The Value in Law and Economics — No, Really!

Kenneth Anderson asks

What should I tell my 1L students tomorrow as to why they should study law and economics — or not?

The context is that his students are increasingly dissatisfied with his previous explanation that economic “consequences matter”:

As one of them put it, that might be fine for students at the top ten schools, but students at my school are not going to become judges or people who create the rules. They are going to become, if they are lucky, lawyers doing much more modest tasks that take the existence of the rules — including their efficiency or inefficiency, and their consequences — pretty much for granted. They are, after all, the rules of the game.

I would respond that every lawyer who drafts a contract is one of the “people who create the rules.” And lest you think that this excludes litigators, remember that settlements are contracts too, and that most lawsuits end in settlement. A divorce lawyer putting together a separation agreement with an alimony component needs to know something about varying tolerance for risk. A real-estate lawyer negotiating a newsstand’s lease needs to know something about incentive compatibility. Many, indeed most, divorce and real-estate lawyers understand these concepts implicitly; a course in law and economics helps build that intuition by making the issues explicit and given them names.

Beyond that, persuasive arguments are the stock-in-trade of every practicing lawyer, and microeconomic analysis is nothing if not a fruitful source of arguments. Economic thought provides rhetorical topics that work in a tremendous range of situations. A lawyer who can explain why the other side’s proposed wording for an injunction gives the defendant the “wrong incentives” has an advantage over a lawyer who hasn’t mastered incentive-talk. In the last half century, only the deconstructive genius of critical legal studies has offered lawyers anything like the rhetorical cornucopia that law and economics does.

Thinking like an economist is not thinking like a lawyer. Neither is thinking like a philosopher, literary critic, programmer, psychologist, poet, historian, bench scientist, anthropologist, statistician, or theologian. But being able to think like one — or better, like several — is a way of thinking like a more effective lawyer. These insights of these fields are not substitutes for long and close practice with law’s primary materials. But, as an economist might say, they can be excellent complements for it.

I’d like to suggest that there’s another reason for studying {law and economics} (“the set of doctrines and presumptions that form the academic subdiscipline and legal subdiscipline called ‘law and economics’”): Understanding its limits, and how extending {law and economics} beyond its limits leads to bad decisions at all stages of legal process.

As a specific example, consider the author who has just received a contract offer from Media Conglomerate X and asks Lawyer Y (perhaps Professor Anderson’s objecting student) for advice on negotiating strategy. A strict {law and economics} approach would focus almost entirely on the offered advance, the offered royalty rates, and the rights being licensed.+ Those, however, are precisely the areas where a lawyer is least likely to either influence the actual negotiations in the client’s favor or point out problems that the client needs to pay attention to — things like warranties and indemnification, delivery instructions, permissions, derivative-work rights, later-edition rights, audit rights, and so on. Sure, that seems obvious… but the language that’s going to come back from the publisher will sound like it’s parroting an article in the Journal of Legal Studies, and if the lawyer at the receiving end doesn’t understand {law and economics} he/she will not be able to either explain things to the author or make an intelligent rejoinder.

The law is a woodworking shop with a whole bunch of different tools, and failing to learn the capabilities (and limitations) of that {law and economics} lathe over in the corner will result in a woodworker of limited capability (and a lot of needless sawdust). Even if the woodworker thinks that all he/she ever wants to do is make coffee tables, he/she is eventually going to need to at least consider some turnery…

  • Licensed, not sold, under the 1976 Act… unless it’s a transfer of the copyright itself. Unfortunately, the publishing subindustry has not gotten around to recognizing this in the thirty-odd years since the 1976 Act became effective, and continues to claim that it’s a “sale of rights” (primarily because that’s beneficial to them under New York contract law, but that’s a much more complicated issue in itself). And then we run into interesting disparities between “sale” and “license” in the Bankruptcy Code — but nobody in publishing ever goes bankrupt, do they?

A study of Go Rin No Sho and Clausewitz will also help understanding the importance of strategy (intention) to guiding choice of tactics (the letter of the law?).