Marc Roark

Assistant Professor of Law

Marc Roark

Assistant Professor of Law

Marc Roark's Blog

Understanding Intermediaries in Payment Systems — Introducing Liquidity to Law Students

This post was published at Concurring Opinions July 2011

So as I noted a few days ago, one of my annual rites of passage is returning to the University of Missouri each summer to teach Modern Payment Systems.  (Its always interesting to hear different people recall what the course was called when they were in law school — commercial paper, negotiable instruments, Commercial Payments, but I digress). This year, I decided to do something I have not ventured to do — teach the class through an article that I am writing on the role of payment intermediaries in consumer transactions.  (As an aside, I believe the material came across far more dynamic).

Each year, I introduce the course by starting with the central policies of liquidity and certainty as pillars of all payments systems.  Students that have had an economics background know certainty as the legal cornerstone to efficiency — but fewer students understand what liquidity is beyond the pale of converting something to cash; they don’t for example understand that liquidity can mean enabling something with cash-like qualities.  To explain liquidity (one of the central promises of negotiability) I turned the class into a mini-bazaar.  As a condition of staying in the class they must barter something to me in exchange for a cup full of M&M’s.  By exchanging goods, I tell them, we have established economic worth and created new wealth — I know my cup of M&M’s is worth a highlighter, bookmark, Lexis Flash Drive, or Starbucks card as the case may be. But, our economy has a problem — there is no certainty in the transaction.   A cup of M&M’s might be worth a highlighter to one, a flash drive or Starbucks Card to the next person.   The economy is far too personal to be effective as a predictive wealth creation tool.

So I suggest we create some established value — perhaps using M&M’s since everyone has some by now, there are several different types (colors) and people have differing amounts.  After we vote about which colors should have the most value (blue for some reason always wins and brown never wins — we still apparently value beauty over quantity since this year I made sure that every cup had more browns than blues — at least when evaluating has no real consequences), we decide that for convenience sake it would be better to have a central depository to hold our M&M’s and can issue statements of value.  After some prompting, we decide to forgo having to exchange the statements of value for M&M’s, and instead simply exchange the statements as having value in and of themselves — cut out the step of going to our M&M bank to collect our goods for later exchange.

So now, I ask the students in groups to consider the big question we have been building towards — if we are going to say that the paper is just as good as the things the paper represents, what kind of rules should be enforced to ensure that the paper (a) keeps its value; and (b) is accepted in the most places possible?  From this year’s class, here are some of their responses:

  • Establish some guidelines in which people can know the paper is legitimate
  • Have the government back the paper used in transactions
  • Enhance the value of the paper exchanged for goods over paper that is merely cashed in
  • Create co-ops of merchants that promise to the bank that they will  accept the paper regardless of who uses it for exchange
  • Insulate the market against forgeries by adopting standards of acceptance

These responses (amongst others offered) showed the intuitive reasoning that students can offer.   For example, students deduced that paper would only maintain is value if it were easily discerned as legitimate — either through formalizing the medium or through an outside body guaranteeing their performance.  Similarly, the students recognized that the paper could have value that varied according to the risk of the transaction — a principle idea behind discounting notes.  Finally, the students recognized the impact that networks have in payments — an idea that I will flush out more later.

In my next post I will talk about the constructs of liquidity and certainty — namely longevity, efficiency, and confidence.

Understanding intermediaries in Payment Systems — Constructs of Liquidity and Certainty

Posted at Concurring Opinions, July 2011

In my previous post on intermediaries, I talked about introducing liquidity to students and rules enhancing liquidity and certainty. In talking about payment systems we often talk about the policies of creating liquidity and certainty, and then talk about other things, like confidence and efficiency.  One of the troubling things that I think the scholarship surrounding payments systems has not really discussed is the ways in which liquidity and certainty are related to by-products of transactional goals.  I think at times, we talk about the goals of liquidity and certainty, and policies of efficiency, confidence building and (one I’ll add) longevity, without really parsing out how these things come about. What it produces is a bramble bush where we recognize lots of contributing roots, but little discussion of how those roots work together.

One reason that these things create problems is that they clearly live in symbiotic relationships to each other, but it is unclear which is the feeder and which is the fed.   Does liquidity and certainty create systems that are efficient, that create confidence, and that innure longevity into the payments markets.  A model that looks like this perhaps, where these policy constructs are created by systems that innure towards liquid systems with substaintial certainty.

Or perhaps liquidity and certainty are created through efficient, trust-worthy, systems that have the capacity for substantial longevity.  Something like this perhaps.  Some might argue compellingly that this doesn’t really matter — whether liquidity and certainty are byproducts or instigators for further policy constructs matters little except in ivory towers.

I argue that it does matter, at least from the standpoint of understanding how these individual constructs affect consumer and merchant choices to engage in the payments market.  I will offer one example and then save the rest for my last post on this particular project.

Consider the role that credit cards have played in the impacting consumer choices.  In the last several years, as noted by a study conducted by the Philadelphia Federal Reserve [the Visa Payment Panel Study], not only has consumer choice in medium of payment moved towards more plastic mediums, but the type of plastic medium has changed, with merchants moving away from private label cards and towards general use cards with enhanced benefits when the general use card is used with that merchant (i.e., your Shell MasterCard in which you receive .20 rebate on gasoline purchases at Shell).  Why consumers move towards general use cards versus private label cards implicates the policies and constructs described above.  The more the card may be used with multiple merchants (liquidity & certainty) the more the card’s effectiveness is built up by the market-life of the payment and its outgrowths (including accounts which can be leveraged by the bank supporting the card (longevity); consumer convenience in reducing the number of bills they must pay at the end of the month lead to more use (efficiency); and the greater impact of the payment’s reach, the better terms inure themselves to the consumer creating greater confidence in the payment. Moreover, the more the card is used by the consumer, the greater the efficiency and confidence in the medium.

The result is that we may have different policy constructs that reveal themselves as more powerful factors depending on the manner of payment.   So perhaps with credit cards and other networked payment intermediaries, we are in a model in which longevity becomes the instigator producing the policy aims we seek — a model that looks like this, where longevity becomes the catalyst for greater efficiency and confidence which renders the effect of the payment medium being accessible in more places (approaching liquidity) and the certainty that it will be accepted when using the card [though it does not happen often, many of us can recall when a restaurant did not accept one of our preferred payment partners].

How consumers and merchants sort through these questions will be considered next.

Sotomayor, the King’s Two Bodies, Corporations and Property

So the story goes, a Justice, a King and a Property Teacher Walk into a Bar and the Justice says how are we supposed to turn the other cheek on Corporations when they are given all of the privileges of people but all of the immunities of an immortal.” The King turns to the professor and says, “it helps to have two faces.”  (Rim Shot — and if you want to know why the punch line makes sense, read on….).

In the wake of Sonia Sotomayor’s first entre’ into Campaign Finance Reform on the court, she asked what many scholars have asked over time:  Why do corporations get to be treated as people for certain things. Sotomayor said: Judges “created corporations as persons, gave birth to corporations as persons,” she said. “There could be an argument made that that was the court’s error to start with…[imbuing] a creature of state law with human characteristics.”   Of course, the historical precedent is not what Sotomayor is taking issue with, its the correctness of that decision.  Indeed, Abraham Lincoln warned that “Corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the republic is destroyed.”  Clearly, American Corporation law draws its roots in the nineteenth century’s industrial revolution and the transformation of the American economy. And ever since Santa Clara County v. Southern Pacific, American law has recognized that corporations are entitled to assert the bill of rights much like an actual person.  But the concept of the corporation as a person, is far more nuanced and mystical, yea its a Dan Brown novel waiting to be written…

The first scholar to dive into the concept of origins of the Corporation was F.W. Maitland.  In two early twentiethcentury articles titled The Corporation Sole (1900),  The Crown Corporation (1901), Maitland dives into the question of corporations as artificial persons.  Maitland begins Corporation Sole by quoting Edward Coke:

Persons are either natural or artificial. The only natural corporations are either aggregate or sole. Persons are men. The only artificial persons are corporations.

Maitland then goes on to describe the creation of the concept of artificial persons as one directly attributable to property. Specifically, the first English Corporations were in the form of the Parson of the church, who as the “corporation sole” represented the body that held the lands on behalf of the church. In Coke’s day, there were three distinct corporation soles, Ecclesial or parsons, the Chamberlain (or Treasurer) of the City of London, and the King.  Its the King, however, that becomes the most prominent artificial person. Indeed, the King is said in the Case of Dutchy Lane at Sergent’s Inn, (Plowden’s Reports) to possess

a body natural adorned and invested with the estate and dignity royal, and he has not a body natural distinct and divided by itself from the
office and dignity royal, but a body natural and a body politic, together indivisible, and these two bodies are incorporated into one
person and make one body and not divers, that is the body corporate in the body natural et e contra the body natural in the body corporate.

But the body politic and the body natural, though joined in one “corporation” held distinctive natures. As stated in the same report:

His body natural… is a body mortal, subject to all of the infirmities
that come by nature or accident, to the imbecility of infancy or old
age, and to the like defects that happen to the natural bodies of other
people. But his body politic is a body that cannot be seen or handled,
consisting of policy and government and constituted for the direction of
the people and the management of the public weal, and his body is
utterly void of infancy, and old age, and other natural defects and
imbecilities which the body natural is subject to, and for this reason,
what the king does in his body politic cannot be invalidated or
frustrated by any disability in his natural body.

Thus, the concept of the body of the king recognized that in the capacity as King a number of conclusions were appropriate including that he was flawless and that time did not run against him (nullem tempit occurit regis). What’s perhaps the most interesting, is that these fictions begin at the property level. Property represented in the early days of the fiction the point in the material world where the mystical properties of corporations, kings, and governments interceded into normal human activity. It is, as Ernst Kantorowicz analogized, the metaphor of the Eucharist in one political person — the mystical joined with the tangible and therefore made known in an understandable form. In the early days, it was the property or the person that made the corporation a meaningful entity. And thus, the corporation did not speak or exist outside of the tangible form, but rather adopted the tangibility, cleansed it, and made it sacrosanct.

Perhaps that is why Sotomayor has a point. It seems that Sotomayor struggles with the idea of imbuing corporations with eternal qualities at the same time that we offer them human existence and privileges. In large measure this is a function of the intangible entity. Do we really want corporations that are not tied in some tangible way to human existence, whether by the actors that can be held accountable for their actions, or the property that can be taken away and therefore stripping the corporation of its existence in the real world, with the perpetual ability to speak. That seems to be a relevant point in a day in which Corporations so easily vanish without a trace of their existence except the path of destruction they left behind.

And if Dan Brown does write a novel about King’s and corporations, I expect my royalties.

Marc
Image of F.W. Maitland, taken from Wikipedia
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Starbucks Cards, Seating Charts and First Year Property

This post Appeared at Property Prof Blog on October 5, 2009

Thanks Ben for the introduction.  I am teaching Property for the first time this semester, but I feel like i have been here for a while.   I have tried some things this semester that I was not sure if they would work, but have been pleased with their results.  The first day, I took a trick from Thom Lambert (who blogs over at Truth on the Market), and held a swapping bazar of “things I cleared out of my office.”  I traded an old copy of Friedman’s History of American Law for a $10.00 Starbucks card; some various treatises that I had accumulated and which were out of date (only because the publisher had a more recent edition) for another $10.00 Starbucks card; and what turned out to be the most bargained for item of the day, a CD from the early 1990′s titled Pornographiti, which went for (you guessed it) another $10.00 Starbucks card and a Subway Sub Club Card, which was half punched through.  (There is another post somewhere about why so many law students have $10.00 Starbucks cards).

After the bartering was done, I asked the first student on my call list if there was anymore property in the room than when we first started.  Of course, he said no because no one has brought anything else in the room since we began, and I moved on to the next student. The answer, of course, was that there was new property in the room in the form of the value in the transaction we created. The point was getting them to see that property is (1) not just tangible things, but intangible as well (the secured transactions professor coming out in me); and (2) that property carries with it certain economic distinctions.  I also asked them to think about how property could be used to order our classroom environment.  For example, if in having a seating chart, what if I only allowed those that bartered with me to select their seat, but otherwise dictated where everyone should sit. Better yet, I could have allowed the bartering students to determine where individual people sit.  All in all, it was a nice introduction to some basic ordering concepts of property — commodity and propriety we might say.
What happened to the Starbucks cards, you might ask.  Well, since I don’t drink coffee, I really had no problem parting emotionally with them — besides I felt slightly conflicted for taking someone’s valued coffee money for out of date treatises, and a Pornographiti CD.  However, I also felt that in order for the lesson to be truly understood and remembered later on, I could not just return them to the original owner.  So, I used them as a lesson in capture prior to Pierson v. Post.  You should see law students run after Starbucks cards when they learn that they have been deposited (apparently) into the card’s natural environment.  But that’s a tale for another day…

Does the way we transfer money indicate economic turns?

This post appeared on Commercial Law Prof Blog on July 31, 2009

Since 1987, the volume of transactions on FEDWIRE have consistently exceeded the volume of transactions on CHIPS. This is not necessarily unexpected. FEDWIRE handles, according to the Comptroller’s Handbook one-third of its volume as federal funds transactions and one-fourth of its activities as securities transactions. Another significant source of transfers are those between Federal Reserve Banks, which would naturally include certain mortgage funds. Naturally, the volume of these transactions probably should be higher. On the other hand, CHIPS primarily deals with foreign-exchange transactions (nearly 1/2 of the dollar value. Another 1/3 of the dollar value is Eurodollar placements.

See Chart showing Number of Transfers

However, over time, the value of these transactions has changed. Consider that in 1987, the amount transferred on Fedwire was slightly higher than that transferred via Chips.

From 1987 until 1998, the amount of money transferred via Chips exceeded that on Fedwire by a maximum of 28.51% difference in 1994. Beginning in 1995, however, the amount of money transferred on Fedwire began inching closer to that on Chips, and in 1998 exceeded the amount of money transferred on Chips. After 1998, the amount of money transferred on Fedwire has exponentially grown reaching a high in 2008 of a 32.61% differential; the only two years in which the growth pattern was not consistent was 2006 and 2007, and even then, the differentials were the third highest differential (2006) and the seventh highest (2007) of the years between 1988-2008.
As we look at the numbers, I can’t help but notice the date similarities to the current economic crisis. For example, consider the following graph provided by Planet Money on the economic crisis charting debt from 1999-2008:

From 2000 to 2003, government borrowing steadily rose, followed by a short decline through 2008, when it suddenly spiked. During that same period, Business lending acted inversely: declining from 2000 to 2003; rising from 2003 to 2007; and suddenly nose-diving in 2008. In fact, in their post titled Charting Debt, the planet money guys point out that early in 2008, Americans simply stopped borrowing.
In another chart, in their post titled Chart: Inflation, not the flu, we see other similarities:

Between 2004 and 2007, we see a drastic drop in inflation. However, beginning again in 2008 and through 2009, we see a drastic rise.
This is what I am wondering. Can we make conclusions about the future of our economy by the way we transfer money now. That is, are the types of transactions reflected on Fedwire and Chips the types of transactions that give us a barometer of the economy. Moreover, is there a healthy balance of reciprocal relationship between the two — does a substantial amount of transference on one wire service lead to high chances of inflation and higher government spending, with lower consumer activity. A few unknowns in this quest:
1. Are there funds that in certain years appear on Chips that in the last few years have appeared on Fedwire because of the type of transaction. One category of these transactions might be if foreign investment shifted from currency exchange to securities. If so, this might suggest that the way we invest foreign money does matter for the way the economy functions.
2. Are there institutional issues that have resulted in the changes and can we segregate the institutional issues from the non-institutional issues in the rise and drop of value transactions between the two wire services. For example, we know that the institutional controls for lending were significantly more lax between 2000 and 2007. This might explain a high proportion of funds on Fedwire during that period of time.
I am curious for other thoughts — institutional or economic that might show a correlation between the current economy and the future economy.
Marc (MLR)

iPhones, Kindles, Digital Rights Management and the Warranty

This post appeared on Commercial Law Prof Blog on April 23, 2009

So I have been thinking of how to talk about (shamelessly plug) my recent work on Apple’s iPhone warranty. The article argues that Apple might be better off not litigating its intellectual property rights against consumers and instead using their warranties as a bait to convince consumers to act with good behavior to the iPhone (i.e. not hack it and therefore avoid the service arrangement Apple receives comensation through with AT&T). Last week I wrote a column for the Los Angeles Daily Review in which I said that gateway sales were possibly more important to certain vendors of high end consumer products than the thing itself:

In the high-tech consumer arena, device sales often are the gateway to other profits beyond the sale. Apple receives monthly compensation from AT&T for every iPhone that reaches the AT&T network. X-Box, Sony, and Nintendo reap profits from pay-to-play online gamer services like X-Box Live, Nintendo DSi, and Playstation Network, in addition to the stand alone games they sell in stores. Sony Blueray sells DVD Players — but is far more interested in selling consumers DVD’s from the Sony library. And the recent Amazon Kindle is poised to make a significant dent in the book seller market. Post-sale profits have become such a large factor that some manufacturers value those profits more than those made on the device itself. If those post-sale profits don’t materialize, the potential loss for companies like Apple is enourmous — conservatively between $3 million and $18 million per month for iPhones that never reach the AT&T network.

So how do you entice consumers to act better with their products. One means of doing so has been to “brick” the device so that the cnsumer has no more functional use (or desired use from the product). Hackers use the term brick because to them, the device obtains the value of a brick. Microsoft has been successful in “bricking” users from their x-Box Live accounts for invalid use, by banning user accounts for 7992 years (or until 12/31/9999). And Amazon, most recently terminated a user account for “frequent returns” effectively blocking the user from using his Kindle. Amazon ultimately relented, but the warning was served.

The problem with “bricking” is that it is only a temporary solution until consumers (or another third party) catch up technologically to offer a better use. In fact, the reality is that there are consumers that actually do buy the product to have the product. Consumers that have been bricked will eventually grow weary of paying for new accounts, buying new devices or whatever means the manufacturer has used to keep the user out. Then, those bricks will eventually form cities/ communities of disgruntled dwellers that have the technological knowledge and incentive to find alternative uses for their product, particularly in ways that do not benefit the manufacturer.

The solution I have offered, in both the Duke Law and Technology piece and the L.A. Daily Review, is that manufacturers should reevaluate how they approach these consumers. Indeed, Manufacturers may find better profits by approaching consumers on a negotiated terms basis utilizing things like warranties as enticements. By enticing the consumer to be better stewards of the product, they can probably avoid most hackers (except for those that do so for the pure sport of it).

Over the next few weeks I will say more about the longer piece including the Behavioral Economics Aspect of the article and some other commercial solutions for a not entirely commercial problem.

Marc (MLR)

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The Death of the Contracts Course — Maybe that’s a Good thing

This post appeared on Commercial Law Prof Blog on March 18, 2009

The AALS Contracts list-serve two months ago carried a stream of interesting comments around the question whether contracts should be taught in four or six hour blocks of time. These discussions have been brought by the need to inject other things into the first year curriculum, such as skills courses, constitutional law, etc… (which I am all for). However, I want to offer a different proposal than a mere reduction of hours — maybe we shouldn’t teach contracts to first year students at all. Instead perhaps we should teach students in the first semester Article 2 of sales. Here are my reasons, in no particular order of significance. By the way, you can disparage me in person if you are going to the Contracts Panel at SEALS this summer, as this will be the basics of my presentation…

1. Its a Legislative World and I’m a Legislative…. The same argument I consistently hear justifying common law contracts as a First Year Course is that it teaches students how to read cases. First, doesn’t Torts, Property, Criminal Law, and Civil Procedure do equally fine jobs of teaching students how to read cases? Second, and more importantly, where in the first year curriculum are we teaching students how to read statutes and Codes. We are not, and as a result, when students come to take a code based course, they repeat their first year growing pains again by by having to learn how to read and analyze statutes. Sales provides a great opportunity to fill the legislative gap and still …..

2. Introduce Students to the basic principles of contracting. Offer, assent, parole evidence, statute of frauds, battle of the forms (of course) impossibility, remedies… Its all there. The difference is two fold: one, the material is in a more concrete format in the form of a code; and two, the material becomes more understandable because students have a familiar and definite context for understanding specific rules like parole evidence, statute of frauds exceptions and the battle of the forms. As I tell my UCC students, we have all bought candy bars by the time we get to law school and we know the essence of the process –I give you money and you give me a Snickers. We now are putting definite terms to that process.

3. Is Common Law Contracts that relevant anymore? Sure the basic principles of offer, acceptance, etc…. in some form stretch the gambit of contracting. But our legal system has created so many different types of contracts that each vary in nuanced ways from each other. Employment contracts are different from sales contracts which are different than construction contracts, which are different from licenses and so on and so on. The idea that we are teaching general principles that stretch through the curriculum falls apart when students learn that each of these different contracts have their own unique language and terminology that renders the common law of contracts at best a quaint introduction to the sport of creating obligations. Add to that fact that much of contracting gets reduced to form-negotiations and contracting as an art becomes mostly irrelevant. If contracting were taught as an exercise in transacting, I believe it would be far more effective. One of the comments from the contracts list-serve discussion that I really appreciated came from Peter Linzer, in which he said:

At a less abstract, but much more practical level, I have for a long time been advocating a shift from Contracts as a course in busted deals to a course in what real contracts lawyers do, advising clients, helping them to plan, and getting the plan on paper through good drafting. I’m still trying to slip a bit of that into my four-credit course, but I can’t really change much. Some parts of Contracts must be taught from the cases (interpretation, the parol evidence rule, remedies, the click-wrap issues (which, of course, are also part of the transactional part of the process)). But the real task of preparing students to be transactional lawyers needs to be taught differently, and can’t be covered well in a four credit course. I can teach a class of 100 how to draft, but I can’t review their work to raise them beyond the very basics. That has to be covered in a more advanced course. But if we can sensitize students to what contract lawyers really do, and the important role of drafting and planning, we can greatly improve the abysmally low level of quality among most business lawyers, especially those dealing with small businesses. That, however, needs much more time than is available in a four hour course.

I concur.

4. Teaching common law contracts does not necessarily prepare students for the bar exam. First of all, students rarely retain what the parole evidence rule is versus the statute of frauds between the end of their contracts course and the beginning of their second year (or they may just deny any knowledge of those things in class). Moreover, we have pretty well ceded bar preparation to Bar-Bri, Mishmash, or what ever other cram course students are willing to fork out $2500 to cram long-forgotten doctrines in their minds. Have we all of a sudden become less confident in bar-review’s capacity to teach contract doctrine as well? It seems to me that most professors I talk to vehemently deny that they are teaching for the bar (which I do as well). So why would we teach a course on that basis.

5. For that matter, Sales does not prepare students for the bar exam either, but there is a trickle down effect. In the same way that contracts does not necessarily create a long-term knowledge of contracts doctrines, neither will Sales. Though, at least by teaching sales early, we open the door for other UCC courses to be more accessible to students. Students that take Article 9 or Article 3-4, are more likely to be prepared for courses like bankruptcy, debtor and creditor rights, taxation, and corporations. Getting students in the sales curriculum earlier rather than later aids that process.

6. Wouldn’t we all be happier teaching a perspectives-esque upper level course on the theory of contracts. Really isn’t that what we all really want to teach anyway. This to me is the best use of the contracts course and one that often gets pushed aside for lack of hours or because students are not quite ready to understand these nuances. This is the art of preparing lawyers: equipping them with the intellectual tools to make rational decisions regarding how contracting should be undertaken. Forcing students to struggle through Law and Economics views of contracting, moral theory of contracting, etc… before they truly understand the contracting process seems to me to be reversed. Students will learn more and professors will be happier with the result.

The only upside to the contracts course is it might make the classic movie, The Paper Chase irrelevant, though I think I can live with that — I think.

Marc (MLR)

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Good Commercial Faith and the City

This post appeared on Commercial Law Prof Blog March 18, 2009

I want to talk about commercial virtues.

One of the troubling aspects of commercial dealings today is the focus on ethics. Truthfully, I despise the topic (perhaps because I was never very good at the subject in either theological classes or law classes — like professional responsibility for one). But the real reason I despise ethics, my own discordant academic performance in the subject aside, is I think we are often times asking the wrong questions. We assume that by ethics, we mean some form of social responsibility, but more often than not, that responsibility is defined by communities of interest, rather than greater social values. Consider the problem with UCC 1-201 and the definition of good faith. Do we really mean good faith is “honesty in fact” when we combine that with the observation of “reasonable commercial standards of fair dealing”. Which takes precedence — clearly the latter. The secured lender that tells only part of the story to his debtor (your income statement is a mere formality) has not been completely operating with “honesty in fact” though his actions may well fit within the constraint of reasonable commercial standards of fair dealing — after all, fudging your income was hardly the act of just a few bad apples. The subjective element of good faith gives way to the relevant community that defines what good faith means.books.jpg

Deirdre McCloskey in her defense of capitalism, aptly named, the Bourgeois Virtues, makes many debatable claims that Capitalism makes the world better (many of which I will not attempt to defend). But what McCloskey does get is that commerce (and commercial law) urges the continued development of social structures for the betterment of the individual within a community that is itself working to be better. Quoting Rabbi Starks, McCloskey writes:

It is the market — the least overtly spiritual of contexts — that delivers a profoundly spiritual message… The free market is the best means we have yet discovered… for creating a human environment of independence, dignity and creativity.

McCloskey’s message of capitalism as a movement of social ingenuity is at its core the spiritual message of hope we find in some of our best religious literature. The prophet Jeremiah admonished the Israelites in Captivity:

This is what the Lord Almighty, the God of Israel says to all those I carried into exile from Jerusalem to Babylon: ‘Build houses, settle down; plant gardens, eat what they produce, Marry and have sons and daughters; find wives for your sons and give your daughters in marriage so that they too may have sons and daughters. Increase in number there do not decrease. Seek the peace and the prosperity of the city to which I have carried you into exile. Pray to the Lord for it, for if it prospers, you too will prosper

180px-RWEmerson.jpgRalph Waldo Emerson also saw that hope comes from capitalist engagement but only when the mind is able to reflect upon its work. Emerson distinguishes between the Brute Economy, in which labor and strength build vast empires of material longing only (i.e. its good to spend money to relieve us of the pain of 911), with the capitalist economy which employs intellect in an analytical expansion of labor, material and wealth. What Emerson says the Capitalist lacks is the moral and spiritual wisdom of the poet – “who acts upon nature with his entire force — with reason as well as understanding.”

The virtue of McCloskey’s work is that Commerce (and capitalism) share a common goal of enhancing our social order, instilling the hope that we might reshape “the city” into an image that is not of ourselves as we currently stand, but of the selves that we might one day hope to be, both individually and collectively. And that actions should be weighed and measured against both of these standards. Whether we segregate capitalists from capitalist poets, we nonetheless, come to the same conclusion as Emerson and McCloskey — that commerce creates the potential for humans to be good.

Which brings me back to 1-201. Do we really want good faith to be watered down by community constraints or is there a moment for reflection of the aspirational norms that commercial dealings might adhere to? I was much happier when good faith was simply “honesty in fact” without the burden of community differences, whatever that might mean — even if the aspirational view of good faith was nearly impossible to enforce.

Marc (MLR)

Book Review: Divergent Opinions: Why Community Matters — A Review of Sunstein’s Going to Extremes

Appearing at Concurring Opinions on February 4, 2010

Going to Extremes: How Like Minds Unite and Divide, by Cass Sunstein. Oxford University Press: New York 2009. Pp. 171. $21.95

Cass Sunstein argues in his new book Going to Extremes: How Like Minds Unite and Divide that extremism is a phenomenon that is enhanced when people of like minds get together to talk. When we think of people that lie at the extremes of society, our minds are often drawn to reclusive characters. People like John the Baptist living in the wilderness “wearing clothes made of camel hair, eating locusts and wild honey;” (Matt. 3:3-4) or people like Raskolnikov from Fydor Doystoyveski’s Crime and Punishment – a reclusive character who develops a radical and warped sense of morality in response to his perception of society’s values. In reality, people that live on the extremes are rarely alone. They are surrounded by a network of like thinkers who confirm the attitudes, beliefs and interpretations of sensory data that those persons embrace as normal. Extremes are about information. That is, where you get your information from; whether you believe that information to be reliable, and how willing you are to accept information outside of your preferred source.

Going to Extremes is about how, when and why extremes develop in communities. The theme of the book is that “[w]hen people find themselves in groups of like-minded types they are especially likely to move to extremes” (p. 2). Sunstein’s work fits into the genre of human behavioral psychology proposed by James Sidanius and others that views extremists’ cognitive complexity as more complex than moderates. See James Sidanius, Functioning Sociopolitical Ideology Revisted, 6 POLITICAL PSYCHOLOGY 637, 639 (1985). This is in contrast to extremism theory, which largely assumes that political extremists display less-sophisticated cognitive behavior than moderates. About the form of extremism we call terrorism, Sunstein writes at one point,

it is tempting to think that terrorism is a product of extreme poverty, lack of education, or a kind of mental illness. It turns out that all of these thoughts are quite wrong. Most of the time, [terrorists] come from middle-income families. Nor have terrorists lacked education. There is no evidence that they suffer from mental illness…. Alan Krueger argues that terrorism is a form of political protest, and those who lack civil rights and civil liberties not having other means of engaging in protest resort to terrorism. To Krueger’s point, we might add that when civil liberties do not exist citizens have only one prominent source of information – the state – and that source cannot be trusted. (p. 115)

Terrorism then becomes a reaction against information that the extreme positions assume can’t be right. Thus, in Sunstein’s work, the why and how of extremisms (like terrorism) can be associated with how individuals interact in communities – the trust they place in the information received, the confidence they derive from like-minded members, and the authority or submission they respond to as a member of the community.

Sunstein supports his theme with various empirical anecdotes, studies and discussion. Sunstein begins by describing how people and groups gravitate towards extremism by polarizing their positions. (pp. 1-20). Chapter two describes how polarization occurs, considering factors that increase the likelihood of extremities; namely, Sunstein describes the role of assimilation, confidence, rhetorical speech, time, authority, and medium in the facilitation of polarization. (pp. 21-98). Chapter three considers several extremist movements and how those extreme movements have impacted American discourse (pp. 99-125). Chapter four considers how extremism can be prevented by traditionalism (pp. 127-135); systems of checks and balances (pp. 135-140) and the role of deliberative democracy. Sunstein’s final chapter illustrates some good consequences of extremism, namely its propensity for creating dialogue across the political spectrum.

This review makes two points regarding Sunstein’s work. One critique about Sunstein’s work as a whole is that it does not define extremism, but implies that extremism is a relative concept to community and time. Second, Sunstein’s work does a nice job, though scattered at times, of describing how information leads to confidence in communities, largely through anecdotal evidence. I want to focus on just one aspect of information based confidence – the role of technology in making information available and engendering confidence.

First, Sunstein does not offer or propose to offer a definition of extremism. At best, Sunstein implies that extremism is a function of communities. (In Sunstein’s defense, the work is not about defining extremism or how to recognize extremes). Nevertheless, the lack of a definition reduces the conversation to a question of community or political dynamics. I find two distinct problems with this approach. First, without a definitional starting point, the notion of extremism does not account for movements over time. Sunstein implies that extremism can have the effect of moving the middle over time. Sunstein says:

For any nation, second-order diversity may be especially important, certainly in the long run. If many organizations are allowed to exist, and if each of them is made up of like-minded people, the nation will ultimately benefit from the greater range of views and practices that emerge. Inevitably, several of those groups will be extreme, but their very extremism will enrich society’s argument pool and thus promote sensible solutions. (pp. 150-51).

I believe that Sunstein’s point is to say that extremism is a context dependent idea. That is, apart from the community or the time in which the community exists, it is difficult to pinpoint an exact meaning of what it means to be an extremist. If this is in fact Sunstein’s point, I think support can be found in a variety of places.

Second, assuming that Sunstein’s definition is community dependent (which I believe it is), the second definitional problem is how do you define the community in which extremism develops. Or, more problematically, can the community self-select itself. These two definitional problems of boundaries and self-selection are exemplified by looking at two American Jurisprudential Groups of the last thirty years – the Crits and the rise of religiously oriented law schools in the 1990s.

In the 1970’s the Critical Legal Studies movement sat on the left fringe of the American Legal Academy as a result of dissatisfaction with the legal academy’s approach to the law. Yet, the Crits were not necessarily welcomed members of the legal academy. As Neil Duxbury suggests, the Crits sought refuge from the law school culture in annual conferences, meetings and conventions, in which Crit ideology was not only embraced, but exacerbated. Eventually, the once-fringe movement, became an accepted part of the legal academy. Two narratives can be told of the Crit movement. One narrative is that the Crit movement forced the legal academy to move further to the left by its continuation over time, so that as more Crits infiltrated the ranks of the academy, the middle shifted. The second narrative is that the Crits self-selected a move to the middle. In other words, one story of Crit acceptance is that the Crits had to moderate their message in order to be accepted into the broader legal community. The other story is that the academy self-selected the crits as a known fringe part of the broader law school community.

In contrast, the rise of religiously affiliated law schools similarly came out of dissatisfaction with the legal academy. By religiously affiliated law schools, I am referring not to those schools that affiliate with a religious institution, but those institutions that endeavor to teach law from a religious perspective. For example, Regent University, Liberty University, and Ave Maria primarily come to mind. These schools emerged similarly to the Crits – beginning in smaller gatherings and then emerging as whole communities of legal training. Their isolation, though was different from the Crit isolation of the early 1980’s. First, the time was different. The Crits isolated themselves in enclaves for weekends at a time or in smaller less formal meetings when conventions were not possible. Afterwards, they returned to the world in which, no doubt, they themselves became moderated, and the non-crits became Crit-i-fied. The Crits thus found themselves as members of multiple communities – members of the academy during most of the year, and members of a Crit community when the enclave was able to meet (whether there be two or more were joined together). It seems that the opposite may be true for those religiously oriented schools I have named. Most of their time is spent as a member of a particular ideological community, with more limited time spent as a part of a mainstream group (perhaps at conferences and other larger community gatherings of American law schools). At this point, if the definition of extremism is dependent on what constitutes community, whether either of these groups are deemed extremists at any point in time depends largely on perception. Because being an extremist is so tied to community, defining both extremism and community would be useful in understanding what it means to be an extremist. These are questions not addressed by Sunstein’s work.

Second, the best part of Sunstein’s work is the description of information as a catalyst for community movement. Sunstein points out that the “key to extremism in all forms is the exchange of new information. Group polarization often occurs because people are telling one another what they know, and what they know is skewed in a predictable direction.” (p. 21). Sunstein ties extremism to confidence in information; when people are less confident in their information, they tend to moderate their views; however, when multiple trusted sources confirm information, people tend to become more extreme. (p. 23). The rise of the Internet and social networks has aided the ease by which people are able to find communes that instill confidence in one position or another. Importantly, these social online networks are not passive engagements, but rather are types of mediums that require regular investment by the participant. By regularly investing his or her time reading and contributing to the activity, participants become quietly both less moderate and more confident in their extremism. (p. 25)

The internet’s instant access allows people to by-pass what we might term general interest media, and instead focus on specialized media that is directly targeting one particular viewpoint or another. (The same problem could be associated with the rise of cable news directed to individual interests). One problem with this analysis is that it ignores the fact that the general interest media may have been the mainline media simply because there was no other option. Sunstein’s assumption that the general interest media would remain the general interest media in the context of choice may not be right. Nevertheless, his primary point on access is a good one. As people find like-minded people on the internet, communities based on interest as the single unifying principle begin to emerge into a homophilized zone of rhetoric. This is not necessarily out of the ordinary from interactions outside of the internet. People attend churches, mosques and synagogues that they find a theological correlation of beliefs and attitudes. Political parties are largely comprised of people that maintain shared interests in government, whether those interests derive from geographic, moral, financial or constitutional concerns. (p. 83-84) The internet does bring two new forms of interaction to the traditional community. First, individuals can build confidence derived mostly from anonymity. Thus, the internet can effectively allow someone to build a different sense of confidence in a community than they would if that community interacted in person. We saw this effect in December when local community members were shocked to learn a young doctor who wore blue jeans and baseball caps led a double life an Islamic jihadist online; they of course learned this after the doctor carried out a bombing that killed himself and seven CIA agents. The internet for good and for bad allows people to segregate their identities into convenient communes.

Second, the community, in theory, is always meeting online. In the form of forums, blogs and list-serves, people can express their views to the community or read the community’s views anytime that is convenient. Thus, the internet becomes a perpetual community, which may be accessed anytime, and confirm the views that the individual already believes.

Sunstein’s work on extremism is simple and intuitive, but also very thoughtful and artistic in its assessment of extremist behavior. Sustein demonstrates not only the detrimental effects of extremism but also its positives. To wit, Going to Extremes makes a distinctive contribution to the literature of human behavioral economics, and deserves attention by academics, judges and attorneys alike.

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Marc Roark is Assistant Professor of Law, University of La Verne College of Law. He would like to thank Brannon Denning, Daniel Solove, Malana Jones, and Chuck Doskow for reading prior drafts and Allen Easley, John Linarelli, and Diane Uchimiya for thoughtful comments and discussion of this material.