With a new project entitled Law and Economics: Contemporary Approaches, we hope to liberate casebook examples of economic analysis of law from their current cramped confines. While law and economics associations increasingly feature empirical work in their annual conferences, casebooks in property, torts, contracts, and other core legal subjects all too often feature simple models of economic activity developed decades ago. While new ways of thinking about finance, health care, and privacy have developed rapidly in the past few decades (and particularly after the global financial crisis of 2008), casebooks all too often rely on simple models of market-driven supply and demand, out of touch with current economic realities.
This forthcoming casebook will address the shortcomings of the vision of law and economics familiar in dominant instructional materials, which took root in legal education in the 1970s. In 1995, Yale Law School Dean Anthony Kronman noted that law and economics was the “single most influential jurisprudential school in this country.” In the decades since, it has remained not only dominant, but also especially powerful in its influence on the teaching of private law topics. For nearly a half century, law students have been taught that narrow and abstract modeling is the hallmark of rigorous economic analysis of legal scenarios.
The law and economics so influential in law school casebooks is particularly powerful because it so often reduces the search for the optimal legal rule to a quest for efficiency. The concept of efficiency is, by and large, narrow: wealth maximization. As leading proponent Richard Posner explained several decades ago, wealth maximization “refers to weighting preferences for the things that people want, either by willingness to pay for a thing, if you do not own it, or by unwillingness to part with it voluntarily, if you do own it.” From this ground, making law “efficient” means taking most existing legal and economic privileges, constraints, and inequalities as given, and focusing law on increasing wealth regardless of who gets it, how they get it, or what they do with it. More recent versions of the efficiency goal often use the term “economic welfare” instead of “wealth” to represent the individualized gain that law should maximize, but that ideal remains similarly narrow and misleading. The persistent message is that law can and should be guided by an economic goal of maximizing an abstract aggregate “pie,” closing off scrutiny of the quality, content, and distribution of that pie. If law makes a presumed sum of existing individual preferences bigger, it can be “efficient,” without analysis of whether that maximized “pie” is actually toxic or temporary or totally controlled by the top one-tenth of one percent of wealth holders.
In a 2014 essay, Harvard Law student Ted Hamilton reflected that the “most repeated word in my first year curriculum was not justice, or liberty, or order. It was efficiency.” As Hamilton explains, this term continues to reduce law to the goal of maximizing economic gain without evaluating that gain, so that law students are taught that efficiency means wealth maximization, and students learn to treat legal questions as objective problems of counting divorced from complex social, moral, and political analysis. Some empirical research confirms that this emphasis on efficiency can affect students’ views.
This understanding of economics in law is partial, in two ways. It is incomplete, largely ignoring new economic issues and theory, such as the excellent work done by Institute for New Economic Thinking (INET) fellows. And it is often biased, privileging the perspectives of the most powerful actors in the economy by presenting legal rules favoring these interests as uncontestable economic truth.
Law and Economics: Contemporary Approaches will address the shortcomings of law and economics by examining its fundamental theories, methods, and failures. In chapters on specific legal topics, we use examples of current issues in judicial decisions, statutes, regulations, or policy debates as the basis for showing the gaps in conventional economic analysis and the potential contributions of more complete and clear thinking. We will make a more robust economic analysis accessible to non-specialists by showing how economic analysis of law inevitably depends on and draws from other disciplines, and relies on assumptions about facts and values that are not the subject of distinctively economic expertise.
The topics covered will include health law, international trade, labor law, minimum wage policy, civil rights, unemployment policy, securities laws, and financial regulation. The chapters offer new understandings of the assumptions, contingencies, and omissions that complicate legal applications of standard economic principles like supply and demand, comparative advantage in trade policy, externalities, or the distinction between market and state.
To move beyond existing misconceptions and oversimplifications, our casebook chapters draw on methodologically diverse approaches to economics, integrating the best of historical, anthropological, and sociological approaches with a new emphasis on macroeconomics. This approach aims to correct the methodological individualism and lack of context characteristic of traditional law and economics. Legal experts’ narrow focus on microeconomics contributed to the recent financial crisis by reinforcing faith in the capacity of markets to reach optimal outcomes without strong regulatory oversight. Such misplaced faith highlights the need for a new economic analysis of law that is responsive to theories of macroeconomic conditions and financial instability.
In addition, these new approaches to law and economics will include more diverse and sophisticated understandings of law, including legal realism’s understanding that economic conditions shape how law is implemented and enforced. As Columbia Law Professor Katharina Pistor’s recent scholarship on law and finance adeptly demonstrates, law and markets are co-constitutive. Just as law depends on economics, economics cannot provide a simple and unidirectional expertise in “market forces” to legal scholars and policymakers because these economic forces are at least in part a matter of law. If preferences are endogenous, and dependent upon legal rights, then the criterion of allocative efficiency cannot determine a uniquely optimal set of legal rules. Additional normative criteria must be employed. Similarly, insights from behavioral economics have revealed the ways in which so-called “social preferences” may be crowded out by legal incentives. If this is the case, then the law cannot merely and simply respond to a pre-existing homo economicus; it may, additionally, be responsible for shaping it.