As Posner and Landes note in their article, adjudication is not only about precedent production (which is characterized by market failure) but also dispute resolution. Couldn’t the latter be
ized, such as through private arbitration? The authors see arguments for and against the proposition.
On the “pro-arbitration” side, they argue that, so long as parties could agree on a judge, the judges that were most competent and impartial would receive higher fees,[i] and competition between arbitral centers and judges would ensure optimum levels of judging at minimum costs. Lay judges with expertise might also yield superior factual findings than lay juries without the expertise. (Landes and Posner, 1979, at 252)
The problem with this view is that public intervention would probably still be necessary to enforce the arbitral agreement, and to ensure both parties appoint arbitrators (and don’t drag their feet). Indeed, the problem of foot-dragging makes “arbitration a virtually unusable method of dispute resolution where there is no preexisting contractual or other relationship between the disputants.” (Landes and Posner, 1979, at 246)
The problem could be partially attenuated through randomization of judicial selection or membership in a group with ongoing benefits. In the first case, however, even sub-par judges would be assured an income, so would not maximize output. The latter case is unlikely to characterize all disputes.[ii]
In any case, Landes and Posner seem to ultimately suggest that justice could not be privatized, because of economies of scope in having legal systems that provide both precedent and dispute resolution. (Landes and Posner, 1979, at 240)
Judicial versus legislative allocation, and general versus specific rules
Posner’s general glowing account of courts contrasts with a more skeptical take on legislatures. Courts are more likely to produce efficient outcomes than legislatures, because parliaments’ needs to seek electoral and campaign finance support will distort away from efficient policy. In comparison, the relative costs are “close to the surface” in the adversarial court system, and an independent judge can opt for the more efficient outcome.
While the analysis of law in the previous section focused on the efficiency of judge-made law, courts also help make statute-made law (bad as it often is) more efficient. There are high transaction costs to obtaining statutory changes (i.e. getting a majority of legislators to vote for the proposal, high costs of deliberation, etc.). These transaction costs, when coupled with the limited foresight of legislators, means that legislatures will tend to promulgate general rather than specific rules. Courts fill the gaps that necessarily occur in this general statutory language. But because judges are motivated by extending their influence and being cited, they will not interpret statute in ways contrary to Congress’ intent (as doing so risks being overruled by appellate courts or through a new statute). As a consequence, judges will attribute a public interest justification to legislation when none truly exists, and then constitute this justification as part of an “original deal.” The value of judicial independence increases as a function of the number of periods over which returns to legislation accrue. (Posner, 1977, at 409-415)
[i] It seems that this calculus would change in cases where only one party (say an investor) could initiate a case (say against a state). Judges in such a system might see incentives to cartelize and would have no reason to be absolutely impartial, only to be not more obviously impartial than the average. In any case, privatized justice would tend to give itself jurisdiction over more cases so as to maximize income, unless there were the type of judicial safeguards that Posner elsewhere emphasizes. Indeed, Landes and Posner note that “the judge who is not paid proportionately to either his final output [i.e. compliance with proper standards of behavior] or his precedent production, but solely according to the number of cases he decides, will have an incentive to overproduce that input. He may write confusing opinion that generate unnecessary disputes; he may create unmeritorious rights; he may even … promulgate rules that discourage the growth of nonjudicial substitutes for judicial dispute resolution…” (Landes and Posner, 1979, at 241)
Later, they write that, if mainstream judges were paid out of litigant fees, alongside arbitration systems that also did so, then “the competing courts would offer not a set of rules designed to optimize dispute resolution but a set designed to favor plaintiffs regardless of efficiency.” (Landes and Posner, 1979, at 254) They later note that they don’t really know why “blatant plaintiff favoritism” did not emerge in judge-fee systems. (Landes and Posner, 1979, at 255)
[ii] Again, the example of investor-state arbitration comes to mind. These parties are not part of the same club, and in any case both as hierarchical and complex structures that don’t have production functions of the kind that are neatly presumed here.
(Further, while there may be a reputational cost to failure to arbitrate even in complex societies, shirkers can get around this if there is a sufficiently large pool of potential contract partners. (Landes and Posner, 1979, at 247)) This would seem to describe realities of a fast growing state, or a state with access to a globally scarce asset like oil.)
In any case, Landes and Posner note that the argument for associational dispute resolution is weakened by the possibility of a faction seizing control of the association apparatus and using it to extract rents. (Landes and Posner, 1979, at 238)