'Comparative Economic Analysis of Law Development in Civil Law Systems' Part 3 of 4

Using the Tools of Law and Economics to Analyze Legal Decision-Making In discussion of the current state of lawmaking under the civil law, it was seen that, although a liberalization of views toward the judiciary has made it more possible for judges to exert their ideas and opinions on cases, their power to shape law on a case by case basis is non-existent compared to their common law counterparts. This extends even to the modern constitutional courts, some of which are actually legislative bodies, and whose decisions are not binding. What then, is the effect of this type of system? One way to answer this question is by using the tools of the economist to analyze whether there may be inefficiencies due to this lack of judicial decision-making ability. Law and economics is a way of analyzing lawmaking and legal decisions that emphasizes efficiency, leaving matters of distribution, fairness and justice to legislators. Or, as Ugo Mattei puts it, “The change of focus proposed by law and economics goes right to the heart of the legal discourse. Its agenda is as simple as it is revolutionary: rather than focusing on justice, legal analysis should focus on efficiency. Efficiency should become the key of legal interpretation.” Ugo Mattei, Comparative Law and Economics 3 (The University of Michigan Press 1997). Mattei goes further in breaking down the differences between the common law and civil law systems,

“To begin with, the idea of a common law process of decision making as opposed to a centralized command and control “regulatory” model is simply unknown in Europe. The impact of judicial decision making in future cases is also presumed (by the law and economics scholar). The American structure of incentives to litigation and, more generally, judicial creativity in framing remedies is taken for granted…the civil law is mostly a codified system where the role of bureaucratically recruited judges is to interpret and apply a written body of statutes. Common law, conversely, consists mostly of case law where technocratic judges are concerned with finding the applicable rule within the body of law made up of legal precedents…there is no doubt that law and economics, being mainly concerned with efficient judicial decision making, seems at odds with civil law systems where judges limit themselves to mechanically applying the law contained in written codes.” Mattei, supra at 75 - 78.

Additionally, while traditional lawyers and judges look at situations ex-post to determine how to make an offended party whole, economists are not concerned with welfare, but the future implications of the legal remedy imposed. The focus is to develop a system of incentives that will both reduce harm and push participants to use resources more efficiently. Nicholas Mercuro and Steven Medema Economics and the Law, From Posner to Post-Modern and Beyond 43-44 (Princeton University Press, 2nd ed. 2006). The conclusion that could be drawn is that the lack of judicial ability to creatively interpret legal problems and develop the most efficient result for the parties and society in civil law jurisdictions leads to difficulties in economic analysis. There is also debate regarding more broadly whether economic analysis even has a role in legal analysis. Some argue, as noted above, that the common law system leads to uncertainty, that the ex-post nature of common law decision-making rather than ex-ante rule-making leaves wide ranging legal uncertainties. Eric Brousseau, Did the Common Law Biased The Economics of Contract…And May It Change?, in Law and Economics in Civil Law Countries, vol. 6, 79, 88 (Bruno Deffains & Thierry Kirat, eds. Elsevier Science B.V. 2001). Additionally, the civil law is built on foundations of justice and morality rather than efficiency. Criticisms of law and economics analysis are not unfounded. For example, in law and economics, there is discussion of certain individuals benefitting at the expense of others. Also, “equity and efficiency are usually perceived as antithetical concepts. An efficient legal solution may not be equitable, and an equitable one may not be efficient.” Mattei, supra at 1. However, equity and fairness do not necessarily need to contradict each other, as Brousseau has argued that fairness and equity can impact favorably on efficiency despite the entrenchment of Aristotelian-Christian morals in civil law doctrine. Brousseau, supra at 102. Brousseau also that it would be naïve to think that moral considerations don’t play into common law decisions, nor efficiency into civil at some level. Brousseau, supra at 88. An even more direct argument about efficiency is that efficiency in and of itself is moral. Although some are predictably against this idea, others embrace it. For example, in his essay ”Is Law and Economics Moral?”, Robin Paul Malloy states his belief that, “…freedom, liberty and human dignity are something more than the cold hard variables of economic calculus, and that these values require us to continually avoid this responsibility by appealing to the concepts of efficiency and wealth maximization because they play no constructive part in the determination of the basic essence of human dignity.” Robin Paul Malloy, Is Law and Economics Moral?, in Adam Smith and the Philosophy of Law and Economics 160, 160 (Robin Paul Malloy and Jerry Evensky eds., Kluwer Academic Publishers 1994) Meanwhile, Richard Posner argues just as persuasively that economic liberty is the equivalent of personal and political liberty Richard A. Posner, “Law and Economics Is Moral” in Adam Smith and the Philosophy of Law and Economics, supra at 169, 177, and that “Wealth maximization (as opposed to mere moral discourse) is analytically fruitful and…has a large, although not unrestricted domain of application to law and to public policy in general.” Id. Despite a lack of consensus on whether law and economics is a moral method of analyzing law, and despite the fact that the process developed under the common law, there is no reason why the tools of the economist cannot be utilized to analyze civil law results. Taking the moral implications out of the equation leaves simply efficiency, a metric that allows for comparison between legal systems, legal results, etc. This is what law and economics attempts to do at its core; namely produce easily compared options based on efficiency which lawmakers and judges may then analyze to determine whether it is still the best way, or if equity considerations would lead to better results. Understanding The Tools of Law and Economics With efficiency serving as the focal point of law and economics analysis, an understanding of its historical basis as a tool to analyze legal scenarios is critical. Ideas of efficiency, though likely practically understood for thousands of years by merchants and traders from Asia to the Mediterranean, were only consolidated and brought to wider public view by Adam Smith and his notions of the invisible hand. This is the idea that if all of the members of society acted in their own self interest, if the butcher cut as much and sold as much meat as possible, and if the baker did the same with bread, and the cobbler with shoes, society would be better off. David Ricardo expanded these ideas to greater national interest, suggesting that countries with comparative advantages in growing or manufacturing certain items focused on those at the expense of less fruitful endeavors, and then engaged in trade with other like-minded nations, that these trade partners would benefit. These notions have served as the roots of globalization, and guide decision-making in even modern socialist nations. The focus of neo-classical economics in this context is efficiency in and of itself, essentially to make as much of whatever good can be made as efficiently as possible. It does not consider justice, fairness, or political questions, which economics leaves to the political scientists and politicians. These ideas spread to legal analysis nearly two centuries later, predominantly in the 1960’s when judges and legal scholars began to thoughtfully consider efficiency concepts as part of their decisions and analysis. In this context, the “economics” part of law and economics focuses on neo-classical economics, and utilizes the efficiency concepts of Pareto efficiency and Kaldor-Hicks wealth maximization. Mercuro, supra at 21. It is important to note that there are several schools of law and economics analysis. However, the analysis used henceforth will be based on the tenets of the Chicago School, the predominant school. [1] It is not a stretch to state that this neo-classically based idea of efficiency is at the heart of much US legal reasoning, particularly in the areas of tort law, anti-trust, and contracts. Pareto efficiency, or a notion of overall efficiency named after Vilfredo Pareto, serves as the basis for law and economics analysis. Under this notion, the optimal state of society is one where no one can be made better off without making someone else worse off. A change in a society is Pareto optimal if one person is made better off as a result and no one is made worse off. Richard O. Zerbe Jr. Economic Efficiency in Law and Economics, 3 (Edward Elger Publishing Limited 2001). Additionally, if all factors of production, goods and services are sold in perfectly competitive markets, the efficient outcome can said to be Pareto optimal. Mercuro, supra at 21. A necessary requisite for this state to occur is that the parties to transactions believe that they will benefit as a result. Additionally, no actor may benefit at the expense of his trade partners. When all such transactions have occurred, and no one can be made better off without a detriment to someone else, society reaches a Pareto optimal state. Mercuro, supra at 24. It is not difficult to find holes in such a theory. There are always relative winners and losers in a given transaction, so if Pareto optimality were the requisite for legal change, change would never occur. Mercuro, supra at 26. Therefore, upon this foundation Nicholas Kaldor and John R. Hicks added their own contributions, which have come to be known as Kaldor-Hicks efficiency. The two understood that, in reality, there are winners and losers in transactions. However, they believed that efficiency could still be achieved in such a situation. The premise of Kaldor-Hicks is if the legal change or transaction that favors some individuals at the expense of others results in overall societal benefit and if the winners would still better off themselves even after compensating the losers, the result is efficient. Mercuro, supra at 26. This concept can be best illustrated in a commonly cited historical example used by Kaldor. The Corn Laws of England prohibited the importation of cheap foreign wheat, benefitting farmers at the expense of consumers of bread. It has been argued that if the laws were repealed, and the bread consumers were so much better off that they could afford to compensate the farmers and still be in a better position than before the change, society would be better off. Id. Interestingly, Kaldor-Hicks does not require that any compensation actually be paid, just that it could be. This speaks, once again, to a political distribution question. Mercuro, supra at 27. It also leads to one of the great moral criticisms of law and economics, namely that, although it suggests that society is better off, if losers are not compensated than too much benefit can shift to the winners. An additional level of analysis was provided by Nobel Prize-winning Ronald Coase. His theorem, really a synopsis of a number of his writings and statements, is that in the absence of transaction costs, parties will bargain to efficient outcomes regardless of initial rights. Therefore the final result will be that which benefits both, and therefore society, economically. Mercuro, supra at 110. These combined ideas of efficient bargaining and compensation for losers are the main foundations of contemporary law and economics. [1] going forward, mention of “law and economics” will refer to this school and its principles