Social Proof and Pluralism

By John Garvey 

Perhaps it's because I have a one-track mind, but the present financial crisis has led me to think again about the benefits of pluralism.

If free markets work as we are taught to suppose, a lot of the turmoil we see now should not be happening. For some reason people mistakenly came to believe that housing prices would keep going up. By “people” I mean everyone – not just home buyers, but also lenders, government officials, rating agencies, insurance companies. Why did everyone think the same way? When housing prices increased by 85% (corrected for inflation) between 1997 and 2006, why didn't more buyers dig in their heels, and more sellers unload?

Robert Shiller maintains, in The Subprime Solution (2008), that the real explanation is not monetary policy, or mortgage policies, or the behavior of rating agencies, or regulatory failure. These are effects rather than causes. The phenomenon at the root of the market's collapse is what he calls the “social contagion of boom thinking, mediated by the common observation of rapidly rising prices.” The failure of the capital markets can be traced to a failure in the market of ideas. It is not easy to understand how so many people came to think alike, but they did, and it means we're headed for trouble.

Here is another illustration of the same point. Social psychologists at CUNY once did an experiment on “the drawing power of crowds,” as they put it. They had a man stand on a street corner and look up at a sixth-floor window across the street. A few passersby stopped. The psychologists gradually increased the size of the stimulus crowd to 2, 3, 5, 10, and finally 15. At 5, four times as many pedestrians stopped, and even more looked up. At 15, 40% of the passersby stopped, and 86% looked up at the window. James Surowiecki, in The Wisdom of Crowds (2004), calls this an instance of social proof. It's not the same thing as conformity. People don't look up because of peer pressure or fear of sanctions. There is, Surowiecki says, a “tendency to assume that if lots of people are doing something or believe something, there must be a good reason why.”

Here is one more example that will resonate with baseball fans. Since the nineteenth century players, managers, and fans have measured the quality of performance by batting average, runs batted in, fielding percentage, stolen bases, and so on. We still do. Look at the Sunday paper. Scouts have looked at the physical skills of young players – body type, foot speed, arm strength, etc. – to predict success in these metrics. Michael Lewis tells in Moneyball (2003) how the manager of the Oakland Athletics set aside conventional wisdom and built a winning baseball team. He ignored physical skills and fielding percentage, discouraged base-stealing, urged batters to walk, and measured success by slugging and on-base percentage. The data he used supported his judgment. But it was hard to get a team to abandon the way everybody did things, because if everybody did them there must be a reason why.

I have been wondering how this kind of social contagion affects our thinking about law, and what means there are to combat it. Consider this case. American antitrust law began in 1890 with the passage of the Sherman Act. For a long time antitrust policy was animated by the idea that it is good to protect small firms, and (this is not the same thing) that regulation is sometimes better than competition at increasing wealth. Group-think in law is not exactly the same as in the housing market or pedestrian traffic or baseball, because once courts accept an idea it acquires normative status, not just social currency. In the legal academy there is a further support to group thinking. We don't just depend on social proof to spread ideas; we teach them. So this view of antitrust law was the one teachers taught and judges enforced.

It changed when Edward Levi asked Aaron Director to teach an antitrust course at the University of Chicago . Director brought to the subject the ideas of the Chicago school of law and economics – his brother-in-law Milton Friedman, Ronald Coase, George Stigler, Gary Becker. His students Richard Posner and Robert Bork (he was educated at Chicago , though he taught at Yale) spread the critique. Bork's The Antitrust Paradox (1978) argued that “the only legitimate goal of antitrust is the maximization of consumer welfare.” Over the next three decades the Supreme Court and much of the academy came to accept these views.

An even bigger revolution happened several decades earlier at the Yale Law School . The conventional wisdom shared by academics, the bar, and the courts was that law was a kind of science based on high level principles, from which legal practitioners could derive rules that afforded a high degree of certainty. The idea, which we call legal formalism, did not originate with Christopher Columbus Langdell, but he deserves credit for its propagation through the system of legal education. His case method, his casebooks, and the success of the Harvard Law School were soon widely imitated. This belief informed Williston's view of contracts and in time gave birth to the American Law Institute's Restatements. The legal realist movement attacked this idea. And though the realists claim Oliver Wendell Holmes as their patron saint, much of the work was done by a group of faculty (and adjuncts) at Yale: Thurman Arnold, Felix Cohen, Arthur Corbin, William O. Douglas, Jerome Frank, Leon Green, Fred Rodell, Underhill Moore.

You see where I am going. One of the benefits of institutional pluralism is that it provides a shelter from the social contagion of popular ideas, and a space where new thoughts can grow mature enough to survive outside. I don't want to overargue my point. In the small town where I was born people have some odd ideas about style in pants and eyeglasses. I suspect it's because they don't get out much, and now that the steel mills have closed nobody visits there. Isolation is bad for the sense of style, and it's equally bad for the life of the mind. What made Chicago and Yale distinctive was not that they were walled off from popular thought, but that they built counter-cultures strong enough to compete with it.

October 4, 2008

S. Milgram, L. Bickman, and L. Berkowitz, Note on the Drawing Power of Crowds of Different Size , 13 J. Personality and Soc. Psych. 79 (1969).

There were parallel developments at Columbia , where Karl Llewellyn taught from 1925-1951.