Institutional Law and Economics: The Legal-Economic Nexus

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 eco...

  Back in March of 2006 (Vol. 28, No. 1) in the Journal of the History of Economic Thought, Mary S. Morgan gave the presidential address for the History of Economic Thought Association entitled “Economic Man as Model Man”. This is an excellent review of how economists have thought about and modeled the behavioral models that have been used going back to Adam Smith.  In brief, economists have moved over time from “thick” descriptions of human economic behavior in the 18th and 19th century to increasingly narrow descriptions until we reach neoclassical human economic agent in the 20th century.  Thick descriptions may be more realistic but don't provide a clear cut casual tool for understanding the link between behavior and economic outcomes such as prices and quantities.  In the 20th century, we ultimately ended up with the rational choice economic agent who acted under a specific set of assumptions and allowed economists to derive very specific predictions about price...

In several columns from 2019 through to today, Roger Valdez has written in Forbes about markets, defending markets and price as a social construct amongst other items*. In particular he has focused on the issue as it relates to housing and the affordability of housing prices.   In a piece in 2019, he wrote about the idea of commodification that he took from Marx*. In essence, he boiled it down to the idea that a commodity is best represented as in Marx as derived from exploited labor and that price is a construct and does not represent scarcity. This, he then goes on to argue, is the point that leads to housing being a right and therefore should not be subject to market forces because an increase in housing prices is not based on scarcity but exploited labor  In a more recent piece, he writes about the fact that “price as a construct is poppycock”** and that this left idea has led to bad housing policy.  He also accusesse the left of being driven by ideology rather t...

  Despite many differences and even outright hostility at times, there are a few points of commonality between new and original institutional economics as represented by Ronald Coase and John R Commons.  One point of commonality is that both agree that markets and capitalism involve the trading of legal rights and duties and not the physical goods themselves (which is present but incidental to the process).  In contrast, neoclassical economics views the law as a background variable and that markets involve the transfer of physical goods and services between consumers and producers. Ronal Coase wrote in 1992 in his Nobel speech, "If we move from a regime of zero transaction costs to one of positive transaction costs, what becomes imme- diately clear is the crucial importance of the legal system in this new world. I explained in "The Problem of Social Cost" that what are traded on the market are not, as is often supposed by economists, physical enti- ties but the rights to...

 An interesting battle is playing out over the nature, future and trajectory of the idea of capitalism in reality and in the pages of many online news formats.  In the past such as the cold war, the battle was capitalism versus communism.  It seems at one glance a straightforward battle of markets versus state planning and control and which system could better deliver benefits to people.  Many claimed that state planning and control lost after the collapse of the Berlin Wall and the end of Soviet Union. The new battle shaping is more oriented towards which form of economic organization will best address the climate crisis and inequality more generally.  Many serious business years such as Bill Gates of Microsoft and the Gates Foundation and Larry Fink of Black Rock are stating that companies must develop zero emission plans and take leadership to make changes for example that will build inclusive and equitable growth which we will explore in detail later. These ...

Are you awaiting the Covid-19 vaccine? A little known federal government agency, the Biomedical Advanced Research Development Authority (BARDA) is behind the financing of the current crop of vaccines.  This agency, located within the large bureaucracy that is the Department of Health and Human Services is the one that signed large financial agreements with drug makers and drug manufacturing facilities as part of the so-called “Operation warp Speed”.In December of 2020, Time magazine reported that the U.S. government is on track to spend $12 billion ( https://time.com/5921360/operation-warp-speed-vaccine-spending/ ) on vaccine development. It has been noted in many articles that vaccine development represents a classic form of the diversion between social costs and benefits and private costs and benefits.  Drug companies have found that vaccines offer little private incentives for wealth creation and cost a tremendous amount of their own resources to develop.  The U.S. gov...

  The Council on Inclusive Capitalism ( https://www.inclusivecapitalism.com/ ) is a new group formed by CEO’s, global leaders and the Vatican that seeks to, “Capitalism lifts people out of poverty and powers global innovation and growth. But to address the challenges of the 21st century, capitalism needs to adapt. Through our commitments, actions and solutions, we will create stronger, fairer, more collaborative economies and societies, ultimately improving the lives of countless millions of people across the globe.” (Council on Inclusive Capitalism, 2020) What does Institutional law and Economics have to say about this kind of approach? First, we need to acknowledge that this group states their normative purpose up front and are not trying to hide beneath a cloak of doing something on the grounds of economic efficiency.  This is a good thing and one can agree or disagree with the group's aims but at least acknowledge that they are upfront and transparent about them. They make...