The Erroneous Foundations of Law and Economics

Conservative legal theory is based on a shoddy definition of what constitutes “efficiency”

Law & Economics (L&E) is a central theory of conservative legal scholars. Beginning in the 1970s, it has had a profound impact on American jurisprudence. L&E is taught in virtually every leading law school. A large portion of the federal judiciary has received training in L&E. Although L&E has received some criticism from law school faculty, including from many in the Critical Legal Studies movement and from specialists in moral philosophy, few if any, legal scholars have challenged the aspects of the “economics” imported by L&E.

The fundamental core principle of L&E is that legal decisions should be based on economic “efficiency.” In our new INET Working Paper, we show that L&E advocates do not define efficiency in the way agreed to by most economists, as Pareto Efficiency. This is because Pareto Efficiency requires that policy changes not have “losers,” while legal decisions always have “winners” and “losers.” Instead, as we explain, L&E defines efficiency as either potential Pareto Efficiency (also known as Kaldor and/or Hicks Efficiency), or as Total Surplus, often problematically labeled by L&E writers as “Wealth Maximization.” Our paper shows that these alternatives lack logical consistency unless quite unrealistic assumptions are made. As a consequence, we argue that L&E lacks any scientific basis.

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