ELFARE CONOMICS FOR APITALISTS HE CONOMIC …cardozolawreview.com/content/33-6/Campbell.33-6.pdf · ticular, in Richard A. Posner, Utilitarianism, Economics and Legal Theory,

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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. Rudi-mentary 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 par-ticular, 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 Sympo-sium on Efficiency as a Legal Concern, 8 HOFSTRA L. REV. 485 (1980). Posner’s principal con-tribution to that symposium was Richard A. Posner, The Ethical and Political Basis of the Effi-ciency 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 Rich-ard Posner that he has since “clearly played the major role” in the de-velopment of law and economics,2 it now seems entirely without inter-est. 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 rea-soned thought: “it would be a mistake to allow philosophy to deflect us [from wealth maximization], just as it would be a mistake to allow phi-losophy 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 no-tions, but that is because that stance dispenses with the drawing of ra-tional distinctions. This can all be put to one side.

Though he has given up trying to make a rational statement of wel-fare maximization, Posner has never given up the sentiment that lies behind it, and that sentiment, and the muddle that it generates, are im-portant 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 intermit-tently 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: RICH-ARD A. POSNER, ECONOMIC ANALYSIS OF LAW (8th ed. 2010). Perhaps the most striking exam-ple 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 mid-1980s, is perceptively reviewed in KLAUS MATHIS, EFFICIENCY INSTEAD OF JUSTICE?: SEARCH-ING 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 Con-ference Papers, in COST-BENEFIT ANALYSIS: LEGAL, ECONOMIC, AND PHILOSOPHICAL PER-SPECTIVES 317, 319–20 (Matthew D. Adler & Eric A. Posner eds., 2001).


2012] W ELFARE ECO NO M ICS FO R CAPITALISTS 2235

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 re-distributive economic and social policies as part of what Posner be-lieved 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 eco-nomics, 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 re-quired now.

Seeing this allows us, not to straighten out the muddle of welfare maximization, which, muddle being the essence of the concept, is ine-luctable,6 but to criticise Posner for pursuing, not merely a sometimes ethically repugnant policy, but, more importantly because more influen-tially, an economically incompetent one. The reason this criticism is worth making is that Posner still, as he has ever done, gives very influ-ential 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 remark-able. 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 Eco-nomic Efficiency, 1 INT’L REV. L. & ECON. 5 (1981). 7 RICHARD O. ZERBE JR., ECONOMIC EFFICIENCY IN LAW AND ECONOMICS 293 (2001).



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 ini-tial 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, eco-nomics 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 associ-ated with Pareto, as developed by Robbins, Hicks and Allen and Samu-elson,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 liber-al political philosophy which respects freedom of choice, neither properly came to terms with the fact that, at its heart, utilitarian eco-nomics 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 satis-factions objectively perceived to be conducive to happiness over satis-factions 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, ECO-NOMICS 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 skepti-cism has come the recognition that a cardinal measure of utility is in any case unnec-essary; 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 ES-SAYS ON ETHICS, RELIGION, AND SOCIETY 203, 209 (John M. Robson ed., Univ. of Toronto Press 1969) (1863).



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 val-ues of goods. The impossibility of coherent economics is most striking-ly 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 cor-rect 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 theo-rem of welfare economics tells us that, under general competition, goods will be exchanged whenever there is a mutually beneficial possi-bility 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 an-other person.18 At this point of Pareto optimality, the market is in equi-librium because there are no further mutually beneficial exchange op-portunities and, vitally importantly, it has been brought there by the working out of voluntary exchanges which automatically identify the

14 See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 49 n.4. 15 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 LEGISLA-TION 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 PA-PERS OF KENNETH J. ARROW 290 (1983) (“Every competitive equilibrium is Pareto efficient.”).



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 be-cause 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 pos-sible, with the values of the market economy seems to have dawned on Posner after 1975. Particularly, in his 1979 paper Utilitarianism, Eco-nomics and Legal Theory, he distinguished utilitarianism from econom-ics—“two systems of thought,” he told us, he had “until recent-ly . . . insufficiently distinguished,”20—in order to put forward wealth maximization as the normative basis of law and economics: “[t]he im-portant question is whether utilitarianism and economics are distin-guishable. 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 posi-tion he himself had held only a little while earlier was expressed in stri-dent 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 per-

19 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



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 under-lying criticism of utilitarianism’s consequentialist trumping of the au-tonomy 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 can-not 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 Philo-sophical 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 Ben-tham’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 MANAGE-MENT IMPROVED (1812) are unacceptable to a modern sensibility, which finds it hard to distin-guish 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 Haunt-ed 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 MAR-KETS: 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 supe-rior 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



Though, as I have said, Posner appears to have initially been una-ware of the centrality of the critique of cardinalism to neo-classical eco-nomics, the first alternative to utilitarianism he considered was the “Pa-reto approach,”33 which, surprising as it first seems to say, he immediately rejected, and, as we shall see, continued to reject through-out the formulation of the concept of wealth maximization. This is sur-prising 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 socie-ty’s wealth.”34 In a clear echo of Weber’s account of the initial for-mation of capitalism, Posner tells us that wealth maximization is noth-ing “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 self-description 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 facilitat-ing 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 mor-phine 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 satis-fies 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.



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 transac-tion costs are low, the market is, virtually by definition, the most effi-cient method of allocating resources,”43 and though he does sometimes say things to the effect that “where market transaction costs are prohibi-tive” is an “exceptional case,”44 wealth maximization is based on deny-ing 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 op-timization, 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 Posner, Wealth Maximization Revisited, supra note 1, at 95. 42 Posner, supra note 3, at 384. 43 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, Eco-nomic Analysis as a Potentially Defective Product: A Buyer’s Guide to Posner’s Economic Anal-ysis 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 techno-logical 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



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 en-dorsement of free markets that Posner argues that a wealth maximiza-tion 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 fre-quent indeed. Posner has maintained this position throughout his subse-quent 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 superi-ority.”58

What, then, is the definition of efficiency Posner believes is operat-ing in economics? I think it is undeniable that in Utilitarianism, Eco-nomics and Legal Theory Posner believed that economics was caught in a debilitating choice between the two unsatisfactory alternatives of utili-tarianism 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.



making welfare economic judgments whilst avoiding value-laden inter-personal 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 pre-scriptions by economists,64 Posner has normally employed the terms “Kaldor-Hicks efficiency” and “wealth maximization” interchangea-bly,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 in-tends 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 con-clusion to be reached that the reallocation is optimizing. As Kaldor him-self 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 See R.F. Harrod, Scope and Method of Economics, 48 ECON. J. 383, 395–97 (1938). 60 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, MOR-ALS 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.



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 communi-ty 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 opin-ion.”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 con-sent, 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 Pare-to 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 profes-sional 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 com-pensate the losers, whether or not they actually do so. This is equiva-lent to wealth maximization.75

Posner has two types of justification for coercive wealth maximiza-tion. 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 maxim-ize 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 POS-NER, 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.



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 Pro-fessor 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 ethi-cally 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 Pos-ner gives for questioning the “Pareto approach” is that “the voluntary-transaction 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 Id. at 51–56. 79 Id. at 87. 80 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 maximiza-tion 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 welfar-ist 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.



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 alloca-tion of goods, could be established on the basis of another distribution. About the ethical ranking of possible Pareto optima, neo-classical eco-nomics 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. Unargua-bly, there is something highly questionable about this, such that at-tempts 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 extraordi-nary 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 contribu-tion to the production of wealth as he defines it. Wealth maximization is, fundamentally, a policy which will maintain distribution on this ba-sis. 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 of-ten translate into differences in productivity, are the result of a natu-ral lottery and therefore ought not to guide entitlements. But if dif-ferences in entitlements are indeed genetic, as the argument assumes, then liberal and radical arguments about the exploitiveness of capi-talist society are undermined. A genetic basis for intellectual differ-ences 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 institu-tions. It also implies that such inequality is apt to be strongly re-sistant 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.



We have reason to believe that markets work—that capitalism deliv-ers 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 opportuni-ty obtains, to be wholly implausible. I have had my say on this previ-ously88 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 ac-count 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 coer-cive. 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 ex-pressed 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 liber-al 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 con-notations of his deprecating attitude towards Pareto optimization be-cause wealth maximization “allows a reconciliation among utility [and]

86 POSNER, supra note 3, at 382, 384. 87 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.



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 ex-aggerated. As wealth maximization is methodologically similar to Kal-dor-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 wel-fare 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 ap-proach . . . with the Pareto approach.”97 If, as Coleman allows, “Pos-ner’s rule . . . generates outcomes that are both Kaldor-Hicks efficient and Pareto optimal,”98 this “squaring of the circle”99 of welfare econom-ics 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 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 115. 94 Id. at 66. 95 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.



consent which may be “implied”101 from what he calls “ex ante com-pensation.”102 The first example Posner gave in The Ethical and Politi-cal Basis of the Efficiency Norm is of “a person who buys a lottery tick-et 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 similar-ly 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 “in-surmountable” “technical obstacles” to the determination of liability regimes by “an actual contract,” that is, by explicit consent.105 “Assum-ing,” 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 vir-tue 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 criti-cisms of the “distortion of the proper meaning of the word ‘consent’” employed in that argument as a means of generating political obliga-tion.111 Posner’s treatment involves two novelties. The first is the em-ployment of the term ex ante in this context. The second shamelessly

101 Id. at 96. 102 Id. at 94. 103 Id. at 94. 104 See id. at 94 n.18. The paper is Posner, Epstein’s Tort Theory: A Critique, supra note 1. 105 Id. at 460. 106 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 95. 107 Posner, Epstein’s Tort Theory: A Critique, supra note 1, at 464. 108 See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 96. 109 See id. at 103–06. 110 See POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at Part II. 111 J.P. PLAMENATZ, CONSENT, FREEDOM AND POLITICAL OBLIGATION 27 (2d ed. 1968).



paraded as a fundamental improvement over Rawls despite it taking only one or two pages to state,112 is the replacement of the credible phil-osophical anthropology of the sense of justice, which was one of Rawls’ principal achievements,113 with the views of the curious wealth maxim-izing 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 de-rived 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 estab-lished. 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 fol-lows not that we must abandon the principle of consent but that we should be satisfied with implied (or more precisely, perhaps, hypo-thetical) 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 mim-icking,” 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 ex-

112 See POSNER, ECONOMICS OF JUSTICE, supra note 1, at 59, 99–101. 113 See RAWLS, A THEORY OF JUSTICE, supra note 15, at 41. 114 See supra note 80 and accompanying text. 115 POSNER, ECONOMICS OF JUSTICE, supra note 1,at 100–01. 116 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.



change took place—to mimic or simulate the market . . . . [I]n other words”122:

An important normative question . . . is whether and in what circum-stances 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 sys-tem 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 boat-ing, we might try to determine, using whatever quantitative or other data might be available to help us, whether in a world of zero trans-action 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 interper-sonal comparison of satisfactions involved in judging any policy de-signed to increase the sum total of wealth just because any such poli-cy could be carried out in a way as to secure unanimous consent . . . . [I]f the increase in total income is sufficient to compen-sate for such losses, and still leaves something over to the rest of the community [it can] be said to be “justified” without resort to inter-personal 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 POSNER, ECONOMIC ANALYSIS OF LAW (8th ed.), supra note 1, at 20. 123 Id. 124 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.



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 opti-mal 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 com-pensation, no one would lose; plus, there would be a surplus to be dis-tributed. 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 ob-stacle faced by Kaldor-Hicks is one of economic epistemological prin-ciple, 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 expendi-ture. 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 sub-jective 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-



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 trans-fer, 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 identifia-ble 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 decid-ed—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 analy-sis . . . .”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 eco-nomics.

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 eco-nomics 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 (Fran-cesco 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 understand-ing 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).



Kaldor-Hicks seeks to optimize total welfare but, since it is impos-sible to maintain that any policy based on it actually does this, the de-termination of which purportedly optimizing transfers will actually be made is a function of the political process, guided by cost-benefit analy-sis.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 govern-ment in order to implement particular transfers in pursuit of their partic-ular improving projects. Far from approving the left-wing transfers typ-ically 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 en-dorse 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 relin-quishment of the claim that the political content of wealth maximization can be philosophically defended has not at all prevented him from re-peatedly working that content into his verdicts on all the things he sees fit to evaluate from the perspective of economic efficiency as he under-stands 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 do-ing.134 He is misdescribing allocations secured by a coercion which is the opposite of consent. This is theoretically possible only because, de-spite 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



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 opera-tional device for achieving Pareto superiority, the voluntary transaction, which by definition makes both parties better off than they were be-fore.”137 This is to reduce Pareto optimization to a technique for achiev-ing 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 conse-quence being that, “If the utilitarian could devise a practical utility met-ric, 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 regu-lar, 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 wealth-maximization sense,”143 when Nozick’s attack on patterning is an im-portant 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.



In all that has gone so far, I have been highly critical of the short-comings of Posner’s way of formulating the concept of wealth maximi-zation. 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 inter-est 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 max-imization, 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 econ-omists say Pareto but use Kaldor-Hicks in making welfare judge-ments.”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 LOUIS ALTHUSSER & ÉTIENNE BALIBAR, READING CAPITAL 24–30 (2d ed. 1977). 145 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.



IV. 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 im-portant 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 dis-cusses 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 pur-chase 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 neighbor-ing 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 behav-ioral 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.



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 whatsoev-er for this conclusion!157

This is quite typical of Posner’s applications of wealth maximiza-tion, 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 princi-ple”), everything else is a matter of arguing about the most effica-cious means to that end. Is there a duty to obey the law? It depends

155 Id. at 69. 156 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 maximi-zation 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 regis-ter a wholly inconsistent agreement with Mill’s position. See Posner, supra note 39, at 199. Pos-ner’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.



on the consequences for aggregate utility. Can governments legiti-mately 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 utili-tarianism 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, es-pecially the English shopkeeper, as the normal man. Whatever is use-ful 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 so-lutions to allocative problems when Pareto optimizing exchange was not possible, he did not advocate this in the sparks case. Regarding the cor-rect 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, non-market 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 Pigou-vian 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 BARRY, supra note 81, at xxxv; see also infra note 207, and accompanying text. 160 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.



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 criti-cism of the Pigouvian tradition. All empirical markets have positive transaction costs and therefore cannot possibly conform to the condi-tions for general equilibrium which will yield a Pareto optimum. If de-parture from this theoretical position is enough to identify market fail-ure, 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. Alt-hough, in anything but the longest term, Pigou wanted only to make piecemeal interventions in a fundamentally market economy, the uni-versality 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 mar-kets 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, trans-action costs being ubiquitous, this is just not good enough. Posner must tell us the basis on which he picks, from an infinite range of possibili-ties, 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 seri-ous 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 fail-ure of the market,” it was perhaps inevitable that such development would not take place. Posner cannot be blamed for this widespread er-ror, 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 is-sues. Their extensive margin being but weakly constrained by the ne-cessity 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 See supra text accompanying notes 34, 57. 167 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 80.



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 noth-ing 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 volun-tary choice is imperfect does not normally make us turn to telling peo-ple 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 advo-cacy 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 institution-al, 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 mar- 168 See Coase, supra note 162, at 118–19. 169 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.



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 maximiza-tion,175 and this allows and requires Posner to substitute the predilec-tions 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 mar-kets at all.177

We have seen Posner take this line with the railway sparks exam-ple that he treats as hypothetical, but let us return to the favorite exam-ple—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 hy-pothetical 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 nonmar-ket but arguably wealth-maximizing institutions, such as the negli-gence system of automobile accident liability, on the [wealth maxi-mization] 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 tech-

175 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 perva-sive market failure seriously” is, as it were, exactly wrong about Posner. See BRUCE A. ACKER-MAN, 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.



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 negli-gence . . . 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 re-mained 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 alterna-tive, based on actual contracts, to liability for negligence causing per-sonal injury, especially in relationship to motor accidents. This alterna-tive 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 consid-er the compensation debate, it is unsurprising that, the die having al-ready 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 Posner, Epstein’s Tort Theory: A Critique, supra note 1, at 463. 180 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 Rail-road 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 gen-erally 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.



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 liabil-ity. 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 exam-ple of the disregard of actual markets at the heart of wealth maximiza-tion.

Behind this example lies Posner’s extremely influential argument that the Hand formula185 articulates a commitment to wealth maximiza-tion, 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 recip-rocal 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 deci-sions about liability, it is of very limited use.189 Its results entirely de-pend 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 for-mula in negligence judgments. But whereas it is arguable that it is im-possible 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 in- 184 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).



surance market. Whatever one’s view about imposing liability for neg-ligence, it is a good argument against it that its use involves irremedia-ble 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 im-portant 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 econom-ics movement.”191 The political influence of Posner’s views is some-thing upon which I insist. But as welfare maximization has nothing to do with free markets, and indeed expresses a thoroughgoing commit-ment 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 mean-ing is ideological in that it involves an almost complete misdescription of Posner’s actual practice of, until recently, advocating an entirely neg-ative 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 cer-tain 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 counterproduc-tive public expenditure for wealth maximization, it would be irrational to deny the value of such removal. Now that the fading neo-liberal he-gemony has rightly been brought into public obloquy by the current economic crisis, we are in understandable but nevertheless severe dan-ger 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 POSNER, ECONOMICS OF JUSTICE, supra note 1, at 62. 191 RICHARD A. POSNER, FRONTIERS OF LEGAL THEORY 35 (2001).



economists would say, the marginal product is negative.”192 But, what-ever 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 regu-lation but should be one of reregulation in order to establish and main-tain 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 inter-vention.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 elimi-nation of regulation.”195

One of the issues Posner considered in Natural Monopoly and Its Regulation was the then emerging community antenna television indus-try, which he believed might be “an instance when the bargaining pro-cess might be an effective substitute for regulation.”196 Posner expanded on this shortly afterwards in one of his first papers advocating a deregu-latory 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 frequen-cies 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, NAT-URAL 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.



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 “regula-tion.”203

To the very small extent that I understand the issues, Posner’s neg-ative 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 fu-ture. 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 regu-lation and say almost nothing about what positively should be done. It is not enough to say that auctioning should be “permitted” or “encour-aged.”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 class-room 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 Coase, supra note 169, at 21. 200 Id. at 25–26. 201 Posner, supra note 196, at 111. 202 Id. at 98. 203 Id. at 126–27. 204 Id. at 127. 205 Id. at 126. 206 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).



form. Not paying sufficient public attention to the institutional design necessary to create an actual market leaves the legal framework of eco-nomic action largely to be determined by those who hold power in ex-tant corporate capitalism and, of course, if all we are doing is deregulat-ing, 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 incompe-tent 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 Mat-thias 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 con-cept 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 misdescrip-tion 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 Campbell & Klaes, supra note 169. 209 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, endorse-ment 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,



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 Pigou-vian 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 interven-tion as it had been for him formerly to embrace deregulation. Both are forms of a policy of corporate welfare—a welfare economics for capi-talists. 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 down-side 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 Eco-nomic Crisis, and the Future of Law and Economics, 12 AM. L. & ECON. REV. 265, 268 (2010).



in A Failure of Capitalism. I was aware of another somewhat tangential article he wrote which makes reference to elementary financial theo-ry,217 and partially aware of a more substantial set of articles on invest-ment trusts he wrote with his then colleague, the distinguished trusts lawyer John Langbein,218 though I must confess that I only now appre-ciate their significance.

What is striking about these papers is the utter naïveté of their be-lief in the beneficent operation of the financial markets. The sort of views involved are now so familiar even to the general public as to re-quire 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 obliv-iousness 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 over-valued securities to sell. These opportunities would attract more and more investors into an active strategy, and this process would con-tinue until an equilibrium was re-established at which trades oc-curred 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. Lang-bein & 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 COL-LECTED 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).



The imaginary horrible that is the centrepiece of the Humbach-Dresch article is simply inconsistent with the competitive charac-ter . . . 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 mar-kets 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 com-mon-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 finan-cial services industry turned on a failure to “differentiate between bank-ing and other regulated industries, such as railroads and airlines”224 be-cause “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.



prepared to countenance the development of products they never under-stood, 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 trad-ing, 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 macroeco-nomic 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 Rich-ard 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 finan-cial market was deregulated, although he now sees this to be a mistake because this is not an “ordinary industry,”226 and calls for welfare eco-nomic intervention in pursuit of the public good of financial stability,227 on the basis of a continuing and complete misunderstanding of the na-ture of the issues.228 The work of establishing a welfare-enhancing framework for open-ended decision-making on financial markets re-garded 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 deter-mine 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 deregula-tion 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 pro-gress 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 opti-mism. 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 excep- 226 Posner, supra note 216, at 268. 227 See POSNER, supra note 212, at 248. 228 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).



tional step is what it will take to stimulate the necessary revolution in what we believe to be “the workable, the practicable, and the accepta-ble.”229

CONCLUSION

I started this Article with the unpromising observation that its sub-

ject, 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 econom-ics. Beginning with a conception of economics as a form of utilitarian-ism which could be maintained only by someone apparently then igno-rant of the ordinal revolution, Posner put forward wealth maximization as a novel solution to the problems caused by the clash between objec-tive 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 ad-dress. 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 cer-tain 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 ZERBE, supra note 7, at 293. 230 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).



legitimacy of coercive transfers, so much so that I wish we could dis-pense with them, and hence have found the promise of Posner’s argu-ment for consent to wealth maximization very attractive. But that prom-ise 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 coer-cive transfers we adopt, we should be clear that those transfers are coer-cive. 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 in-tended,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 cost-benefit 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 crite-rion 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 con-stitutional framework which can legitimately, because openly, underpin both optimizing markets and collective expenditure.

234 See Robert E. Lucas, Econometric Policy Evaluation: A Critique, 1 CARNEGIE-ROCHESTER 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 conclu-sion, 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 econ-omist 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.”).

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