EMORY School of law Law economics Research Paper Series EMORY Why Was the Common Law Efficient? Paul h. rubin Emory University Department of Economics Emory University School of Law Working Paper No 04-06 This paper can be downloaded without charge from the ocial Science Research Network Electronic Paper Collection
EMORY School of Law Law & Economics Research Paper Series Why Was the Common Law Efficient? Paul H. Rubin Emory University Department of Economics and Emory University School of Law Working Paper No. 04-06 This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=498645
WHY WAS THE COMMON LAW EFFICIENT? Paul h. rubin Introduction a basic question for law and economics is the efficiency of law. Hayek, (1960 and 1973)although writing before the law and economics movement and writing from another perspective, had argued that common or judge-made law was better than statute law, we return to Hayek's arguments below. Posner(1973; 2003) has of course argued often and forcefully that the common law is efficient. His arguments are based on examination of particular legal doctrines. I call this the"micro"argument for legal efficiency. The evolutionary models were aimed at explaining this micro efficiency There is more recent literature that uses empirical methods to compare various legal systems. This literature generally finds that common law is more efficient than other forms of law. I call this the"macro argument for efficiency. It is ultimately a hayekian argument, based on the idea that in common law systems, governments have less power than in other systems. I first discuss micro efficiency, and them macro Micro” Efficiency Micro efficiency is based on an examination of particular legal doctrines and attempts to determine if they are efficient. This was the method used by Posner.(Much of my own work is of this type; see for example Rubin, 1983). The difficulty with this method of analysis, is that often the conclusion regarding the efficiency of a particular rule depends on unmeasured transactions costs of various sorts; if the analysts'intuition
WHY WAS THE COMMON LAW EFFICIENT? Paul H. Rubin* Introduction A basic question for law and economics is the efficiency of law. Hayek, (1960 and 1973) although writing before the law and economics movement and writing from another perspective, had argued that common or judge-made law was better than statute law; we return to Hayek’s arguments below. Posner (1973; 2003) has of course argued often and forcefully that the common law is efficient. His arguments are based on examination of particular legal doctrines. I call this the “micro” argument for legal efficiency. The evolutionary models were aimed at explaining this micro efficiency. There is more recent literature that uses empirical methods to compare various legal systems. This literature generally finds that common law is more efficient than other forms of law. I call this the “macro” argument for efficiency. It is ultimately a Hayekian argument, based on the idea that in common law systems, governments have less power than in other systems. I first discuss micro efficiency, and them macro. “Micro” Efficiency Micro efficiency is based on an examination of particular legal doctrines and attempts to determine if they are efficient. This was the method used by Posner. (Much of my own work is of this type; see for example Rubin, 1983). The difficulty with this method of analysis, is that often the conclusion regarding the efficiency of a particular rule depends on unmeasured transactions costs of various sorts; if the analysts’ intuition 1
about relative magnitudes of costs is incorrect, then doctrines claimed to be efficient may not be so. Nonetheless, Posner's analysis has been the intellectual spark behind the growth of law and economics, and questions about efficiency of the sort he was the first to raise, have dominated the literature. Much of this literature may be considered as detailed attempts to answer the positive efficiency question first posed by Posner, and much of the rest aims at deriving normative conclusions as to what is efficient This method of analysis is fundamentally different from efficiency analysis in other branches of economics. There, a process (market competition) is postulated and it is shown that the process leads to efficient outcomes. Economists do not generally examine consumers to see if they are equating ratios of marginal utilities to prices, or irms to see if they are charging marginal cost. Rather, the process by which outcomes are generated is shown to lead to efficiency. It is for this reason that many economists are uncomfortable with the efficiency arguments of law and economics. Nonetheless because this is the standard method in law and economics, any analysis of the efficiency of any particular body of law can be considered as evidence for or against Posner's hypothesis. If some law is found efficient, then this is evidence for the hypothesis. If some law is found inefficient, or if there are proposals for reform, then this is evidence against the hypothesis. In this sense, much of law and economics is aimed at testing this fundamental hypothesis Evolutionary Models Scholars are of course aware of these difficulties and have sought to identify a process that would lead to efficiency. I first proposed the evolutionary model of legal
about relative magnitudes of costs is incorrect, then doctrines claimed to be efficient may not be so. Nonetheless, Posner’s analysis has been the intellectual spark behind the growth of law and economics, and questions about efficiency of the sort he was the first to raise, have dominated the literature. Much of this literature may be considered as detailed attempts to answer the positive efficiency question first posed by Posner, and much of the rest aims at deriving normative conclusions as to what is efficient. This method of analysis is fundamentally different from efficiency analysis in other branches of economics. There, a process (market competition) is postulated and it is shown that the process leads to efficient outcomes. Economists do not generally examine consumers to see if they are equating ratios of marginal utilities to prices, or firms to see if they are charging marginal cost. Rather, the process by which outcomes are generated is shown to lead to efficiency. It is for this reason that many economists are uncomfortable with the efficiency arguments of law and economics. Nonetheless, because this is the standard method in law and economics, any analysis of the efficiency of any particular body of law can be considered as evidence for or against Posner's hypothesis. If some law is found efficient, then this is evidence for the hypothesis. If some law is found inefficient, or if there are proposals for reform, then this is evidence against the hypothesis. In this sense, much of law and economics is aimed at testing this fundamental hypothesis. Evolutionary Models Scholars are of course aware of these difficulties and have sought to identify a process that would lead to efficiency. I first proposed the evolutionary model of legal 2
efficiency in an attempt to solve this problem(Rubin, 1977). The evolutionary models are attempts to explain judicial behavior without resort to preferences or utility functions Initially, these models aimed at explaining Posner's putative observation that the common law was efficient. It is fair to say that the models failed in this endeavor, perhaps because the law is not so efficient as posner argued. nonetheless these models have had an important impact on the literature because they have called attention to forces other than judicial preferences in explaining the law. The evolutionary models are ultimately based on the model of the litigation process first set forth by Landes(1971) In the first paper applying an evolutionary model to the common law, I argued that most cases are settled, rather than litigated, and that it is only litigated cases that can lead to legal change. Cases are settled when the expected value to the plaintiff of a case is less than the expected cost to the defendant, which is generally true if stakes are symmetric. However, inefficient laws can sometimes create asymmetric stakes because the inefficiency means that there are deadweight losses than cannot be bargained away in the settlement process. That is, an inefficient rule creates a loss to one party that is greater than the gain to the other because of future stakes in similar type cases. Thus, litigation becomes more likely when rules are inefficient, and so inefficient rules are subject to greater selection pressure, and more likely to be overturned. (Note that this model, like many of its successors, depends on parties having ongoing interests in disputes of a certain sort, rather than merely in the matter at hand. Following this initial contribution were several extensions and modifications Priest(1977)argued that inefficient rules generated larger stakes and so were more likely
efficiency in an attempt to solve this problem (Rubin, 1977). The evolutionary models are attempts to explain judicial behavior without resort to preferences or utility functions. Initially, these models aimed at explaining Posner's putative observation that the common law was efficient. It is fair to say that the models failed in this endeavor, perhaps because the law is not so efficient as Posner argued. Nonetheless, these models have had an important impact on the literature because they have called attention to forces other than judicial preferences in explaining the law. The evolutionary models are ultimately based on the model of the litigation process first set forth by Landes (1971). In the first paper applying an evolutionary model to the common law, I argued that most cases are settled, rather than litigated, and that it is only litigated cases that can lead to legal change. Cases are settled when the expected value to the plaintiff of a case is less than the expected cost to the defendant, which is generally true if stakes are symmetric. However, inefficient laws can sometimes create asymmetric stakes because the inefficiency means that there are deadweight losses than cannot be bargained away in the settlement process. That is, an inefficient rule creates a loss to one party that is greater than the gain to the other because of future stakes in similar type cases. Thus, litigation becomes more likely when rules are inefficient, and so inefficient rules are subject to greater selection pressure, and more likely to be overturned. (Note that this model, like many of its successors, depends on parties having ongoing interests in disputes of a certain sort, rather than merely in the matter at hand.) Following this initial contribution were several extensions and modifications. Priest (1977) argued that inefficient rules generated larger stakes and so were more likely 3
to be litigated, again subjecting them to increased selection pressure. Goodman(1979) argued that efficient precedents were worth more to parties who would benefit than inefficient precedents were worth to their beneficiaries, and that parties to whom a decision was worth more would spend more litigating and so would be more likely to win. In other words, efficient precedents were more likely to win in litigation and thus survive than were inefficient precedents. Katz(1988)expanded on this notion in the context of presenting a model of litigation expenditures. Terrebonne(1981)also presented a model of efficient legal evolution Other scholars began critically examining these models, and the general notion of legal efficiency. For example, Tullock(for example, 1997)has long argued that the English common law process is less efficient than Continental processes. Rizzo(1980a and b)argues from an Austrian perspective that the amount of information needed for judges to achieve efficiency is excessive, although in a critique I have argued that rizzo's criticism might apply to efficiency in all of economics, not merely in law and economics (Rubin, 1980). Aranson(1992) argues that it is impossible for judges to seek efficiency because the calculations required are equivalent to those required to make central planning work. Hadfield (1992) has argued that because judges see only a biased sample of potential cases, depending on the rules in existence, it is impossible for judges to move towards efficiency, even if they desire to do so. Landes and Posner(1979)in a symposium paper published in the Journal of legal Studies argued that the earlier models had erred by modeling precedent as an all or nothing issue, when the proper question was whether a precedent was stronger or weaker. That is, litigation might strengthen or
to be litigated, again subjecting them to increased selection pressure. Goodman (1979) argued that efficient precedents were worth more to parties who would benefit than inefficient precedents were worth to their beneficiaries, and that parties to whom a decision was worth more would spend more litigating and so would be more likely to win. In other words, efficient precedents were more likely to win in litigation and thus survive than were inefficient precedents. Katz (1988) expanded on this notion in the context of presenting a model of litigation expenditures. Terreborne (1981) also presented a model of efficient legal evolution. Other scholars began critically examining these models, and the general notion of legal efficiency. For example, Tullock (for example, 1997) has long argued that the English common law process is less efficient than Continental processes. Rizzo (1980a and b) argues from an Austrian perspective that the amount of information needed for judges to achieve efficiency is excessive, although in a critique I have argued that Rizzo’s criticism might apply to efficiency in all of economics, not merely in law and economics (Rubin, 1980). Aranson (1992) argues that it is impossible for judges to seek efficiency because the calculations required are equivalent to those required to make central planning work . Hadfield (1992) has argued that because judges see only a biased sample of potential cases, depending on the rules in existence, it is impossible for judges to move towards efficiency, even if they desire to do so. Landes and Posner (1979) in a symposium paper published in the Journal of Legal Studies argued that the earlier models had erred by modeling precedent as an all or nothing issue, when the proper question was whether a precedent was stronger or weaker. That is, litigation might strengthen or 4