usclaw - USC Gould School of Law - University of Southern California

DEAN’S M E SS AG E
USC Law and Economics Center Leading a Stormy Field Toward Clarity
Though the new USC Center for Law, Economics and Organization (CLEO) has existed for
less than a ye a r, it has been shaped by four decades of change in the field of law and economics.
When law and economics first took root in the legal academy, we faced tumultuous times: It
was the late 1960s and 1970s, and amid outlandish fashions, war protests and macro b i o t i c s ,
legal academics found themselves on the brink of a fairly re vo l u t i o n a ry way of studying the law
by using the analytical tools of economics. Although the social turmoil of the time faded, the
e volution of this emerging field had only begun.
Consider a change from negligence to strict liability in tort law. Is it a good thing? In s t e a d
of questioning the morality of requiring someone to pay for damaging a plaintiff re g a rd l e s s
of whether the damage was negligent or intentional, law and economics asked whether the
re q u i rement would motivate people to take care against accidents. Would the change fro m
negligence to strict liability increase or decrease a defendant’s efforts to pre vent accidents? If
defendants adjust their behavior to the new rules of tort, would plaintiffs also adjust? And when
the adjustments have taken place, law and economics asked, how much would be spent on
p recaution, how many accidents would occur, and how much would the accidents cost?
To fig u re out if the change from negligence to strict liability was good or bad — or too close
to call — law and economics scholars compared the spending on precaution plus the total costs
of accidents under negligence rules and under strict-liability rules. Their first cut at eva l u-
ating the alternative legal rules was to choose the rule that minimized the sum of the costs of
p recaution and the costs of accidents.
This method of evaluating law took much of the legal academy by storm. Law pro f e s s o r s
and policy analysts, tired of being tossed about on the seas of “this rule seems fair to me” or “t h i s
rule seems more ‘c o n s i s t e n t’ with this area of law,” embraced law and economics like wingwalkers
grabbing a handhold. Fi n a l l y, here was a methodology that had rigor and pro d u c e d
plausible answers. It also produced enormous controversy and ideological conflict among
c o n s e rva t i ve supporters and liberal detractors. It was, re m e m b e r, the late 1960s and 1970s.
Rather than revisit the ‘sturm und drang’ that ensued, I’ll focus on two crucial assumptions
that typically drove economic analysis. First, corporations and other business entities we re
assumed to be ‘u n i t a ry actors,’ treated as individuals and presumed to be ‘p ro fit maximize r s’
who reacted smoothly and efficiently to changes in the environment. Internal strife, confli c t
and self-dealing we re not part of the equation. Second, economic analysis held that individual
actions we re governed by a simple ‘utility function,’ which assumed people cared only
about the final amount of money they ended up with, and not the path that got them there .
For example, someone who had net worth of $1,000 on Jan. 1, $1 million on June 1, and then
$100,000 on Dec. 31 would be expected to feel the same as if his net worth had remained at
$100,000 throughout the year; envy, frustration, empathy and other emotions we re of little use
to economists. Clearly, when such economic assumptions we re applied to an analysis of law, the
conclusions we re a bit suspect.
In the 1980s, economists shined a light inside the ‘black box’ of the corporation and tried
h a rd to analyze what they found. Bosses we re no longer assumed to have perfect information
about what their employees did, nor did they have perfect control over employe e s’ behavior.
Economists re c o g n i zed other inconsistencies: Many tasks re q u i red teams, but team members
did not always have the same incentives. Some corporate employees had more than one task,
but only one task could be observed by management. Each variation was a deviation fro m
2 USCLAW s p r i n g 2001