The Essence of Economics: Behavior, Choice and Comparison - Essay One 'The Basic Thesis with Lessons from the Economic Analysis of the Common Law'
30 Pages Posted: 13 Sep 2011 Last revised: 9 Nov 2011
Date Written: September 12, 2011
All economic analysis is about institutional behavior the behavior of decision-making processes such as markets, firms, political processes and courts. In turn, when economists bring these insights about institutional behavior to the analysis of law and public policy, they focus on institutional choice such as the choice between markets and political processes (the regulation issue), the choice between markets and firms (issues of industrial organization) and the choices between courts and markets (law and economics and the common law) and between courts and political processes (law and economics and constitutional law). But at present, most economic analysis of these institutional choices is carried out in a peculiarly non-economic and illogical manner. Rather than comparing these decision-making processes, standard economic analyses of institutional choices focus on the character and imperfections of one alternative. Welfare economics focuses on market malfunction or imperfection. Public choice focuses on the political malfunction or imperfection. These analyses, although often highly sophisticated, are just examinations of necessary conditions for institutional choice. Moreover, these are trivial necessary conditions. Most importantly, the imperfections in institutional alternatives are correlated: institutions tend to move together in response to variations in basic variables such as numbers and complexity. The failure to account for the parallel movements of institutions has deformed the economic analysis of law and public policy by focusing on the wrong issues and on the wrong margins of inquiry. Without comparative institutional analysis, the economic analysis of institutional choice is largely empty and the remarkable insights about institutional behavior provided by economic analysis are wasted. This is the first in a series of essays attempting to correct this problem. It sets out an approach to understanding and comparing institutions based on the dynamics of participation, an approach already inherent in most economic analysis. This essay then shows the problems created by the failure to employ this approach in a comparative institutional manner by examining economic analysis of law in general and the efficiency of the common law in particular.
Keywords: comparative institutional analysis, law and economics, property rights, torts, economic analysis, common law, analytical framework, institutional choice, efficiency, participation, transaction costs, law and public policy, adjudicative process, market, political process, two-force model, courts
JEL Classification: K41
Suggested Citation: Suggested Citation