The Chronicles of a Capitalist Lawyer

Since I call myself the Capitalist Lawyer, it's hard for me to resist the temptation of enrolling in one of my law school's courses: Law and Political Thought - Neoliberalism and Its Critiques. After all, I always believe that you can't properly learn a thought if you don't learn its critiques. One of the required readings in this course is Naomi Klein's book, the Shock Doctrine. The basic idea of her book is that the globalization of neoliberalism is primarily caused by the shock doctrine, where neoliberalism supporters use a crisis in a particular place in the world to spread their ideology in an effective way, ensuring that the changes can be made in a massive scale and that such changes would be almost irreversible once they are established as governmental policies.

To add the spices, the book also shows how the shock therapy is administered to various part of the world such as Chile (Auguste Pinochet case), Iraq (the oil companies saga), Asia tigers (the 1997 crisis where Indonesia was part of the victims), China (Deng Xiaoping reformation and the Tiananmen Square) and also England's liberalization (under Margaret Thatcher rule). Furthermore, she also believe that all of these disasters were caused by the idea of Milton Friedman, the famous economist from the University of Chicago. Milton Friedman who was very famous for his teaching on the power of freedom, free market and limited government was blamed as the prime perpetrator of neoliberalism. He was also quoted as the guy who first started the idea of using crisis as a way of spreading ideology.

I must say that reading her book, I am not convinced that there is a strong relationship between the idea of Milton Friedman and the administration of the shock doctrine. It seems that most, if not all, of her critiques and evidence used in the book are precisely not a part of Milton Friedman teachings, nor should they be considered as a part of the original idea of neoliberalism. I would say that she has mixed neoliberalism with corporatism and/or crony capitalism which should be rejected from any point of view.

First of all, using crisis as a starting point of spreading your idea is totally legitimate. Through out the history, we have seen numerous times how crisis change how people perceive the world. If it is not because of the Great Depression in the 1930s, Keynesianism would never had the chance to spread. No one would believe that the solution for depression is additional government consumption. And if it is not for the 2008 crisis, no one would write books on Keynes revivalism. I think the reason why crisis is so effective to spread new ideas is simply because during crisis, people are shocked, their previous believe is shaken, they are vulnerable and would easily see any other new alternatives as the solution. This is what we call as hindsight bias.

Unlike her idea, that shock therapy is a bad idea, I believe that crisis is neutral. Any person can use a crisis for his own advantage, including spreading his ideas. Whether such idea is good or not is a separate matter and history will usually determine the longevity of an idea, whether it will survive for a long time or not. The same thing also happened in Indonesia during the 1966s. When Sukarno fell from his throne and Indonesia was consumed by more than 600% rate of inflation, it was also the right time to dethrone the socialism ideology and replace it with a balanced government intervention-free market economic system. In reality it was a success until Indonesia was turned into a state of crony capitalism and ended badly in the 1997 crisis. If we don't have such crisis, who knows where will our beloved country actually end. Maybe worse than now.

Second, her stories show how dictators use their power to force the free market idea into the society and how corrupt governmental officials cooperate with corporate officers for the sake of their own profits and interests (business lobbying is a serious problem, even in the United States). While that might be true, I don't think that represents the vision of Milton Friedman on capitalism and freedom. The capitalism that I know and believe as the best economic system for the welfare of society does not support dictatorism nor does it support crony capitalism. The capitalism that I know also does not support absolute freedom where business firms can do everything without any liabilities whatsoever. That does not make any sense. Economics teaches us that there are externalities that can be produced by a party against the welfare of the society and that in order to enable the market to work efficiently, such party must be held liable and internalize the costs that it has imposed to the society.

This is where I think Naomi Klein miscalculated her own idea. She work really hard to show how evil Milton Friedman is and how bad neoliberalism is, where government is being stripped from their power and the state assets are sold to several oligopolists who then control the market for their own benefits. Yet in reality, none of these represent neoliberalism thought. Minimum government should not be translated into: "you can do whatever you want". It means that the government should not try to be too big and then used by various interest group for their own purposes. We know that government consists of people, and we also know that they are not angels. To believe that government would always consist of good people would be as naive as believing that the market would always full with good people.

Ronald Coase in his famous Theory of the Firm has shown that firms, coordinated and integrated business units where capital, management, and employee meet and work together, exist within the market. Some empirical researches also show that 50% of the businesses conducted in the market are being run by firms. In short, this means that coordinated effort is necessary and also useful to the extent that the costs of doing so is cheaper than doing transactions via the market. So naturally, there is a balance between coordinated economy and uncoordinated economy where the invisible hand will work.

So in the end, what is neoliberalism? I am still looking for the answer during the course. But I don't believe that it should be placed in the same place with dictatorism and crony capitalism. The idea to promote the welfare of the society by maximizing the freedom of the people and limiting the role of the government in order to make it focus on its essential duties should never be used to justify greed and crimes. It is stupid if you think everything should not be regulated, but that's just the same with the idea of regulating everything. I'll update this issue once I finish the course.

Two of the interesting notions in the world of legal interpretation are the existence of legislative intent (maksud pembuat undang-undang) and that such intent is eligible to be used in interpreting ambiguous laws. I too must admit that I once agreed with those notions during my undergraduate days, but later on I changed my position and my encounter with Public Choice theory strengthened my conviction. First of all, legislators (in our case, DPR) are not a single entity. As famously termed by Kenneth Shepsle, a Professor of Government from Harvard University, "congress is a they, not an it". There is a deep insight in that statement with some serious implications.

Some legal scholars believe that legislators have certain intentions when they promulgate a law. Thus, whenever there are ambiguities in the law, judges should try to interpret the text of the law in accordance with the governing legislative intention. But of course, this is far from the truth. Try reading a law and see the elucidation section. Some have explanations, but most of the time, we only see the words: cukup jelas (clear enough). And I can confirm with huge confidence that the term "clear enough" is simply overrated, meaning that what those legislators thought as clear is not clear at all. After all, no language can perfectly express the intention of a single person, what do you expect then from our language in expressing the intentions of 560 people?

The fact that our DPR consists of hundreds of members shows that it is impossible to determine their intention as a whole. There would never be a single unified intention from these people. Each faction has its own interest, and each member of such faction might also have different interests and preferences. The final product, i.e. the law along with its elucidation, does not necessarily reflect the intention of the overall legislators, it is simply the result of various political compromises with all of its flaws and errors. There might be the winning coalition and losing coalition and the law may only reflect the view of the winning coalition. Not to mention that there are also possibilities of interest groups' involvements in law making process which might jeopardize the interest of many for the needs of the few.

So what is the biggest implication of the above insight? We must understand that since the legislators do not have an unified intention, trying to interpret the laws in accordance with their intention might not really work in practice. A good example is the Constitutional Court decision in the judicial review of Broadcasting Law (Law No. 32/2002), specifically on the authority of the Indonesian Broadcasting Commission (KPI) to issue broadcasting licenses for private broadcasting companies. In such decision the Constitutional Court declared that what the legislators intend to say does not mean anything if it is not expressed in the law itself.

As a background, the law says that the authority to issue broadcasting license resides with the Ministry of Communication and Informatics (KOMINFO). However, KPI argues that the legislators actually intend to give such authority jointly to KOMINFO and KPI in its capacity as the representative of the people. After all, KPI has the authority to conduct the preliminary selection process and provide recommendation to KOMINFO. Why then the licensing authority should solely fall into KOMINFO? But as stated by the Constitutional Court, it doesn't matter what the legislators thought about what KPI authorities should be. If they don't put it in the law, they can't say it as a law.

I tend to agree with the Constitutional Court, but I would not stop only on the texts of the law. Even when we refuse to acknowledge the existence of legislative intent, we still need to be practical. In my view, interpretation of the law must consider three main factors: (i) the texts of the law, (ii) the context of such texts in view of the overall provisions of the relevant law, and (iii), the possible consequences of using such context in practice. The law is a product of men and thus cannot and should never be separated from a reality check. Furthermore, with respect to my third point, as I've always stated in my posts, the law should be directed to reach the most efficient result, meaning satisfying the welfare of the society as much as possible with the lowest costs possible.

Using this method of interpretation, the text of the law would still be the primary source of the law, but we will also be less formalistic in interpreting the texts. Instead, judges decision will be guided by how their judgment can achieve the best results for the society welfare by calculating the costs and benefits of the immediate and long term effect of their judgment. No wonder Oliver Wendell Holmes, in his most famous law review article written in 1897, The Path of the Law, argued as follow: "For the rational study of the law the black letter man may be the man of the present, but the man of the future is the man of statistics and the master of economics."

Of course, it is not easy to use this method of interpretation in practice. We tend to narrow this method to simply judging based on the society's sense of justice which is not helpful at all since we really don't have a standard of what could be exactly considered as the society's sense of justice. No wonder judges choose to use legislative intent as a solution when plain meaning method does not work to solve the case.

Right now, I am taking a class on Judicial Decision Making, focusing on corporate law issues, where I act as a justice of the supreme court in the State of Delaware, United States of America. I believe this would be a very good opportunity for myself to test how I will decide the cases using my own legal interpretation method (since we start with a clean doctrinal state) and whether I can consistently apply what I've said in this post. Once I've completed the whole course (it will take around 2 months period), I will update again my view on this issue in a separate posts.

It's been a month since the last time I wrote in this blog. I guess vacation time is really over. Anyway, yesterday I read a interesting news from Kompas. Apparently, one of the former chiefs of the Commission of Corruption Eradication (KPK) had an idea that lawyers of corruption case suspects must report the payment for their service that they received from their client to the anti money laundering authorities. The reason for this policy? Because they believe that there is a good indication that the money is coming from corruption and therefore the lawyers must report it.

Although I am always sympathetic with anti corruption movement and would love to hear new innovations, I can't believe that a former lawyer could actually voice this perverse idea. Sure, having this kind of mandatory reporting could be a good screening mechanism. Those who report would probably have no case at all, while for those who refuse to report, we can expect that there is something fishy is going around. Would not that produce an efficient way of legal enforcement?

The answer is no. There is a good reason why lawyers are sworn not to provide any information to third parties that might jeopardize the interest of their clients. A good analogy to this issue is the market for health insurance. One of the main problems of health insurance industry is the fact that there is a huge information asymmetry between the insurance companies and the policy holders. Insurance companies get money from this business by pooling the money from their clients and hoping that the amount of the pooled money will exceed the total money that they will pay for the claimants. Of course, the pooled money are just a fraction of the total expected health costs of the policy holders depending on the probability of paying the insurance claims in the future.

As you can see, there is a huge incentive for people with high health risks to buy insurance policy while people who know that they are quite healthy will most likely refuse to purchase an insurance policy (unless they are risk averse or the price is acceptable to them). In case the numbers of high risk people beat the numbers of low risk people significantly, a market of lemon will soon be created where insurance companies will be flooded with high risk policy holders and the insurance premium will be increased to cover the higher probability of insurance claims payment. In one instance, the premium can reach a level where those who actually really need the insurance cannot afford the price and those who are previously interested to buy the insurance policy refuse to do so. A solution for this problem is to require all people to buy mandatory health insurance policy in order to reduce the premium amount (see as an example, automatic insurance for employees).

Similar thing would also happen once lawyers have the obligation to report anything fishy related to their clients (I mean, if you do this for corruption cases, we should also do the same for all criminal cases, from thievery to murder and rape crimes, why bother making the differentiation?). Being a lawyer myself, I could assure you that lawyers are the master of covering their own liabilities. Rather than being a victim, the lawyers will eventually report the client to the related authorities. There would be no incentives for lawyers to protect the interest of their client. Once they know that their clients are most probably guilty, they will stop representing their client since they are being required to report things that may jeopardize their clients' interest. Why bother having state attorneys if that's the practice?

And clients are not stupid, some will refuse to use lawyers services because of fear of being betrayed, in which we can assume that they are indeed guilty. But that is a very dangerous assumption. One of the basic principles in criminal law is that we cannot punish someone based only on assumptions. That's why we have the "beyond the reasonable doubt" rule. Punishing the wrong people or giving a punishment which is not in accordance with the severity of the criminal activities is not efficient since it lowers the costs of doing criminal activities (the lower the probability of getting punished, the lower the costs of crime). Thus, we invest in creating a rule that can produce the most correct result (or at least we hope to).

Creating a system where lawyers can turn out to be their clients own enemy once they deem that the clients are most likely guilty is not helpful at all. Those who are really in need of legal assistance will be excluded from the legal service. We need to understand that law is not an easy subject for most of the common people and they might not always understand whether they have done something wrong or not. That's why we create a system where lawyers act as their assistant in understanding the legal issues that they will face in the court and that the lawyers will protect the confidentiality of any information that they receive from the client. This is the essence of presumption of innocence. To ensure that the system will work, there must be a relationship of trust between the lawyers and the clients.

This bring us to the second reason. If people don't use the service of lawyers if they don't believe their own lawyers, the number of clients will decrease. Depending on the situation, there can be two possibilities. One, the end of lawyers business. Second, an increase in the fee of lawyers and a new business focusing on the clients who solely conduct validly legal activities. I am certain that this is not the intention of having lawyers in our legal system. It might be hard to accept, but the only way for the whole system to work is to let lawyers represent all the people regardless of the fact whether they are really guilty or not.

In any way, I am happy that the idea has been rejected by the legislators. At least now I can find something that I could agree with them after all these years.

The latest case of an Indonesian law student who burned himself to death in front of the Presidential Palace is indeed an interesting one. At first, I want to disregard the student's motive but then I realize that the question of motive is the essential part in the analysis which will affect our final thoughts in perceiving his decision. So, let's start with the question: do people have the right to die?

It's a tricky question which triggers a lot of debates involving significant different views. The comments on the above case can be a good example. Some people consider the action as a foolish one without any benefit to the society, that people will soon forget it and it is harmful to the student's parents and close family members. Other people consider it as a heroic action, that it demonstrated a resistance to a corrupt government, and that the student should be honored because not a lot of people will have the bravery to burn themselves as a form of protest.

What interest me the most is the fact that the discrepancies in views were ultimately caused by the motive of the student in burning himself. Why the motive should be considered at all? Are we saying that the right to die should be honored in certain conditions in accordance with the motive? We condemn ordinary suicide (in case the student burned himself out of desperation with his own life) but we approve the action if it is done out of desperation of other people's life? How come? More importantly, why should we bother with the right to die? The dead guy would have no interest with what we will say on his right to die simply because he is already dead.

The main problem here is because if we agree that people have the right to die, it indicates that people should also have the basic right to freely do whatever they want with their own body (well at least some people believe that people should be free to do so). I mean, if we agree that people has the right to kill themselves (which is the ultimate action that a man can do with his body), they should also have the freedom to, say, hurt themselves or conduct activities that may be harmful to their body as long as they give their full consent for doing such action (meaning no fraud or coercion or misappropriation of condition by third parties).

Applied consistently, there should be no paternalistic regulation on how people should behave, and there should be no "protective" regulations intended to protect the public from doing dangerous activities as long as they agree to do such action. In other words, those "protective" regulations should be optional instead of mandatory. Yet we know that the this is not the case in real life. Safety regulations in factories and mining sites, and even mandatory safety belt in cars can be a good example of those kind of regulations.

It is weird if we assess the validity of a right only based on a motive. Suppose, a company is conducting a risky business. Installing a safety device would cost them a lot of money, say, US$20 million which will reduce the accident rate into 1%. If the Company chooses this option, they will pay 5 workers, each with a fixed salary of US$20,000 a year. Another possible way of doing this business is to employ those 5 people without any safety device, where each will receive an upfront payment of US$1,7 million, but the risk of deadly accident will increase to around 85%. From economics point of view, it is possible that the second option would be optimum for the welfare of the society. The company can reduce its costs, allowing them to sell cheaper products, and they compensate the employee generously for the additional risk taking.

Now imagine that one of those 5 employees is a father to three children. Thinking about the future of his family, he decides to take that risky job with a full understanding of the high probability of death. He believe that the payment justifies his increase of risk that even in the case that he dies, the overall compensation is enough to ensure the survival of his family in the future. Should he be prohibited from doing so? Should the company be deemed liable when an accident happen and the father dies? If we care about motives in deciding whether an act is good or not, can't we consider this as an heroic action? A father who chooses to increase his probability of death for the sake of his family?

I bet that most of you will consider this idea as a perverse one, but if we choose to assess the right to die simply from the motives, this is the consequence. It's easy to create similar cases and yet people preferences can vary significantly. It is almost impossible to find consistency of opinion in this matter. Here Law and Economics tries to provide the answer from welfare maximization issue. It might be easier to have a standardized safety regulation because not all people have the same perception of risks. Some will agree to take the risks, some will not. Creating a standard regulation could effectively solve the collective action problem among the employees. Granted there are costs associated with safety regulations, but the costs should be calculated in a way that promotes overall efficiency to the society (increase safety might increase productivity and might induce people not to participate in too risky business which may turn out to be bad for the welfare of the society).

If we agree with the above welfare maximization analysis, the right to die should also be viewed in such instance. Thus motive is irrelevant, instead, we should ask, what's the costs and benefit for granting people with the right to die? Should we give incentives for people to die? Might be in war with other countries for the sake of gaining victory or in case of patients with terminal ill where prolonging life would be too costly and too painful for him. But in cases where there is no perceive benefit of killing yourself and even worse, where the action imposes certain costs to third parties (imagine the costs imposed to the family left behind due to the suicide), I would say that we need to give incentives for people to avoid such action.

How can we give the incentives if the person is already dead? Well, we can do that by condemning certain type of suicidal activities that we view as wasting a precious life for nothing or where the benefits do not justify the costs of losing the life. Might not be effective for people who have lost their hope with their life, but for those who believe that their suicide can be meaningful, it could be a good deterrent mechanism. By informing them that their action would be useless and meaningless, we impose a huge costs to them for doing their action. What is the use of killing yourself in such case if people will simply disregard it?

Another way is to impose liability to anyone who knows a person's plan to kill himself but fail to prevent such death. Again, might not work for suicide for private reasons. But if it is for the so called "public cause", there is a high probability that some people will know about the plan in advance and therefore should be imposed with an obligation to refrain the soon-to-be-dead guy from his planned suicide. This is primarily based on the least cost avoider principle. It is not cleat though whether our current law is in line with the above approach. While there is no legal sanction for a failed suicide (no court will punish you if you fail to perform your suicidal action successfully), any people who assist you in your suicide attempt can be penalized with a prison sanction of at least 4 years. The text of the law indicates active assistance, while my proposed solution is to impose liability for passive assistance.

To close this post, I admit finding a right answer on the right to die is problematic. I am certain that some people will disagree with the notion that killing yourself could be justified as long as the perceived benefits exceed the costs. But we do have some examples on this issue, such as in war (imagine suicide mission) or in euthanasia (interesting to note that some Islamic legal scholars prohibit active euthanasia but not the passive one). It might be that there is no right answer for this problem and in the end, it's all about preferences. If that's the case, the voice of the majority will eventually determine whether a right to die should ever be granted.

Imposing a death penalty or capital punishment for certain type of criminal activities would always be a controversial issue. Some people believe that the imposition of death penalty is important to create an effective deterrent effect toward criminal activities. Others believe that death penalty is against one of the basic human rights, i.e. the right to live. Before I provide my arguments below, I will have to inform you all that I am a supporter of death penalty, albeit with certain conditions.

First of all, in normative Law and Economics, welfare maximization and efficiency are the two key terms that must be prioritized in assessing the quality of a law, including the imposition of any criminal sanctions. Why? Because in Law and Economics terms, a law would be deemed useful for the society if it can maximize the overall welfare of the people without imposing too much costs on them. The perfect law would be pareto efficient, where all people will be better off without having any losers in the society. While that might be nice, in practice it is almost impossible to satisfy the Pareto criterion, and therefore Law and Economics usually end up with Kaldor-Hicks efficiency, i.e. a law will be considered efficient if it can maximize the overall welfare of the society (so that in general, there is a surplus for the society) and open the possibility of compensating the losers, even though the compensations have not yet been materialized.

I understand though that welfare maximization is not the sole value that can be adhered in a society. What about, say, fairness? However, as argued by Steven Shavell and Louis Kaplow, two prominent economists and law professors from Harvard Law School, in their book, Fairness vs Welfare, welfare should always be prioritized whenever there is any conflict between welfare and fairness principles, simply because fairness is an element of welfare maximization while welfare itself is not necessarily a part of fairness maximization. The duo provide some very interesting arguments in the book but I will discuss that in another occasion. For now, I only like to introduce the basic concept of welfare maximization in Law and Economics.

Having said that, the next question would be: can we justify the existence of death penalty in a legal system from Law and Economics perspective? The quick answer is: it depends. The three main factors that should be considered are: (i) the costs and benefits of imposing the death penalty compared to alternative sanctions, (ii) the administration costs for death penalty, and (iii) the net effect of death penalty to the society.

Costs of Imposing Death Penalty in Comparison with Alternative Sanctions

With respect of the costs of imposing death penalty, suffice to say that death penalty is cheaper than prison. Killing one person is definitely easier than maintaining a person's life in the prison for certain period of time. But it would be wrong if the comparison is made only to prison. The fact that the costs of death penalty are cheaper does not necessarily means that it is superior to other type of sanctions. In fact, from economics perspective, death penalty might be inferior compared to the sanctions in the form of fines because death penalty does not produce any direct additional wealth or at least create a transfer of wealth. The only way we can say that death penalty produces wealth (indirectly) is if there is a good evidence that death penalty effectively deters crimes and therefore reduces the overall costs of criminal activities to the society and save the people's money for costs of legal enforcement.

Administrative Costs for Imposing Death Penalty

Another important issue is the costs for administration of death penalty. Since death penalty is irrevocable, in the sense that you can't raise the dead once the sanction has been administered, the administrative costs for getting the right decision tends to be higher in order to avoid costs of wrong decisions (such as longer waiting period for the execution of the penalty, additional costs for producing evidence, etc). Why we need to avoid these wrong decisions and why people should pay for the costs? Other than fairness related argument, Law and Economics believe that wrong judgment reduces the probability of allocating the criminal sanctions to the intended target, i.e. the real criminals. For each wrong judgment, we impose unnecessary costs to the innocent person and let the criminals free from the sanctions which means that the costs for them to do their criminal activities are reduced, inducing them to do more criminal activities.

In other words, wrong judgment is a factor that may increase the probability of doing crimes simply because the criminals know that the probability of them getting caught and being sanctioned is reduced. So, letting too many wrong judgments will be inefficient for the society. But the same inefficiency could also happen when we spend too much money in trying to reduce the error costs of judgments. A good example would be cases where it is very difficult to proof that the defendant is guilty, such as in rape case. I have argued in my working paper here, that imposing death penalty for rape cases might be counterproductive because the process of evidence is difficult and the administrative costs for getting the right decision would be too huge. As a result, imposing alternative sanctions which are revocable in the future might be the best option for rape cases.

The Net Effect of Death Penalty

The most controversial aspect of death penalty is the claim that it can effectively deter crimes rate. Obviously, this is something that needs further empirical research, especially in Indonesia. I note from one of my professors that some empirical researches in the US found that high death rates in the prison can effectively deter the rate of crime. We can categorize this as an indirect death penalty sentence since you can be easily sentenced to a prison (and therefore less administrative costs for the entire process) but there is no guarantee that you will survive the prison. Apparently, having no life guaranty in the prison is scarier than having a direct death penalty where the process is longer and the possibility to avoid such sanction is higher.

As I said above, to the extent that death penalty can be an effective deterrent mechanism, such penalty might be an efficient solution for reducing criminal activities. How can we assess the efficiency of death penalty? In simple mathematical formula, death penalty would be deemed efficient when P > (C + AC + WC), where P is the amount saved by the society from reduced criminal activities, C is the costs of imposing death penalty, AC is the administrative costs of death penalty and WC is the costs for irrevocable wrong conviction. To be more consistent, we can also add the utility function of the criminals who receive such death penalty, since in a way, we impose costs to him by taking his life.

Based on the above super simplified model, I could tell that the basic problem with death penalty is that there is no calculation for the utility function of the victim, in fact the imposition of death penalty will never calculate the interest of the victims because they are simply out from the equation. Granted, the victim might receive some utilities from the retribution effect of death penalty, but I am not sure whether that will be enough. Again, as I said above, while death penalty might be more efficient than prisons, fines might actually be more superior than death penalty in welfare maximization and the use of death penalty should be really limited to certain type of criminal activities.

Conclusion

If I have more spare time, I would love to write more on the Law and Economics analysis of death penalty just like when I write about Economic Analysis of Rape Crimes. My support for death penalty is basically conditioned upon the satisfaction of the above model. If the overall costs of death penalty are bigger than the expected reduction in criminal activities, then supporting death penalty would be useless as it is the same with reducing the welfare of the overall society. Personally, I will give more support to any sanctions that can compensate the victims while still giving deterrent effect to criminal activities, such as a significant amount of fine and/or forced labor.

My another thought would be that death penalty should only be imposed to criminals whose activities are considered very dangerous to the societies and therefore letting them return to society without effective way of preventing them from doing the same thing would be too costly, such as serial murderers. But this can lead to another debate on what type of dangerous activities that should be sanctioned with death penalty. On that matter, I will reserve it for another time.

Yesterday, another interesting case occurred in Indonesia. Apparently, a private school required a child with HIV positive father, who has been previously admitted to such school, to undergo a HIV test. If the result is negative, the child is permitted to enroll, but if she is positive with HIV, then her admission will be cancelled by the school. In short, the parent refused to give the result and the school later on informed them that because the other parents in the school refuse the presence of the child having a potential of HIV positive, the admission for the school is cancelled. The main question from law and economics perspective, can this action be considered as a discrimination? Can the school, as a private party, refuses the admission of a child because of the risks brought by that child to other children, whatever the probability is? What would be the solution?

I look first at Law No. 23/2002 on Protection of Children and I find in Article 13 of that Law that a child, while under the care of parents,guardians, or any other parties responsible for the custody,is entitled to protection from any form of discrimination. If we consider the above action as a discrimination, judging from the text of the Law, I doubt that the school can be blamed, since the text seems to be intended to protect children from discrimination by their own parents or guardians. A school might be considered as a guardian of a child during the school time, but if the child never enrolled in the first place, there would be no legal obligation to protect the child from any discrimination. And based on that notion, I can see why the school chose to instead cancel the admission rather than accept the kid, if the kid is already in the school, the school will be obliged to protect her from any kind of discrimination.

So what would be the answer to this problem? Let's take a look at the reasoning used by the school to cancel the admission, i.e., they say that other parents disagree having a child with a potential HIV in the school. If this is true and these parents are the majority faction in the school, I can see why the school ended up with their decision. I bet they know that in the modern interconnected world like we are having now, this case will cause public controversies, there will be uproar, and to certain extent their name will be tainted. But, as long as their legal risks are low and most parents whose child go to their school support such policy, their benefits are still higher and there will be less incentives to change such policy.

Should we change the law then? Should we impose liability to the school for cancelling the admission? Should we force them to accept a child whatever his/her sickness is and whatever the probability of that sickness in infecting other kids is? I admit, these are very hard questions, and before we can answer those questions, we should analyze first the economics of preventing risk of infectious diseases. The State of Illinois can be a good example where it requires all international students to have immunization from certain diseases. Failure to do so within a certain time frame will cause the students to be rejected from registering for the remaining quarters in an academic year. Can we call this as a discrimination to immigrants or visitors? Might be, but voters love a state that seems to protect their citizens interest and the state can always say that it has the obligation to protect its citizens from any unwanted casualties.

This is precisely the problem faced by the above school. On one hand, the risks of accepting a kid with HIV positive might be very small to the other kids enrolled in such school, after all, HIV is not a disease that can be easily transmitted to other person. But on the other hand, even though the risks are small, the majority have different perception, which, I suspect, is caused by availability heuristic, i.e., since HIV is such a famous disease with significant adverse effect to a person's health, people tend to think that the risks of having such sickness is also high and therefore they reject any possibility of having a kid with HIV positive around their kids.

If my prediction is correct, imposing liability to the school will make no sense. You can't expect them to solve the problem that is out of their control (you can't control the preference of all the people in this world and it would be even harder if these people are already becoming your stakeholders), and it is likely that even when the kid is finally admitted, she will receive more discrimination from other kids and their respective parents (because we know that even when the kid is not admitted yet, some parents have already voiced their concerns and rejections). It's a bad game for the poor kid. Of course, this should not be the end of the world for the kid.

Other schools might actually take this opportunity as a marketing tool. But to achieve that, they must state their policy from the beginning. As an example, they should say that their school is opened to any kids with HIV positive and that they will provide a safe environment for everyone when they open their school registration. Stating this from the beginning will have the effect of screening parents that might not agree to have their kids sharing a class room with a positive HIV kid and therefore, we can expect less rejection from other parents. Only parents who support such idea who will send their kids to the school and this will allow the creation of a better environment for the HIV positive kid.

Borrowing the term from one of my Professors, Lior Strahilevitz, we can call this strategy as an exclusionary vibe. You effectively screen people who disagree with your policy and discourage them from getting into your community without having to say that you reject them. It's a double edge sword, it can be used to discriminate people, but it can also be used positively, as in creating a healthier environment for kids development. Furthermore, can this be a good business? I would think so, there are still many people who buy the idea that having a non-discriminatory school is good for the education of their children. And when these schools can attract many students, other schools will soon follow.

To close this post, in dealing with hard cases like this, sometimes, imposing liability would only increase the costs for each parties involved and might not be beneficial for the kids. Using strategy to raise public awareness is good, but I would suggest not to continue with a legal fight unless we can ensure that the problem lies within the school itself and not the parents. Because if the other parents are the problem, punishing the school will only add more fire to these parents, and the end result might be backfired. Remember, you can't control people preferences, it would be more effective to screen these people out and build a different business. If it is profitable, and my guess is: it is, the problem can be solved quicker than we thought.

Today's news indicates that the Department of Religion is considered as the worse governmental department in terms of corruption level. That's not so surprising, considering the fact that similar problem has occurred numerous times in the past. As an example, see this news from 2002. Our main question for today's post is: why religiosity is not translated into better legal compliance? Shouldn't religion help a person to be a better person and therefore religion can assist us in creating a community that has better legal compliance? I will argue that religiosity per se does not help in pursuing higher rate of legal compliance. In fact, the case is universal even for a person who denies the validity of any religion and instead claims that he is a moralist.

As I have argued in one of my previous posts, Knowing the Law vs Complying With The Law, people respond to incentives. You cannot expect that people will comply with the law simply because they know the law. To the extent that the benefit of doing a crime is higher than the costs, it is most likely that a criminal will conduct his crime. Thus, in law and economics view, we need legal enforcement to impose sanctions to criminals with a hope that such sanctions will increase the costs of doing criminal activities and can induce the criminals to reduce their negative activities.

Based on the above insight, no wonder that religion, standing alone, cannot be expected to significantly reduce the level of criminal activities simply because religion does not impose any sanction in the current life. You may be aware that certain religions offer a terrible afterlife sanctions for whoever dare to violate religion rules. While we can always debate on what constitutes religions rules, the issue is clear, although the sanctions are so vicious (burned alive and might be for an eternity too) that they cannot be comprehended by any ordinary human beings, they will only happen in the after life.

Some behavioral law and economic researches show that in general, people tend to discount the occurrence of bad things in the future even though they know that their current actions can increase the likelihood of those bad things. Good example: we know that overeating and less body exercise can be translated into higher probability of various nasty sickness, including heart attack, stroke, and diabetes. Yet, most people tend to discount that probability by staying with their unhealthy lifestyle (shamefully, I am also in the same category). It is also usual that significant changes in behavior will only occur after these people experience the problem by themselves. As an example, rate of doing healthy lifestyle activities will increase for people who have experienced heart attack and survive. That kind of experience will most likely leave a scar (or in economic terms, huge costs) in their life and they will have strong incentives to alter their behavior.

Returning to religiosity, not only that afterlife sanctions will be hugely discounted in considering them as a cost of doing criminal activities, there are several concepts in religion that can significantly reduce the value of such afterlife sanctions. Consider the concept of repentance of sins (taubat) that exist in any type of religion. This concept allows all believers to be forgiven by God from all of their sins to the extent they faithfully stop all of their previous heinous activities and do many good things as a repayment to the society. You can say from law and economics perspective that this is in line with the principle that criminals should compensate the society for the costs that these criminals impose to the society due to their criminal activities. That's true, but you must also consider the fact that the concept of repentance is not as effective as you think would be.

First, there is an issue on when should a person commit repentance? Since this can be done in any time before he dies and if we assume that people also discount the possibility of them dying at a time nearby, you can bet that most criminals will choose to repent far far away in the future. Even worse, since there is no minimum standard repayment for repentance, there is a possibility that such repayment activities are not suffice to cover the costs of their previous criminal activities. Obviously, that is not efficient for crime preventing. We are happy that religion provides an incentive for criminals to repay their sins in this world but without any clear enforcement mechanism, the repayment can be too late or not enough at all.

Second, since there is a possibility for multiple offenses and also multiple repentance, there are no strong incentives for religious people to comply with the law. They can always say that they are weak, that God is forgiven and all is well. Yes, we can argue that God might not agree with these people in relation to the faithfulness and intensity of their repentance, but no ones know what God really thinks. Uncertainties in this type of case increase the discount of afterlife sanctions, rendering their effectiveness into a new low level.

Having said that, the case is also similar for any moralists out there. We learn from one of US founding fathers, James Madison, that people are not angels. According to him, if people are angels, we do not need government, but since we know that they are not, we need a government to supervise them, and we also need further mechanism to check and balance the government since they consist of people too. You can claim that righteousness can come from many different ways, but you are just an ordinary human, and not all human can resist temptations.

Let me give you a simple example on insider trading cases. In the US, it is not unusual to find lawyers who still conduct insider trading cases even though they know the law and the severe punishment that will be imposed to them for doing such activities. Yet, some lawyers fall under insider trading cases. How could that be? Because the temptation is very high, we are talking about millions and millions of dollars here! And it is so easy to do insider trading that unless you can find a good way to remind yourself of the risks, you will most likely do it. And when they actually do it, you should ask why? Because again, they discount the probability of them getting caught because they know the law and they feel that they can avoid liability through their legal skills. Try to compare this with the fact that the Department of Religion handles an excessive amount of money from the government for hajj purposes. Do you think they are mentally strong enough to fight their temptations?

As you can see, even in the case of clear and severe punishments, some people cannot resist the temptations and end up doing their criminal activities. They might have already calculated the costs and benefits of their actions, where higher risks are translated into higher return. So, what can you expect from severe sanctions that will only occur in the future, the possibilities of them happening are pretty much uncertain, and there are many ways to avoid those sanctions with low costs(i.e. repentance)? The end result is clear, religion or morality, standing alone, is not effective to prevent people from doing criminal activities.

To close this post, I disagree that people are using this fact to blame religion as a source of evil. While religion and morality are not effective when they are standing alone, they can become a nice addition for strong legal enforcement. In his book, Predictably Irrational, Dan Ariely, a famous behavioral economist, shows that religion and morality can be useful tools in increasing the commitment of people to walk in the right path (especially by repeating such moment of commitments every day), i.e. as a method to increase their awareness that what they are doing is bad. But remember, they are only additional psychological tools, and effective strong legal enforcement would always be mandatory and necessary if we want to effectively reduce the rate of criminal activities.