Judge Richard Posner died this week. Few scholars have left such a mark on both law and economics. As Alex Tabarrok put it, he was “the only person ever to deserve a Nobel prize and a seat on the Supreme Court.”
Most writing about him will—and should—focus on his contributions to legal scholarship. He was by far the world’s most-cited legal scholar. His “Economic Analysis of Law,” published when he was 33 ?, laid out an entire field: using economics to understand legal rules and their effects. He also put that approach into practice during his 36 years as a judge on the 7th U.S. Circuit Court of Appeals.
I want to focus on Posner the economist, especially the economic theorist. His contributions are too numerous to list, but what stands out to me is his method of applying economics.
One of modern economics’ great sins is that we often use a new model for each situation. You see something in the world and write down a new model to explain it. The model matches the facts, but if everything we see gets a different explanation, what have we really learned about the world? Many an applied theorist has made a career doing this.
Posner and his colleague and former blogging partner, Gary Becker, went furthest in the opposite direction. They asked: How can we explain the most with the fewest variables?
That question made Posner’s approach to economic theory so powerful—and helped launch the revolution in law & economics.
One Theory Across the Law
Law before Posner had a similar “myriad of models.” In a torts class—about liability for injuries—you might ask when a railroad owes damages to someone injured at a crossing. Then you head to contracts, where a machine arrives late and you’re asking who owes what to whom. Finally, in property law, you’re trying to figure out whether a factory owner has to stop smoke from reaching a neighbor’s land.
In each class, you trace the history of rulings. Great. Wonderful. Can anything you learned in one help you make sense of the next?
Posner thought it could. His conjecture was that much of the common law—the rules courts develop through their decisions—could be explained by its tendency to promote economic efficiency. Imagine a court choosing between two rules. What would people do under each, and what outcomes would follow? If one rule encourages people to take precautions worth their cost or strike bargains they’d otherwise miss, Posner expected to find that rule more often in the cases.
For example, in “Economic Analysis of Law,” Posner discusses Hadley v. Baxendale. A mill hired a carrier to take its broken shaft to a manufacturer, who would use it as a model for a new one. The carrier was late, so the mill sat idle longer and sued for its lost profits.
The court denied recovery because the carrier had no reason to expect a delay to keep the mill shut. In Posner’s account, leaving the loss with the mill gave it a reason to keep a spare if avoiding a shutdown mattered that much. The mill was in the best position to take that precaution.
The more powerful step comes next, since “efficiency” can be pretty malleable. If the same economic reasoning favors a rule in contracts and torts, Posner expected to find it in both. Moving from one area of law to another doesn’t, by itself, change the costs and benefits.
The explanation of Hadley thus becomes a prediction about tort law. You’re committing to a theory of law: If a buyer can prevent a loss by bargaining with the seller in advance, at less cost than a court can prevent it by imposing liability, we should expect courts to deny recovery for lost profits in tort, too.
Now consider a repair yard that damages a ship’s propeller. The charterers—who had hired the ship—lose two weeks’ use of it and sue the yard. Who was in a better position to address the risk? The yard could take care with the propeller, of course. But it didn’t even know about the charter.
If I buy the explanation of Hadley, I’d expect the charterers to lose. This isn’t a prediction about the future—the Supreme Court denied recovery in 1927—but it gives us one theory that explains both outcomes.
Much of “Economic Analysis of Law” makes these connections. An explanation in one area becomes a prediction in another. It’s a great example of economic analysis.
The Logic of Cross-Subsidies
You’ll see this move throughout Posner’s classic work: How can we explain different things with one theory? Take his article “Taxation by Regulation,” which examines a Federal Communications Commission (FCC) decision from the early days of satellite communications.
At the time, sending a telegram meant paying a company to transmit and deliver a written message. Large customers who wanted to send their own messages could rent a satellite channel. Telegraph companies rented channels from Communications Satellite Corp. (Comsat), then rented them to the Pentagon at a higher price. Why not cut out the middleman? Comsat offered to rent channels directly to the Pentagon for about a third of what the telegraph companies quoted.
The FCC blocked the deal. Why?
Suppose the FCC wanted to keep international telegrams cheap. Why would it care where the Pentagon rented its channels? Posner’s argument was that the telegraph companies lost money sending telegrams and made it back through channel rentals. They were cross-subsidizing telegrams—using revenue from one service to cover losses on another. High-volume customers effectively subsidized low-volume users. Letting the Pentagon rent directly from Comsat would have undermined the system that kept telegrams cheap.
That may or may not explain what happened. But if we buy the explanation, where else should we expect to see the same thing?
Think about the Post Office. A stamp cost the same even though some letters cost more to deliver than others. If the money left over from cheap deliveries helped pay for expensive ones, we’d expect the government to keep competitors out of the cheap deliveries, too. That’s where a rival could undercut the Post Office and take away the money that paid for the rest. And the postal monopoly did cover those deliveries.
The important part isn’t whether Posner had the best explanation in each case. The goal was to explain a variety of cases with as few explanations as possible. That’s how we increase our understanding.
The Discipline of a Unified Theory
There are tradeoffs. A single theory won’t explain everything, and sometimes multiple theories are the best we can do. We have quantum theory and classical mechanics rather than one unified theory. But understanding the world requires carrying explanations from one phenomenon to another. We want a connected explanation for orbits and falling apples.
My colleagues and I try to do much the same thing. If supply and demand explains what happened in one market, what should we expect in another? The supply-and-demand framework allows a lot of flexibility, as does the concept of efficiency. But it still commits us to more than a separate theory for every situation. Beware of theorists bearing free parameters—adjustable assumptions that let a model fit whatever happens.
Posner took that intellectual discipline seriously. More economists should follow his example. He was one of a kind, and we’re worse off without him.
