Institutional law and economics
Institutional law and economics originated from the works of Ayres (1944), Hale (1952) and Commons (1934), and is mainly represented by Samuels (1971, 1972, 1974, 1989), Schmid (1965, 1978), Liebhafsky (1987) and Bromley (1989).
Institutional law and economics authors criticize what they call “neoclassical law and economics”, that is Chicago-style economic analysis of law, particularly Posner. They dismiss the assumptions of rational behaviour and given individuals, the absence of distribution issues (while they are at the core of a great part of legal decisions) and of notions such as justice and fairness. They reject the definition of efficiency as Kaldor- Hicks efficiency since it entails interpersonal comparisons of utility, gives more weight to the preferences of the wealthy, and since its normative application (giving the right to whoever is ready to pay the most) reinforces inequalities. They criticize the positive thesis of the efficiency of common law for various reasons: this thesis is not refutable; it is ahistorical and cannot explain changes in the law or the variety of legal systems; it does not account for the origin of the alleged criterion of efficiency; and judges pursue fairness or are subject to other types of influence.
Above all, institutional law and economics stresses the circularity of the normative claim that the law ought to maximize wealth, and particularly that a judge must attribute rights to the person who is ready to pay the most for it (Liebhafsky 1976; Samuels 1971, 1981). The reason is that each initial distribution of property rights determines the level of prices in which the output of this initial structure is measured, thus the outputs produced by different initial structures cannot be compared. Since to each structure of rights corresponds (at least) one allocation that maximizes wealth, choosing one structure amounts to choosing one efficient allocation among non-comparable others.
Hence the choice of an allocation hides a choice of the distribution of rights at the origin of this allocation, which favours certain interests at the expense of others. This criticism stresses that the allocation of rights not only entails allocation considerations but also, more importantly, considerations of distribution. Therefore the choice of an efficient initial distribution of rights among others entails normative elements that are a matter of “selective perception”. Finally, the recognition that to each initial distribution of rights corresponds an efficient allocation denies its relevance to the Posnerian positive efficiency thesis, which is reduced to an “empirical regularity” (Samuels 1981: 162).The specificity of institutional law and economics comes from its not applying economic tools to study law, using instead, like Commons, an interdisciplinary approach to study the “legal-economic nexus”: law is a function of economy (some legal issues have an economic component) and economy is a function of law (Samuels 1989). It is this last aspect that neoclassical theory cannot deal with: rights determine allocation of resources, distribution, opportunity sets and power structures (Liebhavsky 1976).
Institutional law and economics is a positive theory that analyses cumulative legal- economic processes and describes the consequences of different institutional arrangements, leaving normative choices to legal actors or citizens who are actually involved (Samuels and Schmid 1981). Since “optimal” solutions can be obtained from every rights structure, a choice between them is a matter of whose interests are to count; the economist does not decide this, and leaves it to the political process. These authors do not reject the efficiency criterion as such, but stress that it cannot be separated from distributional aspects: a particular efficient allocation entails a particular distribution. The government has to choose among different allocations of resources, all equally efficient, but each originating from a specific distribution of rights.
It selectively perceives costs and advantages according to its ideology, and chooses a distribution of rights. Institutional law and economics authors do not want to answer the question of the best policy, but pose the question “better for whom?” Since values (costs and benefits) are not given independently of the law, choosing the law is choosing which values are to count; it is a choice between conflicting interests. As a consequence, they study the evolutionary change of the legal-economic nexus, rather than change of the law exogenously guided by efficiency considerations.Another issue is that each right impedes actions from others, denying others some rights and entailing coercion: the dual nature of rights is recognized (an influence of Commons and Coase). Since externalities are ubiquitous and reciprocal, the law does not find an optimal solution, but sets out who is authorized to coerce whom. The economic system, which is not reduced to the market, is viewed as a structure of power, analysed from organization and control perspectives. The initial distribution of rights determines power structures and therefore influences allocation of resources, income levels and distribution of revenue. In the market, power generates coercion, and transactions are not perfectly voluntary.
Institutional law and economics indeed describes a world in which conflict is primary, and the law is designed and changed to maintain order. Rights are not given, but endogenously determined by government. Now, access to government is determined by power, unequally distributed. Since access to power gives access to government, which in turn gives access to rights, power is self-enforcing: “opportunities for gain, whether pecuniary profit or other advantage, accrue to those who can use government... If income distribution and risk allocation is a partial function of law (of property) then the law is an object of control for economic or other gain” (Samuels 1971: 444). The question of more or less government is irrelevant, since what may appear as a greater governmental intervention is only a redefinition of rights that were attributed beforehand by the government. The question is therefore: which type of regulation? Institutional law and economics does not distinguish between regulation, common law or statutory law: each defines rights.
With its descriptively historical and evolutionary analysis instead of a deductive one, institutional law and economics claims to go back to the sources of old institutionalism: “institutional law and economics is rather redundant language because institutional economics has never been anything but the nexus of law and economics” (Schmid 1994: 33).