The Evolution of Efficiency Principle: From Utilitarianism to Wealth Maximization
20 Pages Posted: 18 Dec 2005
Date Written: December 17, 2005
Efficiency is a vital normative criterion used for economic analysis of law; however, there is no unanimity of opinion among scholars of law and economics on the definition of efficiency. This paper intends to clarify this confusion by critically reviewing three different definitions of efficiency used in current literature, Kaldor-Hicks principle, Pareto principle and wealth maximization.
Section two critically reviews Kaldor-Hicks principle and Pareto principle, two efficiency definitions offered by welfare economists. Due to the imperfect method of measuring utility, Kaldor-Hicks principle has two technical problems, namely the difficulty of interpersonal comparison and Scitovsky paradox. Moreover, as a cost-benefit analysis, it sometimes may conflict with ethics. Conversely, Pareto principle is more morally attractive and also seems to overcome the difficulty of measuring utility. However, Pareto principle is conceptually illogical. It seems impossible to achieve Pareto efficient rule. Furthermore, even Pareto efficient rule were achieved, it might cause unfairness.
Section three examines Posner's wealth maximization theory. According to Posner, the goal of law is to promote total wealth rather than total welfare or utility. The main difference between his theory and two previous theories is that he uses wealth rather than utility as a parameter for economic analysis of law.
Section four explores three main criticisms of wealth maximization theory: (1) as a normative legal theory, it is unable to provide a sufficient explanation for the initial assignment of rights; (2) sometimes, wealth maximization legal rule may be conflict with ethics; (3) it fails to reveal true value of wealth.
Section five reaches the conclusion that it is unreasonable to set efficiency as the only goal pursued by law. Although economic analysis cannot appropriately answer the question what the ultimate goal of law is, nor do other schools of jurisprudence. Therefore, it is unfair to criticize economics and law approach on this ground.
Keywords: efficiency, Kaldor-Hicks efficiency, Pareto efficiency, wealth maximization
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