Good Economics — Bad Law: A 40-Year Natural Experiment
ABSTRACT: Forty years have passed since James Buchanan published his article “Good Economics — Bad Law.” In Buchanan’s piece, he engages in a though experiment regarding how the law and economics field will develop. Given that all of the assumptions Buchanan makes in his thought experiment have turned out to be a reality, I investigate ow Buchanan’s predictions compare to the actual development of law and economics. I argue that Buchanan’s predictions have become a reality and explain how equilibrium theorize gave rise to this reality. Specifically, Chicago style neo-classical economics can be a valuable tool for analyzing rules within a given institutional environment, but is unable to aid discussion over the meta-rules that define the environment under which exchange takes place. Because of his accurate predictions, Buchanan’s expanded law and economics paradigm — Constitutional Political Economy — warrants our renewed attention.
Forty years ago, in 1974, James Buchanan wrote “Good Economics — Bad Law.” In his article, Buchanan review Richard Posner’s textbook, Economic Analysis of Law, in an unorthodox fashion. Buchana creates a though experiment, predicting that diligent students who rigorously apply Posner’s teachings will be left with a cognitive dissonance. The thought experiment serves to illustrate how, according to Buchanan, Posner’s tool kit proves fruitful for making decisions of a “legislative” nature but relatively unfuitful for decisions involving collection action of constitutional design.
Buchanan’s argument can only be fully understood by accounting for the context in which he is writing. In the 1960’s, at the University of Chicago, the law and economics movement shifted into a higher gear, marked both by the founding of the Journal of Law and Economics and a distinct shift in emphasis. Articles by Becker, Coase, Demsets, Landes, and Manne, pioneered using economic analysis of law to understand laws beyond those that regulated financial interactions. Rowley observes that the “distinctive feature [of Chicago style law and economics] is the application of market economics to legal institutions, rules, and procedures which in certain areas (notably in tort and in crime) are not conventionally seen to influence market behavior, but which indeed are defined in terms of market failure.”
