Efficiency and Externalities in an Open-Ended Universe: A Modern Austrian Perspective

5 APPLICATION: THE ECONOMICS OF TORT LIABILITY

In spite of these similarities between Coase and the Austrians, the approach to externalities and harmful effects developed here implies a significant reformulation of the way problems in tort law are assessed and ultimately dealt with. The methodological problems that Austrians have had with Pigouvian analysis also apply to both the economics of tort law as it has developed in the Chicago school tradition and to its underpinnings as they were first developed by Coase. In other words, while Coase’s analysis rightfully took issue with Pigou, and has been cast in opposition to Pigouvian welfare economics, Austrian analysis takes both Pigou and Coase to task for similar reasons (see Cordato, 1989).

The primary purpose of this chapter is to illustrate how catallactic efficiency and the externalities analysis that it suggests can be applied to a particular area of analysis, the economics of tort law. Since this field of study has developed out of a non-Pigouvian property rights approach to the problem of externalities, it is important to clarify why it is not acceptable from an Austrian perspective. Before reconsidering the economics of tort law, a critical assessment of both the Coasean foundations of law and economics and its applications, as developed by Posner, Polinski, Priest, and others, is in order.

COASE AND MODERN LAW AND ECONOMICS

Nearly all of modern law and economics, and particularly the economics of tort and contract, has been developed as a direct application of the theory presented in “The Problem of Social Cost” and in particular the “Coase theorem.” All of the major textbooks in law and economics (Posner, Polinski) present Coase’s 1960 article as the analytical touchstone for this entire field of study. It is important then to assess these widely recognized foundations. The problems that Austrian economists have had with the modern economics of tort law go directly to its foundations in Coase.

Coase and Negative Externalities: A Problem of Social Cost

The primary concern of Coase’s 1960 article was to reassess the normative implications of negative externalities. He argued that the traditional Pigouvian approach misconstrued the externality problem as a divergence between private and social costs. Furthermore, he concluded that this misperception could lead to less-than-optimal results in terms of the application of public policy. For Coase the traditional focus on the internalization of negative externalities was misplaced. He argued that the goal of public policy should be to maximize the value of output (p. 16), which may or may not imply the internalization of all harmful effects. For example, in considering the case of a factory contaminating a stream and killing the fish, Coase argues that the principle “question that needs to be decided is: is the value of the fish lost less than or greater than the value of the product which the contamination of the stream makes possible” (p. 27).

It should be clear, even before delving into the specifics of Coase’s analysis, that there is a fundamental incongruence between Coase and the Austrians. The “question that needs to be decided” from Coase’s perspective, is one that, for Austrians, is not only undecidable but essentially meaningless to ask. The subjective nature of value precludes from the outset any scientific comparison between the “value” of the lost fish and the value of the product that would have to be sacrificed in order to save the fish. For Coase this is clearly a problem of comparing and minimizing the opportunity costs to society associated with losing one kind of output or another. For reasons stressed throughout this book, it is the kind of normative standard that, from the perspective of catallaxy, could never get off the ground, even within the context of a zero transaction costs world (see Littlechild, 1978).

Coase highlights his alternative to Pigouvian analysis with many examples where the actions of one person or business has harmful effects on others. These problems are assessed within the context of one of two broad assumptions about transaction costs. His first scenario assesses the results that are obtained when transactions costs are zero or so low as not to hinder bargaining between the affected parties. The parties, regardless of who is held to bear the costs ex ante, will bargain their way to a result that will minimize the combined value of the products they are producing. This entire process has come to be known as the Coase theorem.

In the second and more relevant case, high transaction costs prevent the efficient result from occurring as a consequence of free bargaining. Under these circumstances a third party, likely to be a judge attempting to resolve a legal dispute, would have the task of determining “the arrangement of rights [that] may bring about a greater value of production than any other” (p. 16).

Coase uses an example where the sparks that are thrown off by a railroad set fire to crops that are growing near the tracks. For our purposes there is no need to go into the quantitative specifics of Coase’s example (see pp. 30-31). Generally, the judge must examine the values, given by market prices, of the marginal outputs that are forgone in assigning rights to the railroad to destroy adjacent farmland, as compared to upholding the farmer’s right to grow crops on that land. He must then use these calculations to determine which rights arrangement would maximize net social product. At this point, property rights, if necessary, are reassigned according to this maximizing rule.

The positive transaction costs scenario has become the foundation for most of the subsequent applications of Coasean analysis in the law and economics literature. Efficiency assessments of alternative liability rules in areas as diverse as automobile accidents and industrial pollution are, in a fundamental sense, specific applications of the general principles established in Coase’s railroad vs. farmer example (see Polinsky, 1983).

From Coase to the Economics of Tort Law

“What has to be decided is whether the gain from preventing the harm is greater than the loss which would be suffered elsewhere as a result of stopping the action which produces the harm.” (Coase. p. 27)

The most well known expositor of law and economics in the Coasean tradition, Richard Posner, generally argues in favor of some form of negligence approach to torts, including the possibility of a strict liability rule that allows for a defense of contributory negligence (see Posner, 1973). The problems of cost-benefit analysis as it is typically used to assess the efficiency of alternative liability rules can all be illustrated by examining the simplest approach to determining negligence, as invoked by Posner. More extravagant formulations of the efficiency problem, which in certain circumstances lead to support for rules other than negligence, suffer from the same fundamental problems associated with the simple rule discussed here. Therefore, there is no need to consider any of the more complicated alternatives found throughout the law and economics literature.

The economic concept of negligence has been defined in what is essentially Coasean terms.

[T]he defendant is guilty of negligence if the loss caused by the accident ... exceeds the burden of the precautions that the defendant might have taken to avert it .... If a larger cost could have been avoided by incurring a smaller cost, efficiency requires that the smaller cost be incurred. (Posner, 1973, p. 69)

To reiterate, the economic analysis of tort clearly gets much more complex than the simple analysis suggested by the Hand formula. Furthermore, no one working in this area would suggest that applying the formula or the efficiency rule in general is, in the vast majority of cases, either simple or straightforward. But the Austrian criticisms of the standard economic analysis of tort are fundamental. The more complicated analyses in the law and economics literature are still all, in one form or another, applications of Coase’s efficiency criteria. The problems that Austrian analysis has with modern law and economics stem from criticisms that are associated with its foundations. As such they apply with equal force to both its simple and more complex applications.

SUBJECTIVE VALUE, INFORMATION, AND TIME: THE AUSTRIAN CRITIQUE

From an Austrian perspective, the problems that face a judge attempting to implement a Coasean-type solution are so fundamental as to make the entire procedure non-operational. The arguments that were made in opposition to the Pigouvian tax assessor are equally applicable to the Coasean judge (see the “Introduction”). But while the arguments are the same, the emphasis is slightly different. Both Coase and those who have applied the Coase theorem to problems in tort law, have, in their analysis, swept away the problems of subjective value, knowledge, and time passage by making one simplifying assumption: all observed prices are perfectly competitive prices. In other words, the analysis assumes away all the real-world public policy problems associated with our living not in a world of comparative statics but rather in an open-ended world of trial and error processes. The assumption that all decision making is based on perfectly competitive prices is not merely a simplification made in order to focus on a problem at hand; it is an essential ingredient. The normative conclusions that are associated with Coasean policy prescriptions could not be reached without this “simplification.”

Open Endedness and Coasean Analysis

To assume all knowledge to be given ... is to assume the problem away and to disregard everything that is important and significant in the real world .... [W]hen it comes to the point where [general equilibrium] misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is high time that we remember that it does not deal with the social process at all. [Hayek, 1948 (1945A), p. 91]

While Hayek’s comments were directed at Schumpeter, it is clear that Coase and many of his disciples have been “misled” into a similar analytical trap. We can examine Coase’s conclusions from a more realistic starting point. If we assume a catallactic process where prices are imperfect reflections of the relevant information and where the information that is generated is always being amended, both the Coase theorem and the more general Coasean approach to property-rights analysis run into intractable difficulties. Although, the implications for the zero transaction costs case are less drastic than for the more realistic positive transactions cost scenario.

The best that can be said is that the result will maximize the market value of the cattle and the crops for the moment that the bargain is struck. Furthermore, even this conclusion depends on our assuming that there are no non-pecuniary factors that enter into the bargaining process. Without the assumption that prices are capturing marginal social costs, no conclusion can be reached concerning the net social value of the cattle and crops that are ultimately produced.

This conclusion, while not obtaining all of the results that the Coase theorem yields, does have normative implications that are significant from the perspective of catallaxy. First, it still can be concluded, in the absence of insurmountable transaction costs, that a mutually satisfactory outcome will be obtained. Even though it cannot be concluded that this result will maximize the net social value of the products involved, it is a result that leaves both the farmer and the cattle owner better off than they would be in the absence of the bargain. Left intact, then, is Coase’s observation that in a zero or negligible transaction costs world, no outside intervention would be needed to resolve disputes concerning conflicts in the use of resources, so long as the right to bargain is guaranteed.

The implications of a disequilibrium world view for the positive transaction costs case and most of its subsequent applications are much more serious. In the absence of equilibrium prices, the amount of information that would be required of a judge (or any third party) in tort cases would create an insurmountable obstacle to obtaining the efficient, i.e. Coasean, solution. Clearly, if the Coase theorem results, in terms of social efficiency, are not unambiguously obtained in the zero transaction costs world, they cannot be mimicked by a judge trying to hammer out a solution in a positive transaction costs setting.

These first steps would need to be taken before any judgments could be made. Given that outside of competitive equilibrium all opportunity costs are subjectively defined and inherently unknowable, the Coasean judge would face an impossible task from the start. In other words, P, L, & B of the Hand formula, i.e., the information necessary to implement the negligence rule, are all conceptually unknowable.

But even if those obstacles created by the subjective nature of opportunity costs and the knowledge problem were possible to overcome, and a rational decision could be made to reallocate resources, the judge’s problems would continue. In a dynamic market setting he would need perfect foresight with regard to all of the variables that were considered in his initial market assessment. As disequilibrium market processes unfold through time, utility functions and relative scarcities will change and opportunity costs will continuously fluctuate.

Outside the stable framework of competitive equilibrium, any judge attempting to reallocate resources and property rights according to Coasean guidelines would face a continuing set of obstacles. He would have to determine an appropriate time frame and obtain all the relevant knowledge, which is not captured in market prices, for making accurate present value calculations with respect to the resources involved. Furthermore, there is no logical conclusion to this process. Even in making the unrealistic assumption that a judge could obtain all the relevant information for a finite period into the future but not infinitely into the future, it would seem that he would have to continuously reconsider decisions at the end of each time period.

The purpose of this discussion is to highlight the fact that, from the perspective of a catallaxy that is always in disequilibrium, change is continuous, costs and benefits are subjective, and knowledge is inherently imperfect. In this setting a Coasean judge faces an impossible task. He must have access to accurate knowledge concerning the forgone opportunities associated with the use of the resources under consideration. Yet disequilibrium prices will not accurately convey this information. In fact, apart from preferences that are actually demonstrated, knowledge of costs and benefits is, in principle, unconveyable.

Furthermore, at a given point in time there is no way of telling how accurate the information that prices are conveying actually is. In other words, to argue that market prices are “close enough” to general equilibrium prices to be useful in this judicial decision-making process is an unverifiable assertion. To know this would be to already know the equilibrium price configuration. This would mean that all of the relevant information is at hand, even with out the use of market prices.

In this regard it is important to digress for a moment and focus on the judicial process described by Priest (1977) (see also Rubin, 1977, and Goodman, 1978). At first glance, it could be concluded that his work addresses the criticisms of standard analysis that arise from the perspective presented in this book. He argues that while every decision in the common law might not be efficient, the common law process encourages the legal system to promulgate increasingly more efficient rules over time (see also Rubin). Again, the distinction is between analysis that is carried out within the context of an open-ended market process that is characterized by a continuous flow of new information, and analysis that is carried out with a particular “efficient” allocative outcome in mind. Priest makes it clear that his analysis is Coasean (p. 66), i.e., efficient rules are those that result in an allocation of resources that would maximize the value of output (minimize “social cost”). In contrast with the open-ended catallactic process, he envisions a closed-ended system with particular market outcomes in mind.

His purpose is to explain why common-law rules can be expected to become allocatively more efficient over time, even if judges are unconcerned about the efficiency effects of their decisions. Priest describes a process of rule evolution that is driven by the amount of litigation that a particular rule generates. He argues that because inefficient rules will generate higher (joint) costs to litigants, they will tend to be relitigated more frequently. This increases the probability that they will be overturned in favor of more efficient rules. Priest describes an iterative process driven by the amount of litigation that a rule generates, which leads to an equilibrium solution dominated by efficient rules.

While those who have attempted to assess the efficiency of the common law, are, on one level, focussing on a judicial process that is in disequilibrium, the analysis is ultimately end state bound. From the perspective of catallactics, it is the Coasean welfare standard of “economic” efficiency that must be jettisoned from the analysis of tort law, including economic assessments of the common law.

CATALLACTIC EFFICIENCY AND THE ECONOMICS OF TORT LAW

The problem of unintentional torts is a problem of negative externalities involving a conflict in the use of property. As such, the theory of catallactic efficiency can be directly applied. In doing so, efficient legal rules can be identified and alternative applications can be considered. The purpose here is to reconsider some fundamental questions in the economics of tort law to illustrate the theory developed in the previous sections. Hopefully this discussion will also serve as a foundation for further refinements and developments in this area. Ultimately, I believe that most questions in law and economics can be reconsidered from the perspective of catallactic efficiency. While a comprehensive analysis of such issues is well beyond the scope of this chapter, the theory presented here can form the basis for research into the history and evolution of the common law, the meaning of causation (touched on briefly below), contract law, antitrust law, and even criminal law.

Most problems in tort stem from the fact that there has been an interpersonal conflict over the use of property. Issues in both nuisance and accident law can be viewed from this perspective. The normative economic question that arises relates to the approach that judges should take in attempting to resolve such conflicts. What principles should guide judges who are attempting to maximize catallactic efficiency? What approach to rule making do these principles evoke?

Clearly, the overriding guidepost must be the notion that property rights should be clearly defined and, ultimately, strictly enforced. Ideally, a judge’s rulings should be crafted, where possible, within the framework of the IIS. Where this institutional arrangement is not in place, the goal of the judge should be to improve the legal setting in the direction of the ideal. This suggests a fundamental difference in approach from the Coaseans. While in Coasean analysis property rights are viewed as the most important variable, from the perspective of catallactic efficiency, they must be taken as a given. If title to the property that is under conflict is clearly delineated, then the judge has no bases in efficiency from which to alter the existing rights arrangement. In cases where titles are not clearly delineated, the purely cost-benefit approach of Coase cannot be invoked to solve the problem. A different, and in many cases, a non-economic, ethical approach must be invoked.

The theory presented here leads to a non-Pigouvian efficiency defense of strict liability. We can illustrate the fundamental issue by examining Coase’s railroad and farmer example in light of catallactic efficiency considerations. The application is straightforward. The principle question that a judge must ask in resolving this dispute is not whether the farmer or the railroad contributes more to the social value of output, but who owns the land that is acting as a receptacle for the sparks. Note that in Coase’s analysis this is an unimportant question. In the zero transactions cost case it makes no difference who is the owner of the property at the time that the harmful effect is generated. The same efficient result will ultimately come about. In the positive transactions cost case, the task of the judge is to decide who should have the property rights, not who does have the property rights.

The approach presented here completely changes the nature of the judge’s inquiry. Rather than focussing on the expert testimony of economists, presenting sophisticated cost-benefit analysis, the focus might more appropriately be on the results of land surveys and the nature of deeds or contractual arrangements such as protective covenants. In the case at hand, if the farmer had title to the land that the crops were growing on, there is no question that his right to continue to grow them should be upheld. The railroad should be held strictly liable for the damage inflicted. Possibly, it should be forced to internalize the sparks, for example, by building a fire wall. This would be an issue of injunction versus damage relief, clearly an area for further research from this perspective. The point is that, in accordance with the IIS, the farmer should be allowed to fully utilize his property in a way that is consistent with his hierarchy of ends. On the other hand, if it were determined that the framer’s crops were being grown on land owned by the railroad, then the right of the railroad to incinerate as much of it as it pleases should be upheld. In either case, at least in a prima facie sense, the judgment should be for whoever has title to the property.

It should be pointed out that the purpose of a strict liability rule in this case is not Pigouvian. The internalization of costs, per se, is not what gives rise to the efficiency. The point is that it is a rule that strictly enforces property rights. It is consistent with the IIS, and therefore, if predictably applied, it will enhance the efficiency of both non-social and market oriented goal-seeking activity. Precise calculations of external costs are not a necessary ingredient.

The concept of strict liability being advocated here has been most extensively developed by Richard Epstein (1973, 1974, 1975), and has typically been endorsed by Austrian school economists (Rizzo 1980A&B; Rothbard, 1982 and Lewin, 1982). But for the most part, this support has been grounded in ethical considerations or what Epstein refers to as “corrective” justice (1979), and has been as an outgrowth of rejecting Coasean-type efficiency considerations (see Egger, 1979; Rizzo, 1980C; and O’Driscoll and Rizzo, 1985). The conclusion that has typically been reached is that efficiency is not an appropriate guide for such questions. As O’Driscoll and Rizzo have argued:

Our support of [judicial rectification of tortious acts]... rests on a belief in principles of corrective justice. We would not pretend that utility is being maximized by the use of common law remedies. We would be quite pleased, however, if the victim were made whole. Pursuit of the latter strikes us as a worthy enough goal even if it falls short of [a]... welfare ideal that is ... unattainable in principle. (p. 142)

This concept of strict liability should be distinguished from the concept that is currently being invoked in the debates concerning tort reform and products liability. In that setting the concept is associated with the nearly complete abandonment of contract and the idea that the plaintiff should never bear the costs of his or her actions. As it is currently being used in discussions of products liability, “strict liability” negates any att to limit liability through ex ante agreements between buyers and sellers. Indeed, this approach to liability is inconsistent with catallactic efficiency. It interferes with the contracting process, i.e., voluntary exchange, and therefore denies people the full utilization of their property. It is an approach to liability that limits and, in fact, denies certain property rights with respect to contract. There is no question of who owns what, or what rights and liability limitations have been agreed to as part of the contracting process. I believe that the term “absolute liability” rather than strict liability is more an appropriate term for the approach to consumer products issues that has developed over the last several decades (Huber, 1988,).

The Question of Causation

Strict liability, as endorsed here, is rooted in the notion of property rights and, as such, suggests a concept of causation that is similarly centered around property. As has often been pointed out, the implementation of strict liability requires an approach to the issue of causation (Kelman). Rizzo sees causation as an integral part of the definition of strict liability. He argues that:

A system of strict liability ... is preeminently based on causation. A is liable, at least prima facie, if he is the cause of B’s harm. (1980B, p. xi)

In the standard framework established by Coase, it is typically argued that the concept of causation is vacuous. This view has been succinctly summarized as follows:

[T]he injury cannot have occurred unless the plaintiff (P), at a minimum, existed, that is P is invariably a necessary condition for the damage to occur, we can never causally attribute any injury solely to a second party, a defendant (D). It will never be the case that the injury could occur without the plaintiff, such that the defendant is entirely causally responsible....[W]e can never fully causally attribute damage to any D, and there is no obvious way to distinguish, on purely causal grounds, the relative causal contribution of two wholly necessary parties....[this is] the most basic Coasean insight that parties interact to cause harm ... (Kelman, p. 579)

As opposed to Coasean analysis, where property rights are the most important variable, the Austrian school’s approach to all externality related issues has consistently been that clearly delineated property titles and rights must be taken as given. The notion of strict liability that is derived from that view of property rights casts up a “but for” test of causality that subverts these conceptual ambiguities. Causality is established, at least prima facie, if, but for the fact that the plaintiff (P) invaded the property rights of the defendant (D), the harm would not have occurred. In this case “invade the property rights” means to make use of property that D had title to, without D’s permission.

In the case of the railroad’s sparks and the farmer’s crops, again assuming that the farmer had title to the land on which he was growing the crops, the approach offered here would lead to the conclusion that the railroad caused the damage that was experienced by the farmer. But for the fact that the railroad’s sparks crossed over onto the farmers land, the crops would not have been destroyed. This can be compared directly to the Coasean view:

Coase’s basic point... was that if what we meant by causation was but for causation, then both R [the railroad] and F [the farmer] were but for causes of whatever damage is done, for there would be no fire unless the sparks were emitted and crops placed near the tracks. (Kelman. p. 584).

It is as if all property lines had been erased, or never existed. The farmer simply chose a plot of land somewhere that had good soil and started planting crops and unfortunately it happened to be near a strip of land that a railroad picked to lay tracks and run train service through. In this sense the Coasean approach to tort is completely void of property rights analysis. Causality is assessed in an institutional vacuum.

As Rizzo and others have pointed out, strict liability is integrally related to causality. In fact its implementation could not proceed without some assessment of causation. By integrating strict liability with catallactic efficiency and the IIS an operational approach to causality can be derived. It is an approach that comes about from a recognition that the issues of property rights and causation cannot be separated.

The Lack of Property Rights and “Coming to the Nuisance”

A troublesome area for dealing with problems in tort from the perspective of catallactic efficiency centers on cases where property rights are not clearly defined. As argued in the previous chapter, in general, determining initial entitlements to property is beyond the scope of economic analysis. Fundamentally, since such decisions cannot be ends-independent, ethical arguments must come into play, and in many if not most cases, such decisions must be based entirely on ethical considerations. For the reasons already discussed, cost-benefit analysis of a Coasean nature cannot be a guide. Furthermore, speculation about how initial entitlements might be determined in a Hobbsean state of nature, from behind a “veil of ignorance,” is similarly non-operational as a real-world policy guide.

On the other hand, catallactic efficiency can offer some guidance for certain kinds of nuisance problems in tort law. For example, consider the upstream industrial polluter of an unowned river that is being used for recreational purposes downstream. The problem facing a judge in trying to implement the catallactic approach to determining whether the polluter should be held liable in such circumstances, centers on the fact that neither party has title to the river.

In such cases there would be efficiency reasons for invoking a rule of “coming to the nuisance,” which suggests that the party that first used the resource should be granted the right to continue to use it. With the problem at hand, the prima facie case would be in favor of whoever was making use of the stream first. The task of the judge and jury would be to sift through the evidence in order to determine whether or not the recreationalists “came to the nuisance.”

From the perspective of catallactic efficiency, such a rule, consistently applied, would aid both the market process and the process of individual goal seeking. Its primary efficiency property relates to the certainty that it would provide in the planning and exchange process. If a person is knowingly the first user of an unowned resource, he can feel free to use the resource in a way that will further his goals. A consistently applied rule of coming to the nuisance would add to the first users confidence that his use, if problems arise, will be sanctioned by the courts and that ultimately his plans will be fulfilled and his goals will be accomplished. Of course, this certainty will feed into the knowledge disseminating aspects of the price system as discussed at various points throughout this book.

Such a rule would also send important signals to potential “comers” to a nuisance. Those signals would aid in the plan formulation process from their perspective, with similar efficiency-enhancing properties for the price system. Clearly, people who expect to use a stream for recreation will not purchase property along that stream if it is being polluted. Similarly, a potentially polluting industry would also be unlikely to purchase land upstream from sites being used for recreation. In both cases, the consequences of their actions would be known, with reasonable confidence, in advance, reducing uncertainty and therefore the potential for errors in the formulation of plans.

Furthermore, a rule of coming to the nuisance would increase the likelihood that a mutually satisfactory bargain might be struck between the potential litigants ex ante, enhancing everyone’s goal-seeking activities through expanded exchange. Confident that the rights of the existing user will ultimately be upheld in court, the party that arrives second will face a strong incentive to purchase any rights that he considers worthwhile prior to any litigation.

All this is quite different from the Coasean analysis of coming to the nuisance. The most prominent discussion of this issue from a standard law and economics perspective is by Donald Wittman (1980). Wittman describes the problem as follows:

It is first necessary to establish the proper sequence of inputs into the productive process (including the production of negative externalities); one must consider who should have been first instead of who was first .... Once the efficient sequence is determined, the next step is to determine the liability rule or property right that promotes the efficient sequence. (p. 559)

The analytical approach to these questions is purely in terms of cost-benefit analysis. The answer to the question of who should have been there first varies with how the costs and benefits associated with the competing activities break down. From our perspective this entire approach is a non-starter, for reasons that should be obvious by this point. No outside observer of the market process could ever take the place of the market in determining “the proper sequence of inputs into [a] productive process.” This is particularly true in Whittman’s analysis where “proper” refers to that sequence which maximizes social efficiency.

Wittman considers coming to the nuisance in a much wider sense than the assessment here. He is not merely examining situations where existing property titles are unclearly defined. On the contrary, in his primary example property titles are not at issue-people building a residential community on property adjacent to a pig farm. As is typical in Coasean analysis, existing property titles are unimportant. Thus the problem we are attempting to solve with a rule of coming to the nuisance, i.e., situations where ownership is not clearly established, is never even an issue. Who actually owns the property over which the conflict exists is an unimportant question.

From the perspective of catallactic efficiency, Wittman’s approach could create uncertainties in the formulation of plans and ultimately lead to inefficiencies in the market process. No one could be sure that existing property rights would be upheld in the future. It could not be known with any degree of certainty who one’s future neighbors will be or how a future court will resolve the question of “who should have been first.”

CONCLUSION: PROBLEMS AND CONSIDERATIONS FOR FURTHER ANALYSIS

The purpose of this chapter is not to write the final word on issues of tort law or to iron out all the problems that could arise when examining issues in tort from the alternative perspective of catallactic efficiency. The primary purpose has been to illustrate how the alternative theory of externalities developed in the previous chapters can lead to policy analysis that is significantly different from standard analysis. With respect to the economic analysis of tort, the purpose here is to open a door-to introduce a new way of thinking about efficiency when examining approaches to liability and property rights.

There are plenty of unresolved questions and areas yet to be explored. It is hoped that enough interest will ultimately be generated in this mode of analysis to flesh out answers to many of the critical questions that a catallactics approach to law and economics generates.

Generally speaking, some of the most important and interesting questions center on two important areas: the issues of judicial remedies and unclearly defined entitlements. While economics may be able to shed some light on specific aspects of these issues, I believe that a complete solution to problems in these areas will require a non-efficiency based theory of justice.

The question of judicial remedies moves the discussion from the general issue of what kind of liability rule should guide judicial decision making to the specific issue of how that rule should be implemented. From the perspective of catallactic efficiency and its derivative theory of externalities, we can conclude that strict liability, as opposed to negligence, is the rule that should guide the decisions of common law judges and juries. It is the rule that is most consistent with the IIS. But having made a decision of guilt or innocence, how should the problem be resolved?

A number of issues arise in that regard. The first relates to the question of compensation. Can economics be used to determine the amount of damages that should be awarded in any given case? While both the Pigouvian and Coasean paradigms provide solutions to this problem, it has been argued here that these solutions are completely unidentifiable in the real world. Because the standard solutions typically invoke general equilibrium based efficiency criteria, those solutions are unhelpful as a guide to judicial problem solving.

I believe that the theory of catallactic efficiency would not be much more useful in this regard, although the entire issue requires a great deal more consideration and research. Ultimately, this is an issue of corrective justice and clearly must rest on ethical questions of just compensation. My own sentiment holds with that of O’Driscoll and Rizzo, namely that, to the extent possible, the victim should be “made whole.” This is consistent with Epstein who explicitly bases his case for strict liability on notions of corrective justice. He argues as a matter of fairness not efficiency, that:

There is no reason why ... a defendant in a law suit should be able to shift the loss in question because the [property] belong[s] to someone else. The action in tort in effect enables the injured party to require the defendant to treat the loss he has inflicted on another as though it were his own. (1973, p. 12)

But what making the victim “whole” or requiring the defendant to treat the loss “as though it were his own” means in concrete terms would have to involve ethical judgments that stand apart from questions of efficiency, either economic or catallactic. Because the compensation will probably be monetary does not make it an economic problem.

A second issue that must be dealt with under the rubric of judicial remedies is the relative appropriateness of injunction and damage remedies. This is a specific application of the general problem identified by Calabresi and Melamed, namely choosing between property and liability rules for property rights enforcement. Definitionally:

An entitlement is protected by a property rule to the extent that someone who wishes to remove the entitlement from its holder must buy it from him in a voluntary transaction in which the value of the entitlement is agreed upon by the seller.... Whenever someone may destroy the initial entitlement if he is willing to pay an objectively determined value for it, an entitlement is protected by a liability rule. (Calabresi and Melamed, p. 1092)

From a Coasean perspective it is typically argued that when there are only a few parties involved, i.e., when transaction costs are low, injunctions are appropriate. The parties will freely bargain and the efficient solution will be reached. When transaction costs are high, damage relief is appropriate because bargaining will not take place (Cooter and Ulen, 106-108). Again it is assumed that a judge could somehow mimic a Coase theorem solution.

Calabresi and Melamed candidly admit the futility of that approach, using eminent domain as an example to highlight the problems of implementing a liability rule guided by economic efficiency. Recognizing that value is ultimately subjective, they point out that:

In practice ... eminent domain simply gives [the plaintiff] what the land is worth “objectively,” in the full knowledge that this may result in over or under compensation. (p. 1108).

At first glance, it appears that injunction relief and property rules in general are most consistent with the IIS and therefore catallactic efficiency. But I do not see this conclusion as definitive or necessarily holding in all cases. From the perspective of catallactic efficiency, several issues need to be examined in detail. Primarily, it must be asked how the alternative remedies might affect successful plan formulation. This involves questioning how the alternative approaches would affect uncertainty and whether they would enhance or decrease the possibility of making erroneous decisions in the goal seeking process. Furthermore the impact of the alternative approaches needs to be assessed in terms of their effect on the exchange process and the information flows captured in price movements. The results of these inquiries may be different in different cases or in different categories of cases. Therefore it may not be possible to reach a blanket conclusion concerning one approach vis a vis the other. Clearly, this is fruitful territory for further research.

Furthermore, questions of corrective justice again will likely come into play. This could include considerations of what may be “reasonable” in different situations. But the concept of “reasonableness” must be based, not on the impossible cost-benefit standards of Coasean analysis, but on notions of morality and fairness, even if those concepts cannot be applied with the rigor that only apparently exists in the typical law and economics approach to such issues.

The second broad category of issue that needs much greater attention than was given here is the issue of ambiguous or undefined property titles. While a rule of coming to the nuisance can offer us some help in this area, it most certainly will not apply in all cases. The historical record with regard to the first user may not be clear. Furthermore, there are problems associated with determining entitlements at all to some resources, for example, air, fish in the ocean, etc. Obviously, many of these problems are technological and could be overcome in time. But serious property rights analysis of these issues is just now beginning (see Anderson and Leal).

Again, this is an area where it is unlikely that economics as a science will be able to provide a definitive answer, and economists should be perfectly willing to pass the baton to analysts in other disciplines when disciplinary boundaries are reached. This should be viewed not as an abdication but simply as an honest recognition that all disciplines have domains and certain questions are simply not appropriately or even potentially addressable by economic science.

This point does not negate the primary conclusion of this chapter. As a general approach to problems of tort, strict liability, as a means of strictly enforcing property rights, is more likely to promote catallactic efficiency than is negligence. In the preponderance of cases, the question of who has title to what is clear, and strict liability can be implemented in a relatively straightforward manner. Certainly, there will always be situations that involve subjective considerations of fairness and reasonableness on the part of judges and juries. But this does not imply fundamental problems with using strict liability as a general guide for judicial decision making.