Law and Economics 2.0 at the University of Chicago: What is the Law For?


Losing their market dominance, according to this Businessweek article, the University of Chicago's Law and Economics division launches "Law and Economics 2.0." Details:

Chicago Law…Dean Michael…Schill's big idea is to open new frontiers, both intellectual and geographic. This summer the school will play host to 75 Chinese legal scholars, who will get to meet stars like professor emeritus Ronald Coase—still writing in the field at the age of 101. "Coase is a god in China," says Omri Ben-Shahar, who is directing a newly created University of Chicago Institute for Law and Economics.

Meanwhile, Chicago Law professors are lobbing new bombs into the arena—fresh ideas for injecting economic thinking into law and regulation. Chicago Law professor Todd Henderson proposes paying bank examiners in part with "phantom" securities linked to the banking companies they regulate. The phantom bonds, essentially derivatives, would rise and fall in concert with a bank's debt. If banks took too much risk, regulators would feel a hit to their own wealth. To keep regulators from getting so cautious that they ban legitimate transactions, Henderson would throw some phantom stock into their pay packages as well. "There is no reason we can think of why bank regulators should not be paid for performance," he wrote…

Lee Anne Fennell, a specialist in property law….daring to challenge a central tenet of law and economics, has written that sometimes property rights can be too strong—say, allowing irrational homeowners to block worthy projects even when accommodating them somehow would be better for all. Her solution: Create an exchange where property owners could surrender certain veto powers over land use for a price before conflicts ever arose…..

The human actor in some of the newest law and economics writing is truer to life. Henderson, for example, acknowledges that for some people money isn't the motivation: "Once diligence has been priced, perhaps some regulators will slack," he wrote in Regulation.

But Hanson wonders whether law and economics scholars on the whole have gone far enough in incorporating humanity. A case in point: Should the question of motivation matter in assessing damages? A dispassionate law and economics analysis still might say no, while an ordinary juror would say unequivocally yes…

Defenders of Chicago-style law and economics want to be seen not as ideologues, but as realists. Posner again: "We ask not whether the economic approach to law is adequately grounded" in any particular ethical system, "but whether it is the best approach for the contemporary American legal system to follow."

Best why and for what goals, of course, a question that economics qua economics can't answer.

In April 2001, Steve Kurtz interviewed law and economics pioneer Richard Posner for Reason. Posner's own hint about the question of what the legal system is for, and how sure we can be about that question:

When people say Americans are pragmatists, they don't mean they are postmodernists with strong philosophical views about the correspondence theory of truth. They mean they are not interested in large theoretical questions; they are interested in practical solutions to current problems. That is the lay sense of pragmatism and also my sense. I don't want to get tangled in metaphysical questions. I didn't always feel this way, but today I don't want to argue that efficiency is the most important thing in the world and aggregate wealth is the only thing society should care about. I can defend an emphasis on efficiency in the law on practical grounds, which will create results most people like, but I'm not prepared to erect a metaphysics of efficiency that will prove that's the only thing we should be worrying about.

In reality, people's sense of justice often flies far away from that sort of efficiency question–and sometimes that's probably a good thing. As the old joke about Ronald Coase goes: I wonder if anyone has ever gone up to him and threateningly asked him how much he would charge to get punched in the face? (That is, sometimes questions of rights and propriety should overwhelm sheer economic efficiency. Or not, of course.)