Law and Economics CIA-3.

Article Review “An Economic Analysis of The Criminal Law as A Preference-Shaping

Policy” by Kenneth G. Dau-Schmidt.

Submitted by

Uday Poonia
(Registration No. 2250131)

Submitted to

Mr Freddy Thomas
Professor

School of Law
CHRIST (Deemed to be University)
Bengaluru

INTRODUCTION
The economic model of individual behaviour, discussed in the article's introduction, is
predicated on the idea that people make logical decisions based on their preferences to
maximise their level of happiness. According to the economic model, a person's choices will
alter in response to changes in their opportunities or preferences. This concept has
concentrated chiefly on creating possibilities to lessen criminal behaviour in the context of
criminal law. Critics counter that it falls short in elucidating essential facets of criminal law.

The author offers a different viewpoint, arguing that in addition to acting as a deterrent to
crime, criminal punishment also shapes preferences. Through promoting societal standards
for individual conduct, criminal law seeks to mould the choices of both offenders and society
at large. This preference-shaping function clarifies criminal law features the economic model
had previously found difficult to account for.

There are three sections to the article: The economic theory of crime and how it is regulated
by criminal law, together with preference- and opportunity-shaping strategies, are covered in
Part I. Part II addresses problematic elements of the existing economic model and offers
empirical evidence for the preference-shaping theory of criminal law. The contrast between
criminal and tort law is examined in Part III using the preference-shaping viewpoint.

THE ECONOMIC ANALYSIS OF CRIME

The foundation for comprehending the economic viewpoint on crime and possible remedies
that can deal with criminal activity as an externality is laid in the first section. The economic
study of crime is presented in this part as a rational choice theory that emphasises how
society shapes opportunities and preferences and how people aim to maximise their utility.

The notion that people make logical decisions based on utility or happiness is one of the
cornerstones of economic analysis. This idea is essential to comprehending the financial
perspective on crime since it assumes that people consider the advantages and disadvantages
of their choices before acting. The "objective function" or "utility function" rates these
opportunities based on personal preferences, but the "constraint" or "opportunity set" reflects
all realistic options accessible to humans. People decide based on their preferences and how
best to use their resources.

Economists use two criteria to assess these decisions from a societal point of view: Pareto
optimality and social welfare maximisation. According to the theory of Pareto optimality, a
situation is optimal when resources are allocated so that no one may profit from a
redistribution without endangering another. The subjective elements brought about by
variations in starting assets, preferences, and the requirement for interstate and interpersonal
comparisons are all considered while maximising social welfare. It incorporates subjective
assessments yet seeks to identify the ideal condition for society.

This section's depiction of crime as an externality in economic research is a crucial finding.

When one person's activities impact others, even when those people have no control over the
situation, it's an externality. The expenses incurred by those affected by the offender in terms
of lost commodities and preventive actions are borne by them due to their incompatibility of
preferences. These involved parties become external to the decision-maker since there is no
market mechanism for them to hold the offender accountable for these expenses. As a result,
even when the advantages outweigh the costs to others, the offender may still commit crimes.
The current scenario is not Pareto optimum since the criminal may be persuaded to cease
with a simple reward, improving the welfare of society as a whole and benefiting both sides.

Applying this reasoning to the problem of crime, it is clear that, in a society without a
criminal justice system, there is a possibility that someone may take from someone else. This
is the case with stealing, for example. While theft helps the perpetrator, it hurts both victims
and future victims. The primary issue is that theft is not Pareto optimum if the advantages
outweigh the penalties. It is theoretically possible for prospective victims to buy off the thief
to stop their illegal actions, which would benefit everyone involved and boost societal
welfare.

Traditionally, opportunities are shaped rather than desires to mitigate externalities. To force
people to internalise the expenses and determine if the benefits outweigh the drawbacks, the
"Pigouvian tax" is used in this situation. Gary Becker expanded on this concept about crime,
viewing criminal penalties as a price on offence to lessen its allure. In light of the possibility
of getting detected, Becker believed that the punishment ought to be equivalent to the
external expenses of the offence. This strategy prioritises monetary penalties over
incarceration wherever feasible to maximise efficiency and social welfare.

On the other hand, Becker's study brought up issues with social welfare concerns. It was
proposed that to determine the ideal degree of crime, society should consider the advantages
that criminals derive from their deeds. This expansion raised concerns since it presupposed
that society always valued criminal benefits, which may not be accurate. Critics contend that
social norms and values deter illegal activity, particularly in the case of repeat offenders.

Furthermore, it suggests that criminal penalties should be so severe as to discourage all

possible offenders if society does not regard criminal advantages in the social welfare role.
Due to incomplete information, this is difficult in practice and might lead to certain crimes
continuing. Adverse effects of setting unduly severe punishments include distancing
marginally legal activities and eliminating rewards for excellent behaviour. It becomes
difficult to strike a balance between preventing crime and these expenses.

The idea of forming preferences is the substitute remedy that the text presents. The paper
highlights that neglecting the malleability of preferences reduces the explanatory power of
economic analysis, even though economists have hesitated to investigate preference-shaping
solutions because of challenges in measuring priority changes and a lack of experience in
preference-shaping technology. When activities are classified as "good" or "bad," authorities
use incentives, punishments, and education to shape preferences. Family, friends, and
coworkers are considered essential participants in preference shaping because of their
capacity to affect one another's choices through mutual trust and shared experiences.

To sum up, Dau-first Schmidt's article section introduces the ideas of rational choice theory,
externalities, and the function of both opportunity-shaping and preference-shaping techniques
in combating crime. This establishes the groundwork for comprehending the economic study
of criminal law. It poses significant queries regarding the connection between illegal rewards,
punishments, and social welfare. It makes the case that striking a balance between preventing
societal costs and preventing crime is crucial. The essay also highlights the intricate
relationships between these ideas in the context of criminal law. It promotes modifying
personal preferences to reduce crime and increase societal welfare.

CRIMINAL LAW AS A PREFERENCE-SHAPING POLICY

The emphasis changes to the many facets of criminal responsibility, the significance of
purpose, the connection between actual injury and criminal culpability, and the nature of
criminal punishment in the second section of Kenneth G. Dau-paper, Schmidt's "Criminal
Law as a Preference-Shaping Policy." In this part, we explore the subtleties of criminal law
and provide an alternate explanation of criminal responsibility and punishment—the
preference-shaping hypothesis.

The idea of intent in criminal law is one of the main topics covered in this section. When
deciding who is criminally liable, intent is crucial since the state must prove that the offender
meant for the damaging conduct to be punished. Criminal law is predicated on purpose,
unlike tort law, which does not need intent in situations involving accidental or careless
injury. According to Posner and Shavell, the intent is significant since it is linked to the
chance of injury and being discovered, which supports different penalty thresholds.

The essay raises the topic of whether all relevant probabilities are regarded equally in the
context of criminal punishment and why probable harm is thought to be more significant than
actual injury. An alternate viewpoint is provided by the preference-shaping theory of criminal
law, which emphasises that the primary goal of criminal punishment is to shape people's
preferences when they defy societal norms. According to this perspective, purpose becomes
vital since it denotes a break from accepted standards, but carelessness or errors do not. As a
result, it is believed that obtaining proof of purpose is necessary to demonstrate the
defendant's guilt and support their sentence.

The essay also discusses how genuine injury appears "irrelevant" to criminal responsibility. It
draws attention to the gap between harm and culpability in criminal law, where those who try
crimes and create harm may still be punished even when they don't harm, but those who
conduct crimes and cause injury may not be penalised if their actions are justified. The
opportunity-shaping theory of criminal law, which contends that criminal punishment should
be connected to the reality of harm—a notion that is not always observed—finds it difficult to
explain this gap.

Nonetheless, the preference-shaping approach offers a stronger justification for penalising

efforts. It suggests that even when significant steps toward committing a crime cause no
harm, these behaviours show abnormal tendencies that must be corrected. This aligns with the
primary goal of penalising efforts, which is to update individuals who exhibit risky
preferences; deterrence is the secondary goal.

The topic of the severity and type of criminal punishment is also covered in the article.
Conventional perspectives on criminal punishment place a strong emphasis on personal
accountability. Judges evaluate the degree of guilt and the gravity of the offence to establish
the proper sentence, which may include death, imprisonment, probation, fines, or
condemnation. This viewpoint, however, runs counter to the opportunity-shaping theory of
criminal law, which supports punishment as a tax or price that deters crime—preferably in the
form of fines for cost-efficiency—and is correlated with the likelihood of an arrest and
opportunity costs.

On the other hand, preference-shaping criminal law emphasises the significance of moulding
people's choices. It proposes that the type and severity of punishment need not be uniform.
Instead, they ought to be customised based on individual traits that suggest aberrant
inclinations and receptiveness to various techniques for modifying preferences. Younger
criminals, for instance, could benefit from rehabilitative techniques, whereas wealthy people
would face heavier punishment because of their aberrant tastes.

Ultimately, this portion of the essay questions conventional wisdom regarding criminal
responsibility, the connection between injury and purpose, and the nature of punishment. It
presents the theory of preference-shaping as a provocative substitute that reinterprets the
nature of criminal law and its function in modifying personal preferences to conform to social
norms and ideals.

EXPLANATION OF THE CRIMINAL CATEGORY

The fascinating topic of why some injurious behaviours are categorised as crimes susceptible
to state prosecution while others are addressed through civil tort law is the emphasis of
Kenneth G. Dau-closing Schmidt's article's section. This section examines many theories
proposed by economists and legal experts and poses significant questions about how criminal
activity should be classified.

The first part of the essay looks at the perspectives of well-known economists and lawyers,
including Becker, Calabresi, Melamed, Klevorick, and Posner. Various academics have put
forth multiple justifications for creating the criminal category. For example, Becker believes
that when it is difficult to identify and apprehend wrongdoers, externalities turn into crimes.
To discourage future offenders who do not have the financial means to pay fines, criminal
penalties in such circumstances must be greater than actual damages. To deter people from
violating laws about property and inalienability, Calabresi and Melamed suggest that some
behaviours be classified as crimes. Based on considerations of efficiency, distribution, and
fairness, society decides whether an externality is subject to property, liability, or
inalienability regulations.

Klevorick extends this approach and presents the notion of the "transaction structure,"
including the selected set of regulations. According to Klevorick, criminal law goes beyond
concerns for economic efficiency to prevent breaches of this system. For efficiency, Posner
contends that voluntary transactions should take precedence over involuntary ones in criminal
law and that criminal penalties must be more severe than damages to promote voluntary
transactions.

Although the paper raises concerns over the explanations' completeness and application, they
clarify how illegal behaviours are classified. For example, the fact that not all criminals are
apprehended does not entirely account for the criminal category's existence because it does
not clarify why specific behaviours are deemed illegal in the first place. Furthermore,
criminal law sometimes makes voluntary transactions less efficient and fails to consider their
moral component adequately.

From a different viewpoint, the preference-shaping theory of criminal law is presented.

According to this idea, society uses administratively efficient tort law to address externalities.
Criminal law is only applicable in circumstances when the imposition of a criminal penalty
would significantly benefit the community. Criminal penalties are seen as instruments for
reshaping opportunities and preferences in a way that reflects societal norms and morals.

The preference-shaping hypothesis does concede, though, that it is not a perfect means of
determining what behaviours society considers criminal. The formation, shaping, and
valuation of preferences within the social welfare function determines the classification of
criminal offences. This complex process draws on concepts from sociology, psychology,
philosophy, and other fields outside of economics. According to the paper, economics may
obtain a thorough grasp of the intricacies of crime and the social issues about the criminal
category by utilising the contributions of these many professions.

Finally, in the final section of the paper, Dau-Schmidt explores the puzzling subject of why
some negative behaviours are labelled as crimes. It presents the preference-shaping theory as
an alternative viewpoint and offers a critical study of the explanations that are currently in
use. This approach recognises the interdisciplinary character of the process and emphasises
the significance of social benefits and administrative efficiency in selecting the criminal
category. It highlights how important it is to have a comprehensive understanding of crime
that draws on knowledge from various academic fields to completely comprehend the
workings of criminal law and how it shapes morality and social standards.