Ugo Pagano

1
Ugo Pagano

• Teorie economiche, dottrine giuridiche e la
  storia dellanalisi delle istituzioni.

Associazione Italiana per la Storia del Pensiero
Economico (AISPE) VIII Convegno
Nazionale Economia e Istituzioni. Contributi
dalla storia del pensiero economico Palermo, 30
settembre 2 ottobre 2004
2
Some References.

• Attempt to formulate a revised edition of
• Diritto e..
• In Boitani A. Rodano G. (1995)Relazioni
  Pericolose. Laterza, Bari.
• Before that paper
• (with Bob Rowthorn, 1994) Ownership, Technology
  and Institutional Stability Structural Change
  and Economic Dynamics.
• After that
• Public Markets, Private Orderings and Corporate
  Governance. International Review of Law and
  Economics (2000).
• (with M. A. Rossi, 2004) Incomplete Contracts,
  Intellectual Property and Institutional
  Complementarities. European Journal of Law and
  Economics 2004.
• Legal Positions and Institutional
  Complementarities in Cafaggi F., Nicita A. and
  Pagano U. Legal Orderings and Economic
  Institutions. Routledge, London (2005).

3
One enormous debt.

• To Letizia Gianformaggio who was the Professor of
  Philosophy and Theory of Law at my University.
• Unfortunately she died one month ago. I have no
  chance di discuss with her how my views have
  changed during these ten years.

4
The common ethical roots of law and economics
the existence of God-given natural laws.

• From Aquinas Summa Theologica
• The rational guidance of created things on the
  part of God, as prince of the universe, has the
  quality of law..this we can call the eternal
  law.
• The participation in the eternal law by rational
  creatures is called natural law.
• Law must have as its proper object the
  well-being of the whole community.

Isnt the last quotation applicable also to
Economics?
5
The importance of the scholastic tradition
From H. Berman Law and Revolution(p. 9) (The
revolution is that of the Pope Gregory VII
against the Emperor)

• In the Western legal tradition law is conceived
  to be a coherent whole
• The phrase corpus juris Romani was not used by
  the Romans but by the twelfth - and thirteenth -
  century European canonists.
• It was the twelfth-century scholastic technique
  of reconciling contradictions and deriving
  general concepts from rules and cases that first
  made it possible to coordinate and integrate the
  Roman Law of Justinian.

6
Natural Law and Legal Pluralism.

• In the formative era of the Western legal
  tradition, natural-law theory predominated. It
  was generally believed that human law derived
  ultimately from, and was ultimately to be tested
  by, reason and conscience.
• This theory had a basis in Christian Theology as
  well as Aristotelian philosophy. But it had also
  a basis in the history of the struggle between
  ecclesiastical and secular authorities, and the
  politics of pluralism.
• Legal pluralism was a common legal order
  containing diverse legal systems (church vs.
  crown, crown vs. town, town vs. lord, lord vs.
  merchant).
• Legal Pluralism was a source of freedom and of
  legal sophistication and was a decisive factor in
  the foundation of Universities and the origin of
  Western Science.

7
Typical questions

• Which Court had jurisdiction?
• Which law was applicable?
• How were different legal differences going to be
  reconciled?

Institutions, like Universities, where different
approaches could co-exist, were needed and
founded in that age. This method of formulating
and discussing different hypothesis and checking
their validity of natural laws was extended
from law to medicine and to other disciplines.
8
Classical British positivism and the separation
between law and ethics

• Every law and rule is a command.
• The science of jurisprudence (or, simply and
  briefly, jurisprudence) is concerned with
  positive laws, or with laws strictly so called,
  as considered without regard to their goodness or
  badness.
• John Austin (17901859) The Province of
  Jurisprudence Determined.

A law may be defined as assemblage of signs
declarative of volition conceived or adopted by
the sovereign in a state, concerning the conduct
to be observed in a certain person or class of
persons, who in the case in question are supposed
to be the subject of his power. Jeremy Bentham
(17481832) Of Laws in General.
9
Kelsen (1881-1973) Pure Theory of the Law

• The pure theory of law separates the legal
  completely from the moral norm and establishes
  the law as a specific system independent even of
  moral law.
• The law, or the legal order, is a system of
  legal norms. The first question we have to
  answer, therefore, is this What constitutes the
  unity in diversity of legal norms? Why does a
  particular legal norm belong to a particular
  legal order? A multiplicity of norms constitutes
  a unity a system, an order when validity can be
  traced back to its final source in a single norm.

Morality ? Validity? Efficacy
10
Walras Elements of Pure Economics.

• From Smith onwards also Political Economy had
  been following a similar path of separation of
  morality that achieves its clearest expression
  with the concept of Pareto efficiency.
• Particular instructive is the case of Walras
  Pure Economics that, well before Kelsens Pure
  Theory of Law, was sharply distinguished from
  moral considerations.
• However, Walras believed in two basic principles
  of natural law
• Everyone belong to himself or herself.
• All the other natural resources belong to
  everybody.

11
The main proposition of Pure Economics.

• Production in a market ruled by free competition
  will give the greatest possible satisfaction of
  wants within the the double condition,
• that each service and each product have only one
  price in the market, namely the price at which
  the quantity supplied equals the quantity
  demanded
• and that the selling price of the products be
  equal to the cost of services employed in making
  them.
• (Walras, Elements of Pure economics)

12
Pure economics and natural law

• This double condition was also necessary for
  commutative justice that implied that individuals
  would not change their wealth because of unjust
  exchanges.
• But if the achievement of the greatest
  satisfaction was compatible with commutative
  justice it would have sustained any initial
  distribution of resources including that
  consistent with the natural laws of distributive
  justice.
• Thus, Walras pure economics was sharply separated
  from distributive natural laws but it was used to
  show that these laws were consistent with the
  maximization of material welfare.

13
Pure Economics and Pure Law.

• The separation of both disciplines from ethics
  went together with the separation between law and
  economics.
• Pure economics concentrate on the internal
  consistency (equilibrium) and efficiency of the
  decentralized decisions of maximizing
  individuals.
• Pure law concentrated on the validity of laws,
  that is the internal consistency (equilibrium?)
  of legal systems that were assumed to stem from a
  single authority or from a single grundnorm.

The two disciplines seemed to live into separate
pure Nirvanas and, besides their purities, only
a formal analogy seemed to relate them. But
there were also some hidden relations between
the two Nirvanas..
14
Two related Nirvanas?

• Pure Economics assumes well defined and complete
  rights that are exchanged and enforced by a third
  party. Thus the Economic Nirvana requires a Legal
  Nirvana.
• Pure Law assumes that the legal ordering could be
  completed and made consistent by a single agent
  or on the basis of a set of basic norms without
  limitations due to bounded rationality, cognitive
  ability, failure of collective action and other
  limits due to the scarcity of resources. In other
  words the Legal Nirvana requires an Economic
  Nirvana.

15
Coase and the fall of the Economic Nirvana.

• Coase observed that in the world of pure
  economics all decisions were coordinated by
  prices at zero costs.
• In this world firms would not exist. We would
  live in what became later the world of the Coase
  theorem.
• In the world of the Coase theorem all possible
  externalities, including those related to
  economies and diseconomies to scale would have
  been internalized by market transactions.
• Firms, state regulation and other arrangements
  can only appear in a word where no alternative
  institution is available at zero costs.
• There is no Economic Nirvana all institutions
  are costly.

16
Fuller and the fall of the Legal Nirvana.

• Fuller defined law as the enterprise to subject
  to rules human behaviour.
• This enterprise is too costly to be carried out
  by a centralized ordering.
• The costs of Law can and are in fact decreased by
  decentralizing its enterprise to a plurality of
  orderings.
• Unions, Churches and Universities have their
  internal orderings. Firms themselves can also be
  seen as private orderings.
• There is no Legal Nirvana completeness, unity
  and consistency can possibly be the aim of a
  legal ordering but they cannot be taken for
  granted.

17
The economic consequences of Justice

• In a Coase-theorem world with zero transaction
  costs attributing the rights to a particular
  individual has no economic consequences. In any
  case rights will flow to the individual who
  values them the most. We are in a Legal and
  Economic Nirvana where judges can ignore the
  economic consequences of their decisions.
• In a world with positive transactions the
  decisions of the judges have economic
  consequences because rights will not necessarily
  flow efficiently to the individuals who value
  them the most. According to Posner (and to much
  classical Chicago, law and economics) in this
  case judges should allocate rights, according to
  criteria of economic efficiency to the
  individuals who value them the most.

18
Judges al wealth maximizers?

• According to Posner, Judges, aware of the
  economic consequences of their actions should
  behave like quasi-markets attributing the rights
  to the individuals who in a world of zero
  transaction costs would have acquired them.
• They apply the Kaldor criterion according to an
  allocation is efficient if the gainers could have
  compensated the losers.
• He claims that this is consistent with an
  intuitive view of justice. If avoiding some
  damages is very costly for some agents and not
  costly for the others, the latter are guilty for
  the damages.

19
Fading boundaries?

• Posner view is extreme. Clearly, in most cases,
  economic efficiency cannot be only criterion for
  the administration of justice. But it shows how
  difficult is to separate efficiency and justice
  considerations in a world of positive transaction
  costs.
• The impossibility of defining sharp boundaries
  becomes even more clear when we accept Fullers
  view (and also Hayeks and Bruno Leonis
  views!) all sorts of public and private
  orderings co-exist in the economy and they all
  face the problem of compromising efficiency and
  (other types) of justice considerations.

20
Is Economics widening too much?

• In a recent paper Hodgson defines institutions
  as systems of established and prevalent social
  rules that structure social interactions.
• They are both the products of and constraints of
  human action. They inhibit some actions and allow
  other actions. They can be both social habits
  (Veblen) and formal rules (Commons) by which
  rights, duties, liberties and powers are
  attributed to different agents by both public and
  private orderings.
• If Economics studies Institutions, its scope
  becomes often undistinguishable from that of
  other disciplines.
• Is Economics widening its scope too much?

21
Widening vs. deepening.

• One may regret that the long process, by which
  Economics separated itself from other disciplines
  like ethics, law and sociology, is reversed and
  be nostalgic of the narrow definition of
  Economics as a Science of Scarcity.
• (And an analogous feeling may be shared by legal
  scholars!)
• I have never been a victim of this sufferance.
• But one may even argue that we must necessarily
  widen the scope of our discipline if we want to
  deepen the concept of scarcity.

22
Deepening the concept of scarcity?

• Scarcity is a relation between means and ends. As
  I tried to show (many years ago in my book Work
  and Welfare in Economic Theory) that the
  dichotomy between means (such as work) and ends
  (such as leisure) is unjustified. The definition
  of of means and ends (or of both) should be
  endogenous. Treating part of human activity only
  as means violates basic principles of Kantian
  ethics.
• There are dimensions of scarcity that are ignored
  in economic theory where constraints are only
  related to natural scarcity.
• These dimensions are

23
Additional dimensions of scarcity

• 1) Cognitive and rationality scarcity.(Clark,
  Simon)
• 2) Social Scarcity. (Veblen, Commons)
• 3) Institutional Scarcity. (All Old and New
  Institutionalism)
• There is a long costly historical cumulative, and
  often conflictual, process by which new
  institutions are produced by the means offered by
  pre-existing institutions. Institutional
  complementarities constraint this path dependent
  process.
• (H. Berman, H. Hart and L. Fuller consider this
  problem with reference to legal rules).

24
Economics vs. Institutional Political Economy

• Economics has to be necessarily extended to
  Institutional Political Economy. This widening
  is not simply an optional justified by our
  (legitimate!) intellectual curiosity. It is a
  necessary move even if we define Economics as the
  a field that studies the human problems arising
  from scarcity.
• 
  Thank you!