Posner, Hayek, and the Economic Analysis of Law

• Author: Todd J. Zywicki; Anthony B. Sanders:
• Position: Todd J. Zywicki: Professor of Law, George Mason University School of Law; Anthony B. Sanders: Associate Attorney, Arnold & Kadjan, Chicago, Illinois
• Pages: 04

Todd J. Zywicki: Professor of Law, George Mason University School of Law; Research Fellow, James Buchanan Center for Political Economy: Program on Politics, Philosophy, and Economics, George Mason University. Professor Zywicki would like to thank the Law and Economics Center of George Mason University School of Law for financial support.

Anthony B. Sanders: Associate Attorney, Arnold & Kadjan, Chicago, Illinois. The Authors would like to thank Bill Modahl, Michael Rappaport, Cass Sunstein, Adrian Vermeule, and participants in the James Buchanan Center Workshop on Politics, Philosophy, and Economics at George Mason University for comments on an earlier draft of this Article.

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I Introduction

Although Friedrich August von Hayek (1899-1992) was trained as a lawyer and earned a Nobel Prize as an economist, he has been largely ignored by modern law-and-economics scholars. Richard Posner's recent essay comparing Hayek and Hans Kelsen through the lens of the economic analysis of law indicates why Hayek has been overlooked by the modern school of law and economics.¹ The Hayekian view of the world rests on conceptions of law, economics, and the state that are fundamentally at odds with prevailing modes of analysis. Finding this fundamental incompatibility, Posner concludes somewhat surprisingly (to both conventional wisdom as well as himself) that it is Kelsen, not Hayek, who provides a better fit with modern law-and-economics analysis.

This Article focuses on three areas of contrast between Posner's and Hayek's models of the economic analysis of law. This comparison, however, quickly reveals more fundamental and far-reaching distinctions between the Posnerian and Hayekian systems. At root, the two systems of law turn on radically different assumptions about the nature of knowledge and ignorance in society and the economy and about the effect that this has on the nature of the judicial process. Posner believes that judges (such as himself) are capable of collecting and applying substantial amounts of both factual and theoretical knowledge that can and should be used to inform the judicial function. Hayek, by contrast, is doubtful that any collective decision maker, including a judge, has the ability to collect and weigh enough information to be able to consciously develop and improve the law according to any measuring stick of social outcome.

From this fundamental disagreement about the nature of knowledge and the ability of judges to harness it, fundamental disagreements also arise about both the positive and the normative economic analysis of law. First, Posner and Hayek hold fundamentally different views about the nature of the common law, as encapsulated in Hayek's characterization of the common law as a "spontaneous order," in contrast to Posner's conceptualization of the common law as essentially a collection of disparate Page 562 rules. Second, these contrasting views of the common law lead to a radical difference of opinion regarding the normative purpose of law in society. Posner argues that judges should consciously use law to further designated social goals, namely wealth maximization. Hayek, by contrast, argues that the purpose of the law should be to create the conditions necessary for the maintenance of the spontaneous order of society, including the spontaneous order of the common law itself. Hayek's approach actually reinforces the traditional model of the common law as a logical system in which judges engage in analogical and doctrinal reasoning. Hayek views this as the proper role of judges, whereas Posner views it as nave. Finally, these contrasting views of the nature of law and the role of economic analysis in law generate fundamentally different views of the rule of law. Whereas Posner contends that Hayek confuses the rule of law with the rule of good law or the rule of liberal law, the analysis presented here reveals that Hayek views the rule of law as being determined precisely by its relationship to a liberal social order and market economy. Thus, there is in fact no confusion in Hayek's use of the rule of law, but rather it may be Posner who is confused because his use of the term fails to situate it in a social context.

At bottom, Hayek argues that judges should act as common-law judges traditionally were believed to have acted: they should apply the law as it is and as it has grown over time instead of independently formulating new law untethered to the larger social order. When Posner faults Hayek for not allowing the law to evolve, he misunderstands Hayek's view of legal change. Hayek does not call for the law to remain beholden to prior custom without adapting to new circumstances. Hayek merely argues that, on the whole, judges should not change the law. Because law arises through a spontaneous process, it is in law's very nature that it will change. Judges should look to how law has changed and not create those changes through social planning.

The purpose of this Article is not to defend Hayek's legal theory as either an accurate descriptive model of the common law as a historical system or as a normative system on economic principles. Instead, it is primarily intended to clarify Hayek's views in order to better assess Posner's critique. As will be seen, Posner's characterization of Hayek misunderstands Hayek in some subtle, but important, ways. Hayek's model of law is rooted in the traditional common law method but justified by economic reasoning, albeit economic reasoning that differs from Posner's neoclassically grounded economics.

Part II of this Article thus begins with an explanation of the different understandings of knowledge in Hayek's and Posner's systems of economics. Part III then compares Hayek's and Posner's views of law and the judicial role in the common law. Part III addresses Posner's criticism of Hayek's understanding of the concept of the rule of law. Part IV concludes with an analysis of the accuracy and normative attractiveness of these two rival views of the economic analysis of law and provides a Hayekian response to Page 563 Posner's claim that there is no room for legal change in Hayek's legal system.

II The Nature Of Judicial Knowledge

The foundation for the disagreement between Posner and Hayek on the economic analysis of law is grounded in a fundamental difference between the two over the nature of knowledge and its accessibility to collective decision makers such as judges.

A Posner On Judicial Knowledge

The cornerstone of Posner's economic analysis of law is that judges can, do, and should use economic principles to inform their decision making and to improve the law itself. Embedded within this analysis is a fundamental assumption about the ability of judges to compile and analyze the knowledge necessary to understand the implications of their decisions and to render those that will have both the goal and effect of improving the economic efficiency of the law.

In Posner's view, when a judge announces a legal rule, he must take into consideration the future effects of that rule. For example, in a torts case, the judge should "consider the probable impact of alternative rulings on the future behavior of people engaged in activities that give rise to the kind of accident in the case before him."² In choosing between possible rules, efficiency is the paramount criterion. According to Posner, judges "might as well concentrate on increasing" efficiency because they are not well disposed, qua common-law judges, to enforce alternative values, such as wealth redistribution.³ Thus, Posner views judges as future-looking rule makers who decide which rules to impose on the parties before them based upon the most efficient outcome that will follow from those rules. This includes assessing what would be the most efficient outcome in circumstances where, because of transaction costs, a transaction would not occur without judicial intervention.⁴

Viewing judges as rule makers who seek the most efficient outcome begs the question of how judges decide what rule will be the most efficient. Posner admits as much when he states that "the economic theory of law presupposes Page 564 machinery for ascertaining the existence of the facts necessary to the correct application of a law."⁵ Judges must rely not only on the facts provided by the parties in the cases before them, but also on general social science data that can help judges ascertain how a legal rule will influence behavior.⁶

Posner admits that there are some limits to this view, limits that Hayek, as is discussed below, recognizes much more concretely. Posner states that in crafting new rules of law, "judges, and legal professionals in general, may be so bereft of good sources of information . . . that their most efficient method of deciding cases and resolving issues of institutional design is to follow, or at least to be strongly constrained by, precedent."⁷ Posner limits this handicap, however, to situations where social change has created conditions so removed from the judges' knowledge that precedent is the only reference point. This is not meant to imply that Posner does not believe judges should generally adhere to precedent-he does-but rather that judges should also seek outside information in crafting legal rules.

B Hayek On Judicial Knowledge

Hayek holds a far less optimistic view of the ability of judges to collect and synthesize the degree of knowledge necessary to engage in the far- reaching economic balancing encouraged...