The Limits of Preference-Based Legal Policy

Abstract

America's political institutions are built on the principle that individual preferences are central to the formation of policy. The two most important institutions in our system, democracy and the market, make individual preference decisive in the formation of policy and the allocation of resources. American legal traditions have always reflected the centrality of preference in policy determination. In private law, the importance of preference is reflected mainly in the development and persistence of common-law rules, which are intended to facilitate private transactions over legal entitlements. In constitutional law, the centrality of preference is reflected in the high position we assign to voting and other forms of governmental participation.

Both the theory of law and economics and the theory of public choice claim superiority over alternative disciplines, such as sociology or some kinds of psychology, which offer policy recommendations based, not on people's preferences, but rather on objective judgments about what the observer thinks is good for someone else. Indeed, neoclassical economics, which forms the foundation for both law and economics and public choice theory, generally regards objective welfare judgments as illegitimate.

Assumptions about preference have enabled neoclassical economics and public choice theory to describe both private and public markets by means of mathematical models that have great rhetorical power These models begin with the proposition that preferences, as revealed by the market at hand, are positive, or observed. As a result, they are subject to scientific description. By contrast, objective welfare judgments are one person's assessment of what is good for another, made without observation of the other's asserted preference. These judgments are sometimes called "normative," a term which implies that any conclusions to be drawn are unscientific. They can be neither verified nor falsified, but are based on someone's value-laden or ethical notion about what is good for someone else.

My thesis here is that the task of discovering and evaluating preferences is so filled with unverifiable assumptions and gaps that it cannot be described in any fashion other than as normative. As a result, a complete legal policy can never be based on the policymaker's observations of the preferences of her constituency. A coherent legal policy must supplement revealed preference with a substantial dose of objective welfare judgments. By the same token, many critiques of existing legal policy are misguided, because they rest on too narrow a view of how the legal policymaker determines welfare.

Keywords: Jurisprudence, Law and Economics, Legal History, Legal theory, Welfare economics

JEL Classification: H40, K30, N01