A caricature of classical economic theory has it that people’s behavior can be fully explained by the rational pursuit of their self-interest. We act egoistically and opportunistically. It is a vision of human behavior which is rather bleak.
Professor Larry DiMatteo referred in his Heremans Lecture of today to the “bad man”-hypothesis of the great justice Oliver Wendell Holmes. Holmes described in The Path of the Law the bad man – and women can also be bad men – as someone “who cares only for the material consequences which such knowledge [of the law] enables him to predict.” The bad man “cares nothing for an ethical rule which is believed and practiced by his neighbors.” The bad man cares about the law because of the sanctions imposed for violating it.
This bad man-hypothesis, written down in 1897, can be said to be the intellectual forerunner of economic analysis of law.
The very fact of that these lectures can be offered shows that this dark and bleak view should not not exhaust our vision of human kind. The Heremans family, who made this lectures series possible, has showered us this week with the positive externalities of their generosity. The scholarly contributions of Professor Dirk Heremans, recently often together with Dr Tine Heremans, have established law and economics as a field of study in Belgium.
Professor DiMatteo introduced us this week to a topic which is at the same time classic and novel. Classic, because what could be more fundamental to law and to law and economics than contract law. Novel, because he applied the insights of behavioral law and economics.
This is already the third edition of the Heremans Lecutures. The Law School and the Faculty of Economics and Business of KU Leuven have welcomed before Professor Giuseppe Dari-Mattiaci of the University of Amsterdam (on the proprietary aspects of corporate law) and Professor Katharina Pistor of Columbia University (on the legal code of finance).
“Firms, contracts and financial structure”: the common thread in the three lectures is also the title of probably the most accessible book by Oliver Hart, co-winner of last years’ Nobel Prize in economics. His work on incomplete contracts has been tremendously important for economic analysis of law.
Hart’s work shows how contract theory is important for understanding firms. Professor Di Matteo reminded us this week how, on the other hand, many contracts of long duration – organizational contracts or relational contracts – resemble firms without actually being legal entities. The future of economic analysis of contracts and, in my view, even of traditional legal contract scholarship lies in these organizational contracts aiming to govern complex economic activities without creating a new legal entity. See here for an interesting primer on this subject.
This post was taken from the closing words during the 2017 Heremans Lectures. The picture above the post shows Professor Dirk Heremans (KU Leuven). The picture in the post shows Professor Larry DiMatteo (University of Florida).