On Norms and Analysis

            Michael Livermore views my book as either challenging the normative foundations of law and economics or as offering a set of proposals to improve cost-benefit analysis (CBA). The book advocates goals, namely systemic risk avoidance and opportunity creation, and a focus on the shape over change over time that challenge the normative foundations of law and economics, i.e. static allocative efficiency. It also commends an analytical technique, economic dynamic analysis, to improve the economic analysis of law, but intends this technique to improve all economic analysis of law, not primarily CBA. By conflating analytical and normative questions and reducing all economic analysis to CBA, Michael makes it hard to properly understand either the normative or the analytical debate.

The question of whether avoidance of systemic risk and keeping open a reasonably robust set of economic opportunities constitutes a more important goal for society than allocative efficiency requires a normative discussion not focused on questions of technique. (See Martha McCluskey’s post in this symposium). The only glimmer of normative discussion that Michael offers casts doubt on his apparent preference for efficiency as a goal. He agrees with me that government should not be viewed as a master allocator of resources. But the goal of achieving allocative efficiency flows from viewing government as a master allocator of resources. And it is this goal that motivates proposals for use of CBA as an analytical technique. This is, reducing all costs and benefits to dollar terms in order to compare them on a single metric, however morally dubious and technically difficult, does serve the goal of optimal resource allocation. It’s a lot of wasted effort for many other kinds of goals.

As I mentioned in a clarifying comment on Michael’s post, I do not think that any economic theory can legitimately claim to provide a complete catalogue of acceptable normative goals. I don’t claim that for my theory and Richard Posner does not claim that for law and economics. But an economic theory should focus on important economic goals.

Nor does economic theory (mine or anybody else’s) properly guide judicial interpretation of statutes. Just as the Constitution does not enact Spencer’s statistics, Congress does not usually enact neoclassical law and economics, and certainly did not do so in the 1970s.

Michael finds economic dynamic analysis, the methodology I recommend for analyzing choices, useful as a means of improving CBA, but not otherwise. This position misses most of what economic analysis of law is about and is analytically indefensible.

It is natural that Livermore would view the merits of the book as part of the long running debate we both, as environmental law scholars, have been engaged in about CBA’s value. But the book emphasizes that CBA in most areas of law (including the area that gave rise to the Chicago School—antitrust) plays no role in economic analysis except as a metaphor giving the enterprise prestige. Instead, law and economics scholars reason based on the assumption that market actors are rational and have perfect information, rather than through a quantification of costs and benefits in dollar terms (which is what I mean by CBA). This form of reasoning is not particularly rigorous, partly because its practitioners only occasionally systematically consider countervailing incentives. And analysts frequently achieve clarity at the expense of realism when they employ a conventional rational actor model. The financial crisis demonstrates that the price we pay for that purchase of profession reputation through clear, simple, but terribly wrong analysis is very high. The government did not simply fail to address the risks leading to the financial crisis; it dismantled the regulatory regime that had previously made almost everything done to create the crisis illegal. And it did so in part by employing a rational actor model to come to the conclusion that we did not need these regulations.

Michael does not consider my argument that the neoclassical economic framework substantially contributed to these failures sufficiently vigorous. When I wrote the book, many prominent economists had expressed the view that neoclassical economics provided the intellectual underpinning that led to deregulation helping cause the financial crisis. Although I thought I had sufficiently argued this point in that context, I have since crafted an article that bolsters the case by tracing the reasoning and recommendations of neoclassical law and economics scholars employed to successfully advocate dismantling the post-Depression framework for financial regulation. It’s not possible to prove anything about what motivates any policy process beyond a reasonable doubt. But I thought the broader case that law and economics has helped create an intellectual climate that glorifies markets and tends to disfavor regulation was pretty strong in the book. And it’s possible to accept that case and still like CBA as a technique.

Indeed, that view seems completely congruent with Michael’s previous writing on the subject. He recognizes that in practice CBA has been used to weaken or throttle regulation, but would rather improve it than jettison it. My book helps explain why a technique that does not necessarily imply weakening of environmental regulation has so often had that effect.

In any case, Michael’s view that economic dynamic analysis only works well if it supports CBA is analytically unsound. He finds that scenario analysis might aid CBA. Presumably he recognizes that giving some sense of a problem’s dimensions in the future while acknowledging uncertainties in this way can be useful. But if it is useful when we express the consequences in dollar terms, why is it not useful if we express those consequences in terms of natural units or using some other descriptor? In other words, scenario analysis helps us understand the future whether one is committed to dollar-to-dollar comparisons or not.

Michael is correct that economic dynamic analysis can improve CBA and thereby contribute to his project. But my primary goal in writing the book involves offering an alternative that responds to foundational problems in conventional law and economics. Rejecting this normative critique on the grounds that it does not resolve all normative and statutory interpretation questions amounts to requiring it to surpass, by a wide margin, my own ambitious goals and the claims made by responsible scholars for law and economics. Nor is it necessary for Michael’s work to have continued merit. Even if the normative foundations for CBA have crumbled, as they have, Michael’s work on improving that technique will remain valuable for as long as it remains in use.

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