That Law and Economics is an ideologically captured discipline
Yet law and economics has neglected a feature of reality that is no less foundational than that of positive transaction costs: the large and variable costs associated with the political impediments that must be surmounted to achieve welfare-maximizing distributive results. We argue that these political action costs are significant, that they vary in knowable ways among types and methods of redistribution, and that perceptions of fairness, among other things, play a role in their magnitude. Because both efficiency and distribution matter to welfare, the two impediments to its maximization—transaction costs and political action costs—should be treated in parallel fashion.
Lee Anne Fennell & Richard McAdams (2016): The distributive deficit in law and economics
The thesis
Law and Economics is:
"the application of microeconomic theory to the analysis of law, which emerged primarily from scholars of the Chicago School of Economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.”
I am in this piece particularly interested in the aim of assessing which legal rules are efficient. This aim has to be understood- especially in relation to the institutional apparatus around law and economics- as a component of a practical goal- not just assessing efficiency but promoting it. Law and Economics is unusually well united on a common agenda, as far as academic disciplines go. The economic sense of efficiency (which I will define shortly) may or may not coincide with, or even be compatible with, the ordinary notion of efficiency, but it as at the heart of L&E’s goals.
What I will be arguing in this piece is that Law and Economics is an ideological practice in a certain sense, viz, that it is animated by a set of ideas that serve a particular class, but those ideas help mystify that relationship. In the worst possible scenario -and perhaps this is a tad unfair in practice- Law and Economics is effectively a machine for taking money from poor people and giving it to rich people, and this is its primary (and very negative) conduit of effect on social welfare. What I am saying draws heavily on the work by Fennell and McAdams mentioned above, but takes it in a less genteel and more pugilistic direction. While the tenor of Fennell and McAdams piece is to talk about it as a discipline that has gone astray, done some harm, and missed opportunities to do good, I’m concerned it’s systematically destructive and an engine of class war.
There is no inherent ethical interest to KH efficiency
Efficiency, in an economic context, usually means something like Kaldor-Hicks efficiency. An action improves Kaldor-Hicks efficiency if the winners from that policy could compensate the losers if they wanted to.
The first claim I want to make in establishing that L&E is ideological should not be controversial: Economic efficiency understood as Kaldor-Hicks efficiency has no inherent ethical interest. Efficiency has ethical interest only because it can be used, in theory, to increase social welfare.
Let me give a brief illustration of how morally bankrupt ‘mere efficiency’ without redistribution is. A wealthy philanthropist has decided to build an expensive bridge over a river. There are two possible sites, site A and site B. Site A is preferred by a village of one hundred people who all want to use it to cross the river to visit their ailing mothers. Site B is preferred by Richy McMoneybags who wants a bridge there so that he can get to his golf course by Limousine rather than helicopter. Richy McMoneybags is willing to pay a million dollars to have the bridge built at site B- a seemingly large sum of money- but only a drop in the ocean of his multibillion-dollar wealth. The people in the village are each willing to pay 2000 dollars to have the bridge built near them. For many, this is all they own.
The combined willingness to pay for site A then is:
2000*100=200,000
The combined willingness to pay for site B is 1,000,000.
Since 1,000,000>200,000, site B is more efficient, in the sense of Kaldor-Hicks efficiency. This advantage vis a vis Kaldor-Hicks efficiency means we can make an argument that the bridge should be built at site B. The argument runs as follows:
Build the bridge at site B conditional on the billionaire agreeing to pay much of his windfall to the people of the village. Split, say, 900,000 dollars between the hundred villagers at 9000 each. Since they were only willing to pay 2000 dollars each for the bridge, this is 7000 dollars better for them than if the bridge were built where they wanted, but the billionaire didn’t pay them. It’s also still better for the billionaire than the bridge being built at site A. Everyone wins.
But this argument has no force unless the redistributive payment is made. Indeed, even the sense in which it can be described as ‘efficient’ in any ordinary meaning of that term is unclear. No increased productive capacity has been achieved. Nor has there been any economic growth in any sense that will benefit or enrich the nation in the long term.
Aside: To be honest, I have my doubts about a ‘let it rip and then redistribute to compensate’ approach to justifying normal cost-benefit analysis and Kaldor-Hicks efficiency, I tend to favor weighted cost-benefit analysis. My preferred alternative to cost-benefit analysis which I outline in my Ph.D. thesis can be seen as closely related to weighted cost-benefit analysis. I also tend to think that having fair and equitable legal rules matters for all sorts of reasons that go beyond direct efficiency. But if we are going to use a ‘make the system efficient and let it rip’ the compensation to the poor damn well better be paid. Either on a policy-by-policy basis or through a generalized and generous tax and transfer system.
Why increasing efficiency without redistribution is effectively redistributing money to the rich
Legal rules are a bit abstract, so I’ll illustrate the case with infrastructure choices- but the same argument would apply directly to legal rules and institutions.
Imagine two rules:
Assign infrastructure building equally to all areas contingent on population.
Assign infrastructure on the basis of willingness to pay.
TBC, I’m not advocating for Rule 1, which is poorly formulated as stands. However, Rule 1 will not increase inequality, at least not in a direct way.
Rule 2, by contrast, will very directly increase inequality. Let’s say I build a stack of infrastructure near your house (or holiday house) because you’re loaded and are willing to pay for it. What’s the effect of that going to be? Your house will greatly increase in value, relative to the prices of other houses. You will grow even richer. Since it’s purely hypothetical willingness to pay- you don’t actually have to hand over the cash, it’s in effect free money for the already rich.
This is true generally. Whether we’re talking about legal rules or infrastructure-building decisions. The rich have more money, so cost-benefit analysis tends to go their way, and that gives them even more money.
How the public doesn’t think about redistribution
Can’t the Law and Economics academic just add a little note advocating for redistribution to their papers then? Just to quickly cover that base? “While this change would favor the rich alone, it should be accompanied by redistributive changes and the total effect would be to improve things for everyone blah blah…”
I’m sure a lot of people in law and economics- even if not all (or most)- add such little notes. A quick end script saying ‘of course, my support for these ideas is conditional on appropriate redistribution’.
Or alternatively, couldn’t the law and economics advocate defend their position as follows?:
“If we expand the total amount of product that is available, it’s up to the democratic public how they want to distribute that. If they don’t redistribute that, it just goes to show that they are pleased with the current income distribution, I’m just giving the electorate more choices”.
The problem with both these approaches is that they express what would normally be for an economist a remarkably naïve theory of democratic government. Bromley notes of similar views:
“The rationale for this position is as follows: the current distribution of income must be the appropriate one for otherwise the politicians would change it. This rather surprising declaration of faith in politicians is the only time that an economist will admit to any confidence in the outcome of the political process.”
The first problem here, which I won’t get into in any detail, is that it’s not possible to take money from some people and give it to others without some deadweight loss. This is a problem with Kaldor-Hicks thinking generally.
The bigger problem is that as we already alluded redistributing money is not politically free, there is enormous inertia against it. Fennell and McAdams referred to the distributive deficit in law and economics, viz, there is a pervasive assumption that the tricky bit is growing the pie, once we do that, we can throw around money as we will. But that’s not true. There are enormous barriers both to increasing efficiency and redistributing money. Both the baking and the cutting of the pie are difficult- and if you only put effort into making the pie bigger, you’re effectively advocating for efficiency increases without redistribution, which as we have already argued is redistribution to the rich.
But why does such inertia exist? There are, I think, two possible families of explanations- public-focused explanations and elite-focused explanations. I believe that both have an element, of truth, though traditional explanations have perhaps placed too much blame on the public and not enough on elites.
The elite-focused explanations have a childlike simplicity which gives them theoretical charm. Elites don’t support redistribution, because they have quite a lot of money, and therefore favor the interests of those with more money.
What about the public and public-focused explanations, how does the public feel about redistribution? The exact specifics vary from country to country, time to time, and within the ever-shifting boundaries of the ‘deserving’ versus ‘undeserving’ poor. Nonetheless, I see one negative constant. The public doesn’t think about property right distribution in terms of a social welfare function where the aim is to maximise some preferred pattern of distribution. The public tends to think about the distribution of property rights as being the ‘natural’ outcome of market activity- justified through the process rather than the optimality of the outcome. Now philosophers, and economists, know, albeit for somewhat different reasons, that this is nonsense. In this context, it’s particularly clear, because we’re talking about changing legal rules in a way that will alter the distribution of property, but it’s a deeply entrenched belief- see, for discussion “The myth of ownership” by Murphy & Nagel, who call this view folk libertarianism.
Where the public is in favor of redistribution- and in many places, they are- see polling on Newstart in Australia for example- it’s not so easy to get the government to follow through on that- see, again, Newstart in Australia. And while the typical voter may care about these issues, it is not usually at the top of their political priorities, and their feelings may be ambivalent and highly contingent on the method and mode of redistribution, and exact determinations of deservingness.
I want to be clear that I am not saying that the public on average hate the poor or want to leave them to their fate. On the whole, they do support some measure of redistribution, but A) as already noted, they often do not support it strongly enough to overcome the barriers to redistribution, and B) It also seems to me that the public often want the poor to be supported and protected through many of the very same ‘inefficient’ legal rules that L&E wants to abolish. The preferred strategy is to setup a kind of ‘fair play’ that organically (organically from the point of view of the ordinary voter) results in a ‘better’ distribution.
To put it in terms similar to Fennell and McAdams, there can be tradeoffs between the political costs of a form of redistribution and the monetary costs. To bring out a point implicit in F&M, but not spelt out- ignoring political costs and difficulties ultimately turns the discipline into a giveaway for the rich. There is a real danger that economists, in advocating that redistribution be achieved through ‘efficient’ means, will make the perfect the enemy of the good. If the public can’t have its preferred forms of redistribution, it may simply opt for no or greatly reduced redistribution.
Sometimes there’s even a view in the public that income isn’t really income unless it’s market income. Perhaps the ultimate summary (and reductio) of this view came from Stephen Miller. While he is admittedly an arch-conservative, I think that his view captures something of a folk belief, especially in America. Government benefits aren’t really income, in the way that ordinary, honest, god-fearing employment or proceeds of capital or rent is income.
We might summarize this all by saying that elites aren’t all that keen on redistribution and the public isn’t consequentialist about it- they care about how it is achieved in a way that clashes with the preferred methods of the law and economics discipline. Their support for redistribution is at best mixed.
Thus it’s not enough to add a little note saying ‘Obviously these efficiency-increasing measures should be accompanied by just, ethical and welfare-increasing transfers’ but only put in the work for the efficiency side of the program.
If the law and economics discipline actually wants to increase economic welfare, they need to push two boulders up the hill- efficiency and transfer I would suggest then- with my tongue only half in my cheek- that if the law and economics academics are sincere about increasing social welfare, they must adopt a 50-50 rule, and spend half their time advocating for redistribution and the other half advocating for efficiency. Actually- given the barriers to redistribution are probably greater than the barriers to efficient legal rules, 50-50 may not be demanding enough.
“How could we devote equal time to advocating for compensatory redistribution? We can’t just write endless homilies on the subject”. Nonsense! There is nigh unlimited material that could be written, at the intersection of law and economics, about the harm that inequality and poverty do: from tort law to criminology, from critical race theory to legal philosophy. Any conception that distributive issues fall ‘outside’ the domain of law and economics is silly. If Law and Economics as a discipline wanted to spend equal time advocating for redistribution and efficiency, it absolutely could.
What about the “we’ll just increase the size of the pie and let the public decide what to do about it approach?” “We’re giving the public options, if they don’t want to take that up, that’s on them”. That doesn’t work, because it rules out a priori that what the public really wants in this area is ‘inefficient’ legal rules that redistribute implicitly, but relatively little direct redistribution. If the public thought about things in the economists’ terms of social welfare functions and the way we cut up the pie, this would be a defensible approach. The trouble is that the public doesn’t just think in terms of the final bank balance, they think about how it is arrived at- with a preference for odd and inefficient methods.
So why say that law and economics is ideological?
I intend the term “ideological” to refer to a special meaning, drawn from the Marxist tradition but with a slightly different emphasis. In my sense, to behave ideologically is to:
Serve the interests of a specific class or group.
While believing yourself, due to your ideological justification, to be serving some other interest- perhaps your own interest or the general interest.
In plain terms, and taking away a little nuance, to behave ideologically is to be a dupe acting on behalf of those more powerful than yourself.
By abstracting away from the real politics of redistribution, and convincing themselves that advocating for efficiency in isolation matters, the Law & Economics discipline is ideologically captured. In a world in which inefficient laws are sometimes part of the thin layer of protection the poor have, taking away those laws amounts to a redistributive project in favor of the rich. To cover up this redistributive project even from its own practitioners, a castle of ideas in the sky is constructed, which ignores the political realities of redistribution- the barriers redistribution faces from both elites and the public.
Recapping our argument:
*Increases in efficiency have no intrinsic value without redistribution.
*Increasing efficiency in the economic sense without redistribution will reliably redistribute to the rich. To advocate, whether explicitly or in practice, for greater efficiency without redistribution is to advocate for redistribution to the rich.
*There are substantial barriers both 1) to changes that harm the poor but increase efficiency, and 2) to changes that redistribute to the poor. The public doesn’t like steamrolling over the poor but also doesn’t like redistributing money to them. Elites don’t like redistributing to the poor, and are often ambivalent on questions of efficiency.
*The law and economic discipline has lobbied fought extensively to overcome the first barrier- and implement changes that harm the poor, but not to overcome the second barrier.
*Hence the law and economics discipline is shilling for the rich in practice, if not in theory. Much the same could be said of many other areas of economics.
*Because it is shilling for the rich in way which specifically disguises and mystifies its material effect, even from its practitioners, it is ideological.