What I am Doing

If there were only one man in the world, he would have a lot of problems, but none of them would be legal ones. Add a second inhabitant, and we have the possibility of conflict. Both of us try to pick the same apple from the same branch. I track the deer I wounded only to find that you have killed it, butchered it, and are in the process of cooking and eating it.

The obvious solution is violence. It is not a very good solution; if we employ it, our little world may shrink back down to one person, or perhaps none. A better solution, one that all known human societies have found, is a system of legal rules explicit or implicit, some reasonably peaceful way of determining, when desires conflict, who gets to do what and what happens if he doesn't.

The legal rules that we are most familiar with are laws created by legislatures and enforced by courts and police. But even in our society, much of the law is the creation not of legislatures but of judges, embedded in past precedents that determine how future cases will be decided; much enforcement of law is by private parties such as tort victims and their lawyers rather than by police; and substantial bodies of legal rules take the form, not of laws, but of private norms, privately enforced.

Going farther afield in time and space we encounter a much greater diversity, both in the sources of legal rules and in the ways in which they are enforced. If we are considering all systems of legal rules in all times and places, the ways in which legal rules are created and enforced in America in this century are simply data—one out of many possible solutions to the problem of human conflict, one out of many possible systems of legal rules. This book directs most of its attention to the past century or two of Anglo-American law not because it is more important than other legal systems but because the author, most readers, and most of the scholars whose ideas I will be talking about, know more about that legal system than about the legal rules of Homeric Greece, Papua New Guinea, Saga period Iceland, or Shasta County, California. But the ideas I am discussing are as relevant to those systems as to ours—as we will see when we take a brief look at several of them in Chapter 17.

There are many ways of looking at a legal system, among them the perspective of a legal historian, a legal philosopher, or a lawyer interested in creating arguments courts will accept or contracts they will enforce. This book is written by an economist. My approach is to try to understand systems of legal rules by asking what consequences they will produce in a world in which rational individuals adjust their actions to the legal rules they face.

While this is not the only possible approach, it is one with very general application. Legal rules exist, at least in large part, in order to change how the people affected by them act. A speed limit exists because someone wants people to drive more slowly. The legal rule that holds that any ambiguity in a contract is to be interpreted against the party who drafted it exists because someone wants people to write contracts more carefully.

The economic approach works in two directions. Starting with an objective, it provides a way of evaluating legal rules, of deciding how well they achieve that objective. Starting with a legal rule, better a system of legal rules, it provides a way of understanding it—by figuring out what objective it is intended to achieve.

The central assumption of economics is rationality—that behavior can best be understood in terms of the purposes it is intended to achieve. The secondary assumption running through this book is that systems of legal rules, or at least large parts of systems of legal rules, make sense—that they can be understood as tools with purposes. The rationality assumption will not be questioned here, although there is an extensive literature elsewhere on the subject of which the most interesting part, in my judgement, is the recent work in evolutionary psychology. The secondary assumption will be questioned repeatedly. One of the questions running through this book is to what degree the legal rules we observe can be explained as tools—in particular, as tools designed to achieve the particular purpose, economic efficiency, that economic analysis of the law most commonly ascribes to them. In chapter nineteen I sum up the evidence and deliver a mixed verdict.


What Is Wrong With It

A system of legal rules is not entirely, perhaps not chiefly, the product of deliberate human design; to a considerable extent it represents the unplanned outcome of a large number of separate decisions, by legislators bargaining over particular provisions in the law or judges trying to find and justify verdicts for particular cases. It is therefore possible that such a system may have no objective for us to find. There is no guarantee that we will be able to make sense of any particular system of legal rules, since there is no guarantee that it makes sense. Human beings are born equipped with a superb pattern-recognition engine—so good that not only can we find patterns that even a well-designed computer would miss, we can sometimes find patterns that aren't there. One of the questions you should be asking yourself, especially as you approach the end of the book, is to what degree economics discovers order in law and to what degree it imposes it.

One objection to the economic approach to understanding the logic of law is that law may have no logic to understand. Another and very different objection is that law has a logic but that it is, or at least ought to be, concerned not with economic efficiency but with justice. We punish criminals not, or at least not entirely, because doing so achieves good consequences but because criminals deserve to be punished. We require tortfeasors to make their victims whole not because doing so gives people an incentive not to be tortfeasors but because it is just that he who did the damage should pay for it. On just the same grounds, we insist that if our child has made a mess, he should clean it up.

To this very persuasive line of argument I have two answers. The first is that justice does not give an adequate account of law, both because it is irrelevant to a surprisingly large number of legal issues and because we have no adequate theory of what makes some rules just and some unjust. To a considerable degree, our intuitions of justice are consequence, not cause—we think rules are just because they are the rules we have been brought up with.

My second answer is that in many, although probably not all, cases, it turns out that the rules we thought we supported because they were just are in fact efficient. To make that clearer, I have chosen to ignore entirely issues of justice going into the analysis. In measuring the degree to which legal rules succeed in giving everyone what he wants, and judging them accordingly, I treat on an exactly equal plane my desire to keep my property and a thief's desire to take it. Despite that, as you will see, quite a lot of what looks like justice—for example, laws against theft and the requirement that people who make messes should clean them up—comes out the other end. That, I think, is interesting.


And For Whom I Am Doing It

This book is aimed at three different sorts of reader. The first is the proverbial intelligent layman—someone who thinks it would be interesting to know about law and economics and what they have to do with each other, himself, and the world in which he lives, and so is reading this book for the same sort of reasons that make me read The Selfish Gene or The Red Queen. The second is the legal professional who would like to know more about the economic approach to his field. The third is the student, most probably in an economics department or a law school, who is reading this book because his professor told him to—and will, I hope, find that that is not the only reason to do so.

One problem in writing for different sorts of readers is that they want different sorts of books. Students, especially law students, and, to some degree, legal professionals, expect a scholarly apparatus of footnotes, case cites, extensive bibliographic references and the like that the intelligent lay reader is likely to find clumsy and unnecessary. I have dealt with that problem by moving the scholarly apparatus to cyberspace. This book is written for the lay reader, with no footnotes and few case cites or references. To go with it, I have produced a web site containing, I hope, everything that the student or legal professional will find missing in the hardcopy currently in his hands. To link the two, the margin of the book contains icons representing links on the book's web page.


One reason I wrote the book this way is that I have a somewhat mixed view of scholarly apparatus, even in an academic context. Certainly it is useful to have pointers to cases, articles, and the like readily available. But this book is fundamentally about a structure of ideas, and it is easy to lose track of that structure in a maze of academic detail—easy not only for reader but also for writer. I still remember with distaste the first chapter of an early book in this field that consisted entirely of hooks to hang footnote references to, with scarcely a sentence that would convey any real information to a reader who did not already know what the book was supposed to be teaching.

My hope is that by paring the book down to what it is really about and taking advantage of modern technology to put everything else somewhere out of the way but within easy reach, I can achieve the benefit of the apparatus without the costs. At the same time, I also provide myself a place for continued revision and expansion—without the need for any expensive resetting of type. Readers who want to help with that process will find my email address readily available on the book's web page, at:


[or wherever we decide to put it]

[Math icon]: Mathematical material

[Case icon]: Cite to a law case

[article icon]: Cite to a scholarly article

[book icon]: Cite to a book

[comment icon]: None of the above

Note to students using a prepublication version of this book:

I don't know how much of the webbed material will be there at the point you are reading the book.


And, Finally, a Road Map


There are two ways to organize the economic analysis of the law—economic or legal, by economic ideas or by areas of law. In this book I do both. Part I sketches basic economic concepts—rationality, economic efficiency, externalities, value of life, economics of risk allocation, et multae caetera—that can be used to understand a wide range of legal issues. It is followed by a one chapter intermezzo in which I try to sketch out how our particular legal system is put together, primarily for the benefit of those readers who are neither lawyers nor law students. Part II then applies the economics to the analysis of the core areas of law—roughly speaking, the courses a law student will take in his first year—and is organized accordingly.

Part III applies what we have at that point learned in a variety of different ways: a chapter on legal systems very different from ours (including one located a few hours from where I am sitting), a chapter on the question of why we have two legal systems—tort law and criminal law—to do roughly the same thing in different ways and whether we could dispense with one of them, and a chapter considering the evidence for and against the claim that law, at least judge-made law, is economically efficient. The book ends with a final chapter in which I attempt to sum up what we have learned about systems of legal rules.


This book is dedicated


with respect and affection




Aaron Director




Ronald Coase

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