KALDOR-HICKS EFFICIENCY: NO NEED TO COMPENSATE LOSERS

One way to make sense of Posner’s routine judgment that Kaldor-Hicks effi­ciency is an effective means to maximize wealth is to step back to gain

²⁵ For the unsatisfactory elements of this means of condemning property, see Richard Epstein, Takings: Private Property and the Power of Eminent Domain (Cambridge, MA: Harvard University Press, 1985).

²⁶ There is also the issue of the lack of transparency of the test of Posner’s rule of entitlement in accordance with the highest bidder - for its inherent obscurity, see Coleman, Markets, Morality, and the Law, 2002, 91.

²⁷ Ibid., 92.

²⁸ Ibid., 117.

²⁹ Ibid.

perspective on how rational decision theory per se has an overarching impact on the meaning of consent. Coleman notices that in rational choice theory, argu­ments for self-interest and those for consent are misleadingly merged under the idea that it is self-evident that the promotion of self-interest is indistinguishable from consent. Individuals inherently consent to that state or action that makes them better off. Coleman explains, “The source of this confusion is the axiom of rational choice that rational, fully informed individuals naturally agree to pursue goals, promote policies and support institutions that maximize their expected utility.”^[501] By this interpretation, consent is analytically built into the premise that purposive agents maximize expected utility. It is assumed to be consistent with the axioms of rational choice theory that “one consents to what is in one’s interest; what is in one’s interest, one consents to.”^[502] In fact, both Posner and Buchanan, as devotees of rational decision theory, fall into the same confusion, although with distinct implications: “Both the... [rational choice] economist and the constitutionalist blur this distinction in ways that rob their respective enterprises of normative grounding.

Conflating consent with expected utility maximization is doubly misleading. First, it assumes that consent is incorporated into individuals’ expected utility rankings over possible world states. Second, the analytic equation of consent and self-interest makes it virtually impossible to appreciate that individuals are able to accede to states of affairs that may in fact go against their own evalua­tions of personal satisfaction or self-interest.

Let us examine the latter point first, as it is more readily communicated. Coleman explains,

In order to make good the distinction we recognize between autonomy and utility, we must admit that it does not follow logically that people would consent to what they prefer. This sounds odd at first, but it need not. The root idea, I think, is that efficiency or utility is a property of social states themselves. Autonomy speaks to the concern for the process by which one moves from one social state to another. Put another way, an ordering of one’s preferences over social states is path independent, whereas which social states one consents to or agrees to is path dependent.^[504]

This characteristic inability to address the quality of process versus the utility of ends challenges virtually all rational choice scholarship mobilized to draw political theoretic conclusions.^[505] To demonstrate the point more explicitly, Coleman draws attention to the now standard supposition, either in the Nash equilibrium or the Prisoner’s Dilemma account of the social contract, that agents’ desire for goods simultaneously implies that each would rather acquire the other’s goods via theft than mutual exchange.

Drawing attention to the very scenario implied by the Prisoner’s Dilemma rendering of the exchange problem, Coleman observes,

My having the gold and you not is thus an incomplete description of a social state [even if one that is typically used to illustrate that PD actors prefer the state in which they have all the goods at the other’s expense]. More complete ones are: my having the gold and your not in virtue of, say, my [means of] earning it or my purchasing it from you; and my having the gold and your not in virtue of my defrauding or robbing you of it. I prefer having the gold to not having it when I secure it legitimately, but not when I come to it through illegitimate means.^[506]

This quote is important because it gets to the heart of the Prisoner’s Dilemma rendering of the social contract and exchange. For the reason that preferences are purely over outcomes independently of how they are attained, actors are automatically presumed to prefer suckering others rather than obtaining goods through legitimate and bilateral exchange. Rational choice stipulates that expected utility functions contain all the information relevant to purposive agents, so Coleman’s path dependence could be incorporated into the indivi­duals’ utility functions.^[507] However, in practice, this nuanced interpretation of utility is not permitted in the expected utility theory required in game theory, which can only guarantee solutions under the assumption that actors base strategies for action on their evaluation of outcomes and may permit die role to govern their choice of actions.

The first point alluded to earlier, that consent can be analytically contained within individuals’ expected utility functions, also bears further scrutiny because it is the foundation for Posner’s insistence that consent is consistent with Kaldor-Hicks efficiency and his argument that justice should be restricted to wealth maximization.

Posner’s argument rests on two pillars. One is the idea that individuals’ expected utility functions permit setting an economic price for all eventualities. The second is the idea that property rights are best viewed as reflecting a pricing system for different eventualities. This first point is intelligible if we imagine a state of affairs, not so different from the manner in which Nash sets up his bargaining problem, in which I not only order various potential states of the world from most to least preferred but also have a clear sense of intensity of my preference satisfaction or loss for every conceivable outcome. For example, I would really like to go out to dinner tonight with friends, but I could also stay home and get some work done.^[508] Perhaps I am indifferent between these two alternatives such that an additional bonus or attraction could sway me toward one alternative or the other. However, say there is the possibility that on my way to dinner I might have a bicycle accident, after which I would neither eat dinner with my friends nor work. According to Posner’s logic, this newly introduced less attractive possibility can be measured on a metric of monetary value, so that even if I am only slightly bruised and my bike a bit damaged, receiving a $500 cash payment could make me indifferent between the first two options and the bicycle accident. In law and economics, all outcomes are measurable on a monetary scale that reflects individuals’ utility functions, based on how each individual measures worth against the backdrop of actual resources and actual income.

Posner’s use of a monetary metric that covers all contingent states of affairs and permits individuals to rank outcomes on a finely graded scale also depends on the existence of monetary prices as independent quasi-Platonic entities external to all decision problems. This idea of monetary value that stands apart as a metric all can use to differentiate between various states of affairs is foundational for Posner’s defense of justice as wealth maximization. Ultimately, wealth production is evident in the world by individuals’ abilities to generate income streams; the more income generated from given resources, the more wealth has been maximized and justice is satisfied. Likewise, the greater the positive gradient between an acquirer’s willingness and ability to pay for and the yielder’s willingness to part from a resource, the more wealth has been generated in a transaction.

Posner’s view that wealth maximization is the leading mission of justice turns Adam Smith’s commutative system upside down, yet it similarly implies that any growth of the economic pie will be beneficial to all agents. Adam Smith gave priority to individuals’ rights and argued that inalienable rights generate pros­perity. He provided an objective standard for this outcome: that the cost of living will go down, thereby rendering even less affluent individuals better off.^[510] Posner, by contrast, argues that rights have no intrinsic validity but only serve the function of maximizing wealth. Posner does not attempt to provide a detailed argument for how less well-off individuals’ cost of subsistence will necessarily decrease in his system, or how justice as wealth maximization will offer inclusive and improving access to resources for all members of society.

neoliberalism’s equation of ex ante and EX POST CONSENT

To further argue his case, Posner must still somehow incorporate consent into his system of justice as wealth maximization. His utter dependence on the analytic containment of consent within preference satisfaction measured against a backdrop of monetary value is readily evident in his commitment to law and economics liability law. Here, the contrast between Buchanan’s constitutional­ism and Posner’s utilitarianism reveals itself again. Buchanan and Posner must confront the question of what level of threatened punishment is appropriate or necessary to satisfactorily defend a property rights regime consistent with their positions. Each gravitates toward a distinct rationalization of punishment con­sistent with his respective concept of consent: Buchanan emphasizes unanimity and veto power; Posner turns to consent implicitly defined by agents’ utility functions. Both theorists’ systems work to enforce status quo property rights with a bias toward augmenting the status of the more well-off to the detriment of the less well-off. Although law and economics is not inherently a conservative or elitist system of jurisprudence, Posner’s version results in social outcomes that are even more regressive than Buchanan’s constitutionalism.

Coleman’s discussion of the contrast between property rules and liability rules, which delineate when one party harms another party, is invaluable for seeing how law and economics equates rights with prices agents are willing to pay to avoid harm as expressed in their expected utility scales or revealed preferences evident in actual choice. Buchanan’s constitutionalism, on the other hand, views rights as an inalienable quality protected by individuals’ veto power over actions against them. The decisive difference between property rules and liability rules is that the former requires as a condition of transfer of rights the possessor’s ex ante agreement; the latter dispenses with the need for ex ante agreement and instead places the full responsibility of legal recourse on ex post compensation for a price determined by law.

Property rights, characteristic of Buchanan’s constitutionalism and Nozick’s libertarianism, hold the following: “If the content of B’s entitlement is specified by a property rule only, then he has a legitimate claim against A that any transfer of his resources from B to A must proceed according to terms established by ex ante agreement. Agreement is necessary and sufficient for legitimate transfer.”⁴¹ Property rules require as conditions of exchange that individuals agree to terms; otherwise, the transaction is invalid, and the role of justice is to seek redress from party A who exacted the property of B. Property rules may well add additional penalties on the harm caused by A and may criminalize actions as well. Liability rules have a different character: “If the content of B’s entitlement is specified by a liability rule only, then B has two claims: One is to the liberty to seek a transfer through ex ante agreement with A; the other is to recompense in the event A forgoes negotiations and imposes a transfer upon him.”⁴² The crucial distinction between the protection of rights via liability rules and via property rights is that the former allows A to take B’s property without prior agreement so long as A pays the damage at a legally approved (shadow market) price. According to Posnerian law and economics, as long as this price is consistent with an agent’s personal utility function over outcomes, then ex post compensation in accordance with prices the markets demonstrate in every­day transactions meets the criterion of consent even without that agent’s active participation.

To provide an example of how this reasoning works, consider the difference between property and liability rights over one’s body. Let us consider two cases of their illegality upheld by either ex ante property rules or by ex post liability rules. We know that in developing countries, especially Brazil, there is a functioning market in live organs, and it is the established practice in some nations to use live organs as collateral for loans.⁴³ Therefore, there is a market reflecting the value of live organ donation that actually sets a price of about $3,000 on the sale of a kidney, what typical agents in less fortunate circumstances are voluntarily willing

⁴¹ Coleman, Markets, Morality, and the Law, 2002, 40.

⁴² Ibid., 40.

⁴³ Nancy Scheper-Hughes, “The Global Traffic in Human Organs,” Current Anthropology (2000), 41:2, 191-224. Gary Becker and Richard Posner address the topic of live organ sales on their blog post “Should the Purchase and Sale of Organs for Transplant Surgery be Permitted?” Their blog is called The Becker Posner Blog, available at www.becker-posner-blog.com/2006/01/should-the -purchase-and-sale-of-organs-for-transplant-surgery-be-permitted-becker.html, posted January 1, 2006, accessed July 15, 2015.

to accept to part with an organ. If bodies were only protected by liability rules, then it would be possible to steal a kidney while a patient is undergoing another surgery and then to subsequently pay the damages of $3,000 if a claim is pressed. On the strict liability reading of entitlements, the acceptance of ex post compen­sation is equivalent to consent under the reasoning that it is already established that individuals voluntarily undergo such transactions for products for a like price. Of course, under a property rights regime, ex ante agreement is legally necessary to validate the transfer. If this condition is violated, then market compensation is insufficient to right the wrong that has been perpetrated.

Indeed, it is in equating consent on an ex post compensation basis in accor­dance with prices set by external rules that Posner is able to suggest that Kaldor- Hicks efficiency functions in accordance with consent. The former residents of New London did not ex ante agree to the transfer of their property rights. They were stripped of decisional autonomy and did not share in the surplus that provided the rationale for the transfer in the first place; they were merely offered ex post compensation at an earlier shadow market price. By Posner’s scheme, this structure of rights transfer exemplifies consent when the victim accepts compensation.

Posner approaches the structure of rights in direct opposition to Buchanan because he views rights only as instrumentally useful for maximizing wealth. He seeks to embrace consent to propose that law and economics respects individual freedom of choice, yet he eviscerates the concept so that it permits nonconsen- sual property transfers in accordance with a principle of ex post compensation, the price of which is settled outside of mutual agreement. He awards his concept of efficiency the highest position and seeks to provide it with residual justifica­tion by claiming it is consistent with consent. Once Posner has rationalized ex post compensation as a legitimate form of consent, he has precisely what he needs to endorse the Kaldor-Hicks compensation principle as a favorable means of wealth maximization.

If Posner’s liability rules were used to defend persons’ bodies, then accepting compensation after an accident or theft would be equivalent to prior consent to the terms of the transaction. Buchanan’s property rules, on the other hand, do not validate ex post agreement; compensation does not transform a property violation into a permissible action. Posnerian law and economics has the unsalutary effect of putting every resource up for sale for market prices deter­mined independently of actual consent.

By analytically building consent into individuals’ expected utility functions, and by referring to “willingness to pay” as a coded phrase implying “ability to pay,” Posner sets the stage for justifying two radical ideas. First, an individual with greater financial wherewithal is positioned to extract resources from less well-off individuals purely given the former’s greater ability to command resources. Second, this involuntary extraction of resources from the less affluent to the more affluent definitionally satisfies the criterion of wealth maximization. Posner’s legal position, with its eviscerated concept of consent, ends up justifying the forcible expropriation and transfer of resources to those who most value them measured by their greater financial wherewithal.

As an example, consider the notorious memorandum written by the World Bank’s chief economist Lawrence Summers that explicitly endorses dumping toxic waste on less developed countries.^[512] This public policy can be justified using law and economics reasoning in the following manner. Land use may be evaluated according to the stream of income it generates, or its sale value. The Somali national coastline neither generates an income stream nor has much sales value as real estate. In fact, considering its accessibility for dumping waste, it may be some of the lowest-valued available land. According to Summers’s analysis, if it costs more to dump waste in developed countries, it is economic­ally viable for wealthy countries to select to dump on the Somali coast instead. At this point, Buchanan could make an argument for property rights based on constitutionalism, under which it is dubious that the country of Somalia would agree to dumping on its beaches; if locals had the wherewithal to do so, they have the right to exercise veto power. However, Summers and Posner would adopt a different argument strategy. By recourse to the concept of virtual consent underlying liability law, Posner would recommend that wealthier countries can choose to dump on poorer countries and can validate this “trans­action” by paying a fee that would compensate for the loss of rent or property value otherwise commanded by the property: no ex ante consent is necessary to validate this ex post facto consensual exchange.

To carry this example further, residents of less developed countries person­ally have less economic value as they generate less value viewed objectively as lifetime earnings potential.^[513] If we extrapolate outward to consider the impact of the dumping on the Somali coast to acknowledge that some of this pollution in fact may be highly toxic waste linked to serious health injuries, then we could still present an economic argument that the lives of Somalis are worth less in terms of the total dollar amounts they are able to earn in their lifetimes. Therefore, even considering the health damages, it may still be economically efficient according to Posner and Summers to dump waste on poor countries.

Although both Buchanan and Posner endow wealthier individuals with greater advantages, Buchanan’s constitutionalism seeks to prevent interactions from emerging that would disadvantage agents because each should ideally have veto power over actions that would produce such a consequence.^[514] However, Posner’s law and economics gives agents no say over preventing their resources from being taken by agents with greater purchasing power. Posner could argue that his entitlement scheme in accordance with liability rules and ex post compensation is more efficient because it more accurately reflects the prices agents would and could pay to personally defend their rights, whereas, as we have seen, Buchanan requires the force of law to threaten sanctions to incur punishment beyond that of mere compensation. Regardless, however, Buchanan’s property rights regime will still be more costly to enforce because the apparatus needs to be in place to try and penalize those agents whom Posner’s justice as wealth maximization permits to pay compensation at a market price without additional penalty for causing harm.