Second Best
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Legal Theory Lexicon 011: Second Best
Introduction
The post provides a very basic introduction to the idea of "second best." The
term "second best" originated in a famous 1956 article by Lipsey and
Lancaster, and it was originally used as a technical economic concept. Despite
its technical origins, the idea behind the second best is very general: some-
times the ideal solution to a problem (or "optimal policy option") is infeasi-
ble. The best should not be the enemy of the good; so, when the first-best
policy option is unavailable, then normative legal theorists should consider
second-best solutions. In this post, we will take a hard look at the idea of
the second best, beginning with a statement of the intuitive idea and then
looking at the more formal idea of the second best in its original economic
context. As always, the Lexicon is aimed at law students, especially first-year
law students, with an interest in legal theory.
The Intuitive Idea
The intuition behind the idea of the second best is simple. We would like to
have the best possible legal system. But sometimes the best legal policies are
not in the cards; that is, the best policy may be impractical. Why? In legal
theory, one common reason that we cannot adopt the best policy is politics.
Given the political forces that operate, the best campaign finance system may
be pie in the sky. So we ask the question, of those systems that might be
politically feasible, which is the "second best"? Although I've introduced the
intuitive idea by talking about "political feasibility," the idea of the second
best is more general than that. First-best solutions may be unavailable because
of a variety of constraints, of which politics is only one. The intuitive idea
of the second best is a bit broader and less technical than the way economists
define "second best," so let's turn to that now.
The Second Best in Economics
Let's move from the intuitive idea of the second best to the origins of that
idea in economic theory. The very general idea of the economic theory of the
second best can be expressed as follows:
Assume a system with multiple variables. Take the most desirable state the
whole system could assume and the associated values that all of the variables
must assume to produce this state: call this condition, the first-best state
of the system and call the associated values of the variables, the first-best
values. Now assume that one variable will not (or cannot) assume the value
necessary for the first-best state of the whole system: call this the
constrained variable. Holding the constrained variable constant, consider the
most desirable state the whole system could then assume and the associated
values that all the nonconstrained variables must assume to produce this
state: call this the second-best state of the system. There are systems in
which achieving the second-best state will require that at least one variable
other than the constrained variable must assume a value other than the
first-best value: call these value(s) the second-best value(s).
And here is the way that Lipsey and Lancaster formulated the idea:
[I]f there is introduced into a general equilibrium system a constraint which
prevents the attainment of one of the Paretian conditions, the other Paretian
conditions, though still attainable, are in general, not desirable.
Lipsey and Lancaster are making a normative (but technical) argument. They
assert that if one variable is constrained and cannot assume its first-best
value, then "in general" other variables should not assume their first-best
values. The "in general" qualification is important. Lipsey and Steiner
didn't and couldn't show that it is always (or necessarily) the case that
constraint of one variable affects the most desirable value for other
variables. Rather, their proof shows that this is possible. In the real
world, whether nonconstrained variable should depart from their first-best
variables depends entirely on the facts. In fact, if a policymaker lacks
certain information about the second-best variables, it may turn out that the
real world policy that will produce the best result is to try to move the
constrained variable as close as possible to its optimal state, leaving the
second-best variables in their first-best states. The possibility was called
the "third best" by Ng (see bibliography below).
One or two additional points are necessary to complete the technical story.
First, the definition that I just gave assumes that only one variable is
constrained. But there is no reason to limit the theory of the second best in
this way, more than one variable may be constrained. In fact, in theory every
variable could be constrained: in this limiting case, the second-best state
would be the only possible state of the system.
Second, the second best is usually understood as relative to a constrained
variable. We could use the phrase "second best" to refer to the second-best
state the system could assume if all the variables were unconstrained, but
this is not the way that Lipsey and Lancaster used that phrase.
Third, there is an important difference between the way economists understand
"second best" and the way the same phrase is understood by noneconomists.
What was interesting and powerful about Lipsey and Lancaster's proof is that
it produced the counterintuitive result that sometimes when one variable is
constrained, the best policy choice will involve moving other variables away
from their first-best values.
Although technically, the definition of second best need not be limited to
that special situation, that is the interesting result, and the use of the
theory of the second best in economics may be limited to the special case.
Outside of economics, however, the phrase "second best" tends to be used in a
much looser sense. The important thing is not the terminology, but the ideas.
To be clear, however, it is useful to explain what you mean by second best!
The Second Best and Nonideal Theory
The idea of the second best that is used by economists is analogous to a
distinction made famous by the political philosopher, John Rawls. Rawls
distinguished between two ways of approaching political philosophy, ideal and
nonideal theory. In ideal theory, we assume compliance with the normative
requirements of our theory. Rawls used the phrase "well-ordered society" to
refer to the situation that obtains in ideal theory. In a society that is well
ordered by Rawls's principles of justice, citizens actually would be guaranteed
a fully adequate scheme of basic liberties and the basic structure would
actually work to the advantage of the least well off group in society. In
nonideal theory, we relax the assumption that the society is well ordered by
the principles of justice. Can you make that very abstract description more
concrete? Yes, here is a really good example. In a society that is well-ordered
by Rawls's principles of justice, we might assume that if there are local
governmental units, they will comply with the restraints imposed by the freedom
of speech. But in the real world, local governments might be more susceptible
to political pressure to suppress unpopular speech than would be the central
government (i.e. the national government in Washington, D.C., in the case of
the United States). So, in the real world of nonideal theory, we might be very
considered with constraining the jurisdiction and powers of local governments;
whereas, this issue may not even arise in the case of ideal theory.
Pinpointing the Constrained Variable
The notion of the second best and the related idea of nonideal theory get
tossed around quite a lot in legal theory, but sometimes these terms are used
carelessly or without precision. Whenever you hear or read the term "second
best," ask yourself the question, "Which variable is constrained, and why is it
constrained?" Because the "second best" is second best relative to a cons-
trained variable, use of the concept of the second best doesn't mean anything
unless and until the constrained variable is specified. Moreover, it is some-
times very important to know why the constrained variable is constrained. This
is because it is easy to construct an argument for a second-best policy option
that uses a double standard with respect to whether variables should be con-
sidered to be constrained. Here is a simple example:
Suppose our problem is racial justice with respect to the distribution of
income and resources. Someone might make the case for reparations (a one time
payment of a compensatory amount to descendents of the former slaves) on the
ground that reparations are the second-best solution. The first-best solution
would be a just economic order in which market mechanisms operate in a
nondiscriminatory fashion to allocate income and wealth according to just
criteria. (For this purpose, we don't need to specify what the just criteria
are.) But the first-best solution is unavailable, because a just economic
order is politically infeasible. Therefore, we ought to support reparations,
which is the second-best policy. So far, so good. But notice that there is a
hidden assumption in this argument. The argument assumes that reparations are
politically feasible. If this assumption is incorrect (which it may well be as
an empirical matter), then it follows that the argument for reparations as the
preferred second-best solution is fallacious. Of course, one can deploy double
standards with respect to which variables are constrained (or which options
are infeasible) so long as the double standard is made clear. But when the
double standard is concealed and the argument is made in the context of
policy evaluation, then we have either an innocent mistake or an attempt at
manipulation.
The Feasible Choice Set
Another way of approaching the general problem revealed by the theory of the
second best is via the notion of the feasible choice set. Take all of the
possible legal policy options with respect to a particular legal problem. Then
lay out a set of well-defined criteria for feasibility. Apply the criteria to
the set, sorting the options into the feasible choice set and the infeasible
choice set. Practical policy discussion will usually be limited to the options
within the feasible choice set, but legal theory is not limited to the prac-
tical. Frequently we can learn something important by considering options that
are outside the feasible choice set. For example, a rule of strict liability
might turn out to be the optimal rule of tort law. It could also turn out that
strict liability regimes are politically infeasible--perhaps because the fault-
based social norms are very strongly held. But that fact should not preclude
legal theorists from examining the merits of strict liability regimes. Not only
may such an examination be of intrinsic interest, but the insights gleaned from
such an examination may well assist in the evaluation of the options that are
within the feasible choice set.
The Bottom Line
The notion of the second best, the distinction between ideal and nonideal
theory, and the idea of the feasible choice set, are all essential tools for a
legal theorist. As a first year student, you are likely to encounter these
ideas in classroom discussion or in law review articles assigned as ancillary
reading. The trick to mastering these concepts and using them effectively is to
identify the constrained variable (or the nonideal conditions). Once you've
done that, you can move to the next step, which is the question, "What criteria
are used to identify the constrained variables?" And if you can answer that
question, you are now in a position to respond in an intelligent and sophis-
ticated way to applications of the theory of the second best!
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