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Polish Yearbook of Law and Economics. Vol. 4 (2014) - ebook/pdf
Polish Yearbook of Law and Economics. Vol. 4 (2014) - ebook/pdf
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This fourth volume of the Polish Yearbook of Law & Economics contains a collection of articles selected, following a separate review process, from papers delivered at the 30th Annual Meeting of the European Association of Law and Economics (EALE), which took place at the University of Warsaw on September 26-28, 2013. More than 200 scholars from 25 countries were participants of this Conference organised by the Polish Association of Law & Economics (PSEAP) in cooperation with the Centre for Economic Analyses of Public Sector (CEAPS) at Faculty of Economic Sciences of the University of Warsaw, as well as Warsaw School of Economics.

“The yearbook shows how contemporary Law and Economics is bringing theory towards an impressive diversity of topics. The analysis of the relationship between law and contemporary economics is a rapidly expanding subject in Europe and the Polish Association is a very significant part of this European dynamism, as illustrated by the debate on Regulatory Impact Assessment including some of the best European specialists invited by the Association. Law and legal institutions are known to have a profound impact on the economy and, at the same time, to be deeply influenced by it. The yearbook provides a clear overview of this two-way relationship in a manner that is accessible and interesting to economists and lawyers alike.”

Prof. Bruno Deffains, Université Panthéon-Assas (Paris 2), President of the European Association of Law and Economics (EALE)

Polish Yearbook of Law & Economics Vol. 4 (2013) contains papers by scholars from various countries of Europe and beyond. They include: Prof. Leszek Balcerowicz, Prof. Ejan Mackaay, Prof. Paolo Maggioni, Prof. Matías Irigoyen Testa, Alain Parent, Iacopo Grassi, and Jurgen Goossens. Topics covered range from economic freedom, financial regulation and federalism to piracy, punitive damages and suretyship. The novel Applications section presents a stimulating discussion of best European scholars and experts about the possibilities of increasing the contribution of Law and Economics to Regulatory Impact Assessment.

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Yearbookok_4 8/13/14 11:18 PM Page 1 Recommended by Polish Association of Law and Economics This fourth volume of the Polish Yearbook of Law Economics contains a collection of articles selected, following a separate review process, from papers delivered at the 30th Annual Meeting of the European Association of Law and Economics (EALE), which took place at the University of Warsaw on September 26-28, 2013. More than 200 scholars from 25 countries were participants of this Conference organised by the Polish Association of Law Economics (PSEAP) in cooperation with the Centre for Economic Analyses of Public Sector (CEAPS) at Faculty of Economic Sciences of the University of Warsaw, as well as Warsaw School of Economics. The yearbook shows how contemporary Law and Economics is bringing theory towards an impressive diversity of topics. The analysis of the relationship between law and con tem porary economics is a rapidly expanding subject in Europe and the Polish Asso cia tion is a very significant part of this European dynamism, as illustrated by the debate on Regulatory Impact Assessment including some of the best European specialists invited by the Association. Law and legal institutions are known to have a profound impact on the economy and, at the same time, to be deeply influenced by it. The yearbook provides a clear overview of this two-way relationship in a manner that is accessible and in teresting to economists and lawyers alike. Prof. Bruno Deffains, Université Panthéon-Assas (Paris 2) President of the European Association of Law and Economics (EALE) Polish Yearbook of Law Economics Vol. 4 (2013) contains papers by scholars from various countries of Europe and beyond. They include: Prof. Leszek Balcerowicz, Prof. Ejan Mackaay, Prof. Paolo Maggioni, Prof. Matías Irigoyen Testa, Alain Parent, Iacopo Grassi, and Jurgen Goossens. Topics covered range from economic freedom, financial regulation and federalism to piracy, punitive damages and suretyship. The novel Applications section presents a stimulating discussion of best European scho lars and experts about the possibilities of increasing the contribution of Law and Economics to Regulatory Impact Assessment. www.ksiegarnia.beck.pl tel. 22 31 12 222 fax 22 33 77 601 V o l . 4 ( 2 0 1 3 ) Polish Yearbook of Law Economics Editors: Jarosław Bełdowski Katarzyna Metelska-Szaniawska Louis Visscher Vol. 4 (2013) P o l i s h Y e a r b o o k o f L a w E c o n o m i c s strYearbook_4 8/5/14 9:54 AM Page 1 Polish Yearbook of Law Economics strYearbook_4 8/5/14 9:54 AM Page 2 Authors: Prof. Leszek Balcerowicz Warsaw School of Economics Prof. Ejan Mackaay Université de Montréal; CIRANO Alain Parent McGill University Prof. Paolo Maggioni University of Trento Dr. Iacopo Grassi University of Naples Federico II Dr. Matías Irigoyen-Testa University Torcuato Di Tella, Buenos Aires; Universidad Nacional del Sur, Bahía Blanca Jurgen Goossens Ghent University Editors: Jarosław Bełdowski Collegium of Economic Analyses, Warsaw School of Economics Dr. Katarzyna Metelska-Szaniawska Faculty of Economic Sciences, University of Warsaw Dr. Louis Visscher Erasmus School of Law, Erasmus University Rotterdam strYearbook_4 8/5/14 9:54 AM Page 3 Polish Yearbook of Law Economics Editors: Jarosław Bełdowski Katarzyna Metelska-Szaniawska Louis Visscher Vol. 4 (2013) Wydawnictwo C.H.Beck Warszawa 2014 Publisher: Anna Wieczorek Editing: Magdalena Mularczyk Cover by: GRAFOS Cover illustration by: © iStock/pmtavares © iStock/zentilia © iStock/JuSun Publication co-financed by: – Rector of the University of Warsaw – Faculty of Economic Sciences at University of Warsaw – Polish Association of Law Economics (PSEAP) Copyright © Wydawnictwo C.H.Beck Warszawa 2014 Wydawnictwo C.H.Beck Sp. z o.o., ul. Bonifraterska 17 00-203 Warszawa, tel. (22) 33 77 600 Typesetting: Studio Graficzne MIMO, Michał Moczarski Printing and binding: Elpil, Siedlce ISBN 978-83-255-6582-4 ISBN e-book 978-83-255-6583-1 CONTENTS From the Editors (Jarosław Bełdowski, Katarzyna Metelska-Szaniawska, Louis Visscher) ............................................................................................... Section I. FEATURED ARTICLE ......................................................... Chapter 1. Economic Freedom: Fundamentally Important and the Most Attacked (Leszek Balcerowicz) .............................................. 1.1. The conceptual confusion ................................................................. 1.2. The deification of the state ................................................................ 1.3. Individual freedom and institutional systems ................................. 1.4. Political and civil liberties ................................................................. 1.5. What is economic freedom? .............................................................. 1.6. The paradox of economic freedom ................................................... 1.7. The attacks on economic freedom .................................................... 1.8. How to defend the economic freedom .............................................. References ................................................................................................... Section II. ARTICLES .............................................................................. Chapter 2. An Economic Analysis of Suretyship (Ejan Mackaay, Alain Parent) .................................................................................................. 2.1. Introduction ....................................................................................... 2.2. Suretyship – economic function ....................................................... 2.2.1. The cost of credit for unsecured loans ................................... The cost of money ............................................................... Transaction costs ................................................................. The cost of risk .................................................................... 2.2.2. Suretyship as a means of reducing the cost of credit ............. Reduction of the cost of information .................................. Reduction of the cost of moral hazard ................................ Reduction of the cost of default .......................................... 2.2.3. Constraints ............................................................................ Misperception of risk by the surety ..................................... Opportunism ....................................................................... 1 3 5 6 6 8 10 11 12 15 17 19 21 23 23 24 25 25 25 26 26 27 28 29 29 30 31 V CONTENTS 2.3. The economics of suretyship rules in the Code ............................... 2.3.1. Protection against opportunism by means of specific code provisions ............................................................................... Protection of the surety ....................................................... Protection of the creditor .................................................... Protection of the debtor ....................................................... 2.3.2. Protection against opportunism through the general obligation of good faith dealing ............................................ 2.4. Conclusion .......................................................................................... References ................................................................................................... Chapter 3. Did Financial Markets Reward the Burden of Unlimited Liability? Evidence from Mid-Nineteenth Century British Banks (Paolo Maggioni) ............................................................................................ 3.1. Introduction ....................................................................................... 3.2. Overview ............................................................................................. 3.2.1. A general model for limited liability ...................................... 3.2.2. Theoretical analysis ............................................................... 3.2.3. Empirical analysis .................................................................. 3.3. Another look into British history ..................................................... 3.3.1. Company law and the introduction of limited liability ........ 3.3.2. Organized exchanges ............................................................. 3.4. Another look into the British equity market ................................... 3.4.1. Data sources and sample construction .................................. 3.4.2. Monthly return calculation ................................................... 3.4.3. Price indexes .......................................................................... 3.5. Measured excess return ..................................................................... 3.5.1. Interpretation of the results ................................................... 3.6. Conclusions ........................................................................................ References ................................................................................................... Appendix. Tables and figures .................................................................... Chapter 4. A Game Theory Approach to the Effect of Piracy on Collusion in a Vertically Differentiated Oligopoly (Iacopo Grassi) ....... 4.1. Introduction ....................................................................................... 4.2. Collusion as an application of the Prisoner’s Dilemma .................. 4.3. The model without piracy ................................................................. 4.4. How piracy might affect collusion ................................................... 4.5. Conclusion .......................................................................................... References .................................................................................................. Appendix. Generalization of the conditions expressed in the text ........ Chapter 5. Prohibition Against Punitive Damages Insurance: The Argentine Case (Matías Irigoyen-Testa) ............................................... 5.1. Introduction ....................................................................................... VI 32 33 33 37 38 39 40 40 43 43 44 44 46 49 51 51 54 55 56 57 58 59 61 61 62 65 73 73 76 78 82 87 88 90 93 93 CONTENTS 5.2. Punitive damages in Argentina ......................................................... 5.2.1. General issues ........................................................................ 5.2.2. Insurability of punitive damages ........................................... 5.3. A brief idea about the insurability of punitive damages in the U.S. ........................................................................................... 5.4. The traditional position of the Economic Analysis of Law ............ 5.4.1. Cooter’s position .................................................................... 5.4.2. Polinsky and Shavell’s position .............................................. 5.5. Assumption included in our analysis of the Argentine case ........... 5.6. Re-analysis of the effects of punitive damage insurance ................ 5.6.1. Differences with the effects of compensatory damage insurance ................................................................................ 5.6.1.1. Differences in risk reduction ................................. 5.6.1.2. Differences in ensuring a solvent patrimony to compensate injured victims ............................... 5.6.2. Positive effects of the punitive damage insurance ................. 5.6.3. Negative effects of punitive damage insurance ..................... 5.6.3.1. Negative effects from adverse selection problems . 5.6.3.2. Effects against the punitive damages function of sanction ............................................................. 5.6.3.3. Effects against the punitive damages function of deterrence .......................................................... 5.6.3.4. Effects against the victims’ welfare in irreparable harm cases ............................................................. 5.6.3.5. Effects against the function of compensatory damages insurance ................................................. 5.6.3.6. Effects against the market equilibrium of goods and services ............................................................ 5.7. Our position for the Argentine case ................................................. 5.8. Conclusions ........................................................................................ References ................................................................................................... Chapter 6. A Law and Economics Analysis of Federalism Applied to the Belgian Judiciary (Jurgen Goossens) ................................................ 6.1. Introduction ....................................................................................... 6.2. Constitutional distribution of legislative power regarding the Belgian judiciary .......................................................................... 6.2.1. The fata morgana of a logical distribution of powers ........... 6.2.2. State reforms .......................................................................... 6.3. A Law and Economics analysis of federalism .................................. 6.3.1. Preliminary framework .......................................................... 6.3.2. Advantages of decentralization .............................................. 6.3.2.1. Voting with their feet ............................................ 6.3.2.2. Administration of justice in Belgium .................... 95 95 97 98 99 99 100 101 102 102 102 103 104 104 104 105 106 107 107 107 108 108 109 115 115 117 117 118 119 119 122 122 125 VII 126 129 130 130 134 135 135 136 137 137 137 138 139 140 140 141 142 144 149 151 CONTENTS 6.3.2.3. Homogeneity bonus ............................................... 6.3.2.4. Institutional learning ............................................. 6.3.3. Disadvantages of decentralization ......................................... 6.3.3.1. The loss of economies of scale and the increase of transaction costs ................................................ 6.3.3.2. Externalities ........................................................... 6.4. Reform proposals ............................................................................... 6.4.1. Preliminary ............................................................................ 6.4.2. Judicial management and training ........................................ 6.4.3. Organization and functioning of the judiciary ..................... 6.4.3.1. In general ............................................................... 6.4.3.2. Highest courts ........................................................ 6.4.3.3. Lower courts .......................................................... 6.4.3.4. Fundamental procedural principles ....................... 6.4.3.5. Technical procedural rules .................................... 6.4.3.6. Law-making power regarding general criminal law .......................................................................... 6.4.3.7. Synthesis ................................................................ 6.5. Conclusion .......................................................................................... References ................................................................................................... Section III. APPLICATIONS .................................................................. Chapter 7. Law Economics and Regulatory Impact Assessment ...... VIII From the Editors Jarosław Bełdowski (Warsaw School of Economics) Katarzyna Metelska-Szaniawska (University of Warsaw) Louis Visscher (Erasmus University Rotterdam) We have the pleasure to present the fourth volume of the Polish Yearbook of Law Economics. The collection presented in this volume encompasses articles from various areas of Economic Analysis of Law, selected on the basis of an additional review process from papers presented at the 30th Annual Meeting of the European Association of Law and Economics (EALE), which took place at the University of Warsaw on September 26–28, 2013. The conference, organized by the Polish Association of Law Economics (PSEAP) in cooperation with Centre for Economic Analyses of Public Sector (CEAPS) at the Faculty of Economic Sciences of the University of Warsaw and the Warsaw School of Economics, brought together more than 200 scholars from 25 countries, including a vast representation of Polish researchers. This fourth volume of the Polish Yearbook of Law Economics contains three sections: Featured Article with Leszek Balcerowicz’s paper on “Economic Freedom: Fundamentally Important and the Most Attacked”1; Articles with five papers presented during the above conference; as well as an Applications section devoted to the topic of Regulatory Impact Assessment viewed from the perspective of Law and Economics. Leszek Balcerowicz’s “Economic Freedom: Fundamentally Important and the Most Attacked” provides an in-depth account of the notion of economic freedom –  from conceptual foundations and clarifications to the discussion of its effects and, in particular, the consequences of the lack of economic liberty, i.e. various statist regimes. The author, being the architect of Poland’s 1 Leszek Balcerowicz presented a keynote lecture at the conference entitled “Institutional Change after Socialism and the Rule of Law”. However, the author decided to submit his recent essay on economic freedom to the current edition of the Yearbook. 1 From the Editors early transformation from socialism to the market economy, formulates the ‘economic freedom paradox’, emphasizing this freedom’s particularly important consequences for millions of ordinary people, while at the same time arguing that it is the most attacked liberty under democratic capitalism. He illustrates the presented argumentation with examples from numerous countries, including socialist and post-socialist Central and Eastern Europe. The subsequent articles focus on topics falling within five important areas of Law and Economics: (1) contract law – with Ejan Mackaay and Alain Parent’s economic view on the civil law institution of suretyship; (2) financial and banking law –  with Paolo Maggioni’s analysis of 19th century British banks and discussion whether markets rewarded equity holders in the case of unlimited liability regime; (3) the nexus of intellectual property law and competition law –  with Iacopo Grassi’s study of the effect of piracy on the ability of firms to collude in a  vertical differentiated oligopoly; (4) tort law – with Matías Irigoyen-Testa’s considerations on the potential introduction of punitive damages insurance for cases of direct liability; and (5) constitutional law and economics represented by Jurgen Goossens’ study of federalism and decentralization with regard to the judiciary. The theory and empirical results presented in these papers form the basis for policy recommendations, usually not limited to countries specifically studied by the authors (e.g. Argentina, Belgium) but of more general applicability. The final section of this volume deals specifically with application of Economic Analysis of Law in the field of Regulatory Impact Assessment (RIA). The content of this section is based on a panel discussion on this topic conducted during the 30th Annual Meeting of the European Association of Law and Economics. The following scholars and practitioners contributed to the discussion: Andrea Renda, Daniel Trnka, Alberto Alemanno, Jarosław Bełdowski, and Anne van Aaken (moderator). Having very briefly presented the contents of the volume we leave the Reader to explore the subsequent chapters in more detail. 2 Section I FEATURED ARTICLE Chapter 1. Economic Freedom: Fundamentally Important and the Most Attacked Leszek Balcerowicz (Warsaw School of Economics) I  start1 with noting the conceptual confusion surrounding such basic terms as freedom, state, law, democracy. I  stress against this background that conceptual clarity is of great analytical and political value. I  then discuss the tendency, present both in the public and in academia, to treat the state as a  deity, while criticizing its functionaries. The next section deals with individual freedoms and links its variation to various institutional systems. I then discuss the political and civil liberties. This is the stepping stone to the analysis of the economic freedom, and especially of the threats this freedom is exposed to, even in democratic capitalism. The next section is dedicated to a more thorough discussion of the economic liberty as this concept is far from clear in most debates. This brings me to the paradox of economic freedom – to the fact, that this liberty is especially important because of the consequences in its variation to the millions of ordinary people, and at the same time, the most attacked under democratic capitalism. I then discuss the importance of the economic freedom by pointing out how socially costly the restrictions of this institutional variable are, i.e. consequences of various statist regimes. The next section deals with the attacks on economic freedom coming from the statist pressure groups. The essay ends with a note on how to defend economic freedom under democracy and capitalism. 1 This essay is an expanded version of the lecture held at the XXVI Conferenza Fulvio Guerrini (Torino, Centro Einaudi, October 9, 2013) and has earlier been published in Biblioteca della libertà, XLVIII (2013), n. 208 online, http://www.centroeinaudi.it. 5 I. Featured article 1.1. THE CONCEPTUAL CONFUSION We cannot discuss any basic aspect of the life of an individual in a society without using such terms as freedom, property, law, state, justice, democracy, etc. However, each of these terms has different meanings, sometimes contradictory. For example, democracy was supposed to exist in the West and in the former Soviet Union. What liberty meant to J.S. Mill was very different from the meaning Hegel gave to the same term. There have been lengthy discussions among political philosophers on what law is and what the rule of law is. This state of affairs results from various factors. One of them is a simple political manipulation of the language, typical of totalitarian regimes. What should be surprising and considered to be disgusting, is that certain intellectuals have supplied a pseudo-intellectual justification for these practices. Some other politically engaged authors have changed the original meaning of a term by replacing it by a different one, while claiming that they have been faithful to the original concept. This is what has happened to the expression “liberalism” in the US or to the term “freedom” in the hands of Hegel. Some philosophers have had an unfortunate habit of making conceptual discoveries, by giving new meaning to the established terms instead of assigning new terms to the new concepts. Such a practice creates only confusion and brings nothing to better understanding of a real word. Rather it obstructs it. And this is not only an intellectual but also a  political problem: old terms loaded with new meanings, and often supplied with powerful emotional “charges”, have been an effective instrument in the political struggle. This has been especially true regarding the intellectual and political expansion of statism (i.e. expanded role of the state in a society); the reverse side of this process has been the reduction in the scope of individual freedom, especially the economic one. Against this background, the fight for conceptual clarity has an important intellectual and political sense2. This effort should focus on such terms as the state, liberty, and rights. 1.2. THE DEIFICATION OF THE STATE The expansion of statism has been related to the spread of the concepts of the state which ascribe to it a large and positive role in a society. Many people, both in the West and in the former socialist countries, display an attitude which I call – somewhat pointedly – “a mentality of Soviet official”. It is a generalized belief: “whatever problem there exists only the state can solve it. The state is perceived as a deity, i.e. an omniscient and benevolent 2 This is why I  published in Poland in 2012 a  selection of essays under the title: “Discovering Freedom. Against Brainwashing”. The book has sold more than 30 thousand copies so far. In this essay I am drawing on my introduction to this book. 6 1. Economic Freedom: Fundamentally Important and the Most Attacked being with unlimited resources. Many persons display such an attitude, while complaining about politicians and government bureaucrats”. The mentality of Soviet official results from years of statist propaganda and from the practices of many politicians which pretend to be universal problem solvers, if not, outright “Santa Clauses”. The unavoidably growing gap between the popular expectations raised by such propaganda and the possibilities to deliver, must have contributed to the declining popularity of the politicians and the Parliaments across the democratic world. This creates an opportunity for the proponents of a limited government to inject a note of realism and to explain that under such a system these are individuals who are the best problem solvers, and that an extended state, by crippling their initiatives and by distorting their incentives, is the main source of problems in a society. There is a lot of empirical research which shows this, and which should be used in the anti-statist campaigns. Not only the public but also a  large part of social sciences display a  statist bias. This refers to many philosophers (Hegel is just a  prominent representative of this group), sociologists and economists. Much of the modern economics is based on the assumption that the state, by definition, aims at maximizing social welfare and corrects various market failures. This scientific deification of the state overlooks ample lessons of history and ignores the basic fact that the more expanded the state was, the worse were the results in terms of “social welfare”. The discipline of public choice of James Buchanan and Gordon Tullock, which restores a  common-sense by pointing out that politicians and bureaucrats who populate the state are just normal human beings, still has to penetrate more deeply into social sciences. The same goes for the thoughts of wise men of the past. Take James Madison (1757–1836), the first President of the United States: “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary” (Madison 1788). Or take Frederic Bastiat (1801–1850), French economist and philosopher: “Government is the great fiction through which everybody endeavors to live at the expense of everybody else. But the thing that never was seen, and never will be seen or conceived, is, that Government can restore to the public more than it has taken from it” (Bastiat 1848). Against the popular and scientific deification of the state, one should stick to its classical definition as put forward by Max Weber (1922), whereby the state is an organizational apparatus on a given territory which has there a monopoly for a use of force. Not every unit conventionally called “a state” meets this Weberian definition, which suggests that one needs a more extended typology of political units to deal with a  complex reality. However, this definition has basic advantage: it is Wertfrei (value free) and thus prevents the deification of the state. 7 I. Featured article 1.3. INDIVIDUAL FREEDOM AND INSTITUTIONAL SYSTEMS The term “freedom” is especially burdened by many, sometimes, conflicting meanings. It is partly the result of a political manipulation of this term, e.g. the life under the Soviet regime was officially declared to be the most free. Another reason for that is confusing freedom with wealth and the lack of freedom with poverty (as criticized by F.A. Hayek 1960). Finally, the multiple meanings are due to an unfortunate practice of many philosophers to use the term “freedom” with respect to very different spheres of reality, e.g. internal versus external freedom. This is why one should specify what part of reality they refer to when using the term “freedom”. In the following when speaking about freedom I will have in mind the relationship between the respective individuals and the state. This is the basic dimension of individual liberty in the contemporary world. Another one is the relationship between individuals and various groups (or public opinion) which exert pressures upon them3. These two dimensions of freedom were distinguished in a classical essay by J.S. Mill (2001/1859). Freedom in the relationship between individuals and the state is a variable i.e. depending on the type of a state regime, individuals have more or less liberty. A simple way of operationalizing this variable is to connect it to the nature of the institutional regime and to assume that the more types of individuals’ feasible actions treated as crimes (i.e. threatened by state’s sanctions), the less freedom the individuals in their relationship with the state have. In other words, the extent of freedom is inversely proportional to the length of the list of types of actions, treated as crimes by the state. The next step is to distinguish two types of crimes: 1. Political crimes, i.e. crimes against the rulers or a political regime; 2. Ordinary (non-political) crimes. Institutional systems differ, first of all, in the length of the list of political crimes. This list was especially long under Soviet socialism (communism) and this was not an accident. The constitutive feature of such regime is the monopoly of state-ownership of enterprises; and this requires, first nationalizing the inherited private enterprises and then prohibiting them, i.e. declaring private economic activity a  crime. To maintain this basic prohibition one also has to prohibit, i.e. to declare as crimes, other freedom acts such as setting up independent non-economic organizations or independent newspapers, etc. (for more on this see Balcerowicz 1995). Therefore, a democratic socialism is a utopia. To enforce these prohibitions, a prominent role of political police (e.g. the KGB in the USSR) was necessary; ordinary police was also used to prevent and punish the crimes against socialism. 3 In some societies these pressures are very powerful: a drastic example is the caste system in India. 8 1. Economic Freedom: Fundamentally Important and the Most Attacked In non-socialist dictatorships, private economic activity does not constitute a  political crime. However, all other actions perceived as threats to those who hold the monopoly of political power (e.g. the monarchy, the army, the mono-party), are still on the list of such crimes. Therefore, a strong political police, directed against the opponents of the monopolistic rulers, is an indispensable element of these regimes, too. The list of political crimes is the shortest under democratic capitalism, and correspondingly the role of security apparatus is the smallest in this type of the institutional system. However, the threat of terrorism tends to both increase the list of political crimes and to strengthen the position of this apparatus. It is an example of a  classical conflict between the liberty and security. The lists of ordinary crimes contain common elements across various regimes, e.g. killing and robbing other members of a given country is everywhere regarded as a  crime. However, there have been also substantial differences in these lists regarding the sexual behaviors –  e.g. compare the treatment of homosexuals in the 19th and 20th century in the West, or between the contemporary Western countries and some Islamic regimes. Other differences refer to the extent of economic regulations in various systems. I will return to this topic, when I discuss the economic freedom. Measuring the extent of freedom by the length of the list of types of actions treated as crimes by a state is only a first approximation in an attempt to operationalize the liberty in the relationship between the individuals and the state. More elaborate analysis, especially regarding the political crimes, should consider the severity of the state punishments and the level of their enforcement. Regimes which punish these crimes more severely and/or prevent them more effectively, should be regarded as less liberal (or – in other words – more repressive) than those which impose less severe sanctions and/ or are less efficient in prosecuting the political dissidents. In these respects Polish socialism after 1956 was less repressive than that, say, in USRR or in East Germany, even though in all these cases private ownership of productive assets was considered, in principle, as a crime. One should also remember that in the socialist regimes where the political rulers are not subject to the constraints of the rule of law and where they are large distributors of benefits, such as jobs, ranks, apartments, consumer durables and various budgetary entitlements, the state capacity to punish (i.e. to restrict the scope of freedom) goes well beyond using the criminal justice system, as the disobedient individuals can be punished by depriving them of these goods. This is why socialism was even more anti liberal than judged by its formal legislation. More generally, any state which is a big owner, has an extra power to punish and to reward its citizens, i.e. to produce its own clientele. This is, of course, not the only way to achieve these effects. Another one is to produce legislation which gives privileges to various groups, a practice which spread widely under most capitalistic systems. However, having the formal ownership rights gives the political decisions-makers a  tempting and easy way of running an informal reward – punishment system, and of using the 9 I. Featured article state owned enterprises for their political purposes, e.g. financing prestigious but financially dubious projects. 1.4. POLITICAL AND CIVIL LIBERTIES Individuals participate in various spheres of social life. This is why one speaks of various types of freedom: political, civil, economic. Let me briefly discuss the political freedom. I think that, it is analytically useful while discussing the modern political systems, to equate with democracy. And democracy is best defined following Schumpeter (1962/1942) as an elected government, i.e. as a system whereby personal succession in the political power proceeds via free elections, i.e. elections based on open and reasonably fair political competition. Elections without open competition are not democracy but pseudo democracy. Pseudo democracy belongs to the group of non-democratic regimes. Other mechanisms of this type include the heredity mechanism, the monopoly of one particular organization in a state (e.g. an army or a single party) or irregular coup d’etats. There are various theories which praise (or condemn) democracy. The one which especially appeals to me was put forward by Karl Popper (1988): “Anybody who has ever lived under another form of government –  that is, under a dictatorship which cannot be removed without bloodshed – will know that a democracy, imperfect though its, is worth fighting for, and, I believe, worth dying for”. I would add that there have been many justified criticisms of the deficiencies of contemporary democracies. However, many critics dream of replacing imperfect democratic system with a perfect non-democracy, while there have been many awful dictatorships and the worse among them were much worse than the worse democratic systems. Therefore, while trying to reduce the weaknesses present under democracy, one should rather work within its institutional framework. This framework includes extensive civil rights, i.e. freedom of assembly, of speech, of religion, of media, of association. There is no open political competition (i.e. democracy) without such rights. Therefore, political and civil rights constitute a system. Besides, civil rights have an independent value, i.e. they matter also under non-democratic system. Extensive civil rights give rights to various groups and non-economic organizations which are often called “civil society”. Some of them are apolitical, i.e. they group people who want to pursue certain private goals, e.g. helping less fortunate individuals, or mutual assistance, or watching birds. Some other groups are politically – oriented – their main activity is serving the ideological or pecuniary interest of their members by exerting the pressure upon the political system4. 4 Some of these groups, fully or partially overlap with political parties, i.e. some party members are just representatives of certain pressure groups (This has been typical of the peasant parties). Therefore, the pressure groups act both outside and inside the party system. 10 1. Economic Freedom: Fundamentally Important and the Most Attacked It is the composition and the resulting balance of the pressure groups which matters the most for the economic freedom. The problem is that this balance has been often detrimental to the economic liberty, even though the reduction in its extent sooner or later hurts the interests of the millions of people. It is this problem to which I now turn. But first I have to discuss briefly the very concept of economic freedom. 1.5. WHAT IS ECONOMIC FREEDOM? Broadly understood economic freedom is a set of institutional factors which determine: 1. How individuals can obtain their income (or more broadly – means of living); 2. How can they spend (or save) this income. The second component –  the freedom of consumption –  overlaps with the personal liberty. In the past some groups, especially the peasants, were legally discriminated against, regarding how they could dress. Nowadays, in the countries of orthodox Islam women clothing is heavily regulated too. In other contemporary countries such legal discrimination of the freedom of consumption of certain groups does not exist. However, there has been a tendency, motivated by ecological, safety or social consideration, to eliminate consumption of certain goods for everybody. Such reductions of consumers’ choice are especially visible in the EU, e.g. the ban on the genetically modified food. However, it is the differentiation in the first sphere – that a productive actions – which has been the largest, producing the profound consequences for the standard of living of millions of ordinary people. It is also the freedom of productive actions which has been subject of the most bitter controversies in philosophy and social sciences and gave rise to the most pernicious proposals and policies. Freedom of productive actions refers to: – – institutions regulating work; property rights (ownership). Superimposed upon these two components are institutions which determine the freedom of contract. Free labor is a relatively new invention of history – slavery and serfdom were widespread in most countries until recently on the history’s timetable. It is less known that still in 17th and 18th century in the relatively liberal England and the US, the formally free workers were subject to intrusive government restrictions which set their wages, limited their mobility and threatened criminal sanctions for abandoning work (Steinfeld 1991). It was the age of classical liberalism which has introduced the liberal right to work (Lomasky 1987), 11
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Polish Yearbook of Law and Economics. Vol. 4 (2014)
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