Can Law and Economics be Both Practical and Principled?

Abstract:     
This article describes important recent developments in normative law and economics, and the difficulties they create for the project of efficiency-based legal reform. After long proceeding without a well articulated moral justification for using economic decision procedures to choose legal rules, scholars have lately begun to devote serious attention to developing a philosophically attractive definition of well-being. At the same time, the empirical side of law and economics is also being enriched with an improved understanding of the complexities of individuals' decision-making behavior.

That is where the problems begin. Scholars may have better, more plausible conceptions of well-being in hand, but it is not at all clear how to develop practical techniques for measuring and comparing individuals' gains and losses in well-being, so defined. And at the practical end, behavioral research suggests that the range of individual preferences that economic analysis must accommodate is broader and more complex than was previously assumed. We detail a variety of psychological studies that suggest that individuals often hold law-related preferences: direct preferences about the content and fairness of their legal system. These preferences defy market valuation, yet we argue that they cannot be ignored. Most intriguingly, studies suggest that in some cases people hold a preference that legal decisions should not be made on an economic basis. We describe such anti-utilitarian preferences, collecting evidence of their strength and permanence.

In the final part of the article, we offer predictions about the future development of law and economics, in light of its growing theoretical sophistication and the evidence of law-related preferences. The most likely outcomes are: (1) scholars advocating various forms of paternalism, whether by excluding citizens from participation in the legal system or by discounting some types of individual preferences from consideration in choosing policies; or (2) a limited implementation of economic techniques, applying them strongly in some areas of the law but not in others. We discuss the relative strengths and failures of each proposed approach, and offer suggestions for future empirical work. We conclude by giving a tentative answer to the question that titles the article.

Keywords: Law and economics, welfare, cost benefit analysis, utilitarianism, behavioral economics, juries, preferences, fairness, paternalism, legal theory, wealth maximization, Pareto, Kaldor-Hicks

JEL Classifications: A12, D6, D31, K00, K10, K11, K1, K4, K40

Accepted Paper Series