"Equilibrium Decadence" in Law and Economics?

Josh Wright —  3 March 2009

Here is Justin Wolfers discussing what Paul Krugman has called “equilibrium decadence” in the context of the current macro debate:

The claim is that academic macroeconomists have become mired in a particularly fruitless equilibrium, in which each is engaged in the search for ever-greater levels of formal elegance, at the expense of empirical relevance. There’s definitely something to this. Today’s macroeconomists write for other macroeconomists. If you aren’t using the right tools, you aren’t part of the club. And so yesterday’s approach becomes tomorrow’s approach. Echoing Yogi Berra’s famous dictate, each time macroeconomists came to a fork in the road, we took it. It doesn’t take a radical to suggest that perhaps trying the road less traveled might have led somewhere more interesting.

Wolfers goes on to note that he has an optimistic outlook with respect to macroeconomics because the competing trend of empirical rigor is dominating the pre-existing trend of “formally elegant but empirically irrelevant” macroeconomics. The evidence in favor of this proposition is that macroeconomists who favor elegant theory over empirical relevance are suffering on the job market.

Does equilibrium decadence explain what I’ve previously noted as a disturbing trend in law and economics scholarship toward formal mathematical elegance over empirical and policy relevance? There are certainly some parallels, including the stand alone trend of increasing demand for empirical legal studies (including empirical law and economics) which gives some reason to be optimistic. See in particular, this post discussing the tradeoff between mathematical formalization (elegance) of economic models and policy relevance and the prediction that those these trends militated in favor of an exodus of theoretical modelers from law schools in favor of empiricists. There are also important differences in the situations. Perhaps there is cause for optimism to the extent that movements from theory to empirics in the stand alone economic science are as sure to benefit law and economics as earlier era of “detachment” caused harm.

My initial reaction is to be less optimistic about the prospects for the future of law and economics than Wolfers is about macroeconomics. The latter has had a huge exogenous shock in the financial crisis to jolt the profession and perhaps modify the research agenda. In law and economics, which is largely informed by applied microeconomics (industrial organization, labor, some finance) rather than macro, there is no such intellectual crisis. I do believe there are potential solutions to the challenges that lie on the road ahead for law and economics.

Perhaps the most important of these are institutional responses at the law school and “foundation” level to provide incentives for policy relevant empirical work and a premium for producing research than is amenable to “retail” to policy makers, legal scholars and judges. While there are some important and promising steps being made in the right direction as of late (e.g. at the Searle Center at Northwestern, the Kauffman Foundation’s recent investments into law and economics 2.0), but I’m still a skeptic. I’m not sure this is sufficient to change the incentives facing potential young researchers to re-engage policy relevant empirical work in the types of large numbers that would allow law and economics to escape the current equilibrium favoring theoretical elegance over empirical punch.