A while ago David recommended Bernand Harcourt’s ‘T
he Illusion of Free Markets: Punishment and the Myth of Natural Order.’ I started reading it a while ago. The ‘Chicago School’ chapter was interesting. Luckily I found a PDF copy of a draft of that chapter. Here’s an excerpt where Harcourt talks about how ‘efficiency’ is defined by laissez-faire economists (from page 24 of the pdf, page 168 of the draft, emphasis is mine):
The Efficiency of the Competitive Market
Ultimately, in the law-and-economics tradition, the Physiocratic belief in natural order metamorphoses into a faith in the efficiency of the competitive market. The earlier, more nebulous concept of an economic system is refined into the “competitive” market. To unpack this claim, a few observations are necessary. First, it is crucial to properly understand how the contemporary use of the term “efficiency” gets refined and improved—and in the process becomes so much more persuasive. As a result of the work of economists such as Vilfredo Pareto, Nicholas Kaldor, and John Hicks, the field of welfare analysis developed a far more workable definition of efficiency. At an earlier time, the concept of welfare maximization aggregated individual welfare without always paying attention to particular individuals whose welfare might decline. This was true, to a certain extent, of Bentham himself. In his Introduction to the Principles of Morals and Legislation, where he clearly defined all his terms, Bentham wrote that “An action then may be said to be conformable to the principle of utility, or, for shortness sake, to utility, meaning with respect to the community at large) when the tendency it has to augment the happiness of the community is greater than any it has to diminish it.”658 The interest of the community, on this formulation, represents the sum of the interests of the individuals, but increasing the total utility of the community does not preclude the fact that some individuals may end up worse off. The utility principle, which Bentham would alternatively discuss under the rubric of “the greatest happiness of the greatest number,” might still allow for decreased utility of some individuals, even perhaps as few as one.659
This collective notion of welfare would give way, in the twentieth century, to more refined definitions of “efficiency.” The first, associated with Pareto, provides that an improvement in collective welfare requires that absolutely no one be make worse off individually. In other words, a Pareto improvement is possible if some people are made better off, but none worse off. This gives rise to the notion of a Pareto efficient (or Pareto optimal) outcome, which is one in which no further Pareto improvements can be made. It also gives rise to another definition of efficiency, the Kaldor-Hicks efficient outcome, where persons who would be made better off by a Pareto improvement could hypothetically compensate those who are made worse off, so that a Pareto efficient result would have obtained at least in theory. These crisper definitions of efficiency now substitute for the looser notion of welfare maximization.660
Once the Pareto and Kaldor-Hicks refinements are in place, it becomes far easier to argue that “efficient” outcomes are in fact neutral, objective, or non-normative, since no one should be opposed to a Pareto improvement in the distribution of resources (unless, of course, equity matters). Some view these Pareto and Kaldor-Hicks refinements as “a much weaker form of utilitarianism,” since they narrow the category of welfare improvements and eviscerate the possibility of collective welfare debates.661 Some argue that they render the entire economic analysis trivial and marginal, something everyone could agree about and that therefore functions only at the margins.662 I think otherwise. Making the term “efficiency” so much less controversial has in fact empowered the welfarist argument, at least in the legal domain. This is especially true since, as Coase admitted, it is generally impossible to imagine assembling the empirical data to support any of these complex welfare calculations. Being able to claim that a legal rule or allocation of resources is Pareto efficient is far more persuasive than to say that it maximizes collective welfare. It facilitates a myth of neutrality. It allows the law-and-economists to argue, as Posner does, that efficiency “offers a neutral standpoint on politically controversial legal topics.”663 In most legal controversies, we are told, lawyers tend to favor either the propertied or the propertyless. “The economist favors neither side, only efficiency.”664 Clearly, the term “efficient” now has a more crisp definition and does a lot more work. …
With a definition of ‘efficiency’ an income growth pattern like this:
would be characterized as efficient! So, be careful when the word ‘efficiency’ is thrown around.
And a second excerpt from the ‘Chicago School’ chapter where Harcourt talks about how criminal sanction is seen by laissez-faire economists (page 32 of the pdf, page 176 of the draft, emphasis is mine):
The Birth of Neoliberal Penality
The function of the criminal sanction in a capitalist market economy, then, is to prevent individuals from bypassing the inherently efficient competitive market because market bypassing—non-voluntary, non-compensated forms of social interaction—are by their very nature inefficient and reduce social welfare. Criminal activity is best understood as an end-run around the market, and the criminal law is therefore best understood as what prevents this kind of market evasion. The central premise of this argument, naturally, is the efficiency of markets: “When transaction costs are low,” Posner emphasizes, “the market is, virtually by definition, the most efficient method of allocating resources.”680 This maps on perfectly, as well, to Richard Epstein’s conception of the penal sphere. The role of the penal sanction, on Epstein’s view, is to prevent fraud and coercion, in order to facilitate the proper functioning of the free market. Notice the underlying notion of orderliness and the strong parallel to Quesnay’s ordre naturel.
This view of the penal sanction has a number of important features that are worth emphasizing. First, …
Fourth, there is a clear wealth dimension to these distinctions. The criminal sanction—rather than tort law—is necessary in the case of murder, violent crime, theft, property crimes, and generally street crime because the value at which the deterrence would have to be placed is too high and the defendants are most often judgment proof (Epstein and Posner agree on this). Both for reasons of insolvency and because of the high costs that would be necessary to deter street crime, the tort system is inadequate and the government must intervene. Posner explains: “In cases where tort remedies, including punitive damages, are an adequate deterrent because they do not strain the potential defendant’s ability to pay, there is no need to invoke criminal penalties—penalties which … are costlier than civil penalties even when just a fine is imposed. In such cases, the misconduct probably will be deterred…. This means that the criminal law is designed primarily for the nonaffluent; the affluent are kept in line, for the most part, by tort law.”682
“This means that the criminal law is designed primarily for the nonaffluent.” Isn’t this how the law is applied towards the thieves at Wall Street?