Legal Philosophy:

Law and Economics

(L&E)
Brian Orend, Fall 2016

Todays Agenda
Admin Stuff, re: next/last class:
*reminder that term paper is due
next class, hard copy, in class:
on time, or zero*
Next class: you submit your
paper; I give out take-home final;
we do course evals; and then Ill
do a lecture for those interested.

Contd
-emerging alternative
perspectives on the law:
A) Law and Economics
(L&E)
If time, start B) CLS (Critical
Legal Studies)

Law and Economics

-one of the most recent attempts
at formulating a radically
different, yet theoretically rich
and deep, perspective on the
nature of the law. Unlike CLS,
which seems more associated
with left-wing political
orientation, L&E seems more
associated with a right-wing
political orientation (though

L&E
-basic proposition of L&E is
that the law should be viewed as
a tool to promote human
happiness and well-being, here
understood more narrowly as a
well-run and growing economy
which generates lots of
prosperity and material wellbeing for citizens.

All of the alternative...

....perspectives which well look
at share this notion, which is
quite un-traditional: the law isnt
anything special, or something
which exists in its own category.
Its best seen as a tool in the
service of something else. For
L&E, its economic growth; for
CLS, its a darker vision about
how law, too often, serves as a

The traditional notion...

...of course, is that the law IS a very
special institution, and in fact one
which regulates and lays the
ground-rules down for all the
other social institutions:
economy; health care; and even
political institutions. Seems fair to
say that this was the prevailing view
in legal philosophy until Marx comes
along (and well see how he up-ends

The modern
understanding...
....is thus to be more skeptical of
the laws role, and whether it
performs its role well, and to
wonder whether it might,
systematically, be in the service
of something elsee.g., as Marx
would say, the financial and
political interests of the ruling
class, as they strive to cement
their own well-being and keep

L&E...
...in general is an attempt to
meld the traditionally
separate disciplines of law
and (micro-) economics, and
see whether, and if so how,
they might share common
ground that can help out
both disciplines, both
conceptually and in terms of

Its important...
...that its really only microeconomics, and not also macro-. L&E
is basically accepting of the bigpicture scenario of free-market
capitalism, or at most welfare
liberalism, as the best kind of
economy (unlike for Marx, of
course). This is perhaps why it is
viewed as a right-of-centre
perspective on the law.

Descriptive vs.
Prescriptive
-there are two quite different projects
which get grouped under L&E:
1) the descriptive project, which
tries to understand how the insights
of economics allow us to predict the
behaviour of legal actors, and indeed
the behaviour of us all, in response
to legal rules. It further...

Contd...
...tries to understand how
different kinds of legal rules are
more or less likely to lead to the
kind of widespread economic
growth, technological progress,
widespread happiness, and
socio-economic development
which it is so centrally concerned
with.

Contd
-2) the prescriptive project is more
concerned with legal reform.
*How should legal rules and systems
be changed, so as to maximize
broad-based economic growth and
prosperity?* How have legal rules in the
past, and still today, held back economic
growth, or resulted in economic failure?

Whats interesting...
...is how relentless and
systematic the L&E people are
(e.g., Richard Posner). Applying the
insights of L&E to nearly every subbranch of law, sometimes with clear
and helpful advice that most people
would agree with, and other times
with controversial application which
seems completely counter-intuitive
to how people think of the function of

Lets proceed...
... from the more
compelling to the more
controversial, thereby
getting a full flavour of
L&Es strengths and
weaknesses.

Micro vs. Macro

Macro-economics, of course, is
about the functioning of an
entire economy (and, indeed, is
increasingly complicated by
globalizations impact on national
economies). It is concerned with GDP
per capita, rates of inflation and
unemployment, and such equations
as:
GDP = C + I + G + (X - M)

Whereas...
...micro-economics concerns the
choices of individual decisionmakers within the economy,
whether they be consumers (C),
businesses (I), or even government
(G). Core assumption: homo
economicus: actors in an economy
are most plausibly assumed to be
rational actors who are trying to
use their time and resources to

Well-being...
...is seen as the maximization of utility,
and we recall that term long ago from
Jeremy Bentham. For him, it meant the sum
total of sensory pleasures minus sensory
pains flowing from an action or choice (to do
A over B, e.g.). Economists like that def, but
also refer to utility as usefulness,
subjective, self-reported happiness, and so
on. *Everyone is assumed to be out to
maximize their own utility.*

L&E people...
... say we should follow this picture of
human behaviour, and see what
conclusions follow from it. We know
the macro-picture already: if
people are like this, and we care
about allowing them to maximize
their own utility, we should favour a
liberal, free-market, capitalist
economy overall.

It follows, for L&E...

....that a prime source of concern
would be so-called market
failure, wherein there is some
kind of interference with people
freely producing and consuming,
and being buyers and sellers of
various goods and services.
What are some instances of
market failure?

The first case...

...which is credited as giving
birth to L&E, actually, and
which casts interesting doubt
on labelling it a mere rightwing perspective, concerns
monopolies and so-called
anti-trust legislation.

Kinds of Market
Economists will tell you that, for
any given good or service,
usually there is one of three
market structures which
determine how much gets
produced, and at what price:
-competition
-oligopoly
-monopoly

Competition is when...
...there are lots of suppliers, and
lots of consumers. The costs for
entering the market are easily
achievable, and as a result there
is a large and diverse supply of
the good or service in question.
Generally, this keeps overall
costs down and drives up the
quality of the good or service, as
suppliers strive to please

Oligopoly is when...
...supply is controlled by a
handful of mega-powerful
companies. Entry into the
market, e.g., for becoming a
supplier, is very expensive and
difficult. Consumers have much
less bargaining power with their
buying dollar, and are largely
subject to what the controlling
companies wish to supply (e.g.,

Monopoly is when...
...there is literally only one
supplier of the good or
service in question.
Consumers are completely
held hostage to the power
of the one company, who is
therefore free to charge
whatever it wants.

The very first L&E...

....people argued in favour of extensive antitrust legislation to declare monopolies
illegal and at odds with a healthy, competitive
economy. Economists most prefer the market
model of competition, and view monopoly as
being at odds with having incentives to
innovate, and with sucking up too many
resources which consumers would otherwise
spend with other companies on other products,
resulting in better overall economy.

Examples...
....John D. Rockefellers Standard
Oil was broken up into dozens of
companies in the very early 1900s.
-there have been recent anti-trust
suits against Microsoft, forcing it to
share some of its technology with
competitors in both EU and USA
-various IP examples weve already
seen..

Some L&E people favour the

govt..
...taking over/nationalizing so-called
natural monopolies, and turning such
into publicly-run Crown corporations, or
branches of govt, with rigorous over-sight
(esp., re: price and distribution) and
accountability to elected officials: e.g.,
water distribution and treatment; firefighting; electricity supply. The goods
are just too vital to leave in the hands
of one for-profit company.

Stress that...
...the L&E argument here is NOT in
terms of fairness, or rights, or
democracy, or raison detat. It is a
purely economic argument: our
society will be wealthier, and
well have higher utility and
happiness as individuals, if we
dont allow monopolies and if we
ensure that vital goods are provided
for, on a widespread basis, by well-

Externalities
-another classic case of so-called
market failure is externalities.
-externalities happen when a
third person is affected by a
transaction between two other
parties (e.g., a buyer and seller).
*crucial to note that externalities can
be either positive or negative,
though negative ones get all the
attention*

The major...
...negative externality which gets
mentioned, historically, is pollution,
especially by heavy industry. The notion is
this: youve got a supplier making stuff to
sell to a consumer. The process of
manufacturing also produces a polluting byproduct, which the manufacturer dumps into
a nearby well/river/lake. That pollution over
time has a negative impact on someone else
(e.g., the publics drinking water).

This is market failure...

... because the true overall cost of
the good is not reflected in its price.
For the longest time, companies
could get away with this, and it even
became a kind of slogan by ruthless
types that the essence of
capitalism is to private the
benefits of production, while
socializing its costs.

Modern environmental..
..legislation exists, in part, to counteract this. L&E has a lot to say about such
things. On the prescriptive side, they
would say: the penalties for pollution
need to be large enough to internalize
the externalities and force polluters to
pay the full price for their pollution. This
will incentivize them correctly to cut
down on their pollution and increase
prices to reflect the true cost of the good.

Contd...
...on the descriptive side, L&E
people predict that, unless the
amount of the penalty is equal to, or
greater than, the costs of such
internalization, then companies will
keep on polluting, as its just cheaper
to pay the fine. Indeed, many
environmental laws fall way
short of such an amount, and
thus are not effective, and hence

L&E people...
...are actually bitter critics of trophy
laws. Useless laws benefit no
one, except maybe
people/institutions who are
behaving badly. Indeed, L&E
people argue that the deep reason
behind trophy/zombie legislation is
an economic failure to get the
incentives right in terms of the
equation between bad behaviour and

Indeed, L&E people...

...are firm supporters of not only effective
laws, but in general the firm and effective
enforcement of all contracts freelyentered into by people. All contracts
should be enforced because this provides
effective basis of planning and moving
forward for everyone. Economy runs better
on stability and predictability. (Especially
important in cases where A promises to do X
at time T1, and B doesnt have to do Y until
time T2.)

OK, weve got L&E

perspective on market
structure, monopolies, public
goods, environmental law,
and contract law. Lets now
consider tort law, negligence
and product safety law, as
weve not had any material
on that yet. Then, well turn
to criminal law, where L&E is

Tort Law
is a branch of civil law, and
the main concept within tort is
that of negligence. Its the
largest basis of civil action
liability and litigation.
Negligence, defined, has 3 big
parts:

Part 1: Failure to act

as a reasonable
person/practitioner/corporation
wouldve done, in the exact same
instance.
(the reasonable person standard is
very complex, but the first-level
explanation is that it is the average
person/practitioner/corporation in
that society)

Part 2: The Failure

breaches
..or violates a duty of
care to someone.
(Loosely, we all owe a
duty of care to anyone
we can reasonably foresee
might get injured or
harmed as a result of our

Part 3: All leading to

the causing of
measurable physical or
financial harm/damage
upon that someone.
If found negligent, youre
liable for at least some
part of the damages.

L&E people
tend to view negligence
much the same as antipollution legislation: the
damages in tort law need to
be proportionate to the actual
damages done, else the law
will not be able to deter
damaging behaviour. Plus

 youll have the bad

situation
of people/corporations doing
the harming unfairly not paying
the full price for the costs
theyve inflicted upon others,
resulting not only in market
failure but also in things like
widespread perception of laws
impotence, or unfairness.

Luckily, though
tort law has tended over
time to become quite wellstructured in this regard
(indeed, in contrast to
environmental law).
Consider, e.g., a classic
case involving both
negligence and product

How, negligent?
1) failure to act as a reasonable corp
wouldve done, in same conditions:
a) Ford shouldve done product
recall;
b) Ford couldve either absorbed
cost, or split cost, of repair with
customers;

Contd.
c) at very least, Ford shouldve
informed customers of risk,
letting them make the choice.
But, none of the above:
deliberate do-nothing, and
silence; thus manifestly
unreasonable.

Contd
2) Ford had a duty of care to
its customers (who of course
can be injured while driving a
car), and it breached this by
imposing much higher risk
upon them, with zero
information. And
3) leading to severe harm:
injury and death.

Whats interesting
is how the Ford execs used
the same kind of cost/benefit
calculation usually so favoured
by L&E people. But L&E experts
rightly say: its about getting
such calculations right, and
Ford totally failed, and they paid
the price -- as they should have.

But
did Ford actually pay the full
price? Well come back to this
when we consider the pros and cons
of the L&E approach in general.
Suffice for now to say that, for
them, its an utterly rigorous,
comprehensive cost/benefit
approach, much as Bentham had
dreamed of. Ford: flop!

Lets finish product safety

law:
-negligence the main
basis. But two other
bases:
1) warranty; and
2) strict liability

Warranty
- a promise regarding product function
and safety. Express: printed promise,
limited time frame and specific
conditions. Implied: not printed; its
intrinsic to purchase. In CDA/USA:
the good will not, of itself, harm;
and will at least do what its
designed to do, at the level of
average quality, for 3 months.

Why is this good law?

-so that consumers will have
faith in their purchases, and not
fall victim to fraud. Its better for
the economy overall if we have
these laws, so that if goods are
seriously defective, consumers
get a refund/replacement and
will keep on purchasing.

Strict Liability
-even if not negligence, nor
breach of warranty, you can
as a maker/supplier of a
good/service still be held
liable if harm routinely and
predictably results from the
use of your good/service
under normal conditions

Examples include.
. Fireworks, knives, acids,
lawn-mowers, intrinsically
dangerous goods or services,
such as sky-diving.
(NB: some goods have been
lobbied exempt: guns, cars,
alcohol.)

Strict
because youve done nothing
wrong: no negligence, no
breach of warranty. But liable,
why: because cost/damage gets
created from the use of your
good/service. You profit off the
sale of such things, and you
should share in the burden of
some of the costs. Public policy
choice re: rational cost-sharing.

L&E supports all such

efforts
..to spread costs around on a
fair and accurate basis
around the economy, and
above all to ensure those who
do damage pay the price for
it, and certainly NOT that
those who suffer damage be
alone to foot the bill.

Two further things

about.
.negligence. In practice,
what will happen in such trials
is much like criminal trials: 1)
step of whether negligent or
not; and 2) determination of
damages. Step 1, weve seen
with the three-fold test
above. Re: step 2

in practice, it boils down

.to a complex, per-case
calculation of total damages,
and then whos to blame for
x portion of the total. E.g.:
-consumer/victim: 10%
-manufacturer: 60%
-retailer: 10%
-municipality: 20%

Second, re: RPS

you should know that judges
are empowered to find industrywide practices negligent. In such
(rare) cases, its no defence to
say I acted as the average corp
in my industry does. Such
judgments force changes on a
whole industry, usually in the
name of public health and safety
(e.g. Learned Hand & ships &

All good, right?

-but then consider some of
the more controversial
applications of L&E.
Analogous to the
externalities point above, L&E
scholars, when considering
the criminal law, have noted
that:

Contd...
For effective deterrence of
criminal behaviour to occur,
the penalty equation
(Becker) needs to be:
Likelihood of getting caught
(by cops) plus likelihood of
conviction (in court) must be
greater than the gain

Contd...
...sounds good enough as a
description, though many have
pointed out how the core assumption
of homo economicus may actually
fall apart, when it comes to much
criminal behaviour. The rationality
of many of these deeds can be
questioned, and thus such people
may not be responsive to incentives
as L&E people understand them. So,

(as an aside...)
...theres also a lot of evidence
that people in their actual
behaviours are not true
maximizers but, rather,
satisficers, and are willing to
accept a sub-optimal amount of
utility for various reasons
(usually because they have set
an expectation beforehand, and
are happy once its meteven if

Further on criminal law...

...some L&E experts, e.g., in
America, when reflecting on the
broken system of retributive
incarceration, and the fullness
and expense of Americas jails,
have proposed viewing all of it
as an economic problem begging
for an economic solution: simply
determining: a) how much a
crime has truly cost; and then b)

So, radical reform:

-no jail time at all. Just
fines, and if they cant pay
now, then garnishee into
the future, and split amount
between the victim(s) and
societys cost in arresting
and making the judgment.

Some people...
...think that its good, creative thinking about
how to deal with such a problem. Others
point out that, in practice, it leads to such
powerfully counter-intuitive notions
that, so long as you can afford to pay the
price, theres nothing wrong, no incentive
not to commit horrible crimes. They even
say itd be like *purchasing a verdict.*
True justice must mean something more
than economic exchange...

In other words....
...there are some things which just
seem to stand as first principles, and
this is what a purely
consequentialist or cost-benefit
approach like L&E cannot
capture. E.g.: retribution on
principle; or the symbolic function of
the law; or that you cannot simply
calculate whether you can afford
to violate my rightsmy rights

One final criticism

Of the L&E approach is that, in
enshrining and glorifying a
cost/benefit approach to all these
problems, assumes the following two
dubious things:
-all benefits and costs can be
quantified (whereas some want to
say not all of them can be: e.g., the
value of an un-injured body, or the
value of not experiencing

Contd...
-ignores the crucial question of the
distribution of costs and benefits. Its
all just about aggregating overall. But this
may allow:
A) too few benefitting, while the majority
pay the price (patents?); or
B) the majority benefitting, but then
disproportionate costs fall on a minority
(force majeure?)
(depending on the situation)

Contd...
-and so some people argue that, in
the rush towards economic
productivity, efficiency, and overall
growth, vital legal values get lost
in L&E, notably individual rights
and fairness across people. Such
critics tend to offer something like
Rawls core principles as a superior
alternative to straight-forward
economic cost/benefit (even if such

Recall, for Rawls

-all of us come together as selfinterested rational agents trying
to do the best we can for
ourselves. Our objective is to
arrive at unanimous agreement on
the most basic principles of law
and society.
But...

Veil of Ignorance
...in this original position, were
behind the veil of ignorance,
which radically deprives us of
the kind of information most
commonly used by people to
gain unfair advantage in realworld bargaining situations.
-key: you dont know where
youre going to wind up, once
veil is lifted; and, there must be

Results?
Rawls says there would be
unanimous agreement on three
big principles:
1) The Liberty Principle: wed all
want the most extensive set of
personal freedoms we could
possibly get, and would only
agree to everyone getting the
exact same set: thus, equal

Contd...
2) Primary Goods for all. Wed
also want to ensure that we
each had equal access to the
primary goods: those things
needed to pursue any kind of
life plan at all. In particular:
personal security from violence;
and material
subsistence/fulfilment of vital

Contd...
3) The Difference Principle.
Essentially, its an economic principle
which seeks to balance freedom with
equality. He says that we would
allow inequalities, so long as
they would benefit everyone. He
says this implies progressive taxation
and the welfare state: the more you
make, the more you pay, and that
money gets channelled to improving

In fact, a lot of the

L&E literature and research now
concerns itself with the
differences between what they
would recommend and what
Rawlsians would recommend, and
seeing which seems superior in the
situation as a model for what the law
should be. Rawls a focus because
hes like them in holding up rational
choice as method, plus liberal

So, always a fruitful

..approach to the analysis of a
given legal issue to compare and
contrast those two approaches:
-L&E, with comprehensive
cost/benefit calculation, focussed
on maximizing economic growth
-Rawls, allowing for economic
freedom but within firm framework
of individual rights protection

In many ways
such a debate boils down to
a dispute over the nature and
degree of state intervention,
or legislative regulation, in an
otherwise market-based
economy. In other words, the
quest for The Goldilocks
Standard.