Saturday, February 7, 2009
Posted by Jeff Lipshaw
To quote the Stanford Encyclopedia of Philosophy entry on Leibniz, the principle of sufficient reason is "that the claim that nothing takes place without a sufficient reason means that nothing happens in such a way that it is impossible for someone with enough information to give a reason why it is so and not otherwise." That's pretty mundane stuff if what you are assessing is the physical world. What made Voltaire mock Leibniz (as Dr. Pangloss) was the additional fillip of metaphysical sufficient reason. That is, if somebody suffers or somebody succeeds, it is because there is a reason (namely, God) and this is the best of all possible worlds. That's a different way of saying not only does the world operates as it does for a sufficient reason, but the world also operates as it ought to, and also for a sufficient reason.
Whether we think about it or not, we all grapple with sufficient reason when faced with coming to terms with great fortune or misfortune. Captain Sullenberger is a hero for his perfect water landing just off the West Side Highway and 50th Street, and I wouldn't for a minute deny him the adulation. But he was also damned lucky, as all the accounts tell us. Nevertheless, just as we rebel against the idea of random misfortune (doesn't the world make a lot more sense if, when you hear that somebody has lung cancer, the answer to the next question, "is he/she a smoker?" is "yes"?), we don't like the idea of random fortune either. Sometimes all the models we construct for air safety work (most of the time, by the way), and sometimes they don't. Sully made a bet on the Hudson over Teterboro, and it paid off. We'll never know what would have happened in the other possible worlds in which he decided to go for New Jersey.
This morning, Joe Nocera in the New York Times calls on the usual suspects (my friend Steve Davidoff as well as Dale Oesterle of our sister Business Law Prof Blog) to try to derive sufficient reason out of the current status of Dow Chemical's attempt to acquire Rohm & Haas. I used to be in the chemical business, so let me make the appropriate analogy between Andrew Liveris (as synecdoche for Dow) and Sully. R&H is the best pure specialty chemical company in the world. What does that mean? There are commodity chemicals and specialty chemicals. Commodity chemicals are substances like benzene or chlorine in which there's no trick, no premium, no patent, no nothing. The only way to make money in commodity chemicals is to be the lowest cost producer in the world. That's why the only companies that make commodity chemicals are huge, Dow, BASF, DuPont, etc. You make them in humungous plants in humungous volumes and then sell them at the market price. Specialty chemicals, on the other hand, have high margins because there's something about them that is unique, either in terms of patents around the substance (not so common), or patents or know-how around making them effectively. An example of a specialty chemical would be a drug intermediate that has to be made just the right way, or a plastic or fuel additive. The history of the chemical business is of specialty chemicals that over the course of time turn into commodities.
As I said, R&H was the best specialty chemical company in the world, and it was a plum. The reasoning as reported behind the deal, it seems to me, is unchallengeable: we, Dow, will be better off if we jettison some of our commodity chemical business (to the Kuwaitis) and substitute a gem of a specialty business by acquiring R&H. When faced with that decision, Liveris, his staff, and the Dow board have to consider at least three possible worlds, one in which R&H stays independent, one in which Dow acquires it, and one in which BASF acquires it. There's also a pretty good analog to Sully in terms of time: you have to fish or cut bait quickly. As to Professor Oesterle's observation that the contract is seller-biased, well, yup. If BASF was willing to buy R&H without a financing "out," that set the terms of the deal. In other words, you pays your money and you takes your chances.
The legal version of the principle of sufficient reason is that nothing happens in such a way that it is impossible for someone looking at the deal and the contracts not to give a reason why it is so and not otherwise. Of course, Dow is in this situation as a matter of cause and effect in the real world because it signed that agreement, but legal sufficient reason imposes a metaphysical element as well: there must be something about the contracts that explain why the world operated not just as it did, but as it ought to have. That is, well, geez, if you sign an agreement without a financing out, what do you expect? There's justice, and we can attribute blame. That, of course, ignores another possible world, in which Liveris and others insisted on the financing out, R&H said "no thanks," BASF won the deal, and proceeded to eat Dow's lunch. In aviation terms, Captain Andy, just as skilled as Captain Sully, turned the plane toward the Hudson, glided in smoothly, and just as he was setting it down, caught a wind gust, tipped the wing in the water, and cartwheeled down the river.
Nocera's contribution to sufficient reason is to look for deus ex machina - the god from the machine - who will swoop in and make everything right, even though the model of the world that is the game of the legal system has no solution other than to enforce or not to enforce its own rules. Overriding those rules to make it this all come out to somebody's idea of the right result would be justice, the possible world in which everything turns out to be as it ought to be. Maybe justice, however, is just a figment of the principle of sufficient reason.