Tuesday, May 06, 2014

Gary Becker and the Development of Law & Economics

When I left Chicago in 2012, I promised myself that I will do 2 two things once I return there in September 2014. First, I'll attend an event of Ronald Coase and ask him for an autograph. Second, I'll attend Gary Becker's class, Price Theory, since I was not able to take the class in 2012 due to conflicting schedules. I spectacularly failed to do both because both of Coase and Becker have passed away. I'm grateful that I had the chance to attend one of Becker's seminar when he debated Francois Ewald on Foucault thoughts on Becker. But of course that was not enough, it will never be enough. So for me, this is a profound loss. 

In honor of Gary Becker, I think it would be proper to write a piece of article on his impact to the development of Law and Economics. If Ronald Coase introduces the idea of transaction costs, persuading lawyers to think not only from liability perspective but also transactional perspective in designing regulations, Gary Becker introduces the idea that economics can be used as a tool to analyze almost every aspect of everyday life. This is a very important contribution to economic analysis of law where previously the scope of economic analysis is limited to specific areas of law such as antitrust. 

Furthermore, before the formal existence of Law and Economics, lawyers are mainly divided in two groups: (i) the natural lawyers who believe that law is derived from higher morality principles (can be God's wisdom, morality of the society, etc), and (ii) the positivist lawyers who believe that law is derived from social facts in which lawyers can know and find valid sources of legal authority (not to be confused with legal formalists).

For natural lawyers, contents of the law matter and they believe that immoral laws cannot be considered as laws. While their approach creates inconsistencies in practice (immoral laws can actually exists and be enforced), at least they have some criteria for a good law. The problem is reversed for positivist lawyers (including me) that mainly focus with sources and not contents. Since legal positivism is basically a descriptive theory of law, it can describe the requirements for a rule to be considered as a law but it lacks a proper theory in determining the characteristics of a good law.

Law and Economics (especially the normative one) fills such gap. It provides an alternative theory in analyzing the requirements of a good law. Instead of relying on vague moral principles, we rely instead on cost & benefit analysis, and efficiency and welfare maximization principles. Such idea is foreign to classically trained lawyers. But once they know the gist of it, their view of the world will be significantly changed, hopefully, for the better.

Let me give an example from one of Becker's most famous article on the economic approach toward crime and punishment. When dealing with criminal laws, classical lawyers tend to think from simple retributive or distributive justice point of view. It's about making a fair punishment, a just desert for the villain. Sometimes, the lawyers would also think about humane sanctions or possible reconciliation between victims and criminals. Unfortunately, to be honest, all of these things are obscure and it is difficult to recommend a satisfying policy because when speaking about morality principles, people tend to disagree based on personal values or preferences.

With Becker's paper, lawyers are reminded that criminal activities are generally activities that are costly to the society. Furthermore, criminal enforcements also involve costs. Nothing is free and there would always be a trade off. From such a simple idea, one can think of many implications as follows: what activities should be criminalized? What are the most efficient way of imposing sanctions? How to reduce the costs of law enforcement? Should we focus the enforcement on specific criminal actions only? How to introduce sanctions that can improve the welfare of the society? Is prison effective? Any preventive mechanism that can be used to reduce crime other than using traditional criminal laws?

The last question is very important. Although most criminal lawyers understand that criminal law is ultimum remedium, the last resort to be taken for dealing with harmful activities, in general, common people think that the criminal law is the solution of all ill problems in the society. If you don't like act X, you should criminalize act X, and so on. Of course that does not make any sense from Law and Economics perspective because again, legal enforcement needs money. And who will pay for that? Maybe the public will be more careful in supporting criminalization of acts once they know that they also share the costs instead of maintaining a false sense of justice.

Now, Becker's analysis can be extended outside the realm of criminal law. That's the beauty of his theory, it can be used for virtually any areas of law, such as: contract law, administrative law, constitutional law, torts, and family law. It can even be used to support the use of cost and benefit analysis in designing and promulgating regulations.  In the modern world, a regulation should not be enacted if it cannot pass a strict cost and benefit analysis. The reality is, a regulation can have a significant impact on the economy. To name a few, the list would include regulations on foreign investment, capital market, banking, environment, and safety. It is simply preposterous if the government or the legislative imposes new laws without considering the above cost and benefit analysis, only relying on petty concepts such as nationalism or self-supporting taglines.

I believe that thinking using the economic approach is beneficial for lawyers. It trains you to focus on things that really matter, namely, whether the law's provisions are actually good for the society or not, transforming a lawyer from a mere spokesman of the law to become an educated policy maker. The economic approach also allows the lawyers to rationally analyze the provision of a law and provides a basic set of criteria (though not perfect) to assess the quality of such law.  

I always dream that lawyers can collaborate more with economists in Indonesia. I've seen the great results from such cooperation at the University of Chicago Law School and I think Indonesian lawyers and economists will also benefit from such cooperation. This is now the era where multidisciplinary cooperation among scholars are really needed (not arrogance and exclusivity among scholars). Gary Becker was an excellent example for being a supporter of such cooperation (he also held a position at the Chicago Law School). He will be deeply missed, but the show will go on, and thanks to him, we still have a lot of many exciting issues to be studied and analyzed. Long live Law and Economics!


Elizabeth J. Neal Thursday, December 11, 2014 12:27:00 PM  

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