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Subject Area: Political Theory

Efficiency as a Common Law Norm - Leonard P. Liggio, Literature of Liberty, Spring 1982, vol. 5, No. 1 [1982]

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Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


Efficiency as a Common Law Norm

Richard A. Posner

“The Ethical and Political Basis of the Efficiency Norm in Common Law Adjudication.” Hofstra Law Review 8 (Spring 1980): 487–507.

Efficiency—in the sense of wealth-maximization—is a desirable goal for the common law because there is implicit consent to this norm, and also because wealth-distribution cannot be effectively handled by the common law in any case. According to the Koldor-Hicks criterion, wealth (not utility) is maximized when transactions are allowed to occur which net enough wealth so that any third-party “losers” could be fully compensated.

A principle of consent is inherent in this notion, because of the prevalence of “ex ante compensation,” that is, the notion that people have already been compensated for the possibility of loss, and have thereby implicitly consented to any losses that actually occur. A person who buys a lottery ticket and loses the lottery has consented to the loss and has been compensated for that possibility beforehand in the form of the discounted price he paid for the ticket. Similarly, the landowners who lose money when a factory moves from their area were already compensated for their loss when they bought the land, since the probability that the factory would move was discounted into the purchase price they paid for the land. Even without an explicit contract, we can say that the affected parties consented to the market and wealth-maximizing solution.

An apparent counter-example to “consent” might be the negligence system where an injured party may not get “expost compensation” for his injury if, for example, neither driver involved in an accident was at fault. However, the injured party's consent may be implicit in the ex ante compensation that he had already received in the form of lower liability insurance rates, which keeps driving costs lower than would a strict liability system.

Another objection to the efficiency standard alleges that this standard could conceivably justify slavery (which is obviously not based on consent). But, Posner counters, even if we started in a society where one person owned all the others, the others could buy their freedom from that person because their output would be greater as free individuals than as slaves. (They could borrow money against their future earnings as free men to raise the needed money.) Efficient solutions are, it is asserted, therefore consistent with our general structure of rights.

Another reason why the efficiency criterion is desirable is that the courts are simply not in a position to redistribute wealth effectively. At most, courts can change only one term of a contract, and the parties could freely alter the other contract terms in the future. If the court tried to redistribute wealth from landlords to tenants, for example, by refusing to enforce the leases that poor people sign, landlords could simply charge higher rentals because of the greater risk of loss. Thus, the common law system has no systematic distributive effects, and that makes it less open to control by special interest groups. Since no group can hope to benefit ex ante from a change in the system (that is, the system is efficient) and since those few who lose out ex post are a diffuse and ineffective group, we can expect political forces to converge on the ethical goal of efficiency in common law adjudication.