Finance and economics
Prophets of maximisation
How Chicago school economists reshaped American justice.
In recent years the antitrust division of America’s Department of Justice has gone on a crusade against corporate mergers, filing a record number of complaints in an attempt to stop the biggest businesses from getting even bigger.
With few exceptions, these efforts have been thwarted by the courts.
That it is so hard to get a judge to intervene in business reflects the work of an institution known more for its free-market influence on economics than the law: the University of Chicago.
Fifty years ago this autumn Richard Posner, a federal judge and Chicago scholar, published his “Economic Analysis of Law”.
Now in its 9th edition, the book set off an avalanche of ideas from Chicago school economists, including Gary Becker, Ronald Coase and Milton Friedman, which passed into the folios of America’s judges and lawyers.
The “law-and-economics” movement made the courts more reasoned and rigorous.
It also changed the verdicts judges handed out.
Research has found that those exposed to its ideas are more opposed to regulators and less likely to enforce antitrust laws, and tend to impose prison terms more often and for longer.
Links between economics and the law have long been studied.
In “Leviathan”, published in 1651, Thomas Hobbes wrote that secure property rights, which are needed for a system of economic exchange, are a legal fiction that emerged only with the modern state.
By the late 19th century, legal fields that overlapped with economics, such as matters of taxation, were being analysed by economists.
With the arrival of the law-and-economics movement, every legal question was suddenly addressed in the context of the incentives of actors and the changes these produced.
In “Crime and punishment: an economic approach” (1968), Becker argued that, rather than being a balancing-act between punishment and the opportunity for reform, sentences act mainly as a deterrent: the literal “price of crime”.
Harsh sentences, he argued, reduce criminal activity in much the same way as high prices cut demand.
With the caveat that a greater chance of arrest is a better deterrent than longer prison sentences, Becker’s theorising has since been borne out by decades of empirical evidence.
In the movement’s early days, “the legal academy paid little attention to our work”, recalls Guido Calabresi, a former dean of Yale Law School and another of the field’s founding fathers.
Two things changed this.
The first was Mr Posner’s bestselling textbook, in which he wrote that “it may be possible to deduce the basic formal characteristics of law itself from economic theory.”
Mr Posner was a jurist, who wrote in a language familiar to other jurists.
Yet he was also steeped in the economic insights of the Chicago school.
His book successfully thrust the law-and-economics movement into the legal mainstream.