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Economics - Law & Economics | Efficiency Instead of Justice? - Searching for the Philosophical Foundations of the Economic Analysis

Efficiency Instead of Justice?

Searching for the Philosophical Foundations of the Economic Analysis of Law

Series: Law and Philosophy Library, Vol. 84

Mathis, Klaus

Translated by Shannon, D.

2009, XV, 220 p.

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  • Enables interdisciplinary-minded researchers and practitioners to look over the rim of their own subject disciplines and beyond
  • Addresses not only the philosophical substance of the demand for economic efficiency, but also introduces the modern concepts of social ethics
  • Represents a well-founded academic treatise on the economic analysis of law addressing the tension between efficiency and justice
  • Easy to read text, despite its analytical detail and depth

Economic analysis of law is an interesting and challenging attempt to employ the concepts and reasoning methods of modern economic theory so as to gain a deeper understanding of legal problems. According to Richard A. Posner it is the role of the law to encourage market competition and, where the market fails because transaction costs are too high, to simulate the result of competitive markets. This would maximize economic efficiency and social wealth.

In this work, the lawyer and economist Klaus Mathis critically appraises Posner’s normative justification of the efficiency paradigm from the perspective of the philosophy of law. Posner acknowledges the influences of Adam Smith and Jeremy Bentham, whom he views as the founders of normative economics. He subscribes to Smith’s faith in the market as an ideal allocation model, and to Bentham’s ethical consequentialism. Finally, aligning himself with John Rawls’s contract theory, he seeks to legitimize his concept of wealth maximization with a consensus theory approach.

In his interdisciplinary study, the author points out the possibilities as well as the limits of economic analysis of law. It provides a method of analysing the law which, while very helpful, is also rather specific. The efficiency arguments therefore need to be incorporated into a process for resolving value conflicts. In a democracy this must take place within the political decision-making process. In this clearly written work, Klaus Mathis succeeds in making even non-economists more aware of the economic aspects of the law. 

"Mathis gives a succinct and lucid presentation of the economic theory of law, and of the problems associated with its application as a normative theory in law. At the same time, he rightly draws attention to the advantages associated with this approach, and provides a helpful and thoroughly ambitious introduction to its fundamental principles."
Prof. Dr. Jan-R. Sieckmann, Archives for Philosophy of Law and Social Philosophy (ARSP), Vol. 91/2 (2006)

Content Level » Research

Keywords » Adam Smith - Jeremy Bentham - John Rawls - Moral - Rawls - economic analysis of law - efficiency - justice - philosophy of law

Related subjects » Economic Theory - Law - Law & Economics - Philosophy - Political Science

Table of contents 

§ 1 Introduction PART ONE: ECONOMIC FOUNDATIONS § 2 Homo economicus A. Introduction B. The economic paradigm I. The scarcity of resources II. Methodological individualism III. The theorem of self-interest IV. The assumption of rationality V. Strict distinction between preferences and constraints VI. Economic man as a heuristic fiction C. Fundamental principles of economics I. The law of demand II. Maximization of utility and profit III. The market takes care of the optimum allocation of resources D. Models of utility and profit maximization I. Household maximization of utility II. Maximization of profit by the business firm 1. Perfect competition 2. Supply monopoly E. Critique I. Unrealistic assumptions II. The static nature of the analysis III. Reductionism F. Summary § 3 Efficiency criteria A. Introduction B. Pareto efficiency I. The concept 1. The Pareto criterion 2. The Pareto optimum II. The Pareto optimum and competitive equilibrium III. Critique 1. The problem of initial endowment 2. External effects 3. The static nature of the analysis 4. The danger of mixing positive and normative theory C. The Kaldor-Hicks criterion I. The concept II. Comparison with the Pareto criterion III. Critique 1. Logical inconsistency 2. The measurement problem 3. The no-compensation problem 4. The accusation of collectivism 5. No guarantee of increased social utility 6. The issue of consensuality D. Summary § 4 Economic Analysis of Law A. Introduction B. Concepts I. Transaction costs II. Propertyrights 1. Property rules 2. Liability rules C. The Coase Theorem I. The concept II. The reciprocal nature of harmful actions III. The absence of transaction costs 1. Negotiations ensure an efficient outcome 2. Negotiation as an alternative to state intervention 3. Critique a) The assumptions are unrealistic b) Wealth and endowment effects influence allocation c) Bargaining is not the same as competition IV. Taking account of transaction costs 1. The choice between different social arrangements 2. The crucial importance of law D. Applications of economic analysis of law I. The incentives of liability rules 1. Introduction 2. A model for minimizing the social costs of accidents 3. Explanation with illustrative example 4. Unilateral precautions by the victim a) No liability b) Strict liability 5. Unilateral precautions by the injurer a) No liability b) Strict liability 6. Implications 7. Bilateral precautions a) Liability for negligence b) The ‘Hand rule’ for determining the scale of negligence 8. Critique II. Efficient breach of contract 1. Introduction 2. Breach of contract in a case of double sale a) Compensation for the reliance loss (reliance damages) b) Compensation for the expected loss (expectation damages) 3. Critique III. Optimal punishment 1. Introduction 2. The rational delinquent 3. The optimal crime rate 4. Critique E. Summary PART TWO: PHILOSOPHICAL FOUNDATIONS § 5 Adam Smith’s Moral Philosophy A. Introduction B. Smith’s theory of ethics I. Self-interest II. The forces which control

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