Thursday, June 22, 2023

"The Long Law and Economics Movement" -- Gocke on "Outside In: The Oral History of Guido Calabresi"

This post, by Alison Gocke (Associate Professor of Law, University of Virginia School of Law) is the tenth in a series of posts in which legal historians reflect on Outside In: The Oral History of Guido Calabresi (Oxford University Press), by Norman I. Silber.

The Long Law and Economics Movement
In Karen Tani’s earlier posts on Guido’s life and work (which readers can find here, here, here, and here), she has reflected on the ways in which Guido does and does not embody a certain kind of “economic style of reasoning.” As Tani points out, Guido is associated with bringing “economics precepts and insights into legal domains where they had not previously had much purchase.” But Tani, I think rightfully, also distinguishes Guido from others whom we might group in the Law and Economics school because of his recognition that economics provides only one way of thinking about legal problems, and that societies often settle on “mixed” collectivist and market-based systems. This analysis leaves Tani somewhat ambiguous about where Guido falls in the Law and Economics tradition. I would like to use this post to suggest a different law and economics legacy to which it may be useful to compare and contrast Guido, with the hope of shedding further light on his scholarship and the history of law and economics in the United States.
The body of legal thought which interests me here is that of public utility regulation. Public utility regulation describes the doctrine we use to regulate certain industries, including electricity, natural gas, telecommunications, transportation, and finance and banking. It has a close association with the Law and Economics school of Guido’s cohort. Indeed, many of the economists and lawyers that make appearances in Outside In—including Harold Demsetz, George Stigler, and Richard Posner (see, e.g., OI, v.1, 228, 292-95, 327, 357-58)—cut their teeth writing influential pieces on public utility regulation before they extended their law and economics ideas to other contexts. In this light, it is curious that Guido himself chose not to step into the public utility mix early in his career.
But the connection between public utility regulation and law and economics appeared decades before the modern Law and Economics movement, and it is this earlier instantiation that is of interest to me. Public utility regulation as a distinct field of law arose at the end of the nineteenth and the beginning of the twentieth centuries in the United States. (For those who are interested, William Novak has written about how public utility regulation as a body of administrative law developed from a variety of common law and other principles.) Many of the economists and lawyers involved in crafting public utility regulation were part of what Herbert Hovenkamp has dubbed “The First Great Law and Economics Movement.” Hovenkamp describes members of this movement as being, on the whole, more liberal in their ideology, more “interested in the relationship between the law and the distribution of wealth in American society,” and more “dubious about markets and about the common law as a welfare-enhancing device” as compared to the modern Law and Economics movement. (Hovenkamp, p. 995)

One of the most prominent members of this group was the lawyer and economist Robert Hale. Hale spent much of his career writing about public utility regulation. His interest in the subject was not merely technical—he was motivated by the belief that public utility regulation, done well, could help ameliorate wealth inequality. As Barbara Fried observes in her 1998 book, The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement, Hale and his fellow members of the first law and economics movement were preoccupied with, first, demonstrating that the then-extant “laissez-faire” economic regime “was constituted by a regime of property and contract rights that were neither spontaneously occurring nor self-defining, but were rather the positive creation of the state,” and second, that “the particular configuration of contract and property rights embraced by late nineteenth- and early twentieth-century Anglo-American law had produced a distribution of wealth that was hard to square with any obvious institutions of justice.” (Fried, pp. 2-3) Hale’s most famous contribution to this intellectual agenda was his 1923 article, “Coercion and Distribution in a Supposedly Noncoercive State,” in which Hale argues that the state exercises coercive power even in the realm of private law when it enforces private property rights against a backdrop of unequal societal wealth.
Reading Hale’s article against Guido’s scholarship, particularly Guido and Doug Melamed’s piece, “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral,” one can’t help but notice the similarities. On the surface, the overlap is obvious: both articles emphasize the crucial fact that the state makes key distributional choices when it places legal entitlements upon particular individuals. But there is also deeper kinship in how Hale and Guido incorporate economics into their discussion of law. Hale begins his piece by criticizing the then-current “practical function of economic theory” of being “merely to prove to statesmen the wisdom of leaving such matters [of wealth distribution] alone, not to aid them in the process of interfering.” (Hale, p. 470) Hale argues that instead because “statesmen cannot avoid interfering with economic matters,” there is a “need for the development of economic and legal theory to guide them in the process.” (Hale, p. 470) Guido and Melamed, too, criticize arguments for “letting the costs lie where they fall” out of concern for the expense of government interference, because “[b]y itself this reason will never justify any result except that of letting the stronger win.” (Calabresi & Melamed, p. 1093) Instead, they argue that decisionmaking about the placement and enforcement of legal entitlements ought to take into account broader economic efficiency concerns, distributional goals, and “other justice reasons.” (Calabresi & Melamed, pp. 1903-1105). At bottom, both pieces seem to recognize that economic theories can help illuminate “what laws and rules are actually doing” (OI, v.1, p. 292) in order to enable better legal decisionmaking.
Of course, there are differences in Hale and Guido’s approach to law and economics. Hale appeared much more willing to countenance the government’s selection of various goods for society. (See, e.g., Hale, pp. 478-84) Guido, on the other hand, is skeptical of what he calls “paternalism,” and for the most part ascribes to the theory that people “know what is best for themselves.” (See, e.g., The Cost of Accidents p. 55) This may explain why Hale wrote about public utility regulation—a system under which the state sets the prices for certain industries—whereas Guido has for the most part written about private law.
That said, there are parts of public utility regulation that appear “Guido-esque” to me. For instance, there is a form of rate-setting in public utility regulation in which all consumers of the same class are charged the same rate, regardless of other cost characteristics. The most common example of this is the mail: all mail of the same type is charged the same price, no matter whether it’s sent 10 miles or 1,000 miles. This may not be the most economically efficient system from a resource allocation perspective: because consumers are not being charged the actual cost of the service, they may under- or over-consume it. But the practice can have important distributional effects, for instance, by creating an internal subsidy for those groups (e.g., rural populations) who would otherwise be too costly to serve. This balancing of economic efficiency and distributional concerns seems characteristic to me of both the first law and economics movement and Guido’s own writings in law and economics.
If we take a step back and view Guido’s contributions in light of this longer law and economics movement, I think we may get some clarity Guido’s role, and law and economics in the United States more generally. On the one hand, Guido seems less like an “outsider” to the law and economics movement than one of its more direct descendants—picking up on the thread of concerns over distribution effects where they had left off. At the same time, Guido’s belief in the decisionmaking abilities of individuals (and of markets to facilitate those decisions) seems more characteristic of the modern Law and Economics movement. I wonder, then, whether Guido is not so much of a “mixed” character as a bridge—a link between one law and economics movement and another. The possibility of this bridge seems important to me, as we see various movements to rethink the role that economics ought to play in legal thinking. Contrary to what may be conventional wisdom, the law and economics movement in the United States did not begin in the 1950s or 1960s; it has a much older pedigree. Examining that longer historical arc could help us figure out where we want to go in the future. 

-- Alison Gocke