A Hedgehog’s Legal Glossary

Professor Michael DeBow
Cumberland School of Law, Samford University
Birmingham, Alabama  35229

November 27, 2013:  This site is under construction.  Comments are welcome!

Why a hedgehog??  See The Core of American Law on a Single Page.
If you find this page helpful, you might want to take a look at my British/American Legal Timeline.

Terms that appear in the definitions that are themselves defined herein are indicated by bold italics.

- A -

Agency problem -- We need to work with and through other people to accomplish most of our worldly goals.  In any situation where one person (the "principal") seeks to employ another person (the "agent") to act on the principal's behalf, the principal runs a risk that the agent will not work as diligently, competently, and unselfishly as the principal would prefer.  We refer to the consequences of this fact as "agency costs."  There are steps the principal can take to specify the behavior he expects from his agent, and to monitor and discipline the agent to achieve the principal's goals, but these steps involve costs themselves.  A rational principal will pursue these forms of agency discipline only up to the point where the cost of additional steps to monitor and control the agent are larger than the agency costs.  In other words, the agency problem may be ameliorated in any given situation, but it can never (in principle) be eliminated!

Anglosphere -- All the nations that, to one degree or another, share in the English language and the English concepts of liberty and the rule of law -- what Sam Adams called our "fair inheritance."  For more on this, see James C. Bennett's "Anglosphere primer"  and his blog, Albion's Seedlings.

Assuming the conclusion/Begging the question --

- B -

Bargaining range -- The set of prices that is higher than the lowest price a seller would be willing to take, and lower than the highest price a payer would be willing to pay.  For example, assume that Sam is willing to sell his old car as long as he gets at least $600, and Bob is willing to buy it for any price up to $700.  In this situation, it is possible for Sam and Bob to reach an agreement to buy-and-sell, at a price somewhere between $600 and $700.  Of course, they may not, since either one or both might overplay their hand and ask too much/offer too little.  But the existence of a bargaining range -- in this case between $600 and $700 -- holds out the possibility that the parties will reach a bargain somewhere within it.  (For the rest of this story, see Gains from trade.)

Bastiat, Frederic -- (1801-1850)  French politician and thinker, an eloquent opponent of government redistribution of wealth.  His 1850 pamphlet, The Law, has proven eerily prophetic.  See New Deal,Redistribution,and Welfare state.

Bentham, Jeremy -- (1748-1832)  British lawyer-philosopher, economist, and legal reformer.  The leading exponent of Utilitarianism -- the idea that law and government should seek to promote "the greatest good of the greatest number" of people.  Bentham's thought is the basis for much of our present-day politics and government.  Bentham was the author of many influential works, including An Introduction to the Principles of Morals and Legislation (1789).

Blackstone, William -- (1723-1780)  The first professor of English law, ever.  His multi-volume work, Commentaries on the Laws of England, published between 1765 and 1769, was enormously influential on both sides of the Atlantic, particularly with the Founding generation in the United States.  Noted historian Daniel Boorstin was of the opinion that, "In the history of American institutions, no other book -- except the Bible -- has played so great a role . . . ."

Buchanan, James -- (1919-2013)  One of the founding fathers of public choice theory, Buchanan received the Nobel Prize in economics in 1986.  For a 2004 interview, click here.  A 1995 interview is here.

Burke, Edmund -- (1729-1797)  For an introduction to Burke, click here; for a timeline of his life, click here.

- C -

Capitalism -- “Capitalism is what people do if you leave them alone” (attributed to political philosopher Kenneth Minogue).

Civil law -- Two meanings are encountered: 1) Civil, as distinguished from criminal, law; 2) The legal systems descended from Roman Law, as in western Europe and countries that were once colonies of western European nations.

Classical liberalism --

Coase, Ronald/Coase Theorem/Coasean contracting -- (1910-2013)  Economist whose work revolutionized the teaching of law, and academic research in law.  His reputation is secured by two landmark articles, The Theory of the Firm (1937) and The Problem of Social Cost (1960).  The former transformed thinking about corporations and corporation law.  The latter is the starting line for the field of "law and economics."  Coase received the Nobel Prize in economics in 1991.

The Coase Theorem is developed in the 1960 article.  (Coase did not coin the phrase, of course.)  It asserts that the question of resource allocation will be answered by the legal system's choice of a legal rule only in those cases where the costs of contracting around the legal rule are prohibitively high.  For an example illustrating the Coase Theorem, read this first, then read this.

Coasean contracting occurs when a legal rule applicable to a given transaction 1) is framed as a default rule and 2) is not the rule preferred by the parties to the transaction.  Under these circumstances, the parties will "contract around" the legal rule, unless the cost of such contracting -- referred to as transaction costs -- are so high that the negotiation does not take place, or fails to reach a satisfactory conclusion.

For Professor Coase's judgment on the current state of government intervention in the free market, click here.  For a very brief intro to the subject of Coase's 1937 article, see Make-or-buy decision.  For more on all this, visit the website of the Ronald Coase Institute.

Coke, Edward -- (1552-1634)  Pronounced "Cook."  A leading figure in the development of the common law (particularly in his defense of it against the royal perogative asserted by King Charles I), and in the struggle between Parliament and Crown.  Author of Institues of the Laws of England (1628).

Collective action problem --

Common law -- The core of American law, taken from the core of English judicial decisions in the areas of property law, contract law, tort law, and criminal law -- which happen to comprise most of the first year law school curriculum.  The distinctive internal coherence of these areas of law is the product of default rules and Coasean bargaining.

Common law baseline -- Handy phrase coined by Professor Cass Sunstein, referring to

Commons, Tragedy of the --

Comparative institutions analysis --

Contract around -- See Coase, Ronald.

Cost-benefit analysis -- Comparison of the costs and benefits of an action before deciding whether to engage in it.  People tend to avoid actions where the costs of the action exceed the benefits it yields.  (Don't you?)  People tend to engage in actions where benefits exceed costs.  (Right?)  Of course, not everyone acts like this all the time, etc.  But few people can manage to avoid the concept -- which is really just a restatement of rationality, after all.  Potentially a way to (partially) rationalize government decision making.

Cowperthwaite, John (1915-2006) -- The British official who served as Financial Secretary in the Government of Hong Kong from 1961 to 1971, his free-market policies (property rights, freedom of contract, limited government) are credited by many as the most important factor in Hong Kong's breathtaking economic growth after World War II.  Ttributes can be read here and here.

- D -

Default rule -- A legal rule that is offered by the government to the world, to either accept (expressly, or through silence) or to reject (by "contracting around" it).  Compare mandatory rule.

Most of commercial law consists of default rules.  Examples abound; here's one -- The Uniform Partnership Act of 1914, adopted in roughly half the states, provides that all existing partners must vote to approve the admission of a new partner -- unless they have agreed to a different rule.  In other words, this default rule provides a legal rule for a partnership (unanimity required for new partner's admisison) that will apply if the partners do not agree otherwise.  Default rules, in effect, are "off-the-rack" legal rules that parties may use, or alter to fit their tastes.  That is, the government has no reason to care what the rule is -- simple majority, or 2/3, or unanimity, for example -- but does want to promote economic activity by providing some default rule to cover situations where the parties have not agreed among themselves how the issue will be handled.  (For another example, click here.)

If the government attempts to provide default rules, it would make sense for the rules it adopts to be those rules that come as close as possible to the set of rules that most parties would choose, if they addressed the issue on their own.  This will minimize the number of cases 1) where parties are "surprised" by a somewhat odd default rule, and 2) where the parties choose to go to the trouble and expense of contracting around a somewhat odd default rule.  For judicial expression of this idea, see Justice Oliver Wendell Holmes:  "[A]s people when contracting contemplate performance, not breach, they commonly say little or nothing as to what shall happen in the latter event, and thus the common rules have been worked out by common sense, which has established what the parties probably would have said if they had spoken about the matter." Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540, 543 (1903) (emphasis added).  See also hypothetical bargain.

- E -

Efficient market hypothesis --

Enumerated powers -- Those "legislative Powers" vested in Congress by Article I of the Constitution.  The actual enumeration (list) is found in Article I, Section 8.  If you take time to read the list, you will discover that much of what the federal government does these days is not provided for by the Constitution.  For example, there is no mention of any power in Congress to legislate as to Social Security or Medicare or any other health care program.  One answer offered for this is: "Well, these programs could fit within Congress's power "to regulate commerce" or the "general welfare" language of the final clause of Section 8."  Sorry, but that won't do.  To read either of these clauses in this way would deprive the rest of Section 8 of any meaning, and the rules of construction take a very dim view of that result.

Epstein, Richard -- (Born 1943)  Professor of law at the University of Chicago; in my opinion the leading exponent of the common law way of thinking in his generation.  Author of Simple Rules for a Complex World.  For a 1995 interview, click here.

Ex ante/ex post -- Latin phrases meaning “before the fact” and “after the fact,” respectively.

Expected value -- The value of an uncertain outcome, before the uncertainty is removed.  Expressed as the product of (the probability of the outcome) multiplied times the (value of the outcome).  For example, a lottery ticket that gives its owner a one in a million chance of winning a $1 million jackpot has an expected value (EV) of $1, as follows:

       EV = 1/1,000,000 X $1,000,000 = $1

This concept is fundamental to business decision-making.  Consider an investment opportunity that would cost $1 million, and is estimated to have a 25% chance of earning $2 million (i.e., the return of the $1 million invested, plus a further $1 million), a 50% chance of earning $1.25 million, and a 25% chance of earning only $750,000.  What is this project’s EV?

       EV = (0.25 X $2 million) + (0.50 X $1.25 million) + (0.25 X $750,000) =
            $500,000 + $625,000 + $187,500 = $1,312,500

Is this a good investment?  All we can say with the information given is that the EV exceeds the cost of the investment.  Whether the investment should be pursued depends on what other investment opportunities are open to the firm making the decision, and on the firm's and its owners' attitude toward risk.

Expectations, Reasonable --

Extended order --

Externalities --

- F -

Fairness --

Federalism --

Force or fraud --

Free lunch, There is no such thing as a --

Free market -- The reason you and I enjoy such a high standard of living.

Free riding --

Freedom of contract/Liberty of contract -- Reference key Supreme Court decision?

- G -

Gains from trade -- Voluntary exchanges, or trades, make both parties to the exchange better off, by definition.  To see that this is the case, we will borrow the example used in the definition of "Bargaining range," above.  Sam is willing to sell his old car as long as he gets at least $600, and Bob is willing to buy it for any price up to $700.  Thus, Sam and Bob are negotiating within a bargaining range between $600 and $700.  Where will they end up, assuming that they do manage to come to agreement?  We can't really predict that.  Depending on the relative bargaining skills and other factors (how many other, similar used cars available? and so forth), they might end up anywhere within the range.  Let's say they settle on a price of $640.  Is Sam made better off by the trade?  Of course; he wouldn't part with his car if he wasn't made better off by the deal.  Plus, his minimum acceptable price was $600 -- and $640 is $40 better than that.  How about Bob -- is he made better off by the trade?  Of course; he would part with his money if he wasn't made better off by the deal.  Plus, his maximum acceptable price was $700 -- and $640 is $60 better than that.  But wouldn't Bob have preferred to pay less than $640?  Of course -- and Sam would have preferred to have received more than $640.  But both are better off than before, once the trade is made!  The possibility of gains from trade makes the world go 'round.

Glorious Revolution -- The mostly bloodless coup against King James II, in which Parliament invited William of Orange and his wife, Mary (James's daughter), to take the British throne.  This was a signal victory for Parliament in its long struggle with the Crown, with its terms memorialized in the Bill of Rights in 1689.  (The Bill of Rights should have a familiar ring for American readers.)  For an interesting website, click here.

Government failure (information problems, rent-seeking, incentive problem) – The reasons why government action falls short of theoretical perfection.  All real-world governments are imperfect (too).  The key insight of the “public choice” view of government.

- H -

Hand formula -- A useful way to think about negligence, using cost-benefit analysis.  Sketched by Judge Learned Hand in his 1947 decision in United States v. Carroll Towing Co.:  "the [defendant's] duty . . . to provide against resulting injuries is a function of three variables: (1) The probability that [an accident will occur]; (2) the gravity of the resulting injury, if [an acccident occurs]; (3) the burden of adequate precautions. Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B; liability depends upon whether B is less than L multiplied by P: i.e., whether B less than PL."

Harm principle --

Hayek, Friedrich A. -- (1899-1992)  One of the most influential thinkers of the 20th century.  An economist and philosopher associated with the so-called "Austrian School," Hayek received the Nobel Prize in economics in 1974.  For a 1977 interview, click here.

Hobbes, Thomas -- (1588-1679)  Philosopher, author of Leviathan (1651).  "state of nature"  "warre of all against all"  "nasty, poor, solitary, brutish and short"

Hypothetical bargain --

- I -

Invisible hand -- See Adam Smith.

Information failures --

- K -

Knowledge problem --

- L -

Lawyer, Thinking like a -- The goal of all law students.  If you read the following definitions, in the order they appear, you will have gotten a good start on this project:
        Cost-benefit analysis
        Opportunity cost
        Bargaining range
        Gains from trade
        Expected value
        Settle, pressure to
        Default rule
        Coase, Ronald
        Transaction costs
        Agency problem

Limited government -- See also Enumerated powers.

Locke, John -- (1632-1704)  For a timeline of his life, click here.

- M -

Make-or-buy decision -- A business often confronts the question whether it should perform a given part of its production process internally -- that is, with its own employees and materials -- or contract with another firm to perform the work.  That is, the firm can choose either to "make" the thing itself, or "buy" it from an outside supplier.  The answer to the make-or-buy decision normally centers on questions of cost (including agency costs) and quality.  To the extent the firm chooses "make," the firm will grow internally.  To the extent the firm chooses "buy," the scope of the firm will remain limited.  This process is explored by Ronald Coase in his famous 1937 article,The Theory of the Firm.

Mandatory rule -- A legal rule announced by the government that is not optional -- that is, it cannot be "contracted around" legally.  For example, there is currently a legal prohibition on the sale of heroin.  Two parties may nevertheless reach agreement as to such a purchase-and-sale, but it takes place outside the legal system (it is "outlawry") and may expose the parties to criminal sanctions.  Compare default rule.  The real question is whether the public interest in the behavior at issue is so strong that a mandatory rule is justified.

Mansfield, Lord -- Chief justice of the King's Bench, 1756-1788.  Single most important figure in the modernization of English commerical law, principally by borrowing from private commerical law.

Market failure (public goods, externalities, information problems, monopolies) -- An economics term, referring to situations in which real-world markets fail to perform in the manner described by the theory of "perfect competition."  Since all real-world markets are "imperfect" in this way, market failure is ubiquitous (in the strict sense of the word).  If government intervenes to (attempt to) "correct" every case of market failure, we will have very large government indeed.  Also, if a government action cannot be understood as an attempt to fix a case of market failure, then it's almost certainly aimed at redistribution/rent-seeking or paternalism.  (Of course, mixed motives and goals are possible here.)  See also Government failure and Nirvana fallacy.

Mill, John Stuart --  (1806-73.)   The "most influential English-speaking philosopher of the nineteenth cenutury."  Best known, probably, for his On Liberty (1869).  

Minimal state -- See Nightwatchman state.

Monopoly -- In economic theory, a single seller of a good or service can extract a higher-than-competitive price from its customers.  This will result in a smaller equilibrium quantity of the good or service being produced, and thus an inefficiently small set of resources being devoted to the production of the good or service.  Put differently, a monopoly artificially restricts the amount produced and sold.  It thereby harms society by not calling forth additional resources for the additional production that would be purchased by additional consumers, at a price lower than the monopoly price but higher than the (estimated) competititive price.  Monopoly is defined as a form of market failure that might provide a justification for government intervention in the form of antitrust laws, etc.

- N -

Nanny State -- A metaphor for the paternalistic activities of modern American government.  Familiar examples include laws requiring the use of seat-belts and motorcycle helmets.  Justificiation of such laws tends to involve the claim that the public is systematically misinformed, or at least under-informed, about the risks inherent in particular courses of action (i.e., eating at McDonald's too often, etc., etc.).

Natural law/natural rights -- class note?  Jeremy Bentham famously declared the idea of natural rights to be "nonsense on stilts."

Negative rights -- Those rights which protect us from adverse actions by government; the right to be left alone.  Most of the Bill of Rights speaks in this way: "Congress shall make no law . . . ."  Compare Positive rights.

Negative sum -- See also Positive sum and Zero sum.

Negligence -- mention Hand formula

New Deal -- The legislative program of the Franklin Roosevelt administration from 1933 until 1941, aimed at combatting the Great Depression (which had begun in October 1929).  As a political matter, the New Deal helped change public opinion in the direction of supporting much larger and more intrusive government in general, and at the federal level in particular.  As a Constitutional matter, the New Deal went a long way towards dismantling the original design of the Framers.  In particular, the New Deal did substantial damage to the Constitution's concepts of the enumerated powers (q.v.) of Congress, the non-delegation of Congressional powers, the separation of powers, and federalism.  See also Redistribution and Welfare state.

Nightwatchman state -- A metaphor for "limited government," government that tends to national defense, domestic law-and-order, and the protection of private property and contracts freely entered -- and nothing else.  Also known as the "minimal state," this is the state of the world preferred by many libertarians and conservatives.  Compare Nanny State, Repairman State, Robin Hood State, Santa Claus State.

Nirvana fallacy -- Viewing reform proposals in an overly rosy light, comparing an imperfect status quo with a perfectly-designed and perfectly-executed "solution," to be imposed by government or otherwise.  In short, failing to recognize that the cure (government intervention) may be worse than the disease (market failure).  The result of naivete about government and politics.  Source: Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L. & Econ. 1-22 (1969).

- O -

Opportunity cost -- The implicit cost of an action, in terms of the opportunities foregone in order to take the action.  For example, if you choose to study tonight, you have implicitly chosen not to do the other things you might have done in the same time (gone out with friends, watched TV, etc).  The highest valued alternative not pursued is defined as the opportunity cost of the action taken.  In business terms, the opportunity cost of one action is the value of the highest valued alternate course of action not chosen.

- P -

Pareto, Vilfredo -- (1848-1923)  Sociologist-economist-philosopher.  Unanimity rule.  Kaldor-Hicks if winners win more than the losers lose.  N.B. no compensation need be paid (!).  Big problem:  How to measure all this?

Passive voice -- In your own writing, avoid wherever possible.  In others' writing, be alert when it is used, since it is often employed to obscure the identity of the actor (i.e., "Mistakes were made") and otherwise muddy the waters.

Pass-through -- Give tort tax as an example.  See also Free lunch.

Plunder -- See Bastiat.

Police power -- The plenary legislative power, so broad that it is difficult to define. One familiar definition is that it is the authority to legislate in order to protect (or promote) “the public health, safety, morals, or general welfare.”  (Village of Euclid v. Ambler Realty Co., 272 U.S. 365, ___ (1926).)  What statute couldn't be fit within one or more of these categories -- particularly the last item in the list, the general welfare?  In the U.K., the idea of "parliamentary sovereignty" is an allied concept.  In the U.S., the police power belongs to state legislatures only, not to Congress.  (U.S. v. Lopez, 514 U.S. 549, 566, 567-68 (1995); U.S. v. Morrison, 529 U.S. 598, 617-18 & n.8 (2000).)  Of course, in spite of this fact, today's Congress often acts as if it wields the police power, thanks to the development of Constitutional law since at least the Franklin Roosevelt administration.  See Enumerated powers.

Polycentric law --

Positive/normative distinction -- Also known as the "is/ought distinction" and the "fact/value distinction."  A positive statement asserts a fact.  Example: Birmingham is the capital of Alabama.  A positive statement is either true or false.  (As it turns out, the example I gave is false.)  A normative statement makes a claim sounding in ethics or morality or religious belief; it is a claim about better or worse.  Example:  Birmingham ought to be the capital of Alabama.  Normative statements are not analyzable in terms of truth or falsity.
      It is a good idea to keep the distinction in mind when arguing about law and government.  It helps you understand what others are saying, and helps you make clearer and more effective arguments.

Positive rights -- These rights entitle the holder to demand that the government do something in his favor -- as in "a right to health care" (to be paid for through taxes, etc.)  Treating claims of entitlement as if they already exist, in some sense.  For example, according to the UN's Universal Declaration of Human Rigths, you (and everyone else) has "the right to rest and leisure" including "periodic holidays with pay" (Article 24), "the right to a standard of living adequate for the health and well-being of himself and of his family" (Article 25), and "the right to education" (Article 26).  Compare Negative rights; see also Redistribution and Welfare state.

Positive sum -- See also Gains from trade, Negative sum and Zero sum.

Posner, Richard -- (Born 1939)  Hugely influential legal scholar, and popularizer of the "economic analysis of law."  Appointed to the U.S. Court of Appeals for the Seventh Circuit by President Reagan, Posner has remained a prolific author.  Reading the Becker-Posner blog once a week will give you a terrific exposure to the use of economics in thinking about law and public policy; his co-blogger is 1992 Nobel laureate Gary Becker.  For a 2001 interview, click hereProject Posner is a (searchable) free database of his judicial opinions from 1981 to 2010.

Price controls --

Prisoner's dilemma --

Private interest group --

Private law -- Law that decides disputes (primarily) between individuals, such as property, contract, and tort.  In private law actions the government is not a party, and the public interest in the dispute is either nonexistent or so small that the government does not have a "dog in the fight" and thus does not care how it is decided, in any given case.  Private law often takes the form of default rules, for reasons best understood using the Coase theorem and the discussion of Settle, Pressures to.  Compare Public law.

Private ordering --

Private property rights --

Profit -- Note that it can be disposed of in two ways only: reinvestment or dividend payments.  Give some average RORs from different industries, etc.

Progressive Movement --

Public choice theory -- Research applying the tools of economics to questions raised by politics and government.  For a brief introduction, see James Buchanan, What Is Public Choice Theory? (2003).    (MORE)

Public goods --

Public interest theory of government -- Compare . . .

Public law -- Compare Private law.

Public ordering --

Public policy -- A make-weight phrase that is thrown around loosely in some legal opinions and in many law school classrooms.  More usefully, the term can refer to the weighing of market failure and government failure, while taking care to avoid the Nirvana fallacy.  There are two kinds of people in the world: Those who tend to think that market failure is worse than government failure, and those who think the opposite is true.  For Ronald Coase's assessment of the current state of this balance, click here.

Public/private distinction --

- R -

Ratchet effect --

Rational ignorance -- The probability that any one voter's vote will decide an election is, for all practical purposes, zero.  As a result, all of us can (and most do) choose not to spend scare time and effort in becoming well-informed voters, without risking anything at all.  (That is, there's no chance that if we cast a poorly informed vote, we will inadvertently be responsible for the election of a "bad" candidate, etc.)  There's plenty of evidence of voter ignorance about a lot of things.  The implications of the concept of rational ignorance are wide and profound, as explained in the recent work of Ilya Somin and Bryan Caplan.  Source: Anthony Downs, An Economic Theory of Democracy (1957).

Redistribution -- Government taxing of Peter to benefit Paul.  Also referred to as "transfer payments."  Virtually unheard of in the US before 18__; ubiquitous today.  Indeed, __% of the federal government's budget in 200_ consisted of transfer payments via Social Security, Medicare, etc., etc.  It is a mistake to assume that redistribution is always designed to help "the poor" -- however you define that term; indeed, much redistribution takes the form of "corporate welfare."  For much data on this key aspect of modern government, see this 2007 Tax Foundation study.

Reification -- "1.  Mental conversion of an abstract concept into a material thing."  from Black's Law Dictionary (7th ed. 1999).
Reify -- verb:  "to treat (an abstraction) as substantially existing, or as a concrete material object -- reification n."  from Webster's New World Dictionary (Second College Edition, 1972). 

Rent-seeking -- An awkward term used by public choice scholars to refer to the activity of seeking favorable treatment from government -- for example, in the form of government subsidies, tax breaks, generous contracts, limitations on one's competitors, and the like.  (Has nothing to do with landlord-tenant relations.)

Repairman state -- My metaphor for government intervention in the economy to fix market failures.  This was the vision that drove the Progressive Movement and, to a lesser degree, the New Deal.  The beating heart of the “public interest” view of government.

Residual claim(ant) --

Risk, Attitudes toward --

Robin Hood state -- My metaphor for government intervention in the economy to transfer wealth from one group to another, accompanied by some form of moral disapproval of the persons whose wealth is being taken and transferred.  That is, the rich "had it (redistibution) coming to them."  Government intervention in the economy to transfer wealth from one group to another, accompanied by some form of moral disapproval of the “donor” group.  For an example of this attitude, see the second Huey Long quote here.  Compare Santa Claus state.

Rule of law -- Short-hand phrase used to refer to one or both of two related ideas:  1)  Government itself is subject to the law, and 2) Law should be stated clearly, applied to future behavior only, and applied equally to all.  (If you think about each of the three elements of the second point, you'll see it's relation to the first point.)  The concept of the rule of law is perhaps the most distinctive thing about the English legal system and those systems that derive from it.  Click here for a couple of famous quotations on this subject.

- S -

Santa Claus state -- My metaphor for government intervention in the economy to transfer wealth from one group to another, without any moral disapproval of the persons whose wealth is being taken and transferred.  Think: Social Security and Medicaid.  Can be driven to a significant degree by paternalism.  The big question here is whether the numbers can be made to work.  Increasingly, large wealth transfer systems in western democracies seem unsustainable in the long run.  For an example of this attitude, see the FDR quote here.  Compare Robin Hood state.

Scottish Enlightenment -- For links to Scottish Enlightenment materials, click here.  For a timeline, click here.

Separation of powers -- In American government, the division of the powers of government into three -- legislative, executive, and judicial -- and the assignment of these powers to three different branches of government.  Observed at both the state and federal levels of government.

Settle, Pressure to -- The vast majority of disputes are settled by the parties without the filing of a lawsuit.  The vast majority of lawsuits (in the range of 95% to 98%) are settled prior to the handing down of a judicial decision on the matter.  Why is this?  Litigation is expensive.  If the facts of a dispute are clear and the law applicable to the dispute is clear, then why should the parties bother going to the expense of a lawsuit?  Consider first an admittedly extreme example:  1) Plaintiff seeks $50,000 in damages from Defendant.  2)  Both Plaintiff and Defendant believe that Plaintiff will certainly win the full $50,000 amount at trial (i.e., both parties estimate the probability of a plaintiff win at 100%).  3)  It will cost Plaintiff and Defendant each $30,000 each to take the matter to trial.  Under these circumstances, the rational (least-cost) thing for both of them to do is settle the case.  Do you see why?  Why should Defendant pay $30,000 to receive a verdict he believes with 100% conviction will go against him?  And why should Plaintiff wish to pay $30,000 to have his (certain) day in court?  Wouldn't both sides be better off if they could avoid paying their attorneys for the cost of a trial?  Doesn't it look as if there are gains from trade to be shared here?  We can illustrate the decision-making that surrounds this settlement negotiation in particular -- as well as settlement negotiations in general -- using the concept of expected value ("EV").

The EV of going to trial for Plaintiff is
[1.0 X $50,000] - $30,000 = $50,000 - $30,000 = $20,000.

For Defendant, the EV is a negative number (a cost) expressed as
[1.0 X -$50,000] + -$30,000 = -$50,000 + -$30,000 = -$80,000.

Assuming that both Plaintiff and Defendant are either risk-averse or risk-neutral, then they will probably settle the case for a dollar amount somewhere between $20,000 and $80,000.  That is, any amount over $20,000 is more attractive to Plaintiff than the prospect of taking the case to trial, while any amount under $80,000 is more attractive to Defendant than the prospect of taking the case to trial.

Now, vary the facts a bit.  Let's say that the Plaintiff believes he has an 80% chance of winning at trial, while the Defendant believes that Plaintiff has only a 66 2/3% chance of winning at trial.  Continue to assume that if the Plaintiff wins, he will win $50,000 in damages.  Now what is the rational decision for each?

The EV of going to trial for Plaintiff is
[0.8 X $50,000] - $30,000 = $40,000 - $30,000 = $10,000.

For Defendant, the EV is a negative number (a cost):
[.667 X -$50,000] + -$30,000 = -$33,350 + -$30,000 = -$63,350.

Thus any settlement offer from Defendant to Plaintiff of greater than $10,000 exceeds the Plaintiff's EV of the lawsuit, and any settlement offer from Plaintiff to Defendant of less than $63,350 is less than the Defendant's (negative) EV.  In other words, Plaintiff and Defendant face a bargaining range of $10,000 to $63,350.  If they are either risk-neutral or risk-averse, they will seek to negotiate a settlement at some dollar amount within this range that will make both parties better off than the alternative of taking the dispute all the way through trial.

You can try your hand at using this simple model of the settlement process by working these problems.

Side payment --

Simple Rules for a Complex World -- Title of a 1995 book by Richard Epstein in which he argued that six rules form the basis for the common law's answer to 90-95% of all cases brought before it.  The simple rules are:
    1)  individual self-ownership, or autonomy
    2)  first possession
    3)  voluntary exchange
    4)  protection against aggression
    5)  limited privilege for cases of necessity
    6)  takings of property for public use on payment of just compensation

Smith, Adam -- (1723-1790)  Scottish philosopher and the father of modern economics.  His two most famous books are The Theory of Moral Sentiments (1759) and The Wealth of Nations (1776).

Spontaneous order (bottom-up, rather than top-down) --

- T -

Third party effects -- See Externalities.

Total Justice -- Striking phrase coined by legal historian Lawrence Friedman (in a 1985 book of this title) to describe many (most?) Americans' "general expectation of justice . . . and . . . general expectation of recompense for injuries and loss.”

Trade-offs -- To get one thing, you usually have to give up another.  Related to the idea of Opportunity costs.

Transaction costs -- Costs incurred in negotiating, drafting, and enforcing an agreement -- including attorneys' fees, lost time, cost of coordinating multiple parties on the same side of a transaction, and the like.  Can constitute a serious, sometimes insurmountable, barrier to the successful negotiation of a voluntary contract.  A key consideration in applications of the Coase Theorem.

Tullock, Gordon -- (Born 1922)  One of the founding fathers of public choice theory, his contributions include ground-breaking work on rent-seeking.  For a 2003 interview, click here.

- U -

Utilitarianism -- class note

- V -

Vote doesn’t count, Your -- See Rational ignorance.

- W -

Welfare state -- Polity in which various interest groups vie for government attention and taxpayer money.  Where Americans have lived since the late 1930s.  Also known as the "transfer state" and the "redistributive state."  Involves high levels of taxation, which undermine the institution of private property.  (A system which taxed away 100% of the taxpayer's income would be acceptable to very few Americans, etc. . . .
The welfare state seems impervious to efforts to scale it back (as in the Reagan administration) and indeed usually co-opts nominally "conservative" politicians (as with George W. Bush, whose prescription-drug benefit for Medicare beneficiaries increased the present-value funding shortfall of that program by an estimated $__ trillion).  Has progressed further in Europe than in America, to date.  No end to its growth in sight.  See Redistribution and Bastiat, Frederic.

- Z -

Zero sum -- See also Negative sum and Positive sum.

Other sources:

Concise Encyclopedia of Economics -- Benefit-cost analysis; Monopoly; Opportunity cost; Property rights; Public choice theory; Public goods and externalities; Tragedy of the commons

Online Library of Liberty biographies and webbed books -- Bastiat, Bentham, Buchanan, Burke, Coase, Coke, Hayek, Hobbes, Locke, Mill, Smith, Tullock

The Economist's Economics A-Z -- Agency costs; Coase Theorem; Cost-benefit analysis; Externality; Free riding; Hayek; Invisible hand; Market failure; Monopoly; Opportunity cost; Pareto efficiency; Property rights; Public goods; Rent-seeking;  Smith; Tragedy of the commons; Transaction costs

Encyclopedia of Law and Economics --

Stanford Encyclopedia of Philosophy -- Burke; Consequentialism (= Utilitarianism); Free rider problem; Mill; Natural law tradition in ethics; Property; Scottish Philosophy in the 18th Century (= Smith)

Internet Encyclopedia of Philosophy --

Professor Larry Solum's Legal Theory Lexicon -- Coase Theorem (#002); Default Rules and Completeness (#050); Efficiency, Pareto, and Kaldor-Hicks (#060) (= Pareto); Ex ante/ex post (#001); Fact and Value (#014) and Positive and Normative Legal Theory (#016) (= Positive/normative distinction); Prisoner's dilemma (#007); Property rules and liability rules (#52); Public and private goods (#029); Rule of law (#017); Utilitarianism (#008)

Wikipedia -- Agency law; Agent; Calculus of negligence (= Hand rule); Capitalism; Coase Theorem; Collective action; Common law; Cost-benefit analysis; Default rule; Efficient market hypothesis; Enumerated powers; Ex ante/ex post; Expected value; Externality; Federalism; Free market; Free rider problem; Government failure; Grammatical voice (= Passive voice); Implicit cost (= Opportunity cost); Invisible hand; Market failure; Monopoly; Natural law; Natural rights; Negative and positive rights; Negligence; New Deal; Night watchman state; Nirvana fallacy; Normative statement; Opportunity cost; Pareto efficiency; Police power; Polycentric law; Positive statement; Prisoner's dilemma; Profit; Progressivism; Property; Public choice theory; Public good; Rational ignorance; Redistribution; Rent seeking; Rule of law; Separation of powers; Spontaneous order; TANSTAAFL (= Free lunch); Trade-off; Tragedy of the commons; Transaciton costs; Utilitarianism; Virginia school of political economy (= Public choice theory); Welfare state

Wikipedia biographies -- Bastiat, Bentham, Blackstone, Buchanan, Burke, Coase, Coke, Epstein, Hayek, Hobbes, Locke, Mill, Pareto, Posner, Smith, Tullock

Logical fallacies websites ??

Copyright (c) 2007-13 Michael E. DeBow