Post by Patrick Goold
I recently had the pleasure of attending the “Future of Law & Economics and the Legacy of Guido Calabresi” conference held at Boston University School of Law. It examined the methodological, institutional, and conceptual issues raised by Judge Calabresi’s new book, The Future of Law and Economics. After two fun days, packed with delightful anecdotes about Calabresi and the early days of the Law and Economics movement, the question I found myself asking was: How do the ideas in this new book relate to the New Private Law project? My sense, which I will explain in this short post, is that there is a strong synergy between that project and Calabresi’s vision for Law and Economics.
At the core of Calabresi’s book is a distinction between “Economic Analysis of Law” (EAL) and “Law and Economics” (L&E). EAL uses economic theory to “analyze the legal world.” EAL scholars explain and justify legal reality through the prism of efficiency. Where that reality does not fit economic theory, the EAL scholar proclaims the law to be “irrational” and in need of reform. The classical precursor to this approach is that of Jeremy Bentham, who tested moral beliefs against a theory of utilitarianism, and dismissed what did not fit the theory as vague generalities and “nonsense upon stilts.” The prominence of EAL scholarship today is due, in part, to the influential writings of Richard Posner.
L&E scholarship also uses economic theory to explain and justify legal reality. However, when that reality does not fit economic theory, the L&E scholar adopts a different attitude than the EAL scholar. At this point, L&E asks two questions. First, “are the legal scholars who are describing the legal reality looking at the world as it really is?” Or, to use my own words, does the apparent mismatch between the law and economic theory require us to reconsider how the law really operates on the ground? And second, 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 is?” In other words, the L&E scholar does not, in the face of a mismatch between theory and law, dismiss the law as “irrational,” but asks whether economic theory has missed something important, such that it ought to be refined, altered, and improved. In this way, L&E is more “bilateral” than EAL. This approach is more classically associated with John Stuart Mill, who criticized Bentham’s reaction to beliefs not explained by utilitarianism. In dismissing such beliefs, what Bentham failed to understand, according to Mill, was that such “generalities contained the whole unanalyzed experience of the human race.” Today, good examples of the L&E approach can be found in the work of behavioral economists, who study apparently “irrational” behavior and have used that data to effect changes in economic theory. It is L&E, not EAL, which Guido Calabresi wishes to promote in his new book. And much of the book is devoted to analyzing issues, such as merit goods, inequality, and preferences, from the L&E perspective.
In my mind, there is a strong synergy between Calabresi’s support for L&E and the New Private Law (NPL) project. Calabresi and NPL theorists share a common attitude: we take the law seriously. Like L&E, NPL theorists are engaged in theorizing about private law; we want to explain, justify, and where necessary, suggest reforms to private law. But unlike EAL, when we find some aspect of private law that is not easily explained, our attitude is not to dismiss it immediately as irrational. Private Law is a millennia-old social institution; it is the product of countless border demarcation disputes, family squabbles over wills, and innumerable accidental injuries. Private law, perhaps even more than public law, contains, as Mill would say, the “whole unanalyzed experience of the human race.” Thus, when faced with some aspect of private law that our chosen normative theory cannot make sense of, our instinct is not immediately to change the law, but to re-examine our theory and ask whether it misses something. This attitude is, in part, what makes NPL theory new theory.
Indeed, while NPL is methodologically diverse, some important NPL theory already exemplifies the L&E attitude that Calabresi praises. An example is Henry Smith’s contribution to the economic theory of property. Previous economic theory did not adequately explain important features of the property system, such as the importance of a property owner’s right to exclude. Harold Demsetz explained that property rights arise to internalize positive externalities associated with goods, and thus encourage allocatively efficient behavior. But this internalization goal could be accomplished in two ways: either by granting the property owner a simple right to exclude others from the good, or alternatively, by picking out specific uses of the good to be exclusively reserved to the owner. Moreover, much Legal Realist inspired EAL would suggest a preference for the highly specific “governance” system of property. However, this is not the legal reality we occupy. Property law typically gives the owner a broad right to exclude others from the protected asset. One of Smith’s contributions is to show how that apparent mismatch between the legal reality and economic theory requires a refinement of the economic theory. The prevalence of the right to exclude makes economic sense once one considers the information costs it would take to create such a governance regime. But it was only by taking seriously legal reality that this advancement in economic theory could be made.
In sum, Calabresi’s “The Future of Law and Economics” has much in common with NPL theory, and for this reason, I suspect many readers of this blog will greatly enjoy the book. Many thanks to Wendy Gordon of BU School of Law for organizing a wonderful conference!