HenrtCManne The Juidiciary and the Free Market Introduction In much of the civilized world today , íhere is growing interest in the question of how to establish a free society and its essential concomitant , a free market economy . This interest was greatiy stirred by the coUapse of the Soviet empire and especially by the dismal showing of the communist economic system . Indeed it has become commonplace — even among members of the political left , who wpuld not have tolerated such calumny merely ten years ago — that only capitalism and free markets can dehver on the promise of material goods that have come to be expected throughout the world . While a great deal has been written on how to estabhsh a free market economy , far less has been studied or is known about the kind of legal process that is crucial to the fimctioning of a market economy . That is the central inquiry of this paper . To some extent , of course , everyone agrees on the basic legal ingredients of a free market system : prívate property and freedom of contract . But these are gross generalizations , and today much of the policy debate is about how strictly these basic notions are to be construed , not whether we should have them at all . In any event , the purpose of this paper is not to examine in any detail the particular substantive rules that are most consistent with the philosophy of free markets . Rather it is to examine the kind of legal system most consistent with that philosophy . For some reason , the already vast and still growing literature on how to establish a free market economy has not emphasized the legal dimensión of the problem . This failure probably results from the fact that most of this literature has focused on the moves necessary to establish a market economy in the fírst instance . Thus little attention has been paid to the equally important question of how to sustain and preserve such a system after it is initially established . Thus our interest here is not in the familiar tools commonly utiíized by political regimes starting their move toward a free market , namely deregulation and privatization . For , by themselves , these actions can never be enough to guarantee the successful perpetuaíion of a free market system , only its initial implementation . Once these outward appearances of a free market system are in place , the more subtle conceptual and practical problems of sustaining the system begin , and that is exactly where the role of the legal process is most important . Henry G . Manne es actualmente Decano de la Escuela de Leyes , George Masón Universlty , Arlington , Virginia ( USA ). Este artículo está basado en una conferencia pronunciada en la Universidad Francisco Marroquín , el 10 de Noviembre , 1996 . Laissez-Faire 40

Generally speaking , the political and legal imderpinnings of a free market economy are not well understood , especially the role of the judiciary in this process . While a system with minimum economic regiUation will certainly have fewer legal disputes than one which is heavily regulated , some system for resolving disputes will always be required . Even the most perfectly free market economy will still exist in a political regime where the rules might be changed , where taxation will exist , where some degree of regulation will be tolerated , and where various defenses to the enforcement of contracts as they are written will be available . Furthermore , a free market system is not a static arrangement ; it is complex , dynamic , and fiíU of uncertainties , faulty Communications , changing circumstances , and risks of all kinds . All of this creates enormous occasion for claims to come into conflict , and that in tum requires a system for dispute resolution . Ideally it will be a system that is conducive to the free market goals exogenously established , and it will opérate in a feshion consistent with the economic goals . It should be emphasized that we are not asking here what substantive rules of law such a society should have / The relevant inquines here , however , are how the judiciary should interact with other parts of the govemment ( including questions of the selection of the judges ), what process of dispute resolution ( litigation or regulation , for example ) is best suited to a free market's needs , and fínally what rules or techniques of decisión making should we want the judiciary to utihze . All of these questions might be subsumed under one phrase that is common in discussions of the prerequisites to estabhshing a market economy , the notion of " the rule of law ." Unfortunately , this phrase , elegant as it may sound , really has little substantive content . As we shall see , the detailed working out of a rule-of-law regime is anything but obvious or simple . The simple sounding idea of the rule of law is actually an extremely complicated set of jurisprudential , political , and economic considerations , most of which are not obvious . The Rule of Law : What and How But some aspects of the notion of the rule of law are in fact obvious , and they are essential to a well-fimctioning maricet economy . First among these is the basic idea that laws will apply equally to all people under the same set of circimistances . That is , govemment officials will not have authority to discriminate in the application of substantive rules of law on the basis of favoritism , prejudice , belief , or politics . But merely saying this is a long way from making it happen . Where are we to find judges who are so honest , so unprejudiced , and so unpolitical ? What kind of incentives can we use to best assure this behavior on the part of judges ? And even if they are honest , what can we do to insure that they will not make too many errors simply as a resuh of ignorance ? The naive theory is that all judges will perform in this fashion out of some general sense of professional duty and social responsibility . We all know , however , how difficult it is to inspire men to behave other than in their own selñsh interest . Yet without some sort of disinterested judiciary , there can be no rule of law and consequently no free market system . Laissez-Faire 41

We might start our inquiry by noting that any judiciary that is to act in disinterested fashion on matters before it must of necessity enjoy a degree of independence from political or govemmental influence . Indeed , since the govemment itself will frequently be a litigant in dispute resolution procedures , it is absolutely essential that the judges have no extraneous reason to favor the govemment in its decisions . This is the straightforward explanation of why the United States Constitution provided for hfetime tenure for Federal judges , as do many state constitutions . If , however , judges are given total independence from any kind of oversight or constraint , how is it possible to insure that they will not abuse this independence and decide cases on the basis of their own personal interests , political altitudes , beliefe , and moral views ? ' Or that they will not simply become venal ? We want them to be independent but not so independent that they are not concemed about the quality of their work . This in tum explains why a number of the states in the United States have regular elections ofjudges . The debate between term or lifetime appointment of judges versus popular elections has raged for a long time in the United States , and it shows no signs of abating . Obviously , there is no easy answer to this problem , and we cannot hope to resolve it here . Fine , honest , and professional judges have appeared under each system , and each also has its losers . Very likely the existence of a popular debate on this subject over the years has served to prevent either system from getting out of control , as it theoretically might . There does not appear to be any significant difíerence in the operation of the legal systems in those jurisdictions using one system of judicial selection rather than the other ñor in the substantive law developed in the two systems . And the fact that the two systems for selecting judges have existed side by side in the United States ahnost from its beginnings strongly suggests that the particular method used to select judges may be less important than the nature of the system in which they are asked to ftmction . On the contrary , one is never surprised to leam that an administrative agency , where appointments are commonly made from among political supporters , has behaved " politically " rather than " judicially ." As stated earlier , the specification of particular substantive laws is not the mission of this paper . It liappens , however , that the matter of substantive law appropiate to a market economy and the disinterestedness of judges are quite interrelated . For a market system to ftmction effectively , every participant or competing firm must be subjected to the same " rules of the game " as far as the govemment is concemed . That is , for the market to ftmction effectively and genérate correct signáis for allocational decisions , the legal system must not reward or penalize ñrms except in accord with known and existing law . For example , tax rates must not be arbitrarily higher or lower on one firm than another ; regulations must not disparately affect competing fírms ; and protection of hfe and property against criminal depredations must be evenhanded . For all of this ever to be tme , it is important that the same substantive rules be applied by every tribunal enforcing a claim , resolving a dispute , or enforcing the criminal or regulatory law . A market economy , as Adam Smith pointed out more than 200 years ago , will exhibit more specialization , and therefore more Laissez-Faire 42

productivity , the larger the market . And there can be only one set of laws for all the fírms in a single market . This , of course , is the reason for the great interest in " harmonization " of national laws in this era of increased intemational competition . ^ Making all courts follow the same rules of law is not as easy as it may sound . One device that has a long history of use in both England and the United States is a system of hierarchical appellate courts , usually two layers , with one court at the top of the hierarchy . This simplifíes the task of holding all lower courts to the same substantive rules , since any time a trial or lower court judge veers from what the higher court views as the proper legal rule , the lower court can be " reversed " and the judge forced to reconsider his or her decisión in light of the higher court' instructions . Obviously , if the top of the hierarchy is a single court , as in the case of the United States Supreme Court or the State supreme courts , its rulings are totally definitive as fer as judicial statements of law are concemed . This enforcement system does not work perfectly , however , and there is a good deal of slippage , analogous to the famous " agency costs " in any employment relationship . Thus , local differences may easily creep into the substantive rules applied by trial courts or other adjudicative agencies , almost in the way that accents develop in the same language in different locales . In fact , the hierarchical structure of courts , while it is probably necessary to preserve a same-rule regime , is not sufiñcient for that purpose , especially since , by definition , it offers no judicial monitoring control over the highest court and will in fact only work weakly for intermedíate appellate courts . Something much more pervasive that can be intemalized by every judge , whether at the trial or appellate level , can aid considerably in performing that task . This is the doctrine of precedent , that is , the decisión rule that once a legal holding is established by an appropriate court , that legal conclusión will be followed by the same court and by all inferior courts in similar or identical cases in the fiíture . To help gain the consistency required by the rule of law the results of litigation must , of course , be made public , for only then can they be followed in subsequent cases . As we have already seen , there must also be a right of appeal to a higher court whose decisions must also be made public . And , although they are related concepts , the doctrine of precedent and the right of appeal are two distinct aspects of assuring a legal system that is consistent with the requirements of a free market . While the ri ¿ it of appeal can be provided in a system of administrative regulation , the underlying requirement of observing precedent is usually , for good reason , absent , We have seen that the doctrine of precedent is a very valuable adjunct to a free market system , since it reduces uncertainty and therefore costs . If administrative regulation were actually designed , as is often claimed , to make the market function more efficiently , then we would see strong demands for the doctrine of precedent there . But the chief goal of this kind of govemment action is usually something other than the smooth functioning of privaíe markets , and consequently there is much less reason to insist on a strict doctrine of precedent . This is not to say that administrative tribunals never decide cases on the basis of precedent . They will , to some extent , if for no other reason than to make their own work easier . But not foUowing their own Laissez-Faire 43