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Law and Neoclassical Economics: Science, Politics, and the Reconfiguration of American Tort Law Theory

  • James R. Hackney


Morton Horwitz once posed the question, “Law and Economics: Science or Politics?” highlighting what has been a contentious issue for legal historians and the general legal academic community. A common historical accounting for the emergence of the law and neoclassical economics movement is that it provided theoretical ammunition for right-of-center politics following the collapse of 1960s progressive politics. Simultaneously, it has been viewed as a continuation of the legal realist moment and a response to the need for a scientific foundation for private law. In short, the consensus seems to be that law and neoclassical economics is about either science or politics. Little thought has been given, however, to its political and scientific formation and, in particular, to how the two in fact intersect. This article attempts to remedy the situation.



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1. Horwitz, Morton J., “Law and Economics: Science or Politics?,” Hofstra Law Review 8 (1980): 905 (hereinafter “Science or Politics?”).

2. See, e.g., Horwitz, Morton J., The Transformation of American Law, 1870-1960 (New York: Oxford University Press, 1993), 269–72; White, G. E., Tort Law in America (New York: Oxford University Press, 1985), 211–43; Tushnet, Mark, “Idols of the Right: The ‘Law-and-Economics’ Movement,” Dissent 40 (1993): 475.

3. Phillips, Kevin, The Politics of Rich and Poor (New York: Random House, 1990; New York: Harper Perennial, 1991); Horwitz, Transformation, 270; Horwitz, “Science or Politics?” 905; Tushnet, “Idols,” 476-77; Kelman, Mark, A Guide to Critical Legal Studies (Cambridge: Harvard University Press, 1987), 151–85 (chapter entitled “Legal Economists and Conservative Preferences”).

4. Horwitz, “Science or Politics?” 905 (arguing that “only the prestige of the sciences could have brought law-and-economics such prominence during the past two decades”); Tushnet, “Idols,” 477 (arguing that the emergence of the law-and-economics movement marked the displacement of “legal logic” by the formalism of “scientific and technical expertise”).

5. In focusing on tort law, this article further explores the “neoconceptualism” that G. Edward White discussed in Tort Law in America, 211-43. The focus on a single legal policy area parallels Herbert Hovenkamp's effort to chronicle developments in economic thinking on business enterprises. See Hovenkamp, , Enterprise and American Law, 1836-1937 (Cambridge: Harvard University Press, 1991).

6. This study is an attempt at, as stated by Carl Schorske, paying attention to the “internal structure” of thought and not merely “skimming the ideological cream off the intellectual milk, reducing complex works of art and intellect to mere illustrations of historical tendencies or movements.” See Schorske, , “1987 Charles Homer Haskins Lectures of the American Council of Learned Societies,” in Life of Learning, ed. Greenberg, Douglas and Katz, Stanley N. (New York: Oxford University Press, 1994), 53, 64.

7. See Section I. A. below.

8. White, Tort Law in America, 211-43.

9. For a comprehensive general account of the rise of the law and neoclassical economics movement, see Duxbury, Neil, Patterns of American Jurisprudence (New York: Oxford University Press, 1995), 301419. However, Duxbury's study does not place the rise of law and neoclassical economics in the context of the intellectual and political shifts set forth in this study and is not focused on the science/politics debate. In addition, the general nature of his study does not lend itself to textual attention to the “internal structure” of law and neoclassical economics that Schorske suggests. See note 6 above.

10. See, e.g., Kelman, Critical Legal Studies, 114-85 (summarizing theoretical critiques of law and neoclassical economics by scholars in critical legal studies).

11. Of course, the choice of a particular concept of science may be political, which leads to the conclusion that an entire enterprise is political even given its fidelity to a certain notion of science. One's stance on this issue may differ from context to context, and I leave it to the reader to determine if this view of science is applicable to the historical context discussed here.

12. Hovenkamp briefly, but acutely, sketches out such a displacement in the American conception of the corporate firm. However, it is not a central theme in his analysis. See Hovenkamp, Enterprise and American Law, 305-7.

13. Hereinafter LSE. Robbins, Pigou, and Hayek all held professorships at the LSE in the 1930s. Ronald Coase was a student in the economics department at the LSE during this period, and Frank Knight spent some time there as a visiting professor. See Robbins, Lionel, Autobiography of an Economist (London: Macmillan Press, 1971), 123–44, 219 (describing economic de-bates and economists at the LSE in the 1930s).

14. For an extended discussion of pragmatic instrumentalism, see Hackney, James, “The Intellectual Origins of American Strict Products Liability: A Case Study in American Pragmatic Instrumentalism,” American Journal of Legal History 39 (1995): 443509. The pragmatist tenets essential to the conception of Section 402A (see note 148 below for description of Section 402A) were antiformalism, anticonceptualism, historicism, and contextualism. The tenets were articulated by such figures as Charles Sanders Peirce, Nicholas St. John Green, Oliver Wendell Holmes, and John Dewey (ibid., 447-62). The insights of institutional economics included a focus on society as a whole (as opposed to individuals), emphasis on large forces (institutions), descriptive (inductive) analysis, and humanistic concern for those at the economic margins of society. Concerns related to the economic underpinnings of Section 402A were expressed by institutionalists including Thorstein Veblen, John R. Commons, Wesley Mitchell, Henry Seager, and Crystal Eastman (ibid., 462-78). Legal realists urged anticonceptualism, concern for connecting law with social reality, and use of social science as a tool for examining legal rules. Those associated with the legal realist movement who took part in the construction of strict products liability law included Harold Laski, Leon Green, Karl Llewellyn, and Benjamin Cardozo (ibid., 478-89).

15. See Hackney, “Pragmatic Instrumentalism,” 447.

16. Ibid., 468-478.

17. “Analytic philosophy” is a term ill-suited to precise definition. It is better defined by the ways of doing philosophy followed by those associated with the analytic turn. Barry Gross has proposed a useful division of analytic philosophy into five historical stages. Gross marks the first stage of development with the early realism and analysis of G. E. Moore and Bertrand Russell. Their concern was with the method of forming precise questions and clear answers. The second stage is ushered in by Russell's later work (1914-1919) and the early work of Ludwig Wittgenstein. Gross refers to this stage as adopting the position of logical atomism “to construct a language whose syntax mirrored the relations of the basic entities of which the world was made.” The third stage, logical positivism, marked an attempt to dispense with any form of metaphysics and the “desire to construct a formal language adequate for science.” Performance of analysis in “natural languages” (ordinary language) marks the fourth stage and is an implicit rejection of stages two and three. The final stage is concerned with the problem of untangling the “diversity of language.” See Gross, Barry, Analytic Philosophy: An Historical Introduction, (New York: Pegasus, 1970), 1314. This article focuses on developments in stages two and three, with particular emphasis on the importation of logical positivism onto American soil.

18. Nicholas Rescher lists the major tenets of analytic philosophy as follows: the enchantments of language, linguistic analysis as a philosophical anodyne, reduction to scientific residues, prioritizing of science, and the end to philosophical theorizing. See Rescher, , American Philosophy Today and Other Philosophical Studies (Maryland: Rowan & Littlefield, 1994), 3435.

19. See note 13 above describing the LSE affiliation of Hayek, Robbins, Pigou, Knight, and Coase.

20. Joergensen, Joergen, “The Development of Logical Empiricism,” in Foundations of the Unity of Science, vol. 2, ed. Neurath, Otto, Carnap, Rudolf, and Morris, Charles (1939; reprint Chicago: University of Chicago Press, 1970), 845.

21. Sorell, Tom, Scientism: Philosophy and the Infatuation with Science (London: Routledge, 1991), 4 (discussing the role of Vienna Circle members in laying the foundation for scientism).

22. Ayer, A. J., Language, Truth & Logic (1936; reprint New York: Dover Publications, 1952); hereinafter LTL.

23. Wang, Hao, Beyond Analytic Philosophy (Cambridge: MIT Press, 1986), 103.

24. LTL, 31 (preface to first edition).

25. Ibid., 31.

26. This illustration is from Mounce, H. O., Wittgenstein's Tractatus: An Introduction (Chicago: University of Chicago Press, 1981), 63.

27. LTL, 57-58.

28. Ibid., 75.

29. Ibid., 79-80.

30. Noting the “fair amount of criticism”that LTL's theory of ethics received, Ayer made a point that needs emphasizing: the book's ethical discussion does not “entail any of the non-ethical statements which form the remainder of… [LTL]” and is “valid on its own account" (LTL, 1946 Introduction, 20).

31. Ibid., 107-8. This does not mean that for Ayer there is no place for intellectual, even scientific, investigation regarding ethics. Such an investigation would not constitute an “ethical science” but an inquiry into the “moral habits of a given person or group of people, and what causes them to have precisely those habits and feelings” (112). In LTL it is proposed that this inquiry takes place in the disciplines of psychology and sociology(112). For an extended discussion of this positivist method of ethical investigation, see Schlick, Moritz, “What Is the Aim of Ethics?” in Logical Positivism, ed. Ayer, A. J., trans. Rynin, David (New York: Free Press, 1959), 247–63.

32. Wang, Beyond Analytic Philosophy, 102.

33. West, Cornel, The American Evasion of Philosophy: A Genealogy of Pragmatism (Chicago: University of Chicago Press, 1989), 183; Joergensen, “Logical Empiricism,” 886-94; Borradori, Giovanna, The American Philosopher: Conversations with Quine, Davidson, Putnam, Nozick, Danto, Rorty, Cavell, Maclntyre and Kuhn, trans. Crocitto, Rosanna (Wisconsin: University of Wisconsin Press, 1994), 5.

34. West, American Evasion, 183.

35. Borradori, American Philosopher, 4.

36. Schorske, Carl, Fin-de-Siecle Vienna: Politics and Culture (1961; reprint, New York: Vintage Books, 1981), xx.

37. Ibid., xxv. (“[The political and intellectual life of post-war America suggested the crisis of a liberal polity as a unifying context for simultaneous transformation in the separate branches of culture”)

38. See Janik, Alan and Toulmin, Stephen, Wittgenstein's Vienna (New York: Simon and Schuster, 1973), 242–43 (noting cultural malaise in fin-de-siecle Vienna).

39. Schorske, Fin-de-Siecle, xxiii.

40. Ibid., xxiii.

41. Stephen Kresge and Leif Wenar identify Hayek with the general “intellectual and cultural eruptions from Vienna and Central Europe to which the rest of the world has been forced to respond.” See Hayek, F. A., Hayek on Hayek: An Autobiographical Dialogue, ed. Kresge, Stephen and Wenar, Leif (Chicago: University of Chicago Press, 1994), 1. Hayek recognized that the intellectual milieu of Austria in the 1920s and 1930s was “almost entirely the influence of Ernst Mach,” the intellectual forebear of logical positivism and the Vienna Circle, and acknowledged that his “introduction to… philosophy—scientific method… was through Machian philosophy” (ibid., 49). While Hayek never joined the Vienna Circle, he was exposed to its ideas (ibid., 50). Ultimately, he would “emancipate” himself from positivism and declare it to be “misleading in the social sciences” (ibid., 50).

42. Ronald Coase, in his brief intellectual history of law and neoclassical economics, credits Hayek with helping to launch the law and neoclassical economics program at the University of Chicago Law School. According to Coase, Hayek, following the success of his The Road to Serfdom (Chicago: University of Chicago Press, 1944 [hereinafter Serfdom]), made connections with H. W. Luhnow of the Volker Fund of Kansas City. Henry Simons, an economist at the University of Chicago, wanted to establish an “Institute of Political Economy” with the aim of bringing together “traditional liberal” or “libertarian” economists. These economists were “not [to] be mainly concerned with formal economic theory” or “engage substantially in empirical research.” This idea eventually evolved into a project entitled “A Free Market Study” (also referred to as the “Hayek Research Project”) housed in the University of Chicago Law School. Hayek played a key role in negotiating with the University and the Volker Fund to set up the program and Aaron Director was put in charge. See Coase, Ronald, “Law and Economics at Chicago,” Journal of Law and Economics 36 (1993): 239, 243-46.

The publication history of Serfdom also reveals the institutional symbiosis between Hayek and the law and neoclassical economics movement. Two economists at the University of Chicago were largely responsible for arranging for Serfdom to be published by the University of Chicago Press. Aaron Director, a pioneer in the law and neoclassical economics field and the first editor of the Journal of Law and Economics, first read the proofs. He forwarded them to Frank Knight, one of the leading thinkers in the neoclassical economics movement, who suggested that the university press might be interested in publishing the book. (On the contribution of Frank Knight to the law and neoclassical economics movement, see Section II. C. below.) The University of Chicago Press agreed to a publication contract. See Serfdom, xvii (introduction by Milton Friedman).

43. Ibid.

44. Ibid., xlv (preface to 1944 ed.).

45. Ibid., xxviii (preface to 1956 ed.).

46. Over 600,000 copies of a Reader's Digest condensed version of the book were sold in 1945. Since its publication, over a quarter of a million copies have been sold. Ibid., xix (Friedman introduction).

For a discussion of the book's impact on the postwar American political scene and how it was instrumental in conservative politics, see Gleason, Abbott, Totalitarianism: The Inner History of the Cold War (New York: Oxford University Press, 1995), 6467. Gleason argues that “Hayek's contribution to the British and American understanding of totalitarianism was original in its virtually total emphasis on the economic bases of both democratic freedom and totalitarian servitude” and that Serfdom was “ideally suited to make the debate over totalitarianism a more integral part of arguments between conservative Republicans and liberal Democrats in the postwar United States” (64). Gleason also cites comments made at the time of Serfdom's release declaring it to be “‘one of the most important books of our generation’” and “‘perhaps the most discussed non-fiction work since the war began’” (65). Edmund Whittaker situates Serfdom as an “important” text for economists arguing against government economic planning and stressing individual freedom. See Whittaker, , Schools and Streams of Economic Thought (Chicago: Rand McNally, 1960), 388. Irving Kristol, a leader in the American neoconservative movement, has made the following statement regarding Serfdom's influence in America: “Post-World War II conservatism begins to take shape with the American publication of Hayek's The Road to Serfdom…” See Kristol, , Neoconservatism: The Autobiography of an Idea (New York: Free Press, 1995), 378.

47. For an example of the progressive response to Serfdom, see “The Road to Serfdom: A Radio Discussion, April 1945,” in Hayek on Hayek, 108 (Hayek discussing Serfdom with Maynard Krueger, the national chair of the Socialist party, and Charles Merriam of the National Resources Planning Board). In June 1945 Hayek debated Harold Laski, a prominent progressive intellectual. See Gleason, Totalitarianism, 65-66. For a discussion of Laski “s role in the intellectual development of strict products liability law, see Hackney, “Pragmatic Instrumentalism,” 479-81.

48. Hayek, Road to Serfdom, xxxiv (preface to 1956 ed.).

49. Ibid.

50. Ibid., 4.

51. Ibid., 66 (emphasis added). The importance of preference formation to neoclassical economics theory is discussed in Section II below.

52. Ibid., 41 (emphasis added).

53. Ibid., 41-42.

54. Ibid., 43 (emphasis added).

55. An in-depth discussion regarding social costs and neoclassical economics is presented in Section II below. The neoclassical economics focus on social costs preceded Serfdom and is found in the work of A. C. Pigou and Frank Knight, which is discussed in Section II. Suffice it to say that Hayek's discussion of social costs parallels standard neoclassical analysis (ibid., 43-45).

56. Ibid., 45.

57. Serfdom's reception on the American intellectual and political scene reflected a general retreat from progressive reform due to the fear, even of those on the left, that increased government control of the economy would lead to totalitarianism. See Theodore Rosenof, “Freedom, Planning and Totalitarianism: The Reception of Hayek's, F. A.The Road to Serfdom,” in Modern Economic Classics—Evaluations Through Time, ed. Katz, Bernard S. and Robbins, Ronald E. (New York: Garland, 1988), 277. Rosenof makes a compelling argument that progressive positions formulated in the 1930s depression era were abandoned by the left after World War II, which led to the “compromise choice” of “Keynesian-welfare state” policies (290-91). This “compromise choice” reflects the narrowing of the political spectrum, with regard to left-policy prescriptions in particular, in postwar America.

58. Schorske, Fin-de-Siècle, xx (emphasis added). For a discussion of institutional economics and its intellectual milieu, see Hackney, “Pragmatic Instrumentalism,” 462-78.

59. Horwitz, “Science or Politics?” 905.

60. Robbins, Lionel, An Essay on the Nature and Significance of Economic Science (1932; reprint, London: Macmillan, 1962) (hereinafter Significance). See Screpanti, Ernesto and Zamagni, Stefano, An Outline of the History of Economic Thought, trans. Field, David (Oxford: Clarendon Press, 1993), 197, 270 (discussing how Robbins's contact with Hayek at the LSE led to the publication of Significance and the introduction of Austrian ideas into mainstream economics; also discussing how Robbins's conceptual reorganization “helped the neoclassical theoretical system to resume its dominant position”); Seligman, Ben, Main Currents in Modern Economics (1962; reprint, New Brunswick: Transaction Publishers, 1990), 520–26 (discussing Robbins's position as a major figure in the neoclassical tradition and Significance as his “major work”); Spiegel, Henry, The Growth of Economic Thought, rev. ed. (1971; Durham: Duke University Press, 1983), 528 (describing Significance as “important” and “the leading treatise on economic methods before the advent of macroeconomics”); Burtt, Everett Johnson Jr, Social Perspectives in the History of Economic Theory (New York: St. Martin's Press, 1972), 6, 276 (describing Significance as providing the “clearest expression” of the twentieth-century view of economics as “‘pure science’” and labeling it as a “highly influential work”); Roll, Eric, A History of Economic Thought, 3d ed. (Englewood Cliffs: Prentice-Hall, 1956), 461 (arguing that the case for a value-free economics was “presented most clearly to the English-speaking world” in Significance).

That Significance, as well as some of the other fundamental contributions to neoclassical economics theory, appeared before the postwar dominance of the analytic definition of science does not negate the importance of its relationship to that definition. (Of course, Significance appeared only three years before LTL, which memorialized ideas that were already ensconced in the British intellectual milieu of which Robbins was a part.) The importance of the analytic turn is that it allows for a superior claim to science from intellectual products that meet its dictates, whether those products were produced before, after, or in conjunction with the turn.

Indeed, the framework for neoclassical theory had already been constructed in the late 1800s. See Ross, Dorothy, The Origins of American Social Science (Cambridge: Cambridge University Press, 1991), 176 (identifying Carl Menger, Leon Walras, and Stanley Jevons as having independently devised the tools for neoclassical economic theory in the late 1800s).

In pondering “why did the passage from cardinalism to ordinalism [a major neoclassical economics move] occur only during the 1930's if… all the necessary presuppositions were already available at the beginning of the century,” Screpanti and Zamagni point to logical positivism: “There was a widespread opinion, among the economists gathered together by Robbins at the LSE, that the notion of ‘individual preferences’ was epistemologically safer than that of ‘levels of wel-fare’. Logical positivism had had a dramatic impact on Anglo-American social science, and the entry point in England had been the LSE. At the beginning of the century, positive epistemology had not yet begun to disturb the sleep of the economists. It was not until the philosophical settling achieved by the Vienna Circle that economists, too, began to speak of ‘observability’ as a demarcation criterion between science and fiction, and of neutrality with respect to value judgments as a separation criterion between science and ethics. The notion of ‘individual preferences’ seemed able to dispose of the concept of inobservability of utilities and, at the same time, to give a new foundation to the normative character of the interpersonal comparisons which motivate social policies.” See Screpanti and Zamagni, Economic Thought, 270 (emphasis in original).

61. Significance, 1-2, 16 (emphasis added). The same formulation was integral to Knight's definition of economic science. See Section II. C. below.

62. Significance, 4.

63. Ibid., 11.

64. Ibid., 16-17 (emphasis in original).

65. Ibid., 75-78 (emphases added). The idea of preference ordering (indifference curve analysis) is a foundational analytical tool for contemporary neoclassical analysis. For a discussion of how the emphasis on “individual preferences” as opposed to “levels of welfare” fits with the logical positivist view of science, see note 60 above.

66. Ibid., 76.

67. Under the law of diminishing marginal utility, the greater the consumption of a good, the lower the marginal (additional) utility the individual receives from consuming additional units of the good. For example, $ 10,000 would mean a lot less to me if my total net worth were $ 1,000,000 as opposed to what it would mean to me if my net worth were only $100. This concept could support the redistribution of wealth. For instance, if Person A is worth $ 100 and Person B is worth $1,000,000, $10,000 taken from Person B and given to Person A would improve society because Person A presumably values the $10,000 to a greater extent.

68. Significance, 137 (emphasis added).

69. Ibid., 138.

70. See note 60 above for an illustration related to this point.

71. Significance, 139-41 (emphases added). For a detailed discussion of the political significance of not recognizing interpersonal comparisons of utility in economic science, see Robbins, Lionel, “Interpersonal Comparisons of Utility: A Comment,” Economic Journal 48 (1938): 635. Robbins bemoans the fact that there can be no scientific case for ethical goals such as mitigating economic inequality (637). He does not have a problem with the ends articulated by egalitarians but with the “logical status” of such ends (641). Interpersonal comparisons of utility have no logical status because, unlike other neoclassical postulates, such comparisons could not be “verified by observation or introspection, or, at least,… [be] capable of such verification” (637).

72. See Section III below for an extended discussion of Robbins's articulation of economic science and Calabresi's and Posner's reconfiguration of tort law theory.

73. Pigou, A. C., The Economics of Welfare, 4th ed. (1920, London: Macmillan, 1962). See Spiegel, Growth of Economic Thought, 512-1 A, 806 (recognizing Economics of “Welfare as Pigou's most important text and noting that Pigou found instances where private gain did not benefit the general welfare and used the point to create a “full-fledged system” arguing for welfare state policies); Seligman, Main Currents, 477-96 (praising Economics of Welfare as an “extraordinary book,” which gave economists new areas for investigation); Screpanti and Zamagni, Economic Thought, 183-85 (situating Pigou as central to formal economic thought and arguing that his “most relevant contribution” was the distinction between private and social cost articulated in Economics of Welfare); Lekachman, Robert, A History of Economic Ideas (New York: Harper & Row, 1959), 386 (stating that “[t]he major work in welfare economics was Pigou's Economics of Welfare”); Whittaker, Streams of Economic Thought, 308-10 (identifying Pigou as a principal figure in wel-fare economics and noting the centrality of Economics of Welfare to his work); Roll, History of Economic Thought, 398, 476 (recognizing Pigou as a founder of welfare economics and labeling him [along with his mentor Alfred Marshall] one of the “chief twentieth century representatives” of the “social reform tradition in English economic thought”).

74. This approach dictates a nonchronological discussion of texts. Here the stress is on thematic rather than temporal ordering so as to search beyond “scientific” texts to illuminate the authors’ political objectives. I take the same approach to the work of Frank Knight, examining the intersection of methodological stance, political position, and attitude toward social costs.

75. Pigou, Economics of Welfare, 4-5 (emphasis added).

76. Ibid., 5 (emphasis added).

77. Ibid., 6 (emphasis added).

78. Ibid., 6-7 (emphasis added).

79. Ibid., 7 (emphasis added).

80. Ibid., 11.

81. Pigou, A. C., Socialism Versus Capitalism (1937; reprint, London: Macmillan, 1939). In a recent exchange regarding Ronald Coase's dispute with Pigou's analysis in Economics of Welfare, both A. W. Brian Simpson and Coase recognize Socialism and Capitalism as a central text in Pigou's oeuvre. See Simpson, , “Coase v. Pigou Reexamined,” Journal of Legal Studies 25 (1996): 53, 68-70; Coase, “Law and Economics and A. W. Brian Simpson,” ibid. 103, 113-16.

82. Pigou, Socialism, 21 (emphasis added).

83. Ibid., 13-14, 17.

84. Pigou, Economics of Welfare, 134-35.

85. Ibid., 135.

86. Ibid., 172.

87. Ibid.

88. Ibid., 183.

89. Ibid., 192.

90. Pigou, Socialism, 138-39.

91. Spiegel, The Growth of Economic Thought, 578. For a general discussion on the down-fall of Pigouvian economics, see Aslanbeigui, Nahid, “On the Demise of Pigouvian Economics,” Southern Economic Journal 56 (1990): 616.

92. Ross, American Social Science, 420.

93. Seligman, Main Currents, 646.

94. Knight, Frank, Risk, Uncertainty and Profit, (1921; reprint, New York: Augustus M Kelley, 1964); hereinafter Risk. For the importance of Risk, see Spiegel, Growth of Economic Thought, 642 (labeling Risk an important theoretical text in neoclassical theory and identifying Knight as “an intellectual force whose impact was felt by several generations of economists”); Ross, American Social Science, 420-27 (acknowledging Knight as “one of the most powerful theorists among neoclassical economists,” recognizing his position as “founder of the libertarian Chicago school of economics,” and calling Risk his “major and still classic theoretical work”); Seligman, Main Currents, 646-65 (arguing that Risk established Knight as “one of the more important economists on the American scene”); Roll, History of Economic Thought, 439 (recognizing Risk as the “best exposition of the theory of choice as it emerged at last from the successive refinements of a generation of marginalists”).

95. Risk, 3 (emphasis added). This can be contrasted with Ayer's view that analytical methods help in understanding complex arguments. See Section I. B. above.

96. Ibid., 5-6.

97. Ibid., 6.

98. Ibid., 7.

99. Ibid., 7, n. 1.

100. Ibid.

101. Knight, Frank, “What Is Truth in Economics?” in On the History and Method of Economics (Chicago: University of Chicago Press, 1956), 151, 155.

102. Ibid., 164 (emphasis added).

103. Ibid. (emphasis added).

104. Ibid., 153.

105. Ibid., 169-70 (emphasis added).

106. Knight, Frank, “The Role of Principles in Economics and Politics,” American Economic Review 41 (1951): 129.

107. Ibid., 1,5.

108. Ibid., 12.

109. Ibid., 7.

110. Ibid., 12 (emphasis added).

111. Ibid., 3.

112. Ibid., 28.

113. Ibid., 20 (emphasis added).

114. Knight, Frank, “Laissez-Faire: Pro and Con,” Journal of Political Economy 75 (1967): 782, 788, n. 5.

115. Coase, Ronald, “The Problem of Social Cost,” Journal of Law and Economics 3 (1960): 144 (hereinafter “Social Cost”).

116. Knight, Frank, “Some Fallacies in the Interpretation of Social Cost,” Quarterly Journal of Economics 38 (1924): 582 (hereinafter “Fallacies”).

117. Ibid., 583.

118. Ibid., 583-84 (emphasis in original).

119. Ibid., 586.

120. Ibid., 586 (emphasis added).

121. Ibid., 587.

122. Risk, 370 (emphasis added).

123. Ibid., viii-ix (preface to first edition; emphasis added).

124. Ibid., xxx (preface to 1933 reissue).

125. The choice of the three texts mirrors Henry Marine's recognition of “Social Cost,” Costs of Accidents, and Economic Analysis of Law as core works in law and neoclassical economics discourse. See Manne, , An Intellectual History of the School of Law, George Mason University (Law and Economics Center, George Mason University School of Law, 1993). “Social Cost” is widely recognized as a foundational law and neoclassical economics text. See Kuklin, Bailey and Stempel, Jeffrey, Foundations of the Law: An Interdisciplinary and Jurisprudential Primer (St. Paul: West Publishing, 1994), 35 (citing “Social Cost” as a foundational text for the “modern Law and Economics movement”); Seidenfeld, Mark, Microeconomics Predicates to Law and Economics (Cincinnati: Anderson Publishing Co., 1996), 91 (identifying “Social Cost” as a germinal law and economics text); Rabin, Robert, Perspectives on Tort Law, 4th ed. (Boston: Little, Brown and Company), 186 (recognizing “Social Cost” as important text in bringing “formal economic theory directly to bear on tort doctrine”); Law, Economics and Philosophy: A Critical Introduction with Applications to The Law of Torts, 4, ed. Kuperberg, Mark and Beitz, Charles (Lanham, MD: Rowman & Littlefield, 1983) (the editors commenting, “[s]ince most schools of legal thought develop from a variety of sources, it is usually difficult to identify any individual writer or work as the foundation of the school. The economic approach to law is an exception to this generalization, for its origins can be pinpointed exactly: they lie in Professor Ronald H. Coase's article, ‘The Problem of Social Cost,’ which appeared in 1960”). In 1991 Coase received the Nobel Prize in economics as a recognition of his general contribution to neoclassical theory. The Costs of Accidents is generally regarded as having reformulated tort law theory. See Kuklin and Jeffrey, Foundations of the Law, 35 (identifying Calabresi as founder of the “modern Law and Economics movement”); Rabin, Perspectives on Tort Law, 187 (who observes that “[a] leading influence among scholars taking an economic perspective has been Guido Calabresi, whose book, The Costs of Accidents, provides a comprehensive and systematic economic analysis of the tort system”); Kuperberg and Beitz, Law, Economics and Philosophy, 7 (who comment, “Calabresi's book, The Costs of Accidents [1970], remains a leading example of how the approach may be applied to a genuinely perplexing issue of tort doctrine—the allocation of liability for unintended harms”). An abridged version of the sections on Coase and Calabresi below has been published as a brief comment. See Hackney, James, “Law and Neoclassical Economics: An Examination of Two Classic Texts as Artifacts,” University of New Brunswick Law Journal 44 (1995): 321. Economic Analysis of Law, while not necessarily providing the novel theoretical insights of Coase's and Calabresi's work, has been recognized as a counterpoint to Calabresi and a text that establishes the do-main of law and neoclassical economics. See Rabin, Perspectives on Tort Law, 187 (using Economic Analysis of Law as a countertext to Costs of Accidents); Kuklin and Stempel, Foundations of the Law, 169 (commenting that “L & E did not become firmly established in the legal academy until the publication in 1973 of Richard Posner's The Economic Analysis of Law”).

126. Seidenfeld, Microeconomics Predicates, sums up the historical and theoretical importance of “Social Cost” as follows: “It concerns itself with the allocation of legal entitlements and the effect of that allocation on efficient outcomes. This is precisely the thrust of the whole subject of law and economics. As such, technically Coase's Theorem is not ‘economic background,’ but rather part and parcel of the subject of law and economics. Nonetheless, the lessons of Coase's Theorem apply to every possible legal rule which we might economically evaluate. Because its applicability is universal, no text on economic predicates to law and economics would be complete without presenting and discussing Coase's Theorem” (91).

127. On the methodological structure of “Social Cost,” see Seidenfeld, Microeconomics Predicates, 91.

128. In this section I refer to the strand of neoclassical economics with an antistatist bent as “Chicago School” law and neoclassical economics, as distinct from the more progressive school of law and neoclassical economics represented by Calabresi.

129. For a discussion regarding Coase's criticism of Pigou's analysis in Economics of Welfare, see Simpson, “Coase v. Pigou Reexamined”; Coase, “Law and Economics and A. W. Brian Simpson.”

130. Coase et al., contributors, The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932-1970,” ed. Kitch, Edmund W., Journal of Law and Economics 26 (1983): 163.

131. Ibid., 215. In “Social Cost” Coase does not cite Knight for the central proposition commonly referred to as the “Coase Theorem.” However, Coase later acknowledged that “Social Cost” was a “natural extension of Knight's insight that the institution of property rights would ensure that the excessive investment which Pigou thought private enterprise would make in industries subject to decreasing returns to scale would not in fact happen.” See Coase, “Law and Economics at Chicago,” 239, 250.

132. Coase, “Social Cost,” 2.

133. The tautological structure of economic arguments based on the assumption of “rational self-interest,” including the Coase theorem, have been noted by Paul Samuelson: “Except by fiat of the economic analyst or by his tautological redefining what constitutes ‘nonrational’ behavior, we cannot rule out a non-Pareto-optimal outcome.” See Samuelson, , “The Monopolistic Competition Revolution,” in Collected Scientific Papers of Paul A. Samuelson, 5 vols., ed. Merton, Robert C. (Cambridge: MIT Press, 1972), 3:18, 35, 36, n. 18.

134. Coase, “Social Cost,” 8 (emphasis added).

135. For an extended discussion of the facts surrounding the Sturges case, see Simpson, “Coase v. Pigou Reexamined,” 83.

136. Coase, “Social Cost,” 9 (emphasis added).

137. Ibid., 10.

138. Ibid., 18.

139. Ibid.

140. A similar observation regarding the lack of an empirical basis for Coase's antigovernment leanings has been made by A. W. Brian Simpson. See Simpson, “Coase v. Pigou Reexamined,” 75, 92-93. Coase disputes that his antigovernment leanings are without empirical grounding. He argues that during his tenure as editor of the Journal of Law and Economics the empirical studies on the economic effects of government regulation have led him to the conclusion that such regulation is “bad.” Coase, “Law and Economics and A. W. Brian Simpson,” 107-8.

141. The relationship between analysis and libertarianism is implicit in Coase's discussion of Hayek's role at the LSE. In the 1930s, it was not the libertarian manifesto Serfdom (which was yet to be published) but Hayek's “encouraging rigour in… thinking” that was his contribution to his students. See Coase, “Economics at LSE in the 1930's: A Personal View,” in Essays on Economics and Economists (Chicago: University of Chicago Press, 1994), 208, 209. However, Coase also notes that the effect of Hayek's, and Robbins's, teaching was to “make students look to private enterprise for solutions to economic problems” (214). As far as personal influence, Coase states that “[w]ith the arrogance of youth, I myself expounded the Hayekian analysis to the faculty and students at Columbia University in the fall of 1931.” See Coase, “How Economists Choose?” in Essays on Economics and Economists, 15, 19.

142. Coase, “Social Cost,” 33-34.

143. Ibid., 39.

144. Coase, , “Notes on the Problem of Social Cost,” in The Firm, the Market and the Law (Chicago: University of Chicago Press, 1988), 157, 159.

145. Ibid., 179.

146. Ibid., 185 (emphasis added).

147. Coase, “Social Cost,” 43. For Coase's part, he believed in the fundamental “truth” of self-interest. See Coase, “Economists and Public Policy,” in Essays on Economics and Economists, 58. This truth formed the core of Coase's belief that “government is attempting to do too much…” (62). Coase has recently emphasized the political differences between himself and Pigou, and how those differences affect his view on the social cost issue versus Pigou's. See Coase, “Law and Economics and A. W. Brian Simpson,” 115.

148. Section 402A states that: “(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if (a) the seller is engaged in the business of selling such a product, and (b) it is expected to and does reach the user or consumer without substantial change in the condition in which it is sold. (2) The rule stated in Subsection (1) applies although (a) the seller has exercised all possible care in the preparation and sale of his product, and (b) the user or consumer has not bought the product from or entered into any contractual relation with the seller.” Restatement (Second) of Torts, Section 402A (Philadelphia: American Law Institute, 1965).

149. G. Edward White describes this shift as follows: “[Beginning in the early years of the twentieth century and becoming dominant in the 1930s and 1940s, [there was] a reaction against conceptualism, an atomizing of the subject of Torts, and a resistance to comprehensive theorizing. One can also see, beginning irregularly in the 1960s and gaining considerable momentum in the 1970s, the rebirth of conceptualist perspectives.” White, Tort Law in America, 211.

For White, conceptualist thinking is marked by attention to “[c]omprehensive, abstract, generalized theory” (211). White includes the application of “welfare economics” to tort law as part of the conceptualist turn: the reconfiguration of tort law theory. In examining the neoconceptualization of tort law, particularly product liability law, represented by neoclassical economics, White specifically recognizes Guido Calabresi and Richard Posner as its principal proponents (219-23).

150. Calabresi, Guido, The Costs of Accidents: A Legal and Economic Analysis (New Haven: Yale University Press, 1970); hereinafter, Costs of Accidents. Costs of Accidents as a text reflected thoughts from several articles authored by Calabresi dating back to 1961.

151. Robert Rabin gives a brief account of the conceptual break between Fleming James's defense of strict products liability and the need for a reconceptualization after the 1960s: “With the two major areas of liability for unintended harm [products liability and no-fault auto compensation] in a state of flux [post 1960s], comprehensive reexamination of the merits of the fault principle was virtually inevitable. A leading influence among scholars taking an economic perspective has been Guido Calabresi.…” See Rabin, Perspectives on Tort Law, 187.

152. Calabresi, Costs of Accidents, 5.

153. Ibid., 5.

154. Ibid., 27.

155. Ibid., 13.

156. Ibid., 20, n. 3 (emphasis added).

157. Ibid., 20-21.

158. Ibid., 26 (emphasis added).

159. Ibid., 69.

160. Ibid., 72.

161. Ibid., 70.

162. Ibid., 24.

163. Ibid.

164. Ibid. Calabresi's discussion of justice mirrors Knight's arguments that “social justice” is a term that is “hopelessly undefinable” but allowing for agreement regarding “concrete injustices.” Knight, “Laissez-Faire: Pro and Con,” 788, n. 5 (emphasis in original).

165. Calabresi, Costs of Accidents, 24-25.

166. Ibid., 25-26.

167. Ibid., 32.

168. Ibid., 26. This marks a strategic choice for Calabresi. As Robbins recognizes, other goals, like compensation, could have been set and then examined, from a neoclassical economics perspective, as to the means of achieving the goals.

169. Ibid., 30.

170. Ibid., 28, n. 6.

171. Ibid., 39.

172. Ibid., 39-40 (emphasis added). The commonsense notion that a loss to many affects economic well-being less than the same loss to one individual was even acknowledged by Knight. Knight, Risk, 239. Of course, given the libertarian core of Knight's beliefs, he would not use this commonsense observation to argue for a program of economic redistribution.

173. Calabresi, Costs of Accidents, 43. He points to Blum and Kalven as conflating the general problem of poverty with compensation in tort law (44, n. 11).

174. Ibid., 66.

175. Ibid. (emphasis in original).

176. Ibid., 69.

177. Ibid., 50 (emphasis added).

178. Ibid., 54.

179. Ibid., 67.

180. Posner, Richard, Economic Analysis of Law (Boston: Little, Brown and Company, 1972); hereinafter Economic Analysis.

181. Kuhn, Thomas, Structure of Scientific Revolutions, 2d ed. (Chicago: University of Chicago Press, 1970). Kuhn notes that textbooks play a key role in perpetuating normal science paradigms (10, 43).

182. Posner, Economic Analysis, 1 (emphasis added).

183. Ibid, (emphasis added).

184. Posner, Richard, “The Costs of Accidents—Book Review,” University of Chicago Law Review 37 (1970): 636, 637 (hereinafter, “Book Review”).

185. Ibid., 637-38 (emphasis added).

186. Posner, Economic Analysis, 1 (emphasis added).

187. Ibid., 1 (emphasis added).

188. Ibid., 1-3.

189. Ibid., 4.

190. Ibid.

191. Ibid.

192. Ibid., 5 (emphasis added).

193. Ibid., 7 (emphases added).

194. United States v. Carroll Towing Co., 159 F.2d 169 (2d. Cir. 1947).

195. Posner. Economic Analysis, 69.

196. Ibid., 84.

197. Ibid., 85.

198. Posner, “Book Review,” 646 (emphasis added).

199. Posner, Richard, “Strict Liability: A Comment,” Journal of Legal Studies 2 (1973): 205, 211.

200. Ibid., 205, n. 1. Justice Traynor's concurrence in Escola was a major event in the intellectual construction of strict products liability. Escola v. Coca Cola Bottling Co. of Fresno, 24 Cal. 2d 453 (Cal. 1944). For a discussion on the pragmatic instrumentalist critique of corporate power and its incorporation in Traynor's Escola concurrence, see Hackney, “Pragmatic Instrumentalism,” 498-500.

201. Posner, “Book Review,” 644.

202. Ibid., (emphasis added).

203. Posner, “Strict Liability,” 221.

204. Posner, “Book Review,” 646.

205. See generally Restatement of the Law of Torts (Third) (Tentative Draft No. I) (Philadelphia: American Law Institute, 1994).

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Law and Neoclassical Economics: Science, Politics, and the Reconfiguration of American Tort Law Theory

  • James R. Hackney


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