Book Reviews
The Economic Approach to Law
By Thomas J. Miceli. 2004. Stanford, CA: Stanford University Press. Pp 408. $85.00 hardcover.
Business economists use economic principles to help understand and solve problems. Since litigation affects more and more business decisions, it would be useful to analyze legal conflict using the framework of economics.
In The Economic Approach to Law, Thomas J. Miceli applies economic tools and principles to the functioning of the law. The book is aimed at undergraduate economics majors, but the treatment of the topic does not require economics or legal training on the part of the reader. Indeed, anyone with curiosity about the connection between law and economics and the willingness to think through numerous examples should read this book. A professor at the University of Connecticut, the author is well-qualified for the topic, having published numerous academic studies in the field of law and economics. The law considered in The Economic Approach to Law is case law or common law, built up over the years in the U.S. judicial system.
Relatively new, the field of law and economics can be traced to the early 1960s and the Chicago school of economics. The most important contribution to this literature was Ronald Coase, “The Problem of Social Cost” from The Journal of Law and Economics (October, 1960). In this article, Coase argues that parties to an externality will reach the efficient outcome by bargaining, regardless of how liability is assigned by the law. The implication is that government intervention is not necessary to internalize externalities; simply let the parties bargain and the efficient solution will result. This idea became known as the Coase Theorem.
Before the Coase Theorem, the prevailing view in economics was government intervention in the form of taxes on externalities, forcing the polluter to internalize costs borne by others. The Coase Theorem argued that government intervention is not required as long as the costs of bargaining are low and the parties reach a solution. In these situations, the role of law can be limited to a set of relatively inflexible rules. The catch is that when costs are high, bargaining is difficult or impossible. In these cases, the court system provides a framework for resolving disputes, balancing the costs and benefits case by case. When transactions costs are high, the law matters for efficiency.
The textbook applies economics to the study of the common law of torts, contracts, and property, with discussions of the litigation process, involuntary property transfers and eminent domain, concluding with a chapter on the economics of crime. The role of incentives, so important in economic theory, is found throughout the volume. For example, tort law, or accident law, sets out rules of behavior for those who engage in risky activities. An injured party may sue and obtain monetary compensation for negligence, thus presenting an important incentive for minimizing costs to others from risky activity. How much should a business invest in risk reduction? Keep spending on risk reduction until all risk is eliminated? In general, no: the last dollar spent for risk reduction should be just equal to the value of accident losses saved.
Each chapter begins with an overview and introduces the material with a little theory and a lot of context. The discussion begins with simple examples, giving way to more complex and realistic situations as the chapter progresses. The exposition is mostly textual with a few well-placed equations and graphs. The graphs and equations help move the story along, clarifying points as needed. The limited use of graphs and equations is a welcome relief from most economics texts.
The chapter on property law applies the Coase Theorem, initially assuming low transactions costs, then relaxing this assumption later in the chapter. The discussion is fluid and exceptionally well-done; I plan to draw on this chapter in my economics class. The chapter develops a corollary to the Coase Theorem: use property rules to enforce property rights when transactions costs are low, while liability rules should dominate when transactions costs are high.
I suggest beginning with the chapter on property law, then skimming the chapters on tort law and contracts. The book can be picked up and reviewed when specific information is needed without loss of understanding.
The over-riding theme of this book is this: the legal system facilitates exchange in markets when feasible, and provides a framework of incentives when market exchange is not feasible. I recommend this book to economists, human resource managers, business owners, and others who must consider the implications of the law in their decisions.
Review by David Penn, Director, Business and Economic Research Center Middle Tennessee State University
