Economics and the Law: Too Much One–Way Traffic?

DOIhttp://doi.org/10.1111/1468-2230.00063
Date01 January 1997
Published date01 January 1997
AuthorC.A.E. Goodhart
Economics and the Law: Too Much One-Way Traffic?
C.A.E. Goodhart*
Introduction
When Professor Simon Roberts asked me to give this Chorley Lecture, he told me
that this would be the first time that an economist had done so. It is, indeed, most
appropriate that an economist should have been asked to talk on the subject of
economics and the law here, particularly so because LSE was the site where
Ronald Coase did his formative work, under the supervision of Arnold Plant; as
Coase’s biographer, Steven Medema writes,
1
‘There can be no doubt that Coase’s
career was largely shaped by his LSE experience’; Coase’s work here was later to
develop into his paper on ‘The Problem of Social Cost,’
2
which is famous for being
the source of the Coase Theorem. Posner
3
states that this theorem, ‘slightly
oversimplified, . .., is that if transactions are costless, the initial assignment of a
property right will not affect the ultimate use of a property.’ This, and Coase’s
analytical work more generally, provided one of the main foundations of the
economic-legal approach to law, whose best known proponent nowadays is,
perhaps, Judge Richard Posner in the USA. I have chosen to concentrate more on
Coase’s contributions, but Hayek provides yet another LSE link between the two
disciplines, and I shall also briefly mention his work towards the close of this
paper.
Whereas it is appropriate that an economist should give this lecture, I came to
realise with increasing cogency, as the effective date came ever closer, that it
should not have been me. Simon Roberts chose me because banking law was
Chorley’s main academic interest and he thought that it would be appropriate if
this anniversary occasion could be marked with a lecture on some aspect of Central
Banking. As I said at the time, I had little to offer on that subject and, moreover,
The Modern Law Review Limited 1997 (MLR 60:1, January). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA. 1
*Norman Sosnow Professor of Banking and Finance, Department of Economics, London School of
Economics.
This is the text, with some footnoting, of the 25th Chorley Lecture, delivered in the Shaw Library, London
School of Economics, on 5 June 1996.
I am especially grateful to my brother, Sir William Goodhart QC, for his many helpful comments, and also
to Ross Cranston, Bob Gould, Oliver Hart, Klaus Meyer, Mancur Olson, Christopher Staughton and Max
Steuer for their helpful suggestions and comments.
1Ronald H. Coase (London: Macmillan, 1994) p 4.
2 Coase, The Firm, the Market and the Law (Chicago: University of Chicago Press, 1988) ch 5;
reprinted from (1960) 3 The Journal of Law and Economics 1. Quotations from this paper refer to the
1988 reprint.
3Economic Analysis of Law (Boston: Little Brown, 4th ed, 1992) p8.
that I and most economists tended to take the legal underpinnings of the economy
for granted in most of our work.
Why, then, did I accept the invitation in the first place, especially if I may quote
Ralf Dahrendorf’s opening sentence when he gave this same lecture in 1976: ‘It is
perhaps understandable that a non-lawyer invited to deliver this distinguished
lecture, and even threatened by its publication in a law review, feels a sense of awe
and embarrassment?’
4
There are a number of reasons. First, it is hard to refuse an
offer to give such a prestigious lecture when that is made so far in advance; one can
hardly plead a prior commitment over a year ahead. Secondly, this must be one of
the few such lectures which my father, Arthur Goodhart, had not himself given, so
there was a matter of family pride to complete the set. Finally, I did think that there
was one issue that I could develop, which was that economists tended to take the
legal underpinnings of the economy too much for granted, and I shall return to that
in a moment as it represents my first major topic.
But when I eventually came to prepare for this lecture, I felt that I should read
more widely in the area, thereby trespassing on fields outside my own familiar
areas of banking and the foreign exchange market. This reading, not surprisingly,
reinforced my own sense of inadequacy. But what really struck me as I browsed
through the various journals dedicated to the study of the interaction between law
and economics, among others The Journal of Law and Economics;The Journal of
Legal Studies;The Journal of Law, Economics and Organisation;Research into
Law and Economics;International Review of Law and Economics; and finally The
European Journal of Law and Economics, is that the vast majority of the
contributions involve the application of economic methodology to the law.
In the main, the relationship between economics and law involves one-way
traffic. In his fascinating 1982 paper on ‘Evolutionary Models in Economics and
Law: Cooperation vs Conflict Strategies,’ Hirshleifer notes that: ‘In recent years
there has been growing intellectual interchange between legal and economic
scholars. The dominant influence, it seems fair to say, has been economics, in the
sense that economic propositions have been borrowed or applied to provide new or
more fundamental explanations of certain legal phenomena.’
5
This is perhaps
epitomised in Judge Richard Posner’s great textbook on Economic Analysis of
Law, now into its fourth edition.
Economics has become an increasingly and unashamedly imperialist social
science in recent decades. And you in the law provide one of our finest colonies.
To quote Hirshleifer again: ‘For my purposes, all human motivations and
interactions constitute the subject-matter of economics, so long as they respond to
the pervasive fact of resource scarcity.’
6
Since time, money, land, capital and
labour are all scarce, there are few such motivations and interactions that are not
affected by such scarcity. Whereas the conquistadores in Latin America had steel
swords and horses to carry all before them, our own economics and law
conquistadores, Ronald Coase, Guido Calabresi, Gary Becker and Richard Posner
amongst them, have something much more powerful: a unifying methodology,
particularly in the form of constrained maximisation.
The success and scope of such colonisation becomes apparent as soon as one
samples the law and economics literature to which I have already referred. For
example, in the latest complete volume of the Journal of Law and Economics
4 ‘A Confusion of Powers: Politics and the Rule of Law’ (1977) 40 MLR 1.
5 (1982) 4 Research in Law and Economics 2.
6ibid 1.
The Modern Law Review [Vol. 60
2The Modern Law Review Limited 1997

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