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WELFARE ECONOMICS FOR CAPITALISTS:
THE ECONOMIC CONSEQUENCES OF JUDGE POSNER
David Campbell
∗
TABLE OF CONTENTS
INTRODUCTION ..................................................................................................... 2233
I. WELFARE MAXIMIZATION AND THE LEGITIMACY OF WELFARE
ECONOMICS ................................................................................................... 2235
II. HOW CONSENT TO WELFARE MAXIMIZATION IS SECURED ........................... 2248
III. WEALTH MAXIMIZATION AND THE CRITIQUE OF WELFARE ECONOMICS ...... 2251
IV. POSNER ON THE CHOICE BETWEEN MARKET AND NON-MARKET
ALLOCATION ................................................................................................. 2257
V. WEALTH MAXIMIZATION, DEREGULATION, AND POSNER’S PIGOUVIAN
TURN ............................................................................................................. 2265
CONCLUSION......................................................................................................... 2273
INTRODUCTION
We now find it hard to recall why such significance was attached
to the “wealth maximization” debate at the turn of the 1970s.1 Other
Professor of International Business Law, School of Law, University of Leeds, UK. Rudimentary versions of what has become Part V of this article were presented to the Cardiff Law
School, UK and to the Law School, Hull University, UK in 2001. I decided not to seek to publish
this material at that time because, having got my own ideas straight, I saw no point in adding to
the criticism of a concept which I thought was by then dead as a topic of serious debate. My wish
to revive these ideas has been stimulated by relatively recently realising the significance of wealth
maximization to Posner’s thinking on deregulation in general and on the current economic crisis
in particular, and of the significance of that thinking for the explanation of the mistakes about
regulation that have been and are being made.
1 In Richard A. Posner, Blackstone and Bentham, 19 J.L. & ECON. 569 (1976), and, in particular, in Richard A. Posner, Utilitarianism, Economics and Legal Theory, 8 J. LEGAL STUD. 103
(1979), Posner set out the concept of wealth maximization which gave rise to the famous Symposium on Efficiency as a Legal Concern, 8 HOFSTRA L. REV. 485 (1980). Posner’s principal contribution to that symposium was Richard A. Posner, The Ethical and Political Basis of the Efficiency Norm in Common Law Adjudication, 8 HOFSTRA L. REV. 487 (1980). These three papers,
together with RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 189–91 (2d ed. 1977), and
Richard A. Posner, The Value of Wealth: A Comment on Dworkin and Kronman, 9 J. LEGAL
STUD. 243 (1980), were revised to produce what now stands as Posner’s core statement of wealth
∗
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than the historical part it played in so establishing the influence of Richard Posner that he has since “clearly played the major role” in the development of law and economics,2 it now seems entirely without interest. So muddled and unproductive was the basic concept of wealth
maximization that Posner’s various determined but often unscrupulous
defenses of it ended in farce when, having finally conceded that, “It
may be impossible to lay solid philosophical foundations under wealth
maximization,” he thought the appropriate step was to abandon reasoned thought: “it would be a mistake to allow philosophy to deflect us
[from wealth maximization], just as it would be a mistake to allow philosophy to alter our views of infanticide.”3 Posner’s adoption of a
“pragmatic” stance,4 leaving us free to use any welfare criterion that
“improves the performance of government in any sense of improvement
that the observer thinks appropriate,”5 allowed him to give weight to
welfare maximization as not being demonstrably worse than other notions, but that is because that stance dispenses with the drawing of rational distinctions. This can all be put to one side.
Though he has given up trying to make a rational statement of welfare maximization, Posner has never given up the sentiment that lies
behind it, and that sentiment, and the muddle that it generates, are important keys to our present discontents. Wealth maximization has been
subject to excoriating criticism for giving primacy to “economics” over
maximization in RICHARD A. POSNER, THE ECONOMICS OF JUSTICE 11–115 (1981). To this
statement one might add Posner’s restatement of his views in light of reflection on the Hofstra
debate in Richard A. Posner, Wealth Maximization Revisited, 2 NOTRE DAME J.L. ETHICS & PUB.
POL’Y 85 (1985).
The literature that the wealth maximization debate has generated is very large. However, a
bibliography compiled in 1984, see CENTO G. VELJANOVSKI, ECONOMICS OF THE COMMON LAW
56–59 (1984), lists most of the contributions now worth reading because that debate had already
run out of steam before the publication of Wealth Maximization Revisited. Posner has intermittently continued to write on the theory of wealth maximization, and the argument of this Article is
that his work on the substantive law has always been informed by the feeling underlying the
concept, with the most notable result being, of course, his extremely influential textbook: RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (8th ed. 2010). Perhaps the most striking example of his later theoretical writings about the concept is Richard A. Posner, Wealth Maximization
and Tort Law: A Philosophical Inquiry, in PHILOSOPHICAL FOUNDATIONS OF TORT LAW 99
(David G. Owen ed., corrected ed. 1997), in which he seems quite to have forgotten the problems
the application of wealth maximization to tort law had encountered since he published Richard A.
Posner, Epstein’s Tort Theory: A Critique, 8 J. LEGAL STUD. 457 (1979), for the arguments of the
two papers bear marked similarities, except that the grandiosity of Posner’s philosophical claims
reaches a new height in the later paper.
Posner’s entire discussion of welfare maximization, including developments from the mid1980s, is perceptively reviewed in KLAUS MATHIS, EFFICIENCY INSTEAD OF JUSTICE?: SEARCHING FOR THE PHILOSOPHICAL FOUNDATIONS OF ECONOMIC ANALYSIS OF LAW 143–83 (2009).
2 R.H. Coase, Law and Economics at Chicago, 36 J.L. & ECON. 239, 251 (1993).
3 RICHARD A. POSNER, THE PROBLEMS OF JURISPRUDENCE 384 (1990).
4 RICHARD A. POSNER, THE PROBLEMATICS OF MORAL AND LEGAL THEORY (1999).
5 Richard A. Posner, Cost-Benefit Analysis: Definition, Justification, and Comment on Conference Papers, in COST-BENEFIT ANALYSIS: LEGAL, ECONOMIC, AND PHILOSOPHICAL PERSPECTIVES 317, 319–20 (Matthew D. Adler & Eric A. Posner eds., 2001).
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other values which may go to our concept of “justice.” Much of this is
simply true. But criticism of Posner should not concede, as it typically
does, that he was attempting to establish “free markets.” This is the last
thing wealth maximization did. Its core condemnation of positively redistributive economic and social policies as part of what Posner believed to be “deregulation” did not prevent, indeed was integral to, the
endorsement of government action in support of corporate capitalism.
Wealth maximization is, I shall show, a right-wing form of welfare economics, as Posner’s coming to regard it as methodologically of a piece
with Kaldor-Hicks optimisation and cost-benefit analysis made clear.
Now that three decades of the deregulation said to be so essential to
corporate capitalism has brought it to the verge of actual breakdown,
Posner has shifted his position in what prima facie is an extraordinary
manner. He now warmly supports the Obama administration’s immense
public expenditures in response to the current crisis. But this is readily
explicable as the provision of corporate welfare in the form that is required now.
Seeing this allows us, not to straighten out the muddle of welfare
maximization, which, muddle being the essence of the concept, is ineluctable,6 but to criticise Posner for pursuing, not merely a sometimes
ethically repugnant policy, but, more importantly because more influentially, an economically incompetent one. The reason this criticism is
worth making is that Posner still, as he has ever done, gives very influential legal expression to neo-liberal ideology. However feeble Posner’s
economics and philosophy, its great success shows that his native grasp
of “the workable, the practicable, and the acceptable”7 has been remarkable. Unfortunately, what is taken to be “the workable, the practicable,
and the acceptable” has brought us to the brink of ruin.
I.
WELFARE MAXIMIZATION AND THE LEGITIMACY OF WELFARE
ECONOMICS
The key to understanding the aspect of wealth maximization that is
of interest to us is that Posner believed that, in formulating that concept,
he was, firstly, making a fundamental advance upon utilitarianism; and,
secondly, that he did this whilst being only rudimentarily aware of the
nature of Pareto’s own critique of utilitarianism as a basis for economic
analysis, or of the reformulation of that critique in the “new welfare
economics” based on the Kaldor-Hicks compensation criterion. Pos-
6 See Cento G. Veljanovski, Wealth Maximization, Law and Ethics: On the Limits of Economic Efficiency, 1 INT’L REV. L. & ECON. 5 (1981).
7 RICHARD O. ZERBE JR., ECONOMIC EFFICIENCY IN LAW AND ECONOMICS 293 (2001).
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ner’s first article appeared in 1969.8 It is evident from the first edition of
his immensely successful textbook, published in 1972, that, at this initial stage of his career, he held to the remarkable view that economic
analysis was a species of utilitarian philosophy:
Bentham’s utilitarianism, in its aspect as a positive theory of human
behavior, is another name for economic theory. Pleasure is value and
pain is cost.9
As late as 1975, Posner criticized:
some legal philosophers who argue that since the philosophical basis
of economics is utilitarianism, which they consider discredited, economics has no foundation and must collapse, carrying the economic
approach to law with it.10
I have called Posner’s view of the relationship of utilitarianism and
neo-classical economics remarkable because it is apparently based on
ignorance of the “ordinal revolution” in economics particularly associated with Pareto, as developed by Robbins, Hicks and Allen and Samuelson,11 which cemented the foundations of neo-classical economics by
placing the concept of demand on a determinedly non-utilitarian basis.12
Although Bentham, and even more J.S. Mill, were committed to a liberal political philosophy which respects freedom of choice, neither
properly came to terms with the fact that, at its heart, utilitarian economics must be cardinal because, if one maintains “utility as the test of
right and wrong,”13 one inexorably is led to pass objective evaluations
of the utility of subjective satisfactions, and to privilege subjective satisfactions objectively perceived to be conducive to happiness over satisfactions perceived to be harmful. Perhaps the best overall expression of
8 See Richard A. Posner, Natural Monopoly and Its Regulation, 21 STAN. L. REV. 548
(1969). Posner had previously published two book reviews in 1964 and 1968.
9 RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 357 (1972).
10 Richard A. Posner, The Economic Approach to Law, 53 TEX. L. REV. 757, 773 (1975).
11 Samuelson’s concept of revealed preference, see P. A. Samuelson, A Note on the Pure
Theory of Consumer’s Behaviour, 5 ECONOMICA 61 (1938), is brushed aside in POSNER, ECONOMICS OF JUSTICE, supra note 1, at 89 n.4.
12 In a passage I understand was drafted in 1937, PAUL A. SAMUELSON, FOUNDATIONS OF
ECONOMIC ANALYSIS 90–91 (enlarged ed. 1947) tells us:
One clearly delineated drift in the literature has been a steady tendency towards the
rejection of utilitarian, ethical, and welfare connotations of the Bentham, Sidgwick,
Edgeworth variety . . . . [M]any writers have ceased to believe in the existence of any
introspective magnitude or quantity of a cardinal, numerical kind. With this skepticism has come the recognition that a cardinal measure of utility is in any case unnecessary; that only an ordinal preference, involving “more” or “less” but not “how
much” is required for the analysis of consumer’s behavior.
Id.
13
John Stuart Mill, Utilitarianism, in COLLECTED WORKS OF JOHN STUART MILL: 10 ES203, 209 (John M. Robson ed., Univ. of Toronto Press
1969) (1863).
SAYS ON ETHICS, RELIGION, AND SOCIETY
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utilitarian economics to which Posner refers14 is Henry Sidgwick’s 1883
Principles of Political Economy, which traced into the economic sphere
the conclusions Sidgwick had reached in The Methods of Ethics, the
work of moral philosophy in which the utilitarian tradition received its
“clearest and most accessible formulation.”15
I shall not dwell on the difficulty of generally allocating goods in
the way utilitarianism requires, one aspect of which is the impossibility
of objectively ascertaining the “interpersonal comparisons” of the values of goods. The impossibility of coherent economics is most strikingly illustrated by the implausibility of Edgeworth’s belief, admittedly an
extreme case, that Bentham’s “felicific calculus”16 could be based on
the measurement of “units of pleasure-intensity” by a “hedonimeter”:
“an ideally perfect instrument, a psychophysical machine, continually
registering the height of pleasure experienced by an individual.”17 The
much more important point is that, even were it possible, goods should
not be allocated in this objective fashion in a market economy, in which
there must be no overall planning authority which determines the correct type of goods consumers receive, for this should be determined
subjectively by voluntary choice.
The claim that the market economy is efficient is not a claim that
that economy efficiently produces a particular set of politically valued
goods in pursuit of a social goal, but that goods are allocated through
the voluntary self-interested choices of economic actors. The first theorem of welfare economics tells us that, under general competition,
goods will be exchanged whenever there is a mutually beneficial possibility of exchange, giving a succession of “Pareto superior” states in
which, driven by the pursuit of subjectively defined self-interest, the
possibilities of exchange are each individually exploited, up to the point
where the increase in the satisfactions of one person achieved by further
exchange would be more than offset by the diminution of those of another person.18 At this point of Pareto optimality, the market is in equilibrium because there are no further mutually beneficial exchange opportunities and, vitally importantly, it has been brought there by the
working out of voluntary exchanges which automatically identify the
14
15
See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 49 n.4.
John Rawls, Foreword, in HENRY SIDGWICK, THE METHODS OF ETHICS v, v (7th ed.,
Hackett Publishing Co. 1982) (1874). Rawls is repeating a view he had stated in 1971 in the first
edition of JOHN RAWLS, A THEORY OF JUSTICE 20 (rev. ed. 1999).
16 JEREMY BENTHAM, AN INTRODUCTION TO THE PRINCIPLES OF MORALS AND LEGISLATION ch. 4 (J.H. Burns & H.L.A. Hart eds., Athlone Press 1970) (1789).
17 F.Y. EDGEWORTH, MATHEMATICAL PSYCHICS: AN ESSAY ON THE APPLICATION OF
MATHEMATICS TO THE MORAL SCIENCES 8, 101 (1881).
18 See KENNETH J. ARROW, Pareto Efficiency with Costly Transfers, in 2 COLLECTED PAPERS OF KENNETH J. ARROW 290 (1983) (“Every competitive equilibrium is Pareto efficient.”).
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point of Pareto optimality by reaching that equilibrium.19 The beautiful
symmetry of the model lies in its being driven by voluntary exchange
motivated by subjectively defined self-interest, and working only because it is so driven. Non-consensual allocations of goods to consumers,
including those made by the exercise of government power, cannot be
Pareto optimizing.
Some perception of the impossibility of utilitarian interpersonal
comparisons of utility and of the inconsistency of these, were they possible, with the values of the market economy seems to have dawned on
Posner after 1975. Particularly, in his 1979 paper Utilitarianism, Economics and Legal Theory, he distinguished utilitarianism from economics—“two systems of thought,” he told us, he had “until recently . . . insufficiently distinguished,”20—in order to put forward wealth
maximization as the normative basis of law and economics: “[t]he important question is whether utilitarianism and economics are distinguishable. I believe they are and that the economic norm I shall call
‘welfare maximization’ provides a firmer base for ethical theory than
utilitarianism does.”21 What, then, are the salient features of “economic
analysis as an alternative moral system,” as Posner conceives it?22
In what became a very typical manner, Posner’s rejection of a position he himself had held only a little while earlier was expressed in strident terms. “Moral monstrousness,” Posner now told us, “is . . . a major
problem of utilitarianism.”23 One of the two ways in which this is so is
“instrumentalism,”24 that is, “utilitarianism’s readiness to sacrifice the
innocent individual on the altar of social need.”25 Not given pause by
the apparent puzzle that those of the standing of John Austin, Bentham
and J.S. Mill would maintain such wicked positions,26 for which there is
no evidence in anything they wrote of which I am aware, Posner gives
examples of utilitarianism condoning recreational torture27 and the per19 See VILFREDO PARETO, MANUAL OF POLITICAL ECONOMY ch. vi, sec. 33 (Ann S. Schwier
& Alfred N. Page eds., Ann S. Schwier trans., Augustus M. Kelley Publishers 1971) (1906).
20 Posner, Utilitarianism, Economics, and Legal Theory, supra note 1, at 104. This passage is
omitted from POSNER, ECONOMICS OF JUSTICE, supra note 1.
21 Id. at 48.
22 Id. at 60.
23 Id. at 56.
24 Id. at 80.
25 Id. at 57.
26 Posner singles Bentham out as the “principal, and inexhaustible, source of bizarre policy
deductions from utilitarian premises.” Id. at 56 n.24.
27 See id. at 82. If one decides to comment on Posner, one has to strive to avoid being put at a
loss by the inconsistencies and outright contradictions to be found in his huge oeuvre. I have,
however, been unable to do this in regard to his later admission that wealth maximization would
not prevent recreational torture, and the way he simply passes over the implications of this for the
way he stated his early claim that welfare maximization is superior to Benthamite utilitarianism.
See Richard A. Posner, The Justice of Economics, in 1 ECONOMICA DELLE SCELTE PUBBLICHE
15, 25 (1987). This article has been made more readily available by being reprinted in RICHARD
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secution of minorities28 if they increased overall happiness in order to
make his point. One has to ignore any distinction between act and rule
utilitarianism and regard utilitarianism as advocating generalized act
utilitarianism on the purest consequentialist grounds to accept Posner’s
point in the way he makes it.29 But although this is to abstract from what
is characteristic about its Posnerian statement,30 let us accept the underlying criticism of utilitarianism’s consequentialist trumping of the autonomy of individuals, which undeniably has force,31 and certainly is at
odds with the values of market economics.32
A. POSNER, THE ECONOMIC STRUCTURE OF THE LAW: THE COLLECTED ECONOMIC ESSAYS OF
RICHARD A. POSNER 129 (2000).
Though the brevity of his discussion of the issue in POSNER, ECONOMICS OF JUSTICE,
supra note 1, at 82, and his anxiety there to make a common debating point, make it difficult to
be certain, Posner seems to accept Bentham’s defense of torture for reasons of state, see id. at 58–
59, and this defense is indeed a most thought-provoking one. See W.L. Twining & P.E. Twining,
Bentham on Torture, 24 N. IR. LEGAL Q. 305 (1973).
28 Id. at 58. Though I do not want to talk about the substance of wealth maximization, I cannot refrain from pointing out in this connection that Posner purports to demonstrate the concept’s
merits by saying that, with regard to recreational torture, the sadist would have to buy the victim’s
consent. See id. at 82. Similarly, when inevitably turning to the Nazi persecution of Jews as an
example of the persecution of minorities, Posner exults that, if wealth maximization had been
applied, then, “If Nazi Germany wanted to get rid of its Jews . . . it would have had to buy them
out.” Id. at 84.
29 Posner paid only fleeting attention to the distinction between act and rule utilitarianism in
his initial formulation of wealth maximization. See, e.g., Posner, Utilitarianism, Economics, and
Legal Theory, supra note 1, at 117 n.49. This note was omitted from POSNER, ECONOMICS OF
JUSTICE, supra note 1. The somewhat greater attention he paid to the distinction in later work did
not lead to any substantial refinement of his criticism of utilitarianism. See POSNER, ECONOMIC
ANALYSIS OF LAW (8th ed.), supra note 1, at 16. In this later work, Posner classified his own
views as “primitive rule utilitarianism.” Posner, Wealth Maximization and Tort Law: A Philosophical Inquiry, supra note 1, at 106 n.16.
30 The nearest Posner comes to actually landing a blow of this sort is his criticism of Bentham’s policy towards the confinement of beggars. See RICHARD A. POSNER, OVERCOMING LAW
23 (1995). Posner’s brief reference to that policy, unsupported by citation, is sensationalist, but
one would have to acknowledge that the views set out in JEREMY BENTHAM, PAUPER MANAGEMENT IMPROVED (1812) are unacceptable to a modern sensibility, which finds it hard to distinguish them from JONATHAN SWIFT, A Modest Proposal, in A MODEST PROPOSAL AND OTHER
WRITINGS 230 (Penguin Books 2009) (1729). Or at least one would have to say this, were it not
that, upon close examination, Bentham’s views display marked similarities to the penal polices
adopted in the U.S. under the influence of neo-liberalism. See Gertrude Himmelfarb, The Haunted House of Jeremy Bentham, in IDEAS IN HISTORY: ESSAYS PRESENTED TO LOUIS GOTTSCHALK
BY HIS FORMER STUDENTS 199, 232–38 (Richard Herr & Harold T. Parker eds., 1965). The
connection between law and economics and the pathological penal policies currently adopted in
the U.S. is very interestingly traced in BERNARD E. HARCOURT, THE ILLUSION OF FREE MARKETS: PUNISHMENT AND THE MYTH OF NATURAL ORDER (2011).
31 See RAWLS, A THEORY OF JUSTICE, supra note 15, at § 5; Bernard Williams, A Critique of
Utilitarianism, in UTILITARIANISM: FOR AND AGAINST 77 (J.J.C. Smart & Bernard Williams
eds., 1973). Posner quickly establishes—to his own satisfaction at least—that his views are superior to Rawls’ in a fundamental way, see infra note 112 and accompanying text, and does not deal
with one of Williams’ refinements of the utilitarian position, which is indeed worthless if one
understands utilitarianism as Posner understands it, see POSNER, ECONOMICS OF JUSTICE, supra
note 1, at 58.
32 The other criticism Posner makes is of “the utilitarian’s refusal to make moral distinctions
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Though, as I have said, Posner appears to have initially been unaware of the centrality of the critique of cardinalism to neo-classical economics, the first alternative to utilitarianism he considered was the “Pareto approach,”33 which, surprising as it first seems to say, he
immediately rejected, and, as we shall see, continued to reject throughout the formulation of the concept of wealth maximization. This is surprising because the “Pareto approach” formalizes the welfare argument
for general competition, and Posner’s work is, of course, replete with
encomiums to “free markets”: “It is the almost universal opinion of
economists (including Marxist economists) that free markets, whatever
objections can be made to them on grounds of equity, maximize a society’s wealth.”34 In a clear echo of Weber’s account of the initial formation of capitalism, Posner tells us that wealth maximization is nothing “but the ethics of capitalism”35 or “the capitalist ‘conception of
justice’”36 which encourages and rewards the traditional “Calvinist” or
“Protestant” virtues and capacities associated with economic progress.37
Posner goes so far as to claim that “[t]he morality I have deduced from
wealth maximization resembles what Adam Smith called the system of
‘natural liberty,’”38 and even manages to top this when his selfdescription as “a libertarian in approximately Mill’s sense”39 allows him
to ally himself with the classical liberal commitment to free markets:
“By creating a large sphere of inviolate private activity and by facilitating the operation of free markets, liberalism creates the conditions that
experience teaches are necessary for personal liberty and individual
prosperity.”40 Such regulation as is allowed would be that of the night-
among types of pleasure.” Id. at 56. Posner does not seem to appreciate the contradiction involved
in criticizing utilitarianism both for this and for instrumentalism. This point is worth making only
because it is of a piece with Posner’s general inability to grasp the nature of Pareto optimality.
Pareto was so anxious to distinguish his position from utilitarianism that he coined the term
rendered in English as “ophelimity,” and used it in his statement of Pareto optimality, in order to
emphasize that their being voluntary was not sufficient to convey moral approval of consumers’
choices. See PARETO, supra note 19, at ch. iii, sec. 30 (“In political economy the word utility has
come to mean something quite different from what it can mean in ordinary language. Thus morphine is not useful, in the ordinary sense of the word, since it is harmful to the morphine addict;
on the other hand it is economically useful to him, even though it is unhealthful, because it satisfies one of his wants.”).
33 See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 54.
34 Id. at 67.
35 Posner, Wealth Maximization Revisited, supra note 1, at 102 n.17.
36 Posner, Utilitarianism, Economics, and Legal Theory, supra note 1, at 136 (quoting Donald
J. Devine, Adam Smith and the Problem of Justice in Capitalist Society, 6 J. LEGAL STUD. 399,
408 (1977)). This passage is omitted from POSNER, ECONOMICS OF JUSTICE.
37 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 68.
38 Posner, Utilitarianism, Economics, and Legal Theory, supra note 1, at 135. This passage is
omitted from POSNER, ECONOMICS OF JUSTICE.
39 Richard A. Posner, On Liberty: A Revaluation, in JOHN STUART MILL, ON LIBERTY 197,
197 (David Bromwich & George Kateb eds., 2003).
40 POSNER, supra note 30, at 24.
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watchman state: “a lightly regulated capitalism . . . will maximise a
society’s wealth.”41 In sum, the claim with which Posner is most closely
associated is that, “We have reason to believe that markets work—that
capitalism delivers the goods if not the Good . . . .”42
However, it is vital to see that, though Posner seems to accept the
first theorem of welfare economics when he says that: “When transaction costs are low, the market is, virtually by definition, the most efficient method of allocating resources,”43 and though he does sometimes
say things to the effect that “where market transaction costs are prohibitive” is an “exceptional case,”44 wealth maximization is based on denying the practical relevance of Pareto optimization. Though Posner is less
than clear about this fundamental part of his reasoning,45 it is right to
say that, rather than actually working with free markets and Pareto optimization, Posner far more commonly argues that “once the unrealistic
assumption of zero transaction costs is abandoned,”46 then it can be seen
that there are “circumstances where the costs of market transactions are
so high that the market is not a feasible method of allocation.”47 His
characteristic position actually is that “[a]s is well known, the Pareto
solution is apparent rather than real,”48 because it requires conditions
that “can only rarely be fulfilled,”49 and so we are faced with a general
problem of “the unavailability of a practical method for eliciting express
consent . . . .”50
It is possible to distinguish four reasons for Posner’s belief in the
limited applicability of Pareto optimization, but to explain the confusion
involved in their combination is not possible within the space available
here, even were the labor justified.51 Though I shall return to one of the
41
42
43
Posner, Wealth Maximization Revisited, supra note 1, at 95.
Posner, supra note 3, at 384.
Richard A. Posner, An Economic Theory of the Criminal Law, 85 COLUM. L. REV. 1193,
1195 (1985).
44 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 80; see also infra note 135.
45 A. Mitchell Polinsky’s famous review of the first edition of Economic Analysis of Law was
understandably led astray by Posner’s argument here. See A. Mitchell Polinsky, Comment, Economic Analysis as a Potentially Defective Product: A Buyer’s Guide to Posner’s Economic Analysis of Law, 87 HARV. L. REV. 1655, 1670–71 (1974) (book review).
46 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 71.
47 Id. at 62.
48 Id. at 88.
49 Id. at 55.
50 Id. at 96.
51 One of the other reasons Posner gives is the “third party effects” of exchanges, which leads
him into some areas of economic theory, such as the distinction between pecuniary and technological externalities, which have proven obscure to those with a greater knowledge of the history
of economic theory than him. See id. at 90. Posner sometimes seems to treat these effects as a
result of the presence of transaction costs and sometimes as a distinct consideration evincing a
sort of contradiction in the idea of general competition even at zero transaction costs. The idea of
such a contradiction certainly emerges from Amartya Sen’s claim that intrusiveness regarded as a
third party effect means that liberal politics cannot be stated in terms of Pareto optimality, see
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subordinate reasons, the distribution of income,52 I shall now focus on
the reason which is central to our concerns, which is his view of the
transaction costs of market exchange. Posner typically maintains that,
though “consent . . . is the operational basis of Pareto superiority,”53 in
the presence of positive transaction costs, consent to many beneficial
exchanges, which would have been made in the absence of those costs,
will not be able to be secured and therefore “[v]oluntariness is . . . too
restrictive a condition” for the identification of optimizing allocations.54
It follows that “the Pareto-superiority criterion is inapplicable to most
policy questions”55 as it is very often unable to endorse a “move [which]
must increase the wealth of society.”56 It follows from his general endorsement of free markets that Posner argues that a wealth maximization solution “should be reserved for cases . . . where market-transaction
costs preclude use of an actual market,”57 but it transpires that Pareto
optimality is of such limited applicability that those cases are very frequent indeed. Posner has maintained this position throughout his subsequent work, and in the 2011 edition of Economic Analysis of Law he
summed up his thought on this matter by saying that, “The fact that the
conditions for Pareto superiority are almost never satisfied in the real
world, yet economists talk quite a bit about efficiency, means that the
operating definition of efficiency in economics cannot be Pareto superiority.”58
What, then, is the definition of efficiency Posner believes is operating in economics? I think it is undeniable that in Utilitarianism, Economics and Legal Theory Posner believed that economics was caught in
a debilitating choice between the two unsatisfactory alternatives of utilitarianism and Pareto optimization and saw wealth maximization as a
novel way forward, though the combination of ignorance of the history
of his subject and (to some extent consequent) confidence about the
significance of his innovation which this implies stretches credulity.
Posner compounds his initial lack of awareness of the ordinal revolution
in general with a lack of awareness that the new welfare economics of
Kaldor-Hicks optimization was itself an attempt to devise a means of
Amartya Sen, The Impossibility of a Paretian Liberal, 78 J. POL. ECON. 152 (1970), which Posner
repeatedly mentions. See, e.g., POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at
17. In my opinion, these considerations add nothing save confusion to the treatment of transaction
costs in the formulation of wealth maximization, though Posner cannot be entirely blamed for this
as, I will say without argument, these are very confusing notions.
52 See infra note 84 and accompanying text.
53 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 89.
54 Id. at 79.
55 Id. at 89.
56 Id. at 91.
57 Id. at 62.
58 POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at 18.
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making welfare economic judgments whilst avoiding value-laden interpersonal comparisons in general,59 and utilitarian ones in particular.60
However this is, responding to criticism by Jules Coleman of his
early statement of wealth maximization,61 Posner “quickly” “picked
up”62 that Kaldor-Hicks optimization was a claimed third alternative
already not unknown in economics which intended to do much of the
work Posner intended welfare maximization to do.63 After realizing that
Kaldor-Hicks optimization is the claimed basis of most welfare prescriptions by economists,64 Posner has normally employed the terms
“Kaldor-Hicks efficiency” and “wealth maximization” interchangeably,65 and in the latest edition of Economic Analysis of Law he tells us
that “the . . . concept of efficiency mainly used in this book [is] called
the Kaldor-Hicks concept of efficiency, or wealth maximization.”66
Zerbe is right to say, then, that “by wealth maximization” Posner intends to “mean application of the [Kaldor-Hicks] criteria,”67 but, as we
shall see, Zerbe is also right to go on to say that “wealth maximization
is not [Kaldor-Hicks efficiency] as the term is usually used.”68
Posner rightly tells us that Kaldor-Hicks optimization “requires not
that no one be made worse off by a change in allocation of resources but
only that the increase in value be sufficiently large that the losers can be
fully compensated.”69 This is, as Posner maintains, “Potential Pareto
Superiority”70 because the compensation need not be paid for the conclusion to be reached that the reallocation is optimizing. As Kaldor himself put it, the point is to identify “cases . . . where a certain policy leads
to an increase in . . . aggregate real income” such that:
it is possible to make everybody better off than before, or at any rate
to make some people better off without making anybody worse
off . . . . In order to establish his case [for the policy], it is quite suf-
59
60
See R.F. Harrod, Scope and Method of Economics, 48 ECON. J. 383, 395–97 (1938).
See LIONEL ROBBINS, AN ESSAY ON THE NATURE AND SIGNIFICANCE OF ECONOMIC
SCIENCE 150–51 (2d ed. 1945).
61 See JULES L. COLEMAN, Efficiency, Auction and Exchange, in MARKETS, MORALS AND
THE LAW 67, 83–86 (1988). This paper was first published in 1980.
62 Id. at xi.
63 See JULES L. COLEMAN, Efficiency, Utility and Wealth Maximization, in MARKETS, MORALS AND THE LAW 96, 110 (1988). This paper was first published in 1980 as a contribution to the
Hofstra wealth maximization debate.
64 See POSNER, ECONOMICS OF JUSTICE (8th ed.), supra note 1, at 91; see also POSNER,
ECONOMIC ANALYSIS OF LAW, supra note 1, at 18 (“When an economist says that free trade or
competition or the control of pollution or some other policy or state of the world is efficient, nine
times out of ten he means Kaldor-Hicks efficient.”).
65 See infra note 129 and accompanying text.
66 POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at 17.
67 ZERBE, supra note 7, at 91.
68 Id. at 293.
69 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 91.
70 Id.
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ficient for [an economist] to show that even if all those who suffer as
a result are fully compensated for their loss, the rest of the community will still be better off than before.71
Whether compensation actually is paid is “a political question on
which the economist, qua economist, could hardly pronounce an opinion.”72 Posner has some awareness of the blatant problem with this,
which is that the integral possibility of compensation not being paid
clearly shows that Kaldor-Hicks optimization need not allocate by consent, as Pareto optimization must, but rather is essentially a matter of
coercive transfers by the exercise of government power.73 The whole
point of Kaldor-Hicks is, as Kaldor said, to relieve the economist of the
necessity “to prove—as indeed he never could prove—that as a result of
the adoption of a certain measure nobody in the community is going to
suffer.”74 It is just this aspect of Kaldor-Hicks that Posner sought to
incorporate in wealth maximization:
The meaning of efficiency employed in these studies is different
from the concept of Pareto efficiency. A change in allocation is Pareto superior only if the change makes at least one person better off
and no one worse off. Pareto superiority is a widely used concept of
efficiency but it is not (as Dworkin states) the only “normal professional sense” of the term efficiency . . . . Under the Kaldor-Hicks
definition of efficiency, which is also widely used by economists, a
reallocation of resources is efficient if it enables the gainers to compensate the losers, whether or not they actually do so. This is equivalent to wealth maximization.75
Posner has two types of justification for coercive wealth maximization. The first is an “instrumental”76 argument that, as a result of the
way he defines “wealth,”77 the institutions and policies which wealth
maximization endorses will produce ethically good results. In particular,
Posner argues that the “happiness” which utilitarianism seeks to maximize is so broad a “maximand” that it cannot exclude from its “indefinite”
71 Nicholas Kaldor, Welfare Propositions of Economics and Interpersonal Comparisons of
Utility, 49 ECON. J. 549, 550 (1939).
72 Id.
73 See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 92–94.
74 Kaldor, supra note 71, at 550.
75 Posner, The Value of Wealth: A Comment on Dworkin and Kronman, supra note 1, at 244.
This passage is only partially reproduced in POSNER, ECONOMICS OF JUSTICE, supra note 1, at
91.
76 Posner, The Value of Wealth: A Comment on Dworkin and Kronman, supra note 1, at 248.
Though references to “the instrumental character of wealth maximization” are retained in POSNER, ECONOMICS OF JUSTICE, supra note 1, at 108, the overall exposition there seems to me to be
inferior to that in The Value of Wealth.
77 Posner, Utilitarianism, Economics and Legal Theory, supra note 1, at 119–20. The revised
version of this in POSNER, ECONOMICS OF JUSTICE, supra note 1, at 60–61 seems to me to be
inferior.
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or “uncertain” “domain” or “boundary” all sorts of inappropriate or
ethically unacceptable considerations,78 but the maximization of wealth
as he defines it does exclude those considerations. In this sense, wealth
maximization is a productively “constrained utilitarianism.”79 It is at
just this point that wealth maximization has been deluged with criticism
to the effect that, far from being ethically attractive, its concept of
wealth and economic “efficiency” involves, in some respects, a grossly
impoverished and, in other respects, an extravagantly repugnant view of
human wants. In addition, the theory’s evaluation of legal institutions
and policies in terms of their efficiency in maximizing such wealth is a
markedly inadequate conception of the justice we seek through law.
I have always thought80 that some of Posner’s arguments of this
sort were so sensationalist that they were bound to generate more heat
than light.81 I have no intention of going over them now that what Professor Schroeder has felicitously called their “lethal effect”82 has been
so starkly exposed that those arguments certainly should be regarded as
exhausted. So far as is possible, I wish merely to note the outright ethically unpleasant aspects of wealth maximization and set them to one
side.
A point which is central to Posner’s economic reasoning does,
however, require elaboration. One of the three subordinate reasons Posner gives for questioning the “Pareto approach” is that “the voluntarytransaction or free-market solution to the problem of measuring utility
begs [the critical question]: whether the goods exchanged were initially
distributed so as to maximize happiness (were the people with money
those who derive most happiness from the things money can
buy?) . . . .”83 Though expressed in a contortion of economic theory,
Posner has a point here, for he is referring to the second theorem of
78
79
80
Id. at 51–56.
Id. at 87.
My own earlier criticisms of some of Posner’s shocking statements have tried to focus on
what the form of those statements tells us about the integrity of Posner’s thinking. See, e.g., infra
note 174 on baby sales.
81 For reasons set out in Part III of this Article, the political philosophy of wealth maximization invites comparison with STANLEY I. BENN & RICHARD S. PETERS, SOCIAL PRINCIPLES AND
THE DEMOCRATIC STATE (1959) (published in the U.S. as PRINCIPLES OF POLITICAL THOUGHT
(1964)). The latter is a now-forgotten book that attempted, as Brian Barry put it, “to show that all
political principles could be reconciled with one another within a framework that allegedly fused
the insights of Bentham and Kant,” with the effect of reducing the principles to a “bland mush.”
BRIAN BARRY, POLITICAL ARGUMENT: A REISSUE WITH A NEW INTRODUCTION xxiv (1990).
The ideological significance of Posner’s work is that it moves far away from the post-war welfarist consensus that Benn and Peters articulate, and in his often excessive anxiety to emphasize this,
the last thing Posner can be accused of is producing bland work.
82 Jeanne L. Schroeder, The Midas Touch: The Lethal Effect of Wealth Maximization, 1999
WIS. L. REV. 687.
83 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 54–55.
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welfare economics,84 which states that the establishment of a Pareto
optimum does not connote that an economy is to be ethically preferred.
A Pareto optimum reflects the initial distribution of income under which
it was established, for it should be recalled that preferences are revealed
in a market as effective demand backed by money. There is nothing
unique about this equilibrium. Another optimum, i.e. a different allocation of goods, could be established on the basis of another distribution.
About the ethical ranking of possible Pareto optima, neo-classical economics has nothing to say.85 The thrust of the two theorems is to allow
economic analysis of the efficiency of an allocation to be separated
from judgments about the allocation’s ultimate ethical value. Unarguably, there is something highly questionable about this, such that attempts to work distributive issues back into the analysis of efficiency—
effectively a criticism of the core of neo-classical economics, which
sometimes is stated as an explicit case for rejecting those economics—
are perennial.
Posner is right if he is arguing that the separation of efficiency and
distributive arguments limits the use of Pareto optimality in identifying
desirable policies. But his response to this is simultaneously extraordinary and mundane. He very largely takes the existing distribution of
income in capitalist societies such as the U.S. to be ethically legitimate
because it is the result of desert understood as returns from the contribution to the production of wealth as he defines it. Wealth maximization
is, fundamentally, a policy which will maintain distribution on this basis. One quote, by no means the most incendiary one could pick, is more
than enough to illustrate this point:
The egalitarian is apt to say that differences in intelligence, which often translate into differences in productivity, are the result of a natural lottery and therefore ought not to guide entitlements. But if differences in entitlements are indeed genetic, as the argument assumes,
then liberal and radical arguments about the exploitiveness of capitalist society are undermined. A genetic basis for intellectual differences and resulting differences in productivity implies that inequality
in the distribution of income and wealth is to a substantial degree
natural . . . rather than a product of unjust social and political institutions. It also implies that such inequality is apt to be strongly resistant to social and political efforts to change it.
The strongest argument for wealth maximization is not moral but
pragmatic . . . .
84 See ARROW, supra note 18, at 290 (“For every Pareto efficient allocation of resources,
there is a redistribution of the endowments such that the given Pareto efficient allocation is a
competitive equilibrium for the new endowment distribution.”).
85 This argument should be distinguished from Pareto’s refusal to pass an economic judgment
on the substance of consumers’ choices, which we have noted. See supra note 32.
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We have reason to believe that markets work—that capitalism delivers the goods if not the Good . . . .86
Though much of this is so blatantly silly that it takes one’s breath
away,87 in my own view there is actually more to this argument than
many of Posner’s critics allow, for they seem to put little or no value on
desert however understood when considering the distribution of income,
and this lacks common sense. But I find Posner’s confidence that the
existing social structure of the corporate capitalist societies actually
reflects desert, with the implication that a general equality of opportunity obtains, to be wholly implausible. I have had my say on this previously88 and, for our purposes here, it is enough for me to make it clear
that I believe that wealth maximization supports returns to desert only to
the very limited extent that this is possible if one does not take into account the structural inequality central to corporate capitalist society.
Posner’s second justification of wealth maximization is of direct
interest to us. It is, in effect, a denial that wealth maximization is coercive. Posner describes Pareto optimization as a form of Kantian ethics,89
which, in the general sense that it intrinsically embodies a respect for
autonomy, it is (in the case of Pareto optimization, the autonomy is expressed in voluntary economic choice). Nothing specifically Kantian
emerges from Posner’s superficial treatment of autonomy,90 and the
same effect of affirming some general value to it emerges from his
claim to be “a libertarian in approximately Mill’s sense,” which we
have already noted.91 The “Pareto principle,” Posner tells us, “is a liberal principle akin to Kant’s and Mill’s principle that everyone is entitled
to as much liberty as is consistent with the liberty of all other people.”92
This approval of the Pareto principle by means of gestures in Kant’s and
Mill’s directions does seem really rather outrageous when made by one
intent on developing a law and economics based on the claimed general
inapplicability of that principle. But the point is that Posner thought he
could pull off the truly remarkable feat of nullifying the pejorative connotations of his deprecating attitude towards Pareto optimization because wealth maximization “allows a reconciliation among utility [and]
86
87
POSNER, supra note 3, at 382, 384.
Posner seems to have come to see this and, in a characteristic manner, has watered down
what he says whilst by no means really reconsidering his basic point. See POSNER, ECONOMIC
ANALYSIS OF LAW (8th ed.), supra note 1, at 18–19.
88 See David Campbell, Ayres versus Coase: An Attempt to Recover the Issue of Equality in
Law and Economics, 21 J.L. & SOC’Y 434, 445–49 (1994). I was completely wrong about the
relationship between Posner and Coase in this article, but the criticism of the distributive effects
of wealth maximization is, I believe, still correct.
89 See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 89.
90 See id. at 55 n.21.
91 See supra note 39 and accompanying text.
92 Posner, Wealth Maximization and Tort Law: A Philosophical Inquiry, supra note 1, at 104.
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liberty . . . as competing ethical principles.”93 “The ethics of wealth
maximization,” Posner told us:
can be viewed as a blend of these rival philosophical traditions.
Wealth is positively correlated, although imperfectly so, with utility,
but the pursuit of wealth, based as it is on the model of the voluntary
market transaction, involves greater respect for individual choice
than in classical utilitarianism.94
If this argument was a success, its importance could hardly be exaggerated. As wealth maximization is methodologically similar to Kaldor-Hicks optimization, were Posner able to give it a non-coercive
foundation, then Kaldor-Hicks optimization could be placed on this
foundation, and this would break the intimate connection between welfare economics and coercion, which is the principal ground on which
the legitimacy of such economics has been called into question. For,
second in importance only to Pigou’s foundational conception of the
social net product,95 Kaldor-Hicks optimization has been the theoretical
justification for the widespread piecemeal government intervention that
has created the universal welfare state. That such left-wing intervention
involves normalized government coercion obviously is a major, if not
theoretically insurmountable, obstacle to its, and therefore the welfare
state’s, legitimacy.96 But, Posner now tells us, “[t]here is . . . [a] way of
harmonizing the Kaldor-Hicks or wealth maximization approach . . . with the Pareto approach.”97 If, as Coleman allows, “Posner’s rule . . . generates outcomes that are both Kaldor-Hicks efficient
and Pareto optimal,”98 this “squaring of the circle”99 of welfare economics would, in my opinion, be the most important contribution to welfare
economics, not merely since Kaldor and Hicks, but since Pigou.
II.
HOW CONSENT TO WELFARE MAXIMIZATION IS SECURED
Posner’s argument that there is consent to welfare maximization
involves consent of a sort he acknowledges to be “unorthodox.”100 It is a
93
94
95
POSNER, ECONOMICS OF JUSTICE, supra note 1, at 115.
Id. at 66.
See ARTHUR CECIL PIGOU, THE ECONOMICS OF WELFARE 134–35 (Transaction Publishers
2002) (1920).
96 I have recently considered the normalization of coercion by modern administrative law in
David Campbell, Gathering the Water: Abuse of Rights After the Recognition of Government
Failure, 7 J. JURIS. 413, 507–22 (2010).
97 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 94.
98 COLEMAN, supra note 61, at 86.
99 MATHIS, supra note 1, at 172.
100 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 98.
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consent which may be “implied”101 from what he calls “ex ante compensation.”102 The first example Posner gave in The Ethical and Political Basis of the Efficiency Norm is of “a person who buys a lottery ticket and then loses the lottery [who] has ‘consented’ to the loss so long as
there is no question of force or fraud or duress . . . .”103 The force of the
example is somewhat undercut as he neglects to tell us what the ex ante
compensation is, and his other initial hypothetical examples are similarly inadequately made out. But, drawing heavily on a slightly earlier
paper,104 he goes on to give what became his favorite example, that of
negligence liability for motor accidents. His views on such liability are
framed against his belief that “prohibitive” transaction costs pose “insurmountable” “technical obstacles” to the determination of liability
regimes by “an actual contract,” that is, by explicit consent.105 “Assuming,” as he himself says, that the negligence system has the optimum
effect on the costs of driving,106 Posner tells that wealth maximization
should endorse negligence liability because, although:
tort law does not provide monetary compensation to the people on
whom it imposes duties—compensation for whatever costly steps
they may have to take in order to avoid inflicting, or receiving, injury
for which they would be liable . . . . But . . . to view compensation
solely in ex post pecuniary terms ignores the fact that people may be
compensated ex ante in a variety of forms—such as greater freedom
of action, lower insurance costs, or a reduced risk of injury—by virtue of being part of a system of tort rules that may require them to
take some accident-avoidance measures without compensation ex
post.107
This argument works at two levels. The first is to justify the basic
institutions of the U.S. and similar societies,108 principally the common
law itself,109 and many of its central doctrines.110 This is a form of social
contract argument which is completely open to the established criticisms of the “distortion of the proper meaning of the word ‘consent’”
employed in that argument as a means of generating political obligation.111 Posner’s treatment involves two novelties. The first is the employment of the term ex ante in this context. The second shamelessly
101
102
103
104
105
106
107
108
109
110
111
Id. at 96.
Id. at 94.
Id. at 94.
See id. at 94 n.18. The paper is Posner, Epstein’s Tort Theory: A Critique, supra note 1.
Id. at 460.
POSNER, ECONOMICS OF JUSTICE, supra note 1, at 95.
Posner, Epstein’s Tort Theory: A Critique, supra note 1, at 464.
See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 96.
See id. at 103–06.
See POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at Part II.
J.P. PLAMENATZ, CONSENT, FREEDOM AND POLITICAL OBLIGATION 27 (2d ed. 1968).
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paraded as a fundamental improvement over Rawls despite it taking
only one or two pages to state,112 is the replacement of the credible philosophical anthropology of the sense of justice, which was one of Rawls’
principal achievements,113 with the views of the curious wealth maximizing fellow committed to the capitalist ethic and the Protestant values,
as Posner understands them, that we have already encountered. The first
seems pointless but unobjectionable. The second, we have noted,114
often is objectionable, but we can simply pass over Posner’s undoubted
preference for the “natural ignorance” of certain “actual people” over
Rawls’ “artificial” constructions.115
If we turn to instances of “the specific distribution of wealth
[which] is a mere by-product of a distribution of rights that is itself derived from the wealth maximization principle,”116 we can address the
second level of the consent argument, the justification of particular
wealth maximizing allocations. The problem, it will be recalled, with
Pareto optimization is that, working through actual voluntary exchanges
on the market, it requires actual consent, but, Posner claims, positive
transaction costs may prevent the necessary markets from being established. The proper response to this, Posner tells us, is to work with a
“fictitious” consent117 which is not express but which may be generated
if we expand “the domain of the wealth maximization criterion . . . to
include hypothetical markets”118:
If there is no reliable mechanism for eliciting express consent, it follows not that we must abandon the principle of consent but that we
should be satisfied with implied (or more precisely, perhaps, hypothetical) consent where it exists. Its existence can be ascertained by
asking the hypothetical question whether, if transaction costs were
zero, the affected parties would agree . . . .119
This is, of course, the Posnerian contribution to the “market mimicking,” which has been at the heart of the neo-classical revolution in
regulatory technique. “[W]here market-transaction costs preclude use of
an actual market to allocate resources efficiently,”120 we should employ
“the hypothetical-market approach”121 “[t]o reconstruct the likely terms
of a market transaction in circumstances where instead a forced ex112
113
114
115
116
See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 59, 99–101.
See RAWLS, A THEORY OF JUSTICE, supra note 15, at 41.
See supra note 80 and accompanying text.
POSNER, ECONOMICS OF JUSTICE, supra note 1,at 100–01.
Posner, Utilitarianism, Economics, and Legal Theory, supra note 1, at 135. This passage
was omitted from POSNER, ECONOMICS OF JUSTICE.
117 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 96.
118 Id. at 79.
119 Id. at 96.
120 Id. at 62.
121 Id. at 62.
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change took place—to mimic or simulate the market . . . . [I]n other
words”122:
An important normative question . . . is whether and in what circumstances an involuntary exchange can confidently be said to increase
efficiency. Even if efficiency is not defined as something that only a
voluntary transaction can create—even if the Kaldor-Hicks concept
is used instead—it is only when resources are shifted pursuant to a
voluntary transaction that we can be confident that the shift involves
an increase in efficiency. The transaction would not have taken place
unless both parties had expected to be made better off by it. But
many of the transactions either affected or effected by the legal system are involuntary . . . . How is one to know when such transactions
increase, and when they reduce, efficiency? Kaldor-Hicks asks
whether, had a voluntary transaction been feasible, it would have
taken place. If, for example, the question were whether clean water
was more valuable as an input into paper production than into boating, we might try to determine, using whatever quantitative or other
data might be available to help us, whether in a world of zero transaction costs the paper industry would purchase from the boater the
right to use the water.123
III.
WEALTH MAXIMIZATION AND THE CRITIQUE OF WELFARE
ECONOMICS
It is difficult to say whether Posner was aware that he could have
spared himself most of his labor over consent to welfare maximization
because, to a large extent, he is merely repeating the justification for
coercive transfers that was central to the new welfare economics. In one
of the papers formulating Kaldor-Hicks optimization, Kaldor told us:
This principle . . . simply amounts to saying that there is no interpersonal comparison of satisfactions involved in judging any policy designed to increase the sum total of wealth just because any such policy could be carried out in a way as to secure unanimous
consent . . . . [I]f the increase in total income is sufficient to compensate for such losses, and still leaves something over to the rest of the
community [it can] be said to be “justified” without resort to interpersonal comparisons.124
Lacking the explicit concept of the transaction cost, Kaldor was
unable to claim that the reason the policy was not carried out in a way
122
123
124
POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at 20.
Id.
Kaldor, supra note 71, at 551 n.1 (emphasis added). Coleman was aware of this at the time
of the wealth maximization debate. See COLEMAN, supra note 63, at 128 nn.57–58.
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that secured consent was the existence of positive transaction costs, but
nevertheless this is the effective claim of Kaldor-Hicks optimization.
For Kaldor-Hicks does claim to be consensual in that it optimizes the
subjective satisfactions of those involved in the transfer, the specific
transfer yielding an overall surplus of those satisfactions. The kernel of
truth in the claim that Kaldor-Hicks transfer is potentially Pareto optimal is that, were the compensation actually paid, it would not be absurd
from the outset to say that the transfer was Pareto optimal. It would not
be the result of voluntary exchanges, but its result would represent the
sum of the satisfactions yielded by the exchanges which would have
been made in the absence of transaction costs, from which, after compensation, no one would lose; plus, there would be a surplus to be distributed. It is not absurd from the outset to say that the government
making such a transfer would meet with retrospective approval. Its
function would be to overcome the transaction costs of allocations
which prevented that transfer from being made through the market.
Unfortunately, this claim is unacceptable. The most important obstacle faced by Kaldor-Hicks is one of economic epistemological principle, for a sample preference revealed in response to an inquiry by a
government agency seeking to identify possible transfers is an uncosted
or remotely costed, effectively third party, demand on public expenditure. This simply is not the same thing as a set of preferences revealed
by a voluntary commitment of one’s own resources to an exchange.
Running the two together is intrinsically offensive to the recognition of
the economic actor’s autonomy, in the sense of bearing responsibility
for his own actions, which is the core of liberal political philosophy.125
But, even if we leave this question of principle aside, it is not possible
for any government to obtain the necessary information about the subjective satisfactions of all those involved in a significant transfer. As the
search and computational costs of doing so are tantamount to infinity,
this is a task requiring omniscience. If the answer to these problems is
to create a generally competitive market on which these preferences will
be revealed, then the argument does become absurd, for such a market
will by definition be Pareto optimal and no government action would be
needed—indeed, for reasons already mentioned,126 it is essential that no
government action is taken—to bring about optimizing exchanges that
would take place voluntarily and, in this sense, spontaneously.127
125
This is the position of the “purist” of which Posner takes brief note in POSNER, ECONOM-
ICS OF JUSTICE, supra note 1, at 62. See also infra note 158.
126 See supra note 19 and accompanying text.
127 Though he does address the alleged contradiction in Kaldor-Hicks
optimization exposed by
Scitovsky, which arises when the effect of a Kaldor-Hicks transfer on the distribution of wealth is
considered, Posner does not, to my knowledge, address this much more profound contradiction,
which follows from Gorman’s 1955 criticism of Scitovsky’s attempt to deal with the problem he
had revealed. See W.M. Gorman, The Intransitivity of Certain Criteria Used in Welfare Econom-
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In acknowledgement of all this, no Kaldor-Hicks transfers are ever
actually attempted. The basic idea of the surplus is retained in purported
welfare optimizing public expenditure, but it is operationalized through
a cost-benefit analysis which, though often expressed in an intimidating
manner that gives a patina of technical economic efficiency to the transfer, weakens the claims of Kaldor-Hicks optimization dramatically.
Cost-benefit analysis replaces the claim to know subjective satisfactions
with ultimately arbitrary assumptions about hypothetical willingness to
pay. It also gives up any claim to optimize the sum of satisfactions
across the economy with a very much second best claim that a transfer
within a specific sector will produce surplus welfare assessed just by
looking at that sector. In effect, if the (inevitably ultimately assumed)
benefits of a project are said to be greater than its (in principle identifiable if not normally in practice accurately identified) costs, it is justified.
Posner came to the theory of cost-benefit analysis much later than the
theory of Kaldor-Hicks optimization but, like M. Jourdain,128 he found
he had unknowingly been talking prose for a long time. Writing in
1999, he told us: “I have long argued that cost-benefit analysis in the
Kaldor-Hicks sense is both a useful method of evaluating the common
law and the implicit method . . . by which common law cases are decided—and rightly so in my opinion.”129 At the level at which he thinks
about these issues, Posner is entirely right about this. Indeed, at this
level, he is right to say that “Bentham proclaimed the universality of
what in modern terminology would be called cost-benefit analysis . . . .”130 In his later work, he has added “cost-benefit analysis” to
what thereby became, along with “Kaldor-Hicks efficiency” and
“wealth maximization,” the indivisible trinity of Posnerian law and economics.
ics, 7 OXFORD ECON. PAPERS 25, 33 (1955). Coleman made a criticism of Posnerian market
mimicking which I think draws on Gorman in Jules L. Coleman, The Economic Analysis of Law,
in ETHICS, ECONOMICS, AND THE LAW 98 (J. Roland Pennock & John W. Chapman eds., 1982).
128 See MOLIÈRE, LE BOURGEOIS GENTILHOMME, act 2, sc. 4.
129 Posner, supra note 5, at 318.
130 RICHARD A. POSNER, FRONTIERS OF LEGAL THEORY 61 (2001). Posner expresses the close
link between Bentham and Becker, which is the central theme of his understanding of the history
of law and economics, in the following way: “Becker performed a vital service for law and economics simply by reviving Bentham’s theory of crime and dressing it in the language of modern
economics.” Richard A. Posner, The Law and Economics Movement: From Bentham to Becker,
in THE ORIGINS OF LAW AND ECONOMICS: ESSAYS BY THE FOUNDING FATHERS 328, 345 (Francesco Parisi & Charles K. Rowley eds., 2005). It probably tells us enough about Posner’s view of
economics that he saw punishment—including capital punishment, the affinity of which with
voluntary choice is not obvious—as the fons et origo of law and economics. But it is his belief
that Becker drawing on Bentham was merely a matter of dressing the latter up in the language of
modern economics that really gives the game away. As I have never found Becker’s understanding of what he calls economic behavior fundamentally plausible, I actually think Posner has a
point about him, but it is not remotely the point Posner intends. See David Campbell, On What Is
Valuable in Law and Economics, 8 OTAGO L. REV. 489, 495–96 (1996).
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Kaldor-Hicks seeks to optimize total welfare but, since it is impossible to maintain that any policy based on it actually does this, the determination of which purportedly optimizing transfers will actually be
made is a function of the political process, guided by cost-benefit analysis.131 All this is inevitable as Kaldor-Hicks can only be given concrete
content by those who gain control of the coercive power of the government in order to implement particular transfers in pursuit of their particular improving projects. Far from approving the left-wing transfers typically justified by reference to Kaldor-Hicks optimization, Posner
typically endorses right-wing transfers, and rather cleverly builds the
right sort of policy in at the beginning because wealth maximization is,
as we have seen him to be at pains to insist,132 constrained so as to endorse only transfers that maximize, precisely, wealth as he defines it,
and so reproduce the social structure of corporate capitalism.
I have acknowledged that Posner’s definition of wealth is in many
respects ethically objectionable, but the point I am trying to make is that
no definition of this nature can possibly be consistent with the claim
that transfers are made with consent, for voluntary choice not directed
toward the defined social goal must by definition be overridden. The
real difference between Kaldor-Hicks and wealth maximization is that,
whereas the inadequate economics of the former leave its content to be
politically filled in ex post, Posner gives the game away over this ex
ante in the way he formulates wealth maximization. His seeming relinquishment of the claim that the political content of wealth maximization
can be philosophically defended has not at all prevented him from repeatedly working that content into his verdicts on all the things he sees
fit to evaluate from the perspective of economic efficiency as he understands it.
We have seen Posner acknowledge that he is using “consent” in an
unorthodox manner,133 but this does not really capture what he is doing.134 He is misdescribing allocations secured by a coercion which is
the opposite of consent. This is theoretically possible only because, despite the number of times he has invoked the term Pareto optimality,
Posner has never been in sympathy with, nor even properly understood,
the meaning of efficiency in neo-classical economics after Pareto.135 He
131 The estimation of costs in cost-benefit analysis may bring some objectivity to political
decisions about the allocation of goods, and the acknowledgement of this lies behind the idea that
analyses of cost-effectiveness may be more valuable than cost-benefit analysis.
132 See supra note 79 and accompanying text.
133 See supra note 100 and accompanying text.
134 See COLEMAN, supra note 63, at 115–22; Ronald Dworkin, Why Efficiency? A Response to
Professors Calabresi and Posner, 8 HOFSTRA L. REV. 563, 574–79 (1980).
135 The nearest he comes to such an understanding in the work formulating the concept of
wealth maximization is to note that, “Some libertarians worry that the economist will exploit the
measurement problems inherent in the use of a hypothetical-market criterion to impose all sorts of
duties on people in the name of efficiency.” POSNER, ECONOMICS OF JUSTICE, supra note 1, at
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sees economic efficiency as the determination of efficient means of
reaching predetermined ends. He tells us that it is an “advantage of the
Pareto approach” that it “may seem to offer a solution to the problem of
measuring satisfaction”136 and that there “seems ready at hand an operational device for achieving Pareto superiority, the voluntary transaction,
which by definition makes both parties better off than they were before.”137 This is to reduce Pareto optimization to a technique for achieving a goal or to “a tool of utilitarian ethics.”138 But Posner has always
understood Pareto superiority “as an attempt to solve the utilitarian’s
problem of the interpersonal comparison of utilities,”139 with the consequence being that, “If the utilitarian could devise a practical utility metric, he could dispense with the consensual or transactional method of
determining whether an allocation of resources was Pareto superior—
indeed, he could dispense with Pareto superiority itself.”140
We do not know why market exchange ends, not in chaos, but in
coordination, though we do know that a legal framework, one which
facilitates maximizing behavior in the welfare enhancing form of regular, proportional exchange, is necessary. But this framework should
create the conditions within which autonomous, voluntary exchanges
can be made. It must observe the core liberal value of neutrality and not
attempt to impose what Robert Nozick has called a “pattern” on these
exchanges.141 It is highly significant that Posner is critical of Nozick’s
“ethical defense of market transactions [which] is unrelated to [the]
promotion of efficiency . . . .”142 It is even more significant that he
thinks this is unrelated to “efficiency in either the Pareto or the wealthmaximization sense,”143 when Nozick’s attack on patterning is an important political philosophical explication of the conditions for Pareto
optimality.
80, 93. I relegate this to a footnote not only because I do not think Posner properly understands
the issue it raises but because his response to this difficulty is really rather unscrupulous. His
response is to off-handedly minimize the incidence of the circumstances that bring it up, despite
this cutting across everything he normally says. See id. (“[I]mposing duties is appropriate in the
economic view only in the exceptional case where market-transaction costs are prohibitive.”).
Posner’s willingness to throw in things like this makes the elucidation of his views difficult. See
supra note 44 and accompanying text.
136 I am certain that Posner does not fully understand the significance of this solution being
that he has stated that “the Pareto approach . . . requires information only about marginal and not
about total utilities.” POSNER, ECONOMICS OF JUSTICE, supra note 1, at 54; see also supra note
32.
137 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 54–55 (emphasis added).
138 Id. at 89.
139 Id. at 89.
140 Id. at 89. The claim that “Pareto himself” looked at the matter in this way, id. at 88, is flatly
wrong, see supra note 32.
141 ROBERT NOZICK, ANARCHY, STATE AND UTOPIA 155–60 (1974).
142 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 90.
143 Id. at 90.
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In all that has gone so far, I have been highly critical of the shortcomings of Posner’s way of formulating the concept of wealth maximization. I have felt obliged to do this because it is those shortcomings
that give that concept its significance. But it is irrelevant to argue, as I
am arguing, that Posner’s attempt to justify coercive state transfer by
claiming that there is consent to it is tantamount to nonsense. That it is
so influential whilst being tantamount to nonsense is the point of interest about Posner’s work. Posner is what Louis Althusser would have
called a “symptomatic” figure.144 His work rarely reveals things—quite
the opposite in fact—but working out what his work conceals often is of
considerable importance because there can be no doubt that Posner is a
genius at giving irrationally persuasive expression145 to very influential
neo-liberal positions. Beset by a nagging feeling that he is playing some
sort of trick in the way he tries to manufacture consent to welfare maximization, Posner, right from the outset, took refuge in saying that he
was merely doing what economists do. We have seen that he came to
see that Kaldor-Hicks optimization is the normal welfare criterion cited
by economists making policy prescriptions, and assimilated wealth
maximization to this.146 The way he put this was to say that “most economists say Pareto but use Kaldor-Hicks in making welfare judgements.”147 I think this is the most telling thing Posner has ever said. It
certainly captures his own practice but also accurately describes what
most economists making welfare prescriptions actually do. Ineluctably
coercive Kaldor-Hicks reallocations are described as if they were in
some defensible way a Pareto optimizing realization of the choices of
economic actors, when this is exactly what they are not. Putting to one
side the objectionable substantial features of wealth maximization, the
objectionable feature I am trying to point to in this Article is the formal
misdescription of coercive state transfers as having some quality of the
voluntary choice they extinguish.148 Posner can be thought to
“blend . . . the rival philosophical traditions” of “utility [and] liberty”149
only in the sense that he so camouflages the former that it blends into
the latter.
144
145
LOUIS ALTHUSSER & ÉTIENNE BALIBAR, READING CAPITAL 24–30 (2d ed. 1977).
See Kate O’Neill, Rhetoric Counts: What We Should Teach When We Teach Posner, 39
SETON HALL L. REV. 507 (2009).
146 See supra note 75 and accompanying text.
147 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 92.
148 Reasons of space—and having a life—preclude me from following every line taken by
Posner, but it should be here mentioned that this error is the source of Posner’s desire to conflate
contractual and tortious duties, and in the course of this conflation the actual voluntary element of
contract disappears. Initially developed in his criticism of Epstein’s commitment to strict liability
in tort, see Posner, Epstein’s Tort Theory, supra note 1, at 460–61, Posner has repeatedly stated
this position in general terms. See POSNER, supra note 3, at 60–61.
149 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 66, 115.
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POSNER ON THE CHOICE BETWEEN MARKET AND
NONMARKET ALLOCATION
In his exposition of the Coase Theorem in Economic Analysis of
Law, Posner engages with Coasean bargaining, one of the most important attempts to base economic policy upon Pareto optimization.150
Posner’s first account of the Theorem essentially reproduces Coase’s
farmer and rancher example in The Problem of Social Cost, though
Posner substitutes for the rancher the railway company that Coase discusses in a rather different context later in his article, to which we shall
return.151 Assuming, with Coase, zero transaction costs at this initial
stage, Posner is able to demonstrate one of the implications of the Coase
Theorem: that “the land will be put to its most productive use regardless
of the initial assignment of rights.”152 However, he does not, in my
opinion, make it clear that this implication is merely the logical result of
zero transaction costs, for at zero transaction costs, general competition
will obtain, all possible exchanges will be made, and a Pareto optimum
will be established by definition.
But things go dreadfully awry when Posner next returns to the
Theorem.153 This time:
X buys a farm long before there is a railroad in his area. The purchase price is not discounted to reflect future crop damage from
sparks because the construction of a railroad is not foreseen. But
eventually a line is built near enough to X’s farm to inflict spark
damage. He sues the railroad, but the court holds that the amount of
sparks emitted is reasonable because it would be more costly for the
railroad to prevent the crop loss. With property values thus exposed
to uncompensated depreciation by unforeseen changes in neighboring land uses, the incentive to invest in farming will be reduced.
But . . . a reduced level of investment in farming may be an efficient
adjustment to the possibility that some day the highest value of the
farmer’s land may be as a dumping ground for railroad sparks.154
What has happened here, of course, is that the transaction costs of
foreseeing the construction of the railway and discounting the price of
150 Professor Hovenkamp has recently considered the real world applicability of Coasean
bargaining in a very valuable fashion, though one which, in my opinion, greatly underestimates
the range of application of Coasean solutions and greatly overestimates the contribution behavioral economics may make to these issues. See Herbert Hovenkamp, Coasean Markets, 31 EUR.
J.L. & ECON. 63 (2011).
151 The rancher does make his appearance in the middle of a later discussion of the railway.
See POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at 67–68.
152 Id. at 10.
153 There is a brief intervening mention of the Theorem. See id. at 30.
154 Id. at 68–69.
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the land are taken into account. This should be a paradigm illustration of
the value of wealth maximization for, having earlier demonstrated the
working of the Coase Theorem when transaction costs were zero, here
transaction costs are positive. Evidently taking this to therefore be a
case where Pareto optimization is inapplicable, Posner immediately
endorses the wealth-maximizing conclusion that “the highest value of
the farmer’s land may be as a dumping ground for railroad sparks.”155
Though one who grasps Posner’s cast of mind can easily see why he
would say that this is a case of “assigning the property right to the party
to whom it was valuable,”156 for any schoolboy knows that railways
generate more wealth than agriculture, he gives no argument whatsoever for this conclusion!157
This is quite typical of Posner’s applications of wealth maximization, which are all the merest speculation resting on the complacent
belief that although “[t]he purist would insist that the relevant values are
unknowable since they have not been revealed in an actual market
transaction . . . in many cases a court can make a reasonably accurate
guess as to the allocation of resources that would maximize wealth.”158
Blithely acting on this belief, Posner has produced the compendium of
the homespun wisdom of the curious wealth maximizing fellow that is
Economic Analysis of Law. Giving preferential legal treatment to the
railroad over the farmer for a reason not specified, but that everyone
knows, is perfectly natural to this fellow. The point is that, if one sets to
one side the unpleasant aspects of wealth maximization which have
caused sparks to fly, one is left with, as Brian Barry said of Benthamite
utilitarianism:
[a] very boring political philosophy, because once the goal has been
postulated (some version of Bentham’s “greatest happiness principle”), everything else is a matter of arguing about the most efficacious means to that end. Is there a duty to obey the law? It depends
155
156
Id. at 69.
Id. at 66. Posner’s account of his reasoning here in the first edition of POSNER, ECONOMIC
ANALYSIS OF LAW, supra note 9, at 18, seems to be as clear as the exposition of wealth maximization admits and it is regrettable it was omitted from subsequent editions.
157 I put to one side Posner’s admission that this “is not a realistic” example, id. at 69 n.6,
which seems to be quite shameless speculation intended to take the sting out of what is said in the
main text, perhaps motivated by some sense that what is said there is suspect.
158 POSNER, ECONOMICS OF JUSTICE (8th ed.), supra note 1, at 62. When, almost twenty years
later, Posner realised that Mill was a purist in this sense, he got over his surprise in order to register a wholly inconsistent agreement with Mill’s position. See Posner, supra note 39, at 199. Posner’s way of dealing with this point in Economic Analysis of Law is breathtaking. He tells us that
a welfare maximization approach “is no panacea [because it] ignores the costs of administering
the property rights system . . . and it is difficult to apply in practice . . . . But,” he goes on to say,
“in most cases and without excessive cost [it] may be able to approximate the optimum definition
of property rights, and these approximations may guide resource use more efficiently than would
an economically random assignment of rights.” POSNER, ECONOMIC ANALYSIS OF LAW, supra
note 1, at 66–67. Well, that’s alright then.
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on the consequences for aggregate utility. Can governments legitimately be overthrown by force? Same answer. Is economic equality
desirable? Same answer again. And so on for any question that might
be asked.159
In fitting irony, the result of all of Posner’s efforts to improve on utilitarianism was that he opened himself up to the same criticism that
Marx, with less justice, levelled at Bentham:
With the driest naïveté [Bentham] takes the modern shopkeeper, especially the English shopkeeper, as the normal man. Whatever is useful to this queer normal man, and to his world, is absolutely useful.
This [yardstick he then] applies to past, present, and future . . . With
such rubbish has the brave fellow, with his motto “no day without a
line,” piled up mountains of books. Had I the courage . . . I should
call Mr. Jeremy a genius in the way of bourgeois stupidity.160
Posner does not seem to be aware that the reason Coase picked the
railway sparks example is that this was the first illustration of what we
would now call an externality which Pigou gave in The Economics of
Welfare.161 Although Coase certainly allowed that the common law162—
and government action under legislation163—could supply coercive solutions to allocative problems when Pareto optimizing exchange was not
possible, he did not advocate this in the sparks case. Regarding the correct attitude towards this particular problem he said nothing except that
it “depends on the particular circumstances.”164 Instead, he came up
with some devastating criticisms of Pigou for believing that the sparks
case necessarily was an example of what we would now call a market
failure and, of direct relevance to us here, even if it was a case of market
failure, for far too quickly assuming that there was a superior, nonmarket solution to which we should turn.165 Reinterpretation of Pigou in
light of Coase’s criticism of him has shown that Pigou was a much more
subtle thinker over these issues than this particular example, where I am
convinced Pigou was very substantially at fault, would lead one to
think. Coase’s criticisms are perhaps better directed at the broad Pigouvian tradition of welfare economics, which for these purposes includes
Kaldor and Hicks, rather than at Pigou itself. They certainly are apposite
to wealth maximization as right-wing welfare economics.
159
160
BARRY, supra note 81, at xxxv; see also infra note 207, and accompanying text.
Karl Marx, Capital: Volume One, in KARL MARX & FRIEDRICH ENGELS, 35 COLLECTED
WORKS 605 n.2 (International Publishers, 1996) (1867).
161 See PIGOU, supra note 95, at 134.
162 See R.H. Coase, The Problem of Social Cost, in THE FIRM AND THE MARKET AND THE
LAW 95, 132–33 (1988).
163 See id. at 116–19.
164 Id. at.141.
165 See id. at 135–42.
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The solution the Pigouvian tradition typically advocates for market
failure is, of course, some form of left-wing government intervention
and, as we shall see, until recently, nothing could be less to Posner’s
taste. But the way Posner’s mind works is entirely open to Coase’s criticism of the Pigouvian tradition. All empirical markets have positive
transaction costs and therefore cannot possibly conform to the conditions for general equilibrium which will yield a Pareto optimum. If departure from this theoretical position is enough to identify market failure, then market failure is universal. In a sense, the case for general
planning particularly associated with Bergson, Lange and Lerner is
based on consistently pursuing the implications of this truism. Although, in anything but the longest term, Pigou wanted only to make
piecemeal interventions in a fundamentally market economy, the universality of market failure has allowed Pigouvian justifications to be
given to the widest range of such interventions, with the result being the
growth of the scale and scope of state economic activity that we can all
see. But Posner repeatedly states his general commitment to free markets and his wish to supply a wealth maximizing solution only when a
market solution is unavailable.166 However, this obliges him to supply a
coherent theory of the occasions when such a solution is needed. He
puts forward the presence of transaction costs as that theory but, transaction costs being ubiquitous, this is just not good enough. Posner must
tell us the basis on which he picks, from an infinite range of possibilities, certain occasions for supplying a non-market solution.
I am anxious to insist that there are a few passages in Posner’s
work which, it seems to me, could be developed along these lines, such
as when he tells us that, “In the wealth maximization approach the only
basis for interference with economic and personal liberty is such a serious failure of the market to operate that the wealth of society can be
increased by public coercion, which is itself costly.”167 But as he thinks
the presence of transaction costs is sufficient to identify “a serious failure of the market,” it was perhaps inevitable that such development
would not take place. Posner cannot be blamed for this widespread error, characteristic of the entire Pigouvian tradition. But he might be
thought to be at fault for the relish with which he exploited the freedom
it has extended to him to light on whatever issues took his fancy at any
particular time and to put forward a non-market response to those issues. Their extensive margin being but weakly constrained by the necessity of demonstrating any exacting case for market failure, these
issues have become legion.
Though transaction costs are ubiquitous and all markets fail, we
accept that most goods should be allocated by a market, and the natural
166
167
See supra text accompanying notes 34, 57.
POSNER, ECONOMICS OF JUSTICE, supra note 1, at 80.
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line we might take when faced with a neo-classical allocation problem
is to consider creating, not a hypothetical market, but an actual market
to solve them. This is, of course, what goes on in market economies all
the time, with results that we generally believe are optimizing. That any
markets created must fail in the sense of not being optimal tells us nothing about whether it would or would not be welfare-optimizing to create
them. I hope I am not behind the times if I say that knowing that voluntary choice is imperfect does not normally make us turn to telling people what to do. Whether market allocation is wise can only be known by
comparing this solution to other governance structures which might
possibly be used (or with doing nothing).168 It was, of course, his advocacy of an auction in broadcasting frequencies169—creating an actual
market in goods thought at the time to be inherently public goods—that
led to Coase’s appointment at Chicago170 and to the publication of The
Problem of Social Cost.171 This can now be seen as an episode of major
significance in the foundation of law and economics and, indeed, in the
post-war development of the theory and practice of regulation, to which
we shall return.172 The formulation of a welfare policy based on the
creation of what we might in this context call “Pareto regions” is, as
James Buchanan has pointed out, a question of changing the institutional, principally legal, framework for exchange.173
Posner has not taken this line for the very good reason that wealth
maximization cannot consistently stipulate the creation of an actual
market.174 Pareto regions are not hypothetical markets but actual mar168
169
See Coase, supra note 162, at 118–19.
See Ronald H. Coase, The Federal Communications Commission, 2 J.L. & ECON. 1 (1959).
This article was part of a large body of work on broadcasting which has considerable significance
for understanding Coase’s views on regulation; see also David Campbell & Matthias Klaes, The
Principle of Institutional Direction: Coase’s Regulatory Critique of Intervention, 29 CAMBRIDGE
J. ECON. 263, 263–64 (2005).
170 See Edmund W. Kitch, The Fire of Truth: A Remembrance of Law and Economics at
Chicago, 1932-70, 26 J.L. & ECON. 163, 218–22 (1983).
171 See Coase, supra note 162.
172 See infra Part V.
173 See JAMES M. BUCHANAN, Economics and Its Scientific Neighbors, in 17 MORAL SCIENCE
AND MORAL ORDER: THE COLLECTED WORKS OF JAMES BUCHANAN 3, 17 (2001) (“If . . . no
laws are . . . changed, Pareto optimality is automatically attained by each individual acting within
the constraints imposed upon him. The whole discussion of Pareto optimality must, therefore,
imply some change in the laws governing human conduct . . . . These questions . . . suggest the
need for some greater tie-in between the structure of economic theory on the one hand and the
legal-institutional framework on the other.”).
174 Posner has sometimes argued for the creation of an actual market, but these arguments are
not based on wealth maximization. His early proposal about baby sales was, in its original form,
such an argument. His use of it in Posner, Utilitarianism, Economics and Legal Theory, supra
note 1, at 138–39 (omitted from POSNER, ECONOMICS OF JUSTICE, supra note 1) has done much
to lead the criticism of wealth maximization in precisely the wrong direction. It is very significant
that, in response to the criticism of baby sales, Posner has not continued to defend his obviously
sensationalist initial statements regarding the possible results of market allocation but has sidled
away from them. See Campbell, supra note 130, at 695–96.
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kets, the outcomes of which would be left to the voluntary choices of
economic actors within the framework created, whether or not those
choices maximized wealth as Posner has it, or realized any other social
goal. But the pursuit of a social goal is intrinsic to wealth maximization,175 and this allows and requires Posner to substitute the predilections of his curious wealth maximizer for actual choices, in which he
usually shows no interest whatsoever. Criticism of Posner for rashly
advocating free markets is essentially wrong.176 When he advocates
market mimicking, he advocates “markets” that produce results he likes,
and markets that produce any such predetermined results are not markets at all.177
We have seen Posner take this line with the railway sparks example that he treats as hypothetical, but let us return to the favorite example—which one would have thought should have an empirical basis—of
negligence leading to personal injury, especially as related to motor
accidents. His treatment of this subject in his work initially formulating
wealth maximization is really rather extraordinary. It is not merely hypothetical but amounts to no more than pure presumption. I have said
above that Posner assumes that negligence is the optimum system. He
makes out this case against one alternative possibility, strict liability, in
this way:
A . . . difficult question is raised by the attempt to . . . base nonmarket but arguably wealth-maximizing institutions, such as the negligence system of automobile accident liability, on the [wealth maximization] principle. . . .
To answer this question, we must consider the effect on the costs of
driving of insisting on . . . a system of strict liability. By hypothesis
the costs would be higher. Otherwise the negligence system would
not be wealth-maximizing . . . . Would drivers be willing to incur
higher costs in order to preserve the principle of [strict liability]?
Presumably not.178
Presumably not indeed. And from this presumption, heaped on top of a
hypothesis, the conclusion inexorably follows that, if the “purely tech175 See Jeanne L. Schroeder, Just So Stories: Posnerian Methodology, 22 CARDOZO L. REV.
351, 353 (2001) (“Posner . . . sees law and economics as a form of policy science. That is, he
wishes to use the law to manipulate legal and economic subjects to act in such a way in order to
further a societal goal, such as wealth maximization.”).
176 We can now see that Ackerman’s criticism of “true believers” who “refus[e] to take pervasive market failure seriously” is, as it were, exactly wrong about Posner. See BRUCE A. ACKERMAN, RECONSTRUCTING AMERICAN LAW 89 (1984); see also Herbert Hovenkamp, Positivism in
Law and Economics, 78 CALIF. L. REV. 815, 852 (1990).
177 See David Campbell, The “Hybrid Contract” and the Merging of the Public and Private
Law of the Allocation of Economic Goods, in PROMOTING PARTICIPATION: LAW OR POLITICS?
45, 52–55 (David Campbell & N. Douglas Lewis eds., 1999).
178 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 95.
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nical obstacle” of transaction costs “prevents people from explicitly”
revealing their preferences, “why should not the law prescribe a liability
rule that will carry out their desires, which might be a rule of negligence . . . rather than one of strict liability.”179
Despite his own commendable strictures about the use of empirical
evidence in law and economics,180 in the hundreds if not thousands of
pages in which Posner has set out his views on negligence, he has remained true to the spirit of his early statement that he did “not really
care how realistic the example” of the relative costs of negligence and
strict liability was.181 He has written, instead, interminable expansive
repetitions of his early hypothetical argument—if something entirely
based on assumption can be called an argument—culminating in the
treatment of accidents in The Economic Structure of Tort Law,182 which,
as a discussion of the empirical operation of the personal injury system,
is a work of the purest fantasy; although, of course, it is hardly alone
amongst books on tort in this respect.
This is particularly indefensible as, of course, there is an alternative, based on actual contracts, to liability for negligence causing personal injury, especially in relationship to motor accidents. This alternative is first party insurance. The “compensation debate” in which this
alternative is extensively considered was more or less ignored by Posner
when he was formulating his views. When, in later work, he did consider the compensation debate, it is unsurprising that, the die having already been cast, he dismissed the empirical claims made by those who
would abolish the negligence system about its actual operation with
more speculation about what “might” be the best policy.183 It may be
that third party liability insurance based on negligence is superior to
first party insurance, although the opposite seems to so clearly be the
179
180
Posner, Epstein’s Tort Theory: A Critique, supra note 1, at 463.
See Richard A. Posner, The Future of Law and Economics: A Comment on Ellickson, 65
CHI.-KENT L. REV. 57, 58–59 (1989).
181 Posner, Epstein’s Tort Theory: A Critique, supra note 1, at 463. Posner has carried through
his preparedness to indulge in welfare maximizing speculation about the virtues of negligence
and strict liability in the absence of empirical evidence into his judicial reasoning. See David
Rosenberg, The Judicial Posner on Negligence Versus Strict Liability: Indiana Harbor Belt Railroad Co. v. American Cyanamid Co., 120 HARV. L. REV. 1210, 1217–18 (2007). On the bench
Posner is, of course, in a poorer position to be sure he has the necessary empirical work at hand
than he would be in his study, and this undermines Rosenberg’s generally laudatory attitude
toward Posner’s preference for instrumental over formal reasoning, for instrumental reasoning in
the inevitable absence of evidence is one of the best arguments for formalist reasoning. See generally Cass R. Sunstein, Cost-Benefit Analysis Without Analyzing Costs or Benefits: Reasonable
Accommodation, Balancing and Stigmatic Harms, 74 U. CHI. L. REV. 1895, 1895–96, 1901–09
(2007).
182 See WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT
LAW chs. 3–5 (1987). It is interesting to compare Professor Fleming’s description of the real
world in a set of lectures delivered the same year as Landes’s and Posner’s work of fiction was
published. See JOHN G. FLEMING, THE AMERICAN TORT PROCESS (1988).
183 See POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at 254–58.
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case that I cannot ascribe the continuation of the negligence system
mainly to rational influences upon policy making;184 which may, of
course, be evidence of dogmatism on my part. But the point is that the
former is an actual market alternative which Posner barely considered
when giving his wealth-maximizing rationalization of negligence liability. That one of Posner’s favorite examples of wealth maximization
ignores the possibility of extending the Pareto frontier and more or less
immediately moves to a system of coercive transfers is a telling example of the disregard of actual markets at the heart of wealth maximization.
Behind this example lies Posner’s extremely influential argument
that the Hand formula185 articulates a commitment to wealth maximization, the pattern for all his work on the common law.186 Although the
main credit lies elsewhere, as Posner would not deny,187 he must be
congratulated for making it clear that the Hand formula captures the fact
that the prevention of accidents is, as Coase would have put it, a reciprocal problem.188 But we can now see why Posner is so enthused by the
Hand formula. As logic, the formula seems impeccable. As a way of
clarifying our thinking about negligence liability, especially when we
are new to the subject, it is very helpful. But as a way of making decisions about liability, it is of very limited use.189 Its results entirely depend on the magnitude of the values one places on its variables in any
particular case, and the determination of these magnitudes is subject to
the same criticisms as are made of the values selected in cost-benefit
analysis, with at least one of those values being irremediably arbitrary.
The only defense of cost-benefit analysis that is of any weight is that, if
we are going to make coercive transfers, we need something like it to
guide our decision-making. It might be allowed that a similar, though
even more gestural, argument can be made for the use of the Hand formula in negligence judgments. But whereas it is arguable that it is impossible to dispense with something like cost-benefit analysis because
certain coercive state transfers are indispensable, it is entirely possible
that we can dispense with the tort of negligence causing personal injury,
especially if it was replaced with an adequately designed first party in184 See DONALD HARRIS ET AL., REMEDIES IN CONTRACT AND TORT ch. 24 (2d ed. 2002). The
views I express in this chapter are based on the U.K. position in which first party insurance must
be set in the context of tolerably effective welfare state provision against incapacity. This chapter
also does not consider product liability.
185 See U.S. v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947).
186 For the latest statement, see POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note
1, at 213–18.
187 See LANDES & POSNER, supra note 182, at ch. 1.
188 See Coase, supra note 162, at 96, 133.
189 Judge Posner’s and, indeed, Judge Learned Hand’s own judgments show this. See Richard
W. Wright, Hand, Posner, and the Myth of the “Hand Formula”, 4 THEORETICAL INQUIRIES L.
145 (2003).
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surance market. Whatever one’s view about imposing liability for negligence, it is a good argument against it that its use involves irremediable arbitrariness, but, for Posner, with his confidence that “a court can
make a reasonably accurate guess as to the allocation of resources that
would maximize wealth,”190 this is a great opportunity rather than a
problem.
V.
WEALTH MAXIMIZATION, DEREGULATION, AND
POSNER’S PIGOUVIAN TURN
My argument so far has been that wealth maximization endorses
state intervention in a very general manner. This, of course, seems to fly
in the face of the undoubted fact that the most important policy that,
until recently, has been advocated on the basis of welfare maximization
is deregulation in order to leave “free markets.” This has been an important contribution to the neo-liberal regulatory revolution which we
may trace back to the 1970s. With commendable modesty, Posner tells
us that, “The deregulation movement, and the increased respectability of
free-market ideology generally, owe something to the law and economics movement.”191 The political influence of Posner’s views is something upon which I insist. But as welfare maximization has nothing to
do with free markets, and indeed expresses a thoroughgoing commitment to their opposite, one has to ask what is the actual meaning of
Posner’s notion of deregulation. I think it is right to say that this meaning is ideological in that it involves an almost complete misdescription
of Posner’s actual practice of, until recently, advocating an entirely negative destruction of existing regulation as if this was the creation of free
markets, when this is the last thing it is.
The formulation of correct policy may involve the removal of certain existing regulations, and the neo-liberal revolution gained much
purchase by identifying areas in which this was indeed the case. If we
substitute, say, reduction or elimination of wasteful or counterproductive public expenditure for wealth maximization, it would be irrational
to deny the value of such removal. Now that the fading neo-liberal hegemony has rightly been brought into public obloquy by the current
economic crisis, we are in understandable but nevertheless severe danger of forgetting the core sense of neo-liberalism—that “the government
is attempting to do too much . . . [and] that it operates on such a gigantic
scale that it has reached the stage at which, for many of its activities, as
190
191
POSNER, ECONOMICS OF JUSTICE, supra note 1, at 62.
RICHARD A. POSNER, FRONTIERS OF LEGAL THEORY 35 (2001).
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economists would say, the marginal product is negative.”192 But, whatever one’s attitude to all this is, save in the relatively rare cases in which
government programs can be abolished and nothing put in their place,
reducing the size of government activities should never be a question of
deregulation in the purely negative sense of destruction of existing regulation but should be one of reregulation in order to establish and maintain the legal framework necessary for all economic action, including
market exchange.
Posner has never seen this. In my opinion, Posner’s first article,
Natural Monopoly and Its Regulation, remains the most intellectually
challenging thing he has written. In that article, he did contribute in an
original way to the unsettling of the belief that there were certain natural
monopolies which had to be publicly owned or highly regulated, which
was one of the then most taken for granted parts of the case for intervention.193 But he also set the tone for his future work by over-egging
the pudding, claiming that there is “no reason to believe that the benefits
of regulation, if they could be quantified, would be found to exceed its
direct and indirect costs,”194 and looking forward to “the eventual elimination of regulation.”195
One of the issues Posner considered in Natural Monopoly and Its
Regulation was the then emerging community antenna television industry, which he believed might be “an instance when the bargaining process might be an effective substitute for regulation.”196 Posner expanded
on this shortly afterwards in one of his first papers advocating a deregulatory policy towards a specific industry.197 In doing so he was entering
upon the hallowed ground of law and economics for, not only was he
advocating what he understood to be Coasean bargaining, but, as I have
mentioned,198 Coase’s advocacy of an auction of broadcasting frequencies was an episode of major importance in the foundation of law and
economics. But it would be quite wrong to understand what Coase had
in mind as deregulation. Coase’s reregulatory proposal was to replace
the direct public allocation of frequencies with an auction in which the
Federal Communication Commission (FCC), as the “government agen-
192
Ronald H. Coase, Economists and Public Policy, in ESSAYS ON ECONOMICS AND ECONO-
MISTS 47, 62 (1994).
193 His evaluation
of the originality and importance of this article in the preface to its reprint
on the occasion of its thirtieth anniversary seems to be very fair. See RICHARD A. POSNER, NATURAL MONOPOLY AND ITS REGULATION v–viii (30th anniversary ed. 1999).
194 Posner, supra note 8, at 620.
195 Id. at 643.
196 Id. at 642–43.
197 See Richard A. Posner, The Appropriate Scope of Regulation in the Cable Television
Industry, 3 BELL J. ECON. & MGMT. SCI. 98 (1972). Posner also wrote a policy paper on this
subject for RAND which I have not consulted.
198 See supra note 169 and accompanying text.
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cy appointed to act as custodian of frequencies,”199 played an essential
role in “the creation of . . . rights in the use of . . . frequencies.”200 Far
from following Coase’s lead by making concrete suggestions about how
to create the property rights necessary to conduct the auction, Posner’s
paper, though denying the “intriguing possibility” of “the elimination of
all franchise regulation,”201 was an, as it were, overwhelmingly negative
lament that “government has not left development of cable television to
the free market,”202 which sought to ensure the role of government was
in future to be limited to “research and evaluation” rather than “regulation.”203
To the very small extent that I understand the issues, Posner’s negative criticisms of much of what had previously been done seem prima
facie persausive. But it is not prima facie persuasive to proceed without
some positive specification of the framework to be adopted for the future. However, in his belief that “[t]o expound the details of particular
regulations and proposals . . . would serve only to obscure the principal
issues,”204 Posner made proposals which only clear away existing regulation and say almost nothing about what positively should be done. It is
not enough to say that auctioning should be “permitted” or “encouraged.”205 Posner is obliged to say how this could be done. And in 1976,
Oliver Williamson responded by using his superior knowledge to direct
appropriate ridicule towards Posner’s abstract approach and reached
what has become a very telling verdict on Posner’s use of transaction
cost economics in general: “However powerful and useful it is for classroom purposes and as a check against loose public policy descriptions,
it easily leads to extreme and untenable ‘solutions.’”206
Posner’s ill-thought cable television proposal set the course for the
interminable application of a simple, economic-sounding deregulatory
formula to a huge range of issues that he has since charted, in which the
occasions on which he scores a hit are greatly outnumbered by the
misses.207 But even if certain regulations should be cleared away, any
market which remains must and will have a specific legal institutional
199
200
201
202
203
204
205
206
Coase, supra note 169, at 21.
Id. at 25–26.
Posner, supra note 196, at 111.
Id. at 98.
Id. at 126–27.
Id. at 127.
Id. at 126.
OLIVER E. WILLIAMSON, Franchise Bidding for Natural Monopolies—in General and with
Respect to CATV, in ECONOMIC ORGANIZATION: FIRMS, MARKETS AND POLICY CONTROL 258,
259 (1986).
207 This is the key to the criticism of Posner’s deprecation of institutions and choices he does
not think are wealth maximizing as “one-way traffic” in C.A.E. Goodhart, Economics and the
Law: Too Much One Way Traffic?, 60 MOD. L. REV. 1 (1997); see also David Campbell & Sol
Picciotto, Exploring the Interaction Between Law and Economics: The Limits of Formalism, 18
LEGAL STUD. 249 (1998).
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form. Not paying sufficient public attention to the institutional design
necessary to create an actual market leaves the legal framework of economic action largely to be determined by those who hold power in extant corporate capitalism and, of course, if all we are doing is deregulating, how much attention needs to be paid? Pursuit of wealth
maximization generates a legal and economic policy which reproduces
this happy state of affairs, which seems so natural to Posner that he
views it as a free market.
I will not repeat the argument to which I have sought to contribute
on many previous occasions, that Posnerian deregulation is an incompetent policy indeed and that Coase’s critique of intervention calls, not for
deregulation, but for extensive reregulation based on the continuous
weighing of alternative feasible governance structures, a process Matthias Klaes and I have called “institutional direction.”208 Professor
Schlag’s article in this symposium represents the latest thinking on this
by one of the leading contributors to that argument,209 from whose work
I have greatly benefited. I am trying to show, not merely that the concept of deregulation is senseless, but how Posner’s deregulatory pursuit
of what Professor Harcourt, in his article in this symposium and in his
important recent book, calls the illusion of free markets,210 was made
theoretically possible. The point I hope to have established is that the
disregard for the institutional framework of economic action integral to
Posner’s concept of deregulation is based on wealth maximization’s
lack of concern with actual markets. Pareto optimization is dismissed
for theoretically trivial reasons and almost no attention is ever given to
the possible extension of Pareto regions in the overwhelming rush to
advance proposals for coercive transfers in pursuit of an end state to
which Posner is committed.
Recognizing that deregulation is merely an ideological misdescription of rereregulation in the interests of corporate capitalism allows us
readily to make sense of what, on its face, is the extraordinary volte face
Posner performed in response to the 2007 credit crunch and the ensuing
depression.211 Posner’s A Failure of Capitalism212 is a hastily written
208
209
Campbell & Klaes, supra note 169.
See Pierre J. Schlag, Some Fallacies in the Interpretation of Transaction Costs, 33
CARDOZO L. REV. 2357 (2012).
210 See Bernard E. Harcourt, Fantasies and Illusions: Order, Liberty, and Free Markets, 33
CARDOZO L. REV. 2413 (2012); HARCOURT, supra note 30.
211 Reasons of space prevent me from discussing another apparently anomalous exception to
Posner’s deregulatory attitude—intellectual property law. See WILLIAM M. LANDES & RICHARD
A. POSNER, THE ECONOMIC STRUCTURE OF INTELLECTUAL PROPERTY LAW (2003). This body of
law is, as much as antitrust, an attempt to regulate market entry, albeit by restricting rather than
widening the possibility of entry. The explanation of the contrast between Posner’s almost always
excoriating, if often sound, criticism of the former and his overall warm, if not wrong, endorsement of the latter may be explained by the way that intellectual property monopolies are handed
over as private resources typically to corporate interests. See David Campbell & Sol Picciotto,
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and rather disgracefully slight account of the crisis, the symptomatic
significance of which is that in it he very warmly endorses the Obama
administration’s interventionist response. This would have come as a
surprise to those familiar with Posner’s advocacy of deregulation, but
not as much as will his equally warm embrace of Keynesian and Pigouvian justifications for this response. All this is done without any attempt
by Posner to consider the implications of this volte face for his former
views on deregulation, which is a shame in that it is both disingenuous
and a lost opportunity. I hope what has been argued so far allows us to
see why it was almost as easy for Posner to embrace Obama’s intervention as it had been for him formerly to embrace deregulation. Both are
forms of a policy of corporate welfare—a welfare economics for capitalists. When the errors consequent upon deregulation have brought
corporate capitalism to the point where it might actually break down,
nothing is more natural than to turn to the state to restore the conditions
for corporate accumulation which deregulation has put at hazard. But it
must be said that the description of this in free market terms has rather
slipped now that the Protestant values of those who ran the financial
system seem not to preclude their open begging for government bail
outs of their appalling mistakes.
I reviewed A Failure of Capitalism and do not want to add to what
I have already said of Posner’s apparent volte face.213 But a further point
can now be made. In my review, I criticized Posner for rushing into
print about a subject about which he knew very little, having never
“written about the financial services industry or financial economics in
any other than an oblique way, save in blogs since the storm clouds
gathered in June 2007 . . . .”214 My scholarship about this was, I am
afraid, defective. In a recent article, Posner has made reference to a
1979 article advocating the deregulation of bank holding companies that
he wrote with Fischer Black and Merton Miller,215 two of the Chicagoan
financial economists most responsible for the policies which have led to
the crisis, in order briefly to acknowledge that he “missed” “the downside of financial deregulation, which is that it increases the danger of
recession or depression.”216 I myself missed this paper, though, in my
defense, I must say Posner himself made no reference to it whatsoever
The Acceptable Face of Intervention, 15 SOC. & LEGAL STUD. 435, 442–47 (2006) (reviewing
WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF INTELLECTUAL
PROPERTY LAW (2003)).
212 See RICHARD A. POSNER, A FAILURE OF CAPITALISM (2009).
213 David Campbell, The End of Posnerian Law and Economics, 73 MOD. L. REV. 305 (2010)
(book review).
214 Id. at 308.
215 See Fischer Black et al., An Approach to the Regulation of Bank Holding Companies, 51 J.
BUS. 379 (1978).
216 Richard A. Posner, On the Receipt of the Ronald H. Coase Medal: Uncertainty, the Economic Crisis, and the Future of Law and Economics, 12 AM. L. & ECON. REV. 265, 268 (2010).
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in A Failure of Capitalism. I was aware of another somewhat tangential
article he wrote which makes reference to elementary financial theory,217 and partially aware of a more substantial set of articles on investment trusts he wrote with his then colleague, the distinguished trusts
lawyer John Langbein,218 though I must confess that I only now appreciate their significance.
What is striking about these papers is the utter naïveté of their belief in the beneficent operation of the financial markets. The sort of
views involved are now so familiar even to the general public as to require no detailed discussion here, but let us take up one specific point
that I trust readers will find fresh. The articles with Langbein defend the
then rapidly growing use of the “market fund,” a portfolio investment
vehicle which tracked broad stock market indices rather than attempting
to “pick” specific investments or classes of investment (i.e. a markedly
passive investment strategy). In response to criticism by Humbach and
Dresch that such funds should effectively be prohibited because they
freeloaded on others’ active investment efforts,219 Langbein and Posner
made some entirely convincing and detailed arguments, but to these
they added the following general reflections:
The most serious flaw in the Humbach-Dresch analysis is their obliviousness to the self-correcting capacities of the securities markets.
Suppose investors flocked to market funds . . . as Humbach and
Dresch predict they will . . . in such droves that the markets became
inefficient . . . . In that event, there would be renewed opportunities
to outperform the market averages—and hence to outperform the
market funds—by picking undervalued securities to buy and overvalued securities to sell. These opportunities would attract more and
more investors into an active strategy, and this process would continue until an equilibrium was re-established at which trades occurred at the best estimate of a security’s true value and the passive
investor was thereby protected.
217 See Richard A. Posner, Law and the Theory of Finance: Some Intersections, 54 GEO.
WASH. L. REV. 159 (1986).
218 John H. Langbein & Richard A. Posner, The Revolution in Trust Investment Law, 62 AM.
B. ASS’N J. 764 (1976); John H. Langbein & Richard A. Posner, Market Funds and Efficient
Markets: A Reply, 62 AM. B. ASS’N J. 1616 (1976); John H. Langbein & Richard A. Posner,
Market Funds and Trust Investment Law, 1976 AM. B. FOUND. RES. J. 1 (1976); John H. Langbein & Richard A. Posner, Market Funds and Trust Investment Law: II, 1977 AM. B. FOUND.
RES. J. 1; John H. Langbein & Richard A. Posner, Social Investing and the Law of Trusts, 79
MICH. L. REV. 72 (1980). My attention had been drawn to Law and the Theory of Finance: Some
Intersections, Market Funds and Trust Investment Law, and Social Investing and the Law of
Trusts by their being reprinted in POSNER, THE ECONOMIC STRUCTURE OF THE LAW: THE COLLECTED ECONOMIC ESSAYS OF RICHARD A. POSNER, supra note 27.
219 See John Humbach & Stephen Dresch, Prudence, Information and Trust Investment Law,
62 AM. B. ASS’N J. 1309, 1311–12 (1976).
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The imaginary horrible that is the centrepiece of the HumbachDresch article is simply inconsistent with the competitive character . . . of the securities markets. If the passive strategy should ever
create genuine opportunities to beat the market by an active strategy,
there would be no shortage of investors pursuing such a strategy.220
One of the things that certainly went wrong in the financial markets that has led to the current crisis was that the balance of passive and
active investment was markedly and consistently unjustifiable. Now that
the efficient markets hypothesis has been so called into question, the
facts about the actual operation of the financial markets are beginning to
be collected in a comprehensive and consistent, rather than sporadic and
anecdotal, way, and the facts about the costs of active investment have
been revealed to be so outrageous as to gladden the heart of the most
militant anti-capitalist.221 While it remains difficult to say just how this
situation could prevail over so long a period, it is unarguable that the
financial services industry has been able to extract revenues from its
customers in a way which, far from representing “the self-correcting
capacities of the securities markets,”222 shows those markets to have
been the setting for action that is wholly inexplicable on the assumption
that investment managers are effectively, rather than merely legally,
subject to fiduciary duties to their customers.
In A Failure of Capitalism, Posner was anxious to tell us that “[t]he
deregulation movement was the response to justified criticism of common-carrier and public-utility regulation”223 (i.e. of the sort of things
Posner himself had argued should be deregulated in Natural Monopoly
and Its Regulation), and that the extension of deregulation to the financial services industry turned on a failure to “differentiate between banking and other regulated industries, such as railroads and airlines”224 because “deregulating banking has a macroeconomic significance that
deregulating railroads or trucking or airlines or telecommunications or
oil pipelines does not.”225 In my review I argued that the distinction was
unconvincing and that the claims that the financial services industry was
deregulated or could sensibly be called a free market were ridiculous.
Trading was led by senior investors who were effectively insulated from
personal liability for the downside of their decisions, principally by the
statutory imposition of general limited liability, who therefore were
220 Langbein & Posner, Market Funds and Efficient Markets: A Reply, supra note 218, at
1616–18.
221 See Kenneth R. French, Presidential Address: The Costs of Active Investing 63 J. FIN. 1537
(2008).
222 Langbein & Posner, Market Funds and Efficient Markets: A Reply, supra note 218, at
1616-18.
223 POSNER, supra note 212, at 326.
224 Id. at 115.
225 Id. at 317–18.
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prepared to countenance the development of products they never understood, save that they were incredibly lucrative. That trading took place
on terms set or supervised by numerous public regulatory bodies which
saw their predominant task as the promotion of the volume of such trading, whilst public financial authorities which should have taken the
punchbowl away were instead strengthening the punch. That a situation
based on Federal mortgage guarantees which created the liabilities at
the core of the contagion, the statutory power given to senior investors
to walk away from any disaster they may cause, the proliferation of
regulatory agencies facilitating all this, and the overheated macroeconomic climate established by a Federal Reserve foolishly seeking to
accelerate growth, can all be described as the deregulated operation of
the free market is to no negligible extent the result of the work of Richard Posner.
In a way which one would find incredible if taken by most others
of his significance, Posner now seems to persist with thinking the financial market was deregulated, although he now sees this to be a mistake
because this is not an “ordinary industry,”226 and calls for welfare economic intervention in pursuit of the public good of financial stability,227
on the basis of a continuing and complete misunderstanding of the nature of the issues.228 The work of establishing a welfare-enhancing
framework for open-ended decision-making on financial markets regarded as a Pareto region never features as Posner has moved from
complete confidence in self-correcting markets to imposing levels of
risk-bearing set by the government to achieve stability, although this is
a paradigm case of when it is impossible for the government to determine a correct policy. One can again say that such views are tantamount
to nonsense, but once again Posner has captured the general feeling, for
this is how the crisis predominantly is understood and how the response
to it is being framed. Having plunged us into crisis, this ideological
misunderstanding of the nature of economic action turning on deregulation will now enormously hinder recovery. I write this article in order to
contribute to the rethinking of our understanding of regulation that is
necessary for substantial progress to be made. But to believe this progress will be made in the short time in which it must be made in order to
avoid intensification of current hardship is beyond my stock of optimism. Indeed, I believe the economic consequences of Judge Posner’s
work have been to bring us to a point where some form of suspension of
the operation of the international financial system will be needed in
order to reground the market economy. Perhaps, however, this excep226
227
228
Posner, supra note 216, at 268.
See POSNER, supra note 212, at 248.
See Campbell, supra note 213, at 319–23. For Posner’s further general reflections on these
issues, see RICHARD A. POSNER, THE CRISIS OF CAPITALIST DEMOCRACY (2010).
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tional step is what it will take to stimulate the necessary revolution in
what we believe to be “the workable, the practicable, and the acceptable.”229
CONCLUSION
I started this Article with the unpromising observation that its subject, wealth maximization, was an idea of so little intrinsic merit that it
is now hard to see why it had anything like the success it had. I believe I
can conclude this paper by saying that its lack of merit is indeed the
cause of that success. Posner could put forward wealth maximization
only because he has never been au fait with neo-classical economic
analysis and has been largely ignorant of the history of modern economics. Beginning with a conception of economics as a form of utilitarianism which could be maintained only by someone apparently then ignorant of the ordinal revolution, Posner put forward wealth maximization
as a novel solution to the problems caused by the clash between objective evaluations of welfare and the ethical claims of market economics,
which turned on a failure to appreciate the purported solution of those
problems in the new welfare economics. When all of this ran out of
steam, he remained committed to welfare maximization at a visceral
level, applying it to every legal policy and institution he cared to address. In so doing, he has given a highly influential statement of the
neo-liberal ideology of deregulation.
It is my opinion, ultimately based on a rejection of “monism” in
political theory,230 that any conceivable welfare-optimizing economy
must be a mixed one in which most allocations of goods are the result of
Pareto-optimizing market exchanges, but in which there also is a very
significant class of allocations that are the result of coercive transfers by
the state.231 Posner is right that the allocations necessary to create certain fundamental “institutions . . . such as the market itself,”232 are
amongst this class. I nevertheless believe that Pareto optimality is a
fundamentally sound and, even in actually existing market economies,
an underemployed welfare criterion.233 I am much less clear about the
229
230
ZERBE, supra note 7, at 293.
See DAVID MILLER, MARKET, STATE AND COMMUNITY: THEORETICAL FOUNDATIONS OF
MARKET SOCIALISM 4 (1989).
231 See Anthony T. Kronman, Wealth Maximization as a Normative Principle, 9 J. LEGAL
STUD. 227, 229 (1980) (“[A] combination of utilitarian and voluntarist principles best expresses
our moral judgments and best equips us to deal with the dilemmas of moral life.”).
232 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 96.
233 My views are more or less the polar opposite of those expressed in Professor Sager’s
contribution to the Hofstra debate. See Lawrence G. Sager, Pareto Superiority, Consent, and
Justice, 8 HOFSTRA L. REV. 913 (1980).
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legitimacy of coercive transfers, so much so that I wish we could dispense with them, and hence have found the promise of Posner’s argument for consent to wealth maximization very attractive. But that promise is, as I must confess I thought it would be at the outset, utterly
spurious, and we are left to manage conflicting allocative principles in
the mixed economy.
We are not helped in this by Posner’s ideological misdescription of
the conflict, which we should discard. For, whichever principle of coercive transfers we adopt, we should be clear that those transfers are coercive. We should do this, not only because democratic respect for the
autonomy of citizens demands frankness about this, nor because such
frankness is a condition of getting the transfers to work in the way intended,234 but because one imagines that the hurdle of being known to
be coercive will be a serious obstacle to all but the most justifiable
transfers.235 It is not because Kaldor-Hicks optimization and costbenefit analysis in general, and wealth maximization in particular, effect
coercive transfers that they are unacceptable. It is because they seek to
deny their intrinsic coerciveness that they have a necessary duplicity
and incoherence which allows them to ground policies for which only
utterly slovenly welfare cases could possibly be made. In advancing and
persisting with views under which even he has acknowledged it may
indeed “be impossible to lay solid philosophical foundations,” Posner
has done what one thought impossible and come up with a welfare criterion arguably inferior to Kaldor-Hicks optimization and cost-benefit
analysis. But the hegemony of those views and their like will continue
until it is clearly seen that the deregulated free market is an illusion, that
welfare economics are inherently coercive, and that welfare enhancing
economics of any sort must rest on the legal foundation of a public constitutional framework which can legitimately, because openly, underpin
both optimizing markets and collective expenditure.
234 See Robert E. Lucas, Econometric Policy Evaluation: A Critique, 1 CARNEGIEROCHESTER CONF. SERIES ON PUB. POL’Y 19, 42 (1976) (“[I]t appears that policy makers, if they
wish to forecast the response of citizens, must take the latter into their confidence. This conclusion, if ill-suited to current econometric practice, seems to accord well with a preference for
democratic decision making.”).
235 See George J. Stigler, The New Welfare Economics, 33 AM. ECON. REV. 355, 357–59
(1943) (“[T]he new welfare economics has been rather pretentious . . . . [T]he welfare economics
here proposed has a conservative bias. In the nature of things the wideness with which any end is
accepted depends on the specificity of that end . . . . Until the distant day when the welfare economist can assign quantitative orders of importance to various (degrees of fulfillment of) ends,
therefore, it seems necessary for him to recommend only gradual changes of policy in many
areas. This formal conclusion could . . . be defended on substantive grounds as the only approach
which is compatible with democratic social processes.”).