Economics and the Judges: The case for simple rules and boring courts
Richard A Epstein
June 1996
Richard A Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago, where he has taught since 1972. Previously, he taught law at the University of Southern California from 1968 to 1972.
He has been a member of the American Academy of Arts and Sciences since 1985 and a Senior Fellow of the Center for Clinical Medical Ethics at the University of Chicago Medical School. He served as editor of the Journal of Legal Studies from 1981 to 1991, and since 1991 has been an editor of the Journal of Law and Economics.
His books include Bargaining With the State (Princeton, 1993); Forbidden Grounds: The Case Against Employment Discrimination Laws (Harvard, 1992); Cases and Materials on Torts (Little, Brown, 5th ed, 1990); Takings: Private Property and the Power of Eminent Domain (Harvard, 1985); and Modern Products Liability Law (Greenwood Press, 1980).
Professor Epstein has written numerous articles on a wide range of legal and interdisciplinary subjects and taught courses in contracts, criminal law, health law and policy, legal history, property, real estate development and finance, jurisprudence and taxation, torts, and workers' compensation.
His latest book, Simple Rules for a Complex World (Harvard,
1995), grew out of a series of lectures and seminars given in New Zealand and Australia in
1990.
Introduction by David Williams QC
Professor Epstein, Mrs Epstein, your honours, ladies and gentlemen.
A couple of years ago, the Dean of the Yale Law School published a book called The Lost Lawyer: Failing Ideals of the Legal Profession-a legal profession which, incidentally, he said was in very poor shape. Speaking of the law and economics movement in the years since 1965, he wrote:
No other approach to the study of law has had a comparable effect on the way that academic lawyers in the United States write and teach. Law and economics is today a permanent institutionalised feature of American legal education. Specialised journals are devoted to it, and its presence is pervasive in the older law reviews as well. Faculty positions at many law schools are explicitly reserved for its adherents and it is now represented by a professional organisation of its own, the American Association of Law and Economics. Even these external markers do not fully measure the movement's influence which is nearly unrivalled in some fields such as corporations and commer-cial law and is dominant in others such as torts, contracts and property.
The Dean of the Yale Law School might have added that the law and economics movement has been significantly boosted by the appointment of some of its most notable members to influential positions on the United States federal judiciary. One thinks immediately of former pro-fessor, now judge, Richard Posner, whose 1972 work Economic Analysis of Law is a central text for the law and economics movement. One thinks as well of his former colleague on the University of Chicago Law Faculty, Judge Frank Easterbrook. Both of these professors are now judges on the Seventh Circuit of the Federal Court of Appeal.
In this country, the interest in law and economics has been slow to materialise, although it has been given a boost in recent times by the formation in 1994 of the Law and Economics Association of New Zealand and by the organisation of several Law Society seminars on economics and the law. Is there anything that is useful for the New Zealand judiciary in the acquisition of some understanding of the basic principles of law and economics? One of the few New Zealand judges who has some real interest in the subject so far is Sir Ivor Richardson, who is the founding patron of the Law and Economics Association and is soon to be the President of the Court of Appeal. In a 1995 speech to the Waikato Law School (see Rt Hon Sir Ivor Richardson, 'The Harkness Henry Lecture: Public Interest Litigation' (1995) 3 Waikato Law Review 1, 9) he said:
The acceptable resolution of disputes involves reaching a satisfactory substantive answer in a fair and cost efficient way. Both the substantive decision and the process by which it is arrived at must balance community values (moral, social and political), fairness considerations and resource constraints. In economic cost terms, the object is to minimise the sum of three types of costs. In other areas of public policy the costs are conven-tionally referred to as administration costs, compliance costs and economic or deadweight costs. In the justice system the administration costs are the net costs to government after deducting court fees and other receipts. The compliance costs are the costs borne by those involved in the litigation. The economic costs are the risks and the costs of erroneous and inefficient decision making.
Sir Ivor went on to say that the substantive decision also carries costs and benefits. The point is that in both the decision-making process itself and in the ultimate decision on the public policy rule, the court should take account of all of the costs involved.
If we are to have someone who can speak to us authoritatively on the subject of law and economics, and in particular on economics and the judges, we could not possibly hope for a more highly qualified speaker than Professor Richard Epstein, the James Parker Hall Distinguished Service Professor of Law at the University of Chicago. He is a graduate of Yale, Oxford and Columbia universities and the author of a number of well-known books which consider in a theoretical as well as a practical way the interaction of law and economics. Professor Epstein has taught at the University of Chicago since 1972.
As was stated in a recent New York Times book review of his latest work Simple Rules for a Complex World, "Richard Epstein has a record of proposing radical and extreme alterations in key areas of the law-alterations that perhaps initially could be dismissed as so far from the centre of legal thinking as to be of only theoretical interest, but that turn out to have much more political life in them than one could have thought possible." The reviewer gave one example among many from Professor Epstein's book Takings: Private Property and the Power of Eminent Domain. This was a book, published in 1985, in which he took the radical position than any governmental restriction on the rights of private property should be properly compensated. The reviewer pointed out that Richard Epstein's views on what was proper compensation went far beyond what judges at that time had traditionally allowed, and yet today we are told that legislation which incorporates much of what Professor Epstein was proposing is making its way through the US Congress. Anyone who is familiar with his writings or who has heard him speak will surely agree that his intellectual range is impressive and his ideas enormously stimulating.
As you have heard, this is not Richard Epstein's first visit to New Zealand. Indeed, in the preface to his most recent book, Simple Rules for a Complex World, he records that he was approached by the New Zealand Business Roundtable and an Australian company to make a speaking tour of New Zealand and Australia and that the talks he gave on that visit were the origins of that book. It is obvious that Professor Epstein finds the atmosphere of this part of the world congenial and intellectually stimulating, and, in December, doubtless a welcome relief from the sub-zero temperatures of Chicago.
It is my great pleasure on behalf of the New Zealand Business Roundtable
and all present tonight to warmly welcome him back, and to invite him to address you on
the subject of economics and the judges.
ECONOMICS AND THE JUDGES: THE CASE FOR SIMPLE RULES AND BORING COURTS
This paper investigates the use of economic theory by common law judges. I shall begin that inquiry by propounding a gentle paradox. Great progress has undeniably been made over the last two generations, both in the science of economics and, more specifically, in the law and economics movement. Today we can analyse, in a more sophisticated fashion than formerly, a range of economic processes that are relevant to legal issues. We know something of the impact that legal rules have on social behavior and how economic theory can assist in choosing the efficient legal rule. Given these academic advances, we might have imagined that this new knowledge would slowly diffuse itself throughout the legal profession and the courts. We could hope therefore to see the development of a judicial body of knowledge reflecting many of these academic advances. Yet the opposite is largely true. A little learning-or even a great deal of learning-can sometimes be a dangerous thing. The legal profession today seems not unlike an overstretched juggler who tries to keep too many balls in the air at once. In attempting to do too much he gets himself into a terrible tangle, and the balls come clattering down and fall at his feet.
In some instances the source of our uneasiness lies in the direct way that legal rules are said to incorporate economic considerations. Too often we are told, for instance, that the courts should consider a wide range of costs, and then seek to minimise their sum across disparate domains, or to undertake similar technical feats. To that challenge we react with confusion, wondering how on earth to take all these variables into account, how to acquire all the relevant information, and how to put the data together in a coherent manner so as to come out with the correct answer. In many cases modesty is the superior virtue. The effort needed to apply so precisely an articulated theory is so fraught with difficulty that judges are well advised to abandon it. In its stead, they should follow some simple commonsense rule, or rule of thumb, in order to avoid these complicated economic calculations. The equal division of damages under the older admiralty rules may well be superior to the constant struggles to develop more refined approaches to the apportionment question.
My contention is that greater judicial sophistication has not brought forth higher quality judgments, but rather the reverse. Nineteenth cen-tury judges, who thought in much less sophisticated economic terms than their counterparts today, often delivered judgments that better reflected sound economic principles. No one would deny that we have greater economic wisdom today and more sophisticated tools of analysis. But where should we go from here, now that the economic genie is well and truly out of the bottle? Our challenge is to domesticate that new know-ledge within the judicial setting.
What then accounts for the disjunction between economic knowledge and judicial performance? One obvious constraint is that judges are not economists. We do not expect to see in judges' opinions precise eco-nomic demonstrations of the kind found in a standard textbook. Judges do not derive a demand curve or a long-run supply curve. That does not in itself concern me. The legal profession is better off taking eco-nomics more as a set of heuristic principles for understanding fundamental social relationships than as a set of formal equations or precise quantitative knowledge.
A second constraint is that judges themselves are limited by institu-tional barriers. Frequently they must interpret statutes and regulations. Unfortunately, a sound rendition of a bad statute should yield a bad result. Judicial construction should not be able to cure the flaws in bad legis-lation; consequently one cannot criticise judges for faithful construction. Conversely, a good statute, correctly construed, should lead to a congenial result because now an accurate translation should preserve the basic statutory principles. The task of judges is not to make the law but to apply it in a sensible fashion; they have delegated authority only. When the statute they are applying contains economic wisdom, that wisdom should be reflected in their judgments. When the statute does not contain wisdom it is not the role of judges to attempt to improve the law under the guise of construction. Thus we cannot look simply at judicial output and automatically criticise judges for decisions with bad consequences. We need to look deeper, and decide whether it is judges who have mangled a fine statute or whether it is the statute itself that is doing the damage.
But we cannot push this point too far for, within the set of statutory constraints, judges retain considerable capacity to use the economic tools at their command for good or for ill. There are three aspects to this judicial discretion. First, even today a large number of judicial decisions are at common law, whose first principles are rightly understood as falling in the province of judge-made law. Thus judges retain a degree of freedom-without any legislative guidance-to make decisions, for good or for ill, regarding which of our earlier doctrines should be preserved and which should be changed. In these circumstances no judge can 'pass the buck'. Each judge must rationally defend his or her decision with reference to the principles appropriate to the decided cases. If those prin-ciples include our favourite duo, justice and efficiency, then the sound judge needs rationally to address both.
Secondly, a large number of statutes themselves contain a reasonable degree of openness and fluidity. For instance, the Sherman Antitrust Act-one of the leading statutes in the United States-opens by prohib-iting in general terms contracts and combinations that operate in restraint of trade. It is largely left to judges to determine how its grand principles will apply to concrete situations. Legislation that gives judges that degree of running room should be read in a different light from more tightly specified statutes. A statute such as the Sherman Antitrust Act should not be thought of as a series of chains binding judges to certain inevitable outcomes, but rather as an authorisation for judges to tread in areas they might not otherwise have thought appropriate to enter. When judges are given this degree of discretion, we are entitled to expect them to do the right thing, and to be critical of them if they fail. Using that statute to attack vertical and conglomerate mergers should be condemned as an over-aggressive judicial invalidation of transactions that hold out no real economic danger.
The third area where there is scope for judicial discretion concerns a unique American institution-our written constitution. The judicial application and interpretation of constitutional law, designed as a check upon statutory authority, brings us back to territory very similar to the common law adjudications handled by judges. For example, under the American constitution, the protection of private property necessarily invokes the common law conceptions of 'what sticks are contained within the bundle'. So do freedom of speech, freedom of religion, the impair-ment of contract, and a wide range of other doctrines. The framers of our constitution clearly understood the continuity between common law rights, the statutory systems designed to implement and preserve those rights, and the constitutional safeguards designed to ensure the legislature did not misbehave. In this context, economic reasoning by judges will again be appropriate to explain why these institutions are worthy of constitutional protection in the first place. When modern judges there-fore strip private property of its content, and treat ownership as embracing little more than bare possession, they both do violence to the original constitutional structure and weaken perhaps the m