The correct way to argue with Milton Friedman

I’m pretty sure that it was JK Galbraith (with an outside chance that it was Bhagwati) who noted that there is one and only one successful tactic to use, should you happen to get into an argument with Milton Friedman about economics. That is, you listen out for the words “Let us assume” or “Let’s suppose” and immediately jump in and say “No, let’s not assume that”. The point being that if you give away the starting assumptions, Friedman’s reasoning will almost always carry you away to the conclusion he wants to reach with no further opportunities to object, but that if you examine the assumptions carefully, there’s usually one of them which provides the function of a great big rug under which all the points you might want to make have been pre-swept.

A few CT mates appear to be floundering badly over this Law & Economics post at Marginal Revolution on the subject of why it’s a bad idea to have minimum standards for rented accommodation. (Atrios is doing a bit better). So I thought I’d use it as an object lesson in applying the Milton Friedman technique.

Let’s see what Alex Tabbarok has to say:

” If tenants benefit from a law that says apartments must have hot water then surely a law that says tenants must have hot water and a dishwasher benefits them even more, right? What about a law that says tenants must have hot water, a dishwasher and cable tv? By now the students have cottoned on to the idea that the rent will increase. Once you realize that the law causes the rent to increase it’s no longer obvious if tenants benefit or if landlords are harmed. We can work out what happens with sone numbers. Let’s suppose that after much bargaining the tenant and landlord have agreed upon the rent and the amenities – each party to the contract is profit maximizing, doing as well as they can given market conditions and the interests of the other […]”

Hold it right there.

“No. Let’s not suppose that”

Specifically, let’s not suppose that all the negotiations between tenant and landlord have been sorted out in a reasonably equitable manner. Let’s suppose instead that those negotiations are going on right now.

It is really quite rare to find a buyer’s market for rented accommodation. Even if there is a slight oversupply of rental units for sale, time is almost always on the landlord’s side, because waiting is typically much more inconvenient for the party that has to wait without a house to do wait in. In general, when tenants and landlords are negotiating over the potential Pareto gain that could be made from renting the house, the landlord ends up capturing most or all of the surplus. The hot water and habitability laws are simply aimed at skewing things a bit in favour of the tenant and putting a floor on how bad a deal the tenant can end up accepting. It’s a standard game theory result that something which reduces your options can benefit you by reducing the number of bad options that you can end up agreeing to (most famously, the secret ballot has to be compulsory, because if you had the option to reveal your vote, you could be intimidated), and habitability laws are there for exactly this purpose. Mystery solved, through application of the Friedman technique.

This sort of issue (the way in which legal frameworks shape negotiations over the gains from economic interactions) was right there at the start of the law and economics movement with Ronald Coase. Which is why it’s a mystery to me that modern law ‘n’ economics courses appear to have abandoned them in favour of rinky-dink numerical models with politically convenient deregulatory conclusions.