Specific observations

Some observations apply specifically to the different approaches and uses, as displayed in Table 33.1.

Table 33.1 Different approaches to law and economics

Evaluative	Positive	Normative	Analysis applications
1	[2]	[3]	[Courts]
4	5	6	Administrative
7	8	9	Legislative

Most of the analysis needed in court situations is straightforward applications of economic techniques. Here, reliance on empirical data is particularly called for. Since the expert is brought in to help determine the case one way or the other, he/she should expect to be confronted by a counter-expert. Critical assumptions of the economic analysis are eagerly picked up by lawyers, particularly in adversarial procedures. This tends to confuse all parties involved, including the judges. Therefore one has to be careful to avoid jargon and to state assumptions and conclusions in clear terms. The model itself should be kept basic.

2. When trying to reconstruct involved court decisions in terms of positive economic theory - this is the art Judge Posner has developed to the point of mastery - it is important to trace the roots of the conflicting aspects of court decisions. The conflicting outcomes may result from any one of the following causes:

(a) faulty reasoning (unlikely in high court decisions, but see Tullock, 1993),

(b) implicit factual assumptions that have to be brought to the surface and proved correct or incorrect,

(d) the incorrect generalizations from non-legal theories,

(e) uncertainty of the courts about the likely outcomes of their decisions,

(f) conflicting intentions of traditional decision making.

For the economic analyst it is important to pinpoint one or several of these problems and focus on their resolution. The results of the economic analysis will be welcome to the court decision makers as long as they clearly improve upon their lawyering. The judicial intentions have to be clearly formulated and need to enter the analysis. Much of the opposition to the economic analysis of legal problems such as Posner’s stems not so much from an aversion to economic analytical techniques as from a sense that the economic analysis is a Trojan horse carrying ideological value judgements not shared by the court.

3. Welfare economic analyses often revolve around highly technical questions that can have important consequences. An example is the proper choice of a discount rate in compensation cases. The economic analyst should be aware of these arguments and state them explicitly in his/her brief, while not relying excessively on dubious assumptions (see previous section).

4. In administrative decisions, typically, more time is allowed to prepare an argument. Therefore the level of sophistication can be substantially higher. This will refer in particular to the empirical corroboration of the analysis. The administrative agency may actually be helpful and assist in data gathering and processing.

5. When attempting to reconstruct in economic terms a whole set of legal norms such as an administrative decree or an act, the analyst should determine what shaped the act and its current interpretation and implementation. It is unrealistic to assume that an economic analysis can bring about a change in either the act itself or its interpretation or its implementation if that change runs counter to the intentions of powerful pressure groups. It is not the task of the economist to change the political balance. The economist has to take the political status quo as given and try to improve upon it in the Pareto sense. Hence a political economic analysis of the legal norms under consideration is likely to be necessary.

This does not mean that the economic analyst should skirt the difficult ‘political’ or distributive issues. It is quite appropriate and sometimes welcome to elucidate distributive consequences of alternative decisions in conjunction with the emphasis on allocation. Only where one alternative is clearly superior to the other in the Pareto sense should the economic analyst make this judgement, and explicitly so.

6. In some administrative procedures, explicit normative economic analyses are called for. When, for example, environmental impact statements are required, the analytical techniques used should be clearly described. Confusion about those techniques can lead to a perversion of their results.

7. There is no doubt that the economic analyst can play a role of the greatest importance in the legislative arena. Economics is most useful when applied to a large number of similar cases, and this is the case when a piece of legislation is to be enacted. Since most legislation is controversial, the economic analyst should try to stay outside the political turbulences while being aware of the different pressures involved. Nothing hurts the standing of an economic analyst more than being involved in a heated discussion with another economic analyst in public. Questions of economic methodology cannot always be resolved. They can never be resolved in the political arena. In order to be successful, it is important to stress the areas of agreement among economists and state, but not controversially discuss, the points of disagreement. In an evaluative analysis of this kind, heavy reliance on empirical techniques with large data bases is particularly useful. The economic analyst who is also politically involved should state clearly where the analysis ends and the political persuasions begin.

8. When analysing legislative proposals or laws that have to be passed or may have to be amended, the economic analyst should keep in mind that the impact of a law begins much earlier than the date at which it gets passed.

The more important the legislation is, the more forceful will be the reactions to it before its enactment. The economic analyst should therefore try to construct a model which takes into account the likely reactions of those affected by the law, and spell out the consequences of alternative proposals in these terms. Far-reaching legislative proposals often have consequences even if they are not enacted. In order to avoid such unintended consequences, it is wise and makes economic sense to provide for loopholes and clauses making it possible to opt out of the provisions of the law. Often the distributive consequences of particular pieces of legislation foster so much opposition that a well-thought-out and balanced piece of legislation cannot be passed. In that case, a long transition period and an effective date pushed far into the future can prove to be an attractive solution. (See Frey, 1983, p. 29.)

9. In the legislative process, the economic analyst can play an important and helpful role by spelling out the implications of different political persuasions. In this way, deadlocked committees can sometimes be got moving again. In order to make welfare economic analyses useful for these applications, it is important to translate them into plain everyday language.

10. A short guide to the literature is in order here. A legal economic analysis which follows roughly the approach outlined above can be found in Backhaus (1987), a book which gives a legal-economic analysis of one court case. The classical works in law and economics are, of course, Calabresi (1970), which he followed up with Calabresi and Bobbitt (1978), and Posner’s Economic Analysis of Law (1986). An alternative, institutionalist approach can be found in Samuels and Schmid (1981). Texts commonly used at American universities include Polinsky (1983) and Shavell (1987). The text by Ogus and Veljanovski (1984) offers a collection of relevant readings, and widely used, although somewhat opaque, is Veljanovski (1982).

Most texts de-emphasize procedural law, but Tullock (1980) is a notable exception. His book is particularly accessible to the non-economist. An excellent case study is Reuter (1983), which has since appeared in a student edition. While most of the literature is in English, the German literature is also extensive, most of it being quoted in Adams (1985) and Backhaus (1987). The most important journals in the field are the Journal of Law and Economics, the Journal of Legal Studies, the Journal of Law, Economics, and Organization, the International Review of Law and Economics, and last, but not least, the European Journal of Law and Economics.

References

Adams, M. (1985), Okonomische Analyse der Gefahrdungs- und Verschuldenshaftung [Economic Analysis of Absolute and Encumbrance Liability], Heidelberg: R. v. Decker’s Verlag, G. Schenck.

Backhaus, J.G. (1987), Mitbestimmung im Unternehmen: Eine okonomische Rechtsanalyse des Verfassungsgerichturteils vom 1. Marz 1979 als Beitrag zur Theorie der Wirtschaftlichen Rechtspolitik [Co-determination : A Legal and Economic Analysis], Gottingen: Vandenhoeck & Ruprecht.

Calabresi, G. (1970), The Costs of Accidents: A Legal and Economic Analysis, New Haven, CT and London: Yale University Press.

Calabresi, G. and P Bobbitt (1978), Tragic Choices. The Conflicts Society Confronts in the Allocation of Tragically Scarce Resources, New York: W.W. Norton.

Frey, B.S. (1983), Democratic Economic Policy: A Theoretical Introduction, Oxford: Basil Blackwell.

Ogus, A.I. and C.G. Veljanovski (1984), Readings in the Economics of Law and Regulation, Oxford: Clarendon Press.

Polinsky, A.M. (1983), An Introduction to Law and Economics, Boston, MA: Little, Brown.

Posner, R.A. (1986), Economic Analysis of Law, 3rd edn, Boston, MA: Little, Brown.

Reuter, P. (1983), Disorganized Crime: The Economics of the Visible Hand, London and Cambridge, MA: MIT Press.

Samuels, W. J. and A. Schmid (1981), Law and Economics — An Institutional Perspective, Boston, MA: Martinus Nijhoff.

Shavell, S. (1987), Economic Analysis of Accident Law, Cambridge, MA: Harvard University Press.

Tullock, G. (1980), Trials on Trial: The Pure Theory of Legal Procedure, New York and Guildford: Columbia University Press.

Tullock, G. (1993), ‘Court errors’, European Journal of Law and Economics, I, 9-22.

Veljanovski, C.G. (1982), ‘The Coase theorem and the economic theory of markets and law’, Kyklos, 35 (1), 53-74.

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Source: Backhaus Jürgen G. (ed.). The Elgar Companion to Law And Economics. Second Edition. Edward Elgar,2005. – 777 p.2. 2005

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