The Chronicles of a Capitalist Lawyer

Sebenarnya sudah cukup lama saya berpikir menulis dalam Bahasa Indonesia, tetapi karena sejak awal blog saya ditulis dalam Bahasa Inggris, saya sering kali mengalami dilema kalau harus menulis dalam Bahasa Indonesia. Namun demikian, setelah saya pikir-pikir lagi dari analisis untung rugi, saya melihat kalau tulisannya difokuskan untuk kasus atau masalah khusus di Indonesia, sebaiknya memang ditulis dalam Bahasa Indonesia agar bisa menarik lebih banyak Pembaca.

When I left Chicago in 2012, I promised myself that I will do 2 two things once I return there in September 2014. First, I'll attend an event of Ronald Coase and ask him for an autograph. Second, I'll attend Gary Becker's class, Price Theory, since I was not able to take the class in 2012 due to conflicting schedules. I spectacularly failed to do both because both of Coase and Becker have passed away. I'm grateful that I had the chance to attend one of Becker's seminar when he debated Francois Ewald on Foucault thoughts on Becker. But of course that was not enough, it will never be enough. So for me, this is a profound loss.

In honor of Gary Becker, I think it would be proper to write a piece of article on his impact to the development of Law and Economics. If Ronald Coase introduces the idea of transaction costs, persuading lawyers to think not only from liability perspective but also transactional perspective in designing regulations, Gary Becker introduces the idea that economics can be used as a tool to analyze almost every aspect of everyday life. This is a very important contribution to economic analysis of law where previously the scope of economic analysis is limited to specific areas of law such as antitrust.

Furthermore, before the formal existence of Law and Economics, lawyers are mainly divided in two groups: (i) the natural lawyers who believe that law is derived from higher morality principles (can be God's wisdom, morality of the society, etc), and (ii) the positivist lawyers who believe that law is derived from social facts in which lawyers can know and find valid sources of legal authority (not to be confused with legal formalists).

For natural lawyers, contents of the law matter and they believe that immoral laws cannot be considered as laws. While their approach creates inconsistencies in practice (immoral laws can actually exists and be enforced), at least they have some criteria for a good law. The problem is reversed for positivist lawyers (including me) that mainly focus with sources and not contents. Since legal positivism is basically a descriptive theory of law, it can describe the requirements for a rule to be considered as a law but it lacks a proper theory in determining the characteristics of a good law.

Law and Economics (especially the normative one) fills such gap. It provides an alternative theory in analyzing the requirements of a good law. Instead of relying on vague moral principles, we rely instead on cost & benefit analysis, and efficiency and welfare maximization principles. Such idea is foreign to classically trained lawyers. But once they know the gist of it, their view of the world will be significantly changed, hopefully, for the better.

Let me give an example from one of Becker's most famous article on the economic approach toward crime and punishment. When dealing with criminal laws, classical lawyers tend to think from simple retributive or distributive justice point of view. It's about making a fair punishment, a just desert for the villain. Sometimes, the lawyers would also think about humane sanctions or possible reconciliation between victims and criminals. Unfortunately, to be honest, all of these things are obscure and it is difficult to recommend a satisfying policy because when speaking about morality principles, people tend to disagree based on personal values or preferences.

With Becker's paper, lawyers are reminded that criminal activities are generally activities that are costly to the society. Furthermore, criminal enforcements also involve costs. Nothing is free and there would always be a trade off. From such a simple idea, one can think of many implications as follows: what activities should be criminalized? What are the most efficient way of imposing sanctions? How to reduce the costs of law enforcement? Should we focus the enforcement on specific criminal actions only? How to introduce sanctions that can improve the welfare of the society? Is prison effective? Any preventive mechanism that can be used to reduce crime other than using traditional criminal laws?

The last question is very important. Although most criminal lawyers understand that criminal law is ultimum remedium, the last resort to be taken for dealing with harmful activities, in general, common people think that the criminal law is the solution of all ill problems in the society. If you don't like act X, you should criminalize act X, and so on. Of course that does not make any sense from Law and Economics perspective because again, legal enforcement needs money. And who will pay for that? Maybe the public will be more careful in supporting criminalization of acts once they know that they also share the costs instead of maintaining a false sense of justice.

Now, Becker's analysis can be extended outside the realm of criminal law. That's the beauty of his theory, it can be used for virtually any areas of law, such as: contract law, administrative law, constitutional law, torts, and family law. It can even be used to support the use of cost and benefit analysis in designing and promulgating regulations. In the modern world, a regulation should not be enacted if it cannot pass a strict cost and benefit analysis. The reality is, a regulation can have a significant impact on the economy. To name a few, the list would include regulations on foreign investment, capital market, banking, environment, and safety. It is simply preposterous if the government or the legislative imposes new laws without considering the above cost and benefit analysis, only relying on petty concepts such as nationalism or self-supporting taglines.

I believe that thinking using the economic approach is beneficial for lawyers. It trains you to focus on things that really matter, namely, whether the law's provisions are actually good for the society or not, transforming a lawyer from a mere spokesman of the law to become an educated policy maker. The economic approach also allows the lawyers to rationally analyze the provision of a law and provides a basic set of criteria (though not perfect) to assess the quality of such law.

I always dream that lawyers can collaborate more with economists in Indonesia. I've seen the great results from such cooperation at the University of Chicago Law School and I think Indonesian lawyers and economists will also benefit from such cooperation. This is now the era where multidisciplinary cooperation among scholars are really needed (not arrogance and exclusivity among scholars). Gary Becker was an excellent example for being a supporter of such cooperation (he also held a position at the Chicago Law School). He will be deeply missed, but the show will go on, and thanks to him, we still have a lot of many exciting issues to be studied and analyzed. Long live Law and Economics!

A couple of months ago, the West Jakarta District Court annulled a contract between an Indonesian party and a foreign party made entirely in English on the ground that it contravenes the provisions of Law No. 24 of 2009. You can read the Court's decision here. The Court said that based on Article 31 (1) of Law No. 24 of 2009, the use of Indonesian language is mandatory in contracts involving an Indonesian party and therefore, the failure of having an Indonesian version of the contract caused the contract to be annulled by operation of law based on Article 1335 of the Indonesian Civil Code.

I won't discuss in this article whether the Court's decision was correct since I have already made my analysis here. What I would like to analyze now is the practical issues relating to the case and my prediction on whether we will see a lot of similar cases in the future.

First of all, this is generally a case about a debtor that was getting caught by a loan shark. If you read the case carefully, the interests attached to the debt was very huge. No wonder the debtor tried to annul the contract using various cheap tactics, including arguing that the failure of using Indonesian language in the contract can be used as a valid reason to annul such contract.

But should we treat this case as a disaster? That parties will no longer be able to enter into foreign language contracts? I don't think so. The issue can be mitigated easily if only the parties entered into a dual language contract. The Court only said that the main problem in this case is the fact that the Indonesian version of the contract was not available.

In general, there are no prohibitions for Indonesian parties to enter into foreign language contracts, they just need to prepare the Indonesian version to be safe. Moreover, there are no clear rules on the governing language of contracts, so I will stick to my old opinion that parties are free to choose foreign language as the governing language of their contracts.

The issue here is that having dual language contracts tends to be costly. Although it is good for the lawyers' business, it imposes unnecessary costs in contract drafting. I need to admit that in drafting contracts, I also prefer the use of English over Indonesian language. This was not caused by lack of nationalism. It was simply because English can capture more terms needed in our contracts compared to Indonesian language. In addition, we have a lot of precedents in English, making it more efficient to draft the contracts in English compared to Indonesian language.

If you think that I am wrong, try to translate the Indenture (the document generally used for issuing bonds under New York Law) into Indonesian language and see by yourself whether you can be satisfied with the result when you compare the Indonesian version with the English version. Monstrous.

Finally, I do not think that we will see a lot of similar cases. In practice, creditors are very prepared nowadays. When dealing with first time debtors, they will insist on having the Indonesian version at the same time with the English version of the contract. With repeated debtors or debtors that have good reputation, the Indonesian version will be provided later on but as soon as possible.

More importantly, no sane debtors will ever try to do the same thing with the debtor in our case above. You will simply be blacklisted by most of the creditors and you will never receive credits unless you replace all of your management and change your name. The stain stays with you forever.

To give you an example: Indonesia was famous among investment bankers as a country where an ordinary SPV structure for global bonds issuance was annulled by the Supreme Court because it was deemed to breach the public policy of Indonesia. The case involved a US$500 million bonds and the debtor successfully run away from its obligations. Since 2006 until today, there are only two cases have ever reached the Supreme Court, both are from the same group company, and both have different results (one was annulled and one was enforced).

I always describe the above case in the risk factors section of my client's offering documents but I have never seen similar case to occur despite the fact that Indonesian issuers are quite aggressive in getting foreign financing. Why? Because we all know what happen to the executives of the company described above. The company cannot get any new financing (at least from foreign banks) and even if the executives have moved to another company, if the banks know about this, they will simply cancel or break the deal so that the new company cannot get any financing.

In conclusion, this crazy move to annul debts based on frivolous reasons can only be done by debtors rich enough so that they can sustain themselves without ever getting new financing or desperate enough so that they choose to abruptly end their adventure in the financing world. Apparently, most debtors are sane enough not to choose the above way.

2013 was a really bad year for my blogging activities. In fact, it is my worst year of blogging within the last 5 years and I am committed to ensure that this will not happen again. Let's start the 2014's first article by analyzing a misleading story.

A couple of days ago I read the following short story: a child asked her/his mom whether the mother would ever leave her precious jewelries and purses full with money with the maid. The mother's answer was no, explaining further that she does not trust the maid. Then the child replied: why do you leave me with the maid then? End of story.

I hate this kind of story, simply because it tends to be misleading most of the time. The quick reaction on the mother would be: how could you leave your child with the maid when you actually don't trust her? Are you saying that the jewelries and money are more valuable than your own child? Typical. But this quick reaction is completely wrong. If you read it further, you will realize that making a comparison between the child and the jewelry is misleading in the first place. Why?

First, from the mother's perspective, when she said that she does not trust the maid, she wasn't talking about the maid's capability to take care of the child. She was basically saying that the probability of the maid to escape the house with her jewelries and money are higher than the probability of the maid to stay at the house, guarding the jewelries.

Second, from the maid perspective, the costs of badly treating the child are generally higher than stealing the jewelries and money. If you treat the child badly, you can be held liable and you may lose your job and salary, or even go to the prison (if it turns out to be a criminal activity). Meanwhile, if you steal the jewelries, although there is also a probability of going to the prison for stealing, at least you gain something to compensate the costs, i.e. jewelries and monies. Ultimately, the maid will need to do cost-benefit analysis: will getting the jewelries and monies be more beneficial compared to the costs of penal sanction multiplied with the probability of getting caught?

Given the above incentives of the maid, it would really make sense for the mother to trust the child to the maid but not her jewelries. So yes, that's the answer to the child question. If you think that this answer is too long, I have prepared a shorter answer for the child: "nak, pertanyaanmu gak nyambung."

I'm always interested with the claim that if all workers in the world cease to work, capitalism would crumble and there will be no more masters and servants afterward. I highly doubt that a labor strike in such supernatural level will ever occur considering the nature of men and their self interest. Nevertheless, this could be an interesting thought experiment.

So, for the argument's sake, let us just assume that all of the workers in this planet simultaneously stop their work. What would happen? If all productions stop, I assume that most businesses (especially those which use employee/employer system) will also stop save for businesses that are being run by individuals. My assumption that individual businesses will still conduct their business activities is based on two further assumptions: (i) they are their own masters, and therefore, there is no need for them to follow the workers, and (ii) they can run their businesses without significant dependance on other businesses or infrastructure support. In short, they would be most likely local businessmen who have the capacity to produce their own products by themselves.

Now, you can always stop working, but you can't stop living. You still need to obtain your basic needs right? If you can gather everything by yourself from the nature, that would be fine. But if not, what would happen? You'll depend on other people, and in this case, you will depend on the above individual businesses during your strikes while waiting for the crumble of capitalism.

In such case, the law of supply and demand will automatically work. With less supply and more demand, price will increase. Even worse, without any competitors, the local businesses will eventually have enough monopoly power to solely control the price of their goods and services. And trust me, that would be a very bad scenario.

Let me give you an example: previously a local farmer sells an apple for US$2. In reality, he's almost out of the business since he can't compete with the local supermarkets which are far more efficient than him and can sell their apples for US$1 each. But, with the great labor strike, the supermarkets cease to operate and the farmer becomes the only apple seller in the community. Imagine his power now to determine the price of his apple without any competitors. Why bother charging US$2 if you can get a higher price? After all, people can only get apples from you.

How about the workers? Without a job, the only thing that they can do is to use their savings, or they can try to become businessmen on their own, selling their own services/products to other parties. If they can do it, that would be nice, if not, they will need to rely on the new capitalists, i.e. the individual businessmen as I described above and the cycle will begin again. The irony is: in order to survive, they need to become new capitalists.

So in the end, at best, the strike will only produce new capitalists and a new cycle of capitalism. At worst, the workers lose their savings before the rich guys lose all of their money and therefore, the old capitalism prevails. In any case, it won't change the fact that servants and masters will always exist.

The problem lies with human nature, namely: the basic needs for surviving in this world. In the past, in order to survive, men must have a lot of skills. In such case, only the true elites can survive while others perished. But humans are not stupid, there is an easier way to survive, and that is by interacting and cooperating with others.

Unfortunately, by default, you can't get anything for free. Either you need to obtain your needs by self labor (producing everything by yourself) or you exchange something with others to obtain what you need from them. This process creates the market and within such process, the iron law of supply and demand will eventually lead some people to be on the top place while others will stay below depending on their skills and luck.

The above analysis is made on the assumption that order and authority remain to exist. But how about in worst case scenario when there is a revolution? Suppose the workers are out of their savings and they decide that they will take control of the resources from the businessmen. Will that change the analysis?

My answer is no. Once the workers gain control of the resources, similar issue will still exist. Even if you have all the money in the world, you can't do everything by yourself. Some will still be better at doing things than you and the process of exchange of products and services will start again. This will lead to another cycle of supply and demand, market, etc. And before you know it, capitalism will return swiftly. Of course, this is also assuming that those workers will distribute the resources evenly in the first place. If not, even from the very beginning, new masters will emerge without having to wait for another cycle of capitalism.

In the end, I don't think the slogan "All Workers Unite" will work to end capitalism. It will just produce another capitalism (but with different "capitalists"). It is still a nice slogan though, has a nice ring to it, and sounds powerful. Well, at least it is perfect for campaign and propaganda.

There is a fundamental problem when I read this paper titled: Islamic Commercial Law and Social Justice: Shari'ah Compliant Companies, Worker's Rights and the Living Wage (written by Susan C. Hascall), namely, the fact that she argues that some of the Prophet's Hadiths can be used to support the existence of minimum wage for employees and the notion that a company cannot claim itself to be Shari'a compliant without complying with minimum wage requirement.

Why? Let us read first the Hadiths used by Ms. Hascall below:

"Give a servant his fee before his sweat dries"

"God Most High said: I shall be the opponent of three people on the day of judgment: the man to whom I gave generously but then he cheated; the man the man who sold a freeman into slavery and ate up its price, and the man who hired a worker and took his due measure from him but did not pay him for his (fair) wages"

The word "fair" that I underline above is an additional language used by her. I have to disagree with Ms. Hascall because from the very beginning, these Hadiths do not deal with the fair amount of wages to be given to a worker. It is true that some Islamic scholars tried to argue in such a way, but I do no think that their interpretation is correct.

In my view, these Hadiths deal with the obligation of an employer to honor his contract with his worker, i.e. to pay his employee's salary/fee for the work that has been done and that he should not postpone such payment without a valid reason. No words on fair amount. Therefore, this is about the sanctity of contract not minimum wages.

As I have argued several times in my blog and in my paper here, Islamic Law (as a concept and not in the context of Legal Positivism) separates moral and legal issues and also puts efficiency and the general welfare maximization as the main principles in building its legal system. This is why Islamic Law does not prohibit or even condemn pre-existing slavery, condemns riba but does not provide any sanction even though God says that the sin of committing riba is equal to murdering a man or having an incestual relationship with our own mother. When dealing with economic/commercial issues, we have to admit that Islamic Law is very flexible, namely it does not criminalize the violation of provisions relating to commercial issues.

This is also in line with the fact that God does not prescribe an absolute value of minimum wage and cannot be expected to do so. Once we deal with fairness issue, there is no single clear answer. Saying that Islamic Law compliance can only be done once you pay your worker with a fair amount of salary creates too much ambiguity. It also transforms a moral issue into a complicated legal issue. As an example: if an employer pays his worker too small, does it mean that he violates the law? Would that mean that the contract is invalid? What would be the consequences?

Of course you can always say that it would be good if employers pay attention to the overall well being of his employees and should pay good salaries to them. But that should stay as a moral issue rather than a legal issue with all of its consequences. Because payment of salary is also subject to many factors and the law of supply and demand. As there is a fairness aspect relating to the employee, there is also a fairness aspect relating to the employer.

I think that is why Islamic Law focuses more on the enforcement of the contract to protect the rights of the worker and the Hadiths are more consistent with this approach. As I argued here, I believe that the best way of promoting the interest of the workers is by making policies that are correlating with the supply and demand of manpower.

It's been a while since the last time I wrote in this blog. I admit, I have sinned. But enough with the excuses. I've just finished two papers having completely different themes. The first one is titled: "Special Purpose Vehicles in Law and Economics Perspective". You can download the paper here. The second one is titled: "Legal Positivism and Law & Economics: A Defense". You can download the second paper here.

The first paper will be published in the Journal of Indonesia Corruption Watch to be published this year. In this paper, I discuss the nature of Special Purpose Vehicles (SPV) in the form of corporation, their function and benefits, their potentials for misuse, and also the techniques to solve or prevent such issue. I believe that for a developing country like Indonesia, relying on legal doctrine such as piercing the corporate veil to chase the ultimate shareholders of SPVs who conduct illegal acts would be too costly. They are just too cunning and some countries specialized in the formation of SPVs have all the incentives to assist these crimes.

So, the other solution is to ensure that those SPVs established in Indonesia will be here to stay, namely, we need to put some of their capitals as hostages in Indonesia by way of mandating minimum capital requirement or bank guarantee/insurance requirements. I also discuss the costs and benefits of these solutions as there is no such thing as a perfect solution. The rest can be read in the paper.

The second paper will be presented in the third Indonesian national conference of legal philosophy to be held at Surabaya on 28 August 2013. I always enjoy legal philosophy, particularly Legal Positivism and I think that most Indonesian scholars misunderstand the nature of Legal Positivism by equalizing Legal Positivism with Legal Formalism or even worse, strict textual method of legal interpretation.

Of course this is wrong. Legal Philosophy is a theory of law while Legal Formalism is a theory of adjudication. But the mistake is so persistent that Legal Positivism is often blamed for many issues in Indonesian legal system! I think the conference would be a good place to present a defense on Legal Positivism so I decided to write this paper.

The paper will discuss the main thesis of Legal Positivism, i.e., the Source Thesis (that law is a social fact and can only be derived from social sources) and the Separability Thesis (that the content of the law does not have any necessary connection with its validity). People usually connect Separability Thesis with the relationship between law and morality. But I believe that the issue is wider than that, it can include religion, local custom and other type of norms.

I certainly believe that Legal Positivism (if applied correctly), is a democratic thought that will allow various legal theory to compete for domination within a legal system. I argue this by showing how Law and Economics (which is obviously not a pure theory of law) can survive in the framework of Legal Positivism but will be kicked out from the game in the framework of Natural Law (because by nature, Natural Law which supports only one absolute value will not be tolerant to other type of thoughts). As usual, the rest can be read in the paper itself.

Happy reading and hope it is useful.

This article is a continuation of my previous article: In Defense of Legal Positivism - A Reply to Iman Nasima. Since Imam has kindly responded to my article here, I think it should be appropriate to press the discussion one step further (though I have to apologize for the huge delay in responding to his second article).

Legal Positivism is Not a Method of Legal Interpretation

The first question that I asked in my previous article is: how critics to Legal Positivism perceive Legal Positivism? Is it a legal theory or method of interpretation? For me, the answer is obvious. Legal Positivism does not deal with method of legal interpretation, it is a theory of law.

Why does this distinction matter? Because from my readings of various people who criticizes Legal Positivism, I get a tendency that they equate Legal Positivism with strict Textualism or Legal Formalism, i.e. that under Legal Positivism, judges tend to interpret the laws solely based on the texts of the formal laws issued by the state, and that these judges do not consider other basic principles such as justice and morality when they can found a governing law in resolving legal matters.

Of course this is completely wrong and shows a lack of understanding of what is Legal Positivism. You cannot make a good critic if you don't understand the concept that you criticize. It will simply be a waste of time for everyone.

Whose Authority?

This is indeed a really difficult question. In practice, questioning the normativity of law will not be completed without asking who is the authority that must be honored in the first place. This is in line with the support given by Legal Positivism to the Source Thesis, i.e. that the existence of law can be solely derived from its sources and not its contents.

Under the Source Thesis, people can recognize the existence of the law by paying attention to the sources of that law, i.e. the authority who issues the law. HLA Hart tried to explain this thesis through Rules of Recognition, i.e. secondary rules in a legal system that give guideline on when certain rules can be treated as laws.

When certain rules meet the criteria of the Rules of Recognition, those rules will be deemed as laws with all of their authoritative/normative power upon their subjects. The problem is, who stipulates the rules of recognition and why we should follow those rules of recognition in the first place?

At this stage, Legal Positivism as a descriptive theory of law would be unable to answer that question. Why? Because it is a question of fact. Imam correctly shows that there are various competing theories on dealing with the concept of authority and how authorities derive their power.

To give more context on the above discussion, I recently read Justice Scalia and Bryan Garner's treatise on Legal Interpretation where they said that British and US judges differ in terms of authority. In England, the judges can hold the same position with legislators, so they can make the law and interpret the provisions at the same time. While in the United States, the power to make laws lies with the legislators while judges are required to enforce the laws.

The basis for this separation of power in US (at least according to Scalia and Garner) is to maintain the basic principles of democracy, i.e. that laws should be promulgated by representatives of the people that will be held accountable to their voters, and not by judges who are not appointed through democratic process.

It's an interesting theory of how judges and legislators should behave in a legal system, but I'm not sure that we can consider this as a pure legal theory. It's more of a political theory. There is no legal basis on why judges should behave like what Scalia said nor a rule of recognition for that given the fact that judges in the United States are still debating on their roles in the legal system.

The same thing is also applicable for Indonesian case. Suppose that judges political power is weak here, would that be a concern of Legal Positivism? I would say no and that would be enough for the purpose of defending Legal Positivism. From the very beginning, what I want to show through my previous article is that the critics misunderstand the issue. If the judicial branch is weak in Indonesia, it does not have any correlation with Legal Positivism as a theory of law.

How Social Facts Are Determined?

In dealing with Imam's second question, I find it interesting that he made a correlation between public acceptance of judges decision with the normative power of such decision. Should the judges decision be accepted by the majority of the public in order to be eligible to be considered as a valid law?

As interesting as it may be, it is actually not a question that can be answered by Legal Positivism as a descriptive theory of law. It is again, a question of fact. Legal Positivism only says that law is a social fact, that its existence relies on the acceptance of the majority, including the people and legal authorities.

However, Legal Positivism is silent on the actual practices of social acceptance because they can have many different forms. Theoretically speaking, we can have a legal system where court's decisions will be automatically considered as an authoritative source regardless of public acceptance of the content, and it is also possible to have a legal system where in order to obtain validity, a court's decision should be accepted first by the majority of the people. Can we use Legal Positivism to endorse the first system against the second one and vice versa? I don't think so.

In fact, we already have a very good example when we discuss the power of judicial precedents. It is common to aspiring Indonesian law students that in Indonesia (and other civil law countries), unlike in the common law countries, the principle of stare decisis, i.e. that a court's decision will be considered as a binding precedent to be followed by future court decisions, is not applicable. Thus, in Indonesia, future judges are free to disregard previous decisions and make their own decisions for a similar case.

Will Legal Positivism say that common law stare decisis system is better than civil law system? No. Can Legal Positivism explain why Indonesia and civil law countries choose to abandon stare decisis system? No.

But I am confident that Legal Positivism can explain to us that stare decisis is not applicable in Indonesia because most, if not all, of Indonesian legal authorities reject the concept. In other words, under Indonesian rules of recognition, court decisions do not have binding precedent power toward future court decisions (at least as of the date of this article). Can this rule of recognition change in the future? Might be, who knows?

Can Law and Economics Succeed in Indonesia?

Imam claimed in his article that Law and Economics method will fail as long as the judicial power is not strong enough to uphold any form of legal certainty. I do not think so. After all, judicial branch is just a part of the overall legal system and Law and Economics can become a mainstream legal thought through many windows, including the academic world and other branches of government.

When Imam mentioned the names of Posner, Dworkin, Barak, etc, I do not think that he discussed their debates in legal theory but more on legal interpretation method. This is not relevant to Legal Positivism. How the judges should interpret the laws is not a question for Legal Positivism (the same mistake made by Dworkin when he criticized Legal Positivism).

As a descriptive legal theory, Legal Positivism would be more interested on what are the actual methods of interpretation that are acceptable in a legal system. What does this mean? In a situation where there is no clear ground rules for legal interpretation, every system of legal thought can fight for domination.

As I said in my previous article, Law and Economics was not a mainstream thought in the United States prior to the 1970s era. It was thanks to Richard Posner and many other academics and political patrons that Law and Economics could finally gain a dominant position in the US legal thought. We see more judges using economic analysis in resolving cases.

How about in the executive branch? It was Cass Sunstein who brought cost and benefit analysis to the next level in the US government regulatory making process through his office, OIRA. Is this because of Legal Positivim? Of course not, it's a political and academic fight. The same thing can also happen in the legislative branch through political process.

This is what I want to reiterate to the misleading critics of Legal Positivism. If you want to ensure that your personal legal thought (whatever that is) can dominate Indonesian legal thought, it is a waste of time to criticize Legal Positivism because it is not Legal Positivism's mistake in the first place. In short, try other persuasive methods and good luck with that.

One of my favorite legal issues is the existence of victimless crime, usually defined as non-forceful actions whose participants are not complaining for their participation and no direct injuries are inflicted to non-participants of such actions.

Victimless crimes are traditionally associated with actions performed by consenting adults which harm the society's moral foundations but not the society directly. These include drugs use, prostitution or non-marital sex and gambling, to name a few.

Some economists would argue that rather than criminalizing the above acts, it would be better to instead legalize them. Not only that those acts can provide additional income to the government in the form of tax, it can also minimize the costs of legal enforcement. A good example would be the war on drugs which has caused a significant costs in the form of money and lives.

Contrary to the above opinion, I, on the other hand, argue that victimless crime does not exist. If we are calculating the general welfare of the society, the costs imposed to each member of the society, even if they don't directly affect other members, would still matter.

There are costs involved associated with drugs usage, health costs of the user. There are also costs associated with prostitution, costs related to sexually transmitted disease and possible costs to marriage relationship because yes, marriage too is a form of investment between the parties.

And how about gambling? It is a form of property transfer which may easily fall into an inefficient form of resources allocation. Why? Because the game is usually designed to ensure that the bookie will always win.

A simple example: most gamblers' chance of winning is very slim in many types of games, while the winning chance of the bookie depends on the probability of the gamblers losing the game, i.e. 1 – whatever the probability of the gambler to win. If the gambler only has a chance of 1 percent or 0.01, the bookie will have 99 percent chance to win the game. A really easy way to gain money.

Sure, we always have the usual argument: those adults have already given their consent and they must take the responsibility for themselves. And it is also true that the regulations are not always consistent.

Take the cigarette industry as an example. The business is legal and they pay a considerable amount of taxes to the government each year in order to maintain the business.

So why don't we do the same for other type of "victimless crimes"? Let us view this not from moral point of view, but from economics point of view. Usually most people forget that when we legalize certain acts, it does not necessarily mean that the enforcement costs will disappear into thin air.

You still need to spend money to ensure that the "legalized" business will comply with the rules set out by the government.

As an example. If you criminalize drugs sale, you will need to allocate funds to enforce the law and punish the violators. If you legalize drugs sale, you will spend funds to also supervise the business, ensuring that these "business men" will play in accordance with the rules on drug sale. And if they don't? You will simply penalize them again.

How about income from tax? Well, you don’t need to legalize an act in order to gain additional income via tax, you can simply change the rule so that instead spending times in the prison, the criminals are required to pay all of their profits to the government. The effect will be similar to a tax and the government will receive money too.

How about prostitution? Legalizing the prostitution might reduce the costs of supervision because legalizing the business is usually associated with its localization. This will reduce the possibility of sexual diseases transmission and improve the protection of the sex workers.

But it is also not without additional costs. Localization may also increase the costs of the prostitution business. The procurer will need to pay taxes and the building lease fee, not to mention that there will be additional costs for moving the business place. With increasing costs, the service fee will also increase.

Who will guarantee that it will not create incentives for a black market with cheaper services for consumers who don't have enough money to go to the valid prostitution area? This will again impose another costs for legal enforcement, i.e., eradicating the illegal prostitution outside the legalized area.

Through these examples, I would like to show that thinking about victimless crime is not as easy as imposing tax and reducing legal enforcement costs. Instead, for every action, there would be economic consequences and if we want to make a proper policy, we need to carefully calculate the costs and benefits of such policy.

Recently, I found an excellent paper from Ronald Coase which summarizes the basic concept of Adam Smith on human nature. I would urge my readers to read the whole paper (first published in The University of Chicago's Journal of Law and Economics) as I think it provides a correct summary and a strong insight on how economists and also lawyers should think about human nature.

The final paragraph of Coase's paper is very important that I will just copy it here for ease of reading. Enjoy!

"It is wrong to believe, as is commonly done, that Adam Smith had as his view of man an abstraction, an “economic man,” rationally pursuing his self-interest in a single-minded way. Adam Smith would not have thought it sensible to treat man as a rational utility-maximizer. He thinks of man as he actually is-dominated, it is true, by self-love but not without some concern for others, able to reason but not necessarily in such a way as to reach the right conclusion, seeing the outcomes of his actions but through a veil of self-delusion. No doubt modern psychologists have added a great deal, some of it correct, to this eighteenth century view of human nature. But if one is willing to accept Adam Smith’s view of man as containing, if not the whole truth, at least a large part of it, realization that his thought has a much broader foundation than is commonly assumed makes his argument for economic freedom more powerful and his conclusions more persuasive"