The ‘economic theory of the law’ and the study of legal institutions

Proceeding from the history of the law to an analysis of individual institu­tions, Loria’s study and theory seem right. The institution of the family ‘is the result of the necessity of production’.

According to Loria, economic factors are always at the core of the institu­tion of the private property, which determines the rise of the institution of patriarchy. Consequently, ‘patriarchy is an organizational arrangement for the natural production of private property that allows the man to join with the woman and together produce children.

Along similar lines, Loria suggests that the institution of divorce is created for essentially economic reasons: ‘In fact, the expansion of job opportunities for women creates the economic independence of the woman’. On the other hand, Loria suggests that the multiplication of the ownership of real estate always creates the predomination of the capitalist class. This is the class for whom the institution of divorce is profitable, a system ready to break the economy when it cannot freely change itself.

In sum, Loria views the influence of economic relationships on the legal disposition of property as self-evident. The essential economic foundation of property rules is already to be found in Roman law, which did not demand subjecting property to harsh restrictions as soon as these were required by the demands of production. At that time, legal servitude was instituted, ‘inspired by the opportunity to promote the rural production; it also allowed the pursuit of private funds, because production does not hurt agriculture, still develop­ing today; indeed, production helps agriculture with the killing of animals that are dangerous to it’.

Above all, this last statement is extremely interesting not only for its practical content (these days we cannot talk about extensive agriculture and hunting, which makes it even more effective, but, instead, it is the exact opposite problem), but also because it refers to the method utilized by Loria, who was committed to enunciating a methodology that is similar to the economic approach to law followed by modern academia.

Continuing the analysis of the economic foundation of property rules, Loria believes:

[T]he disposition of the Roman law was based on the right to put a price on whatever was a potential object of ownership rather than compelling individuals to undertake natural barter.

Loria continues his analysis of the origins of legal rules in the Roman tra­dition, observing:

[I]n the primitive Roman law, the good faith possessor can be expelled by the proprietor and even deprived of the property and its fruits. This inflicts a strict sanction and obstacle on the progress of agriculture, and necessitates lenient legislation. It thus becomes possible to let the good faith possessor retain the fruits of his work.

Loria concludes that if the law is inspired solely by the interests of the property owner at any time, then it compromises other incentives for the efficient use of scarce resources. As an example, Loria cites France, where in the eighteenth century it was customary to entitle agrarian property; on the other hand, in the following century it was customary to privilege industrial property.

The evolution of hereditary law is explained ontologically by economics. Loria considers that the philosophers of the law, Gans and Lasalle, were not able to reach a satisfactory conclusion regarding the legal nature of hereditary institutions. That is, wills are far from being the product of ‘man’s freedom’, as stated by Gans and Lasalle. This concept forms the basis of Loria’s idea of the economic causation of legal institutions.

According to Loria, the rise ‘of the economy based on slavery’, was associated with the transformation of property from the collective to the individual, and the custom of making a will developed as a legal conse­quence. In certain circumstances,

[There are] serious reasons [for] allowing the proprietor the right to utilize his belongings even in a different historical time.

This situation starts to weaken when, ‘under the action of the imminent antagonism of slavery, the previous accumulation creates a universal impov­erishment. Therefore, the ancient necessity to stimulate wealth accumulation creates the necessity to contain it’. Likewise,

[T]he more intensive the production, the more necessary it becomes for a coordi­nated direction of the family firm that is absolutely incompatible with the collective intestate inheritance. Therefore, it is a difficult moment when the necessity to further perfect the institution of primogeniture is realized, understanding that only the first son can benefit from the inheritance rather than all of the children. From this we see the birth of the law of primogeniture.

Even the disappearance of the servant economy contributes to the abandon­ment of registered inheritance, and it imposes the necessity of instituting the freedom of testator. In an economy based on wage accumulation, this free­dom is crucial to maintain the incentives of the worker in the latter years of his life: ‘It is easy to understand why an economy based on salaries creates the right to make wills. It becomes the normal form of transmission of property. Thanks to its own force, the accumulation proceeds more rapidly, and the accumulation of the belongings is even more rapid’.

Even in an economy based on salaries, as compared with one based on slavery, accumulation eventually encounters severe limits. Beyond these lim­its, the accumulation can go no further without ruining the entire system: ‘At this point, even the capitalist class’s interest demands that capitalization and accumulation of wealth must be limited’. Therefore, hereditary rights show how economic rules govern, following the alternating and recurring stages of its own evolution.

Moving from the hereditary laws to the analysis of the law that regulates the relationship between proprietors, the logic of Loria’s reasoning does not change, but rather is confirmed, for even this law represents the product of mutation of the economic order. For instance,

[T]he rigid rules of ancient Roman law allow that bad faith in contracting parties is the basis for much of the reluctance of honest people to engage in contracting. Therefore, with the progression of society and the necessity of frequent economic relations, the standard of good faith must be imposed upon those contracting, and the rules of the primitive strictum jus must be abandoned.

In addition, lease contracts deserve particular attention. Even a superficial study of this type of contract shows:

[There is a] substantial diversity between the conditions of the Roman tenant who has only jus ad rem (even if later extended through the judicial decisions) and the modern tenant who possesses jus in re, with the enjoyment of full real remedies. Now, the reason for this division is found in the different conditions of the economy, initially based on slavery, subsequently based on wage labour. In the economy based on slavery, the reduction of cultivation of most fertile lands almost completely excludes income from property. This made it impossible for progres­sive increments to urge the proprietor to expel a renter off the land in order to earn a higher income. Instead, in the economy based on salaries, the difference be­tween cultivated lands creates income from property. The growth of property income induces the proprietor to break the contract with a renter as soon as the income is more than the designated contract. At this point, it becomes obvious that the renter’s conditions, which were previously ignored, have a direct impact on the agricultural industry. It also creates the necessity to guarantee the renter a safer position, defended from the arbitrary behaviour of the proprietors.

The logic of Loria’s argument closely resembles the modern law and eco­nomic explanation of contractual safeguards in the presence of incomplete contracts with asset-specific investments. In this way the legal property con­tract is substantially mutated by the change in the underlying economic relationships: ‘These relationships transform the incompatibility of rent due to the persistence, and the normality, of production. The position of the tenant who at first was exposed to the arbiter of the proprietor is now more and more invading and threatening to the law’.

In Loria’s view, the area of the law deserving particular attention is that which disciplines the relationships between the owners and the non-owners: this area of the law reveals the dependency of legal choices on economic ones. Related to this issue is Loria’s study on the employment relationship, which is an agreement between two parties, employer and employee, who generally have unequal bargaining power. When Loria was writing, legis­lators refrained from imposing strict restrictions on employment contracts, leaving most of the contractual terms to the freedom of the market. In this setting, Loria’s assertion that the discipline of the civil code does not contem­plate the problems embedded in wage-based employment relations and the consequent overbearing behaviour of the dominant class can be explained. Here, Loria is overcritical of the neutrality of the code with respect to distri­butional issues related to employment contracts and usury.

Loria is also critical of the greater vulnerability of the worker which ‘allows the master to be the workers’ judge, and to inflict upon the workers his own wicked desires without any sort of control’. He is wary of the idea that the market provides any substantive constraint on the employer’s discre­tion, given the imperfect information which characterizes the labour market.

Loria then moves from the study of private law to the study of criminal law, and the interrelation between the legal and the economic relationships in the criminal arena. The economic nature of criminal sanctions appears clear in Loria’s mind: ‘Economic considerations powerfully impact crime rates, and the choice of the appropriate penalty’. Indeed, Loria thinks that crime can be considered as the product of two fundamental factors: a social factor essentially economic, and an individual factor directly anthropological and indirectly economic: ‘crime is the byproduct of both factors’. Loria suggests, paradoxically, that crimes against property would not be a reason to exist in an environment characterized by perfect economic equality. The thief could not benefit from the additional share of wealth that he illegally appropriated. In the real world, perfect equality is not achievable, rendering Loria’s obser­vation empty of practical content.

Finally, Loria considers the social costs and benefits of criminal sanctions. He contemplates the evolution of penalties, observing that ‘the penalty of mutilation was abrogated to avoid the burden upon society of the mainten­ance of an invalid’. Associated with this, it is necessary to consider Loria’s belief that, ‘the harshness of the penalties inflicted by the state for crime, is proportionate to the intensity of the associated compulsion of the criminal’. The optimal social penalty is that which maximizes the deterrence associated with its imposition and minimizes the social cost of its infliction. Obviously, Loria believes that the criminal system is not immune from political bias. He considers that each state punishes more severely the crimes that damage the interest of the class for which political power is created.

Loria’s excursus of the economic theory of law is certainly not limited to these areas of law. Of all areas of law considered by him, international law appears most directly influenced by economic relationships. Its genesis and development are indeed connected exclusively to economics. International law arises because of the need to facilitate commerce between people of different nations. International commerce greatly benefits the trading partners and wars may annihilate such exchange opportunities. The evolution of inter­national law then raised commerce to a new and superior role, to the great advantage of people who live together and produce in a global economy.

Notes

1. La Rendita fondiaria e la sua elisione naturale (Income from property and its natural annulment), Milan: Hoelpi, 1880.

2. The following quotations are derived from this monograph.

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