Law and economics starts with judging. Along with other schools of legal thought, law and economics tries to answer a general question: on what basis should a judge decide a case, if there are no prior cases compelling a particular outcome? Trying to offer a basis for decision grounded on consensus, law and economics answers that judges should decide cases according to the principles which will maximize society’s total wealth, even when some parties are left worse off. Despite a general agreement with Richard Posner that “the role of economics in moral and political debate is to draw attention to consequences or implications that people ignorant of economics commonly overlooked”, this Paper finds troubling precisely the tie between law and economics and judging. While the legislature may be proper to adopt law and economics analyses when creating law, the judiciary is ill-suited to heed to law and economics when applying law for two reasons: 1) judges are limited in their institutional capacities and 2) judges have more important social roles than wealth-maximizers.
According to law and economics, at least one way judges can maximize society’s total wealth is to mimic what the free market would have done, absent any transaction cost between the parties. However, a judge’s imitation of the free market is at best often inaccurate, and at worst completely fake. Take, for instance, the tort case of Eckert v. Long Island R.R, wherein a man was killed by a negligently operated train when rescuing a child. According to the law and economics analysis, a judge should decide Eckert in a way that resembles the result of a hypothetical negotiation between the railroad and a potential rescuer before any rescue happens. This analysis, first of all, presupposes that parties in the hypothetical negotiation have knowledge of the values a court would assign to the lives and the rescuer and the rescued, and the chance that the rescuer would be killed in the rescue. Because the hypothetical negotiation happens only in the judge’s head, these parameters might or might not reflect the reality, and when the parameters do not reflect the reality the hypothetical negotiation will not produce the wealth-maximizing result for the two parties. More fundamentally misleading, however, is that this analysis presupposes that a deal will be struck by the two parties and overlooks the possibility that no such deal will happen. It is perfectly reasonable an assumption that the Eckert rescuer decided to dash forward and scoop up the child in a split-second; that she had never paused to think about her risk of being killed in the rescue; and that had she contemplated she would have refused to take the risk, whatever amount of money the railroad pays her to do just that. The question then is: if the free market negotiation is a legal fiction that would never materialize in real life, how convincing is the wealth-maximizing result it produces?
To its credit, law and economics does sometimes back away from requiring judges to compel involuntary transfers of legal entitlements even when these transfers would in theory increase social wealth. However, “involuntary transfer” characterizes many cases that a judge has to decide, and by relinquishing the area of “involuntary transfer” law and economics renders itself less useful than a universal tool for judging. The Eckert judge had to decide whether the railroad was liable or the rescuer had assumed the risk, no matter whether the rescuer would like to strike a deal in the hypothetical negotiation. Law and economics is a limited weapon for judges because of the judges’ own infirmities—the inherent flaws of the enterprise of imagining a free market negotiation.
But that judges are bounded by their institutional capacities to realize the full potential of law and economics judging should not be taken to suggest that law and economics judging itself is beyond reproachable. Far from it, even assuming that the Eckert judge can perfectly mimic a real life negotiation mentally, her approach is quite likely to produce wealth maximizing but socially disturbing results.
First of all, judging in strict accordance with law and economics might sometimes unsettle social consensus. One of the self-perceived strengths of law and economics is value-neutrality: a judge following the percept of law and economics is relieved from having to choose between conflicting value systems, because increasing social wealth is a value universally supported by social members. The strength of law and economics judging lies in its ability to be justifies in terms of consensus, and importantly law and economics never denies that value consensus exists in society. For instance, the vast majority of Americans subscribe to the view that all men deserve equal protection in the eye of law. Assume for now the Eckert judge decides that the remedy of railroad’s negligent killing is the expectancy of the victim’s life earning. Because one’s financial prospect is contingent upon one’s age, health, and education, the railroad company would be much more eager to enter into a contract with a potential rescuer if the rescued is young, able-bodied and intelligent, and much more reluctant to do so with the same rescuer if the rescued is old, quadriplegic or mentally disabled. Thus, the Eckert judge would in essence encourage a random rescuer to prefer rescuing the more robust members of society to rescuing the weaker members. Despite a dubious argument of being economically viable to the railroad company and to the society as a whole, this approach of judging clearly runs afoul of our society’s commitment to equal protection across different social groups and is morally repugnant.
Another rarely contested social consensus is that altruism is a good thing, that self-sacrifice, as the epitome of altruism, should be rewarded rather than punished by the society. However, in the Eckert judge’s hypothetical negotiation, the higher the rescuer’s likelihood of being killed in the rescue is, the less willing the railroad company would be to enter into contract with her. As a result, the more endangered the child’s life is by the negligently operated train, the less encouraged the rescuer would be to put her own life at risk to rescue the child. (An advocate for law and economics might be tempted to avoid this problem and restore enough incentives for the altruistic rescuer by adjusting the remedy for being negligently killed to be the same for all men. Thus, the railroad company would be willing to contract with the rescuer no matter what the risk of her being killed is, as long as it is less than one hundred percent certainty. But what about the risk that the rescue is unsuccessful and both the rescuer and the rescued are killed? If there is a constant failure rate of rescue, the railroad company would quickly be unwilling to enter into a contract with the rescuer again.) The ironies law and economics judging creates is a testament to the simple fact that judges are guardians of some basic values of our society—like equal protection or rewarding altruism—and that substituting this role of guardians with the role as wealth-maximizers undercuts rather than reinforces the value consensus underlying judicial decisions and ultimately delegitimizes law.
Perhaps even more problematic than undermining value consensus in society is the intrinsic tension that law and economics judging has with the protection of individual rights. The tension is heightened in far-reaching cases that not only affect the interests of private parties but resonate in the rest of the society as well, where the scale of wealth maximization is clearly tilted by the aggregation of across-the-board societal interests. Slavery might be necessitated by plantation economy in antebellum South. Tortures on Guantanamo prisoners might conduce to fewer terrorist attacks and hence benefit societal wealth. Judging in accordance with social wealth maximization eclipses the anti-majoritarian function of law and courts to protect the minorities in the society. While law and economics judging tries to legitimize itself by social assent, the Americans as a political community has also consented to the Constitution and the bill of rights, and established the Article III courts to interpret and enforce them. After all, what is the use of an undemocratic independent legal apparatus if all that the law enforces is whatever principle that maximizes social wealth, and the society consisting of rational actors is perfectly capable of reaching at the same principles?
Overall, while this Paper wholeheartedly embraces law and economics to the extent that it reminds us of long-term effects that we might not otherwise have considered, this Paper cautions against using social wealth maximization as the guiding principle for judiciary for two reasons. The enterprise of hypothetical free market negotiations that law and economically minded judges engage in is fundamentally flawed and often does not reflect the reality, and furthermore law and economics provides no guide at all at times when the hypothetical negotiations yield no result. Judges bear more important social roles than wealth-maximizers: they are also the guardians of consensus social values and the individual rights enshrined in the Constitution. Reducing judges to social wealth-maximizers is both an overestimation of judges’ institutional capacities to conduct law and economics analysis and an underestimation of the proper roles judges play in our society.