The application of economic analysis to the law is based on the proposition that economic efficiency is useful for examining legal rules and institutions. Although this is not an uncontroversial proposition, the continuing vitality of the field of law and economics suggests that it has at least some validity, as I hope this book exemplifies.
When we say that economic efficiency is "useful" for examining the law, we can mean one of two things. First, we can mean that efficiency is useful in explaining the actual structure of the law. This type of argument, which is a form of positive analysis, suggests that the law tends to evolve in the direction of greater efficiency, not necessarily as a result of the conscious choices of judges or other participants in the legal process, but by the accumulation of the decisions of rational agents acting in their own self-interest. Thus, positive claims about the tendency of the law toward efficiency closely resemble Invisible Hand-type arguments regarding the efficiency of markets. 1
The second sense in which efficiency is useful for examining the law is in suggesting how legal rules and institutions can be improved, or, more specifically, how they can be made more efficient. This type of normative analysis therefore views efficiency not as a theory for explaining how the law has evolved (or how it will evolve in the future), but rather as an ethical foundation for prescribing how it ought to be structured.
Although the positive and normative approaches to the economic analysis of the law can be quite distinct, much of the law and economics literature has elements of both. For example, the standard economic analysis of tort (or accident) law typically begins by describing the socially efficient outcome in a risky situation by deriving, as the solution to a maximization problem, the optimal allocation of liability (see chapter 2). This is purely normative analysis (given the social objective of minimizing expected costs). However, the analysis then goes on to suggest that several actual liability rules can duplicate this result -- a positive assertion. In examining the various areas of the common law in this book, I will attempt whenever possible to engage in this sort of combined posi-