The perils of forgetting fairness.

AuthorDorff, Michael B.
PositionBy law economics in welfare maximization calculations for policy formation

A physicist, a chemist, and an economist are shipwrecked on a desert island. Starving, they find a ease of canned pork and beans on the beach, but they have no can opener. So, they hold a symposium on how to open the cans. The physicist goes first:

"I've devised a physical solution. We find a pointed rock and propel it at the lid of the can at, say, 25 meters per second--"

The chemist breaks in:

"No, I have a chemical solution: we heat the molecules of the contents to over 100 degrees Centigrade until the pressure builds to--"

The economist, condescension dripping from his voice, interrupts:

"Gentlemen, gentlemen, I have a much more elegant solution.

Assume we have a can opener ..." (1)

That's funny. But now consider our addition of the newest participant in the symposium on the island: the legal economist. The legal economist argues that the pork and beans should be distributed in a wildly controversial way, ultimately arguing that this is the most efficient distribution of the goods. He advocates the creation and destruction of legal structures in the name of maximizing the happiness of all who love pork and beans. His ideas are creative. They are controversial. They are counterintuitive. But, he says, they are welfare maximizing.

But there's a problem: there is no can opener. And there's just nothing funny about the legal economist.

One significant problem with legal economists' methodology is that they believe that they are entitled to the same assumptions that economists are. That is, they are entitled to extract out difficult variables in making their calculations. They are entitled to make certain types of assumptions. But they are not.

Legal economists make far reaching and extraordinarily visible policy prescriptions. They seek to influence the law. They seek to change the law. And thus, they are not entitled to ignore the elephants in the room, nor are they entitled to any can opener presumptions. Specifically, they are not entitled to ignore fairness concerns.

In recent years, economists have made some controversial proposals, and here are just a handful: execute minors, (2) punish the innocent, (3) settle cases by lottery, (4) allow women to sell their babies, (5) permit racial discrimination, (6) and allow insider trading. (7) Legal economists have argued that each of these activities should be legalized in the service of welfare maximization. Indeed, these are just a few of the legions of contrarian proposals advanced by legal economists as efficient. Such proposals are at least counterintuitive, and perhaps even shocking. Economists argue that people's intuitive reactions to proposed legal rules are irrelevant; ali that matters is efficiency. But in searching for welfare-maximizing policy proposals, the authors of these works have overlooked the negative externalities that also accompany avant-garde positions. Legal rules that strike most people as unjust may upset community expectations and undermine the efficiency of the very rules proposed. In short, such rules may not prove welfare maximizing at all.

In this Article, we argue that legal economists' failure to include people's preferences for fairness undermines their policy prescriptions, even by economists' own consequentialist standards. The assumptions that may be acceptable for an economist are simply impermissible for the legal economist. It is important to note that this Article is not another contribution to either the behavioral law and economics movement or the growing scholarship on happiness. Rather, our claim is far simpler and far more pronounced: Fairness counts as a preference. And forgetting that fairness counts will have drastic ramifications with respect to welfare-maximizing abilities of the very law and legal system that the legal economist hopes to influence. Part I discusses three prominent counterintuitive proposals from legal economists. Our purpose here is not to engage the authors' arguments in detail, but rather to provide a context for the rest of our discussion. Part II discusses the relationship between welfare and fairness. Here, we discuss the empirical evidence of people's preferences for fair rules and argue that, given this evidence, it is methodologically unacceptable for legal economists to fail to include (and to give sufficient weight to) these preferences within their calculations. Part III discusses the likely costs of actually adopting rules that are broadly perceived as surprising and unfair. We point out that such rules are likely to defeat reasonable expectations, instigate resistance, and undermine the overall legitimacy of the legal system. As a result, we believe these proposals fail even on their own welfare-maximizing terms.

  1. A FEW SALIENT EXAMPLES

    Law and economics literature is rife with examples of proposals that would strike most non-economists as unfair, immoral, or at least unexpected. In this section, we highlight a few prominent examples to concretize the phenomena and ground our subsequent discussion. Specifically, we discuss the recommendations to legalize baby selling, racial discrimination, and insider trading.

    1. Baby Selling

      In 1978, Richard Posner and Elisabeth Landes proposed that baby selling (their term, not ours) be legalized. (8) They argued that creating an open and legal market permitting an adoptive parent to pay a natural mother for the right to adopt her child would have numerous positive effects. Paying mothers for their children would reduce the number of abortions, eliminate the shortage of babies available for adoption, and decrease the number of unadopted children kept in foster care. (9) Their article employed sophisticated mathematical modeling and statistical data to bolster their argument that legalizing baby sales would produce these beneficent policy outcomes.

      Posner and Landes acknowledged that many people would consider a market in children "undesirable." (10) They cited commentators who referred to such a market as "dealings in human flesh" and a "taint on civilized society." (11) They also admitted that permitting natural parents to sell their children might "smack of slavery" (12) and produce "moral outrage." (13) But they argued that these objections were not well-founded. Unlike slaves, children sold through their system would retain the protections of legal prohibitions on child abuse and neglect, though these protections might admittedly prove inadequate. (14) Also, while a market system would not screen parents for suitability the way the current system does, they doubted the value of such screening and proposed requiring some "minimal background investigation" for buyers in the baby market, a sort of driver's license for baby purchasers. (15) Landes and Posner took comfort in their faith that people do not generally buy expensive items in order to damage them, analogizing adoption of a child to the purchase of a television set. (16)

      Perhaps their most telling point is their analysis of the likely costs of babies in the newly legalized market. Although the black market for babies resulted in very high prices, they argued that in a legal market babies would be relatively affordable. (17) They had several supportive arguments, but the most interesting for our purposes involved the amount necessary to compensate the natural mother for giving up her baby rather than aborting the pregnancy or raising the child herself. Landes and Posner contended that the net cost in this category would be quite low because the costs to the natural mother would be substantially identical to those saved by the adoptive mother in not bearing a child herself. (18) Although this theory might have some validity when applied to medical costs, (19) we think most mothers would find quite surprising the proposition that the amount they would demand to give up their children consists mostly of the medical costs they incurred during pregnancy and birth. The emotional toll of giving up a baby is not a cost the adoptive mother would face if she bore the child. The authors also fail to account for society's parallel abhorrence at the selling of human beings. Landes and Posner's argument highlights the problem we are illustrating--that legal economists frequently ignore most people's feelings about what the law should be. This tendency may have sharply deleterious consequences, as we argue below.

    2. Racial Discrimination

      In his landmark book, Forbidden Grounds, (20) Richard Epstein relied on economic arguments to explain why the laws prohibiting racial discrimination in employment should be repealed. (21) Epstein claimed that laws prohibiting racial discrimination actually harm racial minorities (along with everyone else) and that repealing these laws would benefit everyone. (22) Epstein premised his case on the notion that discrimination may sometimes reduce agency costs and therefore prove efficient. (23) Governance costs rise as the tastes of the firm's members and employees diverge. (24) One way to reduce agency costs and promote harmony within the firm, then, is to hire employees with similar tastes. (25) Employees who share the same tastes in music, Epstein illustrated, will not quarrel over what type of music to play in a common workspace. (26) Finding workers with similar tastes will often result in hiring a disproportionate number of some particular racial minority, whose members may be more likely to share some tastes than the components of a more diverse group. (27)

      Another way to reduce agency costs is to recruit through a third party referrer who implicitly bonds the workers' performance. (28) For an example, Epstein drew on the case of the Daniel Lamp Company. (29) The Daniel Lamp Company established relationships with two Hispanic groups, the Spanish Coalition and the Latino Youth Organization, which each recommended unskilled workers for employment. (30) The organizations then had a vested interest in ensuring that the workers they recommended were of...

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