Judge Richard Posner died this week. It is a cliché to call someone a giant in their field, but it fits here. As Alex Tabarrok said, “the only person ever to deserve a Nobel prize and a seat on the Supreme Court.”
Most of the writing about him will (and should) focus on his contributions to legal scholarship. He was the most cited legal scholar in the world, by far. His Economic Analysis of Law (which he published at 33 😭) laid out a whole field that has come to be known as the “economic analysis of law.” He also applied this to the law directly, as a judge for 36 years on the Seventh Circuit Court of Appeals.
I want to focus on Posner, the economist, especially the economic theorist. There are too many contributions to list, but what makes Posner stand out to me is his method of applying economics.
One of the great sins of modern economics is that we often use a new model for each situation. You see something in the world, and you write down a new model to explain it. The model matches the facts, but if each thing we see has a different explanation, what have we really learned about the world? Many an applied theorist has made a career doing this.
Posner and his colleague and former blogging partner Gary Becker were the two scholars who went the furthest in the opposite direction.
How can we explain the most with the fewest variables? That made his approach to theorizing so powerful and what set up the whole revolution in law and economics.
The Posner Conjecture
Law before Posner had a similar “myriad of models.” In a torts class, you might ask when a railroad owes damages to someone who was injured at a crossing. Then you go to your next class. It’s contracts. There a machine arrive late and you’re asking who owes whom what? Finally, you end up in your property law class. There you are trying to figure out if a factory owner has to stop smoke from landing on a neighbor’s land.
In each case, you trace the history of rulings. Great. Wonderful. Can anything you learned in one class help you make sense of the next?
Posner thought it could. Posner’s conjecture was that much of the common law could be explained by its tendency to promote economic efficiency. Imagine there are two possible rules under consideration in any decision. Ask what people would do under each. What would be the equilibrium outcome in these counterfactual worlds? If one rule induces people to take precautions worth their cost or make bargains they’d otherwise miss, Posner expected that to be the rule you’d more often find in the cases.
For example, in Economic Analysis of Law, Posner discusses Hadley v. Baxendale. In that case, a mill hired a carrier to take its broken shaft to a manufacturer who would use it as a model for a new one. The carrier was late, so the mill sat idle longer and sued for the profits it lost. The court ruled that the mill couldn’t recover those profits. As the court saw it, the carrier had no reason to expect a delay to keep the mill shut. Leaving the loss with the mill gave it a reason to keep a spare if it were that important. The mill was in the best position to take the precaution.
The more powerful step is actually the next one, since “efficiency” can be pretty malleable. The tighter connection is that if the economic reasoning favors a rule in contracts and in torts, he expected to find it in both. It’s not that the costs and benefits are different across the areas.
That explanation of Hadley then becomes a prediction about tort law. You’re committing to a theory of law. If the buyer can prevent the loss at lower cost by bargaining with the seller in advance than the court can by making the contractor liable, we should expect courts to deny recovery for lost profits in tort too.
So now you have a case about a repair yard that damages a ship’s propeller, so the charterers lose two weeks’ use of the ship and sue the yard. Who was in a better position to do something about the risk? The yard could take care with the propeller, of course. But it didn’t even know about the charter.
So if I buy the explanation of Hadley, I’d expect the charterers to lose. This isn’t a true prediction about the future, but in 1927, the Supreme Court said they couldn’t recover from the yard. So you have one unified theory of both.
So much of Economic Analysis of Law is just making these connections throughout the book. You have an explanation over here and carry through the prediction over there. It’s such a great example of economic analysis.
Taxation by Regulation
If you look around at a lot of the classic Posner pieces, you’ll see this type of move. How can we explain different things under one theory? Let me give one example from Posner’s article, Taxation by Regulation, which looks at an FCC decision from the early days of satellite communications.
At the time, if you wanted to send a telegram, you paid the company to transmit a written message and have it delivered. If you were a big customer and wanted to send your own messages, you could rent a satellite channel. So the telegraph company rented the channel from Comsat and then rented it out to the Pentagon at a higher price. Well, maybe should cut this middleman? So Comsat offered to rent the channels directly to the Pentagon for about a third of what the telegraph companies quoted.
The FCC blocked the deal. Why?
Suppose the FCC wanted to keep international telegrams cheap. Why would it care where the Pentagon rented its channels? Posner’s argument was that the companies lost money sending telegrams and recouped it through line rentals. They were cross-subsidizing this from the channels. This is the usual high-volume subsidizing low-volume users. The FCC wanted to keep telegrams cheap, and letting the Pentagon rent straight from Comsat would have destroyed the whole system.
That may or may not be a good explanation of what happened. But if we buy that explanation, where else should we expect to see the same thing? Think about the Post Office. A stamp cost the same even though some letters cost more to deliver than others. If the money left over on cheap deliveries helps pay for expensive ones, we’d expect the government to keep competitors out of the cheap deliveries too. That’s where a rival could undercut the Post Office and take away the money that pays for the rest. And the postal monopoly did cover those deliveries.
The important part isn’t whether had the best explanation in each case. The goal was to have as few explanations as possible to cover a variety of cases. That is how we increase our understanding.
As with everything, there are trade-offs. We don’t want everything to be a nail, even if we have a hammer. Sometimes the best we can do is multiple theories. We have quantum theory and classical mechanics, instead of one unified theory. But to have a real understanding of the world, we need to carry explanations between different phenomena. We want orbits and falling apples to have a connected explanation.
Much of what we do here at Economic Forces tries to do the same thing. If supply and demand explains what happened in one market, what should we expect in another? There is a lot of flexibility in the supply and demand framework, just as there is a lot around efficiency, but it still commits you to more than the alternatives without a unified theory. Beware of theorists bearing free parameters.
Poosner took that intellectual discipline seriously. More economists should follow suit. He was one of a kind, and we are worse off without him.
well said