A Modest Critique of Posner’s Wealth Maximization Normative Theory

Ștefan Baciu
Ștefan Baciu

According to Richard Posner, the most cited legal scholar of the 20th century (as identified by The Journal of Legal Studies), “Wealth maximization provides a firmer basis for a normative theory of law than does utilitarianism.” Senior lecturer at the University of Chicago Law School, Posner is probably best-known in common law jurisdictions as the living figurehead in the field of law and economics. This field aims to explain the effects of laws using microeconomic theory, assessing which legal rules are economically efficient, and even to predict which legal rules will be promulgated. Law and economics gained ultimate recognition when Ronald Coase received the Nobel Memorial Prize in Economic Sciences in 1991, author of the famous articles “The Nature of the Firm” (1937) and “The Problem of Social Cost” (1960). Unlike Coase, a lifelong academic who is more interested in the positive aspects of law and economics, Posner, having served as a federal appellate judge on the U.S. Court of Appeals for the Seventh Circuit from 1981 to 2017, dared to use the economic underpinnings of judge-made law as the basis for a normative legal theory in his article “Utilitarianism, Economics, and Legal Theory” (1979).

Coming at a time when utilitarianism in legal thought was on the defensive, Posner proposed wealth maximization as an alternative normative basis for the economic analysis of law, to the utility-based efficiency criterion. Dismissive criticism of utilitarianism is sufficient for many critics to repudiate economic analysis of law, seeing it as a species of applied utilitarianism. From the following discussion, it is our hope that the reader shall see that wealth maximization is a complex and (mostly) coherent normative theory of both societal choices and common law adjudication. Nevertheless, our argument shall be that what is gained by the principle of wealth maximization, namely a more constrained and determinate version of utilitarianism, will be lost not only because it fails to overcome the moral unattractiveness of the latter, but also because its two foundational arguments, namely the one from consent and the instrumental one, fail due to formal incoherence.

We shall begin by looking at how wealth maximization differs from utilitarianism, being a more determinate version of it, both in terms of measurement and boundaries. Secondly, we shall argue that its instrumentality interpretation of the theory of rights and obligations fails for the same reasons as utilitarianism as well as for the fact that it is related to prices. Thirdly, we shall look at the argument from consent and why this also fails when applied to both societal choices and common law adjudication. Finally, we shall look at both the possible moral outcomes of following such a principle and the reason why both a deontological and teleological moralist will reject it.

Starting from the basics, utilitarianism, ordinarily understood, is a consequentialist morality that values an action in accordance to how much it contributes to “the surplus of pleasure over pain” (as Henry Sidgwick describes it) aggregated across all individuals in a society, or commonly understood as happiness. Mutatis mutandis, normative economics value an action by how much it promotes welfare and has been seen by many of its proponents as the practical application of utilitarianism. Leaving aside for now the substantive criticism regarding this philosophy, we shall look at what Posner construes as indefiniteness.

The indefiniteness identified by Posner consists of three main issues: (1) a lack of a unit of measurement, (2) a boundary issue as to who’s utility we should take into account, (3) “moral monstrousness” or an inability to differentiate between pleasure derived from killing flies, as an example.

The Pareto criteria provide a basis for welfare economics: Pareto-superiority is a criterion for comparing two states of affair, stating that one is better than the other if it leaves at least one party in a better position without negatively affecting anyone else; Pareto-optimality is a criterion for distributions that defines a state as such if no more Pareto improvements can be made. Relating this to utilitarianism’s indefiniteness, Posner observes that not only the Pareto criteria cannot be a satisfying metric for happiness because we cannot know the total effects of an action (be it a transaction, policy or legal precedent) across a whole population, yet also fail to explain the initial allocation of resources exchanged in a transaction on utilitarian grounds.

Furthermore, another issue raised by utilitarianism’s indefiniteness is the allocation of resources on the capacity to enjoy. Thus, to Posner’s dislike of such indefiniteness, when considered in relation to decreasing marginal utility of money from income, utilitarianism provides an argument for income equalization. This relates to the third issue raised by indefiniteness, utilitarianism’s incapacity to differentiate between the distinct weighting of various wants and the failure to protect individual autonomy.

The principle of wealth maximization, on the other hand, offers such a metric. This principle as an ethical maxim states that an action is to be valued according to the increase it generates in societal wealth. Posner defines wealth as the equivalent in currency of everything in society. Preferences in this system count if they can be backed up by money and the individuals’ preferences, unlike utilitarianism, are given attention on the basis that they are maximizing wealth and the individuals’ willingness–to-pay, understood as the individuals’ ability to produce as well as to pay. Wealth is not a goal in itself, but a “false-target” that will result in other attractive features such as contributions to society, yet this issue will be discussed in the second part of our argument.

Thus, by relating wealth to currency, Posner’s obtains a metric that can be used to analyze different outcomes on the basis that preferences can be registered in a market. Coupling this with the claim that a market can be non-explicit (e.g. the dating market) and “hypothetical” (as opposed to ‘actual’ where actions are based on voluntary exchange), it offers the courts an important tool for adjudication, this will be further discussed in the third part of our argument.

Kaldor-Hicks efficiency is the main efficiency criterion with which wealth maximization is concerned. This standard judges an outcome as efficient if the winners in an allocation of resources earn enough to compensate the losers, but does not require actual compensation. Furthermore, the Scitovsky Paradox, the fact that two allocations can be Kaldor-Hicks efficient to one another, is overcame by the fact that wealth is related to currency, which offers a basis of ranking social on this criterion (this would not be possible if utility was the unit of measurement because interpersonal utility is non-comparable).

Considering all the above, let us now look at what Posner defines as the boundary issue of utilitarianism. Whether we should include the rights of foreigners, as an example, is problematic if utilitarianism tries to offer an answer related to immigration policy questions. Wealth maximization as a principle implies little wealth redistribution (only in the cases where the cost of crime would exceed the cost of welfare), it would make sure that only productive individuals enter the country, which by this virtue, they add more than they put in.

Kronman’s failed criticism of the wealth maximization principle as being indeterminate is an additional argument to this theories’ success at overcoming one of the basic issues underlying utilitarianism. The criticism, consisting of an example of where a transfer of resources without any cost in a situation when free exchange could not occur because of high transaction costs, tries to present wealth maximization as unable to determine whether compensation should be paid to losing party, assuming that the payment does not promote efficiency in itself. Posner, in his reply, argues that even though it is “obnoxious”, wealth maximization would dictate that compensation not be paid to the losing party since it is costly.

Before moving on to the second part, we need to address the substantive criticism that made utilitarianism an unappealing moral theory. This can be summarized as follows: utilitarianism, being outcome oriented, may require the violation of one’s own moral principles for the sake of utility; by obligating to benefit others, it is incompatible to a deep commitment to personal liberty, and because of the instrumentalist understanding of rights, their existence being dependent on the way they promote utility, fails to provide a theory of moral or legal rights.

Moving on to our second part, the instrumentalist argument for pursuing wealth alluded previously, states that wealth is not a good in itself. Rather its pursuit will offer a desirable “combination of happiness, rights (to liberty and property) and of sharing the less fortunate members of society”. In Posner’s conception, rights are “mere” instruments in the pursuit of wealth. This interpretation is even more problematic when we consider that rights are assigned on the basis-of-willingness to pay fixed currency, thus they have a price.

Posner is able to argue that all rights are assigned to the person who values them most, thus increasing society wealth. If A holds right X and he values at £2,000 and B is willing to pay £3,000 for it, then the right should belong to B as it would increase societal wealth by £1,000. Thus all our rights, including to one’s one body, belong to us for no other reason than because this is currently the most efficient allocation. Under this theory the most atrocious aspects of slavery as an institution were that it was unproductive and not wealth maximizing. But this is the focus of the last section, for now let us look at the logical inconsistencies of this claim.

Firstly, as Coleman notes, the fact that rights are defined as instruments of producing wealth means that this is the only good in society. This view is paradoxical when considering that wealth is “false-target” to achieve other, better goals. By contrast, utilitarianism values social happiness as a good in itself, thus justifying the infringement of rights on an ultimate criterion. Thus, the instrumentalist argument for wealth maximization when added to its interpretation of rights as instruments of wealth, fails to go beyond the criticism of utilitarianism, because in the latter’s a right is just an unable to foreclose a policy justified in the name of the common good.

Secondly, as Coleman goes on to observe, this instrumentalist claim rests on the fact that pursuing wealth will result in an achieving other social goals. Dworkin, as well as Kronman, asks the obvious question of why we should not pursue the goals individually if we want to maximize them. According to Posner’s reply, wealth maximization is worthy to be overriding goal because by virtue to its relationship to prices, it can compare and select between competing moral claims.

Before moving on as to why defining wealth according to prices is problematic, we need to mention the circularity of the instrumental argument and instrumental conception of rights, as noted by Dworkin. Rights exist because they are wealth maximizing, but wealth maximization is worth pursuing because it provides a basis for protecting individual rights. Further to this, this egg-hen dilemma is even more exacerbated when considering that Posner’s system fails to give a basis of an initial allocation of rights because entitlements are assigned on the individuals willingness-to-pay for them and wealth distribution is dependent upon them, but in the initial stage nobody has any wealth and any entitlements.

For Coleman, the reliance on prices is the reason why wealth maximization fails as a moral maxim. In the absence of prices we lose the ability to compare and select the morally right outcome because we would not be able to tell which would be wealth maximizing. Related to the fact that wealth maximization relies on prices, it fails to provide a consequentialist argument for free exchange in their absence, something that utilitarianism can do under the constraints of knowledge and rationality.

The final point we have to make before moving onto the third part is the fact that, according to Coleman, scarcity for an upholder of wealth-maximization as a moral maxim is deeply problematic as its elimination leads to the disappearance of prices, and thus of wealth. Yet the elimination of scarcity in any form should not raise any issues for one who understands why Posner adopts the wealth maximization principle: to choose the efficient allocation of limited resources.

Moving onto our third part, we shall analyze Posner’s principle of consent, its implications for his theory of common law adjudication and why it fails to provide a necessary firm ground to hold the theory. The principle of consent is an attempt to connect Pareto criteria to Kaldor-Hicks by reference to choices under uncertainty, and Posner argues that it can explain legal developments. It is also an attempt to forge an alliance with libertarian and Kantian philosophies. These are both deontological in nature and thus consider rights as absolute rights, placing an ultimate value upon individual autonomy.

Posner presents the principle of consent as an alternative basis for Pareto criteria instead of utilitarianism. He goes on to note that it can be located in the traditional Kantian philosophy that places a high value on individual autonomy. It is thus a constraint upon utilitarianism much firmer than the determinacy of wealth to prices, and it also liberates the Kantian by giving an indication of when rights should be disregarded.

This would all be perfect if he had not defined “consent” as “compensation”. Ex ante compensation provides an argument for consenting to, as an example to the negligence system instead of the strict liability one in cases of accidents. Posner observes that the former results in cheaper costs for transportation from which all society benefits, thus the risk of being in accident and not begging compensated is mitigated by the fact that one has already received ex ante compensation represented by cheaper prices.

Posner attempts to explain the common law’s preference for negligence, a Kaldor-Hicks institution, instead of strict liability, a Pareto-superior one. Posner’s assumption is that Kaldor-Hicks institutions are cheaper than Pareto-superior ones, as they do not require compensation to be paid to losers. Pareto-superiority is attached to Kaldor-Hicks efficiency in the principle of wealth maximization by means of the argument that individuals consenting to the allocation of resources on the basis that the latter can be a workable alternative to the former.

Posner admits that the principle of wealth maximization based on consent suffers from two limitations: (1) in the initial assignment of property rights and (2) in the situations that would result in a non-random distribution of wealth. The problematic aspects of (1) have been dealt with in the second part and we will present Posner’s reply in the last part. The second limitation of the principle is the reason why the wealth maximization principle is relegated from the position of an ethical political philosophy to a theory of adjudication. Posner supports this by reference the fact that most utilitarian policies adopted because they were wealth maximizing, inefficient policy proposals such as the legal duty to be a Good Samaritan are absent.

As noted by critics, the argument for consent suffers from three insufficiencies: (1) it fails to explain why individuals in a state of uncertainty would choose Kaldor-Hicks efficiency criteria over any other efficiency criterion or even an altogether ethical principle; (2) the fact that even if compensation is received it fails to be anything more than the Pareto-superiority or Kaldor-Hicks efficiency; (3) it fails to understand consent in the Kantian sense.

With regards to the first point, Posner fails to say why would anybody choose wealth maximization over any other competing theory. Yet Posner fails to understand that consent is distinct from compensation, and thus his attempt to forge an alliance with the libertarian philosophy fails. Market failures would reveal the tension between the libertarianism and the utilitarianism that underlie this principle, yet a Kaldor-Hicks intervention would be rejected by the former because its an intervention and by latter Kaldor-Hicks is not able to tell us anything about the increase or decrease in total utility. In addition to this, the only way to make the principle workable least by utilitarian standards is to impose an obligation to pay compensation to the losers in a Kaldor-Hicks distribution, but as the cost of this is more often than not non-trivial, it goes against the principle of wealth maximization.

Following this requirement, the second point of criticism, as brought up by Kronman, is that if compensation for the losers is mandatory by the principle of wealth maximization supported by the argument of consent, it becomes Pareto-superiority, and if not, it remains Kaldor-Hicks efficiency. Yet the fact that an outcome leaves at least one person better off does not say anything why that person should be better off. Thus, one would need to have an independent conception of rights and of moral deserts to ethically judge the distribution.

The last point of criticism and preliminary to our final part is the fact that Posner assumes that compensation is the same as consent, in the Kantian sense. The fact that a loser receives compensation, be it ex ante or ex post, for ending up on the wrong side of a Kaldor-Hick redistribution, does not equate that he consented to the loss but the risk. Thus the principal of individual autonomy is not respected stricto sensu.

Moving onto our final part, Posner attempted to dismiss utilitarianism on two grounds: lack of logical consistency and the fact that it is contrary to our moral intuitions. The first ground has been dealt with throughout the previous two parts and we have hopefully proved the unstable formal foundations of the claim.

First and foremost, it needs to be mentioned that the theory of wealth maximization claims to appeal to both a Kantian who wants to avoid “moral fanaticism” and to the “enlightened utilitarian”. Yet, as Kronman noted, a Kantian who listens to the arguments of utilitarianism may endorse some of its arguments, but will not follow a wealth maximization approach as an increase in wealth does not mean an increase of societal happiness, as Posner stated. Mutatis mutandis, a utilitarian will not be persuaded by the arguments of wealth maximization if he wants to secure a better protection of rights because Posner’s system has also an instrumental theory of them.

Moving on, Posner claims that a productive individual’s social product in a market economy will exceed his earnings, no matter how selfish he is and the principle of wealth maximization offers a better protection of individual autonomy than utilitarianism, that by its main implications will try to force some wealth distribution. The individual will have to benefit others in a free market economy so that he can benefit. Furthermore, such virtues as those of self-reliance, industry and temperance, ascribed to Protestantism, will be encouraged by the free market economy. Despite the willingness-to-pay, because entitlements are based on merit, entitlements will be assigned to the most deserving. These are the main attractive arguments of Posner’s claim, yet their basis is morally unsound, as we shall demonstrate.

Posner admits that in such a system the support of the less fortunate will be the limited only to the extent it reduces crime. Furthermore, even though Dworkin accused it of committing the “ambiguous sin” in failing to treat people differently, wealth maximization admits the difference in individuals in their productive capacity. This is the anti-egalitarian non-explicit implication of Posner’s ethical system.

Posner’s contempt of utilitarianism stems from the fact that it treats all preferences equal. Posner’s ethical system regards only the preferences of those with money. This is not to be confused to the admitted “indifference” to egalitarian values that supports a minimal financial assistance of the productive. This is a systemic issue of the distribution of rights based on a willingness-to-pay to pay, the productive will be able to secure enough entitlements by the time the unproductive will develop the Protestant virtues necessary to survive in a society run by this unforgiving principle. As Kronman notes, where the Rawlesian system tries to mitigate the differences of the “natural lottery”, the principle of wealth maximization exacerbates them even more.

Kornhauser observes that the principle of wealth maximization as a moral maxim does not only risk the “wholesale slaughter” of the unproductive (be they amputees from war or mothers on welfare), but that it coerces the individuals to be as productive as they can be, no matter their preferred profession. Thus, where utilitarianism might constrain the individual to sacrifice his autonomy for the sake of others, wealth maximization forces the individual to sacrifice for wealth.

Still, Posner makes a compelling argument that at every stage the accumulation of money through a productive process will result in positive externalities befalling upon third parties, and thus gives the pursuit of wealth a better moral claim. Yet, both Dworkin and Kornhauser notice the limitations of this argument. Kornhauser notes that the fact that more wealth is produced does not entail that it will be allocated efficiently, or even allocated at all. Dworkin, on the other hand, notes that “wealth for others” will not equate with “welfare for others”, which is a better moral achievement than the former as it includes distributional preferences. Both criticisms can be related to what can be called “the confusion of the Invisible Hand with goodwill”.

Despite its moral claims, Posner that admits wealth maximization admits the possibility of the taking of one’ rights to his body or labor on the basis of efficiency, yet this can only happen in limited circumstances, as accepted by Kronman as well. Furthermore, the fact that he presents his principle of as accommodating markets for body parts and babies, segregation, freedom of contract that allows slavery makes that this ethical system suffers from the same moral objections that utilitarianism does.

Hart criticized utilitarianism as being concerned with treating people equally because they have no value in themselves, only their happiness being of value. Wealth maximization does not escape this criticism, but by attaching moral value to people’s capacity for being productive it creates an anti-egalitarian that still may require sacrifices for the greater good, which is of no value in itself.

Before concluding, one final question needs to be asked: can wealth maximization be a normative basis for common law adjudication? Without reference to its validity as a positive claim, one needs to simply point out that the role of courts ought not to be a pursuit of some single policy, but the determination of rights and obligation. Economic analysis can be used in adjudication and, as the Hand Formula proves, it can provide precedents that can be decided on a more numerically determinate level. Maybe in the case of conflicting use of resources where nobody is at fault or has no better right than one another, or to use economic terms two possible Kaldor-Hicks allocations encountering the Scitovski paradox, the principle of wealth maximization may be a good and workable metric. So to answer our question: only in very limited cases.

To conclude, the principle of wealth maximization, as we have tried to prove, fares better in terms of measurement only by comparison to utilitarianism. Logical inconsistencies aside, its anti-egalitarian undertones and (possible) outcomes are of such magnitude to cast a shadow upon the promises of an efficient mixture of wealth, happiness and traditional virtues.

Further Reading
Posner, Utilitarianism, Economics, and Legal Theory, 8 J. Legal Stud.103 (1979),
Posner, The Economics of Justice. (1981),
Posner, Wealth Maximization Revisited, 2 Notre Dame Journal of Law, Ethics and Public Policy 85 (1985),
Coleman, Efficiency, Utility and Wealth Maximization, 8 HOFSTRA L. REV. 509 (1980);
Dworkin, Is Wealth a Value?, 9 J. LEGAL STUD. 191 (1980);
Kronman, Wealth Maximization as a Normative Principle, 9 J. LEGAL STUD. 227 (1980);
Weinrib, Utilitarianism, Economics, and Legal Theory, 30 U. TORONTO L.J. 307 (1980).

Ștefan Baciu, Consultant CMS Cameron McKenna Nabarro Olswang LLP SCP

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