Corporations, Economics, Economic History, Legal History, Marginalism, Coase
Beginning in the 1880s American economists turned their attention to the law in a way unprecedented in American thought. Some legal academics in turn incorporated economics into their thinking about the law. Whether their output or its impact were great enough to warrant calling their efforts a law and economics "movement" is worth debating. This essay argues that there was such a movement.
Four things account for the increasing interest in law and economics at the turn of the century: (1) the widespread application of evolutionary models to the development of both law and economic theory; (2) the influence of the German Historical School, which encouraged economists to spend more time studying social institutions, including law; (3) the rise of marginalist welfare economics, with its enhanced concern about the relationship between distribution and welfare; and (4) the development of the social sciences, which were perceived to include both law and economics, and the widespread belief that the social sciences must somehow be "unified".
Why did the critics of Progressive law and economics make the value judgments that they did? Principally, it seems, because of a preference for markets over state command as a mechanism for allocating resources. Even under the strictest ordinalist criteria for measuring welfare, markets were welfare enhancing: Someone makes a voluntary exchange only if the exchange makes him better off. Thus, ordinalist economics recovered the strong preference for the market reflected in classical political economy but which had gradually eroded during the late nineteenth century under the marginal utility theory. Use of the positivist economist's rather than the psychologist's behavioral criterion of welfare has led to quite astonishing real world consequences. The real reason that neoclassical economics gave up marginal utility as the basis for welfare economics was not because utilitarianism was less "scientific" than the alternatives. Before one could know whether it was scientific, he had to settle on a definition of science. That decision was driven by the fact that marginal utility economics was traveling down a politically unacceptable path, leading economics directly to socialism.
Hovenkamp, Herbert J., "The First Great Law & Economics Movement" (1990). Faculty Scholarship at Penn Law. 1925.