(R)evolution in Law & Economics

book-calabresiIt is a real pleasure to read Guido Calabresi’s The Future of Law and Economics almost 20 years after taking his torts class. Calabresi always struck me as a warm and inspiring presence at Yale. He’s attained eminence as a scholar, teacher, and public servant. There is much to learn from and celebrate in his work. I’ll start with his latest book’s major contributions, and then go on to raise some questions about just what future(s) might be in store for law & economics.

Bentham’s Shadow

Jeremy Bentham casts a long shadow over the legal academy. As Fred Schauer helpfully recounts, Bentham was extraordinarily suspicious of the complexity of law, and wanted it “to be understood by ordinary people without the intervention of lawyers and the interpretation of judges.” Bentham’s utilitarian legacy also stalks the profession of law. Following the lead of cost-benefit analysts, administrators may decide that legal regularity should shrink in importance as a value in comparison with quantified estimates of, say, consumer welfare. As another former Yale dean observed, the reduction of difficult conflicts to purely economic (or philosophical) questions threatens to undermine the autonomy of law as a field.

Calabresi advances this discussion with his crystalline distinction between “Economic Analysis of Law” and “Law & Economics.” I will quote at length here, since this distinction is central to the book:

What I call the Economic Analysis of Law uses economic theory to analyze the legal world. . . . In its most aggressive and reformist mode, having looked at the world from the standpoint of economic theory, if it finds that the legal world does not fit, it proclaims that world to be “irrational.” And this, of course, is exactly what Bentham did when he tested laws and behavior on the basis of utilitarianism and, in his most aggressive moments, dismissed what did not fit as nonsense. . . .

What I call Law and Economics instead begins with an agnostic acceptance of the world as it is, as the lawyer describes it to be. It then looks to whether economic theory can explain that world, that reality. And if it cannot, rather than automatically dismissing that world as irrational, it asks two questions.

The first is, are the legal scholars who are describing the legal reality looking at the world as it really is? Or is there something in their way of seeing the world that has led them to mischaracterize that reality? . . . . If . . . even a more comprehensive view of legal reality discloses rules and practices that economic theory cannot explain, Law and Economics asks a second question. Can economic theory be amplified, can it be made broader or more subtle . . . so that it can explain why the real world of law is at it is?

For Calabresi, behavioral economics is a great example of the kind of “bilateral relationship between economic theory and the world as it is” that he calls Law and Economics, because it has expanded economic theory to account for humans’ predictable irrationalities, and for some higher principles of altruism and fair play.

Calabresi’s chapter on non-profit institutions is a particularly strong vindication of the “Law and Economics” (as opposed to “Economic Analysis of Law”) perspective.  For market enthusiasts, the lack of profit motive at universities and hospitals is the key to understanding all that ails them. But from a more cosmopolitan perspective, one could just as easily conclude that the excess marketization of US systems of health and education (relative to, say, a European benchmark) is the better explanation.

Nevertheless, we can still expect plenty of government and corporate agitation to promote the profit motive in these sectors, however bad its results may be. Ugo Mattei (in a 2006 essay on Calabresi’s work) helps explain why:

Law and economics would not have attained a dominant, global role if it had not been leveraged, beginning in the Reagan years, by a full-fledged political agenda and a real industry, capable of flooding with cash any movement that gave cultural prestige to deregulation and other reactionary politics of those years. It is proof enough to look at the early lukewarm reception of the law and economics movement in Europe to understand how much lawyers were willing to resist the ideal of efficiency in the name of justice and distribution. But the multiplication of prestigious law professor chairs, endowed research facilities, and fellowships [in the US]. . . created a certain recipe for global success.

What Mattei calls “law and economics” would probably be called “economic analysis of law” by Calabresi. Aware of concerns like Mattei’s (and McCluskey’s), perhaps Calabresi is trying to preserve some objective domain of “law and economics” from the more ideological “economic analysis of law.” For example, work to model the fair and efficient allocation of the costs of accidents could be seen as just such a non-ideological and yet reformist project.

Engines & Cameras

So there is much to commend in the “law and economics” that Calabresi promotes. Yet I am troubled by its potential failure to address the performativity of economic theory–that is, the ability of economic analysis of law to act as not just a camera, but an engine, shaping the reality that “law and economics” later respects. There can be a ratchet effect to such a theory: extant communitarian, altruistic, and non-profit institutions garner some respect from Calabresi’s law and economics, but once a field becomes marketized, it may be hard to find the theoretical resources to justify a return to socialization.

We see this problem in the politics of the day. The Yale JD now running for president has solemnly announced that the U.S. “is not Denmark,” and constituents should not be expecting Medicare-for-all (or free college) any time soon. Those are solidly centrist positions built on a certain set of neoliberal assumptions about the inevitably transactional nature of human capital and health. However, many young voters are skeptical. They don’t want to shop for insurance on ACA exchanges, and they find the intricacies of income-based repayment for student loans a Rube Goldberg contraption of chutes, ladders, and traps for the unwary. They aren’t interested in being “nudged” into better choices, however insightful behavioral economists may be. To the extent they care about legal scholarship and reform, they want solutions directly responsive to their own sense of precarity and enormous inequalities.

Calabresi’s law and economics does not appear to speak directly to such demands. Addressing concerns about the ability of law & economics to comprehend and affirm the human values expressed in altruism, he asks:

When economics was less model dependent, less mathematical, more political economy than econometrics, the difficulty of [quantifying or modeling altruism] . . . might not have mattered much. Why, then, not simply return to that sort of “political economy?” Even to ask this question is, however, to ignore why economics has become what it is today. The type of analysis that characterizes much of current economics has become dominant because it has let economics, in distinct contrast to other social sciences, be more rigorous, more scientific, and as a result, more logically powerful in the conclusions it reaches.

As a member of the Association for the Promotion of Political Economy and Law, I’ll have to differ here. It is easy to overstate the rigor of mainstream economics. The field has long struggled to “take the con out of econometrics.” A recent analysis suggested that at least half of papers in economics are not reproducible. Moreover, the methodological pluralism of clearly great work (like Piketty’s Capital in the 21st Century, or that of a Piketty critic like Deirdre McCloskey) suggests that the future of economics (and, a fortiori, law and economics) lies in interdisciplinary engagement with a wide variety of social scientific and humanistic perspectives.

So perhaps there are three directions for the future here. The “economic analysis of law” will continue a general neoliberal movement to “make markets,” seizing on times of crisis to dismantle older non-market institutions. “Law and economics” will endure as a methodology for subtle and incrementalist reformers eager to improve the law while respecting “social realities.” And an emerging political economy school will envision a broader concept of social justice, to balance the neoliberal economic analysts. As Martha McCluskey, Jennifer Taub, and I put it when announcing a casebook project:

The urgent challenges of the 21st Century call for a new Law and Economics. Solutions to problems such as extreme inequality, climate change, deindustrialization, infrastructure deterioration, underdevelopment, and financial instability will depend on deepening understandings of how economics is interrelated with complex legal rules and legal institutions. Lawyers with a more advanced and nuanced understanding of economics will be far better poised to help solve these problems than those lulled into thinking that simple neoclassicism reflects all that economics can offer to law. . . . So-called “market forces” are thoroughly intertwined with law and cannot be understood without some reference to history, sociology, psychology, and other social sciences.

I look forward to continuing to learn from, and be in dialogue with, Calabresi and his work. He is one of the greats of the legal academy. His insights should be part of any future version of law and economics.

Frank Pasquale

Frank is Professor of Law at the University of Maryland. His research agenda focuses on challenges posed to information law by rapidly changing technology, particularly in the health care, internet, and finance industries.

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