Case studies, counterfactuals, and causal explanations.

• Author: Mitchell, Gregory

This Article critically examines the use of single-observation case studies to develop causal explanations for significant legal events, detailing the evidentiary and inferential problems inherent in this methodology. Most signicant among these problems is that focus on a single case necessitates the use of counterfactual thought experiments to test causal hypotheses. The pitfalls of such thought experiments are illustrated through the discussion of the recent attempts to explain the collapse of Enron Corporation using this approach. Application of a set of normative criteria to the products of these Enron thought experiments reveals the suspect nature of causal explanations and policy prescriptions drawn from single-observation case studies. The Article closes with a discussion of the tension in legal scholarship between political relevance and epistemic humility.

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The Enron matter will prove to be a very important event in the history of American shareholder capitalism. (1)

While many of the events are dramatic, their implications do not necessarily fall into the category of "news." (2)

INTRODUCTION

What should the legal system learn from the collapse of Enron Corporation? (3) Quite a bit, if the volume of scholarship is any guide. Within two years of Enron's bankruptcy, legal scholars have offered a dizzying array of views on the meaning of Enron for the legal system's regulation of corporations, securities and energy markets, gatekeepers and facilitators of these markets, taxes, bankruptcy, employee benefits, the environment, and even the mapping of the human genome. (4) Many of these ruminations on Enron offer interesting explanations of what went wrong, some suggest creative solutions for the future, and a few may even influence the legislators and judges who must deal with the political and legal fallout from recent corporate failures. (5) We may ask, however, whether these Enron autopsies truly help us understand when business and regulatory failures are likely to occur and how we might prevent them in the future. (6)

Accordingly, rather than offer yet another opinion on the legal lessons of Enron, this Article instead considers how we should go about learning these lessons. More specifically, this Article critically examines how causal stories are created to explain significant legal events such as Enron's demise and how these stories are used to generate policy prescriptions. In a causal story, which is a type of single-observation case study, the author constructs a story to explain why an event occurred and then uses this causal explanation to argue about why the law should or should not be reformed. (7) For instance, Professor Lynne Dallas composes a story about Enron's corporate climate that reveals a "culture [that] did not encourage and support ethical behavior." (8) She then assigns causal significance to this unethical corporate climate in order to support a regulatory agenda: "It is ... clear that given Enron's climate it was only a matter of time before Enron would have imploded. Congress, the SEC, and other regulatory organizations are, therefore, justifiably directing attention to codes of ethics and ethical climates." (9)

While Professor Dallas and other legal scholars tell interesting and plausible stories to explain how the law failed with respect to Enron and to support their views on reform, reader engagement and plausibility are poor guides to the validity of causal explanations. (10) In fact, the methodological problems associated with the causal story approach are so severe that many social scientists avoid this approach if at all possible. Social scientists would argue that causal stories provide, at best, innocently misleading portraits of the causes of behavior and, at worst, unavoidably partial stories biased by the writer's preexisting beliefs and values. (11)

This Article analyzes treatments of the Enron matter using this causal story approach to illustrate (1) the evidence-selection and analytical problems that arise in the construction of causal stories; (2) the necessary reliance in this approach on thought experiments and counterfactual causal reasoning, modes of analysis highly susceptible to inferential bias and fallacy; and (3) the indeterminacy of causal accounts offered under this approach. Although these problems are substantial, the causal story approach does not need to be entirely rejected. A more constructive approach is to consider ways to improve the use of causal stories. To this end, this Article proposes a set of normative criteria that may be used to evaluate causal stories. Although the Enron causal stories often fail to satisfy one or more of these normative criteria and thus should be given little or no prescriptive weight as presently constructed, the criteria point to ways in which the stories may be improved.

The purpose of this Article is to draw attention to the unavoidable methodological and interpretive problems associated with the use of causal stories in the law and to argue that stringent normative criteria should guide the use of these modes of analysis. Causal stories about Enron serve as the focus of this discussion not because they represent particularly egregious examples of this genre, but because they provide good and prominent examples of the methodological hazards that arise employing this approach. Moreover, consumers of these stories may benefit from a discussion of ways to evaluate and adjudicate among conflicting causal accounts. Causal storytelling in the law is not unique to Enron, nor is the application of counterfactual thought experiments unique to causal storytelling. (12) The dangers of these methods extend beyond the creation of causal explanations for business failures.

Furthermore, the Enron stories do not serve as departure points because they necessarily get the story wrong. In fact, given the multiple, conflicting stories, some accounts surely get the story right. Indeed, implementing the reforms suggested by some of the Enron scholars might turn out well in the end. The simple point argued here is that these causal stories, as currently constituted, provide little justification for the reform of our laws or legal theories. While some causal stories are better than others, scrutiny of these stories reveals that even the best causal stories provide, at most, a starting point for more rigorous analysis of the causes of business and regulatory failures.

The Article proceeds by illustrating in Part I the range of causal stories used to explain Enron's collapse and to argue for and against particular legal reforms. These causal stories are then situated within the broader category of empirical approaches to causal inference to demonstrate that the stories present special problems when used to develop singular causal explanations for Enron's failure or general causal explanations for business failures.

Part II then details specific evidentiary and inferential problems with the Enron causal stories and promulgates a set of evaluative criteria that may be used to separate the better stories from the worse in future research. The Article concludes by considering reasons why legal scholars may choose the causal story approach over more rigorous forms of causal analysis and generalization.

1. TELLING ENRON STORIES

   Many legal scholars mark the fall of Enron as a momentous event in our legal and economic history. They have described it in various ways, including as "an occasion for moral lament"; (13) evidence that "[w]hat is needed today, short of perhaps a wholesale change in modern capitalism, is a new SEC"; (14) proof of "the inability of government regulation and criminal law to prevent the widespread dislocations caused by corporate misconduct"; (15) and, most strikingly, along with the September 11th terrorist attacks, as "the product of unchecked, antidemocratic fanaticism" reflecting a "deep hostility to the norms and values embodied in the notion of the secular 'rule of law.'" (16) Given the significance assigned to Enron, it is not surprising that many legal scholars would seek to understand the underlying reasons in hopes of preventing future collapses. (17)

   In this endeavor, legal scholars offer a wide range of explanations for Enron's demise and draw diverse and, at times, inconsistent, lessons from Enron. These Enron postmortems necessarily involve inferences about the causes of Enron's collapse. Any diagnosis of the conditions leading to the corporate failure or any prescription to prevent future failures requires a set of beliefs about the causes of past failures. Even broad forecasts about the historical significance of Enron require a set of beliefs about how past events will alter future events--that is, a set of beliefs about causal relations in the world. As the following examples illustrate, the stories being told about Enron vary in their specificity about the causal processes supposedly at work and the complexity of the causal story being told.

   The most basic explanations for Enron assign greed or character a causal role: "It was the perceptions of greed that largely resulted in the demise of Enron and its tax advisors." (18) Professor Victor Flatt similarly sees an uncontrolled acquisitive drive as Enron's undoing:

   In order to understand why Enron's actions and subsequent collapse were inevitable, we must focus on the basic primal principle of "taking" what is available. Property rights and accompanying moral codes must be seen as a derogation of what exists "naturally" before this time, and what exists in most animal species. That is, humans take whatever they can, in any way they can, without restraint, at least from noncooperating family or tribal units. This suggests that humans will work around any prohibition that is not clear, or will be tempted to take anything of value if the taking is not explicitly prohibited. (19) Professor Nancy Rapoport settles on character as a...