“What I call Economic Analysis of the Law,” he explains, “uses economics to analyze the legal world.” The analyst evaluates laws “from the standpoint of economic theory” and may “argue for change in that legal reality.” “What I call Law and Economics,” he continues, “instead begins with an agnostic acceptance of the world as it is, as the lawyer describes it to be.”
The lawyer-economist also uses economics as a tool to evaluate the laws themselves. However if the legal environment is inconsistent with economic theory, the lawyer-economist may recommend modifications to economic theory. Calabresi exalts the law-and-economics approach so that we may gain a better understanding of both laws and economic theory.
Merit goods / We may learn a lot by studying “merit goods,” he writes, referring to goods that are deemed “loathsome to price.” In the economic way of thinking, people undertake projects when the expected benefits exceed the expected costs. But if we learn that, say, a construction project incorporates the value of lives lost as simply another cost of the project, we may cringe.
This “commodification” of human life is only one offensive notion that concerns Calabresi; another is “commandification” of human life. For instance, those who would take offense at a construction company manager approving a project despite the possibility of workers losing life or limb would also be offended to know that officials at the Occupational Safety and Health Administration might reason the same way. Calabresi observes, “If we do not want to price lives (and we don’t), we also do not want the government to tell us, too obviously, that some lives, in some circumstances, are not worth saving.” The solution is to find the right tradeoff between commodification and commandification.
Tort law helps to find this tradeoff. “In effect,” he writes, “what we do in torts is to some extent pricing lives and safety, but we do this in ways that do not lead to the heavy moral costs that would be imposed if we did that pricing obviously and directly.” These moral costs are the offense we take at pricing life or limb. We tolerate the “huge costs” of tort law, such as litigation costs, because tort law lowers moral costs.
Other merit goods are such that “it is loathsome to allocate them through a prevailing wealth distribution that is highly unequal.” For instance, human vital organs belong in this class, Calabresi argues, because poor people may not be able to afford them, and poor people may be eager sellers of their own organs. In order to determine how many of these goods will be available and who will get them, he recommends “modified command structures” and “modified market structures.”
Compulsory service / The distinction between these structures is “nuanced,” to use one of the author’s favorite words. Consider “a rationing scheme” for national service. Assuming that “service” is mandatory and that there are multiple ways to serve, “each subject individual would be free to choose where and how to spend his or her time.” Calabresi imagines many possibilities. A young adult could serve in the armed forces, “an international peace corps,” or “in varied American ‘needy’ zones.”
The author imagines that “service in, say, sunny Italy or rainy England would be priced to take into account how much each was favored or disfavored by those who had to choose.” If this sounds unworkable, a “tax/subsidy scheme” is an alternative. He then outlines three such schemes, with the goal of recruiting (or drafting) an equal percentage of individuals from each “wealth category.”
In one scheme, the government might make service mandatory, then tax those who want to avoid service based on their wealth. In the second scheme, government might make military service voluntary so that “the richest would be paid greatly to serve, the poorest not much.” These different pay levels would attract wealthier citizens and deter poorer citizens, but would hardly seem acceptable to the public. The third scheme is a combination of mandatory service and voluntary service with taxes and subsidies. “In effect,” Calabresi assumes, “one could tax the richest a large amount for nonservice, while simply paying the poor to serve.” If this sounds like a Rube Goldberg contraption of social engineering, he admits that “there are obvious problems with each of these (and any other yet more mixed schemes).”
His musings on the allocation of merit goods provoke thought. “Just as it is worthwhile to try to find ways of producing wheat more efficiently,” he reasons, “so it is worthwhile to search for less ‘costly’ ways of allocating merit goods!” These moral costs are the “pain” one feels knowing that goods are allocated through a market in which wealth is unevenly distributed. The author recognizes a tradeoff between reducing moral costs and maintaining incentives to produce. “On the one hand,” he observes, “many people prefer equality to inequality.” “On the other hand,” he recognizes, “many of these same people believe that a considerable amount of inequality is inevitable if we are to have the kinds of incentives needed to make more [goods] available for all to share (however unequally).”
The challenge is in determining which goods qualify as merit goods. They will be the goods whose modified market provision reduces moral costs the most with the least damage to incentives. He illustrates this notion using such examples as education, health care, vital organs, and campaign finance.
Readers may wonder what limits the number of goods provided through the many hybrids of markets and government that Calabresi envisions. For example, ordinary citizens regard an appendectomy as health care that is a merit good. But would they count cosmetic surgery? The author maintains that if society allows a limited number of merit goods to be allocated through some blend of markets and command, incentives to produce will be sufficient to achieve prosperity and objections to inequality will be few.
Government-administered altruism / Readers with socialist leanings may be shocked to learn that Calabresi sees “so much altruism” in free-market society. He believes that altruism is pervasive because it is both a means and an end. For example, he identifies “private altruism” and “state beneficence.” Is the latter an oxymoron, when whatever good deeds a government may undertake are backed by coercive tax collections? Perhaps this is why he thinks a government-provided safety net is legitimate: “But if everyone behaved altruistically toward others in the private sphere, people would be unhappy if their government were not also charitable and beneficent, at least to some extent.” Government welfare programs, if I understand him correctly, are “state beneficence.”
The author observes many “modified structures” producing altruism. One is “the legendary Minneapolis 5 percent tradition”: businesses based in that city donate 5% of their profits to philanthropy. Another is the tax deduction for charitable giving. Not-for-profit organizations are a means to produce merit goods such as education and health care. According to Calabresi, they also satisfy our desire for altruism. The author describes many different ways that people cooperate in order to produce altruism. Then he asks whether we have “the optimal amount of beneficence,” and “the optimal mix of different forms of altruism.” His answer is, “I have no idea.” He does not know because “we do not have a model that demonstrates that, under certain conditions, an optimal result is achieved.” The building of such a model is for future lawyer-economists.
Pricing government intervention / Lawyer-economists characterize the liability rule as a way to orchestrate an exchange that resembles a market transaction with “collectively set” terms of trade. These terms of trade are usually called a “price,” in keeping with the terminology of markets. We may also refer to the terms as a “penalty,” “assessment,” or “sanction.”
The author treasures the liability rule for its widespread application in what he calls “social democratic societies—in which the reigning ideology is neither libertarian nor collectivist.” Consider an application to tort law. If an airline loses a passenger’s luggage, the damages might be the market prices of the lost items. But the “polity” may add punitive damages to reflect sentimental values. Another example comes from property law. A government might use eminent domain to take land in return for the market price. In order to discourage takings of land with sentimental value, compensation might be set at a multiple of the market price. Alternatively, if a government intends to hasten economic development, compensation might be set below the market price. “In such instances,” the author claims, “the assessment that both allows and limits entitlement shifts may be chosen to reflect that polity’s liking for, and devotion to, its ideologically mixed foundation.” Calabresi urges us to recognize that “some people like markets, while others like command,” and he endorses the liability rule “because it is an approach that a social democratic polity likes, in and of itself.”
The author argues that economists don’t adequately incorporate “tastes and values” into their analyses, and that a law-and-economics approach may be used to evaluate them. Consider this bit of his reasoning. Calabresi assumes that people value a greater quantity of goods over a smaller quantity, a more equal distribution of goods over a less equal distribution, and creativity. Call these primary values. He then searches for “subsidiary” values that reinforce the primary values. These are “the desire for things which are in common supply in that society,” such as “ordinary water and wine,” “ordinary sport watching and ordinary sex,” and “child rearing.” If prosaic is what we want, we will be able to produce great quantities, distribute them equally, and satisfy our desire to create. In contrast, if we want fine wine, fine cuisine, and “great athletic feats,” incentives to produce these exceptional goods will be necessary and we will fail to achieve all the primary values, in particular a more equal distribution of income.
Now the author asks, “What has this to do with laws and legal structures?” Using the law to promote values may cause “value-alteration costs.” His example of this is antidiscrimination laws. Though Calabresi doesn’t cite the Civil Rights Act of 1964, it’s safe to assume he has it in mind. Among other benefits, its passage emboldened women to enter the labor force. But it was not a true Pareto improvement. To the extent that raising children is valuable, a tradeoff occurred. Using the law to combat discrimination against women is commendable and effective. “It has,” unfortunately, “made ordinary, out-of-home, but not especially creative, jobs available to women and furthered legal structures that implied that holding a paying job is worth doing, while staying home and rearing children is not.” In the author’s terminology, we failed to achieve a “joint maximization” of all our values. Although we achieved what we value in terms of reducing discrimination against women, the unintended consequence was a “devaluing” of the creative activity of child rearing. Laws exist to correct the situation and support child rearing, he claims. He doesn’t explicitly mention a child tax credit, but again it’s safe to assume he has that in mind. His main message is that we should use law-and-economics analysis when making and evaluating laws.
Given the author’s fascination with the intersection of markets and government, libertarian readers will be wary of policy ideas that expand the role of government at the expense of markets. Other than that, I find little in the book to criticize. Calabresi, “an early tiller in the field” of law and economics, teaches much that the next generation may reap.
