Law & economics traces its intellectual roots to the University of Chicago. That lineage still shapes how the field is understood. Chicago price theory—especially Gary Becker’s (1976) systematic application of maximization, equilibrium, and stable preferences across social life, and George Stigler’s (1992, p. 459) suggestion that “every durable social institution or practice is efficient, or it would not persist over time”—left a deep imprint.
It also left a durable misunderstanding.
Many assume economic analysis purports to prove that existing institutions are good, justified, or normatively desirable. That confusion surfaces most clearly in debates over Richard Posner’s wealth-maximization rule, among critics and supporters alike.
In policy discourse, “efficiency” often functions as an evaluative conclusion—a way to endorse current arrangements or to claim that legal and political disputes can be resolved by neutral technocratic criteria. Read that way, economic analysis looks like a theory of justification.
Within the economic framework, though, efficiency is evaluatively empty by design. It operates inside the model. It does not rank alternative social states, and it does not supply an independent moral criterion. Efficiency follows from the assumption of constrained maximization. It describes the internal coherence of a model, not the justice of an outcome.
Posner acknowledged that limit. He did not treat efficiency as self-justifying. Instead, he defended wealth maximization as an adjudicative decision rule grounded in liberal commitments—not as a claim that “efficiency” itself carries independent normative force.
Why Inefficiency Cannot Follow from Maximization
Michael Staten and John Umbeck (1989) provide the clearest account of why “inefficiency” cannot emerge from a model built on constrained maximization. They distinguish two common meanings of inefficiency and show that each conflicts with the logic of the economic framework. Their point is not that outcomes cannot be regrettable, or that institutional reform cannot improve welfare in some broader sense. It is that the economic model, taken on its own terms, cannot generate inefficiency as a theoretical conclusion.
If that is right, efficiency cannot serve as an evaluative criterion—unless the analyst excludes relevant constraints or draws arbitrary categorical lines among them. Once an economist labels a legal regime “inefficient,” she has stepped outside the model, whether she admits it or not.
Start with the traditional Pareto conception. An allocation is Pareto (P) efficient if no reallocation can make one person better off without making someone else worse off. To call an allocation P inefficient is to claim that mutually beneficial trades remain unrealized.
Staten and Umbeck (1989, p. 62) argue that this result cannot follow from constrained maximization because “if theoretical actors are assumed to maximize, then they must maximize.” Once the objective function and relevant constraints are specified, “the solution of a constrained maximization process must always be P efficient.” Alleged inefficiencies, they conclude, are “illusions” produced by a “failure to fully specify all of the relevant constraints.”
Their example is the familiar deadweight-loss triangle in the monopoly model. The standard story has the monopolist restrict output until marginal revenue equals marginal cost. Arnold Harberger’s triangle then appears as unrealized gains from trade.
But the textbook setup embeds a hidden assumption. Marginal revenue lies below demand only because the model forces the monopolist to charge a single price per unit. It “implicitly assumes away price discrimination.” If alternative pricing schemes permit additional mutually beneficial exchanges, a maximizing monopolist must adopt them. The alleged P inefficiency disappears.
For the traditional marginal-revenue curve to remain relevant, some constraint must block price discrimination. Yet once that constraint enters the model, marginal cost “is no longer the correct marginal cost curve,” because it “fails to fully measure the cost of producing and selling extra units.” In a fully specified model, the original marginal-revenue and marginal-cost curves cannot both survive. Fix either inconsistency, and the inefficiency vanishes.
Economists often respond by shifting from Pareto inefficiency to comparisons across equilibria. Monopoly is “inefficient” relative to perfect competition, adverse selection relative to perfect information, externalities relative to zero transaction costs. Staten and Umbeck call this N (Nirvana) inefficiency, invoking Harold Demsetz’s (1969) critique of the nirvana approach to comparative analysis.
That move does not solve the logical problem. It either repeats the same specification error—by excluding binding constraints from the comparison—or it amounts to little more than regret that the world is not ideal. Wishful thinking does not supply a decision rule.
Does this render efficiency meaningless? As a moral verdict, yes. As a decision rule, also yes. Efficiency cannot perform evaluative work if every outcome is efficient relative to its constraints.
Yet that very emptiness gives the concept analytic bite. An alleged inefficiency is not a conclusion. It is a signal. It prompts the analyst to ask which constraint the model has omitted. If the shortest path from A to B is a straight line, but we observe a winding road, the Chicago move is not to infer irrationality. It is to infer an obstacle—information costs, bargaining costs, enforcement costs, organizational limits, political constraints, strategic behavior, distributional conflict, or related frictions.
This leaves economists with a choice. They can acknowledge the evaluative emptiness of efficiency, recognizing that contrary claims rest on arbitrary exclusions or incomplete specification. Or they can abandon maximization as the core behavioral assumption of the model. In the Chicago view, the latter abandons the economic approach itself.
An economist who wants to evaluate law while remaining faithful to that approach must therefore adopt a separate normative criterion—state it explicitly, and defend it on independent grounds.
Posner’s Wealth Maximization as Political Philosophy
Critics often argue that law & economics treats wealth maximization as a rough proxy for welfare—a practical stand-in for efficiency because “costs and benefits are both hard to measure, and transfers (if ever actualized) hard to achieve” (Jebediah Britton-Purdy et al., 2020, p. 1797). On that account, Posner becomes the cautionary tale: an effort to resolve contested moral questions by appealing to a crude metric dressed up as neutral economics.
Read through a Chicago lens, the charge shifts. Posner appears to misunderstand—or strategically evade—efficiency’s evaluative emptiness, using economic language to smuggle in normative conclusions. That reading misses the mark. Whatever one thinks of his economics or his moral priors, Posner exemplifies evaluative law & economics done well. He does not launder wealth maximization through “efficiency.” He defends it as a normative decision rule.
As a leading figure in the Chicago tradition, Posner (1985, p. 91) understood that efficiency has no independent evaluative content. He rejected the idea that analysts can restore that content by treating some constraints as categorically distinct. “Transaction costs … are just like any other costs—like transportation costs, for example—and when added in, show that the [claimed benefit from reallocation] really has no net value.” Transaction costs differ from transportation costs, he explains, not in their effect on efficiency, but “because they sometimes can be circumvented by substituting a legal institution for the market as a method of allocating resources.”
The move is not to ignore transaction costs in order to compare reality with an ideal. It is to recognize that, when bargaining breaks down, law must allocate entitlements. That choice carries normative implications. The question is not whether a reallocation is “efficient.” It is how courts should exercise coercive power when private ordering fails.
Posner’s answer is wealth maximization. Not because wealth approximates welfare. Not because he endorses utilitarianism, even if “wealth and happiness are positively correlated” (Posner 1985, p. 88). He offers wealth maximization as a rule of adjudication suited to conditions of deep moral disagreement—a way to prevent judging from dissolving into ad hoc particularism.
He is explicit about the nature of the claim: “It must also be emphasized that it is a political philosophy that I am expounding” (Posner 1985, p. 103, original emphasis). Wealth maximization is “merely a way of operationalizing, of making concrete, the idea of [liberalism].” It serves as an “analytic tool” whose “primary” function is to “strip away distributive considerations,” including “the complications introduced in public policy analysis when you think of dollars as being worth different amounts, in some ethical sense, depending on who has each dollar” (Posner 1990, p. 167).
Posner grounds the rule in liberal and pragmatic commitments. Liberalism, he writes, “is the political philosophy best suited for societies in which people don’t agree on the foundations of morality, and pragmatism is the philosophy of living without foundations,” because both reject “the idea of using some comprehensive doctrine… to supply the answers to questions about either reality or personal conduct” (Posner 1996, p. 29). Wealth maximization provides a publicly intelligible judicial rule under those conditions, without asking courts to resolve first-order moral disputes.
In his account, the rule advances liberal values by taking voluntary exchange and consent as the baseline, treating individual rights as constraints on state action, and orienting adjudication toward rules that expand material prosperity. It also reflects institutional humility. His claim is not that wealth is the “only social value that government ought to pay attention to, but that it is the only such value … that courts can do much to promote” (Posner 1984, p. 133, original emphasis).
One need not share Posner’s commitments to grasp the methodological lesson. Economic analysis can clarify tradeoffs and constraints. It cannot supply the evaluative rule. Posner’s defense of wealth maximization models evaluative law & economics at its most transparent: it uses economics to map the terrain, then takes responsibility for the normative choice that economics itself cannot make.
Further Reading:
- Harold Demsetz, “R. H. Coase and the Neoclassical Model of the Economic System,” Journal of Law and Economics, Vol. 54, No. 4 (2011)
- Gary Lawson, “Efficiency and Individualism,” Duke Law Journal, Vol. 42 (1992)
- Peter T. Leeson, “Logic Is a Harsh Mistress: Welfare Economics for Economists, Journal of Institutional Economics, Vol. 16, No. 2 (2020)
- Richard A. Posner, “Review: Pragmatic Liberalism Versus Classical Liberalism,” The University of Chicago Law Review, Vol. 71, No. 2 (2004)
- Richard A. Posner, “Law, Pragmatism, and Democracy,” Harvard University Press (2005)
