On Fairness and Efficiency

Abstract

What is the relationship between fairness, efficiency, accountability, and expertise? What role, if any at all, do these values play in answering the question whether a part of the law is legitimate? This paper provides an answer by introducing a distinction between the substantive and the procedural goals of any part of the legal system. Substantive goals are the ultimate ends of some part of the law, some values or objectives whose pursuit by that part of the law shows why it is desirable to have that law in the first place. Procedural goals are concerned with the methods the law adopts in pursuit of its substantive goals. It is argued that efficiency, accountability and expertise are procedural goals of the law, and can only make sense as benchmarks of legitimacy if they are connected to the accomplishment of some substantive goal that insolvency law could be shown to be committed to. Fairness, on the other hand, is a substantive goal of the law. One implication of recognising this distinction is that the common assertion that fairness might sometimes have to be traded off against the other three values, must be mistaken. Fairness (as an end) does not compete with efficiency, expertise, and accountability (which are all means), and so cannot be traded off against them.

This paper uses these arguments to provide a critique of Vanessa Finch's book, 'Corporate Insolvency Law - Perspectives and Principles' (Cambridge: CUP 2002). It is shown that Finch does not motivate her choice of technical efficiency (referred to in this paper as transaction cost efficiency) over other understandings of the concept of efficiency, does not explain the sort of costs it is meant to mitigate, nor the desired ends in pursuit of which it is to be harnessed. Because of these deficiencies, Finch fails to notice that expertise and accountability are in fact aspects or components of efficiency. The paper explains how the former is a function of coordination costs, the latter is a method for controlling motivation costs, and the mitigation of both types of cost is very much part and parcel of transaction cost efficiency.

Another implication is that Finch's normative framework would only make sense if she could provide a coherent and attractive theory of fairness, the ultimate end the pursuit by insolvency law of which is facilitated by the other, procedural, values. Having examined the notions of fairness Finch employs throughout the book, the paper concludes that two of them are question begging, a third is probably inconsistent with the others, and none of them withstands scrutiny.

JEL Classification: D23, K19, K22, K39