1. Is the common law efficient? The conjecture: Posner –Common law can be best explained as –That set of legal rules –That maximizes economic efficiency Might be supported either theoretically –By showing reasons to expect that judges –Would end up making decisions in a way –That moved the law towards efficiency Or empirically –By showing that the existing pattern of common law –Fits the prediction of the conjecture –Which one would do by, for any legal issue, by Figuring out what the economically efficient rule would be And comparing it to the actual rule that exists In the common law Note that Posner limits the conjecture to common law –Others might apply it to legislated law or administative rule or norms –As well as or instead of to common law

2. Theoretical Argument: Judges Judges trying to do the only good they can –In many cases, judges at most set part of the terms of an interaction –Cannot redistribute among groups of people because – other terms adjust in response If the courts are pro-tenant, supply and demand for housing Moves rents up –Less true for criminal law or tort law between strangers But even with theft, the rent seeking argument suggests That harsher penalties for theft might Make even most thieves better off –So increasing the size of the pie the only good thing left to do. But … Do they know it is the only good they can do? –Most people don’t believe that, and lots of opinions –Sound as though judges don’t believe it. Also Do they know how to do it? –Figuring out what legal rules maximize efficiency isn’t always easy –And it isn’t clear judges have any special expertise in doing so

3. Theory: Invisible hand mechanism Ordinary markets tend to give efficient outcomes –Not because anybody is seeking efficiency –Or knows how to get it, but –As an unintended result of individuals seeking their own welfare Perhaps there is some similar mechanism in the production of law For example, if the court establishes an inefficient rule –Parties keep trying to contract around it –Which generates new cases, some of which give different rules –The process continues until the rules are efficient Hard to make this a rigorous argument –It applies to only some parts of the law, and … –Efforts to litigate to change the law face the public good problem

4. Empirical argument General structure seems to fit, at least roughly –Property+contract to produce and allocate goods –The way rights are bundled in real property What starts in the bundle--rights that are most valuable together Mechanisms for rebundling –“Make the victim whole” in tort looks like the Pigouvian rule With negligence as a solution to dual causation problems And strict liability for ultrahazardous activities to deal with cases where unobservable precautions are important –Differences between patent and copyright roughly fit But those are established mostly by legislation And so not evidence for the Posner thesis Some details seem to fit –Defense of necessity: special case efficient crimes –Forseeability: no point in an incentive to avoid something when you have no way of knowing it will happen. Falling safe. –Restriction of freedom of contract in salvage cases –When easements enforceable against innocent purchaser

5. Inefficient Rules of the Common Law Retreat from freedom of contract –Penalty clause unenforceable –No organ sales, no legal adoption market, … –No waivers in product liability … but. –Arbitration contracts may let parties get around the restrictions Treatment of value of life in common law –Set at zero in tort, because your claim died with you –Altered by legislation to be the value of your life to others –Ought to be the value of life to you & others –“Hedonic damages” Failure to make tort claims marketable –As a solution to “can’t afford a lawyer” –And a possibly better alternative to class actions

6. Many we can’t tell Coming to the nuisance defense? –Yes--easier to move things before they are built –No--pig farmer shouldn’t be able to effectively claim all the neighboring land which is going to be suburb eventually Himalayan photographer vs eggshell skull –The arguments are the same –Take your victim as you find him-> right average damages –Only liable for the usual value gives the incentive to the person who knows this is a special case –In each case, Posner looks at the argument that justifies the legal rule that exists, misses the other one My whole chapter on crime/tort –Where I repeatedly show a way of doing something –Then a problem that way raises –Then a way of dealing with that problem –Then … through seven rounds

7. Verdict on Judge Posner? Truth of the Posner thesis? Jury still out –Some parts of the common law fit –Some don’t –For many the efficient rule is sufficiently unclear That one can “prove” the existing law is efficient By suitably selecting one’s arguments And may, if you believe it is true Usefulness of the Posner thesis? Yes –The question “what is the efficient rule?” –Helps convert legal theory into a unified problem –Where the same argument apply to a wide range of legal rules

8. Hence the economic analyst can move easily not only within common law fields but between them. Almost any tort problem can be solved as a contract problem, by asking what the people involved in an accident would have agreed on in advance with regard to safety measures if transaction costs had not been prohibitive....

9. Equally, almost any contract problem can be solved as a tort problem by asking what sanction is necessary to prevent the performing or paying party from engaging in socially wasteful conduct, such as taking advantage of the vulnerability of a party who performs his side of the bargain first. And both tort and contract problems can be framed as problems in the definition of property rights;.... The definition of property rights can itself be viewed as a process of figuring out what measures parties would agree to, if transaction costs weren’t prohibitive,...”

10. Summary Comments Start with –One behavioral assumption (rationality) Individuals have objectives And tend to take the correct actions to achieve them –One conjecture about the organizing principle: Efficiency Legal rules are designed to maximize the size of the pie The degree to which everyone achieves his objectives End with –A way of unifying all of law –As solutions to a common set of problems, with a single objective –In different contexts –Not only all of law today but potentially over all of time and space

11. Applying ideas across legal topics Risk allocation: The economics of insurance –Relevant to who bears what risks in tort –More relevant to contract design Ex Ante/Ex Post –Choice between tort and criminal law of highways –Explaining why attempts are criminal –Applied to contract Do we measure inputs or outputs? Especially employment contracts. Coase and Pigou –Externalities, incentives, double causation problem, transaction costs apply to Pollution regulation Defining property rights in land Common law of nuisance Tort law--auto accidents. Product liability. Contract damage rules

12. All law in all times and places Becomes one problem –Evidence and ideas from one system are relevant to all –Including ours, now and in the future For example –Shasta County and the virtues of inefficient punishment –18th century England and deterrence as a private good –Iceland and transferable torts –Classical Athens and punishing nuisance suits –19th c. Whalers and when norms are efficient

13. A Very Brief Summary

14. Solutions to the coordination problem Direct violence--might makes right Improved version –Commitment strategies, mutually recognized –Property in territorial species –Norms, rights, … –Feud societies Could imagine a full blown modern version Part 3 of my first book: Machinery of Freedom Centralized solution: Dictatorship –Works on a small scale, but –Scales up very badly Decentralized solution –Private property and trade, but … –Raises a variety of problems, for which –A legal system offers at least partial solutions

15. Property, Contract Tort and Crime Private property requires –Definition of what each is owned –Way of knowing who owns it and how ownership is acquired –Mechanisms for enforcing, settling disputes –Generalized from real property to much else –Hence property law, including IP Important that property can be transferred –Sometimes in complicated exchanges –We need contracts specifying terms of transfer –Mechanisms to settle disputes over their implications –Hence contract law Rules can be violated, so we need –Mechanisms to make it in people’s interest not to violate the rules –Ways of settling disputes over whether they were violated –And the consequences thereof –Tort law, criminal law, courts and procedure

16. Efficient Rules Start with private property and trade, but World doesn’t break up into wholly separate pieces My use of my stuff effects you: Externalities Solutions? –Direct regulation-- “do that” –Liability rule--pay for costs you impose But costs are jointly caused So alternatively we can –Treat rights as property, to be defined and then transacted over Works well where transaction costs are low But often they are not –Do nothing Put up with some inefficiencies, because The cost of dealing with them is more than it is worth

17. Other pieces of the answer Not just the control of externalities but Defining what rights –Ownership implies –And who has them How to enforce rights –Ex post vs ex ante –Liability vs property rules –Optimal punishment …

18. To build efficient law Choose an appropriate combination of property and liability rules taking account of the costs of both. Define and bundle property rights in a way that minimizes costs associated with defining and defending them and transacting over them. Enforce the whole by some mix of public and private action under a suitable set of rules of proof and liability. Throughout the project consider the incentives of all parties, including the enforcers, transaction costs, and the problem of using dispersed and imperfect information. Where possible, create institutions that make it in someone’s interest to use such information to generate the appropriate rules.