Efficiency criteria for optimal laws: Objective standards or value judgements?

Abstract

No discipline or combination of disciplines can provide a value-free basis for prescribing a constitution or any set of rules. Nevertheless, economists frequently compare alternative institutional and contractual arrangements and confidently identify which are more efficient without noting that their conclusions rest on the implicit welfare functions chosen and the presumption that values can be measured by outside observers. Moreover, comparing institutions on the basis of equilibrium conditions that will never be attained in a world of change and uncertainty ignores all information about the process of change itself. At best, economics can explain why certain rules exist and how different rules affect the welfare of individuals and the allocation of resources.—The paper focuses on the concept of efficiency taking account of transaction costs and the system of property rights. It then examines the belief that market prices and wealth are a suitable measure of value, the status of legal rules as a “common” good, and the limitations of Pareto criteria in assessing efficiency.