Abstract

Economic analyses of law predominate in the United States because they can claim to be objective and scientific thus verifiable and the basis of predictions and reproducible experiments. However, several of the claims of economic analysis of law go too far and are entirely unrealistic. This explains why economic analysis of law has not been taken up outside of the U.S. to the extent it has in the U.S. This article points out the unrealistic presumptions within law and economics theory (homo economicus and efficient markets, mostly) and the unrealistic claims of law and economics (that the law is and should be a mirror of the economy). Economic analysis of law cannot and should not serve as a general basis of legal decision making. However, as a special theory applicable as a method for determining certain issues economic methods can well inform legal decision making helping judges to shape justice correctly. This article exposes the competing schools within law and economics and presents a defensible version of economic methodology applied within legal discourse.TABLE OF CONTENTS I. INTRODUCTION 3II. THE ORIGIN OF CONTEMPORARY L&E IN CLASSICAL ECONOMISTS 4A. Adam Smith 5B. David Ricardo 5III. LAW AND ECONOMICS: RICHARD POSNER 6IV. THE CHICAGO SCHOOL (SUPPLY SIDE THEORY): MILTON FRIEDMAN 9A. Supply determines demand 9B. The General Theory as a special theory 10C. Primacy of the Market 101. The role of prices 102. Monetary Policy 11a. Money as a signalling system 11b. Money as an instrument of economic management 12c. Monetary policy must prevent inflation (and deflation) 12d. Opposition to state intervention 13V. THE VIENNA SCHOOL 14A. Mises and Rothbard 16B. Hayek 181. Hayek on inflation 182. Hayek on epistemology 183. Hayek's Prescriptions 23VI. THE SCHOOL OF PUBLIC CHOICE: JAMES BUCHANAN 24A. The analysis of "political markets" 251. Political failure 272. Bureaucracy 283. Public bads 284. The Political Market 29B. Consequences of the analysis 301. Balanced Budget 302. Privatization of legal functions 31C. Critiques of the School of public choice 32VII. CONCLUSIONS: 33A. Valid Applications of Economic Methods in Law- "Weak" Law and Economics 331. Balancing Tests 332. Cost-Benefit Analysis 33B. Invalid Claims: "Strong" Law and Economics 341. Homo Economicus - An Unrealistic Model of Human Behavior in the Real World 362. Presumptions about Markets - And Failure to Account for Market Failure 363. Information Theory 37C. Why Law and Economics? 38D. A Reductio to Refute Strong Law and Economics 39.