Law, Economics, and the Skeleton of Value Fallacy

Abstract

Experiments in the last decade or so have demonstrated persistent failures on the part of ordinary individuals rationally to pursue self-interest. The experiments pose serious challenges to economics, rational choice theory, and the law and economics school. Some experiments, for example, suggest an "endowment effect", that contradicts the Coase Theorem; the notion that, in the absence of transaction costs, goods will find their most efficient distribution regardless of their initial assignment. Cass Sunstein has collected a set of essays by economists and legal scholars exploring these challenges, in a volume entitled Behavioral Law and Economics.

This review essay argues that the contributors to the volume have not worked out the full implications of these experiments, and that to do so gives one good reasons not to do economics or the economic analysis of law at all.

The experiments indicate that value is context dependent. If value is context dependent, then it is also intransitive. But the transitivity of value is an essential assumption of economic analysis. Economists recognize, of course, that their method is reductive, and that it does not reflect human valuation and choice in all its actual richness. But economists and legal economists do suppose that they have captured at least the essentials of sound practical reasoning, so that their policy prescriptions are reliable. This assumption is unsustainable. I refer to this defect as the skeleton of value fallacy, and describe how it infects several of the essays collected in this volume.