Economic Rationality in the Analysis of Legal Rules and Institutions
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In the first half of the twentieth century, lawyers and legal academics referred to economic concepts and theories only to elucidate areas of laws such as antitrust, the regulation of public utilities, and taxation that had an explicit economic content. Even the suggestion that economics should play a role in the understanding of core doctrinal subjects of the common law would have been rejected as ludicrous. In the early 1960s, however, Ronald Coase (1960) and Guido Calabresi (1961) began the systematic application of the techniques of microeconomic analysis to the study of legal rules and institutions including common law legal rules and institutions. Within 15 years, the tools of microeconomics had been applied to virtually every area of law. By the end of the twentieth century, serious scholarship in almost every area of law had to address issues and arguments raised by the economic analysis of law. During the 1970s, Richard Posner (1973, 1979, 1980) claimed first that common law rules were in fact efficient (the positive claim) and second that common law rules ought to be efficient (the normative claim). Around 1980, the proliferation of economic analyses spawned great controversy in the legal academy. The controversy centered on the second of Posner’s claims: that common law rules ought to be efficient. The controversy has had two primary components. The first, at least in part internal to the community of economic analysts of law, concerns the appropriate understanding of the term ‘‘efficient.’’ On one interpretation, ‘‘efficient’’ simply means ‘‘Pareto efficient’’; that is, a legal rule is Pareto efficient if and only if there is no other rule that would induce behavior such that no person was worse off and at least one person in society was better off. On a second interpretation, ‘‘efficient’’ means ‘‘wealth-maximizing’’ where ‘‘wealth’’ is the sum of the compensating or equivalent variations of the individuals in society. This second interpretation essentially adopts cost–benefit analysis as an implementation of the Kaldor–Hicks welfare criterion. (On Kaldor–Hicks see Coleman 1980 or Kornhauser 1998b.) On the third interpretation, offered most recently by Kaplow and Shavell (2002), ‘‘efficient’’ means only that the evaluation of legal rules should be welfarist; evaluation should depend only on the well-being of the individuals in society. This third interpretation is the most general as both Pareto efficiency and the maximization of the compensating or equivalent variations are welfarist criteria. (For more extensive discussion of these claims, see Kornhauser 1998b, 2003b.) The other focus of controversy over Posner’s normative claim concerned its moral validity. Various authors, for example, Dworkin (1980a, 1980b), asserted that ‘‘wealth,’’ understood either as Pareto efficiency or as the ‘‘consumer surplus’’ generated by a legal rule, was not a value or, at least, a value that the law ought to promote. In its current incarnation, the dispute has turned to the more general moral issue of the validity of welfarism as the exclusive social goal. A commitment to economic analysis of law, however, does not entail a commitment to welfarist evaluation of legal rules and institutions. The denial of the normative claim in any of its three formulations does not undermine much of the practice of economic analysis of law. Consequently, the dispute over the normative claim has not much influenced either the internal development of the discipline or the acceptance of its approach by its critics. The dispute has merely diverted attention from the principal difference between economic analysis of law and more traditional enquiries concerning legal rules and institutions. This difference reflects distinct approaches to the normativity of law. Within the legal academy, scholars start from the premise that legal rules are norms; they primarily study the content and interpretation of those norms. By contrast, economic analysis of law, at its core, analyses the causes and effects of legal rules and institutions. Consequently, it must explain and predict how private citizens and public officials will respond to legal rules and institutions. These explanations, however, generally ignore, and sometimes deny, the normative features of legal rules. This chapter seeks to elucidate the contrasting approaches to normativity and to determine the extent to which they are incompatible. The argument, however, is complex and tentative for two reasons. Within law and jurisprudence, the concept of the normativity of law itself is controversial and elusive. Moreover, economics has substantial resources for modeling diverse phenomena. The failure of economic analysis of law to account for the normative aspects of law may be a contingent rather than a necessary feature of the practice used to explain legal behavior. The chapter proceeds as follows. In the following section, I formulate the question. I then distinguish between two distinct research programs in economic analysis of law: a modest and a strong one. The modest research program poses little or no challenge to traditional questions concerning the normativity of law. The strong research program rejects normativity. The next section sets jurisprudential accounts of the normativity of law. Then, in the central section of the chapter, I elaborate and assess the resources available to economic analysis of law to capture jurisprudential conceptions of normativity.
Source Publication
The Blackwell Guide to the Philosophy of Law and Legal Theory
Source Editors/Authors
Martin P. Golding, William A. Edmundson
Publication Date
2005
Recommended Citation
Kornhauser, Lewis A., "Economic Rationality in the Analysis of Legal Rules and Institutions" (2005). Faculty Chapters. 1027.
https://gretchen.law.nyu.edu/fac-chapt/1027
