Hofstra Law Review Volume 8 | Issue 4 Article 1 1980 Legal Analysis and the Economic Analysis of Allocative Efficiency Richard S. Markovits Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/hlr Recommended Citation Markovits, Richard S. (1980) "Legal Analysis and the Economic Analysis of Allocative Efficiency," Hofstra Law Review: Vol. 8: Iss. 4, Article 1. Available at: http://scholarlycommons.law.hofstra.edu/hlr/vol8/iss4/1 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Markovits: Legal Analysis and the Economic Analysis of Allocative Efficiency HOFSTRA lAW REVIEW Volume 8, No. 4 Summer 1980 LEGAL ANALYSIS AND THE ECONOMIC ANALYSIS OF ALLOCATIVE EFFICIENCY Richard S. Markovits* INTRODUCTION Recently, intense interest has been generated by Professor Richard Posner's hypothesis1 that the economic analysis of allocative efficiency (or wealth in Posner's terms) provides a relia- ble algorithm for defining common law rights. 2 The appeal of this hypothesis to various groups is entirely understandable: to those Copyright © 1980 by Richard S. Markovits * Professor of Law, University of Texas. A.B., 1963, Cornell University; Ph.D. 1966, London School of Economics; LL.B., 1968, Yale University. I would like to thank Ronald Dworkin, Jack Getman, Tom Grey, and Inga Markovits for reading a draft of this Article, Guy Wellborn for discussing various deficiencies of Posner's model of the common law of torts, and the participants in the Law School Faculty Re- search Seminar and the Law and Philosophy Reading Group at the University of Texas for commenting on a number of ideas in this paper. 1. See Posner, The Ethical and Political Basis of the Efficiency Norm in Com- mon Law Adjudication, 8 HOFSTRA L. REv. 487 (1980). Some proponents of this hy- pothesis might prefer the following somewhat different formulation: judge-made de- cisions about the relevant set of rights can be accurately predicted by determining which rights definition would be the allocatively most efficient for a court to develop and enforce. This latter formulation makes it clear that the hypothesis is not con- cerned with whether the relevant decisions are legally "correct." Note that both these formulations fail to specify whether the hypothesis refers to the allocative effi- ciency of the relevant rights decision at a given point in time, or to a tendency of such decisions to become more allocatively efficient over time. 2. Proponents of this hypothesis have vacillated when describing its precise do- main; at times, they seem to speak as if it covered all nonstatutory rights, including both fundamental fairness-type constitutional rights and moral rights in pre-legal so- cieties. In less effusive moments, they have restricted its coverage to a subset of common law rights-namely, those that involve issues whose allocatively efficient resolution would damage no significant political group. Published by Scholarly Commons at Hofstra Law, 1980 1 Hofstra Law Review, Vol. 8, Iss. 4 [1980], Art. 1 HOFSTRA LAW REVIEW [Vol. 8:811 who seek certainty in results it appears to offer right answers;3 to those who desire methodological clarity it appears to offer straight- forward instructions for legal problem-solving;4 to those who oppose redistributions to the poor it appears to offer a policy argument as well as a justicizing precedent for their own distributional prefer- ences;5 and to the imperialist economist and economist/lawyer it offers congratulations for possessing a skill that is more useful than would otherwise have been the case. This Article will attempt to show why-despite its obvious appeal-Posner's hypothesis must be rejected. The first three sections of this Article will analyze various defi- ciencies of the attempt by Posner 6 and others7 td demonstrate that the analysis of allocative efficiency is a useful algorithm for the so- lution of common law problems. The first section will criticize the way in which Posner has defined the concept that is central to his whole analysis: the concept of an increase in wealth or allocative ef- ficiency. As we shall see, Posner seems to have been unaware of how difficult it is to operationalize this concept. In this symposium, he mistakenly assumes that the Kaldor-Hicks test can determine whether any given policy will increase allocative efficiency in the sense that decisionmakers employ this term and, equally impor- tantly, in the sense that is most useful for policy analysis. 8 As we shall see, viewed from these perspectives, the Kaldor-Hicks test has several crucial deficiencies which lead its employers to underestimate the allocative efficiency both of policies designed to aid the poor and of government interventions in general. The sec- ond section then examines the evidence Professor Posner cites in 3. The appearance may be illusory since two or more rules may be equally allocatively efficient. 4. Once more, the appearance may be illusory since the actual method that allocatively efficient courts would have to employ in our worse-than-second-best world would be far more complicated and would involve far more judgment than Posner seems to suppose. For a full discussion of the appropriate method, see Markovits, A Basic Structurefor Microeconomic Policy Analysis in Our Worse-than- Second Best World: A Proposal and Critique of the Chicago Approach to the Study of Law and Economics, 1975 Wis. L. REv. 950. 5. As we shall see, this appearance is also somewhat illusory: if the concept of allocative efficiency is defined to conform with the expectations of the decision- makers who employ such data, the goal of achieving such efficiency will conflict less often with egalitarian distributional goals than Posner and others have argued. 6. Posner, supra note 1. 7. E.g., Priest, The Common Law Process and the Selection of Efficient Rules, 6 J. LEGAL STUD. 65 (1977); Rubin, Why is the Common Law Efficient?, 6 J. LEGAL STUD. 51 (1977). 8. Posner, supra note 1, at 491-97. http://scholarlycommons.law.hofstra.edu/hlr/vol8/iss4/1 2 Markovits: Legal Analysis and the Economic Analysis of Allocative Efficiency 1980] ANALYSES OF ALLOCATIVE EFFICIENCY this symposium to support his hypothesis that the common law is allocatively efficient: in particular, this section will show that the common law of torts (which Posner claims has adopted the negli- gence standard as defined by Learned Hand) is not allocatively efficient-that is, is almost certainly not the most allocatively effi- cient set of standards a common law court could adopt. Obviously, given the dubiousness of Posner's evidence, it becomes even more important for him to explain why the common law should have evolved toward allocative efficiency. The third section of this Arti- cle reviews the two types of arguments with which Posner or oth- ers have tried to explain the supposed allocative efficiency of the common law. I will show that no one has yet given a persuasive "economic" account of why disputants and/or judges should act so as to make the common law allocatively efficient and that Posner has failed to justicize a system of allocatively efficient rights. In sum, the first three sections of this Article are designed to show that Posner and the Posnerians (1) have failed to define their basic concept in a satisfactory manner, (2) have failed to adduce persua- sive evidence that the common law is allocatively efficient, and (3) have failed to account for the supposed allocative efficiency of the common law. The fourth section of the Article lists a number of reasons why this result should not be surprising. In particular, this section de- lineates four a priori grounds for doubting the explanatory power of economics in many legal contexts: more specifically, the fourth section examines the extent to which the ability of economics to il- luminate various legal issues is undermined by its inability to dis- tinguish (a) prejudices from tastes, (b) entitlement interests from psychological and welfare interests, (c) liberty as independence from liberty as license, and (d) right-bearing entities from nonright- bearing entities. Finally, the fifth section will delineate in very broad terms my own preliminary views about the relationship be- tween allocative-efficiency analysis, legal analysis, and general pol- icy analysis in our culture and will examine the implications of my approach for the proper way to investigate income distribution and tort law questions. I will argue (a) that there is a crucial distinction between ought claims (which are based on ultimate values) and obligation-right claims (which are based on obligational values), that unlike most other government decisions, common law and fun- damental fairness-type constitutional decisions always involve obligational values and their correlative rights, and that our deepest obligational value is respect for the individual defined as a Published by Scholarly Commons at Hofstra Law, 1980 3 Hofstra Law Review, Vol. 8, Iss. 4 [1980], Art. 1 HOFSTRA LAW REVIEW [Vol. 8: 811 chooser of his or her own ultimate values and life plan; (b) that nei- ther the general methods of positive science nor the particular methods of economics can enable one to determine the implica- tions of this value for specific legal questions; but (c) that econom- ics can provide considerable help to analysts who are seeking to determine the legal and moral implications of these obligational values. THE DEFINITION OF "AN INCREASE IN ALLOCATIVE EFFICIENCY OR WEALTH" Obviously, definitions of such concepts as "an increase in allocative efficiency" can never be right or wrong in the sense in which these terms are normally employed.