The Erroneous Foundations of Law and Economics

114 Pages Posted: 1 Apr 2021

See all articles by Mark Glick

Mark Glick

University of Utah - College of Social & Behavioral Sciences

Gabriel Lozada

University of Utah

Date Written: February 15, 2021

Abstract

The fundamental originating principle of law and economics (L&E) is that legal decisions should be (and are) based on maximizing efficiency. But L&E proponents do not define “efficiency” in the way agreed to by most economists, as Pareto Efficiency. A Pareto optimal condition is obtained when no one can be made better off without making someone worse off. Pareto Improvements are win-win changes where no losers exist. In the judicial system, however, there are always winners and losers, because under Article III § 2 of the Constitution a legal case does not exist unless there is a justiciable “case or controversy” in need of resolution. Unable to use Pareto Efficiency, L&E scholars have been forced to adopt alternative definitions of efficiency. Most L&E scholars claim to define “efficiency” based on the work of Kaldor and Hicks, but (perhaps unwittingly) instead use a definition of “efficiency” derived from the 19th century idea of consumer surplus, which encompasses L&E notions such as “wealth maximization,” and “consumer welfare” in antitrust. Neither of these alternative definitions is viable, however. Outside of L&E, the Kaldor-Hicks approach has long been recognized to be riddled with logical inconsistencies and ethical failures, and the surplus approach is even more deficient. Remarkably, virtually none of the numerous L&E textbooks even hint at such problems. Critically, all definitions of efficiency improvements in economics are biased in favor of wealthy individuals or firms, either because they are dependent on the status quo ante distribution of assets, or because they bestow large advantages on parties with political influence or who can afford to bring lawsuits quickly. Many L&E practitioners treat efficiency improvements instead as being objectively good, an error revealing that L&E is primarily motivated by its neoliberal policy agenda.

Keywords: law and economics, antitrust economics, efficiency, wealth maximization, legal realism, neoliberal theory, Kaldor Hicks, Pareto Optimality

JEL Classification: K1, D61, L4

Suggested Citation

Glick, Mark and Lozada, Gabriel, The Erroneous Foundations of Law and Economics (February 15, 2021). Institute for New Economic Thinking Working Paper Series No. 149
https://doi.org/10.36687/inetwp149 , Available at SSRN: https://ssrn.com/abstract=3812839

Mark Glick (Contact Author)

University of Utah - College of Social & Behavioral Sciences ( email )

United States

Gabriel Lozada

University of Utah ( email )

1645 E. Campus Center
Salt Lake City, UT 84112
United States

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