The Rise of Law and Economics

An Intellectual History

George L. Priest

• Editorial: Routledge
• Año: 2020
• ISBN:
  9781000701173
• Edición: 1
• Categoría: Law
• Categoría: Legal History

This is a history—though, intentionally, a brief history—of the rise of law and economics as a field of thought in the U.S. college and law school academy, though the field has expanded to Europe and South America and will expand further as other legal systems develop.

This book explains the origins of the field and the sources of its growth during its formative period. It describes the intellectual roots of the field, and the field's relationship to the understanding of the role of the legal system in directing the functioning of the economy. It describes the effect of the Great Depression and the expansion of governmental power on advancing the functional approach. The book then addresses the work of Aaron Director, during the late 1950s, on focusing economic analysis as a means of understanding the effects of the legal and regulatory system on the allocation of resources in the society. Then it turns to the subsequent intellectual founders of the field—Ronald Coase, Guido Calabresi, and Richard Posner—and attempts to explain the significance of their work. It also discusses the efforts of Robert Bork and Henry Manne toward the influence of law and economics on public policy. The book ends with the founding of the American Law and Economics Association in 1991.

This is an essential companion to law and economics texts for undergraduate law and economic students and, especially, a general supplement to first-year casebooks for law school students.

1

Introduction

Law and economics can be identified today as the dominant academic discipline in understanding the rule of law in the United States and, increasingly, around the world. It informs—directs—obvious economic areas such as antitrust, regulation, and corporate organization but also all other areas of law: torts, contracts, property, and environmental law, among many others.

Law and economics concepts also inform vast areas of governmental activity. Of course, there is inevitably an economic component to direct governmental regulation of industry, but the content of regulation has been dramatically changed as law and economics scholarship has progressed, both refining operative regulatory tools and eliminating vast areas of governmental regulation entirely. Moreover, the direct regulation of manufacturing in specific industries—such as of safety features in automobiles, of occupational health and safety in the workplace, of environmental regulation, and of health care, as examples—is now dominated by concepts deriving from law and economics.

This book attempts to explain the origins of the field and the sources of its growth during its formative period. It describes the intellectual origins of the field, and the field’s relationship to the understanding of the role of the legal system in directing the functioning of the economy. It discusses the history of the field from its earliest origins in the 1940s and 1950s (and earlier) to 1991, at the founding of the American Law and Economics Association.

There are many origins, though the most important of them, in terms of purely intellectual achievement and direction, derived from academic work completed or inspired by scholars at the University of Chicago Law School and at Yale Law School.

The successes of these purely academic endeavors followed the increasing adoption over the twentieth century of a functional approach to thinking about the role of law in a society. The shift in the conception of the role of the legal system as moving beyond merely a definition of rights—such as the right to own personal property and the right to freely enter contracts—to thinking about the legal system more functionally—what are and what should be the functional effects of legal rules regarding property and contracts—began at the end of the nineteenth century and has continued progressively since then.

At the end of the nineteenth century, the predominant view of the law was that it consisted of a set of constant, immutable rules, explicated in Harvard Law School’s Dean Christopher Langdell’s casebooks and, similarly, enforced by the Supreme Court to protect the right to own private property and an individual’s liberty of contract. The legal system had been employed—though sparingly—toward the regulation of some industries since the late nineteenth century—chiefly some railroads and some public utilities (Kahn 1970–71; McCraw 1984)—to achieve the functions of prohibiting price-fixing and maintaining competition, though the economic analysis in designing this regulation was quite crude. The functional conception of law, however, was accelerated by the Depression of the 1930s with the extraordinary disruption of the society that resulted. From that experience, a consensus emerged involving a greatly enhanced role of government generally, including a more aggressive conception of the possible role of legal rules and regulations, aimed toward enhancing the welfare of the society.

Given the acceptance of a functional view of the role of law, law and economics emerged as the most powerful and most defensible method for implementing that approach and so has affected both government policy and the work of the academy.

The greatest successes in the field of law and economics generated from Chicago: from the work of Aaron Director, who founded the Journal of Law & Economics; from the achievements, as his successor as Editor of that Journal, of Ronald H. Coase; from the work of Richard A. Posner, and from many others.

The work that Director and Coase encouraged and supported chiefly addressed issues of industrial organization, including antitrust law and regulation in the United States. As shall be shown, that work probably demonstrates the greatest direct influence of modern law and economics ideas on current law.

As part of his project studying regulation, Director asked Coase, who was not then at Chicago, but who had written earlier on British broadcasting, to study the U.S. Federal Communications Commission. In this study, Coase developed startling economic insights later, and most prominently, presented in his exceptional article “The Problem of Social Cost,” published in 1960, which revolutionized the analysis of the function of common-law rules by extending the importance of economic analysis far beyond antitrust and regulation to all of law. Coase showed that the assignment of liability of a legal rule will have no effect on the allocation of resources, given markets to overcome it, except for the existence of transaction costs which constrain market exchange.

This demonstration shocked the legal community, though it took some time because the Journal of Law & Economics was then not a central journal in the law school world. The standard view, in contrast, was that the law and legal rules or liability findings affected activity in the society: for example, a rule that made a party who had dammed or flooded a river liable for resulting damages to a downstream property owner would cause that activity to end. Coase’s point, from an economic standpoint, was that that simple conclusion was indeterminate, and depended on the relative value of the competing upstream and downstream resources and the magnitude of transaction costs, a matter never considered in the standard view. Coase’s paper constituted a revolution in legal analysis brought about by the application of economics.

Roughly a decade later, in the early 1970s, Richard A. Posner, ingeniously developed a theory that all common-law rules were efficient in the sense of optimizing the costs and benefits generated by the rules on social behavior. Posner’s radical idea, and the extraordinary support that he and his accomplished colleague William M. Landes provided to support that theory, purporting to show the efficiency of all common-law rules, sub-area by sub-area, equally shocked the legal academy. Because Posner’s application extended to all of law, it forced virtually all legal scholars to define themselves for or against this version of law and economics. Coase’s initial shock, though it took time for it to be understood, and Posner’s later work, brought law and economics to the forefront of legal academic debates.

The greatest success of the Yale approach was the work on accident law of my colleague Guido Calabresi. Calabresi, who preceded Posner, analyzed tort law from an economic perspective beginning in “Some Thoughts on Risk Distribution and the Law of Torts,” an important article published in 1961, essentially explaining tort law’s deterrent functions as well as arguing that the rules of the law had risk and wealth distributional effects, insisting upon the importance of these distributional effects to the analysis of otherwise purely deterrent issues (Calabresi 1961). Calabresi’s formulation, generalized in his important 1970 book The Costs of Accidents, definitively established the economic basis of the functional analysis of law. Posner, following Calabresi, adopted a similar economic framework, but differed by disclaiming any role for distributional concerns in his efficiency analysis.

In the early years, Calabresi and Posner debated the importance of wealth distributional concerns in thinking about the law. The combat between Calabresi and Posner energized attention to the field. But, after these initial works, Calabresi directed his research to higher levels of theory (writing many important books and papers on topics less related to law and economics); Posner’s work seemed empirical—most papers were based on exhaustive studies of all cases dealing with a particular subject—and the publication of many seemingly empirical papers by Posner and by Posner and Landes made the debate difficult for the Calabresians.

At the same time, and significantly contributing to the advance of the field, were important efforts by Henry Manne, who can be described as an evangelical in pursuit of the transcendence of law and economics. Manne himself was a considerable law and economics scholar, trained at Chicago (though he also had a Yale graduate law degree, which he seldom acknowledged). Manne developed the idea of the market for corporate control (now universally accepted) and raised telling theoretical criticisms of restrictions on corporate insider trading (which remain ahead of their time). These two ideas have become deeply significant to the understanding and legal control of corporate behavior.

Perhaps Manne’s greatest achievement, however, was his promotion of law and economics as a discipline: first, through organizing training sessions in economics for non-acquainted legal academics and some attorneys to learn about economic analysis, and organizing similar sessions for economists to learn about the law; second, through organizing an extraordinary series of conferences for federal judges to teach basic economic principles; and third, through organizing conferences that enlisted academics to discuss current major issues in law and economics.

As shall be explained, the advance of law and economics has transformed the way that legal issues are described in all areas of law and, as a consequence, how these issues are resolved. It has had its most important tangible success to date in the field of regulation and antitrust law. With respect to industry regulation, scholarship in law and economics can be said to have vastly improved the effects of regulatory methods but, also, to have generated the deregulation movement, in which many federal regulatory agencies have had their authority limited or were eliminated altogether. This scholarship has substantially slowed subsequent ambitions to extend regulation. In the field of antitrust law, since the mid-1970s, the U.S. Supreme Court has radically revised its approach to antitrust analysis, essentially adopting the Aaron Director Chicago School approach. This change in Supreme Court doctrine was importantly influenced by my late colleague Robert H. Bork, who had first served as a Research Associate under Aaron Director, though later, and importantly, as Solicitor General, and by Richard A. Posner, who had also learned from Director.

These various intellectual achievements all contributed toward the adoption of the functional approach to law, with economic analysis emerging as the primary instrument in explicating that functional approach. Because of its dominance as theory, its empirical dominance toward understanding the effects of law in comparison to any other approach, and, to a much lesser extent, to the belief of many of its practitioners that market decisions about the allocation of resources are superior to government decisions, law and economics has become the predominant intellectual approach both to understanding the content of the law and to the direction of future law, both in government and in the academy.

The rise of law and economics has been spectacular. Solely as an indication, in 19...