Side-payments and efficient law

I was discussing free trade with a coworker last night, who expressed the belief that changing legal rules was not OK unless it was a Pareto improvement. I replied that I was fine with side payments made to, say, domestic producers of uncompetitive products, if that was what it took to make the change. (A one-time payment is fleeting, the benefits of free trade are forever).

I wonder if acceptance of side payments would be a useful principle for a legal system to adopt. In anarcho-capitalism, you have it sort of built-in: the PPAs have a financial stake in the legal compromises, so they can make side-payments to each other, reflected in lower premiums (in a competitive market). So the PPAs have incentive to generate efficient law and make side-payments (or create bundles of legal changes) such that all of them gain from adopting it.

Dynamic geography
I see more as being a competitive market of monopolistic legal systems, so it is interesting to think about how those local monopolistic systems could grow and improve, besides just competitive destruction. Since people tend to be satisficers, rather than maximizers, Pareto actually makes sense as a criterion when you consider things in utility space. If you change the laws of my village in a way that doesn't help or hurt me, but helps some of you, I'll think "hey, good for you". If you change the laws in a way that helps some of you, and costs me a buck a day, I may think "you selfish bastards!" So an explicit legal policy and social norm for estimating the effects of a legal change and doing a one-time side payment might allow the legal system to change much more frequently.

It also helps ensure that the system is generating efficient changes, since the money for the side payments has to come from somewhere, presumably the beneficiaries of the change, so the actual test of getting people to agree to the set of side payments is essentially a test of efficiency. Otherwise, how do you determine efficiency?

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That would be a Kaldor-Hicks

That would be a Kaldor-Hicks improvement, to be specific. There are problems with desert here (it seems morally wrong to require somebody to pay for creating a rule that prohibits his own murder--presumably it's wrong to kill a person no matter that person's ability to pay), but that probably wouldn't sway you.

So here's a better issue. If the only means of telling whether or not law is efficient is whether or not money changes hands in the legal process, then how can we verify that a market in law would produce efficient law?

That qualm aside, when it comes to less charged issues than murder, side payments make sense. Nozick, for instance, thought that if we produced rules that prohibit people from doing very risky activities, they should be compensated for that inability.

Misanthropic principle

I hate everyone so there can be no Pareto improvements.
I do think buying out rent seekers can be a good pragmatic strategy though. The most ethical way to do it would be to buy them out through a tax cut (from now on, no tariffs on cotton but any owner of an ex cotton field can deduce X amount of dollars from his taxes for the next 10 years).
One problem with such an approach is that it would make any 'protected' activity susceptible of being 'unprotected' much more attractive.

Investment carries risk

I was discussing free trade with a coworker last night, who expressed the belief that changing legal rules was not OK unless it was a Pareto improvement.

Why? Pragmatically, I understand that it may be easier (and worth the money) to bribe certain interest groups to go along with policy improvements, but I don't see why we should consider this a moral necessity.

Investment carries risk. We don't, in general, compensate people who lose money on bad investments, nor should we. We didn't pay the manufacturers of typewriters when computers became popular. And free trade is to mercantilism what computers were to typewriters--a superior technology.

Also, compensating people when we change the legal rules creates moral hazard and encourages them to invest in the status quo.

The Civil War could have been avoided with side payments

Even as a one time deal the buying out of slave holders in the south would have been far less expensive than Lincolns war. I believe the British approached it this way.

I doubt the civil war was

I doubt the civil war was about slavery...