by Steven Horwitz

Presumably most readers are now broadly familiar with the recent incident on United flight 3411 from Chicago to Louisville. The short version is that the operator, Republic Airlines which is a United regional carrier, needed four volunteers to give up seats to make room for a crew it needed to transport to Louisville for a morning flight. Flight 3411 was boarding when the crew was assigned the seats, so passengers were seated when the ground crew offered compensation for folks who would leave the plane and take a later flight. When there were not enough volunteers, the gate agents used United’s protocol for involuntary bumping from a flight. One passenger, a doctor, refused to leave when his name was called. Reports indicate he became belligerent and the Chicago Aviation Police were called.
They very forcibly dragged him off the plane, causing significant injuries to his mouth and elsewhere in the process, as passengers filmed the incident. The videos went viral, United’s public relations response was terrible, and everyone on social media instantly became airline experts. Boycotts of United were called for and its stock took a tumble.

I have weighed in on the incident on Facebook myself, and I have my own take on it, but here I’m more interested in exploring a variety of questions this incident raises for classical liberal political economy. How can we use those ideas to understand what happened? What questions and issues does this incident pose that are challenges for those ideas? I will offer some views of my own in what follows, but it’s these questions that interest me most.

Let’s start with some of the economics here. First, why do airlines overbook flights and have to bump people? From the airlines’ perspective, they would like every flight to leave the gate completely full. The marginal costs of adding the last few passengers is very low (just a tiny bit of extra fuel and food and drinks), so the net gain from selling those seats is pretty high. Given that some passengers might have refundable tickets and change their plans, and that others will miss flights due to missed connections or any of a bunch of other reasons, it makes sense for airlines to oversell flights and have “spare” passengers to fill in. The cost to doing so is that if too many people do show up, some folks will have to give up their seats.

The late Julian Simon helped to develop the system for dealing with such situations, which was to offer passengers compensation to give up their seats. This is economics in action, ensuring that those who value the seats the most will get them, while those with “flexible travel plans,” will be compensated for their flexibility. United offered up to $800 plus hotel and meals to passengers on flight 3411 but did not get enough takers.

The response from economists is “well, why stop at $800 then?” If supply curves slope up, raise the price and elicit more volunteers. There are a few answers to this. One of them involves price controls. The Department of Transportation limits the compensation airlines are required to provide to involuntarily bumped passengers to 4 times the fare to a maximum of $1350. It makes no sense for the airlines to offer more than that for voluntary boarding denials because if no one takes $1350 voluntarily, the airline doesn’t have to pay more than that if they have to force someone off the plane.

But, you might respond, given what happened and all the negative publicity for United, wouldn’t it have been worth it to go above the maximum? That maximum is all they are required to provide, but they could provide more. I think the answer here takes us into just the sorts of questions that this case raises.
I’m guessing that the gate agents just assumed that the people involuntarily denied boarding would comply and thus get the required compensation. They could not have anticipated the reaction of the one passenger, nor could they have predicted that security would bloody him and that the videos would go viral. Of course it would have been cheaper in retrospect for United to have offered more than the maximum, but it’s not clear why they would have thought that was a wise thing to do in the situation they found themselves at the moment of choice. Economic choices are always made in the face of uncertainty and are driven by our expectations. What we know after the fact can’t explain why we chose the way we did, knowing what we knew then. The job of the economist is to start our explanations from the perceptions of the choosers. This is the subjectivism and methodological individualism at the heart of sound social science.

Economists might also ask why the doctor didn’t offer to personally compensate someone else for giving up their seat. Suppose he had said “I’ll pay $2000 to anyone who agrees to leave the flight so that I can get home to my patients.” First, it’s not clear that doing so is legal, as the airlines might see that as an illegal resale of a ticket. Second, the transaction costs of enforcing that contract would be high if the doctor didn’t have the $2000 in cash. How would the other party ensure the doctor paid him or her?

These two points nicely illustrate the issues involved in the Coase Theorem. In situations of apparent externalities, such externalities can be eliminated through negotiation and exchange if transactions costs are low and property rights are clearly defined and well-enforced. Those two conditions were not present here, preventing an exchange from solving the problem.

What this aspect of the incident nicely shows is that prices, markets, and exchange can be very effective at diffusing conflict and allocating scarce resources such as airplane seats if they are allowed to work and the institutional conditions (low transaction costs and clear property rights) are sufficiently present. The doctor clearly placed a high value on taking that particular flight and someone else would have been willing to give up a seat at a high enough price. Normally raising the offer induces enough people to give up their seats, but in the face of a maximum compensation requirement and no reason to expect the violence that ensued, the pricing process couldn’t get the job done. Raising or eliminating that maximum compensation requirement would be a sensible policy response to this fiasco.

A second part of this incident of interest to classical liberal political economy is the role of contracts. As noted above, the inability to know if a contract between the doctor and another passenger for direct compensation was either legal or sufficiently low cost to enforce was a problem preventing a better outcome. The other two relevant contracts were the contract between the passengers and United and then the contract between United and the Republic Airlines crew they had to transport.

The latter contract was such that United was obligated find those four crew members seats on that flight even though they claimed the seats after the flight began to board. One can rightly blame United for finding itself in a situation where a crew was so out of place at the last minute, but, given that, it had to accommodate them.

This contract, of course, is also framed by various federal regulations about crew rest. Why couldn’t the crew take a later flight or even drive the 5 hours to Louisville? Most likely because that would not give them enough required rest for their early morning flight. United clearly made a decision to inconvenience four passengers on the flight to Louisville rather than delay or cancel a whole plane full of them the next morning. Again, not expecting a violent outcome, that seemed like a reasonable decision at the time.

This aspect of the flight is also a nice example of Bastiat’s “the seen and the unseen.” Suppose United had decided to leave four passengers on the flight, preventing the crew members from getting seats. We might well applaud United’s surface humanity because we’d see how it valued those customers and wanted to get them to Louisville on time. What we might not see is the canceled flight the next morning, which was the direct, if unseen, result of that decision. All of the people in Louisville inconvenienced by the cancellation would likely not know that United’s “humanity” the night before was the cause. Good social analysis tries to see the unseen and recognize the opportunity cost of choices. Had United flown without the crew for Louisville, the visible gains to four passengers would have been more than outweighed by the unseen losses to far more the next morning.

Firms face difficult decisions like this all of the time, and had United been able to entice enough volunteers, or had the doctor not refused to disembark, this would have been a complete non-story of the sort that happens from time to time in air travel. The regulatory environment made it more difficult for the airline and its passengers to have the flexibility necessary negotiate solutions that could have avoided the conflict and violence that resulted. One might think that the maximum compensation rule or the rest time regulations are good ideas, but even well-intended regulations can have unintended consequences and outcomes like this reflect the often hidden costs of such regulations.

The other contract is the one stipulating United’s obligations to its passengers. There is much debate on social media about what is meant by “boarding” in this context. United claimed that this situation was covered by the clauses in the “Contract of Carriage” that discuss involuntary boarding denials. Others have argued that because the passengers were already on board, this was covered by the “Refusal of Transport” section. If the former is the case, then United acted properly in denying seats to four passengers, including the doctor. If the latter is the case, the argument is that creating seats for crew movement is not listed among the acceptable reasons for refusing transport. If so, then the crew member’s instruction to leave the plane was not a lawful instruction and the doctor’s refusal to obey is not a violation of the obligation to obey crew instructions, or so claim some legal experts.

I’m not going to take a stance on this debate here. The debate does point out the importance of clear and complete contracts for markets to work for mutual benefit. Of course no contract can be totally complete or require no interpretation, and that’s what judges are for. Almost certainly, the doctor will sue and courts will sort out exactly what is meant by “boarding,” among other things. And whatever those decisions are, they will have the salutary effect of creating clearer expectations for both passengers and airline employees that will, one hopes, avoid these sorts of situations in the future – or at least give us guidance about how best to deal with them. Clearer legal expectations can provide room for negotiated solutions, or at least clarity about which party has which rights.

Without the ability to use prices and negotiation to resolve the conflict at the heart of this incident, it is not surprising that force was necessary. Given United’s (reasonable at the time) decision to inconvenience four passengers rather than a whole flight the next morning, four people were going to have to get off of that plane. When there was no other voluntary mechanism for the doctor to keep his seat by buying out another passenger, and when he refused to disembark, United was going to have to use some sort of force to get him to comply with what they thought (perhaps wrongly) were the conditions of his contract to travel.

The problem, of course, was that the Chicago Aviation Police who responded used excessive force in resolving the issue. I have not seen a video that shows what happened before they began to drag the doctor out, but it’s hard to believe that the kind of force they used was necessary and appropriate. And United certainly has no interest in the reputation it has now gained as a company that allows cops to bloody its customers. The cultural reasons why police might feel entitled to use that degree of force are beyond the scope of this post. However, it’s worth noting that once exchange, prices, and negotiations cannot be used, conflicts over scarce resources will involve force, and quite possibly violence.

The lesson here from classical liberal political economy is that clarifying the institutional questions about the nature of the Contract of Carriage, the ability to auction off a seat directly to a customer, and the unintended consequences of various regulations, would help to avoid the need to use force in the future. In other words, the rules of the game matter. Before we blame the players for their possible errors, we need to know if the rules were sufficiently clear to the players and plausibly enforceable. The debate over denied boarding versus refusal to transport as well as the lack of clarity over whether the doctor could have auctioned off his seat reflect uncertainty about the rules that make positive-sum game outcomes that much less likely.

This whole incident raises a question that classical liberals must often confront. Suppose, for the moment, that United acted completely within the law throughout this whole process, including asking the police to remove the passenger. Suppose that the passenger was clearly in the wrong here. At what point, if at all, does a firm’s legal right to take certain actions run into moral or ethical limits on what they should do. In other words, just because the airline could do what it did, should it have done so? To be fair, it could not have predicted the violence used by the police, who clearly had no moral limits on their behavior, making it surely the most outrageous part of this whole incident. However, is there some moral or ethical calculation that United could have engaged in that could have prevented this?

It does seem like all of their other options, up to the point of calling in the police, would have caused more harm to more people than the path they chose. If one’s ethics are broadly utilitarian, it’s not clear what the other options were. If one’s ethics are more deontological, what was the point at which the airline should have behaved differently? One can criticize United’s competence with respect to crew placement, but where was their ethical failure here, if any, and what would the consequences have been of making that more ethical choice? These are questions that political economy can help us answer, but perhaps cannot answer on its own.

Finally, two brief observations. First, stuff happens. There’s no doubt that it took a perfect storm of events to create this whole fiasco: Republic Airlines having crew out of place, a flight that was full, a compensation scheme that didn’t get any takers, a regulatory environment that made alternative solutions unobtainable, a passenger who refused to be passive, and, especially, law enforcement officials who clearly over-reacted with with excessive force. Millions of people fly every year and fewer than 1 out of every 10,000 get involuntarily denied boarding. It took a highly improbably set of circumstances to produce this awful scene, and we should think carefully about whether the best response to “black swans” is a regulatory one. Fixing the rules of the game through the legal system and removing regulations that contributed to the problem would seem better options.

The beating that United has taken on social media and in the stock market is well-deserved. Whatever their degree of complicity in creating the problem, their response to it has been an utter disaster. Firms need to get out in front of these sorts of problems and “run to” them rather than running from them. The public relations response just confirmed the narrative from the video that this is a firm that does not care at all about what happens to its customers. In a world of instant, near-zero cost communication, a firm’s reputation is everything. A better, more empathetic response would have gone a long way in stopping the cascade of negative publicity. Even those of us who like markets and who can understand why United made some of the choices they did as the incident itself unfolded should feel free to join the criticism of the mistakes it did make, both along the way and in the aftermath. Negative feedback is central to the market punishing those who make mistakes.

One thing is for sure: the odyssey of flight 3411 will rank up there with the scalding McDonald’s coffee cup incident as lessons in business behavior that will be studied repeatedly. The McDonald’s case did have the positive effect of leading stores to reduce the temperature of the coffee they sell, which has reduced the number of burned customers. Hopefully, the numerous lawsuits that will surely follow the events of flight 3411 will have a similarly positive effect by clarifying the rules of the game that govern such situations, and thereby enable the positive-sum exchanges and negotiations of the market to substitute for the violence when situations like this arise again.

Steven Horwitz is currently the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY, an Affiliated Senior Scholar at the Mercatus Center in Arlington, VA, and a Senior Fellow at the Fraser Institute of Canada. He is the author of three books, including most recently Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He has written extensively on Hayek and Austrian economics, monetary theory and history, and American economic history. In the Fall of 2017, he will become the Schnatter Distinguished Professor of Free Enterprise at Ball State University in Muncie, Indiana.