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Economic Analysis of Law

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E
Economic Analysis of Law
Alain Marciano
Faculté d’Economie, Université de Montpellier
and LAMETA-UMR CNRS, Montpellier, France
Abstract
The purpose of this entry is not to identify the
central claims upon which rests an “economic
analysis of law.” That goes far beyond what
could be done. Our goal is to characterize meth-
odologically an economic analysis of law and, as a
consequence, to establish and explain the distinc-
tion that exists between an “economic analysis of
law” and “law and economics.”
Definition
Economic analysis of law is the field defined by
the use of economics to analyze legal phenomena
and the functioning of the legal system.
Introduction
The purpose of this entry is not to identify the
central claims upon which rests an “economic
analysis of law.” That goes far beyond what
could be done. Our goal is to characterize meth-
odologically an economic analysis of law and, as a
# Springer Science+Business Media New York 2016
A. Marciano, G.B. Ramello (eds.), Encyclopedia of Law and Economics,
DOI 10.1007/978-1-4614-7883-6_598-1
consequence, to establish and explain the distinc-
tion that exists between an “economic analysis of
law” and “law and economics.”
Usually, those terms are used interchangeably
to describe any economic work dealing with law
or legal rules. For instance, “The Problem of
Social Cost” (Coase 1960) that represents the
“origin [of . . .] the modern law and economics
movement” (Hovenkamp 1990, p. 494; emphasis
added) and marks the passage from an “old” to a
“new” law and economics (Posner 1975) is also
viewed as the article that “established the para-
digm style for the economic analysis of law”
(Manne 1993). Symmetrically, an Economic
Analysis of Law (Posner 1973) was viewed as
“coursebook in law-and-economics” (Krier
1974, p. 1697). One could also quote Cento
Veljanovski (1980, p. 160) and even Richard
Posner, one of the founders of an economic anal-
ysis of law, who characterized his work as one of
the “recent developments in law and economics”
(1975, emphasis added). Many additional refer-
ences could be cited that would confirm that the
two expressions are usually viewed as
synonymous.
Yet, sometimes, they are distinguished. In this
regard, Ronald Coase is probably one of the most
significant authors to quote. He explained that
“two parts” coexist in law and economics (1996,
p. 103; or Coase in Epstein et al. 1997, p. 1138),
which are “quite separate although there is a con-
siderable overlap” (Coase 1996, p. 103). The first
part corresponds to what is called law and
2 Economic Analysis of Law
economics and implicitly corresponds to the ana-
lyses to which Coase attached his name. The
second part, to which “Judge Posner is the person
who has made the greatest contribution” (Coase in
Epstein et al. 1997, p. 1138), is “often called the
economic analysis of law” (Coase 1996, p. 103).
This is the distinction we want to emphasize in
this text. Our point is that a better understanding
of an “economic analysis of law” requires careful
understanding of the differences with “law and
economics” and, therefore, a careful understand-
ing of what is law and economics.
A Negative Characterization of an
Economic Analysis of Law: Law
and Economics
In a “law and economics” approach, the focus is
put on the economy, the economic system, or
economic activities, and, since economic activi-
ties take place in an institutional, legal environ-
ment, a correct understanding of the economy and
of economic problems requires to take into
account how and how far legal rules do affect
the economy. This is precisely what law and eco-
nomics is. This is exactly what Coase did in “The
Problem of Social Cost (1960).” He “used the
concept of transaction costs to demonstrate the
way in which the legal system could affect the
working of the economic system” (Coase 1988,
p. 35). Later, he added: “[F]or me, ‘The Problem
of Social Cost’ was an essay in economics. It was
aimed at economists. What I wanted to do was to
improve our analysis of the working of the eco-
nomic system” (1993, p. 250). From this perspec-
tive, Coase was one of the founders of “law and
economics” in its modern form but not of an
economic analysis of law.
What is important to correctly understand the
distinction between law and economics and eco-
nomic analysis of law is that a law and economics
approach rests on a definition of economics by
scope, object, domain, or subject matter. In other
words, what distinguishes economics from other
social sciences is that each of these sciences has its
own subject matter. Once again, this was the per-
spective explicitly adopted by Coase, for whom
“economists do have a subject matter” (1998,
p. 93). It corresponds to “certain kinds of activi-
ties” (1978, p. 206) or, more broadly, “the work-
ing of the economic system, a system in which we
earn and spend our incomes” (1998, p. 93). Or, in
a slightly different way, economists study “the
working of the social institutions which bind
together the economic system: firms, markets for
goods and services, labour markets, capital mar-
kets, the banking system, international trade, and
so on” (1978, pp. 206–207). In other words, econ-
omists study the activities that take place on
explicit markets. That’s the only set of activities
that they can analyze with their tools. Coase
again: economists “should use these analytical
tools to study the economic system” (1998, p. 73).
This view has two implications. The first one is
that economists should not study what is outside
of the scope of their discipline, in particular legal
rules, legal phenomena, and legal cases. They do
not fall into the subject matter of economics and
are not studied by law and economics. They are
important but only to give “details of actual busi-
ness practices (information largely absent in the
economics literature)” (Coase 1996, p. 104). Sec-
ond, law and economics does not only exclude
certain objects from its domain of investigation
and also excludes noneconomists from the analy-
sis of economic activities. Coase was very clear
about that: the subject matter is “the dominant
factor producing the cohesive force that makes a
group of scholars a recognizable profession”
(p. 204), “the normal binding force of a scholarly
profession” (p. 206), and what “distinguishes the
economics profession” (p. 207). Thus, the delin-
eation or delimitation of the scope of economics
establishes a distinction with other social sciences
and guarantees the unity and the autonomy of
economics.
What Is an Economic Analysis of Law
By contrast with “law and economics” presented
above, an economic analysis of law implies a
radical change in the object of study. The focus
is no longer put on economic activities – defined
as the activities that take place on markets – and
Economic Analysis of Law
the objective is no longer to understand how legal
rules influence the economy. The legal system is
no longer seen as the environment in which eco-
nomic activities take place and therefore external
to the object of study – the working of the eco-
nomic system. It becomes the object of study. In
fact, and very straightforwardly, an economic
analysis of law consists in using economics to
analyze the legal system and how it works or, to
quote Lewis Kornhauser, “Economic analysis of
law applies the tools of microeconomic theory to
the analysis of legal rules and institutions” (2011).
This means, in particular, that legal rules are no
longer taken as given and exogenous. An eco-
nomic analysis of law endogenizes legal rules.
To quote Posner, an economic analysis of law
consists in “the application of the theories and
empirical methods of economics to the central
institutions of the legal system” (1975, p. 39).
From a methodological perspective, an eco-
nomic analysis of law rests on and requires a
specific definition of economics – completely dif-
ferent to the definition of economics used in law
and economics; the difference in definition of
economics is such that it makes law and econom-
ics and an economic analysis of law incompatible.
Indeed, an economic analysis of law does not and
cannot rest on a definition of economics by sub-
ject matter or by scope or by domain, as it is the
case with law and economics. Analyzing the
working of the legal system is possible and legit-
imate, only if the very idea that there exists a
subject matter specific to economics, to which
economists should restrict their attention, is aban-
doned. Otherwise, there would be no justification
to analyze, among other things, the behavior of
criminals, judges, prosecutors, or attorneys and
any of the phenomena that are usually studied in
economic analyses of law. These behaviors and
phenomena are not, strictly speaking, of economic
nature because they do not take place on markets.
They can be studied by economists only because it
is assumed that any kind of activity and of behav-
ior or any phenomenon, even those taking place
outside of markets, can be studied by economic
theory. This is exactly the view adopted and pro-
moted by Gary Becker who stressed that eco-
nomic theory “applies to both market and
3
nonmarket decisions” (1971, p. viii) or “the eco-
nomic approach is clearly not restricted to mate-
rial goods and wants, nor even to the market
sector” (1976, p. 6).
Let us note here that such a change in
perspective – the expansion of the domain of
economics beyond its “traditional”
boundaries – is a consequence of the assumption
that no difference exists between market and
nonmarket behaviors. Individuals are supposed
to always behave in the same way. As Becker
wrote, “human behavior is not compartmental-
ized, sometimes based on maximizing, sometimes
not, sometimes motivated by stable preferences,
sometimes by volatile ones, sometimes resulting
in an optimal accumulation of information, some-
times not” (1976, p. 14).
This then means that all social sciences have
exactly the same subject matter. All social sci-
ences can study the same behaviors and the same
phenomena. The only difference that exists
between them is the method or the approach they
use (Becker 1971). Then, from such a perspective,
economics is defined or rather described or
characterized – Posner (1987, p. 1) argued that
economics cannot be defined – by its method.
Economics is a “way of looking at human behav-
ior” (Becker 1993, italics added). To use Posner’s
words, economics is “a powerful tool” (1973, p. 3)
or “an open-ended set of concepts” (Posner 1987,
p. 2), which can be used to analyze any kind of
human or social phenomenon – including legal
ones. Then, “when used in sufficient density these
concepts make a work of scholarship ‘economic’
regardless of its subject matter or its author’s
degree” (Posner 1975). It is only if this definition
of economics is adopted that an economic analysis
of law is possible.
A Few Historical Landmarks
Cesare Beccaria and Jeremy
Bentham – sometimes Gladstone (see Posner
1976) – are viewed as the “predecessors”
(Stigler 1984, p. 303) of an economic analysis of
nonmarket behavior (among others: Posner 1975,
1993, p. 213) and, more specifically, of economic
4 Economic Analysis of Law
analyses of crime and punishment. Indeed, they
were the firsts to analyze illegal behaviors and
illegitimate activities as the result of an “economic
calculus” (Becker 1968, p. 209) or of a “rational
choice” (Posner 1993, p. 213).
In the twentieth century, the first who devel-
oped an economic analysis of law is Guido
Calabresi in the early 1960s. In “Some Thoughts
on Risk Distribution and the Law of Torts (1961;
see also Calabresi 1965)” by contrast with Coase,
Calabresi used economics to analyze a legal
problem – namely, the compensation of victims
of car accidents in different systems of liability.
This was acknowledged by Walter Blum and
Harry Kalven (1967, p. 240), Posner (1970,
p. 638) and Frank Michelman (1971, p. 648).
However, Calabresi also insisted that his work
should not be viewed as a form of economic
analysis of law. We suggested elsewhere that his
analysis should be viewed as a form of heterodox
economic analysis of law, mainly for two reasons.
First, he rejected the behavioral assumption that
economic analyses of law use – individual ratio-
nality. Second, he eventually criticized
standard – read, Posnerian – economic analyses
of law because it assumes that the “world” – the
conditions in which individuals act and live – is
given and by analyzing how individuals chose in a
set of given conditions. To him, the law could be
used to change the world and not to promote its
economic efficiency (Kalman 2014). In other
words, Calabresi claimed that economics, and
economic analyses of law, should not be only
about the allocation of resources. And, one could
add, Calabresi did not make the methodological
move of explicitly defining economics as a
method.
It was Becker who did this move, because and
when he was the first economist who consistently
and repeatedly used economics to analyze
nonmarket behaviors and to explicitly define eco-
nomics as an “approach.” Among his writings,
“Crime and Punishment: An Economic
Approach” (1968) must be singled out as the
first (modern) economic analysis of a legal prob-
lem, namely, crime and illegal behaviors. Indeed,
Becker was the first to explain crime as the result
of a rational decision, of an economic calculus,
that is, of the comparison of costs and benefits. As
mentioned above, this comes from the idea that all
human behaviors are of the same nature and can
be explained as if they were rational, an assump-
tion that remains crucial to an economic analysis
of law.
However, Becker’s direct contributions to an
economic analysis of law were scarce. The ones
who really founded an economic analysis of law
are William Landes, Isaac Ehrlich, and Richard
Posner.
Landes and Ehrlich were Becker’s PhD stu-
dents (Fleury 2015, 2016). They transformed
Becker’s insights into a specific field of research.
Ehrlich studied the participation in illegitimate
activities and deterrence (1967, 1970), and
Landes analyzed the effects of fair employment
legislation on the well-being of discriminated
nonwhites (see Fleury 2014). Also of particular
importance, Landes was the first who developed
an economic analysis of courts (1971). Landes’s
work was important because it was the first to
really propose a model of the working of the
judicial system, taking into account the two sides
of the legal “market.” Thus, while Becker had
introduced the assumption that criminals are ratio-
nal, Landes introduced the assumption that pros-
ecutors also are rational.
Landes played also an important role for hav-
ing involved Posner in a program in law and
economics launched by the National Bureau of
Economic Research (Landes 1998). Posner
became one of the most important figures in eco-
nomic analyses of the law. Not only he invented
the expression, in the title of his 1973 book, and
launched the first journal devoted to an economic
analysis of law – namely, the Journal of Legal
Studies – but he also contributed to explicitly
define the field, providing its methodological
bases and incessantly opening up new domains
of analysis. He is one of the most
important – quantitatively and
qualitatively – contributors to the field. Posner’s
contribution cannot be described or summarized,
and, accordingly, it could be said that it is partic-
ularly difficult to summarize an “economic anal-
ysis of law.” However, let us note that Posner
generalized the use of the assumption that
Economic Analysis of Law
individuals are rational in economic analyses of
law; in particular, he developed and expanded the
analyses of judicial decision making – explaining
that judges make their decisions by maximizing a
utility function. Actually, Posner linked this claim
to another claim about the efficiency of the law, at
the same time a positive and normative claim.
Rationality and efficiency are two central claims,
maybe the two pillars upon which rest economic
analyses of law.
Conclusion
We suggest to distinguish between “law and eco-
nomics” and an “economic analysis of law.” An
economic analysis of law is based on a definition
of economics as a method, a (set of) tool(s) that
can be used to analyze the functioning of the legal
system. The distinction was invented in the early
1970s but remains central to understand most of
the analyses made at the intersection of economics
and the law.
Acknowledgments Special thanks to Magdalena
Malecka for her comments on a previous version.
Cross-References
▶ Austrian Law and Economics
▶ Austrian School of Economics
▶ Beccaria, Cesare
▶ Becker, Gary S.
▶ Coase
▶ Coase Theorem
▶ Consequentialism
▶ Cost of Accidents
▶ Law and Economics
▶ Law and Economics, History of
▶ Posner, Richard
▶ Rationality
5
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