Aaron Director was one of the founders of law and economics: the application of economic reasoning to understand the effects of law and, in some cases, to recommend particular laws. He wrote very little but his influence was immense.
Director was best friends with George Stigler, brother of Rose Director Friedman, and brother-in-law of Milton Friedman.
I interviewed him in the late 1990s and Milton Friedman showed some of that interview at Aaron’s memorial service at the Hoover Institution.
If I were asked to characterize Director’s views, I would say that he was someone who cared a lot about freedom and thought that freedom for everyone would particularly benefit taxpayers and consumers. That doesn’t mean he was right, although I think he was. But I think that’s what animated him.
But that’s not what Matt Stoller thinks. On the blog of the Stigler Center last week, the center named after Aaron Director’s best friend, Matt Stoller writes what can be reasonably be described as a hatchet job on Director, not just going after his ideas but also going after Director’s motivations. The post is titled “How Powerful Ideas Can Shape Society: Aaron Director and the Triumph of Nihilism.” Here are some quotes from Stoller about Director and about economics with my comments afterward.
Director’s life was dedicated to setting free the power of concentrated capital, eliminating the power of labor, and undoing the New Deal. His success is so profound it is hard to describe, so embedded are we today in the world and rhetoric Director shaped.
Actually, Director was a strong believer in competition, which, Stoller might not know, tends to undercut the power of concentrated capital. It is true, I think, that Director wanted to eliminate “the power of labor” to the extent that that was monopoly power granted to labor unions by federal law. One example: when workers in a workplace organize into a union, all of the workers (not management), whether they’re members or not, are part of the collective bargaining agreement; they can’t bargain for themselves.
Banks were strictly controlled, with the largest banks in New York City prohibited from even opening branches outside of the five boroughs.
In context, Stoller is saying this is good because he thinks big corporations are bad. He probably would be surprised to know that the restrictions on branch banking were part of the reason that the Great Depression was “great.” That fact is familiar to economic historians who study the Great Depression, but not, apparently, to Stoller.
Director made his final turn in 1950. Simons and Hayek both saw corporate monopolies as dangerous, perhaps even more dangerous than big government or labor unions. And Director was a great admirer of Simons, whose Positive Program for Laissez Faire was as antimonopoly as it was anti-big government. But Simons killed himself in 1946. And the extreme right-wing funder of the project, Harold Luhnow of the Volker Fund (who later dallied with fascists in the 1960s), essentially threatened to fire Director if he didn’t jettison his allegiance to Simons’s anti-corporatist ideas.
Director suddenly decided that conservative ideas were compatible with corporatism after all. Monopolies, apparently, were always created by government. At this moment, Director broke with the conservative tradition and birthed neoliberalism, the anti-government, pro-monopoly philosophy that now dominates policymaking globally. Director convinced George Stigler and Milton Friedman of the new creed. Both had opposed corporate monopolies, but flipped to support Director’s new movement. The Chicago School was born.
Get it? Director didn’t come to his free-market views because he thought they made sense. Oh, no. He “suddenly” came to them because, hints Stoller Harold Luhnow threatened to fire Director if he didn’t. Oh, and those two friends, George Stigler and Milton Friedman? They “flipped.” And apparently their “flipping” had little to do with looking at arguments and evidence.
And “the anti-government, pro-monopoly philosophy” dominates policymaking globally. Trump’s tariffs, to take a recent example, are admittedly pro-monopoly, but they’re hardly anti-government. A lot of pro-monopoly policies are pro-government. Think of the almost total government monopoly of K-12 schooling, for example.
Throughout this ideological journey, Director remained a Mencken-ite above all, a man who believed that some were fit to rule, and others to be ruled. He didn’t characterize it this way, instead using the term ‘economist’ to mean those fit to speak the language of power. But that was his framework, and in many ways, it is still the framework by which antitrust insiders think about who gets to have opinions in dialogue about political economy.
The idea that some were fit to rule and others to be ruled fits Franklin D. Roosevelt more than it fits Director. Director was not a full-fledged libertarian but he did believe in a fair amount of freedom for everyone. The ultimate in freedom is that no one is ruled.
To his credit, Stoller does raise some concerns about one of Director’s most important accomplishments: getting the young John S. McGee to go through the transcripts of the famous Standard Oil case to see if it was indeed true that Rockefeller engaged in predatory pricing. McGee found that it wasn’t, but Stoller cites a long law review article by Chris Leslie that raises some doubts about this.
Here are Stoller’s last two paragraphs:
Director’s impact is undeniable. I started out researching Director’s role in the rise of law and economics with a belief that there was a good faith attempt to wrestle with flaws in what perhaps was an overwrought New Deal structure. But what I realized, after seeing how he constructed a brilliant and intellectually dishonest political movement to attack the ability of democratic institutions to touch economic questions, is that Director modeled himself after Mencken. He was a nihilist and an elitist, and so was his movement.
Today’s America, where lifespans are declining, where giants like Google and Amazon stride across the land unchallenged, where big banks crush the economy and bring forth men like Donald Trump to lead, is Director’s legacy. It is a legacy of nihilism and hopelessness. I admire his stunning ability to build political power and transform society. But truthfully, I could never really understand why he sought to use them towards such wretched ends.
I don’t know that it’s true that Stoller “could never understand” why Director used his ability the way he did. I bet he could understand. But what’s clear is that he doesn’t. To understand, Stoller would have to understand better what Director’s ends were. They were not wretched.
READER COMMENTS
William Anderson
Sep 22 2019 at 8:52pm
If there is anything nihilistic about this article, it is the fact that modern historians (Distorians?) and journalists feel free to create things out of whole cloth, tell outright falsehoods, and yet be honored as truth-telling prophets. From Nancy MacLean to Joe Stiglitz, these are discouraging times.
Jon Murphy
Sep 22 2019 at 9:35pm
Interesting comment on McGee. McGee’s paper is a favorite of mine and I assign it and teach it in my law & econ course. I’ll need to go through the other paper to see what his objections are
Mark Brady
Sep 23 2019 at 6:28pm
Chris Leslie’s critique of John S. McGee’s research is but one paper in an issue of the Southern California Law Review almost entirely devoted to papers presented at the 100 Years of Standard Oil Antitrust Symposium. See vol 85, no. 3 (March 2012). This is all new to me, so I can’t recommend any particular paper, but it does sound as if the proceedings are worth a look.
Kevin Erdmann
Sep 22 2019 at 11:41pm
The first sentence of the subtitle is sort of ironic. “The rise of giants like Amazon and Facebook proves the long-lasting influence of Director’s approach.”
Two firms who, between them, don’t have more than 30 years of history as public corporations, but they have risen past the previous generation of firms to the heights of the American economy.
Mark Z
Sep 23 2019 at 12:28am
It seems Stoller has decided to follow in the footsteps of Nancy MacLean. Writing – let’s say, to be as charitable as possible, ‘questionably researched’ – intellectual ‘histories’ of (usually libertarian) intellectuals one despises instead of trying to rebut their arguments seems like it’s becoming a troubling trend these days.
The last sentence is a real gem though. As though tech companies and banks are driving down the life expectancy? Are they the one selling fentanyl to people? And the steadily growing economy with the unemployment rate at its lowest point in decades, crushing? I admit, I don’t envy Stoller: of all the times and places in history to have to paint as some dystopian hellscape to sell his millenarian vision, he’s stuck with this one.
Jim Rose
Sep 23 2019 at 5:17am
Bizarre. Director wrote little, was a shy guy and what is known of his views is from his friends
Don Boudreaux
Sep 23 2019 at 10:16am
Not only is Stoller’s understanding of Aaron Director’s economics utterly misbegotten, his reading of H.L. Mencken can be described only as – well, I have no words to convey just how mistaken that reading is.
Mencken argued for individual liberty – for keeping each individual as free as possible from what Thomas Sowell calls “the rampaging presumptions of their betters.” It’s nothing short of astonishing that Stoller accuses Mencken of believing that some people are fit to rule others.
From where might such a deeply erroneous interpretation come? One possibility is that Stoller never actually read more than a few out-of-context snippets of Mencken’s writings and judges Mencken either exclusively from those snippets or from some extant popular caricature of Mencken – a caricature itself the bastard child of such out-of-context snippets.
Another possibility is that something is going on along these lines: Mencken warned of the many dangers of majoritarian democracy and, hence, is believed by people such as Stoller to support, therefore, some sort of rule by aristocracy. One of the sad realities of popular understanding is that to oppose majoritarian democracy is necessarily to endorse rule by some over others.
In reality, of course, Mencken feared unlimited majoritarian democracy for the same reasons that unlimited majoritarian democracy was feared by the likes of James Madison and America’s other founders – namely, not because unlimited majoritarian democracy prevents rule by an aristocracy but, rather, because it poses a threat to the freedom of each individual to rule himself and herself.
To describe the ‘analysis’ offered by Stoller as juvenile and shallow is to treat it too kindly.
Jim Rose
Oct 13 2019 at 4:45am
Is there a prize out there at the moment for drumming up the most obscure economist who was the secret ringmaster of neoliberalism?
When all those crazy books and articles are written about James Buchanan, my reaction was simply “James Buchanan! But he’s so boring to read”.
Robert Schadler
Sep 23 2019 at 11:44am
What a missed opportunity (Stoller and Henderson) to have a larger discussion of the concept of monopoly. Most libertarians (Friedman included if I recall correctly) saw “natural monopolies” that needed to be regulated outside of the market. Something close to that might be “unnatural” or contrived monopolies such as a “company town” where essentials for life (food and shelter) were controlled by a single seller who prohibited competitors in the immediate area and distances precluded an alternative nearby. After than, Yale Brozen’s classic needs to be contended with: are monopolies the result of government.
Bigness in and of itself. Lack of a competitor in the market. Extracting “monopoly prices” from consumers. Each have interesting problems in the 21st century, that Stoller and Henderson could have addressed with Director as the backdrop.
“Bigness” is relative and in the eye of the beholder. One might add whether this bigness include political power. In an era of services, just who or what is a competitor is no easy thing to decide: the range of possible substitutes can be very wide and subjective according to individual tastes. Determining the “fair” or market price when there are not competitors is a very abstract and problematic exercise. So, how should democracies, through its politics and legislatures, deal with “monopolies”? Grounds for a good discussion.
Jon Murphy
Sep 23 2019 at 12:00pm
This is not quite correct. Friedman did see monopoly as an issue, but many have responded to him on that. I have a response on him here: https://www.jonmmurphy.com/a-force-for-good/2019/7/5/what-milton-freidman-gets-wrong-about-monopolies?rq=monopoly
Also be sure to check out the paper I link to there by Don Boudreaux and Burt Folsom
Alan Goldhammer
Sep 23 2019 at 3:40pm
To paraphrase the Bard, “David Henderson doth protest too much, methinks.” This is a blog post sponsored by the Stigler Center at the University of Chicago (how ironic!!) that probably was written to trumpet Stoller’s forthcoming book (maybe Tyler Cowen received a pre-pub copy but if so, he has not commented on it). A lot of blog posts don’t warrant responses and Stoller’s is perhaps one of them. Far more interesting ‘might’ be the book but it’s certainly not one that I’m going to read. After finishing Binyamin Applebaum’s book, ‘The Economists’ Hour’ I have moved on now to Nicolas Lehman’s ‘Transaction Man: The Rise of the Deal and the Decline of the American Dream’ which is equally as interesting.
Mark Brady
Sep 23 2019 at 4:13pm
Aren’t limited liability corporations an example of government privilege? Without government corporations may limit their liability in law to those parties with whom they have contracts, but they cannot limit their legal liability to third parties with whom they do not have contracts unless the government grants them that privilege.
Mark Z
Sep 23 2019 at 7:32pm
How is limited liability a privilege? It merely extends to investors the same immunity from financial responsibility that is extended to creditors. I’ve never really understood this argument. Why should someone who buys stock in a business be more liable for what it’s executives do with their money than someone who loans money to a business? The equivalence seems justified to me.
Vivian Darkbloom
Sep 24 2019 at 12:47pm
One one hand, if this is not a “privilege”, why is not limited liability granted to general partners in partnerships (limited or general partnerships). Admittedly, this is a very, very small category of investors in today’s investment world (particularly given the rise of the LLC). But, still…
The usual justification for limited liability is to encourage investment by liability- averse investors who may or may not have much say about the doings of the business. This might provide some justification for the distinction with sole proprietors.
On the other hand, nearly anyone who wants to do business in the US can enjoy limited liability if they really want it. I say “nearly” because certain professions such as lawyers and doctors may not limit their personal liability in most cases. Economists seem in this regard to be a real exception among professions–they don’t seem to be held legally and financially accountable for any of their mistakes and misjudgements. Is that not a great privilege?(!)
Mark Brady
Sep 25 2019 at 10:56pm
Mark Z. Bondholders are debtors. Stockholders are residual claimants. It’s a huge difference.
Mark Z
Sep 26 2019 at 10:34am
But why exactly would being a residual claimant confer greater liability than being a debtor?
Mark Brady
Sep 26 2019 at 11:34am
But this is the difference between a creditor (who is owed a particular sum) and a residual claimant (who is entitled to what is left after all creditors are satisfied, but has to pay the damages awarded to third parties who have won tort actions against the corporation).
David Henderson
Sep 26 2019 at 10:34am
Mark, I think you mean that bondholders are creditors.
Mark Brady
Sep 26 2019 at 11:31am
Oops! Yes, I do mean bondholders are creditors. Thank you, David.
Mark Brady
Sep 23 2019 at 6:04pm
“And the extreme right-wing funder of the project, Harold Luhnow of the Volker Fund (who later dallied with fascists in the 1960s), essentially threatened to fire Director if he didn’t jettison his allegiance to Simons’s anti-corporatist ideas.
“Director suddenly decided that conservative ideas were compatible with corporatism after all. Monopolies, apparently, were always created by government.” –Matt Stoller.
This does read like a hatchet job, but I’d like to know what, if anything, did Harold Luhnow say to Aaron Director, and how and why Director changed his views on corporations. In his blog post Stoller does not link to any source so I turned to his forthcoming book, Goliath: The Hundred Year War Between Monopoly Power and Democracy (Simon & Schuster). Since this book has not yet been published (October 15, 2019), Amazon does not offer to opportunity to Look Inside. Thwarted again!
Matthew Stoller
Oct 2 2019 at 8:37am
I drew my claim from an essay by Robert Van Horne in The Road from Mont Pèlerin: The Making of the Neoliberal Thought Collective, With a New Preface (pp. 208-209, Harvard University Press 2009, Kindle Edition). Here’s the relevant excerpt:
Daniel Klein
Sep 24 2019 at 4:12pm
Good that you call it for what it is, David, thanks.
David Henderson
Sep 25 2019 at 3:45pm
You’re welcome, Dan.
Comments are closed.