Law and Economics of Justice

Debates about economic inequality permeate public discourse around the globe, and researchers devote much attention to studying its causes, consequences, and more. While the psychological study of inequality is still in its relatively early stages, this chapter considers the role of inequality in distributive decisions from a social comparison perspective. This perspective is particularly apposite, since the subject matter of social comparisons—that is, people’s relative outcomes or positions—is what defines inequality. The social comparison approach to inequality suggests that factors that influence decision-makers’ social comparison concerns are also likely to affect their decisions when inequality is at stake. After making the theoretical case for the role of the situational factors of social comparison in decisions that implicate inequality, we illustrate it through extant findings on social categorisation as well as exploratory evidence of the effect of another situational factor—the number of recipients of an unequal distribution. With respect to both factors, we identify the impact of social comparison by studying the weight decision-makers give to equality in resource allocations that require trade-offs between equality and competing distributive considerations (e.g., efficiency). Importantly, the findings we discuss indicate that decision-makers’ equality preferences are malleable and depend in part on situational factors that can bear little normative relevance for those important trade-offs between inequality and other distributive considerations.

Efficiency is a key objective of the Law & Economics movement that potentially is in an antagonistic relation to the more socially oriented distributive justice. But a closer look at the manifold roles of law and the legitimacy functions shows that measures exist for tempering the antagonism. In particular, justice failures must be avoided or overcome. Possible remedies are the standardisation of distributive justice principles through international guidelines and special regulatory “innovations” (such as the “regulatory impact analysis” and the “regulatory lookback”). The newest developments go in the direction of tensions mitigation.

This chapter analyses the normative appeal of a conception of the just price based on the value of market efficiency (the ‘Efficiency Conception’). The chapter suggests that the Efficiency Conception is a normatively attractive conception of the just price only under conditions of wealth equality and discusses two common objections to the feasibility of a price system committed to wealth equality.

Traditionally, the academic literature on corporate law and governance has cabined problems of externalities—unpriced economic effects on nonconsenting third parties—to other legal domains, such as tort law and employment law. However, the most critical private-ordering mechanisms of corporate governance, including executive compensation and takeover discipline, depend critically on market prices, which may be incomplete if externalities are present. The central argument of this chapter is that many corporate social responsibility efforts and ESG investments are in fact best understood as private-ordering responses to the information and incentive problems arising from corporate externality problems. Because externalities are ordinarily unpriced in market transactions, social enterprises that consider externalities in their decision-making face unique institutional challenges: information costs, coordination costs, and other transaction costs. Legal, institutional, and private-ordering developments are already advancing to meet these challenges. The chapter argues that an area ripe for future research is institutional and legal design that minimises information, transaction, and agency costs for coalitions of stockholders with similar preferences that seek to coordinate corporate production around non-financial objectives.

In a series of legal fields, from constitutional law to contracts to competition law, the market mechanism has provided a claimed neutral baseline against which to measure justice. Rights and remedies have been benchmarked against what “the market” would have provided the parties. That neutrality was always something of a legal fiction—economics has long understood that in some contexts, the market mechanism does not deliver a single, stable equilibrium. However, that did not stop the law from fixating on the cases where market mechanisms do deliver a single, stable equilibrium as a baseline proposition from which to measure rights and remedies. The rhetorical strength of the law’s adoption of a purported neutral market baseline bolstered classical liberals, Chicago School adherents, and others who favoured the translation of market ordering into the positive legal framework.

Recent years have seen the dominance of neoclassical, marginalist and welfarist schools of Competition Law and Economics being challenged more vigorously than ever [See two major collecting works in: Fennell and McAdams (2013) and Cappelen and Tungodden (2019)]. Although the core assumptions of the neoclassical school regarding overt reliance on rationality and efficiency ever since the inception of the school have been target of much criticism [Flynn (December 1988), pp. 713–43 and Dworkin (1980), pp. 191–226], the latest decades of both research and real life developments have reinvigorated the criticim [An indication is the title of the latest Global Competition Forum, themed “Time for a Reset?”, see here: http://​www.​oecd.​org/​competition/​globalforum/​GFC-2020-agenda-en.​pdf, accessed 2020-12-07]. Nowhere is the influence of neoclassical and marginalist economic approaches, in turn underscored by Legal Realism and Legal Positivist approaches, more prevalent, than laws governing economic activities, chief among them antitrust law and policy. The famous “Antitrust Revolution” in the late 70s by the likes of Robert Bork (1978) and Richard Posner (2014) still today dominates mainstream law and economics of not only US Antitrust law, but also of European [Bartalevich (2016), pp. 267–83] and global competition law [Stiglitz (2017)]. Leaving behind decades long (and one would say, centuries long) fairness-related approaches to law and economics [Watkins (1922)] (which in this article will be dubbed Kantian although the core philosophy predates Kant by eons), we now also note insights in bounded rationality [Piron and Fernandez (1995)], which further underscore the previous theoretical and philosophical approaches. Using the legal prohibition against “unfair pricing” as an optimal proxy [See e.g. Treaty on the Functioning of the European Union Article 102a, prohibiting unfair pricing imposed by a dominant undertaking capable of affecting trade between member states or in substantial part of the Union; See also Kianzad and Minssen (2018), pp. 133–48], the present article juxtaposes the neoclassical and marginalist approaches to this area of political economy, by way of using Kantian ethics and Kantian legal philosophy to demonstrate the inaptness of the so-called mainstream Law and Economics approaches to the matter “fairness in law and economics”. A return to Kantian philosophy of law [White (2019), pp. 53–76] and a balanced approach between law and economics disciplines, more so regarding laws governing economic activity, is forwarded, making the case that whether one is Kantian or Utilitarian in the normative will invariably affect the substantive positive legal and economic analysis. This fact is independent of the claims to “rationality”, “objectivity” or “humanity” and “divinity” made by either approach. Following the introduction framing the “paradox” regarding the return of Kantian, fairness-based approaches to law and economics, the second section depicts the Posnerian attack on Kant construed alongside Wealth Maximisation as an optimal goal of law and economics. The third section describes the supposed division between fairness and welfare, or efficiency, as an optimal goal of law and economics. The fourth section in turn constructs the Kantian comeback. The fifth section concludes.

In this paper, I will show that most of the debates regarding the relevance of law and economics for practical decision-making (law and economics is then used to make a choice in the real world) are based on the idea that there would exist a scientific “right” way to approach legal issues and decision making. According to this perspective, all issues (legal, political or scientific) should be addressed using the same method and the same scientific rationality. If we deviate from this very modern (and utopic) conceptualization to stress an inherent difference between practical reasoning and scientific reasoning, it is impossible to deny the relevance of law and economics for practical decision-making in the realm of law. This approach will also force us to reconsider the relevance and practice of law and economics.

This chapter explores the question of whether and if so how different disciplines may be enriched from the theories and practices of other disciplines. In this instance, the paper explores how lessons may be shared between law and economics on the one hand and international human rights law on the other. The paper addresses the question of the suitability and benefits to international human rights law of the law and economics methodology. This is in response to the emerging narrative that attributes considerable adverse human rights impacts to liberal economic methodology. The lesson from this section is to highlight the tension between the “sacredness of the market” and the “sacredness of humani dignity”. From this tension, the paper assesses some of the ways in which economic theory may be employed to enrich international human rights law and vice versa, that is to say, how international human rights principles and lessons may be employed to enrich our understanding and application of economic theory. The chapter then interrogates one of the most recent developments in the international human rights law field, i.e., business and human rights as a reflection of this reconciliation between microeconomic methodology and human rights principles.

This chapter analyses the relationship between efficiency and fair access to healthcare. The principle of efficiency is one of the guiding principles in the Swiss Health Insurance Act. However, the regulatory framework around the Swiss mandatory healthcare system is equally concerned with the access of sick persons to needed medical care. The fact that the Health Insurance Act pursues these two regulatory goals raises the question of whether there is a potential goal conflict between efficiency and fair access to healthcare. This chapter therefore examines in depth how the Swiss Health Insurance Act strikes a balance between the two regulatory goals. Finally, it will be shown that the relationship between efficiency and fair access to healthcare is much more complex than a simple trade-off. It is ultimately a matter of balancing interests and giving different weight to different objectives.

This chapter focuses on the ‘court reform’ in Poland, in particular the restoration of the so-called small courts in 2015. Previously most of such courts were merged into larger entities, but due to the political pressure, they have been restored. The aim of such restoration was to improve access to courts for residents of rural and small-town areas. Using a two-stage test procedure combining non-parametric Data Envelopment Analysis and Tobit regression, we observe that the change was associated with a decrease in the efficiency of those larger courts from which the new courts were separated. It appears that the reintroduction of the small courts was not driven by efficiency but by political considerations.

One of the most iconic phrases on sharing is the Swedish proverb “Delad glädje är dubbel glädje; delad sorg är halverad sorg.”—“Shared joy is a double joy; shared sorrow is half a sorrow.” The focus in this chapter will be on the positive side of this saying, on the value-multiplying effect of sharing, which is a mechanism that connects reciprocity with efficiency. Despite the widely known and accepted general benefits that come from sharing as an ethical deed, attempts at operationalizing, quantifying, and testing–relative to its anticipated potential—are few and far between. This chapter thus contains three parts. First, the theory around sharing, reciprocity and value multiplication, with the review of the literature, as well as proposed systems of equations inclusive. Second, an empirical section, wherein the statements (through the remote connections drawn) will be tested on data. Third and finally, a discussion of the findings ensues, proposing behavioural foundations as reasons for the phenomenon of sharing as value multiplication, including an outlook in the form of further research opportunities.

Many people think that structuring at least some of our organizations in a hierarchical way is inevitable, even in modern liberal democracies. When trying to justify this practice, the notions of desert and merit have historically played a major role. However, in recent times, most philosophers have been deeply sceptical about these notions, instead attempting to justify hierarchies by referring to considerations of efficiency. I argue that this comes at a price. More specifically, I argue that although we neither need to nor should refer to merit to justify the mere existence of hierarchies, the notion provides important justificatory resources within hierarchies, i.e., regarding who occupies which position and how the people in a hierarchy should relate to each other. We thus have reason to be hesitant to discard merit altogether when it comes to the of justification of hierarchies.

In this chapter we examine the preference-shaping power of meritocratic competition. On the centenary of Frank Knight’s influential thesis that systems of competitive selection can cause pervasive shifts in our values, we use recent advances in behavioural economics and psychology to develop this philosophical assertion into a more structured critique of meritocratic institutions. Drawing on Knight’s insights on the social context-dependence of preferences, we recommend that the use of meritocratic selection be subjected to public, iterative analysis that takes advantage of the norms of deliberative democracy. Meritocracy has notable strengths, including its emphasis on the priority of equality of opportunity and its direction of social activities towards efficiency. But even at its best, it can exercise a subtle and domineering effect on our values and our perceptions if it is applied excessively. In understanding where competitive norms can be deployed to positive effect, and where they might do more harm than good, we better equip ourselves to determine meritocracy’s proper boundaries.

Many share the view that even though gross inequalities of wealth are something to worry about, it makes a difference whether or not they are accompanied by substantive equality of opportunity. If people or their children are able to climb up and down the economic hierarchy, inequality is no longer deemed so objectionable. In this chapter I examine the soundness of this common view. I argue that against the backdrop of acute economic inequality, equal opportunity and mobility might be less morally significant than we often assume.

Meritocracy is the hallmark of our modern day societies. It is widely believed, and also empirically established, that meritocratic systems outshine non-meritocratic ones. Meritocratic individuals, on average, tend to perform better. Meritocracy takes subjective elements, such as chance, and luck out of the equation, and seeks to reward those with intelligence, and fortitude. From the Silicon Valley in the US, Singapore’s political and economic growth, to the rise, and the sustenance of the big pharma in Switzerland, meritocracy has consistently nourished these economies to catapult them to the world’s leading economies, and innovation systems. The meteoric rise of Singapore from a resource-deprived and newly independent country (in 1959) to the world’s fifth richest Nation State (in 2022) may be attributed in part to its unique, meritocratic political system. What then is this meritocracy? Is there one standard understanding of meritocracy, or does it vary by the State, the context, or is it simply a narrative of the times that we live in? Is there a correlation between meritocracy and inequality? This research article discusses the nature of meritocracy, and how the fallacies of meritocratic societies be remedied to ensure a balance between meritocracy, egalitarianism, and justice. The article discusses the foregoing issues against the backdrop of the fast-rising Generative Artificial Intelligence, that just like meritocracy, contributes to growth, while simultaneously exacerbating the societal inequalities (and its accompanying discontent). From a normative perspective, this research suggests a Scandinavian approach to balancing wealth creation with a more positive and detailed welfare-state institution that will not only foster increased social trust; it will also ensure that those with “merit” are able to exercise it with “empathy” in the age of Generative AI.