In his book, The Analytical Failures of Law and Economics, Shawn Bayern tackles what, for a time, was arguably contract law’s leading school of thought, and argues that the emperor has no clothes. Bayern is not the movement’s sole critic; however, his critical approach is different because he adopts “analytical techniques, often of a type similar to those that have driven the legal-economics movement forward, in order to show that many leading legal-economic arguments would not reach their goals on their own terms.” (P. 3.) Thus, Bayern challenges law and economics theory with law and economics reasoning. (Maybe sometimes the Master’s tools can be used to dismantle the Master’s house).1 The book covers property, tort and contracts, but this review focuses on contracts.
Bayern starts with two important clarifications. First, he is not arguing that efficiency is not important. However, the “orthodox American law-and-economics movement” is a “poor way…to achieve efficiency” (P. 5) and “efficiency “is not the law’s only goal, does not have a singular definition, and is not always easy to recognize.” (P. 5.) The second clarification is that the law and economics movement has not been “worthless”; however, when it comes to “specific, determinative conclusions about legal policy” the movement “fails.” (Pp. 5-6.)
Bayern’s gloves-off writing style makes for easy reading, quite an accomplishment given its relatively dry subject matter. For the past few decades, the legal academy in general and contracts scholarship in particular, has seemed to be enamored or at least, highly deferential, to the law and economics movement (L&E). But Bayern suggests that L&E’s contributions are overblown in some ways and unremarkable in others. At its most useful, it is just what the law has always done which is consider economic reasoning in outcomes. In this form, it is, as Bayern notes, “not flashy” or “counterintuitive” but rather “tries to integrate broadly economic techniques with sensitivity and caution into the law.” (P. 6.) At its most self-important and presumptuous, however, it is a failure that robs the law of “its deeper efficiencies” and returns “only a mechanical- and usually politically right-wing –understanding of economic policy in its place.” (P. 6.)
And with that one-two punch, Bayern is off to the races. He lays the groundwork with a general critique of “several general patterns of analytical failure in legal-economic argumentation.” (P. 12.) These recurring failures include “ungraceful degradation” (P. 14.) because of its unrealistic assumptions, notably about human rationality but also about the state of the world and how it operates. Economic models may (sometimes, even often) work under perfect circumstances, but an argument based upon an economic model fails “to have any explanatory or justificatory force if the model is even slightly imperfect.” (P. 15.)
Bayern doesn’t shy away from toppling giants in the field or questioning the tenets of L&E classics. One such classic is Richard Posner and Andrew Rosenfeld’s “foundational” article on impossibility and related doctrines.2 According to Bayern, their article argued that, all things being equal, parties (being self-interested and rational) would negotiate to make their contracts efficient; thus, contract law should allocate risks in the way the parties would have done if they had considered the issue. Bayern argues that their argument “fails to recognize…that not all contracts are negotiated in a perfect world in which parties can maximize the surplus of individual contracts.” For example, companies that employ agents to negotiate their contracts might impose rules to reduce agency costs which “may prevent agents from negotiating optimal individual contracts.” (P. 15.) In other words, assumptions about rationality, and even what is efficient, risk “tampering with that contract in ways that the parties would not at all have intended.” (P. 15.)
Another analytical failure of L&E is the “neglect of alternatives” which ignores that “even if an activity is productive…other activities may be more productive.” (P. 18.) Bayern observes, “This is like saying that being a manufacturer produces wealth, so we should encourage college graduates to become manufacturers.” (P. 18.) There are other failures (I especially like the “terror of costs and externalities”) but “ungraceful degradation” and “neglect of alternatives” seem to be particularly relevant to L&E as applied to contracts and contract doctrine.
According to Bayern, perhaps the biggest “misstep” is the theory of efficient breach”: “First, it is almost entirely wrong. Second, it has achieved quite a significant following; it is taught uncritically in many or most first-year Contracts courses in the United States.” (P. 86.) While influential among academics, it has an unimpressive track record in the real world: “Courts have never seriously adopted the rule….When given an opportunity to apply the theory of efficient breach…the law tends to hold otherwise across a wide range of questions and legal disciplines.” (P. 87.) Even Richard Posner, when faced with the opportunity, “rejected the theory.” (P. 89.) If Judge Posner isn’t going to apply efficient breach in the real world, then who is?
Bayern also tackles the new business rule and contract interpretation, “the trickiest, the most important, and the most litigated question in contract law.” (P. 99.) Here, Bayern notes that L&E favors textualism over contextualism because it is presumably more efficient; however, why it is more efficient is unclear. It is either because it lowers transaction costs (P. 99.) or reduces litigation costs” (P. 100.) Bayern dismantles each of these arguments in turn.
The 2008 crisis exposed as myths some of L&E’s assumptions, tarnishing the movement’s sheen. Bayern’s book provides the intellectual firepower to further debunk these myths. For those who have rolled their eyes at the impracticality of some of L & E’s assumptions and solutions, Bayern’s book is a warmly welcomed and long-awaited addition to contracts scholarship.
- With apologies to Audre Lorde who famously stated, “The master’s tools will never dismantle the master’s house.” Audre Lorde, The Master’s Tools Will Never Dismantle The Master’s House (2018).
- Richard A. Posner & Andrew M. Rosenfeld, Impossibility and Related Doctrines in Contracts Law: An Economic Analysis, 6 J. LEGAL STUD. 83 (1977).
