Why Is Law Fertile For Econ?

I’m about to teach graduate law & econ for the first time, after teaching the undergrad version five times. Going over my new text (Shavell) I’m struck by a difference between law & econ and other areas of applied econ, like labor econ, enviro econ, defense econ, managerial econ, public choice, econ of the family, etc. Relative to these other areas, it seems to me law & econ has more non-obvious insights that can be explained with very little econ machinery, usually in just a paragraph or two of text. Yes most areas have some of these, but in law they just seems to go on and on. Why is law so fertile for economics this way?

You might say that law & econ started recently, but in many other areas we learned most of what we know after law & econ work started. You might say that law & econ has participation by law specialists and it helps to have simple arguments to be able to explain insights to them. But most of these other areas also have specialists who appreciate simple arguments.

You might say that law typically deals with interactions in pairs, which are intrinsically simpler than interactions between many parties. But when supply and demand applies it is also a pretty simple interaction, and many other areas like family econ also deal with pairs a lot.

Another explanation is that for most of us the usual heavy moral coloring of law blocks our simple understanding of consequential arguments in law. In other areas of econ application that lack such mental blocks, most people would already understand the simple consequences of simple actions, and so economics couldn’t get credit for those as insights. But in law economics can get credit for explaining simple consequences that many folks would have already understood in other areas without such mental blocks.

This last explanation is my tentative favorite, though I’m open to other suggestions. It says law is an area where most folks are especially reluctant to let themselves appreciate simple consequences, most likely because they prefer to hold onto standard far ideals about law, and try not to see consequences that might conflict with such ideals. For example, seeing contract breach as immoral promise breaking makes it hard to see how good breaches happen when damages for contract violation equal the value the other party places on non-breach.

Of course this explanation also suggests it will be particularly hard to get the actual law to change much in response to good economic arguments about law. Which is roughly what we see.

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  • IMASBA

    “Of course this explanation also suggests it will be particularly hard to get the actual law to change much in response to good economic arguments about law. Which is roughly what we see.”

    Bringing morality and ethics into it slows down the dynamics, but they do move. In the past social taboos were intrduced as laws for economic reasons (such as population control), the other way around we’re seeing removal of laws for economic reasons (such as legalizing marijuana) and that’s a good thing. Still we must be careful we don’t apply that kind of thinking to everything because not all moral/ethical taboos are equal, some are so fundamental that they only become relative at a level where economic arguments also become relative (for example removing the right to life to make the survivors wealthier, along the idea that life has no intrinsic value, makes no sense because if being wealthy had intrinsic value that would give life intrinsic value).

    I don’t like saying it but I get the feeling certain people are so preoccuppied with deconstructing morality and ethics as “relative” and “subjective” that they fail to see that economics too is ultimately relative and subjective. You shouldn’t declare everything secondary to economic utility, because economic utility ultimately is a human invention too. Sure it’s useful not to think about the reasons behind worshipping economic utility when you’re doing relatively trivial work, but when you get to the level of considering to abolish/change things like human rights you also have to consider abolish/change the foundations of your economic theory. Economics should serve the people and their wishes, not the other way around.

    • Stephen S

      This argument extends further than you say. The law just is a set of norms and taboos with the imprimatur of state force. Economics is useful as a way of evaluating the law normatively, and of checking to see if it is efficient in achieving its stated goals.

  • John Salvatier

    I’d be curious to see 3 or 4 of these examples.

    • Stephen S

      1. The theory of efficient breach.
      2. The Hand formula for tort liability.
      3. Antitrust standing.
      4. Supply and demand explanation for efficiency of the common law.
      5. Disclosure of Brady materials as a Lemon market problem.

      • John

        Thanks!

  • kevinsdick

    Well, it seems like economics is mostly about explaining how incentives affect outcomes. Law (both criminal and civil) is mostly about proscribing incentives. So there you go.

  • http://juridicalcoherence.blogspot.com/ Stephen Diamond

    That’s part of the explanation. Topics that have been highly moralized can offer “low-hanging fruit” for those who aren’t daunted by taboos. It’s not just law and economics. The signaling of status and “team” membership is another example of a study where you can go far by saying what would be obvious to anyone if they reflected on the subject–because people usually don’t, for reasons infused with morality.

    But not all moralized topics provide easy insights. It depends on what stage of thinking the morality gets its grip. Freud’s insights about sex were by no means obvious–because sexual morality results in repression of the target ideation, whereas signaling morality results merely in suppression of reflection on it.

    Law developed in a largely conscious fashion in the interest of economic efficiency. That’s the other part of the explanation why reflecting on the economic efficiencies of law is as easy as reflecting on signaling if you’re willing to breach taboos.

  • blink

    Do you see a parallel to the general reluctance of organizations to try — or even consider arguments in favor of — prediction markets? Comparing your posts on the topics, it sounds like the underlying mechanisms are the same.

  • http://priorprobability.com/ F.E. Guerra-Pujol (Enrique)

    I hear what Hanson is saying (for example, I find the Coase theorem fascinating) but perhaps the ability of economics to explain law is exaggerated. See this paper by Eric Posner: http://www.law.uchicago.edu/files/files/146.EAP_.ContractLaw.pdf

    • http://juridicalcoherence.blogspot.com/ Stephen Diamond

      A more general argument might show that economic analysis of law can’t explain law generally. Leo Katz’s showing of how law is necessarily perverse (by which he means that its values aren’t transitive) implies that it’s not all economic (market pricing applies a ratio scale). Conflicting underlying values (not just market-pricing’s ratios) are inevitable in law.

  • Maximum Liberty

    Robin:
    I am a lawyer. Most of my colleagues don’t get along well with numbers. That is what we have accountants for.
    Theorists in the field of law and economics more directly interact with the law than most of the other types of theorists you mentioned. That is, they write for readers who are judges. Their writing must therefore appeal to judges. And the judges hate numbers.
    And, moreover, the judges’ own status and moral authority depends on being able to explain decisions persuasively (so as not to get ignored, distinguishes, or overruled on appeal). They therefore pander a further audience that hates numbers.
    Max

    • http://overcomingbias.com RobinHanson

      Yeah but most people in most fields prefer to avoid economists’ technical arguments. So there’s a huge demand for simple arguments – the problem is supply.

      • Maximum Liberty

        Robin:
        I disagree that most people in most fields preder to avoid technical arguments. The insiders always prefer the esoteric knowledge that sets them apart from outsiders. Arguments from law and economics are more likely to be presented to a judge, who is not an insider and will not be terribly impressed by an insider’s status. That creates an incentive for the simple expression of non-obvious insights.
        Another way of saying this is that I think the difference is not that non-obvious insights that could be expressed simply are more common in law and economics; rather, I think that the difference is that the incentives to express the non-obvious insights simply result in more non-obvious insights being expressed simply in law & economics.
        Max

  • Peter St. Onge

    I think your moral argument is good. But I don’t think it’s so much confusion as an innate need to satisfy the two, often contradictory criteria of efficiency and fairness. The moral multiplier is always in flux, as the culture shifts, so this introduces a constant stream of new questions and re-examinations of old ones.

  • Samuel Hammond

    Other types of economic analysis use a spectrum between “free market” and central planning/monopoly, as if taking a simple physics model and adding frictions. This is of course incredibly simplistic. In a strict sense, there is no such thing as a “free market” per se. All markets function under some legal and normative framework, from direct regulations to the type of property regime, etc. Adam Smith saw the invisible hand as being aligned with the general good only under a narrow set of circumstances – namely, with the right the rules of the game. Law and Economics is fruitful because it does away with the silly idealized spectrum and lets researchers play with the background machinery that determines the basic rules of the market.