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Men Who Made The Rules
February 1989 | Volume 40, Issue 1
Brandeis’s reputation as the “people’s lawyer” has obscured the extent of his indifference to the welfare of consumers. At one point he even led a campaign on behalf of “resale price maintenance,” a form of price-fixing. The supposed champion of the common man was actually suggesting, McCraw observes, “that small retailers be exempted from the antitrust laws and permitted, in concert with each other, to fix the prices of consumer goods.”
The third of McCraw’s prophets, James M. Landis, began his career as clerk to Justice Brandeis in 1925. Landis had graduated first in his class from both Princeton and Harvard Law School.
In 1933 Felix Frankfurter asked him to come to Washington to join the team that was drafting federal securities regulations. Three protégés of Frankfurter—Landis, Thomas Corcoran, and Benjamin Cohen—became known as Frankfurter’s “Happy Hot Dogs.” They worked together on three key pieces of New Deal legislation—the Securities Act of 1933, the Securities Exchange Act of 1934, and the Public Utility Holding Company Act of 1935.
In striking contrast to Brandeis in his design of the Federal Trade Commission, Landis developed a philosophy of “participatory regulation” that emphasized “a careful shaping and bending of the incentive structures, so that each of the major players would voluntarily carry out SEC policies.” The result, McCraw argues, was that the Securities and Exchange Commission became “the most successful of all federal regulatory agencies.”
Landis succeeded Joseph P. Kennedy as chairman of the SEC in 1935 and was succeeded himself by the future Supreme Court justice William O. Douglas in 1937, when Landis accepted an invitation to become dean of the Harvard Law School. A year later, drawing on his experience in Washington, he published a landmark study, The Administrative Process —“the most forceful argument ever written in favor of regulation.”
Brandeis’s reputation as the “people’s lawyer” has obscured the extent of his indifference to the welfare of consumers.
In his forties Landis began to drink heavily, and his family life fell apart. He eventually resigned his Harvard deanship and married his secretary, and in the early 1960s he was sentenced to thirty days in prison for an evasion of taxes that seems truly to have been unintentional. Only a few years before, he had produced for President-elect Kennedy a brilliant and devastating report on the state of the federal regulatory agencies. But his brilliance could not save him. Accidental death by drowning was the coroner’s ruling when he was found dead in his backyard swimming pool in 1964.
McCraw’s fourth prophet, Alfred E. Kahn, was born in Paterson, New Jersey, in 1917, the son of a Russian Jewish immigrant. He graduated from high school at fifteen and, at eighteen, graduated summa cum laude and first in his class from New York University. A doctorate from Yale was followed by an impressive academic career that culminated with the publication of a two-volume masterpiece, The Economics of Regulation , in 1970 and 1971.
In 1974 Kahn was appointed chairman of the New York Public Service Commission. Over the next few years he revolutionized utility rate structures in New York. Kahn insisted that rate structures must reflect true costs. That meant, for instance, that telephone companies must charge less for calls made during off-peak hours and that consumers must pay more for calls made during peak hours. This was “marginal-cost pricing.” Under any other system, Kahn argued, consumers made the wrong decisions—made too many high-cost calls during peak hours and not enough low-cost calls during off-peak hours.
From New York Kahn moved to Washington, where, as chairman of the Civil Aeronautics Board in 1977 and 1978, he presided over the first major deregulation of an entire American industry and became a media favorite. No government official had ever talked to executives quite the way Kahn did. “I really don’t know one plane from the other,” he told Frank Borman of Eastern Airlines. “To me they are all marginal costs with wings.”
To McCraw, Kahn represents “the economist’s hour in the history of regulation"—a refreshing change from the “notably different hours during which the muckraker and the lawyer alternately held center stage.”
In general, business executives feel about regulation the way children feel about rules that limit their consumption of ice cream. The rules that irritate executives, however, are not always as rational as the rules that frustrate the appetites of children. Nor do the rules always secure the good they intend. Prophets of Regulation is a provocative, tightly argued work that illuminates the past and should help guide public policy in the future.