Law and Economics Theory

Author:Stephen F. Williams

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The "positive" economic theory of law argues that one can discern an economic logic implicit in law, constitutional as well as any other. Economic analysis can also play a normative role, providing a benchmark for assessing the soundness of any particular constitutional clause or interpretation. (As economics itself does not establish indisputable criteria of judgment, the benchmark itself may be blurry.) For some constitutional provisions or doctrines, the relevance of economics is obvious; the Fifth Amendment's takings clause is an example.

A market economy requires private property. One can imagine an economy of government firms relating to each other, to workers, and to consumers primarily through market operations. But if capital were allocated by government, this would be an odd parody of a market economy, and if capital were allocated by markets in the sense

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that individuals were free to place their capital where they chose, the firms would not be government firms. The Fifth Amendment's requirement of JUST COMPENSATION for the TAKING OF PROPERTY thus supplies a qualified protection for the market economy. The economist naturally asks how alternative constructions of the clause will affect incentives?the feature of a market economy that accounts in large measure for its productivity.

One might view the clause as aimed at assuring owners correct incentives to invest and improve property. The Supreme Court's focus on "investment-backed expectations" in PENN CENTRAL TRANSPORTATION CO. V. NEW YORK CITY (1978) suggests such a concern. But insurance against such risks could be provided by private insurers, and so the question arises why the duty to pay should fall on government. At least one answer?again look ing at incentives?is that such a duty will improve incentives for government decision makers, deterring the pursuit of programs that sacrifice a greater value than they produce.

Does such a view lead to a rule that compensation is required for government acts that fail some sort of cost-benefit test, and not for ones that pass? Clearly not. To resolve claims on such a basis would require the courts to assess the wisdom of virtually every government decision, a costly repetition of other branches' work. Because many of the benefits and costs of a program are political, this inquiry would take courts into areas where other institutions might have a comparative advantage. Finally, the Constitution establishes rights. Whether created for instrumental or for ethical reasons (e.g., a sense of the moral fitness of people's owning themselves and what they receive in free exchanges with others), a right would hardly be worthy of the name if it succumbed whenever a cost-benefit test ran against it. Thus, the economist, along with everyone else, would not define the protections of the taking clause by reference to "case utilitarianism" (assessing particular acts in terms of their direct effect on aggregate utility).

But the criterion of maximizing utility may help define the rules that embody constitutional rights?"rule utilitarianism." Reading the takings clause to require compensation for all government acts, for instance, would provide a strong incentive against wasteful government acts. But such a rule would entail enormous administrative and information costs?though never the costs of evaluating the program's benefits, as the rejected case-utilitarian view would. The concern for administrative costs suggests a reading of the takings clause that requires compensation for any act (or class of acts), except where its costs are relatively widespread?in the extreme case, for example, those of a change in monetary policy?so that the administrative costs of awarding compensation are high. (The compensation itself is not a social cost, but a transfer from taxpayers or users to whoever's property...

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