Category: Symposium: Future of Law & Economics

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Law and Economics for the Read-Write Generation: A Review of Guido Calabresi’s “The Future of Law and Economics”

One of the great pleasures of this little book is that it does not attempt to be exhaustive. Reading it feels like being whisked through a behind-the-scenes tour of a chocolate boutique, with the chocolatier himself merely gesturing modestly at the lines of perfected squares behind the counters, and then enthusiastically pressing new creations upon you: would you try this one, where I have treated basil as if it were raspberry? How about a bite of altruism, which I treat just like any other taste or preference? Many flavors are familiar, others exotic; and some of the oddest combinations seem obvious when combined by the hand of a master.

It’s best, of course, to go on the chocolate tour yourself by reading the book. For myself, I want mostly to point to just two of my favorite pieces. The first is what Calabresi doesn’t want for the future of law and economics: he doesn’t want economic analysts of law to keep on talking at lawyers. That kind of unidirectional application of insights from one field to another—what he terms “Economic Analysis of Law”—just can’t capture or explain either “legal reality” or “human experience.” “In this sense,” he explains, in a move that grounds his vision of the interactive future, “while in Economic Analysis of Law economics dominates and law is its subject of analysis and criticism, in Law and Economics the relationship is bilateral.”

law and econ talking

In Calabresi’s view, the relationship between the disciplines should be based on a give and take, where each sometimes talks and the other listens. Calabresi’s view of the future of law and economics, then, is a distinctively friendly one: a social, creative, interactive future where economists and everyday lawyers meet over drinks to share their insights with one another, and to gradually illuminate the realities of human behavior. Is this the best possible future for law and economics? Whether it is or not, it may be the kind of future that the modern digital generation is best poised to make reality.

To expand on this thought, let me start by pointing to the second piece of the book I wanted to review: the book’s remarkable culmination, a wacky and/or brilliant exhortation to economists to help lawyers—and everyone, really—enjoy the simple, creative things in life: ordinary wine, child-rearing, macramé. Yes really: even the “now often devalued arts like knitting, quilt making, and lacework” have a central role to play in the future of law and economics. If this sounds crazy, well—it is. But what’s even crazier is that, if you read this book, you may—like me—end up with an uneasy inkling that it could also be true.

The fact that I am skipping from the beginning to the end should not dissuade the reader, and indeed, the ending is best savored in light of the craftsmanship of the preceding courses. These are delicious: the first the spicy critique of “economic analysis of law” sketched above, followed by a crunchy/soft confection of commodification and commandification, a peppery treatment of inequality, the unexpectedly smoothness of the insights on altruism, a carefully self-referential redux of the liability rule, a biting treatment “of tastes and values ignored.” Each builds on the previous until: at the zenith of this extraordinary collection of expertise, the book concludes with his sudden and even uncomfortable paean to ordinariness.

The impact of this conclusion is difficult to overstate. It is as if, after touring the boutique and having our minds blown by the chocolatier’s sheer mastery of his art, and the layered beauty created by this gift for pulling disparate ingredients together into an intuitive whole, the master ushered us out of the door by encouraging us to go home and make our own hot chocolate with Swiss Miss and tap water. Really? Really?

The author knows himself to be pushing the envelope here, and he is. Given the title, we are all on notice that this is supposed to be a book about the future of law and economics, but this is radical. Can law or economics really be ready for this kind of Warholization—for this deliberate exultation in the everyday and the mundane?

Well…perhaps. At the least, I think that this approach will find fertile ground with the so-called “read-write” generation: the generation of scholars developing now, who have always engaged with the world through digital networks, and who carry with them a presumption that scholarship—like the rest of their lives—involves listening and talking: reading and writing.

But before I develop that further, let me explain a bit more about how exactly Calabresi ends up where he does.

First, it’s worth noting that Calabresi is does not reject the extraordinary: but while fine wines, sexual acrobatics, and Yankees pitching may all be very well, he suggests they are rare and scarce and costly, and probably best left to professionals. Wouldn’t the world be better—wouldn’t there be more value, more happiness, more delight in the world—if people appreciated things that were common? Law can help shape people’s values, he points out, with a hat tip to critical legal studies. So why not shape values so that preferences can be commonly satisfied, so that achieving that which we hold dear is made easier instead of harder? Economists, he says, can help us—lawyers, society—with this: not by hiding behind a false objectivity, but by deriving principles based on articulated normative priorities. The key is to take principles constitutive of a desirable society, and to derive sub-principles, which can then be used to construct legal interventions. (An even more inclusive view might point out that philosophers might be helpful here as well in identifying the right goals, and that non-economics social scientists might be useful in observing human behavior and testing the impact of selected interventions.)

Calabresi even takes a quick first cut at what key values might be. He adds the two principles “more is better than less” (i.e. bigger pies are better than smaller ones) + “a more equal distribution is better than a less equal one” (i.e. that equal divisions of pie are better than unequal ones) to come up with the conclusion that = “any tastes or values that increase the desire for things which are in common supply in that society—for things that are not scarce—will yield a larger joint maximization.”

This is already a lot to consume—perhaps particularly for economists, whom as Calabresi recognizes, have historically experienced a pervasive queasiness at the thought of recommending some tastes or values over others. But Calabresi doesn’t stop there: he brings a third and even more provocative principle to bear, suggesting that people have a “desire to create.” In combination with the prior principles, this leads him to two questions—the kinds of questions, he argues, that an interactive law and economics can help answer, for the purpose of determining the desirability of specific law and legal structures. These are “[f]irst: What creative activities are broadly available to people who do not have unusual skills? Second: What can law do to further the desirability of such activities?”

And this is where the book steps into the ordinary. Calabresi lists a set of goods—fiber arts, common food, ordinary sex—that he suggests may be widely available. Economists have a critical role to play in identifying these sorts of goods, Calabresi says, and the relationship between law and economics should be one where lawyers can listen, learn, and respond to insights like these from economists. On this conversational model, the give-and-take between disciplines allows law to encourage things that economists point out would make society better off (and presumably?—although this is not the essay’s focus—to discourage things that would make it worse off).

While Calabresi mentions a number of goods that might fit into his categories, he doesn’t mention two that form the basis for much of the modern human experience: social goods, and technology. These are arguably also the building blocks for the creative recipes of the read-write generation. The idea here is that digital natives—people who have never known a world that was not connected through digital means—have a different set of expectations about how to engage with and understand the world around them. Conditioned by social media updates, blogs, and Youtube comments, they expect to participate in creating the world around them—in “writing”—instead of (merely?) passively reading the words of others. They curate Reddit threads; attach biting Twitter hashtags; label and re-label the same picture to create memes. The same generation embraces—often with self-conscious hipsterism—“DIY culture;” an emphasis on “doing it yourself,” whether the “it” is brewing their own alcoholic beverages, constructing homemade marshmallow guns, or using what Calabresi worries are the lost fiber arts to crochet pillows of the Star Wars Death Star. They even share tips with the world on how to make the perfect Swiss Miss hot cocoa. Some of these attempts are more impressive than others, but they all share a commitment to engagement, interaction and creativity. These goods are by no means scarce, in part because of the access allowed by technology, and in part because many are produced in part by the social processes that are also their product. Perhaps even most importantly, they already evidence a shift towards the kinds of values that Calabresi suggests society would do better to affirmatively embrace.

By the end of the book, I had a simultaneous feeling of optimism and foreboding. If Calabresi’s account of common goods is right, then the DIY nature of modern read-write culture is on exactly the right trajectory: in fact, economists and lawyers should all be working to find ways to use law to make more hipsters. At the same time, while networked engagement and creativity may generate significant social value, I worry that the ordinary may sometimes be substituted for the extraordinary. If posting hourly to Facebook means that our best writers never write novels, and our best readers spend their time on social media updates instead of Calabresi’s book, then something truly valuable is lost.

I’m honestly not sure, yet, what I think about the tradeoffs inherent in Calabresi’s final proposal. Regardless, however—and this may be the best test of the book’s success—I am left with an almost overwhelming urge to talk this book over with some economist friends. Possibly over a glass of ordinary wine. And if that’s the future of law and economics, please count me in.

the future of law and econ

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Means and Ends in Law and Economics

Is law and economics about means, ends, or both? This question, which lies at the heart of Guido Calabresi’s intriguing new book, turns out to have no easy answer.  Law and economics is by turns imperialistic and indifferent, a dominating know-it-all and a deferential technician.  Often law and economics seems like a means-focused enterprise:  Give us a social goal, its practitioners offer, and we will find the best way there—the efficient way.  This accords with the lay definition of efficiency, which, according to Merriam-Webster, means “the ability to do something or produce something without wasting materials, time, or energy.” But what is that something that we wish to do or produce?  Here, as Calabresi observes, law and economics oscillates between open-minded acceptance of varying tastes and values and the reflexive dismissal of some tastes and values as unworthy of consideration—including, notably, many tastes and values relating to redistributive practices undertaken by society, and to altruistic practices undertaken by individuals.

Why should this be the case? A clue can be found in Calabresi’s observation that altruism “is a collection of goods that can substitute for each other as means, but also that are each wanted as different ends in themselves.”  It is entirely possible to rank and evaluate charitable efforts based on the effects that they produce in the world.  But many, if not most, charitable donors care less about the net impact of their donations than they do about helping particular others with whom they can identify, through particular means that seem intrinsically worthy.  The means, in short, are also ends in themselves.  And where ends are not shared, advice about means will fall short.

The same might be said about different methods of redistribution. Legal rules and the tax-and-transfer system can both redistribute income.  This makes them look like competing means to achieve the end of greater (or lesser) economic equality.  And conventional law and economics holds that one of these means, tax-and-transfer, plainly dominates.  But it dominates, if it does, only as a means to that broad end of increasing or decreasing overall economic equality. It does not, and could not, dominate as a means to achieve the very different sets of ends that are suggested by and actually embedded in other redistributive routes.  If many people are what Aanund Hylland and Richard Zeckhauser call “goods egalitarians,” rather than “income egalitarians,” then a move in the direction of equalizing income does not simply represent a speedier path to the same destination as could be reached by, say, subsidizing housing and medical care; rather, it involves substituting different ends for the ones originally chosen.

This point connects to Calabresi’s discussion of “merit goods,” one of the central ideas in the book. According to Calabresi, a merit good is one that many members of society believe should be allocated on some basis other than conventional market transactions.  As examples, Calabresi discusses kidneys, education, and avoidance of military service.  A significant part of the population holds such goods to be “pearls beyond price” that should not be commodified, or, accepting commodification in principle, abhors a market allocation that allows the rich to outbid the poor, given existing inequality. In this arena, Calabresi explains, law and economics tends to violate its own commitment not to judge preferences.  The most important aspect of preferences surrounding merit goods, as Calabresi describes it, is this: only some goods are merit goods; most are not. Many people can accept a certain level of general inequality in society, indifferent to the fact that the rich outbid the poor for run-of-the-mill goods, but feel a moral pain at the same kind of allocation for the subset of merit goods.

Significantly, this pain does not come from a generalized maldistribution but rather from its appearance in particular realms. Accordingly, addressing it through generalized redistribution would be cumbersome and ultimately infeasible; to redistribute at a level sufficient to remove painful inequities from these particular pockets of concern would conflict with other widely held preferences about maintaining market incentives in most domains. Thus, even if using legal rules to allocate merit goods in a way that benefits the poor seems inferior to tax-and-transfer as a means to address the general problem of maldistribution, it may be very well suited to serve a far more specific and widely shared end: avoiding the pain of allocating merit goods through the market.

What is more, as we have recently argued, such an approach may also turn out to be a more politically viable path for improving distribution overall, precisely because it accords with the preferences that many people hold.  There is no set quantum of redistribution that people are categorically prepared to engage in, regardless of its form; the shape that redistribution takes determines the ends that it is capable of serving, and hence the political support it will enjoy.  Likewise, charities that appeal to the human desire to help identifiable victims are not necessarily channeling money away from more effective causes, because the act of giving is itself endogenous to one’s selected ends.  Perhaps people should have different ends than they do—and perhaps law and economics can even help in that enterprise—but their existing sets of preferences cannot be dismissed.

Law and economics is, fundamentally, a method, a means, a way of thinking systematically about rules, policies, and institutions, but it is also an activity of engagement between disciplines, an end in itself. When we are in the true realm of law and economics, which Calabresi distinguishes from the economic analysis of law by the former’s sense of mutual engagement, the method operates not only to assess means, but also to ask questions about ends.  If law and economics can become more curious about why people and societies address questions of distribution in the way that they do, Calabresi’s optimism about the future of law and economics will prove well founded.

(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:

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Markets, Morals and Guido Calabresi’s The Future of Law and Economics

Guido Calabresi is a dear friend and mentor, and like everyone else who knows his justly famous work, I was delighted to hear that he has a new book. One central theme of the book is his critique of conventional economists– for not doing what they say they do. They say they treat all preferences alike, but then they ignore some widespread popular preferences because, well, because these preferences just don’t fit well into a conventional economic focus on markets. According to Guido, people widely prefer not to use markets for some kinds of matters, for reasons of humaneness, justice, and generosity. Thus, for example, many people think that no one should be able to buy and sell babies or kidneys; they think educational opportunity should not depend on money; and they think health care is best supplied by altruistic institutions. Guido’s critique is that these uncomfortable non-market preferences are still preferences, and if economists really mean what they say about their neutral treatment of preferences, then economists should count these preferences too. But they don’t, and Guido takes them to the woodshed for this inconsistency. Then later he relents and suggests some ways to change their ways.
This is a quite resounding critique, written with Guido’s customary combination of incisiveness, bravado and charm. It was a great read, not only for this critique of conventional economics but also for many other fascinating discussions. Nevertheless, I found myself having a few qualms about the depiction of market transactions.
In the book, market transactions generally come off as cold, impersonal, and ruthlessly dog-eat-dog, by comparison to the market-rejecting sweet moral preferences for humaneness, equality, and altruism. I found myself wanting to say, hey, wait a minute, markets aren’t so bad! To you, reader, I would ask something like the following: Consider your circle of friends: haven’t you met a lot of them at your workplace? Perhaps even your spouse? Who are all those people whose work gets you a safe airplane ride—not just the TSA (please!), but all the factory workers, mechanics, flight personnel, baggage handlers, the lot. Why do you feel so confident about them?
I think there is a reason: markets and morals are not so separate. In fact, to a very considerable degree, they are all mixed up together. It is not hard to make the case that markets depend on moral values, and they teach moral values too, and in fact some of the same values that inform those preferences that supposedly reject market transactions.
To be sure, some disagree. Shortly after the breakup of the Soviet Union, a joke circulated in Russia, pondering why people accepted the blatant corruption springing up all around them. The answer was that everyone had been hearing for seventy years that capitalism is theft, and they wanted capitalism.
But wait, it was a joke! Capitalism is not theft at all, because cheaters and con men do not develop anything like viable commercial practices. Successful market practices rest on a culture of honesty, fair dealing, promise-keeping, and acceptance of limits on self-interest. At the outset of market relationships, there has to be a little nugget of generosity: someone has to take the risk of making that first “nice” move in the tit-for-tat game. If no one does, nothing gets off the ground; and if someone cheats later, things fall apart. Fair dealing and generosity are the factors that can start a cascade of reciprocity, building trust and trustworthiness, enlarging relationships–and subtly teaching the value of all those good things.
And speaking of teaching, market behavior has a relationship with democratic values, too. There is a lot of claptrap out there about how democracy needs capitalism, blah blah blah, without much thought about why. But insofar as there is something to the claim, a big part of it has to be a moral one. Market activity teaches the participants to attend to what the others want, to find overlapping interests, to put aside divisive but irrelevant disputes, and to proceed on the basis of consent rather than force. Those are practices and attitudes that democracies need, too. We do not have very many institutions that can act as schools for democratic decision-making, and we need to give proper credit to the ones we have. Markets are among them.
I know, I know, I am an apologist for doux commerce and the bourgeois virtues. Yes, indeed, markets can be vulnerable to meanness, cheating and overreaching. But those are not features that make markets work—quite the contrary. In any event, restraints on markets can be prim and stifling, while altruism can be smarmy and devious, and all a source of resentment and evasion. It won’t do to judge market activities by their flaws and non-market arrangements by their virtues.
But Guido knows these things as well as anyone I know. His book observes the costliness of non-market preferences and makes creative suggestions for mixing market and non-market approaches, and he certainly avoids the worst of some anti-commodification canards about markets. I just wanted his book to say more about market morality, and how markets too can teach the good human qualities he applauds.

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Pearls Beyond Price

Guido Calabresi is now in the sixth decade of his remarkable career as a scholar, Dean, and Judge. With luck there will be more to come, but in the meantime we have The Future of Law and Economics: Essays in Reform and Recollection (2016), his late-career reflections on the work of, and recommendations for, what he calls “lawyer economists.” Because my colleagues in this Symposium are focusing on the substance of Judge Calabresi’s explicit program, I will instead say a bit about the implicit message of the book.

The explicit program of the book is to urge lawyer economists to attend to, and when possible to model, what economists more generally find it difficult to deal with: merit goods, altruism, benevolence, tastes, and values. Much of the book consists of Calabresi’s explications of the nature of these phenomena, the reasons that ordinary markets do not, cannot, or should not be relied upon completely to allocate them, and the ways in which hybrids – what he calls “modified markets” and “modified command” (which is essentially modified regulation) — address and allocate them. Mainstream economists often have little to say about these devices, and Calabresi wants lawyer-economists, to whom he ascribes a greater willingness, and perhaps a greater ability, than ordinary economists, to break out of conventional patterns of economic analysis, and thereby to deal with, analyze, and contribute to the ways we can think about hard-to-quantify but important phenomena and make better policy about them.

In addition, however, I think that there is an implicit program in the book, though perhaps “implication” would be a better term, because I am not sure that it was even consciously in Calabresi’s mind when we was writing. But this implication is certainly part of what I came away with. The implication concerns what the rest of us, who are not directly his audience, should do, and it follows pretty automatically from what Calabresi hopes lawyer-economists will do. The rest of us also should attend to merit goods, altruism, benevolence, tastes, and values, even if do not have the skills to model them, quantify them, or demonstrate with precision how they figure in what we are analyzing. I don’t want to put words in Calabresi’s mouth, but the message I received, as someone who does not do modeling, is that — to give just a single example of what could be many — we should not talk about the internalization of costs through tort liability without recognizing that one of the reasons we impose liability is because the rest of us, even when we are not victims, lose something when others suffer. Perhaps at some point lawyer-economists will be able to model this phenomenon, but in the meantime the rest of us should not be thinking that a simple negligence calculus is all we would ever need in order to determine when to impose liability for accidental injury, or that any number of other legal rules are simple reflections of simple values.

Because, deep down, Calabresi is fundamentally a teacher, the book is in a sense is an extended lecture in print. His scholarship, for all of others’ identification of some of his most celebrated, earlier work with a preference for strict liability over negligence, is often essentially positive rather than normative. Both his scholarly and his personal energy are heavily devoted to explaining. And that is what someone who is always teaching does: explain. Sit down with him for a chat about torts, or insurance, or constitutional law, or baseball, or Yale, and his side of the conversation will often consist largely of explanation.

Thus, although the book is ostensibly and expressly about his hopes for a certain kind of future for law and economics, in a larger sense it is an explanation of how rich and complex both ordinary life and the life of the law are, and how conventional economic analysis of law so often misses this richness and complexity. In the past Calabresi has contrasted messy reality with the artificial and simplistic “wonderful worlds” conjured up by some other scholars. This book, in contrast, is effectively a tribute to the actual wonderful world in which has lived, a wonderful world that is full of pearls beyond price, kindness, and difficult or impossible-to-quantify treasures of many other kinds. All of these he has loved, and has been interpreting and savoring, for an entire career. Do not ignore these things, his book said to me, for you cannot understand law, or life, without understanding and deeply appreciating them.

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The Liability Rule Continuum(s)

One conception of liability and property rules sees property rule protections as a continuum of punishments sufficient to deter potential takings, but sees liability protections as a specific quantum of damages sufficient to compensate an entitlement owner for a non-consensual taking or as the quantum that mimics the price of arms-length consensual trade. Chapter 6 explores the latter conception and quite expressly argues that policymakers should think of liability rules as having, like property rules, a continuum of potentially appropriate damages. For example, Guido tells us:

[I]t should not be surprising that the amount charged to permit entitlement changes might mirror neither the price that a market would set nor the penalty that a pure command structure would impose. In such instances, the assessment that both allows and limits entitlement shifts may be chosen to reflect that polity’s liking for, and devotion to, its ideologically mixed foundation.
I have, of course, used the terms “price,” “penalty,” and “assessment,” above, intentionally to indicate when the liability rule is being used, respectively, in place of a market, in place of a command, and for reasons having to do with its own ideological desirability. But I must confess that, in many instances, I cannot say which of the three is represented by the charge made under the liability rule.

Guido Calabresi, The Future of Law and Economics: Essays in Reform and Recollection 127-28 (2016).
Here I want to extend this Calabresian project of expanding the policy rationales that can support a continuum of liability rule damages.

First, the same continuum that separates a liability-rule “price” or “assessment” from a property-rule “penalty” might also exist with regard to inalienability protections. While the traditional conception of inalienable rules as being enforced with the threat of severe penalties, the Calabresian thrust suggests that policymakers might want to merely tax or impede certain kinds of alienation if the externalities or parentalistic concerns are not sufficient to warrant full-blown inalienability protection. For example, we might want to generally prohibit cars from driving in the breakdown lane of a highway, but make an exception for those with elevated need. Of course, the necessity doctrines provide one route to this result. But one can also imagine charging elevated amounts that deter casual usage but facilitate usage where the private benefit exceeds the external cost. Calabresi thus opens a space for both quasi-inalienable and quasi-property rules which produce intentionally intermediate deterrence and channeling effects. See also Ian Ayres, Regulating Opt Out: An Economic Theory of Altering Rules, 121 Yale L. J. 2032 (2012) (“When externality concerns or paternalistic concerns to protect the contractors themselves are insufficient to justify a full-blown mandatory rule, lawmakers might at times usefully impose “impeding” altering rules, which deter subsets of contractors from contracting for legally disfavored provisions. Impeding altering rules produce an intermediate category of “quasi-mandatory” or “sticky default” rules, which manage but do not eliminate externalities and paternalism concerns.”).

Second, the continuum of amounts charged can be more clearly seen if we better appreciate the “opportunity” charges that are often woven into our existing election of remedies or could be. Jon Hanson and Matt Stowe have shown that the venerable decision in Vincent v. Lake Erie, 124 N.W. 221 (Minn. 1910) is a vivid example where the common law election of remedies implicitly uses opportunity costs as incentives. Jon Hanson & Matt Stowe, Lecture Notes, Torts, Harvard Law School (Fall 1996). Vincent of course held a ship owner liable for damages when his ship damaged a dock during a storm. The decision is usually characterized as a traditional liability rule—in which a ship owner during a storm has the option (by exposing itself to a damage suit) to take the dock owner’s original entitlement to exclude mooring ships. But Vincent’s discussion of an earlier case makes clear that the ship owner’s liability option is itself only protected by a liability rule:

In Ploof v. Putnam, the Supreme Court of Vermont held that where, under stress of weather, a vessel was without permission moored to a private dock at an island in Lake Champlain owned by the defendant, the plaintiff was not guilty of trespass, and that the defendant was responsible in damages because his representative upon the island unmoored the vessel, permitting it to drift upon the shore, with resultant injuries to it. If, in that case, the vessel had been permitted to remain, and the dock had suffered an injury, we believe the shipowner would have been held liable for the injury done.

Vincent, 124 N.W. at 222. Vincent’s parsing of Ploof v. Putnam makes clear that the dock owner holds the initial entitlement; the ship owner (during the exigencies of a storm) has a first-stage option to take but in doing so makes itself liable for the injury done; and finally the dock owner has a second-stage option to unmoor the ship—which causes it to incur the opportunity cost of giving up its cause of action against the ship owner but also to expose itself to tort liability.
A different kind of opportunity cost arose in Producers Lumber & Supply Co. v. Olney Bldg. Co., 333 S.W.2d 619 (Tex. Civ. App. 1960) where the court discussed what should happen where a good-faith improver built a home on a vacant lot:

The landowner will first be permitted to pay the enhanced value and keep the land, but if he is unable or unwilling to do so, then the improver may be permitted to pay the value of the land before the improvements were placed thereon, and thus become the owner of the land and the improvements.

Id. at 624. The landowner in deciding whether to exercise its initial liability-rule option to “pay the enhanced value and keep the [improved] land” would rationally take into account that doing so would eliminate the possibility of being paid by the improver “the value of the land before the improvements.” The cost of foregoing prospective opportunities can also influence the total liability incentive effect. In filling out the liability rule continuum, judges and other policymakers can utilize a dizzying array of second-order liability rules that confront potential takers with pay or be paid choices, as in Olney, or even pay (a larger amount if you take) or pay (a smaller amount if you don’t take) choices. By manipulating the mixture of costs and opportunity costs, policymakers can maintain allocative efficiency while varying the expected payoffs of the parties to better accord with distributive notions of equity or to better promote ex ante investment decisions. See Ian Ayres, Optional Law: Real Options in the Structure of Legal Entitlements 89 (University of Chicago Press, 2005) (discussing this decoupling result).

President Barack Obama in his valedictory State of the Union said “for my final address to this chamber, I don’t want to just talk about next year. I want to focus on the next five years, the next 10 years, and beyond. I want to focus on our future.” But his speech quite appropriately used the successes of his administration as a spring board for motivating four big questions that he argued our country in the future will have to answer. Obama’s address in many ways parallels Guido’s book. While not his valedictory contribution, Guido leverages his reflections about the past to allow us all to better peer into the “future of law and economics.”

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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.

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