Since its start in the 1960s, the field of “law and economics” has revolutionized legal thinking. It might well count as the most influential intellectual development in law in the last hundred years. It has also had a major impact on how regulators in the United States, Europe, and elsewhere deal with antitrust, environmental protection, highway safety, health care, nuclear power, and workers’ rights. But from the beginning the entire field has contained a major fault line, sharply dividing two schools of thought: the Chicago School and the Yale School.
The Chicago School, led by Judge Richard Posner, regards economics as a kind of spotlight, enabling us to see legal problems far more clearly than we otherwise would. Posner’s main goal has been to use economic tools to identify the real-world consequences of different legal rules.1 Suppose, for example, that a cement factory emits noxious fumes, causing illnesses in nearby families. With the help of economics, Posner asks: What would be the effects of different legal rules on the likelihood that people will take remedial action? If the law requires the cement company to compensate the families, it might scale back its operations or even close them down. That might be a good thing, because it will prevent illnesses, but it might also have harmful consequences if it means that the cost of cement will increase or that a lot of workers will lose their jobs.
In this situation, economics can help us to identify the relevant tradeoffs. Posner thinks that courts should reject the families’ effort to shut down the cement factory if the health benefits turn out to be lower than the total economic costs. (Of course, it may not be so easy to turn the health benefits into monetary equivalents; there is an extensive economic literature on that question.2)
Posner himself dislikes the term “law and economics,” and he has long preferred to speak of the “economic analysis of law.” This is not just a matter of semantics. To…
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