Academic journal article Law and Contemporary Problems

A Free-Market View on Accidents and Torts

Academic journal article Law and Contemporary Problems

A Free-Market View on Accidents and Torts

Article excerpt



Since the early 1960s, the activity of legislators has attracted increasing attention from the economics profession. In particular, many economists of the modern law-and-economics tradition have taken a consequentialist approach, focusing on how to utilize lawmaking and judicial rulings to efficiently obtain social goals. (1) Under the neoclassical-law-and-economics approach, for example, the politician should select the social goals and the economist should identify those instruments--including taxation, regulation, and other encroachments on private-property rights--most appropriate for obtaining these predefined social goals. (2)

The neoclassical-law-and-economics literature has not aroused great enthusiasm among free-market supporters. (3) Free-market advocates hold that all

individuals have a right to be free from coercion and have a duty to not violate the liberty and property rights of others. In this light, the role of government is to protect individuals from violence, while the role of the judiciary is to enforce contracts and to adjudicate the use of violence. The state cannot force individuals to consume public goods, and the judiciary must abstain from introducing regulation and assigning property rights. (4) Thus, free-market supporters feel uneasy about tampering with private-property rights and engaging in extended policy making, even if such policy making would aid in the efficient achievement of social goals.

Guido Calabresi is often associated with the neoclassical-law-and-economics tradition. His 1961 article, Some Thoughts on Risk Distribution and the Law of Torts, was one of the seminal works that gave rise to the modern law-and-economics research program. (5) Yet Calabresi--as he expresses his view on accidents and torts in that article--offers key methodological insights that keep him distanced from the mainstream neoclassical tradition and that should in fact be appreciated by free-market supporters. In particular, Calabresi is wary of rule making and rule overhauling that is driven only by efficiency concerns. (6) He is also reluctant to accept technocratic planning even in the presence of uncertain costs. In a word, Calabresi's contribution is an interesting still-neoclassical alternative to the traditional Chicago view. (7) Embedded in Calabresi's view is a better understanding not only of the distinctive features of the free-market approach to liability, but also of other issues currently debated, such as the consequences of the Lockean view of property rights and the role and limits of institutional analysis. (8)

To illustrate this claim, in the next subparts I briefly clarify the nature of the costs to which liability applies--the focus of Calabresi's 1961 article. (9) I also review Calabresi's arguments on how to legislate for efficient cost allocation in the realm of accidents and torts. I then proceed in parts II and III to investigate the free-market perspective regarding two sets of situations in which uncertain costs play a role--respondeat superior and limited liability--and assess the difference between the free-market perspective and Calabresi's approach. I conclude in part IV by drawing attention to key issues for the future of institutional economics broadly understood.

A. On the Nature of Uncertain Costs

Uncertainty plays a crucial role in the free-market context, because it creates opportunities for entrepreneurial endeavors, which in turn are the handmaiden of growth. Free-market supporters particularly draw on Frank Knight's Risk, Uncertainty and Profit to classify uncertain costs in three categories. (10) The first are "risky costs": costs the nature and probability of which is known. For example, most drivers know there is chance their car will be stolen during the next six months and that, as a consequence, the cost of using that car might suddenly increase, because when the theft occurs the residual value of the vehicle drops to zero. …

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