Beyond Law and Economics: A Review of Guido Calabresi’s “The Future of Law and Economics”

Any book by Guido Calabresi is self-recommending. Not only is he among the founders of modern (that is, the second great movement in) Law and Economics; his carefully wrought and nuanced work marks him as among the most important and influential scholars and jurists of the past half-century (at least). His new book, The Future of Law & Economics: Essays in Reform and Recollection (Yale 2016), provides, as his subtitle announces, both a glance backward to the historical evolution of Law and Economics and issues some challenges for 21st century economists to make their work more relevant to real-world policy dilemmas.

Judge Calabresi begins by reminding readers that Law and Economics has never been monolithic, despite what some of its critics believe. His own brand of Law and Economics has always been decidedly different from Chicago-school thought; but, at the same time, it was never outside the mainstream of economic thinking. Which is to say that Judge Calabresi’s approach to Law and Economics, as reflected in works such as The Cost of Accidents (Yale 1970), his famous Cathedral article with A. Douglass Melamed, and “The Pointlessness of Pareto” (100 Yale L.J. 1211 (1990-1991)) consistently offered an alternative perspective on Law and Economics to the “economic analysis of law” approach advocated by Richard Posner, William Landes, and others (not including Ronald Coase) at the University of Chicago. Instead of engaging in economic analysis to determine the efficiency properties of alternative legal rules – with a decidedly normative goal of ridding society of inefficient legal rules – Judge Calabresi’s approach has always been to use economics to explain or understand the real world of law as it is.

To take a simple example from Calabresi’s own work, when a property entitlement is protected by a “liability rule” (money damages) rather than a “property rule” (injunctive relief), a Chicago-school scholar would simply ask whether the one remedy is more efficient than the other. By contrast, Judge Calabesi (and his co-author Melamed) first sought to understand the economic meaning of the alternative remedies – a liability rule results in a forced sale of an entitlement from plaintiff to defendant at a price set by the court, while a property rule informs the defendant that if she must enter into a voluntary market transaction with the plaintiff in order to acquire the entitlement. Then, they explained why such a remedy might have a legitimate role in circumstances where transaction costs might impede efficient market transfers.

In his new book, Judge Calabresi calls for an “expanded economic theory” to better explain certain social and legal realities that cannot be explained by simple “economic analysis of law.” Those realities include the persistence of a healthy non-profit sector (as just one example of a preference for some amount of altruism and beneficence in society), the legal protections provided for the admittedly ambiguous and potentially very large category of “merit goods,” and, more broadly, the diversity of tastes and preferences of aggregations of social actors. While aware of the great challenge this poses for economists, Judge Calabresi expresses great optimism that economic theory can meet the challenge. After all, he observes, way back in 1937 Ronald Coase was able to explain a preference for certain hierarchically organized command-structures (that is, firms) within markets, based on the implicit costs of using the market mechanism for organizing production in certain sectors.

As this is a review rather than a summation – you should definitely read the book for yourself – I will not recount the specific analyses and arguments found in Judge Calabresi’s very rich book. Instead, I will offer a few observations, some of which will challenge certain of the judge’s claims, others of which will offer additional support for his claims or put his claims into a broader context.

While Judge Calabresi observes two categories of Law & Economics – economic analysis of law (a la Posner and Landes) and the use of economic theory to explain and understand the real world in which the law operates (Calabresi’s own approach) – he neglects a third, and even older category of Law and Economics as the legal structure of economic activity. This category extends back to the first, pre- WWII Law and Economics movement, and even further to the German Historical School of the 19th century and later German “ordoliberal” economists, such as Walter Eucken. In 1924, Karl Llewellyn provided a historical landmark of this third approach to Law & Economics in a speech to the American Economic Association (founded in 1885 by the early institutional economist, Richard Ely, who, like Calabresi in his new book, was very concerned about issues of moral costs and law). Llewellyn’s speech was published the following year under the title, “The Effect of Legal Institutions upon Economics” (15 Am. Econ. Rev. 665).

Llewellyn observed that modern, large, complex markets depend on a complex structure of legal rules, stemming from property rights and rules establishing reliable contracting, to standard weights and measures, and protections against fraud and other forms of criminal or civil misconduct. He and other pre-war “old institutionalists,” such as Ely and John R. Commons, focused a great deal of attention on issues similar to those that concern Calabresi in the present, including the distribution of resources, wealth disparities, merit goods, and values. They were also practical men of action seeking to reform the laws that structure economic exchange. Commons, for example, drafted much of the labor-protection legislation in Wisconsin that Governor Scott Walker has recently been working to dismantle. The early institutionalists were engaged in a manifestly normative enterprise, much like Chicago-school Law & Economics, and also like Jeremy Bentham’s late-18th century efforts to reform the common law, which Calabresi criticizes.

Ronald Coase definitely had a point when he argued that the early institutional economists of the first Law & Economics movement merely amassed mountains of data “waiting for a theory, or a fire” (“The New Institutional Economics,” 140 J. Institutional & Theoretical Econ. 229, 230 (1984)). His basic complaint was that they had no theoretical basis for choosing between one set of institutions and another, aside from pure political ideology or self-interest. But Coase’s own 1937 article on “The Nature of the Firm,” which Calabresi celebrates throughout his new book, both contributed (if unwittingly) to the “old institutionalist” literature, and provided the basis for resolving the very problem he had identified in that literature. Indeed, Coase’s seminal article provided (if belatedly) the pivot point on which the “old institutionalism” or “first Law & Economics movement” evolved into “new institutionalism” or “modern Law & Economics,” with his invaluable (but difficult-to-employ) metric of transaction costs. The one constant in the move from old institutionalism to the new institutional economics was the focus on the legal structure of economic activity, rather than the efficiency properties of legal rules or explanations of existing legal rules.

All of this historical explanation is prefatory to my main claim in this review, which is that Calabresi’s arguments about the need for an expanded economic theory would benefit from more attention to that history, and from a broadened focus that attends to both explaining the legal world as it is and understanding how that law (or changes in law) affects economic activity. Indeed, Coase himself made similar calls when he and Douglass C. North (who sadly passed away a couple of weeks ago) created the International Society for New Institutional Economics (ISNIE, recently renamed the Society for Organizational and Institutional Economics, SOIE). Coase called for a more elaborate economic theory – a new institutional theory – that would better explain the complexity of the economic system, and the larger, immensely complex social systems within which that economic system is embedded (see id. at 73). In effect, Coase was identifying similar challenges to those presented in Calabresi’s new book. For that reason, I find somewhat confusing Calabresi’s argument, toward the end of Chapter 1, that legal scholars are better suited to the task at hand than institutional economists. Don’t we need both? After all, organizations such as ISNIE and the more recently created World Interdisciplinary Network for Institutional Research (WINIR, which has its own Journal of Institutional Economics) are big tents where scholars from various disciplines can collaborate on solving at least some of the problems Judge Calabresi identifies. The problems of explaining preferences or tastes for merit goods and how to deal with “moral costs” are not just dilemmas for lawyers or economists to resolve. It will also require the active participation of social and behavioral psychologists, sociologists (such as those who work in the area of Law & Society), public choice scholars, and other social scientists to deal with such complex problems that obviously cut across disciplinary boundaries, requiring multiple methods and analytical approaches.

I may be mistaken in reading Judge Calabresi’s book as, in part, an implicit attack on optimization models that may reflect more or less utopian efforts to bring about the perfect economy and/or society. Such models have a role to play, of course, in providing a kind of baseline against which analysts might to some purpose compare existing performance against what is in theory possible (the so-called “Pareto frontier” that Calabresi discusses). But economists seem often to neglect the point that “collective decisions” (see, e.g., p. 121) may reflect a socially-demanded level of supply that might have little or nothing to do with the economically efficient level of production. He observes, for example, that “The fear of terrorism and the costs undertaken to block terrorists is but one of the most dramatic and recent examples of such differences in valuation” (p. 136). Indeed, in national security policy making, cost-benefit analysis seems to play little if any role. This is consistent with an argument I once made about the difference between a theoretically optimal level of environmental protection and the socially “demanded level,” reflecting collective decisions by some group with the power to make such decisions (Pollution and Property, Cambridge 2002, p. 133).

Finally, can economists achieve the kind of “expanded economic theory” Judge Calabresi calls for, including explanations for social (aggregate?) preferences and tastes? I do not share the Judge’s optimism mainly because I do not believe that economists can accomplish this on their own. This is not a task for a single set of scholars, operating within a single discipline, under a single theory (or single set of theories), using a single method. As noted above in references to ISNIE and WINIR, and based on my own experience as a member of the Vincent and Elinor Ostrom Workshop at Indiana University, complex social (and combined social-ecological) problems can only be properly diagnosed, let alone resolved, using a wide array of diagnostic tools and approaches that are not within a “toolbox” belonging to any single academic discipline. More accurate and thorough assessments of tastes, preferences, and other complex phenomena will require the attention not only of economists, and “lawyer-economists,” but also scholars from all of the other social sciences working together.

For this reason, I do not see much of a future for “Law and Economics,” as we have known it. Rather, progress will come from broader approaches to “Institutional Analysis,” engaging scholars from many more disciplines than just law and economics. Nevertheless, those scholars, regardless of discipline, would benefit greatly from a close reading of Judge Calabresi’s book (as well as his earlier works), if only to get a proper sense of the complexity of (some of) the problems they will likely be grappling with during the course of this century.

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