Beginning in the 1880s American economists turned their attention to the law in a way unprecedented in American thought. Some legal academics in turn incorporated economics into their thinking about the law. Whether their output or its impact were great enough to warrant calling their efforts a law and economics "movement" is worth debating. This essay argues that there was such a movement. Four things account for the increasing interest in law and economics at the turn of the century: (1) the widespread application of evolutionary models to the development of both law and economic theory; (2) the influence of the German Historical School, which encouraged economists to spend more time studying social institutions, including law; (3) the rise of marginalist welfare economics, with its enhanced concern about the relationship between distribution and welfare; and (4) the development of the social sciences, which were perceived to include both law and economics, and the widespread belief that the social sciences must somehow be "unified". Why did the critics of Progressive law and economics make the value judgments that they did? Principally, it seems, because of a preference for markets over state command as a mechanism for allocating resources. Even under the strictest ordinalist criteria for measuring welfare, markets were welfare enhancing: Someone makes a voluntary exchange only if the exchange makes him better off. Thus, ordinalist economics recovered the strong preference for the market reflected in classical political economy but which had gradually eroded during the late nineteenth century under the marginal utility theory. Use of the positivist economist's rather than the psychologist's behavioral criterion of welfare has led to quite astonishing real world consequences. The real reason that neoclassical economics gave up marginal utility as the basis for welfare economics was not because utilitarianism was less "scientific" than the alternatives. Before one could know whether it was scientific, he had to settle on a definition of science. That decision was driven by the fact that marginal utility economics was traveling down a politically unacceptable path, leading economics directly to socialism.
Hovenkamp has also posted Knowledge About Welfare: Legal Realism and the Separation of Law and Economics, which was published in the Minnesota Law Review (2000). Here's the abstract:
The welfare state could not function without judgments about how well off its citizens are. For example, governments devise progressive income taxes, which are designed to capture more wealth from the well off and less from the impecunious. These policies presume an ability to take a manageable amount of information about an individual's income or assets and make judgments about her welfare. In fact, people do this all the time, mostly without thinking about the methodological problems involved. The superficial casualness of our daily observations about welfare belies the state of the economic science of welfare measurement. Economists have attempted to measure welfare scientifically for more than a century, but after an early period of optimism, the general history of welfare measurement has not been a happy one. In the 1930s many economists began to conclude that the measurement of welfare involved interpersonal comparisons of utilities, and that we lacked the observation and measurement tools to make such comparisons scientifically. Progressive legal thought, and particularly the Legal Realists, developed out of the coalescence of three important ideas: (1) Darwinism in the social sciences, which was the view that all organisms, including the human race, are both evolving and struggling to survive in an essentially hostile environment; (2) marginalism in economics, which stressed that rational people make choices by ranking their preferences, committing resources to that which they want most first, and so on; and (3) objective welfare judgments, which are basically judgments about welfare that do not depend on assumptions about other people's mental states. Progressive legal thought was more republican than liberal in its social theory, and was never very comfortable with mainstream neoclassical economics. While economists became increasingly strict and pessimistic about the science of measuring welfare, Progressive legal policy was able to lay the foundation for the New Deal, and later the Great Society - both based on visions about the role of government that required elaborate and ubiquitous assumptions about people's welfare. The Progressives’ use of “objective” welfare judgments serves to remind us that technical methodologies in the social sciences are used for a purpose, that they rarely lack alternatives, and that the search for methodological elegance and sophistication should never trump the search for answers.