NYU Press
Chapter Title: Law and Economics
Book Title: Postmodern Legal Movements
Book Subtitle: Law and Jurisprudence At Century's End
Book Author(s): Gary Minda
Published by: NYU Press
Stable URL: https://www.jstor.org/stable/j.ctt9qg2gf.10
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Legal Movements
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Part Two
Jurisprudential Movement s
of th e 1980 s
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5. La w an d Economic s
The sources responsible fo r th e expansion an d transformatio n o f the law
and economic s movemen t o f th e 1970 s an d 1980 s hav e neve r bee n
adequately explained . On e fac t remain s clear : thi s movemen t coincide d
with th e ris e o f interdisciplinar y lega l studie s an d th e growin g disen chantment wit h th e lega l proces s an d fundamenta l right s schools . I n
the mids t o f th e disintegratio n o f an d disillusionmen t wit h mainstrea m
jurisprudence, lega l scholar s looke d outsid e la w t o economic s fo r law' s
missing authorit y an d th e autonom y o f lega l discourse . O f al l th e socia l
sciences, economic s wa s th e mos t promisin g candidat e offerin g "righ t
answers" fo r law' s problems .
While th e us e o f economi c analysi s i n som e lega l subjects , suc h a s
antitrust law , has bee n ric h an d long-standing , muc h o f wha t i s included
in th e la w an d economic s movemen t develope d withi n th e las t tw o
decades.1 Th e ne w la w an d economic s involve s th e applicatio n o f eco nomic analysi s t o commo n la w subject s suc h a s Tort , Contract , an d
Property, where the relevance o f economics i s less apparent. Th e birth of
the new la w an d economic s occurre d i n th e earl y 1960 s whe n Ronal d
Coase publishe d hi s semina l articl e o n nuisanc e law 2 an d Guid o Cala bresi publishe d hi s economi c analysi s o f tor t law. 3 La w an d economic s
as a n academi c movemen t di d no t "coalesce, " however , unti l Calabres i
published hi s widely acclaime d boo k o n acciden t la w in 1970, 4 followe d
by Richar d A . Posner' s textbook , ECONOMI C ANALYSI S O F LAW , i n
1973. 5
This movement ha s since evolved fo r mor e than tw o decades , creatin g
two generations o f law an d economic s scholarshi p unite d b y quite differ 83
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84 Law
and Economics
ent theoretical jurisprudentia l orientations . The first generation responsi ble for formin g th e movement wer e united b y their fait h i n the merger of
law and the quasi-scientific metho d of economics. The second generatio n
has take n a mor e pragmati c an d no-nonsens e stanc e towar d economi c
analysis o f law : economic s i s foun d t o b e usefu l fo r verifyin g empirica l
observations abou t lega l behavior. The jurisprudential sourc e supportin g
the lawyer' s fait h i n th e economi c analysi s o f law , however , remain s a
subject fo r debate. 6
The economic analysis of law, as presented b y one of the most famou s
practitioners—judge an d lega l theoris t Richar d Posner—epitomize s th e
ambiguity an d confusio n surroundin g th e jurisprudenc e o f thi s move ment. Posner' s ECONOMI C ANALYSI S O F LAW , descriptiv e o f first-generation analysis , fo r example , wa s initiall y viewe d b y many , includin g
myself, a s a refined , moder n versio n o f th e Langdellia n ide a tha t la w
consists o f a universa l syste m o f scientificall y discoverabl e principles .
Posner staunchl y maintaine d i n his early writing the basic tenet o f Lang dellian faith , claimin g tha t "i t ma y b e possibl e t o deduc e th e basi c
formal characteristic s o f la w itsel f fro m economi c theory." 7 However ,
unlike Langdell , who searche d fo r endurin g principle s i n appellat e cour t
decisions, Posner' s ECONOMI C ANALYSI S O F LA W wa s single-minde d i n
its effor t t o reconstruc t lega l doctrin e ou t o f a limite d numbe r o f basi c
economic concepts . Economic analysi s o f la w seeme d t o offe r a moder n
version o f th e typ e o f instrumenta l analysi s associate d wit h progressiv e
legal realism : i t attempte d t o offe r lawyer s a ne w instrumenta l logi c
developed fro m th e socia l scienc e o f economic s t o "solve " th e problem s
of traditiona l jurisprudence .
The parado x o f la w an d economic s i s tha t i t attempt s t o brin g to gether tw o inconsisten t form s o f jurisprudence : Langdellia n formalis m
and progressiv e lega l realism . Thi s parado x help s t o explai n th e confu sion concernin g th e jurisprudenc e o f th e movement . Encourage d b y th e
new interes t i n interdisciplinar y lega l studie s an d a n overal l desir e t o
improve an d refin e mainstrea m jurisprudence , th e first generatio n wa s
correctly understoo d a s claimin g t o hav e advocate d a typ e o f Langdel lian formalism . O n th e othe r hand , thes e sam e lega l scholar s late r re nounced fait h i n law's autonomy an d turned instead to a new instrumen tal analysi s t o critiqu e th e intellectua l positio n o f thei r process-oriente d
and fundamental-rights-oriente d mentor s an d teachers . These tw o juris -
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Law and Economics 8
5
prudential theme s played themselves out differently wit h different gener ations of law and economics scholarship .
First-generation scholar s were the "youn g Turks" who renounced the
modernist's commitment to an autonomous o r fundamental law , but did
not totall y rejec t th e possibilit y o f universa l lega l truth . The y sough t
to reinforc e moder n jurisprudenc e b y claimin g tha t th e authorit y an d
autonomy o f la w coul d b e discovere d i n th e "hardest " o f th e socia l
sciences. Economic analysis , as applied to law, committed these scholars
to a for m o f economi c formalis m no t unlik e Langdellia n formalism .
First-generation scholar s believe d tha t "economic s coul d b e th e maste r
discipline, itsel f autonomous , bu t whic h migh t explai n result s i n othe r
non-autonomous discipline s like law." 8
Indeed, whil e muc h wa s mad e o f th e difference s betwee n traditiona l
legal and law and economic scholars, those differences wer e minor when
compared to what they shared in common. Mark Kelman, a critical legal
theorist an d professo r a t Stanfor d La w School , note d tha t th e la w an d
economics movemen t (i n its earl y stage s o f development ) wa s "th e bes t
worked-out, mos t consummate d libera l lega l ideology " tha t character ized the modern jurisprudence o f traditiona l lega l scholars. 9 Belief i n the
omnipotence an d liberatin g potentia l imminen t i n th e applicatio n o f
economic analysi s t o la w reveale d th e lingerin g influenc e o f bot h Lang dell an d Holmes o n the first generation. I t was the influence an d hold of
legal modernis m tha t brough t jurisprudentia l ambiguit y t o th e work o f
the first generation. I t served t o alig n the first generation wit h th e unresolved ambiguities of moder n jurisprudence.
In th e mid-1980s , th e influenc e o f th e first generation peake d an d a
new generatio n o f la w an d economic s scholar s emerged . Thi s second
generation rejecte d th e stron g scientific-lik e claim s an d th e economi c
formalism o f thei r intellectual father s an d seem to have adopte d a more
pragmatic jurisprudential outlook . The y have embraced the idea that the
authority an d autonom y o f economi c analysi s wa s limited ; an d tha t
truth, knowledge, an d legal understandin g n o longe r b e explained fro m
an objectiv e economi c perspective . Secon d generatio n scholars , empha sizing the pragmatic-instrumentalism o f Holmes , accepte d that law must
be understoo d a s fundamentall y indeterminate . The secon d generatio n
thus attempted to distance itself fro m the "ne w Langdellians" of the first
generation, wh o embrace d LangdelP s "grea t idea " tha t la w migh t b e a
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8 6 Law
and Economics
science. The second generatio n no w associate s itself wit h a post-Chicag o
form o f economi c analyses o f law .
One wa y t o examin e th e relationshi p betwee n first - an d second generation la w an d economic s scholar s i s t o conside r ho w on e leadin g
law and economic s schola r has, at different moments , positioned th e la w
and economic s movemen t i n relatio n t o Holme s an d th e lega l realis t
movement o f th e 1920 s an d 1930s . In 1981 , for example , Posner trace d
the origins o f th e la w an d economic s movemen t t o Holmes' s TH E COM MON LA W an d th e Legal Realists. Posne r argue d tha t i n T H E COMMO N
LAW, Holmes applie d the modern method o f social science in his attemp t
to discove r th e tru e meanin g o f a lega l doctrin e fro m th e stud y o f it s
historical evolution . Posne r claime d tha t Holmes' s metho d wa s late r
picked u p b y lega l realism , a movemen t Posne r sai d ha d "fizzle d fo r
want o f a theoretica l framewor k t o guid e research." 10 Posne r con cluded: "Th e scholarl y movemen t tha t i s today' s counterpar t t o Lega l
Realism a s th e foremos t alternativ e t o doctrina l analysi s i s economi c
analysis of law , or, a s it is sometimes called , 'Law and Economics' " n
By 1990 , Posner published a somewhat differen t historica l accoun t of
the movement. 12 Thi s time, Holmes's T H E COMMO N LA W was compare d
to Nietzsche' s grea t work , T H E GENEALOG Y O F MORALS , whic h Posne r
found t o "emplo y a n effectiv e metho d o f skeptica l analysis : th e genea logical." 13 Apparentl y Posne r rediscovere d a ne w Holme s wh o wa s n o
longer th e pionee r o f th e socia l scienc e method , bu t rathe r th e founde r
of th e lega l pragmatic method , a metho d tha t Posne r no w view s a s
"Nietzsche-like." 14 Posne r no w espouse s a Nietzsche-lik e outlook ,
which h e says is "progressiv e (i n the sense of foreword-looking) , secular ,
and experimental , an d tha t i s commonsensica l withou t makin g a fetis h
of commo n sense." 15 Posner' s contemporar y outloo k i s sai d t o hav e
been shape d b y Holmes' s pragmatism , no t hi s realisti c jurisprudenc e
(law a s experience , rathe r tha n logic ) whic h helpe d shap e th e lega l
realist movement .
Posner's pragmatism , unlik e tha t o f Holmes , emphasize s th e impor tance o f languag e rathe r tha n experience , reason , o r economics . Hi s
pragmatism i s suspiciou s o f th e ver y ide a o f a "scientifi c theory. " H e
now insist s that la w an d economic s project s b e judged "b y thei r confor mity t o socia l o r othe r huma n need s rathe r tha n t o 'objective, ' 'imper sonal' criteria." 16 Posne r als o reject s th e ide a tha t ther e i s a n affinit y
between la w an d economic s an d lega l realism . H e believe s tha t th e
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Law and Economics 8
7
relationship betwee n la w an d economic s an d th e American lega l realis m
movement i s "equivocal"; 17 tha t th e la w an d economic s movemen t i s
"closer t o th e fathe r o f lega l realism , Holmes , tha n t o th e lega l realist s
themselves wit h thei r emphasi s o n libera l meliorism." 18 Pickin g up "th e
thread o f philosophical pragmatism " fro m Holme s an d Cardozo , Posne r
seems to hav e mad e a change i n intellectual directio n t o th e postmoder n
strategy o f neopragmatism. 19
The neopragmatis t i s mor e concerne d wit h developin g instrumenta l
and practica l approache s t o problem s tha n discoverin g th e wa y thing s
"really" are . When applie d to the economic analysis of law, the neoprag matic attitud e i s les s concerne d wit h maintainin g lega l objectivit y an d
consistency tha n bringin g abou t result s tha t "work. " Th e neopragmati c
attitude i s als o skeptica l o f th e claim s o f basi c economi c theor y an d i s
instead draw n t o th e experimental an d predictive use s o f economi c
theory. 20 Neopragmati c economi c analyst s ar e "ca n do " types ; they ar e
interested i n empirica l method s an d th e proprietie s o f factua l phenom ena onl y t o th e exten t tha t suc h knowledg e serve s a n instrumenta l
function i n resolvin g som e proble m o r gettin g th e "jo b don e well. "
Neopragmatists ar e antidogmati c an d skeptica l o f foundationa l claim s
about th e natur e o f "truth. " The y disassociat e themselve s fro m eco nomic formalists, wh o believ e in basic economic theory, an d progressiv e
legal realists , wh o claime d tha t th e answer s t o law' s problem s ca n b e
discovered i n anothe r disciplin e suc h a s economics.
Posner's revisionar y histor y o f th e la w an d economic s movemen t
provides clue s fo r understandin g second-generatio n la w an d economic s
scholarship. Th e firs t generatio n tende d t o vie w it s work a s a continua tion o f progressiv e realism , an d i t advance d a stron g thesi s tha t la w is ,
and ough t t o b e lik e a socia l science—tha t is , economics. First-genera tion la w an d economic s scholarshi p wa s thu s steepe d i n th e jurispru dence o f lega l formalism , especiall y LangdelP s ide a tha t la w i s lik e a
science. Th e secon d generatio n ha s sinc e broke n fre e fro m th e "la w a s
science" idea , an d instea d advocate d a ne w institutiona l economic s tha t
is decidedl y skeptica l abou t th e scientific-lik e an d formalisti c claim s o f
the firs t generation . Drawin g inspiratio n fro m Coas e an d neopragmati c
philosophers, th e secon d generatio n o f la w an d economic s scholar s ten d
to favo r th e stud y o f institution s an d economi c behavio r o f bureaucrati c
organizations rathe r tha n economi c model s an d "theory." 21 Th e shif t
from abstrac t theor y t o concret e institutiona l analysi s has bee n nurture d
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8 8 Law
and Economics
by a ne w understandin g o f economi c theory—a n understandin g tha t
views "theory " merely as a tool fo r investigating what may "work " as a
solution to some problem. While the first generation of law and economics scholar s approache d economic s a s a theoretical science , th e secon d
generation views economics a s an applied science . By 1990 , the founda tions of "science " were "kicke d away" such that Posner could proclaim:
"Today w e ar e al l skeptics." 22 Th e secon d generatio n ha s thu s becom e
postmodern in its aspirations, attitudes, and aesthetics.
First-Generation Law
and Economics Scholarship
The initia l impetu s fo r th e la w an d economic s movemen t cam e fro m
the wor k o f economic s scholars—Ronal d Coase , Gar y Becker , Aarro n
Director—at th e University o f Chicag o who devote d thei r efforts t o the
economics o f nonmarke t behavior. 23 I n deepening what man y regar d as
the "Chicago School" perspective of economics, these scholars employed
a "rational-actor" model of human behavior in their analysis of nonmarket subject s suc h a s discrimination , family , an d th e law . Thi s mode l
"assumes tha t a n acto r wil l choos e th e cours e o f actio n tha t wil l max imize hi s personal expecte d utility , whic h may , o f course , reflec t a concern fo r th e welfar e o f others." 24 Self-intereste d profit-maximizatio n
behavior was assume d to b e a reliable predictor of th e principal motiva ting factors o f huma n endeavor, including human behavior in the law. 25
While th e work o f thes e so-calle d Chicag o Schoo l economist s focuse d
on applied economics , their work cam e to be associated with theoretical
economics a s lega l academic s adopte d th e "theory " o f th e Chicag o
School an d applie d i t t o thei r analysi s o f law . A s initiall y propounded ,
economic analysi s o f la w develope d conceptuall y a s a ne w "basi c the ory" of th e law. The "theoretical " economi c analysi s of la w dre w essential insight s abou t th e la w fro m a limite d numbe r o f fundamenta l eco nomic concepts . Thi s phas e o f th e movemen t resemble d th e
jurisprudence of conceptualis m i n law.
A cardinal principle of economics, from which early law and economics work emerged , wa s base d o n th e assumptio n tha t "ma n [sic] i s a
rational maximize r o f hi s end s i n life." 26 Fro m thi s assumption , la w
and economic s practitioner s erecte d th e rational-acto r mode l o f huma n
behavior: "I t is implicit in the definition o f ma n as a rational maximize r
of hi s self-interes t tha t people respon d t o incentives—tha t i f a person's
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Law and Economics 8
9
surroundings chang e in such a way that he could increase his satisfactio n
by alterin g hi s behavior , h e will d o so." 2 7 I t was assume d tha t behavio r
is rational wheneve r i t conform s t o th e rational-acto r model , even whe n
the acto r i s unawar e o f hi s o r he r rationalit y an d eve n thoug h man y
individuals ma y ac t irrationally . Mos t individual s ar e assume d t o ac t
rationally, an d thos e wh o d o no t ar e assume d t o represen t rando m
exceptions unlikel y t o alte r th e predictiv e abilit y o f th e rational-acto r
model. It is also accepted that selfishness is not the same as self-interest —
"happiness (o r for tha t matte r th e misery ) o f othe r peopl e may b e a par t
of one' s satisfactions." 28
From th e rational-acto r model , la w an d economic s practitioner s de rived thre e fundamenta l concept s fo r th e economi c analysi s o f law. 29
First i s th e "invers e relatio n betwee n pric e charge d an d quantit y de manded (th e La w o f Demand)." 30 Accordin g t o earl y practitioner s o f
law an d economics , th e la w o f deman d ha s man y application s fo r th e
law:
The convicte d crimina l wh o ha s serve d hi s sentenc e i s sai d t o hav e "pai d hi s
debt to society," and an economist would find the metaphor apt. Punishment is,
at leas t fro m th e criminal' s standpoin t . .. th e pric e tha t societ y charge s fo r a
criminal offense . Th e economist i s led t o predic t tha t a n increas e i n eithe r th e
severity of the punishment or the likelihood of its imposition will raise the price
of crim e and therefore reduc e its incidence. The criminal will be encouraged t o
substitute other activity. 31
The secon d fundamenta l concep t i s th e economi c definitio n o f cost .
Cost t o th e lawyer-economis t mean s "opportunit y cost"—th e benefi t
forgone b y employing a resource in a way tha t denie s its use to someon e
else. Law an d economic s practitioners claime d tha t th e opportunit y cos t
concept was usefu l i n legal analysis. For example :
Among the man y application s o f th e concep t o f opportunit y cos t t o law , consider the problem of computing damages for the loss of a child's life. If the child
has no earning power, his death wil l not have imposed a pecuniary cos t on the
parents. However , w e ca n comput e th e opportunit y cost s o f th e resource s in vested by the parents in rearing the child by determining the alternative price of
the parents ' tim e an d othe r input s (food , clothing , education , etc. ) int o it s
rearing. The sum of these prices is a minimum estimate of parental loss. 32
The thir d basi c concep t i s "th e tendenc y o f resource s t o gravitat e
toward thei r mos t valuabl e use s i f voluntar y exchange— a market—i s
permitted." 33 La w an d economic s theorist s believ e tha t throug h a pro -
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90 Law
and Economics
cess of voluntar y exchange , scarc e resources will be shifted t o thos e use s
that ar e th e mos t value d b y people , a s measure d b y thei r willingnes s t o
pay. 34 Whe n resource s ar e pu t t o thei r mos t valuabl e uses , economist s
say tha t the y ar e bein g employe d "efficiently. " I t i s the "efficienc y crite rion" tha t establishe s th e basi c normativ e standar d fo r economi c analy sis of law .
The las t concept , th e economist' s notio n o f efficiency , i s th e mos t
important concep t o f th e thre e fo r understandin g th e methodologica l
theme o f earl y la w an d economic s scholarship . Fo r th e lawyer-econo mist, "efficienc y mean s exploitin g economi c resource s i n suc h a wa y
that 'value'—huma n satisfactio n as measured by aggregate consumer
willingness to pay fo r good s an d services—i s maximized." 35 Earl y la w
and economic s scholarshi p sough t t o sho w tha t commo n la w judge s
should, an d do , decid e case s s o a s t o maximiz e wealth . First-generatio n
practitioners argue d tha t judge s ca n "approximate " th e efficien t out come in decisions by assigning the right to the party who values the righ t
the most , measure d b y th e willingnes s t o pa y standard. 36 A s a n alterna tive t o th e "approximatio n principle, " la w an d economic s practitioner s
argued tha t th e efficien t outcom e coul d b e attaine d throug h th e la w b y
minimizing the cost of bargaining. 37
Much o f th e theoretica l suppor t fo r first-generation scholarshi p ca n
be trace d t o Ronal d Coase' s The Problem of Social Cost, 38 an d wha t
later cam e t o b e know n a s th e Coase Theorem. A s w e hav e seen , th e
Coase Theorem aros e out o f Coase' s effort t o show how economist s ha d
neglected th e importanc e o f transactio n cos t i n thei r theoretica l model s
of markets . Richar d Posne r argue s tha t i n bringin g attentio n t o th e
centrality of transaction cost , Coase declared "war " o n those economist s
who focuse d o n economi c theor y a t th e expens e o f practica l investiga tion o f marke t behavior. 39 On e woul d thin k tha t Coase' s influenc e i n
law an d economic s woul d hav e le d t o a les s forma l an d mor e realisti c
economic analysi s o f law . Bu t thi s i s no t wha t occurred , a t leas t i n th e
early stage s of thi s movement .
This i s becaus e Coas e wa s rea d formalisticall y b y lawyers . Lega l
academics, advocatin g th e ne w economi c analysi s o f law , rea d Coase' s
work a s a "theory " abou t marke t transaction s t o b e applie d t o th e
"facts" o f lega l problems . Th e first generatio n o f la w an d economic s
practitioners consequentl y embrace d a versio n o f economi c formalis m
not unlike legal formalism. Coase' s theorem wa s seen by legal academic s
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Law and Economics 9
1
as supplying th e missin g theory o f authorit y lackin g in traditional form s
of doctrina l lega l analysis . Fo r man y lega l academics , Coase' s wor k
established th e theoretical cas e for th e deregulation movemen t i n American law .
As i t turne d out , Coase' s "theorem " ha d undermine d th e confidenc e
in th e "interventionist " program s o f welfar e economic s o f th e 1960s ,
and thereb y strengthene d th e influenc e o f laissez-fair e marke t conserva tives a t th e Universit y o f Chicag o an d elsewhere. 40 Coase' s preoccupa tion wit h privat e propert y right s committe d th e first generatio n o f la w
and economic s scholar s t o a n underlyin g conservativ e politica l perspec tive whic h favore d laissez-fair e markets , an d a theor y o f jurisprudenc e
which champione d th e vie w tha t la w shoul d facilitat e fre e choic e an d
private contract. 41
Ironically, whil e Coas e advocate d th e advantage s o f privat e marke t
ordering, h e als o recognize d tha t i n rea l markets , transactio n cost s
would b e positive . Coas e thu s acknowledge d tha t governmenta l inter vention woul d b e needed t o mak e market s wor k efficiently . Th e typ e of
intervention Coas e seeme d t o advocate , however , wa s see n b y other s a s
calling fo r a "market-like " solution : Th e la w shoul d tr y t o mak e th e
market wor k and , i f tha t fails , th e la w shoul d mimi c th e market . Th e
type o f lega l interventio n envisione d b y Coas e was interprete d t o b e like
the type of private "regulation " t o be expected b y markets .
The success o f Coase' s theore m wa s largel y du e t o hi s insightfu l
analysis o f th e proble m o f externalitie s i n th e economi c system . Th e
existence of externalities trouble d economist s becaus e they ar e viewed a s
a sourc e of inefficienc y i n the private market activitie s of individuals an d
firms. Becaus e spillove r effect s o f a n externalit y ar e normall y no t re flected i n marke t price s o r costs , i t wa s though t tha t privat e wealth maximizing behavio r faile d t o accoun t fo r th e tota l "social " cos t o f
economic activities . Economists feare d tha t eithe r to o muc h o r to o littl e
would b e produced, resultin g i n the inefficient allocatio n o f resources .
In treatin g externalitie s a s a n exampl e o f "marke t failure, " econo mists wh o followe d th e analysi s o f th e Englis h welfar e economis t A . C .
Pigou conclude d tha t th e wa y t o preven t inefficienc y i n resourc e alloca tion woul d b e t o us e th e lega l syste m t o mak e thos e responsibl e fo r
harmful interferin g activit y bea r th e cos t o f spillove r consequences. 42
Pigouvian economist s thu s advocate d tha t th e la w shoul d b e structure d
to ensur e tha t al l undesirabl e externalitie s ar e "internalized " b y thos e
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92 Law
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responsible fo r suc h costs . In T H E PROBLE M O F SOCIA L COST , Coas e
uncovered a n apparen t oversigh t i n th e logi c o f traditiona l Pigouvia n
analysis—the cost s o f marke t transactions. 43 Coas e claime d tha t i f th e
costs o f marke t transaction s (transactio n costs ) ar e minimal , lega l inter vention woul d hav e n o significan t consequence s o n resourc e allocation .
He demonstrate d tha t i f transactio n cost s ar e low , individual s woul d
bargain thei r wa y t o a n efficien t allocatio n o f resources , regardles s o f
the assignmen t right s an d liabilities . Privat e bargainin g woul d achiev e
efficient outcome s regardles s o f th e judicially dictate d outcome .
For example , i f transactio n cost s ar e zer o an d a factor y owne r i s
initially assigne d a righ t t o emi t smok e a t wil l an d th e smok e adversel y
affects neighborin g propert y owners , th e propert y owner s wil l hav e a n
interest i n offerin g th e factor y owne r a brib e t o refrai n fro m exercisin g
the righ t t o emi t smok e or , alternatively , t o adop t smok e avoidanc e
measures. O n th e othe r hand , i f th e propert y owner s hav e a righ t t o b e
free fro m th e advers e effect s o f smok e pollution , th e factor y owne r wil l
have a n interes t i n offerin g compensatio n fo r th e resultin g smok e dam age i n orde r t o maintai n factor y operations . In eithe r case , th e bargai n
that is ultimately struck will be based on who values the right the most —
the factor y owne r o r th e propert y owners . I f th e factor y owne r value s
the righ t th e most , the n n o matte r wher e th e la w place s th e right , th e
factory owne r wil l end u p with th e right .
While the logic of the Coase Theorem suggest s that liability rules have
no effect o n efficiency , i n the real world wher e transaction cost s exist th e
rule o f liabilit y doe s matter . A s Coas e recognized , ther e ar e simpl y to o
many imperfection s i n th e marketplac e t o permi t partie s t o bargai n
efficiently. Whe n th e assumption s o f th e Coas e Theore m ar e no t satis fied, whic h i s typicall y th e case , th e rul e o f liabilit y wil l determin e
whether liabilit y rule s ar e helpfu l i n bringin g abou t efficien t outcomes .
This wil l occu r whe n th e cos t o f bargainin g i s prohibitively high , whe n
the requisite informatio n i s imperfect o r expensive to obtain, when ther e
are to o man y partie s t o mak e bargainin g feasible , o r whe n i t i s no t
possible t o exclud e nonpaying user s or "fre e riders " fro m th e benefit s o f
a bargain .
The significanc e o f th e Coas e Theorem wa s that i t provided academi c
lawyers wit h a ne w theoretica l basi s fo r analyzin g commo n la w rule s of
Contract, Property , an d Tort . I n bringing attentio n t o th e importance o f
transaction costs , th e theore m calle d fo r a complet e chang e i n th e stan -
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Law and Economics 9
3
dard lega l analysi s o f problem s involvin g interferin g harmfu l activitie s
such a s pollution. Th e regulator y approac h attribute d t o Pigou—inter nalizing th e externality—wa s rejecte d i n favo r o f deregulatio n an d th e
minimization o f transactio n costs . Fo r th e first generatio n o f la w an d
economics practitioner s followin g Coase , th e ultimat e issu e wa s wha t
the marke t woul d d o i f privat e bargainin g wer e feasible , an d whethe r
the logi c o f Coase' s Theore m wa s applicable . Thes e practitioner s em braced a typ e o f economi c formalis m no t unlik e th e lega l formalis m
of Langdell .
Adopting Coase' s marke t perspective , la w an d economic s scholar s
initially aime d their sights at demonstrating that the governmental regu lation o f th e economy wa s unnecessary , an d some case s were detrimen tal. Hence , th e standar d nuisanc e question : "Wh o cause d wha t harm?"
was restate d by Coasian analyst s as: "Whic h legal regime minimizes the
total cost s arisin g fro m th e unfortunate encounters?" 44 And the answe r
most frequently give n was: "Th e legal regime of nonregulation. "
These early versions o f la w an d economics scholarshi p wer e vulnera ble t o form s o f criticis m mad e agains t th e lega l formalists . Thus , firstgeneration la w an d economic s scholar s wer e initiall y calle d th e "Ne w
Langdells" or "New Conceptionalists" of the legal academy. 45 The work
of th e la w an d economic s schola r wa s criticize d fo r failin g t o tak e int o
account th e "realities " of rea l markets . Economi c theory wa s sai d to b e
based on unrealistic assumptions which should be distrusted because the
assumptions would devalue and "relativize " the values of law .
Early law and economics scholars followed tw o basic defensive strategies i n respons e t o thei r critics . First , i n respons e t o thos e wh o claime d
that la w an d economic s woul d lea d t o immora l law, 46 the y argue d tha t
a distinctio n mus t b e mad e betwee n positive an d normative economi c
analysis. Law and economics scholars claimed that the purely descriptiv e
or "positive " forms o f analysi s helped clarify th e cost of various alternatives tha t migh t b e selecte d b y th e normative decisio n maker . La w an d
economics scholar s offere d n o opinio n o n th e ultimat e normativ e ques tion t o b e decided , othe r tha n sayin g tha t mora l question s ar e bes t lef t
to the elected branches of government .
In response to those who argued that law and economics assumption s
fail t o confor m t o th e "rea l world," 47 la w an d economic s scholar s
argued tha t economi c theor y mus t b e evaluate d o n it s abilit y t o mak e
accurate predictions , no t o n th e "realis m o f it s assumptions. " La w an d
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94 Law
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economics scholar s believ e that th e lack o f realism i n a theory's assump tions i s a merit, not a demerit. A s Posner explaine d i n the second editio n
of hi s ECONOMI C ANALYSI S O F LAW : " A scientifi c theor y mus t selec t
from th e welter o f experienc e that i t is trying to explain, an d i s therefor e
necessarily 'unrealistic ' whe n compare d t o actua l conditions . Newton' s
law o f fallin g bodies , fo r example , i s unrealisti c i n it s basi c assumptio n
that bodie s fal l i n a vacuum , bu t i t i s stil l a usefu l theor y becaus e i t
predicts wit h sufficien t thoug h no t complet e accurac y th e behavio r o f a
wide variety o f fallin g bodie s in the real world." 48
The orthodox defens e o f law and economic s was developed b y Posne r
and a cadr e o f la w an d economic s scholar s workin g a t th e Universit y o f
Chicago. I t wa s th e "hardliners " o f th e Chicag o Schoo l (th e foundin g
fathers) who , throughou t th e 1970 s an d earl y 1980s , advocate d stron g
claims base d o n th e law and efficiency hypothesis . Thi s hypothesis ,
normally associate d wit h Posner's initially staunch efficienc y perspective ,
asserted tha t th e commo n la w is, or a t leas t should be , a primary vehicl e
for promotin g efficiency—wha t Posne r late r calle d th e principl e o f
wealth maximization. 49
The first generatio n soo n devote d it s effor t t o th e goa l o f redefinin g
common la w concepts of Contract , Property , Tort, an d Crimina l La w t o
fit what Posne r calle d the "capitalis t conceptio n o f justice." 50 Accordin g
to th e capitalis t conception , th e ethica l basi s fo r determinin g whethe r a
particular stat e o f affair s i s "just " i s determine d b y th e criterio n o f
whether tha t stat e o f affair s promote s th e maximizatio n o f wealth .
Because th e economi c valu e o f wealt h i s determine d b y willingnes s t o
pay, "Th e onl y kin d o f preferenc e tha t count s . . . i s . . . on e tha t i s
backed u p b y money—in othe r words , that i s registered i n a market." 51
While th e first generatio n initiall y avoide d makin g normativ e claim s
about th e law , i t wa s no t lon g befor e the y bega n makin g suc h claims .
Early la w an d economic s scholarshi p hel d stron g ideologica l claim s
about th e commo n la w an d th e functio n o f th e lega l syste m i n th e
market economy . La w an d economic s scholar s argue d tha t judge-mad e
law shoul d maximiz e th e valu e o f lega l entitlement s a s measure d i n
dollar equivalents . The y argue d tha t th e commo n la w is , an d ough t t o
be, efficient . First-generatio n la w an d economic s scholar s soo n claime d
that la w an d adjudicatio n coul d b e bes t understoo d a s profit-maximiza tion activity . Market efficienc y wa s their normative standard fo r evaluat ing legitimate law and effectiv e lega l decision making. They believed tha t
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Law and Economics 9
5
law wa s economics , an d economic s wa s a neutral , apolitica l scienc e o f
"reason." A popular first-generation la w an d economic s sloga n wa s tha t
"law shoul d b e efficient. "
The la w an d economic s movemen t wa s also , in th e earl y stage s o f it s
development, a conservativ e reactio n t o th e judicia l activis m o f th e
Warren Cour t era . Th e Warre n Court' s fundamenta l right s discours e i n
constitutional la w wa s rejecte d b y thes e scholar s a s to o simplisti c an d
underdeveloped t o dea l wit h theoretica l an d institutiona l aspect s o f
the moder n bureaucrati c state . B y focusin g o n th e dynamic s o f marke t
mechanisms, la w an d economic s analyst s place d les s attentio n o n th e
legal conceptio n o f right s a s a normativ e o r descriptiv e framework , an d
focused instea d o n behaviora l consequence s o f differen t rul e systems .
For thes e scholars , lega l right s becam e mer e trope s fo r th e economi c
analysis o f law .
Second-Generation Law
and Economics Scholarship
By the mid-1980s, however, th e influence o f th e Chicago Schoo l peaked .
A new generatio n o f la w an d economic s scholar s emerge d an d distance d
themselves fro m th e orthodox y o f th e Chicag o Schoo l an d develope d
alternative approache s t o th e economi c analysi s o f law . Distanc e wa s
necessary fo r thos e la w an d economic s scholar s wh o rejecte d th e Chi cago School' s conservativ e agend a an d desire d a mor e libera l one . Al though mos t la w an d economic s scholar s no w agre e tha t efficienc y
analysis i s a beneficia l too l fo r understandin g behavio r unde r law , mos t
practitioners no w rejec t th e notio n tha t efficienc y shoul d b e regarde d a s
the only lega l norm i n common la w adjudication. 52
Moreover, ther e i s no w a ne w bree d o f la w an d economic s scholar s
who favo r a genuinel y reformis t la w an d economic s philosoph y t o ad dress th e problem s o f th e moder n welfare , regulator y state. 53 Thes e
scholars n o longe r believ e tha t lega l rule s shoul d b e affirme d o r rejecte d
solely on th e basi s of efficiency . Instead , they have shifted thei r attentio n
away fro m th e commo n la w t o a n examinatio n o f publi c la w an d th e
normative justification s fo r th e activis t state . Thi s secon d wav e o f la w
and economic s scholarshi p helpe d establis h a liberal schoo l o f la w an d
economics, know n a s th e New Haven o r Reformist School o f la w an d
economics.54
This secon d generatio n i s no w quit e diverse . On e grou p attempt s t o
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9 6 Law
and Economics
construct a mor e sophisticate d understandin g o f th e Chicag o Schoo l
approach b y developing nonmarke t theories to explain bureaucratic an d
institutional behavior. 55 La w an d economic s scholar s associate d wit h
the Universit y o f Virgini a adopte d th e Chicag o School' s conservativ e
perspective i n advancin g theorie s o f strategi c behavio r t o explai n long term bargaining relations. 56
Another stran d o f second-generatio n la w an d economic s scholarshi p
embraces th e Chicago ^ School's perspectiv e i n developin g a theor y o f
public choice fo r analyzin g legislative behavior. 57 This theory develope d
from Kennet h Arrow's book, SOCIA L CHOIC E AN D INDUSTRIA L VALUES ,
published i n 1951 , which i s know n i n law an d economic s literatur e fo r
establishing Arrow's Impossibility Theorem. 5* Thi s theore m demon strates tha t unde r certai n conditions , group s attemptin g t o choos e
among thre e o r mor e alternative s b y majorit y vot e ma y b e unabl e t o
reach a consistent decision . I t questioned th e optimis m o f politica l plu ralists wh o i n th e 1960 s assume d tha t interest-grou p representatio n
would lea d th e legislativ e proces s t o sociall y preferre d legislation. 59
Arrow's Theorem also suggested that majority voting in appellate courts
may preven t judge s fro m reachin g consistent an d "principled " deci sions.60 Publi c choic e theor y becam e a vehicl e fo r criticizin g libera l
pluralistic premise s o f democrati c an d judicial theor y o f th e post-Ne w
Deal era.
Post-New Dea l intellectual s attempte d to construct a new democrati c
theory know n a s interest group pluralism. 61 Thi s theor y provide d a
conception o f democrac y tha t optimisticall y accepte d th e legitimac y o f
interest grou p influenc e i n th e politica l process . Pluralist s viewe d th e
political proces s a s a legitimat e battl e betwee n competin g interes t
groups, whose interactio n ensure d tha t the democrati c process was representative o f al l interest s i n society . The y believe d tha t interes t grou p
competition i n the political proces s would operat e muc h lik e the mythi cal "invisibl e hand " o f th e marke t (i.e. , tha t th e grou p pursui t o f self interest would lead to the aggregate social welfare of society).
Pluralists favore d a process-oriente d perspectiv e tha t supporte d th e
views o f th e lega l proces s school. 62 Becaus e pluralist s viewe d interes t
group competitio n a s essentia l fo r a well-ordered , moder n democrati c
process, pluralis m becam e a centra l concep t fo r establishin g th e legiti macy an d authorit y o f lawmakin g process . Fo r thi s reason , process oriented lega l pluralist s believe d tha t politica l lawmakin g (i.e. , legisla -
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Law and Economics 9
7
tion) wa s th e ultimat e authorit y o f lawmakin g o f al l othe r institutions ,
particularly th e courts. 63 Th e lega l proces s schoo l accepte d th e pluralis t
concept o f politics an d advance d a new methodology o f lega l analysis —
a methodolog y tha t promise d a n objectiv e process fo r resolvin g subjec tive question s o f public policy. Throug h belie f i n th e possibilit y o f con sensus an d agreement , interes t grou p competitio n wa s believe d capabl e
of resolvin g substantive disagreement s abou t politica l values . During th e
1950s an d 1960s , lega l theorist s believe d tha t th e ethica l relativis m o f
legal realis m coul d b e tame d b y a democrati c proces s structure d b y
interest grou p compromise s an d politica l action .
Public choic e theorist s rejecte d th e optimisti c visio n o f th e politica l
process o n variou s grounds . Raisin g th e dilemm a presente d b y Arrow' s
Impossibility Theorem , thes e theorist s argue d tha t majorit y rul e ma y b e
unable t o resolv e th e choice s amon g competin g politica l alternatives .
Drawing fro m Mancu r Olson' s wor k o n collectiv e choice, 64 publi c
choice theorist s argue d tha t "free rider" problem s (th e tendenc y o f on e
person t o freel y tak e th e benefi t create d b y the effort s o f others ) preven t
interest groups fro m representin g large and divers e groups. Public choic e
theorists thu s predicte d tha t politica l activit y i s likel y t o b e dominate d
by smal l interes t group s seekin g t o advanc e thei r ow n specia l interests ,
frequently a t the expense of th e public good .
Public choice theory raise d seriou s question s abou t th e efficac y o f th e
"proceduralism" o f lega l proces s scholar s who , followin g th e proces s
tradition o f Har t an d Sacks , uncriticall y assum e tha t judge s shoul d
exercise judicia l restrain t an d leav e "politica l issues " an d substantiv e
questions o f valu e t o th e legislatur e fo r resolution . A t th e sam e time ,
public choice theorists questioned th e efficacy o f first-generation scholar s
who assumed , a s thei r process-oriente d intellectua l father s had , tha t th e
theory o f adjudicatio n coul d b e objectiv e an d autonomous , "free " fro m
political distortions. Second-generation la w an d economic s public choic e
theorists thu s distanced themselve s fro m th e first generation .
Although second-generatio n scholarshi p accepte d th e methodologica l
approaches o f th e foundin g member s o f th e Chicag o School , tensio n
erupted betwee n th e first an d secon d generations . Thi s tensio n wa s
exhibited b y differences i n ton e a s wel l a s anxietie s abou t th e distinc t
conservative agend a o f th e Chicag o Schoo l o f economic s reflecte d i n th e
work o f conservativ e economist s suc h a s Milton Friedman , Gar y Becker ,
and Georg e Stigler . Th e secon d generatio n i s mor e modes t i n it s claim s
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9 8 Law
and Economics
about th e rol e o f economic s i n law , an d les s acceptin g o f th e Chicag o
School's conservativ e orientatio n towar d property-right s analysis . Onl y
a smal l numbe r o f methodologica l issue s appeare d t o b e settled betwee n
the tw o generations , suc h a s th e idea s tha t microeconomi c theor y i s a
basis fo r analyzin g law , deman d curve s ar e downwar d sloping , an d tha t
cost-benefit analysi s an d th e economi c definitio n o f cos t (opportunit y
cost) ar e essential fo r intelligen t policymaking . Second-generatio n schol ars retreate d fro m th e orthodox y o f "efficient " analysi s fo r nearl y ever y
legal question . Instead , the y admi t tha t "[m]os t la w an d economic s
questions ar e still open an d likel y to remai n s o for a long time." 65
Second-generation la w an d economic s scholarshi p i s also mor e eclec tic tha n th e earl y la w an d economic s scholarship. 66 Th e secon d genera tion ha s develope d a ne w institutiona l economic s tha t promise s a mor e
realistic, ye t inchoate , understandin g o f th e bureaucratic , institutional ,
and relationa l context s o f moder n transactions , lega l relations , law ,
and adjudication . On e recen t avenu e o f inquir y involve s a n attemp t t o
construct a ne w versio n o f economi c analysi s tha t goe s beyon d individ ual self-interes t an d support s cooperation. 67 Ne w theorie s o f relationa l
contract an d strategi c behavio r wer e offere d t o modif y o r replac e th e
static model s an d assumption s o f neoclassica l microeconomi c theor y
used b y Chicago Schoo l practitioners .
Public choic e theorist s offe r a n interes t grou p theor y fo r understand ing th e economic s o f statute s an d th e behavio r o f legislators. 68 Publi c
choice theorist s attemp t t o explai n ho w politica l an d bureaucrati c orga nizations make collective choices under models which assum e that political actors , lik e economi c actors , ar e self-intereste d maximizers. 69 Othe r
law an d economic s scholar s see k to resuscitat e a liberal, reformist visio n
of la w b y usin g economi c analysi s t o defen d variou s libera l conception s
of la w an d adjudication. 70 La w an d economic s ha s grow n t o encompas s
a hos t o f divergen t theoretica l perspective s an d normativ e conception s
about la w an d adjudication .
Even thoug h th e la w an d economic s movemen t i s divers e i n theor y
and perspective , ther e ar e som e commo n premise s tha t al l la w an d
economics scholar s accept . Lewi s Kornhauser , a second-generatio n la w
and economic s scholar , recentl y identifie d fou r premise s tha t h e claim s
describe th e corpu s o f la w an d economic s scholarship : (i ) a behavioral
claim, whic h assert s tha t economic s ca n provid e a usefu l theor y fo r
predicting behavio r unde r rule s o f law ; (2 ) a normative claim, whic h
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Law and Economics 9
9
asserts tha t th e la w ough t t o b e efficient ; (3 ) a factua l o r positive claim ,
which argue s tha t th e commo n la w i s in fac t efficient ; an d (4 ) a genetic
claim, whic h assert s tha t th e commo n la w select s efficien t rules , eve n
though no t ever y rul e ma y b e efficient. 71 Accordin g t o Kornhauser ,
"Every articl e i n la w an d economic s adheres , explicitl y o r implicitly , t o
one or mor e of [these] logically distinc t [claims]." 72
Only th e scholarshi p o f th e Chicag o Schoo l foundin g fathers , wh o
adopted th e law and efficiency hypothesis , embrace d al l fou r claim s o f
law an d economic s that Kornhause r identified . Thes e law an d economic s
practitioners accepte d th e behaviora l clai m tha t individual s respon d ra tionally t o incentive s an d tha t lega l rule s affec t behavior . Becaus e the y
assert tha t th e normative clai m identifie s efficien t behavio r an d is , therefore, th e criterio n fo r choosin g amon g rules , the y us e th e behavioral
claim o f economic s t o identif y lega l rule s tha t induc e efficien t behavior .
These scholars view judging a s an exercise in cost-benefit analysis , transaction cos t reduction , ris k assessment , an d wealt h maximization . Suc h
an economic perspective places the judge in the role of "socia l engineer, "
with th e single-minde d purpos e o f shapin g right s an d liabilitie s i n th e
name of efficien t resourc e allocation .
The positive an d genetic claim s identifie d b y Kornhause r describ e th e
position o f Chicag o Schoo l practitioners wh o view the common la w a s a
system o f rule s havin g a factua l o r natura l (genetic ) tendenc y t o induc e
efficient behavio r unde r th e law. Their underlyin g legal perspective is the
product o f a worldview tha t pursue s trut h abou t la w withi n a paradig m
that evaluate s lega l rule s unde r th e singl e universa l standar d o f wealt h
maximization. Fo r thes e practitioners, th e la w an d efficienc y hypothesi s
became a comprehensiv e organizationa l principl e fo r understandin g th e
nature o f lega l relations .
Second-generation la w an d economic s scholar s eithe r rejec t th e nor mative an d geneti c efficienc y claim s identifie d b y Kornhause r o r remai n
agnostic abou t whethe r thes e claim s ar e persuasive . Whil e recen t la w
and economic s scholar s adop t a positive clai m regardin g economi c anal ysis of law, it is different fro m th e one identified b y Kornhauser. Second generation la w an d economic s scholar s merel y clai m tha t " a give n rul e
can b e fruitfull y examine d usin g microeconomi c theory," 73 o r empha size that th e tools of microeconomi c theor y provid e "explanation s o f th e
law an d prediction s o f th e consequence s o f lega l rules." 74 Th e positiv e
claim o f la w an d economic s scholar s i s no w mor e modest . I t simpl y
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ioo Law
and Economics
assumes tha t la w ca n b e understoo d a s a rationa l syste m o f behavio r
based o n economi c interest . I n rejectin g th e ide a tha t efficiency i s th e
foundation o f law , thes e scholar s embrace d a mor e "common-sense "
working hypothesis , whic h claim s onl y tha t economi c efficienc y i s th e
"best approac h fo r th e American lega l system t o follow." 75
Thus, th e onl y clai m identifie d b y Kornhause r tha t characterize s th e
dominant methodolog y o f th e movemen t toda y i s the behaviora l claim .
This clai m commit s all la w an d economic s scholar s t o th e vie w tha t
rational, self-intereste d calculatio n o f individua l cos t an d benefi t i s th e
best ke y fo r understandin g an d evaluatin g th e natur e o f lega l relation s
and variou s rul e systems . Practitioner s o f th e movemen t believ e tha t
rules o f la w ar e lik e prices , an d tha t lega l actor s ar e lik e perfectl y
rational consumers .
While th e secon d generatio n distance d itsel f fro m th e conservativ e
influence o f th e Chicag o School , th e vocabular y an d methodolog y o f
their practic e ensure d tha t thes e scholar s remaine d committe d t o th e
conservative agend a bequeathe d b y Coase . I f ther e i s a n ideologica l til t
to th e la w an d economic s movement , i t i s n o longe r th e resul t o f th e
conservative perspective of the law and efficienc y hypothesis . Rather, th e
ideology o f thi s movemen t i s best explaine d toda y i n terms o f a particu lar worldview , whic h assume s tha t th e rationalit y an d economi c self interests o f lega l subject s ar e th e bes t tool s fo r understandin g la w an d
adjudication. Th e behaviora l an d positiv e claim s o f second-generatio n
scholars hol d tha t la w an d th e large r socia l worl d ca n b e viewe d a s a
system o f rationa l behavior , sometime s influence d b y impulse s towar d
efficiency, othe r time s not , bu t alway s a produc t o f th e "pragmatic "
reason o f th e analyzin g subject . Th e phras e "la w i s pragmatic" charac terizes th e worldvie w o f second-generatio n scholar s wh o accep t th e
possibility o f developin g a pragmati c subjectivit y fo r "muddlin g
through" th e hard problem s i n the law .
Second-generation la w an d economic s practitioner s maintai n a prag matic perspective abou t th e world tha t accept s the utility o f abstraction,
universalism, an d scientific rationality. Thei r pragmati c an d economi c
approach assumes , however, tha t lega l analysis mus t proceed i n the wa y
that applied scienc e proceeds—the examinatio n o f comple x phenomen a
must be explained o n the basis of hypothesis testing. This quasi-scientifi c
perspective presume s tha t lawyer s ca n discove r a relativel y stabl e basi s
for justifyin g lega l results b y universalizing lega l propositions abstracte d
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Law and Economics i
oi
from hypothetica l example s structure d b y behavioral assumption s abou t
economic motivation s o f homogeneou s individuals . Second-generatio n
law scholar s nevertheles s remai n "open-minded , forward-looking , re spectful o f fact , willin g to experiment, disrespectfu l o f sacre d cows , antimetaphysical." 76
Post-Chicago Law
and Economics
By the 1990s , the secon d generatio n shifte d awa y fro m th e deterministi c
efficiency analysi s o f th e first generatio n t o a mor e indeterminate , prag matic intellectua l stance . Th e secon d generatio n move d awa y fro m
strong "scientific " claim s o f economi c formalism . Instead , the y em braced th e pragmati c vie w tha t la w an d economic s mus t b e approache d
from a mor e common-sense , instrumenta l perspectiv e focusin g o n hu man goal s an d aspirations. 77 Hence , whil e la w an d economic s analyst s
continued t o believ e tha t efficienc y i s th e tes t fo r evaluatin g goo d an d
bad law , the y understoo d lega l efficienc y a s a practica l concep t tha t i s
instrumental, adoptive , and functional .
Today, la w an d economic s scholar s hav e move d beyon d th e "ratio nal-actor" mode l an d th e efficienc y analysi s o f earl y la w an d economic s
analysis. They develo p les s ambitiou s bu t mor e complicate d approache s
to the economic analysi s of law . Some contemporary la w and economic s
scholars argu e tha t th e economi c approac h mus t b e supplemente d wit h
insights fro m "moder n psycholog y an d sociology," 78 whil e other s see k
to qualify economi c analysis of th e law b y highlighting the limitations o f
its analysis. 79 Ne w institutiona l analyse s develope d fro m gam e theory 80
have bee n create d t o explai n bureaucrati c behavior . Attempt s hav e bee n
made t o mak e economi c analysi s o f la w mor e realisti c b y explicitl y
incorporating a more realistic understanding o f the interrelation betwee n
substance an d procedure , an d th e stud y o f institution s ha s cause d eco nomically oriente d lega l scholars to reject th e economic formalism o f th e
first generation. 81 Th e fac t tha t s o man y practitioner s hav e "move d
beyond" th e origina l analysi s o f th e Chicag o Schoo l i s evidenc e o f a n
emerging second-generatio n "Post-Chicago la w an d economics." 82
Advocates o f th e post-Chicag o economi c approac h t o lega l studie s
recognize tha t economi c analysi s i s on e o f man y differen t mode s o f
analysis relevan t t o th e tas k o f developin g a realisti c concep t o f la w i n
jurisprudence. Thi s socio-economi c vie w seem s t o b e catchin g on . Eve n
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102 Law
and Economics
the foundin g fathe r o f th e la w an d economic s movement , Richar d
Posner, has softened hi s economic views about law and adjudicatio n an d
adopted a more philosophical perspective . Posner's recent defense o f la w
and economic s i n hi s book , T H E PROBLEM S O F JURISPRUDENCE , fo r
example, represents th e post-Chicago shif t fro m th e jurisprudential vie w
found i n hi s earlier work , ECONOMI C ANALYSI S O F LAW. 8 3 Posner , wh o
once argue d tha t la w i s bes t understoo d throug h th e objectiv e len s o f
efficiency analysis , no w argue s fo r a for m o f lega l pragmatis m tha t
accepts th e ide a tha t "larg e change s i n la w ofte n com e abou t a s a resul t
of a non-rational process." 84
In ECONOMI C ANALYSI S O F LAW , Posne r wa s confiden t abou t th e
possibility tha t judge s coul d discer n economicall y correc t answer s fo r
legal problem s b y consultin g a handfu l o f simpl e economi c concepts . I n
PROBLEMS O F JURISPRUDENCE , Posne r i s less confident an d mor e skepti cal abou t th e possibilit y o f righ t answer s i n law . PROBLEM S O F JURIS PRUDENCE i s thu s offere d a s a "Pragmatis t Manifesto " encouragin g
judges t o rel y o n thei r intuitio n an d commo n sens e i n decidin g lega l
problems. Posne r acknowledge s tha t ther e "i s n o suc h thin g a s 'lega l
reasoning,' " distinc t fro m "th e us e o f simpl e logi c an d th e variou s
methods o f practica l reasonin g tha t everyda y thinker s use." 8 5 H e con cluded tha t th e "method s o f practica l reaso n ar e inarticulate, " becaus e
such reaso n relie s o n "prejudgmen t tha t canno t b e empiricall y estab lished." 86 Posne r thu s argue s fo r a flexibl e jurisprudence—on e tha t
favors th e rational outloo k o f scientific inquir y but rejects th e metaphysi cal search fo r unit y an d order. 87
According t o th e ne w pragmati c Posner , lega l objectivit y merel y de mands tha t lega l decisio n maker s exercis e "reasonableness " i n th e reso lution o f particula r cases. 88 Chang e i n th e la w i s see n "a s a resul t o f a
non-rational proces s aki n t o conversion, " an d tha t "la w i s a n activit y
rather tha n a concep t o r a grou p o f concepts." 89 Economi c analysi s i s
still relevan t t o Posner' s jurisprudence , bu t onl y a s a too l fo r proble m
solving. In Posner's curren t pragmatic stance, "The essence of interpreta tive decisio n makin g i s considering th e consequence s o f alternativ e deci sions. Ther e ar e n o 'logically ' correc t interpretations ; interpretatio n i s
not a logical process." 90
Posner thu s reject s th e ide a o f autonomou s law . H e assert s tha t ou r
legal syste m i s th e produc t o f differen t enterprises, 91 an d tha t th e pri mary goa l o f la w i s th e functiona l goa l o f reachin g soun d effects. 92 H e
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Law and Economics 10
3
believes tha t th e tru e tes t o f ever y lega l analysi s i s whethe r i t "works "
instrumentally t o maximiz e huma n goal s an d aspirations. 93 Th e incur sions o f economic s i n la w ar e justifie d o n a practica l level : economic s
wins ove r othe r approache s becaus e i t "get s th e jo b done " bette r tha n
any othe r method. 94 Withou t a doubt, Posner' s PROBLEM S O F JURISPRU DENCE i s mor e eclecti c theoreticall y an d fa r mor e acceptin g o f th e con tingent natur e o f la w an d adjudicatio n tha n hi s earlie r work , T H E ECO NOMIC ANALYSI S O F LAW .
The shif t i n ton e an d temperamen t i n Posner' s curren t jurisprudenc e
may b e th e resul t o f a consciou s strateg y develope d t o insulat e his
movement an d his plac e i n histor y fro m th e criticis m o f th e academi c
Left an d Righ t durin g muc h o f th e 1980s. 95 Perhap s Posner' s ultimat e
objective i s t o offe r pragmatis m a s a middl e groun d betwee n th e Right ,
which h e feels exaggerates the formalist natur e o f American law , and th e
Left, whic h h e feel s exaggerate s it s indeterminacy . O n th e othe r hand ,
Posner i s als o th e consummat e intellectua l wh o i s willing t o chang e hi s
position afte r reflection . I t i s mor e likel y tha t hi s thinkin g ha s bee n
affected b y broade r intellectua l shift s i n th e academy , whic h ar e cur rently precipitatin g a crisi s o f fait h ove r lega l modernism . Perhap s fo r
Posner, neopragmatis m i s th e bes t postmoder n alternativ e fo r dealin g
with th e "incredulity " o f th e scientific-lik e claim s o f earl y la w an d
economics scholarship .
Posner ha s emphasize d tha t hi s jurisprudence reject s th e possibility o f
developing a ne w metanarrativ e o r groundin g foundatio n fo r jurispru dence. 96 H e als o reject s th e ide a tha t la w i s a n autonomous , self-gener ating activit y an d instea d accept s th e sociall y constructe d natur e o f lega l
knowledge. An d ye t thi s i s ironic , becaus e Posner' s jurisprudenc e i s
now detache d fro m it s economi c foundations . Hi s jurisprudenc e i s bes t
explained toda y i n term s o f a particula r worldvie w tha t regard s eco nomic analysi s a s a for m o f practica l reason , whic h i s peculiarl y suite d
to a jurisprudence withou t foundations .
Contemporary la w an d economic s practitioners , lik e Posner , see m t o
be movin g awa y fro m stron g "scientific " claim s o f lega l determinacy .
Instead the y accep t th e pragmati c vie w tha t la w i s too indeterminat e t o
be rule d b y th e determinate , scientific-lik e analysi s o f economics . I t i s
true tha t contemporar y la w an d economic s analyst s continu e t o believ e
that economic s i s relevan t fo r lega l analysis , bu t the y no w approac h
economic analysi s o f la w fro m a mor e practical , functiona l perspective .
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104 Law
and Economics
Indeed, b y th e lat e 1980 s th e la w an d economic s movemen t shifte d
away fro m deterministi c analysi s t o a mor e indeterminate , pragmati c
approach define d i n part b y postmodern trend s i n the academy. 97
Unlike Chicago Schoo l law an d economic s scholar s who focuse d thei r
research unde r th e efficienc y thesis , post-Chicago scholar s loo k beyon d
efficiency norm s i n developing economi c predictions base d o n wha t the y
expect rational , self-intereste d lega l actor s t o d o whe n confronte d wit h
cooperative-choice situations. 98 Traditiona l economi c analysis , focusin g
on efficien t outcomes , i s sai d t o "blin d [la w an d economic s analysts ] t o
the way s i n whic h th e distributiv e an d productiv e dimension s o f lega l
and politica l constraint s ar e unite d i n rationa l cooperation." 99 Post Chicago la w an d economic s scholar s incorporat e int o thei r economi c
analysis o f th e la w " a normativ e componen t tha t ha s traditionall y bee n
associated wit h socia l contrac t theor y an d whic h i s champione d toda y
by philosophers." 10° The ne w powe r tal k o f economic s thu s encourage s
lawyers an d judge s t o mak e a shif t i n thei r analytica l perspectiv e t o a
new normative perspective of rationality tha t recharacterize s legall y relevant factor s suc h a s cost s an d benefits , an d frame s normativ e issue s
previously misse d b y the narrow contex t o f microeconomi c theory . Thi s
shift i n analytica l perspectiv e allow s post-Chicag o theorist s t o restruc ture the economic analysi s o f law in fundamental ne w ways.
First, post-Chicago theorist s attemp t t o correc t the "efficiency " impli cations o f Chicag o Schoo l la w an d economic s b y refocusin g economi c
analysis o f la w o n distributiv e consequences. 101 Thus , post-Chicag o
analysis acknowledge s tha t whil e "[i] t ma y hav e appeare d usefu l a t on e
time t o distinguis h th e efficienc y o f lega l rule s fro m thei r distributiv e
dimension," i t "wa s neve r analyticall y possible , no r i s i t no w norma tively defensibl e t o d o so." 1 0 2 Post-Chicag o theorist s als o acknowledg e
that privat e negotiation s frequentl y involv e nontrivia l transactio n cost s
that lea d t o marke t failure . Thes e practitioner s no w accep t th e notio n
that "marke t failur e . . . calls fo r lega l interventio n whic h i s intended t o
replicate th e outcom e o f a hypothetica l costles s market." 103 In givin g
more emphasi s t o th e proble m o f marke t failure , post-Chicag o prac titioners argu e that a "mor e sophisticate d understanding " o f transactio n
costs i s needed. 104 Hence , Jule s L . Colema n argue d tha t "transactio n
costs ar e a black bo x tha t need s to b e filled in." 1 0 5 T o bette r understan d
the natur e o f transactio n costs , Colema n argue d tha t decisio n maker s
should follo w a ne w la w an d economic s perspective . Post-Chicag o ana -
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Law and Economics 10
5
lysts consequentl y argu e i n favo r o f a mor e sophisticate d an d comple x
understanding of transaction costs. 106
Post-Chicago la w an d economics als o offers a new approac h t o lega l
scholarship. It s follower s believ e tha t lega l scholarshi p shoul d giv e
greater consideration t o formulating an d testing more realistic and complicated theorie s abou t socia l life . Th e underlyin g approac h i s tha t la w
can be studied and understood pragmatically. La w and economics scholars agre e tha t traditiona l lega l scholarshi p i s flawe d b y ambiguit y i n
purpose an d method , bu t nonetheles s argu e tha t th e curren t doctrina l
justifications o f th e la w ca n b e grounded b y economi c insights . Whil e
only the Chicag o Schoo l advocate s tha t the principle o f wealt h maximi zation ca n ground lega l analysis , al l la w an d economics scholar s believ e
that judge s ca n pragmatically implemen t economi c analyse s t o improv e
law and society.
The economic analysi s of la w encourage s th e legal profession t o loo k
beyond the law to discover a new medium for resolving contested polic y
views, whic h i n tur n necessitate s a ne w understandin g o f law' s legiti macy. Fo r economic s t o becom e th e ne w sourc e o f law' s authorit y an d
autonomy, i t wa s necessar y tha t economic s maste r ever y are a i n whic h
law operates—includin g lega l reasoning . Th e secon d generatio n o f la w
and economic s scholar s realize d tha t economi c analysi s canno t delive r
on thi s promise. A s Posner now concedes , economic s i s not th e "reaso n
behind the reason of the law."
Hence, law and economics scholar s continue to believe that economic
analysis i s instrumental , adaptive , an d functional . Th e jurisprudenc e o f
law an d economics no w associate s itsel f wit h a version of lega l pragmatism that clings to the belief i n a flexible, intuitive understanding of law .
However, it remains committed to the belief that practical reason can do
what economi c analysi s ha s no t bee n capabl e o f doing—tha t is , locat e
the authorit y an d autonom y o f law . Th e la w an d economic s movemen t
has thus shifted away from deterministic scientific-like analysi s to a more
indeterminate, ambivalen t stanc e define d i n par t b y postmoder n trend s
in the academy.
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