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About a half century ago, a handful of social scientists began to formalize what was to become the analytical heart of neoclassical economics. Under the broad rubric of "general equilibrium theory," these scholars demonstrated (in varying degrees of mathematical sophistication) the longstanding intuition behind the so-called "invisible hand": that is, that competitive markets could convert apparent disarray and fragmentation into order and harmony. More explicitly, general equilibrium theory demonstrated how a decentralized collection of self-interested individuals could, through competitive market transactions, allocate scarce goods and services in a socially efficient manner. An equally powerful corollary attended this central insight: that the prices that emerge in such markets convey valuable public information about resource scarcity to individuals possessing little more than "dispersed bits of incomplete and frequently contradictory knowledge.” By many accounts, these dual characteristics of efficiency and information transmission constitute a legacy that is central to much of modem economic thought.

In light of this intellectual inheritance, it is hardly surprising that early law and economics scholars entertained the possibility that the common law could function in a manner similar to competitive markets, effecting order from chaos. The specifics of their story would take a slightly different form, of course. Judges and litigants would supplant firms and consumers as the central economic actors; precedents and rights would replace prices and quantities as the focal equilibrium outcomes. But the underlying argument was otherwise similar – positing first that common law precedent tends over time to converge to rules which are economically efficient, and second that it does so in a decidedly nonorchestrated fashion – obviating the up-front costs that constrain statutory promulgation in favor of a less costly, learning-by-doing protocol.

On first glance, the market analogy has a number of appealing characteristics. Indeed, judges share at least some attributes with actors in a decentralized economy: They possess limited information about the world; they pursue ends which need not coincide with broader social objectives (however defined); and they often pursue their respective ends independently rather than collectively. Moreover, just as prices affect individual consumption, production, and investment decisions, so too can legal rules constrain and shape individual choices. Buttressing these similarities, early advocates of the market analogy identified some striking examples within the common law in which we observe rules that seem (at least roughly) to correspond with efficiency concerns.

Nevertheless, among contemporary legal scholars, the analogy between market behavior and legal evolution remains relatively tenuous. Over the last twenty years, detractors of the efficiency hypothesis have challenged its foundational premises from multiple perspectives. For example, some have noted that judges (often by design) are more insulated from the inefficient consequences of their decisions than are analogous market participants. This added protection, in turn, affords them the opportunity to pursue ends that need not be related systematically to efficiency. Others have registered even stronger criticisms, noting that even if courts were predisposed towards efficiency concerns, there is no guarantee that those who actually litigate important matters will constitute an unbiased sample from the relevant population. Operating from such a skewed sample, the argument goes, judges may stand little chance of arriving at an efficient rule, even if they wanted to.


Law | Law and Economics