At a Congressional hearing examining the role of federal regulators in instigating the Great Recession, Alan Greenspan, a man once hailed by many as the most powerful banker in the world, was hurled with the accusation that his inviolable belief in the supremacy of unfettered and competitive markets to organize economies was grossly erroneous. As someone who had the authority to oversee and modulate lending practices across a range of institutions, it was alleged that his 'ideology' had perniciously interfered with his duties as one of the chief guardians of the financial stability of the nation. But Alan Greenspan was not a man to be fazed by the committee's probing. In his characteristically bland yet composed response, the former Chairman of the Federal Reserve admitted that he had indeed discovered flaws in his 'conceptual framework for interpreting reality' and though it had stood him in good stead for over forty years, the events surrounding the financial crisis had cast the foundation of his beliefs into much doubt. Particularly, the spectacular failure of lending institutions to safeguard their own self-interest as well as their shareholders' equity had caused this economist a great deal of consternation and disbelief.
While the initial cataclysm of the crisis has receded from our memories, it is worth reflecting on Greenspan's 'conceptual framework' for a few reasons. The intellectual edifice that informed his world-view was in no small measure shared by a number of economists over the last decade, if not the last century. In fact, it still has widespread currency among many contemporary figures. From Robert Lucas, Jr. to Lawrence Summers, the most influential voices of the dismal science believe that societies can achieve the greatest prosperity when individuals are left free to choose. Goods, in their widest sense, can be traded voluntarily between parties who wish to exchange it and as long as they are increasing their well-being without impinging upon the liberty or utility of someone else, transactions in all shapes and guises are permitted. Such libertarian market thinking gained widespread traction over the last thirty years and leaders such as Margaret Thatcher and Ronald Reagan endorsed this
logic with great enthusiasm, both intellectually as well as in matters praxis. As a result, with the academic as well as political establishments favouring laissez-faire capitalism, it seemed like the era of deregulation and market triumphalism was finally here to stay. However, the consequences of this shift in the paradigm governing economies was not just felt solely in the arena of markets but had extended deep into areas of society previously governed by non-market norms.
Michael Sandel, a renowned moral philosopher whose insights are the springboard for many of the thoughts expressed here, notes that almost anything and everything is up for sale and consumption these days - from the right to kill endangered species to the practice of hiring private companies to fight wars - it appears as if norms of the society have simply become a reflection of the norms of the market. Under such a state of affairs, certain things that we generally would not like to treat as commodities have come to be considered as instruments of profit and monetary benefit. Additionally, the extent to which economics as a subject has enlarged its scope of enquiry and applied its modes of analysis to aspects of society previously studied by other areas such as anthropology, sociology and so on has further accentuated the commercialization of norms, so to speak. This is best exemplified by the widespread use of gift-cards for shopping, an idea that has its origin in economists' view that rational individuals understand their preferences the best and those who are planning to gift might as well give cash so as to help maximize the recipient's utility. Such an idea, although arising from logical economic precepts, nevertheless betrays the traditional sentiment that gift giving is an exercise in thoughtfulness and an outward expression of the relationship rather than just an act facilitating consumption. In a similar vein, the issue of investors being able to fund legal actions in exchange for a share of the damages is situated at the confluence of the encroachment of market thinking upon traditional, non-market norms as well as the expansive and imperialistic role of economic analysis. It is now useful to examine in brief a certain case that can serve as the starting point of our argument.
Consider the controversial and highly publicized lawsuit Liebeck v. McDonald's Restaurants. In 1992, an elderly lady by the name of Stella Liebeck spilled coffee she purchased from a McDonald's drive-through on herself and suffered from excruciating third-degree burns in many parts of her body. In due course after receiving emergency treatments and skin grafting, she approached the fast-food giant for obtaining coverage for her medical expenses. The company rejected these and further requests outright and the matter had to be settled by the court. Liebeck was awarded up to a seven figure sum in damages and though it was settled for a significantly lesser amount in confidentiality between the two parties, the case proved to be a watershed in the debate over tort reforms in the United States. On the one hand, there were those who argued that the lawsuit set a precedent for frivolous litigation where individuals could sue companies for injuries or harm under conditions where there was little or no legal merit. Simultaneously, there were those who contended that such types of litigation were necessary to keep corporate greed and malpractices under check. In our case, for the sake of argument, imagine that a firm is floated by a group of investors who decide that given the precedent set by The Hot Coffee Lawsuit, there is a great deal of money to be made from frivolous litigations. They design mechanisms where people who feel they have been harmed or wronged by some company can send in their grievances. After some legal research, the investors decide whether or not a litigation is worth pursuing. If indeed a particular legal action is worth the effort, they fund the entire process and enter into a contract with the aggrieved customer to split the share of the damages in the event of a win. The question now is whether we as citizens have reasons for some sort of discomfiture, and if so, on what grounds.
At first glance, it may appear that there is nothing particularly disconcerting about the arrangement between the investors and the disgruntled customers. According to the principles of competitive markets, two parties here have engaged in a mutually advantageous transaction without making someone else worse off, a condition known in the decision sciences as 'pareto improvement'. More importantly, economic reasoning suggests that such transactions improve societal well-being as a whole and this is what economists mean when they claim that competitive markets allocate goods efficiently. In other words, when people engage in mutually beneficial trades, markets allocate goods to those who value them most highly, as measured by their willingness to pay. The fact that a dissatisfied customer strikes a deal with an investor for a share of the damages in return for funding the legal procedure suggests that both the parties are better off, along with the society as a whole. Of course, for argument's sake, it is assumed here that the defendant, whichever the company, would be worse-off regardless of whether or not the plaintiff reached a deal with the investors. The latter, presumably risk-loving individuals who in the spirit of the insurance business have decided to fund numerous lawsuits of different natures so as to maximize the chances of success, are better off since they would not have embarked on this venture otherwise. Similarly, by sharing the potential settlement with the investors, the plaintiff gets access to funding for the legal procedure thereby saving up on costs. Yet, this line of thinking implicitly suggests that the good, whatever it may be, when used in a commercial transaction does not get altered with regard to its character.
Unlike standard commodities or services such as automobiles or haircuts, what is being exchanged in our case is a different kind of good: justice, as dispensed by the courts. Indeed, for us to understand why justice should not be treated as a standard commodity, we need to examine our conception of a reasonable justice system and how the pact made by the investors and plaintiffs corrupts the judiciary and its ideals in many ways. Firstly, it is contended that the judiciary's primary role is in the dispensation of justice and not in the granting of claims or settlements. The latter is simply a mechanism to further 'enhance' the justice dispensed and by itself does not lay claim to any merit. However, the very nature of many frivolous lawsuits are that they are filed assuming that justice is equivalent to receiving a monetary windfall. This is contended to be a wrong attitude towards justice as an ideal since it degrades it and equates it with other base commodities in the market place. Secondly, the plaintiff, whoever it may be, must not view the judiciary simply as a means to accrue monetary benefit for doing so otherwise would be to corrupt the justice system. In effect, those with such an intention would perceive the judiciary as a mechanism for gambling and landing windfall gains. In a similar vein, the investors, when engaging in the funding of legal procedures, render the plaintiffs as potential lottery tickets and thereby turns the judiciary into a source of funding for the prize-money. Therefore, if we as citizens seek to preserve the integrity and respect of the judiciary, we should be aware that allowing investors to fund legal actions in exchange for a share of the damages can corrupt and degrade our cherished ideals of the justice system, and turn it into an instrument of private gain rather than a source of public good.
Free-market advocates may grudgingly concede to the arguments of corruption to a public institution but may not be convinced that there are sound utilitarian reasons for opposing the deal between investors and plaintiffs. But, it is difficult to hold such a position since there are many reasons why such a pact should be regulated, if not opposed entirely. For one, financing many a frivolous litigation means that there will be an excess of unwarranted legal cases circulating within the judicial system. This might result in the devotion of time and resources to lawsuits that do not deserve our judiciary's attention and more importantly, it may crowd out files that deservedly require time and consideration with regard to dispensing justice. Such a situation is certainly foreseeable in developing countries like India where the population is high and the judiciary cannot keep up with the demands of citizenry. Secondly, it may put undue pressure on owners and those heading businesses to be alert for people committing 'mishaps' in their premises. For instance, say a KFC franchise owner is following all the systems in place and assuming that there are no faults, a customer still manages to 'find' insects or some other unwanted items in the food and decides to file a lawsuit. No doubt these frivolous litigations will make business owners more alert in how they serve their customers but for honest businessmen who are interested in a day's work for a day's profit, such lawsuits can be damaging, both financially and emotionally. In this sense, the nefarious pact between investors and potential plaintiffs can harm entrepreneurial spirit of the nation in a myriad of ways.
Last but not the least, it is conceivable that given the way modern finance and its allied disciplines and institutions have developed, funding of legal actions in exchange for a share of the damages will be scaled up and made vastly complicated by the use of financial instruments and securitization. No doubt this will become a massive industry the way mortgages and student loans have become fodder for giant banks, pension funds and insurance companies. The global financial system will soon begin to allocate much needed capital into sectors such as this rather than areas where essential services are provided or tangible goods are manufactured. Employment generation will be sacrificed for getting a share of returns from customers who have slipped in the wash area in Starbucks or purposely stuffed in an insect in their Mc Donald's burger. Furthermore, in the event that such kinds of investing become commonplace, it is possible that even more frivolous and dastardly types of financing and profit generation may crop up in different parts the economy and given that our regulators have limited resources and cannot comprehensively review every single sector of the system, we may well be in for many unforeseeable crises in the future. Indeed, we must certainly do away with Alan Greenspan's 'conceptual framework for interpreting reality' for it may very well lead us on to our next Great Recession. What we need is effective regulation that safeguards the integrity of our public institutions without necessarily destroying the potential for Schumpeter's 'Creative Destruction' or the general entrepreneurial spirit of the economy. Yet, at the same time, investors such as those trying to fund legal actions in exchange for returns should be regulated, if not completely barred from carrying out their activities by the iron hand of the regulatory authorities of the nation.
[Qn. 5, General Paper II, September 2010, Examination Fellowship, All Souls College]
Michael Sandel, a renowned moral philosopher whose insights are the springboard for many of the thoughts expressed here, notes that almost anything and everything is up for sale and consumption these days - from the right to kill endangered species to the practice of hiring private companies to fight wars - it appears as if norms of the society have simply become a reflection of the norms of the market. Under such a state of affairs, certain things that we generally would not like to treat as commodities have come to be considered as instruments of profit and monetary benefit. Additionally, the extent to which economics as a subject has enlarged its scope of enquiry and applied its modes of analysis to aspects of society previously studied by other areas such as anthropology, sociology and so on has further accentuated the commercialization of norms, so to speak. This is best exemplified by the widespread use of gift-cards for shopping, an idea that has its origin in economists' view that rational individuals understand their preferences the best and those who are planning to gift might as well give cash so as to help maximize the recipient's utility. Such an idea, although arising from logical economic precepts, nevertheless betrays the traditional sentiment that gift giving is an exercise in thoughtfulness and an outward expression of the relationship rather than just an act facilitating consumption. In a similar vein, the issue of investors being able to fund legal actions in exchange for a share of the damages is situated at the confluence of the encroachment of market thinking upon traditional, non-market norms as well as the expansive and imperialistic role of economic analysis. It is now useful to examine in brief a certain case that can serve as the starting point of our argument.
Consider the controversial and highly publicized lawsuit Liebeck v. McDonald's Restaurants. In 1992, an elderly lady by the name of Stella Liebeck spilled coffee she purchased from a McDonald's drive-through on herself and suffered from excruciating third-degree burns in many parts of her body. In due course after receiving emergency treatments and skin grafting, she approached the fast-food giant for obtaining coverage for her medical expenses. The company rejected these and further requests outright and the matter had to be settled by the court. Liebeck was awarded up to a seven figure sum in damages and though it was settled for a significantly lesser amount in confidentiality between the two parties, the case proved to be a watershed in the debate over tort reforms in the United States. On the one hand, there were those who argued that the lawsuit set a precedent for frivolous litigation where individuals could sue companies for injuries or harm under conditions where there was little or no legal merit. Simultaneously, there were those who contended that such types of litigation were necessary to keep corporate greed and malpractices under check. In our case, for the sake of argument, imagine that a firm is floated by a group of investors who decide that given the precedent set by The Hot Coffee Lawsuit, there is a great deal of money to be made from frivolous litigations. They design mechanisms where people who feel they have been harmed or wronged by some company can send in their grievances. After some legal research, the investors decide whether or not a litigation is worth pursuing. If indeed a particular legal action is worth the effort, they fund the entire process and enter into a contract with the aggrieved customer to split the share of the damages in the event of a win. The question now is whether we as citizens have reasons for some sort of discomfiture, and if so, on what grounds.
At first glance, it may appear that there is nothing particularly disconcerting about the arrangement between the investors and the disgruntled customers. According to the principles of competitive markets, two parties here have engaged in a mutually advantageous transaction without making someone else worse off, a condition known in the decision sciences as 'pareto improvement'. More importantly, economic reasoning suggests that such transactions improve societal well-being as a whole and this is what economists mean when they claim that competitive markets allocate goods efficiently. In other words, when people engage in mutually beneficial trades, markets allocate goods to those who value them most highly, as measured by their willingness to pay. The fact that a dissatisfied customer strikes a deal with an investor for a share of the damages in return for funding the legal procedure suggests that both the parties are better off, along with the society as a whole. Of course, for argument's sake, it is assumed here that the defendant, whichever the company, would be worse-off regardless of whether or not the plaintiff reached a deal with the investors. The latter, presumably risk-loving individuals who in the spirit of the insurance business have decided to fund numerous lawsuits of different natures so as to maximize the chances of success, are better off since they would not have embarked on this venture otherwise. Similarly, by sharing the potential settlement with the investors, the plaintiff gets access to funding for the legal procedure thereby saving up on costs. Yet, this line of thinking implicitly suggests that the good, whatever it may be, when used in a commercial transaction does not get altered with regard to its character.
Unlike standard commodities or services such as automobiles or haircuts, what is being exchanged in our case is a different kind of good: justice, as dispensed by the courts. Indeed, for us to understand why justice should not be treated as a standard commodity, we need to examine our conception of a reasonable justice system and how the pact made by the investors and plaintiffs corrupts the judiciary and its ideals in many ways. Firstly, it is contended that the judiciary's primary role is in the dispensation of justice and not in the granting of claims or settlements. The latter is simply a mechanism to further 'enhance' the justice dispensed and by itself does not lay claim to any merit. However, the very nature of many frivolous lawsuits are that they are filed assuming that justice is equivalent to receiving a monetary windfall. This is contended to be a wrong attitude towards justice as an ideal since it degrades it and equates it with other base commodities in the market place. Secondly, the plaintiff, whoever it may be, must not view the judiciary simply as a means to accrue monetary benefit for doing so otherwise would be to corrupt the justice system. In effect, those with such an intention would perceive the judiciary as a mechanism for gambling and landing windfall gains. In a similar vein, the investors, when engaging in the funding of legal procedures, render the plaintiffs as potential lottery tickets and thereby turns the judiciary into a source of funding for the prize-money. Therefore, if we as citizens seek to preserve the integrity and respect of the judiciary, we should be aware that allowing investors to fund legal actions in exchange for a share of the damages can corrupt and degrade our cherished ideals of the justice system, and turn it into an instrument of private gain rather than a source of public good.
Free-market advocates may grudgingly concede to the arguments of corruption to a public institution but may not be convinced that there are sound utilitarian reasons for opposing the deal between investors and plaintiffs. But, it is difficult to hold such a position since there are many reasons why such a pact should be regulated, if not opposed entirely. For one, financing many a frivolous litigation means that there will be an excess of unwarranted legal cases circulating within the judicial system. This might result in the devotion of time and resources to lawsuits that do not deserve our judiciary's attention and more importantly, it may crowd out files that deservedly require time and consideration with regard to dispensing justice. Such a situation is certainly foreseeable in developing countries like India where the population is high and the judiciary cannot keep up with the demands of citizenry. Secondly, it may put undue pressure on owners and those heading businesses to be alert for people committing 'mishaps' in their premises. For instance, say a KFC franchise owner is following all the systems in place and assuming that there are no faults, a customer still manages to 'find' insects or some other unwanted items in the food and decides to file a lawsuit. No doubt these frivolous litigations will make business owners more alert in how they serve their customers but for honest businessmen who are interested in a day's work for a day's profit, such lawsuits can be damaging, both financially and emotionally. In this sense, the nefarious pact between investors and potential plaintiffs can harm entrepreneurial spirit of the nation in a myriad of ways.
Last but not the least, it is conceivable that given the way modern finance and its allied disciplines and institutions have developed, funding of legal actions in exchange for a share of the damages will be scaled up and made vastly complicated by the use of financial instruments and securitization. No doubt this will become a massive industry the way mortgages and student loans have become fodder for giant banks, pension funds and insurance companies. The global financial system will soon begin to allocate much needed capital into sectors such as this rather than areas where essential services are provided or tangible goods are manufactured. Employment generation will be sacrificed for getting a share of returns from customers who have slipped in the wash area in Starbucks or purposely stuffed in an insect in their Mc Donald's burger. Furthermore, in the event that such kinds of investing become commonplace, it is possible that even more frivolous and dastardly types of financing and profit generation may crop up in different parts the economy and given that our regulators have limited resources and cannot comprehensively review every single sector of the system, we may well be in for many unforeseeable crises in the future. Indeed, we must certainly do away with Alan Greenspan's 'conceptual framework for interpreting reality' for it may very well lead us on to our next Great Recession. What we need is effective regulation that safeguards the integrity of our public institutions without necessarily destroying the potential for Schumpeter's 'Creative Destruction' or the general entrepreneurial spirit of the economy. Yet, at the same time, investors such as those trying to fund legal actions in exchange for returns should be regulated, if not completely barred from carrying out their activities by the iron hand of the regulatory authorities of the nation.
[Qn. 5, General Paper II, September 2010, Examination Fellowship, All Souls College]
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