John R. Commons: the connection between law and economics

I spent the last two weeks reading some of the work of insitutionalist John R. Commons in preparation for a reading group centered on topics around capital and capitalism. I thought I'd share a crib-notes version of some of Commons thoughts regarding the relationship between law and economics, particularly from his 1925 article Law and Economics. This is in no way an exhaustive summary of the paper, which also includes numerous historical references and exploration of foundational econ topics such as capital and scarcity. 

In this nearly century-old piece, Commons considers why "the two sciences of law and economics" have not been treated as one and advanced together.  He asks us to consider the core economic concept of scarcity (among others) and how they are fundamental to the legal concept of property. It is in thinking about property and rights, and how they are defined, that Commons makes his case for a stronger joint understanding of law and economics.

Given the fields' close relation in studying how and under what conditions resources are distributed, it certainly does seem counter-intuitive that there was not more overlap in Commons' time between economic theory and legal theory of the day.  Commons gives several reasons for why this has occurred (that he notes are largely anglo-american specific):

1.  The English era of invention/manufacturing, resulting in an unequal interest in the production of wealth, namely through the concepts of efficiency and productivity (check out the full article for more on this).

This ties directly into the evolution of the next issue:

2. The influence of Jeremy Bentham, as adopted by Ricardo, the founder of English economic theory.  Bentham criticized reliance on custom and common law putting forth instead, "the pains and pleasures of individuals supported by "reason" as the foundation of legal, ethical and economic science." 

Commons writes, 

"This view fitted in precisely with the extreme individualism of English economists and made it possible for them to assume that the largest production of wealth through the selfishness of individuals was equivalent to the ethical principle of the maximum happiness of all. Great productivity was great happiness....hence custom was apparently eliminated from English economics, so that it came to be based on "happiness" and "reason" instead of "custom" and "authority."

But the custom of private property remained necessary to economic theory, even one that hinged on individualism and self interest. Commons explains that custom was therefore recoded into "the incorpereal and intangible properties of business men", so that English economic theory came down to three principles: productivity, selfishness. and property. 

Commons blames the over-emphasis on the individual and their reasonableness over that of societies reasonable value for the divergence between the two fields.  He paints an unflattering picture of the field of economics at the time as one that cherry picks the pieces of reality it will embrace while wholly ignoring others not in line with an individualistic moral philosophy:

"Economists have sometimes been apologetic, sometimes defiant, sometimes cynical, towards the criticism that they have based the whole of their" economic theory on the selfishness of the individual regardless of the interests of others. In other to offset this animadversion some of them have at times made a fresh start in the field of ethics or law, as a kind of addendum, and there has resulted an irreconcilable dualism of the two principles of the individual and the society. But the courts, being directly in contact with the practices of business and compelled to decide disputes arising out of those practices, have built up both a method of approach and a joint concept of the individual and society which completely transcend this dualism and give us a starting point that is both individual and social."

This approach centers around the concept of custom, as described by Commons (and those institutionalists before him) here:  

"... the word Custom, in his usage, may be said to have the three meanings of Habit, Common Practices and Common Law. Habit is the practices of individuals which may or may not conform to the common practices of those with whom he is associated. Common practices are the pressure of opinion and the exclusion from intercourse by the associates of the individual which thereby require him to conform if he would live and prosper. And the common law is the protection by the courts, by means of the physical penalties and immunities of government, of approved practices and the exclusion of disapproved practice."

Custom has more to do with the process of social choice (I'm using this term very loosely here, as I can't think of a better one at the moment), where individuals make choices about institutions that then shape what rights, etc, look like over time. It is through this idea of custom that Commons makes the strong connection between law and economics clear:

"Economics becomes the Common Practices of feudal lords, of the early guilds, of agricultural communities, of merchants, -manufacturers, business men, of workingmen, professional men and others, in their daily transactions with each other by way of creating and obtaining an income from the earth and from each other. And the Common Law evolves in proportion as the courts decide disputes in accordance with the common practices of these several classes deemed to be good and proper."

Basically, economists study the economy as shaped by the custom of we the people, and the legal system (as shaped by we the people) directly defines what custom to keep should conflict arise. Commons doesn't necessarily use this as an argument for all economists to become lawyers, but rather to encourage deeper understanding of the role of custom and the law in economics. This connection between law and economics also forms the backbone of Reasonable Value as championed by Commons in other works. 

The last bit of the excerpt, "the common practices of these several classes deemed to be good and proper" gets into that conversation of Reasonable Value (and further discussion on normativism in economics), but I'll tackle those topics another time.  I'll close today's post with some similar words from Coase (1992), a lifetime later, that nicely restate the connection between law and econ in a way more familiar to me:

“what are traded on the market are not, as is often supposed by economists, physical entities, but the rights to perform certain actions, and the rights which individuals possess are established by the legal system.”