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Legal Commentary

: FORTUNE Legal Pad

Law and economics 2.0

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On Thursday the Kauffman Foundation will announce that it is making $10 million in initial contributions to found an initiative aimed at reinvigorating, and, to some extent redirecting, the exceedingly influential school of thought that has come to be known as “law and economics.”

The discipline uses economic analysis to try to shed light on which legal rules will most benefit society in all areas of the law, but especially in antitrust, torts, contracts, and property cases.

Kauffman’s new “Law, Innovation and Growth” initiative seeks to refocus the law-and-economics debate to center on the promotion of entrepreneurship, which has long been one of the key goals of that Foundation, which was started in 1966 by pharmaceutical magnate Ewing Marion Kauffman (who started Marion Laboratories). The Foundation, based in Kansas City, Mo., says it currently has a corpus of about $2 billion.

Though the field of law and economics has often been seen as a politically conservative movement, the leader of the Kauffman initiative will be Robert Litan, Kauffman’s vice president of research and policy. Litan has held prominent governmental positions during Democratic administrations and has been affiliated with the centrist-to-liberal Brookings Institution for nearly 20 years. Among other things, Litan was deputy assistant attorney general in the antitrust division of the Clinton Justice Department when Justice first went after Microsoft in the 1990s. (Litan has both a Ph.D. in economics and a law degree from Yale.)

“I’d characterize the law-and-economics school as a mode of economic thinking,” says Litan in an interview, contending that it is politically neutral. “There are many people in the field who are Democrats as well as Republicans, liberals rather than conservatives.”

Indeed, the field’s two most towering figures, he stresses, are positioned toward opposite ends of the political spectrum: Richard Posner, the conservative, former University of Chicago Law School professor and now Reagan-appointed, federal appeals court judge in Chicago; and Guido Calabresi, the liberal former Yale Law School professor and dean, and Clinton-appointed federal appeals court judge in New York.

In Litan’s view, the law-and-economics movement to date has focused on the issue of achieving “static efficiency” — in essence, how best to allocate the existing pie of wealth — while giving insufficient attention to dynamic efficiency, i.e., the need to ensure that the pie keeps growing. For example, a raging issue lawyers are wrestling with today, he notes, is the question of how to reform the current patent and copyright laws to ensure that they spur entrepreneurship and invention, rather than stifle them. This is the type of issue that is right smack in the new initiative’s wheelhouse.

Even before the current economic crisis, Litan says, the law-and-economics movement needed a shot of adrenaline for at least two reasons. The first was age: the school, after all, got rolling in the late 1940s at the University of Chicago. “Like all revolutions when they mature,” observes Litan, “they change. They hit sort of a wall. What’s happened to law and economics is . . . that it’s become incredibly mathematical, very niche, highly theoretical, and difficult to understand.”

Secondly, he explains, the movement has not only lost its momentum, it’s lost its funding. Since at least the early 1970s, the law-and-economics school had been able to purchase premium shelf-space in the marketplace of ideas thanks to generous funding from two (politically conservative) foundations: in its early days, the Liberty Fund, and, later, The John M. Olin Foundation. But the latter group disbanded in late 2005, having spent down its corpus in accordance with its benefactor’s direction that his bequest be entirely used up within a generation.

“So what better time for another foundation to come along,” asks Litan, to not only pick up the slack, but “to try to torque the movement away from static efficiency to growth.”

How does the current economic collapse — and its implicit lesson that over-reliance on market mechanisms have led us to disaster — affect his and Kauffman’s plans?

“Ironically,” he responds, “it may be an even bigger deal now that economy is collapsing. We are now about to have a huge national debate on the role of markets and regulation … and how much are we going to roll back from the market-oriented philosophy in which a lot of law-and-economics participated. … From our viewpoint we’re hopeful that whatever repairs we make in the economic system, we don’t kill off risk-taking and entrepreneurial drive, because that’s what we need for growth.”

The foundation’s initial $10 million investment will include a $2.8 million grant for researchers to examine the impact of law and regulation on growth at seven top law schools, including Yale, Harvard, Stanford, Columbia, Boston University, George Washington, and the University of Iowa. Another $2.8 million will go the Harvard’s Berkman Center for Internet and Society; and $2.2 million more to fund research by young assistant professors at law schools, to be called Kauffman Legal Research Fellows. The rest will be used to fund seminars at law schools , and to fund the new Stanford Intellectual Property Litigation Clearinghouse, which launched Monday, and is being run by professors Mark A. Lemley and Joshua Walker.

Litan’s role model here, he acknowledges, is Henry Manne, a dean emeritus at George Mason University School of Law in Arlington, Vir., who was law-and-economics’ chief proselytizer and salesman. Beginning in the early 1970s, Manne set up seminars for influential professors, followed by seminars for federal judges, followed by, eventually, law-and-economics centers at many prominent law schools, typically with backing from either the Liberty Fund or Olin Foundations.

Manne has written a very engaging history of this missionary work, entitled “How Law and Economics was Marketed in a Hostile World: A Very Personal History.” In it, Manne notes that in the early 1970s, when he was first trying to attract top law professors to a summer program in economics he was launching, “we paid everyone the then princely sum of $1000, plus all expenses and some very fancy meals.”

Now there’s some economics we can all understand.

      

Full post as published by FORTUNE Legal Pad on December 10, 2008 (boomark / email).

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