The Chronicles of a Capitalist Lawyer

Yesterday morning, I had a nice discussion with one of my juniors in the Faculty of Law, University of Indonesia, @najmulaila, concerning the concept of legal awareness. The basic case is quite simple, she's complaining about the law students' attitude who make a right turn within the faculty, despite knowing that it is clearly prohibited. She further argued that it's useless to talk about legal compliance in Indonesia if these students don't follow the rules themselves. After all, according to her, what's the purpose of knowing the laws, if you don't comply with them? Suffice to say, she is a proponent of legal awareness campaign, i.e. having more awareness of the law should be translated into an increase in legal compliance.

Here where I quickly have a different opinion. Knowing the law does not necessarily mean that you will comply with such law. The reason is simple and can be traced back to the basic assumption of Law and Economics, people are rational being and they respond to incentives. From the fact that most students violate the no-turning-right rule, I can conclude that the Faculty has not imposed any sanctions to the violators. No sanctions means no costs to these students to violate the rule. Hence, what are the incentives for them to comply? Surely we can't assume that these young students are those "righteous people" who will follow the law simply because it is the right thing to do as depicted in legal philosophy course. Plato always dreams of having a philosopher as the king because he exactly knows that it is impossible to have such king in the real world.

Of course, being a diligent law student, she didn't immediately agree with me and instead offered another argument: my line of thinking is the same with corruptors! They corrupt because they know that the benefit of corruption is bigger than the costs (such as going to the prison). I almost shouted "EUREKA" when she actually said that because it is precisely what I have argued before in some of my posts (here and here). This is how Law and Economics explains the behavior of criminals, they calculate the costs and benefits of their criminal acts and whenever they decide that the benefits exceed the costs, they will most likely conduct the crime.

If we think it through, assuming that knowing the law will increase legal compliance is a dangerous assumption, because it is a highly misguided assessment of human behavior, and there are many consequences to such assumption. Take the law students case as an example. You can always say to them how humiliating their act is, but unless the Faculty takes a real action toward the violators or unless making a right turn will cause the students to be involved in a serious accident, I bet that the rate of violations will never decrease significantly. What do you expect? Are these students hypocrites? I don't think so. They are mere human.

Another example: it is possible that the people who understand the law can find a leeway and use such understanding for their own benefits which of course is not in line with our hope that increasing their awareness will induce them to comply with the law. So what should we do? The answer is better legal enforcement! Legal enforcement should never be separated from the law itself.

You can make the best law in the world, but if you have no one to enforce it, such law would be meaningless. This is especially true when you are trying to regulate people's behavior. Oliver Wendell Holmes correctly pointed out that people are only interested with what judges will do with the law. In other words, people are more interested to know what legal authorities will decide against them in certain cases and not only what the law say.

By this, I'm not talking only about criminal law, this is applicable for any subject of law. Suppose there is a law saying that certain contracts are prohibited and will be deemed void by operation of law if people entered into such contracts. If people know that the judges will declare these contracts null and void whenever the parties bring them to the court, they will most likely not sign these contracts in the first place.

So there we have it, a short discussion on how we should take a look at the law. One important thing that I learn from Law and Economics: some of the concepts are so obvious that people tend to disregard them entirely. At least that's the experience of Ronald Coase and his concept of Transaction Cost. The concept was made when he's still in his 20s and yet, he received his Nobel Prize in his 80s. It took 60 years for people to realize a concept that is so obvious to everyone if they think it through. Ain't that crazy?

This is too important to be not posted in my blog, a series of important essays by law professors of the University of Chicago Law School on the future of law and economics program. Enjoy!

I have received several comments for my previous post, and I thank all of the commentators for the effort. I must say though, if only I set a prize for giving these comments, I would definitely give such prize to my brother, Prasetya Dwicahya, for his excellent comments (no family bias involved here). So if you have not read his comments, you better check it out before going further with this post.

Anyway, most of what I will say has already been covered by Prasetya's comments. Thus, I'll focus instead in analyzing his proposed policy to find out whether such policy can be the best option to be pursued by the government. Prasetya's proposed policy is something that we call as the freedom of choice policy which is in line with the concept of free market and pareto efficiency (a condition where as a result of the policy, some individuals are made "better off" without making any individual to be "worse off"). People is free to choose whether they want to use the car without the safety device or bear an additional costs in order to install the safety device. The company is free to produce its products (even if there is a defect) provided that it discloses all material information to the public so that people can make an informed decision and the company can reduce its marginal costs. And the Government has the role to enforce the law to ensure that the company will pay the expected compensation to any victim of the car due to the unavailability of the safety device .

Theoretically, this can be a win-win solution that promotes efficiency to the maximum. With this kind of policy, the costs of legal enforcement by the government would not be too expensive (assuming that the rate of accident is low in accordance with the probability that has been set out by the company), the company will not be burdened with huge additional costs, and the people will have many options to choose in order to maximize their utility and preference (i.e. getting an absolutely safe car or playing with the laws of probabilities for a huge jackpot). But it seems this is too good to be true. Or isn't it? Or do you think this idea disgusts you, that it is a morally reprehensible choice? I mean, how do you even sure about letting people take a bet with their life in the line, even though the probability is very small?

In practice, we let people take this kind of risk all the time. We know smoking is dangerous, yet we are not able to prohibit people from doing it. And suppose you say that there is a huge interest group behind smoking activities, there is even a better example which is more similar to the above car case. We know overeating and poor exercise are a good recipe for health problems and they also increase the probability of getting caught by various diseases, including heart attack. Yet, I bet that the government will not issue any law that prohibits people from overeating and force them to exercise routinely. My main question, if we care about our people (like in the case of the automobile company), why don't we just choose the path of regulating people's daily life? There are many answers to that: the enforcement costs will be too big, it's an invasion to people's privacy, it's another form of "big brother"/dictatorship, etc. Now, if we can give those lines of arguments to the overeating problem, shouldn't we take the same position for the problematic car?

What I would further argue is this, the above proposed policy that respects the element of freedom can potentially be the best option for the automobile case in any possible way. Let us tweak the case a little bit. Suppose now the probability of having an accident due to the unavailability of safety device is 80%, meaning that from 2,500,000 cars, 2,000,000 cars will go haywire. Will our proposed policy save the problem? Or should the government forces the automobile company to install the device? I would say there is no need for the government to do that. Using a simple costs and benefit analysis, the company will definitely realize that the costs of not having such safety device will be too big to be borne by the company. In this case, their best option is to install the safety device.

Now, another tweak. Suppose the costs of installing the safety device is not US$10 per car, but US$100,000 dollar. Will our proposed policy work? I bet yes. In this case, the marginal costs of producing the car (i.e. the costs of producing an additional unit of the car) will defeat its marginal benefits. Simply saying, the automobile company will never produce the car in the first place.

Having said the above, I need to put a caveat. Our world is very complex and a solution for a problem may not work for another problem. What I want to show here is how economics can be used as a handy tool in formulating our laws and policy. I'll continue to use this theme for my next articles and hopefully we can try to apply it in different cases with different policies. One thing for sure, this exercise should be fun.

Suppose one day a major automobile publicly listed company announces that it is selling a new cheap product that will allow people to have car more easily (for the sake of discussion, we will not discuss the externalities that people will face with more cars in the road). The car is a huge success for the company, generating a huge profit, and the stocks' value of the company has also increased several times in a year. But then, an accident happens, a gruesome one. Further independent investigation shows that while the probability of the accident is very low, around 1:100,000 per year, it can be avoided if only the company install a safety device.

Facing this result, the company announces to the public that to cut the costs of the car, it did not install the safety device required for preventing such accident. Why? Apparently, the cost for installing the safety device is around US$10 per car and since they produce 2,500,000 car a year, the total additional costs that the company will bear for a year is US$25,000,000. Meanwhile, by attaching a value of at least US$100,000 per person as a compensation for each accident and with the assumption that the car will be purchased entirely, the company estimates that the total costs of the accident per year wouldn't be more than US$2,500,000. So, by a simple cost and benefit analysis, the best option of the company would be not to install such safety device.

Soon this controversial information fills all the major newspapers. The enraged citizens are calling this company as an evil car company, and politicians demand the company to be responsible for such matter. Assuming that you are a policy maker, what will you do with this case? What kind of policy that you will formulate against the fact that the company has chosen not to install such safety device?

This is the first part of my post that deals with the basic question. I'll post my proposed policy but I would like to see first how my readers will respond to this kind of question. Your comments will be much appreciated.

All first year law students in any part of the world should know this principle: ignorantia legis neminem excusat or simply saying, you will not be able to defense your illegal act in front of the court on the basis that you don't know the law. This might be a simple principle, but there is a deep meaning here and I had a very nice discussion with Prof. Anup Malani this morning regarding this matter.

Try to consider this. Suppose you're attending a class of a "killer" professor. Most of the time, he only mumblings aimlessly. Then, on the final examination day, you suddenly realize that the questions presented do not contain a single thing that has been taught in the class. It's completely different and you stare blankly at the exam paper. What do you feel? That it isn't fair? That it seems like the professor is cheating the student? Well if you think so, I would completely agree. This is not fair at all. In fact, if I were you, I will definitely report the professor to the higher ups and ask him to be removed since this is so unprofessional.

But if you think it through, wouldn't you find the similarities between the case above and the legal principle that we are now discussing? With so many regulations issued each year, in reality we've already drowned in regulations (and the parliament is still thinking about issuing new regulations each year?). No human being, even the best lawyer in the world, can know and fully understand the entire law in a single country. And yet, with all of these facts, there would be no excuses for all citizens to say that since they don't know the law, they should be exempted from legal liabilities in case they mistakenly violate a law. How can that even be possible?

Apparently, there is a good economic reasoning for this certain principle and that is the fact that the cost of faking your ignorance of the law is so cheap (as easy as I say: "I don't know") that opening the possibilities of exempting people out of ignorance would be a major disaster for legal enforcement. Of course, this is not a perfect solution. When the laws aren't as many as nowadays and when the laws are usually still in line with basic common sense, adhering the non ignorance principle would be a good choice. But the case would be different with the current development in legal system.

One of the issues that was discussed today is the fact that there are a lot of new laws in the United States that criminalize acts without any mens rea element. Mens rea basically means the intent to violate the law or the "guilty mind". In other words, you can be criminalized for doing certain acts even when you do not have any intention to conduct such act. Let us take an example, suppose that there is a local law that restricts people to put their cars on the road sideways in certain hours. Say that the regional parliament members have their own reasoning and it is common for the people there to put their car on the road sideways. Wouldn't you be surprised when one day you are being fined for putting your car in the sideways without any warning whatsoever and you can't defense yourself on the basis that you don't know about that law?

What was considered as a good legal principle can be turned into a giant mess. Try the regional regulations in Indonesia. It's very hard to access any information about these laws, there are plenty of them, and each person, including companies, are expected to comply with all of the requirements set out under these regional laws. It does not work that way and a legal system that works like that is no different than legalized burglary.

Having said that, I have to admit that finding the right balance is difficult. On one side, we do not want to provide huge incentives to people to violate the law. On the other hand, we can't let government officials do as they please without proper restriction or we will end up with high cost economy in many part of our lives. Some suggestions would be: (i) with respect to criminalization, the government should be careful in not creating too many new criminal acts, it sends the wrong signal and it increases inefficiency in state management; (ii) even if we need to criminalize, adding the element of mens rea would be helpful in reducing unnecessary violation; and (iii) socialization of new laws is imperative and it would be better if the Government can introduce those kind of laws gradually. Remember the introduction of seat belt rule?

It's been a while since the controversial discussion on whether mini skirts induce men to rape women. Various debates have occurred but I would say that most of the times they miss the important points. You see, criminals are human being and to some extent they will calculate the costs and benefits of doing their criminal activities. It does not even have to be a sophisticated analysis, it can be in the form of a quick analysis that anyone can do by himself.

Let us use corruption as an example. The benefit? A huge amount of money to be used by yourself and maybe your family. The costs? Going to prison and/or losing your corruption assets. Then do a simple calculation on the probability of you getting caught by the authority and how severe the punishment will be. If you think that the probability of enforcement is low and that you can buy your freedom later on, then the benefits of corruption outweigh the costs. The result? People will have strong incentives to corrupt.

The same analysis goes with rape. Why do men rape? Is it because the urge of their hormones? Because they can't withstand the sexiness of a hot girl in front of them and thus they must channel their sexual needs by raping such girl? Well, those might be added to the equation, say the benefits of rape. But there are more important factors and those are timing and situation for the rape itself. A rational human being, even the stupidest one will never conduct a disgusting activity such as rape at the middle of the day in front of many people. The costs will be too big to bear by any rapist existing in this world. And there would be other ways that are far cheaper and less risky to channel your sexual needs in the above case, such as masturbation or even looking out for a prostitute (yes there are other costs associated with having sexual activities with a prostitute, but we can safely assume that the costs should be lower than raping a woman in front of the public).

Going back to timing and situation. Why do I say that these are the main factors in determining whether a rapist will conduct his evil deed? Timing and situation affect greatly the success rate of a rape! And each rapist who have minimum thinking capacity knows that if he has a good chance to rape someone and a small chance of getting caught, the benefits of the rape outweigh the costs. You know the rest of the story. Furthermore, I would assume that in the mind of the rational rapist, whether the victim wears a mini skirt or a long dress is simply a small factor in the equation. In the end, a rapist will do something to let the victim out of her dress, longer dress takes longer time, but that's it. If the timing and situation do not permit, I dare to say that no one will rape even an almost naked woman.

Even worse, rape is not a criminal activity that can be easily proofed in the court. Usually the crime is conducted behind the scene and the longer the crime is reported to the authorities the harder it would be to find any supporting evidence for bringing the rapist to justice. All of these facts minimize the cost of rape crimes! The fact that the public normally blame the victim does not help at all. To certain extent, it induces the authorities to think that the victims have a role in the crime and you may say this is as a baseless claim, but I would assume that such kind of thinking will slow them down in doing their job. Imagine this: a friend comes to you saying that he lost his wallet because he put it carelessly in a public park. Would you quickly help him, or will you say: "dude, that's stupid and is your own fault, and now you ask me to help you?".

Will all of the above things, how can we effectively prevent rape crimes? By not working together in creating a safer environment and instead blaming the victim, the general public are actually responsible for supporting the crime itself! Honestly, I don't even want to be a part of it. Would you want to be a part of such bad act? I hope not.

Note: For follow up readings on the economic analysis of criminal activities, I would suggest you to read the articles of Gary Becker (Crime and Punishment: An Economic Approach and The Economic Approach to Human Behavior can be a good start), a Nobel laureate from the University of Chicago. He writes a lot and has a very nice blog with Judge Richard Posner here.

Imagine that you are a voter in a general election for the newest legislative members. Suppose that you dedicate your own time to know each particular candidates in order to vote as an informed voter. You further realize that individually, your voting will be pretty much insignificant, you can't and will never know whether your voting will be a decisive one in case there are a lot of voters (let us just say that in the context of Indonesia, there are around 60 million voters). Calculating all the costs for doing your personal research and doing the act of vote itself plus your understanding of how insignificant your vote is, would you still call yourself as a rational being if in the end, you still vote? (To shed some light, the typical definition of rationality used in this discussion is the definition used by economist, rational person means a person who act for his own best interest)

This is the basic premise of the Voting Paradox's concept, at least the first part of it (I'll deal with the second part later). It genuinely asks why rational people vote even though the circumstances show that it's an useless act and costly. Is this a solid evidence that people are irrational? Or is there something else that we miss? From what I have read, there are a lot of explanations for this behavior, but no solid answers. Nevertheless, for the sake of discussion, I guess it would not be a problem if I share some of these theories to my readers. Maybe one of you can provide a better explanation.

Voting as a Way to Express Your Voice

The first theory argues that people vote because it is a way to express their voice. It might not be effective, but hey, people have not found a better way anyway, so why don't with stick with voting? Under this theory the act of voting is considered as a type of consumption. The satisfaction of voting comes from the act of voting itself, i.e. shouting your opinion and hoping that somehow your voice matters. At first, I consider this as a ridiculous theory, but then I realize, I'm doing the same with my blog :p

What can we conclude from this theory? Since the rationality is derived from the satisfaction of doing the act of voting, such satisfaction comes with certain expectation, there is an inherent cost and benefit analysis here. If you know the probability of your vote being significant is small, and thus the benefits of voting are uncertain, you would be less likely to vote if the costs of doing so are increased. A simple conclusion but apparently this is supported by some empirical findings. Some good examples, people are less likely to vote in a rainy day or if the voting location is too far from their home or if the registration process is too complicated.

Voting as a Strategic Act

The second theory argues that people vote when they think it is a strategic one. I would guess that the applicability of this theory is limited. First, there are not many occasions where voting can be a strategic one, such as in a election where the results will be close. Second, while this might work in smaller groups, it is difficult to asses when your voting will be a strategic one in terms of big elections.

Voting Due To Group Mobilization

The third theory's basic argument is simple, people vote due to group "pressures". I can agree with this. Sometimes, group pressures is the best way to encourage people to vote, whatever the platform of the group is. And I have a very good example of this behavior. In my university days, I saw how the University's Islamic student organization encouraged their members to vote for their candidates for student senates and they were quite persuasive in doing this (although persuasive might be an understatement). And these guys have won the election for many times. How can they win the election even though they are not the majority? Well it seems, being "rational people," the other students chose not to participate in the voting process, thus, giving a major benefit to the groups who vote militantly. This end result actually has a strong connection with our last theory.

Voting as A Game of Cat and Mouse

Suppose that we know that most people are rational and there is a huge probability that they will not vote since it's an useless act. In this kind of situation, what will you think? If you vote now, you voice will absolutely matter! You will be the determinant of the voting result. But then again, when all the people think the same, we'll back to square one, i.e. people are returning to the voting chambers, meaning your voice becomes worthless again. See how this resembles a game of cat and mouse?

It should be noted, however, that while this game can be cyclical in theory, in practice it can actually alter the end results. My case of the Islamic student organization is a good example. Other students didn't vote, they were skeptical with the election. Now, as a rational person, what would you do in the place of the Islamic student organization? Of course the answer is: gathering all the like minded people to vote for your interest and beat the majority that have chosen not to vote.

Conclusion

So, in the end, can we say that voting is an irrational act? Is there any Voting Paradox? I still don't have an exact answer. But my gut feeling says that voting is a rational act. My reason is simple, as long as the costs of doing so is not that significant, you should always vote and even better, encourage other people to vote too. And when calculating the cost of voting, you must also calculate the costs of not voting, such as getting people that you hate to lead you, or even worse, getting incompetent people that will ruin your life as your leader and you don't have any mechanism to put them down other than a bloody revolution (yeah, I'm talking about our honorable members of legislative board). I guess this is something that missing from the equation. There are costs and benefits of voting, but on the other side, there are also costs and benefits of not voting. To be an informed voter, we need to calculate both, or else, you'll end up thinking that you a are rational person, though in reality, you're just an ignorant fool.

Note: Most of my materials are derived from Stearns & Zywicki's Public Choice - Concepts and Applications in Law. A highly recommended book for the student of Public Choice Theory and anyone interested with Public Policy.