Economics Of NonState Legal Systems Research Essay

Economicss Of Non-State Legal Systems Essay, Research Paper

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The Economicss of Non-State Legal Systems & # 8221 ; Possibly the most typical feature of the Western legal tradition is the coexistence and competition within the same community of diverse legal powers and diverse legal systems - Economics Of NonState Legal Systems Research Essay introduction. The pluralism of Western jurisprudence, which has both reflected and reinforced the pluralism of Western political and economic life, has been, or one time was, a beginning of development, or growing & # 8211 ; legal growing every bit good as political and economic growing. It besides has been, or one time was, a beginning of freedom. A helot might run to the town tribunal for protection against his maestro. A liege might run to the male monarch & # 8217 ; s tribunal for protection against his Godhead. A cleric might run to the ecclesiastical tribunal for protection against the king. & # 8221 ; & # 8211 ; Harold Berman, Law and RevolutionTABLE OF CONTENTS1. Introduction2. Adjudication of Disputes 2.1. Inefficiency in the public tribunals: overview 2.2. Inefficiency in the tribunals: under-pricing, nuisance suits, input waste, and more 2.3. Inefficiency in the tribunals: fosterage uneconomical legal struggles 2.4. Private dispute declaration: an efficient alternate 2.5. The possible and bounds of private difference resolution3. Formation of Rules 3.1. Preview 3.2. The economic theory of rule-making with no outwardnesss 3.3. Rule-making in the real-world: the job of outwardnesss 3.4. Non-patentable inventions and outwardnesss jobs 3.5. The development of usage as a replacement for rational belongings rights 3.6. Wayss to internalise the benefits of rule-production 3.7. The assortment and flexibleness of private regulation production 3.8. Public vs. private rule-creation: an exercising in comparative institutions4. Private Enforcement of Law 4.1. Banishment and boycott 4.2. The Becker-Stigler theoretical account 4.3. Posting wagess and the Posner unfavorable judgment 4.4. Torts and offenses: inducements for enforcement 4.5. Security guards and private constabulary 4.6. Monopoly on coercion: the beginning of the bounds of arbitration 4.7. Strictly private enforcement: a theoretical account 4.8. Criticisms of strictly private enforcement5. Conclusion & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; & # 8212 ; -1. IntroductionLaw, even more than national defence, appears to be the perfect illustration of a populace good which merely must be supplied by the authorities if society is to be at all. It is non- excludable because everyone enjoys the fruits of jurisprudence simply by populating in society. And it is wholly non-rivalrous & # 8212 ; one time the province creates a organic structure of sound legal rules, an limitless figure of people can profit from them at no extra cost.But these apparently iron-clad truisms can be undermined by even a cursory glimpse at history. In crude societies, jurisprudence develops bit by bit from usage in the absence of any kind of authorities. As Richard Posner explains, & # 8220 ; The staying beginning of jurisprudence [ in the absence of the province ] , and the 1 that dominates crude jurisprudence, is custom. Custom ( including customary jurisprudence ) resembles linguistic communication in being a composite, easy altering, extremely decentralised system of exact rules. & # 8221 ; 1 On juncture, this crude jurisprudence bit by bit spreads outside the narrow confines of a individual folk to embrace a broader community. Therefore, early tribal Germanic jurisprudence evolved into a more cosmopolitan legal codification in the absence of a cardinal authorities. What makes this advancement bit by bit unfold? As legal historian Harold Berman explains, & # 8220 ; Violation of the peace of the family by an foreigner would take to retaliation in the signifier of blood feud, or else to interhousehold or interclan dialogues designed to prevent or compose blood feud. & # 8221 ; 2 ( accent added ) By this procedure crude jurisprudence became more civilised, broadening its vision to include anon. every bit good as face-to-face societies. In order to be and germinate, such systems must hold given rule-creating inducements to person ; in other words, at least some of the benefits were non public but exclusive.There is another sense of & # 8220 ; non-exclusion & # 8221 ; that legal systems must allegedly hold: they must regulate everyone in order to map at all. If law-breakers could merely drop out of the system, jurisprudence could barely protect us from their misbehaviors. And yet, history contains many cases of pluralistic legal systems, in which there were multiple beginnings of jurisprudence in one and the same geographic part. In the medieval society that Prof. Berman investigates, canon jurisprudence, royal jurisprudence, feudal jurisprudence, manorial jurisprudence, mercantile jurisprudence, and urban jurisprudence co-existed ; none was automatically supreme over the others. Naturally, there were jurisdictional struggles. But this system of coincident legal power overlapped with a period of economic and political growing ( c.1050-1250 ) , non a period of pandemonium and poverty. Apparently these diverse systems did what Thomas Hobbes ( along with most modern political minds ) declared impossible: They created societal order and peace in the absence of a distinguishable, supreme crowned head. These illustrations might look to be historical anomalousnesss, intriguing but irrelevant to current economic systems and legal systems. Yet in modern times analogues have sprung up, albeit in a less dramatic signifier. Commercial differences, for illustration, are handled virtually in toto by agencies of private arbitration. Accurate figures are really hard to acquire ; but one expert in alternate difference declaration, Jerome Auerbach, estimates that business people arbitrate 75 % of their commercial disputes.3 In earlier times, one of the cardinal maps of authorities was concern difference declaration ; but now it has mostly escaped the province & # 8217 ; s sphere of influence. A more utmost illustration is that of the VISA corporation.4 Member Bankss agree to maintain their wrangles within the VISA household when they join the cardinal organisation. Expecting many dearly-won legal differences between the system & # 8217 ; s members, the VISA corporation saw the chance to contrive a cheaper manner to decide dissensions. It created the VISA Arbitration Committee to judge the differences of the member Bankss harmonizing to VISA & # 8217 ; s really ain legal codification. The methods are speedy, lawyerless, and unbureaucratic. Compared to the slow and dearly-won justness that the Bankss receive when they have to settle a struggle with a house outside the VISA cantonment ( and within the range of the public tribunals ) , the VISA Bankss get a bargain.It is the economic features of these kinds of legal systems that this thesis investigates. How do they work? To what extent might private legal systems of this sort divider and get down up the near-monopoly of jurisprudence that most authoritiess possess? How does customary jurisprudence give inducements to make and develop a legal model? It should be noted that I am non simply analyzing the economic sciences of federalism. While there are some analogues between pluralistic legal systems and federalism, there is a important difference. Under federalism, a cardinal authorities delegates the authorization to do Torahs to two or more sub-polities. In this sense, there is legal pick and legal competition. But federalism gets rid of a national legal monopoly by making a host of smaller geographic monopolizers, each of which has sovereignty in its ain district. Truly plural legal systems such as arbitration compete within the same geographic region.There is more than an analogy between pluralistic legal systems and the economic expert & # 8217 ; s construct of competition. With a big figure of possible beginning of jurisprudence in a given geographical part, plus some method of excepting non-contributors from benefits, economic theory implies the familiar consequences that hold of competitory markets by and large: productive efficiency ( a given degree of end product gets produced at the minimal cost ) , allocative efficiency, ( resources get assigned to their most socially productive utilizations ) , and dynamic efficiency ( worsening cost curves over clip ) . We might besides anticipate to happen the greater flexibleness and heed to single differences that typify private supply.This thesis investigates the non-state supply of the three indispensable facets of jurisprudence: difference declaration, regulation formation, and enforcement. The first and least controversial is the non-state declaration of single differences. The province could still take the regulations and simply privatise their application. Economists normally see the rule-application facet as the best campaigner for denationalization, because the parties to the difference get all of the benefits. This is one factor that explains the outgrowth of crude jurisprudence: the demand to avoid inter-family bloodshed over every incorrect gave both sides to a difference an inducement to voluntarily subject to a peaceable colony process and abide by whatever consequence emerged. Even the also-ran benefits, since he trades entry on a individual wrangle for long-term peace. In footings of game theory, what looks like a zero-sum game ( a civil wrong, say ) is really a concerted game because refusal to judge leads to feuds between persons, households, or kins that leave both sides worse off.But there is a 2nd component to jurisprudence ; as Landes and Posner explain, & # 8220 ; A tribunal system ( public or private ) produces two types of service. One is dispute declaration & # 8211 ; finding whether a regulation has been violated. The other is rule-formation & # 8211 ; making regulations of jurisprudence as a byproduct of the dispute-resolution process. & # 8221 ; 5 To many people, the latter is a less likely campaigner for private supply, because the production of regulations of jurisprudence is a public good. The economic value of case in points ( like other rational inventions ) is difficult to internalise. Section three will analyze this issue at length. But there are leading facie grounds to be disbelieving of this unfavorable judgment of private regulation creative activity. The VISA corporation has its ain legal codification ; so make other professional associations, nines, and co-ops. More startlingly, most crude jurisprudence and a great trade of commercial jurisprudence were developed by organic structures other than the province. Therefore, the jurisprudence merchandiser ( subsequently adopted, non created, by most authoritiess ) evolved during the Middle Ages ( c.1000-1200 ) , while national authoritiess ignored the demand for chiseled regulations of international trade. Merchant tribunals bit by bit developed contract and civil wrong jurisprudence, specifying regulations of incorporation, recognition instruments, and damages.6 Legal growing on this degree would look to be possible merely if private inducements existed someplace ; subdivision three will seek out the inducements & # 8217 ; sources.Last, there is the most controversial map of jurisprudence that might be executed in private: enforcement. The right to utilize force seems to be a necessary monopoly of the province ; otherwise wouldn & # 8217 ; t pandemonium and random force be inevitable? Still there are many types of non-violent private enforcement. Commercial boycott and banishment enforce most signifiers of arbitration. Within the concern community these countenances are rather effectual. Becker and Stigler note that expiration of employment ( instead than legal action ) can and frequently does discourage malfeasance. & # 8220 ; The cardinal reply is to raise the wages of hatchet mans above what they could acquire elsewhere. A difference in wages imposes a cost of dismissal equal to the present value of the difference between the future net incomes watercourse in enforcement and in other occupations. & # 8221 ; 7 Section four explores the enforcement tools of private legal systems and how they work. It besides raises inquiries about what might go on if we relaxed the province & # 8217 ; s monopoly on force and allow more drastic signifiers of enforcement autumn into private hands.In amount, this thesis examines how non-state legal systems work in their three distinguishable facets: difference declaration, rule-creation, and enforcement. It will pull on many decisions from economic theory ; most often, the Prima facie high quality of private competitory supply to public monopoly. There are many imaginable market failures that might be ; but the scheme of this paper is to at least explore unmarked legal options. Before the organic structure of the paper can get down, nevertheless, it is necessary to indicate out a a major misconception that might forestall one from earnestly sing the private supply of law.The most profoundly frozen obstruction to the grasp of non-state legal systems is the theory, articulately stated by Thomas Hobbes, that the law-making map indivisibly and needfully belongs to the crowned head. As Hobbes famously wrote, & # 8220 ; The lone manner. to support them [ world ] from the invasion of aliens, and the hurts of one another. is, to confabulate all their power and strength upon one adult male, or upon one assembly of work forces, that may cut down all their volitions, by plurality of voices, unto one will. & # 8221 ; 8 On this position, the presence of more than one law-giver in a part has to devolve into violent conflict until merely one remains. Imagine, the statement might travel, that two councils issue jurisprudence in one metropolis. Their Torahs will necessarily conflict on juncture. And since by premise there is no higher organic structure to decide their difference, they will hold to decide it violently.Two things can be said here. First, history gives illustrations of coincident legal powers that operated peacefully. Harold Berman, for illustration, describes multiple viing beginnings of jurisprudence in the Middle Ages, with merely a smattering of serious struggles between them. So Hobbes must be incorrect at least sometimes. Second, Hobbes & # 8217 ; game theoretic tax write-offs are inconsistent. Purportedly, driven by the desire for nutrient, money, and power, rational egotists turn to violence to acquire what they want when there is no stronger entity to continue peace. And yet, as Hobbes says, the fright of decease is even stronger than the thrust for nutrient, money, and power. Given this, isn & # 8217 ; t the rational scheme the defensive one of live-and-let-live? Given the pick between two immoralities & # 8211 ; a little opportunity of decease vs. somewhat less ingestion & # 8211 ; a Hobbesian adult male would certainly prefer the latter.9 This preliminary observation gives a plausible account for why peaceable cooperation was often the dominant scheme. Throughout this paper I imagine that profit-making houses, instead than non-profit organisations, would be the major alternate providers of jurisprudence. This premise overlooks the fact that much, possibly most, arbitration is non run for net income. I do this for two grounds. First, I find it hard to believe that non-profit houses could vie with for-profit houses if they were on equal legal terms. The 2nd ground is merely that the economic theory of profit-making organisations is better-developed than the theory of non-profit groups. I trust that this premise will non earnestly impact the analysis.A concluding caution. This paper considers merely the non-state supply of private, as opposed to public jurisprudence. That is, it considers systems of alternate declaration of struggle between persons whose rights are defined by the common jurisprudence classs of belongings, contract, civil wrong, and offense. Public jurisprudence must be left for another time.2. Adjudication of Disputes2.1 Inefficiency in the public tribunals: overviewOne of our most ridiculed establishments is the public tribunal system. Interestingly, economic analysis gives us hints about many of its cardinal failings. Some of these jobs could be solved with reasonably minor reforms. For illustration, tribunal services are under-priced ( normally, free ) . These leads to serious extra demand, lasting deficits, and strategic holds. Presumably, if the public tribunals were so inclined they could bear down tribunal fees for civil instances to ration demand. A 2nd job is nuisance suits. Frequently, there are cases where one party is clearly in the incorrect, but drags the conflict into tribunal anyhow in the hope that the other side will merely give up. The public tribunals could work out this job by altering the damages regulation & # 8211 ; for illustration, by doing the also-ran in a nuisance suit pay the other side & # 8217 ; s tribunal costs.Other inefficiencies in the public tribunals would be difficult to extinguish with minor reforms. The public tribunals are supported by revenue enhancements ; they therefore have small incentive to command costs. Tests take excessively long, entreaties are excessively frequent, and labour subject is slack. Since juries are conscripted, tribunals treat their labour as a free good ; accordingly, they use juries even when the value of their part to justness is little. And possibly most earnestly, the tribunals foster uneconomical legal conflicts. Alternatively of promoting litigators to restrict their joint legal outgos, they give them incentives them to race to out-spend each other. But since the outgos normally cancel each other out, this legal competition is instead ineffectual. It is difficult to see how the public tribunal system could work out the 2nd group of jobs even if it wanted to. Indeed, it likely won & # 8217 ; t rectify the first set of troubles either. In order to understand the benefits of turning differences over to private options, we must foremost understand why and how the public tribunals fail. This done, we can look into the ways that private organic structures overcome the inefficiencies that the public tribunals can non.2.2. Inefficiency in the tribunals: under-pricing, nuisance suits, input waste, and moreAn first-class work detailing the public tribunals & # 8217 ; failures is Judge Richard Neely & # 8217 ; s Why Courts Don & # 8217 ; t Work. As justice with preparation in economic sciences, he is peculiarly qualified to indicate out the failures of our tribunal system. Neely has a long list of complaints.First, the tribunals grossly underprice their services, taking to extra demand and non-price rationing ( normally, waiting in line ) . It is illegal to sell one & # 8217 ; s topographic point in line. The most pressing instances must wait every bit long as fiddling 1s, taking to drawn-out legal struggle and higher legal costs. If tribunals charged user fees, people with undistinguished differences would be more likely to drop them. Or they might seek a cheaper declaration method. Yet the tribunals provide subsidized ( free ) services, frequently complete with juries. The whole procedure is expensive, but litigants merely necessitate to see their attorneies & # 8217 ; fees. They ignore the cost to taxpayers of excess tests. They besides ignore the cost of justness denied and delayed to everyone waiting behind them for their twenty-four hours in court.Underpricing besides helps the lawfully bosomy wear out their oppositions. As Neely puts it, & # 8220 ; Often the attractive merchandises that the tribunal delivers free are detain itself or a forum that provides the stronger litigator with an chance to have on out or outgun the opposition. & # 8221 ; 10 ( With absolutely working capital markets this could non go on: Bankss would merrily loan money to litigators with good instances. But strategic hold does look to be a existent job. ) Since a longer hold gives both sides a greater chance to out-spend each other, detain normally favors the richer litigator. Delay besides deadens the deterrent consequence of amendss: hereafter amendss, like other future income watercourse, will be discounted by the involvement rate. There is a simple economic account for all of these jobs: since tribunal services are free, there is no manner to ration them other than waiting in line. And this likely is unambiguously terrible for difference declaration, because the litigators can fiercely fight with one another while they wait to travel before the judge.Neely points to a 2nd job that plagues the justness system: the tribunals give inducements to litigate non-disputes. For case, in landlord-tenant instances or creditor-debtor instances, there is seldom any & # 8220 ; legal issue. & # 8221 ; Alternatively, as Neely explains, one side usually merely refuses to carry through its half of the deal. & # 8220 ; In the existence of all the everyday instances that go to tribunal, most of the clip one party will be level incorrect, and he or she will cognize that from the beginning. & # 8221 ; 11 If legal costs exceed the expected value of the judgement, so aggrieved parties may good drop legitimate instances. When nuisance instances do acquire a full test, they crowd out more substantial differences. One solution for insincere instances ( though Neely rejects it on distributive evidences ) would be to do the also-ran wage both sides & # 8217 ; costs & # 8212 ; but this is a reform that tribunals are loth to seek. At the really least, in countries of the jurisprudence filled with nuisance suits, this thought has potential.Profs. Landes and Posner argue that the public tribunals waste and misallocate their resources ; after all, it is taxpayers, non Judgess or litigators, who pick up the check. Landes and Posner so reasoned that the arbiters are likely to do more efficient usage of inputs than the public tribunals. Since arbiters do last on user fees, controversialists and arbitration houses alike will desire to incorporate costs. From these premises, these two legal economic experts proposed the undermentioned trial of the efficiency of the public tribunals & # 8217 ; civil tests: the public tribunals are efficient if they match the patterns of arbitration. Since arbitration does non utilize juries or attorneies, and the public tribunals do, Landes and Posner conclude that these may be inefficient, as least in civil cases.12 ( Since felon instances are non arbitrated, we can & # 8217 ; t cognize what condemnable arbitration would be like. ) This is input waste on a immense graduated table & # 8211 ; a bulk of the inputs in civil instances may good be unwarranted. The misallocation of jury clip is particularly crying, since they are conscript labour & # 8211 ; virtually a free good. While juries cost a great trade to society ( including the jury members themselves, who lose work clip ) , tribunals and litigators have the inducement to utilize them even when the benefit is negligible.Landes and Posner use the same efficiency trial for other public tribunal patterns. For illustration, contention exists over the virtues of the loser-pays regulation for legal disbursals. Arguments cut both ways: If tests occur because of over-optimism, so the loser-pays regulation leads to more suits ; if many suits are & # 8220 ; nuisance & # 8221 ; suits in which the party in the incorrect strategically holds, so the loser-pays regulation would take to fewer suits.13 It is difficult to make an empirical trial to everyone & # 8217 ; s satisfaction. However, we could reasonably foretell that profit-maximising private tribunals would utilize the more efficient regulation, particularly if the parties pre-contract to intercede with a specific house with a set damages regulation. How does the trial bend out? The American Arbitration Association requires the defendent to pay all legal costs if the complainant wins, but splits the difference if the suspect wins.14 Posner suggests that this vindicates the American regulation over the English ; but really this regulation implies that suspects are frequently clearly guilty, whereas malicious suits by complainants are infrequent. Or in other words, nuisance suits by defendents are more common than nuisance suits by complainants ( in differences presently open to arbitration ) . The parties can besides voluntarily change the damages regulation: some contracts change the standard AAA regulations, qualifying that the complainant pays the legal costs if he loses. Landes and Posner bring up another interesting issue: entreaties. They argue that private arbitration ( excepting trade associations ) lack appellant tribunals because the exclusive map of such tribunals is to explicate regulations of jurisprudence, non decide differences ; and the former, unlike the latter, is a public good. Landes and Posner view the production of regulations as a pure public good: society at big benefits when person refines a legal rule, but ( as is frequently the instance with rational creative activities ) , it is difficult to claim a belongings right in a precedent.This claim may good be true ; it will be examined in subdivision three. But possibly there is another account: Private tribunals do non allow entreaties merely because the excess costs ( in clip, legal fees, tribunal services, and so on ) are non worth the societal benefits. Both parties gain if they agree antique ante to restrict each other to a individual hearing. But in public tribunals there is no manner to believably perpetrate to restrict entreaties. On this theory, the deficiency of entreaties is a benefit to both parties because it keeps dispute declaration costs low. Posner and Landes point out that trade associations do license entreaties ; and these entreaties sometimes produce case in points. They argue that this happens because a trade association can internalise the benefit of a case in point. True, but they besides concede that appellant courts are non cosmopolitan. In all likeliness, trade associations seldom permit entreaties, purely limit their disbursal, or both. Furthermore, the VISA corporation does non allow entreaties, even though the corporation & # 8217 ; s alone construction and secretiveness enable it to to the full internalise the benefit of case in points. Quite perchance the permission of appellant reappraisal in condemnable instances makes economic sense ; for as Posner suggests, the high mistake costs of convicting the inexperienced person may warrant the sensible uncertainty regulation for grounds in condemnable proceedings.15 On the other manus, the behaviour of many arbitration houses and trade courts suggests that the entreaties procedure in civil instances has inordinate costs. 2.3 Inefficiency in the tribunals: fosterage uneconomical legal struggles Even the most harmonious society has differences. In the involvement of peace, these differences must somehow acquire resolved. The upshot is that every difference comes with declaration costs tied to it. There is some extra load on top of the costs of the difference that the controversialists must finally divide. This is frequently a significant amount. From this is follows that to a limited extent the complainant and defendent have a common involvement: minimising their several difference declaration costs. We may deduce that the parties portion an inducement to cheaply decide their conflict.In the authorities & # 8217 ; s tribunal system we see this rule at work when suspects settle, or alleged felons supplication deal. Yet public tribunals have clear inefficiencies that both increase the costs of dispute declaration and do colony more hard. Judge Neely & # 8217 ; s strongest unfavorable judgment of the public tribunal system is that it promotes futile but expensive strategic behaviour. The result of a instance depends non simply on the facts of the difference ; it is besides a map of the several legal disbursals of the two sides. Since the controversialists can non make a concerted solution to the difference itself, it is similarly hard to hold to restrict joint legal outgos. The consequence is that both complainant and suspect haste to outspend each other, but finally the chance of success remains unchanged because the competitory outgos cancel one another out.Neely & # 8217 ; s proposed solution would probably elicit incredulity from economic experts: & # 8220 ; What is needed is a tribunal version of the Strategic Arms Limitation Treaty & # 8211 ; a method for finding in progress what a sensible investing in a peculiar case is, and a tribunal order prohibiting both sides from passing money for a competitory advantage that in the nature of things will be illusory. & # 8221 ; 16 Like statutory caps set on inordinate punitory amendss, this is likely a band-aid step destined to make bureaucratic inefficiencies of its ain. Difficult inquiries present themselves. First, judicial finding of maximal legal outgos would itself utilize up valuable tribunal clip. Maximum allowable outgos might itself be an issue of legal contention. Second, there would certainly be active involvement groups who would fight to set the ceiling in their preferable way. Frequent defendents might really good desire the cap pushed down every bit far as possible to take the inducements for complainant & # 8217 ; s attorneies to convey suits against them. Accustomed complainants and their lawyers would in bend anteroom in the opposite way. ( Or possibly they would prefer a cap that applied entirely to defendents! ) Third, it seems hard to see how attorneies working on eventuality could be dealt with under Neely & # 8217 ; s regulation. Would their awards be capped? Would the tribunals set a ceiling for the allowable entire lawyer-hours per instance? These jobs seem serious & # 8212 ; for public tribunals. Politicss would likely predominate over economics.Private tribunals, on the other manus, already limit legal disbursals with pronounced success. The AAA does non allow attorneies & # 8212 ; a rather drastic restriction. VISA does non even let the parties to go to their ain hearing. But these are efficient consequences. On the norm, these patterns are improbable to harm the legal chances of either side. Yet these patterns limit the joint legal costs per instance & # 8212 ; a large asset. Since both sides typically agree to intercede differences in progress, before cooperation has broken down, it is easy to pre-commit to reciprocally limit legal costs in future disputes.Why has private difference declaration worked so good in this country? The public tribunals would happen it difficult to administrate such a regulation. Is at that place a critical difference between the restrictions that private and public tribunals topographic point on legal outgos? I think there is. To understand it, we should turn to Ronald Coase & # 8217 ; s authoritative article, & # 8220 ; The Nature of the Firm. & # 8221 ; 17 Directors of a house, Coase explained, normally run it by the & # 8220 ; command-and-control & # 8221 ; methods that economic experts deplore on the economy-wide degree. Once a worker gets hired, he is expected to make what he is told ; likewise, office supplies are likely to be centrally allocated to each section instead than sold to them. What this shows, said Coase, is that command-and-control methods ( since they survive and thrive within competitory houses ) must be utile to some extent ; most notably, command-and-control reduces minutess costs. The job with centrally-planned economic systems is that they extend command-and-control techniques far beyond their efficient point & # 8212 ; and so extinguish the competitory force per unit area that checks this inefficiency. In competitory markets, a house that grows so big that it can non efficaciously pull off itself starts to lose market portion and net incomes. This gives an inducement to scale back to a less cumbrous size. Central planning by a authorities does non confront this deterrence. For private tribunals, restricting the usage of attorneies, adept informants, and so on would be kindred to any other concern determination. All houses use command-and-control to some extent ; what prevents inefficient command-and-control is the force per unit area of competition. When private tribunals experiment with limitations on legal outgos, they need simply judge the demands of their ain patronage, non those of the whole society. And when they judge falsely, competition can unbend them out. If a house decides to restrict legal outgos, market portion and net incomes can bespeak whether or non the pattern is efficient in that peculiar instance. No 1 of all time needs to do the much more hard judgement about what is efficient for all firms.In contrast, the public tribunal system is a centrally-planned industry & # 8212 ; when it uses command-and-control there is small or no feedback to demo whether its actions are reasonable. And if it chooses wrongly, consumers frequently have no close replacement. More critically, the public tribunals choose non simply for a individual house ; they choose for the whole society. Judgments of this sort are likely to be incorrect because, foremost, there is no market feedback, and 2nd, because single penchants and fortunes differ excessively much for one

set of regulations and processs to accommodate them all.Judge Neely is certainly right that litigators would frequently be better off if they could reciprocally & # 8220 ; disarm & # 8221 ; by jointly cut downing outgos. Unfortunately, given the public tribunals & # 8217 ; construction and political restraints, this undertaking may be impossible. Yet private arbitration houses could cheaply research these possibilities ; they do so already ( for illustration, by forbiding the usage of attorneies and entreaties ) . One manner to cut back on legal costs without monolithic disposal jobs would be to open up a wider scope of differences to private declaration and increase the liberty of private options from public control.This list of inefficiencies in the public tribunals is barely thorough. We might besides observe that Judgess make many economically unwise opinions. Juries in civil instances, guided more by emotion than by consideration of long-term effects, do the same. In any instance, the public tribunals are sufficiently unattractive that we should earnestly see alte

rnatives. And I think that Landes and Posner point in the right direction: if we can measure the efficiency of public courts by comparing them to arbitration, then private dispute resolution, if possible, is a welcome option. Fortunately, this option is not only possible but real and growing. The next two sections will explore its benefits, its solutions to the problems of the public courts, and the its feasible scope.2.4 Private dispute resolution: an efficient alternativeMany of the faults of the public courts would not exist (or would be less severe) under private arbitration. Private courts could raise fees to efficiently ration judicial services. They could experiment with indemnification rules to reduce their clients’ expected legal costs. Firms might offer various methods to restrain joint legal costs (by, for example, prohibiting or limiting the use of lawyers). They could limit or eliminate appeals. Each of these problems seems difficult for the public courts to manage: partly for political reasons, but also because public monopolies have little ability to recognize entrepreneurial opportunities.Consider some further advantages. One characteristic of private supply is that it recognizes that consumer have different needs; and since many suppliers can survive in an industry simultaneously, it is possible for them to sell a wide variety of services side by side. Some parties prefer swift decisions at the cost of lower accuracy — the member banks of the VISA corporation, for example, realize that errors will even out in the end, but that adjudication costs increase with each dispute. VISA consequently has a system of rough but swift justice. Other conflicts — for example, over isolated contracts between strangers — require a more thorough investigation. Public courts have a systematic bias toward excessively slow resolution; but even if the courts were right on average, they would still ignore the fact that litigants’ preferences vary.The most impressive arguments for privatizing dispute resolution have little to do with the unique attributes of the adjudication industry; rather, they are the standard arguments for the prima facie superiority of private to public supply. Namely: (1) Public bodies have no incentive to be efficient, and private ones do; and (2) Public bodies usually don’t know what is efficient, while private bodies, though not omniscient, know better. Why don’t courts have any incentive to be efficient? First, there is no residual claimant with an interest in cutting costs and increasing consumer satisfaction. In profit-making firms, the owners have an incentive to keep costs low and make them fall over time. And the incentives of the employees are different. Judges are typically either elected, or appointed for life. Elections are a a bad way to monitor work effort — informing oneself about each judge’s attributes is a pure public good: society at large benefits from intelligent selection of judges, but individual diligent voters bear the costs. Life appointments take away even the meager incentive effects of voting. If we want the public courts to work, we must rely on the self-monitoring of the judges themselves. This might work sometimes. But is it a good incentive structure? The incentive structure of private labor markets is more sensible: while they have imperfections, private labor markets leave employment decisions up to a concerned manager or entrepreneur, not the public at large. These managers reward their employees if they work well and fire them if they don’t. Surely this spurs work effort better than voting or life appointments.Second, as Hayek and others suggest, private markets use knowledge more effectively than public monopolies.18 They are more able to calculate costs and benefits. In markets there are explicit prices that measure costs and benefits. But public bodies must estimate social costs and benefits by using (at best) surveys or (at worst) guessing. The judicial industry needs the low-cost experimentation that private firms can provide. It is cheap and safe if one firm decides to restrict the use of lawyers, or get rid of appeals, or change the indemnification rule; even if these experiments flop, the losses to society are small. Often an experiment proves useful, at least for one section of the consuming public. Private adjudication services would be free to experiment and see what their clientele thinks. Public courts, in contrast, rarely try new ideas. But there is perhaps a justification for this — namely, their error costs are terribly high because public experiments involve everyone. Perhaps public courts hold to the status quo because they fear that their experiments will fail miserably. What we need is to permit experimentation, but keep it decentralized so that mistakes can be abandoned before they become disasters. And private firms are the ideal arena for low-cost experimentation. For years, academics in law and economics have speculated about the relative efficiency of different rules and procedures for trials. Rather than have the public courts try each out in succession, we could expand the scope of private courts and see what innovations evolve.2.5 The potential and limits of private dispute resolutionAs Posner and Landes point out, there are two cases where private dispute resolution works best: “(1) those where a preexisting contract between the parties requires submission to arbitration according to specified rules for selecting an arbitrator, and (2) those where the disputants belong to an association which provides both arbitration machinery for its members and a set of effective private sanctions for refusal to submit to arbitration in good faith or to abide by its results.”19 They go on to suggest that (1) works only because the government courts enforce the contract.This seems partly correct. But reflection suggests that preexisting contracts to arbitrate could work if the public courts simply refused to overrule them. Consider video rentals — before we can get a rental card, we must authorize the rentor to use our credit card if we do not return the video or pay our fees. Our credit card company in effect guarantees our trustworthiness; and if we break our agreement, it pays the video rental firm. If we refuse to pay our credit card bill, our company could of course take us to court; but this is usually so ineffective that it simply ruins our credit rating if we renege. If we extend this model further, we can imagine an effective way to enforce all sorts of contracts — including arbitration contracts — non-violently and without the help of the public courts. Put simply, it is not actually necessary that we have repeated interaction with all of our fellow contractors in order to make non-violent enforcement necessary; we must merely repeatedly interact with one firm whose job it is to guarantee our payments.Repeated interaction, game theory teaches us, can substitute for enforceability. So long as parties develop some kind of bonding relationship, they do not need the public courts to enforce their agreements. However, it is necessary that the public courts and legislature refuse to overrule them. Arbitration is a way to escape from the public courts; but if the public courts regulate arbitration, the “escape” is less effective. What I am suggesting is that contra Posner and Landes, arbitration can work even if the public courts don’t enforce it, but that it can’t work if the public courts positively disallow it. Nathan Isaacs, a professor of business law at Harvard during the 1920’s, noticed that when the government began to enforce arbitration (in 1920 in New York) it also began to hamper it: “There is irony in the fate of one who takes precautions to avoid litigation by submitting to arbitration, and who, as a reward for his pains, finds himself eventually in court fighting not on the merits of his case but on the merits of the arbitration.”20What then, should public courts and legislatures do (or rather, not do) to make arbitration work as well as possible? First, courts must refuse to review any arbitration clause in a contract; i.e., make a clear rule about what an arbitration clause must say to be court-proof, and then rigidly stick by that rule. Second, courts must refuse to review the content of arbitration, leaving the efficiency and justice of arbitration to the parties’ judgment. Third, legislatures must refrain from legally hampering the ostracism and boycott efforts of arbitration firms, professional associations, and credit card companies (for example, by banning credit ratings as an invasion of privacy). Private firms do not have violence at their disposal, so they must use subtler methods of enforcing agreements, like credit ratings and reputation. To put restrictions on these comparatively mild enforcement techniques makes it difficult for arbitration to work at all. Fourth (and least importantly), the government should refrain from making any antitrust charges against professional associations that publicize the untrustworthiness of members who refuse to arbitrate or submit to sanctions.How come only preexisting agreements to arbitrate work? First, it is difficult to enforce a claim non-violently unless both parties can credibly pre-commit to comply. Especially if one party is sure to lose in any fair trial, he has no incentive to cooperate unless he previously made himself vulnerable to sanctions (for example, by authorizing his credit card company to pay for any damages). Second, it might be difficult to get a fair trial even if two common law strangers agreed to arbitrate. Each side might try to get arbitrators, rules, procedures, etc., beneficial to its case; and if the other declined, he might be accused of “foot-dragging,” of willfully delaying and stifling the resolution process. These problems might make us skeptical of purely private resolution of quarrels between strangers.Nevertheless, many disputes do not involve strangers; and in principle all of these might be turned over to the private sector. All commercial disputes, employment quarrels, creditor- debtor complaints, landlord-tenant problems, and perhaps divorce and products liability fit the mold well. The parties need merely record their mutual decision to arbitrate future quarrels (including perhaps their preferred arbitrator), plus some sort of assurance or guarantee of compliance. Commercial disputes might rely on reputation effects; employment quarrels on the threat to fire on the one hand (to exact compliance from employees) and the harm to worker morale on the other (to get employers to accept decisions); landlord-tenant relations on a security deposit. In other situations the parties might use credit cards or the like to pre-commit themselves to pay up. (More on this in the section on enforcement.)Consider, for example, sexual harassment. Instead of having court-enforced anti-harassment laws, we might leave firms to develop their own policies, or “law” on the matter. When a male manager and a female employee have such a dispute, either the firm itself or a sub-contractor might conduct an internal investigation with its own procedures, rules of evidence, etc. The firm has the power to enforce the arbitrator’s ruling: it might fire an offending employee, attach his wages in order to compensate the injured party (coupled with a threat to enter the harasser’s name with a sort of “employee rating firm” if he should opt to quit), or any number of other remedies. In order to attract a satisfied workforce, each firm might compete to develop more efficient rules and enforcement techniques. There are at least two important factors that they might weigh: first, the harm done to harassed employees; second, the harm done to those falsely or mistakenly accused. Competing employers would probably better balance these two costs than the courts.If the government were involved at all, it might restrict itself to summarily enforcing the result of outside arbitration. If, for example, a landlord-tenant arbitration case rules that the tenant must leave at once, the government might restrict itself to enforcing the order. Or if a products liability arbitrator rules in favor of an injured customer and the firm refuses to pay up, the courts might merely summarily order the firm to pay.What about the hard cases, such as torts (between strangers, anyway) and crimes? Courts might summarily enforce arbitration to which both parties agree. In a way, they do this now with plea bargains and settlements. The only difference would be that instead of enforcing a determinate outcome, the courts would agree to enforce the outcome of a process, however it turns out. It might be difficult to get two strangers to agree to a common arbitrator. But, as Posner and Landes point out, arbitration entrepreneurs have thought about this problem for a long time and developed some workable solutions. The AAA sends both parties a list of arbitrators; each side then crosses off unacceptable arbitrators and ranks the remainders according to his or her preferences. Whichever arbitrator gets the highest joint ranking gets the job. And this system aligns both sides’ incentives skillfully. As Posner and Landes explain, “A party who crosses everybody off the list hurts only himself, by guaranteeing that the arbitrator will be selected from among the names not deleted by his opponent.”21 It might be unfair for the courts to impose arbitration on unwilling parties; but perhaps arbitrators would strive to develop reputations for fairness to lure parties to try it voluntarily. After all, the parties to acourt case rarely have any choice about their judge unless he is plainly biased. (The side that likes its assigned public judge might refuse to arbitrate. To prevent this problem, one might delay announcing the judge until after the parties learn of their option to arbitrate.)If this section has an overall conclusion, it is that competitive arbitration could successfully take over a large array of disputes currently handled in the public courts. There are no obvious market failures for individual dispute resolution. Arbitration firms’ decisions and procedures would be kept fair and efficient by means of free competition, rather than by self-monitoring or voting. Since there are no glaring market failures, the results of competitive arbitration would approximate the high expectations that we have of freely competitive industries in general. But for arbitration to work, we must meet two conditions: (1) The public courts must adopt a simple rule about what arbitration clauses must say to bind the signatories, and then stick to that rule; (2) The legislature must refrain from passing laws that hinder non-violent private enforcement like ostracism and boycott.Resolution of individual disputes could easily be privatized. There are no apparent market failures, such as externalities, imperfect information, or monopoly. At least these problems do not seem unusually serious. (We might also note that these “market” failures have parallels in the public courts.) The next function of private legal systems that this thesis will investigate has, in contrast, been accused of a quite serious market failure. Landes and Posner allege that private organizations and arbitrators have no incentive to make rules because of serious positive externalities. The next section examines private “law-making” and investigates whether the market failure is as serious as Landes and Posner think.3. Formation of Rules3.1 PreviewWhat does economic theory have to say about the private supply of rules of law? First, a rule-production market with no externalties would be economically efficient. If it were possible for rule-inventors to charge judges and arbitrators who use their rules (with some costless copyright system, for example), then private supply would be quite feasible. In fact, such an idealized system would be a marked improvement over rule-creation by the public courts: there would be stronger incentives for efficient law-production, and product differentiation would make it possible to satisfy many sub-markets simultaneously.Alas, the rule-production market has serious externality problems because it is difficult to establish property rights in a precedent. Posner and Landes take this as proof that private rule formation is an industry with little or no realistic potential. But things are not so simple. For one thing, patents are not the sole or even primary incentive for innovation. Surveyed businessmen in R&D-intensive industries rate several other factors more highly, as we shall see below. Unsubsidized firms continue to produce non-patentable innovations, so other incentives must exist somewhere. On top of this, it is sometimes possible for firms and parties to pre-contract to internalize any possible externalities of rule production. In other words, there are several mitigating forces that could reduce the externality problem for private rule-creators.Posner himself (in The Economics of Justice) points to another source of private rule provision: the evolution of custom. Cultural evolution gradually produced customary law in the absence of government supply; and despite some disadvantages, customary law and other “grown” orders have many attractive features. They draw on centuries of legal wisdom and experience; they are extremely stable; and they easily adapt to marginal social changes. The common law originated in the customary law of early tribes. Cultural evolution leads most societies down parallel tracks: divergent societies’ customary laws of property, contracts, and torts are remarkably similar. And these evolved customs of property, contract, and tort are precisely the kind of legal rules that law and economics scholars consider efficient. All this points to a tentative conclusion: Leaving the production of legal rules to the market may be feasible after all. Markets supply many other non-patentable innovations. Posner and Landes are probably too swift to dismiss the possibility of non-governmental supply; after all, many industries overcome the problem of non-patentability. The potential for private supply turns out to be greater than commonly assumed. The following sections challenge this common assumption in depth.3.2 The economic theory of private rule-making with no externaltiesAs is often the case in economics, it is convenient to begin the analysis of private rule-making with a counter-factual assumption. Let us assume for the moment that all legal innovations’ benefits can be internalized by their producer (whether an individual judge or the firm that employs him). Imagine a costless system of rigidly enforced copyrights. Any time someone uses a precedent, procedure, ruling, or law pioneered by another person, the user must pay royalties to the creator. What would happen under these circumstances?First, every judge or private adjudication firm would strive to develop the most efficient laws that it could find in order to maximize royalty revenue. They would funnel money into research and development, search out weaknesses in the law, and advertise the advantages of their respective systems. Just as with an ordinary copyright, the marginal cost curve shifts upwards in order to eliminate supernormal profits, because firms increase their spending in research and development and educate customers about the latest advances. This is perhaps the dreamland of law and economics scholars — the efficiency of every conceivable legal rule could be tested, not in the arid world of econometrics, but in the practical realm of business.This market might have a host of possible structures. If Posner and Landes are correct, there are economies of scope in dispute resolution and rule-formation, so we would see “vertically integrated” adjudication firms performing both functions simultaneously. If they mistake an accidental feature of public courts in the U.S. for an economic advantage, then there might be two interrelated industries — one resolving disputes for the public, the other selling rules to the dispute resolution firms. Just as in normal patent law, the discoveries of the distant past would belong in the public domain; only recent innovations would be rewarded by monopoly grants. All firms would probably embrace the basic categories of property, contract, tort, and crime — innovations on par with Newton’s work in physics or Darwin’s in biology. Legal rules at this level of generality, being part of our accumulated cultural heritage, would naturally be free. But specific developments within these categories might be patented just like any other intellectual innovation. To be sure, there would be the usual problems in patent law concerning the breadth of the patent and its duration; but the core intuition is that if there were perfect exclusion it would be possible to have a flourishing law production market.Posner and Landes assert that private judges might have an incentive to promulgate vague rules that maximize the public’s need for court services. It is difficult to imagine that any system could be more vague that our current public court system, so the argument seems misplaced. More to the point, this could not happen under free competition. Customers would patronize the arbitrators that offered the cheapest and highest quality service. Arbitrators would have to select the proper inputs — most importantly, clear and simple legal rules. The incentives to promulgate vague rules and thereby increase demand might exist if the government sub-contracted its rule-making function to a single monopolist. But the genuine market in rule-formation that this section explores would be fully competitive. In such a situation, a firm that tried to “increase demand” by adopting vague rules would be much more likely to lose all of its clients than reap a bounty from an explosion of litigation.A competitive market in the formation of rules would be different from our current system of rule-formation by judges and legislatures in one crucial respect: there would be legal diversity within one and the same geographic region — or if you prefer, product differentiation. Courts and legislatures (leaving the mitigating effects of federalism aside) usually make the same rules for everyone. Posner and Landes offer a plausible economic rationale: “there would appear to be tremendous economies of standardization in the precedent market, akin to those that have given us standard dimensions for electric sockets and railroad gauges.”22 True enough; but the existence of some economies of standardization hardly shows that total standardization is economically desirable. Only when the production of legal rules became freely competitive could we correctly balance the preferences for both diversity and uniformity. Properly functioning markets do this without us even trying. Restaurants, for example, have many things in common: they are clean, have waiters and waitresses, serve non-poisoned food, and have bathrooms; but they have many differences: quality of service, type of food, decor. Presumably, restaurant entrepreneurs balance the costs and benefits of standardization and diversity when they make a final decision on their business practices, realizing that customers want both uniformity and choice. A competitive rule-formation market that strictly protected intellectual property rights would do the same. In fact, private adjudication (still assuming no externalities) might be better able to standardize law than governments; for it is a characteristic of state law that it applies merely within national borders. Yet as the world’s economies become more interdependent, the need of international businesses for a common legal code increases. Private rule-formation could gradually amalgamate diverse business norms into a common legal code; for just as inventions from one nation can be exported to another, so too might legal practices. So long as law-formation remains a monopoly of governments, standardization requires international treaties, years of negotiations, and so on. And while such agreements claim to bring productive efficiencies like a shared commercial code, there is also the danger (as some critics of the European Community argue) that international standardization might eliminate legal competition on tax and regulatory policy. The economically preferable outcome would be legal standardization without a legal cartel. Prof. Bruce Benson sums up the “legal standardization” controversy aptly: “Where the tremendous economies of standardization that Landes and Posner alluded to exist, the private sector will take advantage of them. Government typically cannot respond because of the artificial constraints of political boundaries. There is no reason to believe that any national government is of the ideal size to take full advantage of the economies of standardization in law. In some areas of law (e.g., commercial law), these economies appear to be greater than any existing nation can encompass. In other areas, such economies may be considerably more limited so that existing political entities are too large. A private system of law would generate efficiently sized ‘market areas’. “23 (emphasis added). These “efficiently sized market areas,” I might add, need not be geographic in character — they could just as easily be broken down by industry-type, by cultural norms, by risk-preferences, or any other factor. Since by assumption law would be produced in competitive markets without externalties, we could be confident that whatever market sizes and levels of standarization emerged would be optimal.3.3 Rule-formation in the real world: the problem of externaltiesWe have seen that a law-production market with no externalities generates rather attractive results. What happens if we relax the assumption of perfect patent and copyright protection for law-producing individuals and firms?As Posner and Landes first suggested, all legal innovation could disappear. Everyone might try to free ride on the precedent and procedure R&D of their competitors; but this individually rational strategy is not, as the saying goes, “socially rational.” If there were no public courts, the probable result would be a steadfast adherence to tradition, because tradition would be the only source of law left. Put simply, we would have nothing but a static stock of legal knowledge inherited from the past. It is not clear how serious a defect this would be; as Posner hints, both the rule of stare decisis and the low rate of depreciation of precedents (4-5% according to his research) indicate that rapid innovation is not even desirable.24 Richard Epstein’s mistrust of legal change is still more pronounced: “the merits of freedom of contract in no way depend upon the accidents of time and place”25. Other basic legal principles, he says, are similarly timeless. Unfortunately, legal innovation can alter good laws as well as bad ones. (One of Epstein’s favorite examples is the doctrine of assumption of risk, which modern public courts seriously weakened.) Perhaps legal innovation is not as important as some people think. It is at least possible that the harmful changes made by the public courts in this past century outweigh all of the beneficial ones.Nevertheless, Posner and Landes’ case against purely private production of rules seems strong. It does appear that patent and copyright protection would be difficult to bestow upon legal innovators. And normally economists assume that intellectual property rights of this kind are the only effective way to get the market to invest in research and development. Without effective ways to internalize the benefits of innovation, government funding seems like the only way to assure us of the supply of this valuable good. 3.4 Non-patentable innovations and externalties problemsThe central problem with the Posner-Landes analysis is that it proves far too much. It is a historical fact that private systems of law began, evolved, and thrived. The medieval law merchant, for example, was so effective that national governments adopted the market’s rules rather than the other way around. Bruce Benson points out that during the 19th century private commercial arbitration competed fiercely with the common law courts.26 The former relied extensively on business custom and the law merchant, while the latter did not. One of the main ways that the private sector competed with the public was by adopting a different legal code — one that the business community found more efficient and fair. Gradually, competition drove the common law courts to adopt rules similar to those of private adjudication. Competition persisted even though the common law courts were partly subsidized by the crown. Even Posner and Landes admit that, “the doctrines developed by the [private] merchant courts to deal with contract and commercial matters were absorbed into the common law and the official courts began winning business from the merchant courts. In a similar vein English procedural reform in the nineteenth century has been attributed in part to the competition from private arbitration.”27 Notice how the private and the public courts competed by offering different rules of law, which would not be possible if public courts were the only possible source of law in the absence of patent protection for legal inventors.Prof. Benson raises a still more challenging point: Who free rides off of whom? Posner and Landes observe that public and private courts typically have similar legal codes; they then conclude that the private courts free ride off of the public courts by “borrowing” their precedents. But Benson argues for the opposite view: “[C]ommercial arbitration should enforce virtually the same laws recognized by the public sector, but the causation actually flows in the opposite direction. Public courts enforce virtually the same laws as commericial arbitrators do. If they did not, the public court bureaucracy would lose its commercial business because businessmen would use their own courts (as they are).”28 I doubt that this is wholely true today, because the private courts cannot compete with the public courts on equal terms. The public courts can trump the decisions of the private courts. Before we can test these alternative hypotheses, we would first have to give private courts the autonomy that they need to compete effectively.There is a second and more serious reason to

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