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— CH. 1 · CHICAGO SCHOOL ORIGINS —

Law and economics

~5 min read · Ch. 1 of 6
6 sections
  • Harold Luhnow, the head of the Volker Fund, financed F. A. Hayek in the United States starting in 1946. He shortly thereafter funded Aaron Director's move to the University of Chicago to establish a new center for scholars in law and economics. Robert Maynard Hutchins headed the university as a close collaborator of Luhnow during this period. The faculty included libertarian scholars like Frank Knight, George Stigler, Henry Simons, Ronald Coase, and Jacob Viner. Soon Milton Friedman joined as Director's brother-in-law and Stigler's friend. Robert Fogel, Robert Lucas, Eugene Fama, Richard Posner, and Gary Becker also became part of this intellectual circle. Historians Robert van Horn and Philip Mirowski described this development in their chapter titled "The Rise of the Chicago School of Economics" published within The Road from Mont Pelerin in 2009. Bruce Caldwell added details about Hayek and neoliberalism in his 2011 chapter Building Chicago Economics.

  • Aaron Director founded The Journal of Law & Economics in 1958 while co-editing it with Nobel laureate Ronald Coase. This publication helped unite the fields of law and economics with far-reaching influence. Ronald Coase and Guido Calabresi independently published two groundbreaking articles in 1960 and 1961. Their works were titled "The Problem of Social Cost" and "Some Thoughts on Risk Distribution and the Law of Torts." These publications are seen as the starting point for the modern school of law and economics. Aaron Director helped found the Committee on a Free Society in 1962. He taught antitrust courses at the law school with Edward Levi who later served as Dean of Chicago's Law School. Levi eventually became President of the University of Chicago and U.S. Attorney General during the Ford administration. Director retired from the University of Chicago Law School in 1965 before relocating to California. He took a position at Stanford University's Hoover Institution where he remained until his death on the 11th of September 2004.

  • Economic analysis of law divides into positive and normative subfields according to standard academic definitions. Positive law and economics uses economic analysis to predict the effects of various legal rules. A positive economic analysis of tort law would predict the effects of a strict liability rule versus a negligence rule. This approach has sometimes purported to explain the development of legal rules like the common law of torts in terms of their economic efficiency. Normative law and economics goes one step further by making policy recommendations based on economic consequences. The key concept for normative economic analysis is allocative efficiency. A legal rule is Pareto efficient if it could not be changed to make one person better off without making another worse off. Kaldor, Hicks efficiency represents a weaker conception where parties compensate others to offset losses. Guido Calabresi questioned this clear distinction in his book The Future of Law and Economics published in 2016. He believed value judgments underlie much economic analysis despite claims otherwise. Uri Weiss proposed an alternative approach focusing on preventing games leading to unjust results rather than maximizing happiness.

  • Gary Becker published Crime and Punishment: An Economic Approach in 1968 before winning the Nobel Prize in Economic Sciences. His work relied on the economic concept of utility as the basic unit of analysis. Richard Posner set out an alternative approach in 1985 within An Economic Theory of the Criminal Law. Posner's method instead used wealth as the basic unit of analysis. Cullerne Bown criticized Posner's approach on methodological grounds concluding that these failings made his conclusions on the criminal process unreliable. Critics argue that normative economic analysis does not capture human rights or concerns for distributive justice. Jon D. Hanson of Harvard Law School argues systems are unduly influenced by individualistic models based on preferences. This model fails to incorporate cognitive biases and social norms according to Hanson's perspective. The law and economics movement may not achieve efficiency even when allocative efficiency remains its stated goal.

  • Judicial opinions use economic analysis with some regularity in the United States and increasingly in Commonwealth countries and Europe. Graduate programs in the subject exist in a number of countries beyond American borders. Textbooks of law and economics appear in English and other European languages including works by Schäfer and Ott from 2004 and Mackaay from 2013. Many law schools in North America, Europe, and Asia have faculty members holding graduate degrees in economics. Professional economists now study and write on relationships between economics and legal doctrines. Anthony Kronman former dean of Yale Law School wrote about this intellectual movement in The Lost Lawyer published in 1993. He described it as having the greatest influence on American academic law in the past quarter-century of the twentieth century. A 2025 study found judges attending an intensive economics course at the Manne Economics Institute for Federal Judges used more economics language in their opinions. These judges ruled against regulatory agencies more often and imposed more severe criminal sentences. Almost half of all federal judges between 1976 and 1999 were trained through this specific economics course program.

  • Most law and economics scholarship operates within a neoclassical framework inviting fundamental criticisms from competing frameworks. Critical legal studies movement members Duncan Kennedy and Mark Kelman offer some of the heaviest criticisms available today. Warren Samuels argued in his 2007 book The Legal-Economic Nexus that efficiency cannot define rights assignment because rights must be determined first. Additional criticism targets assumed benefits of policies designed to increase allocative efficiency when modeled on Pareto optimal conditions. Under second-best theory fulfillment of any subset of optimal conditions does not necessarily result in increased allocative efficiency. Critics argue expressions of public policy claiming unambiguous increases in allocative efficiency are fundamentally incorrect. Law and economics has adapted to these criticisms by applying game theory to legal problems. Behavioral economics now incorporates into economic analysis of law alongside increasing use of statistical and econometrics techniques. Within the legal academy the term socio-economics describes approaches broader than the neoclassical tradition. Property rights analyzed using economic analysis remain seen as fundamental human rights by defenders of the movement.

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Common questions

Who financed F. A. Hayek in the United States starting in 1946?

Harold Luhnow, the head of the Volker Fund, financed F. A. Hayek in the United States starting in 1946.

When did Aaron Director found The Journal of Law & Economics?

Aaron Director founded The Journal of Law & Economics in 1958 while co-editing it with Nobel laureate Ronald Coase.

What are the two main subfields of economic analysis of law?

Economic analysis of law divides into positive and normative subfields according to standard academic definitions.

Which book by Gary Becker won him the Nobel Prize in Economic Sciences?

Gary Becker published Crime and Punishment: An Economic Approach in 1968 before winning the Nobel Prize in Economic Sciences.

How many federal judges between 1976 and 1999 were trained through the Manne Economics Institute for Federal Judges program?

Almost half of all federal judges between 1976 and 1999 were trained through this specific economics course program.

All sources

51 references cited across the entry

  1. 2journalThe Relation of Law and EconomicsEugene Allen Gilmore — 1917
  2. 4journalThe Problem of Social CostRonald Coase — 1960
  3. 6bookThe Economics of JusticeRichard Posner — Harvard University Press — 1983
  4. 12citationCrime and Punishment: An Economic ApproachGary Becker — March 1, 1968
  5. 13citationAn Economic Theory of the Criminal LawRichard Posner — October 1985
  6. 15journalCorporate Governance: Some Theory and ImplicationsOliver Hart — 1995
  7. 16journalInvestor protection and corporate governanceRafael La Porta et al. — 2000-01-01
  8. 17journalWhat Matters in Corporate Governance?Lucian Bebchuk et al. — 2009-02-01
  9. 18journalCost–Benefit Analysis in Criminal LawDarryl K. Brown — 2004
  10. 21journalUnderstanding Why Crime Fell in the 1990s: Four Factors that Explain the Decline and Six that Do NotSteven D Levitt — 2004
  11. 22journalAn Economic Approach to the Law of EvidenceRichard A. Posner — University of Chicago Law School — 1999
  12. 24journalA Strictly Evolutionary Model of Common LawR. Peter Terrebonne — 1981
  13. 25journalThe Evolution of Common LawNicola Gennaioli et al. — 2007
  14. 27bookGoverning the Commons: The Evolution of Institutions for Collective ActionElinor Ostrom — Cambridge University Press — 1990
  15. 28journalToward a Theory of Property RightsHarold Demsetz — 1967
  16. 29journalThe Property Right ParadigmArmen A. Alchian et al. — 1973
  17. 30journalPublic Health Strategies for Pandemic Influenza: Ethics and the LawLawrence Gostin — 2006
  18. 32webModern Portfolio TheoryCornell Law School
  19. 33journalThe Misallocation of Housing Under Rent ControlEdward L. Glaeser et al. — 2003
  20. 34journalThe Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San FranciscoRebecca Diamond et al. — 2019
  21. 35journalThe Political Economy of the Rent-Seeking SocietyAnne O. Krueger — 1974
  22. 36journalThe Value of Risks to Life and HealthW. Kip Viscusi — 1993
  23. 37journalThe Value of a Statistical Life: A Critical Review of Market Estimates Throughout the WorldW. Kip Viscusi et al. — 2003-08-01
  24. 39journalThe Definition of a Surface Water Right and TransferabilityRonald N. Johnson et al. — 1981
  25. 41journalCoase Minus the Coase Theorem – Some Problems with Chicago Transaction Cost AnalysisPierre Schlag — 17 September 2013
  26. 42citationThe law and economics of developmentJAI Press — 1997
  27. 44bookIdeology, Psychology, and LawJon D. Hanson — Oxford University Press — 2012
  28. 45bookSecond-Best Theory and Law & Economics: An IntroductionRichard Markovits — Chicago-Kent Law Review — 1998
  29. 46bookThe Analytical Failures of Law and EconomicsShawn Bayern — Cambridge University Press — 2023-10-31
  30. 49bookGame Theory and the LawDouglas G. Baird et al. — Harvard University Press — 1998
  31. 50journalA Behavioral Approach to Law and EconomicsChristine Jolls et al. — 1997–1998
  32. 52journalThe Human Right of PropertyJosé E. Alvarez — 2018