The Law and Economics of Entrenchment

• Publication year: 2019

The Law and Economics of Entrenchment

Michael D. Gilbert
University of Virginia School of Law, mgilbert@law.virginia.edu

THE LAW AND ECONOMICS OF ENTRENCHMENT

Michael D. Gilbert^*

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Should law respond readily to society's evolving views, or should it remain fixed? This is the question of entrenchment, meaning the insulation of law from change through supermajority rules and other mechanisms. Entrenchment stabilizes law, which promotes reliance and predictability, but it also frustrates democratic majorities. Legal scholars have long studied this tension but made little progress in resolving it.
This Article considers the problem from the perspective of law and economics. Three arguments follow. First, majority rule can systematically harm society—even when voters are rational (i.e., not passionate) and no intense minority is present. This is because of a collective action problem created by transition costs. Second, entrenchment is unnecessary when bargaining is easy, but it offers a second-best solution when bargaining is hard. This helps explain why some laws are entrenched but not others. Third, the optimal degree of entrenchment depends on a distinction existing scholarship ignores: whether the transition costs associated with a change in law are variable or fixed. Given variable costs, the argument for entrenchment is even stronger than scholars realize. But given fixed costs, the argument weakens. To overcome fixed costs, outdated laws require major change, but entrenchment

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encourages only minor change. This mismatch relates to an age-old question: when, if ever, should judges update entrenched law through interpretation? In one sense, judges can beneficially update in a way that democracy cannot.
These ideas cast doubt on work by originalists, living constitutionalists, and others. They have implications for legal design and constitutional law, and they plant seeds for a new and fruitful field: the law and economics of entrenchment.

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Table of Contents

I. Introduction............................................................................64

II. The Entrenchment Debate..................................................69

III. The Economics of Instability............................................74

A. MINORITIES AND THE ASYMMETRY THEOREM...................74
B. STABILITY AND TRANSITION COSTS...................................75
C. THE PUZZLE OF INSTABILITY.............................................77
D. TRANSITION COSTS AND THE ASYMMETRY THEOREM........79

IV. Entrenchment: A Coasean Approach................................83

A. THE COASE THEOREM IN BRIEF.........................................83
B. THE COASE AMENDMENT THEOREM..................................85
C. TRANSACTION COSTS AND ENTRENCHMENT......................88

V. On Optimal Entrenchment...................................................89

A. THE MODERNIZATION PRINCIPLE......................................90
B. FIXED VERSUS VARIABLE COSTS........................................92
C. ON OPTIMAL LEGAL CHANGE.............................................93
D. THE TRANSITIONS THEOREM............................................97
E. A GENERALIZATION.........................................................101

VI. The Economics of Constitutional Change....................101

VII. Conclusion.........................................................................106

VIII. Appendix............................................................................107

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I. Introduction

Can one generation bind another? Thomas Jefferson thought the answer no, arguing that "[e]very constitution [,] . . . and every law, naturally expires at the end of 19 years."¹ James Madison disagreed, contending that making law "too mutable" would invite disorder and violence.² Each generation, Madison wrote, gives "tacit assent . . . to established Constitutions and laws."³ These titans confronted a foundational question: how changeable should law be? Should it respond readily to society's evolving views, or should it remain fixed? This is the question of entrenchment.

Entrenchment pits constitutionalism against democracy, and it runs through legal debates old and new, from constitutional design and judicial review to the countermajoritarian difficulty. Constitutions, treaties, and other laws feature entrenchment in fact. Entrenchment goes to the heart of contemporary, burning debates. Can the British exit the European Union—and unwind a lot of law—with a bare majority vote?⁴ Must we amend the Constitution to reform the Electoral College, which has recently produced anti-democratic results?⁵

Given the stakes, one might suppose that jurists have a well-developed theory of entrenchment. But this is wrong. scholars have made extensive arguments but little progress. They "place one or the other value—legal stability or democracy—in the foremost position" and make their normative case,⁶ but they offer no mechanism for reconciling these competing values or determining the best level of entrenchment in practice.

This Article applies law and economics to the problem. It begins with a fundamental idea in democratic theory. suppose a majority

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approves a change in law that the minority opposes. If the average member of the majority gains less than the average member of the minority loses—if an asymmetry exists between the two sides—then majority rule can harm society.⁷ The losses to the minority can exceed the gains to the majority. For convenience, I will call this the Asymmetry Theorem. Scholars (including those in law and economics) understand that this theorem can justify the entrenchment of minority rights.⁸ What scholars do not understand is that the theorem can justify the entrenchment of law much more broadly.

To see why, consider a puzzle. A central purpose of entrenchment is to stabilize law.⁹ Stability, the argument goes, has great value. But "[i]f people value legal stability, then simple majorities should be hesitant to change laws."¹⁰ In other words, if we care about stability, we will oppose legal change on our own with no need for a demanding amendment procedure. One might respond with an argument about passions, which sometimes overtake us. Impassioned people do not appreciate legal stability,¹¹ but that answer provides only a partial explanation. Countless laws about which people are unlikely to become passionate—from speed limits to government leases—are entrenched, if not in constitutions, then with other mechanisms like bicameralism, presentment, and the Senate filibuster.

Law and economics can justify the entrenchment of law on stability grounds, even when passions run cold. The argument has just one ingredient: transition costs.¹² When laws change, people incur transition costs—they must change their behavior, draft new plans, update their equipment, and so on. Supporters of a change in law, the majority, gain the difference between the policy benefit of

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the change and the transition costs they pay. Opponents of the change, the minority, lose the sum of the policy loss change brings and the transition costs they pay. Because of this asymmetry, the majority may gain less than the minority loses. This asymmetry does not grow from differences in the intensity of opinion. This is not like, say, laws prohibiting same-sex marriage, which a majority might weakly support and a minority strongly oppose. The asymmetry identified here emerges from something different and ubiquitous: transition costs. Given the Asymmetry Theorem, transition costs make majority rule inefficient—even when people are dispassionate, and even when no intense minority is present. These ideas provide a law and economics justification for widespread entrenchment.

Well, almost. Law and economics uncovers the collective action problem inherent in legal transitions, but it does not point inevitably to entrenchment as the solution. Consider that mainstay of legal scholarship, the Coase Theorem: given zero transaction costs, parties will bargain to efficiency regardless of the legal rule.¹³ I can restate that idea as the Coase Amendment Theorem: given zero transaction costs, parties will achieve efficiency in legal transitions regardless of the amendment rule. According to this theorem, the majority will only amend the law if the benefits exceed the costs. Thus, bargaining can solve asymmetry. It can prevent the inefficiencies that result from combining majority rule with either transition costs or intense minorities. Later, I will provide examples to prove this point.¹⁴

For bargaining to work its magic, transaction costs must be low. Bargaining must be easy. In practice, transaction costs are often high.¹⁵ The minority may be unable to strike a deal with the majority. In that case, entrenchment offers a second-best solution. Some simple but fundamental propositions follow. The benefit of entrenchment grows as the transaction costs of bargaining increase. The case for entrenchment is weak when bargaining is easy. To solve the fundamental problems of instability and minority

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exploitation, legal designers can entrench law—or lower the costs of bargaining among the people law governs.

Together, transaction and transition costs justify a minimum degree of entrenchment in law. What is the optimal degree of entrenchment? Should the U.S. Constitution, for example, be easier or harder to amend? The answer depends on a factor overlooked in the literature: the nature of transition costs. Those costs can be fixed or variable. A fixed transition cost arises in a set amount every time law changes, whether the change is minor or major. To give a simple example, when the sales tax increases, all cash registers must be reprogrammed, which takes the same effort regardless of the size of the increase. A variable cost grows with the size of change, so major changes are costlier. As voting rights expand, politicians make increasingly drastic changes...