Courts and regulatory agencies as markets

For most of us every day folk, courts are places where we want a judgment that says, “We are right.” But courts are also “rules markets.” Rules markets are where frameworks for how we engage each other going forward are produced and depending on how broad the issue is defined, those rules may be forcibly consumed by others who were not a party to the conflict that brought the original rule producers together in the first place.

The recent U.S. Supreme Court ruling in Masterpiece Cakeshop v. Colorado Civil Rights Commission provides an example. While the issue in that case focused on whether Colorado’s equal rights agency applied its civil rights rules in a neutral manner where civil rights violations were alleged, some Americans questioned why the consequences of that case should spill outside of Colorado and impact citizens and businesses in other states. The short answer is that externalities, whether positive or negative, from a court ruling enter society because of the structure of our legal system. The legal structure is centralized and the ripple effect of legal decisions spreads out to more citizens the higher up the legal rule production hierarchy you go. The interpretation as to what the rule should be for governing a relationship or conflict becomes the “law of the land” where the highest court becomes the market for producing legal rules.

I heard some of this concern from every day folk during a CSPAN session the day after the Masterpiece Cakeshop ruling. “Why did this conflict have to escalate?” some asked. It escalated because a centralized legal system provides opportunities for individuals occupying a minority class to extend its views on how society should work to the rest of America by accessing and participating in the rule making process.

Conflict is a high cost for entering this “centralized rules” market, but a higher price is paid by the rest of society where we are subjected to rules produced by a small number of participants seeking to produce rules that favor their behavior and the detriment of limiting or modifying everyone else’s.

In my opinion, the limitation of the behavior of others as a result of rules produced in a centralized market is a negative externality or negative benefit. No matter the noble intent of the rule producers, where the rule produced impacts my behavior, it impacts my liberty.

One way to limit the negative externalities of centralized rulemaking is for parties to enter into voluntary agreements, agreements limited to the parties resolving the immediate conflict. It would be a lot cheaper for parties in actual conflict or anticipating conflict if the rules were produced as a result of voluntary engagement designed to head off conflict versus the other way around. It would also be less expensive for members of society who are not direct parties to the conflict since they would not be subject to rules that they did not produce.

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