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Law's Order

Law's Order: What Economics Has to Do with Law and Why It Matters

David D. Friedman
Copyright Date: 2000
Pages: 344
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  • Book Info
    Law's Order
    Book Description:

    What does economics have to do with law? Suppose legislators propose that armed robbers receive life imprisonment. Editorial pages applaud them for getting tough on crime. Constitutional lawyers raise the issue of cruel and unusual punishment. Legal philosophers ponder questions of justness. An economist, on the other hand, observes that making the punishment for armed robbery the same as that for murder encourages muggers to kill their victims. This is the cut-to-the-chase quality that makes economics not only applicable to the interpretation of law, but beneficial to its crafting.

    Drawing on numerous commonsense examples, in addition to his extensive knowledge of Chicago-school economics, David D. Friedman offers a spirited defense of the economic view of law. He clarifies the relationship between law and economics in clear prose that is friendly to students, lawyers, and lay readers without sacrificing the intellectual heft of the ideas presented. Friedman is the ideal spokesman for an approach to law that is controversial not because it overturns the conclusions of traditional legal scholars--it can be used to advocate a surprising variety of political positions, including both sides of such contentious issues as capital punishment--but rather because it alters the very nature of their arguments. For example, rather than viewing landlord-tenant law as a matter of favoring landlords over tenants or tenants over landlords, an economic analysis makes clear that a bad law injures both groups in the long run. And unlike traditional legal doctrines, economics offers a unified approach, one that applies the same fundamental ideas to understand and evaluate legal rules in contract, property, crime, tort, and every other category of law, whether in modern day America or other times and places--and systems of non-legal rules, such as social norms, as well.

    This book will undoubtedly raise the discourse on the increasingly important topic of the economics of law, giving both supporters and critics of the economic perspective a place to organize their ideas.

    eISBN: 978-1-4008-2347-5
    Subjects: Law

Table of Contents

  1. Front Matter
    (pp. [i]-[vi])
  2. Table of Contents
    (pp. [vii]-2)
  3. Introduction
    (pp. 3-7)

    If there were only one man in the world, he would have a lot of problems, but none of them would be legal ones. Add a second inhabitant, and we have the possibility of conflict. Both of us try to pick the same apple from the same branch. I track the deer I wounded only to find that you have killed it, butchered it, and are in the process of cooking and eating it.

    The obvious solution is violence. It is not a very good solution; if we employ it, our little world may shrink back down to one person,...

  4. 1 What Does Economics Have to Do with Law?
    (pp. 8-17)

    You live in a state where the most severe criminal punishment is life imprisonment. Someone proposes that since armed robbery is a very serious crime, armed robbers should get a life sentence. A constitutional lawyer asks whether that is consistent with the prohibition on cruel and unusual punishment. A legal philosopher asks whether it is just.

    An economist points out that if the punishments for armed robbery and for armed robbery plus murder are the same, the additional punishment for the murder is zero—and asks whether you really want to make it in the interest of robbers to murder...

  5. 2 Efficiency and All That
    (pp. 18-27)

    Legal rules affect lots of people in lots of different ways. In a society as large and complicated as ours one can be fairly certain that passing or repealing a law will make some people worse off, including some who have done nothing for which they deserve to be made worse off, and make some people better off, including some who have done nothing for which they deserve to be made better off. How, then, can one decide what the law ought to be?

    One possible answer is that we ought to have whatever laws best serve our interests—result...

  6. 3 What’s Wrong with the World, Part 1
    (pp. 28-35)

    The next few chapters are concerned with two very simple questions. The first is under what circumstances rational individuals, each correctly acting in his own interest, produce an inefficient outcome. To put it differently, under what circumstances does individual rationality fail to lead to group rationality—to the best possible outcome for the group, with “best” defined in terms of economic efficiency? The second question is what can be done about it—in particular, how can legal rules be designed to minimize such problems.

    Start with the simplest case, a situation in which I bear all of the costs and...

  7. 4 What’s Wrong with the World, Part 2
    (pp. 36-46)

    The argument of the previous chapter can be stated quite simply:

    A takes an action that imposes a cost upon B. In order to make A take the action if and only if it produces net benefits, we must somehow transfer the external cost back to him. The polluting company is charged for its pollution, the careless motorist is sued for the damage done when he runs into someone else’s car. The externality is internalized, the actor takes account of all relevant costs in deciding what action to take, and the result is an efficient pattern of decisions.

    That view...

  8. 5 Defining and Enforcing Rights: Property, Liability, and Spaghetti
    (pp. 47-62)

    Coase’s work provides one possible approach to the problem of constructing efficient legal rules. To make that approach clearer I spend most of this chapter using Coase’s ideas to analyze how legal rights ought to be defined in the context of a particular real-world problem, one that Pigou used to explain the problem of externalities and that Coase in turn used to show why Pigou was wrong.

    Having seen how, in principle, we would find the efficient legal rules for that particular situation, we then generalize the argument to the question of how to decide whether rights ought to be...

  9. 6 Of Burning Houses and Exploding Coke Bottles
    (pp. 63-73)

    When something goes wrong, legal rules help determine who pays for it. When, on a hot summer day, a Coke bottle does a plausible imitation of a hand grenade, product liability law determines whether you or Coca-Cola pays the cost of removing fragments of glass from your skin. When a company that ordered goods from you finds that it no longer needs them and refuses to take delivery, contract law determines whether you or they bears the resulting costs. Legal rules allocate risk.

    Insurance companies also allocate risk—to themselves, at a price. The economic analysis of that activity was...

  10. 7 Coin Flips and Car Crashes: Ex Post versus Ex Ante
    (pp. 74-83)

    Someone offers you a bet on the flip of a coin: Heads he pays you two dollars, tails you pay him one. You agree. He flips the coin. It comes up tails, and you pay him a dollar.

    Whether you should have made the bet depends on whether you judge itex anteorex post.Ex ante, judged by the information available to you at the time, it was a good bet, since on average you could expect to come out fifty cents ahead.Ex post, judged by the information available to you after the coin was flipped and...

  11. 8 Games, Bargains, Bluffs, and Other Really Hard Stuff
    (pp. 84-94)

    Economics assumes that individuals rationally pursue their own objectives. There are two quite different contexts in which they may do so, one of which turns out to be much easier to analyze than the other. The easy context is the one where, in deciding what to do, I can safely treat the rest of the world as things rather than people. The hard context is the one where I have to take full account of the fact that other people out there are seeking their objectives, and that they know that I am seeking my objectives and take account of...

  12. 9 As Much as Your Life Is Worth
    (pp. 95-102)

    In chapter 3 I described one approach to producing efficient outcomes: If someone imposes costs on others, charge him an amount equal to the damage done in order to force him to take those costs into account in his decisions. This chapter will deal with a problem raised by that approach, one that may have occurred to you during the discussion of auto accidents in chapter 7. Some accidents destroy cars; we know, at least roughly, how to measure the cost of a car. But other auto accidents destroy people. How does one price a life?

    Economists measure costs and...

  13. Intermezzo. The American Legal System in Brief
    (pp. 103-111)

    Modern economic analysis of law originated in the United States a few decades ago; the first issue of theJournal of Law and Economics, the first law and economics journal, was published in Chicago in 1958. One result is that although the theory is relevant to all systems of legal rules in all times and places, most applications, including most of this book, are to modern Anglo-American law.

    Chapter 17 will change that, applying ideas developed in the preceding chapters to the legal institutions of medieval Iceland and eighteenth-century England and the private norms of a rural county in twentieth-century...

  14. 10 Mine, Thine, and Ours: The Economics of Property Law
    (pp. 112-127)

    Property seems such a simple idea: Things belong to people, and the owner of each thing gets to control how it is used. Like many simple things it becomes more and more complicated the longer you think about it.

    In chapter 5 we looked at some of the complications and saw how, in principle, one might determine an efficient set of property rights. In this chapter we extend the argument in two directions: What an owner owns, and why some things, property, are owned and some, commons, are unowned.

    The idea of a thing belonging to a person is fairly...

  15. 11 Clouds and Barbed Wire: The Economics of Intellectual Property
    (pp. 128-144)

    The clause in the Constitution that covers intellectual property mentions two categories of protectable creations: writings and discoveries. It says nothing about differences in how the two sorts of creations are to be protected. Yet U.S. law, following earlier English law, provides two entirely different systems of protection: copyright law for writings, patent law for inventions. In this chapter we will try to make sense of the differences in the two bodies of law and the allocation of the various sorts of intellectual creation to the different categories, using ideas worked out in chapter 10. The first step is a...

  16. 12 The Economics of Contract
    (pp. 145-170)

    I give you money, you give me an apple. No contract, no need for contract law.

    I hire you to build a house on property I own. We agree on a price of a hundred thousand dollars. I give you a hundred thousand dollars and, in a world without enforceable contracts, never see you again.

    The obvious solution is to make the payment due when the house is finished. You finish building my house and ask to be paid. I suggest that we renegotiate the terms. Until you are paid the house belongs to you, but it is on my...

  17. 13 Marriage, Sex, and Babies
    (pp. 171-188)

    In most past societies that we know of, most people got married, most marriages lasted until the death of one of the partners, and most babies were born, although not necessarily conceived, in wedlock. None of these statements is true of the United States at present.

    This raises a set of interesting questions. One is whether there is a plausible economic explanation for these changes. Another is what part legal rules have played, either as cause or effect, in the process.

    The first step to the answer is another question: Why, in most societies, are childbearing and household production undertaken...

  18. 14 Tort Law
    (pp. 189-222)

    If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer. Crimes are prosecuted publicly, torts privately. This chapter is devoted to torts, the next to crimes. A later chapter examines both, asking whether there are good reasons to have two different systems, whether there are good reasons why each is associated with a particular set of legal rules, and whether there is a good reason why our legal rules sort offenses into the categories of crime and tort in the way in which they do—whether, for example, it might be...

  19. 15 Criminal Law
    (pp. 223-243)

    Someone commits a crime. He is arrested and punished. That is a cost to him, hence a reason not to commit the crime. Seen from this perspective, the explanation of criminal law is simple: It is a way of enforcing property rules. If your car is worth more to me than to you, I can buy it from you. If the law prevents me from stealing it from you, that changes the outcome only when it is worth less to me than to you, in which case the efficient outcome is for you to keep the car.

    This argument assumes...

  20. 16 Antitrust
    (pp. 244-262)

    In chapter 2 I offered a simple argument for laissez-faire. If you leave people free to exchange goods on mutually acceptable terms, the result is to move all goods to their highest-valued uses, producing the efficient allocation of existing goods. If a good is worth more to a potential consumer than it costs a potential producer to produce it, the latter will find it in his interest to produce the good and sell it to the former, with the result that goods get produced if and only if they are worth producing.

    This argument assumes that the only cost to...

  21. 17 Other Paths
    (pp. 263-280)

    The subject of the economic analysis of law is law—all law in all times and places. So far, however, we have applied it almost exclusively to modern Anglo-American law. In this chapter I expand the discussion to cover three very different systems of legal rules. Two are historical legal systems: saga period Iceland and eighteenth-century England. The third is a system not of law but of norms, privately enforced rules that exist a few hours from where I live and, for some categories of disputes, override the public law of the state of California.

    One reason to look at...

  22. 18 The Crime/Tort Puzzle
    (pp. 281-296)

    Our legal system has two quite different sets of rules designed to do the same thing: Deter people from injuring others by making it costly to do so. This apparent redundancy was demonstrated in two recent high-profile cases. In one, O. J. Simpson was first acquitted of the crime of killing his wife and then convicted of the tort of killing his wife. In another, Michael Jackson was accused of child molestation. The civil case settled out of court, at which point the criminal case was dropped, presumably because the witnesses were no longer willing to testify.

    The existence of...

  23. 19 Is the Common Law Efficient?
    (pp. 297-308)

    Almost thirty years ago Richard Posner, then a law school professor, now the chief judge of the Seventh Circuit, proposed a simple conjecture: that the common law could best be understood as a set of rules designed to maximize what we have been calling economic efficiency. Over the years since he and others have offered a number of arguments for why we would expect that to be true—none of which I find entirely convincing. But Posner has also offered empirical evidence on a heroic scale. In a research project lasting decades and attracting the efforts of a large part...

  24. Epilogue What We Have Been Doing for the Past Nineteen Chapters, or a Rough Sketch of an Elephant
    (pp. 309-318)

    The world has limited space and resources and is occupied by people with differing beliefs and objectives. From those simple facts comes the potential for conflict. I want to hunt a deer across the field where you are trying to grow wheat. You want to go swimming in the stream where I am trying to catch fish.

    The simple and obvious solution is the direct use of physical force. You plant a thorn hedge around your wheat field to persuade me to hunt deer somewhere else. I hit you over the head with a tree limb to convince you to...

  25. INDEX
    (pp. 319-329)