Price control and competition. The Torah itself specifically forbids cheating in business. Specific verses forbid dishonest practices such as inaccurate weights and measures which merchants would use to their advantage to cheat others. The Talmud, Bava Basra , 89a, records an interesting inference contained in the Torah’s prohibition against dishonest weights. The Talmudic Sage Shmuel inferred from the Torah’s specific prohibition against dishonest weights and measures a corresponding obligation on the government to insure fair business practices in weights and measures. That government regulation, however, Shmuel extrapolated, should only be limited to regulating weights and measures. The Talmud records, in the name of Shmuel, “inspectors should be appointed for weights and measures, but not for prices.” Professor Aumann explained how the Medieval commentator Rashbam spells out Shmuel’s reasoning. Directly quoting the Rashbam, he said, “It’s common sense, price control is not needed. For if one seller sells dearly, another merchant who needs money, will undercut him, will sell cheaply, because he wants the business, and the buyers will go to this other merchant who sells cheaply, and then the first one will also sell cheaply, because otherwise he won’t get any customers.” “Ladies and gentlemen,” Professor Aumann said, “this is the basic principle of the market economy. This is what the market economy is all about. Competition leads to prices finding their correct level. You do not need to fix prices. You fix prices, then you get situations like you had in Russia and Poland and Viet Nam, where people were starving. “It’s not entirely explicit in the Gemara, but it is entirely explicit in the Rashbam. The Rashbam is 12th century. This was first promulgated in the economic theory by Adam Smith in the 18th century. So we’re talking about Adam Smith, the father of modern economic theory, being anticipated by the Rashbam, not by a few years, but by 600 years he was anticipated. And don’t think that this is a trivial matter. Maybe to you and to me it’s easy to see that prices need not and should not be controlled. It wasn’t at all clear to the contemporaries of the Rashbam, including, I’m sorry to say, the Rambam.” Professor Aumann explained that the Rambam (Maimonides) held that inspectors should be appointed for weights and measures, and also for prices. Professor Aumann speculated that Rambam’s ruling may have been influenced by the Scholastics, including Thomas Aquainas, and Muslim philosophers who advanced the idea of a “just price,” that there is a level of pricing which is correct, which is not determined by market forces. In response to questions from the audience, Professor Aumann clarified that the idea of free markets, with no price controls, was not incompatible with the Torah’s prohibitions against overcharging in business. The law against overcharging in business, called “onaah,” is measured against the rest of the market prices. That is, in order to evaluate whether a merchant has overcharged, his price is compared to the prevailing market price of similar merchants. “Onaah is misleading a particular customer,” Professor Aumann said. An audience member suggested that, in defense of the Rambam, price controls would be appropriate in certain inefficient markets, like monopolies or markets where relative price information is not readily available to the buying public. In such inefficient or opaque markets, it might be advanced, government price control would be necessary. Professor Aumann ceded this point and said the Rambam has been vindicated. Moral Hazard. The Talmud addresses how the decisions of self-interested human actors can alter the rules of probability and render impractical systems that are built on probability. Across the Talmud, according to Professor Aumann, the following case is brought approximately 26 times. “There are 10 stores, all selling kosher meat, except for one, which is selling traife [non-kosher] meat. If a man buys from one and doesn’t remember which one, then because of the doubt, the meat is forbidden. But if he found the meat on the street, then we go by the majority.” Kesubos 15a. “The way this is usually summed up… anything which is in its place, in the original place where it was, is considered half-half, you can’t tell which, and when you have a half-half situation, you go l’chumra [rule stringently to prohibit]. But, if it left its original venue, then you go by the majority, you use probability theory.” To paraphrase, since there are nine kosher stores opposite the one non-kosher store, according to the majority, the probability is higher that the meat is kosher, and, accordingly, the meat that is found on the street would be considered to have “left its original venue” in Professor Aumann’s words, and be deemed halachically kosher. (Whether it is practically rendered permissible depends on the specific circumstances of each case.) However, when the meat is found “in its place,” to use Professor Aumann’s words, that is, it was carried in the hands of the man who bought it, then the probability in reduced to 50-50, that is, either its kosher, or its not. In such a 50-50 question, the law requires a stringent ruling to prohibit the meat. This case turns on the issue of moral hazard, Professor Aumann explained. A practical, modern-day application of the fundamental economic theory of moral hazard is the principle that underlies insurance. Professor Aumann gave an example. A man could take out an insurance policy for the full value of his house. However, if the man tried to purchase two policies, even if the man offered to double his premium, the insurance company would refuse to write him two policies. These two policies would pay out more than the value of house itself. Why wouldn’t the insurance company want to take twice the business? Professor Aumann asked. “If you have two insurance policies, you have a positive incentive to burn down your house. And even if you’re an erliche yid, and you wouldn’t dream of doing such a terrible thing, even then, you’ll be a little less careful, or maybe a lot less careful. You won’t worry if you left the gas on when you go away for a vacation… Your actions influenced the probability that this is going to happen. “The size of the premium is based on the probability that the house will burn down. But now the insured influences in a very clear way the probability. His actions change the probability. Moral hazard is when the actions of the person who is involved in this probability calculation, when the incentives of this person change the probabilities that underlie the problem.” This is precisely what’s happening in the case of the questionable meat, Professor Aumann said. “This person, he forgot which store he bought the meat from, but he bought the meat… He made the choice by himself. When he made the choice, then you right away have an issue of moral hazard. When does moral hazard have nothing to do? When he found it. When he found it, he didn’t determine from which store it came… He could not influence the probability. But when the person himself made the choice, then there’s no probability. The laws of probability do not apply to your choice when you are motivated to go one way or another.” Consistent Fair Division. The Mishnah in Kesubos 93a advances a mystifying approach to resolve a monetary dilemma. The case involves the division a man’s estate among three women who each have a marriage contract entitling them to a different amount from his estate. But how is the estate divided when there is not enough to fully satisfy all three claims? “If a man with three wives dies, and one [holds] a kesuba of 100 zuz, one of 200, one of 300, and there’s only 100 in the estate, then the three women divide equally. If there’s 200 in the estate, then the one of 100 take 50 and those of 200 and 300 take 75 each. If there’s 300, then the woman who has the kesuba of 100 takes 50, the one of 200 takes 100, and the one of 300 takes 150.” “It’s a very strange Mishnah,” Professor Aumann said. “Now each of those methods of division makes sense. But they’re inconsistent with each other. What’s the general rule? Is it equal division, or is it proportional division, and in the case of two hundred it’s in fact neither. “The principle is equal divison of the contested amount… All three divisions over here have the property that any two women divide what they together get in accordance with the principle of equal division of the contested amount.” “Equal division of the contested amount” arises in a case where two parties have competing claims to a single amount of money, but the size of each claim is different. When the two competing parties have different size claims, according to Professor Aumann explained, then the party with the smaller claim, in essence, has ceded his claim on the amount claimed by his adversary that is greater than his claim. To illustrate, Professor Aumann brought the case of “shneyim oksim b’talis.” “Two men come to court, and they’re both holding onto a garmet, a talis. And one says ‘It’s all mine,’ and the other one says, ‘Half of it is mine.’ He doesn’t claim all of it, he only claims half of it. Then the Mishnah says, divide, 75, 25, three quarters, one quarter. “Rashi explains over there, that the reason for dividing ¾. ¼, because on half of the talis, there’s no argument. The one who says, half of it is mine, cedes half of the talis to the other one, the one that says, ‘kulo sheli,’ [‘all of it is mine.’] So what’s the argument is about? The argument is about half the talis. You have an argument about something, split, 50-50. Half of the talis is split, 50-50, so each one gets a quarter. The other half goes all to the one who said, ‘kulo sheli,’ [all of it is mine’], so the result is three quarters, one quarter. The principle over here is equal division of the contested amount. Returning to the three competing claims of the wives in Kesubos , Professor Aumann summarized, “all three divisions over here, have the property, that any two women divide what they together get, in accordance with the principle of equal division of the contested amount.” Professor Aumman explained one of the examples listed above in the Mishnah. “In the case where the estate is 200, so the one who has a kesuba of 100, she gets 50… The third [with a claim of 300]… gets 75, together how much do they get. They get together 125. If they want to divide this 125 between them, according to the principle of equal division of the contested amount. What is the contested amount? The contested amount is 100. Because the woman who has the kesuba of 100, she doesn’t claim 125, she claims only 100, so she cedes 25 to the other woman. How much is left? What is then the contested amount? It’s 100. This is divided equally between them. So the first one gets 50, and the last one gets 50, plus 25, is 75. So you get back exactly these numbers. “Now ladies and gentlemen, this may sound that no matter what you do, you get back the numbers, but that’s not true. For each of the three estates, there’s only way of dividing the estate so that any two women divide what they together get… And not only with these amounts. But no matter how large the estate is, no matter what the kesubas are, no matter how many women there are, even if there a thousand women, like by Shlomo ha Melech, it doesn’t matter. There’s always a way of dividing the estate in order to fulfill this principle. And there’s only one way. There’s always one, and only one way.” The applications for this principle may arise, this reporter speculates, in the operations of modern-day bankruptcy law, which is built on the equal division of the property of a bankrupt debtor among each class of creditor.

