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Analysis of law according to R. Posner

Posner deducted a criterion of efficiency of legal decisions. In his opinion, legal decisions must correspond with the criterion of economic efficiency. He defines this criterion either as the «principle of maximisation of wealth» or as the «principle of minimisation of transaction costs». It is necessary to reform legal institutions only on the basis of considerations of efficiency.

In the theory of economic analysis of law, the legal system begins to reflect the market, and is regarded as a mechanism that regulates the distribution of limited resources. A legal system must imitate the market. Therefore, legal standards, like elements of the market, must be established on the basis of considerations of efficiency.

The following general requirements for a legal system result from such an approach.

  1. The law must facilitate a reduction in transaction costs, in particular, eliminating artificial barriers in the course of a voluntary exchange, and ensuring the execution of concluded contracts.
  2. ÎThe law must also clearly define and reliably protect property rights, thus impeding the transformation of voluntary transactions into compulsory ones. The elimination of uncertainties in allotment of property rights will lead to expansion of the field of voluntary exchange.
  3. Legislation must elect and establish the most efficient possible distribution of property rights, similar to what economic agents would reach themselves, if not hindered by high transaction costs10.
The normative conclusions of economic analysis of law have already begun to penetrate the judicial and legislative practice of many countries. Posner’s thesis on the «imitation» of the judicial system helps the market to reveal and get rid of norms that prevent the economy from working efficiently11. Leaning on Posner’s thesis, we shall compare the economic and legislative interpretation of money and securities, in order to expose the basic trends of overcoming inconsistencies between them and thus to construct legal standards based on the criterion of economic efficiency.

The selection of methods of legal protection of property rights must also be directed by the criterion of economic efficiency. Posner sees a legal analogy of the market in the case-law system. Within the framework of this system, he claims, decisions are made by courts in general in accordance with the criterion of economic efficiency
12. In the general mass of publications on the economic analysis of law, in concrete examples of different precedents and legal standards, it is argued that these precedents and standards were actually established in conformity with the principles of economic efficiency.

As the economic analysis of law draws heavily on the neo-institutional theory of property rights, which was developed in the second half of the XXth century by American economists and winners of the Nobel Prize in Economics in 1991, R. Coase and A. Alchian, we shall dwell on a few aspects necessary for our analysis. (American economists Y. Barzel, H. Demsetz and R. Posner, amongst others, later actively participated in the development and use of this theory.)

The fundamental challenge posed by the theory of property rights, as formulated by these western economists, consists in the analysis of the interaction between the economic and legal systems. Property rights determine which costs and remunerations agents can expect for their actions. Restructuring property rights leads to changes in the system of economic incentives, and the altered behaviour of economic agents will be a reaction to these changes. This logic — from the structure of rights through the incentives system to the behavioural consequences — is clearly reflected in the analysis of the processes of specification or dilution of property rights.

The concept of property rights in the context of a new approach extends to all rare goods. It encompasses powers over both material objects and human rights.

Let’s single out the most important factor of this definition for us: the theory of property rights uses the term «property rights», not «property ». Property is not a resource in itself, but property is formed by a share of rights to use a resource.


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