The economic foundation of law

We start our analysis of Graziani’s work by considering his perspective on the ‘economic foundation of law’. ‘The economic foundation of law’, a lecture to inaugurate the 1893-94 academic year at the University of Siena, was published in the university’s Yearbook in 1894 and reproduced in its entirety in the monograph, Economic Facts and Theories (Graziani, 1912).

Graziani believes it superfluous to insist on the economic bases of constitu­tional phenomena:

The representative system of government, which now governs so many people in Europe, America, and some in Asia, whether parliamentary or purely constitu­tional, whether hinged on monarchical or republican institutions, principally owes its origin to economic reasons. It is the budget, the need to raise income and make expenditures, that is the primary stimulus for convening representative bodies of various classes and cities to institute legislation and public decisions. However, the approval of financial measures implies at least some effective control, however inapparent, over the power of the state. (1912)

Moreover, Graziani specifies that if representative phenomena have in­creased it is partly due to increases in public spending. Thus,

[T]he rise in consolidated debt is an effect of democratic systems of government, though it would be more truthful to say that the extension of debt has, rather, resulted in the prevalence of representative institutions.

Thus, Graziani submits that the political prevalence of a lower House in representative systems is for financial reasons. For, in comparison with the upper House, the lower chamber is almost exclusively concerned with state spending and income (the US Congress provides a historical example here). Although at first glance economic factors might not seem to have any influ­ence on electoral systems, Graziani states,

[I]t cannot be denied that, despite the perfection of electoral mechanisms, the wealthy, who often employ people who have no assets of their own and who look to the wealthy employers for their means of physical subsistence, benefit from the votes of these employees who have no recourse to the threat of dismissal. Even the basic rights of citizens, such as equality and freedom, are linked to economic circumstances, since the economically weaker may, unfortunately, only aspire to formal equality, which is of little relevance when more marked material inequali­ties predominate. (Ibid.)

In summary, Graziani believes that the foundations underlying institutions evade public constitutional law, unless they are of an economic order which often determines the very form of the organism and its action.

Similarly, respect for private property - which Graziani believes has been historically transformed from a collective to a capitalist concept - represents the effect of economic conditions which demand that personal ownership is necessary in order to guarantee the continuity of production necessary to meet man’s fundamental needs.

State administration also proves to be a byproduct of economic necessities. It ‘reduces the cost of providing certain services’.

Graziani’s view of criminal law is that human choices are the product of economic choices. In this respect, Graziani criticizes the traditional formula­tions of criminal law. Whether they are based on classical or positive lines, they fail to understand the economic nature of criminal behaviour. Graziani formulates a proposition according to which ‘especially in periods of low wages, a correlation exists between subsistence prices and crimes against property, which tends to diminish when prices fall and to increase when prices rise’ (ibid.). In other words, according to Graziani, ‘facility of subsist­ence naturally removes the stimuli to commit crime against property which, in contrast, intensifies at times of insufficient means for survival’ (ibid.). As to crime against people, this phenomenon is obviously related to economic factors, ‘but it would not be inexplicable if a temporary benefit to a worker earning a subsistence wage - a benefit such as a reduction in the price of necessities - were to induce the worker to impulsive spending which, in its turn, might foment crime’ (ibid.).

Graziani employs the same line of reasoning when considering the case of constitutional, administrative and private law. Some institutions of civil law - specifically the law governing inheritance and contracts - assume specific connotations of interdependence between economics and law. In Graziani’s view, commercial law is the supreme area for the application of economics to the explanation of legal change: the transformation of the bill of exchange, for example, is reflected in the legal reforms in the German law of 1848, and was adopted by the Italian Code of Commerce. The dispositions concerning carry-over and financial transfers, commercial companies, transport, insu­rance, and less standardized trial periods and contract forms, are evidence of the change in commercial needs.

Relationships in civil law are an immediate source of economic law. On close inspection, according to Graziani, any initial assessment of the civil code, and of all civil law in general, would seem to show that the highest order stands in arbitrary opposition to economic necessities. For example, civil law does not regulate the labour contract, but it does pay close attention to regulating assets. From this perspective, the governmental regulation of the institutions of ownership - that is, middle-class patrimonial interests, yet not those of wage-earners or of labour contracts in general - appears to be inefficient. However, these latter interests were emerging in the increasingly industrialized society in which Graziani lived and worked. Conversely, this situation is justified in precise relation to an efficiency criterion: considering the ‘changeable’ nature of the working relationship, which moves in relation to social substratum changes, and more rapidly so than in other legal sectors, it is better regulated by special laws ‘themselves more easily modifiable’. Consequently,

[L]egislation protecting factory workers, which promotes disability insurance and old age pensions, has come to be applied in countries seeking to introduce im­provements in working conditions.

On this premise, Graziani’s examination of the principal institutions of civil law looks particularly at family law, and especially the three distinct stages of its historical evolution. It progresses from ‘primitive promiscuity, to matriarchy, then patriarchal authority’. Graziani believes that the economic basis of marriage - that is, the origin of the family - is clearly manifest:

The form of the coemptio is the obvious mark of institutions which considered the woman as a useful economic object to be bought by a man from her father in exchange for a price. The antithesis of the coemptio is the dowry system, which the woman brings as patrimonial enhancement should her husband, because of changed social conditions, have to procure sustenance for the family if he is unable to derive any pecuniary advantage from his wife’s labours. (Ibid.)

Graziani notes that impediments to the marriage of certain people, and the caste systems of some countries, also originate in the different economic realities of those societies.

If, in addition, one analyses the patrimonial rules within the family, one finds that the economic origin and the development of such rules emerge with even more compelling clarity. Graziani is bitterly critical of labour and em­ployment laws because they reconstruct the foundation of ownership as an institution. He maintains that it is important to reflect on the economic function of ownership prior to utilizing such category in an analytical con­text. Changes in the production system denote radical changes in the system of ownership. Graziani further illustrates the economic basis of ownership considering the institution of legal servitudes, which nearly all jurists now regard as limitations on ownership imposed to maintain economic order.

The institution of possession can only be explained with the use of eco­nomic categories. After a brilliant historical analysis of this institution, starting from its medieval connotations, Graziani addresses the important achieve­ment of later scholarship. The rules for the protection of possessions are ‘a necessary complement to the rules for the protection of property; it provides proof of ownership, which also benefits the non-owner. Wherever the system of individual ownership is acknowledged, possession must also be acknowl­edged, or the owner would constantly be required to provide proof which would be very difficult’ (ibid.). In summary, possession was introduced by the lawmaker with ownership in mind. The practical value of this situation is not determined by the fact that it presents certain advantages, but by the relationship established between its advantages and disadvantages, and by the preponderance of the former over the latter. In this context, Graziani adds: ‘Since the economic organism requires the permanent state of individual ownership, and this could not subsist without protection of ownership, it is clear that this same protection of ownership is an effect of the system of production and distribution of wealth’ (ibid.).

The economic insight in Graziani’s works, however, reaches its maturity in his study on laws governing inheritance and contract. In ‘The economic nature of death and succession’ (Graziani, 1890) and Institutions of the Financial Sciences (Graziani, 1929, 526ff.) the author criticizes and probes the theoretical justification behind succession taxes which were founded either on a presumed relationship with hereditary law, or on the legitimacy of the various ways of acquiring property. Graziani explains the economic effect of the alternative types of taxes. Inheritance taxes, from this perspective, must not be considered as a state’s share of the inheritance, but are designed to integrate and diversify income tax.

Likewise Graziani justifies progressive taxation and higher rates for suc­cession taxes in terms of a marginal rate of substitution:

Death duties are paid by the taxpayer because, while his personal wealth in­creases, he senses that the value of public services grows at the same time. In other words, the amount for the public spending that each one of us is willing to pay depends on the relative urgency and intensity of his individual needs, and on the amount of wealth possessed.... An individual compares the cost of goods with the benefit of satisfying his needs. In determining cost, he compares the fraction required to obtain his satisfaction of desires (benefit) with the total quantity of wealth at his disposal. That is, the larger total quantity of wealth possessed, the lower the value attributed to each fraction. This is because ultimate utility dimin­ishes; in fact, the more goods at an individual’s disposal, the more needs he satisfies, since the last one he satisfies, where the utility is the dependent factor, is of lesser importance. An inheritance increases the wealth of the heir so the heir attributes less value to each fraction of his wealth and, in his progressive estima­tion in equal values of the utility of public services, he must provide the state with a larger quota which has the same value for him as the quota previously paid. Given that, after the inheritance brings an increase in assets, a larger expenditure for public purposes (tax) represents the same sacrifice or the same utility as a smaller quantity paid before the inheritance. Therefore, the correspondence between individual evaluations and taxes must be graduated. So, the simple principle is that the ultimate degree of utility explains the tax level. It could be observed that the ultimate utility of the wealth inherited is also a function of that already possessed by the heir, and which most tax systems do not take into account. But since this is a special tax, and not general income tax, it objectively regards the quantity of wealth as the basis for the taxation, the case of every property tax.

Some tax systems generally allow for rates of taxation to be graded de­pending on how close the family relationship between the deceased and the heir. Graziani considers those criteria of taxation: observing that in the event of devolution to descendants who were already advantaged during the fa­ther’s life by the sums now left to them legally on his death, these descendants see their patrimony only partially increased, in some cases reduced to nothing or even to a loss. This is because they now lack the income generated by the father’s work. But the economy of more distant relatives is distinct from the economy of the deceased, since a larger patrimonial advantage can be pre­sumed which leads to a reduction of the level of final assets across the board. It is not because the state regards the right to hereditary collateral as less legitimate than that of the descendants whom it taxes more heavily, but because it considers their patrimonial relations, and by this means state law takes into account the different situations and the different expectations of the parties involved.

In Graziani’s view,

[T]he succession tax constitutes a supplement to income tax. Diversification of rates prevents overburdening on property income. Income tax differentiation ac­centuates the greater burden on established income but, when liabilities are moderate, this serves to tax income that would otherwise escape taxation. The recent legislative tendency is toward the progressive approach, but this also de­pends on how other taxes are formulated as a whole. Laws must adjudicate the overall ratio between the wealth of the taxpayer and the tax rate. But one objec­tion might be that the deceased no doubt paid direct taxes on the income of the assets he bequeathed and, therefore, death duties imply dual taxation. But since the matter regards individuals, this payment is not of a dual nature. However, it does guarantee that any extraordinary increase in the private wealth of an heir through inheritance does not escape taxation. It is true that the heir in his turn will pay income tax and that he will pay indirect duties on the same wealth. But this is payment imposed by the lawmaker since death duties are a sort of partial patrimonial tax designed, as we said before, to integrate, compensate and balance. (Graziani, 1929)

More generally, Graziani considers the entire law of succession, suggest­ing its coherence with the laws of economics: ‘Wealth induces greater savings. Individuals are motivated to accumulate more wealth than they need to pay averted present or predicted future needs. Naturally private, deeply-rooted ownership leads one to draw up a will and testament’. The freedom to make a will is limited only by requirements of an economic order. The perpetual dispositions and substitutions are explained by the need for free circulation and use of wealth. Limitations and prescriptions established by the law for estates or future interests of long or perpetual duration are justified by a simple economic logic. Even the legal quota, according to the author, must be studied in relation to economic phenomena. It ‘may be a reaction to the majority and a means to prevent any significant concentration or centraliz­ation of wealth since the obligation to distribute a share of the inheritance equally among descendants results in a redistribution of assets as opposed to a concentration of assets’.

Finally, in the essay ‘The economic foundation of law’, (Graziani, 1912), he observes how civil obligations, especially those arising from binding contracts, have evolved according to the economic needs of the time. Specifi­cally, Graziani clearly anticipates, many of the modern theories of economic analysis of contract law, both in the execution phase of a contract and in regard to its breach:

A contract is always the result of an economic calculation on the part of the contracting parties who estimate that the advantage they derive from the thing obtained in exchange or from the services of others is higher than the cost of their performance. If I agree to sell an object to Tom for Lit. 10,000 and he accepts, it means that Tom attributes more utility to the object than to Lit. 10,000 and that, vice versa, I attribute a higher subjective value to the Lit. 10,000 than to the object. The same reasoning may be applied to all contracts whether they are for the purchase of a thing (do ut des), or for the acquisition of a service (facio ut des or facio ut facias). This is because the obligation may be said to arise only when the contracting parties make an inverse assessment of their respective utility of the wealth or services exchanged. (Graziani, 1912)

This calculation, in Graziani’s view, constitutes the very substance of the contract. However, the emergence of a legal obligation lies in compulsion designed to prevent violations of the agreement:

The parties, in fact, foresee the possibility of non-fulfilment of the contract. They can formulate provisions in the contract in advance, or they can rely on the protection of the law. The legal obligation in the contract could be matched by the protection that law provides to the promises of the contracting parties. This objection is not irrefutable because, primarily, one must look for the need for legal enforcement. If no party ever defaulted on his commitments, there would be no reason for legal enforcement or legal sanctions. But, there are three reasons why he might well default on his commitments: first, the contracting parties would aim at obtaining the other parties’ services without performing themselves; second, the contracting party might not fulfil his obligations because of changed circum­stances; third, he might no longer consider it convenient to carry out the original agreement. (Ibid.)

Graziani considers each possible situation in turn:

In the first case, the other party would derive no benefit and, if the law were not to guarantee the performance of contracts, fulfilment of contracts would be the exception rather than the rule. Therefore, legal enforcement is an economic neces­sity. In the second case, the same analysis applies. In the third case the reasoning is that the value ratios change continually, rendering an agreement less profitable or detrimental even though it may have been useful in various respects when it was concluded. If the utility no longer exists for both parties, the contract would cease to exist automatically. What would be the justification of the Code’s stance on bilateral contracts, if not the sanction of this economic principle? If legal enforcement were to be applied strictly, the contractor who did not receive the services promised would have to limit himself to asking the courts to intervene to enforce the agreement’s execution. However, in reality, the party who did not receive the services contracted for has a choice as to remedy. He may ask the court to enforce the contract, or try to resolve it himself, or he may refuse to perform his obligations under the contract. While this demonstrates the correlative nature of contract obligations, it also allows for an escape from a contract where, because of changed circumstances or convenience, a contract is no longer beneficial. For reasons of public interest, the lawmaker may not recognize the validity of some agreements, such as those on gambling credit. However, in these cases, the eco­nomic reasons stand intact. (Ibid.)

In this sense, Graziani anticipates the common law concept of ‘efficient breach’ of the contract as recently elaborated by legal scholars. Still referring to the contract, Graziani considers the economics of typical categories of contract:

Special contract forms are established, as everyone knows, with the aim of guaran­teeing the specific desires of the parties. Idiosyncratic provisions are the easiest, though not always the most convenient, expression of that desire. Individual contracts, moreover, are more manifestly dependent on economic relations. For example, the possibility of emphyteusis redemption is the consequence of the tendency to remove all obstacles to full freedom of disposing of lands and capital, which constitutes a hinge of the present system. The emphyteutic institution itself brought marked advantages when the density of population was low with respect to land or when, in order to stimulate cultivation, soil conditions were such that long-term concessions had to be made and nearly all ownership rights were conferred upon the farmer. The same transformation of the lessee’s right from the simple jus ad rem, which is totally personal, to jus in re precluding the owner as a legal person, was born of the need to guarantee the farmer against sudden dis­missal such as to impede or reduce the intensity of cultivation and production in general. (Ibid.)

References

Graziano, Augusto (1890), ‘The economic nature of death and succession’, in Studi Sensi, Woodland Hills, CA: Siena.

Graziani, Augusto (1912), ‘The economic foundation of law’, in Economic Facts and Theories, Woodland Hills, CA: Siena.

Graziani, Augusto (1917), ‘Introduction’, in Instit¹Utions of Economic Policy, Milan, Turin, Rome: Fratelli Bocca Editori, pp. 26-50.

Graziano, Augusto (1929), Institutions of the Financial Sciences, 3rd edn, Turin: UTET.

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