The Chronicles of a Capitalist Lawyer

I guess most of the people know about the latest fatwa issued by one of the National Ulema Council (MUI) members, Mr. Cholil Ridwan, stating that viewing the concert of Lady Gaga is prohibited under Islamic law. In this post, I will not discuss the validity of his opinion under Islamic law principles, rather, I want to discuss a more pressing matter, and that is the market for ridiculous ideas. The distribution speed of such fatwa is ridiculously high as everyone want to give their comments, either agreeing with the content, or just for the purpose of mocking the fatwa.

I find the overall conduct as highly inefficient. Although the article did say that Mr. Ridwan did not represent MUI and that it was only his personal opinion, the title might give a misleading perception to the readers (especially in a world where most people focus only on the headline instead the content of the news), at least evidenced by the multiple comments that I read in my Twitter timeline. And it goes on and on, from saying that such fatwa is a part of fundamentalist thoughts, that the fatwa is being used to blackmail the music promoter, and not to mention people who spend their time explaining to other people that the news is actually misleading. What a waste of time!

Sure, people might say that this is only a single case and the argument of efficiency might not be applicable. But we should also see the facts that this kind of news is only a part of many other stupid news, spreading ridiculous ideas that do not have any social benefit other than to attract readers for the relevant medias. For the media, it is an efficient system. After all, whether the news has a good quality or not is not a problem, the most important thing is that the media can gather as many readers as possible at an instance and engage them in useless debate that will promote the ideas to a new level.

I am a supporter of freedom of speech and I will not say that ridiculous ideas cannot be spread to the general public. But for God's sake, media should act as an effective screening mechanism for useful ideas, somewhat similar to the role of underwriters and investment bankers in capital market. The laws in many countries require these bankers to give their best effort and to satisfy a very high standard of conduct in order to ensure the integrity of the market. We want them to ensure that only the best products that will go to the public or at least that they can give adequate information to the public so that the public can make an informed decision.

The problem with the market of ideas is that it is far more difficult to set the standard for determining a good idea. Different with capital market where we can tag prices to the securities being sold, the value of spreading an idea for a media corporation is not in the idea itself but on how it can attract viewers. And even if the idea is a complete failure and also wasteful, as long as the actual monetary damages to the society is not clear, no one can go to the court and sue the media for spreading such stupid ideas.

I guess this is a good example of market failure where asking for intervention from the government might be more costly than the perceived benefits since I do not want to open any possibilities for the government to censor ideas, even if it is utterly ridiculous. I hope that Indonesian readers would start to treat this kind of news as unimportant and therefore reducing the value of news itself. The more people choose to ignore this kind of news, the more incentives for the media to pick better news to satisfy their readers. That would be an acceptable solution for both parties.

My suggestion for medias, please pick a better source of news, especially when you know that your source is not reliable. Each man is entitled to his own opinion, but it does not mean that each opinion should be treated as important and therefore good for publication. In the short term, doing this kind of thing might be profitable for the media, but I doubt that it will be good for the long term, along with the increase of education level in Indonesia. Smart medias should take this opportunity to establish their own niches as medias that only broadcast high quality materials and attack medias that spread wasteful ideas to attract readers. Who knows, competition might effectively solve this problem sooner that we all expect.

Is burning books an efficient action? It depends. On the one hand, people should be free to do what they want with their own assets, including burning their books. As long as they pay for those books, why should we bother? On the other hand, spreading an idea with a book may be beneficial, so burning them might be costly for society since we’re deprived of the opportunity to receive more knowledge.

But these days, burning books might not be as costly for society anymore. Information can now be transmitted efficiently to a huge audiences that, unless you are the government of China, nothing you do can effectively prevent the spread of the ideas in those books.

With respect to the latest case of book burning, I feel that the action itself was not that significant. Some people wanted to show that they disagreed with certain ideas, bought books they didn’t like and burned them. In a way, such a demonstration is actually good for promoting the books. The burners derived utility from the bonfire, and I assume the costs for buying and burning the books were minuscule for them compared to the benefits they received from burning the books. Life goes on and no one was harmed.

What I am more concerned about is the idea that this action was a symbol of people enforcing the law themselves because the legal authorities did not perform their job properly. In short, the burning was an act of vigilantism. Now that’s a serious matter. Expressing your thoughts publicly is a right guaranteed by the Constitution. Enforcing the law by yourself? Not so fast.

Why should people be prevented from enforcing the law by themselves? Why can’t we let them to do what the authorities should actually do in the first place? We’ve seen many cases when we feel so helpless with law enforcement in Indonesia that some of us think it’s acceptable for certain criminals to be tried by the masses. It would be more efficient, and it serves them right. Right?

The answer is no. Despite the alluring character of vigilante acts in movies and comics (who doesn’t love superheroes crushing criminals that cannot be touched by the law?), it is not efficient at all if we allow people to assume the role of judge and jury.

First, there are procedural standards that must be satisfied before we can punish someone for conducting criminal activities. Although there are costs associated with such a process, we still need it simply to avoid additional costs that might occur in case we punish the wrong person. The less the chance of being punished, the cheaper the cost of doing crime and the higher the cost to the society.

Second, there should also be a clear standard of violation for enforcing the law. You can’t simply punish an act if you can’t justify the adverse effects to society or certain individuals. Moreover, even when you think you are being harmed by an act, we should also consider whether the benefits of having such an act would still be bigger than its costs. In antimonopoly law, we call this the rule of reason analysis. We determine whether an act should be deemed illegal based on its economic effects to the welfare of the society.

Third, the remedy should also be clear. If we feel that an act adversely affects a person, such a person would be entitled to a remedy. In such a case, we must ensure that the remedy is fair and proportionate to the damages caused by the act. If you can’t justify the damages, there should be no remedy — it’s as simple as that.

This is why in a war of thoughts, it is very tricky to satisfy the three elements above. We can’t accurately judge the correctness of a thought if it stays only as a thought. We can’t assess the damages caused by a thought if it only affects your thoughts. And therefore, we can’t declare a proper remedy for the damages that are non-existent.

There are better ways to fight a thought, and one of them is making a counterargument which I am currently doing through this article. You are free to attack other people’s thoughts, but that war should stay in the realm of words.

Asking law enforcement to join the debate or thinking that you may represent them will only complicate the process. Without clear guidelines, it will become another waste of tax payer money and create unnecessary social unrest.

Fight your war by yourself and fight it decently.

After almost 3 years since the inception of this blog, I manage to write my 100th post! Whew, I must say that I am actually amazed that I can finally reach this stage, considering the fact that I am a master of procrastination. I hope that I can continue to write regularly in this blog for many years to come and increase my platforms of writing by publishing books and research papers. Stay tune for those future projects.

For now, I will write about one of the most fundamental issues on corporate law, the fiduciary duties and business judgment rule. After all, writing on law and business issues was actually my primary intention when I first established this blog before I expanded my interest to other fields of law and economics. So, it would be proper if my 100th article deals with such issue. I hope you can enjoy the article and thank you for reading my posts in this blog.

A. Establishing the Duties of Directors

One of the most fundamental issues in the realm of corporate law is how can we define the standard of good business judgment by the management? From such a simple question, various derivative questions can also be asked: when should we deem the directors liable for their business decision? Where can we set a line to separate the good managers from the bad ones? How should we regulate the relationship between shareholders and managers in a corporation? Should we let the market decides how such relationship will work or should the court intervene? If the court should intervene, to what extent?

From economics point of view, corporation can be considered as a business platform where market process (capital, production, and consumption) is integrated through a systematic decision making procedure (what we call as management). From law and economics point of view, corporation is a nexus of contract, i.e. the aggregation of people bound together by a complex web of contractual relationship.

I personally refuse to view corporation as simply an entity whose ownership lies in the shareholders and whose management lies in the board of directors, and therefore, the directors can be considered as the agent of the shareholders and must work for the best interest of the shareholders. Such simplification tends to be problematic in practice.

First of all, what kind of business model is where someone transfers his controlling power to other parties under the guise of ownership versus professional management where he knows that the interest of these so called professionals might not be in alignment with his own interest? Why making such sharp distinction? Second, it should also be noted that there are some instances where the interest of the shareholders will no longer be placed as a priority anymore, such as in bankruptcy cases where creditors will have higher priority than shareholders as the residual claimant.

Instead, I want to view the corporation as a business organization where the parties involved within it should have a good coordination (between the capital owner, the manager, the employees, etc) and should work together in the most efficient way to ensure the maximization of their overall welfare without imposing unnecessary costs to the society. The only way to align all of these interests within the corporation would be to ensure that all party must work for the best interest of the corporation as a whole. From that point we can determine further what would be the proper role of each parties within a corporation, especially the role of shareholders and board of directors.

With respect to the above idea, a specific discussion must be made with the nature of public corporations. As we may be aware, the ownership structure in these public corporations may vary in Indonesia. There are corporations where the ownership structure is pretty much diversified to the extent that it is difficult to find any controlling shareholders, and there are corporations which are being controlled by certain controlling shareholders.

In a perfect world with minimum transaction costs, shareholders and the board of directors can negotiate the terms and conditions for managing the corporation and we can assume that: (i) they will find the best way to balance their authorities and (ii) in case changes must be made, they can quickly adapt to such situation by amending the contract made between them. The problem is, this is almost impossible to happen within a public corporation.

In a public corporation where the numbers of shareholders are huge, it is easy to conclude that they will face collective action problem, preventing them from making an effective negotiation with the directors nor from conducting day to day management of the corporation. As a result of which, the board of directors will ultimately become the controlling party of the public corporation without any internal counterbalancing party. In short, the ownership structure in public corporations create a situation where there is no opposition in the corporation that can ensure a good check and balance mechanism.

The same problem can also occur when controlling shareholders exist within a corporation. Having the majority power to decide what the corporation should do, they can use their power to pursue their own interest at the expense of the corporation and other shareholders. In short, whoever controls the corporation, shareholders or directors, might abuse their power. Thus, a check and balance mechanism would be necessary. For the purpose of this post, I will focus on the directors part.

We have these kind of check and balance mechanisms in our government structure (or we think that we have) because we understand that the government consists of people and they are not angels which have no self interest. By simple logic, the same thing should also be applied to corporations which obviously are also managed by a bunch of people. In case shareholders cannot be the counterbalancing party, we need to have other external mechanisms to ensure that the board of directors will have the correct incentives in doing their job.

One of the possible solutions might be to rely on the market. Bad managers will reduce the value of the corporation that they manage and will induce other potential buyers to takeover the corporation and replace the old management. This seems good, but there is no guarantee that it will always work nor will it be be beneficial to the overall stakeholders of the corporation. Furthermore, in Indonesia, the regulators seem want to limit takeover practices by imposing certain limitations such as the requirement to conduct a mandatory takeover which increases the overall costs of a takeover.

An alternative solution would be having the assistance from the law and the court by filling the gap, creating specific duties that must be performed by directors and that will cause them to be liable either to the corporation or the shareholders (as mandated by the prevailing laws of Indonesia) in case they fail to perform those duties properly. By imposing such liability, we expect the directors will be more careful in performing their work and will always be loyal to the interest of the corporation.

It should be noted though that this is but one solution among many solutions to be used in guiding the directors performance. In corporations with small numbers of shareholders, where coordination between managers and shareholders is easy to achieved, limiting liability might be the best way. But for public corporations, that will not work. Imposing liability is necessary as a check and balance mechanism for corporate governance. It is what our law supports and what any rational men will agree anyway.

B. Best Interest and Best Effort

Even though legitimizing the existence of directors duties is not a difficult task, the real challenge is to expand those duties into a standard that would be acceptable to all stakeholders. Two issues that we need to address here: (i) defining the best interest of the corporation, and (ii) defining the standards that the directors must comply in order to satisfy the best interest of the corporation.

1. Defining The Best Interest of Corporation

On the first issue, in line with my view that corporation should be seen as a platform for business organization for various stakeholders, the best interest of the corporation should be translated into maximization of the value of the corporation which will benefit the whole stakeholders of the corporation in general.

Each managerial decision to be made by the directors must consider carefully whether there is a perceived benefit for the corporation if such decision is taken. Whether the benefits are for short term or long term should not be a major problem, the more important thing is that the directors when being asked by the stakeholders of the corporation can provide sufficient justification that they have done their best effort to ensure that their decision is made only and only for the benefit of the corporation as a whole.

2. Defining The Best Effort Standard

The next step is to define the term “best effort”. A good standard would not sacrifice the flexibility that the directors have in managing the corporation. Putting too high standard will burden the corporation as it will increase the costs of decision making by the directors. While putting too low standard will defeat the purpose of finding the correct incentives for directors as they can cover their liability even when they are reckless by ordinary standard.

A major issue related to defining the best effort standard is the fact that the court is not a business expert. Creating an ambiguous standard would eventually burden the court since when there is no certainty, we can expect that more cases will come to the court and there is no guarantee that the court can provide the best result. On the other hand, if the court creates a rigid business management standard, what would be the justification to provide such standard? The court could end up damaging the welfare of the society for making standards outside their own expertise.

In order to determine whether the directors have conducted their best effort, I would suggest that the court should not try to create an ambitious standard that will be problematic for future cases. I would instead urge the judges to think as if they are ordinary people who trust their money to certain trustees and expect that they will cooperate with them for their best interest and that they will work with the money as if the trustees own the money themselves. In such position, I will naturally focus on the decision making procedures that have been taken by the trustees before I move on to the end result of their decision.

Can they show that they have enough time to discuss the proposed action? Can they show that a proper study has been conducted by the board of directors, at least internally, that the action is beneficial to the corporation? Can they show that they have considered the risks that might occur, the probabilities of the risks occurrence, and how the corporation will mitigate such risks? I believe that all of these questions reflect the common sense standard in doing a business.

In case of doubt, all of these actions should be judged in accordance with the standard usually used by similar industries or type of business and the court can obviously rely on expert witnesses concerning such matter. If it can be proved that the directors did not meet those standards, they should be deemed violating the best effort standard, and it will open the door of liabilities.

Another solution would be to induce the directors to use the service of independent third party professionals in rendering their decision, such as lawyers, financial advisers, and appraisers. The use of these professionals has already been required by certain capital market regulations and might indicate the good faith of the directors to ensure that they don't make significant mistake in doing their job. Of course, the court can always review the independency of the professional parties to ensure that there is no conflict of interests which may taint the business decision.

C. Conclusion

Although our law has stated that directors have fiduciary duties to satisfy the best interest of the corporation, further elaboration is needed to ensure that all corporation stakeholders can have the right incentives in doing so. There are many ways to ensure that directors stay true to their duties, either bia the market or the law. If we want to use legal mechanism, the role of the court should be expanded as the guardian of the last resort in the business world. Of course, to achieve such state, the quality of the judges must also be improved.

Today is a sad day indeed for Indonesia as one of its greatest economists, Prof. Widjojo Nitisatro, passed away this morning. What a great loss! Although I have never met him in person, I know him through his splendid articles and books about him, especially the Kesan dan Pesan Sahabat-Sahabat Widjojo Nitisastro. Two of my favorite articles of him deal with the economic analysis for national development and the economic analysis of Article 33 of the 1945 Constitution (which discuss the correct economic structure for Indonesia). I consider those articles as the classical example of economic analysis of law in Indonesia and they have significant impact on inducing me to pursue the art of Law and Economics.

While I have been writing about law and economics for many times in my blog, I have never formally written about an introductory article on economic analysis of law itself. I guess this is the right time to do so as a tribute to the late Prof. Widjojo Nitisastro. You will surely be missed and may you rest in peace. God bless you.

Economic analysis of law or law and economics is a school of thought primarily developed in the United States that uses the powerful tool of economics to analyze various legal issues. It discusses three primary questions: (i) What is law? (ii) Why law exists in the society and can have binding power? (iii) What can be considered as a good law? Two prominent scholars can be considered as the early developers of law and economics, Gary Becker, a prominent economist who won Nobel prize in 1992, and Richard Posner, a prolific legal academician who is also considered as one of the best judges in the United States. Both teach at the University of Chicago and contribute significantly to the development of law and economics.

Why economics can be a useful tool in analyzing the law? The primary notion used in this school of thought is that men act rationally. Not in the sense that they can always make perfect calculation at all times but in the sense that they respond to incentives and pay attention to the costs and benefits of their actions, even when they are subject to various limitations in doing so. This is the basis of positive law and economics which deals with descriptive analysis on the law and how it will affect human behavior.

The second notion in law and economics is the pursuit of efficiency and welfare maximization of society. This is used by normative law and economics which believes that law should be designed to maximize the welfare of the society, whereas to reach that goal, law must be designed as efficient as possible. The more efficient the better, since it means that we can save costs while produce the biggest benefits to the society.

Interestingly, despite the fact that law and economics has reached a very strong position in the United States, dominating the legal thought there, it is relatively unknown in Indonesia which sadly, still focuses its law teaching with classical legal thought. I guess this should be changed if we really want to improve our Indonesian legal system.

Why law and economics is helpful for developing our legal system? I have three main reasons. First, by paying attention to how the law can shape the incentives of the people, we can shape our law to effectively affect the behavior of the people. As an example, I once argued on limiting the use of prison as a sanction for corruptors and instead using the sanction of assets confiscation. Assets and money are the bloodline of corruptors, the ones that significantly induce them to do the crime in the first place. If we only send them to prison but fail to secure the assets back, that will allow the criminal defendant to use the money to buy his way through the legal system (remember the case of luxury prison).

Second, by paying attention to the notion of efficiency, we will also pay attention to the costs and benefits of having regulation. Only regulate if the costs of doing so are lower than the benefits. Do not try to regulate everything because we cannot have an effective regulation without effective enforcement. And enforcement can be costly, the bigger the scope of the enforcement, the bigger the costs. Classical legal thoughts believe that law should be obeyed because it is promulgated by the relevant authorities. This is completely wrong. It is obeyed either because we find a mechanism to enforce it or the general society believe unanimously that such law is useful. Hence, the need of enforcement.

One good example of this would be laws that deal primarily with regulating private behaviors that do not produce clear harms such as how to dress publicly. On the one hand, regulating those kind of things will be costly, imagine the price for enforcement and the potential social unrest that it will create since it will give legitimation to people to violate other people on the basis of dress. On the other hand, there is no clear benefit of regulating such behavior in the first place other than to serve the idea of several people about morality. We've seen a lot of these absurd laws, such as laws that try to regulate how to name your child. I wonder how these laws could even exist if not only for the purpose of political maneuver.

Finally, by putting the goal that laws should always aim to maximize the welfare of the society, we will have a good guide in developing laws that will be useful for the society. And there are a lot of things that we can discuss here. Some good examples that I have once discussed: how to efficiently regulate liability of people in tort cases (such as whether we need to establish good samaritan liability), whether we should maintain death penalty (do the benefits justify the costs?), how to prevent rape crimes effectively, the extent to which we can limit foreign investment in Indonesia, how to share the legal risks of infrastructure development in order to induce more investors to come to Indonesia, how to reduce courts burden by cutting unnecessary costs for judging petty crimes (the latest Supreme Court regulation is a nice example of this), and many more.

I believe that it is important for law makers and legal enforcers to always strive for welfare maximization in rendering and interpreting the law. You do not enforce the law for the sake of the law itself. Law is not holy, it is not untouchable, it is not derived from the sky, rather it is made to serve men and should be made in view of men needs. Prof. Widjojo Nitisastro has started the idea of using economic analysis in shaping our national development and making sound economic policy long time ago. It was a great contribution, something that we, youngsters, must also strive to achieve. The least thing that I could do is to introduce law and economics to Indonesia and contribute in offering good public policy for our nation.

Recently, I saw an interesting question on Twitter: Are lawyers allowed to receive payments from corruption money? My answer is yes, and there is a good reason for that.

Based on my personal observation, it seems that there is a belief by the public that lawyers should not represent suspects of corruption cases, and should therefore not receive their money, since it might be tainted with the corruption itself.

I find this argument to be ridiculous. First of all, under the prevailing laws, if you conduct a transaction with a third party, provided that you act in good faith, there is no need for you to know where the money is coming from.

From an economics point of view, it is an efficient rule. Imagine the costs to society if we need to know the source of income of all parties that transact with us. This kind of know-your-customer rule is generally applicable only for banking and securities transactions, where the potential of money laundering is high; but this rule should not be applied to the general public transactions.

Second, every criminal suspect has the right to be represented by a lawyer, whatever his criminal activities are, be it murder, rape, thievery, or corruption. Hating corruptors does not mean that lawyers cannot represent them or receive their money for payment of their service.

In one of my previous articles, I argued that lawyers have an absolute duty of confidentiality in assisting their clients. This means that the lawyer is prohibited from ever betraying his client, or jeopardizing the interest of his clients in any way. It is the only way to ensure that all criminal suspects will have the same position in front of the law to prevent abuse of power by legal enforcers.

By imposing such duty, even when the lawyer knows that his client is guilty, it does not mean that he can suddenly report his client to the relevant authorities. Once he represents the client, the duty must be applied at all times. It also means that when the lawyer receives the money and knows it’s coming from corruption, the lawyer should not be required to report the source of such payment to any authority, simply because that will defeat the entire purpose of client-attorney confidentiality.

At this point, readers might voice their protest over the above rule. How could we let corruption suspects use their money lavishly for paying their lawyers, which can also be used as a cheap tactic for money laundering. Don’t give up hope yet. There are many things that we can do to prevent such a thing from happening.

While the lawyers are not required to report the source of their payments, the authorities can always require them to report the amount of their fee. Doing so will allow the authorities to determine whether the payment is reasonable or whether it is being used for something suspicious. If it is used for a money laundering purposes, we can expect that the amount will be excessive. Furthermore, in the end, such money will still need to be returned to the corruption suspects. Of course, the authorities may interfere during the process of returning the money.

It is true that the lawyers are entitled to receive payment for their services, but it does not mean that they may assist their clients in another type of crime. At that point, we can impose liabilities upon the lawyers for abetting money laundering. This will provide less incentives for them to assist their clients in doing so, and the clients will also have less incentives to use the lawyers service for money laundering purposes.

As a result, we can expect that the payment made by the corruption suspects will only represent the lawyers fee. After all, if the lawyers cannot find a way to transfer the money back, the corruption suspects will never transfer an excessive amount of money to their lawyers in the first place.

I think this is a win-win solution for all parties to ensure that lawyers can represent their clients properly and protect the integrity of the criminal justice system, while also preventing abuse of the lawyer’s position to help the corruption suspects in securing their corruption assets.

In law and economics terms, we call this as a pareto efficient rule where we can maximize the welfare of the society without having to impose costs to other parties. And in my opinion, we should always strive for achieving that efficiency if we really care about society.

A couple of days ago, a notorious organization disrupted a health charity event, demanding the event be stopped on the basis that it might be related to the spreading of a certain religion. Their claim was simple, if the event was made to spread religious beliefs, it will cause social unrest within the nearby community.

I find such arguments to be completely unreasonable. It not only shows that the organization does not understand the basic concept of spreading of religion, it also interferes with events that might increase the welfare of society and therefore are beneficial from a legal and economic perspective.

Under Islamic law, one of the valid recipients of "zakat" is "muallaf." These are the people who have just converted to Islam and therefore need to be given more incentives to maintain their faith. In other words, Islam publicly recognizes and validates the use of economic incentives to gain more followers.

The fact that Islam allows the use of economic incentives means that other religions should also be permitted to do the same, and in case Muslims are concerned with the spreading of other religions via economic means, they should also fight back using the same measures. It would be very beneficial to people who are in need if religious organizations compete among themselves to increase their charity spending in order to gain new followers.

Interestingly, people often want to separate economics from religion, fearing that combining them will taint the religion’s sanctity and that it will look very bad in front of God. Again, that is nonsense. In reality, every religion always plays with incentives. And I am quite confident that the general concept of religion is compatible with the notion that humans are rational and will always try to maximize their self-interests, even though they might not be very good in assessing the costs and benefits of their actions and in assessing future risks.

Let us first begin with the concept of heaven and hell. All major religions have such a concept in their teachings. If you always act good or at least the amount of your good deeds outweighs your bad deeds, you will go to heaven with all of its benefits. Meanwhile, if you end up doing more bad deeds, you will go to hell with all of its scary tortures. Like it or not, heaven and hell are the perfect examples of how religions use economic incentives to shape people preferences.

There is a follow-up question though: if people are really rational, how could they still do bad deeds? I have discussed this issue in my previous article, “On Why Religiosity Has not Translated Into Better Legal Compliance,” so I will not discuss it here. But you don’t need to worry, it won’t change my analysis in this article.

Some religious followers believe that the highest level of piety is to act not because of the promise of benefits and punishment by God, but simply because they love God and they want to receive the grace of God. However, it does not necessarily mean that such courses of action are free from economic realities.

These people realize that doing the above will increase their level of religiousness in front of God. Furthermore, the satisfaction that they receive from reaching such a level also maximizes their value. In short, to the extent the benefits outweigh the costs (since it is not easy to reach this level), it is absolutely rational for religious people to chase the grace of God.

Sufi followers desperately train themselves to get rid of individualism by doing religious activities. Yet, I have not uncovered any successful incidents of cleansing our minds of the idea of getting maximum rewards for pleasing God. Deep in our minds, we realize that if we can please God, it will be beneficial to us, even if we don’t expect heaven. We are still bound by our interest in maximizing our rewards.

And there are many good examples of economic incentives and the notion of individuality in religion. Helping other people is not mandatory, it is encouraged unless you are talking about people that are legally dependent on you. Islamic law also recognizes the concept of "fardu kifayah" for more urgent issues that need collective action. This means that the responsibilities of the faithful of a religion are collective. Once one person satisfies the required obligation, the others will be released from any liability of sin.

Having said that, I think religious people should embrace economic realities in their lives and start to contribute to the betterment of society. It is the original goal of religion anyway and would produce the best result for all of us.

A couple of days ago, the Constitutional Court decided that Article 43(1) of Law No. 1/1974 on Marriage is deemed conditionally unconstitutional. You may read the complete decision here. This is indeed an interesting development. For many years, most legal scholars agree that a child born outside a legitimate marriage will only have legal relationship with his/her mother and not with the father. In other words, the Constitutional Court decision revolutionizes the entire concept of illegitimate child. The big question is, is it a good thing?

I must say that I am disappointed that the decision is poorly reasoned. From a total of 45 pages, the majority opinion only consists of 3.5 pages. It is true that you can't assess the quality of a legal opinion merely from its length, but still, I think that the majority should further elaborate their thoughts before making such a revolution, especially when they claim that: (i) marriage registration is only an administrative requirement of marriage instead of a validity requirement, and (ii) that sexual intercourse that produces child imposes a legal obligation to the parties involved.

The discussion will be divided into 3 sections. First, we will discuss the claim made by the majority opinion that marriage registration is only an administrative requirement. Second, we will discuss whether Constitutional Court has the power to change the concept of father's obligation toward illegitimate child. Third, we will discuss the economic analysis of this major change and how it will affect the incentives of Indonesian people.

A. Marriage Registration is not and should not be an Administrative Requirement

I do not understand how the Constitutional Court can say that registration of marriage should only be an administrative requirement when in fact Religious Court usually, if not all the time, does not recognize a marriage which has not been properly registered even though such marriage has satisfied the so called "religious" requirements. While this is only a reasoning and is not a part of the decision itself, it still gives an ammunition to the proponents of unregistered marriage who believe that they can validly marry without having to register the marriage, seriously jeopardizing the rights of the parents (either the mother and/or the father) and the children in case they don't have any supporting evidence in the court.

There is a good reason why we want marriage to be registered and as far as I can see from the majority opinion, they too reach the same understanding, i.e. that it will be more efficient for court and administrative process if the marriage status of citizens is clear. Maybe the majority think that since an illegitimate child will have legal relationship with his/her father after this case, it will not be harmful to say that marriage registration is not a requirement for marriage validity. If this is true, then the majority has made a big mistake.

Under the rational choice theory, we could safely assume that rational people who choose the path of marriage would love to have their marriage properly validated. This means that they will do all the necessary requirements to ensure that there is nothing wrong the legal status of their marriage, including their marriage registration. And it is also rare to find a modern day case where these rational people fail to register their marriage properly only because they don't know about such requirement.

This indicates that marriage registration can be considered as an effective way to screen those who want to have a valid marriage and those who want to find a loop hole within their marriage. As such, we can infer that unless there is a strong evidence of good faith negligence, people who do not register their marriage must have a bad faith intention. After all, it would be highly questionable if a couple would let go all of their marriage benefits by fail to register their marriage, unless they have other goals to pursue.

Right now, there are some ambiguities in the law on the legal status of marriage registration. While legal ambiguities are usually bad, there are situations where ambiguities are helpful, such as in this case. We can screen the bad faith couple and since there is a risk that the marriage is invalid, parties will have the correct incentives to make their own decision for the marriage. However, by saying that marriage registration is only an administrative requirement, we destroy the protection given to the good faith couple and also the effectiveness of the screening mechanism.

Remember, marriage cases can be complicated and it does not have to include child issues. It could be that a male want to avoid responsibility, it could also be the husband want to have another wife, it could be that a woman want to steal another woman's husband, etc. In any case, priority of protection should always be given to those who have a valid marriage. First, the costs to assess the validity would be cheaper. Second, it also gives incentives to good faith spouse to question his/her spouse on why they don't register the marriage. That would not happen if we say that registration is only an administrative thing, meaning that the marriage would still be valid even without any registration. How could an average person (without any legal knowledge) effectively screen his/her spouse if he/she can convince her that registration does not affect their marriage?

If Constitutional Court wants to talk about the right of illegitimate child, they should focus on the relevant article, instead giving a poorly reasoned analysis like this. It does not help the already problematic marriage case and it will reduce the costs of being unfaithful.

B. Constitutional Court Authority for Making Such Decision

Can we say that the Constitutional Court breached its authority by saying that an illegitimate child also has a legal relationship with his/her father? Not necessarily. Legally speaking, declaring that the provision of Article 43(1) of Law No. 1/1974 which says that an illegitimate child only has a relationship with his/her mother is unconstitutional can only mean one thing, that an illegitimate child should also have a legal relationship with his/her father. This is an a contrario method of interpretation and is acceptable among legal scholars.

The fact that the Constitutional Court must add the requirements for having a scientific test in order to prove the blood lineage is something that we can't avoid. If the Constitutional Court does not say anything about such problem, it would be problematic for district and religious courts in determining the status of their child since currently there are no clear standards for such proceeding. As such, I believe that the decision, poorly reasoned as it may be, did not breach the scope of Constitutional Court's authority.

C. The Economic Effect of the Decision

The economic effect of this decision would be interesting. On the one hand, people who want to avoid marriage responsibility by refusing to register the marriage will have less incentives to produce child, while those who want to steal other people spouses will try their best to produce an illegitimate child. For the illegitimate children, this might be a good decision, at least if they are unwanted, the parents will have less incentives to give birth to them. However, I still have some concerns, especially with the Court's reasoning on marriage registration and also the right of legitimate child.

To the extent the couple can successfully prevent the birth of a child in unregistered marriages, I doubt that we can reduce the rate of unregistered marriage if we say that it is only an administrative requirement. And this will be bad for people who don't know how to protect their right under a valid marriage. It seems the Constitutional Court forgot that a child is only one actor within a marriage and that we should also consider the right of the husband and wife.

Furthermore, granting legal relationship to illegitimate children would not be a problem to the extent it is applied to a father who only have one spouse. It would be problematic if the illegitimate child was produced with his mistress, since it means that the grant of such relationship is made on the expenses of the person's wife and legitimate child. This is something that should also be considered. It might be that this decision will give more incentives to wives to increase their supervision on their husbands, ensuring that they will not cheat outside and thus increases the costs of their marriage. But it could also be used by a husband to subdue his wife to follow his intention of having another marriage since no matter what, once he produces an illegitimate child, such child will still have legal relationship with him, and the legitimate wife and child will not be able to do anything.

From these scenarios, we can see that the problem is not that simple. Personally, I believe that it would be more efficient if the Court clearly says that the marriage without any registration is invalid, after all, all of these problems would not happen if not for the registration issue. This would give better clarity and give incentives to people to avoid unregistered marriage so that guys cannot trick women into that kind of marriage and vice versa. Nevertheless, the decision has been made and we will need to abide by it. I could only hope that it will not produce the wrong incentives to Indonesian couples.