Wishart, David A --- "Arguing Against the Economics of (say) Corporations Law" [2003] UNSWLawJl 39; (2003) 26(3) UNSW Law Journal 540
[#] This essay is dedicated to the memory of Michael Whincop – a true academic who would have recognised it for the tribute it is.
[*] Senior Lecturer, School of Law and Legal Studies, La Trobe University.
[1] See the discussion in ‘The Future of Law and Economics: Looking Forwards – Roundtable Discussion’ (1997) 64 University of Chicago Law Review 1132.
[2] William W Bratton Jr, ‘The “Nexus of Contracts” Corporation: A Critical Appraisal’ (1989) 74 Cornell Law Review 407, 415. See also the excellent overview in Nicolai J Foss, Henrik Lando and Steen Thomsen, ‘The Theory of the Firm’ in Boudewijn Bouckaert and Gerrit De Geest (eds), Encyclopedia of Law and Economics, VolumeI The History and Methodology of Law and Economics (2000) 631, <http://encyclo.findlaw.com/5610book.pdf> at 20 November 2003. I have cited articles from http://encyclo.findlaw.com wherever possible not only because it is readily available but also because the articles are generally excellent and provide comprehensive bibliographies that are not confined to one school of thought or one national tradition.
[3] Bratton, above n 2, 409.
[4] See, eg, (1983) 26(2) Journal of Law and Economics 1, 1–496; (1989) 89(7) Columbia Law Review, 13 95–1774.
[5] About this time Roman Tomasic, James Jackson, Brendon Pentony and Robin Woellner provided an excellent overview of ‘law and economics thinking about corporate law’, which now appears in Roman Tomasic, James Jackson and Robin Woellner, Corporations Law: Principles, Policy and Process (4th ed, 2002) 8–12 and passim.
[6] See, eg, Ian M Ramsay, ‘Law and Economics as an Approach to Corporate Law Research? A Commentary’ [1996] Canberra Law Review 48; Ian M Ramsay, ‘Company Law and the Economics of Federalism’ (1990) 19 Federal Law Review 169; Ian M Ramsay, ‘Holding Company Liability for the Debts of an Insolvent Subsidiary: A Law and Economics Perspective’ [1994] UNSWLawJl 18; (1994) 17 University of New South Wales Law Journal 520; Ian M Ramsay, ‘Corporate Law in the Age of Statutes’ [1992] SydLawRw 33; (1992) 14 Sydney Law Review 474.
[7] Stephen Bottomley, ‘Taking Corporations Seriously: Some Considerations for Corporate Regulation’ (1990) 19 Federal Law Review 203.
[8] Salomon v Salomon [1897] AC 22.
[9] [1999] FedLawRw 12; (1999) 27(2) Federal Law Review 217–321.
[10] Brian R Cheffins, Company Law: Theory, Structure, and Operation (1997).
[11] David A Wishart, ‘Corporate Law Reform: A Note on the Process and Program’ (2000) 52 Australian Company Secretary 140.
[12] Usefully summarised in Michael J Whincop, An Economic and Jurisprudential Genealogy of Corporate Law (2001).
[13] Cf Andrew Fraser, Reinventing Aristocracy: The Constitutional Reformation of Corporate Governance (1998) ch 2; Neil Andrews, ‘Bad Company? The Corporate Form in an Uncertain Law’ (1998) 9 Australian Journal of Corporate Law 39; Neil Andrews, ‘The Logic of Late Capitalism Illustrated’ (1997) Australian Journal of Corporate Law 139. Despite these writers, and those mentioned earlier, theoretical discussions in Australian corporations law are mostly inconclusive: David A Wishart, ‘The Absent Discussion in Australian Corporations Law’ (1998) 15 Law in Context 142. There is a fair amount of literature in the United States, the principal exponent of critical comment being William Bratton, see especially Bratton, above n 2; in the United Kingdom see Paddy Ireland, ‘Company Law and the Myth of Shareholder Ownership’ (1999) 62 Modern Law Review 32; Paddy Ireland, ‘History, Critical Studies and the Mysterious Disappearance of Capitalism’ (2002) 65 Modern Law Review 120; David Sugarman, ‘Reconceptualising Company Law: Reflections on the Law Commission’s Consultation Paper on Shareholder Remedies’ (1997) 18 The Company Lawyer 226, 228–37.
[14] Gillian Hewitson, Feminist Economics: Interrogating the Masculinity of Rational Economic Man (1999).
[15] ‘Corporate law “is not a branch of poverty law’”: Whincop, above n 12, 20, citing Frank H Easterbrook and David R Fischel, The Economic Structure of Corporate Law (1991) 23.
[16] See Bratton, above n 2, 410–11.
[17] Lindy Edwards makes the compelling point that there is a vast distinction between economic theory and that which is implemented under the guise of policy: hence critique of, say, the Corporate Law Economic Reform Program may well be useless if directed at the difference between what is done and what economic theory would recommend, or even at the implementation of economic theory in the first place’: Lindy Edwards, How to Argue With an Economist (2002). To persuade policy makers away from their course, argues Edwards, requires a simpler polemic, which she indeed provides. That is not to deny the utility of this essay, directed as it is to a more sophisticated critique than that with which Edwards recommends we address policy makers: I am naïve enough to believe that learning is necessary to rhetoric.
[18] Paul Burrows and Cento Veljanovski, ‘Introduction: The Economic Approach to Law’, in Paul Burrows and Cento Veljanovski (eds), The Economic Approach to Law (1981) ch 1.
[19] Milton Friedman, ‘The Methodology of Positive Economics’ in Milton Friedman (ed), Essays in Positive Economics (1953).
[20] Burrows and Veljanovski, above n 18.
[21] Karl Popper published his theories in many versions, directed at diverse ends. The book I am familiar with is Objective Knowledge (1972). More often cited are The Logic of Scientific Discovery (1959); Conjectures and Refutations: The Growth of Scientific Knowledge (1969).
[22] Raymond A Morrow, Critical Theory and Methodology (1994) ch 1.
[23] Thomas S Kuhn, The Structure of Scientific Revolutions (1970). We could even move to Lakatos’ ‘research programmes’ – Imre Lakatos, Methodology of Scientific Research Programmes (1978). See Gerrit De Geest, ‘The Debate on the Scientific Status of Law and Economics’ (1996) 40 European Economic Review 999.
[24] See David A Wishart, ‘Resuscitating Popper: Critical Theory and Corporate Law’ (1996) 3 Canberra Law Review 99–1 03.
[25] See generally Heico Kerkmeester, ‘Methodology: General’ in Bouckaert and de Geest (eds) above n 2, VolI The Regulation of Contracts (2000) 383, <http://encyclo.findlaw.com/0400book.pdf> at 20 November 2003.
[26] Bratton, above n 2, 410.
[27] First published in 1972, but now Richard A Posner, Economic Analysis of Law (5th ed, 1998). Posner’s position has been significantly tidied up and the descriptive premise of the efficiency of the common law softened in much of his later work.
[28] This is not to argue against normative thinking. The policy paralysis resulting from post-modernity is arguably that which has allowed the hegemony of utilitarianism against which this essay rails: Terry Eagleton, The Illusions of Postmodernism (1996) ch 1. My point is simply that we should be sufficiently educated to be able to consider things from many perspectives.
[29] Neil Duxbury, Patterns of American Jurisprudence (1995) 411–14.
[30] Ronald M Dworkin, ‘Is Wealth a Value?’ (1980) 9 Journal of Legal Studies 191.
[31] Even Whincop, above n 12, finds the solution to this puzzle difficult: see David A Wishart, ‘Critiquing Law and Economics: A Review of Michael J Whincop, An Economic and Jurisprudential Genealogy of Corporate Law’ (2002) 14 Australian Journal of Corporate Law 74, 80.
[32] As James Buchanan puts it, ‘the ought is derived from the presumed is’: James M Buchanan, ‘The Domain of Constitutional Economics’ (1990) 1 Constitutional Political Economy 1, as cited in Kerkmeester, above n 25, 390.
[33] Morrow, above n 22. Denis Brion notes that ‘a numerate approach tends to accept the results of measuring those factors that are susceptible to measurement as the proper order of things’: Denis Brion, ‘Norms and Values in Law and Economics’ in Bouckaert and de Geest (eds) above n 2, Vol I The History and Methodology of Law and Economics (2000) 1041, 1049, <http://encyclo.findlaw.com/0800book.pdf> at 20 November 2003.
[34] Kerkmeester, above n 25, 391–4.
[35] Eagleton, above n 28.
[36] Erling Eide, ‘Economics of Criminal Behavior’ in Bouckaert and de Geest (eds) above n 2, Vol V The Economics of Crime and Litigation (2000) 345, 359–60, <http://encyclo.findlaw.com/8100book.pdf> at 20 November 2003.
[37] Certainly the economic theorists have attempted to include other variables in their studies: Ibid 347–55, 361–4. See also Gary S Becker, Accounting for Taste (1996). Those theorists are not so stupid as to be blind to the rest of the world. Yet their theories consequently increase in complexity and Occam’s razor becomes relevant. What use is a normative theory that requires extraordinary complexity to acknowledge the obvious?
[38] Bratton, above n 2, 464.
[39] Hewitson, above n 14, 212. See also the literature on ‘government of the self’: Barbara Cruickshank, ‘Revolutions Within: Self Government and Self Esteem’ (1993) 22 Economy and Society 326; Graham Burchell, ‘Liberal Government and Techniques of the Self’ (1993) 22 Economy and Society 267.
[40] Robin West, ‘Economic Man and Literary Woman: One Contrast’ (1988) 39 Mercer Law Review 867.
[41] Stewart Macaulay, ‘Non-Contractual Relations in Business: A Preliminary Study’ (1963) American Sociological Review 55.
[42] Oddly enough, just as economics recognised cultural norms, attempts are made to theorise them as the results of rational choices: Kerkmeester, above n 25, 385–6.
[43] There are many definitions of ‘efficiency’. All deal with the use of resources. They differ as to who is using the resources (individuals, organisations, society), the time scale (now, the short run, the long run), the means of measurement (utility, wealth, money), what counts as resources (inputs, transaction costs) and the basis of comparison (monetary cost, cost-benefit, Pareto improvement). See Robin P Malloy, Law and Economics – A Comparative Approach to Theory and Practice (1990) 60–8.
[44] See, eg, Trade Practices Act 1974 (Cth) pt VII, dealing with authorisations and notifications of various anti-competitive activities on the grounds of the public interest; and variously in the Competition Principles Agreement entered into between the States and the Commonwealth on 25 February 1994 as to the implementation of competition policy.
[45] Fred Hilmer, Mark Raymer and Geoff Taperell, Independent Committee of Inquiry into a National Competition Policy, Review of the Committee of Inquiry into National Competition Policy (1993) 18.
[46] David A Wishart, ‘Simplification and Motherhood’ (1996) 2 Butterworths Corporations Law Bulletin 16–19; David A Wishart ‘Corporate Law Reform: A Note on the Process and Program’ (2000) 52 Australian Company Secretary 140.
[47] Howard Chang discusses both and comes to a valiant reconciliation: Howard Chang, ‘A Liberal Theory of Social Welfare: Fairness, Utility, and the Pareto Principle’ [2000] YaleLawJl 6; (2000) 110 Yale Law Journal 173.
[48] See generally David Lyons, Forms and Limits of Utilitarianism (1965).
[49] Nicholas Kaldor, ‘Welfare Propositions of Economics and Inter-Personal Comparisons of Utility’ (1939) 49 Economic Journal 549. A relative degree of inequality was also required to make this analysis work.
[50] Hilmer, above n 45; the Australian set of laws is to be found in pts IIIA and IV of the Trade Practices Act 1974 (Cth). Of course, there are disagreements as to the necessity for, ambit and form of these recommendations. Thus, for example, some would dispute the necessity for a general proscription on collusion, being of the opinion that the incentives to drop out of the cartel will always overcome the incentive to stay in it: see Stephen G Corones, Competition Law in Australia (2nd ed, 1999) 10–13.
[51] David A Wishart, ‘Theory, Politics and the Reform of Corporations Law (or Corporations Law as a Glob)’ (2002) 6 Law, Text, Culture 87.
[52] Cento J Veljanovski, The New Law-and-Economics: A Research Review (1982) pt 3; and in neoliberalism generally: Eagleton, above n 28, 78–88. This reflects the ambiguous position of the state in law and economics literature: See Simon Deakin, ‘Law Versus Economics? Reflections on the Normative Foundations of Economic Activity’ in Megan Richardson and Gillian Hadfield (eds), The Second Wave of Law and Economics (1999) 30, 41–7.
[53] Wishart, above n 12, 79–81.
[54] The prohibition is Trade Practices Act 1974 (Cth) s 45A. See also Adam Smith, The Wealth of Nations (1776): ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices’.
[55] Implicated here is the assumption of stable preferences critiqued above as narrowly limiting the range of recommendations for action: see text accompanying nn 36–37.
[56] Lindy Edwards, How to Argue With an Economist (2002).
[57] See Wishart, above n 51.
[58] The seminal text upon which much of this is built (although to my mind it is just ‘Yes, Minister’ in other words) is James M Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962).
[59] Macaulay, above n 41. See generally Vivien Goldwasser and Tony Ciro, ‘Standards of Behaviour in Commercial Contracting’ (2002) Australian Business Law Review 369.
[60] Alessandro Arighetti, Reinhard Bachmann and Simon Deakin, ‘Contract Law, Social Norms and Inter-firm Co-operation’ (1997) 21 Cambridge Journal of Economics 171.
[61] See text accompanying nn 3 8–39.
[62] Guido Calabresi and Douglas Melamed, ‘Property Rules, Liability Rules, and Inalienability: One View of the Cathedral’ (1972) 85 Harvard Law Review 1089.
[63] William J Landes and Richard A Posner, ‘Legal Precedent: A Theoretical and Empirical Analysis’ (1976) 19 Journal of Law and Economics 294.
[64] Whincop, above n 12, 31–40 and passim.
[65] Ronald H Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics 1.
[66] Gary Minda, ‘The Law and Economics and Critical Legal Studies Movements in American Law’ in Nicholas Mercuro (ed) Law and Economics (1989) 111–12; Ejan Mackay, ‘Schools: General’, in Bouckaert and de Geest (eds) above n 2, Vol I The History and Methodology of Law and Economics (2000) 402, <http://encyclo.findlaw.com/0500book.pdf> at 20 November 2003.
[67] Buchanan and Tullock, above n 58.
[68] See, eg, Gary A Klein et al (eds), Decision Making in Action: Models and Methods (1995); William M Goldstein and Robin M Hogarth (eds) Research on Judgment and Decision Making (1997). Even positive economic theory of contract law is forced to deal with the failures of rational actor theory: see Michael M Trebilcock, The Limits of Freedom of Contract (1993) 118; Melvin E Eisenberg identifies recognition of the limits of decision-making within contract law in terms of distress, transactional incapacity, unfair persuasion and price ignorance: ‘The Bargain Principle and its Limits’ (1982) 95 Harvard Law Review 741.
[69] These horrible adjectives are used and coined respectively by Ian R Macneil: ‘Contracts: Adjustments of Long-Term Economic Relations under Classical, Neo Classical and Relational Contract Law’ (1978) 72 Northwestern University Law Review 854. Discrete in this context means that it is the only thing covering the situation and is complete in itself, and presentiated means that an attempt is made to provide for all future contingencies – brought into the present.
[70] Cruickshank above n 39; Burchell above n 39.
[71] Passing reference to child-care manuals makes this obvious. The ones on my bookshelf include Steve Biddulph, The Secret of Happy Children, but particularly the sequel, More Secrets of Happy Children (1994) ch 3; Christopher Green, Toddler Taming (1984) ch 6; Bob Montgomery and Laurel Morris, Getting on with your Teenagers (1988) units 15–26. The process is even more obvious in the strategies adopted by teachers and principals to cope with (at least my) children: the contract to complete homework, the contract to behave in certain ways and so forth.
[72] Burrows, above n 18. Institutional economics goes back a long way, although in its modern form it starts with John Commons: see Steven G Medema, Nicholas Mercuro and Warren J Samuels, ‘Institutional Law and Economics’ in Bouckaert and de Geest (eds) above n 2, Vol I The History and Methodology of Law and Economics (2000) 418, 419, <http://encyclo.findlaw.com/0520book.pdf> at 20 November 2003.
[73] Schmid discusses various formations of institutional economics: Allan Schmid ‘Law and Economics: An Institutional Perspective’ in Nicholas Mercuro (ed) Law and Economics (1989) 57.
[74] Ronald H Coase, ‘The New Institutional Economics’ (1984) 140 Journal of Institutional and Theoretical Economics 229, 230.
[75] Coase, above n 65.
[76] Peter Miller and Nikolas Rose, ‘Governing Economic Life’ (1990) 19 Economy and Society 1, 21–5.
[77] Exemplified in Whincop, above n 12, ch 1.
[78] Peter G Klein, ‘New Institutional Economics’ in Bouckaert and de Geest (eds) above n 2, vol I The History and Methodology of Law and Economics (2000) 456, 462 <http://encyclo.findlaw.com/0530book.pdf> at 20 November 2003.
[79] Ibid 457.
[80] See especially the work of Oliver E Williamson, for example, ‘Contracts: Adjustment of Long-Term Economic Relations Under Classical, Neoclassical and Relational Contract Law’ (1979) 22 Journal of Law and Economics 233.
[81] For example, MacNeil’s listing of transaction costs (see Macneil, above n 69) is remarkably similar to that provided by Toennies at the turn of the century.
[82] Charles E Lindblom, Politics and Markets: The World’s Political Economic Systems (1977).
[83] Ronald H Coase, ‘The Regulated Industries: Discussion’ (1964) 54 American Economic Review 194, 195.
[84] Schmid, above n 73, 68.
[85] Klein, above n 78, 470–1.
[86] Veljanovski, above n 52, 97.
[87] Coase, above n 65; C Edwin Baker, ‘Starting Points in the Economic Analysis of Law’ (1980) 8 Hofstra Law Review 939.
[88] Calabresi and Melamed, above n 62.
[89] See generally Terry Carney, Gaby Ramia and Anna Yeatman (eds), Special Issue: Contractualisation and Citizenship (2001) 18 Law in Context 1.
[90] Crawford B Macpherson, ‘Capitalism and the Changing Concept of Property’, in Eugene Kamenka and Ronald S Neale (eds), Feudalism, Capitalism and Beyond (1975) 104, 120–4.
[91] See the Government White Paper on Welfare Reform: Patrick McClure (Chairperson), Reference Group on Welfare Reform, Participation Support for a More Equitable Society, Canberra: Department of Family and Community Services, July 2000, 33. See generally Tony Blair, The Third Way: Politics for a New Century (1998); Gary Wilson, ‘Business, State, and Community: “Responsible Risk Takers”, New Labour, and the Governance of Corporate Business’ (2000) 27 Journal of Law and Society 151.
[92] Lindy Edwards, above n 17, asserts this is about the only thing that an economic rationalist policy maker understands. What they have to be shown is that the removal of market imperfections requires government intervention which may be more costly than not having a market in the first place.
[93] Mario J Rizzo, ‘The Mirage of Efficiency’ (1980) 8 Hofstra Law Review 641. For a general discussion of the problem of the second best solution see Frederic M Scherer, Industrial Market Structure and Economic Performance (2nd ed, 1980) 24–9.
[94] Stephen King and Rodney Maddock, Unlocking the Infrastructure: The Reform of Public Utilities in Australia (1996) ch 4.
[95] Schmid, above n 73; Scherer, above n 93, 28–9.
[96] Borland’s Trustee v Steel Bros & Co [1900] UKLawRpCh 190; [1901] 1 Ch 279.
[97] Gambotto v WCP Ltd [1995] HCA 12; (1995) 182 CLR 432.
[98] David A Wishart, ‘2001 in Review: Not the Year for Labour’ (2001) 12 Company and Securities Law Bulletin 134–7.
[99] Andrew K Dragun and Martin P O’Connor, ‘Property Rights, Public Choice and Pigovianism’ (1993) 16 Journal of Post Keynesian Economics 127.
[100] Mabo v Queensland (No 2) [1992] HCA 23; (1992) 175 CLR 1.
[101] Mark Harris, The Palimpsest of Native Title (unpublished PhD thesis, La Trobe University, 2001)
[102] See, eg, Elizabeth A Povinelli, ‘The Cunning of Recognition: Real Being and Aboriginal Recognition in Settler Australia’ (1998) 11 Australian Feminist Law Journal 3.
[103] Native Title Act 1993 (Cth) Part 11, ss 253, 24CD, 24DE. See generally Christos Mantziaris and David Martin, Native Title Corporations: A Legal and Anthropological Analysis (2000).
[104] Thomas S Ulen ‘Rational Choice Theory in Law and Economics’ in Bouckaert and de Geest (eds) above n 2, Vol I The History and Methodology of Law and Economics (2000) 790, 801–9, <http://encyclo.findlaw.com/0710book.pdf> at 20 November 2003.
[105] Ronald H Coase, ‘The Nature of the Firm’ (1937) 4 Economica 1.
[106] Cf Roman Tomasic, James Jackson and Robin Woellner, Corporations Law: Principles, Policy and Process (4th ed, 2002) 9–10.
[107] Adolf A Berle and Gardiner Means, The Modern Corporation and Private Property (revised ed, 1968).
[108] Most economics of the firm conceives the corporation as a nexus of contracts. Whincop, above n 12, see especially 209–11, which takes a more sophisticated approach by viewing the idea of legal personality as being deployed for a variety of purposes by courts using analytically quite disparate rules. Yet when it comes to directors, we find ourselves in a variety of roles, for some of which Whincop acknowledges the entity concept is ‘problematic’.
[109] This is not quite the issue considered by quite a large literature on norms and social conventions: Klein, above n 78, 459–61. But I would suggest that literature is more relevant than a consideration of property, as the latter tends to assume that people know about what they are transacting.
[110] Frank Knight – Risk, Uncertainty, and Profit (1921) – distinguished between ‘risk’, which was for him the probability of future events happening, and ‘uncertainty’, which was the possibility of complete surprises in the future. I have initially fudged the two here because ‘risk-taking’, without any such distinction, is a matter which is invariably raised when directors’ duties are discussed. It is also a key feature of the definition of entrepreneurship in ‘Third Way’ literature, which tries to ameliorate economic rationalism. In this context, the idea of risk merely begs the question intended to be solved by the ‘Third Way’: see Cathy Lowy, ‘Is There a Third Way’, in Christopher Arup and David Wishart (eds) Competition Policy with Legal Form (2002) 20 Special Issue: Law in Context 172.
[111] See, eg, Oliver Williamson, ‘The Economic Institutions of Capitalism: Firms, Markets, Relational Contracting’ (1985).
[112] Michael C Jensen and William Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure’ (1976) 3 Journal of Financial Economics 305.
[113] See text accompanying nn 82–6.
[114] I am grateful to my colleague Cathy Lowy for bringing this to my attention.
[115] [1995] HCA 12; (1995) 182 CLR 432.
[116] This is one of the oldest sections in company legislation, and now appears in the Corporations Act 2001 (Cth) s 136(2).
[117] Wishart, above n 31.
[118] [1572] EngR 402; (1612) 10 Co Rep 23a; (1613) 77 ER 960.
[119] Paddy W Ireland, ‘The Rise of the Limited Liability Company’ (1984) 12 International Journal of the Sociology of Law 12; G R Rubin, ‘Aron Salomon and His Circle’ in John Adams (ed), Essays for Clive Schmitthof (1983) 99.
[120] Constructive knowledge is an example, although it is now abolished: Corporations Act 2001 (Cth) s 130. The situation of the unintentional creditor, such as a tortfeasor, causes considerable difficulty such as in the Bhopal cases (see Jamie Cassells, The Uncertain Promise of Law: Lessons from Bhopal (1993)) or the asbestosis case, Briggs v James Hardie (1989) 7 ACLC 841, where isolation of liability in one member of a group of companies effectively denied compensation. A half-way position is represented by the New Zealand case of Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517, where the fact of registration was taken to give notice that advice given was given by the company and, therefore, any negligence in giving the advice was the company’s alone – and not that of the person giving the advice.