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Show Motional Enterprise , May 19, 1976 Page Three Can New York City Be Saved? by David Levy David Levy is a Ph.D. candidate at the University of Chicago and teaches economics at the University of Kansas. The real world is providing students of economic theory a rare treat with the capital markets discipline of New York Citys present legal system. Economists have learned a good deal about how the capital market disciplines firms which have been poorly the Wall Street managed: Journal regularly contains advertisements from investment groups attempting to purchase controlling interest in a company. Successful n takeover bids are a method by which the capital market fires the firm's decisionmakers. But the idea of the capital market breaking an entire legal system is not at all routine. A very real temptation to those discussing public issues is to cast the discussion in terms of heroes and villains. It is certainly easier to point to a small number of choices made by prominent individuals that produced pleasant or unpleasant consequences than it is to trace the process through which collective choices result from public It is not terribly opinion. difficult to see that the newspaper accounts of the problems facing New York are insufficient. That is, it is difficult to believe that the citys expenditures on public assistance, education, or the salaries of the city employees are in any simple way directly related to the current difficulNew York has been ties. making large expenditures for such things for a considerable period of time; yet the heavy discounting of the citys bonds by the capital market is something which has occurred rather recently. Obviously, there is some relation between expenditures and the citys difficulties, but not, I think, a very simple one. Rather, the forces which produce the expenditures on various services are at bottom of the same forces which are bringing about the collapse of New well-know- to protect these rights. In my terminology, the existing legal assignment of the right to block a transaction may very well take away the possibility of enforcing an individuals natural right. For example, if there is a rent control law which sets a minimum price below the competitive price, you and I would have lost the enforceable right to effect a mutually beneficial trade at the latter price. Anyone who observes such an illegal transaction has the legal right to block it by notifying the police. The second term required for the argument is "transThis is simply action cost. the minimum cost of obtaining the legal right to effect a transaction. (Thus, a brokerage fee is not a transaction cost, for it should be insensitive to the legal system.) Let me give an example. If I wish to operate a bookstore, there will characteristically be a cost to obtaining the right to do this: procuring a business license, filling out the state tax forms, etc. Mind you, I have not sold any books, but I have obtained the right to do so. If I wished to sell pornography, I would have to do all that I would to operate a reputable bookstore, and additionally put a lawyer on retainer to fend off police and reduce the number of days I spend in jail. Legal Rights and the Market There is an important aspect of different legal systems which has not been sufficiently studied; that is, what is the impact of different legal systems on what the market produces? (A change in the legal system will make no difference only if there are no transaction costs.) It is, I think. New York Citys legal system, as it has evolved, which is responsible for the citys present condition and which blocks any easy way out of the difficulty. The relation between a legal system and what firms will produce, however. is sufficiently indirect that an example might be useful. It must have struck everyone interested in political and social controversy that the range of opinions presented on television is far more constricted than what one can find at even a mediocre newsstand. This difference is due largely to differences in the assignment of rights in the two industries. Magazine publishers have been given the right by the 1st and 14th Amendments to publish almost anything they please, allowance being made for certain statutory exceptions: classified government docu- ments, libel, and porno- been given, threfore, the right to graphy. They have annoy anyone. If an individual is in fact annoyed, he can cancel his subscription and write an angry letter, but not much else: there is no existing legal recourse. He could, if he wished, try to form a group to buy out the magazine or conduct a political campaign to change the law, but this line of action is usually too expensive to be pursued. People are not that annoyed. Thus, although many magazines annoy many people, the annoyed have no real sanction other than not subscribing. Television broadcasters, on the other hand, do not have the right to broadcast. They hold licenses, good only for a few years, with renewal conpublic tingent upon their If a television service. station were to broadcast material which annoyed enough people to induce a sizable number of hostile letters to the Federal Communications Commission, the station would be in danger of having its license revoked. JBs Notes Improved Loss of a license would be a multimillion-dolla- r loss if the TV station were in a metropolitan market. If the station wished to broadcast disturbSALT LAKE CITY-J- B's ing material, it would have to bribe those who would be Big Boy Family Restaurants, Inc. (OTC 2.25, 2.75) reported annoyed not to write the FCC. Since this would be expensive improved revenues and earnand there is not much money ings for the second quarter of to be made in truly controver- fiscal 1976. sial material, stations cannot Revenues for the twelve afford to broadcast anything week period ending March 11, seriously offensive to any 1976 totaled $5,892,327, up 21 vocal group in its market. from Earnings $4,863,851 percent reported in the prior year. Net Polishing Off the Big Apple income for the current period was $70,111, or 4 cents per The important point for share, versus $35,743, or 2 analyzing New Yorks difficul- cents per share, for the corresties is that different legal last year. ponding period For the 24 weeks ended March 11, 1976, revenues increased from $10,812,969 to $11,484,058, compared to the same period last year. Net income for the 24 wreeks in 1976 w'as $126,668, or 7 cents per share, versus $142,282, or 8 cents per share in 1975. Earnings per share for both transactions. Insufficient years were based on an averattention was paid to the age of 1,730,269 shares outdifficulty that McDonalds had standing. Net income in 1975 in obtaining the right to sell included $50,000 from an hamburgers in part of the city. insurance policy on a former The construction of a McDon- officer of an acquired comald's store annoyed a signifi- pany. cant number of people, whose The Board of Directors complaints had to be taken declared a 2 seriously. The store was built dividend, payable May 28, eventually, but at no inconsid- 1976, to stockholders of record erable cost in obtaining the May 14, 1976. right. Two new restaurants Other examples are not trivial. It seems clear by now were opened this past quarter that under the existing legal in Rock Springs, Wyoming system all sorts of eminently and in Clearfield, Utah. Two sensible transactions cannot additional restaurants in the be made. It does not seem to New England area were sold to another regional restaurant be possible to replace city-ru- n activities with corresponding chain. At the end of the private activities. For exam- quarter, the company operple, private garbage collection ated 59 restaurants in 14 is commonplace in many parts states. JBs Big Boy Family of the country. In New York Restaurants, Inc. is part of the the cost would be less if the 900 restaurant operation s city service were replaced, but utilizing the Big Boy name Continued on Page Ten nationally. assignments of rights result in important differences in the range of economic activity carried on. Indeed, what would be trivial outside of New' York may be prohibitive inside. What makes New York Citys legal system so interesting is its multiplication of the rights of individuals to block cents-per-sha- York City. The Economics of NYCs Plight of economic terminology are required for the argument. The first is that of a legal system. A legal Two pieces system assigns the right to perform an action or the right to block the performance of an It is not important action. whether the right is de jure or simply de facto. I am using "assignment of right as a shorthand notation to analyze the result of the existing legal system. Those who work within a natural right framework argue that people have a set of rights that must be respected in society and that the role of government is, or ought to be. With over. 1600 stock quotations, news articles, earnings reports, corporate profiles, market columns and feature stories, the National Enterprise covers the OTC securities market from coast to coast. behind closed doors of corporate board rooms to changing securities laws and regulations. We'll keep you posted on the latest developments and abreast of current trends. We make it our business to know whats going on in the industry-fro- m The National Enterprise gives your investments the kind of coverage they deserve. Please send me a one-yesubscription to the National Enterprise. Enclosed is $18.00. ar NAME Mail to: THE NATIONAL ENTERPRISE AnnRPCC CITY STATE ZIP P.O.BOX 11778 SALT LAKE CITY, UTAH 84147 re |