To find out what law-and-economics scholars and economists think lawyers should know about economics, we conducted surveys of random samples of members of the American Law and Economics Association and the American Economic Association. We posed two questions to both groups: What do you think are the five most important economic concepts law students ought to learn in a law-and-economics course?
Law-and-economics courses sometimes include economics articles in their reading lists. If you could choose up to five articles for such a course, what would they be

Moorhouse, John C.

Morriss, Andrew P.

Whaples, Robert

English

Texas A&M University School of Law

Texas A&M University School of Law Texas A&M Law Scholarship Faculty Scholarship 1-1998 What Should Lawyers Know About Economics Robert Whaples Andrew P. Morriss Texas A&M University School of Law, amorriss@law.tamu.edu John C. Moorhouse Follow this and additional works at: https://scholarship.law.tamu.edu/facscholar  Part of the Law Commons Recommended Citation Robert Whaples, Andrew P. Morriss & John C. Moorhouse, What Should Lawyers Know About Economics, 48 J. Legal Educ. 120 (1998). Available at: https://scholarship.law.tamu.edu/facscholar/136 This Article is brought to you for free and open access by Texas A&M Law Scholarship. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Texas A&M Law Scholarship. For more information, please contact aretteen@law.tamu.edu. What Should Lawyers KnowAbout Economics?Robert Whaples, Andrew P. Morriss, and John C. MoorhouseLaw and Economics is now part of the curriculum at many American lawschools; the current AALS directory lists 159 persons teaching at least onecourse in the area. Because law schools inexplicably do not generally require abackground in economics, such courses usually must teach some principles ofeconomic analysis before applying those principles to legal questions. Wewondered what law-and-economics scholars and economists thought lawyersshould know about economics' (as opposed to what they should know aboutthe economic analysis of law). The results are important beyond the circle oflaw-and-economics scholars. Teachers and students of torts, property, andcontracts felt the impact of the first wave of law-and-economics scholarship,but every area of law from admiralty to procedure is increasingly subject toeconomic reasoning.Even those legal educators and lawyers who swore off economics after anencounter with an undergraduate principles course are confronting eco-nomic reasoning in scholarly work and judicial opinions. Understanding thatreasoning requires some familiarity with economics. The optimal number ofeconomics courses may always be one more (at least in our opinions), butthose whose consumption of economics education has somehow fallen shortmay reasonably substitute the works economists-and particularly economistswho think about law-think are important for lawyers.To find out what law-and-economics scholars and economists think lawyersshould know about economics, we conducted surveys of random samples ofmembers of the American Law and Economics Association and the AmericanEconomic Association.2 We posed two questions to both groups:At Wake Forest University, Robert Whaples is Associate Professor of Economics, and John C.Moorhouse is Professor of Economics. Andrew P. Morriss is Associate Professor of Law andAssociate Professor of Economics at Case Western Reserve University.1. Perhaps our next project will be to determine what lawyers think law-and-economics scholarsshould know about law.2. Between April and August 1996 we sent 402 surveys to members of the ALEA and 199 surveysto members of the ABA. Fourteen of the ALEA surveys and eight of the AEA surveys werereturned as undeliverable. We received 63 usable responses from ALEA members (a 16.2%response rate) and 70 from AEA members (a 36.6% response rate). ALEA members werealso asked 42 questions on a number of policy issues and factual propositions, somethingwhich may explain their lower response rate. Those results appear in Andrew Morriss et al.,Where Is There Consensus in the Field of Law and Economics? (unpublished manuscript onfile with authors).Journal of Legal Education, Volume 48, Number 1 (March 1998)What Should Lawyers Know About Economics ?What do you think are the five most important economic concepts lawstudents ought to learn in a law-and-economics course?Law-and-economics courses sometimes include economics articles intheir reading lists. If you could choose up to five articles for such acourse, what would they be?Tables 1 and 2 summarize the answers.3Table 1: Concepts MentionedOpportunity cost / diminishing returnsExternalities / Coase TheoremMarginal analysisDemand & supply / market equilibriumEconomic efficiency / Pareto optimalityIncentives mattersComparative advantagePublic choice theoryEconomics of property rightsTransactions costsPresent value / discountingUtility theory / social welfareMarket structure / monopolyUncertainty / riskCompetitionOptimization / individual rationalityGovernment's impactGame theory conceptsPrincipal-agent theoryAntitrustElasticityImperfect informationMarket failureConsumer & producer surplusPublic goodsMoral hazard & adverse selectionPercent MentioningALEA57.151.646.846.828.611.13.213.54.015.114.39.53.29.54.811.96.36.36.30.03.24.84.81.64.86.3As Table 1 shows, four concepts ranked well ahead of the others: opportu-nity cost, the Coase theorem, marginal analysis, and market equilibrium.Economic efficiency/Pareto optimality also ranked fairly high among theALEA economists, although not so high among members of the AEA. Four ofthese five concepts are at the heart of the microeconomic core, and the fifth,the Coase Theorem, is the key to much of law and economics generally.Missing from the top tier are concepts at the center of modernmicroeconomics such as principal-agent theory and property rights econom-ics. Macroeconomic topics are also noticeably absent. This suggests that ourrespondents (correctly, in our opinion) are satisfied with exposing law stu-dents to an abbreviated introductory microeconomics course rather thanfamiliarizing them with recent cutting-edge law-and-economics scholarship.3. Because we asked open-ended questions, we used somejudgment in grouping responses. Forexample, "opportunity cost" includes mention of diminishing marginal utility and scarcity.For reasons of space, we listed only concepts and materials identified by at least tworespondents; half-point scores reflect a few respondents' listing two concepts as equallyimportant.Journal of Legal EducationTable 2: Articles RecommendedPercentMentioningR. H. Coase, The Problem of Social Cost, 3J.L. & ECON. 1 (1960) .............................. 57.9*Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rulesand Inalienability: One View of the Cathedra4 85 HAv. L. REv. 1089 (1972) ....... 11.3Ronald H. Coase, The Nature of the Firm, 4 ECONOMIcA 386 (1937) ........................... 8.3Gary Becker, Crime and Punishment: An Economic Approach, 76J. POL.ECON. 169 (1968) ................................................................................................... 6.0Benjamin Klein, Robert G. Crawford & Armen A. Alchian, VerticalIntegration, Appropriable Rents, and the Competitive Contracting Process,21J.L. & ECON. 297 (1978) .................................................................................... 5.6*Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON.REv. 347 (1967) ...................................................................................................... 5.3Milton Friedman, The Methodology of Positive Economics, in ESSAYS INPosrriw ECONOMICS 3 (1953) ................................................................................. 4.5Armen A. Alchian & Harold Demsetz, Production, Information Costs,and Economic Organization, 62 AM. ECON. REv. 777 (1972) ................................... 4.5George A. Akerlof, The Market for "Lemons": Qualitative Uncertaintyand the Market Mechanism, 84 Q.J. ECON. 488 (1970) ........................................... 4.5GeorgeJ. Stigler, The Theory of Economic Regulation, 2 BELLJ. ECON. &M GMr. Sci. 3 (1971) ............................................................................................... 3.8Richard A. Posner, ECONOMIC ANALSIS OF LAw (1972, 5th ed. 1998) ....................... 3.8*Garret Hardin, The Tragedy of the Commons, 162 SCIENCE 1243 (1968) ................... 3.4Richard A. Posner & Andrew M. Rosenfield, Impossibility and RelatedDoctrines in Contract Law: An Economic Analysis, 6J. LEGAL STUD. 83 (1977) ........ 3.0Paul H. Rubin, Why Is the Common Law Efficient? 6J. LEGAL STUD. 51 (1977) ........... 3.0*Steven Shavell, Strict Liability Versus Negligence, 9 J. LEGAL STUD. 1 (1980) .............. 3.0tR. A. Radford, The Economic Organization of a P.O. W. Camp, 12ECONOMICA 189 (1945) ........................................................................................... 2.3tGary Becker, THE ECONOMICS OF DISCRIMINATION (1957, 2d ed. 1971) ..................... 2.3*GeorgeJ. Stigler, The Economics of Information, 69J. POL. ECON. 213 (1961) ......... 2.3*Oliver E. Williamson, Transaction-Cost Economics: The Governanceof Contractual Relations, 22J.L. & ECON. 233 (1979) ............................................. 2.3*Michael C. Jensen & William H. Meckling, Theory of the Firm:Managerial Behavior, Agency Costs and Ownership Structure, 3J. FIN.ECO N. 305 (1976) .................................................... ......................................... 1.9tRichard A. Posner, A Theory of Negligence, 1J. LEGA. STUD. 29 (1972) .................... 1.5tJohn S. McGee, Predatory Price Cutting: The Standard Oil (N.J.) Case,1J.L. & EcoN. 137 (1958) ...................................................................................... 1.5tHarold Demsetz, Indushy Structure, Market Rivalry, and Public Policy,16J.L. & ECON. 1 (1973) ........................................................................................ 1.5tStephen N. S. Cheung, Transaction Costs, Risk Aversion, and the Choiceof Contractual Arrangements, 12J.L. & ECON. 23 (1969) ........................................ 1.5*Robert Cooter, The Cost of Coase, 11J. LEGAL STUD. 1 (1982) ................................. 1.5*CarlJ. Dahlman, The Problem of Externality, 22J.L. & ECON. 141 (1979) ................ 1.5*Friedrich von Hayek, Competition as Discovery Procedure, in F. A. Hayek,ed., NEw STUDIES IN PHILOSOPHY, PoLmcs, ECONOMICS, AND THE HIsToRY OFIDEAS 179 (1978) .................................................................................................... 1.5*William M. Landes & Richard A. Posner, THE ECONOMIC STRUCTURE OFTORT LAW (1987) .................................................................................................... 1.5*Franco Modigliani & Merton H. Miller, The Cost of Capita CorporationFinance and the Theory of Investment, 48 A. ECON. REv. 261 (1958) ..................... 1.5*Steven Shavell, ECONOMIC ANALYSIS OF ACCIDENT LAw (1987) ................................... 1.5* mentioned only by ALEA respondentst mentioned only by AEA respondentsWhat Should Lawyers Know About Economics?A similar focus is apparent in the suggested readings of Table 2. Respon-dents in both groups focus heavily on "classic" texts and articles: all but five ofthe thirty works mentioned were published before 1980.4 Not surprisingly, therespondents also concentrate heavily on articles from the Journal of Law andEconomics (7 articles receiving 95.5 mentions) and the Journal of Legal Studies (5articles receiving 16 mentions). Of articles not in law-and-economicsjournals,only one (Calabresi & Melamed) is from a law journal; the others are fromeconomics journals (10 articles receiving 53.5 mentions) or books (6 booksreceiving 20 mentions). Since we had asked for "economics" articles a lawstudent should read, the absence of law reviews may seem unsurprising. Butthere are plenty of articles published in law reviews that contain just as mucheconomics (and certainly as much law and economics) as material publishedelsewhere. Our results suggest that neither law-and-economics scholars noreconomists think of law review materials as "economics" articles.For the most part, the readings suggested are relatively nontechnical ar-ticles comprehensible to most law students; only a few, such as Akerlof's,might tax most students' abilities. The desire to choose material within thecompetence of law students may have led to the selection of older articles-articles written before the mathematization of economics.The most striking response, although not unexpected, was the top rank-ing-by a wide margin-of Ronald Coase's "The Problem of Social Cost."Clearly this is the key element in the law-and-economics syllabus. More thanthree-fourths of the respondents gave it a mention; only 15 percent men-tioned the second-most-mentioned article. Another Coase article, "TheNature of the Firm," ranked third.The major difference between the two groups surveyed was in their treat-ment of the Calabresi & Melamed article. Many ALEA members listed it, butthe AEA members did not mention it at all. Apparently law-and-economicsscholars read law reviews, but economists outside the field do notTable 3: Authors Recommended More than 10 TimesPercent MentioningRonald Coase 75.9Richard Posner 19.5Harold Demsetz 14.3Armen Alchian 13.2*Guido Calabresi 12.8*A. Douglas Melamed 11.3George Stigler 10.5tGary Becker 8.3* mentioned only by ALEA respondentst mentioned only by AEA respondents4. The AEA and ALEA responses to this question were generally similar, with two exceptionsnoted below, and so Table 2 combines the results.5. Another difference lies in the works that relatively few respondents cited: with one exception,every work mentioned by fewer than five persons received mention from members of onlyone of the two groups.Journal of Legal EducationAnother way of interpreting our results is to look for authors mentionedrepeatedly. Certainly many law-and-economics scholars have published widely,and some authors' writings lack an obvious focal point like "The Problem ofSocial Cost." Almost anything by Richard Posner, for example, would berelevant. Table 3 lists authors mentioned ten or more times. Not surprisingly,Coase's name tops the list, although large numbers of respondents mentionedArmen Achian, Gary Becker, Guido Calabresi, Harold Demsetz, RichardPosner, and George Stigler. Teachers might wish to include in their syllabiworks by frequently mentioned authors as representative of the field.Teachers can use the suggested articles to introduce students to the con-cepts identified in Table 1. The non-Coase readings come from a variety ofareas, from torts to property rights to finance. The wide range of subject areassuggests materials that could be used in substantive courses to provide a law-and-economics perspective, particularly for students who have mastered basiceconomic principles either in their undergraduate course work or in a law-and-economics course.There are.two major textbooks (Cooter & Ulen 6 and Posner7) and twocasebooks for law-and-economics courses (Barnes & Stout8 and Goetz9). Inaddition there are some shorter works that provide an introduction to law andeconomics (Harrison, 10 Malloy," and Polinsky12). All cover the five conceptsthat our respondents identified as most important, as well as some additionaltopics. Cooter & Ulen provide the most thorough introduction to economicreasoning and come closest to replicating the experience of an introductorymicroeconomics course by more formal presentation. Any of the shorterworks could also serve as back-up reading for lectures on these concepts.The textbook format allows for greater topical coverage but at the expenseof primary sources. The articles suggested by our respondents offer a source ofsupplemental readings. The Barnes & Stout casebook includes significantexcerpts from Coase; the Goetz casebook does not.If you wish to take our respondents' collective advice, you might structureyour law-and-economics course to include a brief overview of basicmicroeconomic concepts, discussion of Coase's "The Problem of Social Cost,"discussion of Calabresi & Melamed's "Cathedral" article, and selections fromone or more of the frequently mentioned writers: Alchian, Becker, Demsetz,Posner, and Stigler.6. Robert Cooter & Thomas Ulen, Law and Economics, 2d ed. (Reading, Mass., 1997).7. Richard A. Posner, Economic Analysis of Law, 5th ed. (NewYork, 1998).8. David W. Barnes & Lynn A. Stout, Cases and Materials on Law and Economics (St. Paul,1992). This book is also available as a series of short paperbacks focused on individualsubjects for use as supplemental material.9. CharlesJ. Goetz, Cases and Materials on Law and Economics (St. Paul, 1984).10. Jeffrey L Harrison, Law and Economics in a Nutshell (St. Paul, 1995).11. Robin Paul Malloy, Law and Economics: A Comparative Approach to Theory and Practice(St. Paul, 1990).12. A. Mitchell Polinsky, An Introduction to Law and Economics, 2d ed. (Boston, 1989).

What Should Lawyers Know About Economics

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