Major Difficulties in Including the Study of Law in Economics

Eric and I recently had the pleasure of chatting with Dr. Pierre Schlag.  Schlag is Distinguished Professor at the University of Colorado and Byron R. White Professor at the Law School. We had been referencing some of his work on Hohfeldian Legal Analysis for some of our model on legal-institutional interdependence, and he was kind enough to offer to Zoom with us as we worked through our many questions. 

We had our conversation about Hohfeld, but Schlag also highlighted one of his past works on the importance of incorporating law into the study of economics.  This 2013 paper, titled "Coase Minus the Coase Theorem-- Some Problems with Chicago Transaction Cost Analysis" is incredibly relevant to all those interested in the intersection of law and economics-- not just those familiar with Coase's larger body of work or those especially familiar with the Coase Theorem. 

Schlag provides a comprehensive overview of Coase's broader critique of neoclassical economic methods through a close reading of The Problem of Social Cost and is specifically critical of Chicago transaction cost analysis through Coase's own words. I highly recommend those interested read the article. A blog post is not the best place for me to go over all the detailed arguments covered in the 50 page text. It is, however, a good place for me to share this succinct list of challenges Schlag identifies that we continue to face in integrating law and legal regimes into neoclassical economics:

4 major difficulties in including the study of law in economics:

1. Law provides no uncontested or uncontroversial theory as to the effects or ideals of various legal regimes. Law certainly does not arrive on the scene with any adequate theory of its own explaining its (economic) architecture or effects.

1. As a formal matter, legal regimes are highly differentiated. The possibilities for decomposing and recomposing any given legal entitlement (e.g., the fee simple, bankruptcy, etc.) are numerous and as variegated as Hohfeld's work intimates.

1.  In practice, legal regimes are generally neither discrete nor additive in terms of their target domains. They are instead overlapping-and very often in variegated transaction-specific ways. Any given economic transaction might be susceptible to regulation by any number of bodies of law (e.g., property, tax, environmental, tort, etc.). Any ostensible violation, breach or non-compliance might be susceptible to restatement along several different causes of action with different remedies.

1. A proper identification of the function and optimization of any given legal regime depends upon the identity and functions of neighboring, overlapping, re-enforcing, competitive, and antagonistic legal regimes. (Schlag, 2013, pg. 198-199).

How could even one of these problems be addressed?  Coase does not specifically address each of these issues, rather attempting to bypass them (see pages 198-202 of Schlag's paper for detailed analysis).  Coase provides a workaround via his opportunity coast approach, and these issues remain unresolved. In fact, Schlag states:

If Coase was right, then it would have made sense for the neoclassical economists to reconsider their model in light of the effects of law and legal regimes on the identity and costs of production factors. The model is in disrepair. It is in the odd position of excluding the roles of law and legal regimes and yet requiring their inclusion for sound analysis-at least where we are concerned with economic performance. The simultaneous dependence upon and yet axiomatic exclusion of law and legal regimes (already a problematic condition) means that it is not clear at all what economic assumptions are being made about the character of law and legal regimes in place. Not only are the basic legal regimes presumed to be working and enforced (whatever that means), but their specific identities, economic effects, and significance remain unarticulated. And of course, insofar as the effects and significance of the legal regimes are simultaneously consequential (they matter) and yet unarticulated (we don't know what they are or do, economically speaking), they have indeterminate effects on the results produced by specific economic analyses. To analogize to computers, it's like having an unknown daemon operating unnoticed in the background and yet running the model and the analyses (Law here being the daemon.). 

 The economists, as Coase noted, largely ignored this aspect of his article.  These issues remain to be addressed, over half a century later. Schlag provides some examples of lawyers attempting to meet some of these challenges, particularly those associated with Chicago L&E, but notes that they offered  "no revision of the neoclassical model itself" simply importing "an unmodified and unreconstructed neoclassical model to analyze law and legal regimes".  It seems we still have a long way to go. 

References:

Pierre Schlag, Coase Minus the Coase Theorem--Some Problems with Chicago Transaction Cost Analysis, 99 Iowa L. Rev. 175 (2013), available at, http://scholar.law.colorado.edu/ articles/292.  

R.H. Coase, The Problem of Social Cost, 3 J.L. & EcON. 1, 8 (1960)