All Commentary
Thursday, March 1, 2001

Law’s Order: What Economics Has to Do with Law and Why It Matters by David D. Friedman

Economic Concepts Are Vital to Understanding Law

Princeton University Press • 2000 • 329 pages • $29.95

Law and economics, or the economic analysis of law, is a relatively new discipline. It was launched in the late 1950s and early 1960s and has grown in importance and in the number of its practitioners ever since. It uses key principles of economics—such as self-interest, rationality, efficiency, and externalities—to predict the intended and unintended effects of different legal rules and to explain why we have the particular legal rules we do and why some legal rules might be considered better than others. Aaron Director and Ronald Coase, to whom the book is dedicated, and Judge Richard Posner, to whom the author refers in several chapters, have been major contributors to the field.

David Friedman is an economist and a professor of law at the University of Santa Clara School of Law. This book is one of his best efforts. His style makes it great fun to read, and it is filled with intriguing insights. Because of its comprehensive scope, it could easily be used as a text in an introductory course in law and economics. For example, it includes a chapter on antitrust law that I wish Joel Klein and Judge Thomas Penfield Jackson had read before they proceeded to punish Microsoft for being too effective a competitor.

Friedman’s early chapters explain basic economic concepts vital to understanding law. A transition chapter explains the structure of the American legal system, and the later chapters apply economics to the analysis of such things as criminal law, tort law, contract law, and marriage, sex, and babies. One especially interesting chapter is devoted to a law-and-economics analysis of three alternative legal systems—saga-period Iceland, eighteenth-century England, and Shasta County, California.

Law’s Order is more than an introductory text, however. For example, in Chapter 5 Friedman goes far beyond the usual exposition of the Coase Theorem. He illuminates the differences between property rights and liability rights and how the choice of efficient rules depends on such things as the free-rider problem among joint buyers and holdouts among joint sellers. A reader is well advised to read this chapter carefully, with pencil and paper at hand since it is basic to much that comes later.

Friedman introduces each new concept with an actual or hypothetical example that puts the reader in the center of the issue. Frequently, he comes to what seems a reasonable conclusion and in the very next paragraph he explains why it is wrong. In one case, the issue of whether, on efficiency grounds, we need criminal law at all, he goes through seven rounds of arguments changing his answer each time. He offers this “as evidence of how risky it is to go from the existence of an argument for the efficiency of some particular rule to the conclusion that the rule is in fact efficient.” It is also an effective expository device because it engages the reader. I tried to anticipate the arguments in each round before I read them. I was often wrong, but I learned something useful every time.

Judge Posner is famous for his conjecture that the common law, which develops over time through judicial precedents and decisions, consists of legal rules that are, for the most part, economically efficient. Friedman gives many examples—for example, the negligence doctrine in torts—consistent with Posner’s conjecture, but he also gives a few—such as product liability rules—that aren’t. Posner’s great contribution, according to Friedman, has been to direct attention to the question of economic efficiency in the law. “We do not know whether the law is efficient. We do know that the question ‘What is the efficient legal rule?’ converts the study of law from a body of disparate doctrines into a single unified problem.”

The book is filled with elegant, instructive arguments. Consider just one. Burglary, Friedman argues, should be a tort rather than a crime, and denting a fender should be a crime rather than a tort. The basis of those startling assertions is the incentive for potential victims to undertake efficient preventative measures. In tort law, successful plaintiffs are made whole through compensatory damages. In criminal law, victims do not receive compensation. If the penalty is a fine, it is the state that receives the money, not the victim. If the penalty is imprisonment, the victim suffers an additional loss in taxes to pay for the incarceration. Therefore, potential victims of crimes are more likely to undertake efficient prevention measures than are potential victims of torts. Preventative measures are more effective for dented fenders than burglaries. Under the general rule that incentives should be placed where they do the most good, denting a fender should be a crime, and burglary a tort.

Finally, the book has no footnotes and very few references. Friedman and his publisher have set up a Web site for his readers to obtain the missing information online. Friedman chose this option to make the book more user-friendly for the intelligent layman who will read it for general information and entertainment rather than as an academic resource. Icons in the margins of the hard copy point to corresponding online icons. I think this bit of entrepreneurship will pay off and thus become widely imitated.

Charles Baird, a professor of economics and the director of the Smith Center for Private Enterprise Studies at California State University at Haywood, is a quarterly columnist for Ideas on Liberty.

  • Charles Baird is a professor of economics emeritus at California State University at East Bay.

    He specializes in the law and economics of labor relations, a subject on which he has published several articles in refereed journals and numerous shorter pieces with FEE.