Reference no: EM131379009

Toward the end of the 18th century, the British legal system had begun to stagnate. This stagnation was reflected in the legal system's ill-advised overdependency on precedent. A Scottish philosopher named Jeremy Benthamsuggested that the law could escape this unhealthy obsession with the past, if it adopted a more scientific approach to the lawmaking process.

If the law simply promoted the greatest good for the greatest number of people, Benthamargued, then judges and members of Parliament would know exactly what to do when faced with a legal problem. In the day-to-day operation of the law, Bentham'splan would require lawmakers to consider the good and the bad effects of any legal proposal and then, after weighing those effects, determine the correct action. All of this sounds good in theory and it might even have worked, had it not been for a single fatal flaw, a flaw that had been anticipated a generation earlier by another philosopher, Adam Smith.

In his famous work, The Wealth of Nations , Smith had considered an approach similar to Bentham'sbut rejected it as impractical for a simple reason. Human nature, Smith argued, led people to focus on their own self-interest rather than the interests of their fellow man. Self-interest, Smith realized, was the best way to build a legal system. Unfortunately, self-interest has a weakness too. Even when people are focused on self-interest, Smith noted, they rarely, if ever, comprehend what that self-interest ought to be.

Ironically, if they actually understood what was in their own self-interest, they would frequently make decisions that promoted the best interests of the group, because, as Smith believed, these two things often went hand in hand. Interestingly enough for our purposes here, Smith targeted bankers as a classic example of a group of men who never really understood what was in their own self-interest and, as a result, frequently sabotaged their own industry.

At one point Smith wrote, "Had every particular banking company always understood and attended to its own particular interest, the circulation never could have been overstocked with paper money. But every particular banking company has not always understood or attended to its own particular interest." Does this tendency to focus on self-interest still plague the banking industry or have bankers learned something over the last two centuries?

As an experiment, answer that question now and then see if the chapter either changes your mind or confirms your answer.

[See J. Bronowskiand Bruce Mazlish , The Western Intellectual Tradition (New York: Harper Perennial, 1960), pp. 336-356, 436-449.]

Opening Case Questions

1. Is Jeremy Bentham'sgreatest good principle really an effective way to create legal principles or is it simply a way for lawmakers to rationalize self-dealing? Explain.

2. Isthe American legal system overly dependent upon precedent or is it flexible enough to respond to social change when necessary? Explain.

3. Does the relationship between the bank and its depositors still reflect the self-focus that Adam Smith detected in the industry 200 years ago or has the banking industry learned something about customer service over the last two centuries? Explain.

4. Has government regulation done anything to improve the bank-depositor relationship? Explain.

5. Has the cyber-revolution done anything to improve the bank-depositor relationship? Explain.