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CounterPunch
October
18, 2002
The Problem with Posner
by EDWARD LAZARUS
The legal world generally doesn't pay much attention
to who wins the Nobel Prize for Economics, and this year is
proving no exception. But I wonder if ten or fifteen years from
now, we will look back at the moment of this year's prize announcement
as the high water mark of the "Law and Economics"
movement.
In the last decade, the Law and Economics
movement has come to dominate legal scholarship and deeply influence
legal and regulatory thinking. But its influence may soon be
on the wane--as the Nobel Committee's choice shows.
This year, the Prize went to Daniel Kahneman
and Vernon Smith. Notably, Kahneman is not an economist at all,
but rather a psychologist. And even more notably, both recipients
were selected for their pioneering work in demonstrating, through
experimentation, that human beings frequently do not act as
the kind of supremely rational actors ordinarily posited in
economic theory.
The "discovery" that people
often make irrational choices-- one more likely to shock economists
than ordinary folk-- strikes at the heart of the Law and Economics
enterprise. For years, the denizens of this approach have been
preaching that the study of "economics" can provide
a rigorous scientific framework for nearly every field of law,
based largely on the assumption that human behavior is rational.
If that assumption is wrong, the movement suffers accordingly.
The Law and
Economics Movement and Its Deep Reliance on Rationality
At the risk of gross oversimplification,
the most ardent devotees of the Law and Economics school tell
us that scientific order both can and should be brought to the
jumble of rules that we call law. If we think of humans as
rational actors efficiently seeking to maximize their interests,
according to the movement, then we can fashion legal rules that
will best help them do so.
Much of this analysis takes place on
a highly theoretical level. But the practical applications have
expanded in recent years as leading Law and Economics theorists--most
notably Richard Posner of the U.S. Court of Appeals for the
Seventh Circuit--have been appointed to the bench.
Of course, you won't see any fancy econometric
formulas showing up in their opinions. But these judges, self-consciously,
are far more willing than most of their colleagues to choose
between competing legal doctrines based on what they foresee
as the likely practical consequences of each doctrinal choice.
Put another way, these judges are willing,
even eager, to shape the law based on their assumptions about
the likely effects of a legal regime. And, in turn, those assumptions
about future effects are based on their judgments as to what
a "rational" person would do under a given set of
circumstances.
The Weaknesses
of Law and Economics, Even Apart From the Nobelists' Work
Even before Smith and Kahneman told us
that this premise of rationality is dramatically overblown,
this kind of law-making was a dangerous business. Posner and
other leaders in the field declare economics to be the most
promising of the social sciences (notwithstanding its moniker
as the "dismal" science), at least where the law is
concerned. Yet in practice, its application is less than scientific.
Economics often involves not controlled
and verifiable experimentation, but instead the positing of
any number of unverifiable (and, as it turns out, dubious) assumptions.
When these assumptions are thrown into doubt, the usefulness
of the conclusions they lead to is also undermined.
Remember when all those economists were
touting the virtues of stock options as a principal component
of executive pay? What could be more "rational" than
rewarding a top executive based on the performance of his or
her company, as judged by the market value of the company's
stock? "Pay for performance "became a virtual mantra.
But it turns out all those stock options
had a major, unacknowledged down side. They gave executives
a giant incentive to artificially inflate their companies' stock
prices, by engaging in all kinds of illegal activity to understate
expenses and pump up revenues. The options also gave executives
a big incentive to engage in insider trading when they learned
that the proverbial mud was about to hit the fan.
Some people might say it isn't rational
for very rich people to put themselves at risk of both going
to prison and suffering economic ruin just to make themselves
a whole lot richer. But that's what happened (as Sam Waksal
just admitted with his recent guilty plea in the ImClone scandal).
Thus, the Law and Economics folks' "scientific" crystal
balls demonstrated themselves to be more than a little cloudy.
Examples like these show that the economic
analysis of law seems wholly dependent on the perspicacity of
its practitioner about the realities (not the rationality) of
human and institutional behavior. And even the best of Law
and Economics thinkers can stumble badly in practice--often
because they are describing people as rational when their actions,
in practice, are anything but.
The Problem
with Posner's Law and Economics in Particular
Posner, who has emerged as one of the
nation's leading public intellectuals, is a case in point. A
decade ago, for example, in one of his leading opinions--Schurz
Communications v. FCC--Posner struck down new regulations promulgated
by the FCC, based largely on a Law and Economics analysis. But
that turned out to be a serious mistake
The regulations had limited the right
of television networks to engage in television production (as
opposed to distribution). In the FCC's view, these regulations
were necessary to protect independent television producers from
being shut out by the networks--who dominated television distribution
channels. The FCC also worried that, absent the regulations,
television would (even despite cable) become increasingly homogeneous.
But Posner was not convinced. He freely
expressed his own views on the most likely result of the proposed
regulations, rather than deferring to the FCC's as administrative
law required. And as a result of those views, he voided the
FCC's limitations on networks as "arbitrary and capricious."
Of course, what the FCC had done wasn't
arbitrary and capricious at all--it made perfect sense from
the FCC's point of view. But in order to replace the FCC's point
of view with his own, something judges are never supposed to
do, Posner had to describe the FCC's decisionmaking as if it
had barely been decisionmaking at all. (Ironically, Posner
thus had to paint the FCC as being far from a rational actor.)
In hindsight, it's hard not to conclude
that the FCC was mostly right. Independent television producers
are an endangered species in Hollywood. Meanwhile, the networks
(and their cable-heavy parent companies) now control a huge
proportion of what's seen on TV. What the FCC predicted, actually
came to pass, since the regulations that would have prevented
it were struck down.
Posner Is Also
Wrong on the Law and Economics of Campaign Finance Reform
Posner's views on important issues of
policy fall victim to the same problem--namely, that an approach
dependent on the weighing of costs and benefits is only as good
as the judgment of the "weigher."
Take Posner's assessment of campaign
finance reform. In putting current proposals on his scale of
good policy, Posner tells us that the harms caused by the current
system are minor. Unlimited soft money contributions, he tells
us, "buy access and modest influence, at best, and often
just offset the contributions to competing candidates rather
than causing substantial distortions in the markets in which
the contributors operate."
Tell that to the California officials
who tried to convince the Bush Administration to put temporary
price caps on energy. They argued to a brick wall, given that
the energy was being produced by the very market-manipulating
companies that provided the financial spine for George W.'s
presidential campaign.
Certainly, a growing number of politicians
admit candidly that money buys a lot more than "modest
influence" (and they should know, shouldn't they?). Moreover,
if modest influence was indeed all that big contributions achieved,
you'd think wealthy donors would have started putting their
money to better uses; instead, they've pulled out all the stops,
showering candidates with donations. (I guess Denise Rich hasn't
read Posner.)
Naturally, if one undervalues the potential
benefits of campaign finance reforms it's easier for a supposedly
"scientific" economic approach to tip against reform.
And Posner also puts his finger on the other side of the scale--
by overstating the potential costs of reform, as well as understating
its benefits.
For example, one creative notion for
solving the campaign finance dilemma would be to turn current
contribution disclosure laws on their head, and require that
all campaign donations be anonymous. This way individuals and
companies could still freely exercise their First Amendment
right to give money to candidates of their choice. Yet the mandatory
anonymity of the contributions would prevent the access and
influence-buying that corrupts the present system: Candidates
would not know who had filled their campaign coffers and without
a "quid" to identify, would not be tempted to provide
a "quo."
In Posner's view, however, this "donation
booth" idea would impose an excessive "information
cost" on voters, who would no longer be able to judge a
candidate by his donors. According to Posner, "the identity
of a donor is a clue to the likely policies of the donee should
he be elected--a valuable clue if the donor has better information
about the candidate than the average voter has."
Indeed, Posner finds this cost so significant
he suggests it might be better to forbid anonymous contributions.
Yet will it really benefit voters to be clued in as to which
candidates are beholden to which donors? That will only help
them to choose between different varieties of corruption; whereas
anonymous donations might obviate corruption itself.
In any event, very few people, I would
venture, assess the relative merits of candidates by looking
at their donor lists--especially these days when interest groups
routinely hide their true identities and agendas behind truth-bending
names. Voters look at what voters have traditionally looked
at--public positions, endorsements, and so on. I'd trade in
a heartbeat the loss of information about donor identity in
exchange for an end to the current practice of quasi-bribery,
and I suspect most voters would feel the same.
Time for a
New Psychology and Law Movement?
All of which brings me back to Smith
and Kahneman. They have suggested, and it appears to be true,
that human and institutional behavior is, at best, a complicated
mix of the rational and irrational. They have also suggested,
further, that even the definition of rational behavior is subject
to plausibly conflicting views and deep uncertainty.
If these suggestions are true--and they
certainly seem to be, then isn't the law making a terrible mistake
by tying itself so closely to a science that is no science at
all? Pretending to offer precise answers to legal questions
by relying on false assumptions only gives a false sense of
security and certainty.
Or, put differently, now that economics
is a field shown to be powerfully dependent on psychology, shouldn't
the legal academy think twice about putting so many of its eggs
in the basket of economics? Shouldn't the Law and Psychology
movement perhaps enjoy a second wind instead? But, hey, I was
a history major--so what do I know.
Edward Lazarus
writes about, practices, and teaches law in Los Angeles. His
most recent book is Closed
Chambers: The Rise, Fall, and Future of the Modern Supreme Court.
This column originally appeared on FindLaw
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