How Bohm became a pioneer in law and economics

Bohm’s association with the ORDO school of law and economics was deter­mined by an institutional tradition which was still very much alive in Germany during his lifetime, but it is hardly an exaggeration to say that the genesis of his neoliberal ideas was also due to a stroke of luck.

The institutional determinant consisted in the fact that in Germany eco­nomics was normally taught at law schools up to the 1930s, so that jurists and economists were able to draw heavily on both law and economics (Backhaus, 1996a, p. 459). As a result,

[a] generation before the American Bar Association and the American Economic Association decided to come together to devote themselves to the economic analysis of antitrust law, this kind of cooperation was perfectly natural at the University of Freiburg... where jurists and political economists taught and did research together in the thirties. (Moschel, 1985, p. 45)

It was a stroke of luck that while Bohm was working on the problems associated with the struggle for monopoly, Eucken was looking for ways and means of setting up institutions to ensure that the price system would remain workable, and Grossmann-Doerth was analysing the excesses of the ‘self­created law of the economy’ which left its mark in the ‘general terms and conditions’ of powerful business enterprises. The thread of common interest which bound together these initially separate research programmes was later described by Bohm (1957, p. 99) in the following terms:

The issue with which we were all concerned boiled down to the question of private power in a free society. It inevitably raised further questions concerning the nature of order in a free society, the various types of economic order that exist, and the dysfunctions which may occur within these various types.

These questions were examined by the founder members of the Freiburg school.

When jurists deal with questions concerning private law, their main atten­tion is given to lawsuits in which litigants’ property rights are clarified and attempts are made to settle disputes between those concerned. By contrast, when jurists look into problems associated with public law, they are primarily concerned with lawsuits whose purpose is to dispel doubts about what the state is entitled to demand from individual citizens and to what extent the latter are entitled to defend themselves against the state. In both cases, we are talking about a specific dispute between two specific litigants at a specific point in time. Lawyers who concern themselves with such matters therefore tend to overlook the fact that by influencing transaction cost structures in a more or less appropriate manner, regulations may trigger off, accelerate, retard or even completely hinder production and exchange processes in eco­nomic systems based on the division of labour. Excessively high transaction costs, for instance, may jeopardize the provision of public goods, produce external effects, create or preserve informational asymmetries, or endanger the functional dynamism of market processes. Excessively low transaction costs may give rise to a situation where unwelcome processes (for example, cartelization) unfold much too smoothly. Inappropriate transaction cost struc­tures may therefore result in various types of market failure (Grossekettler, 1997, pp. 103ff.). Such coordinative deficiencies are the upshot of human decisions, but in the final analysis no one really wants such things to happen.

Economists, on the other hand, are aware that market processes are self- regulatory processes that depend on a large number of decisions. They know that under favourable circumstances such self-regulatory processes can sta­bilize desired equilibria in economic systems, provided that we have an appropriate institutional disposition of decision-making bodies, information rights and duties, and economic incentives. However, economists tend to overlook the fact that in a Rechtsstaat (state based on law), the institutional prerequisites of appropriate economic processes are actionable and must therefore be formulated in such a way that judicial decisions can be taken in individual cases. There is also the further complication that when the law is applied to individual cases within the juridical framework of a Rechtsstaat, the objects of the economic system as a whole are entitled to consideration only in the second place unless there are meta rules³ which ensure that judges will adhere to the same interpretational and organizational rules in every individual case. If the choice of meta rules is left exclusively to the experts who are responsible for specific matters, the general legal framework is bound to be riddled with inconsistencies. Good examples are provided by antitrust and regulation law (which is of fundamental importance for the allocation of rights and duties), accounting and bankruptcy law (which is vital for the flow of information), or national and international tax law (which has a major influence on incentive structure) and the specific, economically inconsistent approaches that may be evolved in these domains.

The foregoing analysis is conducive to a better understanding of the char­acteristic strengths and weaknesses of jurists and economists in respect of the construction of an institutional framework for economic processes.

Bohm wanted to show economists that jurists have legal organizational instruments which can enable a state to resist dysfunctional influences exerted by lobbies. The institutional draft proposals put forward by economists may well be couched only in general or indefinite terms, but jurists can convert such documents into practicable regulations that can be applied by judges. However, jurists can only formulate such regulations correctly if economists provide them with meta rules for the consistent construction of the entire legal frame­work for economic processes. Bohm believed that some of the requisite rules could be found in the fundamental principles for economic policy elaborated by Eucken.⁶ When these principles were enunciated it was not yet clear how such maxims could be put into practice in the sphere of politics, and even today vagueness and want of precision are par for the course in this domain.

Bohm was also anxious to show economists how important it is to recog­nize jurists’ capacity for organization and to take advantage of this capacity in order to construct a suitable economic order. Jurists - especially judges in superior courts of law like the German Federal Constitutional Court or the EU’s European Court of Justice - constantly modify the economic constitu­tion by their regular decisions, and such decisions have an impact on the workability of the economic constitution. If the idea of an efficiency-oriented economic constitution can be firmly anchored in the literature of the legal profession, much may yet be achieved. Since juridical literature is continu­ally expanded and updated by legal scholars, the odds are that the innovation in question will ultimately achieve more than spectacular political decisions, for politicians are forever chopping and changing, and their decisions tend to be oriented towards short-term electoral goals. However, if any progress is to be made in this domain, it is essential that jurists should work together with economists who appreciate specifically legal problems and who have learned how to present an economic analysis of such problems.

Bohm showed how these basic ideas may be applied in two fields of law, namely antitrust law and codetermination legislation.