# Racist ignorance of prior probabilities, explained with Venn diagrams

Last year, in reference to the Trayvon Martin case, Matt Yglesias wrote a great short explanation of how racism is a kind of ignorance of Bayesian updating. In short, racists justify their racism by neglecting base rates. It’s a fallacious form of the availability heuristic.

Bayesian reasoning can be difficult to understand when it’s presented formally with equations and formulas, so let’s illustrate the concept with Venn diagrams.

Consider two populations, white and black. The white population is larger than the black population.

Assume that the amount of crime that occurs in the two populations is roughly proportional to the size of each, represented by the red circle below.

Assume that police attention, due to institutional racism, is disproportionately focused toward black criminals, as represented by the blue ellipse below.

The population of convicted criminals would be represented by the purple shading below.

A racist observing racial discrepancies between the inmate population and the general population is myopically only seeing the purple shading. The racist sees that blacks make up a disproportionately large fraction of the purple shading while falsely assuming the inmate population is an unbiased sample. The racist neglects what the true parameter is.

Disproportionately punishing criminals in minority communities would be horrible in and of itself, but the War on Drugs has subverted the criminal justice system in an even worse way, and exacerbated institutional racism. How?

Conducting the War on Drugs requires the violation of civil liberties. Why? Whereas victims of crimes cooperate with police and offer evidence to bring criminals to justice, victimless crimes produce no such cooperative victims. Without victims pointing toward any kind of offender, the primary method to catch violators of victimless crimes is to preemptively assume some fraction of a population is criminal and use sweeping powers to arbitrarily detain and search.

Without any victims, from where would probable cause originate? Terry v. Ohio paved the path for Arizona v. Johnson, and now the police act on “reasonable suspicion,” which in practice has turned into arbitrary officer discretion, far beyond the original scope of the standard to ensure officer safety. “Reasonable suspicion” is a lesser degree of certainty than probable cause, and as such, was always obviously unconstitutional.

If a police department were already predisposed to target a black community, instructing them go after victimless crimes would intensify their biased policing, giving them cover to target whomever they already were going to target.

Not only does the War on Drugs erode the potency of the Constitution, it erodes the trust between the public and law enforcement. Whereas the public might, in ideal theory, primarily rely on law enforcement for protection from criminals, the War on Drugs has subverted the relationship, and given the public a reason to fear the police. The War on Drugs distracts the police with incentives to maximize drug arrests, drawing their focus drawn away from putting away the harmful elements of society.

The War on Drugs produces a more disturbing Venn diagram.

Assume a majority white population and a minority black population.

Assume that victimless crimes in the two populations are occurring proportionally to their populations, because the drive to alter consciousness is a human universal.

Assume that a smaller amount of crimes with victims are occurring in the two populations proportionally.

The encouragement of police attention to victimless crimes gives the police cover to disproportionately target the black community.

Racists incorrectly infer biased police attention as a proxy for societal harm, failing to distinguish between malum in se and malum prohibitum. The purple shading below represents an entire group of people who are being oppressed by a criminal justice system that is consistently and repeatedly violating Mill’s harm principle.

# Medicalization of criminal behavior is a problematic political weapon

Patients committed to a Catonsville, Maryland psychiatric hospital have been consistently assaulting the hospital staff and generally causing chaos:

The chaos at the state’s largest psychiatric hospital, the consultant found, is fueled by a few patients who “prey upon patients and staff with relative impunity” after being ordered by courts to the hospital for psychiatric evaluation — sometimes with dubious symptoms.

The findings are contained in a report created for the Department of Health and Mental Hygiene in response to safety complaints from hospital staff. The report by Dr. Kenneth Appelbaum, an expert in forensic psychiatry at the University of Massachusetts Medical School, describes a number of violent incidents over the past year. It also highlights an ongoing dispute between judges and clinicians over patient admission standards.

Remember Rosenhan’s 1973 experiment? Rosenhan challenged the validity of psychiatric diagnoses by having sane “pseudopatients” fake symptoms to be admitted into psychiatric hospitals, then immediately cease simulating any symptoms of abnormality. The hospitals never recognized the pseudopatients’ sanity.

Diagnosing mental illness is plagued by ambiguity, and a diagnoses carry power. The combination of power and inherent ambiguity makes the institution of psychiatry a political weapon.

The Maryland criminal justice system faces latent incentives to medicalize criminal behavior. Maybe prisons are overcrowded, or there’s pressure to cook statistics so as to disingenuously minimize the number of crimes, or there’s something else going on. We may never know. Regardless, the violence to the hospital staff is another example of an unintended consequence when a government co-opts a nexus of power.

The Wire: The Musical perfectly describes the nefarious spontaneous order:

There are complex problems inherent in the bureaucratic institutions of the state, but there’s no one to blame. It’s a vast array of personal interests that conflict in a way that undermines the overall system.

# Are limited liability arrangements unjustified economic interventions?

Are limited liability arrangements unjustified economic interventions?

The familiar Western legal concept is a creation of the state, originally crafted for trade expeditions. The first trade expeditions were highly risky, capital-intensive ventures, so to mitigate risk for such trading companies, European governments limited the liabilities of such trading companies by designating them joint-stock enterprises.

The earliest joint-stock enterprise was London’s Muscovy Company, established to trade with Russia in 1555. Limited liability was also granted to the famous British East India Company and Dutch East India Company, in the 17th Century. America’s first limited liability law was passed in 1811.

What’s the point of a joint-stock enterprise? The transaction cost of borrowing capital is decreased by allowing small shareholders to invest directly in a company without needing to interface directly with its proprietors. A joint-stock enterprise protects shareholders’ personal assets from any of the enterprise’s creditors. The benefit of limiting liability is that companies are able to raise capital from the long tail of the population, not just wealthy elites. The cost is manifested through increased moral hazard.

Would it really be such a bad thing if investors actually paid closer attention to what they are investing in? Without limited liability arrangements, prudent investors would need to hash out deals with proprietors, regularly conduct fundamental analysis, and determine a rate of interest. If bankruptcy laws didn’t exist, investors and proprietors would need to set their own terms for failed ventures.

Limiting liability through shareholder arrangements aggravates the principal-agent problem. Though corporations vaguely attempt to “maximize shareholder value,” rationally ignorant small shareholders don’t hold management of any one company accountable, since the amounts of money at stake are relatively small. Small shareholders with diversified portfolios of large mutual funds and index funds suffer from the local knowledge problem, just like socialist governments. They can’t possess enough meaningful knowledge of all the different individual agents to direct resources so as to maximize societal value.

# Everything you think you know about the McDonald’s coffee case is wrong

I recently watched the documentary Hot CoffeeThis is an excellent film, and I highly recommend it.

The movie covers a few different cases, brilliantly debunking the myth of tort reform as a check on widespread frivolous lawsuits. The film exposes the reality that tort reform is an intrusion on the proper mechanism for holding wrongdoers accountable in a free society.

## Stella Liebeck

The film, at its core, is a defense of the civil justice system against tort reform. Most people don’t understand what tort cases are, or the extremely valuable role they play in effecting positive social change.

I first learned about the truth behind the McDonald’s coffee case from a discussion with John Hasnas back in the summer of 2010. He explained that the popular understanding of the McDonald’s coffee case was completely wrong. Hot Coffee was released in June, 2011, but I only heard about it recently, so I rushed to see it.

You probably dismiss or even scowl at the McDonald’s coffee case as an example of a frivolous lawsuit, in which one greedy and opportunistic woman successfully gamed the system. The popular thinking is that a coffee spill is such a common occurrence that it shouldn’t be grounds for anyone to get millions of dollars. You might think that juries are so stupid and biased against big corporations that they enable widespread abuse of the system, extracting money from big corporations, and passing on the costs to consumers in the form of higher prices. All this is wrong.

There are lots of popular misconceptions about the case. The plaintiff, Stella Liebeck, wasn’t absentmindedly driving. She wasn’t even in the driver’s seat of the car. When the spill happened, the car wasn’t even moving.

In reality, the plaintiff and her son got coffee at their local McDonald’s drive-through. Her son was driving. After getting the coffee, he pulled over into a parking space so that his mother could remove the lid and put cream and sugar into her coffee. When the car was stopped, she took the lid off, and spilled the coffee right onto her lap.

The coffee was so hot that Liebeck suffered extensive third degree burns across her legs and groin, and actually required multiple skin grafts. Liebeck herself wasn’t being opportunistic, and wasn’t even after punitive damages. She only wanted McDonald’s to pay for the difference of the cost of her medical bills, for what Medicare wouldn’t cover.

In the trial it was revealed that McDonald’s had documented about 700 complaints about their coffee being too hot, prior to Liebeck’s spill. McDonald’s even conceded that their coffee would certainly seriously burn someone if they tried to drink it immediately. The official determination was that at such a high temperature, the coffee would only need to make contact with a person’s skin for a few seconds to cause a third-degree burn.

Some portray this case as typical leftist activism by attacking big corporations and absolving individuals of their responsibility. Such framing is entirely wrong.

There’s often a knee-jerk reaction among libertarians and conservatives to defend businesses against the left, and admittedly, the left is usually wrong when they advocate the use of the legislative and the executive branches to regulate businesses preemptively, but the judicial branch is different.

Central planning, and all the destructiveness associated with it, is a product of the legislative and executive branches. In contrast, judicial systems predate centralized governments, so framing tort reform as a move toward free markets doesn’t make any sense. Historically, in the absence of governments, courts were the premier mechanism to redress disputes and wrongdoings.

The issue of tort reform manifests Haidt’s moral foundations in an unusual way. The progressives who advocate for strong protection of tort law are concerned with power imbalances that favor big companies, and are operating on the oppression foundation, while the conservatives who wish to avoid rewarding societal moochers are operating on the fairness foundation. The equilibrium is sort of backwards. Usually progressives discount how governments subvert spontaneous orders when advocating for central planning that undermines the rule of law, and usually conservatives hesitate to challenge established traditions for fear of unintended consequences. In the case of tort reform, conservatives are advocating for central planning that would subvert the spontaneous order of the civil justice system, and progressives are defending the mechanism that protects the vulnerable.

Tort law is crucial because it is simultaneously surgical and effective, unlike anything you would ever see from the executive or legislative branches. The day after the ruling of Liebeck v. McDonald’s Restaurants, every restaurant in America cooled its beverages to safer temperatures, because they knew precisely what they would be liable for, and what kind of punishment might befall them if they failed to serve beverages at a safe temperature. It would be unthinkable to see compliance like that from a rule out of some bloated bureaucracy in DC. A hypothetical attempt at regulation by the legislative or executive branches might have been to create some ineffective new agency, bureaucratically guzzling millions of dollars, perhaps employing inspectors to roam the country and issue fines.

The jury had originally awarded \$2.7 million dollars as punitive damages, but the judge reduced that to \$480,000. Those large figures embody what H. L. A. Hart called the Benthamite “economy of threats.” Punitive damages need to be high enough to change the behavior of the wrongdoers, and if the company is quite large, like McDonald’s, it might take a few million dollars to send the message.

## Colin Gourley

Tort reform is destructive because it limits liability. In the case of Colin Gourley, an OB/GYN was found to have breached the standard of care, thereby causing Colin Gourley to suffer numerous mental and physical defects in utero. The parents sued for medical malpractice, and won, but a tort reform law limited the offending doctor’s liability.

Colin Gourley will never be an independent adult, and his parents were seeking enough money to insure that their son would be taken care of for the rest of his life, after the point at which they’d be able to take care of him. The tort reform law effectively absolved the offending doctor from their negligence.

Sure, doctors make mistakes, but it doesn’t follow that protecting strong tort law allows just any patient dissatisfied with their results to sue. The standard of care is an established legal concept, and courts can decide with expert testimonies whether it has been breached.

It is incompatible with a free society for a government to limit liability. Just as centrally planned bankruptcy laws are economic interventions, centrally planned laws limiting liability for doctors, or corporations, or anyone for that matter, are economic interventions. A free market of private business insurance would better weigh the costs and benefits to society of various risky activities. Governments shouldn’t arbitrarily decide in advance how much damage a party can cause. After all, in the course of history, we humans have demonstrated profound creativity in being destructive.

Laws that limit liability systematically favor businesses at the expense of the general public. Tort reform is obviously special interest lobbying for government-created rents.

## Oliver Diaz

When discussing the case of Oliver Diaz, Hot Coffee loses focus by pivoting to tangential leftist issues, incorrectly accusing Citizens United v. Federal Election Commission as a primary driver that corrupts the elections of judges. Citizens United correctly protected free speech.

The real culprit is democracy itself. Choosing judges through democratic processes at all opens up the judicial system to politicking. Less democratic alternative institutional structures for the judicial system are perhaps more robust and less corruptible, if support for tort reform is a widespread weak preference. That the preference for tort reform is widespread and weak is probably due to rational ignorance. The preference is probably just expressive, because conservative framing of the issue has been quite effective and popular. We should expect voters to vote against their own self-interest in democratic referenda about tort reform.

## Jamie Leigh Jones

When is a contract not enforceable? When shouldn’t a contract be enforced?

Jamie Leigh Jones fought against a mandatory arbitration clause in her employment contract, in the fine print. She wasn’t even aware of the clause.

Jones was an employee of Halliburton, and at the time of Hot Coffee’s release, she was supposedly brutally raped while working for them in Iraq. After the film’s release, Jones did finally win the ability to sue Halliburton in open court, but the jury found that the sex in question was consensual. Regardless, the important broader question is the validity of mandatory arbitration clauses.

These stock arbitration firms conduct much repeat business with the large firms that are their clients, but conduct no repeat business with disgruntled employees, so these arbitration firms are strongly biased against employee claims. Would obviously unfair clauses in the fine print of agreements actually hold up in court, or any sensible common law regime? Can you actually sign your rights away in an iTunes EULA? Fortunately, I don’t believe a lot of these clauses actually hold up.

# Do patents spur innovation?

In a new paper from the Federal Reserve Bank of St. Louis, Michele Boldrin and David K. Levine explain that there is no empirical evidence that patents serve to increase innovation and productivity. They recommend that the entire patent system be abolished.

They explain that although government-created Schumpeterian monopolies do provide incentives to innovate, those incentives are negated by political rent-seeking.

They argue that the current patent system in place is plagued by problems:

1. Modern products have so many components from different sources that licensing costs are inefficient
2. Patents do not function as a substitute for trade secrecy
3. Patents in no way improve communication about ideas, as if submitting for a patent was somehow a news bulletin for new technologies
4. The deadweight loss is quite large from patent monopolies, because social loss increases linearly with an increased price, but profits increase only quadratically
5. The cost of litigation is quite high, and this is a waste of resources
6. Patent trolling is destructive

Why don’t we need patents?

1. In most industries, first movers have advantages, enough to extract rents
2. In new, innovative industries, typically many competitive firms scramble for market share; it’s usually only mature firms that attack competition with patent claims

With the lens of economic analysis, the “patent puzzle” is no puzzle at all,

Increasing IP increases residual R&D expenditure at low level of protection… As IP protection is increased further the residual R&D expenditure levels off then falls. Note that at the lower levels we are probably observing primarily the effect of [foreign direct investment]: among poor countries with low IP protection, increases bring in more foreign investment and in doing so directly raise R&D. In richer countries with high levels of IP, foreign investment is not an issue, and increases in IP have little or no effect on innovation.

What would the world look like without patents? Failing monopolies would not be able to inhibit innovation from their last-ditch challenges to competition, and would close more quickly, thereby freeing up resources for other productive ventures.