Magic on the frontier: the norm of efficiency.

• Author: Hardin, Russell
• Position: Symposium: Law, Economics, & Norms

INTRODUCTION: THE NORM OF EFFICIENCY IN THE LAW

The central norm in law and economics is efficiency--not efficiency in the sense of the efficiency of some means to an end, but in the sense of productive and allocative efficiency. The norm has slowly risen to take its place as perhaps the dominant norm of many parts of the law, especially contract and tort law. Oddly, however, it is not a simple or transparent notion as articulated in legal discourse, and it has been the subject of continuing theoretical debate. I wish to trace the rise and explication of this norm from the work of Thomas Hobbes to the present day.

The development of the notion of efficiency has, of course, been facilitated by the fact that it is centrally important in economics. It de facto gives normative underpinnings to economics, even when economists insist that they wish to keep normative and explanatory issues separate. In contemporary law and economic efficiency is held to be both an explanatory and a normative notion. Indeed, it is taken to be explanatory just because it is viewed normatively as very compelling. Judges and parties to suits implicitly share the norm and, therefore, it governs the common law, even though legislation sometimes violates the norm.

There is a grievous theoretical problem with a principle of efficiency, namely, how to handle allocations across interacting parties. If we can make interpersonal comparisons of costs and benefits between people, we have no need for a principle of allocative efficiency nor, given relevant social scientific and technological theories, for a principle of productive efficiency. If we cannot make interpersonal comparisons, any principle of efficiency must reduce essentially to a principle of mutual advantage. This principle raises its own difficult problem. We generally need recourse to legal action only when there is an issue that, in some sense, cannot be settled to the mutual advantage of both or all parties. Hence, there typically cannot be an efficient resolution of a particular case.

Consider rules that appear to be efficient, such as stare decisis. It has almost no content. It has, however, three great values. First, it contributes to stable expectations on the parts of almost all actors, both those governed by the law and those in the legal system itself. In this respect, the rule is strategically effective in giving actors an incentive to behave in more productive ways. Second, the rule greatly reduces the overall volume of cases that must be litigated or heard, in part by changing behavior in ways that arguably reduce the likelihood of parties' resorting to litigation. It also plausibly gives such clear signals about how courts would rule that potential litigants avoid the waste of a trial. Third, it greatly reduces decision costs of judges in many cases that are heard. In all of these ways, the rule is likely to be enormously efficient unless the state of the world to which it is applied is changing in some important way. Let us briefly discuss two of these considerations, while holding the third for later.(1)

The first of the great values of stare decisis is essentially Hobbes's central thesis applied to law. Hobbes argued that any government that produced order should be supported because the risks from trying to change it would be mutually harmful.(2) Many rules share this feature of stare decisis, although they may often be efficient primarily for the strategic reason that they affect behavior ex ante. For example, consider the Hadley v. Baxendale rule against consequential damages.(3) If I know that my use of your product or service has much greater risks at stake for me than you have reason typically to expect it to have, I am responsible for taking extra precautions; otherwise, I will suffer the extra costs. You have to make good only the defective product or service, not such consequential damages. Hence, I may behave differently in using your product. Even if I eventually wish to sue you for the great losses I have suffered, I will be deterred by most lawyers I might consult. If nevertheless I do sue, the judge will not require much deliberation to decide against me.

It is striking that the judge who rules from efficiency under stare decisis or the Hadley v. Baxendale bar to consequential damages rules from outside the case at hand. This fact complicates the claim that efficiency explains the content of the common law, which includes the content of decisions in various cases plus the rules that can be derived from those cases. It raises the questions what the norm of efficiency is and how it works. To answer the first of these, we can trace the norm's evolution in response to problems that various thinkers were attempting to resolve. An answer to the second question must start from the possibility that few judges ever make inferences about the relative efficiencies at stake in the cases on which they rule. Hence, we would have to show that subsidiary rules of thumb or norms that judges actually follow are themselves efficient, which is to say that following these norms serves the mutual advantage of all concerned. In this Article, will suggest a model of how such subsidiary norms could be genuine norms that are internally reinforced by members of the legal community, most notably by judges. In Part I, I will offer a brief discussion of the collective implication of self-interest, which is mutual advantage. In Part II, I canvass the development of views on the efficiency of law, from Hobbes to Posner. Part III discusses the biggest change in view over the course of that development: the elevation of marginal over fundamental values. Part IV considers efficiency as a norm in the legal system, for litigants and for officers of the legal system. Part V briefly addresses the claim that concern with efficiency leads to conservatism in the law, and then, finally, Part VI concludes with general remarks on the problems of mutual advantage arguments in the law.

1. THE COLLECTIVE IMPLICATION OF SELF-INTEREST

   During the eighteenth and nineteenth centuries, microeconomics and utilitarianism developed together. At the turn of the century G.E. Moore was the first major utilitarian philosopher who did not also write on economics; indeed, economists might not be surprised to learn that he mangled value theory and therewith utilitarianism. His value theory reverted to the crude notion that some value inheres in objects independently of anyone's use of or pleasure in those objects.(4) A variant of this notion lies behind the labor theory of value, according to which the value of an object is the quantity of total labor time for producing it.(5)

   Although many (perhaps most) economists in the Anglo-Saxon tradition continued to be utilitarian after the turn of the century, in philosophy utilitarianism separated from economics and, therefore, unfortunately, from developments in economic value theory.(6) Since then the two traditions have been brought back together most extensively in the contemporary movement of law and economics. This rejoining recalls the early origins of the general utilitarian justification of government in the theory of Thomas Hobbes. In both law and economics and in Hobbes's theory of the sovereign, the principal focus is on normative justification. And in both, the basic principle of justification is self-interest somehow generalized to the collective level.

   The distinctive unity of the visions I will canvass in the development from Hobbes to Coase and on to contemporary law and economics is that they are all welfarist. But Hobbes, Pareto, and Coase are not part of the Benthamite classical utilitarian aberration in interpersonally additive welfarism. It is therefore perhaps less misleading here to speak of welfare rather than of utility, although the contemporary notion of utility is manifold in its range of meanings. The chief reason for speaking of welfare rather than utility is that the language of welfare is different from that of utility. Typically we do not want more welfare, although we often want greater welfare. Welfare, unlike utility, is not a cardinal value made up of smaller bits of welfare. The language of welfare is typically ordinalist.

   The normative foundations of the formulations of Hobbes, Pareto, and Coase are essentially the same. Hobbes emphasized that all we have are individual values (essentially the values of self-interest--survival and welfare) and that individuals can be motivated only by resolutions of their collective problem that speak to their interests.(7) Pareto, writing after a century of Benthamite additive utilitarianism, asserted that we do not know what aggregation of utility across individuals means, that it is a metaphysical notion.(8) Both Hobbes and Pareto therefore evidently supposed that we can ground a motivational theory only in disaggregated individual values. The only collective value that can be directly imputed from these individual values is mutual advantage, in which all gain (Hobbes's usual assumption) or, at least, none loses, while at least one gains (Pareto's assumption).

   Coase is less concerned to state his value position than were Hobbes and Pareto, but his position also seems clearly to suppose that collective values are reducible to individual values or that the only values of concern in his accounts are individual values. An example of this move is in Coase's discussion of the negotiations between a rancher and a farmer on the optimizing of returns from their joint enterprises. The total net profits from the farmer's crops and the rancher's cattle are a function of their sales value less the costs of raising them. This total is essentially a cardinal measure, in dollars. Suppose these profits could be increased by letting the cattle roam over part of the farmer's crops, thereby destroying them, but that the farmer has the legal right to fence her land against the cattle. The two then have...