Can There Be a Behavioral Law and Economics?

Article excerpt


The emergence of the modern law and economics analysis generally is dated to the early 1960s with the publication of seminal work by Ronald Coase1 and subsequently by Guido Calabresi and Douglas Melamed.2 These articles laid the foundation for the relation between legal rules, wealth maximization, and transaction costs, which provided the pivotal application of economic analysis to legal problems.3 However, the current sweep of law and economics would have been inconceivable without Gary Becker's insight into the application of neoclassical comparisons of marginal utility to the stuff of everyday life.4 Becker's analysis of routine decision making in terms of the likely returns from marginal choices allowed for the expansion of law and economic analyses into virtually every area of law. This approach is the keystone for Richard Posner's introduction of the law and economics methodology:

[E]conomics is the science of rational choice in a world-our world-in which resources are limited in relation to human wants. The task of economics, so defined, is to explore the implications of assuming that man is a rational maximizer of his ends in life, his satisfactions-what we shall call his "self-interest.' Rational maximization should not be confused with conscious calculation. Economics is not a theory about consciousness. Behavior is rational when it conforms to the model of rational choice, whatever the state of mind of the chooser.5

Clearly, the conception of rational utility calculations is key to this law and economics approach. But this conception is impossible without further simplifying assumptions. The most apparent assumptions are that, first, behavior could be presumed rational only when it conformed to the model of utility maximization, and second, that departures from this model would be random and would therefore not affect the overall power of the economic analysis. The combined effect of these initial assumptions in turn allows law and economics to operationalize its insights. Since virtually all law and economics scholarship exists at the theoretical plane, turning on formal models rather than observed behavior, the presumption of behavior conforming (in the aggregate) to the economic predictions was an indispensable move. To the extent that this economic model tried to understand individual patterns of thought, it relied on a highly reductionist view of the human psyche:

[T]he economic approach does not assume that decision units are necessarily conscious of their own efforts to maximize or can verbalize or otherwise describe in an informative way reasons for the systematic patterns in their behavior. Thus it is consistent with the emphasis on the subconscious in modern psychology.6

Such attribution of microeconomic strategies to the human subconscious is not only extremely suspect; it serves to highlight the reductionist assumptions necessary for translating this first generation of applied economic insights into models of individual behavior. This reductionism invited a second-generation inquiry into the extent to which the law and economics methodology could survive outside the hermetically sealed environment of formal models. What if it were possible to relax the assumptions about human behavior and actually observe how individuals behave? What if in turn it were possible to use the resulting psychological insights to refine both legal analysis and legal rules to anticipate departures from presumed rational responses? The result could be, to quote a truly felicitous phrase, "economics with a higher 'R^sup 2^"7 Or, put more aggressively, "The future of economic analysis of law lies in new and better understandings of decision and choice."8

While I share the enthusiasm for a richer understanding of the behavioral dynamics of market actors, I wish to issue some cautions prior to the declaration of victory over more established economic analyses of the law. …