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Journal of Socio-Economics 32 (2003) 361–390

Law and neoclassical economics theory: a criticalhistory of the distribution/efficiency debate

James R. Hackney Jr.∗

Northeastern University School of Law, 41 Cargill Hall, Boston, MA 02115, USA

Accepted 25 April 2003

Abstract

The law and economics movement is responsible for one of the most influential and powerful ap-

plications of neoclassical economics. Its impact on public policy debates, particularly those centering

around law, has been profound. Given its neoclassical heritage, the prevailing norm in applying eco-

nomic analysis to law was that the distributional implications of legal rules should not be taken intoaccount. This essay chronicles the criticism of this distribution agnosticism and the evolution of a con-

sensus that distributional matters must be dealt with forthrightly. The result is that law and economics

can no longer be viewed as a purely scientific enterprise avoiding inevitable political choices.

© 2003 Published by Elsevier Science Inc.

JEL classification: A13; B29; B31; D31; K10; K13

Keywords: Intellectual history; Law and economics; Distribution

1. Introduction

Law and neoclassical economics (LNE), commonly referred to as law and economics,

is one of the most prominent theoretical approaches in the legal academy. The movement

counts as a founder Roanld Coase, one of the most prominent economists of his generation.

Law and neoclassical economics is essentially an offshoot of neoclassical economics, apply-

ing neoclassical tools to law. Given that it is situated principally in American law schools, it

has had a profound effect on public policy debates. However, its history, particularly recent

developments, are probably unfamiliar to those outside of the legal academy. This article is

an effort to familiarize the uninitiated with one of the more intriguing recent developments.

∗ Tel.: +1-617-373-4260.

E-mail address: [email protected] (J.R. Hackney Jr.).

1053-5357/$ – see front matter © 2003 Published by Elsevier Science Inc.

doi:10.1016/S1053-5357(03)00047-7



362 J.R. Hackney Jr. / Journal of Socio-Economics 32 (2003) 361–390

LNE has arrived at a crucial moment in its development. From a discipline that at its

inception barely, if at all, recognized the importance of distributional concerns, due to the

assertion that distributional issues fell under the rubric of politics and what neoclassical

economists do is science (Hackney, 1997b), a consensus has emerged that distributionmatters. Examining the theoretical debates that have led to this consensus provides insight

into the current state of LNE and how we might expect its practitioners, as well as those

outside the discipline, to deal with these issues in the future.

This essay utilizes a philosophy of science approach to order the field. The idea is to lay

out an intellectual history that while familiar to those within the discipline provides some

historical/theoretical context for those on the outside looking in.

In the 1970s, Guido Calabresi and Richard Posner began the LNE debate on the impor-

tance of distributional concerns. This debate was initially embedded in the doctrinal choice

between negligence and strict liability in torts, which will be a major focus of this essay.

While at first glance their positions might seem quite divergent, in fact, from the perspective

of philosophy of science, they derive from the same tradition. They constitute a research

programme (structure) centering around fundamental questions, accepted assumptions, and

heuristics. This research programme evolved in the standard, rather mundane, manner of

theory development: increasing technicality and relaxing assumptions.

Importantly, as LNE theory development took place, there was an intense questioning

of its fundamental heuristics from “outside” the discipline. This questioning, focused on

distributional concerns, had its genesis in aspects of Calabresi’s initial contribution that fell

outside LNE’s domain. As a result, there has emerged a counter-paradigm to LNE, law and

distribution economics (LDE).This has all been recently capstoned by a dramatic philosophical reconceptualization of

the LNE research programme by Posner and intellectual shift by Calabresi. All the while,

a more technical attempt, led by Steven Shavell, was made to resolve the distribution issue

within LNE. Although this attempted resolution has been called into question,1 it is clear

that distribution agnosticism is no longer an option. This seemingly narrow disciplinary

moment is important to those on the outside because it reflects the broader intellectual

moment, one in which science and politics are increasingly intermingled.

2. Structure

It is useful to hold in abeyance the entirety of LNE and focus on literature that is particular

to tort law, which governs the allocation of losses in the event of an accident. Here, we can

take what I will refer to as the Calabresi–Posner Research Programme (C-PRP) as a special

case of LNE. In this regard, it is important to recognize, as I have argued elsewhere, that LNE

is itself an offshoot of general neoclassical economic theory (Hackney, 1997b). It, including

C-PRP, is therefore subject to the disciplinary restraints that make up the foundations of

1 By dissolution, I mean the breaking up into parts or disintegration of law and economics and, ultimately, legal

theory in general (Hackney, in press). A principal exemplar of this is the evolution of LDE. I do not mean to imply

the death or disappearance of LNE as a discipline. It is obviously very much alive and present.



J.R. Hackney Jr. / Journal of Socio-Economics 32 (2003) 361–390 363

economic analysis (FEA).2 These restraints, about which more will be said later, prove

important to the unfolding of C-PRP.

Calabresi is the central figure in C-PRP because he is the first, with his Cost of Accident

Costs, to point to a comprehensive neoclassical analysis of torts. His role in this regard has

been discussed previously, including my own historical accounting, so I will not belabor

the point. However, it is useful to reiterate the core policy goal of C-PRP as proposed by

Calabresi:

[I]t is axiomatic that the principal function of accident law is to reduce the sum of the

cost of accidents and the costs of avoiding accidents.3 (Calabresi, 1970, p. 26)

This axiom would guide C-PRP development. However, it is not an axiom of neoclassical

economics analysis but rather a policy prescription or, in Lakatosian parlance, a positive

heuristic (PH).4 What Calabresi failed to realize when he articulated this policy heuristic was

that it would be circumscribed by the analytic axioms of FEA and varying interpretations

of what constituted “cost.”

FEA axioms as inscribed in LNE are most clearly and generally stated by Richard Posner

in Economic Analysis of Law:

(A1) “[M]an is a rational maximizer of his ends in life.”

(A2) “[P]eople respond to incentives.”

(A3) “[T]he tendency of resources [is] to gravitate to their highest valued uses if

exchange is permitted.”

(Posner, 1972a, pp. 1–4)

These axioms correlate with FEA. In this regard, it is useful to examine a much discussed

articulation of FEA by Weintraub (1985). Weintraub puts forth a set of axioms referred to

as, again borrowing from Lakatos, the “hard core” propositions of neoclassical (he uses the

term “neo-Walrasian”) economics:

(HC1) “There exist economic agents.”

(HC2) “Agents have preferences over outcomes.”

(HC3) “Agents independently optimize subject to constraints.”

(HC4) “Choices are made in interrelated markets.”

(HC5) “Agents have full relevant knowledge.”(HC6) “Observable economic outcomes are coordinated, so they must be discussed with

reference to equilibrium states.”

(Weintraub, 1985, p. 109)

2 My exposition on the development of the C-PRP owes a great deal to Bert Hamminga’s discussion on the

evolution of Heckscher–Ohlin programme in international trade and Imre Lakatos’ general formulationof scientific

research programmes (Hamminga, 1983; Lakatos, 1978). However, the claim is not that the development of LNE

conforms to the dictates of Laktosian claims for scientific programmes. Thus, the use of Laktosian concepts in

this essay are more general than specific.3

The concept of cost minimization would later be defended under the rubric of “wealth maximization” byPosner. For purposes of this essay, the two concepts may be taken as interchangeable.4 For a discussion of positive and negative heuristics and their role in scientific research programmes, see Lakatos

(1978).




According to Weintraub, these propositions are “questioned only by ‘outsiders’ ” (p. 109).5

(Of course, there are other interpretations of the hard core of neoclassical economics, but

we can take Weintraub’s formulation as illustrative.)

Calabresi, in his prescription for the economic analysis of tort law, admonished that issues

outside the parameters of FEA be taken into account—most notably distributional concerns

regarding social dislocation costs. However, Posner imposed FEA discipline on Calabresi’s

endeavor by reminding those who would participate (not be labeled an “outsider”) in C-PRP,

and LNE generally, that:

The economist’s competence in a discussion of the legal system is limited to predicting

the effect of legal rules and arrangements on value and efficiency, in the strict technical

senses, and on the existing distribution of income and wealth. (Posner, 1972a, p. 5)

This claim to distribution agnosticism was based on the fact that “there is no theoretical[economic?] basis for [the] conclusion” that a “transfer of money from a wealthy man to a

poor one is likely to increase the sum of the two men’s total utilities” (p. 216). This argument

against the interpersonal comparisons of utility was a linchpin in the science and politics of

neoclassical economics, championed by Lionel Robbins (Hackney, 1997a, pp. 288–291).

I have discussed elsewhere the profound political implications of Posner’s position on

interpersonal comparisons of utility and will later expand on it (Hackney, 1997b). For the

moment, I want to emphasize how C-PRP structure established disciplinary parameters,

directing the scientific research programme. Posner’s distribution agnosticism takes its

place in LNE as a negative heuristic (NH). Hence, we can augment the central axioms of

LNE ((A1)–(A3)) with C-PRP’s fundamental heuristics:

(PH) “The principal function of accident law is to reduce the sum of the cost of

accidents and the costs of avoiding accidents.”

(NH) “There shall be no questioning of the existing distribution of income and wealth.”

All tolled, they constitute the structure.

As with any scientific endeavor, it would be up to later generations to tackle unsolved

problems. The principal unsolved problem concerning this essay is the choice between

negligence and strict liability as central organizing doctrines in tort law.

The problem was joined at the inception of C-PRP. In response to Calabresi’s call for strict

liability in torts, principally on loss spreading (distributional) grounds, Posner countered

not only with the disciplinary argument noted above against distributional analyses (NH)

but with a formulation of the problem utilizing the central axioms of LNE.

Posner presented his analysis in “Strict Liability: A Comment” (Posner, 1973). Posner’s

argument centered around relatively straightforward neoclassical analysis and is not particu-

larly noteworthy for its theoretical depth. More crucial was that he concluded by establishing

the central policy positions around which C-PRP would develop:

1. Economic theory provides no basis, in general, for preferring strict liability to negligence,

or negligence to strict liability, provided that some version of a contributory negligence

5 In order to minimize notes, throughout this essay I will place page references in the text whenever I make

continuous and repeated reference to a particular book or article.




defense is recognized. Empirical data might enable us to move beyond agnosticism, but

we do not have any.

2. A strict liability standard without a contributory negligence defense is, in principle, less

efficient than the negligence—contributory negligence standard. Empirical data couldof course rebut the presumption derived from the theory.

(Posner, 1973, p. 221).

Posner’s conclusion opened the debate on the efficacy of strict liability. It strikes at the

core of Calabresi’s policy prescription and strict products liability doctrine (particularly

Restatement Section 402A) that did not allow contributory negligence as a defense. 6 It

also established an “interesting question” that would consume a generation of law and

neoclassical economics development.

3. Development

While Posner’s framing of the negligence/strict liability issue posed an empirical res-

olution, C-PRP developed along analytic lines. Almost immediately C-PRP theoreticians

began formalizing Calabresi and Posner’s rather loose initial exposition. This should come

as little surprise since formalization has traditionally been held out as a means of advancing

science (Lakatos, 1978, p. 52). In addition, however, formalization of C-PRP, in adhering to

the negative heuristic against accounting for distributional concerns, reified C-PRP politics.

A full review of the voluminous literature constituting C-PRP would be unduly bur-

densome. In lieu of such minutia, I will detail the first attempt at formalizing C-PRP and

illustrate that underneath increased formalization lies an adherence to the foundational

structure (science and politics) of C-PRP.

John Prather Brown was the first to formalize C-PRP.7 His path-breaking article, Toward

an Economic Theory of Liability, in his words, “formalizes” “a number of important articles

by both lawyers and economists analyzing the economic effects of liability rules” ( Brown,

1973, p. 323).8 It is an essential touchstone for understanding C-PRP development because

it is the model for subsequent formalizations and extensions (see Appendix A).

Brown’s model is very elegant. Its simplicity lies in using “the standard theory of

production” (p. 323) in its most rudimentary form: two inputs and one output. This fa-cilitated a breadth of future extensions. However, the reliance on the “standard theory of

production” from neoclassical economics also brought with it the disciplinary apparatus of

FEA. This is found in the model’s structure.

Brown poses a liability generator that emits a bill in the amount of A for accidents

related to a particular activity. The generator has two controls, X and Y . Increasing these

6 For a discussion of Restatement Section 402A and its intellectual underpinnings, see Hackney (1995).7 “[T]he first noteworthy success in applying equilibrium theory to common law was John Brown’s classic paper

on tort liability” (Cooter, 1989, p. 821).8

Brown included in his list of “important articles” Calabresi’s Costs of Accidents and Toward a Test for Strict Liability in Torts (with Hirschoff), Coase’s Problem of Social Cost , and Richard Posner’s A Theory of Negligence

and Strict Liability: A Comment , as well as works by Harold Demsetz and John McKean ( Brown, 1973, p. 323,

no. 1).




two controls acts to increase the probability of avoiding an accident, noted as P(X,Y). The

production function analogue is as follows: inputs X and Y are utilized in producing one

output P(X, Y ) (safety). Of course, nothing comes free, and the cost of X and Y are assumed

to be positive and noted as W ( X ) and W (Y ), respectively. Thus, the total cost of avoidingaccidents is W ( X )X+W (Y )Y . In the optimization scheme, this cost of avoiding accidents

must be weighed against the cost of the accident, which, given the probability of prevention,

is denoted A[1− P(X, Y )].

What Brown framed as the central concern in choosing liability rules, minimizing social

cost, corresponds perfectly with C-PRP’s positive heuristic:

minC(S) = W(X)X+W(Y)Y +A[1− P(X, Y )]

In other words, minimize the “sum of the cost of accidents [( A[1−P(X, Y )])] and the cost

of avoiding accidents [(W ( X )X+W (Y )Y )]” (Calabresi, 1970, p. 26).

Brown’s model is completed by inserting two parties, injurer and victim, having control

over X and Y , respectively. It is their role to act as self-interested agents in the cause of

social cost minimization.

Before moving on to apply Brown’s model in making doctrinal choices, it is useful to

explore how it mirrors the axiomatic structure for LNE laid out by Posner and neoclassical

economics’ hard core as articulated by Weintraub.

The insertion of economic agents into the model corresponds to (HC1). While this may

at first glance seem to be a trivial observation, it is crucial because agents, once endowed

with certain characteristics, are the engine that drive the model. A central proposition is

the individual’s preference for fewer accidents (HC2) or, more generally, the preference forspending less, if anything, on accident avoidance or compensation (as victim or injurer).

The context in which these agents perform their roles in the model is “A Noncooperative

Game Played According to Liability Rules” (p. 335). A noncooperative game and the idea

of independent agents optimizing (minimizing) their legal liability subject to constraints

(liability rules, information, etc.) correspond to (HC3). Posner articulates this idea in his

axioms (A1) that an agent is a “rational maximizer of his ends in life” and that “people re-

spond to incentives” (A2). Agent choices are taken as constructed in interrelated “markets,”

i.e. the interaction between victim and injurer (HC4). The proposition that agents have “full

relevant knowledge” (HC5) is well defined in the Brown model. The relevant knowledge is

the costs of accidents (preventative and ex post) and the legal regime. While (HC6) mightinitially seem to be violated by the noncooperative nature of the Brown model, its cen-

tral proposition is adhered to: outcomes must be “discussed with reference to equilibrium

states.” Thus, the central puzzle of Brown’s model: “What are the equilibrium values of X

and Y when they are chosen by different people independently?” (p. 335). Posner articu-

lates this general equilibrium position in his third axiom (A3): the “tendency of resources

to gravitate to their highest valued uses.” The correspondence between the Brown model

and the structure of neoclassical theory laid out in Section 2 confirms that formalization

does not entail structural deviation.

The core of Brown’s analysis and the central puzzle in C-PRP is which set of con-

straints (legal rules) yields equilibrium states that are also social wealth maximizing, C(S)minimizing—(PH). We will turn to this momentarily. First, it is noteworthy that Brown was

quick to define what fell outside of the analysis.




In Brown’s opinion, Calabresi’s idea of “least cost avoider” was too insufficiently defined

to be included. After going through a series of possible interpretations, Brown reconciles

himself to the fact that its insertion into the model would act to “likely confuse rather than

to clarify matters” (p. 327). This brief discussion of cost is illustrative not so much forwhat it states but for what it does not state. While the concept of least cost avoider is worth

mentioning, what Calabresi referred to as “secondary” costs in The Costs of Accidents is not

deemed worth even brief reference. This distributional concern (does it matter in terms of

social dislocation whether injurer or victim pays?) has no place in formalizing C-PRP. This

is so because of Posner’s disciplinary admonition (negative heuristic) but also due to the

historical development of neoclassical economics generally, which omitted, as a scientific

(political) requirement, distributional considerations (Hackney, 1997b, pp. 289–291).9 It

also serves as a harbinger of LDE.

Before moving on to these broader implications, I will take a moment to fully appreciate

the elegance and compactness of Brown’s formalization. The analytic structure laid out

above is, in Brown’s words, “The Model.” In the span of four pages Brown deftly manages

to set out a formal structure from which applications (policy implications) only rely on

working through relatively simple mathematical maneuvers. While other practitioners in

C-PRP would later make further theoretical contributions to the programme, “The Model”

still stands (see Appendix A).

The structure profoundly impacted the policy implications of the Brown model and

C-PRP. Brown defines preferred liability rules as those which combine the equilibrium con-

dition with social cost minimization (the positive heuristic). In the most robust application,

judges are assumed to know what the socially optimum amounts of X and Y are. Liability,under negligence, is assessed against whichever party fails to meet or exceed the optimal

prevention level. Brown examines six possible liability regimes: no liability, strict liabil-

ity, negligence with contributory negligence, negligence, strict liability with contributory

negligence, and strict liability with dual contributory negligence. There are rather technical

definitions for these regimes and a good deal of mathematical derivation put into reach-

ing conclusions. However, the final results are as follows: (1) no liability (sub-optimal);

(2) strict liability (sub-optimal); (3) negligence with contributory negligence (optimal);

(4) negligence (optimal); (5) strict liability with contributory negligence (optimal); and

(6) strict liability with dual negligence (optimal).

The central policy implication is not lost on Brown:

[W]ith either no liability or strict liability rules in effect the incentives on the party without

liability are perverse so the resulting equilibrium will not be the optimal one. For all four

remaining rules, which are based on negligence of one or both parties . . . the game will

give a unique equilibrium and that equilibrium is the social optimum. (p. 343, emphasis

mine)

The key here is that, just as Posner concluded, negligence is an essential component of any

liability regime that is to comply with the C-PRP positive heuristic of cost minimization and

9 In terms of application, the omission of distributional concerns in the modeling of tort liability rules is not

an anomaly. For a discussion of similar considerations in standard neoclassical economics production function

modeling, see Blaug (1992, pp. 170–177).




negative heuristic of distribution agnosticism. The structure that determined Posner’s con-

clusion, the axioms ((A1)–(A3)) and heuristics ((PH) and (NH)), also determines Brown’s.

Formalization is just that: making formal that which is “basic” and structural. This is true

for extensions of Brown’s model as well.As Appendix A illustrates, within the context of C-PRP, “The Model” remains largely

untouched and its fundamental heuristics unchallenged. Extensions are made at the margins,

relaxing assumptions and correcting minor errors in analysis, but, as Richard Epsteinphrased

it, “Brown’s central conclusion remains unrefuted” (Epstein, 1986, p. 1176).

In the world of C-PRP, negligence (even if combined with strict liability) reigns supreme.

(See Appendix A, “Policy Conclusions.”) But this is a strange resting point for a research

programme founded by Guido Calabresi. Calabresi championed strict liability, without

contributory negligence, in the foundational text for C-PRP (The Costs of Accidents). The

point of departure and future dissolution is found in the immediate wake of Costs. Cal-

abresi was always somewhat of an “outsider.”10 His outsider position would evolve into a

competing disciplinary strand in the evolution of law and economics—LDE—marking its

dissolution.

4. Dissolution

On the heels of Costs and in the same year that Posner published his piece on A Theory of

Negligence (Posner, 1972b), Calabresi and Jon Hirshcoff published their Toward a Test for

Strict Liability in Torts (Calabresi and Hirshcoff, 1972). In Toward a Test , Calabresi beganfleshing out themes that were buried in Costs but later developed into an outsider position

opposing Posner’s stand on distribution (NH) and wealth maximization (PH). The policy

implications were evident in Posner’s support for negligence versus Calabresi’s inclination

towards strict liability.

Calabresi and Hirshcoff began by analyzing liability rules using C-PRP precepts. In this

regard, the proposed test for strict liability would be “more likely than either Learned Hand

type test [negligence] to accomplish a satisfactory job of primary accident cost optimization”

(p. 1059). This is in the vein followed by Brown, with an emphasis on narrowly defined

cost reduction. However, the optimization criterion was satisfied not by negligence-type

cost/benefit analysis but strict liability (on either victim or injurer) based on the cheapestcost avoider. The significant doctrinal implication of the cheapest cost avoider analysis

is that it allows for strict liability irrespective of contributory negligence. Calabresi and

Hirshcoff recognized that there was still a level of doctrinal agnosticism in their analysis.

What are we to do in situations where optimization can be accomplished with a variety

(negligence or strict liability) of liability rules? Their answer to this question would mark

the beginning of the break with C-PRP.

First, they argued that even within the efficiency paradigm, the relevant point of analysis

is “categories” of plaintiffs and victims rather than individuals (pp. 1066–1067). Of course,

this is different from the Brown-line of theory development, focusing on individuated X ’s

10 This position confirms Neil Duxbury’s observation that I had previously failed to acknowledge sufficiently the

differences between Calabresi’s and Posner’s positions (Duxbury, 1997, pp. 325–326).




and Y ’s. (Perhaps this explains Brown’s confusion over the cheapest cost avoider concept.)

However, what is even more significant is that Calabresi and Hirshcoff use their categories

not only to do efficiency analysis but to begin a conversation on distribution.

I emphasize “begin” because there is ambiguity in the early Calabresi/Hirshcoff formu-lation. They argue that “[i]t is not likely that the answer [to the move to strict liability] lies

simply in the existence of distributional goals which are served better by the strict liability

test” and that the move is probably based “in part on a desire to accomplish better primary

accident cost reduction” (p. 1074). The ambiguity lies in the fact that they also argue that

when different liability rules “have . . . different distributional effects . . . distributional dif-

ferences may well determine the approach taken” (p. 1077, emphasis mine). How much

consideration should be given to distribution?

The answer is found partially in how they define distribution:

For the purposes of this article, we are lumping together as distributional all those effectsof liability rules which do not relate to minimizing (a) the sum of accident costs and

avoidance costs, and (b) the administrative costs entailed by the minimization. (p. 1078)

This includes preferences to “fractionize losses” (spreading), “moving toward a given dis-

tribution of wealth,” promoting “dynamic efficiency” (entrepreneurship) and notions of

“just desserts” (p. 1078). All of these come under the ideal of “justice” (p. 1078). This is

significant because in Costs justice serves as a veto constraint on notions of efficiency. If

this is the case, it is clear that this formulation marks a point of disciplinary crisis in C-PRP

and LNE generally.

Calabresi and Hirshcoff turn neoclassical analysis on its head. As opposed to distributionlying in the background, it is the foreground. This directly violates the negative heuristic of

LNE and, depending on how cost is defined, undercuts the positive heuristic. Of course, there

was always a tension in C-PRP. Calabresi’s “secondary” costs of accidents as articulated in

Costs had as its basis distributional considerations in arguing for loss spreading (Hackney,

1997a, pp. 307–316). But, significantly, in Toward a Test the loss spreading argument is

taken out of the cost category and placed under the rubric of distributive justice. This is

the final acquiescence to what Calabresi had acknowledged in Costs: “[e]conomists, unlike

lawyers, tend to treat secondary cost under the rubric of justice” (Calabresi, 1970, p. 28, no.

6). Developing a conception of distributive justice would constitute the “outsider” progeny

of C-PRP.While Calabresi and Hirshcoff had gone a step beyond Calabresi’s vague allusions to

justice in Costs, there was obviously much work to be done.11 This work would take place

on several planes: moral philosophy, historical accounting and political theory. However,

11 Calabresi has noted this himself in thinking retrospectively about Toward a Test , saying that he finds the

“discussion of the relationship of the strict liability and fault-based test to goals other than safety optimization to

be inadequate.” In addition, “[t]he lumping of other goals under the rubric of distribution is not helpful” (Calabresi,

1991). The extent to which the distribution issue was taking on evermore importance for Calabresi is found in

his “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral” (“Property Rules”), authored

with A. Douglas Melamed in the same year (Calabresi and Melamed, 1972). Property Rules emphasizes thatdistributional concerns “play a crucial role in the setting of entitlements” (p. 1098). It also contains a discussion

of the mix between economic efficiency, distributional issues and other justice considerations in fashioning legal

rules.




I want to focus on utilitarianism as a particularly relevant strand. The reasons for this are

two-fold: it is the strand that received the most attention in Costs and would later be more

fully developed by Calabresi and others in LDE; it is also the conception of justice with the

closest affinity to neoclassical economics.The utilitarian position, while alluded to in Costs, took center stage in legal academe

with Ed Baker’s Utility and Rights: Two Justifications for State Action Increasing Equality

(“Utility and Rights”) (Baker, 1974). Baker’s project was not initially directed specifically

towards either law and neoclassical economics or tort law theory, but rather the “numerous

proposals . . . that would move American society toward greater economic equality.” The

goal was to “develop and compare theoretical justifications for state interventions in the

market which would guarantee to every member of society either minimum income or

minimum satisfaction of ‘just wants’ ” (p. 39). While on its face this might not seem related

to LNE or Calabresi’s initial framing of the outsider position, it would prove central to

future developments.

Baker’s utilitarianism, borrowing from Jeremy Bentham, had as its core the maximization

of social welfare, the central thesis being that “societal utility is systematically maximized

by a distribution of wealth where equality is greater than it would be if the total wealth

of the society, not utility, were maximized” (p. 40). This thesis is borne out on the basis

of three assumptions: (1) an inverse relationship between equality and societal wealth; (2)

utility is derived from personal wealth; and (3) the declining marginal utility of wealth. Of

these three, Baker identifies the first and third as “critical” assumptions (p. 46). The first

assumption defines the alternative states of the world Baker poses and their implications

for equality:

Persons Possible wealth distributions

A B C

X 10 8 4

Y 9 6 4

Z 1 2 4

Total 20 16 12

Under the first assumption state of the world A is the least egalitarian and C is the most

egalitarian. The third assumption, and analytical core of Baker’s approach, determines

which state of the world is utility maximizing.

The declining marginal utility of wealth proposition is based on the belief that “[p]eople

place a higher value on their first dollar than their second, on the second dollar than on their

third.” This means that a “poor man would thus value an extra dollar more than would a rich

man.” This assumption is crucial to an egalitarian argument because it eliminates state of

the world A as necessarily being utility maximizing, which it would be if every increment

of wealth (20 in the case of A, as opposed to 16 and 12 in B and C ) were valued equally

(p. 45).Of course, to apply these statements about the “categories” (borrowing from Calabresi’s

and Hirshcoff’s framing) “poor” and “rich,” there must be some interpersonal comparison




of utility between the “poor man” and “rich man.” This is in direct contradiction with the

negative heuristic in neoclassical economics—distribution agnosticism—which is based

on claims that interpersonal comparisons of utility cannot be made. Baker recognizes this

argument and attempts to circumvent it by stating that his claim is based on the “typicalindividual utility function for wealth” (p. 45). This concept of “typical” does not require

that we know the specific utility function of an individual but that we make policy based on

our intuitions concerning average utility functions.

Calabresi had hinted at a similar position in Costs. Under the heading “Theoretical Bases”

for secondary cost avoidance, Calabresi discussed the economic rationale for loss spreading

based on the “diminishing marginal utility of money theory” (Calabresi, 1970, p. 39). After

noting that “[t]his theory has been in substantial disfavor among modern economists because

as an empirical generalization it cannot be proven to be universally true” (p. 39), Calabresi

did not attempt to rebut the negative heuristic directly. Instead he relied on the “basic

justification” that “social dislocations, like economic ones, will occur more frequently if

one person bears a heavy loss than if many people bear light ones” (p. 40). In contrast,

Baker took on the central theoretical claim.

In taking his position on the declining marginal utility of wealth and interpersonal com-

parisons, Baker had implicitly struck at the core of neoclassical economics. Its implications

for an outsider attack on LNE, and derivatively C-PRP, would soon be developed in Baker’s

The Ideology of the Economic Analysis of Law (“ Ideology”) (Baker, 1975).12

Baker’s central claim in Ideology was that “welfare economics as currently used by legal

writers provides an ideological, and frequently objectionable, basis for policy judgment”

(p. 4, emphasis mine). The ideology came in the form of two biases in LNE: (1) it “[f]avorsthe claimant of the right whose use is productive over one whose use is consumptive”; and

(2) it “[f]avors the rich claimant whose use is consumptive over the poor claimant whose

use is consumptive” (p. 9).

The source of this ideology centered on the neoclassical stance that value is mea-

sured by consumer willingness to pay and, as Posner phrased it, ‘ “willingness to pay

is . . . a function of the existing distribution of wealth in a society’ ” (p. 6). This belief runs

against utilitarian arguments for the redistribution of wealth. It is little surprise then that

Baker, a proponent of egalitarian utilitarianism, would come to be one of LNE’s harshest

critics.

Baker takes his generalized argument for egalitarian utilitarianism and uses it to critiquewealth maximization as a normative goal in legal theory. Wealth maximization is synony-

mous with the cost minimization heuristic in torts. Generally, it stood as the fundamental

policy basis for LNE. Much more will be said about Posner’s defense of wealth maximiza-

tion in due course. For the moment, the point is that wealth maximization as a general norm

equates to cost minimization as a positive heuristic in C-PRP.

Baker notes the utilitarian aspect of Posner’s wealth maximization norm. However, think-

ing back to the A, B and C choices listed in Utility and Rights, Posner would choose A over

either B or C because it creates the greatest level of wealth. The basis for this choice is that

12 Also in 1975, a similar, but less focused, critique of LNE’s distribution agnosticism and refusal to acknowledge

interpersonal comparisons of utility was put forward by Markovits (1975, pp. 983–990). Markovits’ criticisms are

along much the same lines as Baker’s but not as fully developed.




Posner, in the neoclassical tradition, rejects the “critical assumption” that rough (“typical”)

interpersonal comparisons of utility can be made. Again, for Posner, “ ‘there is no theoret-

ical basis for the conclusion . . . that a transfer of money from a wealthy man to a poor one

is likely to increase the sum of the two men’s total utilities . . . .’ ” (p. 28, emphasis Baker).Baker’s critique of this position tracks his argument in Utility and Rights. His case for an

egalitarian distribution on utilitarian grounds only rests on assumptions regarding average

or “typical” interpersonal comparisons.

Toward a Test, Utility and Rights and Ideology represent both a critique and a nascent

counter-paradigm to LNE—LDE. It is a paradigm of distribution analysis that had as its

genesis Calabresi’s original caveat to LNE in Costs. Over the course of the next decade, the

distribution paradigm would coalesce as a counter-weight to LNE, eventually leading to a

rupture in C-PRP and its dissolution.

The year 1980 marks an important moment in this dissolution. Particularly, a sympo-

sium published by the Hofstra Law Review entitled “Efficiency as a Legal Concern” (the

“Symposium”) capped developments.

The Symposium might just as well have been entitled “The LDE Challenge.” It, effectively,

pitted Posner as a representative of LNE against, among others, Calabresi (1980), Baker

(1980), Coleman (1980), Dworkin (1980), Kennedy and Michelman (1980), all of whom

argued for the centrality of distributional concerns in some form.

We can take Baker’s response to his fellow symposium participants in Starting Points

in Economic Analysis of Law as a guide to the LDE stance (Baker, 1980). As would be

expected, Posner’s position supporting the status quo distribution was attacked in a manner

similar to earlier critiques by Baker. Baker fashioned his criticism around the importanceof starting points in determining what constituted wealth maximization and relatedly the

choice of legal rules (pp. 948–951):

Any use of wealth maximization presupposes both prior normative judgments in order to

make it determinate . . . and possibly related normative judgments in order to justify its

use . . . . [Posner fails] to defend or define starting points and other commentators have

emphasized his related failure to provide a normative grounding.

These other commentators included Calabresi, Dworkin, Coleman, Kennedy and

Michelman. While Baker’s argument with Coleman is rather technical and mundane, the

discussion of the other participants is revealing.As for Kennedy and Michelman, Baker argues that “[f]or one who feels that law-and-

economics writing keeps saying the same things over and over without making any con-

ceptual progress, the article by Professors Kennedy and Michelman will be pleasantly

refreshing” (pp. 957–958). Despite expressing some minor disappointment with portions

of the Kennedy/Michelman thesis, Baker argues that their analysis (mirroring his) “clearly

demonstrates the importance of starting points” (p. 959). Specifically, Kennedy and

Michelman show that any discussion of starting points must begin with a “good deal of

specific factual information” and, implicitly, that “efficiency still leads nowhere until one

makes further value judgments, until one relies on a background of normative theory”

(p. 959).In situating the Calabresi/Dworkin debate regarding the relationship between efficiency,

distribution and justice (rights), Baker, significantly, sides with Calabresi, at least a particular




reading of Calabresi.13 Dworkin (1980a) had earlier criticized Calabresi for framing both

efficiency and distribution as instruments of justice, as opposed to having each subject to a

“deep theory of equality” (p. 954).14 Baker comes to Calabresi’s defense. (His only quarrel

with Calabresi was “merely a matter of clarity” (p. 956).) Baker agrees with Calabresi that

efficiency and distribution are useful instruments in achieving a just society but warns that

they are not “theoretically separable from a dependence on the philosopher’s rationale for

and description of the proper starting points” (p. 957, emphasis mine). In other words, “there

is no way to separate the instrument from the ends” (p. 957). This does not mean, as implied

by Dworkin, that we should not pay particular attention to the instruments.

Baker’s reticence to jettison efficiency illustrates that the LDE paradigm does not elim-

inate efficiency analysis as a mode of intellectual exploration. (LNE’s hard core need not

necessarily be discarded.) LDE interrogates LNE’s heuristic of distribution agnosticism,

displacing it with distribution consciousness. For Baker, the most important signifier of Calabresi’s embrace of LDE is his recognition that “economic analysis is dependent upon

starting points” (p. 956).15

The notion of starting points takes center stage as the central positive heuristic of LDE.

This is clear in Baker’s sketch of a research programme for LDE. Regarding positive anal-

ysis, the “starting point problem is fundamental in the legal context because the givens or

starting points are typically the subject of the legal dispute” (p. 966). With this in mind,

Baker puts forth a positive theory to rival Posner’s positive theory (heuristic) of law as

wealth maximizing. Baker’s theory is a “simplistic class analysis” arguing that “those with

power to choose rules will, when possible, choose as their givens or starting points those

preferences and distributions that further ruling class interests” (p. 968). In this regard, Baker“treats law as a realm of political struggle, of value conflict, and of ethical development

and realization” (p. 968). In Baker’s statement we see a blending of the analytic critique of

LNE (based on starting points) and the conception of law as a site of political contestation.

Starting points could serve a central organizing function for normative analysis in LDE.

However, “[w]hile many of the symposium’s contributors usefully focused on the depen-

dence of economic analysis on starting points and normative theory . . . there were few

attempts to offer descriptions [(a “philosopher’s rationale”)] of any adequate normative

theory . . . .” (p. 968). (According to Baker, a noticeable exception outside the Symposium

was Anthony Kronman’s Contract Law and Distributive Justice (Kronman, 1978).) Baker

made reference to his earlier works as not being specifically directed to LDE but possiblypointing toward a normative theory for the paradigm: (1) “an egalitarian political process

and not an economic market . . . provides the proper basis for defining or determining value

13 The extent to which Dworkin plays a key role in LDE development is seen in Baker’s earlier melding of

utilitarianism with Dworkin’s theory of rights (Baker, 1974). In this regard, Baker’s defense of Calabresi should

not be viewed as an attack on Dworkin’s positive theory of rights, which played a vital role (though distinct from

LDE) in the dissolution of LNE.14 Dworkin would latergo on to unveil his theory of equality in two seminal essays: Equality of Welfare (Dworkin,

1981b) and Equality of Resources (Dworkin, 1981a).15

The genesis for this position goes back to Calabresi and Melamed’s (1972) observation that “what is a Paretooptimal, or economically efficient, solution varies with the starting distribution of wealth. Pareto optimality is

optimal given a distribution of wealth, but different distributionsof wealth imply their own Pareto optimalallocation

of resources” (Calabresi and Melamed, 1972, p. 1096, emphasis Calabresi and Melamed).




to the extent that value notions are used in necessarily collective decisions such as the choice

of legal rule”; (2) “[r]espect for people’s autonomy requires that the collective recognize

arenas of liberty where individual choice is free from collective control”; and (3) “utilitar-

ianism is generally an appropriate policy criterion” because it respects the individual andleads to a “fulfillment of people’s preferences” (Baker, 1980, p. 971).

With the formation of LDE as a competing paradigm, there is an impending rupture in

C-PRP. There are even clearer signs of the break in Calabresi’s letter to Ronald Dworkin

that appeared in the Symposium (Calabresi, 1980). The letter marks Calabresi’s position

as an outsider to C-PRP. A bit of background is necessary for context. Dworkin, in an

earlier exchange with Posner, had taken the position that Calabresi, although situated in the

“moderate” wing of LNE, suffered from a similar confusion regarding the role of wealth

maximization in a just society. (Dworkin, 1980a, p. 201). Calabresi’s letter clarified any

confusion.

Calabresi begins by stating that he fully agrees with Dworkin’s two central propositions:

(1) without starting points, meaning cannot be given to the phrase “increase in wealth”

(Calabresi, 1980, p. 554); and (2) even with such starting points, it is difficult to measure

the benefit in increased wealth without some corresponding relationship to other normative

goals, like utility or equality (p. 556). With regard to the latter point, wealth maximization

corresponds to utility maximization on “the most peculiar, not to say absurd, assumption

about the relationship between wealth and utility, namely, that [US] $ 1 is as likely to be

worth as much to the rich person as to the poor person” (p. 556). Like Baker, and reiterating

what he had alluded to in Costs, Calabresi accepts the diminishing marginal utility of

wealth as a working assumption, violating the negative (“most peculiar”) heuristic of LNE.In making this break, Calabresi recognizes that politics are at the core:

I do not doubt that there exists an unspecified complex of goals—that can be spoken of in

justice-value terms—that are better served by wealth maximization, without redistribu-

tion, than by other “measurable” instruments . . . . I only suggest that in holding to these,

he [(Posner)] is in the very small minority. (p. 557)

In framing the acceptance of the existing distribution as the view of a “very small minority,”

Calabresi attempts to carve out space for a competing research programme that places

distributional issues at the core—LDE. It is a research programme that he suspects augurs

the future of law and economics:

I would suspect that most people would say, and indeed do say, ‘Your goals, Richard, are

fine for you, but without a lot more in the way of equality (pass, for now, of what) they

are totally unacceptable to me. (p. 557)

Calabresi posed the rhetorical question, “Where does this leave law andeconomics? (p.559)”

His response was that lawyer-economists must take distribution and efficiency as “road

signs” to justice.

Calabresi would later take important steps in pointing to the road signs and clarifying

the nature of the rupture in C-PRP. In a 1981 lecture, The New Economic Analysis of

Law: Scholarship, Sophistry, or Self-Indulgence (Calabresi, 1982), Calabresi undertakesa dramatic frontal assault on the positive heuristic of C-PRP that he once described as

“axiomatic.” The claim that “the object of tort law is to minimize the sum of accident




costs and safety costs” is “sophistry” and “reductionism” (pp. 87–88). In this regard, the

science of C-PRP and its theoretical development (centered around Brown’s model) was

ill-conceived if it took “optimization . . . [as] an independently meaningful object of tort

law” (p. 88). This position is identified with “Posner and his followers” (p. 90). In con-trast, Calabresi articulates a competing redistributionist paradigm that can be conducted by

lawyer-economists and qualify as “scholarship.”

Echoes of Baker ring clear.16 Calabresi reiterates that until we know more about starting

points, we can say little about what constitutes wealth. These starting points are the “definers

of wealth,” “what wealth is depends on what people want, and what people want depends

on the allocation of starting points” (pp. 90–91). This parallels Baker’s assault on LNE

because the “[neoclassical] economist knows this and defines ‘wealth maximization’ only

given an initial distribution of wealth.” However, lawyers (including lawyer-economists)

must understand that “any change in law changes this initial distribution” and thus “is

allowed no such luxury” (p. 91, emphasis Calabresi).

Fortunately, an “analogous problem does not undermine utilitarianism” (p. 91). Utilitar-

ianism has the benefit of allowing us, if we could define happiness, to set up a scheme of

starting points “so as to maximize happiness.” According to Calabresi, “[t]he same unfor-

tunately is not true for the strong claim made by Professor Posner and his school” (p. 92,

emphasis mine). What is this strong claim? It is nothing more than the formerly “axiomatic”

positive heuristic of C-PRP of which Calabresi now states, “there is nothing in itself de-

sirable in reducing the sum of accident and safety cost if the result is to burden the wrong

party” (p. 93).

The “wrong party” is determined by an analytically defensible theory of distribution. Butwhat is this theory (“philosopher’s rationale”) of distribution? Calabresi admits to failing to

spell out such a theory and to the extent that he and others produced “[a]rticle upon article

and book upon book . . . in the last 20 years . . . based on [the] Calabresian proposition”

(p. 97), the program constituted “no more than a reflection of the scholars’ own values”

(p. 98). This constituted “self-indulgence.” The problem of devising an “adequate normative

theory” for LDE posed by Baker remained unsolved. To get beyond self-indulgence, again

citing Baker’s Starting Points, the call is to at least begin a conversation about utilitarianism

as an overarching distributional theory:

An example of a philosophical theory that, to the extent adopted, gives rise to distributional

insights that need factual assumptions to apply is, of course, utilitarianism. (p. 104)

These utilitarian assumptions are ones to which “[e]conomists traditionally have said:

‘Nothing,’ but they have said it for rather odd reasons” (p. 104). The principal odd rea-

son is the refusal to make interpersonal comparisons of utility. Calabresi breaks with this

heuristic directly—as opposed to the implied critique in Costs—for many of the same

reasons as Baker:

If we can say that by and large marginal utility declines, and that by and large most mem-

bers of a species get roughly similar pleasure from (i.e. desire similarly) the generality

16 In framing his alternative program, Calabresi argued that he was “in part” synthesizing arguments that he had

already made as well as Baker Ronald Dworkin, Anthony Kronman, Jules Coleman, and Richard Markovits (p. 89,

note 2).




of goods (however much they differ as to particular goods), then if we accept the utilitar-

ian philosophical premiss [sic], we have a very powerful distributional theory indeed. 17

(p. 104, emphasis Calabresi)

But how does one operationalize such a theory? A normative theory in which, according

to Baker, “utilitarianism is generally an appropriate policy criterion” (Baker, 1980, p. 971)

might serve as a critique of distribution agnosticism but be problematic as a jurisprudence

or “philosopher’s rationale.”18 We get a sense of how LDE can, and cannot, be used in

doctrinal analysis from Calabresi’s First Party, Third Party, and Product Liability Systems:

Can Economic Analysis of Law Tell Us Anything About Them? (“First Party”) (Calabresi,

1984).

Calabresi begins by recognizing the assault on the economic analysis of law from a

variety of standpoints—including critiques put forth by Dworkin, Kennedy and Richard

Epstein (p. 833). However, these critiques to his mind are more fairly directed at “theuse made of economic analysis of law by [other] practitioners—for example, Richard

Posner,” further emphasizing the distinction between LNE and LDE (p. 833). Calabresi

restates his critique of distribution agnosticism based on the failure to set forth a suit-

able theory of starting points but also notes that “[w]hile this argument would imply

that economic analysis does not and cannot carry the day, it does not mean that the

values that economic analysis tends to further can be ignored” (p. 834). Particularly,

“[a]voidance of waste [(efficiency)] is part of a common notion of justice” (p. 834, emphasis

Calabresi).

Regarding the choice between liability systems for automobile accidents, there are a

variety of allocative implications, but there are also different distributional consequences.

Calabresi goes through an analysis of winners and losers under different systems with his

principal distributional guide being that we do not want a system that disadvantages the

“poor and the aged.” This is not based on any a priori philosophical justification but on

the fact that there are “rather strong indications of society’s distributional preferences in

this area” (p. 843, emphasis mine). While “Posnerians [(LNE)] would suggest that we

cannot say anything at all” (p. 843) regarding distribution, Calabresi uses distribution as a

jurisprudential tool in conjunction with efficiency.

However, it is not possible to make strong truth (philosophical) claims regarding distribu-

tion because it is “difficult to define the overarching distributional preferences of a polity”(p. 843). Is this a retreat from the utilitarian position? “[A]bsent a notion of starting points,

we cannot say anything about distribution” (p. 850). The LDE starting-points critique of

LNE, given democratic sensibilities, turns on itself when attempts are made to apply util-

itarianism to specific problems of jurisprudence. Calabresi’s resolution to this impasse is

that “it may not be so hard to identify . . . [distribution] preferences in a specific area, like

automobile accident law” (p. 843).

Thus, what we are looking for are particular “indications of society’s distribution prefer-

ences” (p. 843). This political conception of legal policy analysis, combined with LDE’s

“analytic structure” (p. 847), is framed as “middle theorizing” (p. 851). This theorizing in

17 These are, of course, identical to Baker’s “critical assumptions” and their defense is also very similar to Baker.18 For a critique of egalitarian utilitarianism as either arbitrary or inconclusive, see Schwartz (1976).




its best moments “allows us to see far better what is at stake in the choice among the sys-

tems discussed” (p. 847), thus helping our “authorized decision makers [to] choose among

systems of accident law intelligently” (p. 848). This requires that all law and economics

(LDE and LNE) practitioners recognize the limits of theory (utilitarianism included) andtake their place in that “area of middle theorizing that defines much of American legal

scholarship” (p. 851). It is an area, given analytic criticisms and general intellectual shifts,

in which even Posner would settle.

If, as I have argued elsewhere (Hackney, 1997b), LNE arrived at disciplinary dominance

in the wake of the analytic movement and decline of pragmatism, then a parallel can be

seen in its dissolution with the receding of analytic philosophy as the dominant intellectual

position in America and the re-emergence of pragmatism. Just as distribution agnosti-

cism (neoclassical economics’ negative heuristic) and wealth maximization (neoclassical

economics’ positive heuristic) were coming under heavy analytic assault by LDE, Richard

Rorty was proclaiming the demise of the analytic paradigm and resurgence of pragmatism

in Philosophy and the Mirror of Nature (Rorty, 1979). In response, Richard Posner would

fashion a pragmatist defense (“middle theory”) for LNE.

With the 1979 publication of Utilitarianism, Economics, and Legal Theory (“Utilitaria-

nism”), Posner began constructing the philosophical argument for LNE’s heuristics that

would directly lead to the heated debates of 1980 (Posner, 1979). Not surprisingly, given the

LDE specter of egalitarian utilitarianism and criticisms of utilitarianism as a philosophical

position, Posner began his construction attempting to disassociate LNE from utilitarian-

ism: “the economic norm I shall call ‘wealth maximization’ provides a firmer basis for a

normative theory of law than does utilitarianism” (Posner, 1979, p. 103). Posner wished todistinguish LNE from “practitioners of ‘welfare economics’ (the commonest contemporary

appellation for economics as a normative discipline) [who] regard their activity as applied

utilitarianism” (p. 105)—LDE.19

The contours of wealth maximization are succinctly stated:

Wealth is the value in dollars . . . of everything in society. It is measured by what people

are willing to pay for something or, if they already own it, what they demand in money

to give it up. The only kind of preference that counts in a system of wealth maximization

is thus one that is backed up by money . . . . (p. 119)

The import of linking LNE to wealth, as opposed to utility, was principally moral. ForPosner, utilitarianism suffered the fatal flaw of having no principled boundaries on whose

happiness should count in our social calculus. Thus, utilitarianism has to “give capacity

for enjoyment, self-indulgence, and other hedonistic and epicurean values at least equal

emphasis with diligence, honesty, etc. . . . ” (p. 124). Wealth maximization, however, pays

homage to the “productive” (pp. 122–123) and “encourages and rewards the traditional

values (‘Calvinist’ or ‘Protestant’)” (p. 124).

Although Posner also sets forth analytic (logical) shortcomings in utilitarianism, his

ultimate criteria in arguing for wealth maximization are post-analytic. They include

whether:

19 Among the practitioners of “welfare economics” cited by Posner was A.C. Pigou. Pigou’s standing as a

historical predecessor to LDE can be inferred from Hackney (1997b).




(1) “the theory yields precepts sharply contrary to widely shared ethical intuitions” and

(2) “a society which adopted the theory would not survive in competition with societies

following competing theories.”

A pragmatist defense begins to form. Wealth maximization “accommodates, with elegant

simplicity, the competing impulses of our moral nature” (p. 136). There are also etchings

of a political ethic. Harkening back to Adam Smith, and evoking F.A. Hayek and Milton

Friedman, Posner frames wealth maximization as a “capitalistic conception of justice”

(p. 136).

Posner made attempts to clarify his defense of wealth maximization in the immediate

wake of Utilitarianism, including a contribution to the 1980 Symposium (Posner, 1980).20

However, it is in 1985 that we begin to see a crystallization of the pragmatic/political

conception of LNE.

In Wealth Maximization Revisited , Posner (1985) welcomes the opportunity to “reconsi-der” his position on wealth maximization. He begins by providing numerical illustrations

(involving the sale of a house on his part and a car by someone else) of the relationship

between willingness to pay, exchange and the LNE concept of wealth. Significantly, he

recognizes that “both examples ignore a fundamental problem—how it is that I initially came

to have the house, and he the car” (p. 86). With the formation of LDE, the “fundamental

problem” of starting points must be dealt with. Distribution agnosticism is no longer an

option.

Posner rejects the LDE prescription to the distribution issue, interpersonal comparisons

of utility:

The refusal of modern economists to make ‘interpersonal comparisons of utility’ means in

effect that they use wealth rather than happiness as the criterion for an efficient allocation

of resources.21 (p. 88)

In staking out this position, Posner directly addresses LDE’s egalitarian utilitarianism.

His attack mixes moralism with consequentialism. In contrast to the LDE position that

the “poor” are more deserving based on the declining marginal utility of wealth, Pos-

ner, harkening back to Utilitarianism, raises the specter of a utilitarian world where the

“pleasure-loving scamp” and “sadist” make claims for redistribution against the “productive

and hard-working and self-restrained.” Wealth maximization, in contrast, favors the “pro-

ductive side of human activity” (p. 97), confirming Baker’s analysis of “bias” in LNE (Baker,

20 The Symposium contribution is noteworthy because it represented a final effort to ground wealth maximization

on an overarching conceptual basis—consent. I refer the reader to the devastating criticisms of Posner’s consent

argument in the same symposium (Bebchuck, 1980; Coleman, 1980; Dworkin, 1980b) to appreciate the futility of

his effort.21 The need to shift the terrain from utilitarianism to wealth, begun in Utilitarianism, might be due to Posner’s

own recognition that egalitarian assumptions are, at least, plausible:

[S]uppose, for example, that Bentham and many other utilitarians are right that lacking any real knowledge of

the responsiveness of different individuals’ happiness to income we should assume that every one is pretty much

alike [(typical)] in that respect. Then we need only one additional, and as it happens plausible assumption—thatof diminishing marginal utility of income—to obtain a utilitarian basis for a goal of seeking to equalize incomes.

(Posner, 1979, p. 115, emphasis mine)




1975, p. 9). Yes, Posner does look askance at “the consuming, the appetitive” (Posner, 1985,

p. 97).

Posner recognizes that his favoring of production over consumption is an ethical choice

and that to “defend wealth maximization rigorously [(analytically)], it would of course benecessary to assign some ethical value to productivity” (p. 98). He attempts to evade this

dilemma by stating that it “would not be difficult but will not be attempted here” (p. 98).

The problematic nature of this assertion is found in Posner’s admission:

Ethical arguments do not convince doubters but rather provide rationalizations for ethical

positions taken on emotional grounds. Indeed, more ethical arguments have been won

on the battlefield than in the lecture hall . . . . Perhaps—speaking descriptively and in the

long run—might is responsible for most opinions of what is right. (p. 90)

This is a candid admission that analytic arguments (“rationalizations”) for LNE will not

carry the day: “you cannot prove, deductively or inductively, that social decisions ought

to conform to some ethical theory” (pp. 89–90). No, we cannot rely on a “philosopher’s

rationale.”

If analysis, either of the deductive or inductive sort, cannot provide us with “Truth,”

what are we left with? Posner pushes forward his pragmatist response. His basic position

is that “very few people who live in wealthy societies would like to live in poor ones”

(p. 98). This goes a long way towards supporting an ethic that is consistent with wealth

creation (production), such as wealth maximization. However, even wealth maximization is

“an incomplete guide to social decision-making” precisely, among other reasons, because it

cannot tell us when some redistribution—not the “free-wheeling redistributions of utilitariansociety”—is called for. Thus, the pragmatist solution is that “redistributions that conform

to the altruistic feelings that most people harbor or that otherwise serve the interest of the

productive people in the society” be allowed (p. 99, emphasis mine).

Posner recognizes that “it is a political philosophy that I am expounding” (p. 103, empha-

sis Posner). Ultimately, we hear echoes of Calabresi (First Party) in that “[g]iven the absence

of anything approaching a consensus on the optimum distribution of wealth . . . itisveryhard

to see how courts could adopt a redistributive ethic to guide their decisions.” Jurisprudence is

confined as an expression of the “fundamental values of our political culture” (pp. 104–105).

Posner would expand on this concept of jurisprudence and philosophical (or anti-

philosophical?) defense of LNE in 1990, The Problems of Jurisprudence (“Problems”)(Posner, 1990). He began by taking a general jurisprudential stance. The history of jurispru-

dence according to Posner is marked by two distinct positions: natural law and positivism.

Proponents of these two positions can roughly be framed as the “true believers” and the

“skeptics,” respectively. Problems was “devoted to exploring the basic issues debated by

the two groups and the issues that grow out of those issues” (p. 26). As for Posner, he

would steer a middle course and argue “against formalism, against overarching conceptions

of justice such as ‘corrective justice,’ ‘natural law,’ and ‘wealth maximization’—though

not against modest versions of these normative systems—but also against ‘strong’ legal

positivism” (p. 26, emphasis mine). In other words, Posner staked out a position of philo-

sophical pragmatism (middle theorizing).Posner’s philosophical pragmatism questions the capacity to reach conclusive “Truth.”

In this regard, it argues for the “critical as distinct from the constructive use of logic; for




the idea that the judge’s proper aim in difficult cases is a reasonable result rather than a

demonstrably right one” (p. 26). He also “argues for objectivity as a cultural and political

rather than epestemic attribute of legal decisions” (p. 26).

If this pragmatist stand seems in tension with my previous account of the LNE enterpriseas being founded on analytic precepts (both in Section 2 and elsewhere, Hackney, 1997b),

it is. And it is the reason why Posner’s pragmatist turn helps mark the dissolution of LNE,

at least as formerly (formally) constituted. This does not mean that the formal (analytic)

structure of LNE is dismantled, but that its claim to preeminence must be staked out on

grounds other than superior analytics (“constructive use of logic”).

Recall, C-PRP took as its core positive heuristic the minimization of cost, which translates

into a regime of wealth maximization. After the analytic turn, this political position could

be defended on the basis of “science” because to do otherwise would violate the norm of

verifiability—scientists cannot make interpersonal comparisons of utility (pp. 288–291). In

conjunction with the analytic blow dealt to this position by LDE, the decline of analytic

philosophy undercut its scientific pretensions as well. It no longer represented scientific

truth because science no longer portends to “Truth.”22 Problems deals with this dilemma

by “recasting the wealth-maximization approach to law in pragmatic terms” (Posner, 1990,

p. 31).

The pragmatic justification for LNE was “cultural and political.” For judges wealth max-

imization is a “relatively uncontroversial policy, and most judges steer from controversy”

(p. 359). Historically, it is “no accident, therefore, that many common law doctrines assumed

their modern form in the 19th century, when laissez-faire ideology, which resembles wealth

maximization, had a strong hold on the Anglo-American imagination” (p. 359). This bearsa remarkable resemblance to Baker’s conclusion in ideology (Baker, 1975, pp. 47–48). But

the key for Posner is not ideology, but rather “prosperity.” A pragmatic jurisprudence at-

tempts to fashion rules that further social welfare; prosperity is a proxy for social welfare

and can be measured in terms of wealth maximization, thus providing the justification for

LNE.

But what of LDE arguments that the distribution of wealth is also a central consideration

in measuring social welfare? Indeed, “[a]lthough there are other possible goals of judicial

actors beside efficiency and redistribution, many of these . . . are labels for wealth maxi-

mization, or for redistribution in favor of interest groups” (Posner, 1990, p. 360). No longer

able to evade or counter LDE arguments with plausible analytic defenses, Posner extendshis pragmatic account.

First, “judges can, despite appearances, do little to redistribute wealth” (p. 359). If this

were the only argument offered by Posner, it would indeed look more instrumentalist than

based on philosophical pragmatism. However, there is a broader social/historical (pragma-

tist) justification for wealth maximization:

We look around the world and see that in general people who live in societies in which

markets are allowed to function more or less freely not only are wealthier than peo-

ple in other societies but have more political rights, more liberty and dignity, are more

22 For a discussion of changing conceptions of science and their impact on philosophy and legal theory, see

Hackney (in press).




content (as evidenced, for example, by their being less prone to emigrate)—so that wealth

maximization may be the most direct route to a variety of moral ends. The recent his-

tory of England, France, and Turkey, of Japan and Southeast Asia, of East versus West

Germany and North versus South Korea, of China and Taiwan, of Chile, of the SovietUnion, Poland, and Hungary, and of Cuba and Argentina provides striking support for

this thesis. (pp. 382–383)

There are several steps and historical parallels in Posner’s argument that merit attention.

Posner insightfully recognizes that the debate over wealth maximization as a norm for

deciding between legal rules (for example, negligence versus strict liability in C-PRP) has

general implications. (This accounts for the salience of LDE’s general argument for an

egalitarian society in undercutting LNE distribution agnosticism.) Therefore, in thinking

about wealth maximization from a pragmatist perspective, we can glean something from

broad cross-national comparisons.Of course, it seems a stretch to perfunctorily dismiss redistributive claims on the basis

of, at best, vague contrasts in “prosperity” across countries.23 This ad hoc comparison of

economic systems based on prosperity is reminiscent of F.A. Hayek’s argument in The

Road to Serfdom (Hayek, 1944): socialism, or the welfare state, leads to totalitarianism

(Soviet Union or Nazi Germany) (Hackney, 1997b, pp. 283–287). For Posner, the “mounting

evidence that capitalism is more efficient than socialism gives us an additional reason for

believing [neoclassical] economic theory . . . ” (Posner, 1990, p. 384). This, of course, elides

the definition of what constitutes capitalism and socialism, which Posner realizes:

My pragmatic judgment is, moreover, a qualified one. All modern societies depart fromthe precepts of wealth maximization [(capitalism)]. The unanswered question is how the

conditions in these societies would change if the public sector could somehow be cut all

the way down to the modest dimensions of the night watchman state that the precepts of

wealth maximization seem to imply . . . . Until it is answered, we should be cautious in

pushing wealth maximization; incrementalism should be our watchword. (p. 387)

Returning to the puzzle Baker posited in Utility, could Posner’s vague, qualified distinc-

tions help us choose between states A and B? Is West Germany (which has a relatively large

welfare state) less “prosperous” than the United States? Who determines what constitutes

prosperity? (Judge Posner?) (The “productive people”?) (The poor?) These questions illus-trate that Posner must provide a(n) (anti-)foundational argument to buttress his pragmatist

account.

The foundation is revealed in Posner’s Overcoming Law (Posner, 1995). Posner de-

clares that Overcoming Law is the “fullest articulation to date of my overall theoretical

stance” (p. ix). The three pillars of this stance are pragmatism, neoclassical economics and

liberalism:

[A] taste for fact, a respect for social science, an eclectic curiosity, a desire to be practical,

a belief in individualism, and an openness to new perspectives . . .—all interrelated with

a certain kind of pragmatism, alternatively of a certain kind of economics and a certain

23 Posner does cite secondary sources, but it is difficult to determine their meaning from mere citation (p. 383,

no. 31).




kind of liberalism—can make legal theory an effective instrument for understanding and

improving law . . . . (p. viii, emphasis mine)

The key to Posner’s “theoretical stance” is equating pragmatism with neoclassicaleconomics and classical liberalism. In fact, the circularity of his arguments makes one

wonder whether classical liberalism is indeed doing the heavy lifting, with neoclassical

economics acting as a surrogate and pragmatism being put forward as a(n) philosophical

(anti-)philosophical antidote.

It is the type of justification required in an intellectual milieu where “doubts about the

pragmatic worth of philosophy even touch analytic philosophy” (p. 8):

The pragmatist thinks the analytic philosopher . . . too prone to equate disagreement with

error by exaggerating the domain of logic and thus prematurely opposing views . . . .

Logical positivists believe that all propositions can be sorted into three bins: tautological,empirically verifiable, and nonsensical. Pragmatists think this is too simple an episte-

mology, because it leaves no room for nontautological propositions that can be neither

verified nor disbelieved . . . . (p. 9)

The “real antithesis to pragmatism is the kind of rationalism, fairly termed Platonic, that

claims to use purely analytic methods to reason to the truth about contested metaphysical

and ethical claims” (p. 10). This rejection of analytic science could mean the death of LNE.

As in Problems, Posner recognized his dilemma in rescuing LNE as a viable enterprise:

[w]hen a pragmatic approach is taken to law . . . the results are damaging to the amour pro-

pre of the legal profession . . . . A certain [(neoclassical)] conception of economics withersas well. But the enterprise of ‘law and economics’ does not . . . because it epitomizes the

operation in law of the ethic of scientific inquiry, pragmatically understood. (p. 15)

But, despite the virtue of being an “instrumental science par excellence” (p. 151), LNE

has “normative as well as positive baggage, such as efficiency and wealth maximization”

(p. 17). Thus, the mere equation of neoclassical economics with pragmatism—particularly

in light of LDE criticisms—does not get Posner very far. Enter classical liberalism.

Posner articulates his most powerful and forthright vision of the politics underlying LNE:

At some point even one strongly committed to the economic approach to law will have

to take a stand on issues of political and moral philosophy. I take my stand with the

John Stewart Mill of On Liberty (1859), the classic statement of classical liberalism. On

Liberty argues that every person is entitled to the maximum liberty—both personal and

economic—consistent with liberty of every other person in the society. (p. 23)

Posner’s political “stand” is the linchpin in his argument for LNE supremacy over LDE.

There is a symbiosis between liberty and neoclassical economics: “Liberalism also has an in-

timate practical relation to economics. Competitive markets, being arenas of self-regarding

behavior, are in classical liberal theory off limits to government interference” (p. 24, em-

phasis Posner).

Is Posner’s a foundational case for liberalism and thus in violation of his own pragmatiststance? Not according to Posner. He, again reminiscent of Hayek, argues for liberalism

on historical (empirical/pragmatic) grounds: “[t]he history of the 20th century is rich with




evidence that communal alternatives to liberalism, whether fascistic or socialistic, are mon-

strous, nonviable, or both” (p. 27, emphasis mine).

But history does not end the debate between LNE and LDE because the “history lesson

is also blurred by the fact that modern ‘liberal’ states are suffused with socialist elements”(p. 27). Ultimately, Posner cannot stake out either a pragmatic or analytic claim for the

supremacy of LNE over LDE, or other disciplines for that matter. This is why we must

in the end reconcile ourselves to the dissolution of legal economic analysis—left with the

“fundamental values of our political culture” (Posner, 1985, p. 105). Faced with the specter

of dissolution through politics, is there sufficient analytic resilience in the neoclassical

paradigm to constitute a resolution?

5. Resolution(?)

Steven Shavell put forth an ingenious attempt at a resolution. Although ensconced inside

both the law school and economics department of Harvard University since 1980, he was

formally trained as an economist.24 In fact, he began his career in 1974 in the economics

department. Significantly, given the heated debates of 1980, his endeavor at resolution would

begin in 1981 soon after his appointment to the law school.

Shavell sought to resolve the efficiency/distribution debate not by declaring distribu-

tion agnosticism but by placing distributional concerns in their proper institutional forum.

Specifically, distributional concerns should be dealt with via the income tax system, leaving

efficiency as the principal concern of the legal system—much as Posner would have it. Theinstitutional division proposed by Shavell constitutes a resolution because it presents an

analytic, as opposed to Posner’s pragmatist, defense that leaves the LNE enterprise intact

while responding to the equity concerns raised by LDE.

Shavell’s central insight in A Note on Efficiency vs. Distributional Equity in Legal Rule-

making: Should Distributional Equity Matter Given Optimal Income Taxation? (“ Efficiency

vs. Distribution”) (Shavell, 1981) is that “an attempt at redistribution through the choice

over legal rules would involve the same sort of [disincentive] problem as exists under

the income tax” (Shavell, 1981, p. 414). Thus, although redistribution via the income tax

system creates disincentive problems, they are only exacerbated by turning to the legal

system.To prove the point Shavell constructed a simple model of risk-neutral individuals who

expend effort at both working and preventing accidents. The model demonstrates that the

“problem of minimizing expected accident losses plus the cost of care” (PH) is solved

when efficient liability rules based on “harm done and levels of care (and thus not on

income)” are fashioned. This is nothing more than standard C-PRP analysis. Shavell’s

original contribution is his proof that if we replace an inefficient liability rule (due to

24 Shavell was just one of a group of economists that began engaging law and economics in the 1980s. A

partial list of this group includes such important figures as Jennifer Arlen, Lucian Bebchuck, John Calfee, Robert

Cooter, Richard Craswell, Louis Kaplow, Louis Kornhauser, Susan Rose-Ackerman and Mario Rizzo. Many inthis generation have doctorate degrees in economics and an affiliation with economics departments. They have all

participated in the efficiency/distribution debate in some way, including contributions, critical of Posner, to the

Symposium by Kornhauser, Bebchuck and Rizzo.




income considerations) with an efficient one and appropriately modify the income tax

schedule, “everyone can be made strictly better off” (p. 416). Thence, there is never an

occasion to favor inefficient liability rules to address distributional concerns. Efficiency

reigns.The results of the proof are tempered by the “qualification” that “if the income tax would

not be altered on adoption of new liability rules, then the strict logic [(analytic)] argument

given for use of efficient rules does not apply” (p. 417, emphasis mine). Distribution ag-

nosticism is an untenable position post-LDE. However, Shavell seemed to have solved the

distribution problem with his argument for redistribution via income taxation. Legal aca-

demics dealing with common law rules need not concern themselves with the distributional

consequences.

Teaming up with Louis Kaplow, Shavell presented his thesis to legal academe some

thirteen years later in Why the Legal System is Less Efficient than the Income Tax in Redis-

tributing Income (“ Legal System”) (Kaplow and Shavell, 1994). In Legal System, Kaplow

and Shavell lament that “[i]t does not appear . . . that the point [from Efficiency vs. Dis-

tribution] is understood in legal academia” (p. 667). Particularly, it is misunderstood by

such LDE theorists as Guido Calabresi and Duncan Kennedy (pp. 667–668, no. 3). 25 They

reiterate the theoretical insight that “using legal rules to redistribute income distorts work

incentives fully as much as the income tax system,” producing a double distortion effect

because it “creates inefficiencies in the activities regulated by the legal rules” (p. 668). To

bring the message to the masses (legal academia), Kaplow and Shavell do an “informal

demonstration” of the Efficiency vs. Distribution model.

The demonstration pays considerable attention to institutional dynamics, recognizingthat an adequate response to distributional concerns raised by shifting to efficient legal

rules requires a functioning “democracy.” The “qualification” to the theory pushes us back

to politics, an area Kaplow and Shavell “do not seek to address.” They, in effect, substitute

25 In addition, they take issue with Anthony Kronman, Contract Law and Distributive Justice (Kronman, 1978),

and Jennifer Arlen, Should Defendants’ Wealth Matter (Arlen, 1992), for not recognizing that the income tax

system is the proper vehicle for addressing distributive concerns. The critique of Arlen is particularly noteworthy.

Arlen had argued that, given the assumption of risk aversion, liability rules should be fashioned to favor the less

well off. She adopted the LDE declining marginal utility of wealth assumption:

If individuals are risk averse, then, all other things being equal, a wealthier potential defendant has a lower

marginal utility of wealth than does a poorer potential defendant . . . . (p. 422)

While Arlen framed her analysis in LNE terms of “optimal deference,” Kaplow and Shavell criticize her for not

disclosing it as the “masked transfer of wealth that it is.” They see it as a potentially radical redistributionist

argument: “In fact, a complete analysis of her model would lead to the conclusion that the socially ideal outcome

involves damages that fully equalize the wealth of the victim and injurer.” (State of the world C in Utility and

Rights.) Kaplow and Shavell do not dispute the analytic soundness of her argument but do dismiss it in stating that

“[o]bviously, it would not be socially desirable to take parties’ wealth into account in the manner Arlen suggests

unless the income tax were unavailable for redistributive purposes” (Kaplow and Shavell, 1994, p. 676, no. 14).

For a further critique of the Arlen thesis, arguing that if actuarially fair insurance is available and income

can be redistributed via taxation, liability rules should be set independently of defendant’s wealth, see Miceli

and Segerson (1995). Miceli and Segerson identify the implication of Arlen’s thesis and cause for Kaplow andShavell’s concern: “A consequence of this result is that efficiency and distributional considerations cannot be

separated in the design of efficient tort rules when the parties are not risk neutral” ( Miceli and Segerson, 1995,

p. 190).




political agnosticism for distribution agnosticism:“[c]ombinedwith [the]article’s efficiency

argument, [this] suggest that normative economic analysis of legal rules should be primarily

concerned with efficiency rather than the distribution of income” (p. 675).

The analytic force of the Kaplow/Shavell argument is unassailable. It constitutes an inter-nal resolution of LNE and response to LDE. As such, it is open to contestation from within.

The internal critique, questioning the resolution, is put forth by Chris William Sanchirico,

an economist, in Taxes versus Legal Rules as Instruments for Equity: A More Equitable

View (Sanchirico, 2000). Sanchirico tweaks the Kaplow/Shavell model to demonstrate that

redistribution from rich to poor through changed legal rules is required if there is any

concern regarding equity. This is the case even if there is currently an optimal redistributive

tax policy in place. Kaplow and Shavell responded in the same journal (Kaplow and Shavell,

2000) arguing that while Sanchirico’s qualification is “not inconsistent” with their model,

its implications are insignificant (p. 822). Thus, their basic conclusion (that the tax system

should be the vehicle for redistributive goals, as opposed to legal rules) still holds.

The Sanchirico/Kaplow–Shavell debate is noteworthy. Given the “technical” nature of the

interchange, it illustrates how broader philosophical disputes become subsumed in theoret-

ical contestation. In this respect, Sanchirico can be viewed as a second-generation technical

progeny of the original LDE movement. Of course, the broader political concerns may be in

danger of being lost in the technical jousting. Irregardless, the debate illustrates the extent

that distributional concerns must be dealt with in order to have a credible claim of presenting

a comprehensive legal theory. Kaplow and Shavell have reified this point in their latest work,

Fairness versus Welfare (Kaplow and Shavell, 2002). Although they continue to argue that

the tax system is the preferred vehicle for redistribution, they accept the LDE propositionsthat the “distribution of income will matter to social welfare,” and “redistributing income

from the rich to the poor will tend to raise social welfare, assuming that the marginal utility

of income is greater for the poor than for the rich” (p. 30).

Kaplow and Shavell do attempt a resolution of a broader sort by arguing that law and

“welfare economics” (which incorporates LDE insights) is a comprehensive legal theory

and that noneconomic notions of fairness should not be included in legal analysis. For

reasons that will be discussed later, I feel that this effort at resolution is doomed to failure.

6. Epilogue

This critical history of LNE chronicles three significant moments. First, LDE put forth

a withering attack on the scientific (analytic) case for distribution agnosticism. Second,

the rejection of the analytic paradigm as a cohering scientific garb for LNE outed it as

a discipline. Third, the attempt to shift the terrain of social choice from legal rules to

taxation was called into question given the consensus, including among those who offer

up taxation as a solution, on the intellectual poverty of distribution agnosticism: if dis-

tribution matters generally, it must matter in common law decision making. Politics are

unavoidable.

LNE adherents can no longer claim privileged, insider status to the mantel of science overother interdisciplinary approaches. This is found partially in Posner’s need to address, if only

to debunk, a host of other approaches to “overcoming law” but more fundamentally in the




proliferation of interdisciplinary approaches and outsider voices throughout the academy.

It is also the reason why the Kaplow/Shavell attempt to resurrect economic analysis as the

dominant paradigm will not succeed (Hackney, in press).

Posner is right that LNE’s ascendancy, on the wings of claims to scientific status, fore-shadowed the resurgent intellectual ferment in the legal academy. Its dissolution lies in the

nature of a pragmatism that marks the waning of analytic “Truth” generally (Hackney, in

press). With this dissolution and the move towards instrumental science, if the debate within

law and economics (LNE and LDE) is illustrative, we may find a more forthright discussion

of politics throughout legal academe. As law and neoclassical economics comes to grips

with the equinox of science and politics, it takes its place with the rest of the legal academy

in reconciling itself to a moment of “middle theorizing.”

Acknowledgements

The author wrote this essay while in residence as a John M. Olin fellow at the University of

Southern California andwishes to thank both the foundation anduniversity for their generous

support. In addition, the author wishes to recognize Northeastern University for providing

sabbatical support that was crucial in completing this project. This article benefited from

ideas generated at the University of Southern California and Loyola University workshops

for which the author is grateful. Particular thanks goes to Jennifer Arlen, Ann McCarthy

Hackney, Gregory Keating, Matthew Spitzer and Eric Talley for their insightful comments.

The author also recognizes the benefit of correspondence with Louis Kornhauser at theincipient stage of this research project and the privilege of having early access to Chris

Sanchirico’s manuscript.

Appendix A 26

1973

Oi, Walter. “The Economics of Product Safety.” Bell Journal of Economics and

Management Science 4: 3–28.Heuristic: Objective of maximizing the economic welfare of consumers (5).

Model innovation: Specific to products liability and focus on bargaining (contract)

context.

Policy conclusion: Policies that give consumers greater freedom to choose and that

place less reliance on direct government controls come closer to minimizing the sum of

accident costs and accident prevention costs.

Note: although Oi’s article appeared in the same year as Brown, it has not been nearly as

popular as a model for LNE theorists.

26 All of the above works either explicitly build on the Brown model or subsequent works that have done so.

This, of course, is not meant to be an exhaustive list of the relevant literature but a “sampling,” illustrating LNE

theory development.




Appendix A. (Continued )

1974

Diamond, Peter. “Single Activity Accidents.” Journal of Legal Studies 3: 107–164.Heuristic: Deviates from negative heuristic of distribution agnosticism, but concludes

that “[t]he difficulty in pursuing moral [(distribution)] intuitions in such an abstract

setting is why I end the discussion of equity with a mere listing of some possible

approaches (161).”

Model innovation: Focus on a long run situation where the law has become

settled . . . and then asks about the differences arising from different due care standards

(108).

Policy conclusion: Not prudent to draw policy conclusions directly from models with

so many omissions.

1976

Green, John. “On the Optimal Structure of Liability Law.” Bell Journal of Economics 7:

553–574.

Heuristic: Liability law is a social policy whose aim, as we shall view it, is to

administer the distribution of accident costs in an efficient manner (553).

Model innovation: Focus on costs of accident avoidance across classes of injurers and

victims.

Policy conclusion: Fault rules not ambiguous under conditions where there are wide

differentials in cost of accident avoidance.

1977

Spence, Michael. “Consumer Misperceptions, Product Failure and Product Liability.”

Review of Economic Studies 44: 561–572.

Heuristic: Defines “regulatory problem” as maximizing overall utility as measured by

income and product cost.

Model innovation: Examination of consumer choice under imperfect information.

Policy conclusion: Mix of producer liability rules.

1979

Cooter, Robert, Lewis Kornhauser and David Lane. “Liability Rules, Limited Information,

and the Role of Precedent.” Bell Journal of Economics 10: 366–373.Heuristic: Minimizing “sum of the cost of accidents and accident avoidance” (367).

Model innovation: Inserting “incremental precedent” assumption directly into Brown

model.

Policy conclusion: With incremental precedent assumption, extant liability rules (all

containing some element of negligence) will converge to efficiency without having to

make the unrealistic assumption that judges have perfect information regarding optimal

care levels.

1980

Polinsky, Mitchell. “Strict Liability vs. Negligence in a Market Setting.” AmericanEconomics Association Articles & Proceedings 70: 363–367.

Heuristic: Analysis under “very simple partial-equilibrium model: (364).





Model innovation: “Formally” examining negligence versus strict liability in a market

setting and the “impact of the rules on the market price and on the number of firms inthe industry” (363).

Policy conclusion: Call into question informal discussions suggesting that negligence

inefficient in market setting by introducing optimal second best standard.

Shavell, Steven. “Strict Liability Versus Negligence.” Journal of Legal Studies IX: 1–23.

Heuristic: Not concerned with “distributional equity for the welfare criterion will be

taken to be the following aggregate: the benefits derived by parties from engaging in

activities less total accident losses less total accident prevention costs (1).”

Model innovation: Explicating and putting in “general form” previous contributions,

specifically “building” on Posner’s “Strict Liability versus Negligence” (25).Policy conclusion: In bilateral (where care level of victim and injurer matters) strict

liability inefficient under all conditions and negligence only inefficient under condition

of “misperception of average risk” (22).

1984

Assaf, George. “The Shape of Reaction Functions and the Efficiency of Liability Rules: A

Correction.” Journal of Legal Studies. XIII: 101–111.

Heuristic: No general statement but builds on Brown model.

Model innovation: Correcting Brown’s derivation of reaction function (functions

showing minimum level of care party A must take, given level of care by party B, to

minimize expected cost to A of accident).

Policy conclusions: All the same as Brown, except that “cannot in general expect

relative negligence to be efficient” (110).

1986

Cooter, Richard and Thomas Ulen. “An Economic Case for Comparative Negligence.”

New York Law Review 61: 1067–1110.

Heuristic: Minimizing social cost of accidents.

Model innovation: Replacing comparative precaution formulation in Brown model with

true comparative negligence analysis.

Policy conclusion: Comparative negligence takes its place as an efficient tort liabilityrule alongside other negligence-based rules. Moreover, under assumptions of

uncertainty, comparative negligence is more efficient than other rules. Finally,

comparative negligence conforms to the norm of horizontal equity.

Crawell, Richard and John Calfee. “Deterrence and Uncertain Legal Standards.” Journal

of Law, Economics & Organizations 2: 279–303.

Heuristic: Efficiency.

Model innovation: Introducing uncertainty of punishment into analysis of whether legal

rules provide proper incentives for efficient behavior.

Policy conclusions: (1) Over compliance likely result given certain plausibleassumptions but no definitive answers; and (2) complicates the normative enterprise of

designing efficient legal rules.





Letsou, Peter. “A Time-Dependent Model of Products Liability.” University of Chicago

Law Review. 53: 209–231.

Heuristic: This comment approaches the problem of defining. A standard of liability

from an economic perspective, thus with one value at the forefront—the minimization

of the social costs of accidents (209, no. 2).

Model innovation: Examining implications of product age in product liability law.

Policy conclusions: Two-tier standard of liability: (1) strict liability with contributory

negligence for new products and (2) negligence for old products.

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