Individual Rights and Collective Rationality: Some Implications for Economic Analysis of Law

In recent years there has been much discussion of two theorems in economics that relate individual rights to Pareto optimality. In the area of law and economics, Ronald Coase is well known for demonstrating that in a world without transaction costs bargaining will always result in a Pareto-efficient outcome, whatever the initial distribution of rights. In social choice theory, however, Amartya Sen has shown that for certain configurations of individual preferences, the reasonable exercise of individual rights can lead to outcomes that are Pareto-inferior to other outcomes that are attainable. Clearly, there is some tension between these two results.

The purpose of this paper is to point to the lessons we might learn from Sen's theorem in particular and from social choice theory in general, and to suggest some implications for the treatment ofindividual rights within the currently fashionable economic analysis of law. Specifically, I shall argue that rights cannot be sensibly incorporated within any kind of maximization framework, and that this conclusion renders suspect Richard Posner's normative defense of wealth maximization as a goal for legal systems.