The pitfalls of legislative and executive policymaking compared to judge-made law.

Author:Tasic, Slavisa
  1. Introduction

    The literature on the putative economic advantages of common law over civil law is substantial. A number of authors have argued that the institutional advantages of common law stem from the different structures of government that are characteristic of different legal frameworks. The main source of the superior economic performance of common law systems, in this view, is the greater independence that common law judges enjoy (Hayek 1960; Merryman 1996; Glaeser and Shleifer 2002; Klerman and Mahoney 2007). While both common law and civil law judges may enjoy nominal independence from government in terms of security of appointment and salary, common law judges also have substantial behavioral independence associated with their lawmaking power. The weaker judicial protection in civil law countries translates into, on average, more interventionist government, more bureaucracy, heavier regulation, and less secure property rights--and, therefore, inferior economic performance.

    A different kind of argument in favor of common law points to the nature of the law itself, and in particular the adaptability of common law on the one hand and the rigidity of civil law on the other. Posner (1973) makes the case for common law by arguing that judges have a preference for efficiency. A precursor of this view is Coase (1960), who observed that in the absence of other criteria, common law judges are inclined to use economic efficiency as a criterion in dispute resolution. Similarly, Rubin (1977), Priest (1977), and Goodman (1978) argue that inefficient rules are more likely to be litigated than efficient ones are, which pushes common law in the direction of higher efficiency (see Zywicki and Stringham 2010 for a survey).

    Despite all its alleged superiority, common law has been in retreat ever since the Enlightenment era. Not only has codified civil law spread over continental Europe, but in the remaining common law countries, case law has gradually yielded to statutory legislation. Rules created at the executive and legislative levels have become more substantial and more elaborate, while courts, at least when it comes to economic rules and institutions, have become more deferent to the other two branches of government.

    In this article, I maintain that the intellectual background of the growth of statutory law is the rise of rationality's normative status. The elevated status of reason and rationality has consistently extolled deliberate policymaking at the expense of traditional judge-made law. I argue that the uncritical acceptance of the rationalistic attitude may not have left us better off in the institutional and policymaking sense. In particular, certain recent contributions from cognitive psychology call into question some widely accepted ideas about what constitutes rational policymaking. From this alternative cognitive standpoint, I will challenge the view that deliberate policymaking yields superior outcomes compared to decentralized judge-made rulings based on general constitutional principles. II.

  2. Limited Knowledge in the Complex Economy

    It is generally recognized that rule design in representative government is burdened with many incentive-related problems. Public choice scholars warned that rational maximization of political agents brings about regulatory distortions and inefficient rules (Buchanan and Tullock 1962; Olson 1965; Tullock 1967). Legal authors have also recognized difficulties with voters' representation that make legislation and the regulatory bureaucracy poor representatives of public preferences. Several of them have pointed out specifically that judiciary rulemaking has the capacity to alleviate these difficulties: Bruno Leoni's (1961) argument in favor of judge-made law is partly based on the claim that legislation does not properly represent people's interests, and Richard Epstein (1985) sees rent-seeking as a reason why judicial review in the property-taking area should be substantive.

    An alternative and less common view is that the main source of legislative and other regulatory error lies not in bad intentions or even in the self-interest of policymakers, but in the inherent unintelligibility of the market economy. A market economy is a nexus of a large number of causes and consequences that we are not able to entirely recognize and comprehend. The nature of economic complexity is such that no amount of economic, legal, or regulatory expertise may suffice to recognize all relevant causal relationships. Economic behavior is far too multifaceted for us to be able to design rules that will steer it in a predictable and desired direction, even if efforts are both well intentioned and well informed. Bounded rationally and the limited knowledge of policymakers hinder the optimism about the possibility of competent public policy.

    Although often neglected, the argument about the complexity of economic order and the limits of our cognitive abilities to capture it has been present for a long time. Philosophers in the tradition of the Scottish Enlightenment, as well as some representatives of early conservatism and romanticism, understood very well the intricacy of not only the market but all social relationships. They argued that social order is far too complicated to be fully comprehended by reason, and they repeatedly pointed out that the market economy's success was not the result of a conscious design but rather came about spontaneously through decentralized human action. Rules of conduct in the social and market order developed gradually in the process of coordinating different individuals' interests, plans, and actions. We may try to institute some radically different rules of conduct, based on our understanding of the existing order, but that would be a sign of hubris. Our knowledge and understanding of the world are inferior to the knowledge accumulated in the long-surviving institutions. Instead of reason alone, we must therefore rely on experience, tradition, and some universal traits of human nature.

    In the present, literature on the limits of policymaking in the presence of political ignorance among voters has built on this tradition. Caplan (2007) argues that economic policymaking fails due to several voter biases. Voters' policy preferences differ from those of professional economists and are typically biased toward more government intervention in the economy. Literature on many particular cases of government failure has also pointed to the problems of either voters' or policymakers' relative ignorance in comparison to the enormous complexity of problems they are trying to solve (Friedman and Kraus 2011; Somin 2013; Lucas 2014; Friedman forthcoming).

    Still, both economic theory and practical public policy today are dominated by the explicit or more often implicit presumption of the possibility of rational and well-informed policymaking. For example, consider a statement by a leading political economist: "Unlike the generalist judges, regulators also tend to be specialized, and are expected to understand more.... Specialization of the regulators is the central efficiency argument in their favor, particularly in the areas, such as finance and environment, where the issues are enormously complex" (Shleifer 2010, p. 18).

    Shleifer's analysis of regulation lacks any concern that the regulatory design might suffer from a lack of knowledge. Shleifer (2010) argues that regulation exists because it is an efficient solution in cases where the court system fails to resolve contract and tort disputes--and by making this claim, he effectively assumes away the possibility of a faulty, biased, insufficiently informed regulation. While the issues are "enormously complex" (Shleifer 2010, p. 18), they are apparently not too complex for the competent and specialized regulator. In a separate discussion, Shleifer (2005) specifically analyzes possible inefficiencies that may arise from imperfect regulation, pointing to the standard public choice and interest group arguments, as well as to the history of colonial transplantation of institutions that might be less than perfectly suitable for local conditions. He once again does not even consider the possibility of regulatory error as a potential cause of inefficiency. Whereas Shleifer uses interest group arguments to challenge the assumption of government benevolence, he nevertheless tacitly assumes regulatory omniscience.

    It has been typical in standard economics and political economy to presume boundless rationality on the part of policymakers. The recent advance of behavioral economics has changed little in this regard. For one, behavioral economists typically disregard that the regulators within executive and legislative branches, who are supposed to correct markets' behavior, may themselves be prone to cognitive limits and biases. Moreover, behavioral economics is, at its core, a rationalistic enterprise. It is focused on marginally improving human behavior so that real-world decision makers better fit the external standards of rationality. Aimed at making people more rational, it does not come close to the issue of our fundamental incapacity to comprehend and control the world in all its opacity. If anything, it is engaged in the opposite direction--toward the greater influence of knowledgeable and scientifically informed experts in society and the economy. In the words of a leading proponent of behavioral economics, "The executive is the most knowledgeable branch," which is why it should be given "considerable discretion in both domestic and foreign affairs" (Sunstein forthcoming).

    The cognitive psychology standpoint opposed to rationality in the current predominant sense of the term is that of ecological rationality (Cosmides and Tooby 1994, Gigerenzer 2000, 2008; Smith 2003). Gigerenzer (2000) employs the concept of ecological rationality to account for the use of crude heuristics as an optimal cognitive strategy. Ecological rationality does...

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