Foundations of the Economic Approach to Law: Interdisciplinary Readers in Law
Foundations of the Economic Approach to Law: Interdisciplinary Readers in Law, edited by Avery Weiner Katz. New York, NY: Oxford University Press, 1998. Pp. 399. $55.00 (hardcover).
Foundations of the Economic Approach to Law: Interdisciplinary Readers in Law, is designed to serve as a textbook for law students studying economic analysis. As Katz explains in the book's preface, what is most unique about his textbook is what it is not. The editor's intent was not to survey economic analyses of the major areas of law like most major textbooks, but to focus on the foundations of economic analysis. To help students gain a clearer understanding of the "normative, descriptive, and interpretative positions the use of economics really commits them to," the editor organizes his book around basic methodological concepts. In particular, the editor seeks to focus on "economics as a way of thinking and on how economics compares and contrasts to more traditional methods of legal reasoning."
In Chapter 1, "Methodology of the Economic Approach," Katz introduces the basic methods and tools of the economic approach. While focusing on the question, "how does economics differ from other ways of thinking about social life and legal institutions?" the first chapter examines three aspects of economic methodology that differ from the traditional legal approach. The first reading, by Gary Becker, discusses the essential assumption of economics: the model of rational choice, which provides a descriptive theory of human behavior to explain past and future events. Second, the normative premise of the economic approach and related concepts are in outlined in separate readings by Jules Coleman and Thomas Schelling in Efficiency, Utility, and Wealth Maximization and Economic Reasoning and the Ethics of Policy, respectively. Third, selections by Mark Blaug and Milton Friedman focus on economics' central methodological distinction: the difference between normative and positive analysis.
Chapter 2 introduces two competing paradigms to the economic analysis of law: the model of cooperation and the model of market failure. The first readings in Chapter 2, by Guido Calabresi and Robert Cooter, follow the model of market failure, and argue that state intervention is necessary to promote an efficient allocation of resources. Ronald Coase then discusses the model of cooperation. Coase, the model's primary advocate, argues that governmental intervention as the presumptive resolution to market imperfections is a fallacy, and that alternate institutional arrangements should be considered. The concept of transaction costs, for which Coase won a Nobel Prize in 1991, is introduced in his article, The Nature of the Firm. Next, in The Problem of Social Cost, Coase introduces the rhetorical device now called the "Coase Theorem."
Following a more traditional pedagogical approach, Katz devotes Chapter 3 to a survey of the basic applications of the economic approach to law, drawing on the standard first-year legal curriculum. The goal of the chapter is to "train readers to recognize fundamental economic issues as they arise in legal contexts, and to compare functionally similar problems across doctrinal fields." Essays by Harold Demsetz and by Guido Calabresi and A. Douglas Melamed examine basic economic concepts of property rights. In the context of tort law, readings by Richard Posner and by Steven Shavell explore the model of market failure and tort liability.
Analogous issues are explored by Thomas Ulen in the area of contracts and the remedy for breach; by Gary Becker in the areas of criminal law and crime and punishment; and, by Richard Posner and A. Mitchell Polinsky on the design of legal procedures.
The succeeding four chapters introduce more advanced economic concepts that the editor believes are critical to understanding many legal institutions. Chapter 4, "Refining the Model I: Strategic Behavior," addresses the phenomenon of strategic behavior. The first reading, by Robert Cooter, The Cost of Coase, argues that "strategic behavior is the central issue in evaluating the efficiency of private ordering." Cooter joins with Stephen Marks and Robert Mnookin in the second reading to introduce their own model, applied in the context of civil settlement bargaining, that would require the negotiating parties to submit a single sealed demand simultaneously. This strategy "creates a potential for rational disagreement as the parties choose among relatively tough and relatively soft demands." The next two readings, by Arthur Leff and by David Rosenberg and Steven Shavell, show opposing perspectives on how strategic behavior can distort incentives and lead to inefficiency within a state-imposed system of civil liability. Chapter 4 concludes with two pieces that explore strategic behavior in the contexts of contract and property law. Katz argues that the rules of offer and acceptance "fundamentally determine the outcome and efficiency of private exchange, because they form the institutional background to all private transactions." Oliver Hart makes an analogous argument in the context of property law.
Chapter 5 continues to refine the book's earlier concepts by introducing the economic perspective on risk, uncertainty, and insurance. The chapter begins with a theoretical reading by Steven Shavell, The Allocation of Risk and the Theory of Insurance. Shavell discusses the concept of "moral hazard": the tradeoff between efficiency in risk-bearing and efficiency in precaution incentives. The next reading, by Jon Hanson and Kyle Logue, surveys the standard arguments for enterprise liability against business defendants. Because insurance affects expectation damages, Richard Posner and Andrew Rosenfield apply the economic theory of risk-bearing to the "impossibility and impracticability doctrines of contract law."
Another Article in Chapter 5, by Louis Kaplow, applies the idea of risk-bearing to the context of governmental takings. Kaplow argues, from an economic perspective, that risk resulting from governmental actions is no different from any other risk. Kaplow discusses the advantages of private insurance as an alternative to government compensation for transitional relief. Steven Shavell and A. Mitchell Polinsky join in the final reading of Chapter 5 to consider the consequences of risk aversion for the economics of punishment. The authors conclude that due to individual risk aversion, certain punishment is a more efficient method of imposing a legal standard than severe and infrequent punishment.
Chapter 6 examines the economics of information using both the model of market failure and the model of cooperation. The chapter's first piece, an excerpt by George Stigler, contends that information is an economic good and that many private institutions respond to the needs for its production and distribution. Next, George Akerlof applies the model of market failure to the used car market. Akerlof asserts that market outcomes will always be inefficient where buyers are less informed than sellers about the items being sold. Furthermore, the reluctance of buyers to purchase "lemons" can impede market exchange. The remaining three readings of this chapter apply these basic economic concepts of information to various topics in tort, contract, and procedure. William Bishop argues that the "contract doctrine of foreseeability . . . is best understood as responding to a "lemons" problem in the market for contract damages." Next, Sanford Grossman argues that warranty contracts can provide a mechanism to avoid market failures due to inadequate or imperfect information. Finally, Louis Kaplow examines the role of information in the judicial process, "focusing on its private value for litigants and its public value" for the entire legal system.
Chapter 7 introduces the "model of bounded rationality," which states that uncertainty and imperfect information serve as limits on the reasoning process itself. The first reading, by Herbert Simon, compares this idea to the "model of rational choice," and argues that the former is a "better and truer description of human decision-making." Amos Tversky and Daniel Kahneman join in the second reading to discuss the laboratory work done on the relationship between people's decision-making and the presentation of the information relevant to those decisions. The authors find that experimental subjects react differently and exhibit different degrees of risk aversion when choices are measured in terms of relative gains. The authors further discuss this result, and its impact on the economic concept of "opportunity cost." The final three readings of Chapter 7 provide specific applications of the model of bounded rationality to legal rules and institutions. The first selection, by Alan Schwartz and Louis Wilde, examines consumer behavior and criticizes government intervention in markets for complex goods and for secured credit. In the next reading, Thomas Jackson applies a similar approach to the field of bankruptcy, and comes to a rather different conclusion regarding the advantages of government intervention. Finally, Roger Noll and James Krier discuss the "positive and normative implications of bounded rationality for public regulatory policy in the areas of environmental protection, occupational safety, and public health."
Chapter 8 provides six readings that survey the critiques of the economic analysis of law. The first reading, by Ronald Dworkin, introduces the "liberal critique": the objection that economics does not adequately account for individual persons or their rights. Duncan Kennedy provides a "paternalistic critique" of economics, and argues that what people choose for themselves in voluntary exchange need not correspond to their objective interests. Kennedy maintains that because people are often mistaken about what is good for them, paternalism offers a more straightforward justification for public policy. The third reading, by Mark Kelman, offers the "radical critique," which asserts that law and economics is a "deceptive apology for the status quo in that it purports to offer a neutral mediating institution to resolve conflict among competing social interests where no such institution is possible." According to Kelman, legal conflicts are best resolved in the spheres of politics and morality, not economics. Next, Robert Ellickson's study of rancher-farmer disputes introduces the "sociological critique," which suggests that social interactions initially shape people's preferences, and these preferences do not react to legal rules according to economic models. Ellickson argues that people often attach more importance to community than to economic efficiency. Closely related to this idea is the "communitarian critique," which holds that because economics assumes individual wants and preferences and ignores the extent to which they are socially determined, it underestimates the ability of legal institutions to create a better society. Steven Kelman develops this critique within the context of environmental policy. The final reading in this section, by Arthur Leff, presents the "Legal Realist critique," which states that although economic models are useful to legal analysis, social reality is too complex for a purely economic approach. Leff maintains that attempting to force legal discussions into an economic model will distort and impair its conclusions and believes lawyers should use a more eclectic approach.
The final chapter applies the economic approach to the area of family law. The editor concludes the book with this chapter to provide the reader with an occasion to review the ideas of the preceding chapters and explore the scope of the economic approach within a new policy area on the frontier of law and economics. The first reading, by Gary Becker and Kevin Murphy, presents some basic ideas about economics and the family, and the consequence of government regulation in this area. Elisabeth Landes and Richard Posner join in their controversial article to analyze adoption as a market for children. The authors conclude that deregulation of the adoption market would improve the welfare of both parents and children. The third and final reading of the book comes from Michael Trebilcock and Rosemin Keshvani, which takes the idea of freedom to contract and analyzes its merits in the area of separation agreements and divorce settlements. The authors argue that economic advantages of private settlements are generally desirable, but a variety of contractual and market failures including externalities, imperfect information, and strategic behavior justify public oversight of any agreements. These final two readings, in the editor's words, nicely recapitulate "the tension between the paradigms of market failure and cooperation that has served as an organizing theme for this book."…
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Publication information: Article title: Foundations of the Economic Approach to Law: Interdisciplinary Readers in Law. Contributors: Not available. Journal title: The George Washington Journal of International Law and Economics. Volume: 31. Issue: 3 Publication date: January 1, 1997. Page number: 506+. © George Washington University, National Law Center 1996/1997. Provided by ProQuest LLC. All Rights Reserved.
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