Lawsuits and corporatism

by Henry Farrell on July 16, 2004

“Mark Schmitt”: makes an interesting argument about lawyers and trade unions as functional substitutes for each other in checking corporate power. He notes some evidence suggesting that states with low rates of unionization are “hellhole states” for business, where plaintiff’s lawyers deliver huge amounts for a small number of victims.

bq. The correlation isn’t perfect, but it is close enough to say that it seems to be the rule that where there are no unions, there are plaintiffs’ lawyers, and vice versa. (Except in Western states such as Utah, Idaho and Arizona that have both low unionization and also are not perceived to have strong plaintiffs’ lawyers.)

This is not an especially efficient or productive way of doing things.

bq. If you were designing a society and had to choose between two means of checking corporate power — strong unions and a generous but arbitrary and patchwork tort process — you would undoubtedly choose unions. The tort system, especially in the “hellhole” states, delivers very generous rewards to a very few victims, which have no value except deterrence in making the broader societal outcomes fairer. And the victims who do win large awards are sometimes not the most seriously affected victims of even the specific negligence, and they rarely go to those most damaged in the broader sense.

Schmitt’s argument can be generalized beyond internal US politics, to comparisons between the US and other industrialized states. Robert A. Kagan[1] makes a pretty good case that “adversarial legalism” in the US is a direct substitute for European-style regulation.

bq. lawsuits, rights, legal penalties, lawyers, and courts – the building blocks of adversarial legalism – have been the American substitutes for the powerful bureaucracies, corporatist bodies, central banks, keiretsu, and social insurance programs that dominate the regulatory state in other economically advanced democracies.

In other words, Kagan is claiming that lawsuits serve as an effective substitute for the kinds of corporatism and consensual policy making to be found in Western Europe, Japan and elsewhere. Furthermore, as Schmitt notes, they serve as exceptionally _inefficient_ substitutes for the nanny-state – they’re arbitrary (hard for consumers and business to predict), unfair in their distribution of gains, and involve quite enormous transaction costs.

This has some interesting implications. First, as several commenters to “Kieran’s recent post”: noted, one of the reasons for higher health care costs in the US is the risk of litigation. To the extent that Kagan is right, this reflects the US choice of a system based on adversarial legalism rather than a more consensus-driven and encompassing system of social regulation and compensation. Second, lefties like myself could get behind the tort-reform movement in good conscience – but only if it promised to replace torts with a better system of regulation along social-democratic lines. Given the crowd of chancers, shills and ideologues that are pushing tort-reform, I don’t think that this will be happening anytime soon.

fn1. Robert A. Kagan, “How Much Do National Styles of Law Matter?” in “Regulatory Encounters:Multinational Corporations and American Adversarial Legalism”:, .Quote taken from Abe Newman and David Bach in “In the Shadow of the State”: because I don’t have the book on my shelf at the moment.



Brian Weatherson 07.16.04 at 7:53 pm

When I first moved to America I was surprised that tort reform was an issue of the right. What I thought of as tort reform was what various Australian states under Labor governments did in the 1980s. Limit rights to sue in exchange for more explicit rules and regulations and create specialised, low-cost tribunals to arbitrate everyday (alleged) breaches of those regulations. Businesses hated it because for every massive payout they lost there were literally thousands of decent claims they could beat off with the threat of costly legal action. We always had ‘loser pays’ in the court system, so taking on a well-lawyered defendent was a huge financial risk – one that businesses made sure injured workers and customers knew they were taking.

Tort reform of this kind seemed like a very good, indeed progressive, move. Lawyers of course hated it, but of course they weren’t the primary constituency. And there was one giant risk. Once conservatives get into power it’s easy to tinker with the regulations (especially schedules of damages and the like) to get something like what American “tort reformers” want. But in general it’s hard to find much positive to like about the current system – it’s just a lot better than anything the Republicans are offering.


ack 07.16.04 at 8:27 pm

Legal/tort costs are overblown in one sense and misstated in another. McD’s loses a few million to some lady who spills hot coffee on her stupid self, and we read about it ad nauseum for years. What do you want to bet that McD’s annual legal costs dwarf the occasional wacky award, and consist largely of payments to franchise lawyers, labor lawyers, tax lawyers, securities lawyers, etc., etc., etc.? Those costs are laid out for far more prosaic purposes, such as ensuring that McD’s doesn’t violate labor laws and that its contracts with its suppliers are properly drafted.

The notion that unions and the tort process are alternatives to “checking corporate power” is nonsense. Unions do nothing to ensure that corporations avoid hurting their customers, pay their taxes, follow securities laws, obey the antitrust laws, and so on. Unions work to increase their members’ pay and security and reduce their members’ effort. If the way to do that is to stifle antitrust laws or screw the customers, so be it.

As for the notion that “powerful bureaucracies, corporatist bodies, central banks, keiretsu, and social insurance programs that dominate the regulatory state in other economically advanced democracies” are less arbitrary and more efficient and have smaller transactions costs than the U.S.’s legal system, the mind boggles. Ask a businessman, where is it easier to do your job, the U.S. or Europe? Where is it easier to hire and fire? To raise capital? They certainly won’t wax poetic about the ease of dealing with the predictable and efficient bureaucrat in Rome.


Otto 07.16.04 at 9:04 pm

Of course, in the UK we have both bureaucratic government control of medicine and ever rising litigation over healthcare. Over time, therefore, we would seem to be likely to enjoy the dubious pleasures of both worlds at once…


Barry 07.16.04 at 9:04 pm

ack: “McD’s loses a few million to some lady who spills hot coffee on her stupid self, and we read about it ad nauseum for years.”

Actually, we don’t. We read about a distortion. The woman wasn’t stupid; she spilled coffee on herself in a way that is pretty easy to do (among other things, she was stopped, not driving), and the coffee was hot enough to cause third-degree (groin!) burns, requiring surgery and skin grafts. She offered a settlement where McD’s would have paid the medical bills only; McD’s refused. The coffer was served far hotter than it should have been, despite previous incidents. And then McD’s lawyer made the sort of comment during the trial which costs defendants money (IIRC, ‘not statistically significant’).

In the end, it wasn’t an example of ridiculous litigation, but of propaganda.


Lis Riba 07.16.04 at 9:51 pm

In an old thread on my husband’s LJ, somebody pointed out that the UK offers criminal compensation, financial renumeration for victims of crime.
We *don’t* have anything like that in America, so victims have to go to the courts to sue.
It’s a fascinating concept and explains a lot about the difference between America and other countries in this respect.

Also, since somebody mentioned poor Ms. Liebeck, here are some facts on the McDonalds suit


Bill 07.16.04 at 9:57 pm

You’ve left out some other checks on corporate power: an aggressive media, real anti-trust action to limit the economic power of a small group, an active citizenry, a lower class with power or at least voting rights, and simply a stronger social contract.

The media is most important to me. Not only has it completely rolled over and refused to challenge it’s corporate owners, it has actively aided destroying the other struts of “people power.” You can’t talk at all about poverty in America without the media screaming “class war.” The media has also helped propel the capitalism-on-steroids notion that the bottomline is the only thing that matters (why do all channels run stock markets quotes 50 times a day?).

Just because legal action is the last semi-effective tool for citizen action left, doesn’t in any way make it a substitute for all of the other balancing forces that should be there.


Steve Carr 07.16.04 at 10:14 pm

It’s possible that all channels run stock quotes 50 times a day because the vast majority of people who watch news channels have a good chunk of their retirement savings in the stock market, and so might be curious about how it’s doing. Suggesting that running stock quotes is some sinister plot to spread capitalist propaganda is certainly one of the most ridiculous things I’ve heard since, well, Michael Moore suggested that we went to war against Afghanistan so Unocal could build a pipeline.


gavin 07.16.04 at 11:14 pm

It’s funny how often discussions come up which are just variants on Weitzman’s (1973) article on ‘prices vs quantities’. A government has two main tools to control externalities – it can either tax them or it can set quotas. In the case above, law suits are playing the role of a tax, albeit an imperfect one.

Now, under some circumstances, particularly where there is a fair degree of certainty about the private benefits and social costs of the activity that leads to the externality, taxes (law suits) and quotas (regulation) can both lead to the same efficient outcome.

In cases where their is uncertainty, taxes (law suits) are usually better where the social cost is fairly flat (i.e. where each ‘victim’ suffers the same loss in this case) but worse when it is steep (when marginal losses increase rapidly as the number of victims increases).

So, to a large extent, the choice of law suits vs regulation is an empirical question.

As for union power, it is not equivalent to government regulation since, as ack implies, unions care about their own interests not those of the public. Therefore, unions when raise wages, labour standards etc, the people who pay for this are the public in their capacity as consumers, not firms.

To put this all a little more concretely, if I’m worried about a polluting firm, I can either set a quota on how much pollution it emits or I can tax it so that it realizes the cost of its actions or the legal system can award damages equal to the cost of those actions. All those things are equivalent and will lead to a higher social surplus, captured either by those facing pollution or the taxpayer.

Setting up a union in the firm is subtley different – sure, output and emissions will fall, but the rise in the social surplus is in the first instance captured by the firm’s workers. But that’s only the first round effect of course, since the firm will contract employment too, so the surplus actually accrues to the remaining employees, not those who lost their jobs.

There’s only one case where a union will have the same effect as taxes and quotas – where the union represents all workers and therefore takes into account the fact that its actions will raise prices and reduce employment. And that’s much more like the European social model than the American way!


nolo 07.17.04 at 12:06 am

You’re right in not trusting the advocates of “tort reform” to replace the tort system with an adequate regulatory substitute. In fact, if you look carefully (and those of us who practice personal injury law here in the lovely U.S. of A. get to do so with awful regularity), you’ll see that the proponents of tort reform are generally also proponents of deregulation. More than that — they are skilled at using government regulatory authority (in the form of administrative rulemaking) to create islands of virtual immunity from liability, either to individuals or to the government. In short, they do not want to be held accountable by anybody, to anybody. Period.

I’d have nothing against replacing the U.S. tort system with a regulatory framework — if such a thing were possible. For a number of reasons I think the U.S. political climate is unlikely to produce such a thing at any point in the foreseeable future. Be that as it may– I hardly ever see anyone arguing the merits of the tort system, which is sad, since it does have merits. In fact, it has merits that you’d think small-government conservatives would appreciate, since tort law is, in essence, a perfect example of the benefits of privatization. Think of injured people as private attorneys general, and of litigation costs as a regulatory “tax” imposed on the particular industry in question. The impact of the system on taxpayers as a whole is minimized, and costs remain linked to the particular industry or activity (be it health care, product manufacture, automobile operation, what have you) from which the cause of action arose.

The system is not perfect, I do admit. There’s a certain randomness to enforcement that is inherent in the fact that the tort system depends on individual factors. Not all wronged people realize they’ve been wronged, or wish to take on the challenge of asserting their rights. Also, the damages an individual may have incurred as a result of wrongful behavior may not be sufficient to justify a lawsuit from a cost benefit standpoint, which introduces another element of seeming randomness in enforcement. But the government regulation approach has its downsides as well, which I suspect any of you are capable of imagining for yourselves.


John Quiggin 07.17.04 at 2:50 am

I agree with the point that deregulation and more reliance on litigation go hand in hand – this is in fact a central point in the arguments of people like Coase and Hayek for reliance on common law rather than regulation or statute.

In this piece from 1998, I wrote
“the case for corporatisation and privatisation is based on the assumption that the profit motive is the best guide to efficient outcomes. If this is the case, then we will get as much safety and reliability as is profitable. Assuming the suppliers of services have better information than anyone else, this means they should be absolutely liable for the consequences of any systems failure, without a requirement to prove negligence. Absolute liability is the criterion that prevails, for practical purposes, in the United States, which is the model for private provision of infrastructure services. If we import US institutions like private electricity companies, we must also import the legal institutions, such as aggressive litigation, that keep those companies honest.

Australian advocates of microeconomic reform often seem to think we can get rid of political interference in the economy without relying on more litigation. This is naive.”

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