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	Alternative Law Journal

The Waterfront Dispute and the Economic Analysis of Law

If the rich and powerful can ‘buy their way out of the law’ then where does that leave the legal system?

David Ruschena

David Ruschena is a law student at Monash University.

On the evening of Tuesday, 7 April 1998, the Patrick group of companies dismissed its entire waterfront workforce, some 1400 persons. It justified its actions by claiming that the work practices of the waterfront workers, most of whom belonged to the Maritime Union of Australia (MUA), had placed the company in a position of insolvency, and as such could not continue to trade. The Patrick companies were put into voluntary administration, and a commercial administrator was employed. The Lang Corporation, which controlled the Patrick groups, and the federal government of Australia issued statements at roughly the same time to the effect that the workers would have their redundancy allowances paid in full. The MUA, on behalf of the dismissed workforce, sued the Patrick companies, the Lang Corporation, the federal government, and various individuals, claiming they had conspired to remove the workers from the waterfront because, as union members, they did not fit within the government’s ambitions of waterfront reform. This allegation, if proved, would constitute a breach of s.298K(1) of the Workplace Relations Act 1996 (Cth).

In the interlocutory stages of the case, the MUA sought an injunction to stop the Lang Corporation from moving its assets away from the Patrick companies. The case went before North J in the Federal Court. In his final summary, Mr John Middleton QC, acting for Patrick, argued that, regardless of whether such a conspiracy existed, the appropriate penalty for such action would be a claim in damages, which in this case amounted to redundancy payments and a full payout of worker’s superannuation entitlements. Mr Middleton argued that the workers could not be guaranteed employment forever, and that with a payout none of the workers would be worse off.[1] North J replied that such a position would be tantamount to allowing a company to pay its way out of a breach of law. The aim of this article is to examine some of the assumptions that underlie Mr Middleton’s argument. It is arguable that a purely economic analysis of law is being used by Mr Middleton to evaluate the merits of Patrick’s action and to guide the appropriate outcome of the judge. In doing so, it undermines the force and authority of the law in guiding our actions.[2] If we evaluate the law purely on the basis of an economic analysis then the conclusion of North J that we must allow organisations (and, for that matter, individuals) to pay their way out of a breach of the law, is inevitable.

A summary of an economic analysis of law

An economic analysis of law aims to provide insight into two aspects of the law’s functioning.[3] The first is that of impact analysis. Using economics as a means of predicting rational choice, this approach provides an analysis of the impact of changes in the law on various areas of human interaction. For example, economics might be used to predict how changes to airline safety rules might affect passenger deaths.[4] The second area covers investigations into the twin theories that the common law ought to seek to maximise efficiency and generate wealth within the community, and that it does so consistently.[5]

Efficiency is defined, according to this analysis, as the allocation of resources that maximises human satisfaction. Resources can be defined as anything within society for which it might be possible to pay: goods, experiences, rights, duties. The chosen method for allocation of these resources within the community is the market: economics states that as long as the market is operating effectively, the resources within a community will inevitably shift to those who value them the most, measured in terms of willingness to pay. Human satisfaction is measured in terms of aggregate consumer willingness to pay.[6] An economic analysis of law advocates the increase of human satisfaction through maximising total societal wealth. This increases the aggregate of resources which are available to different members of society to exchange for other resources.

It is the premise of an economic analysis of law that it is the role of the adjudicator of a dispute to maximise societal wealth by encouraging market activity that takes into account the adjuducator’s decision.[7] The logic of the market is presumed to be such that the most efficient allocation will result. Where the market has failed, the adjudicator should seek to imitate the role that the market would presumably have played, evaluating the value of the resource to the owner, and permitting anyone who wishes to do so, to purchase the resource.[8]

Three assumptions provide us with a possible critique of Patrick’s arguments in this case:

Such assumptions underlie the way in which an economic analysis of law seeks to characterise the function of the law.

Ex ante analysis

Analysis is performed ex ante when the adjudicator of a dispute bases a decision on the consequences that will flow from it. The events that led to the dispute are purely background, as there has been a zero sum gain to society as a result of the dispute. The only consideration given is to the effect that the decision may have. Such analysis requires the judge to look from a universal perspective, in which the interests of the individuals take second place to the concerns of society. This is supposed to compel the court to ‘treat each of the litigants equally and neutrally, ignoring their personal circumstances and characteristics’.[9] Advocates of an economic analysis contrast such reasoning with a framework that looks to attribute blame between the parties to the dispute, in order to judge one’s actions unacceptable or require compensation. In essence, the view of an economic analysis of law is that ‘looking back robs us of the ability to look to the future’.[10] Ex ante analysis concerns itself also with the effects that might flow from certain remedies. Such a view might limit the use of certain remedies in certain situations because of the effects that might flow: ‘one cannot do much about the ways things turn out without stifling agreements that everyone desires at the outset’.[11]

The notion that disputes are decided in terms of future effects seems to be at odds with the common understanding of the law, that the court will decide cases on the basis of who it is that has committed the wrong. Both the verdict and the remedy of any dispute seem to be a determination of the identity of the guilty party and their degree of culpability. If courts are to judge outcomes purely on the basis of future events, it robs them of any ability to condemn the actions of the party on whom they impose a burden, a function seen by many as essential to the role of the courts. In effect the courts are no longer judging, they are legislating: prescribing likely penalties in relation to future offences.

Decisions which are perceived to be contrary to the function of the court as an impartial adjudicator have generally been decided on the basis that one or both of the parties to the dispute have certain rights, and that these rights have somehow been violated. Such ‘rights based’ justifications of the law have been used both when the courts have tried to make reparations for past injustices and when the future violation of rights is contemplated.[12] The common law is founded on a moral presumption of respect for rights, at least to the extent that ‘certain ways of dealing with people are unacceptable, deserving of blame and condemnation’.[13] This nature of rights is such that a ‘rights based’ determination of wrong is of a fundamentally different nature to a determination based on probable future consequences. Legal history and analysis may equivocate over whether rights are inviolable, but it is yet to render them circumstantial.

As an example, let us consider the waterfront dispute. If the MUA members were world leaders in container movement, were all women, and Patrick was taken over by a group of chauvinists who dismissed them explicitly and openly because of their gender, this would contravene the rights of the female union to equal opportunity employment. It would also be against the evaluation of outcome proposed by an economic analysis, because if the management of the Patrick companies could fire workers on the basis of some outside, irrelevant, factor — even the best workers in the world — then no worker could feel safe in any job where they were not the owner of the company. Such a finding would have disastrous effects on the productivity of the nation.

Assume, however, that the MUA consisted entirely of smokers, and the new owners sack the workforce because they hate the smell of smoke on people’s clothes. The invasion of rights is exactly the same: dismissal because of some quality extraneous to job performance. If, however, it could be shown that this mass dismissal caused the rest of the workers to work harder, or perhaps to stop smoking, and that absenteeism went down due to a decrease in ill-health — that ex ante the efficiency of the docks improved — then there is no case of wrongdoing under an economic analysis of law.[14]

Monetary based compensation

Much of the ideological sting in the economic analysis tail comes from the definition of efficiency used as a guidance to ideas of wealth generation. The problem is primarily one of perspective: in any given situation, it is difficult to determine objectively which outcome best leads to the most efficient allocation of resources. The general legislative aim of maximal satisfaction of society’s desires is solved by the use of money as a measure of possible want satisfaction.[15] However, given that market failures will inevitably occur, and goods are therefore not being shifted to where their value is highest, then some notion of efficiency evaluation is needed beyond the maintenance of market sovereignty. What is needed is some way of evaluating outcomes such that any individual dispute may be measured for the efficiency of the alternative outcomes to be decided by the judge.

Two options are available. The first is Pareto maximisation: an outcome is acceptable if it makes somebody better off while making nobody else worse off.[16] This is an incremental approach to wealth maximisation: as long as no judgment decreases the wealth of society, wealth will increase, albeit slowly. This approach is problematic when applied to dispute resolution because in most disputes any outcome will hurt one of the parties and this is why they have not settled their differences privately. Thus such a guideline is of little help. Another option for measurement is the Kaldor-Hicks definition of efficiency: a change in distribution of resources is efficient if it generates sufficient wealth for the beneficiaries such that they could, if they wished to, fully compensate the losers of the dispute.[17] Taking a society-wide approach and measuring the sum of wealth within that society, the Kaldor-Hicks definition of efficiency does not actually require the compensation since money has a fixed value and actual compensation will not affect the sum of societal wealth. If it can be assumed that a judge would make compensation of the losing party mandatory, there is little to separate the two paradigms of efficiency. If appropriate monetary restitution for the loss can be made, then nobody is worse off, while for the compensating party to agree to the outcome, their wealth would have to have increased sufficiently.

In practice, the court, in deciding which of the future effects it should prefer, may seek to allocate rights to the party who can pay compensation to the loser. This practice may prove to be objectionable for a number of reasons resulting from the involuntary transfer of one person’s right to another. As discussed, the market is seen as the ideal distributor of societal resources because no-one would accept a bargain which lessens their wealth. However, where a problem in the marketplace exists people cannot use the market to shift resources to a more valuable use, and it is argued that the courts should be the mechanism for this transfer.[18] While Posner states that voluntariness is a valuable tool because it is the best predictor for the efficient outcomes between parties to a contract,[19] he also argues that it is too restrictive a burden to place on the courts when deciding a dispute.[20] The courts should in this case ascertain what would have been the value placed on the right by the party who is losing it had a voluntary transaction taken place. In this way, the usual compensation for loss will be damages.

The removal of voluntariness as a necessary basis of wealth maximisation also removes certainty about the value a party places on its right. The best method of actual valuation of a right offered thus far is that the court should look to the valuations put on similar rights by explicit markets.[21] The problem with this valuation process is that it seeks to compare apples and oranges. The existence of a market for sex does not mean that we can put a price on the damage caused by rape. The mere fact of voluntariness in this context is itself a pivotal factor in the experience of the sex worker compared to a victim of sexual assault, and as such the damage (if any) suffered by the two will be different. An ‘involuntary market’ is one that cannot have the same valuations on rights as a voluntary one. The actual difference is purely a matter for conjecture. In this practical situation, as in others, the framework offered to the judge by an economic analysis of law becomes incoherent. What price then, do we put on the removal of the right to work if it is taken away because of matters unrelated to work performance? Should it be the same as if the right were taken away following questions and requirements about job performance? If we assume that the damage suffered by the wronged party was relevant to the question of damages, then there would be a valid difference between the two situations. If we look at the situation ex ante, the question is arguable either way.

Such an approach is also problematic because it assumes that valuation of rights is appropriate. Taken in its entirety, an economic analysis of law provides at least some other arguments that weigh in favour of valuation. Chief amongst them would be complete freedom of contract, in this case including the use of penalties for breach. Thus the alarming situation of a ‘fee’ for rape – of perhaps a billion dollars or more – may arise.[22] Even if such a sizeable fee were levied as a penalty, the undeniable result is that at least two people in Australia could engage in such a heinous act, pay the penalty, and walk away. Ignoring for a moment that this represents a gross inequality before the law, it does not seem too long a bow to draw to say that most people would not consider this to be a true reflection of the concept of ‘paying your debt to society’ that flows from a conception of penalty as punishment.

Professor Calabresi and A. Douglas Melamed distinguish between those rights that may be violated if one is prepared to incur a penalty, and those rights for which no involuntary incursion is tolerated, where criminal sanctions are imposed for violations.[23] They spend some time discussing why the rights distinction for or against inalienability should be made. Their answer is that, apart from the approximate nature of the valuation, there are some areas where ‘we will not without special reasons impose an objective selling price on the vendor’, because to allow such invasions would ‘undermine rules and distinctions of significance’.[24] In this context they were discussing the right to bodily integrity, but put forward no framework to determine the distinction between which rights are alienable and which are not, presumably leaving the distinction for the judges to determine. If an economic analysis wishes to guide the judges, at least some help in making this distinction is necessary.

No public duties

Taking Mr Middleton’s statement that there is no obligation to keep on an employee who could legitimately be dismissed out of context, and distorting it for the purposes of illumination, one can see the wide scale ramifications of such reasoning. The sphere of the law that will be explored here is the concept of societal duty. Whether expressed in the language of the social contract, justice or charity, the point is comparatively simple. Economics is concerned first and foremost with the autonomy of the individual: it sees no place for second guessing the individual’s preference worthiness.[25] Further, economics views society as nothing more than a collection of individuals. Finally, wealth maximisation is itself the goal for which judges ought to aim. The sum of these theoretical demands is to abrogate any positive duty owed by us to the society in which we live. When wealth maximisation is itself the goal, instrumental normative demands[26]are impossible to enunciate. Put simply, when you try to define what people ought to do, using a definition of the law that relies only on what people want to do, you are left without ground to stand on.[27]

If we accept the economic analysis of law perspective, the law becomes oblivious to the demands of distributive justice. If rights are defined (or distributed) only for those who can (or could) afford to pay for them, then those who are not physically or mentally equipped to pay their own way through life are left without anything at all. As Posner states ‘[t]he rights derived from economic theory are not ... bestowed by God or otherwise transcendental; they are ‘mere’ instruments of wealth maximisation’.[28] When in another article he claims that it is a virtue of wealth maximisation that ‘the claims of the unproductive’[29] are ignored, he is talking about the thief who takes without producing. There is nothing in his analysis that excludes the mentally or physically challenged, or the elderly. He argues that these people are entitled to the essentials only ‘if they are part of the utility function of someone else’.[30] His argument against any sort of distributive justice is that ‘there is no theoretical basis for the conclusion that a transfer of money from a wealthy man to a poor one is likely to increase the sum of the two men’s utilities’.[31] In this context, distributive justice includes food, shelter, and warmth which would have to be paid for by somebody. He conceded that such justice would be advantageous if because of it crime could be kept down or the altruistic rich could be kept happy. Notwithstanding this concession, Baker replied 20 years ago by showing that the sum of probable utilities would increase with a more even distribution of wealth.[32] If we accept that the rich derive more pleasure from marginal increases in their wealth than do the poor from significant increases in theirs, we are placing our belief in some sort of sociology of pleasure that defies elucidation.[33] In effect, an economic analysis of law states that because some people were born rich or became rich they are entitled to do what they want to do with their money, without rebuke. The justification for this is that individuals who are so acting are by definition engaging in bargains with others, and are therefore increasing their wealth, for if the others were not benefiting they would not enter the contract.[34] The point remains, however, that while an individual’s wealth lasts, they are still given the chance to expend it in wholly individualistic — even antisocial — ways. In this context, the only duties to which an individual is bound are duties to honour contractual undertakings.

Buying your way out of a breach of the law

The three aspects of an economic analysis of law that have been analysed within this article have been the ex ante perspective; the view of damages as the most appropriate form of punishment the law should impose for an infringement of rights; and the refusal to recognise any notion of public duties or distributive justice as being a necessary component of the law. I have argued that such an analysis of the law dilutes the law’s authority as a normative tool for classifying actions as wrong or right; values rights inconsistently with our notion that autonomy is the cornerstone of an individual’s integrity; and removes any communitarian framework from the notion of legal obligation.

The practical upshot of these three effects is to take the law out of the hands of the legal system, and place it squarely in the hands of the individual. People are not only given the opportunity to calculate for themselves whether it is worth their while to break the law as it stands, they are positively encouraged to do so where they see it as worth their while. As Posner states, ‘[d]amage liability would not deter a breach that increases the value [which a party attaches to] the other property ... since, by hypothesis, his damage liability would be smaller than his gain from the breach’.[35]

With respect, this leaves the concept of the legal right as having meaning only in a circumstantial way. That which the law previously categorised as a right has become nothing but a claim to be made and valued. If one person’s claim can be valued at a higher dollar amount than another person’s claim, then the higher valued claim wins, and the loser is paid out. The court is forced into a position where it must substitute economic objects, such as efficiency and production for other objects, such as morality and culpability, because these objects have no meaning in a wealth maximisation system. The courts are transformed from a social institution into a tool for economic advancement.

In such a legal environment there would be two ways for Patrick to solve the problem of the MUA objections. The first would be to show that, following an ex ante approach, the loss of 1400 jobs by the waterfront workers would advance the goal of wealth production within Australia. Alternatively, with the assistance of the federal government, Patrick could have simply asked the MUA to name a price, bargain with the MUA using the Federal Court as a mediator, and then pay the costs. With the assistance of the largest economic player in Australia — the federal government — it would be difficult to see Patrick losing that dispute. It would also be difficult to see the law having the same moral force as it might previously have been seen as having

The question at the heart of this dichotomy of value is whether the law should allow some members of society to leave others behind. As Professor Kronman argued, for the law to intensify ‘the effects of the natural lottery’ is perverse.[36] Why? Because those who have wealth have their own means of getting what they want. They need the protection of the law significantly less than those who rely on the law to shield them from the injustices they are powerless to prevent. If the law is meting out justice, then it is both flexible and doctrinal and takes into account the actions and positions of the disputants that come before it. Within such a framework, the law generates cohesion within society as well as giving individuals the ability to order their affairs with certainty. In this context, an economic analysis of law attempts to unify the law under a pseudo-ideological banner amounting to a statement that the law might work in practice but it is flawed in theory.

References

[1] Spark and Cannon Transcript VG 42/1998, 17 April 1998, p.240.
[2] It is not the aim of this article to argue the merits of either side of the argument, and given the subsequent agreement between MUA and Patrick, such a discussion is both entirely academic and beyond the resources of this writer. It should also be noted that this article has no views about Mr Middleton’s or Justice North’s perspectives on the law. It merely uses the statements and their context as a tool for illumination.
[3] For a comprehensive survey of the economic analysis of law, see Trebilcock, M., ‘An Introduction to Law and Economics’, (1997) 23(1) Mon L Rev 123.
[4] Easterbrook, F., ‘The Inevitability of Law and Economics’, (1989) 1 Legal Educ Rev 3, at 9.
[5] This final argument, that the aims of the law should be concerned solely with wealth maximisation and efficiency, is made most forcefully and famously by Richard Posner. See Posner, R.A., ‘Utilitarianism, Economics and Legal Theory’, (1979) 8(1) JLS 180; Posner, R.A., ‘Some Uses and Abuses of Economics in Law’, (1979) U Chi L Rev 281.
[6] Posner, R.A., The Economic Analysis of Law, Little Brown Press, 1986, 3rd edn, p.12.
[7] For example, by promoting certainty of contract so that the parties will know the outcome of their bargain should anything go wrong.
[8] It is accepted by the author that no analysis of efficiency exists which can avoid answering the question whether to aim for distributive or productive justice. The choice of wealth maximisation offers us a chance to aim for value neutral evaluation of wealth, which provides a much easier role of the law in property disputes. However, to embrace wealth maximisation is to ignore wealth distribution, and of the two, the effects of wealth distribution more closely match with the normative force of the law.
[9] Cohen, L., ‘A Justification of Social Wealth Maximisation as a Rights-Based Ethical Theory’, (1983) 10(2) HJLPP 411 at 421.
[10] Easterbrook, above, p.28.
[11] Easterbrook, above, p.22.
[12] Mabo v The State of Queensland (1992) 177 CLR 1; Dietrich v The Queen (1992) 177 CLR 292.
[13] Morawetz, Thomas, ‘Comment: Efficiency, Morality, and Rights: The Significance of ‘Cleaning Up’, (1987) 10(2) Harvard Journal of Law and Public Policy 433 at 434.
[14] In reality, the situation is even more contorted: given that economists could not agree on things like whether the waterfront workers had a comparatively good or bad rate of container movement, then the answer of the EAL judge will also depend on the economist to which they listen.
[15] Guest, S., Utilitarianism, Economics and the Common Law’, (1984) 5(4) OLR 657.
[16] Trebilcock, above, ref. 3, p.132.
[17] Posner, above, ref. 6, p.6.
[18] Posner, above, ref. 6, p.49.
[19] Posner, above, ref. 6, p.14.
[20] Posner, R.A., ‘Utilitarianism, Economics and Legal Theory’, above, ref. 5, p.130.
[21] Posner, R.A., above, ref. 20, p.119.
[22] Posner, R.A., above, ref. 20, p.132. Posner says that in a system of wealth maximisation the activities of an ecstatic rapist, for example, ‘are circumscribed by a rights system which forces the monster to pay his victims the level of compensation that they themselves determine’.
[23] Calabresi, Guido and Melamed, Douglas, A., ‘Property Rules, Liability Rules and Inalienability: One View of The Cathedral’, (1972) 85(6) Harvard Law Review 1089.
[24] Calabresi and Melamed, above, p.1126.
[25] Posner, above, ref. 20, p.135.
[26] Moral duties that can be derived from the pursuit of this goal by the law.
[27] Leff, A.A., ‘Economic Analysis of Law: Some Realism about Nominalism’, (1974) 60 Virg L R 451 at 454.
[28] Posner, R.A., ‘Utilitarianism, Economics and Legal Theory’, above, ref. 5, p.127.
[29] Posner, R.A., ‘Utilitarianism, Economics and Legal Theory’, above, ref. 5, p.135.
[30] Posner, R.A., ‘Utilitarianism, Economics and Legal Theory’, above, ref. 5, p.129.
[31] Posner, R.A., The Economic Analysis of Law, ref. 5, p.216.
[32] Baker, A., ‘The Ideology of the Economic Analysis of Law’, (1975) HJLPP 3 at 29.
[33] Baker, A., above, p.31.
[34] Posner, R.A., ‘Utilitarianism, Economics and Legal Theory’, above, ref. 5, p.135.
[35] Posner, R.A., The Economic Analysis of Law, above, ref. 6, p.60.
[36] Kronman, A., ‘Wealth Maximisation as a Normative Principle’, (1980) 9(2) JLS 227 at 241.