The Wealth-Maximisation Principle Accommodates, With Elegant Simplicity, the Competing Impulses of our Moral Nature. (Posner).
– Discuss.
Supposing one were to take a residential lease of premises in a bustling, industrialised area. The premises lie adjacent to a building site where the developer proposes to construct an office block. Suppose further that, in the course of the office block being constructed, one were to experience disturbance in the form of nuisance noise, vibrations, and dust as the piles for new building are driven into the ground by heavy machinery. The works and disturbance continue, incessantly, through the night as the project nears completion. Would the leaseholder have a cause of action for relief against such disturbance? Suppose, this time, that the leaseholder has acquired premises in a quiet, idyllic village somewhere in the English countryside. This premises lies adjacent to a farm that, among other things, produces the occasional unpleasant noise or odour. The farm has been in existence for years, having been passed through generations of the one family. Surely, one might think, any Court would consider that the leaseholder has little grounds, or at the very least acquiesced to any possible legal infringement brought about by the farmer.
It is suggested that the English Courts’ treatment of facts similar to the above-mentioned might produce a counterintuitive result. In Andreae v Selfridge & Co. the Court refused to grant injunctive relief to halt building works in order to preserve the peace and quiet of a nearby hotel.[i] Conversely, in Sturges v Bridgman, the Court was willing to grant relief to a doctor whose consultation rooms were disturbed, intermittently, by the presence of a confectioner’s shop next door, notwithstanding the fact that the confectioner had been using machinery at the premises throughout the 60 years prior to the doctor taking up occupancy.[ii]In that case, the Court adopted the view that the character of the neighbourhood was residential and not industrial, and that finding in the confectioner’s favour would have a negative effect on residential development. As Ratnapala highlights, the economic undertones of these decisions are noticeable in the way in which lawyers argue cases. Arguments are supported by interpretations of established law on grounds of public policy and not private sympathy, “they will say that their interpretation yields the best outcome for society generally and will rarely appeal for sympathy for the client. Poverty does not release a person from legal obligations.”[iii]Judge Richard Posner, who has been described as, ‘the most influential thinker in the law and economics movement’,[iv] has noted that:
Many areas of the law, especially but not only the great common law fields of property, torts, crimes and contracts, bear the stamp of economic reasoning. Granted, few judicial opinions contain explicit references to economic concepts. But of grounds of legal decision are concealed by the characteristic rhetoric of opinions. Indeed, legal education consists primarily of learning to dig beneath the rhetorical surface to find those grounds, many which may turn out to have an economic character.[v]
In essence, Posner’s claim is a descriptive account of the economics of justice. In the exposition of his seminal text, The Economics of Justice, Posner opines that the common law is ‘best explained as if the judges were trying to maximise economic welfare.’[vi] This may, part, explain why much of the ideological underpinning of classical common law doctrine was laissez-faire based.[vii] As Sandel writes, a key facet of laissez-faire economic systems is the notion that markets, as opposed to government, religion, family, or happiness, ‘hold the key to freedom and prosperity.’[viii] This freedom, as Smith famously described, does not appeal to higher principles of morality, such Kantianism but, rather, self-interest:
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.[ix]
The distribution of wealth determines in part both the economic value and the optimal allocation of resources in an economy. Thus, as Veljanovski writes, to say that,‘a situation is allocatively efficient is to say only that all the… gains from trade have been exhausted given the initial distribution of wealth among individuals.’[x] Judges, Posner argues, ought to decide cases based on principles that will maximise society’s total wealth, thereby exemplifying the concepts of utility and autonomy:
…judge-made law is designed to foster market transactions; and in situations where the costs of the market transactions are very high, to simulate the market by imposing legal sanctions that bring about the allocation of resources that free market transactions would have brought about had they been feasible.[xi]
Judges of common law jurisdictions might find it surprising to learn that their decisions are subconsciously infused with economic considerations, though Posner does raise a valid argument. In McFarlane v Tayside Health Board (Scotland),[xii] a surgeon wrongly and negligently advised a husband and wife that a vasectomy had rendered the husband infertile. Acting on this advice, they ceased to take contraceptive precautions. This led to the wife becoming pregnant and giving birth to a health child. The question before the Court was what damages, if any, the parents were entitled to recover on foot of said negligence. Whilst acknowledging that the parents’ basic freedoms and personal autonomy ought to be afforded respect Steyn LJ, in an apparently lucid act of judicial activism, opined as follows:
Should the parents of an unwanted but healthy child be able to sue the doctor…for compensation equivalent to the cost of bringing up the child for the years of his or her minority? I have not consulted my fellow travellers on the London Underground but I am firmly of the view that an overwhelming number of ordinary men and women would answer it the question with an emphatic “No.”And the reason for such a response would be an inarticulate premise as to what is morally acceptable and what is not.[xiii]
Lord Steyn could be saying a number of different things. On one reading, he could be saying that the law is incapable of placing a value on the creation of a healthy human life. On the other, he would appear to be saying that corrective justice requires the claimant to have lost somethingthat it is capable of monetary quantification, and that the parents’ claim in this instance is so void of moral worth that to grant a financial remedy in this case would offend the basic principles of distributive justice. Steyn LJ goes on to note by way of obiter dicta that “judges’ sense of the moral answer to a question, or the justice of the case, has been one of the great shaping forces of the common law.”[xiv]
There are, however, problems that inevitably arise from equating justice with wealth maximisation. Keen to circumvent the problems arising from a purely utilitarian ethic, Posner suggests that the wealth-maximisation principle is rooted in the deontological, Kantian ethic of Pareto efficiency.[xv] Under Pareto economics, transactions that leave the contracting parties better off and no other party worse off are said to be efficient.[xvi] However, this argument sits awkwardly against the backdrop of Posner’s consideration of certain aspects of criminal law, viz. rape. Under Posner’s economic efficiency hypothesis rape cannot, by definition, be an economically useful activity in a Pareto sense, for at least one party must sacrifice her autonomy in order for the event to fulfill the criterion of qualifying as rape. In this instance, the parties to the transaction cannot both be better off, as is required to satisfy the definition of Pareto efficiency.
As Posner writes, ‘the prohibition against rape is to the marriage and sex market as the prohibition against theft is to explicit markets in goods an services.’[xvii] Not only does that observation make Posner appear unfamiliar with the history of female emancipation, but also his metaphor is fundamentally flawed in the sense that theft and rape are non-commensurable criminal concepts. The former is an offence against property whereas the latter is an offence against a person and it would be wrong to conflate the harm produced by rape with that produced by theft. But, let us briefly follow Posner’s identifiably flawed logic.
Supposing there is a demand constituted by a number of individuals (Group A) who enjoy partaking in non-consensual sexual activity. There is equally a supply in the form of autonomous individuals (Group B) who have no desire to engage in sexual activity with those in Group A. According to Posner’s conjecture, those individuals in Group A who go on to successfully rape individuals in Group B were clearly not deterred by the prevailing market norms (i.e. penal implications imposed by the substantive criminal law). The demand has therefore outstripped supply. What measures could therefore be implemented to reduce the likelihood of persons in Group B being subject to rape?Calabresi and Melamed, adopted a purely market-oriented approach to the question by proffering what can be distastefully described as a ‘rape-licence’: –
Why do we allow liability rules here? The only level at which, before the accident, the driver can negotiate for the value of what he might take from his potential victim is one at which transactions are too costly. The thief or rapist, on the other hand, could have negotiated without undue expense (at least if the good was one which we allowed to be sold at all) because we assume he knew what he was going to do and to who he would do it.[xviii]
Instead of tending toward Pareto efficiency, this negotiated position is better described as tending toward Kaldor-Hicks efficiency, which requires that no one be made worse off by a change in the allocation of resources, but only that the increase in value be sufficiently large that the losers could be fully compensated.[xix]However, even this permutation of economic efficiency may be subject to criticism on the basis that the solution is ‘coercively imposed after some third-party determination of costs and benefits.’[xx]Indeed, this patently absurd position not only underestimates the ‘cost’ incurred by the rape victim but also erodes the intrinsic worth of bodily integrity and by extension undermines Posner’s cherished principle of autonomy. As Radin highlights:
Thinking of rape in market rhetoric implicitly conceives of as fungible something that we know to be personal, in fact conceives of as fungible property something we know to be too personal even to be personal property. Bodily integrity is an attribute and not an object. We feel discomfort or even insult, and we fear degradation or even of the value involved, when bodily integrity is conceived of as a fungible object.[xxi]
This leads to one of the most common criticisms leveled against the Law and Economics school of legal thought: reducing justice to a mere analysis of relative bargaining power reflects a particular ideology, and since that ideology is perceived to be capitalistic and free-market oriented, it is seen to constitute an apologia for economic conservatism. In other words, efficaciousness depends on what actors within the economic system are willing to pay for the goods traded within it, the more wealth one has, the wealthier one can become.[xxii] In rebuttal to this criticism, Posner suggests that in order for the Courts to promote efficiency, they should assign entitlements by mimicking the effects of the market, this would inevitably involve assigning rights to resources to those parties capable of purchasing them in an exchange market.[xxiii] As Coleman highlights:
If rights are assigned in this way, the richer not only get richer, but because their newly acquired entitled increase their wealth further, they are in an even better position to increase their wealth again by securing more rights to the grounds that their doing so is required by efficiency. Thus, efficiency not only depends on prior wealth inequalities; pursuing efficiency leads inevitably leads to further inequities.[xxiv]
Of course, even if resources were assigned uniformly along the lines of Rawls’ veiled state of nature, then once resources are allocated through trade or political process disputes will arise ‘in which continuing to promote efficiency will serve only to redistribute wealth further in the direction of the already well-to-do.’[xxv] Moreover, in the wealth-maximising concept of alienability demands that goods acquired in concordance with the Nozickian principle of justice in acquisition ought be capable of being subject to disposal at the owner’s discretion. This can have punishing effects on the poor, as Calabresi and Melamed observe, ‘prohibiting the sale of babies makes poorer those who can cheaply produce babies and richer those who by some non-market device get free an ‘unwanted’ baby.’[xxvi]
Indeed, when we question how such a market-driven state is to be controlled, or how the wealthy are to be prevented from dominating the executive branch or government, Nozick responds with reference to, “free operation of the market, voluntary associations and private philanthropy.”[xxvii] As Stiglitz notes, Nozick’s theory of trickle-down economics has not worked in practice – the US experience indicates that wealth and altruism are not correlative and, “the riches accruing to the top have come at the expense of those down below.”[xxviii]
According to Sandel, there are certain civic goods, chattels and services that money simply cannot buy because, in doing so, these entities are, in themselves, degraded by the moral of the market, reduced to mere commodities; when everything is for sale, we move from a market economy to a market society.[xxix] Duxbury, on the other hand, contends that such an argument is trite; that it is merely an emotive response, and that such feelings are not sufficiently serious to justify the limitation on the commodification of those goods or services.[xxx] Indeed, the existence of market societies is predicted within work of the late Professor Coase, who suggested that the emergence of the corporate structure of the firm arose as a result of employers’ needs to reduce waste what he refers to as transaction costs.[xxxi] In the example provided in Sturges v Bridgman, the Court’s intervention curtailed the activities of the confectioner to the extent that it would have had an impact on the local economic system, i.e. by reducing his capability to manufacture confectionery – this highlights the problem of what Coase refers to as social cost. The general point is that legal rules which allocate rights and duties have a critical bearing on the efficiency of the economic system. As Coase highlights, where is to costly to rearrange legal rights by market transactions, ‘the courts directly influence economic activity’.[xxxii] This is perhaps evidenced through the implications of costs in legal proceedings. In most common law jurisdictions, costs follow the event – i.e. the losing party must bear the winning party’s consequential costs. This means that whoever brings an action has calculated that he has more to gain than lose by inaction, and he who defends the claim has calculated that he has more to lose than gain by conceding the action. Posner suggests that this element of judicial administration acts to the exclusion of busybodies and activists and insulates the Courts from distortions that would otherwise affect a free market system. He opines that:
If, therefore, common law courts do not have effective tools for redistributing wealth…reslicing the economic pie among contending interest groups – it is to the benefit of all interest groups that Courts, when they are enforcing common law principles rather then statutes, should concentrate on making the pie larger.[xxxiii]
Consider again, the facts of McFarlane v Tayside Health Board. Would the parents really have been better off if their claim for damages arising from the unwanted birth of their child had succeeded? Economically, yes, the parents could have recovered substantial damages to cover the cost of potentially raising their daughter up to the age of 25, but critics on the left present a different argument – allowing such recovery may maximise the parents’ wealth, but not the wealth of society generally.[xxxiv] The argument against wealth maximisation is an argument for social justice in the sense of fairer distribution of resources.
Law and Economics proponents have two general replies to the leftist critique. Firstly, they concede that efficiency is an important consideration, but not the only consideration. Legislatures, for example, make legal rules with reference to moral, ideological, or partisan reasons. Wealth maximisation is useful, as it informs judges and legislators of the economic or transactional trade-offs that are involved in doing so. Secondly, they claim, without providing examples, that societies whose laws are more conducive to wealth maximisation have done better economically.[xxxv] As Posner himself suggested, ‘wealth maximisation may be the most direct route to a variety of moral ends.’[xxxvi]
Case Law
Andreae v Selfridge & Co.[1938] 1 Ch 1
McFarlane v Tayside Health Board (Scotland) [1999] 3 WLR 1301
Sturges v Bridgman (1879) 11 ChD 852
Books and Journals
- Edwin Baker, “The Ideology of the Economic Analysis of Law” (1975) 5 Philosophy and Public Affairs 3
- Calabresi and A.D. Melamed, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral” (1972) 85 Harvard L. R. 1089
R.H. Campbell and A.S. Skinner (eds), Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Glasgow edn, OUP 1976)
Ronald Coase, “The Nature of the Firm” (1937) 4(16) Economica 386.
Ronald Coase, “The Problem of Social Cost” (1960) 3 Journal of Law and Economics 1
Jules Coleman, “Economics and the Law: A Critical Review of the Foundations of the Economic Approach to Law” (1984) 95 Ethics 649
Michael D.A. Freeman (ed), Lloyd’s Introduction to Jurisprudence (8th edn, Sweet & Maxwell, 2008)
Nigel Duxbury, “Do Markets Degrade?” (1996) 59 Mod. L. Rev. 331
Richard Posner, ‘An Economic Theory of the Criminal Law’ (1985) Colum. L. Rev. 1193,
Richard Posner, The Economics of Justice (Harvard University Press, 1983)
Richard Posner, The Problems of Jurisprudence (Harvard University Press, 1990)
Richard Posner, “Utilitarianism, Economics, and Legal Theory” (1979) 8(1) J. Legal Stud. 103
Margaret J. Radin “Market-Inalienability” (1987) Harv. L. Rev. 1849
Suri Ratnapala, Jurisprudence (Cambridge University Press, 2009)
Michael Sandel, What Money Can’t Buy: The Moral Limits of Markets (Farrar, Straus and Giroux 2012)
Joseph Stiglitz, The Price of Inequality (Penguin Books, 2013)
Cento Veljanovski in (eds) AnthonyOgus and Cento G. Veljanovski, Readings in the Economics of Law and Regulation (Oxford: Clarendon Press, 1984)
Raymond Wacks, Understanding Jurisprudence: An Introduction to Legal Theory (2nd edn, OUP, 2012) 267.[xxxvii]
[i] [1938] 1 Ch 1.
[ii] (1879) 11 ChD 852.
[iii] Suri Ratnapala, Jurisprudence (Cambridge University Press, 2009) 257.
[iv] Michael D.A. Freeman (ed), Lloyd’s Introduction to Jurisprudence (8th edn, Sweet & Maxwell, 2008) pp. 622-3.
[v] 27.
[vi] Richard Posner, The Economics of Justice (Harvard University Press, 1983) 4.
[vii] G. Calabresi and A.D. Melamed, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral” (1972) 85 Harvard L. R. 1089.
[viii] Michael Sandel, What Money Can’t Buy: The Moral Limits of Markets (Farrar, Straus and Giroux 2012) 6.
[ix] R.H. Campbell and A.S. Skinner (eds), Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (Glasgow edn, OUP 1976) 17.
[x] Cento Veljanovski in (eds) AnthonyOgus and Cento G. Veljanovski, Readings in the Economics of Law and Regulation (Oxford: Clarendon Press, 1984) 22.
[xi] Richard Posner, “Utilitarianism, Economics, and Legal Theory” (1979) 8(1) J. Legal Stud. 103, 108.
[xii] [1999] 3 WLR 1301.
[xiii] Ibid at 1318 per Steyn LJ.(Emphasis Added).
[xiv] Ibid at 1319.
[xv] Posner (n 6) at 8.
[xvi] Raymond Wacks, Understanding Jurisprudence: An Introduction to Legal Theory (2nd edn, OUP, 2012) 267.
[xvii] Richard Posner, ‘An Economic Theory of the Criminal Law’ (1985) Colum. L. Rev. 1193, 1199.
[xviii] Calabresi and Melamed (n 7) at 1125-27.
[xix] Freeman (n 4) at 622.
[xx] Jules Coleman, “Economics and the Law: A Critical Review of the Foundations of the Economic Approach to Law” (1984) 95 Ethics 649.
[xxi] Margaret J. Radin “Market-Inalienability” (1987) Harv. L. Rev. 1849, 1880-81.
[xxii] C. Edwin Baker, “The Ideology of the Economic Analysis of Law” (1975) 5 Philosophy and Public Affairs 3.
[xxiii] Freeman (n 4) at 624.
[xxiv] Coleman (n 20) at 662.
[xxv] Ibid at 663.
[xxvi] Calabresi and Melamed (n 7) at 1114.
[xxvii] Freeman (n 4) at 600.
[xxviii] Joseph Stiglitz, The Price of Inequality (Penguin Books, 2013) at pp. 8-9.
[xxix] Sandel (n 8) at pp. 8-15.
[xxx] Nigel Duxbury, “Do Markets Degrade?” (1996) 59 Mod. L. Rev. 331, 332.
[xxxi] Ronald Coase, “The Nature of the Firm” (1937) 4(16) Economica 386.
[xxxii] Ronald Coase, “The Problem of Social Cost” (1960) 3 Journal of Law and Economics 1.
[xxxiii] Posner (n 6) at 571.
[xxxiv] Ratnapala (n 3) at 265.
[xxxv] Ibid at 266.
[xxxvi] Richard Posner, The Problems of Jurisprudence (Harvard University Press, 1990) 382.