Beyond the Bad Man and the Knave: Law and the interdependence of motivational vectors

Holmes' recommendation was that, as a positive matter, law as a social fact is constituted by the predictions of the bad man about the likely application of public force in cases that might involve his behavior. Coupled with David Hume's normative recommendation that “in contriving a system of government... every man ought to be supposed to be a knave and to have no other end, in all his actions, than private interest” (1742), Holmes and Hume provide the foundations of the law and economics movement of the past four decades. Law as a practical fact acts through its effects on material interests of individuals; the method of legal design ought therefore be to predict the effects of law on the material interests of individuals assumed, for simplicity, to be self-interested. Nothing so well captures this spirit than Douglas Baird's statement of the core simplification that informed economic analysis of law: “people maximize, markets clear.” (Baird 1997 p. 1132). In order for markets to clear whatever it is that people maximize, people must maximize something that markets can price. Hume, like Adam Smith in The Moral Sentiments (1759), had nonetheless emphasized the importance of moral sentiments, or emotionallyand socially-enforced intrinsic constraints on individual action, and their importance in complementing markets and self-interest in allowing society to function well. Indeed, Hume specifically argued that the supposition of knavery, while true in the design of political institutions, is “false in fact.” But both Hume and Smith were able to sustain the recognition of the importance of moral sentiments in interpersonal relations, with the independence of interventions aimed to harness self-interest to the public good, by maintaining an assumption of strict separability between the effects of interventions on material interests or preferences, and their effects on the emotional drivers, social motivations, and moral commitments that provide decisional guidelines for many of us, for much of our behavior (Bowles and Hwang 2008). Assuming that it was possible to intervene to affect the material interests without affecting the direction of any of the other motivational vectors, the law could be designed for Holmes's Bad Man and Hume's Knave without affecting the good man. The same assumptions continue in contemporary thinking about institutional design and incentives. Thus, Kenneth Arrow was able to both identify the necessity of trust and trustworthiness to correct markets given persistent imperfection of information (1971) while at the same time rejecting Richard Titmuss's (1970) claim that a blood market crowded out blood donations to the detriment of the quality of the blood supply, arguing that donors and sellers respond to different incentives systems and are unaffected by each other (Arrow 1972). Extensive experimental and observational evidence, however, has established that interventions with well-defined effects on material interests are not separable from, or additive to, their effects on other motivational vectors. (Surveys: Bowles 2008; Frey and Jegen 2001). Explicit guidelines for action, coupled with either material rewards or punishment, can result in either increase or decrease in the magnitude and directional effect of other sources of motivation, which in turn may act either to negate or amplify the intended effects (Bowles and Hwang 2008). That is, forcing law can either crowd-out, or crowd-in other, motivations. There is some work in law on dynamic preference shaping by law (Bar-Gill and Fershtman 2004; 2005). There has been