Law and Economics - Ethics, Economics, and Adjudicatio

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by Richard A. Posner


There are two fundamental approaches to the judicial role—the formalist approach, and the realist approach. By the former is meant the approach that denies a role to the judge as lawmaker. Rather, the judge’s role is conceived as identifying the applicable rule of law and applying it to the facts of the case. The task of identification may well be analytic, in the sense that the applicable rule is not given but must be derived from some higher-order principle; but the assumption is that the method of derivation is logical in the sense that syllogistic reasoning is logical. The premises are given and the conclusion follows as a matter of logic rather than of emotion, hunch, or empirical inquiry. So if the question in a case were, does a rescuer have a legally enforceable contractual right to the reward that is offered for a successful rescue even if he was not aware of the reward, the answer might be: contracts are enforceable only if there is a meeting of the minds; there is no meeting of the minds in the rescue case if the rescuer was unaware of the offer of the reward; therefore the rescuer has no legally enforceable claim to the reward.

The formalist approach, which remains dominant in the rhetoric though not the reality of adjudication in the courts of the United States, does achieve a near approach to dominance in the reality as well as the rhetoric of judicial decisions in systems in which the governing legal rules are set forth in great detail and with great clarity in legislative codes, such as the legal systems of Continental Europe. Thus, according to the comparativist John Henry Merryman, the Continental judge “is presented with a fact situation to which a ready legislative response will be readily found in all except the extraordinary case. His function is merely to find the right legislative provision, couple it with the fact situation, and bless the solution that is more or less automatically produced from the union. The whole process of judicial decision is made to follow the formal syllogism of scholastic logic. The major premise is in the statute, the facts of the case furnish the minor premise, and the conclusion inevitably follows.”

Clear, comprehensive legislative codes are not characteristic of U.S. law. This is due in part to the indiscipline of American legislatures (which is due in turn to the effectively tricameral character of such legislatures, with their presidential or, in the case of state legislation, gubernatorial veto power, and to the weakness of the U.S. party system), in part to the prestige of constitutional adjudication, which is necessarily “free” because of the age and the vagueness of many constitutional provisions, and in part to the common law tradition, in which judges are recognized at least by sophisticated thinkers as makers as well as appliers of law. Moreover, the practice of lateral appointment of American judges—most of whom will have had a previous career as a legal practitioner or law professor, and so will not be as thoroughly socialized into the “official” role of the judge as oracle, rather than originator, of law as judges in the career judiciaries found in most of the world’s legal systems that, unlike the U.S., do not have an English origin—gives American judges a taste, and a felt competence, for participating in the creation and not merely the application of law. The dearth of clear and comprehensive codes, the prestige of constitutional adjudication, and the common law tradition of judicial creativity together enable American judges to indulge their taste in innovative, policy-oriented judicial rulemaking without violating either professional or lay expectations concerning the legitimate scope of judicial discretion. And therefore the realist approach, though rarely acknowledged as such by the judiciary—which naturally seeks to mask judicial creativity in order to deflect criticisms of the substantive results of its decisions—has a strong hold on the U.S. judicial imagination, as indeed is freely acknowledged by the law’s theoreticians in the academy.

The formalist approach leaves little room for judges to inject ethical considerations into their decisions. This is not to say that the judges who sincerely embrace that approach are not ethically guided and constrained; they are, but the relevant ethics is that of subordination of judicial discretion to the legislative codes. It is an ethics of modesty, self-discipline, and self-abnegation. It is what might be called a “role ethics” rather than a substantive moral theory, because it seeks to confine the judge in a role that actually precludes his looking to substantive moral theory to guide his decisions.

Modesty and self-discipline are judicial virtues in a realist approach to adjudication as well, but to the extent that the realist judge is a policy maker, the ethical enters directly into his decisions, rather than merely operating to constrain him to the narrow role described by Professor Merryman. But to grasp the role of ethics in American-style legal realism, we must first acknowledge the existence of more than one realist approach, two of which will be discussed here—the economic, the pragmatic, and the moral. I shall discuss the last first because it makes a slightly closer fit with the formalist rhetoric that remains a dominant feature of how U.S. judges express themselves in their judicial opinions.

In what I am calling the moral approach (and here I am distinguishing “ethical” in the broadest sense of “what is to be done—how shall I live” from “moral” in the sense in which the word refers to explicit moral principles), the most prominent exponent of which is Ronald Dworkin (see, for example, his book Law’s Empire), the judge’s role is to make his decisions the best possible statements of moral principle. What I am calling role ethics remains important because of the importance that Dworkin assigns to “fit” or (the law’s) “integrity”—the judge must understand that he is not a free-wheeling moral agent but must fit his decisions to the prevailing public morality of his legal system. Nevertheless Dworkin’s approach is remote from that of the legal formalist, and reflects the breadth of discretion allowed to judges (and not only the justices of the Supreme Court) in the U.S. system. Moral (including political) philosophy becomes the source of moral principles to guide the exercise of judicial discretion.

Economic analysis is a prominent rival of Dworkin’s approach and that of other moralistic jurists. Economics is primarily a positive discipline, a science of human choice under conditions of scarcity. It has also, however, a normative dimension, often called “welfare economics.” But welfare economists do not agree on what should count as an improvement in “welfare.” Traditionally, economists understood welfare in the utilitarian terms first announced by Jeremy Bentham; the economic desideratum was the greatest happiness of the greatest number. Later, emphasis shifted to “Pareto Superiority,” essentially a rule of unanimity: a change is Pareto Superior if it makes at least one person better off and no one worse off, i.e., if all users from the change are fully compensated. Neither utility maximization nor Pareto Superiority is a widely feasible criterion of economic policy, so in practice most economists accept as a welfare improvement a change that is Potentially Pareto Superior, meaning that the persons benefited by the change could compensate the losers, but don’t have to for the change to be regarded as enhancing welfare. Potential Pareto Superiority thus abstracts from distributive considerations, since a Potentially Pareto Superior change could benefit the rich at the expense of the poor, provided the benefit to the rich was greater than the cost to the poor. In other words, PPS is a guide to maximizing wealth as distinct from utility, since the distribution of wealth across persons affects utility but not wealth. A transaction that resulted in a $2 gain to a rich person but a $1 loss to a poor person would raise total wealth by $1, but would lower total utility if the poor person derived more than twice as much utility from $1 than a rich person did. The practical justification for substituting PPS for PS as the criterion for an improvement in economic welfare is not only feasibility, but also the notion that distributive injustices can be corrected at lower cost through the tax and spending system than by curtailing transactional freedom.

When Potential Pareto Superiority, or wealth maximization, is used to guide judges in the decision of cases in the open area in which the orthodox materials of adjudication—authoritative legislative texts and previous judicial decisions (precedents)—give out, precluding a syllogistic solution and requiring the judge to exercise discretion to reach an outcome, it becomes an ethical principle to rival the moral principles, primarily equality, that guide the Dworkinian adjudicator. The justification for using the PPS approach (an approach rarely if ever so identified in judicial decisions, yet nonetheless found tacitly employed in many of them—see, for example, my book Economic Analysis of Law) in adjudication is its relative definiteness and objectivity, since it is based on economic theory and evidence, and its consistency with free-market principles, which are an influential component of public policy in many countries, notably the United States where the economic approach to adjudication has the strongest influence on the law. When PPS is applied in fields of law ranging from contract, tort, and property law, among private-law fields, to antitrust, securities, labor, environmental, and administrative law, among public-law fields, it constitutes a regulatory system isomorphic with the economic system itself. For example, contract law, among its other functions, provides standard terms, such as best-efforts and good-faith obligations, that by substituting for what otherwise would have to be negotiated clauses reduce contractual transaction costs, and tort law imposes “prices” in the form of damages judgments, and criminal law imposes “prices” in the form of fines and prison terms on activities that impose costs that are not fully internalized in the private contractual system.

Closely related to the economic approach to law is the pragmatic approach (on which see my book Law, Pragmatism, and Democracy), generally dated from the work of the American legal realists in the 1920s and 1930s, though many precursors and non-U.S. counterparts can be identified. It is ethical in the sense of insisting that judges must go beyond the orthodox materials of legal analysis, which is to say the materials on which legal formalism relies, to obtain the insights necessary for the sound decision of difficult cases; but it is agnostic concerning which body of ethical or moral thought the judge should be guided by. Central to the program of legal pragmatism is that judges should have greater regard for the practical consequences of their decisions and less with the conformity of their decisions to abstract, “logical” principles of law. But of course consequences do not announce the weight or value that a judge should give them. The pragmatic judge, however, is less likely to impose a specific moral theory, à la Dworkin, than to invoke whatever moral principles happen to be dominant in the judge’s society. In a society such as that of the United States, with its strong emphasis on free-market values, pragmatic adjudication will often coincide with the economic approach.

The point of this discussion is not to advocate the economic or the pragmatic approach, though I make no secret of my sympathy for them, but rather to underscore the variety of ethical approaches that are available to judges in a legal system such as that of the United States in which judges have considerable discretion as a result of the incompleteness of the orthodox materials of decision. The Continental European judiciaries, as also the judiciaries in most other regions whose legal system is not ultimately of English origin, are carefully designed to minimize judicial discretion by such means as detailed legislative codes, a career judiciary in which the formalist approach to adjudication is inculcated and enforced, and a strict concept of the “rule of law” as precluding discretionary adjudication. The stronger the commitment to an essentially syllogistic approach to judging, in which a clear-edged rule provides the major premise of decision, and facts found by professional triers of fact the minor premise, so that the outcome is produced by a logical operation without the mediation of a judge’s ethical sense (other than the role ethic that confines him to the formalist approach), the less a judge need worry about the ethical or moral implications of the decision; his role is mechanical rather than judgmental.

No real-world judiciary even approximates the model just sketched; it is an unattainable ideal. But the difference in degree of discretion and hence room for the play of ethical principles in adjudication between at one extreme the Continental judiciaries and at the other extreme that of the United States is notable. Given the wide discretionary latitude of American judges, the question what shall guide the exercise of their discretion is urgent, and is not answered by the observation that, since the duty to decide is the paramount duty of a judge, something will fill the gap between the formal premises of the law and the outcome that those premises fail to dictate—even if that something is some very personal emotion of the judge, perhaps some sense of ethnic identity with one of the litigants. For that is not a satisfactory “gap filler.” In any legal system that aspires to more than a purely personal justice yet cannot rely on formalistic adjudication to generate its decisions, there will and should be pressure to formulate and justify organized systems of thought that can guide judicial discretion. By definition these systems will not be found, at least in an explicit form, in the orthodox materials of adjudication. They will be found in political and ethical theories, such as the Kantian-flavored egalitarianism of Ronald Dworkin or the wealth-maximization approach of many economic analysts of law or the unreflective prevailing moral sentiments of society on which a pragmatic judge might be inclined to rely to guide his exercise of discretion. The key to the acceptance of these theories will lie in their congruence with the underlying values of the society and their objectivity, in the sense of nonmanipulability—of being more than merely rhetorical resources of judges whose decisions are determined by unrelated factors. Because ethical theories to guide adjudication are thus relative to social values as well as to their intrinsic merit and structure, and relative also to the degree to which a judiciary is prepared to forsake a purely formalist approach, we cannot expect universal agreement on the role of ethics in adjudication.

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