Law and Efficiency

Legal scholarship has a very complex and awkward relationship with the idea of 'efficiency'. Scholars like to think that they are promoting social justice in all its forms, and unfortunately the idea of efficiency doesn't seem to be extremely honourable, being connected as it is with capitalist markets and correlated associations such as greed, selfishness, and, most embarrassing of all, great wealth. It therefore seems impossible to write about efficiency without sounding like a cruel person who cares nothing about the milk of human kindness.

Many years ago, before the earth became polarized into simplistic Justice and Efficiency camps, and when it still seemed that perhaps there didn't have to be a contest between the two values, the idea of efficiency took centre stage in the company law reform debates preceding the UK's Companies Act of 2006. Some brave reformers put forward the idea that maybe the law should try to promote efficiency. This was expressed in the Law Commissions' consultation documents as being based on various presumptions:

In principle there should be presumptions:

• against interventionist legislation and in favour of facilitating markets, including provision for transparency of information, wherever possible;

• in favour of minimising complexity and maximising accessibility of the rules; complexity should only arise where the substance demands it and the law should be structured on ‘think small first’ principles;

• against creating criminal offences unless the subject matter demands it; and

​• in favour of allocating jurisdiction to the most suitable regulatory bodies, avoiding duplication and conflict.

Those were brave times. The primary goal was stated to be that of introducing policies 'to facilitate productive and creative activity in the economy in the most competitive and efficient way possible for the benefit of everyone'; efficiency was defined as 'maximum output and contribution to prosperity at minimum cost, rather than simple efficiency in the popular sense'. By 'efficiency in the popular sense' they meant, of course, efficiency in the unpopular sense because many people view 'efficiency' as a nasty word, don't they. 'All he cares about is efficiency!' is never intended as a compliment.

​It was therefore necessary for the law reformers to clarify that by 'efficiency' they did not mean that henceforth it would be ok to steal, kill, plunder and generally do everything possible to stab other people in the back because, if you remain calm and try to think about it very carefully, you will soon realize that there's a difference between 'efficiency' and 'abuse'. Yes, I know, shocking.

​There is a trade-off between freedom and abuse, and between freedom and efficiency. Indeed abuse damages efficiency and the credibility of business and of the productive system. The optimal balance between freedom and risk of abuse is clearly a matter of judgement, to be worked out in the context of particular provisions. 

Of greatest interest for this discussion is the first guiding principle: the presumption against prescription. This is a presumption against new rules and regulations. Yes, I know, shocking. We know that when trying to promote justice and fairness we have the opposite presumption: a presumption in favour of prescription. The more laws you introduce, the fairer and more just and more equal society becomes. If people fail to show kindness and love to each other willingly then we'll have to force them to do so. That's what law is for: to force people to be kind to one another. When efficiency is taken as the goal, the presumption is the opposite: don't intervene and force people to do stuff unless necessary.

First, the need for companies to be responsive to change, to leave space for developing best practice and to enable competitive efficiency leads us to seek maximum scope for freedom of activity for participants.

A key role of company law is as a means of facilitating the operation of market forces, through contractual and other mutual relationships.

We therefore conclude that freedom of contract and exchange in the broadest sense, supported by transparency requirements, should be the approach wherever possible.

The law should acknowledge the diversity of economic activity and provide participants with the means to devise the best legal solution for themselves exercising their own commercial and other judgement and freedom of choice within the network of non-legal constraints and pressures described.

I don't know about you, but the efficient world with all that talk of freedom and letting everyone get on with their private business sounds more attractive by the second. It just sounds friendlier and sunnier, doesn't it, than a grim dystopian world in which everyone is being whipped and flogged into obeying the Rules on How to Be Nice to Everyone.

But what if, left to their own devices, everyone turns on each other and before you know it people are raping and pillaging and life on earth as you know it is about to collapse into brutish anarchy? Only law can save us from Leviathan, or so we've been taught. The reformers did not seem to be unduly concerned. With breathtaking confidence, they write:

This presumption [against prescription] must yield, however, where markets and informal pressures combined with transparency cannot be expected to work; this may happen because participants lack the market power, skill or resources to contract effectively.

Such prescriptive intervention must of course be justified in terms of the costs and benefits and the effectiveness of the protections conferred.

In this context the flexibility of civil enforcement, with costs borne by the wrong-doer, has great advantages over criminal sanctions, which require public resource which is already overstretched. However even civil enforcement may be expensive and inefficient. This suggests that where detailed prescription is nevertheless justified the sensitive application of ‘self regulatory’ rules will often be a preferable approach where available in effective form.

Self-regulation. Like I said, breathtaking confidence.
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