Is it good or bad for a society when people are able to sue each other with abandon?
That question came to mind when U.S. Attorney General Janet Reno said recently that the U.S. government is going to sue tobacco companies for health care expense damages.
Judging by the popularity of jokes about lawyers and by reactions to new reports of large damage settlements, the average American evidently thinks we suffer from excessive litigation. But when politicians push legislation that would reform the civil justice system, they generally have not found strong public support. And when a large judgment against a powerful company is announced, plenty of people applaud.
So when or why is litigation good or bad?
When most people think of a lawsuit, they typically think of liability cases in which one party sues another to get money for damages caused by a wrongful action. Such civil lawsuits form part of a nation’s justice system. Most people think of such lawsuits as a matter of justice, an attempt to right a wrong.
Economists think in terms of “equity,” when evaluating the economic effects of an institution or policy. They also weigh efficiency, or the amount of goods and services produced for a given expenditure of resources.
While most of us think that fairness is the objective of lawsuits, litigation also has effects on how efficiently a society uses resources. The efficiency of a society can suffer from either too little or too much litigation.
Take Japan, for example. Few lawyers are in private practice in Japan. It’s very difficult for an individual to bring a lawsuit for damages in Japan. As civil justice reform advocates in the United States point out, this means that Japan doesn’t expend many resources on bringing or defending against lawsuits.
But the fact that it’s difficult to sue also meant that Japanese firms historically had little incentive not to pollute or to produce safe goods and services.
While anti-pollution laws have been enforced with vigor in recent decades, post-war Japan was a dangerous place for workers and households in terms of pollution. The “minemata” poisoning of coastal villagers by industrial mercury dumping was the most notorious case, but it was far from isolated.
People harmed had to seek help through the political system because the doors of the legal system were largely barred to them. That constituted an injustice and a waste of resources. The Japanese economy allocated too many resources to polluting production processes and too few to pollution abatement.
As a result, Japanese society as a whole was worse off than if resources had been allocated correctly. The absence of a right to sue polluters exacerbated the lax enforcement of inadequate anti-pollution laws. Both equity and efficiency suffered.
Too much litigation can also waste resources.
Between 10 percent to 30 percent or more of medical diagnostic tests ordered in the United States are ordered as a precaution against possible charges of malpractice, not because the doctor needs the tests for a diagnosis. True, in a rich society, “better safe than sorry” may be a desirable approach to questions of human life. But the United States also spends much more on health care—both per capita and as a proportion of GDP—than many other nations that have similar levels of health and longevity. Excessive malpractice litigation is obviously one factor.
And then there are the stickers on vending machines that warn “Tilting the machine may result in injury or death.” Or those on strollers that caution us to “Remove child before folding stroller.”
The fact that large firms find it necessary to remind us of the obvious is an indication that fear of litigation is using up resources that probably would be more productive for society elsewhere.
Most citizens of any society would agree that people should not be free to harm others. Most would agree that when harm occurs, there should be some compensation for the damage caused. Most would want incentives for firms not to pollute, not to have dangerous workplaces and not to make dangerous products.
Societies can try to achieve such goals by using the police power of the state to make harmful actions illegal. They can also try to achieve these ends by allowing civil lawsuits.
Economists such as Nobel Laureate Ronald Coase have shown that in theory, the second approach can be at least as effective as the first. But in the real world, both approaches have weaknesses as well as strengths.
It seems to me, and to many other economists, that in the United States we have tipped the scale toward excessive litigation. But it really is a question that only society as a whole can answer through the political process.
© 1999 Edward Lotterman
Chanarambie Consulting, Inc.