The Economics of Civil and Common Law

Zagros Madjd-Sadjadi

• Publisher: Business Expert Press
• Year: 2015
• Print ISBN: 9781606495841
• eBook ISBN: 9781606495858
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

Law is supposed to encourage innovation, morality, and conformity with societal expectations, yet it may provides perverse incentives causing individuals, or even the State, to act in discordant, inefficient, and even immoral ways. This book will explore the inefficiencies that are created that serve to deny individuals work and shelter in a haphazard and capricious manner. The author examines property rights, including eminent domain, that lets the State take property away with seemingly arbitrary compensation to the owner. Individuals must understand both civil law, codified by statutes, and common law, enshrined in precedential judicial decisions. This book is written for economists and non-economists and has an extensive glossary of economic, political and legal terms. Two items that are not formally treated in other economics of law textbooks are the legal organization of businesses and tax law from an economics perspective.

CHAPTER 1

The Interaction of Law and Economics

In this chapter, we examine the evolution of the legal system and the interaction of law and economics. By the end of this chapter, you should be able to discuss how precedent guides and limits the legal system. You will understand how law and economic theory may align to incentivize individuals to make decisions benefiting all of society in cases where narrow self-interest would normally deviate from this path. You will understand limitations of the economic approach to law and that it helps address questions in a more systematic and rational manner than would otherwise be the case.

Key Economic Concepts

efficiency equitability externality, negative externality, pecuniary externality, positional

externality, positive marginal benefit, private marginal benefit, social marginal cost, private

marginal cost, social optimal punishment theory rationality transaction costs

Key Legal and Political Concepts

Corpus Juris Civilis evidentiary standard inalienable rights jurisdiction, personal jurisdiction, subjectmatter

precedent, binding precedent, nonbinding qui tam stare decisis

unconscionability, procedural unconscionability, substantive

How the Legal System Has Evolved

Hard as it may be to imagine a world without lawyers, the law did not always exist. Prior to permanent settlements, there was little reason for it. Property, contract, tort, and even crime do not require codification of law. This does not mean that in a pre-law system there was an absence of disputes but these were resolved in a rather simple manner—violence. This is the way animals adjudicate conflict. They do not muse about a tribal council and deliberate finer points of who said what and when. Instead, they engage in a brute force competition and to the victor go the spoils.

However, such an arrangement was somewhat unsatisfactory once permanent abodes were established. People wished to protect property, which serves as the basis for most of the common and civil law traditions, and did not want to have to guard it continuously against potential raids. Laws were created to enshrine property rights into the collective psyche of the populace and to protect those rights from trespass.

Law probably originated out of religion and began as an appeal to the gods who were thought to be watching over human endeavors. A concept of justice was formed that ascribed it to the gods since one needs an independent third party to adjudicate disputes, lest you end up back with the aforementioned “solution” to disputes of clubbing the other side over the head to determine the victor. Trials by fire or ordeal were soon consigned to the realm of criminal law, a subject that we will not delve into in this text,¹ and replaced by a written code or past tradition to resolve conflicts.

Past tradition, or oral law, was probably the earlier form, but there is no ability for us to confirm this. On the other hand, codified law dates back to more than 5,000 years ago. The oldest recorded laws are tax laws, which is probably not coincidental since laws are the first manifestations of governance and governments need revenues to survive. Ancient Egyptian texts dating back to 3,100 BC suggest Pharaoh Hor-Aha would collect in-kind taxes of labor or harvest bounty at the biannual Following of Horus during which time he, as head of state and chief lawgiver, would roam the countryside, settle disputes, and promulgate new laws.² These laws could be rescinded as desired by the next ruler (or even the current one). Soon, the first tax shelters appeared in the form of religious institutions, as early governments derived their powers from religion.

The Pharaoh, being a god-king, ruled by divine right;³ however, that right was enforced through the Pharaoh’s security forces and religious authorities. Security forces (what we would now refer to as the military and police, although these two entities were typically combined in ancient times into one unit) dished out punishment in a temporal manner and the clergy reminded citizens that justice was always in service to a higher authority that meted judgment in the afterlife for those who escaped it in the present.⁴ In the case of the ancient Egyptians, a virtuous life meant eternal life, whereas a nonvirtuous one ensured that one’s heart would be eaten by Ammit, a combination of crocodile, lioness, and hippo.⁵ This was a good reason to obey the law.

The earliest known codification of law, the Code of Urukagina, has been lost to the ages but, based on references to it from other documents, it is known that it ascribes to the Pharaoh the task of lawgiver and is the first statement of what is commonly referred to as the Divine Right of Kings.⁶ The Code of Ur-Nammu, the first document for which we have a formal copy, documents a primitive form of family law for the first time.⁷ Yet both of these are not nearly as important as the Code of Hammurabi, the most famous legal document of antiquity, which survives nearly intact. Much of the document deals with matters of contract and labor law, whereas another sizeable chunk deals with family and estate law. There is also a series of criminal laws, with the most common penalty (death) being rather punitive in nature, in line with what would be the optimal punishment when it is rare that one can actually catch the criminal.⁸ I discuss this further in my Business Expert Press companion book, The Economics of Crime.⁹

While criminal law is a natural one for the government to dictate, civil and common laws are different. Criminal law is that field of law characterized primarily by a system where the state takes a position against a defendant and for which a defendant can face legal sanction while there is no corresponding potential negative consequence for the state. Typically, this legal sanction is the potential for loss of liberty or life, as opposed to mere property loss. A civil law has no potential for incarceration or death penalty and typically involves two or more individuals appearing before a court to adjudicate a dispute in which the court can award damages, thus potentially enriching one party to the detriment of the other.

The earliest known form of civil law that corresponds to modern practices is the Corpus Juris Civilis (erroneously but commonly referred to as the Codex Justinianus.) promulgated in the sixth century AD by the Emperor Justinian. It is more refined than earlier legal codes, which were nothing more than perfunctory statements of offense and punishment or they are not extant enough for us to determine their comprehensiveness (such as the laws of Solon and Draco, from which we get the term draconian, due to their emphasis on capital punishment or enslavement for the most minor of transgressions), especially when it comes to civil matters. The Corpus Juris Civilis (Body of Civil Law) is considered to be the foundational document of civil jurisprudence in the West via its well-defined contract and tort law as well as its status as the principal originator of corporate law. Its continued influence is felt in the Napoleonic Code, which serves as the basis for French civil law, as well as the civil law of Louisiana, which alone among the 50 states does not have a strong common law tradition.¹⁰

Common law uses previous decisions of jurists, rather than appeals to legislative authority. Common law in the United States derives from English common law, which originated after the Norman invasion of 1066. While civil law disputes are normally handled before a judge who adjudicates facts of a case as they relate to codified law, common law cases are usually presented before a jury that judges both facts and application of that law, while judges are left to interpret the law and give guidance to juries. On appeal, civil litigation is typically concerned with the nature of that interpretation rather than the facts as presented and judges refer to similar cases adjudicated in the past for guidance. This is in contrast to civil law, where courts defer to the original intent of the legislators. Given the nature of precedence, common law, a mixture of codified law with uncodified localized judicial interpretation, can be quite different from jurisdiction to jurisdiction, even when the same original law is examined.

One thing I should note at this point is that I am not a lawyer and nothing in this book should be considered to constitute legal advice. Instead, this is a book on the economics of law and should be viewed exclusively through that lens. If you seek legal advice, find a lawyer rather than referencing this text.

The Nature of Precedent

Precedent is the deferring to earlier decisions for rendering a decision on a contemporary case. Rather than deciding something based exclusively on the opinions of a jurist without reference to decisions of others, precedent serves as an important tool to maintain consistency between judicial jurisdictions over time and tends to enforce a certain degree of conservatism in legal scholarship. This belief that the past should inform the present is quite old. As far back as the ancient Romans, we have evidence that prior judicial decisions were being used to inform thencurrent ones. The passage of the Law of Citations under the Roman Emperor Valentinian III is an indicator of this as Roman authorities sought to bring order to what was then believed to be a chaotic system of utilizing decisions of other jurists. The rule of the Law of Citations was that a mere citation count based on a limited number of classical jurist (Gaius, Papinianus, Paulus, Modestinus, and Ulpianus) opinions could determine the correct application of law in a particular case and accorded the opinion of one jurist in particular—Papinianus, the role of tie-breaker.¹¹ The irony should not be lost on the reader that codifying the nature of precedents makes the law difficult to alter when circumstances change and ascribing jurisdiction to one lawgiver in particular makes the law excessively conservative.

Modern jurists have reached back as far as ancient Roman times to find justification for rulings. In Pierson v. Post, 3 Cai. R. 175, 2 Am. Dec. 264 (N.Y. 1805), the New York Supreme Court used ancient Roman law to establish that a hunter who pursued a fox was not entitled to sue a different hunter who killed the fox even if the second hunter knew the first hunter was in pursuit. A similar reasoning can be applied to the taking of a parking space even if someone else is waiting. Although common decency may suggest deferring to someone who is already waiting, it is actual possession that renders that taking legal, not the imminence of its possession. Similarly, the claiming of a foul ball goes not to the fan who pursues it first but rather to the one who actually catches it. However, our own sentiments suggest that a 45-year-old grown man who intercepts it and thus denies it to a 7-year-old boy may not wish to assert his right. After all, the child will proceed to bawl for the cameras and have the crowd immediately chant, “Give the kid the ball” until the man dutifully turns it over. The “court of public opinion” may overturn legal right, although it is far from efficient to give in to the brat, given that it will simply encourage more such behavior and possibly lead the little monster to a life of crime, or worse, politics. Perhaps, that is why legal right ought to triumph over mob mentality.

In United States v. Robbins, 269 U.S. 315 (1926), an ancient Visigoth community property standard was held to be controlling in California since its common law tradition emerged from Spanish law, given California’s origin as a Mexican possession and Spanish colonial territory. Thus, decisions are based on prior precedential rulings and law in a particular locale, as opposed to universally across jurisdictions, when it is a matter of local concern.

Precedents can be binding or nonbinding. Binding precedents apply to all inferior jurisdictions under the principle of stare decisis. A U.S. Supreme Court decision is binding on all other courts for U.S. law (though not on the U.S. Supreme Court itself), whereas a California Supreme Court decision has jurisdictional authority over California law, except in conflicts with federal law. Federal district court opinions invoking federal law are binding on areas within that district. However, a federal district court or the U.S. Supreme Court that finds a matter is one of state law defers to opinions of the relevant state authority, as in United States v. Robbins, cited earlier.

Binding precedents have a narrow applicability in that they are only binding when case facts render them applicable. Thus while courts may cite the Supreme Court decision in Loving v. Virginia, 388 U.S. 1 (1967), which invalidated laws prohibiting miscegenation (the mixing of different racial groups, especially with regard to marriage) in other decisions, such as those regarding polygamy (Brown v. Buhman, 2:11-cv-652 [2013]), they may not treat this decision as binding if facts are not the same. At least for polygamy, there exists a Supreme Court decision explicitly referencing polygamy as illegal, so an overly broad interpretation of one decision could cast a pall on the other (Reynolds v. United States, 98 U.S. [8 Otto.] 145 [1878], religious duty is not a defense to a criminal indictment).

Nonbinding precedents may have persuasive authority and can be relied upon for justification for a decision, but the earlier decision will not be binding on the court making the ruling. Thus in Cleopatra De Leon, et al. v. Rick Perry, et al., 5:13-cv-982, U.S. District Court, Western District of Texas (San Antonio) (2013), Judge Orlando Garcia cited cases brought before the Supreme Court of Vermont, the Supreme Court of Hawaii, and the Ninth Circuit Court of Appeals, which oversees decisions on the West Coast, to decide that the ban on same-sex marriage in Texas was unconstitutional. This was done although none of those court cases had binding authority on his court since none were superior to the district court in terms of the hierarchy. Indeed, the only binding precedents on the U.S. District Court in the Western District of Texas are from the U.S. Court of Appeals for the Fifth District and the U.S. Supreme Court.

Although precedent, especially when binding, brings consistency and predictability to decisions and increases economic efficiency by reducing pote...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright
• Contents
• Chapter 1 The Interaction of Law and Economics
• Chapter 2 Property Rights
• Chapter 3 Contracts
• Chapter 4 Torts
• Chapter 5 Organization of the Firm and Competition Law
• Chapter 6 Other Laws
• Glossary
• Notes
• References
• Index