The Economic Dynamics of Law

Abstract

This paper consists of the introductory chapter of a forthcoming book, The Economic Dynamics of Law (Cambridge University Press 2012). The book proposes a macroeconomic approach to law as suitable for creating rules embodying normative commitments over long time periods. This chapter explains and defends this approach, which numerous subject matter specific chapters and a more elaborate theoretical chapter explore in greater depth. This paper advocates a shift in the goals, focus, and methods of law and economics, partially in response to problems revealed by the economic crisis, building on approaches currently found in especially perceptive law and economics scholarship. It proposes a shift from a goal of efficient resource allocation to a primary goal of avoiding systemic risk while keeping open substantial opportunities for economic growth. It proposes a focus on change over time, rather than a vision of law as transactional. And it proposes an analytical method based on institutional economic insights — economic dynamic analysis — for identifying systemic risks and evaluating legal rules’ consequences. The book argues that the economic dynamic analysis provides a systematic way to analyze legal rules’ consequences, building upon law and economics’ universally embraced insight that economic incentives are important. This chapter explains that economic dynamic analysis demands attention to the bounds upon rationality that may influence how actors respond to legal rules and evaluation of incentives potentially countervailing legal incentives. The method also builds on public choice theory by including empowerment analysis — an analysis of who legal rules empower or disempower — in order to anticipate and sometimes circumvent implementation difficulties. Finally, for especially important rules, economic dynamic analysis should include, this Chapter argues, scenario analysis to attempt to evaluate a range of possible future outcomes. hus, the book systematizes an analytical approach to analyzing legal rules’ consequences.

Keywords: macroeconomics, law and economics, institutional economics, innovation, systemic risk, financial crisis, economic dynamics, adaptive efficiency

JEL Classification: E00, D00, K23, K32