April 20, 1998 Economic Analysis of International An Invitation and a caveat effrey L Dunoff Joel P Trachtman"* chard Posner wrote in 1986 that the law and economics movement is perhaps the most important development in legal thought in the last quarter century. 0 Through its application of economic theories and methodologies to legal issues, this movement has revolutionized our understanding of many areas of common law and statutory regulation. Curiously, however, the law and economics revolution has, with few exceptions(see the Appendix), bypassed international law, I perhaps for some of the same reasons that realist political scientists ignore international law, or perhaps because of a concern that economic analysis is somehow less useful in the international context than in the domestic context. The purpose of this paper is to begin an inquiry into the actual and potential application of law and economics to international law With the rejection of both natural law theory and state-centered positivism as sources of Visiting fellow at the woodrow wilson School of International Affairs and Associate Professor of Law, Temple University School of Law Professor of International Law, The Fletcher School of Law and diplomacy Portions of this article were presented at the Harvard Law School Graduate Legal Studies Thesis Writing Workshop, the 1996 Conference of the American Society of International Law International Economic Law Group, the Harvard Law School Research Workshop on the World Trading System w. We are grateful for comments from participants. We are also grateful for nd the george Mason University Conference on the Economic Analysis of Atik, Dan Farber, David Kennedy, David Skeel, Paul Stephan, Al Sykes others], but we retain full responsibility for this paper. Prof. Dunoff's research for this project was supported by a summer research grant awarded by temple University School of Law 0 RICHARD A POSNER, ECONOMIC ANALYSIS OF LAW Xix(1986) But see economic dimensions in international law: comparative and empirical PERSPECTIVES (Jagdeep S. Bhandari alanO Sykes, eds. 1997), and especially the introduction by ronald A Cass
April 20, 1998 Economic Analysis of International Law: An Invitation and a Caveat Jeffrey L. Dunoff* Joel P. Trachtman** Introduction Richard Posner wrote in 1986 that the law and economics movement is “perhaps the most important development in legal thought in the last quarter century.”0 Through its application of economic theories and methodologies to legal issues, this movement has revolutionized our understanding of many areas of common law and statutory regulation. Curiously, however, the law and economics revolution has, with few exceptions (see the Appendix), bypassed international law,1 perhaps for some of the same reasons that realist political scientists ignore international law, or perhaps because of a concern that economic analysis is somehow less useful in the international context than in the domestic context. The purpose of this paper is to begin an inquiry into the actual and potential application of law and economics to international law. With the rejection of both natural law theory and state-centered positivism as sources of * Visiting Fellow at the Woodrow Wilson School of International Affairs and Associate Professor of Law, Temple University School of Law. ** Professor of International Law, The Fletcher School of Law and Diplomacy. Portions of this article were presented at the Harvard Law School Graduate Legal Studies Thesis Writing Workshop, the 1996 Conference of the American Society of International Law International Economic Law Group, the Harvard Law School Research Workshop on the World Trading System and the George Mason University Conference on the Economic Analysis of International Law. We are grateful for comments from participants. We are also grateful for guidance on these subjects, and in some cases comments on earlier drafts, from Ken Abbott, Jeff Atik, Dan Farber, David Kennedy, David Skeel, Paul Stephan, Al Sykes [others], but we retain full responsibility for this paper. Prof. Dunoff’s research for this project was supported by a summer research grant awarded by Temple University School of Law. 0 RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW xix (1986). 1 But see ECONOMIC DIMENSIONS IN INTERNATIONAL LAW: COMPARATIVE AND EMPIRICAL PERSPECTIVES (Jagdeep S. Bhandari & Alan O. Sykes, eds. 1997), and especially the introduction by Ronald A. Cass. 1
theory for international law, international lawyers seek both theory and methodology. 2 As a sult, international legal scholarship too often combines careful doctrinal description--here is what the law is--with unfounded prescription: here is what the law should be. This scholarship often lacks any persuasively articulated connection between description and prescription, undermining the prescription. International legal scholarship lacks a progressive research program. 3 In response, several international law scholars have turned to other disciplines. Some such as Kenneth Abbott and Anne-Marie Slaughter have led the way into international political theory, including international political economy, and have begun a thoughtful arbitrage. 4 At the same time, the international political scientists were engaged in their own rationalist arbitrage, borrowing from various components of economic theory and game theory. While there are valuable tools to be borrowed from political scientists, our focus here is on the rationalist tools that are in turn largely borrowed from economics, and in several cases from law and economics Economics is the study of rational choice. As such, it plays a leading role in evaluating the effects of rational maximizing behavior under conditions of scarcity. Economics enjoys a comparative advantage over other disciplines in rationality-based analysis, simply because this nalysis is central to economics, and economics has developed this analysis extensively. The development has largely been in the mathematical realm, the so-called"blackboard economics. 5 However, at this point in the development of economics--and of international law--the more mathematical models do not seem to engage the core issues of international law. Economics as practiced by lawyer-economists often involves complex cost-benefit analysis. This approach is often useful, but has important limitations due to problems of administrability, commensurability and interpersonal comparison of utility lowever, the more promising economic methodologies, in terms of their capacity to generate a progressive research program that might usefully address persistent international law problems, are not those that teach us to balance the costs and benefits of any particular policy, but For one account of this search, see Anne-Marie Slaughter Burley, International Law and International Relations Theory: A Dual Agenda, 87 AM. J. INT'L L. 205(1993) 3 See Imre Lakatos, Falsification and the Methodology of scientific Research Programmes, in CRITICISM AND THE GROWTH OF KNOWLEDGE 91(Imre Lakatos Alan Musgrave eds, 1970); Jason S Johnston, Law, Economics and Post-Realist Explanation, 24 L. Soc Y REV. 1217(1990) 4 See, e. g Kenneth w. Abbott, Modern international Relations Theory: A Prospectus for International Lawyers, 14 YALE J. INTL L 335(1989); Slaughter, supra note 2 5 See, e.g., Ronald Coase, The Institutional Structure of Production, 82 AM. ECoN. REV 3,719(1992) My remarks have sometimes been interpreted as implying that I am hostile to the mathematization of economic theory. This is untrue. Indeed, once we begin to uncover the real factors affecting the performance of the economic system, the complicated inter relations between them will clearly necessitate a mathematical treatment, as in the natural sciences, and economists like myself, who write in prose, will take their bow. May this
theory for international law, international lawyers seek both theory and methodology.2 As a result, international legal scholarship too often combines careful doctrinal description--here is what the law is--with unfounded prescription: here is what the law should be. This scholarship often lacks any persuasively articulated connection between description and prescription, undermining the prescription. International legal scholarship lacks a progressive research program.3 In response, several international law scholars have turned to other disciplines. Some, such as Kenneth Abbott and Anne-Marie Slaughter have led the way into international political theory, including international political economy, and have begun a thoughtful arbitrage.4 At the same time, the international political scientists were engaged in their own rationalist arbitrage, borrowing from various components of economic theory and game theory. While there are valuable tools to be borrowed from political scientists, our focus here is on the rationalist tools that are in turn largely borrowed from economics, and in several cases from law and economics. Economics is the study of rational choice. As such, it plays a leading role in evaluating the effects of rational maximizing behavior under conditions of scarcity. Economics enjoys a comparative advantage over other disciplines in rationality-based analysis, simply because this analysis is central to economics, and economics has developed this analysis extensively. The development has largely been in the mathematical realm, the so-called “blackboard economics.”5 However, at this point in the development of economics--and of international law--the more mathematical models do not seem to engage the core issues of international law. Economics as practiced by lawyer-economists often involves complex cost-benefit analysis. This approach is often useful, but has important limitations due to problems of administrability, commensurability and interpersonal comparison of utility. However, the more promising economic methodologies, in terms of their capacity to generate a progressive research program that might usefully address persistent international law problems, are not those that teach us to balance the costs and benefits of any particular policy, but 2 For one account of this search, see Anne-Marie Slaughter Burley, International Law and International Relations Theory: A Dual Agenda, 87 AM. J. INT’L L. 205 (1993). 3 See Imre Lakatos, Falsification and the Methodology of Scientific Research Programmes, in CRITICISM AND THE GROWTH OF KNOWLEDGE 91 (Imre Lakatos & Alan Musgrave eds., 1970); Jason S. Johnston, Law, Economics and Post-Realist Explanation, 24 L. & SOC' Y REV. 1217 (1990). 4 See, e.g., Kenneth W. Abbott, Modern International Relations Theory: A Prospectus for International Lawyers, 14 YALE J. INT’L L. 335 (1989); Slaughter, supra note 2. 5 See, e.g., Ronald Coase, The Institutional Structure of Production, 82 AM. ECON. REV. 713, 719 (1992): My remarks have sometimes been interpreted as implying that I am hostile to the mathematization of economic theory. This is untrue. Indeed, once we begin to uncover the real factors affecting the performance of the economic system, the complicated interrelations between them will clearly necessitate a mathematical treatment, as in the natural sciences, and economists like myself, who write in prose, will take their bow. May this period soon come. 2
rather those that focus on the balancers: international institutions(including the general international legal system). Indeed, the threshold issue in many, if not all, international legal blems is that of institutional choice. What institution--market, domestic legislature adjudicatory body or international rule-making body --ought to decide, for example, if one state's intellectual property standards are too low, or another's environmental standards are too high? The answer to questions like these ought to be informed by an understanding of the relative institutional ompetences and capacities of the various alternatives, as well as an appreciation of the strategic interactions among the various institutions We believe that economic analysis may be able to shed substantial light on precisely these sorts of inquiries. Significantly, this form of analysis is not limited to questions of wealth ization.As we note below, if economic analysis were limited to ealth maximiz zation, this would be reason alone to reject, or at least sharply limit the domain of, economic analysis of law In fact, the extension of economic analysis to fields beyond traditional markets requires economics values simultaneously. In this sense, the insights generated by the intersection of international law and law and economics run in two directions: just as economic analysis can deepen our understanding of international law, the application of law and economics to the unique features of the international system helps identify the uses and limitations of economic analysis To develop this thesis, this paper proceeds in seven parts. In Part I, we identify three reasons why international lawyers have not, to date, extensively used economic analysis, and demonstrate that none of these reasons is persuasive. This, " negative argument does not, of course, establish that international lawyers should use economic analysis. In Part Il, we provide a reason to believe that economic analysis will enrich our understanding of international law by oods g the analogy between the market of international relations and traditional markets for While others have alluded to this analogy before, we provide a typology of the ways in which"transactions" in international relations resemble market interactions Those who reject the analogy between international relations and private markets need not reject the economic analysis of international law. In the next three parts of the article, we test the hypothesis that economic analysis will be useful in understanding international law topics that are v explore the applicability of economic analysis to three important international law topics: the nd similar to domestic law topics where economic analysis has been fruitful. Thus, parts Ill, IV allocation of prescriptive jurisdiction, the law of treaties, and the competences of international organizations. In each section, we analogize the international legal issue to a domestic legal issue, and then explore whether the economic methodologies that have been useful domestically can be used on the international plane. Thus, in Part Ill, we outline an analogy between prescriptive jurisdiction and property, and then apply transaction cost economics and economic analysis regarding the design and protection of entitlements to jurisdictional issues. In Part IV, we outline the analogy between treaties and contracts, and explore whether the efficient breach hypothesis and the game theoretic analysis of default rules illuminate our understanding of treaty law. In Part V we analogize international organizations to business firms, and examine whether the theory of the irm can inform current debates over international organizations. To anticipate our conclusions, we will identify certain methodologies included in the new institutional economics and in the public choice branch of economics, such as game theory and transaction cost economics, as having much greater promise than other economic approaches, including price theory used without reference to transaction costs and strategic considerations Of course, like all theoretical approaches, economic analysis has its limitations. In Part VI we outline some of the problems associated with this type of analysis. Some of these problems
rather those that focus on the balancers: international institutions (including the general international legal system). Indeed, the threshold issue in many, if not all, international legal problems is that of institutional choice. What institution -- market, domestic legislature, adjudicatory body or international rule-making body -- ought to decide, for example, if one state’s intellectual property standards are too low, or another’s environmental standards are too high? The answer to questions like these ought to be informed by an understanding of the relative institutional competences and capacities of the various alternatives, as well as an appreciation of the strategic interactions among the various institutions. We believe that economic analysis may be able to shed substantial light on precisely these sorts of inquiries. Significantly, this form of analysis is not limited to questions of wealth maximization. As we note below, if economic analysis were limited to wealth maximization, this would be reason alone to reject, or at least sharply limit the domain of, economic analysis of law. In fact, the extension of economic analysis to fields beyond traditional markets requires economics to revise its approach to maximize additional values, or more accurately, to maximize multiple values simultaneously. In this sense, the insights generated by the intersection of international law and law and economics run in two directions: just as economic analysis can deepen our understanding of international law, the application of law and economics to the unique features of the international system helps identify the uses and limitations of economic analysis. To develop this thesis, this paper proceeds in seven parts. In Part I, we identify three reasons why international lawyers have not, to date, extensively used economic analysis, and demonstrate that none of these reasons is persuasive. This, “negative” argument does not, of course, establish that international lawyers should use economic analysis. In Part II, we provide a reason to believe that economic analysis will enrich our understanding of international law by outlining the analogy between the market of international relations and traditional markets for goods. While others have alluded to this analogy before, we provide a typology of the ways in which “transactions” in international relations resemble market interactions. Those who reject the analogy between international relations and private markets need not reject the economic analysis of international law. In the next three parts of the article, we test the hypothesis that economic analysis will be useful in understanding international law topics that are similar to domestic law topics where economic analysis has been fruitful. Thus, parts III, IV and V explore the applicability of economic analysis to three important international law topics: the allocation of prescriptive jurisdiction, the law of treaties, and the competences of international organizations. In each section, we analogize the international legal issue to a domestic legal issue, and then explore whether the economic methodologies that have been useful domestically can be used on the international plane. Thus, in Part III, we outline an analogy between prescriptive jurisdiction and property, and then apply transaction cost economics and economic analysis regarding the design and protection of entitlements to jurisdictional issues. In Part IV, we outline the analogy between treaties and contracts, and explore whether the efficient breach hypothesis and the game theoretic analysis of default rules illuminate our understanding of treaty law. In Part V, we analogize international organizations to business firms, and examine whether the theory of the firm can inform current debates over international organizations. To anticipate our conclusions, we will identify certain methodologies included in the new institutional economics and in the public choice branch of economics, such as game theory and transaction cost economics, as having much greater promise than other economic approaches, including price theory used without reference to transaction costs and strategic considerations. Of course, like all theoretical approaches, economic analysis has its limitations. In Part VI we outline some of the problems associated with this type of analysis. Some of these problems are 3
also present, although not as starkly, in the economic analysis of domestic law. Other difficulties arise from the particular features of the international legal system. We believe that our identification of these difficulties can inform a research agenda to further our understanding of the appropriate domain of economic analysis of law Finally, in Part VIl, we briefly set forth some ideas about a future research program. We provide, in an Appendix, a bibliography of articles that use economic tools to analyze internationa rather th wve emphasize that our analysis and examples are intended to be illustrative and suggestive be informed by economic analysis, or to apply every possible economic methodology to the international legal problems we do address. Instead, the paper represents an"invitation". we hope to stimulate a series of inquiries into the utility of different forms of economic analysis to analyze a ariety of international legal norms and institutions, and, in so doing, to enrich international le discourse and scholarship Why Have International Lawyers Avoided Law and Economics? While there may be many explanations for why international legal scholars have not articipated in the law and economics("l&E")revolution, we believe that many international lawyers would identify at least one of the following three concerns: (1)L&E's seemingly inaccessible methodologies; (2)L&E's supposedly conservative political prejudices; and (3)l&e's why they provide no rationale for declining to investigate whether L&E methodologies can 2 B these concerns rests upon a misunderstanding of relevant law and economics methodologies. In illuminate international legal problems.6 accessible Methodologies As George Stigler explains, there are two roles that economics may play in law. The first traditional, role of economics is to answer particular questions. For example, economics can speak to the question of market definition in antitrust or anti-dumping, or to the question of whether two oroducts are "like, with the result that discrimination between them is prohibited, 7 by reference to cross-elasticities of demand In this first role, economic analysis supplies inputs to a legal rul e might refer to this role as"economic analysis in law. " This role, which requires the full tools of the professional economist, and can be undertaken without any help from lawyers, is not the focus of our paper A second, more controversial role for economics is in the study of legal institutions and 6 In Part VI, infra, we identify more serious difficulties associated with the of international legal issues 7 E.g., under art. Ill of GATT, The General Agreement on Tariffs and Trade, Final Act Embody ing the results of the Uruguay round of Multilateral Trade Negotiations(Marrakesh, as signed on April 15, 1994), reprinted in H.R. Doc. No 316, 103d Cong, 2d Sess. 1381(1994) “GATT)
also present, although not as starkly, in the economic analysis of domestic law. Other difficulties arise from the particular features of the international legal system. We believe that our identification of these difficulties can inform a research agenda to further our understanding of the appropriate domain of economic analysis of law. Finally, in Part VII, we briefly set forth some ideas about a future research program. We provide, in an Appendix, a bibliography of articles that use economic tools to analyze international legal issues. We emphasize that our analysis and examples are intended to be illustrative and suggestive rather than exhaustive. We by no means attempt to explore every international legal issue that can be informed by economic analysis, or to apply every possible economic methodology to the international legal problems we do address. Instead, the paper represents an "invitation": we hope to stimulate a series of inquiries into the utility of different forms of economic analysis to analyze a variety of international legal norms and institutions, and, in so doing, to enrich international legal discourse and scholarship. I. Why Have International Lawyers Avoided Law and Economics? While there may be many explanations for why international legal scholars have not participated in the law and economics ("L&E") revolution, we believe that many international lawyers would identify at least one of the following three concerns: (1) L&E’s seemingly inaccessible methodologies; (2) L&E’s supposedly conservative political prejudices; and (3) L&E’s positivism and its presumed denigration of international law. However, we believe that each of these concerns rests upon a misunderstanding of relevant law and economics methodologies. In this section, we try to clear up the confusions underlying each of these objections, and to explain why they provide no rationale for declining to investigate whether L&E methodologies can illuminate international legal problems.6 A. Inaccessible Methodologies As George Stigler explains, there are two roles that economics may play in law. The first, traditional, role of economics is to answer particular questions. For example, economics can speak to the question of market definition in antitrust or anti-dumping, or to the question of whether two products are “like,” with the result that discrimination between them is prohibited,7 by reference to cross-elasticities of demand. In this first role, economic analysis supplies inputs to a legal rule. We might refer to this role as "economic analysis in law." This role, which requires the full tools of the professional economist, and can be undertaken without any help from lawyers, is not the focus of our paper. “A second, more controversial role for economics is in the study of legal institutions and 6 In Part VI, infra, we identify more serious difficulties associated with the economic analysis of international legal issues. 7 E.g., under art. III of GATT, The General Agreement on Tariffs and Trade, Final Act Embodying the Results of the Uruguay round of Multilateral Trade Negotiations (Marrakesh, as signed on April 15, 1994), reprinted in H.R. Doc. No. 316, 103d Cong., 2d Sess. 1381 (1994) (“GATT”). 4
doctrines. 8 This is"economic analysis of law, and is the domain we explore below Many of us are uncomfortable with economics, both because we distrust its theory and methodology, and, more embarrassingly, because we are uncertain that we have the quantitative or other skills needed to use these tools. Complex graphs, charts and multivariable equations do not often appear to be particularly inviting to those trained in the law. However, it does not appear that these tools are necessary for all types of economic analysis of law, and in fact, the highly mathematical formal analysis that economists often use has, to date shed little light on the issues that most interest international lawyers. Many of the most relevant and useful tools of analysis for our issues do not require great mathematical skill International legal scholars should find few obstacles to the use of the new institutional economics. "Modern institutional economics is economics as it ought to be. 9 New institutional economics seeks to integrate neo-classical economics, which has concentrated on the workings of the price system(in fields amenable to pricing), with institutional analysis. Institutions, by definition, are entities in which decisions are made outside the formal price system. In order to study institutions, it is necessary to add consideration of the cost of transactions( transaction costs and of the effects of strategic behavior(game theory ); both are areas that international lawyers are already familiar with In brief, new institutional economics incorporates price theory, transaction cost economizing and game theory. 10 It incorporates, and is also incorporated in, economic analysis of property rights, II public choice theory 12 and positive political economy. 13 A primary tool of this approach is comparative institutional analysis 14 -a form of analysis already at the heart of much 8 George Stigler, Law or Economics?, 35 J. L& ECON. 455, 467(1992). See also Guido Calabresi, The New Economic Analysis of Law. Scholarship, Sophistry, or Self-Indulgence, 68 PROC. BRIT. ACAD.(1982) 9 Ronald Coase. The New Institutional Economics. 140J INST. theo ecoN. 229. 231 (1984) econ >2, e. g, Douglass C. North, The New Institutional Economics, 142 J INST& THEO 230(1986) 11 See YORAM BARZEL, ECoNOMIC ANALYSIS OF PROPERTY RIGHTS(1997 12 See, e.g., DENNIS MUELLER, PUBLIC CHOICE II(1979); MAXWELL STEARNS, PUBLIC CHOICE AND PUBLIC LAW READINGS AND COMMENTARY(1996) 13 See, e.g., Daniel A. Farber and Philip P. Frickey, Positive Political Theory in the nineties, 80 GEO LJ.457(1992) 14 See, e.g., Ronald Coase, The New Institutional Economics, 140 J. INST& THEo ecoN 229(1984): Bruno S. Frey, Institutions Matter: The Comparative Analysis of Institutions, 34 EUR ECON REV. 443(1990); NEIL KOMESAR, IMPERFECT ALTERNATIVES: CHOOSING INSTITUTIONS IN LAW ECONOMICS AND PUBLIC POLICY(1994): Douglass North, Institutions, Transaction Costs and 5
doctrines.”8 This is "economic analysis of law," and is the domain we explore below. Many of us are uncomfortable with economics, both because we distrust its theory and methodology, and, more embarrassingly, because we are uncertain that we have the quantitative or other skills needed to use these tools. Complex graphs, charts and multivariable equations do not often appear to be particularly inviting to those trained in the law. However, it does not appear that these tools are necessary for all types of economic analysis of law, and in fact, the highly mathematical formal analysis that economists often use has, to date, shed little light on the issues that most interest international lawyers. Many of the most relevant and useful tools of analysis for our issues do not require great mathematical skill. International legal scholars should find few obstacles to the use of the new institutional economics. “Modern institutional economics is economics as it ought to be.”9 New institutional economics seeks to integrate neo-classical economics, which has concentrated on the workings of the price system (in fields amenable to pricing), with institutional analysis. Institutions, by definition, are entities in which decisions are made outside the formal price system. In order to study institutions, it is necessary to add consideration of the cost of transactions (transaction costs) and of the effects of strategic behavior (game theory); both are areas that international lawyers are already familiar with. In brief, new institutional economics incorporates price theory, transaction cost economizing and game theory.10 It incorporates, and is also incorporated in, economic analysis of property rights,11 public choice theory12 and positive political economy.13 A primary tool of this approach is comparative institutional analysis14 -- a form of analysis already at the heart of much 8 George Stigler, Law or Economics?, 35 J.L.& ECON. 455, 467 (1992). See also Guido Calabresi, The New Economic Analysis of Law: Scholarship, Sophistry, or Self-Indulgence, 68 PROC. BRIT. ACAD. (1982). 9 Ronald Coase, The New Institutional Economics, 140 J. INST. & THEO. ECON. 229, 231 (1984). 10 See, e.g., Douglass C. North, The New Institutional Economics, 142 J. INST. & THEO. ECON. 230 (1986). 11 See YORAM BARZEL, ECONOMIC ANALYSIS OF PROPERTY RIGHTS (1997). 12 See, e.g., DENNIS MUELLER, PUBLIC CHOICE II (1979); MAXWELL STEARNS, PUBLIC CHOICE AND PUBLIC LAW: READINGS AND COMMENTARY (1996). 13 See, e.g., Daniel A. Farber and Philip P. Frickey, Positive Political Theory in the Nineties, 80 GEO. L.J. 457 (1992). 14 See, e.g., Ronald Coase, The New Institutional Economics, 140 J. INST. & THEO. ECON. 229 (1984); Bruno S. Frey, Institutions Matter: The Comparative Analysis of Institutions, 34 EUR. ECON REV. 443 (1990); NEIL KOMESAR, IMPERFECT ALTERNATIVES: CHOOSING INSTITUTIONS IN LAW, ECONOMICS AND PUBLIC POLICY (1994); Douglass North, Institutions, Transaction Costs and 5
international legal scholarship. In fact, like Moliere's Bourgeois Gentilhomme, international lawyers may find to their surprise that they have always spoken new institutional economics, as one of our principal tools of analysis is comparison. On the other hand, we would not be writing this paper if we did not feel that the new institutional economics offers substantial counterintuitive B. Political Prejudices and the Subordination of Non-Economic Values Much criticism of economic analysis on the domestic level focuses on the alleged political biases inherent in this form of analysis 15 Thus, critics have objected to economics alleged conservative political positions. Stated most broadly, economic analysis is often d/smss an or commitment to laissez-faire economic policy, or supposed ideological allegiance to libertaria providing an ideological justification for the unconsidered rejection of government intervention Similarly, economic analysis may be rejected for its supposed elevation of the market, and the economic values that are maximized in market settings, at the expense of other important values. This argument would suggest that economic analysis cannot adequately account for difficult to quantify or incommensurable social values, and necessarily devalues or subordinates those values to economic values apply all L&E methodologies to international legal issues. First, the methodologies that we find Rather, the methodologies we focus on presuppose the potential validity -both the legitimace and the efficiency --of government processes. 16 Contrary to the claims of the critics, in the methodologies we focus on"neither market nor nonmarket forms of organization are primary. 17 Instead under this understanding, legislation -- no less than the market--is a mechanism for preference revelation. However, both the market and the law( the state) are imperfect as such mechanisms. The methologies we explore take as central(and open )the question of which Economic Growth 25 ECoN. INQUIRY 419(1987); Douglass North, The New Institutional Economics, 142 J. INST& THEORETICAL ECoN. 230(1986); Oliver Williamson, Comparative Economic Organization: The Analysis of Discrete Structural Alternatives, 36 ADMIN. SCL. Q. 219 (1994) 15 Scholars from across the political spectrum share this view. See, e. g, George J. Stigler, The Politics of political Economists, in ESsAYS IN THE HISTORY OF ECONOMICS 51, 52(1965)(the professional study of economics makes one politically conservative"); Morton J. Horowitz, La to be a claim that economists tend to support decentralized markets over other institutions. Sees and Economics: Science or Politics?, 8 HOFSTRA L REv. 905(1980)(same). We understand Russell Hardin, Magic on the Frontier: The Norm of efficiency, 144 U PA. L REV. 1987, 2014 (1996). As explained more fully in text, we think this charge of conservative bias cannot fairly be levelled against the methodologies we find most promising 16 See DONALD WITTMAN, THE MYTH OF DEMOCRATIC FAILURE (1995) 17 Guido Calabresi, The Pointlessness of Pareto: Carrying Coase Further, 100 YALE L J 12l1,1214(1991)
international legal scholarship. In fact, like Moliere’s Bourgeois Gentilhomme, international lawyers may find to their surprise that they have always spoken new institutional economics, as one of our principal tools of analysis is comparison. On the other hand, we would not be writing this paper if we did not feel that the new institutional economics offers substantial counterintuitive insights. B. Political Prejudices and the Subordination of Non-Economic Values Much criticism of economic analysis on the domestic level focuses on the alleged political biases inherent in this form of analysis.15 Thus, critics have objected to economics’ alleged commitment to laissez-faire economic policy, or supposed ideological allegiance to libertarian or conservative political positions. Stated most broadly, economic analysis is often dismissed as providing an ideological justification for the unconsidered rejection of government intervention. Similarly, economic analysis may be rejected for its supposed elevation of the market, and the economic values that are maximized in market settings, at the expense of other important values. This argument would suggest that economic analysis cannot adequately account for difficult to quantify or incommensurable social values, and necessarily devalues or subordinates those values to economic values. Again, however, we believe that these related objections do not fatally undermine efforts to apply all L&E methodologies to international legal issues. First, the methodologies that we find most promising do not have a “bias” against government regulation and/or in favor of the market. Rather, the methodologies we focus on presupppose the potential validity -- both the legitimacy and the efficiency -- of government processes.16 Contrary to the claims of the critics, in the methodologies we focus on “neither market nor nonmarket forms of organization are primary.”17 Instead, under this understanding, legislation -- no less than the market -- is a mechanism for preference revelation. However, both the market and the law (the state) are imperfect as such mechanisms. The methologies we explore take as central (and open) the question of which Economic Growth 25 ECON. INQUIRY 419 (1987); Douglass North, The New Institutional Economics, 142 J. INST. & THEORETICAL ECON. 230 (1986); Oliver Williamson, Comparative Economic Organization: The Analysis of Discrete Structural Alternatives, 36 ADMIN. SCI. Q. 219 (1994). 15 Scholars from across the political spectrum share this view. See, e.g, George J. Stigler, The Politics of Political Economists, in ESSAYS IN THE HISTORY OF ECONOMICS 51, 52 (1965) (“the professional study of economics makes one politically conservative”); Morton J. Horowitz, Law and Economics: Science or Politics?, 8 HOFSTRA L. REV. 905 (1980) (same). We understand this to be a claim that economists tend to support decentralized markets over other institutions. See Russell Hardin, Magic on the Frontier: The Norm of Efficiency, 144 U. PA. L. REV. 1987, 2014 (1996). As explained more fully in text, we think this charge of conservative bias cannot fairly be levelled against the methodologies we find most promising. 16 See DONALD WITTMAN, THE MYTH OF DEMOCRATIC FAILURE (1995). 17 Guido Calabresi, The Pointlessness of Pareto: Carrying Coase Further, 100 YALE L.J. 1211, 1214 (1991). 6
institution, including potentially the market, ought to be used in any particular context To be sure, the government processes that might be used are not necessarily efficient in monetary or monetized terms: they might not pass a cost-benefit analysis that has regard only for monetary or monetized benefits. But this cannot be the measure of validity, as there are many values that are not readily monetizable but are worthy of expression, either in private conduct or in olitical action. 18 They are also worthy of being traded for monetary or monetized values, and law and economics as politically doctrinaire or ignorant of non-monetized values, and we argl wect such"trade" is presumptively efficient. We emphasize these points to reach out to those who rei that any dogma or ignorance is a political prejudice that is not necessitated by economic analysis ItSe While we believe, as explained below, that L&e analysis has much to say about questions of institutional choice, the actual decisions are, of course, made through political processes. It is in this sense that politics is the leading mechanism, as it still retains kompetenz-kompetenz to determine the border between its domain and that of the market, and the methods we examine do not question this priority of the political over the economic C. Positivism and the Denigration of International Law A fundamental tenet of law and economics is its positivism, meaning its emphasis on empiricism and analysis of the world as it is, as opposed to a"normative perspective on the world as it should be. The line between positive and normative economics is often unclear, as positive nalysis is often motivated by or used to support a normative critique. 19 While positivism is the sine qua non of social science, international lawyers have long done battle with a brand of international legal theory that is called positivist. Many international lawyers criticize this international legal positivist approach, as it tends to be skeptical of the effectiveness of international law, and has often enshrined state sovereignty as a kind of summum bonum. Those critical of international legal positivism might see little reason to expect economic positivist methodologies to illuminate international legal issues. Again, however, we think this objection to the use of l&e methodologies lacks force. In particular, it confuses the positivism of law and economics with other forms of positivism To the extent that international lawyers confront positivism, it is often in the context of Westphalian20 positivist view of the world: a world of billiard ball states that interact only with 18"Maximum national income, however, is not the only goal of our nation as judged by policies adopted by our govermnment-and government's goals as revealed by s stigle& cosT 9. at 459. See also AvINaSh DIXIT. THE MAKING OF ECONOMIC POLICY: A TRANSACTION-COST POLITICS PERSPECTIVE(1996) 19 See Daniel A Farber, Positive Theory as Normative Critique, 68 S. CAL L. REV. 1565 (1995).Indeed, many deny a strong distinction between positive and normative discourse arguing that a strong distinction takes inadequate account of the relationship between the observer and the observation See, e.g., ROGER TRIGG, UNDERSTANDING SOCIAL SCIENCE: A pHILOSOPhICAL INTRODUCTION TO THE SOCIAL SCIENCES (1985) 20 Leo gross, The Peace of Westphalia, 1648-1948, 42 AM. J. INT LL. 20(1948)
“institution,” including potentially the market, ought to be used in any particular context. To be sure, the government processes that might be used are not necessarily efficient in monetary or monetized terms: they might not pass a cost-benefit analysis that has regard only for monetary or monetized benefits. But this cannot be the measure of validity, as there are many values that are not readily monetizable, but are worthy of expression, either in private conduct or in political action.18 They are also worthy of being traded for monetary or monetized values, and such “trade” is presumptively efficient. We emphasize these points to reach out to those who reject law and economics as politically doctrinaire or ignorant of non-monetized values, and we argue that any dogma or ignorance is a political prejudice that is not necessitated by economic analysis itself. While we believe, as explained below, that L&E analysis has much to say about questions of institutional choice, the actual decisions are, of course, made through political processes. It is in this sense that politics is the leading mechanism, as it still retains kompetenz-kompetenz to determine the border between its domain and that of the market, and the methods we examine do not question this priority of the political over the economic. C. Positivism and the Denigration of International Law A fundamental tenet of law and economics is its positivism, meaning its emphasis on empiricism and analysis of the world as it is, as opposed to a “normative” perspective on the world as it should be. The line between positive and normative economics is often unclear, as positive analysis is often motivated by or used to support a normative critique.19 While positivism is the sine qua non of social science, international lawyers have long done battle with a brand of international legal theory that is called positivist. Many international lawyers criticize this international legal positivist approach, as it tends to be skeptical of the effectiveness of international law, and has often enshrined state sovereignty as a kind of summum bonum. Those critical of international legal positivism might see little reason to expect economic positivist methodologies to illuminate international legal issues. Again, however, we think this objection to the use of L&E methodologies lacks force. In particular, it confuses the positivism of law and economics with other forms of positivism. To the extent that international lawyers confront positivism, it is often in the context of the Westphalian20 positivist view of the world: a world of billiard ball states that interact only with one 18 “Maximum national income, however, is not the only goal of our nation as judged by policies adopted by our government--and government’s goals as revealed by actual practice are more authoritative than those pronounced by professors of law or economics.” Stigler, supra note 9, at 459. See also AVINASH DIXIT, THE MAKING OF ECONOMIC POLICY: A TRANSACTION-COST POLITICS PERSPECTIVE (1996). 19 See Daniel A. Farber, Positive Theory as Normative Critique, 68 S. CAL. L. REV. 1565 (1995). Indeed, many deny a strong distinction between positive and normative discourse, arguing that a strong distinction takes inadequate account of the relationship between the observer and the observation. See, e.g., ROGER TRIGG, UNDERSTANDING SOCIAL SCIENCE: A PHILOSOPHICAL INTRODUCTION TO THE SOCIAL SCIENCES (1985) 20 Leo Gross, The Peace of Westphalia, 1648-1948, 42 AM. J. INT' L L. 20 (1948) 7
another. Moreover, this Westphalian positivist view is often associated with the dominant anarchic, self-styled"realist" perspective on international relations that holds that these states are not bound by law, as they themselves maintain a monopoly on coercive force. However, this perspective is neither truly realist nor truly positivist This is why many international lawyers and international legal scholars reject the Westphalian positivist model. They argue that the model either ignores--or cannot expla many of the most important phenomena on the international legal scene, including the rise of non the binding force of international law. Thus, there is little room in Westphalian positiVIsm 6 s, and state actors, the importance and, at times, relative independence, of international organization binding treaties to allocate regulatory authority or for the pooling of regulatory authority in interests that motivated them; they are epiphenomenal to the power and interest equation rm international organizations. In this model, these agreements only last as long as the short-te lains egotistical state action of the moment. 21 There is little room for the incursions on sovereignty experienced in the European Union, or for the strengthened dispute resolution of the World Trade Organization(WTO), or for many of the other institutions that constitute the core of what international lawyers do and study. In this sense, international lawyers rightly understand positivism to turn a blind eye to precisely those phenomena that interest them the most is very different from the positivism associated with Westphalian realism. While Westphalia eE But"positivism"has different meanings in different disciplines, and the positivism ofL&E positivism is state centric, L&e positivism rests upon methodological individualism. 22 Methodological individualism assumes that each person is in charge of his or her own utility function and is a rational evaluative maximizer. 23 It posits no values other than that of individual choice. Methodological individualism, otherwise known as consumer sovereignty(perhaps more felicitously termed"individual sovereignty in a world in which markets are not the sole forum for revelation of preferences), is a cosmopolitan concept that stands in opposition to the state sovereignty erected by Westphalian positivism Methodological individualism easily lends itself to contractarian approaches to issues involving cooperation and/or conflict. Analogizing from the domestic to the international, the 21 See James E. Alt Lisa L. Martin, Contracting and the possibility of multilateral Enforcement, 150 J INST& THEo EcoN. 265(1994) n a Realist framework, institutions have no power to bind states or even significantly change the constraints in which they operate Hegemonic stability theory would predict that institutions will only be stable and effective as long as the distribution of power underlying their construction remains stable ld.at265-66 22 See, e.g, JAMES M. BUCHANAN, EXPLORATIONS INTO CONSTITUTIONAL ECONOMICS (1989) assumption, it still provides the basis for most models. This rationalism entails self-interes this 23 Although economists and other social scientists are studying the limits and domain of although neither the definition of"self" nor the definition of"interest" is uncontested. Rather, self- interest is being re-examined, to accommodate behavior that seems or is normative, altruistic self-abnegating
another. Moreover, this Westphalian positivist view is often associated with the dominant anarchic, self-styled “realist” perspective on international relations that holds that these states are not bound by law, as they themselves maintain a monopoly on coercive force. However, this perspective is neither truly realist nor truly positivist. This is why many international lawyers and international legal scholars reject the Westphalian positivist model. They argue that the model either ignores -- or cannot explain -- many of the most important phenomena on the international legal scene, including the rise of nonstate actors, the importance and, at times, relative independence, of international organizations, and the binding force of international law. Thus, there is little room in Westphalian positivism for binding treaties to allocate regulatory authority, or for the pooling of regulatory authority in international organizations. In this model, these agreements only last as long as the short-term interests that motivated them; they are epiphenomenal to the power and interest equation that explains egotistical state action of the moment.21 There is little room for the incursions on sovereignty experienced in the European Union, or for the strengthened dispute resolution of the World Trade Organization (“WTO”), or for many of the other institutions that constitute the core of what international lawyers do and study. In this sense, international lawyers rightly understand positivism to turn a blind eye to precisely those phenomena that interest them the most. But “positivism” has different meanings in different disciplines, and the positivism of L&E is very different from the positivism associated with Westphalian realism. While Westphalian positivism is state centric, L&E positivism rests upon methodological individualism.22 Methodological individualism assumes that each person is in charge of his or her own utility function and is a rational evaluative maximizer.23 It posits no values other than that of individual choice. Methodological individualism, otherwise known as consumer sovereignty (perhaps more felicitously termed “individual sovereignty” in a world in which markets are not the sole forum for revelation of preferences), is a cosmopolitan concept that stands in opposition to the state sovereignty erected by Westphalian positivism. Methodological individualism easily lends itself to contractarian approaches to issues involving cooperation and/or conflict. Analogizing from the domestic to the international, the 21 See James E. Alt & Lisa L. Martin, Contracting and the Possibility of Multilateral Enforcement, 150 J. INST. & THEO. ECON. 265 (1994): In a Realist framework, institutions have no power to bind states or even significantly change the constraints in which they operate. . . . Hegemonic stability theory would predict that institutions will only be stable and effective as long as the distribution of power underlying their construction remains stable. Id. at 265-66. 22 See, e.g., JAMES M. BUCHANAN, EXPLORATIONS INTO CONSTITUTIONAL ECONOMICS (1989). 23 Although economists and other social scientists are studying the limits and domain of this assumption, it still provides the basis for most models. This rationalism entails self-interest, although neither the definition of “self” nor the definition of “interest” is uncontested. Rather, selfinterest is being re-examined, to accommodate behavior that seems or is normative, altruistic or self-abnegating. 8
positivism associated with economic analysis easily lends itself to treaty or institutional responses to international issues involving cooperation and/or conflict positivism associated with economic analysis tends to highlight--rather ignore- the treaties institutions and other international legal phenomena that are most interesting to international lega scholars. 24 In short, the most common reasons advanced for not exploring whether L&e might enrich our understanding of international law are not persuasive. The l&e methodologies most likely to be useful are not terribly exotic and, in fact, have a structure and focus that should be familiar to opposed to the state or for economic values as opposed to other values. To the contrary, theseas international lawyers. In addition, these methodologies do not have a bias in favor of the market ethodologies take as central and contingent the question whether market or non-ma mechanisms are appropriate in any particular instance. Finally, these methodologies do not deny a role for, or the reality of, international law. Instead, they direct us towards the very phenomena that are already at the center of the international legal agenda. 25 AK Of course, demonstrating that arguments against the use of l&E analysis lack force is not, any reason to believe that L&e analysis will be useful to international lawyers. It is to this task we now turn The Structural Analogy: The Supra-Market of International Relations and Gains From Before engaging in the economic analysis of international legal problems, it is useful to explore whether international legal problems have some characteristics in common with those already addressed by law and economics. While it is not necessary for our purposes that the analogy be perfect, relevant similarities facilitate the transfer of tools from the domestic sphere to the international. Hence, we outline here the argument that transactions in international relations are analogous to transactions in private markets. In subsequent sections, we outline arguments for more specific analogies between particular international legal problems and particular domestic 24 Many lawyers may also object to another attribute of law and economics positivism: its insistence on the distinction between things as they are and things as they ought to be, between"is and"ought. While there is a general epistemological critique of this form of positivism, see, e.g TRIGG, supra note 20(explaining widespread rejection of positivism in many social science and philosophical traditions), lawyers have advanced arguments grounded in the claim that law ecessarily entails a normative dimension. As these debates have been thoroughly explored elsewhere, we do not revisit them here. See, e.g., Avery Weiner Katz, Positivism and the Separation of Law and Economics, 94 MICH. L. REV. 2229(1996); Anthony J Sebok Misunderstanding Positivism, 93 MICH. L REV. 2054(1995): Herbert Hovenkamp, Positivism in Law and EconomicS, 78 CAL L REV. 815(1990) 25 We do not intend these arguments as a defense of economic theory and methodology generally, including the utility of abstract modelling, the assumption of rationality and the use of the efficiency criterion. For more on these issues, see generally Milton Friedman, The Methodology of Positive Economics, in ESSAYS IN POSITIVE ECONOMICS 3(1953)
positivism associated with economic analysis easily lends itself to treaty-based or institutional responses to international issues involving cooperation and/or conflict. For this reason, the positivism associated with economic analysis tends to highlight -- rather than ignore -- the treaties, institutions and other international legal phenomena that are most interesting to international legal scholars.24 In short, the most common reasons advanced for not exploring whether L&E might enrich our understanding of international law are not persuasive. The L&E methodologies most likely to be useful are not terribly exotic and, in fact, have a structure and focus that should be familiar to international lawyers. In addition, these methodologies do not have a bias in favor of the market as opposed to the state, or for economic values as opposed to other values. To the contrary, these methodologies take as central and contingent the question whether market or non-market mechanisms are appropriate in any particular instance. Finally, these methodologies do not deny a role for, or the reality of, international law. Instead, they direct us towards the very phenomena that are already at the center of the international legal agenda.25 Of course, demonstrating that arguments against the use of L&E analysis lack force is not, in itself, any reason to believe that L&E analysis will be useful to international lawyers. It is to this task we now turn. II. The Structural Analogy: The Supra-Market of International Relations and Gains From Trade Before engaging in the economic analysis of international legal problems, it is useful to explore whether international legal problems have some characteristics in common with those already addressed by law and economics. While it is not necessary for our purposes that the analogy be perfect, relevant similarities facilitate the transfer of tools from the domestic sphere to the international. Hence, we outline here the argument that transactions in international relations are analogous to transactions in private markets. In subsequent sections, we outline arguments for more specific analogies between particular international legal problems and particular domestic 24 Many lawyers may also object to another attribute of law and economics’ positivism: its insistence on the distinction between things as they are and things as they ought to be, between “is” and “ought.” While there is a general epistemological critique of this form of positivism, see, e.g., TRIGG, supra note 20 (explaining widespread rejection of positivism in many social science and philosophical traditions), lawyers have advanced arguments grounded in the claim that law necessarily entails a normative dimension. As these debates have been thoroughly explored elsewhere, we do not revisit them here. See, e.g., Avery Weiner Katz, Positivism and the Separation of Law and Economics, 94 MICH. L. REV. 2229 (1996); Anthony J. Sebok, Misunderstanding Positivism, 93 MICH. L. REV. 2054 (1995); Herbert Hovenkamp, Positivism in Law and Economics, 78 CAL. L. REV. 815 (1990). 25 We do not intend these arguments as a defense of economic theory and methodology generally, including the utility of abstract modelling, the assumption of rationality and the use of the efficiency criterion. For more on these issues, see generally Milton Friedman, The Methodology of Positive Economics, in ESSAYS IN POSITIVE ECONOMICS 3 (1953). 9
legal problems. 26 At its core, the relevant similarity is that international society, like any society, is a place where individual actors or groups of actors encounter one another and sometimes have occasion to cooperate, to engage in what may broadly be termed"transactions. 27 This analogy has been developed by, interalia, Abbott, Keohane, Krasner and Waltz. In this literature, markets are understood to arise out of the activities of individual persons or firms. These individuals seek to further their self-defined interests through the most efficacious means available. while each individual acts for himself, from the action of like units emerges a structure that affects and constrains all of them. Once formed a market becomes a force in itself and a force that the consitutive units acting singly or in small numbers cannot control. 28 So too for the international system. Like economic markets, the international system is formed by the interactions of self-regarding units --largely but not exclusively, states. These utilitarian states interact to "overcome the deficiencies that make it impossible to consummate mutually beneficial agreements. 29 Actors in each system are willing-to some extent--to relinquish autonomy in order to obtain certain benefits 30 Both the international and the domestic systems, then, are individualist in origin, spontaneously generated and unintended products of elf-interested behavior 31 The assets traded in this international"market are not goods or services per se, but assets peculiar to states: components of power. In a legal context, power is jurisdiction, including jurisdiction to prescribe, jurisdiction to adjudicate and jurisdiction to enforce. In international ociety, the equivalent of the market is simply the place where states interact to cooperate on articular issues--to trade in power--in order to maximize their baskets of preferences States enter the market of international relations in order to obtain gains from exchange For present purposes, we can understand the structure of this market as follows: Beginning from the state of nature. the first level of "trade" is that which establishes constitutional rules rules about 26 In drawing these analogies, we do not intend to participate in larger international legal debates over appropriateness of the"domestic analogy. See, e.g., HIDEMI SUGANAMI, THE DOMESTIC ANALOGY AND WORLD ORDER PROPOSALS (1989); Burley, supra note 2, at 239 n 13 27The most fundamental unit of analysis in economic organization theory is the transaction-- the transfer of goods or services from one individual to another Paul mILGROM john ROBERTS, ECONOMICS, ORGANIZATION AND MANAGEMENT 21(1992) 28 KENNETH N. WALTZ, THEORY OF INTERNATIONAL POLITICS XXX(1979) 29 ROBERT O. KEOHANE, AFTER HEGEMONY: COOPERATION AND DISCORD IN THE WORLD POLITICAL ECONOMY 83(1984) 30 In fact, the contractarian model is more easily applicable to the international system than to the domestic, as the international system has more viable exit options 31 KEOHANE, supra note 30, at 83
legal problems.26 At its core, the relevant similarity is that international society, like any society, is a place where individual actors or groups of actors encounter one another and sometimes have occasion to cooperate, to engage in what may broadly be termed “transactions.” 27 This analogy has been developed by, inter alia, Abbott, Keohane, Krasner and Waltz. In this literature, markets are understood to arise out of the activities of individual persons or firms. These individuals seek to further their self-defined interests through the most efficacious means available. While each individual acts for himself, “[f]rom the action of like units emerges a structure that affects and constrains all of them. Once formed, a market becomes a force in itself, and a force that the consitutive units acting singly or in small numbers cannot control.”28 So too for the international system. Like economic markets, the international system is formed by the interactions of self-regarding units -- largely, but not exclusively, states. These utilitarian states interact to “overcome the deficiencies that make it impossible to consummate . . . mutually beneficial agreements.”29 Actors in each system are willing--to some extent--to relinquish autonomy in order to obtain certain benefits.30 Both the international and the domestic systems, then, are individualist in origin, spontaneously generated and unintended products of self-interested behavior.31 The assets traded in this international “market” are not goods or services per se, but assets peculiar to states: components of power. In a legal context, power is jurisdiction, including jurisdiction to prescribe, jurisdiction to adjudicate and jurisdiction to enforce. In international society, the equivalent of the market is simply the place where states interact to cooperate on particular issues--to trade in power--in order to maximize their baskets of preferences. States enter the market of international relations in order to obtain gains from exchange. For present purposes, we can understand the structure of this market as follows: Beginning from the state of nature, the first level of "trade" is that which establishes constitutional rules: rules about 26 In drawing these analogies, we do not intend to participate in larger international legal debates over appropriateness of the “domestic analogy.” See, e.g., HIDEMI SUGANAMI, THE DOMESTIC ANALOGY AND WORLD ORDER PROPOSALS (1989); Burley, supra note 2, at 239 n. 13. 27 "The most fundamental unit of analysis in economic organization theory is the transaction-- the transfer of goods or services from one individual to another." PAUL MILGROM & JOHN ROBERTS, ECONOMICS, ORGANIZATION AND MANAGEMENT 21 (1992) 28 KENNETH N. WALTZ, THEORY OF INTERNATIONAL POLITICS xxx (1979). 29 ROBERT O. KEOHANE, AFTER HEGEMONY: COOPERATION AND DISCORD IN THE WORLD POLITICAL ECONOMY 83 (1984). 30 In fact, the contractarian model is more easily applicable to the international system than to the domestic, as the international system has more viable exit options. 31 KEOHANE, supra note 30, at 83. 10
