The Economics of Justice

Richard A. Posner

• Publisher: Harvard University Press
• Year: 1983
• Print ISBN:
  9780674235267
  9780674235250
• eBook ISBN:
  9780674252813
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Richard A. Posner is probably the leading scholar in the rapidly growing field of the economics of law; he is also an extremely lucid writer. In this book, he applies economic theory to four areas of interest to students of social and legal institutions: the theory of justice, primitive and ancient social and legal institutions, the law and economics of privacy and reputation, and the law and economics of racial discrimination.

The book is designed to display the power of economics to organize and illuminate diverse fields in the study of nonmarket behavior and institutions. A central theme is the importance of uncertainty to an understanding of social and legal institutions. Another major theme is that the logic of the law, in many ways but not all, appears to be an economic one: that judges, for example, in interpreting the common law, act as if they were trying to maximize economic welfare.

Part I examines the deficiencies of utilitarianism as both a positive and a normative basis of understanding law, ethics, and social institutions, and suggests in its place the economist's concept of "wealth maximization."

Part II, an examination of the social and legal institutions of archaic societies, notably that of ancient Greece and primitive societies, argues that economic analysis holds the key to understanding such diverse features of these societies as reciprocal gift-giving, blood guilt, marriage customs, liability rules, and the prestige accorded to generosity. Many topics relevant to modern social and philosophical debate, including the origin of the state and the retributive theory of punishment, are addressed.

Parts III and IV deal with more contemporary social and jurisprudential questions. Part III is an economic analysis of privacy and the statutory and common law rules that protect privacy and related interests—rules that include the tort law of privacy, assault and battery, and defamation. Finally, Part IV examines, again from an economic standpoint, the controversial areas of racial and sexual discrimination, with special reference to affirmative action. Both Part III and Part IV develop as a sub-theme the issue of proper standards of constitutional adjudication by the Supreme Court.

1

An Introduction to the Economics of Nonmarket Behavior

This book takes an economic approach to issues—including the meaning of justice, the origin of the state, primitive law, retribution, the right of privacy, defamation, racial discrimination, and affirmative action—that are not generally considered economic. Is not economics the study of the economic system, the study of markets? None of the concepts or activities in my list are market concepts or activities.

Although the traditional subject of economics is indeed the behavior of individuals and organizations in markets, a moment’s reflection on the economist’s basic analytical tool for studying markets will suggest the possibility of using economics more broadly. That tool is the assumption that people are rational maximizers of their satisfactions. The principles of economics are deductions from this assumption—for example, the principle that a change in price will affect the quantity of a good by affecting the attractiveness of substitute goods, or that resources will gravitate to their most remunerative uses, or that the individual will allocate his budget among available goods and services so that the marginal (last) dollar spent on each good and service yields the same satisfaction to him; if it did not, he could increase his aggregate utility or welfare by a reallocation.

Is it plausible to suppose that people are rational only or mainly when they are transacting in markets, and not when they are engaged in other activities of life, such as marriage and litigation and crime and discrimination and concealment of personal information? Or that only the inhabitants of modern Western (or Westernized) societies are rational? If rationality is not confined to explicit market transactions but is a general and dominant characteristic of social behavior, then the conceptual apparatus constructed by generations of economists to explain market behavior can be used to explain nonmarket behavior as well.

The question of how fruitful this extension of economics is cannot be answered on logical grounds and should not be answered on intuition. I happen to find implausible and counterintuitive the view that the individual’s decisional processes are so rigidly compartmentalized that he will act rationally in making some trivial purchase but irrationally when deciding whether to go to law school or get married or evade income taxes or have three children rather than two or prosecute a lawsuit. But many readers will, I am sure, intuitively regard these choices, important as they are—or perhaps because they are so important—as lying within the area where decisions are emotional rather than rational. The only way to assess the fruitfulness of extending economics into the nonmarket sphere is to make economic studies of nonmarket behavior and evaluate the results.

At the outset of the modern development of economics stands one man who believed that people were rational maximizers of their satisfactions in all areas of human life. This was Jeremy Bentham, who plays a prominent, if somewhat sinister, role in Part I of this book. Bentham’s application of economics to crime and punishment was neglected by economists for almost two hundred years, although it had an enduring influence on penology. Bentham did not try to marshal evidence for his view that people were always and everywhere in rational pursuit of their self-interest. He merely asserted it, and subsequent generations of economists apparently found the assertion too implausible to want to test it.

The modern revival of interest in applying economics to nonmarket behavior begins with Gary Becker of the University of Chicago, although, as always in the history of thought, one can find predecessors.¹ Beginning with the publication of his doctoral thesis on the economics of racial discrimination in 1957,² Becker and his students and disciples pushed economics into such diverse areas as education, fertility, the utilization of time in the household, the behavior of criminals and of prosecutors, charity, prehistoric hunting, slavery, suicide, adultery, and even the behavior of rats and pigeons.³ This is not the place to attempt an evaluation of a large, diverse, and frequently technical literature—much of it controversial even within the economics profession⁴—that attempts nothing less than a redefinition of economics as the study of rational choice, not limited to the market. It is enough to say that because of this literature it is no longer absurd to suggest that justice, privacy, primitive law, and the constitutional regulation of racial discrimination might be illuminated by the economic approach.

My interest in the economics of nonmarket behavior began with, and remains centered on, the field known as economic analysis of law or, somewhat confusingly, “law and economics.” This book represents a broadening of my interests to include aspects of social experience beyond the strictly legal. But everything in the book grew out of the economic analysis of law. It may therefore be helpful if I describe the field briefly and relate it to the specific problems addressed in this book.⁵ The economic analysis of law has two branches. The older—the analysis of laws regulating explicit economic activity—dates back at least to Adam Smith’s discussion of the economic effects of mercantilist legislation. Such studies remain an important part of the economic analysis of law today—indeed, quantitatively the most important part. They include studies of antitrust, tax, and corporation law; public utility and common carrier regulation; and the regulation of international trade and other market activities.

The other branch, the analysis of laws regulating nonmarket activities, is for the most part very recent. It is this branch that provides the background of the present book. The pioneers here are Ronald Coase and Guido Calabresi. In his famous article on social cost, published in 1961, Coase analyzed the relationship between rules of liability and the allocation of resources.⁶ This was also the subject of Calabresi’s first article on accident law, written independently of Coase’s work and published the same year as Coase’s article.⁷ Coase observed—almost in passing, for this was not the focus of his paper—that the English courts, in interpreting the common law doctrine of nuisance (the doctrine governing pollution and related types of interference with the enjoyment of property), had decided cases in a way that seemed to accord with the economics of the problem. In fact they had exhibited a surer, if wholly instinctive, grasp of those economics than the economists had! Coase’s insight into the economizing character of common law doctrines remained for a time undeveloped. Since 1971, however, in a series of studies that is now quite extensive, I and others have examined the hypothesis that the common law is best explained as if the judges were trying to maximize economic welfare.⁸ The hypothesis is not that the judges can or do duplicate the results of competitive markets, but that within the limits set by the costs of administering the legal system (costs that must be taken into account in any effort to promote efficiency through legal rules), common law adjudication brings the economic system closer to the results that would be produced by effective competition—a free market operating without significant externality, monopoly, or information problems.

Evidence for the implicit economic structure of the common law has been found in many studies of legal rules, institutions, procedures, and outcomes. These studies are not limited to the occasional instances where the courts have adopted a virtually explicit economic formulation of the law, as in Judge Learned Hand’s formula for negligence.⁹ He said that negligence is a failure to take care where the cost of care (he called it the “burden of precautions”) is less than the probability of the accident multiplied by the loss if the accident occurs. An economist would call the product of this multiplication the expected costs of the accident. The Hand formula is a tolerable, although not perfect, approximation of an economically efficient concept of care and negligence.¹⁰ But the economic logic of the common law is more subtle than this. In analyzing a wide variety of legal doctrines—a few scattered example are assumption of risk in tort law, the degrees of homicide, the principles of tort and contract damages, proximate cause, mistake and fraud in contract law, the principles of restitution, the doctrine of “moral consideration,” the structure of property rights in water, the law of joint tortfeasors, and the rules of salvage in admiralty law¹¹—economists and economically minded lawyers have found that the law uncannily follows economics.

The Plan of the Book

Part I deals with the relationship between the concept of efficiency as wealth maximization, which has guided the positive economic analysis of the common law, and an acceptable concept of justice. The relationship of efficiency to justice is an interesting subject in its own right, but my interest derives mainly from the occasional suggestion that the efficiency theory is implausible because no judge could be guided by so crude a concept of justice as wealth maximization.¹² One possible reply is that the judge’s preferences do not enter into his decisions. Efforts have been made to show that the common law would evolve in the direction of efficiency even if the judges’ decisions were random,¹³ but the argument is persuasive only under strong assumptions.¹⁴ My reply is different. It is that efficiency as I define the term is an adequate concept of justice that can plausibly be imputed to judges, at least in common law adjudication. The reasons for this conclusion, it turns out, also point the way toward a reconciliation of the efficiency theory of the common law with the interest-group or redistributive theories that dominate current economic analyses of legislation. Part I also attempts to explicate the differences between economics and classical utilitarianism as guides to legal and political action.

Part II of the book deals with the social and legal order of primitive, including ancient, societies. Many common law doctrines have ancient roots, and most law in primitive societies, like the common law itself, is customary rather than legislated or codified.¹⁵ It seems worth inquiring, therefore, whether the economic theory of the common law might be able to explain the law of primitive societies as well. Furthermore, a study of primitive law may illuminate questions in the positive economic analysis of the common law. One such question is why in the nineteenth century strict liability declined in importance relative to negligence as the standard of liability. It is pertinent to note that strict liability is the general standard of liability (sometimes for crimes as well as torts) in primitive law and to ask what features of primitive society might explain this difference between primitive and modern law. Indeed, I began my research on primitive law and society by asking why strict liability looms so much larger in the liability systems of primitive than of modern societies.

Part III first develops an economic theory of privacy and related interests and then asks whether the relevant common law doctrines (including unfair competition, assault and battery, defamation, and the privacy tort itself) are consistent with the theory. If the argument of these chapters is accepted, it provides a further illustration of the power of economics to explain legal doctrines far removed from a concern with “economic” activities in the narrow sense.

Part IV explicates a nonefficiency, in fact antiefficiency, concept of justice: justice as individualized assessment beyond the point where a dollar in additional search would yield a dollar’s worth of additional information. The argument is that much racial and related discrimination probably is efficient because it economizes on the costs of information, but that the equal protection clause of the Fourteenth Amendment to the U.S. Constitution embodies a theory of justice that rejects efficient discrimination. The role of economics in the analysis is thus not to explain the legal position but to distinguish economic from noneconomic concepts of justice. Part IV focuses on affirmative action because that is the cutting edge of legal policy toward discrimination.

Part IV provides evidence that although efficiency can explain common law doctrines, it seems not to explain some important constitutional rules. There is further evidence relating to this point in Part III, dealing with privacy. Not only are state and federal privacy statutes seemingly antiefficient, but the Supreme Court has evolved a constitutional doctrine of privacy that has no systematic relationship to the economics of the problem.

The various parts of the book are connected with each other not only through a common origin in the positive economic analysis of law but also through a convergence on the economics of uncertainty. Uncertainty is a source of risk, which most people dislike, and so also a source of demands for the reduction of risk through various forms of insurance. Uncertainty also creates a demand for information. An important branch of nonmarket economics, the economics of information, pioneered by George Stigler,¹⁶ studies how rational maximizers allocate their time and other resou...

Table of contents

• Cover
• Title
• Dedication
• Copyright
• Contents
• Preface, 1983
• Preface to the First Edition
• 1 An Introduction to the Economics of Nonmarket Behavior
• I JUSTICE AND EFFICIENCY
• II THE ORIGINS OF JUSTICE
• III PRIVACY AND RELATED INTERESTS
• IV THE SUPREME COURT AND DISCRIMINATION
• Index