LITHUANIAN QUARTERLY JOURNAL OF ARTS AND SCIENCES
Volume 48, No.1 - Spring 2002
Editors of this issue: Violeta Kelertas
Copyright © 2002 LITUANUS Foundation, Inc.
ECONOMIC ANALYSIS OF LAW AND THE LITHUANIAN LEGAL SYSTEM
Vytautas Magnus University
The economic analysis of the law is especially emphasized in the legal system of the United States. Why is the economic analysis so important there, but not sociological, philosophical, linguistic: or other approaches?
Conservative Federal Judge Richard A. Posner,1 who popularized the economic analysis of law, explains this by the mutual growth of law and economics in the United States. He points to several factors that incline the American legal system to economics. One is the legislative function of the American courts, which encourages American lawyers to think legislatively. They have to think about policy, match ends to means and balance competing interests. Another factor is the fluidity of the American legal profession, in which lawyers, in the course of their careers, may serve as academics, advocates, politicians, consultants, practitioners, government officials or judges. Yet another factor is the prestige of applied economics in the United States; and the desire of American economists to apply current theory to the law. The final factor is the interest of many lawyers in the problems raised by monopolies stimulated by enforcement of antitrust laws and the regulation of public utilities and common carriers.
All these factors, facilitating the growth of law and economics in the United States, seldom are found in Europe, because European courts, including Lithuanian (except the constitutional courts) do not exercise legislative powers. In Europe, the legal professions are not fluid and because of the isolation of European judiciaries, the law is a technical, autonomous discipline sealed off from economics, which is also more theoretical. And finally there is in Europe the continuing influence of the sociology of law. There are however several factors that show the mutual growth of law and economics in Europe. The first is the recent dismantling of barriers to practice law across national boundaries, to promote greater legal uniformity in Europe. As Posner sees it: "Rather than having to translate the legal culture of one nation into the legal cultures of the other nations of the European Union, the economic analyst of law offers to translate all those legal cultures into the language of economics, which is a universal languageeven more so than English".2 Since Lithuania is a candidate to enter the European Union, it should begin to apply the economic analysis of law to its legal system because that is now the basic tendency throughout the Union.
Notwithstanding the popularity of the economic analysis of law in the United States, criticism of this approach is also active and in some cases it is very telling, especially when it addresses the attempt of the theory to apply a cost-benefit approach to principles of right and wrong. In some cases it may fit, in others it does not, especially when the principle of efficiency is at variance with certain moral norms. This paper, however, will not discuss the shortcomings of economic analysis, but will present the positive aspects of this approach.
In jurisprudence, it is often emphasized that economics, especially the economic analysis of law, can be very useful in revealing the essence of the social relations that are being regulated by legislation. The economic analysis of law has three aims: 1. to determine the social consequences of a specific legislation; 2. explain why certain legislation now exists; and 3. decide what legislation should exist.
Consequently, the economic analysis of law is connected not so much with economics, but especially with a method of economic analysis called the method of "reasonable choice", or the method of efficiency. The method aims above all to apply certain economic laws through legislation.
Lithuania could be an excellent example of the efficiency of the economic method, because the Lithuanian economy has been recently reformed from a Soviet centralized economy to a market economy and the Lithuanian legal system from the Soviet legal system to a democratic legal system.
1. Reflections on an Economic Bill of Rights in the Lithuanian Legal System
I shall begin the discussion of the economic analysis of law with a proposed Gwartney and Stroup Economic Bill of Rights in What Everyone Should Know about Economics and Prosperity.3 It is interesting that some articles of the Economic Bill of Rights are already in the Constitution of the Lithuanian Republic. For example, the prohibition to nationalize private property (Article 23 of the Lithuanian Republic Constitution) and the obligation of the state to regulate economic activity for the wealth of the nation as a whole (Article
46 Part 3 of the Lithuanian Republic Constitution). But these existing regulations do not reduce the need to include the other articles of the Bill of Rights into the constitution or, at least, to be in the Lithuanian legal
One of the articles of the Economic Bill of Rights, is that the basic "human right to buy and sell goods, which are in circulation lawfully by conditions acceptable to both parties, should not be restricted by law or other legislation".4 This article includes economic restrictions of two kinds: controlling prices and licensing commercial activities.
An examination of the Lithuanian legal system reveals that many Lithuanian economic activities are licensed. For example, until May 2001, when some changes in the Enterprise Law of the Lithuanian Republic (1990) were made, the law defined more than twenty kinds of licensed economic activities. To my mind, these restrictions bearing in mind the impact of the Russian economic crisis, together with other economic constraints, such as the regulation of prices, was a major factor in the Lithuanian economic stagnation of 1999.
Few doubt that the requirement of a license for activities such as the manufacture of guns, ammunition and explosives, pharmaceuticals; or narcotic, psychotropic and poisonous substances; retail and wholesale trade in Lithuania; to pyrotechnics (according to the list of the Ministry of Internal Affairs), civil weapons (except pistols and revolvers for self-protection) and their ammunition; the production, wholesale trade, transportation and storage of hazardous chemical, nuclear and radioactive materials (their list is confirmed by the Ministry of Environmental Protection); and the collection, containment and disposal of dangerous wastemay be justified, but the restriction of some other activities raises doubts. Legislators explained the necessity to license many activities to "protect public health and safety". But this explanation raises some questions. Is it really necessary to license such activities as health protection, education, the import-export of oil-products, the production of alcoholic beverages or even tourism? Of course, these activities are important to society, but is it necessary to license them to protect the public? To my mind, instead of licensing these activities, it would be simpler to require professional certification. It is clear that licenses restrict the right to implement economic activity. They also increase the price of goods and services, deprive the licensees of time and effort, and sometimes discourage some tradesmen from even taking up an occupation. In spite of this, legislators amending the articles retain the licensing of various economic activities, althoughone positive step the number of economic activities that required licenses was reduced.
Now we turn to the restriction of the production of alcoholic beverages. In 1996, the Lithuanian Parliament passed the Law of Alcohol Control, which restricts the production of alcoholic drinks that contain more than 22 percent of ethyl alcohol by volume, to the enterprises of the state or local administration. Legislators explained that this restriction is based on the desire to reduce the consumption of alcohol. Of course, this is a praiseworthy goal, but it is difficult to accept that a monopoly of alcohol production in the Lithuanian market could directly reduce consumption of alcohol. The economic arguments against the restrictions on the sale and production of alcohol are obvious: a monopoly does not lead to competition, more efficient production, or to a reduction in prices. One way out of this situation is to privatize this branch of the economy. This would reduce the workforce but any superfluous employees could seek work in another branch of the economy. Of course, here the problem of re-qualification appears; but, in this case, the rule is that the economic prosperity of the state and at the same time, the standard of living and well-being of each inhabitant is directly connected with the amount of goods and services produced, not only with the total number of jobs. The often-heard politicians' slogan: "More jobs!" is a form of populism. So, the economic prosperity of the state must be increased not only through employment opportunities, but by a larger volume of goods and services.
Another article from the proposed Economic Bill of Rights is: "The state cannot apply taxes and quotas to imports and exports."5 When discussing this article it is useful to examine agricultural politics in Lithuania. Lithuania's current agricultural problems are inherited from Soviet economics. Work is very hard in this branch of the economy, but income is relatively low compared to other sectors. But because there are a number of political and public organizations in Lithuania which represent farm interests and, because farmers are one of the most active groups in Lithuanian society, until now all Lithuanian governments tried to show loyalty to farmers' organizations and tried to help solve their problems.
But limitations on the import of agricultural products increases jobs only in this sector of the economy, and decreases the number of jobs in the state as a whole. This politics is oriented to, so called, "quick results," which may work for a while, but do not solve the basic problem. In this regard, it is important to emphasize that every economic decision should be useful for the whole society and not only for a certain social group. In other cases the consequence of "quick results" would be called a "secondary effect." In economics, a "secondary effect" occurs when a policy oriented toward a "quick result" creates more jobs, but ultimately harms the economy of the state and for the majority of its inhabitants. For example, because of import quotas on agricultural goods and subsidies for farmers, there was an increase in prices, a shortage of necessary goods, and less revenue in the state budget, but jobs for the farmers were "maintained." Such results need no further comment.
One more interesting idea connected with the economic analysis of law is the "economics of federalism" which was analyzed by Posner in his book Economic Analysis of Law.6 The essence of this idea is that the administrative territorial units (for example, local administration) should compete with each other along the same principles as private companies. The merit of this "competition" is that people will choose a place to live taking into account the financial policy of the local administration. To implement this idea, the administrative units must have real financial independence.
Section X of Lithuania's Constitution establishes two levels of territorial administration: local and higher. The right of self-government is only granted to local administrations. According to the republic's Law of Local Self-government the financial competence of local administration is sufficiently autonomous, but in reality they reform tax policy very slowly. This is one of the reasons why it is so difficult to attract capital and foreign investment. I have already mentioned that different tax policies induce competition, and that people can choose a place to live or domestic and foreign enterprises can choose a place of business based on the financial policies of local administrations.
In Lithuania there are also other administrative units, districts, which do not have the right of self-government. The organizers of the Constitution established that in Lithuania one level of self-government is enough, but federalist economic laws show that when self-government is granted to the districts for economic competition, this can benefit all citizens. Therefore, it would be useful to think about a reform in Lithuanian public administration: the districts should get the right to self-government too. In this case, the districts could take over more of the economic and cultural living functions of the central government and ministries. This would also help to save a part of the means of public administration.
The last article I would like to discuss from the Economic Bill of Rights, is: "If you want to earn an income, then think of how to help others as much as possible."7 This article proposes that there is a direct relation between helping others and earning an income. As Gwartney and Stroup write in their book this article best expresses the central idea of the economic analysis of law.
It is also important that the economic analysis of law helps to form a new attitude toward such issues as: the differences between common law and civil law; the application of common and individual justice (the importance of court decisions in accomplishing justice); and human rights and family rights. This analysis shows that many things connected with the law can be evaluated according to the principle of efficiency, and that many ideas of the economic analysis of law can be applied to the social sphere. Of course, when the principle of efficiency is at variance with certain moral norms, it would be necessary to consider the norms very carefully, when passing judgment.
2. Legislation for Statutory Interpretation through Economic Analysis
I will now discuss the economic analysis of legislation for statutory interpretation, which is an important consideration in the economic analysis of law, and is especially significant for the present Lithuanian legal system. For the past fifteen years, legal theorists have been locked in a seemingly irreconcilable debate over how the courts should interpret statutes. In reviewing a statute, American courts examine the language of the statute, relevant legislative history, and other evidence of legislative intent. But, according to Posner,8 they do not conduct the kind of economic or political inquiry that might reveal a pattern of special interest group pressures behind the statutes. Courts therefore look to the intent, but not to the motive of the enacting legislature, which is called the limitation on judicial capacity. Posner explains that if the legislature wishes to indicate the lines of political pressure along which the law should be interpreted, it has to say so explicitly, either in the statute or in the legislative history to which courts have ready access. No matter how faithfully the judges wish to carry out the will of Congress, they are limited to public materials in divining that will. And this limitation on judicial capacity, as Posner emphasizes, imposes a further limitation on the operation of special interests that is wholly distinct from the limitations that the Constitution may or may not place on it. The major point stressed by Posner is that, however conscientiously the judge tries to follow the legislature's will, he will be limited to the statutory text and to other public materials. He will not inquire into which interest group got how much of what it wanted from the legislature. In analyzing the court's reasoning from one statute to another, Posner claims, it is important to note that if the first statute was purely the product of pressure from special interests and not of a sincere search for public good, then it cannot serve as a dependable guide for interpreting the second statute.
This 'limitation on judicial capacity' is also clear in Lithuania, because, even if a judge tries to follow the legislature's will, he is limited to the statutory text and other public materials. But according to the Republic's Constitution, a judge is required to serve justice. Consequently, it follows that if certain legislation is not just then the judge is obliged to seek a just decision according to the common principles of law and moral values. If it is a real need, the judge must make a decision contra legem, which would force legislators to search for a just solution for the problem. But in Lithuanian courts it very rarely happens that a judge makes a decision solidly on the principle of justice. I shall give one example, however, to illustrate the rare case when a judge makes a decision according to what is really just in a particular situation. In V. Stukonis v. the Embassy of the U.S.A.,9 the judges' decision was not rendered blindly in strict accord to the law (Article 476 of the LR CPC, which predates March 11, 1990), but was decided by evaluating and applying legislation, admitted before March 11 (at the re-establishment of the Republic of Lithuania). It is necessary to pay attention to the essential changes in Lithuanian society and to the evolving political, economic, and social context of state function. So, the panel of judges tried to come up with a result that would be 'reasonable' under the circumstances, or what, in the judges' opinion would maximize the commonweal society, taking as a given the existing distribution of wealth.
In jurisprudence three well-known methods of statutory analysis predominate: originalism, textualism, and dynamism. Textualism is rooted in arguments that only the democratically enacted text is "law," in doubts that statutes have a coherent public regarding intents or purpose, and in concerns that judges who are permitted to look beyond the text will import their personal biases in interpreting statutes. Originalism is based upon arguments that legislative supremacy requires that courts defer to the legislature, and on confidence that statutes have coherent purposes (or legislators have rational, coherent intents) that courts can and will neutrally discern and apply. Dynamism's concern for consequences is rooted in the belief that democracy values good results, that courts are co-equal lawmakers, and that interpreters necessarily understand statutory language in light of current contexts and personal experiences. Nevertheless, as Karen M. Gebia-Pinetti states, none of these considerations can fully explain either the motivations that drive the competing interpretive models or the implications for the American legal system of choosing among these models.10
Gebia-Pinetti is of the opinion that the American legal system's credibility and its ability to earn its citizens' respect and adherence depend upon "legal-system values" that are not expressly reflected in the rhetoric or concerns of democratic legitimacy.11 Credibility requires that the law be perceived as being predictable, replicable, fair and just. Theorists cannot assure citizens that the law will meet these objectives merely by demonstrating that the courts use "democratically legitimate" interpretive methods designed to honor legislator's words or intents, further a statute's purposes, or achieve just consequences in individual cases. They must also demonstrate that the law produced by these methods will be horizontally coherent, vertically coherent, socially congruent, and instrumental in fostering a social value-formation dialogue. In fact, these legal system values do quietly pervade the current debate. They remain obscured, however, by the current focus on democratic legitimacy. So long as legal-system values are obscured by a complex debate about democratic legitimacy, theorists cannot assure that interpretation will preserve these crucial values.
In Lithuania too, jurists' discussion of statutory interpretation also raises a lot of controversy. The main question is connected with the judge's role in interpreting legislation: does the judge have to look only to the text of legislation or beyond the text? does the judge have to discern and apply a coherent purpose for the legislation (of course, not all jurists agree that legislation has a coherent purpose); does the judge have to understand the statutory language in light of current contexts and personal experiences? does the judge have to heed the legal system's values every time a decision has to be made? These questions do not have a single answer. To some judges "letter of the law" is most important and there is no need to look beyond the text. But, according to Lithuania's Constitution, a judge has to administer justice. To my mind, the implementation of this function requires a look beyond the text of legislation, to understand the statutory language in light of current contexts and the judge's personal experiences, to discern and apply a coherent purpose for the legislation's legal norms and also to heed legal system values every time a decision has to be made. But court practice shows otherwise, for example, in I. Jankuvienė v. the Ministry of Finance of the Republic of Lithuania.12 The plaintiff asked the court to adjudge her deposit to her from the Ministry of Finance (she had the deposit in the ministry's Investment Fund) and it was not returned to her and also asked to be exempted from her legal costs (under Article 101 of CPC), because she is a pensioner, an invalid and raises a young child on her own. The court decided that the plaintiff had brought a baseless action against the ministry and that she had to pay the legal costs. This decision shows the court neglected the criterion of justice, looking only to the "letter of the law," limited itself to applying the legislation mechanically, and forgot that justice first of all requires the protection of the socially vulnerable. Another example is from criminal lawV. Varkus v. A. Barkauskas and others.13 The court did not recognize that Barkauskas and his accomplices formed an organized criminal group, because the group did not fit the definition of such a group under Article 227(1) of the Criminal Code. In this case too, the court decided according to the "letter of the law" and forgot the principle of justice, because the established facts of the case (Barkauskas and his accomplices plundered cars and dwellings, and threatened their victims) showed that they formed an organized criminal group, notwithstanding that some of their activities were not defined in the criminal code. Both cases show the judges neglecting the criterion of justice. The standard of their judgment was not proper, becauseaccording to the famous American jurist Benjamin Cardozo14 the standard of the judge's decision is not simply what he thinks to be just, but what he reasonably thinks to be just and what another person of common sense would reasonably think was just.
The economic theory of legislative and constitutional interpretation assumes that courts are simply agents of the enacting body. But, as Posner argues,15 this assumption is not inconsistent with the tradition of judicial independence from political control, for independence is a precondition of the courts acting as agents of the enacting, rather than the current, legislature. Of course, as Posner further explains, independence from current political pressure does not guarantee that the courts will try to follow the will of the statutory or constitutional draftsmen rather than their own views of what is proper policy. And one of the examples of judicial independence asserted to thwart the will of the enacting legislature is the discredited canon of statutory construction, which states that statutes in derogation of common law are to be narrowly construed. As Posner emphasizes, the courts seeking guidance on the meaning of a statute are limited to the text itself and the published legislative history. This limitation reduces the legislature's practical ability to get the courts, however willing they may be, to work its will. Besides, courts have little to gain by setting their will against the legislature; because, if courts misinterpret a statute, the legislature can nullify their interpretation rather easily through an amending statute. This means, that courts have a lot of leeway in interpreting the constitutionnot only because the Constitution is so costly to amend, but because its great age makes it unlikely that the same political forces that procured its enactment are still around to nullify departures from it.
In the courts of Lithuania, the interpretation of the Constitution is not as pressing a problem as it is in the courts of America. This is so because in practice, (notwithstanding Article 6 of the Constitution of Lithuania which declares the Constitution is a directly applied legal act) the Lithuanian Constitution is not a directly applied legal statement in court. This means that an application to the court cannot be based solely on a particular article of the Constitution, but has to be based on a specific law as well. To my mind, this order of application to the court does not sufficiently promote justice because, especially now, when Lithuania is in the process of crating new legislation and situations arise which are not yet defined by legislation, it should be sufficient for anyone to apply to the court under a specific general article of the Constitution. Besides, a constitution is the basic law of the state, so it seems strange at the least when application to the court cannot be based solely on a particular article of the Constitution, but requires an application based on a particular article together with a specific law.
Final Remarks and Conclusions
This paper presents the economic analysis of law, which is new to Lithuania, but not to the United States. The importance of economic analysis is that it helps explain the basic structure of the law. The analysis is especially useful during the legislative process, and during the process of decision making, because it helps to form a new point of view toward such legal issues as: the difference between common law and civil law; the application of common and individual justice (the importance of justice during courts' decision making); and human rights and family rights. This analysis shows that the law can be valued according to the principle of efficiency, so, that the ideas of economic analysis can be put into practice in the social sphere of life. Of course, when the principle of efficiency is at odds with specific norms of morality, it is necessary to weigh very carefully, if these norms are significant to passing judgment.
This paper also reveals some shortcomings of the Lithuanian legal system, because the economic analysis of law showed that the construction of some Lithuanian legislation is defective. One example is the Enterprise Law of the Republic, through which many types of economic activities are licensed. This restricts the human right to implement economic activity. It also increases the price of goods and services, wastes the time and effort of licensees, and sometimes discourages tradesmen from undertaking certain kinds of activity.
The problemexisting not only in the Lithuanian, but also in the American legal systemof the so-called 'limitation on judicial capacity,' was also presented in this paper. Legal practice shows that even if a judge tries to reflect the legislature's will, he is limited to the statutory text and the other public materials. But, since under the Constitution of Lithuania a judge is required to serve justice, .this means that if certain legislation is not obviously just then the judge is obliged to search for a just decision in line with common principles of law and morality. And if it is a real need, the judge has to make a decision contra legem, which would force legislators to search for a just solution to the problem. But in Lithuanian courts, judges very rarely make a decision solely according to the principle of justice.
This paper has revealed the merits of the economic analysis of law and its applications to the legal system of Lithuania. To discuss the shortcomings of the analysis was not the purpose of this article. That would require a deep discussion of the attempts to apply a cost-benefit approach to principles of right and wrong. The usefulness of the economic analysis of law can be testified by the implicit logic of many of the judge-made rules of English and American law to maximize wealth, since these are wealthy nations. The creation of laws with the implicit logic of wealth maximization is one of the necessary circumstances if Lithuania wants to become a wealthy nation.
1 Posner, R.A. Collection of Articles about Economic Analysis of Law, 1939.
3 Gwartney, J.D. and Stroup, R.L. What Everyone Should Know about Economics and Prosperity. Vancouver, British Columbia: The Eraser Institute, 1993.
6 Posner, R. A. Economic Analysis of Law. 5th edition. A Division of Aspen Publisher, Inc., 1998.
7 Gwartney, J.D., Stroup, R.L., 1993.
8 Posner, 1939.
9 Mikelėnas, V. and Mikelėnienė, D. The Process of Court. Vilnius: Justitia, 1999.
10 Gebbia-Pinetti, K.M. Statutory Interpretation, Democratic Legitimacy and Legal-system Values. Seton Hall Legislative Journal, 1971, Number 2.
12 I. Jankuvienė v. the Lithuanian Republic Ministry of Finance. Vilnius: Circuit Court, 1994.
13 V. Varkus v. A. Barkauskas. Kaunas: Circuit Court, 1995.
14 Cardozo, B. The Nature of Judicial Process. New Haven, Conn., 1921.
15 Posner, 1939.
Artwork of Petras Repšys