EMORY School of law Law economics Research Paper Series EMORY Why Was the Common Law Efficient? Paul h. rubin Emory University Department of Economics Emory University School of Law Working Paper No 04-06 This paper can be downloaded without charge from the ocial Science Research Network Electronic Paper Collection
EMORY School of Law Law & Economics Research Paper Series Why Was the Common Law Efficient? Paul H. Rubin Emory University Department of Economics and Emory University School of Law Working Paper No. 04-06 This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=498645
WHY WAS THE COMMON LAW EFFICIENT? Paul h. rubin Introduction a basic question for law and economics is the efficiency of law. Hayek, (1960 and 1973)although writing before the law and economics movement and writing from another perspective, had argued that common or judge-made law was better than statute law, we return to Hayek's arguments below. Posner(1973; 2003) has of course argued often and forcefully that the common law is efficient. His arguments are based on examination of particular legal doctrines. I call this the"micro"argument for legal efficiency. The evolutionary models were aimed at explaining this micro efficiency There is more recent literature that uses empirical methods to compare various legal systems. This literature generally finds that common law is more efficient than other forms of law. I call this the"macro argument for efficiency. It is ultimately a hayekian argument, based on the idea that in common law systems, governments have less power than in other systems. I first discuss micro efficiency, and them macro Micro” Efficiency Micro efficiency is based on an examination of particular legal doctrines and attempts to determine if they are efficient. This was the method used by Posner.(Much of my own work is of this type; see for example Rubin, 1983). The difficulty with this method of analysis, is that often the conclusion regarding the efficiency of a particular rule depends on unmeasured transactions costs of various sorts; if the analysts'intuition
WHY WAS THE COMMON LAW EFFICIENT? Paul H. Rubin* Introduction A basic question for law and economics is the efficiency of law. Hayek, (1960 and 1973) although writing before the law and economics movement and writing from another perspective, had argued that common or judge-made law was better than statute law; we return to Hayek’s arguments below. Posner (1973; 2003) has of course argued often and forcefully that the common law is efficient. His arguments are based on examination of particular legal doctrines. I call this the “micro” argument for legal efficiency. The evolutionary models were aimed at explaining this micro efficiency. There is more recent literature that uses empirical methods to compare various legal systems. This literature generally finds that common law is more efficient than other forms of law. I call this the “macro” argument for efficiency. It is ultimately a Hayekian argument, based on the idea that in common law systems, governments have less power than in other systems. I first discuss micro efficiency, and them macro. “Micro” Efficiency Micro efficiency is based on an examination of particular legal doctrines and attempts to determine if they are efficient. This was the method used by Posner. (Much of my own work is of this type; see for example Rubin, 1983). The difficulty with this method of analysis, is that often the conclusion regarding the efficiency of a particular rule depends on unmeasured transactions costs of various sorts; if the analysts’ intuition 1
about relative magnitudes of costs is incorrect, then doctrines claimed to be efficient may not be so. Nonetheless, Posner's analysis has been the intellectual spark behind the growth of law and economics, and questions about efficiency of the sort he was the first to raise, have dominated the literature. Much of this literature may be considered as detailed attempts to answer the positive efficiency question first posed by Posner, and much of the rest aims at deriving normative conclusions as to what is efficient This method of analysis is fundamentally different from efficiency analysis in other branches of economics. There, a process (market competition) is postulated and it is shown that the process leads to efficient outcomes. Economists do not generally examine consumers to see if they are equating ratios of marginal utilities to prices, or irms to see if they are charging marginal cost. Rather, the process by which outcomes are generated is shown to lead to efficiency. It is for this reason that many economists are uncomfortable with the efficiency arguments of law and economics. Nonetheless because this is the standard method in law and economics, any analysis of the efficiency of any particular body of law can be considered as evidence for or against Posner's hypothesis. If some law is found efficient, then this is evidence for the hypothesis. If some law is found inefficient, or if there are proposals for reform, then this is evidence against the hypothesis. In this sense, much of law and economics is aimed at testing this fundamental hypothesis Evolutionary Models Scholars are of course aware of these difficulties and have sought to identify a process that would lead to efficiency. I first proposed the evolutionary model of legal
about relative magnitudes of costs is incorrect, then doctrines claimed to be efficient may not be so. Nonetheless, Posner’s analysis has been the intellectual spark behind the growth of law and economics, and questions about efficiency of the sort he was the first to raise, have dominated the literature. Much of this literature may be considered as detailed attempts to answer the positive efficiency question first posed by Posner, and much of the rest aims at deriving normative conclusions as to what is efficient. This method of analysis is fundamentally different from efficiency analysis in other branches of economics. There, a process (market competition) is postulated and it is shown that the process leads to efficient outcomes. Economists do not generally examine consumers to see if they are equating ratios of marginal utilities to prices, or firms to see if they are charging marginal cost. Rather, the process by which outcomes are generated is shown to lead to efficiency. It is for this reason that many economists are uncomfortable with the efficiency arguments of law and economics. Nonetheless, because this is the standard method in law and economics, any analysis of the efficiency of any particular body of law can be considered as evidence for or against Posner's hypothesis. If some law is found efficient, then this is evidence for the hypothesis. If some law is found inefficient, or if there are proposals for reform, then this is evidence against the hypothesis. In this sense, much of law and economics is aimed at testing this fundamental hypothesis. Evolutionary Models Scholars are of course aware of these difficulties and have sought to identify a process that would lead to efficiency. I first proposed the evolutionary model of legal 2
efficiency in an attempt to solve this problem(Rubin, 1977). The evolutionary models are attempts to explain judicial behavior without resort to preferences or utility functions Initially, these models aimed at explaining Posner's putative observation that the common law was efficient. It is fair to say that the models failed in this endeavor, perhaps because the law is not so efficient as posner argued. nonetheless these models have had an important impact on the literature because they have called attention to forces other than judicial preferences in explaining the law. The evolutionary models are ultimately based on the model of the litigation process first set forth by Landes(1971) In the first paper applying an evolutionary model to the common law, I argued that most cases are settled, rather than litigated, and that it is only litigated cases that can lead to legal change. Cases are settled when the expected value to the plaintiff of a case is less than the expected cost to the defendant, which is generally true if stakes are symmetric. However, inefficient laws can sometimes create asymmetric stakes because the inefficiency means that there are deadweight losses than cannot be bargained away in the settlement process. That is, an inefficient rule creates a loss to one party that is greater than the gain to the other because of future stakes in similar type cases. Thus, litigation becomes more likely when rules are inefficient, and so inefficient rules are subject to greater selection pressure, and more likely to be overturned. (Note that this model, like many of its successors, depends on parties having ongoing interests in disputes of a certain sort, rather than merely in the matter at hand. Following this initial contribution were several extensions and modifications Priest(1977)argued that inefficient rules generated larger stakes and so were more likely
efficiency in an attempt to solve this problem (Rubin, 1977). The evolutionary models are attempts to explain judicial behavior without resort to preferences or utility functions. Initially, these models aimed at explaining Posner's putative observation that the common law was efficient. It is fair to say that the models failed in this endeavor, perhaps because the law is not so efficient as Posner argued. Nonetheless, these models have had an important impact on the literature because they have called attention to forces other than judicial preferences in explaining the law. The evolutionary models are ultimately based on the model of the litigation process first set forth by Landes (1971). In the first paper applying an evolutionary model to the common law, I argued that most cases are settled, rather than litigated, and that it is only litigated cases that can lead to legal change. Cases are settled when the expected value to the plaintiff of a case is less than the expected cost to the defendant, which is generally true if stakes are symmetric. However, inefficient laws can sometimes create asymmetric stakes because the inefficiency means that there are deadweight losses than cannot be bargained away in the settlement process. That is, an inefficient rule creates a loss to one party that is greater than the gain to the other because of future stakes in similar type cases. Thus, litigation becomes more likely when rules are inefficient, and so inefficient rules are subject to greater selection pressure, and more likely to be overturned. (Note that this model, like many of its successors, depends on parties having ongoing interests in disputes of a certain sort, rather than merely in the matter at hand.) Following this initial contribution were several extensions and modifications. Priest (1977) argued that inefficient rules generated larger stakes and so were more likely 3
to be litigated, again subjecting them to increased selection pressure. Goodman(1979) argued that efficient precedents were worth more to parties who would benefit than inefficient precedents were worth to their beneficiaries, and that parties to whom a decision was worth more would spend more litigating and so would be more likely to win. In other words, efficient precedents were more likely to win in litigation and thus survive than were inefficient precedents. Katz(1988)expanded on this notion in the context of presenting a model of litigation expenditures. Terrebonne(1981)also presented a model of efficient legal evolution Other scholars began critically examining these models, and the general notion of legal efficiency. For example, Tullock(for example, 1997)has long argued that the English common law process is less efficient than Continental processes. Rizzo(1980a and b)argues from an Austrian perspective that the amount of information needed for judges to achieve efficiency is excessive, although in a critique I have argued that rizzo's criticism might apply to efficiency in all of economics, not merely in law and economics (Rubin, 1980). Aranson(1992) argues that it is impossible for judges to seek efficiency because the calculations required are equivalent to those required to make central planning work. Hadfield (1992) has argued that because judges see only a biased sample of potential cases, depending on the rules in existence, it is impossible for judges to move towards efficiency, even if they desire to do so. Landes and Posner(1979)in a symposium paper published in the Journal of legal Studies argued that the earlier models had erred by modeling precedent as an all or nothing issue, when the proper question was whether a precedent was stronger or weaker. That is, litigation might strengthen or
to be litigated, again subjecting them to increased selection pressure. Goodman (1979) argued that efficient precedents were worth more to parties who would benefit than inefficient precedents were worth to their beneficiaries, and that parties to whom a decision was worth more would spend more litigating and so would be more likely to win. In other words, efficient precedents were more likely to win in litigation and thus survive than were inefficient precedents. Katz (1988) expanded on this notion in the context of presenting a model of litigation expenditures. Terreborne (1981) also presented a model of efficient legal evolution. Other scholars began critically examining these models, and the general notion of legal efficiency. For example, Tullock (for example, 1997) has long argued that the English common law process is less efficient than Continental processes. Rizzo (1980a and b) argues from an Austrian perspective that the amount of information needed for judges to achieve efficiency is excessive, although in a critique I have argued that Rizzo’s criticism might apply to efficiency in all of economics, not merely in law and economics (Rubin, 1980). Aranson (1992) argues that it is impossible for judges to seek efficiency because the calculations required are equivalent to those required to make central planning work . Hadfield (1992) has argued that because judges see only a biased sample of potential cases, depending on the rules in existence, it is impossible for judges to move towards efficiency, even if they desire to do so. Landes and Posner (1979) in a symposium paper published in the Journal of Legal Studies argued that the earlier models had erred by modeling precedent as an all or nothing issue, when the proper question was whether a precedent was stronger or weaker. That is, litigation might strengthen or 4
weaken a precedent without overturning it completely. Thus a party with an interest in overturning an inefficient precedent would also have to consider the possibility that litigation could strengthen as well as weaken the precedent. This consideration greatly weakens the evolutionary pressures for efficiency. Parsons(1983)combined Priest's oint( that inefficient precedents would lead to increasing litigation) with the Landes and Posner point(that precedents that were litigated might become entrenched) to argue that here is a tendency for the common law to become"reckless"to favor rules that inefficiently lead to increased accidents. Cooter and Kornhauser(1980) present a complex evolutionary model in which there are some tendencies towards efficiency, but in which both efficient and inefficient rules will be observed at any time. This model and alternative definitions and implications of efficiency, are discussed in Kornhauser (1980). Von Wagenheim(1993) presents a model with similar results Hirshleifer(1982), building on my discussion of inefficiency when stakes in precedent are asymmetric, provided what may be one of the most useful and influential criticisms of the evolutionary models. Recall that in my original model and in some others, including Goodman(1979)and Landes and Posner(1979), evolutionary forces moved the law towards efficiency only if the party with an interest in efficiency had an ongoing interest in the form of he law. Hirshleifer generalized this point to show that the law could come to favor whichever party could most easily organize and mobilize resources for litigation of unfavorable precedents. This movement would be independent of efficiency. I used this point to argue that common law was more like statute law than many want to admit interest groups could use either common or statute law to achieve
weaken a precedent without overturning it completely. Thus a party with an interest in overturning an inefficient precedent would also have to consider the possibility that litigation could strengthen as well as weaken the precedent. This consideration greatly weakens the evolutionary pressures for efficiency. Parsons (1983) combined Priest's point (that inefficient precedents would lead to increasing litigation) with the Landes and Posner point (that precedents that were litigated might become entrenched) to argue that there is a tendency for the common law to become “reckless”—to favor rules that inefficiently lead to increased accidents. Cooter and Kornhauser (1980) present a complex evolutionary model in which there are some tendencies towards efficiency, but in which both efficient and inefficient rules will be observed at any time. This model, and alternative definitions and implications of efficiency, are discussed in Kornhauser (1980). Von Wagenheim (1993) presents a model with similar results. Hirshleifer (1982), building on my discussion of inefficiency when stakes in precedent are asymmetric, provided what may be one of the most useful and influential criticisms of the evolutionary models. Recall that in my original model and in some others, including Goodman (1979) and Landes and Posner (1979), evolutionary forces moved the law towards efficiency only if the party with an interest in efficiency had an ongoing interest in the form of he law. Hirshleifer generalized this point to show that the law could come to favor whichever party could most easily organize and mobilize resources for litigation of unfavorable precedents. This movement would be independent of efficiency. I used this point to argue that common law was more like statute law than many want to admit: interest groups could use either common or statute law to achieve 5
their goals(Rubin, 1982). I argued that the apparent efficiency of the common law was because most common law was developed at a time when organization of interest groups was expensive, and that more recently both common and statute law have been subject to interest group pressures. Crew and Twight(1990)expanded on this point and found common law less subject to rent seeking than statute law. Rowley and Brough(1987) and Barzel (2000) find that contract and property might be expected to be efficient, but not tort Martin bailey and i extended this theme in a formal model of the influence of interest groups on the law Bailey and rubin, 1994), and we have shown that plaintiffs attorneys have been responsible for the shape of modern tort law, using an evolutionary mechanism to shape the law Rubin and Bailey(1994). In Rubin, Curran and Curran (2001)we modeled an interest group deciding whether to use litigation or lobbying as a method of rent seeking: Osborne(2002)presents a similar model. Fon and Parisi(2003) provide an additional mechanism to explain expansion of tort(mainly product liability) law: since plaintiffs chose courts in which to file, judges who are in favor of expansive law will see more cases and have more influence than more conservative judges Although shaped by evolutionary forces, this law is socially quite inefficient An interesting set of hypotheses regarding legal evolution is in Roe(1996). Roe argues that the notion of evolution towards efficiency is an important determinant of lega form, but it is not the only determinant. He incorporates three subsidiary notions into an efficiency framework- the importance of initial conditions(borrowed from chaos theory ) path dependence, and evolutionary accidents. The result of these processes
their goals (Rubin, 1982). I argued that the apparent efficiency of the common law was because most common law was developed at a time when organization of interest groups was expensive, and that more recently both common and statute law have been subject to interest group pressures. Crew and Twight (1990) expanded on this point and found common law less subject to rent seeking than statute law. Rowley and Brough (1987) and Barzel (2000) find that contract and property might be expected to be efficient, but not tort. Martin Bailey and I extended this theme in a formal model of the influence of interest groups on the law (Bailey and Rubin, 1994), and we have shown that plaintiffs' attorneys have been responsible for the shape of modern tort law, using an evolutionary mechanism to shape the law Rubin and Bailey (1994). In Rubin, Curran and Curran (2001) we modeled an interest group deciding whether to use litigation or lobbying as a method of rent seeking; Osborne (2002) presents a similar model. Fon and Parisi (2003) provide an additional mechanism to explain expansion of tort (mainly product liability) law: since plaintiffs chose courts in which to file, judges who are in favor of expansive law will see more cases and have more influence than more conservative judges. Although shaped by evolutionary forces, this law is socially quite inefficient. An interesting set of hypotheses regarding legal evolution is in Roe (1996). Roe argues that the notion of evolution towards efficiency is an important determinant of legal form, but it is not the only determinant. He incorporates three subsidiary notions into an efficiency framework - the importance of initial conditions (borrowed from chaos theory), path dependence, and evolutionary accidents. The result of these processes 6
would be that laws would be well, but not perfectly, adapted. However, while these notions are interesting, as roe himself admits they do not as of yet provide refutable hypotheses. It would also be interesting to see if these propositions can be generalized to provide some implications In a recent important paper, Zywicki (2003) has added what he calls a"supply side"to the efficiency of law models. He points out that the evolutionary models discussed above are demand side " models, with litigants demanding efficient rules Following Berman(1983), Zywicki shows that during the formative period of the common law there was competition between several court systems. There was first competition between civil and ecclesiastical courts. Within the civil system, there were royal law, feudal law, manorial law, urban law and mercantile law courts, all competing for the fees and business of litigants. There were courts of the King's bench the Exchequer, and the Court of Common Pleas, and four more obscure royal courts as well All of these courts competed for business and fees; for example, church courts jurisdiction over testamentary succession could be used to increase the domain of these courts. This created an incentive for each court to provide unbiased, accurate and quick resolution of disputes. This is the supply side: judges and courts competed to supply efficient rules to get the business of disputants. Courts could also borrow remedies and ules from each other, which facilitated the evolution and spread of efficient rules and In this competition, the Law Merchant (Lex mercatoria) played a major role in commercial law, including contract law(Benson, 1989). Ultimately the common law
would be that laws would be well, but not perfectly, adapted. However, while these notions are interesting, as Roe himself admits, they do not as of yet provide refutable hypotheses. It would also be interesting to see if these propositions can be generalized to provide some implications. In a recent important paper, Zywicki (2003) has added what he calls a “supply side” to the efficiency of law models. He points out that the evolutionary models discussed above are “demand side” models, with litigants demanding efficient rules. Following Berman (1983), Zywicki shows that during the formative period of the common law there was competition between several court systems. There was first competition between civil and ecclesiastical courts. Within the civil system, there were royal law, feudal law, manorial law, urban law and mercantile law courts, all competing for the fees and business of litigants. There were courts of the King’s Bench, the Exchequer, and the Court of Common Pleas, and four more obscure royal courts as well. All of these courts competed for business and fees; for example, church courts’ jurisdiction over testamentary succession could be used to increase the domain of these courts. This created an incentive for each court to provide unbiased, accurate and quick resolution of disputes. This is the supply side: judges and courts competed to supply efficient rules to get the business of disputants. Courts could also borrow remedies and rules from each other, which facilitated the evolution and spread of efficient rules and remedies. In this competition, the Law Merchant (Lex mercatoria) played a major role in commercial law, including contract law (Benson, 1989). Ultimately the common law 7
under Mansfield adopted the law merchant and this is the source of the efficient contract and commercial law rules that many have observed in the common law. It is important to note that in many circumstances(and particularly in business or contractual disputes)the parties would pick the forum ex ante, so that both would have an incentive to choose efficient courts. Thus, in this large class of disputes, there would be no pro-plaintiff bias ht exist when plaintiffs choose courts after a dispute has arisen In this view, an important source of efficiency is the existence of competing courts and bodies of law. where such competition exists, rules will tend towards efficiency; where competition is lacking, there will be weak or non-existent tendencies for efficiency. This explains the actual path of the common law. In its formative stages, here was competition, and the law became efficient. More recently, there has been less competition, and the law has moved towards some inefficiencies. For example in the U.S., federal and state common law originally competed. This competition ended in 1938, as a result of the case Erie Railroad v. Tompkins(304 U.S. 64). After that period there was less competition as the federal courts were required to use the relevant state law. Now, arbitrators do compete with the courts for commercial business What can we say about the evolutionary models? By focusing on the role of litigants and, with the addition of the important Zywicki analysis on the role of competing courts, the models have a good deal of explanatory power. They do not, as irst thought, indicate that the common law will always be efficient. However, they do explain both why common law was efficient in the past and why it is now less efficient They also provide some guidance for methods of channeling the law towards efficiency 8
under Mansfield adopted the law merchant and this is the source of the efficient contract and commercial law rules that many have observed in the common law. It is important to note that in many circumstances (and particularly in business or contractual disputes) the parties would pick the forum ex ante, so that both would have an incentive to choose efficient courts. Thus, in this large class of disputes, there would be no pro-plaintiff bias as might exist when plaintiffs choose courts after a dispute has arisen. In this view, an important source of efficiency is the existence of competing courts and bodies of law. Where such competition exists, rules will tend towards efficiency; where competition is lacking, there will be weak or non-existent tendencies for efficiency. This explains the actual path of the common law. In its formative stages, there was competition, and the law became efficient. More recently, there has been less competition, and the law has moved towards some inefficiencies. For example in the U.S., federal and state common law originally competed. This competition ended in 1938, as a result of the case Erie Railroad v. Tompkins (304 U.S. 64). After that period there was less competition as the federal courts were required to use the relevant state law. Now, arbitrators do compete with the courts for commercial business. What can we say about the evolutionary models? By focusing on the role of litigants and, with the addition of the important Zywicki analysis on the role of competing courts, the models have a good deal of explanatory power. They do not, as first thought, indicate that the common law will always be efficient. However, they do explain both why common law was efficient in the past and why it is now less efficient. They also provide some guidance for methods of channeling the law towards efficiency 8
(for example, Rubin, 1994 and 2004). Additionally, by demonstrating the difficulty of achieving the goal of efficiency, they have helped scholars to understand when the law may be efficient and when it is likely not to be. Moreover, an important component of the evolutionary models was their focus on the litigation decision as driving legal evolution. Other models of legal evolution both economic and non-economic. either leave mechanisms for evolution unspecified or assume that the preferences of judges are the driving forces The economic models were the first to focus on the motives of litigants, realizing that judges can decide only those cases that come before them. As Elliott(1985: 71)in a study of the history of evolutionary models, indicates: " Moreover, the economic school of evolution has broadened our view of the legal system to include the role of litigants, as well as judges, in making law. The literature associated with Priest and Klein(1984)on selectivity bias in case selection is a result of the focus on litigants' decisions, which has come out of the evolutionary models. ( For an analysis of theories of legal evolution from 1880-1940, which thus omits analysis of the economic theories, see Hovenkamp, 1985) Macro” Efficiency In addition to the literature that examines the efficiency of particular rules, there is a newer literature examining the overall efficiency of common law. The theoretical basis for this literature is the work of Hayek. Hayek argued that common law was created from the bottom up, rather than from the top down. The recent literature has elaborated this point to argue that common law does a better job than code law of protecting property rights from predation by the state itself
(for example, Rubin, 1994 and 2004). Additionally, by demonstrating the difficulty of achieving the goal of efficiency, they have helped scholars to understand when the law may be efficient and when it is likely not to be. Moreover, an important component of the evolutionary models was their focus on the litigation decision as driving legal evolution. Other models of legal evolution, both economic and non-economic, either leave mechanisms for evolution unspecified or assume that the preferences of judges are the driving forces. The economic models were the first to focus on the motives of litigants, realizing that judges can decide only those cases that come before them. As Elliott (1985: 71) in a study of the history of evolutionary models, indicates: “Moreover, the economic school of evolution has broadened our view of the legal system to include the role of litigants, as well as judges, in making law.” The literature associated with Priest and Klein (1984) on selectivity bias in case selection is a result of the focus on litigants' decisions, which has come out of the evolutionary models. (For an analysis of theories of legal evolution from 1880-1940, which thus omits analysis of the economic theories, see Hovenkamp, 1985). “Macro” Efficiency In addition to the literature that examines the efficiency of particular rules, there is a newer literature examining the overall efficiency of common law. The theoretical basis for this literature is the work of Hayek. Hayek argued that common law was created from the bottom up, rather than from the top down. The recent literature has elaborated this point to argue that common law does a better job than code law of protecting property rights from predation by the state itself.1 9
