The Value of Wealth: A Comment on Dworkin and Kronman

Author(s): Richard A. Posner

Source: The Journal of Legal Studies, Vol. 9, No. 2, Change in the Common Law: Legal and
Economic Perspectives (Mar., 1980), pp. 243-252
Published by: The University of Chicago Press for The University of Chicago Law School
Stable URL: https://www.jstor.org/stable/724131
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 THE VALUE OF WEALTH: A COMMENT ON
DWORKIN AND KRONMAN

RICHARD A. POSNER*

THE original plan of this Symposium called for Professor

comment on Professor Dworkin's paper. But Kronman later d
what he had to say about the subject matter of Dworkin's pap
about the theory of wealth maximization-warranted independ
ment. His comment, therefore, became an article, and the task of c
ing on both papers' devolved on me: their principal target.
As Dworkin explains, wealth maximization is "achieved when
other resources are in the hands of those who value them most, an
values a good more if and only if he is both willing and able to pay
money (or in the equivalent of money) to have it."2 The difference
wealth and utility is that wanting something very much, but not b
to pay more for it than its owner or competing demanders, does n
a claim to a good in a system of wealth maximization, although
so in a system of utility maximization.3 Wealth maximization th
claims based on pure desire-claims not backed up by willingnes
ability) to pay.
Resources are efficiently allocated in a system of wealth maxi
when there is no reallocation that would increase the wealth of soc
other economic analysts of law have argued that efficiency in
provides a good explanation of many common law rules and p

* Lee and Brena Freeman Professor of Law, University of Chicago.

See Ronald Dworkin, Is Wealth a Value?, 9 J. Legal Stud. 191 (1980); Anthony T.
Kronman, Wealth Maximization as a Normative Principle, 9 id. at 227.
2 Dworkin, supra note 1, at 191.
Economists use "utility" in approximately the same sense as philosophers, except that they
often implicitly exclude claims not backed by willingness to pay-thereby redefining utility as
"wealth" in my sense of the term. At the same time economists often use the terms "wealth" and
"value" more narrowly than I do, to mean the utility of an uncertain benefit or cost to someone
who is risk neutral. Thus the "value" of a 10 percent chance of winning $1000 is said to be $100,
although the utility of this expectation would be greater or smaller than $100 to an individual
who was risk preferring or risk averse, respectively. I use the terms wealth and value more
broadly, to include, for example, the amount of money a risk-preferring individual would pay
for a lottery ticket.
4 See, e.g., Richard A. Posner, Economic Analysis of Law pts. I-II (2d ed. 1977); Some Uses
and Abuses of Economics in Law, 46 U. Chi. L. Rev. 281, 287-95 (1979).

243

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244 THE JOURNAL OF LEGAL STUDIES

Recently I have argued that efficiency is also an ethica

social policy, especially in the common law context
efficiency employed in these studies is different from
efficiency. A change in allocation is Pareto superior onl
at least one person better off and no one worse off.
widely used concept of efficiency but it is not (as Dw
"normal professional sense" of the term efficiency.6
used efficiency in the sense of wealth maximization, ra
sense, in his best-known article.7 Under the Kaldor-
efficiency, which is also widely used by economists
sources is efficient if it enables the gainers to compens
or not they actually do so. This is equivalent to we
Against this background, I shall comment on what I t
central points.
1. He argues that wealth is not "a component of
only component, and not even "one component of so
ers."' This may seem a bold challenge to conventiona
that wealth is a value, even if not the only or the most
it is actually a play on words, for Dworkin defines
value as "something worth having for its own sake,
wealth for its own sake. To argue, however, that wealth
because it is not an end in itself is to adopt an eccentri
value." If I say, "loyalty is a social value because it f
tion of productive activity," I am not misusing the Eng
attaching the term "social value" to a mediate rather
But perhaps I have misled Dworkin and others by
explicit about what I think wealth is conducive to. It
ness, freedom, self-expression, and other uncontrov
versial if not pursued with total disregard for com
maximization as a social policy differs from utilitari
clusively at promoting happiness, by limiting the pu

5 See Richard A. Posner, Utilitarianism, Economics, and Legal T

(1979); The Ethical and Political Basis of the Efficiency Norm in
(forthcoming in Hofstra Law Review). The second of these papers,
made available to Dworkin and to Kronman in draft form, and Kr
in his paper.
6 Dworkin, supra note 1, at 194.
7 See Anthony T. Kronman, Mistake, Disclosure, Information, an
J. Legal Stud. 1, 2-3 & n. 2, 4-6, 12-16, 32 (1978).
8 See Jules L. Coleman, Efficiency, Exchange, and Auction: Ph
Economic Approach to Law, 68 Calif. L. Rev. 221, 239-42 (198
9 Dworkin, supra note 1, at 195.
1o Id.

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 THE VALUE OF WEALTH 245

thereby avoiding certain well-known prob

rise. I shall have more to say later about t
maximization. Here I want to point out
rests his argument that wealth is not an
tya and Derek-actually obscures the instrumental character of wealth
maximization. Derek has a book that he would sell for $2 and that Amartya
would pay $3 to have. An omniscient tyrant short-circuits the market system
and gives the book to Amartya without compensating Derek. It is, as Dwor-
kin argues, difficult to see how society is better off as a result. But suppose
we change the figures. Let the book be worth $3000 to Amartya and $2 to
Derek. Then the transfer probably will increase the amount of happiness in
society, even if Derek is not compensated. This is especially likely if Derek
might some day receive one of these delicious windfalls. Of course, in argu-
ing along these lines I am "hitching" wealth maximization to utility maximi-
zation, but I am willing to do this because happiness is one of the ultimate
goods to which wealth maximization is conducive. The relationship between
wealth and utility is obscured by the particular numbers which Dworkin
uses in his example.
In this vein, I want to comment on one other feature of the Amartya-
Derek example: the absence of a plausible reason for taking the transaction
away from the market and putting it in the hands of a "tyrant.""I Suppose
we change the example as follows. Derek owns a home, and Amartya an
airline. An airport is built near Derek's home, and Amartya's airline pro-
duces noise which reduces the value of the home by $2000. Derek sues the
airline alleging a nuisance. The evidence developed at trial shows that it
would cost the airline $3000 to eliminate the noise and thereby restore De-
rek's home to its previous value, and on these facts the court holds that there
is no nuisance. This example is analytically the same as Dworkin's, but it
illustrates more realistically than his how a system of wealth maximization
would operate in a common law setting, and it makes less plausible his
argument that wealth is not a "component of social value" in some reason-
able sense of this expression.
2. Dworkin discerns a problem of circularity in my attempt to derive a
system of rights from a goal of maximizing wealth. It is the familiar problem
of "wealth effects." Dworkin claims to "dispose of"12 it early in his paper; he
does not realize that it is the same problem which he later discusses under the
heading of circularity. The problem, briefly, is that in asserting that a rise in

S IThe "more familiar" example which Dworkin offers in note 5 of his paper suffers from the
same deficiency: no reason is offered for wanting to bypass the market. On the economics of
compensation in eminent-domain cases, see Richard A. Posner, Economic Analysis of Law
40-44 (2d ed. 1977).
12 Dworkin, supra note 1, at 192.

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246 THE JOURNAL OF LEGAL STUDIES

the price of some good will lead to a fall in the quantity de

good, the economist normally ignores the effect of the price c
comes even though the income effect may feed back into pr
price will reduce the incomes of consumers and a consumer'
change with a change in his income. The demand for some goods may
actually rise as incomes fall (potatoes in Ireland is the conventional example);
hence, a rise in the price of a good could, as a result of the feedback effect
mentioned above, lead to an increase in the demand for the good rather
than, as normally assumed, a decrease. Empirical study has failed to dis-
cover a good that behaves in this way, but it is theoretically possible that
there is one. Similarly, it is theoretically possible that the initial assignment
of a good might determine its ultimate assignment even if transaction costs
were zero, especially where the good was a very large part of the individual's
wealth-like a glass of water in the desert.'3 This has long been known, but
again, no one has come up with a realistic example.
Dworkin's example of Agatha and Sir George is not realistic; indeed, it is
based on an economic mistake. Agatha is assumed to have a talent for
writing brilliant detective stories but a preference for some less remunerative
activity (call it gardening). If Sir George, a publisher, owns her labor, he will
compel her to write detective stories, and she will not be able to buy her
freedom save by promising to continue writing detective stories, because
that is the only activity in which she could hope to earn a sum large enough
to induce Sir George to free her. If he is initially assigned the right to her
labor, therefore, she will remain a slave-whether to him or to whomever
she borrows money from to buy her freedom. If she is initially assigned the
right to her labor, however, she will not write detective stories, or not so
many, and Sir George will not be able to buy the right to her labor. Dworkin
concludes that economic analysis does not yield a determinate initial assign-
ment of rights.
But Dworkin ignores the fact that if Agatha were free she almost certainly
could-not would-have a greater output of detective stories than if she
were a slave. People have an incentive to work harder when they work for
themselves than when they work for other people. As a slave, Agatha has no
incentive to work hard because the fruits of her labor inure to Sir George
rather than to her. He will try to prevent her from shirking, but this will be
difficult to do since output norms are especially difficult to establish and
enforce for such a nonroutine activity as writing stories. Suppose the value of

" In the desert setting as usually described, the glass of water is the only thing of value;
someone who lacks it has zero wealth and therefore cannot buy it from someone who has it.
This is an extreme example of how the distribution of wealth can affect resource use, but it is
formally parallel to the example in the text where a price increase affects resource use via its
effect on incomes and, through that effect, on consumer demands.

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 THE VALUE OF WEALTH 247

her output to Sir George is $1 million, bu

detective stories worth $1.2 million in
works for him. Then presumably she c
$1 million in less time, and have time lef
and would buy her freedom. Having d
she had been free from the outset (sh
whoever financed the purchase of her
The point is that wealth maximization lea
Agatha-Sir George case once it is assumed
were free than if she were a slave. Since she would retain her freedom if
given it from the first, and would purchase it if she began as Sir Georg
slave, the initial assignment does not determine the final assignment. T
final assignment is freedom regardless of the initial assignment. Transactio
costs are therefore minimized by making her free in the first place. Th
freedom is the wealth-maximizing initial assignment.
3. The Agatha-Sir George example appears in the section of Dworkin
paper in which he criticizes my argument that wealth maximization is attra
tive because, in contrast to utilitarianism, it provides a basis for an ethics o
rights and of sharing as well as one of promoting happiness. Dworkin think
that wealth maximization does not give firm enough support for rights
does not rule out slavery. His example to demonstrate this contention
(Agatha-Sir George) is, however, incorrect. On sharing he argues that
wealth maximization is unlikely to "produce more total welfare-for-others
activity than other, more compromising, economic and political struc-
tures."14 To be sure, if the object is to maximize the transfer of wealth from
the more to the less productive, setting a proximate goal of wealth maximiza-
tion may be the wrong approach, although the level of transfers is, in gen-
eral, positively related to the wealth of a society. But it has never been
argued that wealth maximization would maximize transfers-or protection
of rights, or happiness. The argument is that it would give us some of all of
these things. Dworkin thinks that we could get more of all three by aiming
directly at each. But that is not obvious. Partly because there is no common
currency in which to compare happiness, sharing, and protection of rights, it
is unclear how to make the necessary trade-offs among these things in the
design of a social system. Wealth maximization makes the trade-offs auto-
matically. If there is a better approach, it is not obvious and Dworkin has
not described it.

Dworkin states that production for others "has no inherent moral value if
[the producer] acts with the intention of benefiting only himself."'5

14 Dworkin, supra note 1, at 211

'~ Id. at 211-12.

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248 THE JOURNAL OF LEGAL STUDIES

reaches this conclusion as a matter of definition: moral val

"in the will or intentions of the actor."'6 That is a narrow definition. If the
effect of encouraging wealth maximization is, without coercion, to yoke
selfish desires-which in most people are their strongest desires-to the
service of other people, this feature of wealth maximization should commend
it to the altruistic designer of a social system.
In arguing against the instrumental conception of wealth maximization,
Dworkin states that the advocate of wealth maximization must specify his
precise distributive, utility, and rights goals and then show how wealth
maximization leads society to them. If that is my burden, I have failed to
carry it; but arguments that depend on placing a heavy burden of proof on
one's opponent are facile. I want, however, to try to clarify the instrumental
conception. Happiness is a good, but if pursued with total disregard for any
other good it leads to the absurdities emphasized by me (as by many before
me) in my article on utilitarianism. Utilitarianism can be purged of its ab-
surdities by the substitution of wealth for happiness as the social maximand.
This substitution excludes the claims of the unproductive and thus gets rid of
the thief, the "utility monster," and other unappealing claimants to whom
the strict utilitarian must, however reluctantly, give ear. Another effect of
the substitution of wealth for happiness is to make rights more important in
a system of wealth maximization than they are in a utilitarian system.
By modifying utilitarianism in the above fashion we continue to give great
weight to happiness as the goal of social institutions, but we allow the
pursuit of happiness to be limited by other ethical principles. In my
utilitarianism paper these principles-that wealth should be shared with the
less fortunate and that people should have rights in the sense in which this
term is used in the common law-were justified by reference chiefly to moral
intuition. In a subsequent paper (unpublished, but available in draft form to
Dworkin and Kronman) I locate these ethical principles in the idea of con-
sent which I derive from the Kantian ethical tradition.17
4. The appeal of wealth maximization as an alternative to utilitarianism
is brought out in Dworkin's discussion of common law adjudication. He
thinks judges could promote utility more effectively by aiming directly at its
maximization than by trying to maximize wealth as a proxy for it. He
therefore invites the (utilitarian) judge to consider, for example, that al-
though "the community will pay more for candy than for medical care lost
through the noise of a candy machine, . . . the candy will be bad for its
health and therefore its long-term utility."'8 He thinks a utility-maximizing
'6 Id. at 211.

'7 While acknowledging that the principle of consent does not justify every social institutio
that maximizes wealth. See pp. 251-52 infra. The paper is the Hofstra Law Review pie
referenced in note 5 supra.
18 Dworkin, supra note 1, at 218.

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 THE VALUE OF WEALTH 249

judge faced with making "a decision . . .

ailing and possibly noncompetitive ind
by structuring rights in favor of a develo
former.19 Logically, Dworkin's utilitar
deciding a criminal case, whether the
the criminal act than the victim suffere
rian would hesitate to turn judges loos
fact by inviting them to consider ha
Dworkin. Wealth maximization is, to b
utility maximization; but the costs-in
and in error-of using utility as a legal
using wealth as a proxy for utility. Th
common law adjudication is even stro
utilitarianism, besides measurement, a
5. Dworkin discusses in closing the p
common law. The principal finding of th
are best explained as if judges sought
that this finding should be disregarded,
the facts, unless and until a generally ac
so emerges. He illustrates with an examp
Imagine that in the last ten cases decid
sequence of affirmances and reversals
as follows: 1101100111. Would we say that this sequence explained the
pattern of affirmances and reversals? No. It simply describes it. Now let a
group of people sit around making up their own sequences-0011001100,
0001110101, etc. Suppose one of these sequences accurately described the
next ten decisions of the Illinois Supreme Court. Would we say that the
person who suggested that sequence had succeeded in explaining the pattern
of decisions? Again the answer is no. It is odd to suggest, however, that the
reason the sequence fails as an explanation is that it has not been related to
the motivations or biology of judges. It fails because it does not tell us
anything interesting about the world. Let us assume, instead, that we found
that the pattern of affirmances and reversals in all appellate courts in the
United States over the last 100 years conformed perfectly to the formula
Rt =A 12 -that is, the number of reversals in any period (t) is the square
root of the number of affirmances in the previous period. If this "law" were
found to be highly significant in repeated testing on new bodies of data, we
would feel that we had made an exciting, if puzzling, discovery. We would
say that we had "explained," in a meaningful sense of the term, the pattern
of affirmances and reversals by appellate courts, although we would be

'9 Id. at 218.

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250 THE JOURNAL OF LEGAL STUDIES

troubled if we could suggest no reason why the pattern sh

form.
If the common law can be best explained as if the judges
maximize social wealth, this is a less mysterious fact than
"law" of affirmances and reversals. The common law is larg
a period (the nineteenth century) in which economic values
tant part of the prevailing ideology. Also, the common law te
behavior in areas and by means where redistribution is dif
plish and where, therefore, the only way for a group to incr
to support policies that lead to an increase (in which it wi
wealth of the society as a whole.20 There are also the evolutio
the common law that Dworkin mentions. No doubt it is an embarrassment
to the supporters of the economic theory of the common law that so many
explanations of why the common law is efficient are vying for attention. But
the empirical regularity which the economic theorists have found is not so
arbitrary and improbable that it should be disregarded until we have a
generally accepted theory tying this regularity to the motivations or the
biology of judges, litigants, or legislators.
I conjecture, without knowing, that Dworkin believes that the govern-
ment produces what are called in economics "public goods." The national
defense is an example of a public good. As it happens, there is no generally
agreed upon explanation in economics as to how a public good gets pro-
duced. It is difficult to relate its production to anyone's self-interest because,
by definition, the good is consumed by those who do not contribute to paying
for its production as well as by those who do. Yet we do not on that account
regard the suggestion that national defense is a public good as completely
unworthy of credence.
Turning now to Professor Kronman's paper, I shall limit my comments to
those respects in which Kronman attempts to add to Dworkin's analysis.
1. Kronman, like Dworkin, argues that wealth maximization is an inde-
terminate standard for social choice, but Kronman uses a different example
to support this argument-Amartya-Derek (renamed A and B) rather than
Agatha-Sir George. B has a book that he is willing to sell for $2, and A
would be willing to pay $3 for it, but market transaction costs are prohibi-
tive. Kronman argues that wealth maximization can tell us that we should
transfer the book from B to A (he assumes that this can be done costlessly)
but cannot tell us whether B should be compensated for giving up the book.
The second part of this argument is incorrect. Since compensation is costly to
effect, yet under Kronman's assumptions does not promote efficiency,

20 This theme is developed in my Hofstra Law Review article, supra note 5.

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 THE VALUE OF WEALTH 251

wealth maximization requires that com

result may be obnoxious, but it is certa
2. As the premise for arguing that I
wealth maximization on inconsistent gr
utilitarianism because "it fails to take seri
vidual persons."22 That is not my argum
utilitarianism article which Kronman ci
reject utilitarianism because of its prob
measure subjective satisfaction objective
tions are to count?), and of "moral mon
the satisfactions of the criminal and the unproductive?). If I rejected
utilitarianism because it was aggregative (concerned with the sum of happi-
ness across people and indifferent to its distribution among people), I would
be hard pressed to support wealth maximization, which is also aggregative.
But I support wealth maximization because of other objections to
utilitarianism that it avoids.23
Dworkin aptly describes the failure to take seriously the differences among
persons as "the ambiguous sin."24 Utilitarianism respects the differences
among persons in their capacity for happiness, and wealth maximization
respects the differences among persons in their productive capacity (by re-
warding the more productive more highly than the less productive). Rawls's
"natural lottery" approach, which Kronman endorses without attempting to
justify, commits the "ambiguous sin" by treating virtually everything that
distinguishes one individual from another as a moral accident and so pooling
individual talents in the service of the state. Wealth maximization does not
commit this particular form of the ambiguous sin.
3. My Hofstra Law Review article argues that, in certain contexts, th
principle of wealth maximization is supported by a notion of consent (in the
form of ex ante compensation) which can be derived from Kantian ethi
Wealth maximization and Pareto efficiency merge in these contexts. Kro
man criticizes the argument on the ground that wealth maximization will no
always result in compensation of losers ex ante (or ex post). Since my article
made this point, I am surprised that Kronman should proclaim it with an air
of discovery. I gave the example of the progressive income tax. Abolishing it
in favor of a proportionate income tax might well increase the wealth o

21 If paying compensation to B would promote efficiency, the efficiency gain would have to
compared with the cost of compensation in deciding whether compensation should be paid. B
the outcome would still be determinate.

22 Kronman, supra note 1, at 232.

23 Kronman describes these objections as "tangential" to my main argument. Id. at 233 n
They are central to it.
24 Dworkin, supra note 1, at 200.

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252 THE JOURNAL OF LEGAL STUDIES

society, but its abolition probably could not be defended by

principle of ex ante compensation, for some people who
taxes after the change would probably be worse off.25
ante compensation) ground of wealth maximization is
limited contexts, in particular that of common law adj
4. Kronman states that the willingness-to-pay constr
maximization places on utility maximization is not impo
for [the individual's] autonomy or independence as a pe
because in a well-ordered society wealth can normally b
inducing other people voluntarily to transact with one.2

25 It is possible that those who paid more taxes after the change woul
incomes than under a progressive system, because of the increase (in wh
ably share) in the wealth of society brought about by the change. No doubt
progressive taxation this would be true. The Hofstra Law Review paper
true at current levels of taxation.

26Kronman, supra note 1, at 234.

27 As stressed in Posner, Utilitarianism, Economics, and Legal Theory, supra note 5
122-23.

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