There’s wealth and then there’s wealth.

One of the most common criticisms of a lot (not all!) of the so-called “economic” analysis that has dominated the political and legal minds of the last 30 years is its inability to account for value that cannot be reduced to monetary terms. The criticism, while duly noted, tends to be immediately forgotten. As a result, we’ve had an entire generation that’s felt compelled to justify its decisions on purely economic terms. The economic crisis may be affecting this tendency as much as its affecting other ways of viewing the world. Last year, some big law firms that were getting less work from their clients gave graduating law students to whom they’d given offers of permanent employment an offer that sounded to good to be true: go get another job — let it be low paying and “public interest” — and we’ll pay you a part of your salary in the expectation you’ll come work for us permanently next year. But now, according to Georgetown Law Grad Russ Ferguson, those firms are finding out, to their surprise, that the students who took advantage of the offer like their alternative jobs too much. Most importantly, they’re realizing that they’re wealthier in real terms in their lower paying jobs:

These new lawyers have found that their new jobs are more fulfilling and more interesting, and — more importantly — they’ve seen that they can live on a smaller salary. As one of my classmates put it, “Add up the hours I worked this week and add up the hours my friends at law firms worked. Divide our salaries by the amount of hours and you’ll see — I’m rich.”

(hat tip to the ABA Law Journal)

We know the price of everything and the value of nothing.

A couple of weeks ago I quoted from Tony Judt’s critique of free market ideology. Raj Patel, in “How Free Market Delusions Destroyed the Economy,” goes into considerable depth about the stupidity of our faith in markets, but this brief point makes clear the wisdom underlying the entire article:

There is a discrepancy between the price of something and its value, one that economists cannot fix, because it’s a problem inherent to the very idea of profit-driven prices. This gap is something about which we’ve got an uneasy and uncomfortable intuition. The uncertainty about prices is what makes the MasterCard ads amusing. You know how it goes — green fees: $240; lessons: $50; golf club: $110; having fun: priceless. The deeper joke, though, is this: The price of something doesn’t measure its value at all.

Corporations = individuals? Confusions in economic theory and First Amendment jurisprudence

Metaphors are tricky things. Corporations are “persons” under the law in many respects, just as you and I are. And we treat corporations as rational individuals in the market. These figurative equations of legal fictions with human beings certainly have their utility, but they easily can be pushed too far. Individuals at AIG were making individual fortunes based on the income they were bringing into AIG for selling credit default swaps. Those individuals were making and would retain those fortunes even if, as turned out to be the case, AIG might not have sufficient funds to pay off the obligations those credit default swaps imposed on AIG. In other words, if one treated AIG as a rational person, one would suppose AIG would never expose itself to a real risk of obligating itself to pay more than it had in reserve. But AIG is merely a corporation, and the individuals actually making the decisions on behalf of AIG had every incentive to get what they could, subject AIG to irrational risk, and be able to walk away with their tens of millions of dollars.

And now the Supreme Court has overturned over 100 years of precedent permitting limits on corporate contributions to political campaigns because such limits constrained free speech and, according to the truism announced by Justice Kennedy’s majority opinion, ”Speech is an essential mechanism of democracy, for it is the means to hold officials accountable to the people.” But corporations don’t make decisions about how to spend money on campaign contributions — the individuals who control the corporations do. So what the Supreme Court has done is to remove any limits we might put on corporate CEOs to spend corporate money to advance the interests that indubitably are intended to redound to the benefit of those individual CEOs. I wouldn’t limit the ability of CEOs and shareholders to make individual contributions to political campaigns, but why are we treating purely legal entities like they are made of flesh and blood?

As Buzzflash pointed out recently, Thom Hartmann in his book Unequal Protection explains:

Prior to 1886, corporations were referred to in U.S. law as “artificial persons.” but in 1886, after a series of cases brought by lawyers representing the expanding railroad interests, the Supreme Court ruled that corporations were “persons” and entitled to the same rights granted to people under the Bill of Rights. Since this ruling, America has lost the legal structures that allowed for people to control corporate behavior.

Why do we enforce contract promises?

Over the course of my professional career, Law and Economics has grown from one school of thought among many to one so dominant that many of its postulates have virtually become unquestioned premises from which legal reasoning begins. The Law and Economics school of thought is wide-ranging, but might fairly be described the way Wikipedia puts it: Law and Economics is an “approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.”

One of the most influential premises of Law and Economics is that contractual promises are enforced purely because of their capacity to maximize the society-wide allocation of resources. Thus, it is said that the contractual promise has no moral value over and above its economic value. This view both explains why typically someone suing for breach of contract can recover only the financial equivalent of the benefit they would have received had the contract been performed. There is no additional quantum of damages added to provide an incentive not to breach.

Thus, it is said, a contractual promise is in fact a promise either to fulfill the promise or to pay the damages that result from breach. This view, it is argued, has long been the view of the common law, as exemplified by Oliver Wendell Holmes’ late 19th Century statement that “the duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it, and nothing else.” Thus, the thinking goes, if someone who has made a contractual promise can make out better by breaking the promise, paying damages for breach, and entering a different deal, that result is not merely tolerable — it is to be desired. Such a breach of promise is known as an “efficient breach” because it theoretically results in an increase in overall resources: the party injured by the breach is supposed to get everything he was supposed to get under the contract, the breaching party is getting something better, and the new party with whom the breaching party contracts is getting a deal he would not otherwise have gotten.

The Law and Economics view is by no means the only one current in the theorizing about the basis for enforcing contractual promises (and the interpretation Law and Economics devotees put on Holmes’ statement is disputed). As a contracts professor and litigator, though, my experience is that the idea that the contract promise has no moral value over and above its economic value is a very, very influential one.

It is a view, too, that is of a piece with the rise to virtual unquestioned dogma that unregulated free markets always result in the highest social good. One problem, though, is that unregulated free markets entrench the power of the wealthiest. So people bound by promises (the “promisor”) can force the person to whom they are bound (the “promisee”) to change the terms of the promises if the promisor has greater financial ability to force the promisee into a legal resolution that is unacceptable to the promisee.

The disparity in economic power the theory of efficient breach does not account for is on display in the power corporations hold to renegotiate employment contracts.  Since an employee can only recover for breach whatever damages are available to him through law, the threat of being limited to that remedy can be a powerful one. Thus, as the New York Times pointed out last week,

Contracts everywhere are under assault.

The depth of the recession and the use of taxpayer dollars to bail out companies have made it politically acceptable for overseers to tinker with employment agreements.

But, as David Skeel, a law professor from the University of Pennsylvania quoted in the article points out,

We run roughshod over some contracts and not over others. . . . Right now, employment contracts seem to be the type of contract that is viewed as eminently rewritable.

So we have Larry Summers, President Obama’s Chief Economic Adviser, arguing in connection with the bonuses paid to AIG employees that the contractual promises are too sacred under the law to undo: “”We are a country of law. . . There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.” On the other hand, the UAW’s agreement to give up rights under its contract with the auto companies was required by the government as a condition of the federal monies the automakers received.

So, are contractual promises “sacred” in some way, or are they only worth whatever the parties to them can extract given their relative financial strength and political influence? I don’t think I know.

The rise of the conservative legal movement

Over at Firedoglake there is an interesting discussion going on in the comments to a blog post between readers and Steven M. Teles, the author of The Rise of the Conservative Legal Movement.

There is no question in my mind that this country’s legal community has become enormously more open to arguments that assume the wisdom of unregulated free markets and the primacy of property rights in the 28 years since I began law school. “Law and Economics,” an ill-defined legal movement that exclusively applies economic criteria to legal decision-making has gone from being a set of arguments to consider on issues that plainly were economic in nature to an all-encomp0assing explanation of legal decision making in any and all situations.  The Federalist Society, an enormously well organized and well funded organization that coordinates the activities and thoughts of its members from cradle (their first days in law school) to grave (lifetime appointments on the Supreme Court), has gone during that time from non-existent to enormously influential. As the post explains:

Legal academics shape the ways in which judges think and in which bureaucrats administer programs. Judges for their part play an active political role, making decisions that define the contours of politics, often telling elected politicians what they can and cannot do. And lawyers often become politicians. Hence, the law is a key arena of political battle. A generation ago, conservatives were badly out-gunned in this arena. They were badly outnumbered and intellectually underpowered. Now, they are in a position of considerable importance. Republican appointees are a majority on several key appelate courts. Conservative ideas about the limits of politics and the vital importance of markets have reshaped the law’s intellectual basis. And the US Supreme Court has shifted sharply to the right.

Thus, as Rachel Morris puts it, Teles’ book explains the conservative impact on our legal system not as some sinister right-wing plot but, rather, as an intellectual movement:

The story of how conservative lawyers extracted themselves from the wilderness is often cast as a sinister tale, as if the Federalist Society were an affiliate of the hooded and robed cabal that Tom Cruise infiltrates in Eyes Wide Shut. Steven Teles, a political scientist at Johns Hopkins University and a fellow at the New America Foundation, offers a more rational take in The Rise of the Conservative Legal Movement, and in a new article in Studies in American Political Development. However, with Alberto Gonzales’s blank stare lingering in the mind’s eye, Teles’s assessment still sounds quite outlandish: he suggests that the real secret of the movement’s success was its thirst for ideas and intellectual debate.

I’ll follow the discussion with Teles closely. I highly recommend it.