The Irrelevance of Legal Thought
posted by Nate Oman
I suspect that one of the depressing truths of being a law professor is that much of our thinking on how to solve social problems is irrelevant at best and pernicious at worse.
For example, theorists of private law spend a lot of time thinking about what an optimal system of contract, property, or commercial law might look like. If there is a place where these debates really matter, it seems to me that it is in the realm of development. I count myself as a friendly critic of efficiency analysis in private law, but every time I find myself dismissing this or that argument for a marginal improvement in the efficiency of legal rules, I find myself saying something like, “Sure, it is easy for me as a citizen of a rich and relatively prosperous country to dismiss efficiency gains, but would I feel the same way were I the citizen of a poor and developing country where marginal growth matters much more?”
The truth, however, is that the quality of institutions dwarfs the quality of substantive law in terms of explaining economic outcomes. In other words, as between optimal law enforced by corrupt institutions and suboptimal law enforced by honest institutions, one ought to go with honest institutions every day of the week and twice on Sundays. Marginal improvements in substantive law don’t matter nearly as much as the academic energy lavished upon them would suggest.
I can’t help but think that something like this is going on in the current push to reform financial regulations. Legal intellectuals are largely focused on regulating transactional structures or the governance of financial institutions. In other words, we are looking at the sorts of things that we are trained to think about, namely substantive legal rules. I suspect, however, that the reality is that the main drivers of the financial crisis were not regulatory. Rather they were monetary and fiscal. Another way of putting this is that the repeal of Glass-Steagall or the sloth of the SEC were bit players in the causation of crisis compared to monetary policy and fiscal subsidies. Mucking around with the regulation of mortgage brokers, the terms of home loans, methods of foreclosure, or executive bonuses is rather like dealing with the aftermath of the Titanic’s sinking by calling for marginal refinements in the rudder control of ocean liners.
The perniciousness comes when we engage in cost-benefit analysis about proposed legal changes. If it is true that most of our woes were caused by macro-economic factors like money supply and balance of payments, I suspect that legal reformers are going to systematically over-value of the benefits of their proposed changes to legal rules. We will often assume that what we are thinking about is far more important than it actually is. Hence, we are likely to fall into the trap of saying something like, “Yes, new legal rule X will create costs, but those costs are acceptable in light of the way that rule X will protect us from a repeat of recent nastiness Y.” The problem is that the debate over rule X or rule not-X is frequently a sideshow compared to forces such as fiscal and monetary policy.
It’s both politically and intellectually depressing.
January 11, 2010 at 9:44 am
Posted in: Bankruptcy, Consumer Protection Law, Contract Law & Beyond, Corporate Finance, Current Events, Economic Analysis of Law, Legal Theory, Securities Regulation
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Responses (4)
Jeff Lipshaw - January 11, 2010 at 10:21 am
Nate, I think what you’ve described is accurate, but I don’t find it either depressing or frustrating. Indeed, to push your allusion along, if I have a choice between a rock solid contract with a slimeball, and a loosey-goosey contract with a trustworthy partner, I’ll go with the latter any day.
There are two balloons popping here. The first is the notion that law can be systematized into a rational, reductive scientific model, a la Langellian formalism or law and economics. The second is that the model, such as it is, maps well onto the complexities of the real world. There’s something to be said for the Luhmann-Teubner view of autopoietic law, in which those inside the balloon are operating under illusions, but illusions necessary to sustain the system. Or to try another analogy, there were a few discussions that made me think we were in a law professor version of The Truman Show – a lovely self-contained world.
Dan Cole - January 11, 2010 at 9:03 pm
“The truth, however, is that the quality of institutions dwarfs the quality of substantive law in terms of explaining economic outcomes.”
But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.
Jeff Lipshaw - January 13, 2010 at 6:17 am
Dan, I think Nate is pointing out something slightly different. Stable institutions and respect for whatever it is we mean by the “rule of law,” it seems to me, reflects a social-cultural consensus. That is, human-created culture makes respect for institutions and law, and not the other way around (just look around the world). The rules intrinsically part of institutions are disproportionately (I think) constitutive (see Searle and Schauer) – they actually create the institutions and the processes within the institutions.
Nate’s point goes to whether, once institutions exist, we can regulate or legislate our way to an ideal or just set of institutions. Those institutions are something more than the sum of the parts of the legal rules that make them, and merely fine tuning the rules without dealing in the social-cultural issues likely misses the point. Nevertheless, as I suggested in the earlier comment, it’s the nature of the lawyerly beast to think like a lawyer (or to use a cliche – when you have a hammer, every problem looks like a nail).
Michael Froomkin - January 13, 2010 at 7:48 am
Seems to me another way to read this is that those of us whose work focuses on procedure, or on law that shapes institutions (business associations, structural constitutional law, administrative law, many areas of regulation) ought to be real happy.
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