Posted by Authored by: Tyler Clark
The Downstream Economy
Economic inequality is skyrocketing, the productivity pay gap is soaring, and the U.S. is becoming an increasingly financialized economy. At the nexus of the law and economic policy, legal scholars have rightly advanced the merits of the role of law in reducing these disparities or formulating how to achieve broad-based, more equal outcomes across our economy for some time. After all, disparate economic impacts are largely the result of legal policy, which represents the outcome of political contests.
Conversely, economists in recent decades have unearthed destructive assumptions that inform law. They have done so by fighting the regressive legacy of the ‘law and economics’ movement, which sought to insert models of efficiency and cost-benefit analysis (“CBA”) (among others) into legal thinking. Today the impacts of the economic way of thinking are perhaps most visible in our highest court, the US Supreme Court–now effectively a court for the “one percent” alongside the growing influence of money in politics.
But there is a particular instance where the economic way of thinking corrodes law: in common law torts. More specifically, negligence, which reasons in cases like United States v. Carroll Towing Co., that a “calculus-of-risk” may be deployed to balance interests using Judge Learned Hand’s formula: B (burden of precaution) < P (probability of loss) x L (magnitude of loss).
However, this method is said to be deployed by Hand, Richard Posner, and former Supreme Court Associate Justice Steven Breye, one of the most powerful adherents to the ‘law and econ’ platform, is largely only perceived to have practical use in application.
Purported to achieving an “optimal” way of advancing the public good, supported by principles of economic efficiency and utility, Hand in Carroll Towing Co. didnot successfully quantify the size of each risk involved, and courts have only rarely made an attempt to actually apply Hand’s test.
To undermine the law and economics movement writ large, lawyers, economists, and judges must reject status quo economic thinking to formulate a more realistic basis to assess negligence claims.
Re-tooling Tort Law
The foundation for negligence under the Hand Formula was forged to advance economic efficiency, thus a broader theory of liability, as a benchmark to guide legal practice. Yet its methodology to establish liability becomes limited beyond a rough estimate of rationality in explaining human behavior. Hand’s formula for assessing utility has a limited, narrow application that triggers only when customs, behaviors, moral tenets, and other rights are presumed to fail as guidance to assess such behavior. Ultimately, the formula’s role as a utility-maximizing tool is confined to helping distinguish between negligent and non-negligent conduct, to which there are stronger alternatives.
As society developed from nascent versions of tort law, a more general standard of care became necessary to govern the conduct of those who impose risks of injury on others. Thus, negligence developed that standard for assessing proper behavior in an increasingly complex world where people must interact with one another and where interests are myriad and often conflict, eventually adopting versions of the “rational man” popularized by economic orthodoxy.
In contrast, economic data today properly cautions against building standards of assessment based on such perfect rationality. In fact, manifestations of human irrationality can be fully amplified by present-day market failures, financial instability, and discrimination. None of which are consistent with the principles of utilitarianism underscoring Hand’s formula.
Even within economic models in tort law that describe the utilitarian principles under negligence shows that one cannot accurately assess gains and losses under such a theory. In fact, Hand himself did not. Under such circumstances, he rarely referred to his own utility tests–only about 11 times in the 331 opinions retrieved. And where some courts describe its applicability, this reference of such an application often only provided mere context, or dicta.
The law and economics movement represents a forceful paradigm shift from positivism and history to an over-reliance on stylized (and sparsely applied) economic models in the halls of the (often insulated) legal academy. To establish an accurate, applicable model of negligence, we must abandon the dead-end principles of the economic style of jurisprudence and expand our imagination of tort law to promote a truly equitable–and applicable–vision of justice.
About the Author
Tyler Clark is a current 1L at UIC Law. He holds a master’s degree in economics from the University of Utah. His research focuses on Law & Political Economy, Antitrust, and Economic History.
