CONSENT IN POSNER’S SYSTEM OF JUSTICE AS WEALTH MAXIMIZATION

Since Adam Smith, political economists have claimed that individual freedom is the surest means to generate social wealth. However, by the mid-twentieth century, the difficulty of proving that individual freedom - anchored in basic rights to personhood, property, and contracts - produces an optimal level of social welfare became increasingly evident.

Posner, on the other hand, seeks to uphold rights to consensual transac­tions while actually privileging the enterprise of maximizing social wealth. He does this by building on the work of Nobel Prize-winning economist Ronald Coase, who argues that efficiency can be achieved as a separate consideration from the assignment of rights.^[496] Rights are no longer intrinsically meaningful or defensible; instead, they exist and are justified as means to effectively generate wealth. Posner takes this prioritization of efficiency over rights a step further: he endorses the notorious Kaldor-Hicks compensation principle, which argues that social welfare can be improved by policies producing both winners and losers as long as the winners could hypothetically compensate the losers for their loss and still retain a surplus. The principle is infamous in welfare economics because it suggests that social welfare may be increased even if those negatively affected by policy do not share in the surplus generated from their loss of entitlement. Although originally advanced as a means to limit a monopoly’s powers without compensation for its loss, the Kaldor- Hicks principle can also be wielded to argue for the reallocation of resources from the poor to the rich.^[497] According to Kaldor-Hicks logic, traffic projects through poorer neighborhoods may be justified if commuters gain more time and money from the new road construction, and residents are forcibly removed at “shadow market” prices via eminent domain (even if they never voluntarily agreed to them).^{[498] [499]} The losers neither share in surplus gain nor receive compensation for the personal loss of having their property seized.

Posner’s application of the Kaldor-Hicks principle has three intricate mov­ing theoretical parts, each requiring a distinct exposition. First, it is important to understand the intellectual legacy of the Coase theorem and its implications for a theory of rights, as well as its conceptual basis in the neoclassical economics of diminishing marginal productivity. Second, it is important to see how Coase’s theorem essentially views economic value as objective, or at least externally provided to the judge or policy maker. Third, it is necessary to understand the Kaldor-Hicks compensation principle and how it compares to the Coasean idea of assigning rights to achieve market efficiency. In direct contrast to Buchanan’s libertarian priority of rights over externally defined criteria of efficiency through the exercise of veto power, Posner’s utilitarian position privileges social wealth maximization by stripping meaningful con­tent from the exercise of consent.

Coase’s theorem incorporates numerous idealizing assumptions into its ana­lytic structure specifying that perfect competition must obtain with all actors having perfect knowledge of relevant information, markets entailing no trans­actions costs, and no buyers or sellers sufficiently large to impact prices. The theorem holds that any precise legal establishment of entitlements, that is, well- defined property rights, will yield a state in which resources are put to their most productive use. After rights are assigned, resource use will depend on the prices for goods and the rates of marginal productivity for competing products. Even though the resulting distribution of wealth is dependent on the initial allocation of rights, Coase argues that resources will be put to their most productive use.12 Coleman provides a useful synopsis of Coase’s theorem:

Allocative efficiency, or the maximum productive use of resources, does not depend on the initial assignment of entitlements. The initial assignment is only the starting point for negotiations.

Rights are a tool to facilitate free market exchange, not a reflection of conditions protecting individuals’ freedom or a representation of the entitlement indivi­duals had prior to their entry into the market.

Coase’s theorem is based on a stringent set of assumptions.¹⁴ First, rational individuals are not only acting to maximize subjective utility but must be maximizing monetary gain directly, without additional considerations. Second, the economy is perfectly competitive, and thus the prices of goods are independently established and will not be affected by any specific assignment of rights. Third, the bargains achieved once rights are determined are not subject to income effects, so neither party would make a different choice regardless of how rich or poor each were. His breakthrough in legal theory was expressed in terms consistent with neoclassical economics that regarded the conditions for efficiency as externally given criteria of leveraging productive resources to their greatest profit-maximizing use as a function of diminishing marginal productivity.¹⁵ The idea is that if a property could offer a greater profit yield through an alternative use, then the actor able to achieve that outcome would purchase the property from its current owner.

Coase’s paper “The Problem of Social Cost” was a response to welfare economist Arthur Pigou’s tax scheme.16 Coase puts forward a proposal to achieve optimal outcomes given the tendency of competing land uses, such as farming and cattle grazing versus railways, to generate conflict. For example, trains damage farmland, as they produce sparks causing wildfires on adjacent ground.

Coase thus makes the question of which party should have the right against infringement secondary to the fact that any entitlement allocation will yield an efficient deployment of resources. Once rights are assigned, the individual who could make better economic use of a resource will purchase it from the current owner if that prospective owner has the financial wherewithal to do so. Coase argues for his method of adjudication with the full knowledge that the optimal wealth distribution will ultimately depend on the allocation of resources. From its onset then, law and economics gives priority to optimal productivity over considerations of distributive fairness. Rights are fully a secondary considera­tion to economic growth and wealth maximization. Moreover, in relying on principles from neoclassical economics that render diminishing marginal

1 ⁴ See Robert Cooter’s entry on the “Coase Theorem” in The New Palgrave Dictionary of Economics, vol. 1 (London: Palgrave MacMillan, 1987).

1 ⁵ Note that here Coase’s reasoning reflects that of Knut Wicksell more than that of James M. Buchanan, as discussed in Chapter 7, “Unanimity.”

¹⁶ Coase, “The Problem of Social Cost,” 1960.

productivity objective in the sense that all producers face the same constraints, Coase’s theorem obviates the consideration of coercive bargaining by insisting that no single individual can alter any prices.

Posner and law and economics move beyond Coase in adopting a game theoretic (rather than neoclassical) standard of economic value and embracing the Kaldor-Hicks compensation principle, neither of which is endorsed by Coase.1⁷ Indeed, a charitable reading of Coase could recognize his contribution as an additional consideration on which a judge may reflect when deciding a case. A judge could consider both the merits of rights claims based on moral reasoning and historical circumstances, and the potentially worthwhile goal of promoting social efficiency. However, law and economics proposes that wealth maximization should be the judge’s primary, if not only, point of reflection in casting judgments. Coase lauded efficiency for leveraging resources to their greatest productive power given publicly shared standards of diminishing mar­ginal utility and profit maximization functions.¹⁸ Posner instead seeks to place resources in the hands of the individual who most values them given an opaque test of willingness and ability to pay expressed in hypothetical or real auctions over entitlements.¹⁹

In accordance with his refrain “justice equals wealth maximization,” Posner requires a concrete measure of wealth. Instead of subjecting profit maximization to industry-wide constraints, his view, consistent with John von Neumann and Oskar Morgenstern’s game theoretic definition of price, is that wealth is increased through exchange whenever the buyer’s subjective utility for a good (reflected in that individual’s willingness and ability to pay for a good) is greater than the seller’s (reflected in that individual’s willingness to part with the good). The purchaser gains surplus value equal to the difference between his maximum willingness to pay for a good and what he actually pays, while the seller gains value equal to the dollar amount gained minus her subjective utility for the good. If we consider a car valued at $5,000 for the seller (her minimum price to part with it) and valued at $10,000 for the buyer (his maximum price to acquire it), the net gain in economic worth will be $5,000, even if the actual exchange price is $8,000, giving the buyer a surplus value of $2,000 and the seller a surplus value of $3,000.²⁰ Law and economics departs from neoclassical economics’ objective, market-wide aggregate establishment for prices as it considers individuals’ subjective utilities in isolated cases, which can rarely be empirically

1 ⁷ An excellent source on the development of law and economics and Gary Becker’s and Richard Posner’s contributions is Nicholas Mecuro and Steven G.

1 ⁸ Coleman, Markets, Morality, and the Law, 2002, 74.

¹⁹ Coleman alludes to this opacity, ibid., 74-75.

²⁰ This is articulated by John von Neumann and Oskar Morgenstern, Theory of Games and Economic Behavior (Princeton, NJ: Princeton University Press, 1944/1953/2004), 556-557, all editions have the same pagination.

tested, unless through watching how consumers reveal their preferences through actual choices.²¹

Posner’s test of wealth creation, as well as his unrelenting view that resources are socially best allocated when held by the highest bidder, who by definition puts them to their most efficient use, has no external test and consistently determines that individuals who have more financial wherewithal are inherently more justified in owning property. Posner asserts that the justification of owning property is the ability to generate wealth. He implicitly suggests that wealthier individuals are more deserving of resources as a matter of definition: an indivi­dual who is able to pay more for a resource demonstrates that she values the resource more highly than the seller and hence maximizes wealth via the mere acquisition of the resource. To make good on this assertion, Posner provides his own conception of consent and relies on the Kaldor-Hicks compensation prin­ciple to argue for the reallocation of entitlements premised on potential gains made by winners who could compensate losers and still have a surplus left over.²² Even though the winning party who acquires the resource and consumes its surplus value does not compensate the loser, overall wealth is generated. This follows from Posner’s reasoning that the differential between the buyer’s and seller’s willingness to pay for and part from the good is realized in the exchange, no matter which party acquires the surplus. Therefore, a reassignment of property rights can be as effective as an actual market exchange in realizing this surplus value. Coleman astutely crystallizes Posner’s conclusion: “where markets are too expensive or otherwise unworkable why not simply assign the entitlement to the high bidder straightaway?”²³ Thus, justice as wealth max­imization argues that individuals who have the wherewithal to acquire property or to generate greater income streams from it than current owners have priority over acquiring rights to that resource.

The controversial US Supreme Court case Kelo vs. City of New London embodies the principles of law and economics and provides an example of how Kaldor-Hicks reasoning can be used to reallocate resources by coercing indivi­duals to part from private property through legal redress. This case is contro­versial because of how clearly it seems to violate the Fifth Amendment, that is, that private property is inalienable insofar as one private party is not entitled to take another’s private property for private use.²⁴ The five-to-four majority sided with the law and economics reasoning that the current property owners were not able to put the land to its full economic use and the land should thus be given

²¹ See, e.g., Amiram Gafni, “ Willingness-to-Pay as a Measure of Benefits: Relevant Questions in the Context of Public Decisionmaking about Health Care Programs,” Medical Care (1991) 29:12, 1246-1252.

²² Coleman, Markets, Morality, and the Law, 2002, 84.

²³ Ibid., 88.

²⁴ See US Supreme Court decision, Kelo vs. City of New London, 545 US 469, 2005, full text available on Cornell University’s Law School Legal Information Institute website, www.law.cornell.edu/supct/html/04-108.ZS.html, accessed July 15, 2015. to a private developer who promised to build condominiums and other lucrative projects that would increase the city’s tax base. The private developer in ques­tion was permitted to pay the property owners a shadow market price (the average value of property prior to the development initiative) without their consent. By the Kaldor-Hicks test, the new owners do not have to pay those who lost entitlement any of the surplus they hope to gain by leveraging the full value of the property, nor do they have to pay compensation for forcibly removing private residents from their homes without consent.²⁵

Two elements of law and economics reasoning are starkly clear. First, indi­viduals’ rights are not a sacred standard-bearer for personal freedom of choice or autonomous use of property. Second, with its application of the Kaldor- Hicks compensation standard, law and economics not only permits the law to create winners and losers, but it also indiscriminately permits wealthier indivi­duals to exploit poorer individuals without sharing the surplus gained from such exploitation.²⁶ To Coleman, whereas the Coase theorem may be defensible when embedded in a robust theory of rights and moral desert, the Kaldor-Hicks compensation principle can only be legitimate if used to protect society from monopoly power.²⁷ Coleman worries, “The remarkably bold claim Posner advances is not just that wealth maximization is justified because it is consented to; it is that wealth maximization of the Kaldor-Hicks variety... is justified because it is consented to.”²⁸ This point, that Posner defends the mobilization of Kaldor-Hicks according to the view that the losers would consent to their treatment, is so crucial that it is valuable to read it in Posner’s own words: “I want to defend the Kaldor-Hicks or wealth-maximization approach not by reference to Pareto superiority as such or its utilitarian premise, but by reference to the idea of consent that I have said provides an alternative basis to utilitar­ianism for the Pareto criterion.”²⁹ The task ahead is to understand Posner’s use of “consent,” given both the configuration of the legal suit Kelo vs. City of New London and the practical import of the Kaldor-Hicks compensation principle legitimating one party’s gain in wealth through non-consensual means, thus imposing costs on the losing party.