Friday, March 25, 2005

A meme that deserves death

Yesterday's Tax Policy Colloquium at NYU featured a paper by Steve Bank of UCLA Law School, entitled A Capital Lock-In Theory of the Corporate Income Tax, available here. Although I like Bank's legal history work, I disagreed with a lot of the analysis in the paper, which attempted to link one of corporate law's main features - the fact that a shareholder cannot demand her proportionate share of firm assets, since distributions are controlled by the Board of Directors - to the imposition of tax at the corporate level. One of my main objections concerned how the paper, following an established law and economics tradition in legal scholarship, seemed to blend descriptive with normative analysis, i.e., why we have the type of corporate tax system we now have with why this type of system might be good. Bank disclaimed meaning to take this view (which is contrary to the anti-presentist historian's code that he well understands), so what follows is a criticism, not of him, but the law and economics tradition that he did appear to invoke at the paper's start, which describes the search for a satisfying "positive theory of the corporate income tax" that would justify it theoretically and explain "why we treat corporations differently than partnerships."
The meme I denounce, with I hope not quite Bobby Fischeresque passion, in the title of this entry is the "positive theory" meme, which purports to explain why a given rule exists in terms of why it is needed and good.
When Blackstone celebrated the English common law, the idea may have been that God, as a noted Anglophile (in the view of the English) had taken care to make it come out just right. (If I am wrong about the basis for Blackstone's belief, then never mind.) But today I think, at least in academic circles that are not theofascistic in the Bush/DeLay tradition, the basis for the "positive theory" meme has more to do with a confusion either about how evolution operates, or about the reason for certain fruits of evolution that we observe whether or not they are being attributed by the observer to evolution.
Suppose we ask why people have a pancreas. A teleological reverse-engineering approach makes perfect sense here. Figure out what it does, and you will know why we have it. And we have it because it does something that benefits us. [Not to deny, of course, the appendix, the apparently dispensable tonsils, etc.] The reason this approach makes perfect sense is that evolutionary pressures operating at the level of natural selection of individuals have created the equivalent of deliberate design, i.e., having something because it helps the individual who has it. And natural selection also operates at the gene level. As Richard Dawkins famously emphasized, genes are a fundamental level at which natural selection occurs, and thus we may observe design of genes that is as if the genes were trying to help themselves in being disseminated.
Evolutionary biologists used to think that natural selection operated at the species level in such a way that traits would exist "for the good of the species." E.g., a monkey might warn other monkeys that snakes were coming from the ground, or hawks from the sky, because it was good for the monkeys to be warned. Now, there certainly is some natural selection at the species level, for example, in the sense that a species that, say, as a result of runaway sexual selection, adopts genetic innovations that happen to be highly favorable to all of the members' survival might do better than one that, through the same process, adopted something with less of these side benefits. But "good of the species" adaptations must face the prisoner's dilemma problem. If I promote the survival of my species at the expense of my own survival (or that of my kin), then natural selection within the species will tend to select against whatever leads me to do this. For example, if the monkeys that issue the warnings get eaten more because they draw the predator's attention, there will be selection against their doing so (assuming genetic causation) unless there is sufficient offsetting benefit to themselves or their genes (e.g., aiding kin who share the gene, or else reciprocal altruism through deals that help both sides and in which shirking can be policed).
Maybe this is just an overly longwinded way of making the obvious point that society will not adopt collective institutions that are good for the society just because they are good for the society, unless the self-perceived interests of the individuals who influence political outcomes are served thereby. One certainly can't posit here natural selection at the societal level that has led only those societies with good corporate tax rules to survive. So to my mind it is a fallacy, akin to positing good-of-the-species adaptations without showing how they are sustainable at the individual and genetic levels, to look for "positive theories" or "justifications" in the standard legal literature sense, based on the premise that, as with the pancreas, once we decide what a given institution is doing (since we know it must be doing something good) we have as well a full explanation of why it exists. (Not to mention as well that these are usually single-bullet explanations, the more counter-intuitive the better, of institutions that have multiple effects both good and bad.)
Legal Panglossians, beware - I am onto you.

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