Economics and the Law

From Posner to Postmodernism and Beyond - Second Edition

Nicholas Mercuro, Steven G. Medema

• Publisher: Princeton University Press
• Year: 2020
• ISBN:
  9780691216010
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

This is an expanded second edition of Nicholas Mercuro and Steven Medema's influential book Economics and the Law, whose publication in 1998 marked the most comprehensive overview of the various schools of thought in the burgeoning field of Law and Economics. Each of these competing yet complementary traditions has both redefined the study of law and exposed the key economic implications of the legal environment. The book remains true to the scope and aims of the first edition, but also takes account of the field's evolution.
At the book's core is an expanded discussion of the Chicago school, Public Choice Theory, Institutional Law and Economics, and New Institutional Economics. A new chapter explores the Law and Economics literature on social norms, today an integral part of each of the schools of thought. The chapter on the New Haven and Modern Civic Republican approaches has likewise been expanded. These chapters are complemented by a discussion of the Austrian school of Law and Economics. Each chapter now includes an "At Work" section presenting applications of that particular school of thought.
By providing readers with a concise, noncritical description of the broad contours of each school, this book illuminates the fundamental insights of a field with important implications not only for economics and the law, but also for political science, philosophy, public administration, and sociology.

CHAPTER 1

The Jurisprudential Niche of Law and Economics

It is somewhat surprising that so conspicuous a truth

as the interaction of economics and law should have

waited so long for recognition—a recognition by no

means universal. Some of those who question it

maintain the independence and self-sufficiency of

law, while others maintain that of economics. In

reality law and economics are ever and everywhere

complementary and mutually determinative.

(Fritz Berolzheimer 1912, p. 23)

INTRODUCTION

“LAW AND ECONOMICS” can be defined as the application of economic theory— primarily microeconomics and the basic concepts of welfare economics—to examine the formation, structure, processes, and economic impact of law and legal institutions. Various schools of thought compete in this rich marketplace of ideas,¹ including the Chicago approach to law and economics, public choice theory, institutional law and economics, and the new institutional economics. The primary purpose of this book is to provide the reader with a concise overview of the dominant schools of thought within Law and Economics.² We also provide an overview of the principal contours of the New Haven school, modern civic republicanism, and Austrian law and economics, as well as review the burgeoning area of social norms and law and economics, each of which places significant emphasis on the interrelations between law and economy.

We are presenting these schools of thought as both competing and complementary perspectives on, or approaches to, the study of the development and the reformulation of law and to the examination of the interrelations of legal and economic processes generally.³ As such, this material is of fundamental importance not only for those working in the fields of economics and law, but also to those in the contiguous fields of political science, philosophy, and sociology.⁴ It must be underscored from the outset that we are trying only to describe the ideas central to each school of thought. No attempt is made to critique the schools or the ideas contained therein. We are also well aware of the pitfalls of trying to describe the essential elements of a particular school of thought when there are continuing, and occasionally acrimonious, disputes within and between these schools. Our response, in short, is that the benefits of identifying the schools of thought as presented here exceed the costs of expressed misgivings by those few within each school of thought who object to or refuse categorization. The reception given to the first edition of this book would seem to validate this approach.

There are a wide variety of measures that document the continued expansion in the number of scholars interested in exploring and understanding the interrelations between law and economics.⁵ First, there is the relatively recent establishment of the American Law and Economics Association, the Canadian Law and Economics Association, the European Association of Law and Economics, the Israeli Association of Law and Economics, the Australian Law and Economics Association, and the Latin American Law and Economics Association. As recently as 2003, the Portuguese, the Scandinavian, and the Greek Law and Economics Associations held inaugural conferences. Second, there are a number of leading publications dedicated to publishing the scholarly contributions to this field, including journals such as the Journal of Law and Economics; Journal of Legal Studies; American Law and Economics Review; Journal of Law, Economics & Organization; Public Choice; Constitutional Political Economy; International Review of Law and Economics; and the European Journal of Law and Economics. In 2000, the five-volume Encyclopedia of Law and Economics came into print, edited by Boudewijn Bouckaert and Gerrit De Geest (2000). There are also four research annuals—the Supreme Court Economic Review, Research in Law and Economics, The Economics of Legal Relationships, and New Horizons in Law and Economics—devoted to the field, and a wide variety of traditional economics journals and law reviews now regularly publish Law and Economics articles.

The extent and significance of this literature is reflected in the Journal of Economic Literature’s formal recognition in 1991 of Law and Economics as a separate field within its classification system for the discipline of economics. The Association of American Law Schools Directory began listing Law and Economics as a separate subject area in 1988–89.⁶ A third indicator is the existence of a number of programs in Law and Economics within the major law schools, including Harvard University, Yale University, Columbia University, Stanford University, George Mason University and the University of California-Berkeley; the very active working paper series at these schools; and the host of “law and economics” websites now available.⁷ Fourth, in the past decade, we have witnessed the establishment of the European Union’s Erasmus Programme in Law and Economics;⁸ the recent French initiative, the European School of New Institutional Economics;⁹ and the Erasmus Law and Economics Review, an online journal described as a “new, open and free communication interface between lawyers, academics and economists.”¹⁰ Finally, for the past twenty-six years Henry G. Manne, the former Dean of the George Mason University School of Law, and his successors have organized and hosted Law and Economics workshops for judges and law professors, and for economists. Taken together, these programs have had over one thousand professors and judges in attendance.¹¹

THE PRESENT SITUATION IN LEGAL-ECONOMIC SCHOLARSHIP

Although the seeds of contemporary Law and Economics go back at least a century,¹² it is only in the past five decades that it has emerged as a substantial and important body of thought within both economics and law. During this time, Law and Economics has developed within, and in part because of, a somewhat uncertain and unsettled atmosphere within jurisprudence. What once existed as prevailing legal doctrine derived from conventional political and legal theory still exists, but law no longer develops in a self-contained, autonomous manner. Rather, most professors now recognize law as “a multidimensional phenomenon—historical, philosophic, psychological, social, political, economic and religious” in its inspiration and implications (Packer and Erlich 1973, p. 56). Furthermore, almost all American legal scholars, judges, and lawyers hold an instrumental view of the law—instrumental in the sense that legal rules are adopted so as to promote some goal, be it equality, justice, fairness, or efficiency.¹³ Regardless of whether one believes law is used to promote these goals, it does have wide-ranging impact, and the assessment of these impacts necessitates the use of tools and ideas from disciplines outside of legal theory proper.

Today, the law is being analyzed from an incredibly diverse set of perspectives, including Law and Economics, critical legal studies, rights-based theory, feminist jurisprudence, and critical race theory, all of which claim to have something worthwhile to say as to the origin, legitimacy, and development of the law. The outward turn of law thus far has generated no consensus-type movement toward a new and stable foundation for the law (Minow 1987). We now stand at a point where legal study embodies a plethora of competing and often mutually exclusive points of view. To use Alan Hunt’s (1987, p. 7) metaphor, “[T]he glacier that is law has fractured into numerous pieces, and its replacement (if there is to be one) remains to be determined.” Perhaps the present situation is best summed up in the comment that legal scholarship has been “left with a plethora of explanatory frameworks, [and] a dearth of criteria for choice among them” (Note 1982, p. 1976).

The unsettled nature of legal theory and the relationship of law to economics did not arise in a vacuum. Rather, it is partially the outcome of 1) the development of the “Law” in “Law and Economics”—in particular, the various evolving perspectives from which one can analyze the prevailing legal relations governing society—and 2) the development of the “Economics” in “Law and Economics”—particularly as embodied in the work of neoclassical microeconomists since Alfred Marshall. While Law and Economics has had an impact on both the legal and economic disciplines, there is no doubt that it “was institutionalized as a discipline in law schools rather than in economics departments,” where it is just another branch of applied microeconomic theory rather than a disciplinary philosophy as it is in law. The result is that, by “analyzing legal rules and providing prescriptions for legal reforms, law and economics scholars could participate in the major areas of discourse within legal academia. They could even demonstrate the power of their coherent and rigorous theory over the confused intuitions of other legal scholars” (Harris 2003 p. 664).¹⁴

In the next section of this chapter, we will examine briefly the path that brought law and legal theory to its present situation. This will be followed by a brief characterization of the relevant concepts of economic efficiency variously employed by legal-economic scholars.¹⁵ We will then present a description of the stages of choice and the underlying logic of Law and Economics, followed by a section that highlights some of the fundamental differences in methodology and modes of reasoning between economics and the law.

THE “LAW” IN “LAW AND ECONOMICS”

The Three Fundamental Questions

Before we begin our outline of the history of American jurisprudence, it is useful to bear in mind that the several legal theories described here, as well as the schools of thought constituting Law and Economics, try, each in its own way, to provide answers to three fundamental and interrelated questions:

1.What is the law?

2.Where does the law come from and how does it acquire its legitimacy?

3.What should the law be?

The distinctive elements of the various approaches to law, including the several schools of thought within Law and Economics, as well as their similarities emerge quite clearly when examined against the backdrop of these questions, and we shall allude to the questions throughout our discussion.

The Nature of Common Law

Common law, as it has evolved from the English royal courts of centuries past to present-day America, consists of the doctrines and principles developed gradually by judges and used as the foundation for judges’ decisions. The history of this common law jurisprudence has at its roots a search for moorings, for a set of interpretive and adjudicatory principles in which to ground law’s legitimacy and authority, and, thereby, to justify judicial decisions. Once those moorings were set in place, they provided a firm, albeit evolving, basis upon which to guide the law’s development. During the Middle Ages, the interpretation of law was guided by theological considerations, as law claimed to stand as divine revelation or the will of God. From the time of the Renaissance until the middle of the nineteenth century, this idea received a somewhat more secular cast, as law was said to be grounded in ultimate principles or ideas, such as natural law.

Sir William Blackstone, writing in the late 1700s and early 1800s, suggested that the common law can be interpreted as a mass of custom and tradition, manifested in judge-made maxims.¹⁶ These so-called maxims of the common law symbolized the broad guidelines which could be considered to underlie and direct legal decision-making. As observed by one commentator, “[T]hese maxims were the essential core of the common law, woven so closely into the fabric of English life that they could never be ignored with impunity” (Sommerville 1986, p. 96). This concept of “maxims” points to the enduring idea that “the heart of the common law is not comprised of specific rules or procedures, but rather of broad notions which, while difficult to systematize, nonetheless remain, as foundational doctrines, woven into the fabric of life” (Cotterrell 1989, p. 24). Whereas some commentators began to observe a surface chaos in these accumulated judicial decisions, supporters of classical common-law thought continued to argue that there remained an internally coherent, unified body of doctrines and principles making up the substrate of common law. The emphasis on the more malleable doctrines and principles of common law, as opposed to the more rigid rules and procedures of statutes, was intended to convey the notion that the common law remained flexible, that it retained the dynamic character needed in legal decision...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Preface
• Chapter 1: The Jurisprudential Niche of Law and Economics
• Chapter 2: Chicago Law and Economics
• Chapter 3: Public Choice Theory
• Chapter 4: Institutional Law and Economics
• Chapter 5: The New Institutional Economics
• Chapter 6: Branching Out: New Haven, Modern Civic Republican, and Austrian Approaches
• Chapter 7: Social Norms and Law and Economics
• Bibliography
• Index