The historical context

The time was important. It was more than 50 years before the beginnings of the subdiscipline of law and economics as it later developed. Herzl’s inspira­tion came at a high point in the life of the now classical German Historical school.

Adam Smith’s (1723-90) recognition that there were profound and close relationships between law and economics was expanded and developed by German scholars, notably Wilhelm Georg Friedrich Roscher (1817-94). Adolph Heinrich Gotthilf Wagner (1835-1917) and Schmoller. Their writings on law and economics were generally centred on situations where the law affected economic activity, such as labour, taxes, tariffs, the value of money and the role of the state. The German studies were mostly descriptive, often theoretical and almost never primarily analytical in the sense that we now understand the term. They had relatively little use for abstract economic theory. They knew, but deplored, the methods of the famous English econ­omists. Although they used marginal analysis, it was in verbal, not mathematical terms. They were pioneers in the economic application and development of statistics.

The German writings were marked by high scholarship standards. The main tools for economic analysis were solid logic, sound judgement and common sense, nearly always firmly based on contemporary and historical data. The use of specifically economic tools, such as comparative cost, was sparing. Often their employment of other tools such as diminishing returns and supply and demand curves was more implicit than explicit.

Distinctions between the application of economic analysis to the workings of the legal system and how the legal system influences the performance of the economic system were relatively infrequent. Schmoller’s work, the most influential of its time, emphasized the latter approach, although sometimes studies combined both approaches. Law and economics were more inte­grated, in the sense that economic studies frequently included consideration of the legal side of the problem.

A conspicuous characteristic of the classical literature on law and econom­ics was that it was almost always based on explicit value judgements about the social effects of the laws and their economic consequences. Most of the German and Austrian writings that were not purely historical were concerned with social problems. Important secondary themes were the effects of the law on economic development and the role of the state in social welfare.

Faith that changing the law would improve welfare was widespread. Almost all the important German and Austrian economists were optimistic about the possibilities of solving social problems with actions from above. They differed in their approaches. Some, like Wagner and Anton Menger (1841-1906), advocated state socialism of various kinds. Others, like Schmoller and Carl Menger, Anton’s brother, emphasized changing the institutional preconditions to achieve goals in the public interest. Both Anton and Carl Menger were professors at the University of Vienna when Herzl studied there.

Another characteristic of classical law and economics was the active in­volvement of economists in attempts to influence public policy. In England, the Anti-Corn Law League in the 1840s led by John Bright (1811-99) and Richard Cobden (1804-65) resulted in the repeal of those restrictive laws. In Germany, economists were major figures in the organization and operation of the Association for Social Policy (Verein fur Sozialpolitik) established to influence public opinion. Similar organizations, although none so influential and most more narrowly focused, were formed in France and the United States.

The older style in thinking about social reform was in sharp contrast to the law and economics which developed after the Second World War. In the main, it started from a different approach to social problems. Modern studies in law and economics usually derive their proposals for changes in either the law or economic institutions from an economic analysis. The classical tradi­tion was the other way around. Economists defined the social problem first and then gave the economic, moral and ethical arguments for changing the law.

All of these influences are to be found in Herzl’s work.