In that case, what is the question? Economics and the demands of contract theory.

• Author: Craswell, Richard
• Position: Response to article by Eric A. Posner in this issue, p. 829

In his thoughtful essay, Eric Posner asks whether economic analysis has failed contract law and suggests that it has. (1) Not surprisingly, I hold a different opinion. That is, while I agree with much of what Posner says about particular economic findings, I disagree about what it would mean for economics to "fail" (or, for that matter, what it would mean to succeed).

More specifically, Posner argues that economic analysis has failed in two respects, both as a descriptive theory and as a normative one. Descriptively, Posner says, economics fails to predict existing doctrine: Either existing doctrine differs from the rules that economics identifies as efficient, or economics is too indeterminate to identify the most efficient rules. And normatively, Posner says that this same indeterminacy also prevents economics from making any suggestions for the reform of contract law.

On my view, though, the descriptive and normative issues (and what constitutes "failure" for each of these purposes) must be treated separately. The descriptive claims that might be made for economics are largely uninteresting, as most scholars have implicitly recognized. I will speak briefly about those claims in Part I of this Response, but the bulk of my comments--Part II--will concern the normative claims. To the extent that normative analysis is at issue, I am much less troubled by indeterminacy of the sort that Posner describes. I then address, in Part III, the very different demands of what might be called an "interpretive" theory of contract law.

In short, my differences with Posner are largely over the question of "what counts as a good theory" of contract. (2) Posner wisely declined to address that question--wisely, I say, because a full discussion could easily have tripled the length of his essay. My goal in this Response, though, is to put that issue back on the table, for this is where most of our differences can be found.

1. DESCRIPTIVE THEORIES

   In the 1970s, in the early days of law and economics, much attention was given to Richard Posner's claim that the common law (including the law of contracts) was efficient. (3) The elder Posner's claim on this point was not so much that it was good for the common law to be efficient, but simply that, as a descriptive matter, it happened to be the case that the common law was efficient.

   I should note here that it is not clear how many other scholars--other than Richard Posner, that is--actually used this view in their academic work. True, some authors tried to advance theories of the causal processes that might tend, over time, to produce efficient rules, so these authors presumably shared the belief that the common law was, in fact, efficient. (4) But the causal theories they advanced were not persuasive, and one of those authors (George Priest) soon revised his theory and abandoned any claim that it would support the evolution of efficient rules. (5) Meanwhile, most scholars who applied economic analysis confined their analysis to the effects of particular legal rules, so those scholars had no reason to express an opinion as to whether they thought an entire field of law (much less the entire common law) was efficient. (6)

   Still, Richard Posner's more provocative claims attracted a good deal of attention, and his descriptive hypothesis was often attributed to law and economics as a field (or a "movement") rather than to a single author. (7) Since then, however, this descriptive hypothesis has fallen out of favor, in the sense that it is rarely discussed and even more rarely defended in the legal literature. Part of the reason for this decline--I suspect a big part--is the fact that Richard Posner himself eventually retreated from the strongest form of the hypothesis. (8) As I have already noted, it is not clear how many other defenders the hypothesis ever had. But there were also substantive problems with this purely descriptive use of economics, which probably contributed to its decline. (9)

   For one thing, as Eric Posner notes in his essay, the descriptive hypothesis (even if it were true) is not useful for predictive purposes. (10) True, the hypothesis can be cast as a claim that we can predict the content of any common-law doctrine by figuring out what rule would be most efficient. But there are plenty of other ways to figure out the content of any common-law doctrine--by reading the case law, for example--so it is not clear why we should want to predict something we can find out independently.

   To be sure, the descriptive hypothesis, if it were true, might have served a legitimating or quasi-normative purpose, by showing that the common law really did care about efficiency. After all, if common-law rules really did track efficiency, it might be argued that this would justify the use of normative efficiency arguments, at least in any normative system that placed some value on internal consistency. Indeed, this potential use of the descriptive hypothesis might have seemed especially important--both to supporters and to opponents--during the early years of law and economics, when it was still being contested whether efficiency arguments had any legitimate place in the legal academy. (11) But this battle is now over, in the sense that it is (almost) universally permissible to discuss efficiency arguments in law schools. That might explain why this potential use of the descriptive hypothesis is much less salient today.

   In any event, another problem with the descriptive hypothesis is that it was never very clear what null hypothesis was being rejected. (12) In standard hypothesis testing, of course, the researcher seeks not so much to confirm the hypothesis under consideration but rather to reject some rival (or "null") hypothesis. But what null hypothesis did Richard Posner's early research reject? He could surely reject the hypothesis that the common law tends to minimize efficiency--but since nobody seriously endorsed that position, its rejection would not have created any stir. In addition, he might have been able to reject the hypothesis that the common law is essentially random with respect to efficiency. However, either of these conclusions would have established only that the common law places some value on efficiency without ruling out the possibility that it valued many other things as well. And while that view (that the common law places some value on efficiency) might have been controversial in the 1970s, it is not nearly so controversial today.

   By contrast, in order to establish the hypothesis that the common law cares only for efficiency, we would have to reject null hypotheses for each of the possible rival theories. For example, to show that efficiency predicts contract doctrines better than do the autonomy-based theories of Charles Fried, (13) we would have to reject the hypothesis that individual autonomy had any predictive value where contract law was concerned--or, at least, we would have to reject the hypothesis that autonomy added any extra predictive value over and above what could be predicted on the basis of efficiency alone. But that hypothesis would be very difficult to reject, partly because efficiency and individual autonomy often coincide, and partly because Fried never operationalized his theory at a level that would permit predictive tests. As a result, Richard Posner's descriptive work could not address the comparative issues that many scholars cared most about such as the role of economics versus the role of autonomy, or economics versus corrective justice.

   So what remains of the descriptive hypothesis today? It is still true that much work in law and economics proceeds without making full-blown normative arguments, as most economists (and most lawyers) continue to pay little attention to their normative underpinnings. Indeed, this absence of explicit normative argument might suggest that most economic work should be read as making merely descriptive claims.

   In my view, though, this body of work is better read as (implicitly) advancing a limited and contingent normative argument. That is, I read most mainstream law-and-economics articles as saying: "To the extent that you care about efficiency as a value, you should pay attention to the following conclusions." (14) The normative claim in such an assertion is necessarily contingent because most scholars (in most articles, at least) make no attempt to convince the reader that he or she should care about efficiency as a value. But for any readers who already do care about efficiency--either as a sole criterion or just as one value among many--the article will indeed have normative force. It will say, in effect: "To the extent that you do care about efficiency, this is what you ought to do."

   All of which is to explain why I am not interested in defending economics as a descriptive theory of contract law, the topic with which Eric Posner's essay is most concerned. (15) But his essay also criticizes the normative uses of economics, and not just on the grounds that I have already noted (i.e., that the normative argument is limited and contingent). Instead, he argues that, even to the extent that we do care about efficiency, economic analysis has still failed because it is too indeterminate to tell us which rules to adopt. Accordingly, I now turn to that aspect of his essay.

2. NORMATIVE THEORIES

   Posner's claim here is that economic analysis has become so complex, and must consider so many offsetting factors, that it is incapable (in a large number of cases) of determining which rule would be most efficient. This implies that, even if we were to accept efficiency as a normatively desirable goal, economic analysis would fail to tell us how to achieve it. For this reason, he says, economics has failed contract law from a normative perspective as well.

   1. An Example of Posner's Criticism

      Rather than discussing Posner's arguments in the abstract, it will be more useful to consider a concrete example...