Richard Posner reviews Steven Shavell’s Foundations of Economic Analysis of Law in the most recent issue of Journal of Economic Literature (June 2006). Not to take anything away from Posner’s review of the merits of Shavell’s treatise, and his detailed analysis of Shavell’s treatment of particular areas of law (e.g. intellectual property), but to me the most interesting components of the review were Posner’s attempts to place Shavell’s book in the history of economic scholarship about law and to speculate on the future direction of that scholarship. Posner articulates an “overlapping generations” historical account of law and economics, with one generation standing on the shoulders of the next, and some scholars spanning the gap between several generations.
Posner describes the founding generation of law and economics as consisting of Coase, Becker, Calabresi, and “a few others.” The major contributions of the first generation, which Posner described as complete by around 1970, was the transformation of economics from its status as a “subject” to a “method” to be applied to new areas of the law and all sorts of non-market interactions, e.g. Becker’s economic theory of criminal punishment, Coase’s article on transactions cost and tort law, and of course, Calabresi’s The Cost of Accidents. The defining achievement of the founding generation was to supply a set of tools (economics as the theory of rational choice) which could be applied to all forms of social activity.
The second generation’s task was to expand the domain of law and economics. Younger law and economics scholars took the tools of the first generation and applied them to virtually all fields of law. Posner includes himself in this group, along with Becker’s students William Landes and Isaac Ehrlich. Posner describes the work of the second generation as:
“characterized by close attention to legal doctrines, procedures, and institutions. Formal modeling was not emphasized and theoretical rigor was often absent in the work of the law professors. But as a result of the close attention to the law itself, the work of the second generation had and continues to exert an immense influence on leegal education and a growing influence on legal doctrine and on the practice and administration of law.”
Posner views Shavell as the leading figure in the “third generation” of mathematical law and economics scholars, which includes the likes of: Polinsky, Hart, Bebchuk, Kaplow, and Sykes. It is the generation of the JD/PhD. Their work has “tended to cultivate the intensive margin, bringing new insights into fields such as torts and contracts that had already received considerable attention from the second generation.”
Posner recognizes that these generations “overlap both in time and in methods and subject matter.” Becker, for example, has done important work in each of the first three generations. As a young law and economics researcher, I was most interested in what Posner had to say about the next generation. Posner points to five areas of focus for fourth generation research agendas, the first three of which involve some form of empiricism:
1. Comparative study of legal instutions across countries and states.
2. “Situating law in the total system of social control, which includes custom (much earlier emphasized by Friedrich Hayek and, earlier, by theorists of the common law), morality, reputation, and emotion.”
3. Explaining the behavior of judges.
4. The use of economic analysis of law in developing countries to generate legal reform.
5. Deeper study of the insights from the literature in organizational economics for legal reform.
All in all, well worth a read. Some reactions and questions about Posner’s intriguing account of where law and economics scholarship has been and where it is going below the fold.
Who goes where? Of course, Posner’s goal was not to locate all law and economics scholars within his generational framework. This would be a monumental waste of time. But a little of it might be fun without trying to produce an exhaustive classification. I couldn’t help thinking about where a few unmentioned scholars would be classified. Surely, both Armen Alchian and Harold Demsetz qualify as first generation types. No doubt my colleague Gordon Tullock is a first generation figure as well. George Stigler’s many contributions spread across both the first and second generations. Henry Manne is a seminal figure who is difficult to place under this rubric. Manne’s work on insider trading is early enough to be placed in the first generation (1966), but also is an application of economic analysis to a “new” area of law, the hallmark of second generation work under Posner’s classification. Ben Klein and Oliver Williamson are prominent figures of the second generation. My colleague Vernon Smith of Nobel fame is another that is best described as spanning at least the second and third generations, and probably the fourth as well. This list is certainly not meant to be complete. There are hundreds of others. Who else goes in the first and second generations? Third? Fourth?
What else should be included in the fourth generation’s research agenda? Posner’s description of the research agenda for the fourth generation makes sense. After the work of the mathematical and formal third generation, there are greater marginal returns to investing in empirical work. Further, greater availability of data and reduced computing costs suggest a substitution towards empirical work. International comparisons of institutions, or comparisons of institutions across states, as Posner points out, are an excellent source of the type of variation econometricians require to produce interesting results. Surely, the rise of empirical legal studies and empirical law and economics in recent years suggests at least that empirical contributions (whether across countries or otherwise) will be a central focus for years to come.
Posner appears primarily interested in grand issues associated with the comparative efficiency of legal institutions across countries and, to a lesser extent, states. He writes:
The question that must be answered to determine how efficient an actual legal system is, is in what specific respects a change in the system would increase efficiency. That is an empirical question.
True. And as Posner points out, there is important work to be done here. But I thought it worth pointing out that a good deal of applied microeconomic work aimed at addressing to smaller (e.g., less global) but important questions, remains to be done in empirical law and economics. State level experimentation with legal change is another source of exogenous variation for empirical researchers to exploit by analyzing the impact of the legal change on economic relationships of interest. Several papers I have read in the empirical law and economics literature take exactly this approach using a “triple difference” framework. This literature is distinct from that comparing legal institutions in the states and focuses on specific relationships critical to fundamental debates in a variety of legal areas, e.g. abortion on crime, state franchise termination restrictions on franchisee opportunism, tort reform on accidental deaths, or in my case, shelf space contracts on consumer welfare.
What’s next? What will be the focus of the fifth generation? A greater focus on ground level institutional reform in developing economies as Posner predicts? More law and behavioral economics? Will neuroeconomics generate insights for the law? Less mathematical modeling? A return to detailed institutional analysis? How will the increase in the number of peer reviewed law and economics journals impact the next generation’s research agenda?
I predict that behavioral law and economics will turn into a real field: it will start using real experiments, formal models, and serious statistical techniques. Ninety-nine percent of its current devotees will become unemployable, rushing to create the next “don’t know much about science book” field.
Now, the interesting question: what would that field be?