Coleman, Jules L. - Risks and Wrongs
Coleman, Jules L. - Risks and Wrongs
Coleman, Jules L. - Risks and Wrongs
Risks
and wrongs
JULES COLEMAN
YALE LAW SCHOOL
OXFORD
UNIVERSITY PRESS
Thisbookhasbeenprinteddigitallyand producedin a standardspecification
in orderto ensureits continuingavailability
OXFORD
UNIVERSITY PRESS
20
21 430
Notes 441
Index 499
ill
Preface
xi
Acknowledgments
xvii
Chapter 1
02: A social state is Pareto optimal iff there are no social states
Pareto superior to it.
D3': S' is Pareto superior to S iff no one is worse off in S' than in
S, and at least one person is better off in S' than in S.
Or,
I
I
I
I
I
I
I
I
.._ ___________ y
s
Un
Figure 1.1
1.10 AN ASSESSMENT
43
Chapter2
Competition and cooperation
72
Chapter3
Law and markets
86
Chapter 4
90
Efficiencyand marketfailure
markets fail, will we know what needs to be rectified by our
cooperative practices.
91
The market paradigm
termine what the outcome of exchange would have been in
the absence of transaction costs. Buchanan denies that any
such question can be relevant or meaningful. The interaction
that conventional theory treats as inefficient takes place within
a framework of exchange, that framework includes positive
transaction costs. Of what possible value would it be to those
parties to determine what would have been efficient in the
absence of transaction costs. In Buchanan's view, the correct
question is, What would have been efficient in the framework
in which the agents are in fact located,that is, the framework of
positive, not negligible or zero, transaction costs?
In Buchanan's view, conventional theory bars itself from
responding to market failure problems in the following way.
"Yes, I realize that there are externalities, high transaction
costs, and the like in our current environment of choice and
interaction. Still, I want to know what would be the efficient
solution in this context." The traditional economist is barred
from consistently saying any such thing because as soon as
she tries to determine what would have been efficient under
current circumstances, the first thing she does is to ask what
the outcome of exchange would have been in the absence of
transaction costs and externalities.
But that was not the question being asked in the first place.
The question being asked was, What is efficient given trans-
action costs and externalities? Thus, Buchanan believes that,
whether they know it or not, conventional economists sim-
ply cannot talk meaningfully about efficiency under condi-
tions other than the absence of transaction costs, externali-
ties, and the like. The very notion of efficiency presupposes,
in their view, the absence of transaction costs, and that fact
alone makes the orthodox approach virtually useless.
In contrast, Buchanan's view is that what traditional econ-
omists refer to as transaction costs are really part of an insti-
tutional structure or a framework of exchange. Efficiency is
defined relative to such frameworks. Therefore, there is no
conceptual or analytic difficulty (in theory) in defining effi-
ciency under conditions of high transaction costs and exter-
nalities. If Buchanan is right, we should be able to define and
92
Efficiencyand marketfailure
talk about efficiency under precisely those conditions under
which standard theory believes we can experience only inef-
ficiency, that is, under conditions of externalities and posi-
tive transaction costs.
If we can talk meaningfully about efficient outcomes within
frameworks of exchange riddled by high transaction costs,
then we can have no interest in efficient outcomes attainable
under conditions of zero transaction costs and no externali-
ties. The outcome of exchange under ideal conditions is an
efficient allocation within that institutional framework. That
can hardly matter to agents contemplating courses of con-
duct under very different conditions. Thus, the major impli-
cation of Buchanan's view is the utter irrelevance of perfect
competition as a definition of market success and, therefore,
as a reliable barometer of market failure.
96
Efficiencyand marketfailure
scious ploy designed to shift attention away from decisions
within the rules to a discussion of rules, as well as a con-
scious effort to emphasize the role of voluntary choice within
economic analysis.
Make no mistake, for Buchanan the normative punch of
economic analysis is borne by the voluntariness of exchange,
not its efficiency. Although other economists are reduction-
ists of one sort, always trying to reduce deontic categories
like autonomy to arguments in utility functions and, ulti-
mately to considerations of efficiency, Buchanan is a reduc-
tionist of the opposite sort, trying always to capture the es-
sence of efficiency within the moral category of voluntary
choice. For when institutional frameworks are to be com-
pared with one another, the test of their relative efficiency is
voluntary agreement.
Because the choice among rules or institutional frame-
works is more of a social choice than an exchange, the form
of voluntary exchange that is relevant to their assessment is
consent. (It is in this important sense that Buchanan believes
politics must be understood in the model of market ex-
change, and it is for this reason that he is drawn to unanim-
ity as a collective decision rule. 6) Notice, moreover, that in
determining whether a set of rules is more or less efficient
than an alternative, it is consent that does the work. If the
relevant decision group consents to framework R rather than
P then R is efficient and P is not. It would do no good to
point out that from some more traditional economic perspec-
tive, say, welfare or utility maximization, Pis more efficient
than R. If that is so, then normally we might expect people
to choose P over R. If, for whatever reason, they chose R
over P, then that's the end of it: R, not P, is efficient.
97
The market paradigm
Buchanan as an economic contractarian. But, unlike other
economists who have emphasized either the efficiency or ra-
tionality of rules, Buchanan is concerned exclusively with
whether or not people consent to them. Thus, unlike the the-
orists described in Chapter 1 who I have elsewhere called
market contractarians, 7 Buchanan is what I would call a lib-
ertariancontractarian.Thus, in my view, the Buchanan of The
Calculus of Consent, the seminal work in twentieth-century
contractarian theory, is really his coauthor, Gordon Tullock. 8
The economic contractarianism of that book is simply not
representative of the views Buchanan ultimately defends.
Buchanan and conventional economic analysts develop the
relationship between autonomy and efficiency in exactly
contrary ways. Orthodox economists believe that efficiency
can be defined as a property of social states; and given their
definition of it (especially Pareto superiority), it follows logi-
cally that people would consent to efficient rules. Consent
follows from efficiency. Buchanan puts the matter in exactly
the opposite way. What people consent to is efficient. Effi-
ciency follows from consent.
There are many problems with Buchanan's view, most of
which result from the identification of efficiency with vol-
untary exchange and others of which result from an inade-
quately fine-grained analysis of institutions. The impulse to
move the discussion from particular outcomes to the level of
rules is a sound one, however. The idea that efficiency is
relative to frameworks for trade is an even more important
insight.
Following Buchanan part of the way, then, we can define
market failure as relative to particular institutional settings,
though it will remain to distinguish those features of circum-
stances that are properly characterized as institutional from
those that are not. Now that we have a potentially more use-
ful starting point for characterizing market failure, we can
ask ourselves what market failure consists of? That is, what
fails when markets fail?
98
Efficiencyand marketfailure
102
Chapter5
The rational agreement
Player B
Performance
Contract I Contract 2 Nonperformance
Contract 1 Status quo B free rides
C1 D NPb
NPa NPa D
Figure 5.1
NPa
•
Figure 5.2
110
The rationalagreement
acerbating, as we shall see, potential defection and division
problems.
Contracting to secure mutual gains consumes transaction
resources that are scarce and costly to obtain. In the conven-
tional law and economics tradition, transaction costs are as-
sumed to be low in contracting situations, so that parties are
able to gather all pertinent information and to assign all rel-
evant risks. 5 Because it assumes individuals have perfect in-
formation, are completely rational, and face no impediments
to entering transactions, "it would be surprising if such su-
perhumans were not ableto manage their own affairs without
the intervention of government." 6 As it happens, however,
sometimes they are not. The newer law-and-economics tra-
dition emphasizes transaction costs even in contracting situ-
ations. Because it assumes that individuals have imperfect
information, limited rationality, and encounter substantial
impediments in contracting, it would be surprising if such pa-
tently imperfect individuals were able to manage their affairs
without the intervention of government. As it happens, in
some cases, they do.
This discontinuity between "prohibitive" and "nonprohib-
itive" transaction costs, as I have noted earlier, is an analytic
artifice begging for elaboration. The private and governmen-
tal controls that people craft depend on the relative size of
the transaction costs involved. Because each of the three de-
cision-making problems in any relationship involves unique
hazards from imperfect information, the undifferentiated,
generic treatment of transaction costs is analytically untena-
ble as well.
111
Safeguardsand risks
a set of procedures by which these allocations are to be de-
termined. The problem is not just the cost of establishing a
set of feasible and acceptable outcomes. Even if that cost is
nil, the strategicnature of the choice may induce a noncoop-
erative outcome. 8 Strategy may require players to disguise
their true intentions in pursuit of an agreement, moderating
or exaggerating their demands based on their view of how
each will respond to the other. Thus, failure to resolve the
division problem can complicate the process of contracting
even to the point of defeating it.
Returning to Figure 5.2, the division problem arises be-
cause the players have opposite preferences regarding where
along the contract curve agreement should occur. 9 Expressed
in bargaining theoretic terms, C1, contract 1, is player A's best
hope outcomebecause it is the outcome that is: (i) most pre-
ferred by A, (ii) no worse than disagreement for B; (iii) fea-
sible; and (iv) enforceable. Similarly, C2, contract 2, repre-
sents B's best hope. The players' best hopes correspond to
opposite endpoints of the contract curve. When a concession
is defined as agreeing to an outcome less preferred than one's
own best hope, it follows that agreement requires conces-
sions. Either one player makes all the concessions required
for agreement by assenting to the other's best hope outcome,
or both players make concessions resulting in agreement at
an intermediate point on the contract curve. If bargaining
over the allocation of concessions fails, so too does contract-
ing.
Intuitively, we recognize the problem of settling on a di-
vision of cooperative gains as endemic in human behavior
and know that people resolve it when the conditions are right.
Empirical studies confirm that standards of "fair division"
sometimes guide rational agreement even in the absence of
third party enforcement. In particular, Kahneman, Knetsch,
and Thaler have shown that when unanticipated events in-
duce unanticipated divisions, they do not necessarily threaten
the economic viability of an arrangement. 10 In other words,
individuals sometimes appeal to a sense of fairness to solve
division problems when failure to reach agreement on a di-
112
The rationalagreement
vision may jeopardize an opportunity for mutual gain. Lab-
oratory experiments testing the Coase theorem demonstrate
as well that parties are able to secure jointly maximizing out-
comes, though different methods of assigning property en-
titlements influence the division of the gains. 11 Other studies
confirm the importance of the status quo in choices over di-
vision rules and the heavier weight ascribed to losses than
equivalent gains in evaluating outcomes. 12 In short, empiri-
cal studies suggest that players are often able to solve their
division problem and point to some of the relevant factors in
settling on particular divisions: the allocation of initial enti-
tlements, a sense of fairness, the relative disparity in weigh-
ing equivalent gains and losses, and so on.
Under a broad range of conditions, then, contracting par-
ties settle on distributions of the gains from trade, which
simply means that they allocate concessions. They also have
in mind which among the available points on the contract
curve they intend to safeguard by the terms of any contract.
Put analytically, a necessary condition for agreeing to a con-
tract is that its expected outcomes satisfy what may be termed
the principle of concessionrationality.13
Each of the formal models in the literature provides a dis-
tinct meaning to the concept of concession rationality. No
single point-specific solution to the bargaining problem has
gained universal acceptance. But in an abstract or general
characterization of the process of rational contracting, it is
less important to defend a particular solution to the bargain-
ing problem than it is to identify the parameters that influ-
ence the choice of rules for solving division problems. We
want a model that applies to a broad range of contractual
settings and incorporates fundamental principles universally
accepted as affecting the relative bargaining power of par-
ties.
The problem with many bargaining theories is that al-
though they take account of the parties' relative bargaining
strength, they assume away many of the other problems that
lead to bargaining failure, for example, uncertainty. Thus,
they typically yield the result that bargainers will secure a
113
Safeguardsand risks
cooperative division of the gains that reflects their initial rel-
ative bargaining strengths. This outcome is not surprising,
but because of all the evidence of noncooperation (wars,
strikes, etc.), these models are neither predictive nor de-
scriptive.14 Again, though all bargaining models view the rel-
ative costliness of conflict as affecting relative bargaining
power, many do not take into account the parties best hopes,
or aspiration levels, which influence their willingness to in-
cur costs in reaching agreement. That is inconsistent with a
sizable body of experimental evidence indicating that aspira-
tion level is positively related to bargaining power. 15
In contrast, what we call resistancetheory renders an ex-
plicit account of the conditions under which negotiations break
down, treats aspirations as part of the decision-making cal-
culus, and describes the information rational contractors re-
quire to reach agreement. The attraction of resistance theory,
then, is that it illuminates the conditions under which people
will expend resources to contract. 16As conceived in resis-
tance theory, bargainers assess the relative strengths of their
strategic positions based on the utility structure of the game
- that is, the location of the disagreement point, the location
and shape of the contract curve, and their risk and time pref-
erences. The strength with which a bargainer strives to avoid
concessions, his or her resistance, depends on the costliness
to the individual of the concessions required by the agree-
ment (the greater the concession cost, the greater will be the
resistance to the agreement), the costliness of conflict (an in-
crease in conflict's cost increases the willingness to make
concessions and diminishes resistance), and the aspiration
level (higher aspirations enhance resistance). The very exis-
tence of opposing proposals reveals conflicting aspirations.
They establish concession limits and distributional expecta-
tions based on those assessments. Only outcomes where those
limits and expectations overlap satisfy concession rational-
ity.
Formally, where Di is any bargainer i's utility from dis-
agreement (conflict); Bi is i's aspiration level or best hope -
the enforceable outcome on the contract curve that the bar-
114
The rationalagreement
gainer prefers or, equivalently, the outcome he or she most
prefers that is enforceable, feasible, and no worse than con-
flict for any other bargainer; and Ui is i's utility from a given
outcome U, i's resistance to outcome, U, Ri(U) is defined as
(3)
115
Safeguardsand risks
9 19
VA
Figure 5.3
(5)
118
The rationalagreement
find a way to eliminate or minimize the risk of defection.
This is no easy task.
A defection problem arises if either player can gain from
free riding. The magnitude of the problem depends on the
relationship between each player's unilateral defection pay-
off and the payoff from his or her least preferred point on
the contract curve, the other party's best hope outcome Ui(Bj).
In other words, a contractor's greatest incentive to free ride
arises when the agreement represents the other party's most
preferred contract. Notice, however, that a contractor has some
incentive for defection even if the agreement represents his
best hope or most preferred contract. Every unilateral defec-
tion outcome gives him a payoff in excess of any cooperative
outcome.
To guard against unilateral noncompliance, each party must
reduce the other party's incentive to defect. The power of the
incentive to defect can be mitigated in several analytically
distinguishable ways. Compliance can be made more re-
warding, defection less rewarding, or opportunities to defect
reduced or blocked. Of these, the second is the most com-
mon because the first tends to be more costly and the third
tends to be impractical given the near impossibility of remov-
ing all opportunities for nonperformance. In short, no party
will rationally agree to comply and to let the other party free
ride. But because both parties have at least some incentive to
free ride, each has an incentive to deploy resources to ensure
the compliance of the other.
Individual rationality, then, requires that an agreement be
enforceable,not just that an individual be protected against an
outcome worse than the status quo. 18 To be an enforceable
agreement, the parties must expect that each estimates a cost
of violation exceeding the gain from unilaterally defecting.
That is, no agreement on C11C2 is enforceable without pen-
alties sufficient to deter defection, termed the force of agree-
ment.19
Viewed graphically, an enforcement system that penalizes
defection displaces the defection points NP a and NPb toward
119
Safeguardsand risks
the origin, making compliance more rewarding relative to
defection. In Figure 5.3, for example, if each player faces a
violation cost that makes him indifferent between defecting
and his best hope outcome, then no points on the contract
curve will be enforceable. But if each faces a violation cost
that makes him or her indifferent between defecting and the
other party's best hope outcome, then the entire contract curve
constitutes a domain of enforceable agreements.
In general, the greater an individual's defection incentive,
the stronger must be the penalties that would succeed in
making compliance rational. Further, the greater the incen-
tive to defect, the stronger are the incentives for the individ-
ual to seek to evade or undermine an enforcement system.
Put simply, the more a person wants to defect, the harder
and more costly it will be to prevent her from doing so. Al-
though it is not rational to accept a contract that is unenforce-
able - that gives others the opportunity to defect, making a
contract enforceable requires expenditure of considerable re-
sources. The greater the incentive to defect, the greater the
resources required to prevent it.
(6)
121
Chapter 6
Safeguarding
124
Safeguarding
mand more concessions than the other will grant and the
result is conflict. Unresolved conflict does not entail that the
rationality conditions are violated. Rather, divergences from
the outcome predictable under complete information can be
examined as the expected consequences of rational actors
facing imperfect information. Bargaining with incomplete in-
formation can be both rational and unsuccessful.
If uncertainty exists, each party may benefit by manipulat-
ing information to create the appearance that conflict has be-
come less costly to him or more costly to others. That makes
the party's threats credible and signals an unwillingness to
give in. Similarly, every bargainer possesses incentives to
oversell his or her own preferred contract while denigrating
the other's preferred contract. And each possesses incen-
tives to invest in safeguards against precisely this sort of be-
havior because it threatens the divisions to which he or she
would otherwise agree.
One consequence of this analysis is that the main reason
for expending resources in contracting is to overcome some
sort of uncertainty, uncertainty that threatens the equilib-
rium solution to which rational actors would otherwise agree.
Because the possible sources of uncertainty differ in each phase
of contracting, the logical character of the costs that rational
bargainers are willing to incur to reduce uncertainty differs
as well.
125
Safeguardsand risks
ing adequate information about one another's resistances is
necessary to create an agreement that satisfies the concession
rationalitycondition.
People incur monitoring costs because they are uncertain
about the enforceability of alternative outcomes. Each bar-
gainer wants information about the consequences of the other
party's defecting. In that sense, information about the force
of the agreement is relevant to creating an enforceable con-
tract that satisfies the individualrationalitycondition.
If an individual need only estimate his expected utility for
the outcomes possible under a proposed contract against that
of the status quo to ensure that its terms are no worse than
not contracting, then the information required to judge out-
comes by this test is the least stringent of all. ·But because
each party needs to estimate the defection incentive and the
force of agreement, then, in addition to the information
needed to estimate joint and concession rationality, each must
estimate NPa and NPb.
Significantly, each phase of contracting entails greater risks
than the preceding one because, as an inspection of Equa-
tions (1)-(6) in Chapter 5 reveals, more terms come into play
at each step, so more information is required by succeeding
calculations. This means that more potential sources of un-
certainty exist and more estimates must be made, each with
a risk of error. In other words, the mathematics suggests that
gathering information sufficient to fashion safeguards against
defection is more difficult than securing information suffi-
cient to safeguard against exploitive divisions and so on. The
more general point is that by incurring search, bargaining,
and decision costs, individual contractors are able to mitigate
ex ante risks; by incurring monitoring costs they hope to mit-
igate ex post risks. Thus, one can understand the object of
contracting as a joint attempt to minimize the sum of the
costs of uncertainty and of its avoidance, where uncertainty
afflicts all three dimensions ofrationality. 4
126
Safeguarding
6.4 SUMMARY
130
Safeguarding
Defection
Coordination
Figure 6.1
132
Safeguarding
sources with which to contract. That means they do not al-
ways rely upon or even want a third party to secure agree-
ments. Endogenous resources, however, are finite. The points
in transaction space at which private parties exhaust them
define the transactionresourcefrontier. The frontier is simply a
way of visualizing the limits to private settlement and the
reasons for involving a third party. Attainable gains are lost
when contextual features place transactions beyond the fron-
tier and block contracting. That provides an incentive for
parties to the transaction to seek third party intervention.
When transactions lie outside the transaction resources fron-
tier, principal parties tend to seek third-party support.
A third party can facilitate contracting in any of three an-
alytically distinct ways. First, it can help to resolve the co-
operation problem by providing exogenous transaction re-
sourcesto augment the endogenous transaction resources al-
ready present in the relationship. If, for example, commu-
nication channels are poor, owing to the large number of
parties or their geographic dispersion, the centralized chan-
nels and information processing services provided by a me-
diating third party may well prove more efficient. Sometimes
a mediator recognizes opportunities for mutual gain or au-
dits the status quo more effectively than the principals. De-
scribed graphically, this type of intervention expands the
transaction resources frontier to encompass a larger area of
transaction space. Thus, it increases the region within which
contracting among the principal parties becomes possible. It
need not entail granting discretion to the mediator to allocate
the gains by defining the terms of an agreement or to enforce
one by punishing breach.
Second, third parties can help to resolve the division
problem by providing divisionservices.For example, a coalition-
building or arbitrating third party may be granted discretion
to allocate the gains under the contract or merely to narrow
the range of divisions possible under the contract. Described
graphically, this moves the transaction leftward in transac-
tion space, closer to the origin where conditions for contract-
133
Safeguardsand risks
ing are more favorable. It need not entail granting discretion
to the arbiter to enforce an agreement, but arbiters, like me-
diators, need to be a central agent in processing information.
Third, third parties can help to resolve the defection prob-
lem by providing enforcementservices.For example, a policing
third party may be granted authority to punish defectors so
as to increase the force of contractual agreements. Described
graphically, this moves the transaction downward in trans-
action space, again closer to the origin. It may not entail
granting the enforcer discretion to design the terms of an
agreement, but to monitor behavior an enforcer needs cen-
tralized communication channels like a mediator and in ap-
plying the force of agreement across disputants the enfor-
cer's judgments may well involve arbiter-like divisions of
responsibility.
140
Chapter7
Calculus and contexts
142
Calculusand contexts
143
Safeguardsand risks
guarding against missed opportunities to cooperate. But our
earlier discussion demonstrates that features of the context
of contracting may make the division problem more tractable
than the mathematics suggests it ought to be; and that is
why, as I have said, the theory of rational contracting pre-
sented here relies on the mix of calculus and contexts. Simi-
lar remarks are in order regarding the cooperation and defec-
tion problems. The calculus of rational contracting suggests
that the cooperation problem should be easiest to resolve and
the defection problem most difficult. It is not surprising,
therefore, that much contract litigation that comes to the court
raises the question of whether a breach has occurred and if
it has, what damages are appropriate.
I prefer most our both going to the concert and least prefer
your enjoying the silky sounds of the Motown-on-Acid-
Rockers, Was (Not Was), while I am left tortured by the non-
sense of the latest Fad. You, of course, would prefer us to
145
Safeguardsand risks
Fad-out together; and are duly horrified at the idea of me
slumped in my chair half asleep at the lecture while you are
forced to press the flesh with your fingers in your ears trying
to escape the seductive sounds of the Was Brothers.
The important feature of this coordination game is that if
both of us should appear at the Was (Not Was) concert, you
will not leave, whereas if both of us are (God forbid!) at the
lecture by Professor Fad, I will not leave; neither one of us
will change our strategy unilaterally. Either outcome is
therefore an equilibrium. But upon which equilibrium will
we settle? How will we solve our coordination problem? (Of
course the more interesting question is, Why would two
people with such contrasting tastes want to spend the eve-
ning together in the first place?)
Coordination games are solved by features beyond the
logical structure of the game. So if some third person flips a
coin - heads to Was, tails to Fad - and if we agree to abide
by the result, then we can solve our coordination problem.
The simplest example of a coordination game of this sort is
the need for motorists to decide whether to drive on the left
or the right side of the road. Some may prefer the left, others
the right, but all but the perverse prefer that, whichever side
of the road is chosen, everyone drive on that side. That co-
ordination problem is resolved by the state authoritatively
setting a standard that creates a convention or social prac-
tice. Once the practice exists, it is virtually self-enforcing, as,
under normal conditions, no rational motorist has an incen-
tive to defect.
If what economists claim about markets and contracting is
true - that much contracting takes place in competitive mar-
kets among repeat players - then markets provide the cheap-
est safeguards against exploitive divisions and defection. It
is a fair question to ask whether these same market safe-
guards work as well to provide salience, or whether, instead,
one central but underappreciated role of the court in con-
tracts is to provide salience and in doing so help to solve
coordination problems. It is possible that a good deal of con-
146
Calculusand contexts
tractual litigation is best seen in the light of its role in facili-
tating coordination.
To put the matter another way: If individuals contract with
one another in competitive markets or within relatively ho-
mogenous or otherwise closely knit communities, then the
market or the community can go a long way toward guard-
ing against contract failures owing to exploitation and defec-
tion. Legal rules and other forms of exogenous transaction
resources play less of a role in safeguarding against these
risks than one might otherwise think. Though markets, which
reduce the risk of defection and exploitive divisions, require
conventions, they may not themselves create conventions.
The most obvious example is property rights. Contracting
requires property rights. You and I will have a hard time
negotiating the sale of some piece of property if we both be-
lieve we own it. In some cases, the conventions necessary
for contracting are provided by the "communities" within
which the market is itself embedded. In other cases, uncer-
tainty remains and authoritative bodies are called upon to
solve the relevant coordination problem.
The calculus of rational bargaining implies that the least
difficult problem to solve from an information standpoint, is
the cooperation problem. The discussion to this point sug-
gests that the coordination problem, however information-
ally easy to resolve in theory, may be more troubling in prac-
tice. If this is so, then we may find that one of the central
roles courts are being asked to play in contract disputes is to
solve coordination or cooperation problems, not to rectify
breach or guard against exploitive division.
Of course, the court is involved in a relationship ex post,
after one or the other party has breached. Often the case will
come before a court, therefore, as one involving breach.
However, the source of breach is often an unresolved uncer-
tainty at a previous stage in contracting. There is unresolved
doubt about the ownership or scope of the relevant property
right or the like. As events unfold, this uncertainty proves
troublesome and results in breach. The issue before the court
147
Safeguardsand risks
is framed in terms of breach or defection, but the role the
court actually plays is one of reducing uncertainty about the
relevant property right. In doing so its chief function is to aid
coordination. By aiding coordination, it facilitates the ex-
change process, which in turn safeguards against defection
and exploitive divisions. In other words, the best interpre-
tation of judicial practice may be that courts play mediating
roles even when it looks like they are being asked to play
arbitration or enforcement roles.
The hardest part of defending a theory is to show how it
might apply to the practice it purports to explain. I said that
the account I am offering might help us rethink conventional
interpretations of our contract practice. To this end, I want
to take a stab at making good on this claim by considering
two ways of looking at the famous case of Laidlawv. Organ.2
One approach is represented by conventional economic
analysis, another by the theory developed in the preceding
two chapters.
148
Calculusand contexts
enforcement agent and it has done so in a way that is consis-
tent with the principle of economic efficiency.
The more secure the right to information, the more an in-
dividual will be inclined to invest in producing it. The social
as opposed to the individual benefits of such a property right,
however, are not always obvious, nor is the distinction be-
tween information that results from deliberate search and that
which has been casually acquired necessarily decisive in es-
tablishing the economic efficiency of the appropriate legal
doctrine.
149
Safeguardsand risks
silent." Nevertheless Girault and Organ entered into a con-
tract.
The price of tobacco quickly rose by 30 to 50 percent as
news of the treaty circulated, signaling an end to the naval
blockade of New Orleans and the resumption of exporting.
Kronman reports that Laidlaw retained possession of the to-
bacco, but the court record indicates that he first transferred
it to Organ, then recaptured it by force. In any case, Organ
then brought suit for damages and to block Laidlaw from
otherwise disposing of the tobacco. The trial judge evidently
directed a verdict in Organ's favor, deciding from the testi-
mony that no fraud occurred. On appeal before the U.S. Su-
preme Court, Laidlaw's attorney argued, among other points,
that this was a matter for the jury to decide.
The Court agreed, reversed the judgment, and remanded
with directions for a new trial. Noting that Organ's silence
may have been fraudulent, Kronman puts aside questions of
fraud. He focuses on the dictum rather than the holding in
the Court's opinion delivered by Chief Justice John Marshall.
Generally regarded as an accurate statement of the law, it
reads:
158
Calculusand contexts
Long before Laidlawv. Organ, they invested in information,
making deals and allowing producers to specialize in pro-
duction. And they speculated on events that would influ-
ence the value of their holdings, thus creating no apparent
need for third party mediation.The end of the naval blockade,
like a drought or a blight, describes a state of nature inevita-
bly to be revealed to the public: The risk on which the merchants
speculate, then, is less technologicalthan distributive. So this is
not the sort of case, on either Kronman's or Hirshleifer's ac-
count, that suggests a nondisclosure rule.
Moreover, these merchants regularly negotiate over quan-
tity, quality, and price. The risks of unfair divisions are mit-
igated by transforming the decisions into a sequence solva-
ble within the constraints of available bargaining resources
held by private parties. As a consequence these merchants
do not normally need a third party to arbitrate.Finally, alter-
native exchange opportunities and reputation effects typi-
cally mitigate defection incentives without unduly straining
enforcement resources. Thus, the merchants need not risk
creating a third-party enforcer,except to deal with those cat-
egories of defections that are unusually costly to safeguard.
In short, given the theory presented here, in which the
principal parties are viewed as rational actors embedded in
particular contexts, it would appear that neither Laidlaw nor
Organ had sufficient reason to seek any form of third-party
intervention. The context, which is so important to the
analysis, is one that suggests the parties in this case had am-
ple endogenous transaction resources.
One question we need to answer, then, is why the parties
turned to the courts for exogenous transaction resources when
it appears as if the context in which the dispute arose pro-
vided them with all the resources they would need to solve
the contract problem. Another, preliminary, question is to
determine which contract problem they faced: Was it one of
breach, division, or cooperation? These are questions that
must be addressed and resolved in our theory, but they are
not ones that need arise at all in the conventional view, which
159
Safeguardsand risks
is concerned about the effect of various rules only, and not
with the reasons parties would have for seeking legal inter-
vention in the first place.
It is important to note that however extraordinary an event
the signing of a treaty is, it is no more extraordinary than is
a blight or drought, all of which create ample opportunities
for savvy dealers to enhance their position. But one sup-
poses that part of what makes commodities markets valuable
is their ability to respond to such events without recourse to
legal action - even when some parties use information for
their personal benefit not yet available to others.
After having turned over the tobacco, on the day following
circulation of the handbill announcing the Treaty of Laidlaw,
"by force," Laidlaw retook possession of the tobacco and
withheld it for Organ. That action, should it prevail as a
practice, would threaten the network of communication
channels that makes market exchange, the specialized nor-
mative infrastructure that permits commission merchants to
extract payment for their services. The decision to seek to
sequester only highlights the extent of the risk, for doing so
puts at risk whatever gains had been captured by the initial
contractual scheme of cooperation. 15
Think of the problem this way: Laidlaw and Organ are po-
tential cooperators. They disagree about whether individuals
who have private information affecting prices should make
full disclosure to their contracting partners. That they dis-
agree about disclosure may be unknown to both of them,
and in the bulk of the transactions between them, their dis-
agreement has no impact. In the circumstances presented by
the facts of the case, however, the difference of opinion ob-
viously makes a difference. The important difference be-
tween the parties, however, is not that one of them is right
from either a moral or an economic point of view about the
duty to disclose. Rather, what is important is the existence
of a difference, period. The existence of a difference makes
coordination difficult. Bargaining is always easier when
property rights are well defined, and it is most difficult when
genuine disagreement about them exists.
160
Calculusand contexts
This disagreement about the norm regarding disclosure or
its applicability in the circumstances surrounding the sale is
played out in Laidlaw's recapture of the tobacco (or his fail-
ing to deliver it, depending on one's reading of the record).
This action ultimately invites the Supreme Court to provide
an authoritative pronouncement regarding disclosure or
misrepresentation. In doing so, the Court will play a mediat-
ing role, specifying authoritatively the norms governing
market transactions and reducing thereby the risks and costs
of cooperation.
We can distinguish between coordination and welfare ef-
fects of a rule. In circumstances of the sort commission mer-
chants face, any authoritative rule would solve their coor-
dination problem. This was, as we noted, a highly competitive
market in which the principal parties were repeat players.
What Laidlaw and Organ needed was an authoritative char-
acterization of the rule, whatever its content. In that sense,
either ruling on disclosure would have sufficed. Thus, from
a coordination point of view, the rule expressed in Mar-
shall's opinion has no special efficacy with respect to people
investing efficiently in information. Once the rule is in place,
negotiations between the parties are easier because the threat
of noncoordination is reduced.
If it happens that all negotiating parties discover that they
could do better under the alternative rule, then the rule the
court announces will be unstable or the parties will simply
ignore it. 16 No party will diverge from it unilaterally, but all
may be inclined to do so jointly. In the case under discus-
sion, as already noted, the private information concerned price
changes and was fundamentally distributive, not productive
in its impact. Thus, there is no reason to think that a norm
requiring disclosure would be any less efficient from a wel-
fare point of view than would the rule the Supreme Court
actually advanced. So in the instant case either ruling would
be efficient in both the coordination and welfare sense.
The point of the Court's opinion, then, is to facilitate com-
munication by providing salience in the form of a nearly ar-
bitrary choice. With respect to all other matters relating to
161
Safeguardsand risks
cooperation, the Court put the burden of deciding how much
to expend on safeguarding squarely on the shoulders of those
in the best position to exercise that judgment - the principal
parties. That is just as it should be. As Michael Taylor has
argued in other contexts, by serving an authoritative coor-
dination role unnecessarily, the state decreases the incen-
tives for parties to devise creative solutions of their own. By
substituting legal pronouncements for endogenously de-
vised ones, the state weakens the bonds of community or, in
this case, weakens the market structure. In short: However
disinclined they may become to rely on or to exhaust their
transaction resources in favor of a third party solution, where
the principal parties remain in the best position to contract
efficiently, courts should place the burdens of safeguarding
on them. That is precisely what this case does. It provides an
authoritative ruling on disclosure that solves a coordination
problem, and then it imposes all other risks on the commis-
sion merchants who are in the best position privately to safe-
guard against them.
The court's choice of a rule that does not require disclosure
is nearly, but not completely, arbitrary, since, on some oc-
casions, principal parties will lack endogenous transaction
resources to resolve privately all conflicts on the terms of co-
operation. Perhaps the market in which they transact is in-
adequately competitive, and therefore too few alternatives
exist; or the players are contracting on a one-time basis, in
which reputation effects are minimized. In these circum-
stances the parties may rationally call upon the court to me-
diate. In that event the rule that does not impose a duty to
disclose is easier to administer than likely alternatives to it.
Moreover, if the court retained discretion to allocate the search
and distributive risks involved here, it might incur high di-
rect costs as well as frequently abuse the notions of fair di-
vision held by private parties and communities, thereby call-
ing into question the legitimacy of its value as a third party
intervenor.
This is a case about coordination and mediation. As such,
either legal rule would have sufficed. Moreover, from the
162
Calculusand contexts
point of view of wealth or welfare maximization, the circum-
stances of this case provide no argument for the nondisclo-
sure rule. In short, the choice of the nondisclosure rule rests
ultimately on considerations of administrative efficiency.
To sum up: Conventional law and economics interprets
Laidlawas creating a property right in information, one that
can be squared with efficiency. We have argued, first, that a
property right in information may not be generally efficient
and, second, that a more compelling characterization of
Laidlaw, one that follows from the theory developed here,
sees it primarily as a case in which the court resolves a coor-
dination problem by providing salience via authoritative rul-
ing. It thus mediates rather than arbitrates or policies and, in
that way, protects against a shrinking of the transaction re-
source frontier.
Though this analysis of Laidlawis at odds with traditional
economic analysis, there are bound to be many areas of over-
lap. After all, nothing we have said diminishes the incen-
tives associated with protecting the right of one party to re-
alize the gains associated from specialized investments in
information. However, it may not be necessary or appro-
priate to reach the distinction emphasized by Kronman be-
tween casual and deliberately acquired information in order
to explain the case law. A more plausible explanation, we
believe, has the court distinguishing among the relative effi-
cacies of alternative safeguards, including judicial interven-
tion, given the risks of contract failure involved, and placing
responsibility and discretion with the party or parties who
are in the best position to safeguard.
163
Chapter 8
Filling in the gaps
182
Chapter 9
188
Fromcontractsto torts
By specifying the terms of legitimate forced transfers, liabil-
ity rules enable resources to move to more efficient uses, thus
rectifying market failures. Because tort law consists in liabil-
ity rules, tort law is best interpreted as an institution de-
signed to overcome high ex ante transaction costs.
Nevertheless, transaction costs are not a necessarycondi-
tion for the existence of liability rules. Suppose that transac-
tion costs were always sufficiently low so that liability rules
would never be needed for the purposes of moving re-
sources to more highly valued uses. In our example, prop-
erty rules are sufficient to move resources to more highly
valued uses; at least transaction costs are never (we are as-
suming) sufficiently great to present a barrier to the volun-
tary movement of resources to their efficient uses. Even un-
der a scheme of property rules, however, some actors might
be inclined to take without first seeking the consent of oth-
ers. Transaction costs are not the problem. Defective incen-
tives are. How were we to respond to takings or rights vio-
lations that do not conform to the constraints imposed by
property rules? One answer is that we can punish rights vi-
olators. If the punishments are correctly set, all rational agents
will be deterred from takings. Of course, it will probably not
be efficient to impose the penalty that is absolutely necessary
to deter all wrongdoing. Some takings will occur. If they do,
punishment may be appropriately imposed on the injurer.
But what of the victim? Normally, we would feel that the
victim has a right to have his loss repaired. But if his right is
not protected by a liability rule, there will exist no basis for a
claim to repair. Remember, it is liability rules, not property
rules, that give rise to claims to compensation for damage.
In these cases compensation under a liability rule is not de-
signed to legitimate forced transfer. Ex hypothesi, property
rules are sufficient for that purpose. Compensation under
liability rules is designed to repair a wrong or its untoward
consequences. Therefore, even in a situation in which, if fol-
lowed, property rules would suffice to promote efficiency, or
whatever other ends we had in mind, there might yet exist a
189
Safeguardsand risks
need for liability rules. Liability rules would exist to ground
a claim to repair for wrong done, not to specify the compen-
sation condition of legitimate transfer.
Surely, compensation sometimes plays the role of legiti-
mating forced transfers. The existence of high transaction costs
may make this role both necessary and desirable. Still it is a
serious mistake to miss the role compensation under liability
rules plays in rectifying wrongs. This role may have nothing
at all to do with high transaction costs. By focusing primarily
on the role of liability rules in moving resources to more highly
valued uses when transaction costs are too high to permit
voluntary exchange, we will miss entirely the role liability
rules play in rectifying wrongful losses. For that reason alone
it is perfectly possible to defend a market facilitating theory
of contract and a different theory of torts, one that empha-
sizes the role of compensation in rectifying wrongful losses,
not in correcting market failures.
When transaction costs are low, injurers can secure entitle-
ments they value by voluntary agreements. They may,
nevertheless refuse to comply with the constraints that prop-
erty rules impose on them. In doing so, they take without
permission. One approach to this mischievous conduct would
impose a criminal sanction on those who refuse to comply
with the constraints imposed by property rules. That may
suffice to discourage wrongful takings, but what of the vic-
tim? In the absence of liability rules, the victim has no claim
to repair or compensation. By definition, rights to repair are
conferred by liability rules. If a right has no liability rule com-
ponent, its invasion grounds no claim to repair. Liability rules
can arise even when ex ante transaction costs are low as a
way of rectifying wrongful losses, not simply as a way of
legitimating efficient but forced transfers.
9.7 REVIEW
Before moving on to the argument that accident law is largely
a matter of corrective justice, I want to repeat what I take
myself to have been arguing for so far. I reject the market
paradigm, and in its place offer rational choice liberalism.
191
Safeguardsand risks
Like the market paradigm, rational choice liberalism begins
with two primitives: the principle of rational choice and the
centrality of the market. In rational choice liberalism the mar-
ket is important because of its contribution to social stability.
In the market paradigm the market is important because it
creates efficient outcomes under highly restrictive condi-
tions. The kind of economic analysis that falls out of the two
competiting theories may overlap, but their differences are
important. In the view I defend efficiency matters primarily
as an instrument in the pursuit of other goals or as a dimen-
sion or aspect of those goals. It is not an independent moral
ideal. I want to shift the focus of economic analysis away
from efficiency back toward markets.
In Part II, I take a first step at working out this program. I
look at contract law from the point of view of someone who
accepts rational choice liberalism, someone unconcerned with
efficiency as such. Instead the focus is on market transac-
tions as micro or local cooperation problems. Solving those
problems is important for a variety of reasons. First, it en-
ables individuals to get on with their lives with one another
in ways that satisfy their interests and needs, and, second, it
creates conditions of stability. Nowhere do I mean to suggest
that economists are wrong to look at contract law from the
point of view of efficiency. There are a variety of good rea-
sons for doing so, some of which I touched upon in the In-
troduction. Still, I am interested in the normative dimension
of the practice, not the predictive dimensions of it. I think
markets, stability and autonomy are important in this regard
in ways in which efficiency simply is not.
I fear that some readers will misunderstand another aspect
of the argument in Part II and I want to take this opportunity
to try to make clear what I was not doing in this Part of the
book. I was not defending rational bargaining theory as a
better normative theory than conventional law and econom-
ics. At the normative level I am defending markets as against
efficiency. That is the only normative bone I have to pick
with conventional law and economics. The preference for
bargaining theory as against conventional economic analysis
192
From contracts to torts
is not normative; it comes in at an entirely different level of
the argument.
Accept for the moment the argument in Part I on behalf of
rational choice liberalism. I claim that we should take that
argument as an invitation to reconsider certain legal prac-
tices from the point of view of the role they play in creating
and sustaining markets. That leads me to apply the theory
to contract, arguably a part of the law that sustains market
relations. Now I need a way of getting at the ways in which
contract law sustains markets. My suggestion is that we look
at the typical discrete market transaction as a local coopera-
tion problem. Then I suggest that the best way of modelling
the problem of local cooperation is as a divisible prisoner's
dilemma. And then I claim that we can conceptualize the
divisible P.D. as a bargaining game of a certain kind. Therein
lies the preference for bargaining theory. My claim is not that
bargaining theory is a better normative theory than conven-
tional economic analysis. Rather, it is that bargaining theory
might more fruitfully capture the elements of rational con-
tracting, something we will need to do if we are to see the
ways in which the norms of contract law can contribute to
sustaining markets.
193
Chapter 10
197
Part III of this book approaches tort law from the perspective
I referred to in the Introduction as middle-level theory. At
the core of tort law is a certain practice of holding people
liable for the wrongful losses their conduct has occasioned.
This is not the entirety of tort; it may not even reflect the
majority of cases litigated in tort. Often individuals are com-
pensated for losses that are not wrongful; individuals are
sometimes required to repair losses when they did no wrong;
and other times individuals are held liable for losses, wrong-
ful and otherwise, for which they are not in any obvious sense
responsible. 1 Along the way, I hope to have something in-
teresting to say about these and other dimensions of tort law,
departures, justifiable and otherwise, from its core. Still, my
real focus will be on tort law's core, the practice of holding
individuals liable for the wrongful losses they impose.
My claim that this is tort law's core will of course be con-
troversial. My defense of that claim is simply that when one
thinks about or teaches tort law, no matter what else one
feels compelled to explain or to understand, one is required
to understand two features, one structural, one substantive.
The structural feature is that in the typical case decisions about
who should bear a loss are rendered within a framework re-
stricted to victims and those individuals they identify as their
injurers. The question is not; who in the world should bear
this loss? Instead, it is: should the injurer or the victim bear
it? The substantive feature is that if a victim can show that
her loss is wrongful in the appropriate sense, the burden of
making good her loss falls to the individual responsible for
it. An account of tort law that fails to provide a persuasive
understanding of these elements, whatever it may illumi-
nate, simply does not understand tort law.
On the other hand, I am not claiming that the core of tort
law is in any sense immutable or unchanging. Scholars read-
ing this book twenty five years from now - surely that is an
optimistic prediction - might find my discussion entirely un-
helpful as what I am calling the core of tort law s_hrinks to a
198
The goals of tort law
point or disappears into a normative black hole. Though tort
law has undergone significant changes, some of which I will
discuss, and not all of which can be reconstructed as natural
extensions of its core, part of what I am assuming is that the
core remains - at least for now.
It might surprise some readers of what follows that I do
not advance the view that those areas outside the core of tort
ought to be rethought to better reflect tort law's core com-
mitment. It will surely surprise many readers that I do not
argue that the core of tort law must be maintained if the prac-
tice is to warrant our allegiance and reflective acceptance. I
do not argue that all departures from corrective justice con-
stitute moral mistakes in part because I accept what many
readers may find both a controversial and unsettling thesis
about the scope of corrective justice that I set forth in Chap-
ter 19. Briefly, my view is that whether corrective justice im-
poses moral reasons or duties within a community will de-
pend on other practices, including legal ones. For that rea-
son, corrective justice may not provide an independent stan-
dard against which all such practices are to be measured.
Chapter 11 sets out the substantive rules of liability that all
tort theorists seek to provide a convincing account of. Chap-
ters 12-14 consider various attempts to defend those rules of
liability as expressing various norms, some economic (Chap-
ter 12), some moral (Chapters 13 and 14). Chapter 15 begins
the development of my conception of corrective justice. The
analytic structure of the principle is set out in Chapter 16. Its
subsidiary components are developed in Chapter 17. Chap-
ter 18 asks whether the principle so conceived is at the heart
of accident law, defined by the substantive rules identified
in Chapter 11 and a structural component first introduced in
this chapter. Chapters 19 and 20 explore departures from the
corrective justice core and defend those departures in part in
the light of the claim that social practices can sometimes con-
strain legitimately the scope of corrective justice. Chapter 21
tries to tie the entirety of the arguments in Parts I, II, and III
together.
At the heart of middle-level theory is the conviction that
199
Rectifiablewrongs
one has to immerse oneself into a practice in order to under-
stand the norms that inhere in it. This chapter, in particular,
argues that we can only go so far in understanding accident
law if we begin by trying to understand it as having certain
goals and policies external to it that can be identified without
regard to the practice itself.
Let's call any account that holds that the justification of the
practice depends on its capacity to achieve or implement cer-
tain goals or purposes instrumentalist. In any instrumentalist
account of the law, the substantive ambitions or purposes of
the law shape the structure of the legal institution and deter-
mine its content. We can contrast a formalist conception of
tort law with the instrumentalist one. According to formal-
ism, tort law is a body of law defined by the fact that it has a
structure of a certain kind. Whereas the instrumentalist be-
lieves that the substantive aims of tort law determine its
structure, the formalist believes that the structure of tort law
determines the extent to which various goals can be pursued
through it. In its most extreme version, formalism denies that
tort law has any goals or purposes external to the practice.
The only goal of tort law is to be tort law, and that is to
capture in law the way in which injurers and victims are re-
lated to one another in the world in the relationship of injur-
ing and suffering.
Ernest Weinrib, the leading formalist of modern private
law, puts the difference between the instrumentalist and the
formalist in terms of two different forms of orderings:
Instrumentalists believe that tort law has goals and that its
defensibility depends on the extent to which it satisfies them.
Once we identify the goals of tort law, our next project will
be to characterize the basic substantive rules of liability. Then
we can ask whether the rules of liability, or which rules of
liability, satisfy the relevant goals. Finally, we will character-
ize the structure of tort law, the way in which it orders the
relationships of victims and injurers. Once we do that, we
can determine whether this structure is best interpreted in
the light of tort law's substantive goals or as a way of ex-
pressing the relationship between injurer and victim.
The first task is to identify the goals of tort law. We can
distinguish between two kinds of goals: economic and moral.
It may be more useful to think of the moral demands of tort
law not as goals but as principles that are either expressed
through tort law or that serve as constraints on the extent to
which the law may legitimately pursue its policy objectives. 6
The economic goals of tort law have been succinctly captured
by Guido Calabresi, who distinguishes among primary, sec-
ondary, and tertiary costs. 7 Primary costs are the dollar
equivalent of the damages caused by accidents. Secondary
costs are the costs of bearing the costs of accidents. These are
the costs associated with various schemes for distributing the
primary (and tertiary) costs of accidents. Secondary costs are
reduced when they are spread maximally over persons and
time, or when they are borne by those individuals in the best
position to bear them. Tertiary costs are the administrative
costs of any system, including the tort system, for determin-
ing who should bear the costs of accidents.
Deterrence reduces primary costs; insurance reduces sec-
ondary costs; and who knows what can reduce administra-
204
The goals of tort law
tive costs. We might say that the economic goals of tort law
are risk reduction (primary), risk spreading (secondary), and
administrative cost avoidance (tertiary). Tort law should be
designed to minimize these costs. Not quite. The costs of
minimizing these costs also figure in the formula. We would
not want to minimize accident costs by spending more in
prevention and avoidance than what accidents actually cost.
Thus, instead of minimizing, we want to optimallyreduce costs.
We want, in other words, to use Calabresi's useful phrase,
to minimize the sum of the costs of accidents and the costs
of avoiding them.
10.6 INSURANCE
211
Chapter 11
Holmes takes the view that losses should lie on victims un-
less some compelling reason exists for shifting them to some-
one else. Let's refer to the principle that losses should lie on
victims as an initial liability rule. The responsibility for pre-
senting a case for shifting the loss falls to the victim. If the
evidence fails to convince, the burden of shouldering the costs
is the victim's. The initial liability rule, therefore, has both
epistemic and normative implications.
Liability rules specify the conditions the victim must estab-
lish in order that her loss be made the responsibility of some-
one else, usually, but not always, the injurer. The law of
torts distinguishes generally between two sorts of liability
rules: fault and strict liability. If a case is governed by a prin-
ciple of strict liability,the victim must show that
212
1. The injurer has to bear the victim's losses unless the loss is the
victim's fault. 20
But that's not all the principle implies, is it? No; the fault
liability principle implies that if the injurer is not at fault, the
loss remains the burden of the victim, whetheror not the victim
227
Rectifiablewrongs
is at fault. The rule of fault liability, therefore, has a rule of
victim liability contained within it, and it is a rule of strict
liability. If we wanted to capture completely the rule of fault
liability, it would read something like this:
3. The victim is strictly liable for her losses unless she can establish
the fault of her injurer in having occasioned them.
Suppose you did not know much about the actual substan-
tive principles of tort liability, but you had some rough un-
derstanding of the conventional distinction in ordinary moral
theory between a person's being held strictly liable and his
having liability imposed on him only if he is at fault. It is very
likely, I would guess, if forced to choose between strict and
fault liability for accident costs, that you would choose fault
liability. Considerations of fairness or justice would seem to
favor such a judgment, quite without regard to economic or
cost-avoidance considerations.
If we have shown anything, it is that this initial judgment
may not be warranted, or at least that the intuitive grounds
on which it likely rests are indefensible. First, we have seen
that because fault liability, especially for legal negligence, is
objective - conduct, not a state of mind - it is not defeasible
by what would ordinarily count as an excuse. That makes
negligence or fault liability a kind of strict liability, that is,
liability without blame. Second, we have seen that fault lia-
228
Fault and strict liability
bility has another, deeper dimension of strict liability. For
under fault liability, victims are strictly liable if their injurer
is not at fault. Both aspects of strict liability figure in the rule
of fault liability. But it gets worse for the advocate of fault
liability. In strict liability the injurer is held accountable only
if her conduct causes another harm, whereas the sort of strict
liability imposed on victims under the guise of the fault rule
does not require that the victim cause her own loss. She may
be liable even if the harm she suffers is causedby her faultless
injurer. And this is not a result that would have obtained
had her case been litigated under a rule of strict (injurer) lia-
bility.
If anything, the argument to this point suggests that strict
liability may be preferable to fault liability. As long as we
understand that both are really forms of strict liability de-
feasible by a positive defense of the other party's fault or
negligence; the choice between them is a choice about who
should bear the costs of accidents when neither party is at
fault. And if the fact that one person's conduct causes the
harm is a morally relevant feature of the situation, then, other
things being equal, the loss should fall on injurers when it
must fall strictly on someone. Strict injurer liability expresses
this conception of fairness (if it is one); strict victim liability
does not. Thus, from the moral point of view alone, strict
liability is preferable to fault liability. That, I take it, is a sur-
prising conclusion.
233
Chapter12
The economic analysis of torts
238
The economicanalysis of torts
in torts is to act in an economically inefficient manner; neg-
ligence is the failure to make optimal investments in safety.
It should come as no surprise, then, that we have had
such difficulty in constructing a moral theory of fault. To
be at fault is not to act in a morally culpable way or to fall
below a standard of care with which one is morally com-
pelled to comply. To be at fault is to act inefficiently; no more,
no less.
239
Rectifiablewrongs
may not provide the best interpretation of the practice of im-
posing liability on the basis of it.
For similar reasons, it is possible to advance an economic
analysis of liability based on fault without holding an eco-
nomic analysis of the meaning of fault. For example, such a
view might hold that liability is based on fault to discourage
faulty behavior, but by faulty behavior we might mean con-
duct that violates norms of fairness or reciprocity. Typically,
however in an economic analysis of tort law, the principle of
efficiency provides both the understanding of negligence and
the justification for imposing liability based on it.
12.10 INSURANCE
251
Chapter 13
Reciprocity of risk
Risks are reciprocal when they offset one another. When the
risks A and B impose on one another are of the exact same
type and magnitude, they are reciprocal. That's the easy -
and the least likely - case. Nonreciprocal risks are different
in degree or kind from one another. 4 When the risks individ-
uals impose on one another fail to cancel one another out in
this neat way, can they still be reciprocal or offsetting? If the
only risks that are reciprocal are ones that are equivalent in
both degree and kind, then almost all risks individuals im-
pose on one another will be nonreciprocal. Fletcher himself
is not especially helpful in this regard. I want to suggest that
we can do better. My suggestion is that we define nonreci-
procity of risk in terms of expected value or disvalue.
A imposes risks of type a* on B. B imposes risks of type b*
on B. The risks A and B impose upon one another are offset-
ting if and only if the expected value of the harm created by
A's conduct p(a*) is equal to the expected value of the harm
with which B's conduct threatens A, p(b*); the risks A and B
impose on one another are reciprocal if and only if p(a*) equal
p(b*); otherwise, they are nonreciprocal.
It is natural to wonder whether this quantitative account
of offsetting or reciprocal risks reduces reciprocity of risk to
a form of economic analysis. If it does, the standard of non-
reciprocity of risk might then fail to be a genuine alternative
to economic analysis. Let p(a*)=A*, and p(b*)=B*; then either
A*> B* or A* <B* or A*= B*. However great in absolute terms
A* and B* may be, A and B impose reciprocal risks on one
another whenever A*= B*; otherwise, the risks A and B im-
pose on one another are nonreciprocal.
Under reciprocity of risk, if A*= B* then recovery would be
unavailable for either A or B, whether or not A and B are
negligent. If A*>B*, A would be imposing non-reciprocal risks
with respect to B, whereas if B*>A*, B would be doing the
254
Reciprocityof risk
same with respect to A. In the first case, B could recovery in
justice for whatever harms A's conduct causes him, whereas
in the latter case, A could recover in justice for whatever harms
B's conduct imposes on him. Liability is a function only of
the relevant inequalities in expected value.
In economic analysis, the expected value of a harm plays
a different role in determining whether liability or recovery
is appropriate. In economic analysis, liability based on the
negligence of the injurer is a function of the relationship be-
tween the expected value of the harm and the costs of pre-
venting it, not on the relationship between the relative ex-
pected disvalues of the injurer'sand the victim'sconduct. This
means that even if A*=B*, A may be at fault and B not, or B
may be at fault and A not. The costs to A of preventing the
harm, PA*, may be considerably less than A*, whereas the
costs to B of preventing the accident, PB*, may be greater
than B*. in other words, it is possible that PA*<A* and
PB*>B*, even when A*=B*. Therefore, even if A*=B*, A
would be at fault from the economic point of view, but B
would not be. From a purely economic point of view, A can
be liable to B, even though neither could recover against the
other under the principle of reciprocity of risk.
A simple arithmetic example might help. Suppose the ex-
pected value of the harm A imposes on Bis 100, and that the
expected value of the harm B imposes on A is also 100. Then
the risks A and B impose on one another are reciprocal. In
the event of an accident between them, neither A nor B could
recover against the other under the theory of reciprocity of
risk. On the other hand, suppose it would have cost A 50 to
prevent the harm to B, whereas it would have cost B 200 to
prevent the harm to A. Thus, in economic terms, A would
have been negligent, but B would not have been. Thus, in
economic analysis even though A and B impose reciprocal
risks on one another, A can be negligent with respect to B,
but not vice versa. In the event of an accident, B might be
able to recover against A, whereas A would not be able to
recover against B.
Reciprocity focuses on the risks individuals impose on one
255
Rectifiablewrongs
another, whereas efficiency focuses on the risks individuals
impose relative to the costs of prevention each would have
to incur. Reciprocity of risk moves beyond cost-benefit stan-
dards of recovery and liability toward a standard of liability
and recovery that emphasizes the relationshipbetweeninjurers
and victims or among the members of a community of risk
takers.
256
Reciprocityof risk
nonreciprocal risks amounts to imposing risks beyond the
level of normal risk. Risks beyond the norm within a com-
munity are negligent or faulty ones.
Nonreciprocal risks are always characterized relative to a
background of risk imposition. In the Dead Milkmen ex-
ample, that background implies that any risks the band im-
poses on you will be nonreciprocal in the relevant sense. The
expected loss the band imposes on you exceeds the expected
loss you impose on it. In the motoring example, the com-
munity of nonnegligent driving defines the relevant back-
ground of risk taking. Nonreciprocal risks must stand out
against that background. In order for that to occur, the risks
must be beyond the norm, that is, they must be what we
otherwise refer to as negligent.
If everyone in our neighborhood keeps pet dogs, then pro-
vided we take reasonable precautions with respect to their
care and maintenance, all of us impose reciprocal risks on
one another. If, however, a new neighbor decides to bring a
pet mountain lion onto his property, then it does not matter
one bit how much care he exercises in maintaining it safely
on his property. The presence of the animal imposes nonre-
ciprocal risks on everyone else. Should the lion escape and
cause damage to persons or property, it will be no defense
that the owner took every reasonable precaution to maintain
the animal safely. The standard of liability is strict. Under-
stood in this way, it follows that a community of individuals
all of whom keep pet mountain lions on their property would,
other things being equal, be imposing reciprocal risks on one
another. That would make the case of the mountain lion more
like the motoring example. In order for liability to be im-
posed for an escaped mountain lion, one would have to show
negligence in the way in which the owner maintained his
"pet."
The community of risk takers defines the background of
risk. Thus, in Rylands v. Fletcherthe court held that storing
water on one's property could, in some circumstances, be
the sort of thing that subjects one to strict liability. 5 Two the-
257
Rectifiablewrongs
ories were advanced to support the holding, both of which
could be recast in terms of the reciprocity of risk formula: (1)
Building reservoirs in rural England is not the sort of activity
in which people generally engage; and (2) water is the sort
of material like a mountain lion that is harmless when it is
safely tucked away on one's property but is likely to cause
significant damage should it escape. A person who keeps
water in a reservoir is imposing the sort of risk that is uncom-
mon to the community of risk takers; it does not constitute
part of the background of risk. Not only is the risk of escap-
ing water unusual, it is dangerous. Thus, it is different both
in kind and degree from the sort of risks members of agrar-
ian England typically impose on one another.
In sum, fault and strict liability are not fundamentally dif-
ferent standards of liability. Rather, they are distinct ways of
giving expression to the same basic principle of liability and
recovery suitable to differing circumstances, namely, the
principle of nonreciprocity of risk. This is the sense in which
the principle of reciprocity of risk downplays fault.
The reciprocity of risk theory of liability and recovery is
ambitious. It promises, if sound, to provide an account of
liability and recovery that spans the entirety of tort law, both
strict and fault liability alike. In this respect, it is like eco-
nomic analysis. Whereas the economic analysis understands
strict and fault liability as different expressions of the general
principle of efficiency, reciprocity of risk conceives of fault
and strict liability as different embodiments of the general
principle of reciprocity of risk. Thus, reciprocity of risk shares
with economic analysis the ambition of providing a unified
account of the entirety of tort law, as well as the analytic
strategy of interpreting the difference between fault and strict
liability as different ways of expressing a commitment to a
more fundamental principle under different circumstances.
Unlike economic analysis, however, reciprocity of risk seeks
to provide a moral foundation for tort practices, not an eco-
nomic one.
258
Reciprocityof risk
13.4 RECIPROCITY AND EXCUSES
259
Rectifiablewrongs
fies no defect in his character or motivation. Excuses of this
sort defeat liability by defeating the ascription of blame upon
which liability can sometimes be grounded. Liability in torts,
especially for negligence, does not require blame as a condi-
tion of liability, however, and for that reason, it is not gen-
erally defeasible by excuses of this sort. Were these the sort
of excuses Fletcher had in mind, his account would fail to
provide anything like a plausible interpretation of our cur-
rent practices for the same reasons the retributive argument
fails to do so.
On the other hand, liability appears to require human
agency. Therefore, one way of defeating liability of any sort
is to show in a particular case that the conditions of human
agency are not satisfied. Actions are a subset of events; they
are things done by individuals volitionally or intentionally.
Moving one's body under a hypnotic trance is something that
happens to one, not something one does. Liability is for the
consequences of actions performed; actions require agency.
Excuses that defeat agency are essential to any theory of lia-
bility, including the theory of liability for nomeciprocal risks. 8
Even if we accept the distinction between those excuses
that are designed to defeat liability by defeating ascriptions
of culpability and those designed to defeat liability by de-
feating ascriptions of agency, we need an account of why
agency matters to a theory of liability, whereas culpability
does not. One answer is that even if an individual can be
held liable for what she has done, whether or not her doing
it is culpable in any way, she cannot be held liable in justice
for things that, although they involve her, happen to her,
not by her.
Suppose Jane mistakenly shoots Joe, thinking he's a bear.
She may not be to blame for her honest mistake. Neverthe-
less, we can imagine a theory of liability according to which
she must make good Joe's losses. Mistakenly or not, she did
shoot him. On the other hand, if Sarah places a device in
Jane's brain that, unbeknownst to Jane, triggers Jane's shoot-
ing Joe, then Joe gets shot but through no action of Jane's.
In a sense, Jane discharges the rifle, but her doing so does
260
Reciprocityof risk
not constitute an action of hers, and for that reason she does
nothing for which she can be held liable. Liability requires
agency whether or not it requires blame. Or so the argument
goes. 9
262
Reciprocityof risk
ricanes and earthquakes. Those losses, however real, do not
typically trigger claims to recovery in torts, nor are the claims
they trigger matters of corrective justice. When someone like
Joe suffers damage from another's bodily movements, but
not the actions of others, his losses are like those that result
from natural disasters or acts of God. My view, then, is that
excuses that defeat agency are relevant, not because an in-
dividual who has not acted cannot be held liable but because
a person who is injured as the result of events that do not
implicate human agency has no right in justice to repair.
If Joe has no right to repair, then Joe might end up bearing
his own costs. He is liable for his costs not because he de-
serves them; certainly not because he acted in some way that
makes them his doing. He is liable because he has no right
in justice to their repair, and (we might suppose for this ar-
gument) there are no other grounds for imposing his costs
on someone else. In my admittedly unconventional view, ex-
cuses that defeat agency are essential in tort law, not because
they defeat liability but because they are relevant to the le-
gitimacy of the victim's claim to recovery.
We have considered three different accounts of the role of
excuses in the theory of liability for nonreciprocal risk taking.
The first is that excuses are relevant to a just theory of liabil-
ity because a theory of liability can be just only if it imposes
liability on the basis of culpability.Excuses defeat culpability
and, therefore, liability. I reject this account of the role of
excuses in tort liability if for no other reason than tort liability
is typically unconcerned with culpability. The second theory
argues that excuses are relevant if and when they defeat
agency,because liability can be imposed justly only if it is im-
posed for conduct that implicates the injurer's autonomous
agency. I reject this thesis as well, largely because liability in
torts does not require autonomous agency. Strict victim lia-
bility under the fault principle is liability without agency. The
third theory argues that excuses are relevant because only
individuals who are injured as the result of human action
have a claim in corrective justice to repair, and part of the
263
Rectifiablewrongs
inquiry in any torts case is whether in fact the victim has
such a right.
Which of these views of excuses is compatible with Fletch-
er's account? Which account, if any, does he advocate? Fletcher
recognizes as well as anyone that liability in torts does not
require culpability. Thus, he would not defend excuses on
the grounds that they demonstrate the absence of blame or
fault. Only excuses that establish the absence of autonomous
agency are relevant to tort law. These accounts fall into two
categories: those in which the absence of agency defeats lia-
bility and those in which the absence of agency defeats the
claim in corrective justice to repair.
There is some reason to think that Fletcher himself adopts
the view that excuses matter because the absence of human
agency undermines justice in liability. Recall that his general
thesis is that whereas an individual who is injured by a non-
reciprocal risk taking of another is entitled to repair, only
those whose nonreciprocal risk taking is unexcused (in the
relevant sense) are candidates for liability. He explicitly claims
that being injured by nonreciprocal risk taking suffices to
ground a claim to repair whether or not the "event" that
creates the risk is the result of an autonomous human action.
On the other hand, only autonomous human actions are
candidates for liability.
This view is wrong on both sides of the liability-recovery
equation. First, liability does not require agency, as is true of
strict victim liability. Second, individuals can have nonreci-
procal risks imposed on them by sources other than autono-
mous human agency. Lightning imposes nonreciprocal risks,
yet the victims of lightning are not generally thought to have
claims to repair in corrective justice or in torts.
Only the third account of the role of excuses in a just the-
ory of liability is defensible. Though there are grounds for
thinking that this is not Fletcher's view, the most sympa-
thetic reading of his overall thesis would require substituting
it for the thesis he appears to hold. From here on, we shall
say that in any theory of justice in torts, excuses are relevant
264
Reciprocityof risk
because they bear on a defendant's agency, not his culpabil-
ity. Agency, in turn, matters because the victim's claim to
repair in justice depends on his being the victim of another's
conduct. Agency matters to recovery even if it does not bear
directly on liability. There is an important difference be-
tween issues of liability and recovery on the one hand and
those of moral right and duty to repair, on the other. I have
argued that because an individual can be held liable in torts
even if the loss for which he is liable is not his doing, not, in
other words, the result of his doing, torts does not require
human agency as a condition of liability for loss. Therefore,
to the extent excuses that defeat agency are allowed to ex-
cuse an individual from liability, it cannot be because liability
cannot be imposed on individuals who have not acted. There
must be another explanation.
My suggestion is that often in deciding on the incidence of
a loss, the court begins by trying to determine whether the
person who seeks repair, the plaintiff, has a right grounded
in morality to compensation. It may be that under the rele-
vant principles of justice (as I will argue), the victim can have
a right to repair only if there is someone who has a duty in
morality to compensate him, and someone can have a duty
to repair only if he is responsible for imposing a wrongful
loss upon the victim. Excuses are then relevant to this in-
quiry about the moral rights and duties of the litigants be-
cause they bear on whether the injurer is responsible for the
victim's loss in the sense required by the relevant moral prin-
ciple. If the defendant has an excuse, then the victim has no
moral right to repair under the relevant principle of justice.
Because the loss remains to be allocated, determining that it
cannot be allocated under the relevant principle of justice
does not conclude the inquiry. It may be imposed either on
the victim or the injurer, though in neither case will it be
imposed because in the appropriate sense the loss is the lia-
ble party's doing. And that is why excuses are relevant to an
agent's duty to repair in justice, but not to liability. An agent
can be liable for a loss in tort law though he has an excuse,
265
Rectifiablewrongs
whereas he cannot have a duty in corrective justice to make
amends under the same conditions: a duty in morality that
could otherwise provide a ground of his legal liability.
269
Chapter 14
278
Causation, responsibility,and strict liability
interests are illegitimate. The businessman's interest in the
success of his company may well be legitimate, whether or
not he succeeds. If he is driven from business by more suc-
cessful competitors, he is harmed, his legitimate interests
frustrated. Still, it is unlikely that he has a claim to compen-
sation provided the businesswoman who outduels him abides
by the relevant conventions and competes fairly. The con-
cept of harm adds something to the formula of strict liability,
but it does not add enough to explain the sense in which
both liability and recovery are matters of morality and justice.
279
Rectifiablewrongs
ness, no frustration occurs, and no grounds for liability or
recovery exist.
The concept of legitimate expectations is ambiguous. If we
claim that a person has a right to recover only for losses re-
sulting from the frustration of legitimate expectations, then
we need to distinguish between expectations that are legiti-
mate in the sense that someone has good and sufficient
epistemicreason to have them and those that are legitimate in
the normative sense that some rule or principle gives some-
one the right to have them. It is not reasonable in the epis-
temic sense for any motorist to expect that all motorists will
follow the rules of the road; the empirical evidence available
to all motorists suggests that no motorists follow all the rules.
On the other hand, the rules of the road give all motorists
normative grounds for expecting the compliance of others. I
have a right to expect compliance, but no grounds for ex-
pecting that my expectations will be realized. In other words,
I have legitimate normative expectations and no legitimate
epistemic grounds for anticipating that those expectations will
be realized. 11
The unsuccessful businessperson has no right to recover
for damages that result from fair business practices, but does
have a right to recover for damages that result from unfair
practices - even if she has no reason to believe that compet-
itors will comply fully with the relevant legal constraints. If
that is correct, then the relevant criterion of expectation is
normative, not epistemic. If each individual is entitled (nor-
matively) to expect from others that they not impose unrea-
sonable risks of harm, then the concept of normatively legit-
imate expectations implicates the concept of fault. People are
normatively entitled to expect that others will not be at fault
with respect to them. Recovery for frustrated normative ex-
pectations is recovery for fault. Fault does the work; norma-
tive expectations provide the cover. The concept of norma-
tive expectation appears to help explain recovery and liability
in a way in which the concept of harm fails to, but it may do
so only by reintroducing the concept of fault or wrongdoing.
The problem of course is that the concept of normative
280
Causation,responsibility,and strict liability
expectations is itself not basic or fundamental. One's nor-
mative expectations depend on the relevant norms and con-
ventional practices. If reasonable care provides the relevant
norm, recovery and liability are matters ultimately of fault.
At best, the concept of legitimate normative expectations is
only partly helpful. The degree to which it is helpful de-
pends on the underlying norms that create the relevant ex-
pectations. But once we have a set of underlying norms, the
concept of normative expectations becomes otiose; losses that
result from the violation of those norms are compensable be-
cause the conduct is wrongful. At worst, normative expec-
tations play no role in the argument whatsoever.
282
Causation,responsibility,and strict liability
Carla's right imposes on him. If we feel that he owes her
compensation, it cannot be because what he had done was
in any way at fault. What he has done is right. If Hal has a
duty to make good Carla's loss, then the ground for recovery
and liability is the fact that his conduct, however permissi-
ble, was contrary to Carla's right.
Some actions that are contrary to the demands rights im-
pose on us are at fault or otherwise wrongful. We refer to
those as rights violations. Other actions, however, can be
both contrary to the demands of rights and not at fault. In
those cases, there can be both liability and recovery in the
absence of fault. So action contrary to a right does not nec-
essarily entail fault. Therefore, a proponent of strict liability
might try to define compensable losses in terms of rights in-
vasions, and in doing so avoid the charge that he has done
no more than supplement his theory with the principle of
fault.
In those cases of permissible invasions, that is, infringe-
ments, compensation derives from the invasion of the right,
not from the wrongfulness or fault of the injurer's conduct.
There is no wrongful conduct of which to complain. In cases
of culpable invasions, that is, violations, the case for com-
pensation is overdetermined. There is both wrongful con-
duct on the injurer's part and conduct contrary to the vic-
tim's right. The infringement cases suggest that conduct con-
trary to the victim's right is sufficient for liability as well
as recovery. Thus, though the wrongfulness of the injurer's
conduct may be sufficient, it cannot be necessary. If liability
and recovery can be explained as required by justice without
having recourse to the wrongfulness of the injurer's con-
duct, then we have provided a genuine theory of strict liabil-
ity - a theory that makes liability both strict and just. 13
This is the strongest version of the theory of strict liability.
Though I do not believe that the argument ultimately suc-
ceeds, I need to postpone full consideration of it until in
Chapter 16. Rights play a role in the correct theory of liability
and recovery, but not the one theory of strict liability sets
283
Rectifiablewrongs
forth. Before we explore an alternative to the theory of strict
liability, we should first state the theory and give some idea
of the line of objection to be developed later.
The theory of strict liability holds:
1. Liability and recovery are matters of justice for all and only losses
that result from the invasion of rights.
2. Compensation can never be a matter of justice in the absence of
a right.
3. Compensation in torts is always for action contrary to rights.
284
Chapter15
Liability and recovery
The first distinction is the one for which I have been given
undue credit, and that is the distinction between the grounds
of recovery and liability. The distinction between the grounds
of recovery and liability is analytically unassailable, but the
truth is that our current tort practice does not appear to take
advantage of it. In torts, the costs of particular accidents are
allocated between particular plaintiffs and defendants. Tort
285
15.5 NECESSITY
298
Liability and recovery
302
Chapter 16
304
The mixed conceptionof correctivejustice
drive safely. Can compensating you be a matter of justice as
well, and, if so, what principle of justice?
It may be good social policy to compensate you and in so
doing to re-create or protect an unjust distribution of wealth.
That may seem like a price worth paying in order to create
the right incentives: yours to sue, mine to drive safely. I want
to suggest, however, that compensating you under condi-
tions that generally obtain can also be a matter of justice,
and, therefore, that entitling you to repair may be required
by justice, even if that means sustaining a less than fully just
distribution of holdings. One consequence of this view is that
justice may permit sustaining an unjust distribution of wealth.
This is what I believe one must be committed to if your claim
to repair against me can be a matter of justice. If sustaining
or protecting a less than fully just distribution of wealth or
resources can sometimes be a matter of justice, it cannot be
a matter of distributive justice. Then what sort of justice is it
that permits, if it does not explicitly, endorse distributive in-
justice?
The answer is, corrective justice. 2 Before we say anything
more about the demands of corrective justice and the way
those demands fit with those of distributive justice, it is im-
portant that we distinguish between endorsing injustice and
implementing a policy that has the effect of permitting or
sustaining injustice. The difference goes to the point or pur-
pose of an institution or the intentions of the agents within
it. Meeting the demands of corrective justice may have the
effect of re-creating or sustaining a less than fully just distri-
bution of holdings, but endorsing distributive injustice is not
part of the point of corrective justice. Of course, if it turns
out that meeting the demands of corrective justice has the
effect of entrenching distributive injustice, that might well
count as a reason against devoting substantial resources to
meeting the demands of corrective justice. 3
305
Rectifiablewrongs
308
The mixed conceptionof correctivejustice
cance" threshold. The gain in utility must be substantial be-
fore claims of rights are overcome or defeated.
Thus, one can accommodate claims of rights and claims of
utility in a way that does justice to both. On the other hand,
if claims of marginal advantage could defeat claims based on
rights, we would not be able to say that people really have
rights; rather, we would be optimizers or utility maximizers
with no real account of rights. That is one reason, for ex-
ample, why David Lyons, for one, has denied that there can
be a utilitarian theory of rights. Utilitarians are committed to
incrementalist reasoning in a way that is incompatible with
the significance threshold entailed by rights. 6
Something like this is what I am suggesting might be true
of claims to repair in corrective justice within the annulment
thesis. Corrective justice specifies grounds, not modes, of
rectification. It constrains modes of rectification to the extent
that it does not normally permit the creation of wrongful losses
as a way of eliminating other wrongful losses. However, on
some occasions, when no other alternatives are available, and
the difference between the loss created and the loss elimi-
nated is sufficiently great, it may permit the creation of what
would otherwise be a wrongful or unjust loss.
Let's return to the basic structure of corrective justice as it
is conceived by the annulment thesis. Corrective justice re-
quires that wrongful losses be annulled, but on whom does
the duty to repair fall? The annulment thesis does not appear
to impose this responsibility on anyone in particular. In other
words, corrective justice, so understood, gives no one in par-
ticular any special reason for acting, for annulling wrongful
gains or losses.
Suppose we hold the view of justice and morality as action
guiding. Principles of justice and morality do not simply pro-
vide answers to metaphysical questions about which things
in the world are really good or right; they are designed to
give agents reasons for acting. Their importance depends on
the role they play in practical reasoning. One way in which
corrective and distributive justice might differ, then, is with
309
Rectifiablewrongs
respect to the ways in which they figure in an individual's
practical reasoning. Corrective and distributive justice are
distinct principles of justice. That just means that typically
they give individuals different kinds of reasons for acting.
But if we accept the annulment thesis, this is not how correc-
tive and distributive justice differ. For, as I have character-
ized it, the annulment view appears to hold that justice re-
quires that a certain state of the world be brought about, not
that anyone in particular has a special reason in justice for
bringing it about. And this is precisely the way we think
about distributive justice. Therefore, in terms of their reason-
giving properties, corrective justice is indistinguishable from
distributive justice.
At the outset, I suggested that one might appeal to consid-
erations of corrective justice in ways that might sustain cer-
tain distributive injustices. This was part of the point of the
Rockefeller example. If that suggestion is plausible, correc-
tive justice must be logically and morally independent of dis-
tributive justice. The argument to this point suggests, how-
ever, that if corrective justice is understood in terms of the
annulment thesis, it creates reasons for acting in the same
way (and of the same type) as does distributive justice. If the
difference between the two is to be reflected in the reasons
for acting that each creates, the annulment thesis seems dis-
abled from distinguishing corrective from distributive jus-
tice. It would fail, then, as an account of corrective justice.
An example might illustrate the basic problem. If Jo-
sephine steals Ronald's radio, then corrective justice should
be the kind of principle that gives Josephine a reason to act
that neither you nor I have. It is not as if each of us has a
responsibility, if any of us does, to see to it that Ronald's
radio is returned or, if it is damaged, that he is compensated.
Rather Josephine has a reason for returning the radio that
none of us has. The same might not be true with respect to
at least some of our other important duties to Ronald in dis-
tributive justice. If distributive justice required that certain of
Ronald's needs be met, then each of us might have the same
310
The mixed conceptionof correctivejustice
kind of reason in justice to see to it that those needs were
met.
If corrective justice provides individual agent-relative rea-
sons for acting in this sense, it cannot be a principle that
provides only grounds for claims to recovery and liability. It
must be a principle that specifies individual rights and re-
sponsibilities. And if it specifies a system of correlative rights
and responsibilities, it also specifies a particular mode of rec-
tification. Those who have the duty in corrective justice to
make repair must in justice be made liable to do so. Any
other scheme of liability is an offense to justice. Josephine's
wrong is taking Ronald's radio; corrective justice imposes the
duty on her to return it, or, if she has ruined it, to replace it.
No one else in justice has the reason for acting Josephine
does; no one must do what she must do.
The annulment view has two general problems that are
related. First, it seems unable to account for the distinction
between distributive and corrective justice. Second, it pro-
vides only grounds for recovery, whereas a proper concep-
tion of corrective justice will specify a mode of rectification
as well as a reason for doing so. Rectification in corrective
justice will be the duty of someone in particular. This sug-
gests that the annulment view must be augmented or aban-
doned. Before considering alternatives to it, let's develop these
objections to the annulment conception of corrective justice
more fully in the hopes of establishing their ultimate persua-
siveness.
311
Rectifiablewrongs
to summarize the objections of Perry and Raz that have per-
suaded me to abandon the annulment thesis, and then, sec-
ond, to characterize an alternative conception of corrective
justice with which Weinrib in particular has been associated.
One problem with the annulment thesis is that it provides
no one with any special reason for acting. If someone has
suffered a wrongful loss then that loss should be eliminated.
But how and by whom? The answer implicit in the annul-
ment view appears to be that it depends. So justice itself does
not tell us who should do what to repair the damage. It merely
warns us against rectifying the loss in any way that creates
additional wrongful losses. This feature of corrective justice
reduces it to a form of distributive justice, a line of objection
suggested earlier. Let's now develop it in considerably greater
detail.
In one view of distributive justice, we all have reasons for
acting in certain ways, for providing each member of the
community with whatever it is that the principle of distribu-
tive justice requires of us. This responsibility falls to each
and every one of us, but coordination in efficiently discharg-
ing this duty is difficult. Therefore, we create a larger insti-
tution, the state, that acts as our agent and sees to it that we
discharge our obligations under distributive justice. For sim-
ilar coordination related reasons, we may empower this state
to do all sorts of other things as well, like provide public
goods. Indeed, this is the sort of public goods argument for
the state as an agent of distributive justice that one might
defend as consistent with the general theory presented in
Part 1.8
We have other responsibilities to one another that are not
matters of distributive justice; they are owed by us to other
persons as a result of actions we undertake and relationships
we form. Some of these duties are contractual; others derive
from commitments of one sort or anther; still others result
from unjustified advantages we take of one another, or the
harms our conduct occasions. If I take your watch, I have a
duty to return it. No one else has that duty. If I have some-
312
The mixed conceptionof correctivejustice
how destroyed it, then I owe you compensation. No one else
does.
It may tum out that if I take all your possessions, you will
fall below the social safety net. And everyone has a respon-
sibility to see to it that people are situated above the safety
net. I now have two connected responsibilities: one to return
what I have taken; the other to see to it that you rise above
the safety net. I can discharge both by returning your pos-
sessions to you. Suppose I do not. Then you are below the
safety net. In that case the duties of others under distributive
justice apply. Each person has a duty to see to it that you rise
above the safety net. In this case, that might mean working
to get me to return your possessions, or failing that, to see
to it that you are compensated for your loss. Usually that
duty will be discharged by the state in some way, for ex-
ample, through welfare or other forms of social insurance.
But the state is merely acting as our agent in discharging our
duties under distributive justice.
Notice that the duty in distributive justice that each of us
has to come to your aid is triggered only when you fall below
whatever it is that distributive justice claims is your entitle-
ment. No one has a responsibility to make good your loss as
such. Only the injurer, that is, me, is responsible to return
your possessions or to make good your losses independentof
considerationsof distributivejustice. Only I have a duty to re-
turn or repair in corrective justice. That is the essential point
of what I am calling the relational conception of corrective
justice. It is a point whose difference with the annulment
theory is worth emphasizing.
In the annulment thesis, wrongdoing creates no special
reason for the wrongdoer to do anything. Rather the focus
appears to be entirely on the loss the victim has suffered.
That loss should be annulled. In general, we have an interest
in the well-being of the victim. We are sensitive to shifts in
her wealth. Should she suffer a diminution in welfare be-
cause of a flood, a hurricane or other misfortune, then we
might feel that her loss is undeserved and should, if pos-
313
Rectifiablewrongs
sible, be eliminated. The losses she suffers at the hands of
others are also of this sort. They are losses that are unde-
served, and should, if possible, be eliminated. Or so justice
demands. In the same way that losses owing to misfortune
create grounds for annulment, so too do losses owing to the
wrongful mischief of another. If the argument for eliminat-
ing losses in one case is benificence, then so too is the argu-
ment for doing so in the other. If it is our responsibility in
distributive justice to eliminate losses owing to natural disas-
ters or undeserved handicaps, then the argument that brings
wrongfully inflicted losses to our attention is also one in dis-
tributive justice. Losses owing to wrongdoing are among the
set of losses that generally ought to be eliminated.
The problem for the annulment thesis is that corrective
justice provides particular persons with reasons for acting,
and it is that fact about it that distinguishes corrective from
distributive justice. Without the imposition of a duty or re-
sponsibility, corrective justice is, at best, reducible to one or
another form of distributive justice. That would seem to be
an implication of the annulment thesis: to wit, wrongfully
imposed losses are among the kinds of losses that should be
compensated for, but so are (arguable) losses that result from
handicaps, natural disasters, and misfortunes generally.
In the annulment view, the point of corrective justice is to
eliminate or rectify certain gains or losses. It says nothing at
all about who has this duty, if anyone does, in justice. The
alternative conception of corrective justice, what I call, the
relational view, makes exactly the opposite claims. It denies
that corrective justice has any point or purpose with respect
to gains and losses. The existence of a loss is not necessary to
trigger claims based on corrective justice, nor is the point or
purpose of corrective justice to annul or eliminate a loss.
Rather, it specifies a framework of rights and responsibilities
between individuals. In the relational view, it is the wrong,
not the loss that must be annulled, that specifies the content
of the relevant duty. It claims, in effect, that corrective justice
operates on the relationship between persons in the follow-
ing way. If one person has wronged another, then corrective
314
The mixed conceptionof correctivejustice
justice imposes a duty on the wrongdoer to rectify his wrong.
In the annulment thesis, in contrast, the fact that one person
wrongs another can create a state of the world that is the
concern of justice, but perhaps not of anyone in particular,
including the person responsible for the wrong. In the rela-
tional view, the fact that one person wrongs another affects
the system of rights and responsibilities betweenthem.
We have isolated two important differences between the
annulment and relational views. In the annulment view, cor-
rective justice is triggered by wrongful losses (or gains). Its
point or purpose is to rectify them. In doing so, it does not
appear to impose a responsibility upon anyone in particular
to repair the distortion. In contrast, wrongful losses are of no
direct consequence in the relational view. Corrective justice
has no point or purpose, let alone the specific purpose of
annulling gains and losses. In the relational view, justice
merely creates a scheme of rights and responsibilities be-
tween individuals. Thus, unlike the annulment thesis, it cre-
ates specific, agent-relative reasons for acting.
It is important to distinguish the relational view from other
conceptions of corrective justice with which it might be eas-
ily confused. Richard Epstein, for one, appears to hold the
view that justice requires that the individuals responsible
(casually) for the losses of others be held liable in order to
make those losses good. If I understand his position cor-
rectly, Epstein shares with the annulment thesis the view
that the point of corrective justice is to eliminate wrongful
losses. His view differs from the annulment thesis in holding
that such losses ought to be eliminated by imposing liability
on particular wrongdoers. The annulment view is agnostic
with respect to liability for loss. It shares with Epstein, how-
ever, the view that the normatively significant aspect of the
relationship between persons (from the point of view of cor-
rective justice) is the existence of wrongful losses.
Though the relational view appears similar to Epstein's
position, in fact it denies both of its central tenets. In the
relational view, wrongful losses as such are normatively un-
important. Their existence does not trigger the application of
315
Rectifiablewrongs
the principle, nor is it the point of the principle to eliminate
or rectify them. The fact that someone wrongs another creates
the relevant duty in corrective justice. Losses have nothing
to do with it. Moreover, whereas Epstein believes that losses
should be annulled by imposing liability upon particular
wrongdoers, the relational view does not assert that there is
only one institutional form through which the debts under
corrective justice can be discharged that is compatible with
justice. Thus, while it rejects annulment as the point of cor-
rective justice, it accepts the distinction between the claims
of corrective justice and the institutional forms available for
satisfying them. In this regard, it is similar to the annulment
thesis.
Because the relational view is concerned entirely with the
ways in which individual rights and responsibilities are al-
tered as a consequence of wrongdoing, it is also possible to
confuse it with the attempt to embed corrective justice in a
particular account of what it is to have a right, and in doing
so to provide a foundation for that conception of the princi-
ple. The problem of providing a foundation for the relational
conception of corrective justice is important because it is nat-
ural to wonder why corrective justice has no point or goal
beyond merely identifying the ways in which wrongdoing
alters the normative relationships among agents. The rela-
tional view merely imposes a scheme of rights and respon-
sibilities. And one reason it does so, one might argue, fol-
lows from our understanding of what it is to have a right.
Corrective justice, in this view, is simply part of the meaning
of rights.
Suppose we analyze rights in the following general way.
To say that you have a right that I not harm you, for in-
stance, is to say, among other things, that I have a duty not
to harm you. These are correlative rights and duties that are
primary, or fundamental, to the content of the right in ques-
tion. However, part of what it means for you to have such a
right is that you have a variety of secondaryrights as well;
these are, or can include, meta rights - rights about your
primary rights. One such right is the one you have that I
316
The mixed conceptionof correctivejustice
compensate you in the event that I invade or violate your
first order right that I not harm you. Similarly, we might say
that I have a series of second order duties correlative of your
second-order rights, and among these, presumably, is the
right that I compensate you in the event that I fail to dis-
charge my first order duty not to wrong you. Thus, when I
harm you in a certain way that violates your first order right,
you have a second order right against me to repair the re-
sulting damage, and I have a corresponding second order
duty to provide it.
This argument, which purports to provide a conception of
corrective justice, in fact does not mention corrective justice
at all. Instead, it draws its conclusions from a particular ac-
count of what it is to have a right. It is plain that the relation-
ship between secondary and primary claims or rights relies
on normative, not analytic, considerations. Even if we accept
the view, which I do not, that correlative of every right is
some specifiable set of duties, and that rights are to be ana-
lyzed in terms of the relationships between or among the
rights and duties, it hardly follows that the existence of cer-
tain primary rights entails, in any sense, the particular list of
secondary rights or claims that includes the claim to repair.
After all, the right not to be harmed can be protected in any
number of ways, each of which may give rise to very differ-
ent secondary claims, and some of which may give rise to no
secondary claims at all. Surely, how we should secure or
protect the important interests marked by rights is not a mat-
ter of logic but a matter of substantive moral argument. (Sim-
ilar remarks obtain with respect to the relationship between
primary and secondary duties.)
If the duty to compensate and the right to compensation
do not follow as a matter of logic from the nature of what it
means to have a right, but follow, instead, from a suitable
normative principle, the question is, Which principle? The
obvious choice is the principle of corrective justice. In other
words, the duty to compensate and the right to compensa-
tion for the invasion of rights derive from the principle of
corrective justice. Or, to put the matter somewhat differ-
317
Rectifiablewrongs
ently, the second order right to repair and the corresponding
duty to compensate are ways in which the principle of cor-
rective justice requires that first order rights be protected and
duties enforced. But then the principle of justice does not
derivefrom a plausible theory of rights. Instead, it is the moral
principle external to rights that gives rights a certain con-
tent; it is an element of an underlying foundational theory of
rights, not part of the meaning or syntax of rights. In other
words, we cannot defend a particular conception of correc-
tive justice by showing that it follows from our understand-
ing of what it is to have a right when it is that conception of
corrective justice itself that grounds that understanding of
what it is to have a right. So one thing we might say about
the relational conception of corrective justice is that it grounds
a particular conception of what it is to have rights of a certain
kind.
There are two problems with the notion that corrective jus-
tice requires annulling wrongs. The first is that the wrongs
that typically are the concern of corrective justice are not
wrongs in the sense that usually calls for annulment. Sec-
ond, to the extent individuals commit such wrongs, there
already are principles of justice designed to deal with them.
In the typical case an injurer is at fault for failing to take the
care that a reasonable person of ordinary prudence would
have. Fault judgments of this sort are not ordinarily defeasi-
ble by what we would think of as an excuse. To use the lan-
guage I developed earlier and will take up again later, in the
typical case the fault or wrong is in the doing, not in the
doer. The agent need not have done something for which he
is to blame, something that displays a lack of proper moti-
vation or a defect in his character. The wrongdoing is objec-
tive. Similarly, wrongs that are invasions of rights need not
be culpable in the ordinary sense. In the infringement cases,
they are the result of conduct that is, on balance, justified
324
The mixed conceptionof correctivejustice
and not culpable at all. Excusable conduct can be at fault;
justifiable conduct can be rights-invasive, and constitute a
wrong in that sense.
The wrongs that fall within the ambit of corrective often
do not mark a moral defect in the agent or in her action. It is
hard to see why annulling them would be a requirement of
justice. On the other hand, there are cases of genuine
wrongdoing that mark a fault in the agent and in the action.
The reckless imposition of unjustifiable levels of risk; the in-
tentional harming or injuring of another. These can be gen-
uine wrongs. Perhaps a case could be made for the proposi-
tion that justice requires annulling them. But there already is
a principle of justice that holds that such wrongs should be
annulled: the principle of retributivejustice.
Annulling moral wrongs is a matter of justice: retributive,
not corrective, justice. There is a legal institution that, in some
accounts anyway, is designed to do retributive justice, namely,
punishment. The bulk of cases in which claims in corrective
justice are valid do not involve wrongs in this sense. If we
abandon the view that corrective justice requires annulling
wrongs as such, we are left with the claim that corrective
justice imposes the duty on wrongdoers to annul the wrong-
ful losses their conduct occasions.
Does this mean that we have returned to the annulment
thesis, that we have given up the relational view altogether?
No. Correctivejusticeimposeson wrongdoersthe duty to repairthe
wrongful lossestheir conductoccasions,lossesfor which they are
responsible.Thus, it provides wrongdoers with reasons for
action that are peculiar to them - agent relative reasons in
that sense - to annul losses they are responsible for. The
insight of the relational view is that wrongdoing changes the
nature of the relationship between the parties; it creates du-
ties where none had previously existed. It gives agents rea-
sons for acting that they did not previously have. The prob-
lem with the relational view is that it gets the content of the
duty wrong. The annulment thesis has the correct interpre-
tation of the content of the duty: thus, the mixed conception
of corrective justice.
325
Rectifiablewrongs
In the relational view, the fact that he has done something
wrong gives the wrongdoer a duty to repair the wrong. In
the mixed view, the wrongdoer has no duty to repair the
wrong. Instead, he has the duty to repair the wrongful losses
that are his responsibility. What grounds that duty? It is not
the fact that the injurer has done something morally blame-
worthy or otherwise culpable, something, in other words,
that might in fact ground a duty to right his wrong. He may
in fact have done nothing morally reprehensible at all. Still,
he has done something wrong. Because it is wrong, the loss
that results is wrongful, or so I will argue in Chapter 17.
Moreover, because he has done wrong, the loss may be his
fault, his responsibility. And if it is his responsibility, correc-
tive justice imposes on him the duty to repair. That is the
way in which corrective justice connects agency with wrong-
ful interferences with an individual's well-being. Its core idea
is that when individuals are linked to wrongful losses by the
relationship of responsibility there arises a duty of repair.
Corrective justice has two dimensions. First, losses are.the
concern of corrective justice if they are wrongful. They are
wrongful if they result from wrongs or wrongdoings. The
wrong grounds the claim that the losses are wrongful (and
thus within the ambit of corrective justice.) Secondly, the duty
to repair those wrongful losses is grounded not in the fact
that they are the result of wrongdoing, but in the fact that
the losses are the injurer's responsibility, the result of his
agency. The duty to repair those losses under corrective jus-
tice is grounded in the injurer's connection to them. They
are, in a suitable serise, his responsibility, they are his, and,
therefore, his to repair .10
328
Chapter 17
Wrongfulness
334
Wrongfulness
justice. In corrective justice excuses that aim to defeat agency
are relevant for two different reasons. 5 First, in order for an
agent to have a duty in corrective justice to repair a loss,
the loss must be wrongful in the appropriate sense. It must
result from either wrongdoing or wrong. Both involve hu-
man agency. Therefore, an individual who has an agency-
defeating excuse undermines the victim's claim that his is a
loss falling within the ambit of corrective justice. Second,
corrective justice imposes the loss upon the injurer, not sim-
ply because it wrongful, but because the loss is, in some ap-
propriate sense, his responsibility. An individual who has a
suitable agency-defeating excuse may be on the way to
showing that there is no sense in which the victim's loss is
his responsibility. (His having a good excuse does not strictly
imply that the loss is not his responsibility because being
connected to an event by the agency relationship may be only
one of the many morally relevant ways of being responsible
for it.) Thus, agency-defeating excuses are relevant in correc-
tive justice because they bear on the "injurer's" responsibil-
ity as well as on the moral character of the victim's loss. 6
335
Rectifiablewrongs
need an account of what it is to have a right, and what it is
that makes conduct invasive of a right. This section presents
the relevant conception of rights and of rights-invasion, and
in doing so revisits the discussion in Chapter 15 regarding
the relationship between the content of rights and the un-
derlying normative theory of them.
The place to begin is with the distinctions owed to Cala-
bresi-Melamed among property, liability and inalienability
rules as ways of protecting or securing entitlements. These
distinctions should be familiar by now, but a brief review
will be helpful for the discussion that follows. Property rules
protect rights by conferring on right holders the power to
exclude and to alienate. Consent ex ante is a condition of
legitimate transfer under a property rule. Liability rules pro-
tect rights by conferring a right to compensation on right
holders in the event that someone takes that to which the
right holder is entitled. Under liability rules, compensation
ex post legitimates forced transfers. Inalienability rules pro-
tect entitlements by prohibiting right holders from transfer-
ring that to which they are entitled by either consent ex ante
or compensation ex post.
Now let's contrast this account of rights with the classical
liberal theory. In classical liberal theory, to have a right is to
have a protected sphere of autonomy or control. To say that
I have a right to something is to say that I, not you or any-
body else, have control over its use. I make those decisions,
not you. There is an obvious conflict between the classical
liberal conception of rights and the Calabresi-Melamed
framework. How can a liability rule in the Calabresi-Me-
lamed sense protect my right when it gives you and others
certain important discretions with respect to the uses to which
my right can be put (provided that you compensate me for
whatever damages, if any, the uses to which you put my
holdings impose on me)? A liability rule in this sense gives
you options or control with respect to the resources to which
I am entitled. Isn't the notion of a liability rule incompatible
with the classical liberal conception of a right? How can lia-
bility rules protect liberal property rights?
336
Wrongfulness
The answer is that liability rules cannot and do not protect
classical liberal property rights. Something, apparently, has
to give - either the liberal theory of rights or the Calabresi-
Melamed framework. Neither alternative is altogether satis-
factory. There is a third alternative, however, and it is the
one I want to defend. It requires that we give up both the
classical liberal conception of rights and the Calabresi-Me-
lamed framework.
The analysis I offer relies on the distinction between the
meaning and content of rights, or what I have elsewhere called
the syntax and semantics of rights.7 The syntax of rights
specifies what is true of rights analytically: what, in other
words, is part of the meaning of rights. Ronald Dworkin, for
one, claims that part of the meaning of rights is that they act
as trumps in political and moral arguments. 8 For him, their
function is part of their syntax. Were his claim true, it would
be true of all (political or moral) rights as such. In contrast,
Joseph Raz claims that rights ground duties. 9 For Joel Fein-
berg, rights are valid claims of one sort or another. 10 The set
of valid claims can range over a variety of domains including
use, alienation, and transfer more generally. That rights are
valid claims is part of their syntax. If true, it is true of them
necessarily.
The syntax of rights does not specify the content of any
right in particular. When we say that rights are valid claims
that range over a variety of domains, we have said nothing
about the content of any particular right. The content of the
claims associated with rights ownership is given by the se-
mantics of rights. The semantics of rights is not given a priori,
and is not true of rights as such. That rights include some set
of valid claims is an aspect of the syntax of rights. The spe-
cific claims associated with particular rights constitute the
right's semantics.
An example might help to illustrate the way in which the
semantics of rights are constructed. Suppose it is a norm in
our community that in order for someone legitimately to ob-
tain what is owned by another, she must first secure the en-
titled party's consent. Under this norm consent would be a
337
Rectifiablewrongs
condition of legitimate transfer. The right holder would then
have the (moral) power to require others to seek and secure
her consent as a condition of obtaining that to which she is
entitled. Alternatively, we might say that someone can take
what another is entitled to provided he compensates ex post
for what he takes. In that case the right holder has no moral
power to demand consent as a condition of legitimate trans-
fer; instead she has only the power to demand compensation
ex post. She has rights in both cases, the syntax of which is
the same. That is, she has a set of valid claims expressing
powers derived from the relevant norms governing transfer.
The content of the right changes as a consequence of the
relevant norms governing transfer. With the change in con-
tent comes the change in claims associated with the right.
The content or semantics of rights is not given a priori; the
claims associated with rights ownership are not part of their
meaning. Instead, the content of rights derives from the norms
governing the particular domains constitutive of rights own-
ership. Those norms themselves derive from the underlying
normative foundation or theory of rights. The normative or
substantive theory of rights specifies the point or purpose of
the set of rights, the goals or purposes of the practice or the
ideals the practice expresses or aspires to. If I am correct, the
content of rights derives from normative argument, not con-
ceptual analysis.
We can now reinterpret the Calabresi-Melamed frame-
work in a way that eliminates any conflict it appears to have
with the liberal conception of rights. Instead of saying that
the Calabresi-Melamed framework specifies ways of pro-
tecting or securing rights, we should say that it constitutes a
framework of norms designed to specify the terms or condi-
tions of legitimate transfer. It constitutes a framework for
specifying the content of particular rights with respect to the
terms of their transfer. The Calabresi-Melamed framework
tells us what conditions must be satisfied in order for trans-
fers to respect rights. In other words, the mistake in the con-
ventional interpretation of the Calabresi-Melamed thesis is
338
Wrongfulness
treating liability and property rules as ways of protecting
rights, when in fact they are norms that help to specify the
content of rights within the transactional domain. Liability
and property rules determine the conditions of legitimate transfer,
the conditions that must be satisfied if transactionsare to respect
the rights of others.
Here is a sampling of the ways in which property and lia-
bility rules work to specify the content or semantics of partic-
ular rights: (1) If someone has a property rule right, then she
has a valid claim requiring those who seek her resources to
secure her consent first. Failure on the part of others consti-
tutes action contrary to her right, and taking under those
conditions constitutes a wrong to her. Given the analysis of
wrongs, such a taking would be a wrong even if the taker
was justified, on balance, in forgoing efforts to secure her
consent. (2) If someone has a liability rule right, then she has
a valid claim to compensation in the event another individ-
ual secures her resources without her consent. Liability rule
rights do not confer on right holders the power or authority
to exclude or to demand consent as a condition of transfer.
One who has such a right cannot exclude others from enjoy-
ing that to which one is entitled. If liability rule rights can be
rights, then the classical liberal theory must be rejected as an
account of the meaning of rights. It may be considered as a
potential normative theory of the content of rights, however.
As a normative theory, it would hold that the content of all
rights should be given by rules that express the role of rights
in protecting and securing individual autonomy. Thus, it
might hold that almost all rights should be property rule rights
enabling exclusion and alienation. This is, roughly speaking,
the libertarian theory of rights.
We can combine property with liability rules to specify the
content of rights, and we can do so in either of two ways. (3)
In one case the content of a right is given by the disjunction
of property and liability rules. Thus, the right holder is enti-
tled either to consent ex ante or to compensation ex post as
a condition of legitimate transfer, but not both. Thus, in or-
339
Rectifiablewrongs
der to effect a transfer in accordance with rights, someone
would have to negotiate with the right holder or, in the event
he chooses to forgo negotiations, would have to pay com-
pensation. (4) Alternatively, we can specify the content of a
right by the conjunctionof property and liability rules. In that
case, the right holder is entitled to exclude another's use and
to alienate on terms agreeable to her ex ante. Failure to re-
spect voluntary exchange as the appropriate condition of
transfer constitutes a wrong - action contrary to the right
holder's rightful claims. The liability rule gives the right holder
a claim to compensation for consequential damages. In the
case in which the content of a right is given by the disjunc-
tion of property and liability rules, both specify possible con-
ditions of legitimate transfer. In the case in which the con-
tent of rights is given by the conjunction of liability with
property rules, compensation arises as a valid claim when-
ever someone fails to comply with the terms of transfer set
out in the property rule. Compensation rectifies a wrong done;
it does not right what in its absence would constitute a
wrong. 11
1. D is at fault.
2. That aspect of D's conduct that is at fault is causally connected
in the appropriate way to P's loss.
3. P's loss falls within the scope of the risks that make that aspect
of D's conduct at fault.
347
Rectifiablewrongs
350
Wrongfulness
Thus, corrective justice must impose constraints on both the
substantive theories of wrongdoing and wrong.
The set of underlying entitlements may be unjust or wrong,
or it might conform to the demands of justice. The norms
governing their transfer might also be unjust or they might
conform to the demands of justice. This is the distinction
between the underlying entitlements and the transactional
domain with regard to them. We might agree that corrective
justice imposes constraints on the kinds of norms it sustains,
but it remains for us to determine the scope of those con-
straints. Does corrective justice constrain only the norms
governing transfer? Is it a dimension of transactional justice
narrowly conceived? Or does corrective justice reach the un-
derlying entitlements as well as the norms governing their
transfer?
The justice of holdings depends on both the underlying
distribution and the relevant transaction norms. If the net
effect of securing and sustaining a system of norms and rights
in transfer is to embed a fundamentally and uncontrover-
sially unjust distribution of holdings, then one would be hard
pressed to say that doing so is a requirement of justice. It
does not help to say that doing so is required by corrective
justice, but that the demands of corrective justice in such
cases are very weak when compared to other reasons for act-
ing that an agent might have. There may be no reason in
morality for sustaining injustice, not even a weak one - or
so one might argue.
We appear to have two alternatives; neither is fully satis-
factory nor plausible. I want to take a stab at outlining a more
promising line of argument. If we drive a wedge completely
between the norms governing transactions and the justice of
the underlying entitlements, we will sometimes find it im-
possible to explain how corrective justice can provide agents
with moral reasons for acting. On the other hand, if we re-
quire that claims in corrective justice be ultimately support-
able by the distributive justice of the underlying entitle-
ments, then the scope of corrective justice will be narrow
351
Rectifiablewrongs
indeed, so narrow as to give us reason to doubt that it could
play any useful role in understanding any legal practices in
a patently second-best world like our own.
The rights sustained by corrective justice must be realrights;
they must be compatible with the fact that corrective justice
imposes moral reasons for acting. Nevertheless, these need
not be rights that can be shown to be defensible within the
best theory of distributive justice. We need to identify the
middle ground that is picked out by the fact that the princi-
ple of corrective justice provides agents with moral reasons
for acting. Here is an abstract characterization of a solution
to this problem. In order for the principle of corrective justice
to apply to the underlying system of rights sustained by its
application the rights must be such that they are worthy of
protection against infringement by the actions of others, even
if they would not be protected against infringement by state
action designed to replace them with the set of entitlements
which could be defended as required by the best theory of
distributive justice. 20
Other things being equal, the state would always have the
moral authority to impose that allocation of rights required
by the best available theory of distributive justice. Doing so
would be disruptive. It would involve the infringement of
many "rights" that individuals could otherwise claim against
others. The idea here is that since the point of state realloca-
tion is to give each person what in fact he has a right to, it
cannot be the case that his real rights are infringed by state
action. No one's real rights are being infringed; no claims to
repair are sustainable. On the other hand, the state may have
this authority to reallocate resources in a way in which indi-
viduals do not, even if certain individual reallocations might
have the effect of making a more distributively just world. In
order for a scheme of rights to warrant protection under cor-
rective justice, then, they must be sufficiently defensible in
justice to warrant being sustained against individual in-
fringements. Entitlements that fail to have this minimal
property are not real rights in the sense that their infringe-
ment cannot give rise to a moral reason for acting.
352
Wrongfulness
In order that their infringement by other agents matters
from the moral point of view, the relevant "rights" must be
real rights. We can cash out by saying either that those rights
are supported or even required by the principles of distribu-
tive justice that apply in the second or third best world, or
that there is a general moral principle that requires protect-
ing certain entitlements in the real world even if those enti-
tlements are not the ones that would exist under a system
that implemented the best theory of distributive justice. Not
every set of putative entitlements will satisfy either of these
conditions, and, therefore, not every infringement of them
will give rise to claims in corrective justice to repair.
I have stated the condition that must be satisfied in order
for the infringement of a right to give rise to a claim in cor-
rective justice. I have also mentioned two possible ground-
ings for this condition, one in moral theory and one in dis-
tributive justice itself. I have not yet defended either the
condition or the principle that justifies it. Nor have I sug-
gested how we might know whether the condition is satis-
fied in a particular community, or whether it is satisfied in
our own. All this remains to be worked out on another oc-
casion, but on behalf of the general condition, I note tha,t
some such condition must be implicitly, if not explicitly, ac-
cepted by nearly everyone. No one I know believes that the
underlying allocation of holdings in the United States, for
example, exactly coincides with what distributive justice re-
quires. On the other hand, it is not implausible to think that
infringements of those holdings by the conduct of others
normally gives rise to claims in justice to repair. Moreover,
each of us can imagine political institutions that so unjustly
distribute resources that no one could have a reason in jus-
tice for sustaining them by making repair. 21 The important
point here is that there is at least some good reason for think-
ing that nearly everyone is committed to the existence of some
such condition by which the "real" entitlements are to be
distinguished from the pretenders. Real ones in this sense
will be accorded the protection of corrective justice, that is,
their invasion by responsible human agency can create moral
353
Rectifiablewrongs
reasons for acting of a certain kind, even if they will not be
protected against action by the state to implement that allo-
cation of rights required by the correct theory of distributive
justice.
We set aside questions about whether this condition is it-
self grounded in distributive justice or morality more gener-
ally for another time. Ultimately whether some set of "sec-
ond best" entitlements warrants protection in justice or
morality more generally will depend on the extent to which
they contribute to creating and sustaining important social
institutions and arrangements. For example, some set of
property rights will be important to sustaining markets. Per-
haps the existing set of property rights is not what it would
be ideally under the best theory of distributive justice.
Nevertheless, within limits, the rights in place may help to
sustain an institution that generally improves individual well-
being and social stability, and that does so in ways that en-
courage individual fulfillment, initiative and self respect. Those
rights would then be worthy of respect even if they did not
exactly coincide with the best or most just distribution of re-
sources. Roughly this is the status most of us accord to the
scheme of rights protected by private law in liberal political
cultures like our own. 22 The kind of wrongfulness required
by corrective justice, therefore, must consist in departures
from norms and rights that satisfy this condition. Ultimately
in this relationship between corrective and distributive jus-
tice resides both corrective justice's independence and at-
traction to us as a moral ideal. 23
360
Chapter 18
The nature and scope of the duties the state can create and
enforce against individuals and groups depend on the rele-
vant political, not moral, theory. Good character and vir-
tuous action may be desirable, but the state may have only a
limited authority to use its coercive powers to encourage
either. Political philosophies differ with respect to the range
of political coercion they sanction. A libertarian political phi-
losophy, like Robert Nozick's, 2 may restrict the scope of po-
litical authority to remedying private rights violations. To
the extent corrective justice requires that the losses resulting
from private rights violations be repaired, the state may be
authorized to enforce duties in corrective justice, but nothing
more. In that case the state may be free to create a system of
liability-for-loss based on the principle of corrective justice,
but not one based on considerations of economic efficiency.
A utilitarian political theory may extend legitimate political
authority much further. It may authorize the state to create
and enforce a system of liability-for-loss that allocates acci-
dent costs in a way that minimizes them. Under such a
scheme, whether a victim could recover for a loss would de-
pend on whether doing so would be cost minimizing, not on
whether he had a right in justice to repair. Similarly, whether
an injurer or anyone else could be liable for another's costs
would depend on whether imposing liability would be cost
minimizing, not on whether he had a duty in justice to make
good the loss.
In utilitarian political theory, the connection between in-
363
Rectifiablewrongs
jurer and victim is mediated not by corrective justice but by
the relationship of each to the goal of reducing overall acci-
dent costs. The state would not be prevented from enforcing
the demands of corrective justice, but it would not be re-
quired to do so either. Instead, it would do so only if linking
injurers and victims in the way that corrective justice does is
the most desirable or efficient way of bringing about the best
overall consequences.
In a rational choice contractarian political philosophy, the
state may be authorized to enforce both cost minimizing in-
centives and corrective justice between the parties. This is
because in rational choice contractarianism the state is viewed
as a solution to a market failure problem that has both dis-
tributive (including justice between the parties) and produc-
tive (cost minimization) dimensions.
The state will be authorized to implement corrective jus-
tice over a broad range of liberal political ideologies. Our
concern is with corrective justice within the liberal political
culture, and so we have reason for thinking that the sort of
states we are interested in are authorized to implement cor-
rective justice. Let's assume that the sort of political philos-
ophy in countries like the United States, Canada, New Zea-
land, Australia, and the United Kingdom is, broadly speaking,
liberal, not libertarian. That means that the state has the au-
thority to create and enforce reasons for acting grounded in
both considerations of corrective justice and efficiency. It can
set up a tort system, a New Zealand-like no-fault plan, a first-
party insurance plan or some mixture of these, and in doing
so, it can offer as its justification that it is attempting to im-
plement corrective justice, distributive justice, economic ef-
ficiency, or the like. It may be wrong. Perhaps, the New Zea-
land approach is not efficient; or maybe the tort system does
not in fact adequately implement corrective justice. Whether
the state's judgments are correct is independent of whether
it has the authority to act on the basis of those judgments.
If we assume a liberal political theory, then the state will
be authorized to enforce duties in corrective justice, but it
may be equally free to create and enforce reasons for acting
364
Correctivejustice and tort law
based on a range of other principles of political morality. Is
this all there is to it? A liberal state can enforce the demands
of corrective justice, but it need not? It can decide instead to
ignore corrective justice in favor of economic efficiency? It
can decide to have a tort system, but it need not? It can de-
cide to have a tort system that does corrective justice, but it
might just as well decide to have a tort system that creates
incentives designed to minimize accident costs? Can the state
legitimately ignore corrective justice? Can it justifiably set up
a scheme of liability-for-loss that seeks instead to minimize
accident costs or optimally spread risks? If it can, isn't the
authority of the state at least constrained by corrective jus-
tice? That is, though the state may seek to minimize costs
rather than enforce corrective justice, does not corrective jus-
tice function as a constraint on the state's ambitions to mini-
mize or spread safety risks? We cannot determine whether
corrective justice imposes constraints on the state's legiti-
mate authority to implement other goals or principles or
whether our current practices implement corrective justice
until we settle on an account of what it means to implement
corrective justice. That, in turn, depends on the demands of
corrective justice.
368
Correctivejustice and tort law
level. The negligence is not in the manner of doing, but in
the very doing itself.
369
Rectifiablewrongs
has a claim in justice to it? What principle of justice grounds
both the right to the gains and the duty to disgorge them?
Suppose someone drives negligently. In doing so he im-
poses risks on a number of individuals. Let's suppose, how-
ever, that he hits only one person, a pedestrian. The negli-
gent motorist saves the money or resources he would have
had to expend in order to drive safely. This is his wrongful
gain, a gain he secures at the expense of everyone who is put
at risk as a result of his failure to take due care.
We can distinguish between two cases. In one case, the
negligent motorist secures no additional gain as a conse-
quence of his hitting the pedestrian. His only gain comes
from his negligence. In the other case, the negligent motorist
gains from both his negligence and his negligently harming
the pedestrian. Let's consider the case in which the motorist
secures a gain only through his negligence. 4
If the wrongdoer has a duty in justice to disgorge his gain,
each of those individuals he puts at risk has a claim in justice
to part of it. He gains at their expense. He does so unjustifi-
ably. His gain is wrongful and is causally connected to each
pedestrian in a way that could ground a claim on behalf of
each to a share of his benefit. The injured pedestrian is one
such person. The pedestrian has an additional claim in jus-
tice, and that is to the repair of his loss occasioned by the
motorist's negligence. Only this last claim, the one the pe-
destrian and no one else has, is a claim in corrective justice.
Now consider the case in which the negligent motorist se-
cures a gain as a consequence of his negligence and of his
negligently harming the pedestrian. Everyone who is put at
risk by virtue of the motorist's negligence has a claim in jus-
tice to part of the gain he secures thereby. Again, the injured
pedestrian is one such person. The injured pedestrian, how-
ever, has two additional claims. The first is in corrective jus-
tice for repair of whatever loss he suffers as the victim of the
motorist's negligence; the second is for that additional gain
the motorist secures as a consequence of injuring him.
Wrongful loss is the concern of corrective justice; the rele-
vant claim is for repair of a loss. Victims who press claims to
370
Correctivejustice and tort law
an injurer's ill gotten gains are not seeking compensation for
loss. Instead, they seek restitution for being wrongfully taken
advantage of, used, or exploited. Their claims are grounded
in restitutionary justice. Both forms of justice are relational.
Corrective justice imposes the duty on the wrongdoer to
compensate his victims for the costs his wrongdoing im-
poses on them. Restitutionary justice gives the victim the right
to the wrongdoer's gains secured at her expense.
When the wrongful gains and losses exactly coincide, sat-
isfying the demands of corrective justice suffices to satisfy
the demands of restitutionary justice as well, and vice versa.
Wrongful gains and losses need not coincide, however. Con-
duct that creates devastating losses can bring small advan-
tage, whereas conduct that creates enormous gains can oc-
casion minuscule losses. Tort law is the central institution for
discharging the duty to repair wrongful losses; restitution is
the legal remedy for repairing wrongful gains.
372
Correctivejustice and tort law
374
Correctivejustice and tort law
one. Whereas the structure of tort law is reasonably well fixed
or stable, it remains, for the economist, a pliable instrument
in the pursuit of optimal deterrence, optimal insurance, or
both. Indeed, because determining who is the best insurer
or cheapest cost-avoider is always an empirical inquiry, it is
not obvious that injurers and their victims should invariably
be included among the candidates for tort liability, let alone
that the set of suitable candidates be restricted to them.
The problem with any form of economic explanation goes
deeper, for the inadequacy of economic analysis is the result
of its fundamentally forward-lookingconception of liability
running into a structure of litigation that embodies an essen-
tially backward-looking theory of liability and recovery. This
fundamentally backward looking dimension of existing tort
law limits the extent to which economic goals can be pursued
through it. Thus, tort law asks whether A, who allegedly
injured B, should be liable to Bin damages, or whether in-
stead B should be made to shoulder his own costs. However
that decision is made, it is structured in terms of A and B,
two parties whose presence before the court is a conse-
quence of a past event: namely, what B alleges A did. In
contrast, the search for optimal insurers or cheapest cost
avoiders is not similarly constrained by history. Accidents
between A and B may in fact be most easily prevented by C.
Consider automobile accidents. Whenever A rams his car into
B, B brings suit against A. And on the economic analysis, we
are then to decide whether A or B is the person who is in the
best position to reduce accidents of this type. Yet the party
best suited to optimize accident costs may well be the rele-
vant car manufacturer(s), who is (are) party neither to the
accident nor to the litigation.
On the face of it, considerations neither of optimal deter-
rence nor insurance require that litigation be structured so
that only victims and their injurers are candidates for liabil-
ity. Yet this structure of litigation is surely one of tort law's
essential characteristics. Economic analysis can, therefore, only
assume, but never explain, the structure of tort law.
375
Rectifiablewrongs
385
Chapter 19
386
406
Chapter20
Product liability
407
412
Product liability
which public authorities, courts, created a private insurance
scheme. Manufacturers insure product users - period.
In another sense, modern product liability law has main-
tained vestiges of negligence. In order to impose liability on
a manufacturer some threshold requirement had to be met.
This threshold was to be spelled out in terms of a manufac-
turer's failure to measure up to some standard of conduct
either internally or externally imposed. These standards are
represented by "manufacturing" and "design" defect re-
quirements. A manufacturer's product is said to suffer a
manufacturing defect if it fails to perform as the manufac-
turer represents it, that is, it falls below the manufacturer's
own standards.
The negligence component is represented by design defect
standards. And here lies the problem. For there is no one
design defect test applicable in all jurisdictions, nor are any
of the tests easy to administer. Most importantly, the results
under these standards are not at all predictable.
Alan Schwartz has recently reviewed critically four sepa-
rate design tests and finds them wanting. 4 These four tests
are the expectation test, the Learned Hand test, the risk/ben-
efit test, and the regulatory/compliance test. Under the ex-
pectation test, a manufacturer can be liable if its product is
less safe than it is reasonable for a consumer to expect it to
be. A manufacturer is liable under the Learned Hand test if
it is negligent in the economic sense, that is, if the costs of
taking precautions are less than the expected value of the
harm. Liability under the risk/benefit test is more complex,
since a firm's design is defective if, among all the feasible
designs available, it fails to adopt the one that maximizes net
benefits. In the regulatory compliance scheme the appro-
priate standards are set by a regulatory agency and the court's
job is to enforce those standards. Failure to comply with the
operative safety standard is negligent; compliance, however,
is merely evidence of nonnegligence, not constitutive of it.
The expectation test is not helpful. In the absence of some
other test that specifies the level of safety it is reasonable for
413
Rectifiablewrongs
consumers to expect, the test is empty. On the other hand,
if there is such a test, it, and not the expectation test, does
the relevant work. The Learned Hand test is merely the eco-
nomic negligence test. It introduces all the administrative costs
of gathering the relevant information about the benefit and
damage schedules of manufacturers and consumers. These
administrative problems are magnified under the general risk/
benefit test. How are juries to determine from among all pos-
sible feasible designs the one that maximizes social welfare?
What do juries know about product design alternatives? The
regulatory compliance test does not negate uncertainty be-
cause a manufacturer cannot know whether courts will con-
sistently rule that regulatory compliance will free the firm
from liability. Together the rule of strict liability in conjunc-
tion with the design defect tests have wreaked havoc within
the manufacturing sector of the economy.
Strict liability, as Traynor noted, makes manufacturers in-
surers of consumers, though a manufacturer can theoreti-
cally recover these insurance costs in product prices. By
adopting strict liability, tort law has created a system of third
party insurance. First party insurance, for example, health
insurance, the type consumers are most familiar with, is pur-
chased to protest against something untoward happening to
the purchaser. The problem with third party insurance is that
it creates problems of "adver3e selection" and "moral haz-
ard" on excess of those created under a first party system. 5
People will be more inclined to pursue any hospital test or
treatment as a result of an accident, regardless of cost, if
someone else is paying for it. But if a person has to pay for
the service or buy the relevant insurance, he or she would
be inclined to consider undergoing only cost-justified treat-
ments. Third party schemes are also much more expensive
to administer. So great is the difference in cost between first
and third party insurance that George Priest, America's lead-
ing insurance scholar, has argued that tort liability's imposi-
tion of a third party scheme to allocate product safety risks
is the primary source of the recent insurance crisis. 6
Finally, the design defect tests, which constitute a partial
414
Product liability
retreat from the rule of strict liability, turn out to be ex-
tremely costly to administer. These tests are so diverse in
their requirements as to give little guidance to manufacturers
seeking to determine the level of investment in safety they
should make. When applied individually, design defect tests
will result in wildly uncertain outcomes. In short, the mod-
ern solution has failed to provide what we seek, a principled,
rational, and predictable body of law regulating product safety.
The absence of a predictable and rational legal standard is
reflected in the insurance crunch. The greatest danger to an
efficient insurance market is uncertainty, and that is pre-
cisely what the current regime has given us. The question
then is whether there exists a set of policy recommendations
that would add an element of rationality and certainty to the
law governing product safety. In this regard, it is important
to reconsider whether abandoning the contract mechanism
for allocating risk was warranted in the first place.
419
Rectifiablewrongs
429
Chapter 21
Liberalism revisited
438
Liberalismrevisited
tered by his injury, but ones which are nevertheless his to
formulate and to execute.
This way of understanding the damage remedy in torts
further instantiates the interplay between stability and au-
tonomy at the heart of the overarching liberal political theory
that informs all our private law practices. Any other damage
remedy, applied broadly, would do little more than add in-
stitutional insult to personal injury. 4
In sum: Though the political theory outlined in Part I em-
phasizes the importance of stability in heterogenous soci-
eties, both stability and heterogeneity are important to the
liberal because of their connection to political freedom. The
freedom worth having requires both the kinds of options re-
flected in heterogeneous communities and stability within
which individuals can advance their well-being through
projects, plans and goals. By the same token, even if it ap-
pears at first glance to emphasize liberal conceptions of free-
dom, responsibility and equality, accident law is not obli-
vious to the importance of stability. Corrective justice sustains
norms that encourage coordination and sustain important
social institutions. These norms provide part of the stable
framework within which free and equal individuals pursue
the projects and goals they believe contribute to their well-
being. The liberal political theory that grounds the private
law of contract and tort links human freedom with stable
institutions in ways I have only outlined here.
439
Index
499
Index
compensation (continued) as coordination for mutual ad-
to legitimate forced transfers, vantage, 431
190 rational, 106-8
under liability rules, 189-90, 191 torts and, 84
rectifying wrongful losses and, contract failure
342 expending resources to prevent,
rights and, 296-8, 344-5 122
to satisfy constraints of rights problems capable of producing,
ownership, 485 n.14 37-40
competition uncertainty and, 130
with cooperation presupposed, contracting
59-62 bargaining and, 31-3, 141
cooperation as response to context of, 142-3, 146
failed, 4 cooperation as a form of, 36-8
perfect, 96 default rules and, 80-2
rational cooperation as solution division problem and, 111-12
to failed, 42 facilitated by third parties, 133
see also perfect competition forward-looking approach to,
competitive market, 88 430,431-2
as a morally free zone, 4 information and, 127
compliance, 445 n.12 mutual gain and, 109
rationality and, 117-20 number of principal parties and,
concession rationality, 114-16, 121 127
principle of, 31, 113 outside help in, 134-40
concessions phases of, 108
negotiation and, 111-17 in the state of nature (without
theory of, 121 law), 105-6
conflict, market and, 62-5 contract law, 6, 73-4, 75
consent, 97-8 contracts, 73, 75
as a condition of transfer, as bargains, 120-1
484 n.12 completing and creating, 186-8
connecting hypothetical rational economics and, 76-80
bargaining to, 169-73 gaps in, 164-6
default rules and, 166-73 markets and, 6
rationality and efficiency and, political associations established
180-2 by,3
constraints principal parties in, 127
mutually advantageous, 21 reason for, 179-80
rational motivation for, 17 reasons for incomplete, 124
contexts for contracting torts and crimes and, 74-6, 84-6
calculus and, 141-2 see also ideal contracts; rational
defection and, 144-5 contracts
division problem and, 143-4 conventions, 297
contract cooperation and, 145-8
condition for agreeing to a, 109 cooperation
500
Index
competition presupposed with, see also accident costs, error
59-62 costs; transaction costs
ascontracting,36-8 crimes
conventions required, 145-8 torts and, 222-4
market failure and, 40-3 torts and contracts and, 74-6,
markets as a rational form of, 5 84-6
modeled as an iterated P. D., culpability, 334-5
442 n.8
rational, 24, 26, 27, 42 damage remedy, 437-9
coordination default rules, 459 n.2
contractual litigation and facili- as bridge between contracts and
tating, 147-8 torts, 186
joint rationality and, 109-11 consent and, 166-73
private information and, 157-63 contracting and, 80-2, 187
coordination game, 145-6 efficiency and, 173-7
corrective justice, 304-5, 432-5, as external transaction resources,
478 n.1, 480 n.2, 489 n.2, 489 181
n.23 as liability rules, 184
annulment conception of, 306- as rational safeguards, 182, 183
11, 312, 314-16, 318-19, 324, risk assignment and, 184
325 tort liability and, 82-4
contribution to political freedom defection, 33, 119-20
and to autonomy, 437 cost of safeguarding against, 143
distributive justice and, 310, error costs and, 154-7
350-4 group size and, 127
economic efficiency and, 349 defenses
mixed conception of, 318-24 of immunity and of privilege,
between parties, 354-60 462 n.6
practices that limit, 395-406 positive, 215-16
relational conception of, 311-18, design defect standards, 413-15
320 disjunction of property and liabil-
responsibility relationship and, ity rules, 339-40, 341
329,483 n.6 distributive justice, 489 n.24
rights and, 344-5, 352 corrective justice and, 350-4
cost-justified precautions, 238, 245 division problem in contracting,
costs 111-12, 116-17
of administering a fault system,
226 economic analysis
of conflict, 114 contract law and, 105-40
litigation, 248-9 difference between theory of
monitoring, 126 strict liability and, 485 n.16
nonpecuniary (products liability market paradigm as normative
and), 424-9 defence of, 10
pecuniary vs. nonpecuniary, sources of appeal of, 466 n.16
474 n.4 tort law and, 234-51, 377-80
501
Index
efficiency, 92-4 the fault in, 217-19
default rules and, 173-5 and justice and excuses, 224-6
legal institutions and, 2 meaning and grounds of, 239-
rational bargains and, 175-8 40
rationality and consent and, retributivism and, 234-6
180-2 strict liability and, 226-8, 256-8
relative nature of, 91-3 as strict victim liability, 229
strict liability and, 240-3 tort law and, 219
voluntary choice and, 94-6 fault rule, 229
see also Kaldor-Hicks efficiency Ferejohn, John, 448 n.20
Ellickson, Robert, 456 n.10, First Fundamental Theorem of
458 n.16 Welfare Economics, 4
endogenous resources, preference basic implication of, 40
for, 134-6 seealso Fundamental Theorems
epistemic burdens, liability rules of Welfare Economics
and, 213-15 Fletcher, George, 236, 253, 259,
Epstein, Richard, 216, 271-3, 315- 266,432
16, 432, 485 n.15 force of agreement, 119
equilibrium, causation and, 275-7 forced transfers, 183
error costs, defections and, 154-7 compensation to legitimate, 190
Esco/av. CocaColaBottling Co., 24 formalism, 200
Cal 2C, 453, 150 P.2d 436 Fundamental Theorems of Welfare
(1944), 412, 422, 494 n.3 Economics
exchange, comparing frameworks standard proof of, 60
of, 96-7 see alsoFirst Fundamental Theo-
excuses rem of Welfare Economics
agency-defeating, 335, 469 n.7,
gap-filling rules, 181, 459 n.2,
483 n.5
459 n.3
culpability-defeating, 334-5
contracts and, 187
fault and justice and, 224-6
Gauthier, David, 3, 10, 48, 53-6,
reciprocity and, 259-61
445 n.12
tort liability and, 224
grounds of recovery
wrongdoing and, 333-5
liability and, 285, 287
expectations, relationship between
modes of recovery and, 287
normative and epistemic,
group size in contracting
471 n.11
heterogeneity of principal parties
and, 127
fairness
spatial dispersion and,, 128
as a constraint on bargaining,
53-7 harm
solving the problem of, 57-9 concept of, 472 n.13
fault liability strict liability and, 277-9
corrective justice and, 367-9 Hart, H. L. A., 220
cost of administering a system Hirshleifer, Jack, 151-2
of, 226 Holmes, 0. W., 209, 212
502
Index
Hymowitz v. Eli Lilly and Co., 73 law
N.Y. 2d 487, 539 N. E. 2d 941 economics and, 2
(1989), 397, 399-401, 405, 406 economic theories of, 102
instrumentalist account of, 200
ideal contracts
local cooperation in the absence
nonideal agents and, 178-9
of, 451 n.1
inalienability rules, 77, 336
market failure and, 3
individual rationality, 31, 126
legal rules, social conventions as
inefficiencies, low transaction costs
alternatives to, 458 n.16
and, 453 n.5
legitimate expectations, strict liabil-
information
ity and, 279-81
contract failure and incomplete,
legitimate interests, 278, 284
130
as rights, 331
coordination and private, 157-63
liability
distinction between technologi-
assigning, 455 n.4
cal and distributive dimen-
on the basis of culpability, 263
sions of, 151-4
cheapest cost-avoider and, 388-
effects of, 149-54
95
hazards from imperfect, 111
distinction between criminal and
property rights and, 148-9, 153
tort, 225
transaction costs and, 125-6
distinction between grounds of
seealso private information
recovery and, 285, 287
information requirements, litiga-
excuses that defeat, 467 n.8
tion costs and, 248-9
grounds and scope of, 288-91
initial liability rules, 212
nature of strict and fault, 229-30
injurer, redefining, 382-5
recovery and, 253-4, 285-7
injustice, difference between mis-
tension between strict and fault
fortune and, 483 n.4 473 n.1 '
instability, transaction resources
without agency, 261-6
and, 129
see also product liability; strict lia-
instrumentalism, forms of, 203-4
bility
insurance, 205-9, 250-1
liability decisions
justice economic arguments for restrict-
between parties, 354-60 ing to victims and their partic-
and fault and excuses, 224-6 ular injurers, 377
reciprocity and, 266-8 distributive dimensions of, 248
liability rules, 77, 78-80, 82, 83,
Kahneman, Daniel, 112
336-7
Kaldor-Hicks efficiency, 167
activity levels and, 247-8
Kaldor, Nicholas, 168
compensation under, 189-90
Knetsch, Jack, 112
conjunction with property rules,
Kronman, Anthony, 105, 148, 149-
340
50, 152-3, 449 n.1
epistemic burdens and, 213-15
Laidlawv. Organ, 15 U. S. (2 property rules and, 183-4, 188-
Wheat.) 178 (1817), 148-fi'.\ 90, 339-40, 341
503
Index
liability rules (continued) uncertainty and, 5-6, 105
transaction costs and, 188-90 Melamed, Douglas, 77, 183, 336-9
liberalism middle level theory, 8, 441 n.2
characterizing, 1 obstacles and challenges to, 9
rational choice and, 11, 29-30 tort and, 198-200
and stability and morality of modes of recovery, grounds of re-
freedom, 435-39 covery and, 287-8, 326-8
see also rational choice liberalism monitoring costs, 126
litigating under fault vs. under seealso costs
strict liability, 248 moral causation, 469 n.8
litigation costs, information re- moral constraints, 3-4
quirements and, 248-9 moral hazard, 495 n.5
losses morality
falling on victims, 231-2 distributive dimension of, 22, 26
imposed on cheapest cost- motivation and, 30, 44
avoider, 245 productive dimension of, 21-2
risks of nonpecuniary, 495 n.8 productive and distributive, 26-
Lyons, David, 309 7
tort law and, 252
McClennen, Edward, 48
tort liability and, 220-2
MacPhersonv. Buick Motor Co., 217
morally free zone, competitive
N. Y. 382,410,494 n.1
market as a, 4
market failure, 42-3, 78, 89
cooperation and, 40-3 necessity, 292-6
inefficiency and, 99-102, 450 n.9 negligence, 218-19, 333, 367,
law and, 3
486 n.18
perfect competition and, 87-91
negotiation, concessions and, 111-
rational moral constraints and, 4
17
tort law and, 84
New Zealand no-fault plan, 401-2
market paradigm, 43
noncomplaince
basic postulates of, 17
best protection against, 142
as a form of political liberalism, 29
reasons for, 144
incremental, 85-6
nonideal agents, ideal contracts
principle of rationality and, 40
and, 178-9
to provide normative defence of
nonpecuniary losses
economic analysis, 10
bearer of risks of, 495 n.8
markets, 2
products liability and, 420-1
attractive feature of, 62-4, 67
nonreciprocity of risk, 236
conflict and, 62-5
norms
failure of, 99-102
behavior regulated by, 7-8
in liberal political theory, 2,
corrective justice and, 355-60
447 n.19
governing transfer of rights or
as a rational form of cooperation, 5
holdings, 348
rational social organization and,
see also community norms
65-7
Nozick, Robert, 363
504
Index
omission as a cause, 470 n.8 property, liability rules and, 183-4,
ordering, tort law as a form of, 185
200-3 property rights
information and, 148-9, 153
Pareto optimality, 18, 87, 101, 109- power to exclude and alienate
10, 120, 167, 173 and, 301
Pareto superiority, 18, 19, 167-8 property rules, 77-9, 83, 336
P. C. See prisoner's dilemma liability rules and, 188-90, 339-
(P. D.) 40, 341
perfect competiton, market failure proximate cause, but-for and,
and,87-91 270-1
Perry, Stephen, 311-12
political cooperation, rational, 22 rational bargaining
political justification, rational- consent and, 169-73
choice approach to, 444 n.9 economic analysis and, 173
positive defenses, 215-16 fairness and, 49-51
Posner, Richard, 168 morality and, 48-9
Priest, George, 250 see also bargaining
principal parties in contracts, het- rational bargains, efficiency and,
erogeneity among, 127 175-8
principle of consumer sovereignty, rational choice, 27
173 commitment to the principle of,
principle of nonreciprocity of risk, 442 n.8
253, 467n.6 liberalism and, 29-30
principle of retributive justice, 234, modeling the problem of, 33
325 rational choice contractarianism, 3,
prisoner's dilemma (P. D.), 3 30-1
defection outcome in, 19 rational choice liberalism, 70-2
divisible, 31, 39 compatible with starting points
nondivisible, 117 of market paradigm, 11
problem of rational cooperation rational contract, 106-8
as a, 34 risk reduction and, 422-4
private information rational cooperation, contract as a
coordination and, 157-63 local scheme of, 451 n.1
see also information rationality
product liability, 173-5 compliance and, 117-20
contracts and, 415-17 conditions of, 120
design defect standards and, consent and efficiency and, 180-
413-15, 423-4 2
insurance function of, 420-2 criteria of, 20
from law of sales to law of tort, human motivation and, 46-7
410-11 individual, 118, 119, 120
nonpecuniary costs and, 424-9 individual and collective, 18-20,
risk allocation and, 416 33-7
uncertainty in system of, 408 market paradigm and, 45
505
Index
rationality (continued) infringing and violating, 299-
normative neutrality and, 45-6 302, 477 n.7
political justification and, 47-8 as secured interests, 284
rational bargaining and, 48-9 strict liability and, 281-4
stability and, 67-70 weflare and, 342
rational safeguards, default rules wrongs and, 340-2
as, 182, 183 risk
rational social organization, the default rules and assignment of,
market and, 65-7 184
Raz, Joseph, 311-12, 436 knowledge and, 458 n.14
reasonable care, 333 level of acceptable, 128
reasonableness, 46-8 nonreciprocity of, 236
reciprocal risks, 254-6 product liability and, 416
reciprocity rational social policy and,
the cases and, 268-9 486 n.18
excuses and, 259-61 sales contract and, 411
justice and, 266-8 tort law as vehicle for allocating,
recovery 461 n.5
grounds and modes of, 285, risk reducers
287-8, 326-8 constraints on pursuit of poten-
liability and, 253-4, 285-7 tial, 379
rectification, 326 products liability and, 422
institutions for, 289 Rylands v. Fletcher,159 Eng. Rep
resistance theory, 114, 116 737, 3 H. & C. 774 (Exch.
responsibility 1865), reversed L. R. 1 Ex. 265
causation and, 273-5 (1866), affirmed, L. R. 3 H. L.
for consequences of failing to 330 (1868), 257, 367-8
act, 469 n.8
a theory of, 345-7 safeguarding, expending resources
restitution, wrongful gains and, to prevent contract failure as
369-71 rational, 122
retributivism, 432 sales contract
fault and, 234-6 bargaining model and, 32
rights risk allocation and, 411
autonomy and, 342-4 seealso contracts
compensation and, 296-8, 344-5 Schmidtz, David, 48
conflict between Calabresi- Schwartz, Alan, 173-5, 177, 413,
Melamed framework and lib- 495 n.4
eral conception of, 336 secured interests, rights as, 284
content of, 335-40 settlements, 249
corrective justice and, 344-5, Sindell v. Abbott Laboratories,26 Cal.
352-4 3d 588, 607 P.2d 924, 163 Cal.
distinction between meaning Rptr. 132 (1980), 397-9, 405,
and content of, 337-9 406
506
Index
stability default rules and, 82-4
political freedom and, 436 departures from corrective jus-
preference for, 68 tice in, 434-5
rationality and, 67-70 distributional aspects of liability
strict liability, 216, 217, 219-20 rules in, 457 n.1
arguments for, 471 n.13 economic analysis for account of
difference between economic structure of, 377-80
analysis and theory of, economic goals pursued
485 n.16 through, 375
efficiency and, 240-3 elements of, 492 n.8
fault and, 226-8, 256-8 fault liability in, 219
harm and, 277-9 as a form of ordering, 200-3
legitimate expectations and, goals of, 204-5, 209-11
279-81 grounds of, 190-1
rights and, 281-4 how victim and injurer are
the strict in, 219-20 brought together in, 380-2
as strict injurer liability, 229 instrumentalist approach to,
theory of, 269, 342-3, 485 n. 15 202-3
in torts, 225 insurance and, 205-9
wrongful losses and, 371-2 market failure and, 84, 188
see alsoliability middle level theory and, 198-200
strict victim liability, 230-3 moral goals of, 209-11, 220-4,
Summers v. Tice, 3.33 Cal. 2d 80, 252
199 P.2d 1 (1948), 213-14, morality and, 220-2
396-7 problem with economic interpre-
tation of, 380
Taylor, Miahael, 35, 38 to repair wrongful losses, 12
Thaler, Richard, 112 risk management and, 210
third parties in contracting, 132-4, structure of, 374-5
136-40 transaction costs, 67, 79, 81, 91-3
top-down theory, 8, 9 in contracting situations, 111,
tort law, 6, 12, 74, 75 187
for allocating risk, 461 n.5 information and, 125-6
backward-looking approach to, liability rules and, 188-90
432 transaction resources, 110
bringing injurers and victims to- frontier of, 133
gether and, 380-2 transaction rules, 340-1
central feature of, 223 transaction space, 131-2
corrective justice and, 373-4 transfer, consent as a condition of,
crimes and, 222-4 484 n.12
crimes and contracts and, 74-6, Tullock, Gordon, 98
84-6
damage remedy of liability for uncertainty
wrongful loss and, 431 markets and, 5-6, 105
507
Index
uncertainty (continued) wrongdoing, 331-2, 361
in product liability system, 408 corrective justice and, 348-9
problems in contract and, 124-5 distinction between wrong and,
U.S. v. CarollTowing, 159 F. 2d 330
169, 173 (1947), 486 n.18 excuses and, 333-5
harming as form of, 277
Vincent v. LakeErie Transportation wrongful gains, restitution and,
Co, 1910, 100 Minn. 456, 369-71
N. W. 221, 168, 293, 296, 301, wrongful losses, 332, 361, 434
371-2 annulment of, 327
voluntary choice, efficiency and, creating, 331
94-6 restititution and, 371
strict liability and, 371-2
wealth effects of strict liability, 243
tort law to repair, 12
Weaverv. Ward, 467 n.8
wrongs, 324-6, 332, 334, 361
Weinrib, Ernest, 200-1, 311-12,
distinguishing between wrong-
402, 432, 433
doing and, 330
welfare, rights and, 342
rights and, 340-2
welfare economics, fundamental
theorems of, 40-1, 60 Ybarrav. Spangard,25 Cal. 2d 486,
Wright, Richard, 399-400 154 P. 2d 687 (1944), 395-6
508