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

Law as Efficiency is a normative legal theory that is founded on the belief that law serves to promote efficiency and wealth maximization in society. Unlike the 'Natural Law' perspective, 'Law as Efficiency' does not include morality in its foundation. Under this aspect, it is similar to 'Legal Positivism'; one may evaluate laws according to morality but they are not created because of it.

Essence of Law as Efficiency

At the heart of this theory is rational wealth maximization, as established in liberal market economics. Accordingly, a law is valueable if it creates efficient outcomes. Consequently, an application of law ought to place society into a better position. These improvements can be measured by an overall evaluation of society's satisfaction, which includes monetary fulfilment, as well as emotional and physical satisfaction.

This theory assumes that humans are inherently rational and make decisions logically and in their best interest. They are free actors, who are at liberty to pursue their well-being. Ultimately, this leads to an increasingly improved state of existence for everyone. Liberal transactions will always position at least one of the parties into a better position. A rational person will avoid completing a deal if it puts him or her into a worse position. This concept is called Pareto-superiority. Ultimately, these transactions will lead to wealth maximization and a state of Pareto-optimality; a state where no further improvements are possible.

Problems with Law as Efficiency

This theory makes a few basic assumptions about the world and human existence that are problematic:

Humans as Rational Actors

Liberal market economics are inherently motivated by greed; an inner desire to improve one's well-being. The main issue with this theory is that it bases its arguments on an unrealistic perception of human nature. Primarily, the problem is that individuals are not all rational actors. Humans act on impulses, emotions and desires that stem out of a number of different motivations other than reason. Sometimes we act out of fear, love or external pressures that are outside of our control. Subsequently, laws may not necessarily evolve out of reason but out of a variety of different factors.

World of Perfect Information

Following the Coase Theorem, in order to create and sustain laws that are efficient, society must exist in a world of perfect information. In these ideal conditions, people are always going to make the most efficient decisions. The problem is that the Coase Theorem describes a world that doesn exist. Imperfect information and fraud are a real part of our existence. These lead to inefficient outcomes and distorted wealth allocations.

Market Externalities

Externalities are positive and negative effects that result out of transactions and are borne by third parties. Some may be beneficial to society. For example, two parties may contract to create erect a statute or build a park that can be enjoyed by the public. However, most externalities are negative because a rational person will never choose to pay for something that decreases their wealth. A rational individual will avoid a negative externality or will try to pass it on to someone else.

The Kaldor-Hicks test presents a more favourable outcome. Under this theory, a party to a transaction will receive enough wealth in order to use that wealth to outweight the negative externality. This model encourages the betterment of all members in society.

Unresolved Issues

There are a number of legal issues that remain unresolved under this theory. According to Austin and positivism, the Sovereign may never be bound by the law. This is due to the fact that law is created to generate obedience amongs subordinates. The sovereign and its subordinates are separate entities and the law travels from one to the other. This can create a dictatorial and oppressive state that, nonetheless, is valid under this theory.

Furthermore, criticism flows from Hart and the 'Rule of Recognition', which appears to be very similar to morality. In instances where officials fail to recognize a law, they may be disobedient to it. This notion is very congruent to Aquinas' natural law theory, which essentially implies the same. However, Hart argues that there is another sphere to legal positivism. For example, the segragation laws in the US would be considered valid legislation under legal positivism, whereas natural law theory would disregard them as nothing more than expressions rather than true laws.

Finally, there is an inherent lack of closure in this case. A woman, who lived in fear and openly described her worrisome ordeals with the perpetrator is left out cold to fend for herself. The likelihood of an attack was reasonably foreseeable due to the perpetrator's history of violence. According to the court, the police does not owe her a private duty of care and there is no causal connection between the officer's non-feasance and the damages suffered. Nonetheless, the outcome of the decision is incompatible with what society expects from the police, who are in a position of "professional controllers". Officers ought to protect members of the public from violent and dangerous individuals. So although the decision reached by the court is valid as per legal positivist theory, it does not agree with a righteous and fair outcome.