Law and Economics

Alternative Economic Approaches to Legal and Regulatory Issues

Margaret Oppenheimer, Nicholas Mercuro

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317466420
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The economic analysis of legal and regulatory issues need not be limited to the neoclassical economic approach. The expert contributors to this work employ a variety of heterodox legal-economic theories to address a broad range of legal issues. They demonstrate how these various approaches can lead to very different conclusions concerning the role of the law and legal intervention in a wide array of contexts. The schools of thought and methodologies represented here include institutional economics, new institutional economics, socio-economics, social economics, behavioral economics, game theory, feminist economics, Rawlsian economics, radical economics, Austrian economics, and personalist economics. The legal and regulatory issues examined include anti-trust and competition, corporate governance, the environment and natural resources, land use and property rights, unions and collective bargaining, welfare benefits, work-time regulation and standards, sexual harassment in the workplace, obligations of employers and employees to each other, crime, torts, and even the structure of government. Each contributor brings a different emphasis and provides thoughtful, sometimes provocative analysis and conclusions. Together, these heterodox insights will provide valuable supplementary reading for courses in law and economics as well as public policy and business courses at both the graduate and undergraduate levels.

Part 1

Introduction: New Approaches to Law and Economics

1

Law and Economics

Making the Case for a Broader Approach

Margaret Oppenheimer and Nicholas Mercuro

If someone had predicted twenty years ago that law and economics would become a central organizing philosophy in U.S. legal education by the end of the century, he would have been dismissed as delusional. And yet that prediction has come to pass.

Robert D. Cooter and Thomas S. Ulen (2000)¹

Over the last several decades the field of law and economics has expanded and matured beyond anyone’s expectations. As Lawrence Lessig wrote, “We all are law-and-economists now.”² Law and economics has developed into a rather substantial movement, certainly within economics but even more so within the law. Not only has the field helped to expose economics to the important implications of the evolving legal environment, but it has also brought to the forefront the fact that legal decisions often have important economic implications that can be uncovered with the application of economic theory. On the legal side, a key aspect of this process has been the incorporation of mainstream neoclassical economic theory into legal thought and, hence, legal education. The neoclassical approach now dominates research and writing in economics departments as well as in law schools, especially in the United States. The result has been extensive discussion and critique about what is now simply referred to as “the economic approach to law.”

However, despite the popularity of neoclassical theory (and especially rational choice theory), in both economics and law, what critics (mainly within law) call the economic approach to law, is really a misnomer. A central flaw in much of their criticism is the tendency to equate all economics with the Chicago School of Law and Economics and, by extension, with its conservative—ubiquitous market-oriented—ideology. However, the growing field of law and economics is not a homogenous movement; it reflects several traditions, sometimes competing and sometimes complementary, and is actually far more inclusive than the critics recognize. The neoclassical economic approach is merely one of many economic approaches that can be applied to legal and regulatory issues.³

The contributing authors to this book provide alternatives to the mainstream approach. They utilize a variety of heterodox legal-economic approaches to address a broad range of legal issues. They demonstrate how these various approaches can lead to alternative theories and conclusions concerning the role of the law and legal intervention in a wide array of contexts. The legal and regulatory issues examined in this volume include antitrust and competition, corporate governance, the environment and natural resources, land use and property rights, unions and collective bargaining, welfare benefits, work-time regulation and standards, sexual harassment in the workplace, obligations of employers and employees and others, crime, torts, and even the structure of government. Given its scope and content, we believe that this volume will be of interest to lawyers, economists, and those in contiguous disciplines, indeed, anyone who has an interest in how various economic arguments can be used to better understand legal and regulatory issues, and to make better decisions and policies.

The motivation for compiling this volume came, in part, from the experiences of the editors at various conferences on law and economics and presentations at law schools on heterodox economics. These experiences have uncovered a widespread interest in economic approaches to legal-economic issues, but the search seems to be for an economics that is an alternative to mainstream neoclassical theory. Even among the legal scholars who accept and apply mainstream economic thought with accuracy and comfort, there was concern that applying it blindly would result in both bad economics and bad law. Moreover, Lessig’s invocation notwithstanding, some law faculty and students have asserted that they do not accept the application of economics to legal issues at all. Upon further discussion, it became clear that what they rejected were some, although not necessarily all, of the implications of neoclassical economic thought in much of the current law and economies’ literature; at the same time, these same individuals were simply not aware that economists had a wider range of ideas and models upon which to draw. The result was a rejection of economics as a resource for legal thinking, rather than an active dialogue of what economics could bring to legal debates. This volume, by providing concrete examples of various alternative economic approaches to legal and regulatory issues, is meant to broaden the debate over a wide range of legal issues and more generally about the application of economics to the law.

The neoclassical approach to law and economics, as it is typically applied to legal issues, claims to make positive (rather than normative) statements regarding proposed policy/legal changes or recommendations, hence the emphasis on efficiency and Pareto optimality. At the same time, the law to many scholars interested in policy is inherently and appropriately entwined with such issues as rights and responsibilities, equity, fairness, and distribution. The concerns over these latter issues affect attitudes by legal scholars, legal practitioners, and citizens as to the role of the individual and the role of the state. In a newsletter published by the Committee on the Status of Women in the Economics Profession (CSWEP), Susan Rose-Ackerman, an economics Ph.D. from Yale, and professor of law and political science at the Yale Law School, gives the following advice for lawyer/economists:

They…need to be willing to entertain a broader set of normative concerns than just the achievement of Pareto optimality. Some prominent members of the field urge scholars to avoid any taint of normative analysis beyond a concern for efficiency. Those who follow that advice and refuse to engage the concerns of the legal academy risk becoming isolated from the broader range of legal scholarship and debate.⁴

It is hoped that this collection will demonstrate the richness of both positive and normative, nonmainstream economic thought and its application to this broader range of legal scholarship and debate.

There are many fruitful ways to catalog economic models. At one end of the spectrum are schools of thought that emphasize the attributes of markets, especially allocative efficiency; this is the mainstream neoclassical approach. At the other extreme are schools of thought that reject the market completely as a central organizing mechanism to allocate resources.⁵ The chapters in this volume fall somewhere along this spectrum, rather than at either extreme. The schools of thought and methodologies represented here include institutional economics, new institutional economics, socioeconomics, social economics, behavioral economics, game theory, feminist economics, Rawlsian economics, radical economics, Austrian economics, and personalist economics. Although several of these approaches overlap, each author brings a different emphasis to the legal topic he or she has chosen. What they have in common, however, is that all provide thoughtful, provoking analyses and conclusions that depart in some way from the mainstream approach to their topics.

In his foreword, Warren Samuels recognizes that the premise of many chapters in this volume is that institutions matter and that their causes and consequences need to be examined. In order to understand the consequences of particular institutions, we need to study the structures of human interdependence, such as high exclusion cost, information cost, social traps, and so on. However, he goes on to point out that one of the hurdles to clear thinking about legal-economic policy is the sentimentality of the idea of laissez-faire. Many of these chapters ask the question, “What should government do?” Samuels believes that an answer to that question requires more than the agenda offered by neoclassical economics. We need to explore, at a deeper level, the role of government, the concept of governance, the meaning and uses of the concept of property, and so on. From this vantage point it becomes clear that laissez-faire is a far too simplistic and disengaging view of complex real-world problems and that it is necessary to draw on a much wider range of economic approaches to the law than has commonly been done.

The body of the book is divided into five sections. Accompanying this introduction to the volume in Part 1 is a chapter by Amitai Etzioni, presenting the broad contours of the foundations of socioeconomics as a viable alternative approach to the more conventional neoclassical approach to law and economics. His argument is presented on the belief that this new paradigm will, in time, prove to be more useful then existing paradigms that describe and analyze the law. The chapter first outlines the reasons he believes that the time has come to develop a shared disciplinary core for socioeconomics; he then outlines the guiding principles he thinks should be used to develop the core theory, and finally, suggests specific elements for such a discipline.

The chapters in Part 2 explore several legal and regulatory issues concerned with firms and market structure. Claude Menard’s chapter utilizes and extends the theoretical framework provided by new institutional economics. From this theoretical base, he then proceeds to explore the implications of applying the theory to standard competition policies regarding vertical integration or deintegration as well as the case of the so-called hybrid arrangements. In this he shows how competition policies that ignore transaction costs can generate unexpected biases. Emphasizing the key role of transaction costs, both as a tool for analyzing the relevance of these policies and as a key factor that drives decisionmaking, he concludes the following. First, competition policies cannot be examined solely with respect to the cases to which they apply. Second, decisions about vertical integration or deintegration must take into consideration not only ex post consequences but also ex ante circumstances that determined the choices made by actors. Third, modern market economies are made of a complex set of interwoven arrangements, of which spot markets and integrated firms are only two cases among others. In addition, he demonstrates that competition policies cannot evaluate properly nonstandard arrangements of the hybrid type with the sole reference to markets and hierarchies as benchmarks. Fourth, competition policies are embedded in institutions. They are subject to bounded rationality, to the self-interest and opportunism of those in charge of designing and implementing these policies, and to lobbying from the parties concerned. All these factors generate transaction costs that are typically the costs of running the system, for example, a market economy. These costs need to be measured and evaluated comparatively.

Kellye Testy’s chapter employs feminist economics to analyze corporate law and governance. It is premised on the belief that too little attention has been paid to the promising contributions of feminist economics in general and, with respect to law in particular. She demonstrates that the field of corporate law and governance has been quite insulated from feminist analysis and contends that this is both remarkable and unfortunate. Her quest then is to elevate a new vision of corporate law that can be furthered through an alternative form of analysis, one that is grounded in feminist economics. Hers is a three-part effort. First, she provides a brief summary of feminist economics, highlighting the key ways in which its methods and content differ from the dominant neoclassical approach. Second, she describes both the dominant model of corporate law and governance in the United States, as well as five significant counter-approaches, discussing how each approaches key corporate law issues such as the nature of the firm and the relative rights and duties of the corporation’s constituents. She then concludes by explaining how a feminist economic analysis of corporate law would alter significantly one’s view of an optimal corporate regulatory environment, and by outlining several avenues for future research that should be pursued, including the potential for a productive alliance between feminist economists and progressive corporate law scholars.

Patrick Welch and Thomas Greaney outline the three most recognized economic approaches to antitrust: the neoclassical approach, the Harvard School approach, and the Chicago School approach. The chapter includes an insightful analysis of the effects of these different economic perspectives on antitrust enforcement. In observing that there is no complete agreement on the goals and objectives of antitrust enforcement, they explore the several controversies over means and goals that arise with particular attention paid to (1) the relationship of efficiency and consumer welfare, (2) the protection of small sellers, and (3) the protection of democracy.

Part 3 looks at several of the legal-economic issues related to the environment, natural resources, and land use. Nicholas Mercuro’s chapter sets forth a conceptual model of a comparative institutional approach to law and economics including the (1) constitutional, (2) institutional, and (3) economic impact stages of choice. The model focuses on four different means of social control, together with their respective property rights regimes that serve to allocate society’s scarce resources—the market sector (private property rights), the public sector (status rights), the communal sector (communal rights), and the open-access resource sector (no property rights). Environmental, natural resource, and land-use examples are included in the analysis of each stage of choice and in exploration of the consequences of fashioning remedies within the market sector, the public sector, the communal sector, or leaving resources in the open-access resource sector.

In her chapter, Ann Davis observes that in the last few decades, the issue of property rights has become more contested with the increase in concern for the environment and the perceived decline of community. Davis adopts an institutional economics approach to document and detail the development patterns in New York State’s Hudson Valley Region over the course of two centuries. The chapter defines and analyzes the institutional and historical contexts of what transpired with respect to property and land-use development in the area, using the notion of property as a heuristic device for tracing institutional change across a long period. This rich history traces the development of modern notions of “public” municipal corporations and “private” land markets, as both legal theory and republican government developed in the eighteenth and nineteenth centuries. This look to the past brings the reader an awareness of the wide range of land-use regimes, the relatively recent separation of public from private, and the implications related to the separation of governance from ownership. The central argument is that as one comes to understand the history of property—with its differential, shifting meanings over time, both ideological and institutional—that understanding helps make clear the forces that have recently led to scenery and farmland being consumed at a rapid rate in the Hudson Valley Region, all to the apparent dismay of local residents, policymakers, and local leaders.

The premise of Elizabeth Kruse’s chapter on property rights and institutions is that over the past decade the analysis of property rights and institutions has continued to adhere and take place within the neoclassical economic framework. At the same time, she notes, there has been a growing consensus, even among mainstream economists, that such models are too limited to encompass adequatel...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables and Figures
• Foreword: Some Thoughts on the Study of Law and Economics and on the Role of Government
• Part 1. Introduction: New Approaches to Law and Economics
• Part 2. Legal Issues Concerning Firms and Market Structure
• Part 3. Legal Issues Concerning Natural Resources, the Environment, and Land Use
• Part 4. Legal Issues Concerning Labor, Employment, and Unemployment
• Part 5. Other Legal Issues
• About the Editors and Contributors
• Index