From the October/November issue of CEI UpDate
Law’s Order: What Economics Has To Do With Law And Why It Matters
Princeton University Press · 2000 · 329 pages · $20.00
In Law’s Order, David Friedman accomplishes his objective of constructing an introductory level text for the relatively new field of law and economics. The Rational Choice Postulate, the Coase Theorem, property and liability rules, contract law, tort rules, and criminal law are all given in-depth analysis at a level appropriate for readers who have a working understanding of micro-economics but limited experience with the law itself. In addition, Friedman provides detailed examples from areas such as intellectual property, antitrust, and private dispute resolution mechanisms to demonstrate how these principles apply to the real world. As a bonus, he includes a critique of Posner’s theorem of common law efficiency. Only game theory is left behind for authors seeking a more advanced audience.
Friedman begins by stating that the purpose of law and economics is to judge the validity of law by analyzing the incentives it creates for individuals. Their responses to those incentives determine the effectiveness of particular rules. In his discussion on criminal law, he formalizes this approach as the following:
One of the attractions of the economic analysis of law is that it provides a way of answering questions about what the law ought to be, what rights we ought to have. It starts with what looks like a very weak premise¾that one should design legal rules to maximize the size of the pie. It assumes nothing at all about the sorts of things we expect legal and ethical rules to be based on: desert, rights, justice, fairness.
Thus, the field is concerned with answering three particular questions: what effects do various rules have, why do various rules exist, and which rules should exist? To formulate a generalized approach to these questions, Friedman critiques the writings of Alfred Marshall on economic efficiency. In his conclusion, he states that efficiency is a useful, though imperfect, method with which to judge legal rules and outcomes. From this, he deduces that Pareto’s approach to economic optimization creates problems because, in the real world, very few legal changes can be made that yield benefits to some without imposing costs on others.
As a comprehensive example of how various property and liability rules produce different outcomes, he uses the traditional case of farms located near railroad tracks that catch fire from sparks thrown by passing trains. He explains that the potential transaction costs of negotiation and the accuracy of judgments handed down by the courts impact the efficiency of various rules. In his conclusion, he demonstrates that property rules are effective when negotiation costs are low, liability rules are effective when litigation costs are low, and the entire process is dependent upon the court’s ability to find the “least cost avoider” of the externality. From here, he introduces the Coase Theorem and uses it to analyze rules in property law, contract law, and tort law.
In the area of criminal law, he begins with Becker’s traditional view that efficient punishment involves combining the correct penalty with the correct probability of being caught. Thus, the punishment imposed should equal the amount of damage done to the victim. However, he warns that using an efficient punishment can create a risky rent-seeking situation in which law enforcement officials attempt to expropriate various forms of property from citizens. Drug-related takings and the killings at Ruby Ridge are given as extreme examples of this problem.
To critique Posner, Friedman simply points out that many judges engage in the practice of economic ignorance. As evidence of this, he points to various interest groups that have purchased favorable decisions through lobbying over time. Trial lawyers are given as an obvious example of this. In addition, he cites the growing tendency of courts to retreat from enforcing contracts over the last eighty years. Although he stops short of endorsing Tullock’s critique of the common law, he does cast doubt on Posner’s view that judges must hand down economically efficient rulings to preserve their legacies over time.
Although Law’s Order is more formal than The Machinery Of Freedom and The Hidden Order, it does contain many effective barbs. For example, when discussing rationality, Friedman points out that expecting individuals to optimize on their own is a bad assumption for judges and legislators who are supposed to be acting in their best interests. When discussing the reputations of various judges, he comes dangerously close to accusing many Supreme Court Justices of engaging in the sort of self-congratulatory debauchery that led Thomas Sowell to characterize tenured university professors as “feudal barons” in Inside American Education. In addition, he uses a humorous anecdote about a trip to a Humane Society shelter to demonstrate the perverse effects that adoption agencies have on adoption markets in the United States.
While Friedman expects his readers to have a detailed understanding of both the Chicago and Public Choice approaches to economics, his book is an outstanding introduction to law and economics. Although his criticism of the use of genetic testing in insurance markets and defense of punitive damages in tort claims will cause some controversy, he does a commendable job familiarizing the reader to the works of Coase, Posner, Epstein and others. Most importantly, he introduces law and economics as a science used to find efficient laws. Readers will be able to use his work to better understand the more advanced research and recommendations made by other scholars in the field.