Functional Law and Economics

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Book Chapter

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During its relatively short history, the law-and-economics movement has developed a wide spectrum of methodological approaches, distinguishable for their respective emphasis on positive, normative, or functional economic analysis. Ronald Coase's “The Problem of Social Cost” is generally considered to provide the foundations of the first identifiable school of thought – the Chicago school of positive law and economics. Proponents of the Chicago school argue that market forces cause the common law to develop efficient, or wealth-maximizing, legal rules. As suggested by the Coase theorem, only transaction costs will impede first-best efficiency. An important premise of law and economics is that the common law is the result of an effort, conscious or not, to induce efficient outcomes. This premise, first intimated by Coase, and known as the hypothesis of efficiency of the common law, suggests that common-law rules enjoy a comparative advantage over legislation in fulfilling this task because of the evolutionary selection of common-law rules through adjudication and the gradual accretion of precedent. Much of the early work of the positive school of law and economics aims at explaining how common-law rules provide individuals with proper incentives such that society's wealth is maximized. To the extent that positive law-and-economics scholars formulate any prescriptive corollaries, they tend to focus on the reduction of transaction costs that stand in the way of wealth maximization.

Publication Title

Theoretical Foundations of Law and Economics