Foundations of the Economic Approach to Law

Rating:
Summary: Mainstream L&E reader focusing on correcting market failure
Review: This collection of articles takes an unusual approach to law and economics. In its first two chapters, it gives some theory. It then provides, in the third chapter, a brief overview of applications to property, tort, contract, criminal law and procedure (the basic model). The next four chapters are devoted to 'refinements' of the basic model, to wit strategic behaviour, risk and insurance, information problems and bounded rationality. These core chapters are followed by one on various strands of critique of the economic analysis of law and by a concluding chapter on the economics of family law, presented as the frontier of law and economics. Each chapter has introductory and concluding notes and questions, exhibiting admirable mastery of the law and economics literature.

In the second chapter, law and economics is presented as relying on two distinct models. One is called the market failure model, or alternatively the Pigovian model. The other is the co-operative or Coasean model (explained through excerpts of Coase's 1937 and 1960 articles). I wonder whether these two should be presented as alternative models. The first one is clearly normative: markets can be left alone, save when market failure is thought to occur. In that case a form of corrective intervention is called for. Coase's point appears to be descriptive first: transaction costs explain why interested persons choose particular institutions, from amongst several possible options, for structuring their relations. As against Pigou, he argued that supposed market corrections did not in fact alter matters and indeed that the supposed failure of the market was imagined only.

The chapters on the 'refinements' all deal with matters that are particularisations of what were traditionally considered forms of market failure: externalities, public goods, imperfect or asymmetric information as well as monopoly. While this may be sound pedagogically -- start with the basic model briefly, then devote most time to examining deviations which call for particular rules and explain observed legal rules in that manner -- it weds one to a rather traditional approach to law and economics, however admirably the reader is otherwise put together.

The collection devotes no space to public choice or game theory (although it mentions the book by Baird et al.), nor to the Austrian and (neo)institutionalist views of law and economics (although Williamson's work is mentioned in notes). Surprisingly, not a single excerpt of Richard Epstein's work is included, although again his name pops up several times in the notes.

Whoever has even skimmed the Palgrave Dictionary of Law and Economics will surely agree that there is more to the field than is dreamt of in this reader. But perhaps such a solid straightforward approach is just what beginning L&E students demand.

EJAN MACKAAY