The Technological Problem of Social Cost
21 Pages Posted: 2 Apr 2016 Last revised: 16 Aug 2016
Date Written: March 31, 2016
The relationship between law and technology is both important and poorly understood. To be sure, certain aspects of the relationship are well studied. For instance, the use of law and policy to promote the development of technology, or to channel this development along more or less desirable paths, is the subject of longstanding, intense, and ongoing study. And much has been written about the process by which the law responds to exogenous technological shocks – how judges, legislatures, and agencies go about updating the law in response to the development of new technologies. But in these cases legal institutions generally wait for technological change to happen and then respond to that change.
This article draws from economic understandings of the law to consider the relationship between law and technology. The basic theory offered can be stated concisely: technology defines the transaction costs that define what the law both can and should be. As developed by Coase, Melamed & Calabresi, and at least two generations of scholars since, transaction costs play a critical role in defining the law. As famously articulated by Coase, in the absence of transaction costs, it does not matter what the law is – parties will negotiate around any legal rules to achieve preferred outcomes; but, because there are always transaction costs, Coase tells us, we must be careful to design the law with them in mind, so as to minimize those costs. Transaction costs, that is, define what the law can and should be. This article adds that transaction costs are, in turn, defined, by technology – and that technological change can affect transaction costs, and therefore the law, in predictable ways.
This relatively modest observation yields powerful results. Most important, it endogenizes the relationship between law and technology, shifting from one in which law adjusts to exogenous technological shocks to one in which legal and technological change can (and, this article argues, should) occur in tandem. It provides a law-relevant definition of technology, and describes the mechanisms by which technology affects the law. It offers insights into the operation of the law, including explaining that efficient law may require relatively inefficient technology. And it provides a framework for analyzing the relationship between law and technology and identifies ways in which this relationship may at times be antagonistic.
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