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If we now go on we can see how Pareto does not help us in solving these problems, with or without compensation. The obvious problem is a party that has a right but is not willing to sell it. Let's build up Pareto's Ontology. The stuff of the world is goods randomly distributed. Some are born handsome and lovely, some nasty and crippled; some find a pearl of great price, others only swine. In this Pareto world we grant to all a right to that which they received of a lesser god, and we believe that no change must leave someone worse off. We state that everybody must agree to every change affecting him.
This is a theory of unanimity rule, or better a theory of the veto-power of a party involved in the change.
I simply do not see what this has to do with efficiency. Efficiency is a nice word, but I do not see how it correlates to the veto right of any party not willing to be involved in a change.
Let us presume that a businessman and I are queued at the airport ticket counter to get to New York. I want to leave to spend a debauched week-end with my wife's best friend. While standing there I listen to the worried businessman crying, "What shall I do? If I don't reach NY immediately I shall lose the last clear chance to save my business. 500 workmen out of job and home ... a loss of at least $1,000,000...." I snicker and go on up to the counter. The airline employee says, "Lucky man, yours is the last ticket to New York". I buy it. Now the businessman groans and moans. He tells me a tale full of sound and fury and offers me one, two, three hundred thousand dollars, figures beyond a fair expected court compensation (for personal injuries); but I prefer my lover's charms. I act thus consciously, but without any actual malice towards the businessman. Do we reach an efficient result? It may be anything but efficient.
Well, what do we get if we transform this Pareto world in a world of Kaldor-Hicks? Something very similar to a Godard movie. The businessman has no doubt, now he lives "a bout de souffle": since I don't want to bargain with him, he beats me up, and he locks me in the toilet. He takes the ticket and he flies to New York; he will compensate me later. Or even better, he shoots me; he will compensate my widow later. If, given the case, she wants to be compensated for my loss.
Now the problem becomes this: how much must he give me as compensation?
Of course I valued the week-end of lust more then he was willing to pay. So I do not see why he should now be willing to give me a sum he was not prepared to pay before. If we reason in terms of subjective value, it is simply stupid to discuss ex postfacto compensation.
If we reason in terms of objective value, he will pay for the ticket and my hospital stay, plus perhaps the value a court assigns to my losses for personal injury.
In brief: he takes my right at a price I think poor, in the name of the Trinity Pareto-Kaldor-Hicks. Plainly he and I have experienced a complete reversal of fortune. The first world in which we met was a hyper-Lockean world; the second is a nightmare, a world where I can do everything to others if only I gain one dollar more than they lose, as valued at standard prices.
This Kaldor-Hicks nightmare is a world without property rights; with liability rules, but without punitive or moral damages. It is a world in which I can invade the Sudetenland, so long as I pay the ex ante market price of Skoda Steel; the Czechs would have no claim. From this point of view, Kaldor-Hicks is a perfect socialist model. Indeed socialists, as distinct from many communists and even Roman Catholics, are willing (in my country, at least) to pay something for takings. Alfred Dunhill would have no claim against Castro for the taking of his tobacco plantations, because he was compensated. Kaldor-Hicks could easily become part of a critical manifesto against private property.
Another typical example of the way in which rules and rights clash with the economic approach to law is, on another front, welfare economics. If before we had to deal with Posner and Pareto, now we must contemplate Sen . Sen's is a world with funny quarrels. We are asked to aggregate individual preferences according to a social welfare function but to distribute rights to take decentralized choices.
One does not need mathematics to see that this world collapses whenever someone selects out of his couple of available alternatives something different to the outcome of the procedure of aggregation of individual preferences in a social welfare function. In this way Sen succeeded in proving that the choice of an individual having a right to decide over a limited set of available alternatives may differ from the selection made by the entire society over the entire set of all available alternatives. Astounding, that. But what really deserves attention is the confusion introduced by this kind of welfare economics to the definition of dictatorship. Here is one definition, formulated by Arrow in any edition of his impossibility theorem (like Vivaldi, he wrote the same work many times): we have a condition of dictatorship whenever the choice of an individual is imposed upon the entire society. We generally accept this definition because we are captured by its rhetoric and we immediately have in mind the image of Hitler (or Rehnquist) imposing his preferences on society; and so we find it to be a perfect definition of dictatorship.
What is interesting and misleading is that this definition of "dictatorship" is the same as the definition of "subjective right" given by Sen. If someone has a right of choice between two alternative states of the world <a,b> patently his choice is imposed upon society. So we have models claiming to offer a deeper analytical insight about law and society in which rights and dictatorship are totally confused. These models are acceptable only from a communist standpoint: private property is a crime and a subjective right is a dictatorship.
I wonder why the Crits didn't become the first supporters of this approach. Were Joseph McCarthy still alive he should have to investigate. But beyond all these paradoxes I seriously question whether models that muddle up in the same analytical definition the "right" of an individual and the power of a "dictator" can say something interesting about law, or even about social welfare.
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