Contracts
Valuing Modern Contract Scholarship
112 Yale L.J. 881 (2003) In sum, Posner has leveled three different criticisms at the modern economic analysis of contracts: a descriptive critique that the scholarship fails to describe or predict the content of current law, a normative critique that the scholarship fails to "provide a solid basis for criticizing and reforming contract law," and an implicit evolutionary critique that the scholarship has run out of things to say. Posner's descriptive critique is misplaced. Modern scholarship has never been about trying to describe or predict current law. His normative critique is overblown. While Posner is correct that much of the modern scholarship is based on stylized models with results that turn on particular parameter values, he underappreciates the normative importance of "possibility" theorems. Modern scholarship has contributed by showing that the accepted determinacy of prior normative analysis is unsustainable. Moreover, the factors identified by modern literature have generated affirmative policy proposals (such as extending the Hadley foreseeability limitation to seller's lost-profit damages). But Posner's evolutionary critique may stand on a stronger footing. All valuable schools of inquiry at some point in time tend to reach diminishing marginal returns. The economic analysis of tort law, for example, is widely conceded to have reached a point of "maturity" where it is difficult to find basic untheorized questions for study. And maybe--despite my arguments about opt-out rules--the same is taking place, or about to take place, with regard to the economics of contracts. I join Posner in welcoming and predicting a shift from the theoretical to the empirical. But instead of debating the future, it's better for us to wait and see. Methodology pieces like this also are subject to the very criticisms that Posner levels at modern scholarship--they don't predict current law, they don't provide a basis for critiquing current law, and they quickly play themselves out. A few years back, Posner and I participated in a Wisconsin Law Review symposium comparing economic and sociological approaches to law. Posner wisely eschewed writing an ungrounded piece on methodology and instead published what to my mind was the most valuable contribution of the symposium--an analysis of gratuitous contracts. In contrast, I dyspeptically complained about the limited value of publishing method pieces, stating that "I generally believe that ungrounded discussions of methodology are not useful. I don't 'do' method--or at least I don't do method well. . . . Better to have scholars from different disciplines attack a particular problem, and then assess which methodology produces the best purchase."
Tortious Interference and the Law of Contract: The Case for Specific Performance Revisited
111 Yale L.J. 735 (2001)
What Happened to Property in Law and Economics?
111 Yale L.J. 357 (2001) Property has fallen out of fashion. Although people are as concerned as ever with acquiring and defending their material possessions, in the academic world there is little interest in understanding property. To some extent, this indifference reflects a more general skepticism about the value of conceptual analysis, as opposed to functional assessment of institutions. There is, however, a deeper reason for the indifference to property. It is a commonplace of academic discourse that property is simply a "bundle of rights," and that any distribution of rights and privileges among persons with respect to things can be dignified with the (almost meaningless) label "property." By and large, this view has become conventional wisdom among legal scholars: Property is a composite of legal relations that holds between persons and only secondarily or incidentally involves a "thing." Someone who believes that property is a right to a thing is assumed to suffer from a childlike lack of sophistication--or worse. One might think that law and economics scholars would take property more seriously, and at first glance this appears to be true. Analysis of the law from an economic standpoint abounds with talk of "property rights" and "property rules." But upon closer inspection, all this property-talk among legal economists is not about any distinctive type of right. To perhaps a greater extent than even the legal scholars, modern economists assume that property consists of an ad hoc collection of rights in resources. Indeed, there is a tendency among economists to use the term property "to describe virtually every device--public or private, common-law or regulatory, contractual or governmental, formal or informal--by which divergences between private and social costs or benefits are reduced." In other times and places, a very different conception of property has prevailed. In this alternative conception, property is a distinctive type of right to a thing, good against the world. This understanding of the in rem character of the right of property is a dominant theme of the civil law's "law of things." For Anglo-American lawyers and legal economists, however, such talk of a special category of rights related to things presumably illustrates the grip of conceptualism on the civilian mind and a slavish devotion to the gods of Roman law. Or does it? In related work, we have argued that, far from being a quaint aspect of the Roman or feudal past, the in rem character of property and its consequences are vital to an understanding of property as a legal and economic institution. Because core property rights attach to persons only through the intermediary of some thing, they have an impersonality and generality that is absent from rights and privileges that attach to persons directly. When we encounter a thing that is marked in the conventional manner as being owned, we know that we are subject to certain negative duties of abstention with respect to that thing--not to enter upon it, not to use it, not to take it, etc. And we know all this without having any idea who the owner of the thing actually is. In effect, these universal duties are broadcast to the world from the thing itself. Because property rights create duties that attach to "everyone else," they provide a basis of security that permits people to develop resources and plan for the future. By the same token, however, this feature of property imposes an informational burden on large numbers of people, a burden that goes far beyond the need for nonparties to a contract to understand the rights and duties of contractual partners. As a consequence, property is required to come in standardized packages that the layperson can understand at low cost. This feature of property--that it comes in a fixed, mandatory menu of forms, in contrast to contracts that are far more customizable--constitutes a deep design principle of the law that is rarely articulated explicitly. The fact that the in rem aspect of property has largely disappeared from academic discourse has made this latent design principle all the easier to overlook. This Essay will trace the decline of the conception of property as a distinctive in rem right in Anglo-American thought, and the rise of the view among modern legal economists that property is simply a list of use rights in particular resources. As is the case with law and economics more generally, this view of property finds its roots in Ronald Coase's seminal article, The Problem of Social Cost. Coase implied that property has no function other than to serve as the baseline for contracting or for collectively imposing use rights in resources, and he modeled conflicts over the use of resources exclusively in terms of bipolar disputes between A and B. Wittingly or not, this gave rise to a conception of property as a cluster of in personam rights and hastened the demise of the in rem conception of property. In order to appreciate Coase's impact on the modern understanding of property rights, we begin, in Part II, with a brief overview of the traditional conception of property and the legal realists' advocacy of the alternative "bundle of rights" conception. Once the stage is set, we then turn, in Part III, to Coase's work, where we take a fresh look at his classic article and a companion piece in an effort to uncover the implicit conception of property rights that animates his theory. We conclude that Coase adopts an extreme version of the bundle-of-rights conception of property favored by the legal realists; in effect, Coase conceives of property in terms of a list of permitted and prohibited uses of particular resources. This is followed, in Part IV, by a selective review of post-Coasean treatments of property in law and economics scholarship, where we find the list-of-uses conception carried forward in a variety of guises. In Part V, we briefly consider some areas in which an explicit recognition of the in rem dimension of property would enrich the understanding of property issues by law and economics scholars. Part VI concludes.
Currency Policies and Legal Development in Colonial New England
110 Yale L.J. 1303 (2001) This Article presents a new interpretation of the relation of law to economic development in colonial New England. Prior legal historical scholarship has focused almost exclusively on judicial decisionmaking, emphasizing judges' role in adapting the law in some optimal way to satisfy local preferences regarding the development of markets. This Article suggests that the relationship of law to economic development cannot be understood without consideration of the impact of colonial currency policies on the structure of the government, the nature of contractual relations, and the quantity of litigation. The seventeenth-century colonial economy can be characterized as plagued by an extreme scarcity of a circulating medium of exchange, in many periods compelling resort to barter. Currency scarcity reduced the possibility of market exchanges, prevented specialization, and suppressed market conditions. Colonial citizens developed means of surpassing pure barter, but the most central of these, such as book accounts--a system of keeping tabs within an insular community--reinforced localism. Currency scarcity also limited colonial governments' ability to impose monetary taxes with which to finance operations. The circulation of paper money therefore vastly increased the potential for a greater volume of exchanges, greater specialization, and market development, as well as colonial governments' ability to finance more expansive operations. Colonial citizens' reliance on paper money, however, had an additional effect: The value of contractual obligations became dependent upon the stability of colonial governments' currency policies. Colonial governments began issuing paper money, in the form of bills of credit, in the period from 1690 to 1710. Currency policies in New England in the first half of the eighteenth century were nevertheless highly unstable, leading variously to periods of severe inflation and periods of extreme monetary scarcity. Because fluctuations in the value of currency had a direct impact on the value of all preexisting contracts, periods of currency crises coincided with periods in which litigation vastly increased: On a widespread basis, debtors delayed repayment of their debts to benefit from periods of depreciating currency, forcing creditors to sue to claim the debt. In addition, periods of currency crisis were often times of recession, when debtors widely became unable to pay their debts, propelling creditors to sue to establish priority to debtors' assets. The correlation between periods of exponentially increased litigation and currency crisis suggests the need to reassess the role of the court system in promoting economic development. First, a focus on currency policy reveals that colonial courthouses were often occupied with problems that were entirely nonlocal in origin. Indeed, currency policies were the outcome of tense negotiations between colonial assemblies and the Board of Trade and Parliament in England. Second, the litigation crises attending currency crises reveal the weakness of characterizing judges as optimally adapting the law to satisfy the needs of local communities. Indeed, judges may have inadvertently worsened the litigation crises of the first half of the eighteenth century by enforcing the legal tender laws, which allowed debtors to repay debts in the nominal value of contracts, even after severe depreciation of the currency. Moreover, the absence of an organized system of priority-lending rules led to an increased volume of litigation during periods of recession.
The Essential Role of Organizational Law
110 Yale L.J. 387 (2000) In every developed market economy, the law provides for a set of standard-form legal entities. In the United States, these entities include, among others, the business corporation, the cooperative corporation, the nonprofit corporation, the municipal corporation, the limited liability company, the general partnership, the limited partnership, the private trust, the charitable trust, and marriage. To an important degree, these legal entities are simply standard-form contracts that provide convenient default terms for contractual relationships among the owners, managers, and creditors who participate in an enterprise. In this Article, we ask whether organizational law serves, in addition, some more essential role. The answer we offer is that organizational law goes beyond contract law in one critical aspect, permitting the creation of patterns of creditors' rights that otherwise could not practicably be established. In part, these patterns involve limits on the extent to which creditors of an organization can have recourse to the personal assets of the organization's owners or other beneficiaries--a function we term "defensive asset partitioning." But this aspect of organizational law, which includes the limited liability that is a familiar characteristic of most corporate entities, is of distinctly secondary importance. The truly essential function of organizational law is, rather, "affirmative asset partitioning." In effect, this is the reverse of limited liability: It involves shielding the assets of the entity from the creditors of the entity's owners or managers. Affirmative asset partitioning offers efficiencies in bonding and monitoring that are of signal importance in constructing the large-scale organizations that characterize modern economies. Surprisingly, this crucial function of organizational law--which is essentially a property-law-type function--has largely escaped notice, much less analysis, in both the legal and the economics literature.