Where (Law and) Economics Went Wrong

Reflections of a lawyer upon David Colander and Craig Freedman, Where Economics Went Wrong. Chicago’s Abandonment of Classical Liberalism, Princeton University Press, 2019, xii + 267 p.

In Where Economics Went Wrong. Chicago’s Abandonment of Classical Liberalism David Colander and Craig Freedman argue that economics went wrong when economic policy recommendations were presented as applied science. Policy, according to the authors,

“needs to be drawn from a complicated blend of judgments about ambiguous empirical evidence, normative judgements and sensibilities that may be framed, but are not determined, by scientific theory. Put another way, economic policy is a blend of engineering and judgment – an “art and craft”, not a scientific endeavor that follows from economic theory.” (p. 1 – with “sensibilities” they refer to essential policy considerations and factors that are not easily measured or quantifiable, see p. 163, note 1)

They do not dispute that there is a scientific branch of economics, but an economist should not make policy recommendations with the aura of an economic scientist. Policy decisions are too messy for a crisp scientific methodology and, while they should be informed and illuminated by economic science, they are not determined by it. The “ought” of policy precepts rarely follows directly from the “is” of economic science.

The authors argue that classical liberalism – with which they sympathize: their intuition seems to be critical towards government intervention – had a methodological firewall between policy and science. Economists could and should make policy recommendations, but they should not do so as scientists.

The main story of the authors is that this methodological divide between science and policy was abandoned by the post-Keynesian welfare economists – not, Colander and Freedman stress, J.M. Keynes himself – from MIT and Harvard (and also LSE and Cambridge) who developed a formal scientific framework to argue that laissez-faire was not optimal. Policy followed from the mathematical model.

Triggered by this challenge, the laissez-faire economists of Chicago abandoned the classical firewall between science and policy and developed an alternative scientific pathway leading to laissez-faire policy precepts.

The authors argue for a return to the classical firewall between science and policy. Policy is more an “art and craft”:

“in the art and craft path, theory receives far less respect. The limitations of scientific empirical work are accordingly given more focus, which means that the limitations facing scientific solutions to policy problems attract additional attention. The necessity that policy analyses include non-scientifically based judgments and normative values is explicitly recognized. These in turn are intertwined with relevant sensibilities and non-scientific factors. Such aspects of policy analysis are unlikely to be usefully debated by employing the exacting methodological rules of science.” (p. 121)

Theory does not provide a definitive blueprint for policy precepts. Policy involves muddling around without definitive answers.

*  *  *

This story is perhaps one that will not excite all economists. It paints a picture that is a far cry from the “physics of social sciences” that economists sometimes see when they look in the mirror. Arts and craft, muddling around, no definitive answers, tinkering with methodologies that are never pure, ….: it sounds almost like – horresco referens – what lawyers do.

The relationship between Law & Economics has been not unlike that between Monkeys & Biologists. Biologists will happily concede that they have learned a lot about monkeys. However, it will be rather rare that a biologist acknowledges that he got a particular deep insight from a monkey, not about the monkey.

It might surprise economists and probably even lawyers, but economists can perhaps learn something from the methodology of lawyers, even if it is just the humility of not having a crisp clean methodology which leads to definitive answers. A good biologist will recognize he has more in common with his monkeys than he cares to hope.

While Colander and Freedman do not this discuss law at all – and hardly law and economics – it is striking how many of the issues with economics seem familiar to lawyers who grapple with the status of their occupation in academia. Law as well had a positivist period where lawyers assumed that solutions could be more geometrico deducted from rules (statutes or precedents). Lawyers as well believed – or maybe still believe? – in a closed formal system which would lead to a correct answer, regardless of the biases or values of the decision makers. Modern legal authors have convincingly argued that law might be a formal system but it is not a closed one. Rules contradict each other without there always being a meta-rule which resolves the conflict; rules need to be interpreted and interpretation rules do not give a definitive answer; a set of facts can often be subsumed under conflicting rules. Because of this intrinsic indeterminacy of the legal system the role of human judgment, relying on non-legal factors is paramount. Judges, and by extension all lawyers applying rules, make policy decisions.

That is why the concept of “legal science” has a flaky ring to it. A far better name, in my view, is the down-to-earth Latin jurisprudentia (not to be confused with the high-flown modern English derivative “jurisprudence”). Jurisprudentia evokes skill, common sense, practical judgment. It acknowledges the role of human judgement. Such judgement is enlightened by learning for sure, but the learning will rarely solely determine the outcome of a hard case or the soundness of a rule. For this reason I personally prefer in Dutch the quaint “rechtsgeleerdheid” to the modern “rechtswetenschap” which somehow sits ill in the mouth.

*  *  *

It is no surprise that law and economics took off earlier and met with more enthusiasm in common law countries. Continental lawyers traditionally see their system as a geometrically organized closed set of norms. In such a view of one self, it easy to entertain delusions of self-sufficient academic grandeur and to resist the encroaching claims of an economic analysis of law.

Common law lawyers  on the other hand see their discipline as an art, not unlike plumbing, which is very situational and dependent on the particular facts of the individual case (see S. Swaminathan, “Mos geometricus and the Common Law Mind: Interrogating Contract Theory”, The Modern Law Review, Vol. 82 issue 1, 2019, p. 49. It is striking how J.M. Keynes in a similar vein suggested economic policy advisers should see themselves as dentists, see Colander & Freedman, p. 130).

In such a view of one-self, first of all, there will be less resistance against the idea that the soundness of the outcome will be determined by non-legal considerations. This creates an openness to economic analysis. Secondly, economic analysis holds the allure of rationalizing a messy craft.

So where does law and economics go wrong? In my opinion: where it overreaches and has normative pretensions about what the law should be based on a criterion of efficiency. This approach alienates lawyers, brings in ideological biases under the guise of science and is naïve scientism disregarding the messiness of policymaking. In other words: economic analysis of law goes wrong where it presents definitive answers with the aura of science.

It does not have to be that way. A more humble stance is not alien to economists. Such an approach can be found for instance in Jean Tirole on inequality: “When we understand the extent of inequality and have analyzed the effects of redistributive policies, we can begin to make choices about the kind of society we want. On this an economist has little to say, except as an ordinary citizen.” (Economics for the Common Good, Princeton University Press, 2017, p. 57)

Economic analysis of law at its best holds the power to destroy the positivism and formalism of lawyers by pointing out the policy-making at the heart of lawyers’ activities and the real life consequences of rules. It can make lawyers understand the issue and enlighten them about the costs and benefits of possible solutions.

Economic analysis of law at its worst replaces legal positivism with economic positivism pretending that policy differences will be resolved by the advances in economic science (see Milton Friedman’s The Methodology of Positive Economics). Also at its worst it trades in the believe in a formal legal system leading to a correct answer for an equally unworldly believe in precepts directly derived from formal economic models.

One of the foundational texts in the field of economic analysis of law, The Problem of Social by Ronald Coase, was precisely concerned with bringing the real world of transaction costs into the abstract economic model. Colander & Freedman – who do not consider Coase to be part of the Chicago School – stress how the purpose of Coase was to bring in transaction costs when making policy decisions (p. 106 and 109). If transactions costs exist, government action could be preferable over a market solutions in dealing with externalities. (The Coase Theorem as it features prominently in any textbook of law and economics is often used to argue the exact opposite: law should be focused on diminishing transaction costs thus making government intervention superfluous. Some of the most interesting pages for a student of economic analysis of law in the book by Colander & Freedman describe how the Coase’s paper was transformed by George Stigler in a theorem named after Coase, but contrary to his intentions (p. 102-119).)

Where the legal system is open ended – and that is far more often than we make our students believe – economic analysis has an important role to play. Economic analysis should not set the goals of a rule, which are not and should not be limited to efficiency. There can be many other goals: distributive justice, fairness, dignity, and what have you. Economic analysis can help to understand the issue and to point at the costs and benefits of possible solutions. Above all, the ex ante perspective of economists can cure the lawyer of his case-induced myopia. The lawyer looks at the case ex post and sees the interests of claimant and defendant, often forgetting the interests of future claimants, future defendants and other parties. Economists point out the “invisible victims” (J. Tirole, p. 24).

Legal education and scholarship should, more than it does so currently, embrace its open-endedness and acknowledge the role of non-legal factors in decision-making and the valuable perspective economic analysis offers. Human judgment influenced by non-legal factors is a feature of the law, not a bug. If we fully embrace this in legal education, economic analysis is not just a nice academic meta-course reflecting on law without being part of it. It will on the contrary be recognized as a core hard skill for lawyers, together with other disciplines that can enlighten our policymaking. It would make legal education both more academic and more practical, as it will give lawyers tools to make better decisions in the real world. A more humble economic analysis of law will make that scenario more likely.

Joeri Vananroye

This post is based on the closing remarks at the occasion of the Heremans Lectures in Law & Economics at KU Leuven delivered by Professor Ruyoing Chen (UNSW Business School and Peking University Law School).

Author: Joeri Vananroye

Professor of economic analysis of law (KU Leuven), attorney (Quinz)

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