Scand. J. of Economics 106(4), 823–825, 2004 DOI: 10.1111/j.1467-9442.2004.00390.x
Book Review
Werin, Lars: Economic Behavior and Legal Institutions: An Introductory Survey. World Scientific, New Jersey, London, Singapore and Hong Kong, 2003, Index, xv + 415 pp. ISBN 981-238-258-5. A few decades ago, textbooks in economics rarely mentioned the legal system, and textbooks in law were almost equally void of analysis of economic behaviour. Slowly, some modest integration of the two fields is taking place. In 1979, Lars Werin at the University of Stockholm was one of the very first to write a textbook using economic analysis to study legal rules. The present book is a more ambitious project where the purpose is to examine two main propositions, one on the contents of law, and the other on constitutions. The first may be summarized as follows. Judge-made law systematically tends to produce incentives that promote efficiency, whereas politically-based law either concerns constitutional or night-watch matters, or is framed so as to promote distributional objectives. Judge-made law is defined as law emanating from court cases or developed by independent judges or lawyers when preparing certain elements of statutory law. Judge-made law is presumed to be influenced by efficiency concerns of economic life, where reduction of transaction costs is a main goal. Politicallybased law is to a large extent influenced by pressure groups, resulting in statutory law which redistributes income regardless of efficiency. In discussing this proposition on the contents of law, the author surveys the literature inspired in particular by the efficiency hypothesis of Richard Posner and the Public Choice Theory of James Buchanan, Gordon Tulloch, and others. The second proposition, on constitutions, is expressed as follows: ‘‘When the general constitution of a non-authoritarian country is formed, the desire of the individuals to safeguard a basic structure of wealth-creating incentives results in reserving a substantial scope of responsibility for an independent judiciary, expected to generate the required type of law.’’ In discussing this proposition, Werin surveys the literature on social contract theories from Rousseau, Hobbes and Locke to Buchanan, Tullock and Rawls. In Part I of the book, the ‘‘Coase Theorem’’ and the ‘‘Reciprocity Theorem’’, along with the concepts of transaction costs and property rights, are introduced as basic elements of the theoretical framework of the study. Whereas markets and contracts in traditional economics are studied in terms of goods and services, Werin emphasises that property rights constitute a # The editors of the Scandinavian Journal of Economics 2004. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
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more appropriate basic concept. Owners of assets, e.g. plots of land, may have various bundles of rights related to such plots. These rights are delineated and protected by law, and to understand the functioning of the legal–economic system, one has to make them an integral part of the analysis. On this basis, Werin begins by assessing how economic activity depends on legal institutions, and how these institutions are influenced by the needs of economic life. He draws on a vast literature, mainly from the fields of law-and-economics and new economic institutions. Part II of the book deals with the coordination of individual behaviour, in markets, in firms and in political processes. Better coordination produces more wealth, but coordination costs may be too high for coordination to produce net wealth. If parties use more resources in contracting, e.g. by discussing and including more details in a contract, the contract itself will be more valuable to them. But the increase in transaction costs may be higher than the increase in value. There is a trade-off. Coordination costs vary considerably between different sectors of society, which is why different legal institutions, e.g. markets or firms, develop. Firms are established when the sum of administrative and production costs within a firm is lower than the sum of transaction and production costs for individual agents who enter into necessary market contracts. Economic agents’ search for costminimising arrangements leads to different types of institutions in different fields of activities. In Parts III and IV of the book, the main propositions are evaluated with respect to various types of legal rules and decisions in a number of fields of law. To what extent are the rules governing the use and transfer of property rights judge-made or politically determined? To what extent are the rules wealth-creating regardless of distribution, and to what extent do they have a distributive purpose regardless of efficiency? As an example, Werin finds that contracting both influences law and is influenced by it. Law in this field, which is mainly judge-made, has been developed as a consequence of the wealth-seeking activities of contracting parties, partly in an effort to reduce transaction costs. At the same time, contracting relies on ensuring that property rights are well delineated and protected by judge-made law. The ‘‘economic–legal system’’ thus consists of two-way relationships, and adequate analyses of markets should include more institutional aspects than is common in textbooks in economics. The arguments for the ‘‘proposition on the constitution’’ comprise a comparatively modest part of the book. In addition to well-known theories of social contracts, Werin draws on theories of repeated games and evolutionary biology. The author openly admits that the hypotheses of his propositions are of a kind that cannot easily be tested by e.g. statistical methods, and the literature he surveys does not supply such tests. The propositions are nevertheless # The editors of the Scandinavian Journal of Economics 2004.
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found to be supported by various analyses and anecdotes. One would have wished, however, that somewhat more emphasis had been given to criticism of the efficiency hypothesis. Many lawyers would claim that judge-made law is guided by notions of fairness, justice and rights. Moreover, the efficiency hypothesis relies heavily on the questionable assumption that parties bring before the court cases that presumably result in a more wealth-increasing law. This, and other criticism, led Richard A. Wagner (1998) to conclude as follows in a survey article on common law, statute law and economic efficiency: ‘‘The claim of common law efficiency in this instance is limited to a setting where both parties have a continuing interest in the rule being litigated. If only one party has a continuing interest, that party tends to determine the resulting rule regardless of its efficiency. In all, the claim that common law offers a procedure for producing economically efficient rules is unproven, is perhaps unprovable, and may even be wrong.’’ In principle Werin would probably agree, but as a whole, he considers the proposition on the contents of law to be well defended in the literature he has surveyed. Even if it is perhaps true that the two propositions are not testable, the book is a very useful survey of the literature concerning the interrelationship between economic behaviour and legal institutions. The book is primarily aimed at students of economics just beyond their introductory course and students of law in the middle or towards the end of their studies. Better educated economists and lawyers would also benefit from reading it, especially those who are not well acquainted with the law-and-economics literature. Erling Eide University of Oslo
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References Wagner, R. E. (1998), Common Law, Statute Law, and Economic Efficiency, The New Palgrave Dictionary of Economics and the Law, Vol. 1, Macmillan Reference Ltd., London, 313–317. Werin, L. (1979), Economi och ra¨ttssystem (Economics and Legal Systems), LiberFo¨rlag, Stockholm.
# The editors of the Scandinavian Journal of Economics 2004.
