Law, Morality, Trust, and their Limits

Economic production requires cooperative behavior among individuals. The fundamental problem with cooperation is the ability of people to behave opportunistically, which is to say that they behave contrary to an agreement that is supposed to maximize group benefit by engaging in behavior that maximizes their own welfare at others expense. The classic problem is the prisoners’ dilemma, but this happens in all contexts. The clerk at the cash register could take the cash, or the business partner could engage in deceptive practices and leave you holding the bag.

In small group scenarios, this kind of opportunism can be controlled by reputational effects so that it’s not individuals’ interests to behave opportunistically because then other actors will refuse to cooperate with them in the future. As the social group grows from a family to a tribe to a nation, these repeat-play effects diminish so other forms of control are necessary. The state, through its courts, officers, legislature, and all the different institutions we call the “law,” can diminish this kind of opportunism by threatening punishment.

The problem is the reductionism. Now "law" has been defined as a form of social control used to punish opportunistic conduct in economic relations. That's evidently false, both under-inclusive by light-years and over inclusive given the efforts law makes on behalf of defectors from cooperation as well as against them. In short, nonsense. You were able to get to this point, however, because your editorial effort was not spent testing the chain of ideas you were forging, only in forging them without testing.

Of course, if we believed people were trustworthy, there would be no need for most of those institutions or even of most of contract law.

Also obviously false. Whether we trust people has only tangential relevance to whether we need to allocate risks.

If we could trust the clerk to not take money from the cash register because the guilt of doing so would be too much, there would be no need for security cameras or the criminal law. Instead, the law provides a way to exchange trust for assurance, so that we are assured it is in the clerk’s self-interest not to steal. This is what I believe Holmes meant by thinking of the law as a bad man. For good men, or people who internalize the cost of breaking an agreement, there is no need for law.

No, there is confusion about whether particular actions are motivated by predictions of the incidence of governmental force, or by something else. The bad man is a mental construct, an actor whose only concern is avoiding adverse imposition of public force. We discussed this thoroughly in the classroom, and I made every effort to help you avoid falling off the cliff you just dived off.

Under this analysis, the limits of the law become immediately apparent. To combat certain types of opportunism, the law can be effective if the person can be caught. Large business transactions can then be made possible if both sides specify as much as possible the details of the deal so the force of law can be introduced if they are not attained.

But there are types of transactions where the law cannot reach. In classic principal-agent problems, the agent has agreed to maximize the interest of the principal but finds that he can maximize his own welfare at the expense of the principal. If this effect can be documented, then the law can provide a sanction. But in large economies with fine divisions of labor, the principal often does not know that the agreement was even broken. The law is useless in this type of opportunism because it can’t be detected.

Are you sure? What is the simplest effective argument on the other side and how would you meet it? The absence of serious skeptical scrutiny in the editorial process is flagrant here, again.

The only way to solve that problem is by changing people’s moral preferences so that they internalize the cost of breaking an agreement by feeling guilty. Without those preferences, individuals will not engage in certain types of transactions because they know in the absence of external incentives, other people will behave opportunistically, e.g. untrustworthy.

Bad grammar.

This highlights why law is such a weak social force. It operates on large time scales and is only used to solve problems that other forces such as social ostracizing cannot solve themselves.

Ostracism. Sloppy, ungrammatical word choice is another sign of poor editing.

Which requires only coming to a general agreement about what "behaving morally" means?

Only when we are rational, not irrational creatures will the contemporary economy work? Too bad that will never happen, isn't it?

Law is just something? That's the conclusion you want to stand behind on the basis of the argument you've advanced? Surely you can see why a reader who has any less blinkered view than this is unlikely to find the current draft interesting.