On consequential and normative analysis of law

2 Ross’s view of consequential analysis of law

Ross is sometimes interpreted as viewing the domain of legal science as being narrowly concerned with the prediction of how courts will apply legal sources to disputes. However, he in fact saw it as the role of the legal analyst to explore the social consequences of court rulings and legal rules. Such consequences would be important not only to legislators, but also to courts. Thus, he (Alf Ross, On Law and Justice, 1959/Om ret og retfærdighed, 1971, p. 98, 118) wanted to make it:

“clear how unrealistic the kind of juridical positivism is which limits law to comprise no more than such norms as have been made positive and which believes that the activity of the judge consists only in a mechanical application of these.”

According to Ross, the judge interprets the law in light of his or her culturally determined evaluations, and in light of his or her understandings of the real world. Evaluations and understandings merge in the judge’s attempt to find a rule that has “purpose and meaning”.² However, pressure of time will often preclude the judge from a closer study of real world consequences, but then:³

“it is precisely the business of doctrine in consideration de sententia ferenda (concerning how the judges should decide; my insertion) to assemble and systematize that insight and evaluation of social facts and associated circumstances which can make a valuable contribution to the growth of law through the practice of the courts.”

To the fulfillment of this task, i.e. for analysis de sententia ferenda and de lege ferenda, Ross saw the need for “legal-sociological knowledge of the causal connection between the enactment of laws and human behavior”. He continued:⁴

“The knowledge relevant for legal politics proper is concerned with problems such as, for example, the following: What influence does the formulation of the rules of damages have upon the caution people exhibit in various situations? What part is played in this connection by facilities for insurance against liability?”

Ross noted that legal sociology in its state then did not furnish answers to these questions, which led Ross to call for the development of a new science (which has become law and economics). He noted that constructing such a science is⁵ “an urgent but difficult task ... (it) would study the general mechanics of motive by which the law influences the conduct of men”. He asked:⁶

“Where then is the place for specific legal politics to be the domain of the lawyers? Perhaps we might feel that such a domain might comprise, for example, contracts, purchase, the law of torts, matters of insurance, registration, matters of marriage, majority inheritance, penal legislation, and other subjects that by tradition are the main territory of lawyers. When it is, however, accepted that the law does not exist for its own sake in these spheres either but must be evaluated according to its function in relation to objectives and attitudes lying outside law, it then seems that also these political problems must be a task for non-legal experts of various kinds. For example, are not the laws of tort and the insurance law closely connected with economic problems?”

Hence, Ross did not resist normative analysis of law; he wanted legal analysts to analyze how objectives and attitudes lying outside law could be realized through legal means. What he disliked was analysis that hid its own value premises; it should make its objectives clear from the outset. He wrote (p. 3) that legal scientific arguments should be based on hypothetically accepted evaluative criteria, not on the analyst’s own thinly disguised political views.

On the basis of this account, one might expect him to have cherished a role for fairness (or justice) and welfare concepts in the scientific analysis of law, since by such concepts the analyst can make his or her normative criteria explicit. When he mentioned that the judge’s evaluative criteria are culturally determined, one might expect him to have included in this the judge’s sense of fairness or justice (or the judge’s conception of generally held fairness or justice notions in society), and so one might expect him to have advocated an analysis of how different conceptions of fairness could best be realized through legal means. Similarly, one might expect him to have advocated the expression of the analyst’s hidden value judgments through the use of social welfare functions. But such expectations would be frustrated. Rather, he was in fact highly skeptical of these concepts, considering them scientifically meaningless. I first discuss his view of the role of the concept of fairness and then of social welfare.

6.1 The concept of Pareto optimality

A rule or verdict is Pareto-efficient or Pareto-optimal when there is no other rule or verdict that makes one person better off without making another person worse off. Note that this concept does not fall prey to Ross’s criticism of the concept of social welfare that one cannot weigh people’s welfare against each other, as it does not require such weighing.

Its usefulness for understanding the law arises mainly when the law concerns parties that are in a contractual relationship, as the following example illustrates. Consider person A who possesses wealth, but no entrepreneurial ideas, and person B, who possesses an entrepreneurial idea, but no wealth. A may lend to B, but unless B can commit to repaying, A will not lend. In this situation, the State may set up a system of enforcement backed by the State’s monopoly on the exercise of physical force. Force may be necessary to seize B’s assets if B does not repay, such that B can effectively commit to repaying the loan. If such a system is established, A will know that it will generally be in B’s interest to repay the loan, because his assets will otherwise be sold off and the proceeds handed over to A. Such State enforcement is plainly in the interest of both parties, for if it were not for such commitment, it would be optimal for B to borrow and not repay (barring ethical and reputational concerns), and anticipating this, A would not lend to B. B would then not be able to finance his project, and A would not be able to share in the proceeds from the project. In this sense, the general rule that B’s assets act as security enhances the welfare of lenders and borrowers alike, and this seems like a very plausible explanation for its universal application across legal systems. The explanation works whether the median voter is a borrower or a lender, and it would not be correct to say that the system exists to protect the powerful and rich, who are lenders, against the powerless and poor, who are borrowers. Going a little deeper, one can in the same way understand why the system of bankruptcy is set up, protecting the borrowers’ assets from being sold off by individual creditors. When there are many creditors, it is in the interest of creditors as a group to prevent a race between themselves to be the first to liquidate assets that are often more valuable together in a going concern. Ex-ante, it is Pareto-efficient for all involved that assets are protected from premature liquidation; such protection is afforded by a borrower declaring bankruptcy.

By the same Pareto logic, it is possible to explain the main features and the details of contract law, company law, and other areas of civil law where the parties are in contractual relationships. Of course, reality will only broadly correspond to Pareto efficiency, and some aspects of law cannot be so explained (and, in some cases, may need revision). However, considering law through the prism of Pareto efficiency nevertheless provides a key to understanding it, and also for improving it.

Henry Ussing, a Danish law professor who, as the Danish reader is likely to know, was influential in shaping Danish contract law in the last century, expressed the reasoning as follows (Henry Ussing (1967), p. 180):¹²

“For contracts involving mutual obligations the task must here be, – as so often – to conceive rules that on average conform to the parties’ interests, such that those parties who may contemplate the question beforehand in most cases will be satisfied by the rule.”

The point is that the Pareto principle has significant explanatory and prescriptive power when the parties are in a contractual relationship.

What is more, the core of legal doctrine can in the area of contractual relationships be understood in light of Pareto optimality. Legal doctrine works by teaching law students certain key principles and concepts (such as causation, negligence, strict liability, rules concerning damages such as expectation damages versus reliance damages, etc.). These form a system that allow for somewhat predictable resolutions of conflict, but when times and values change, and in general in hard cases, the concepts and the system must be interpreted. One must then go to basic rationale of the concepts and of the entire system. Here, law and economics analysis, which seeks to understand the concepts in terms of Pareto efficiency, can provide useful insights.¹³

6.2 The concept of Kaldor-Hicks efficiency

Another concept of social welfare is Kaldor-Hicks efficiency, which simply measures how strongly different parties are affected by a rule in monetary terms, as measured by their willingness to pay. If the monetary gain is greater for those benefitted than the monetary loss to those harmed by the rule, the implementation of the rule is said to be a Kaldor-Hicks improvement. This is the principle used in cost-benefit analysis. Generally, analyzing laws and court rulings from the perspective of Kaldor-Hicks efficiency is often simply a way of considering costs and benefits that any person would be likely to consider, if the rule in question is of a mundane kind that does not call upon deontological concerns. The advantages and disadvantages are simply labelled benefits and costs in the economic analysis.

Kaldor-Hicks efficiency can have normative appeal, especially if losers and winners are not always the same, but some people benefit from one rule while others benefit from another. Over time, all may then be better off by applying the criterion. It need not have intuitive appeal, however, when rights, which should be equal for all and which should be allocated independently of one’s willingness to pay for the right, are at stake, as this willingness is to a significant degree determined by one’s wealth. Yet even when such objections exists, it can be informative to know whether a rule is Kaldor-Hicks-efficient.

6.3 The utilitarian analysis

To argue the usefulness of the utilitarian mode of thinking for understanding and prescribing law, I shall exemplify the version of utilitarianism developed by the Nobel Prize-winning economist John C. Harsanyi (1953).¹⁴ Consider two neighbors, one of whom plays loud music in the garden, disturbing the other. The police is called and must settle the dispute as to whether one neighbor should be told to turn down the music or the other be told to accept the noise. What would be the fair or just outcome? Imagine, first, it is 1 am on a Tuesday morning, the aggrieved party cannot sleep and must get up early in the morning to go to work, and that the noisy neighbor likes to listen to old records. The police may perhaps order the music to be turned down to a level such that the neighbor in need of sleep cannot hear it. The basis of the decision, the police might say, is that the neighbor in need of sleep is the one more strongly affected by the decision. Most people would probably agree with this decision and say that the decision is just or fair. If the police had been called on a Saturday night at 9 pm and had the noise been moderate, and had the purpose of the music been a family gathering, and had there been a promise to end the music at 10 pm, the police might have allowed it, and this again would be on the basis of a weighing of the utility consequences for the two parties.

The question is why most people would consider these decisions fair. Presumably, the answer is that most people would put themselves in the position of the two neighbors, as the police likely did, and reach the same conclusion when comparing the strength of the interests. Yet, the conventional wisdom rooted in logical positivism is that interpersonal utility comparisons have no basis, that we cannot compare the parties’ interests, as there is no evidence, no sensory data, on which we can base such a comparison. How, then, do we reconcile our everyday use of interpersonal comparisons of utility¹⁵ and our views on fairness based on such comparisons with their alleged impossibility? In answering this question, Harsanyi did not deny that it is hard to measure differences in personal utility, but he insisted (1978) that we are able (to some extent at least) to put ourselves in the shoes of others and to imagine how they must feel.¹⁶ He rejected the claim by logical positivism that only objectively verifiable statements have meaning. Listening to music at night is something we can imagine doing and we can imagine how a music lover might feel about it. Not being able to sleep and having to get up early in the morning is also something we can imagine, because we have tried it ourselves. Introspection provides meaningful information. Moreover, Harsanyi stressed that most of us want the same things: a nice place to live, travels, good food, the absence of physical pain, etc. Of course, we are also different due to different genes, upbringings, and experiences, but these are factors that we may attempt to take into account as impartial evaluators.¹⁷ One might add to this that we are also not without information about the strength of other people’s preferences. In the example, the police may be aware of the rules governing associations of houseowners (where we would expect both the interests of lovers of music and lovers of peace and quiet to be represented). Also, the decision made by the police may be met with consent, even among music lovers and sleep-deniers, which would reinforce the police’s belief in the correctness of his decision. Finally, we do obtain various other kinds of information about strength of preferences; people spend more or less effort to obtain injunctions against noise; we can observe that they sometimes sell to move to a quieter place, doctors can discern the health impact of noise and sleep deprivation, etc.

Also, Harsanyi insisted that although prone to error we have to make choices based on introspection; the police cannot conclude that interpersonal comparisons are impossible and leave the scene.

Assuming, then, that we can and must put ourselves in the shoes of others, Harsanyi conceived the fair outcome as that which we should choose behind a veil of ignorance (a concept that Rawls later adopted and that built on Adam Smith’s impersonal spectator). In the example this would imply that the just decision is that which we would make if we attached equal probability to being one or the other neighbor (with their particular characteristics). He showed, using a theory of rational choice under incomplete information, that we would rationally choose that outcome which maximizes the sum of the two neighbors’ utilities. This analytical result gave new life to utilitarianism by providing it with a new foundation. It combines fairness and welfare in a simple solution.

Ross raised two counterarguments, which he saw as decisive against Nelson’s account of utilitarianism and which built on some of the same foundations as Harsanyi’s. These arguments were extracted from Ross’s discussion in “Kritik der Sogenannten Praktischen Erkenntnis” (1933).¹⁸

The first counterargument was that the theory of weighing of interests cannot explain law at a deep level, for it must be determined which interests should be weighed, and this presupposes and such interests are defined by that legal order which was to be explained (p. 279). For instance, why would a depositor of a failed bank not want to be repaid ten times his or her deposit? This might be in his or her strong interest. When we do not consider such outcomes, it is because we take existing rights as given and proceed to establish what is fair on that basis. But then we can never derive the basics of law, for we cannot assume something which should be proven. Ross had found a circle.

This argument is, however, not correct; the utilitarian optimum is independent of the initial assignment of rights (if one considers the parties as not exhibiting loss aversion¹⁹). If, for instance, two persons together possess two goods, the utilitarian optimum is where the sum of the utilities of the two persons is maximized, and this optimum exists regardless of the initial allocation of property rights. It depends only on the preferences of the two people. In the example of the two neighbors, that neighbor most affected should hold the right. In the example of the depositor mentioned above, it is easy to establish the inefficiency of paying depositors more than their deposits when banks fail; such a scheme would fail the test of Pareto efficiency as described above for the case of contractual relationships (for instance, depositors would flock to failing banks). Such schemes would also fail the utilitarian test, for to pass this test a scheme must first pass the Pareto test.

Ross’s second objection concerned the objectivity of the interest weighed. In Ross’s reading, Nelson required each person’s interest in an outcome to be weighed by an objective standard, not necessarily equal to how the person values the outcome himself. This criticism does not apply to Harsanyi’s theory, however, and so need not occupy us here. In Harsanyi’s theory we must try to put ourselves in the position of the other person, as experienced by the other person given his or her special circumstances and characteristics.

In conclusion, it cannot be said that Ross refuted utilitarianism in the form presented by Nelson, and he never addressed Harsanyi’s revival of it.

I cannot go into the pervasiveness of utilitarian thinking in law in any depth. My claim would be that utilitarian considerations – the fair or welfare enhancing weighing of interests – are ubiquitous and hence of immediate value for the attempt to explain and design law. Let me only mention three examples of utilitarian considerations being at the same time important for understanding and prescribing law. The three examples are far from exhaustive, only indicative.

First, in criminal law, the level of sanctions and the amount of police resources devoted to a given crime are or should be proportional to the perceived level of harm caused by the crime. This can be justified by utilitarian reasoning where the legislator considers how the victim of the crime must experience the crime. The more harmful the crime, the more important it is to deter and incapacitate the offender. (I have argued above that proportionality between harm and sanction can also be seen as stemming from a fairness principle, which shows the close connection between fairness and welfare, but the same is harder to argue for the amount of police resources, which can best be understood from the concept of social welfare).

Second, libel law can be seen as weighing the utility consequences of chilling speech with the utility consequences for the person whose reputation may be harmed.

Third, taxation patterns can at least partly be understood from James A, Mirlees’s (1971) utilitarian model, which seeks to minimize the distortionary impact so as to maximize the sum of people’s utilities.²⁰

A caveat might be in order to this defense of utilitarianism. I do not wish to deny the point made by Ross that there will always be a subjective element in determining the social good. It would be naïve to think that e.g. utilitarianism provides the answer under all circumstances, as there may well be a question of how well it applies to a given case (e.g. whether deontological concerns should be taken into account) and of how to apply it concretely. For instance, normative considerations that are not welfare-based can enter into the consequential analysis of law when it comes to the issue of what kind of utility to count as socially illicit. It is a fundamental question for utilitarianism to answer whether all utilities should be treated the same. A person might e.g. derive great satisfaction from driving too fast, and it is not clear whether this kind of utility should count as part of the social welfare. This question cannot be resolved on utilitarian grounds, for it concerns the foundation of the utilitarian analysis. For the legal analyst, this means that he or she must make clear whether or not such unsocial preference is included in the analysis, and how conclusions from the welfare analysis will be affected by its inclusion or exclusion. Again, in practice this issue does not render the analysis useless. On the contrary, the analysis can shed light on how the right choice may depend on what Ross, in my view, was right in thinking of as an irreducibly subjective, ethical consideration.