Default Rules and the Indeterminacy of Law

The problem of determining the content of default rules is a problem human societies have had to deal with for thousands of years, ever since the first human social group developed a semi-formal system of common law, in which some degree of stare decisis is respected, thereby creating institutional "memory" for the legal system, and thus an evolutionary selection mechanism "designed" to root out and "discover" successful legal rules. (Long before people were fully aware of the problem in an abstract sense, it was still a problem that needed to be - and was - addressed.) I put the preceding words in scare quotes because there was not, in actuality, any single, conscious, deliberate, intentional mind designing such a system and transmitting it to future generations, nor is there any objective reality "out there" from which to discover the "correct" legal rule - rather, individual judges make it up as they go along, basing their decisions on whichever of the many and conflicting legal rationales they may subscribe to: fairness, justice, efficiency, helping the rich, helping the poor, Divine Command theory, etc.

Whether or not a given legal rule is "successful," from an evolutionary perspective, is determined by whether or not judges, in future cases that are sufficiently similar (sufficient similarity, of course, is often the central issue being disputed), choose to respect stare decisis and adopt and reuse the previous decision, or reject it and create a new one. This decision is itself determined by whatever is in the interests of the judges, which, under certain fortuitous conditions, correspond quite closely to whatever rules are in the interests of the litigants. For example, if the structure of incentives inherent in a system is such that it is in the judges' interests to resolve disputes as quickly as possible with as little acrimony as possible, and thereby minimize social conflict, then we can expect the legal rules that result from this system to be successful from an evolutionary perspective, because all of the parties involved (both judges and potential future litigants) are content with the existing legal rules and have no reason to want to change them. Rather than reinventing the wheel whenever a new dispute arises, we can look back at previous disputes and see what worked well in the past, and then infer what might work well in the present and future. This has the added benefit of making legal systems stable, as potential future litigants come to expect what the results of any future legal dispute will be, and can plan their behavior accordingly.

Of course, just as no system of common law, no matter how well-developed it might be, can ever have the answer to every possible future legal dispute, so too no contract can ever account for every possible circumstance. Nor would most of us want such a system of common law, or such a contract, even if we could somehow guarantee that it preaddressed every possible future contingency. The advantage of indeterminacy in both contracts and the set of legal rules as a whole is that indeterminacy is more flexible and has lower transaction costs than a fully determinate system.

It is more flexible because it allows for greater fairness in dealing with unforeseen factors. For example, consider the Romeo & Juliet exception for age-of-consent laws. While an age-of-consent law without such a provision might be fully determinate since we can predetermine the outcome to any future case involving a sexual relationship between a person older than the age of consent and a person younger than the age of consent, we would consider it a great injustice if judges applied such a law blindly, without any concern for possible mitigating factors unforeseen by the law's original creators, such as when one person is just below the age cut-off and the other just above.

Indeterminacy has lower transaction costs because accounting for every possible contingency is extremely costly (besides being impossible), especially if we are concerned with fairly accounting for as many shades of gray as possible, and not just resorting to a simple, if morally outrageous, black and white heuristic. It is costly in terms of contract and initial rule formation, as well as being costly in terms of the transmission of knowledge. A sufficiently complex and lengthy rule system is nearly impossible for any single person to understand, especially if that person's source of employment is not closely connected with the legal arena. More people will unintentionally violate rules in such a system, because it would be nearly impossible to predict the legal consequences of any given action, and therefore impossible to avoid certain behaviors, if you are unaware of the existence of a legal rule prohibiting that behavior in the first place. This, of course, leads to more social conflict, and places a great burden on the legal system itself.

Of course, more social conflict leads to more legal disputes, and more legal disputes provide favorable opportunities for lawyers. To the degree that the legal profession controls or influences the structure of incentives that determine how legal rules get made, more social conflict may not be such a bad thing - for professional law producers, if not for everyone else. Currently, the part of the U.S. legal profession concerned with the production of (enforceable) laws is synonymous with the U.S. government - a monopoly by definition. It is no great surprise, then, that the structure of incentives that determines how (and which) laws are produced tends to serve the interests of the rule makers, at the expense of everyone else. This is simply what monopolies do; when faced with no competition to regulate prices and quality, monopoly firms maximize profits by extracting rents from, and at the expense of, consumers. A monopoly producer of law seeks to structure its product in such a way as to increase its own well-being (whether well-being consists of money, power, or prestige) at the expense of everyone else.

The point of all this is to establish that legal rules are not and cannot be fully neutral - there is no "right" answer to a legal conflict; it depends on what our legal rationales happen to be: fairness, justice, efficiency, helping the rich, helping the poor, etc.

To give an example, consider marriage contracts and wills. Before people get married and before people die (my inner Rodney Dangerfield tells me to stop being superfluous), they often create legal documents delineating how resources are to be distributed in the case of divorce or death. Sometimes these contracts are extremely intricate and complex, attempting to account for every possible contingency with conditional clauses like "if my wife cheats, she get nothing" or "my grandchildren will receive their portion of the inheritance only if they graduate from college."

But not every married couple signs a prenuptial agreement, and not everyone creates a will before they die. What happens then? And even for those who do sign a prenup or create a will, what if some unforeseen circumstance occurs that wasn't covered in the original document? What if, for example, one spouse kills the other spouse: Is the murderer entitled to the victim's money?

To deal with these problems, judges adopt default legal rules to address situations not explicitly covered in the original contract, assuming there was even an explicit contract to begin with. These default rules serve multiple purposes: they resolve disputes that were unaccounted for in the original contract, they define the basic terms of implicit contracts that were never explicitly written down or agreed upon (e.g. when you walk into a restaurant and order food, you are expected to pay for that food when the meal is over, even though you never explicitly agreed to this arrangement on paper), and sometimes the default rules can override even explicit, mutually agreed upon terms of a contract. For example, one default rule in contract law is the unenforceability of any contract where one party is obligated, upon threat of a fine or other penalty, to commit an illegal act. In other words, courts will not resolve disputes between contract killers and their customers, because murder is illegal.

Another default rule is that courts will not enforce any "slavery contract" - an agreement that, in exchange for some consideration, a person will willingly sell himself into slavery, under penalty of specific performance. The "specific performance" part is the key to making a slavery contract actual slavery, as opposed to just a regular, everyday employment contract that stipulates a monetary penalty if the employee chooses to withdraw his labor early (i.e. quit), before a predetermined, mutually agreed upon time.

Judges have good reason not to enforce these sorts of contracts, and it is not a violation of liberty to contract for a judge to refuse to enforce certain kinds of contracts. No one is "entitled" to their preferred form of enforcement from any and all third-party enforcers.

Unlike the cases of murder or slavery contracts, where the default legal rule prohibits potential litigants from contracting around them, in most cases default legal rules simply set, well, the default. Potential litigants are generally free (with the above exceptions) to contract around the default rule; it exists only for those parties to a contract who forget or otherwise fail to stipulate what should happen under certain circumstances.

What determines the content of default legal rules? That is to say, how did it come about that, if not stipulated otherwise, a person's property at his or her death is divided in such and such a way, with priorities given to spouse, then children, then more distant relatives? How did it come about that, if not stipulated otherwise, the bread-winner in a divorce is obligated to give their spouse consideration to maintain some semblance of their current lifestyle?

One theory to explain this latter rule is that, had the couple signed a prenuptial agreement before getting married, there more than likely would have been some consideration given for the fact that, say, homemaking is not directly compensated monetarily, and yet both homemaking and bread-winning are necessary for maintaining the sort of group-effort - a business partnership, if you will - that the marriage contract was written to create. Just as a judge will most likely split the assets of a business partnership along the lines of how much each of the partners contributed to the assets' creation, so too with alimony.

But there is no obvious reason why judges should have picked this legal rule and not some other. This legal rule may seem "more fair" than other possible legal rules distributing assets differently, but fairness is not universally agreed upon as the sole objective and motivation of judges. Part of what we mean by fairness here is that this decision seems like it would be very similar to what the litigants would have agreed to had they had the foresight to agree on a legal rule before the conflict occurred. But this just raises the same question as fairness: Why should the default rules for contractual disputes be determined by guessing what the mostly likely rule would have been had the parties explicitly addressed the issue in dispute in the original contract?

If we assume that judges are any good at guessing the results of counterfactual behavior - a shaky assumption at best - it is true that determining the default rules in this way has certain advantages, advantages that are similar to the advantages of the law being indeterminate. Default rules reduce the transaction costs of contracting, because they allow us to deal with conflicts as they occur, rather than having to predict all of the possible conflicts that might occur in the future. Many people are perfectly satisfied with the default rules of marriage and divorce, or of inheritance, and have no desire to go through the trouble of modifying the default rules through prenups and wills. Even when we might not be entirely sure what the default rules are, we can be secure in the knowledge that the judge will try to decide the case as if we did know all of the relevant factors and as if we had reached a compromise before the conflict ever occurred.

Of course, while this may be an ideal way of determining the content of default rules, it is only ideal if we make certain assumptions. In order for it to be ideal, we must value reducing transaction costs to a minimum, and we must value reducing social conflict and the quantity of legal disputes to a minimum. But there is no objective truth of the matter here. Perhaps we have other values that sometimes, or often, take precedence over reducing transaction costs and social conflict - say, maximizing liberty or minimizing inequality. Also, we have no guarantee that judges will be wise enough or virtuous enough to successfully put themselves in our past counterfactual shoes, and accurately determine what we ourselves would have agreed upon had we been endowed with the proper foresight. The closest we can get to a guarantee is a structure of incentives that make it in the best interests of judges to make their decisions according to the criteria we desire, and not according to some other standard. A monopoly provider of law, whose only regulatory mechanism is electoral democracy at least three steps removed (voters elect politicians who nominate judges), is unlikely to produce a structure of incentives that results in decisions made with litigants' interests in mind, and much more likely to produce a structure of incentives that results in decisions made in the interests of the judges, or the politicians who nominated the judges, or the lobbyists who wine and dine the politicians. or the rent-seeking interest groups who hire the lobbyists to gain concentrated benefits at the expense of dispersed costs, or...

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Slave contracts

I think Walter Block has it right on how far contracts may go here.