Archives For Richard Posner

The recent New York Times article on the high-tech industry argues that software patents and the current “smart phone war” are a disaster for innovation, and it backs this with quotes and cites from a horde of academics and judges, like Judge Richard Posner, that software patents are causing “chaos.”

Judge Posner in particular has been on a tear lately attacking software patents and the current litigation between high-tech companies. In his most recent blog posting, he argues that software patents are inefficient and thus improper because of

a shortage of patent examiners with the requisite technical skills, the limited technical competence of judges and jurors, the difficulty of assessing damages for infringement of a component rather than a complete product, and the instability of the software industry because of its technological dynamism.

In contrast to the software industry, Judge Posner and some academics love to cite the pharmaceutical industry as the one industry in which the patent system works. The New York Times article repeats these claims without question.

But this observation about pharma patents is surprisingly bereft of the facts of how the patent system was first extended to biochemical discoveries.

Here’s just one prominent and well-known example: In 1912, the brilliant Judge Learned Hand, one of Judge Posner’s jurisprudential heroes, complained of his lack of technical expertise in deciding the new biochemical patents that would in a few decades give birth to the modern pharmaceutical industry. In his famous opinion in Parke-Davis & Co. v. H.K. Mulford & Co., Judge Hand called “attention to the extraordinary condition of the law which makes it possible for a man without any knowledge of even the rudiments of chemistry to pass upon such questions as these. The inordinate expense of time is the least of the resulting evils, for only a trained chemist is really capable of passing upon such facts.” Judge Hand bemoaned the “confusion the intricacy of the subject-matter causes” and that judges like him were “blindly groping among testimony upon matters wholly out of their ken.”

This 100-year-old complaint by Judge Hand is eerily similar to Judge Posner’s and others’ complaints today about the inherent problems with the new patents on smart phones, on software and on other aspects of the digital revolution. 

Yet, unlike Judge Posner, who undertook the decidedly unSolomonic part in cutting the baby in half in his decision in Apple v. Motorola, Judge Hand definitely decided the issue of patent infringement put before him in Parke-Davis, just as judges did in the century before in ruling on the equally difficult, confusing, cutting-edge patented innovation of their day in vulcanized rubber, sewing machines, the telegraph, among many others.

Because patent-owners were given clear legal guidance by judges like Learned Hand, despite his protestations of ignorance, inventors and the firms that commercialized their inventive work-product knew what was needed to obtain and enforce their patents.  Thus, the 1930s witnessed the birth of modern pharmaceutical industry with patented innovation in sulfa and antibiotics. Repeating this pattern after the Supreme Court’s split decision in 1980 in Diamond v. Chakrabarty, which upheld patenting in genetically modified organisms, the pharmaceutical industry experienced a renaissance in the 1980s and 1990s with patented innovation in biotech. 

Unfortunately, the complaints today about software patents arise more from intuitions, from unrealistic assumptions about how much certainty we can achieve in the patent system, and from emotionally-compelling anecdotes about innovators running into trouble with patents — like the ones that dominate the New York Times article. It’s time to bring objectivity and a historical-based perspective to public policy discussions about software patents and the role of property rights in innovation.

Thank you to Josh for inviting me to guest blog on Truth on the Market.  As my first blog posting, I thought TOTM readers would enjoy reading about my latest paper that I posted to SSRN, which has been getting some attention in the blogosphere (see here and here).  It’s a short, 17-page essay — see, it is possible that law professors can write short articles — called, The Trespass Fallacy in Patent Law.

This essay responds to the widely-heard cries today that the patent system is broken, as expressed in the popular press and by tech commentators, legal academics, lawyers, judges, congresspersons and just about everyone else.  The $1 billion verdict issued this past Friday against Samsung in Apple’s patent infringement lawsuit, hasn’t changed anything. (If anything, Judge Richard Posner finds the whole “smart phone war” to be Exhibit One in the indisputable case that the patent system is broken.)

Although there are many reasons why people think the patent system is systemically broken, one common refrain is that patents fail as property rights because patent infringement doctrine is not as clear, determinate and efficient as trespass doctrine is for real estate. Thus, the explicit standard that is invoked to justify why we must fix patent boundaries — or the patent system more generally — is that the patent system does not work as clearly and efficiently as fences and trespass doctrine do in real property. As Michael Meurer and James Bessen explicitly state in their book, Patent Failure: “An ideal patent system features rights that are defined as clearly as the fence around a piece of land.”

My essay explains that this is a fallacious argument, suffering both empirical and logical failings. Empirically, there are no formal studies of how trespass functions in litigation; thus, complaints about the patent system’s indeterminacy are based solely on an idealized theory of how trespass should function.  Often times, patent scholars, like my colleague, T.J. Chiang, just simply assert without any supporting evidence whatsoever that fences are “crystal clear” and thus there are “stable boundaries” for real estate; T.J. thus concludes that the patent system is working inefficiently and needs to be reformed (as captured in the very title of his article, Fixing Patent Boundaries). The variability in patent claim construction, asserts T.J. is tantamount to “the fence on your land . . . constantly moving in random directions. . . . Because patent claims are easily changed, they serve as poor boundaries, undermining the patent system for everyone.”

Other times, this idealized theory about trespass is given some credence by appeals to loose impressions or a gestalt of how trespass works, or there are appeals to anecdotes and personal stories about how well trespass functions in the real world. Bessen and Meurer do this in their book, Patent Failure, where they back up their claim that trespass is clear with a search they apparently did on Westlaw of innocent trespass cases in California in a 3-year period. Either way, assertions backed by intuitions or a few anecdotal cases cannot serve as an empirical standard by which one makes a systemic evaluation that we should shift to anther institutional arrangement because the current one is operating inefficiently. In short, the trespass standard represents the nirvana fallacy.

Even more important, anecdotal evidence and related studies suggest that trespass and other boundary disputes between landowners are neither as clear nor as determinate as patent scholars assume them to be (something I briefly summarize on in my essay and call for more empirical studies to be done).

Logically, the comparison of patent boundaries to trespass commits what philosophers would call a category mistake. It conflates the boundaries of an entire legal right (a patent), not with the boundaries of its conceptual counterpart (real estate), but rather with a single doctrine (trespass) that secures real estate only in a single dimension (geographic boundaries). As all 1Ls learn in their Property courses, real estate is not land. Accordingly, estate boundaries are defined along the dimensions of time, use and space, as represented in myriad doctrines like easements, nuisance, restrictive covenants, and future interests, among others. In fact, the overlapping possessory and use rights shared by owners of joint tenancies or by owners of possessory estates with overlapping future interests share many conceptual and doctrinal similarities to the overlapping rights that patent-owners may have over a single product in the marketplace (like a smart phone).  In short, the proper conceptual analog for patent boundaries is estate boundaries, not fences.

In sum, the trespass fallacy is driving an indeterminacy critique in patent law that is both empirically unverified and conceptually misleading, and check out my essay for much more evidence and more in-depth explanation of why this is the case.

Richard Epstein replies to Judge Posner’s Apple v. Motorola opinion and follow-up article in The Atlantic.

The anti-patent sentiment has just been fueled by a remarkable opinion by Judge Richard Posner, my long-time colleague at the University of Chicago, sitting as a trial judge in the major case, Apple v. Motorola. The high-profile case concerns five patents—four by Apple and one by Motorola—that are involved in mobile phone technology, and it has drawn more than its fair share of attention. Judge Posner took the extraordinary step of dismissing the claims of both sides with prejudice—meaning, the case cannot be filed again elsewhere—on the grounds that neither side could make good on its argument for either damages or injunctions.

Thus, when the dust settled, there was no reason at all to have a trial on whether either side had infringed the patents of the other. In a subsequent piece written for The Atlantic, grandly entitled “Why There are Too Many Patents in America,” Posner delivered a general critique of the patent system, discussing the broader issues involved in his judicial decision.

There is much of interest, as always, in Epstein’s column.  But the closing section on damages and injunctions is where the action is:

What is so striking about Posner’s relentless dissection of the imprecision in these claims was that he could apply it with equal conviction in any patent software dispute. The estimates of damages under the law are not confined to a single standard, but often involve an uncertain choice between reasonable royalties for licensing the patent and actual damages that were incurred because the patents were not licensed. The injunctive relief is (or at least should be) awarded precisely because it is so difficult to figure out what those damages really ought to be.

But Posner said that he would not allow an injunction if the best that the plaintiffs could garner was $1 in nominal damages. That surely seems over the top, because if there is infringement, the one number that is manifestly wrong is $1. A more sensible approach here, therefore, is to mix and marry the two remedies, so that the injunction does not pull the past product off the market, but awards some damages for past losses, while giving the infringer some period of time—say three to six months—to invent around the patent for future output. This then sets the stage for a negotiated license if that is cheaper.

By putting the remedial cart before the liability horse, we have the odd situation that no one can find out anything about the strength of the patent or the potential range of damages. If that is done on a common basis, then we will have knocked out the entire patent system for software, without having the slightest idea of the relative strength of the Apple and Motorola contentions.

The Posner decision looks doubly worrisome against the backdrop of his ominous Atlantic column, which shows his ill-concealed disdain for a complex industry with which he has had no direct engagement. It is an odd way to make patent policy. Right now, a similar Apple-Samsung dispute is before Judge Lucy Koh, which will involve a real trial. The Posner opinion is already on the fast track to appeal before the Federal Circuit, which will give us more information as to whether these submarine assaults on the patent system will take hold. Let us hope that Posner’s mysterious patent adventurism dies a quick and deserved death.

Do go read the whole thing.  For interested readers, here is Posner’s Atlantic column.

My blogging colleague Josh Wright has a useful summary of the “Chicago School’s” views of the future of law and economics.  I have some further thoughts.

I think the key challenge and imperative for law and econ scholars in law schools will be to relate what they do to the market for their output — i.e., jobs for their students.  (Shouldn’t market-oriented scholars pay more attention to this?)

I recently discussed this market-oriented perspective on law teaching in my article, Practicing Theory.  The article’s basic point is that deregulation and fundamental changes in the market for legal expertise, particularly including those driven by technology, will  force law schools to think harder about how to make their students more competitive.  Unlike many commentators on legal education, I don’t think this involves more trial practice, clinics and externships in law schools, but rather a refocusing of the theoretical and policy-oriented work that is legal education’s traditional comparative advantage.

More specifically, we need better integration of law and technology.  We should also focus on legal architecture or engineering rather than the mechanics of applying received legal wisdom.  In the future the machines will do the mechanical stuff.  Legal experts will be needed to craft policy and design legal software.

So the question is, how can the theory and practice of law and economics best meet these market needs? Richard Posner comes closest to this general sentiment when he says “economic analysis of law may lose influence by becoming too esoteric, too narrow, too hermetic, too out of touch with the practices and institutions that it studies.”

David Weisbach offers what may be the most practical suggestion — more thinking about the use of computational models in law.  As he says,  this

is a very different view of legal analysis—it views problems as engineering problems that we model and test. It is empirical, practical, and solution-driven. The role of the legal scholar is to help frame problems, to think about how institutional structures affect the framing, to suggest solutions, and to help interpret and evaluate results.

I recognize that this view may irritate some scholars.  We all like universities for the same reason as Dan Aykroyd’s character in Ghostbusters, “([t]hey gave us money and facilities, we didn’t have to produce anything! You’ve never been out of college! You don’t know what it’s like out there! I’ve *worked* in the private sector. They expect *results*”).

I’m not talking about my preferences but about where I think things are actually headed in legal academia given rapid changes in the legal profession. Law and econ scholars, like other legal academics, increasingly will need to justify themselves in market terms. On the bright side, who is better able to do this?

A very interesting group of essays on the future of law and economics by ten University of Chicago professors.  It is especially interesting in light of the attempt to revitalize law and economics in Chicago.  The essays exhibit a great diversity in views of what lies in store for the future of law and economics — a topic I’ve written about frequently at TOTM (and along with Henry Manne available here on SSRN).  Its an interesting discussion.  Here’s my quick, rough and ready guide to the 10 essays — which comes with a recommendation to check them all out in their entirety of course — followed by a few comments and reactions at the end of this  post.

  • Douglas Baird: Law and economics will return to its Chicago-born empirical roots, though the return is complicated by the reduced cost of empirical tools and access to data which give rise to the possibility of an “empirical bubble” (as Larry Ribstein has described it) and a tendency to settle into reliance upon those tools as a substitute for finding new and interesting questions to answer.
  • Omri Ben-Sharar: The view that law and economics will follow “technical” trend in economics is wrong.  One need not worry about law and economics losing its “retail value” — a concern I’ve raised on the blog a number of times — Omri argues, because law and economics has “maintained a stronghold on American legal academia for over 30 years by being relevant, accessible, and relentless in luring new audiences.”  I’m a bit confused by this essay; Ben-Shahar argues that the view that the trend towards the technical trend in economics and law and economics scholarship is no concern, but cites considerable evidence that the trend is real and be explained by the reduction in the return from traditional L&E scholarship.  However, Ben-Sharar is optimistic that higher return opportunities present themselves in exporting law and economic analysis across international boundaries and into new subject matter domestically.
  • Anu Bradford: international law and economics analysis, and public choice, have become incredibly complex in the modern world and are a growth area for future scholarship.
  • Eric Posner: This is my favorite of the essays.  Posner contemplates a strong form of the divergence between economists doing law and economics (ELE) and lawyers doing law and economics (LLE); he goes on to discuss an area in which there is indeed a significant gap between economic theorists and law and economics scholars: contracts.  Posner  discusses a variety of reasons for why this specialization is troubling for both fields.
  • Saul Levmore: The current empirical “bubble” will burst and increase the turns to greater theoretical work — primarily using economic insights to explain cases and doctrine (rather than modeling).  Empirical work is less valuable in law than other disciplines, argues Levmore, and while law and economics’ influence will increase in law schools, a question remains as to whether the work will shift away from technical empirics and toward scholarship more “useful” to the practice of law.
  • Anup Malani: Malani’s first line sums his position up nicely: “The future of law and economics is no different than the future of other applied microeconomics fields such as labor, health, and public economics: better identified empirical work with a solid connection to economic theory.”   Its an odd comparison for me; after all, law and economics is quite different in that it is the only of those applied microeconomic fields in which the producers of scholarship are in law schools and not economics departments.  Malani goes on to make some really interesting points about empirical methods in law and economics compared to labor economics and other applied fields, and some suggestions for improving those methods.  But why should law schools have the comparative advantage in this sort of scholarship?
  • Thomas J. Miles: More on the shift from law and economic theory to empirical work in the last decade.  Miles argues, consistent with others, that the returns to empirical work in law and economics (and the reduced cost of producing it) increased as the  theoretical space became saturated.   empirical scholarship in law and economics has surged.  Miles predicts that empirical work is likely “compose a greater share of law and economics scholarship in the future,” and holds out hope that the increase in the supply of JD/PhD’s along with reduced cost of coordinating between JD’s and PhD’s will reduce the trends towards specialization.
  • David A. Weisbach: “We will see more integration with economics departments, more professionalization of the field, better econometric techniques, and expansion into new  areas and new legal problems. But things will pretty much continue as they are.”  Weisbach’s essay complements Miles in that it emphasizes the key of coordinating between disciplines (for Weisbach, perhaps broader than just law and economics) to solve increasingly complex problems.
  • Richard Posner: Posner points to a strong trend towards increased specialization sacrificing the practical application of law and economics scholarship and is skeptical of the notion that the costs of coordination between disciplines has fallen.  “The increased formalization of economics makes it difficult for lawyers who do not have training in economics to collaborate with economists or lawyer-economists. Increasingly, economic analysts of law write for each other, in specialized journals, rather than for the larger profession. Increasingly, indeed, they write  not for economic analysts of law as a whole but for economic analysts of the writer’s subspecialty. The expansion of a field leads to the multiplication of its subspecialties.”    Like Ben-Sharar and Bradford, Posner describes law and economics as a mature discipline whose future lies in exporting its insights across boundaries and to new problems.  Posner largely subscribes to the view that the future of law and economics may continue to lose its “retail” and practical value as it becomes less connected to legal institutions.  He also uses a rather odd and, in my view, misplaced example about macroeconomics and the financial crisis as evidence of the gap between law and economic theory and practice.
  • Gary Becker: Becker continues the theme of arguing that the future lies in coordination between specialist theorists and econometricians,  Becker also argues that a robust area for future law and economics research lies at the “macro” level, i.e. how legal institutions and rules impact economic growth and how macroeconomic developments influence legal institutions.  No doubt these are interesting questions.  But why, again, is there an argument that law schools have a comparative advantage in producing this scholarship rather than remaining the province of economists?  Or teaching law students?

All interesting reads.  There is a good amount of discussion about coordinating theoretical and empirical work, and overcoming the problem of scholarship that is too formal and too technical for “retail application,” which are no doubt a key to ensuring a bright future for law and economic work.  There are some obvious omissions in the discussion.  Judicial education is one obvious role for law and economics scholars in harnessing the insights of economics for practical application in the law.  There is little discussion about the future of law and economics in the classroom, or the relationship between the role of economics in the law school classroom and the challenging facing law and economic scholarship discussed by the authors.

Pioneers of Law and Economics (with Lloyd Cohen) is now available in paperback. 

You can get it for 20% off the cover price at the link above (discounted price = $36).

There are essays focusing on: Ronald Coase, Aaron Director, George Stigler, Armen Alchian, Harold Demsetz, Benjamin Klein, James Buchanan, Gordon Tullock, Henry Manne, Richard Posner, Gary Becker, William Landes, Richard Epstein, Guido Calabresi, Frank Easterbrook, Daniel Fischel, Steven Shavell and A. Mitchell Polinsky.

Contributors are: Harold Demsetz, Nuno Garoupa, Fernando Gómez-Pomar, Mark Grady, Tom Hazlett, Keith Hylton, Kate Litvak, Andrew Morriss, Sam Peltzman, John Pfaff, Larry Ribstein, Stephen Stigler, Robert Tollison, Tom Ulen, Susan Woodward, and Joshua Wright.

The Glom’s having a book club on McLean & Nocera’s All the Devils Are Here. I haven’t read the book (it takes a lot to get me to read a book by business journalists).  But I have read David Zaring’s interview with his “favorite Times columnist.  One of the questions and answers naturally piqued my interest:

Q:  Business law scholars think a great deal about how the corporate form can facilitate good business decisions.  But financial institutions tend to use corporate governance best practices (no poisons pills, dual class stock structures, plenty of outside, if not always qualified, directors), and yet have extremely high levels of insider compensation, regularly exercise poor risk management, and so on.  You’ve looked at the way the banks were run during the crisis; how did you think their corporate organization affected their performance, if at all? 

A.  It is important to remember that most Wall Street firms were partnerships before they became corporations.  When they took investment risk, they did it with the partners’ money; when they reaped rewards, it was the partners who put those rewards in their pockets.  Once the partnerships became publicly traded corporations, they were suddenly freed from the fear that losses would come out of their own pockets–it was now shareholders’ money they were putting at risk.  Yet their view of compensation never changed: the vast majority of the gains they made went not to the shareholders, but to themselves.  Most Wall Street firms put aside more than 50 of revenues–not profits, but revenues–for compensation, an astounding figure.  That is why there was so little brake on the riskiness, and even the foolishness, of the risk-taking:  all the incentives went in the opposite direction.  Having a corporate structure, in no small measure, created those warped incentives.

Obviously I agree that corporations were a cause, and the uncorporation is a possible solution.  I noted this more than two years ago discussing a post by Charles Calomiris making points identical to those of Nocera.  Since then, the point has been made by so many others that it is now commonplace: 

  • Michael Lewis (“No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.”)
  • James K. Glassman & William T. Nolan, Wall St. J., Feb. 25, 2009, at A15
  • Steve Davidoff  (the firm that best avoided the problems with subprime, Goldman, “retained the most partnership-like attributes” of all the investment banking firms, but that “all partnerships were not created equal”)
  • Caroline Salas & Pierre Paulden
  • Richard Posner, A Failure of Capitalism, 99-100 (2009) (hedge funds didn’t do as badly as large publicly held financial firms partly because they were “less plagued by conflicts between owners and managers” and that “the incentive to take risks that is created by executive overcompensation in publicly held companies has been a factor in the financial crisis”).
  • Alan Blinder (hedge funds have less leverage than investment and commercial banks because their senior partners “almost always have significant shares of their own personal wealth tied up in the funds”)

I noted in my 2008 post that

[t]his story directly supports what I have been saying about the advantages of what I call partnership, or “uncorporate,” governance structures that involve not only high-powered owner-like compensation, as Calomires stresses, but also distributions to owners and limited term of the fund, both of which tend to expose managers to capital market discipline.

* * * [T]hese devices can be superior to the sort of monitoring structures that publicly held corporations and other firms governed on the corporate model typically rely on. So we see that all of the so-called independent directors in the world and the other trappings that are considered so essential to the modern corporation did not stop a huge segment of the investment industry from deliberately ignoring reality, and causing vast dislocations as a result. Yet despite this, as I show in my article, there is still a bias against uncorporate structures in large firms.

I later wrote in my Rise of the Uncorporation (footnotes omitted):

[I]t is not clear that investment firms need to turn back the clock to the partnership era. Managers’ personal liability may deter beneficial risk-taking because there is a lot of uncertainty that even the most intense monitoring cannot eliminate. Modern uncorporate business forms may be a better approach because they combine limited liability with partnership-like mechanisms for addressing agency costs.

In my article, Uncorporation’s Domain, I noted that the uncorporate/hedge fund structure is appropriate for investment banking:

The modern uncorporation could offer a useful compromise for investment banks.  These firms might become more like hedge funds, which survived the meltdown relatively well. * * *

The biggest problem posed by uncorporate investment banking is that it could exacerbate concerns about market risk.  Owner demands for cash might force distressed firms to sell assets in illiquid markets at “fire sale” prices.  In the recent financial crisis, rapidly deteriorating asset values led to fears of investor runs on financial firms.  Toppling financial firms reduce overall market liquidity and thereby can threaten the whole economy.  Thus, rather than permitting the spread of the uncorporation into investment banking, regulators seem poised to apply increased regulation of the financial sector to uncorporations.  Indeed, the U.S. House of Representatives passed a major financial reform bill that would, among other things, impose registration and systemic risk regulation on hedge funds, while European regulators appear to be moving toward even tighter controls. 

It is important to keep in mind, however, that these market risks materialized in a financial industry dominated by corporations.  Uncorporate governance could weed out the weakest firms before disaster strikes, thereby reducing the risk of a market-wide crisis of confidence.  Uncorporations also can avoid some of the problems posed by bankruptcy of financial institutions. An uncorporation that cannot continue making distributions to its owners is in a different position from a firm that cannot continue paying its creditors in that it can deal with the potential shortfall by ex ante contract, possibly avoiding the need for a hasty ex post restructuring in bankruptcy.  This Article’s analysis suggests that regulators should consider the basic governance differences between uncorporations and corporations when deciding which financial institutions are appropriate for systemic risk regulation.

Of course we now know that didn’t happen — Dodd-Frank Section 403 responded to the financial crisis in part by shackling hedge funds with new registration and information requirements despite the now commonplace wisdom that hedge funds were a solution to rather than a cause of the financial crisis.

Final note:  I like the idea of academic bloggers interviewing journalists.  Great illustration of what I saw a few years ago as the potential relationship between blogging intellectuals and the mainstream press — and a way to get a better press corps.  But hey, Dave, how about some follow-up questions?

Douglas Ginsburg is Circuit Judge, U.S. Court of Appeals for the District of Columbia.

Joshua Wright is Associate Professor, George Mason University School of Law.

In the brave new world contemplated by the advocates of government policies informed by behavioral law and economics, many more aspects of each individual’s life will be regulated, or more stringently regulated, than at present.  Within the legal academy, the growth of the behavioral law and economics movement has been dramatic.  Surveying all legal publications from 1980 through 1984 reveals that only a single article made mention of the phrase “behavioral economics.”  In 2005 through 2009, however, there were 917 such articles.  What, we must ask, accounts for the great and increasing attraction of the subject to legal academics?

For at least the last 40 years, academic legal writing has been highly prone to the vicissitudes of fashion.  Starting around 1970 the fashion turned to economic analysis of law; particularly after Richard Posner published his treatise on that subject in 1973, scores of articles presenting an economic analysis of a particular legal doctrine appeared in the law journals every year.

In something of a reaction to the growing interest in economic analysis, a smaller but prolific cadre of law professors created the Critical Legal Studies (CLS) movement, which in turn inspired cognate schools such as Critical Race Theory, Critical Feminism, and Queer Theory.  CLS, which had a significant following, advanced the idea that all law (including court made law) is indistinguishable from politics, particularly class politics. See, e.g., Morton Horwitz, The Transformation of American Law: 1780–1860 (1977); Roberto Unger, Knowledge and Politics (1975); Mark Kelman, Consumption theory, Production Theory, and Ideology in the Coase Theorem, 52 S. Cal. L. Rev. 669 (1974).   As recounted by Duncan Kennedy, a leading figure in the movement, one of the early projects of CLS was to “produce[] a critique of mainstream economic analysis of law.”

Overtly a leftist movement, CLS turned out to be little more than a species of Marxism.  The self-declared purpose of the CLS movement was “to provide a critique of liberal legal and political philosophy,” with adherents arguing the “liberal embrace of the rule of law is actually incompatible with other essential principles of liberal political thinking.” Andrew Altman, Critical Legal Studies: A Liberal Critique 3 (1990).

Key to the CLS analysis was the notion of “false consciousness,” defined as the “holding of false or inaccurate beliefs that are contrary to one’s own social interest and which thereby contribute to the maintenance of the disadvantaged position of the self or the group.” John T. Jost, Negative Illusions: Conceptual Clarification and Psychological Evidence Concerning False Consciousness, 16 Pol.  Psychol. 397, 400 (1995). Driving a wedge between reality and what people — that is, other people — perceive, creates a space to be filled by some combination of re-education and, insofar as the public is not radicalized, a resort to paternalism.  The combination is nicely encapsulated, and given a Mao-ist tinge, in Duncan Kennedy’s proposal that professors and janitors at the Harvard Law School be required to trade places for one month each year. See Legal Education as Training for Hierarchy, 32 J. Legal Educ. 591 (1982). The ultimate goal of CLS, as stated by Kennedy was that of “building a left bourgeois intelligentsia that might one day join together with a mass movement for the radical transformation of American society.” Id. at 610.

The end of the communist era in Russia and eastern Europe dealt a blow to CLS, as it did to all leftist movements; the worldwide triumph of socialism, which had long seemed inevitable to so many, never seemed more improbable.  That is not to say that CLS vanished or even went underground; the leading authors are still publishing, but new recruits seem to be scarce.

With interest in CLS and other “critical’ movements waning, legal scholars were in danger by the mid-1990s of being remitted to further work in economic analysis of law (or even more traditional doctrinal exegeses).  But unlike the pioneering work in that field, which had been done by academic lawyers with only informal training in economics, such as Posner, Robert Bork, Henry Manne, and Guido Calabresi, by the 1990s the law schools had appointed to their faculties one or more Ph.D economists.  In other words, the field had grown up; creative and talented amateurs gave way to highly trained professionals using the formal tools of economics and statistics.  An assistant professor without significant formal training in economics could not hope to distinguish himself in law and economics, let alone write something to warrant his promotion to a tenured position.

Behavioral law and economics came to the rescue.  Just as the first wave of law and economic scholarship had provided hundreds of opportunities to revisit plowed ground and turn up new insights, behavior law and economics offered a reason to return to the same ground once again with confidence the new approach would yield new results.  Much of the early law and economics work explored the hypothesis that a particular common law rule was efficient or, in the public choice variation, that a particular statutory provision served some special interest and was inefficient.  In the new scholarship, the author would almost inevitably conclude the prevailing rule should be reformed to take account of a cognitive bias of those individuals subject to the rule or to regulate some as yet unregulated conduct in order to protect individuals from the errors they commit in an attempt to pursue their self-interest.

Because behavioral law and economic scholarship yields proposals for law reform less radical than what CLS had produced, it appeals to a larger segment of the legal professoriate than CLS ever did.  At the same time, behavioral law and economics shares with CLS the paternalistic premise that the poor wretches to be benefitted by the insights of their governors suffer from a form of “false consciousness.”  Behavioral law and economics scholars never use that phrase but the concept is the foundation of their entire enterprise.

False consciousness, then, is a hearty perennial, much like the notion that there is a “third way” of social organization that suffers from neither the arbitrary and inefficient nature of government nor the unforgiving ways of the market.  The staying power of the idea reflects the romantic notion that government can help individuals overcome their own frailties and conform their behavior to their stated goals.

Claire Hill is a Professor of Law at University of Minnesota.

I want to challenge what seems to be a premise of this symposium: that much of the behavioral “contribution” to economics is about people’s “mistakes” (either cognitive mistakes or “weakness of the will”) and the consequent need for paternalistic intervention.   I think the behavioral perspective has much more to offer; I also think that the focus on mistakes is overblown and pernicious.  Behavioral law and economics was supposed to bring more realism to law and economics.  The worldview in which people are either making mistakes or “getting it right” isn’t much more realistic than the one in which people are always “getting it right.”  Moreover, advancing such a worldview as realistic is a step backwards:  the admittedly “unrealistic” but ostensibly “useful” law and economics is being supplanted by the supposedly more realistic binary world in which people either make mistakes or get it right.  To be sure, of course people sometimes do make “mistakes.” A focus on mistakes that is more methodology (how we proceed) than ontology (how the world is) is quite useful:  of all the ways people act other than as the traditional paradigm predicts, the subset we can label as “mistakes” (and, to be more precise, cognitive mistakes rather than “weakness of the will”) may present a particularly good case for regulatory interventions.  Indeed, the label “mistake” is often used for what is actually “weakness of the will” – not a mistake at all, since a person really does want both cake and good health (and, according to some evidence, she may regret more regularly choosing health over the cake than the cake over health).  In those cases, any regulatory intervention is more appropriately justified by externalities.

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Geoff recently highlighted AAG Christine Varney’s closing remarks at the Horizontal Merger Guidelines workshop and was fairly critical.   Thom intervened to suggest that we at TOTM, while fairly critical of the agencies from time to time, also give credit where it is due — highlighting AAG Varney’s RPM article.  OK, that’s enough credit for now.

Now, I’d like to highlight another portion of the speech Geoff mentioned that, as Commissioner Rosch has done in earlier remarks of his own, takes a shot at the Chicago School in order to justify greater intervention and a “reinvigorated” antitrust enterprise.  On the one hand, it sure is nice to see convergence between the agencies compared to the days when Commissioner Kovacic described the sister agencies as “an archipelago of policy makers with very inadequate ferry service between the islands” and “too many instances when you go to visit those islands the inhabitants come out with sticks and torches and try to chase you away.”  Ah.  Nothing like attacking a vaunted enemy of interventionist antitrust policy like the Chicago School bogeyman to create warm feelings between the agencies.   On the other hand, convergence would seem like a less impressive feat if what is converged upon is an embarrassing error that demonstrates a lack of understanding about the Chicago School in the first instance, and even still less impressive if the error is bootstrapped into justifications for policy changes.

What is all this about?  In leveraging discussion of the financial crisis as the basis of an argument that microeconomic theory that forms the basis of industrial organization economics has been turned on its head, the chiefs of both antitrust agencies have now made the same error.  I’ve criticized Commissioner’s Rosch’s error in declaring the Chicago School “on life support, if not dead” in great detail elsewhere.  Antitrust is getting a little bit depressing.  While the US enforcement agencies would have the Chicagoans on life support, or at least retired, of course, Professor Elhauge goes the whole way to “death of the single monopoly profit theorem.”  All this talk about the Chicago School’s death, retirement, general malaise and otherwise fragile state and one almost forgets the state of Supreme Court jurisprudence, much less the actual empirical evidence.

Let’s turn to AAG Varney’s statement:

The evolution of antitrust law needs to keep pace with the advancement of economic thinking. Judge Posner convincingly made this case for reassessing economic beliefs in his recent, thought-provoking piece entitled “How I Became a Keynesian: Second Thoughts in a Recession,” wherein he questioned some of the theoretical assumptions that had previously guided his work. In an even more recent interview, he is quoted to say that “‘the term “Chicago School” should be retired.'” Theoretical assumptions that market forces naturally and inevitably correct for market failures clearly need to be reconsidered. In the context of the Horizontal Merger Guidelines, the most relevant aspect of this reassessment involves explicit or implicit assumptions that entry will erode market power otherwise enhanced by a merger.

Here’s the link to the interview.  Varney clearly wants to use Posner’s quote about the retirement of the Chicago School to support the next sentence, that is, that we ought to reconsider our priors about markets working and reevaluate antitrust priorities in a way that supports greater intervention.  I mean, if Chicago’s own Richard Posner says the Chicago School should be retired — well, I leave the rest of the proof as an exercise for the reader.

So did Posner And here’s what Posner actually said:

Ronald (Coase) is alive, but he’s very, very old. He’s not active. Stigler is dead. Friedman is dead. There’s Gary (Becker) of course. But I’m not sure there’s a distinctive Chicago School anymore. Except there are probably a higher percentage of conservative people here, but not all. Jim Heckman—not particularly conservative at all. He’s very distinguished. Steve Levitt—he’s very famous. I don’t think he’s conservative. You’ve got people like (Richard) Thaler. So probably the term “Chicago School” should be retired.

There were people—people like Stigler and Coase, Harold Demsetz, Reuben Kessel, and people at other schools like Armen Alchian. They were people rebelling against the very liberal economics of the nineteen-fifties—very Keynesian, very regulatory, very aggressive anti-trust, little faith in the self-regulating nature of markets. Francis Bator, who’s a very distinguished Harvard economist, he wrote a famous essay entitled “The Anatomy of Market Failure.” And he gave so many examples of market failure that you couldn’t believe a market could exist. You have to have an infinite number of competitors, full information, you can’t have any economies of scale, and so on. It was too austere. That was what the Chicago people, with their more informal approach, rebelled against. So we had our moment in the sun, but by the nineteen-eighties the basic insights of the Chicago School had been accepted pretty much worldwide.

Posner did not make the point that the Chicago School ought to be retired because it is outdated, incorrect, or led to antitrust policy that provided inadequate protection for consumers because of misguided notions about market failures.  Posner was making the point, as he has made elsewhere time and time again, that the Chicago School as applied to regulation, antitrust, and industrial organization economics, had been so broadly adopted into mainstream economic thought that it no longer made sense to describe a distinctive “Chicago School.”  This is the point he also makes in the speech.   Posner, actually goes so far as to reject the assertion Varney invites the reader to make, i.e. that the financial crisis should undermine faith in markets in a sense relevant to regulation and antitrust generally.

When asked “Has the financial crisis undermined your faith in markets and the price system outside of the financial sector?”

Here is Judge Posner’s answer:

No. But of course one of the more significant Chicago (positions) was in favor of deregulation, based on the notion that markets are basically self-regulating. That’s fine. The mistake was to ignore externalities in banking. Everyone knew there were pollution externalities. That was fine. I don’t think we realized there were banking externalities, and that the riskiness of banking could facilitate a global financial crisis. That was a big oversight. It doesn’t make me feel any different about the deregulation of telecommunications, or oil pipelines, or what have you.

It really can’t be made more clear than that can it?  I understand that it is tempting to use figures like Greenspan and Posner to play “gotcha.”  I’m quite sure its even an effective rhetorical device at times with those who do not follow the debates closely or do not read the language carefully.  But in both cases, the AAG and the Commissioner do a disservice to those lawyers and economists in their agencies who are dedicated to getting the answer right by hard economic analysis and not by sloganeering.  For a serious and intellectually powerful discussion from a public antitrust enforcement official discussing the Chicago School’s role, along with contributions from Harvard, in forming the intellectual basis of modern antitrust jurisprudence, see Commissioner and former Chairman Kovacic’s seminal article on the subject.

As I’ve written on this topic previously:, at that time motivated by the declaration out of the Federal Trade Commission that the Chicago School was either on life support or dead:

I had always thought that the “Chicago School” stood for the proposition that microeconomic theory should be applied rigorously, with care and attention to institutional detail, and with an eye towards producing testable implications.  These are qualities, especially empiricism, that do not lend themselves to a reflexive “faith” that markets will produce only efficient behavior.  That faith, where it exists, is earned by persuasive theory and evidence.

And with all due respect to the Commissioner, an intellectually honest survey of the state of evidence concerning the actual competitive effects of antitrust-relevant business practices reveals that the Chicago School isn’t close to dead.  In fact, Chicago School principles are alive as ever in the Supreme Court’s jurisprudence.  Perhaps this disappoints the Commissioner and others who might like economics (and particularly Chicago School antitrust economics) to be a lesser constraint on antitrust enforcement decisions.  But it’s the state of play in both the federal courts and in the empirical antitrust literature.  The debate over whether to deviate from the state of play should be determined by the quality of theory and evidence.   A rigorous review of the empirical evidence suggests not only that the Chicago School of antitrust is alive, but in my view, that it is the “best available” mode of analysis for understanding many business practices relevant to antitrust enforcement.

The search for evidence-based antitrust cannot be conducted by assertion.  Instead, if it is to be fruitful, it must take a more scientific approach.

If the Chicago School’s influence on antitrust policy is going to be defeated — let it be by strong theoretical and empirical evidence that its insights give less predictive power than alternative theories and result in policies that provide fewer benefits to consumers than alternatives.  T-shirt slogans are not going to reverse Supreme Court decisions or win Section 2 cases — though perhaps acts of Congress and expanded use of Section 5 will leave a dent.  Still, here’s to authorities and leading voices in the antitrust community, and particular those at the antitrust enforcement agencies, using their podiums to encourage productive and intellectually honest debate and not cheap, deceptive, and misleading rhetorical tricks.

Speaking of, let’s have new Section 2 hearings!

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Pioneers of Law and Economics, a volume I edited alongside my colleague Lloyd Cohen, is now available at the Elgar Website.   I’m very happy with how the book came out in large part because of the fantastic group of contributors who agreed to take on chapters, including:  Harold Demsetz, Nuno Garoupa and Fernando Gomez-Pomar, Mark Grady, Tom Hazlett, Keith Hylton, Kate Litvak, Andrew Morriss, Sam Peltzman, John Pfaff, Larry Ribstein, Stephen Stigler, Robert Tollison, Tom Ulen, Susan Woodward, and Josh Wright.

Here’s a description of the book:

The law and economics movement came of age in the second half of the 20th century and had a profound effect on both the scholarship and practice of law. The specially commissioned essays in this book honor the pioneering contributions of those who created the foundation of the modern law and economics enterprise.

The editors of the volume embrace a view of the field that is inclusive not only of a broad range of issues, but also of economic methods. Celebrated here are the founders of law and economics as well as economic theorists, public choice scholars, lawyers and judges who applied economic insights to the law and legal institutions. They include: Ronald Coase, Aaron Director, George Stigler, Armen Alchian, Harold Demsetz, Benjamin Klein, James Buchanan, Gordon Tullock, Henry Manne, Richard Posner, Gary Becker, William Landes, Richard Epstein, Guido Calabresi, Frank Easterbrook, Daniel Fischel, Steven Shavell and A. Mitchell Polinsky. Contributors to the volume include other pioneers, former students and clerks, colleagues, and influential scholars in the field.

Scholars and students working in the tradition of law and economics, as well as those in the fields of economics, law and public policy will find the book an essential reference for this important area of scholarship.

I will also admit that the proud UCLA Bruin in me is also very excited that the Pioneers volume includes as subjects my picks for the Nobel Prize — Alchian, Demsetz and Klein — as well as Mark Grady, Tom Hazlett, Susan Woodward and myself.

The volume includes almost entirely new material (with the exceptions of the Peltzman and Stigler essays on Aaron Director — which we thought were not likely to be outdone) by high level law and economics scholars with close intellectual familiarity with their subject matter covering  some very familiar and other less familiar characters in the law and economics movement.

Whether a student or scholar in the field,  I think you will learn something reading this book.

Some Antitrust Links

Josh Wright —  23 July 2009
  • Fred Jenny and David Evans just published a new edited volume called Trustbusters which contains chapters from the heads or senior officials of many of the leading competition authorities around the world. You can download the introductory chapter here and you can order the book from  Competition Policy International or from Amazon.
  • Sports Law Blog’s Michael McCann offers up some analysis the recently filed Ed O’Bannon v. NCAA challenging the NCAA’s use and license of former student-athletes’ identifies in various commercial ventures
  • OK, its not exactly antitrust, but Richard Posner’s criticism of a new Consumer Protection Financial Agency based on the insights of behavioral economics is worth reading.  Posner points out that following investment advice borne of behavioral economics a decade ago to invest more in equities to avoid “myopic loss aversion” would not have been a good decision and ends with the important point that is unclear that allowing cognitively biased regulators to regulate cognitively biased consumers improves matters
  • I predict that the Ultimate Fighting Championship president Dana White finds the firm on the defendant side of an antitrust suit in the near future stemming from its decisions to require all sponsors of individual fighters to pay the UFC a $100,000 licensing fee and to prohibit any fighter who signs a licensing agreement with the new EA mixed martial arts video game from dealing with the UFC (see here and here for details)
  • Intel takes on the EU fine on human rights grounds (see also here) and Qualcomm takes a $208 million hit in South Korea