Course:Law3020/2014WT1/Group L/Law As Efficiency

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Law as Efficiency: Susan Dimock

When assessing the relationship between law and economics, good law is efficient law. (page 116) The definition of efficiency in this analysis is based on wealth maximization. As articulated by Richard Prosner, efficiency exists when wealth is maximized. (page 117) Wealth is not limited to monetary gains, but any satisfactions that can be measured is recognized as wealth. (page 117) This principle requires that social wealth is maximized – resources are appropriately allocated to those who value it most. (page 117) Efficient legal rules ensure that this allocation is done in an efficient manner. (page 117)

Economic Foundations of Wealth-Maximization Economist, Vilfred Pareto, established Pareto-superiority to measure efficiency. (page 118) Pareto-superiority assumes that all individuals are rational actors and they will only choose situations in which all parties are better off, thus maximizing the overall social wealth. Pareto-optimal addresses a state in which no more moves can be made to increase wealth without depriving others of their wealth. (page 118)

Yet, Pareto-superiority is not a realistic state because it fails to take into account negative impacts to third parties, thus economists developed an alternate measure of efficiency – the Kaldor-Hicks test. (page119) This test allows for transactions to be made that result in third a party being worse off, only if the benefiting parties can compensate the loser - so that no one is worse off. (page 119)

Equity and Economic Principles With these principles in mind economists begin their analysis of the market under the assumption that market transactions are voluntary and that people are “rational agents.” (page 120 and 121) This assumption is unrealistic, however it does create a void that equitable principles, like the presumption of undue influence has to potential to fill. Like in Geffen v Goodman Estates, when a party is under the influence of another, their transactional decisions may not be voluntary. By the recognizing situations where undue influence has the potential to occur, the courts can return individuals to their former state if they were part of an involuntary transaction. Equity plays a large role in creating a more voluntary market, thus maximizing wealth and allowing for the economic theories to be more applicable.

Equity complements the overall economic theory, allowing it to truly function by testing transactional relationships against the efficiency model. In situations where humans are not acting as rational or voluntary agents we are unable to determine the value of the exchange. Equity allows the judge to remedy these situations with equitable tools like the presumption of undue influence.

Role of Legislators and Judges According to economists, legislators fail in the pursuit of economic efficiency. Their focus is self-interest and they redistributive rather than maximize wealth. (page 121)

In contrast, judges have the ability to properly facilitate efficiency. (page 121) Inefficient cases are the ones judges are most likely to hear, thus they have the opportunity to promote efficiency. (page 122) Posner asserts that judges can make efficient decisions that serve “the broad-based social demand for efficient rules governing safety, property and transaction.” (page 122)

We certainly see this in play in Geffen v Goodman Estates, the judge re-confirms the equitable principle of undue influence and its presumption - protecting the integrity of transactions. Although it was found that the appellant was not victim to undue influence, in assessing situations when it can arise ensures that issues before the court are properly addressed and those who have suffered an unwarranted loss are remedied. This furthers the purpose of judges as economic decision makers who can develop and enforce efficient rules.

The Normality of Maximizing Wealth In assessing the relationship between law and economics there is criticism as to whether the two should interact. Posner suggests, “If judges were to pursue wealth-maximization as their goal, then they would produce a morally attractive mix of rights, virtues, productive incentives and altruism.” (page 135) This seems logical. Conversely, Ronald Dworkin asserts that we should focus on redistribution as the means of increasing social wealth. (page 135) However, if an individual does not pay for a good we have no way of knowing what value the good has to the individual – thus are unable to confirm if there has been an increase in social wealth. (page 136)

That being said, assuming that individuals are always voluntarily engaging in a sale or purchase is naïve. Again equity appears, allowing for this theory to accurately exist by ensuring those who have been victim of a transaction they didn’t wish to do will be properly remedied. This will preserve concept of wealth-maximization and the idea that resources “be distributed according to their most highly valued use.” (page 136)

Additional Application to Geffen v Goodman Estates In the Geffen v Goodman Estates, there was potential for the brothers to unduly influence Tzina to gift land to them. If this was the case, the value of the transaction would be unknown. The presumption of undue influence preserves the exchange of value. Assessing the relationship is important to the functioning of the efficiency model - it allows judges to remedy situations in which involuntary transactions have occurred.

Dimock suggests that contracts exist to promote efficient exchanges - this is only accurate if the participants make a voluntary and influence free exchange. If a contract is entered into when an individual is victim of undue influence, that party will likely be suffering a loss and allowing for this type of influence to exist will decrease market efficiency by harming the integrity of the transactional process. By having a presumption of influence that arises in certain situations will ensure that individuals privy to a transaction ensure the process is voluntary and fair to maximize wealth and efficiency.

Dimock might criticize the presumption of undue influence for raising transaction costs and thus lessening efficiency. To guard against presumption on may need to consult a lawyer or agree to a less than ideal bargain because of their position.