Chapter 2;
sections: fundamentals: maximization/equilibrium/efficiency; math
tools; consumer choice and demand; supply; equilibrium; game theory; present value;
general equilibrium and market failure; risk and insurance
27: uses S & D for pollution reduction
Posner, Economic Analysis of Law, Ch. 1:
3: "The task of economics, so defined, is to explore the
implications of assuming that man is a rational maximizer of his ends in life, his
satisfactions--what we call his 'self-interest.' Rational maximization should not be
confused with conscious calculation. Economics is not a theory about consciousness.
Behavior is rational when it conforms to the model of rational choice, whatever the state
of mind of the chooser. And self-interest shoould not be confused with selfishness; the
happiness (or for that matter the misery) or other people may be a part of one's
satisfactions."
3 fundamental principles of economics:
11: "Suppose that pituitary extract is in very
scarce supply relative to the demand and is therefore very expensive. A poor family has a
child who will be a dwarf if he does not get some of the extract, but the family cannot
afford the price and could not even if they borrow against the child’s future
earnings as a person of normal height; for the present value of those earnings net of
consumption is less than the price of the extract. A rich family has a child who will grow
to normal height, but the extract will add a few inches, and his parents decide to buy it
for him. In the sense of value used in this book, the pituitary extract is more valuable
to the rich than to the poor family because value is measured by willingness to pay, but
the extract would confer greater happiness in the hands of the poor family than in the
hands of the rich one."
"As this example shows, the term efficiency when used as in this
book to denote those allocations in which value is maximized, has limitations as an
ethical criterion of social decisionmaking."
A Pareto-superior transaction is one that makes at least one person
better off and no one worse off.
Kaldor-Hicks concept or wealth maximization
15: "An important question in the economic analysis of law is
whether and in what circumstances an involuntary exchange may be said to increase
efficiency…. An…approach which is in the spirit of Kaldor-Hicks…is to try
to guess whether, if a voluntary transaction had been feasible, it would have
occurred."
Chapter 2
23: New law and economics began with Coase and also Guido Calabresi,
Some Thoughts on Risk Distribution and the Law of Torts, Yale Law Journal 70 (1961): 199.
24: "Although the economist cannot tell society whether it should
seek to limit theft, the economist can show that it would be inefficient to allow
unlimited theft and thus clarify how much of one value—efficiency—must be
sacrificed to achieve another. Or, taking a goal of limiting theft as given, the economist
may be able to show that the means by which society has attempted to attain the goal are
inefficient—that society could obtain more prevention, at lower cost, by using
different methods."
25: The positive role economic analysis of law—the attempt to
explain legal rules and outcomes as they are rather than to change them to make them
better
Many areas of the law, especially but not only the great common law
fields of property, tort, crimes, and contracts, bear the stamp of economic reasoning.
Many legal doctrines date back to the nineteenth century when a
laissez-faire ideology based on classical economics was the dominant ideology of the
educated classes.
"The [efficiency] theory [of the common law] is that the common
law is best (not perfectly) explained as a system for maximizing the wealth of
society."
"The only question in which the parties and their lawyers are
interested and the only question the judge and jury will decide is whether the cost of the
injury should be shifted from [plaintiff to defendant], whether, that it is, it is
‘just’ or ‘fair’ that plaintiff should receive compensation."
To economists, the costs are sunk. "The economist is interested in
methods of preventing future accidents that are not cost-justified and thus reducing the
sum of accident and accident-prevention costs, but the parties to the litigation have no
interest in the future."
But outcome will affect future, and litigants cannot ignore the future,
since the outcome will set a precedent.
Criticisms: (1) reductionist; (2) repulsive normative underpinnings
26: "The economic theory of law is the most promising theory of
law extant."
27: Economic analysis does not ignore "justice." It does not
consider distributive justice, but another type of justice is efficiency.
28: "There is more to justice than economics."
LEA:
Voljanovski, Cento G. "The economic approach to law: a critical introduction." British
Journal of Law and Society 7 (1980): 158.
(University College, London)
22: "[I]t is assumed that the individual is the best judge of his
own welfare and that tastes are given and stable. The former assumption (often referred to
as consumer sovereignty) clearly reveals the normative basis of economics (and the notion
of efficiency) despite disclaimers by many economists that it is value free."
23: "The ex ante basis of the economic approach
necessarily leads to a differing view of the legal system; law and legal procedure are
evaluated from the perspective of an incentive system and not, as is common, as a
mechanism for resolving disputes."
26: "[T]he most important [market failure] for legal analysis is
an external cost (also referred to as an externality, spillover, or third party
effect."
26: Coase theorem: "property rights do not affect the efficiency
of market forces when exchange is costless, although the efficient outcome may vary with
the law because of its redistributive effects."
26: "[I]n the ideal market setting law can pursue non-economic
objectives without any sacrifice of economic efficiency."
27: Calabresi: the "principal function of accident law is to
reduce the sum of the costs of accidents and the cost of avoiding accidents."
27: "The efficiency goal of negligence is to deter uneconomical
accidents by allocating the loss to the 'cheapest cost avoider.'"
27: Amartya Sen: efficiency itself is not such "a momentous
achievement from the point of view of social welfare. A person who starts off ill-endowed
may stay poor and deprived even after...[trading] and if being...[efficient]...is all that
competition offers, the propertyless may be forgiven for not regarding the achievement as
a 'big deal.'"
31: "legal processes or the way of doing a thing (may) yield
utility" that individuals are willing to sacrifice efficiency for.
32: "The economics of crime, it is true, has been largely
predictive, but this is probably a declining research area for economists and it has had a
minimal impact on legal thinking about criminal law."
32: "In contrast to the experience with criminal law, economics
has had a considerable impact on legal scholarship on tort and contract."
34: "The neo-institutional approach...focuses directly on
transaction cost considerations...in an attempt to explain the choice between market and
various nonmarket modes of organizing production, and inteprets institutions and their
evolution as arising from attempts to economize on transaction costs."
Leff, Arthur Allen. "Economic Analysis of law: some realism about
nominalism." Virginia Law Review 60 (1974): 451.
43: "[O]ne is struck by the picture of American society presented
by Posner. For it seems to be one which regulates its affairs in rather a bizarre fashion:
it has created one grand system--the market, and those market-supportive aspects of law
(notably "common," judge-made law)--which is almost flawless in achieving human
happiness; it has created another--the political process, and the rest of "the
law" (roughly legislation and administration)--which is apparently almost wholly
pernicious of those aims."
47: "In brief, there seems to be some normative content in
Posner's neo-Panglossianism after all. Only some kinds of inequality are to be accepted as
an unquestionable grandnorm upon which to base efficiency analyses. The transfers
than come about against a background of wealth inequality are fine; any that come about
against a background of inequality in strength, or the power to organize and apply
strength, are unjustifiable. Some inequalities are apparently more equal than others--and
all without reference to any apparent normative criterion at all."
47: fiat justitia ruat caelum: Let justice be done
though the heavens should fail.
White, James Boyd. "Economics and law: two cultures in tension." Tennessee
Law Review 54 (1987): 161.
(University of Michigan)
52: "Each actor is assumed to be motivated by an unlimited desire
to acquire or consume. Since each is interested only it its own welfare, each is in
structural competition with all the others."
57: "[T]o reduce the ideas of voluntary action, autonomy, and
liberty to mere freedom from restraint, or, even more narrowly, to freedom from
governmental restraint...is deeply impoverishing. For us [professors of law] political
liberty has not meant merely freedom from restraint but enablement or capacitation, and
this is always social and communal in character. The question is not only how far people
are free or restrained in their exercise of dominion over the assets that nature and
society give them, but far more importantly, what our community enables its people to do
or to become. What range of responsibilities and participations, what opportunities for
self-development and education, what roles for self-government, does this community offer
its members? These are the serious questions about liberty that one could imagine fighting
and perhaps dying for, liberty as an aspect of community. To speak to such questions one
needs a standard of human and political excellence of a kind that economics by its nature
cannot have."
58: "The great phrase in the Declaration of Independence--'all men
are created equal'--is partly a theological statement about the conditions under which we
are created and partly a political statement about the obligation of government to
acknowledge, indeed to create or recreate, that equality."
62: "Economics has made real contributions to the law..., in
teaching us, as Ronald Coase has done, that we should focus our attention on the degree to
which any arrangements we try to impose may be bargained away, or, as Judge Posner has
done, that there are new ways to think about 'negligence' and 'strict liability,' or, or
more traditionally, that the actual burden of a tax may fall upon someone different from
the one who pays it in the first instance."
LEA:
65: "Some economists have done studies to learn what circumstances
promote cooperation among people and what types of people tend to cooperate most. The
typical experiment involves setting people up in prisoner's dilemma situations in which,
if the affected parties cooperate they maximize their joint product, but each party also
has individual incentives to defect or cheat and better him or herself at the expense of
the group. Interestingly, it seems that economists are more likely to defect and act on
their individual incentives to the detriment of the group than the general population.
(Gerald Maxwell & Ruth E. Ames, "Economists Free Ride; Does Anyone Else?"
Journal of Public Economics 15 (1981): 295.) However, it seems that this tendency to
act on individual incentives is more an identifying feature of people who choose to study
economics rather than a characteristic that is learned in the study of economics since
underclassmen in economics display the characteristic with almost the same frequency as
upperclassmen in economics. (John R. Carter & Michael P. Irons, "Are Economists
Different, and If So, Why?" Journal of Economic Perspectives 5 (1991): 171.
Ellickson, Robert C. "Bringing culture and human frailty to rational actors: a
critique of classical law and economics, symposium on post-Chicago law and
economics." Chicago-Kent Law Review 65 (1989): 23.
69: "Several strands in the current muddle of takings doctrine
seem consistent with an unstated assumption that property that is psychologically vested
is more worthy of protection than is property that is psychologically on the
horizon." Per Supreme Court: "physical invasion" is a taking, but
"regulatory restriction" is not.
71: "If simplicity would lend power to a social-scientific idea
(such as to the rational-actor model itself), simplicity in a legal rule might also add to
its instrumental force." Argues for stability of law.
72: "Workers compensation statutes, first passed in the early part
of this century, make an employer strictly liable for employee injuries on the job. The
strongest version of the Coase Theorem predicts that these statutes would not have
increased employer safety efforts, because, even when workers bore the risks of employment
injuries, workers should have agreed to wage concessions in order to obtain the
cost-justified level of job safety. There is empirical evidence, however, that the advent
of workers compensation did significantly reduce worker fatalities. A possible
explanation for thie result is cognitive dissonance; once on a job, an employee might
start walling out information about its hazards, and thus come to undervalue the benefits
of innovations in safety equipment."
73: "'In devising a normative theory one may wish to go beyond
tastes as they exist as a benchmark of value. For if tastes derive from some social
process, and defects in that process can be identified, one may wish, for example, to
treat as controlling those tastes which would exist if the process had not been
flawed.'" (Warren Schwartz, J. Legal Educ. 33 (1983))
74: a "suggestive story about how a human society might succeed in
inducing its members to shift...toward cooperative outcomes": "The story depends
on two assumptions. The first is that cultural institutions that promote cooperation among
the members of a group are more likely to endure than are institutions that are less
supportive of cooperation. The second is that, in many contexts at least, first-party
systems of social control are cheaper to administer than third-party sysstems are."
74: "Sociologists refer to taste-shaping as the internalization of
norms."
75: "[A] puzzle for the unalloyed rational-actor analyst is that
diners leave tips even under circumstances where the failure to tip could not possibly
lead to external sanctions, such as harm to reputation. A possible psychological
explanation for habitual tipping is that it saves a diner the transaction costs of having
to dope out the strategic considerations in a particular restaurant setting. A possible
sociological explanation is that the obligation to tip is internalized and enforced by the
threat of self-imposed guilt."
76: "Richard Posner...has been a leader in trying to incorporate
the possibility of altruism into law and economics theory."
77: "For more than a dozen years Posner has advanced a pair of
highly controversial theories of the results of judicial decisions. In brief,
these theories suppose that common law decisions tend to promote the Kaldor-Hicks
efficiency of resource allocation, while statutory decisions tend to safeguard the terms
of deals that interest groups have previously struck with legislatures. A weakness in
these theories has been Posner's explanation for the motivations that would lead
self-interested, rational judges to reach these results."
78: "In his 1985 book, The Federal Courts, Posner...notes that one
of the attractions of a judgeship is 'the opportunity it offers for constructive public
service,' and admits that, when deciding cases, judges in the United States have an
unusual degree of freedom to choose among competing political concepts.
"The admission of the role of ideology creates tension within
Posner's analytic framework."
79: "In the coming years, lawyer-economists will be wise to
investigate the benefits of complicating the rational-actor model by admitting two
notions: the frailty of human cognition and the possibility of a self-enforced altruism
arising from the influence of culture."
Coase, R.. "Economics and
the Contiguous Disciplines." Journal of Legal Studies 7 (1978): 201-217.
Reprinted in O&V: 3-8.
6: Economists "are able to use the 'measuring rod of money'."
7: Economists also find that othe fields influence "the economic
system itself."
7-8: "The need to take into account the influence of other social
systems, above all the legal system, in analysing the working of the economic system, is
now widely accepted by economists." 8: Economists must do this work themselves.
Becker,
Gary S. The Economic Approach to Human Behavior. Chicago: University of Chicago
Press, 1976, 3-14. Reprinted in O&V: 8-10.
8: "The combined assumptions of maximizing behavior, market
equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart
of the economic approach...."
9: "The assumption of stable preferences provides a stable foundation for generating
predictions about responses to various changes, and prevents the analysis from succumbing
to the temptation of simply postulating the required shift in preferences to 'explain' all
apparent contradictions to his predictions."
9: Missed opportunities are the result of costly
information--tautological, but the result has been productive in predicting responses.
Friedman, David. "Law and Economics." In
David Henderson, ed., The
Concise Encyclopedia of Economics, Indianapolis: Liberty Fund, 2002.
The fine for speeding is not higher because our goal is not eliminate
all speeding, but only inefficient. [Also, I might add, to leave a residual incentive not
to take other risks.]
Klevorick,
Alvin. "Law
and Economic Theory: An Economist's View." American Economic Review 71
(May 1975): 237-243. Summary in O&V: 31.
237: One role: to provide information when market issues are
involved--eg, asset valuation. "In such a situation, the economist essentially plays
the role of technician."
238: Cases involving explicit economic issues, such as "the areas
of antitrust law, public utility regulation, and labor law" where "the issues at
hand concern the most efficient way, or at least more efficient ways, of structuing an
industry or a sector of the economy or the relationship between economic agents...."
Can help assess whether the approach helps secure the end--direct effects, indirect
effects, equity effects ("supertechincian")
239: "propounder of a new vocabulary, a new analytical structure
for viewing a traditional legal problem."