Functional law and economics, which draws its influence from the public choice school of economic thought, stands in stark contrast to both the Chicago and Yale schools of law and economics. While the Chicago school emphasizes the inherent efficiency of legal rules, and the Yale school views law as a solution to market failure and distributional inequality, functional law and economics recognizes the possibility for both market and legal failure. That is, while there are economic forces that lead to failures in the market, there are also structural forces that limit the law’s ability to remedy those failures on an issue by issue basis. The functional approach then uses economic tools to analyze market and legal behavior in order to create metarules which limit the extent of the failures in each realm. These meta-rules are designed to induce individuals to reveal their preferences in cases where collective choices are necessary and to internalize the effects of their actions generally. This mechanism design or functional approach to law and economics focuses on ex ante social welfare maximization, rejecting both the ex post corrective function of law assumed by the Yale school of thought and the naturally evolving efficient system view espoused by the Chicago School. This ex ante perspective on the law evokes many interesting parallels with the internalized moral code presented in the Judeo-Christian tradition.
Klick, Jonathan and Parisi, Francesco, "Wealth, Utility, and the Human Dimension" (2005). Faculty Scholarship. 1133.