest Mistake?
The econometrician Henri Theil once said “models are to be used but not to be believed.” I use the rational actor model for thinking about marginal changes but Gary Becker really believed the model. Once, at a dinner with Becker, I remarked that extreme punishment could lead to so much poverty and hatred that it could create blowback. Becker was having none of it. For every example that I raised of blowback, he responded with a demand for yet more punishment. We got into a heated argument. Jim Buchanan and Bryan Caplan approached from the other end of the table and joined in. It was a memorable evening