By Jules L. Coleman. New York: Cambridge University Press. 1992. Pp. xvii, 508. Cloth, $59.95; paper, $19.95.
What is the relation between markets and the law? At first sight they seem to be mutually exclusive forms of social ordering. In markets, individuals make their own arrangements. If cooperation takes place, it takes place voluntarily. If resources are transferred from one person to another, both individuals must agree. We pass laws, on the other hand, when for some reason we are unwilling to allow people to make their own arrangements. In a legal ordering, we decide as a society what is to be done in some set of circumstances, rather than allow individuals to sort things out for themselves. Thus law seems to evince a suspicion of the kind of unilateral or bilateral decisionmaking that market transactions epitomize.
The paradox of course is that market societies are among the most rule-governed and legalistic societies we know. They embody rules of property, they are enveloped in commercial codes, and the individuals whose freedom they vindicate seem to engage in almost continual litigation. Whatever we conclude, then, about law and markets, it cannot be that they are contrary or antipathetic forms of social organization.
One view is that legal rules operate as supplements to markets, correcting for the failure of market transactions in the messy circumstances of the real world to produce the efficiency and prosperity that economists associate with perfect competition, full information, and zero transaction costs.
They may work, for example, as follows: In the real world, it is sometimes possible to imagine transactions that would have occurred but for some identifiable imperfection, uncertainty, or transaction cost and to work out what the outcome would have been if those transactions had taken place. On the basis of that counterfactual reasoning, a society may deploy legal rules as a response to market failure, either by directly imposing the outcome that would have resulted in ideal circumstances or by permitting individuals to bring about the outcome unilaterally, without the normal market requirement that the consent
of those affected must first be secured. Thus, if transaction costs prevent individuals from fully specifying the terms of some agreement, the law of contracts may impose on them the terms to which they would have agreed in the absence of transaction costs, and, through the award of damages, the law may adjust their resource holdings accordingly. Or, if transaction costs prevent negotiation altogether, the law of torts may allow something like "forced transfers" at the initiative of one party, requiring only that he pay as compensation to the other person affected the price upon which the two of them would have agreed if they had had the time and opportunity to deal willingly with one another. In this way, the law may respect underlying market values, even while it is coercively imposing transactions on parties who have not in fact agreed to them. To justify such imposition, we can say that the real world in which the rules are coercive is a world where voluntary interaction is blighted anyway by transaction costs, uncertainties, and other imperfections. The world in which all transactions are truly voluntary is the ideal world of perfect competition. Law, then, is really respecting, not violating, our freedom by moving us coercively from the mire of inefficiency in the real world to the efficient outcomes that we ourselves would have agreed to, if only we had lived in an environment more conducive to trade.
In a collection of essays, Markets, Morals and the Law, published in 1988, Jules Coleman(1) wrote that he was "currently working on a book . . . that explores the extent to which nonmarket institutions [like the law] can be explained and justified as responses to problems of market failure."(2) The working title of that project was "The Market Paradigm," which is Coleman's term for the approach I have just outlined. The book that has eventually appeared, however -- after many vicissitudes including, we are told, the theft of the only existing version of the copy-edited manuscript (p. xvi) -- is entitled Risks and Wrongs. It amounts to a comprehensive critique and repudiation of the market paradigm and its replacement by an alternative theory about the role contract law plays and particularly -- as the title indicates -- the role tort law plays with regard to market transactions.
According to Coleman, the market paradigm, with its emphasis on repairing market failure, neglects the role played by legal rules in creating and sustaining structures of market interaction in the first place. Coleman rejects the view that we need law only when markets do not work. He argues, on the contrary, that we need law in order to make markets work. We need a system of social cooperation to make a system of voluntary transactions and market competition possible (pp. 59-62).
The point is most obvious in the case of property. Without rules to secure particular resources to particular individuals, the idea of market exchange makes little sense. As Coleman puts it, "You and I will have a hard time negotiating the sale of some piece of property if we both believe we own it" (p. 147). Property rights embody the essential principles of a market order: that particular resources are assigned to particular individuals; that an individual's consent is required before anything is done to the holding assigned to him; and that each person has the legal power to transfer his holding to another on, roughly, any terms they agree to. It goes without saying that the existence and efficacy of these principles is wholly the work of the law and that markets could not possibly exist, even in an ideal form, without them. Law here is constitutive, not just ameliorative.
To put it another way: on issues concerning who gets to control and make decisions about which resources, we are not willing to leave individuals to their own devices, at least not initially. Left to their own devices, individuals might well engage in a Hobbesian war of all against all for the use of the resources that surround them. I might try to use and make decisions about the very piece of land that you are attempting to use or make a decision about, and the result would be chaos at best, violence at worst. The matter therefore is one on which we need a collective decision -- a decision that initiates market processes by lending social weight, first, to the assignment of particular resources to particular persons and, second, to the endowment of those persons with the power to alter the assignment of the resources entrusted to them on terms of their own choosing. These collective decisions define a structure of rights that subsequently enables individuals to deal with one another on terms of mutual advantage.
Coleman does not spend a lot of time on property rules. In my view the main importance of property in his argument is the foundation it lays for his understanding of the law of torts. In the paradigm that Coleman attacks, tort law is a response to market failure: when transaction costs are high, liability rules allow individuals to act in ways that affect others' rights and to compensate them ex post without having to secure their consent in advance. This suggests that there would be no place for tort law absent market imperfections. But of course that is nonsense.
In a perfectly competitive market with zero transaction costs, individuals might still be tempted to act in ways that impact on others' rights without securing their consent. Even if a consensual action would lead to an efficient outcome, someone might still be tempted to bypass the consent requirement in order to avoid having to pay the price of the other's consent. Such actions would be simply wrongs -- that is, infringements of the rights established by the basic property rules protecting persons and their holdings. Any legal system must have ways of dealing with such wrongs and making good the losses that they occasion. On Coleman's account, this is the basic task of tort law. To understand it, we need a theory of corrective justice -- a theory that operates at a deeper level than the economist's account of market failure. Tort law is not just a matter of solving problems of transaction costs. The aim of this area of the law is to vindicate against loss or derogation the very rights that constitute the fabric of the market order.(3)
For a market to exist, not only must there be an array of individuals with alienable entitlements, but these individuals must also be disposed to bargain and strike deals with one another. The primary task of contract law, Coleman believes, is to foster this disposition by providing safeguards against violation -- safeguards that the parties would otherwise have to spend valuable transaction resources creating for themselves -- and default rules to cover uncertainty and unforeseen contingencies (pp. 122-40). By offering these resources, the law may open up opportunities for cooperation that a costly search for certainty and security would otherwise dissipate.
With regard to contract law, then, Coleman's story is close to the account the market paradigm offers, inasmuch as both accounts stress the importance of responding to transaction costs. But there is this difference. According to the market paradigm, the point of contract law is to seek directly the efficient outcomes that the parties have been unable to secure themselves. When contractual difficulties arise, we hold the parties to the contract we reckon they would have agreed to ex ante in the absence of transaction costs. Under Coleman's account, however, the main point of contract law is not efficiency as such but the facilitation of market transactions by reducing in advance the misgivings that people in the real world may have about the uncertainty of dealing with...