The Situation of Chicago School “Law and Economics”

From Business Week (an article, by Peter Coy, including several quotations from Situationist Editor, Jon Hanson):

Q: How many Chicago School economists does it take to change a light bulb?
A: None. If the light bulb needed changing, the market would have done it by now.

Chicago-style free-market economics is an easy target for satire, but the movement that flourished at the University of Chicago’s economics department in the 1960s, ’70s, and ’80s really did change the world. Giants such as Milton Friedman, Gary Becker, Robert Lucas, and Eugene Fama provided the intellectual foundation for the political philosophy of President Ronald Reagan and British Prime Minister Margaret Thatcher. In his approach to tax cuts and deregulation, Republican presidential candidate Mitt Romney is an heir to that tradition.

It wasn’t just economics that Chicago revolutionized. Across campus at the University of Chicago Law School, scholars such as Ronald Coase, George Stigler, and Richard Posner were inspired to apply economic analysis to laws and regulations, developing a field that came to be called “law and economics.” It was law and economics types who promoted the now-conventional idea that the benefits of a regulation must be weighed against its costs. Placing a dollar figure on society’s valuation of a human life went from appalling to standard.

They rethought antitrust law, junking simplistic big-is-bad formulations to focus on whether a giant like IBM (IBM) or Microsoft (MSFT) could actually raise prices with impunity. In tort law, they questioned punitive damages that seemed to them motivated by righteous indignation rather than a cool calibration of how to discourage future wrongs. At the apogee of the Reagan-Thatcher era, Chicago Law drew enthusiastic support from businesses and foundations that embraced its small-government message. “Chicago can rightly claim to have been extraordinarily influential in the growth of the field,” says Jon Hanson, a Harvard Law School professor and specialist in psychology and law.

Now Chicago’s law and economics program is coping with problems born of its success. Its intellectual dominance has triggered a pushback from other social scientists who say it’s bloodless—treating people as if they are, or ought to be, perfectly rational calculators of their own self-interest. Even some true believers complain that the field has become too technical. Posner, a federal appellate judge in Chicago, wrote last year in the alumni magazine of the risk that “economic analysis of the law may lose influence by becoming too esoteric, too narrow, too hermetic, too out of touch with the practices and institutions that it studies.” Finally, so many other law schools have launched law and economics programs, and so many judges have learned the lingo, that today law and economics “is like the air you breathe. It’s just pervasive,” says David Weisbach, a Chicago Law professor. That ubiquity has made Chicago less distinctive.

Chicago Law doesn’t take such matters lightly. Last October, Dean Michael Schill announced a major initiative to deal with the challenges, to capitalize on the school’s place in history, and to keep law and economics relevant for the 21st century. He called it, predictably, Law and Economics 2.0. “Just as Chicago was at the forefront of the first wave of law and economics, so it shall be in the future,” he wrote to alumni.

Schill’s big idea is to open new frontiers, both intellectual and geographic. This summer the school will play host to 75 Chinese legal scholars, who will get to meet stars like professor emeritus Ronald Coase—still writing in the field at the age of 101. “Coase is a god in China,” says Omri Ben-Shahar, who is directing a newly created University of Chicago Institute for Law and Economics.

Meanwhile, Chicago Law professors are lobbing new bombs into the arena—fresh ideas for injecting economic thinking into law and regulation. Chicago Law professor Todd Henderson proposes paying bank examiners in part with “phantom” securities linked to the banking companies they regulate. The phantom bonds, essentially derivatives, would rise and fall in concert with a bank’s debt. If banks took too much risk, regulators would feel a hit to their own wealth. To keep regulators from getting so cautious that they ban legitimate transactions, Henderson would throw some phantom stock into their pay packages as well. “There is no reason we can think of why bank regulators should not be paid for performance,” he wrote in the spring 2012 issue of Regulation, a magazine published by the libertarian Cato Institute.

Chicago Law isn’t all about law and economics. President Barack Obama, after all, taught there from 1992 to 2004. So did Supreme Court Justice Antonin Scalia, from 1977 to 1982. (If only they’d overlapped!) Scalia’s brand of constitutional “originalism,” which deeply respects the intent of the Founding Fathers, is an alien idea to the law and economics crowd, who view law as something more useful than sacred.

Even within law and economics there’s ideological diversity. “I don’t think it lines up to any political agenda,” says Lee Ann Fennell, a specialist in property law. Fennell, daring to challenge a central tenet of law and economics, has written that sometimes property rights can be too strong—say, allowing irrational homeowners to block worthy projects even when accommodating them somehow would be better for all. Her solution: Create an exchange where property owners could surrender certain veto powers over land use for a price before conflicts ever arose. That would help new projects sail through.

Still, there is something to the critique that economics can blind legal scholars to other perspectives. The first generation of law and economics scholars reduced people to stick-figure profit-maximizers who would make rational choices every time. “They came into law schools saying, ‘We are social scientists and you are not,’” says Harvard Law’s Hanson. Their authority was undermined when a new wave of social scientists, including Daniel Kahneman, Amos Tversky, and Chicago’s Richard Thaler, presented evidence that people can be irrational, lack willpower, and have shifting, inconsistent senses of what’s in their own best interest.

The human actor in some of the newest law and economics writing is truer to life. Henderson, for example, acknowledges that for some people money isn’t the motivation: “Once diligence has been priced, perhaps some regulators will slack,” he wrote in Regulation.

But Hanson wonders whether law and economics scholars on the whole have gone far enough in incorporating humanity. A case in point: Should the question of motivation matter in assessing damages? A dispassionate law and economics analysis still might say no, while an ordinary juror would say unequivocally yes. As the great jurist Oliver Wendell Holmes Jr. once wrote, “Even a dog distinguishes between being stumbled over and being kicked.”

Defenders of Chicago-style law and economics want to be seen not as ideologues, but as realists. Posner again: “We ask not whether the economic approach to law is adequately grounded” in any particular ethical system, “but whether it is the best approach for the contemporary American legal system to follow.” That’s an appeal to an older Chicago intellectual tradition—pragmatism.

Related Situationist posts:

• How Much Choice Would You Choose?
• Science and Situationism Praised on Huffington Post Blog
• Dan Kahneman on Fast and Slow Thinking
• ‘Situation’ Trumps ‘Disposition’- Part II
• Law and Economics Primer
• Jon Hanson on Law and Mind Sciences
• Situationism at University of Chicago Law
• Tushnet on Teles and The Situation of Ideas – Abstract
• Deep Capture – Part X
• Behavioral Economics and Policy
• Emotional Reactions to Law & Economics – Abstract
• Responding to Law and Economics: Critiques and Alternatives
• David Eagleman on the Brain and the Law
• Brain and Blame
• Allegations of Ideological Bias are Anti-Scientific

Law and Economics Primer

Situationist Contributor Jon Hanson, Kathleen Hanson, and Melissa Hart, have recently posted their outstanding introduction to law and economics (to be published in Dennis Patterson’s forthcoming volume, “Compantion to Philosophy of Law and Legal Theory) on SSRN.  The chapter includes a brief discussion of the emergence of economic behavioralism and situationism, and it is now available to download for free here.  Here’s the abstract.

* * *

This chapter provides an introduction to the history, uses, methods, strengths, and limits of law and economics. It begins by examining the role of positive and normative approaches to law and economics. To examine the positivist thesis – that the law does in fact tend toward efficiency – the chapter discussed and analyzes the famous Hand Formula developed by Judge Learned Hand in United States v. Carroll Towing. As one of the only traditional cases in which a judge arguably made efficiency his explicit goal, the case presents an excellent opportunity to assess whether, even an efficiency-oriented judge will or can identify the efficient result. The chapter reviews the possible liability rules that might have been applied in Carroll Towing, and uses that review to introduce many of the core concepts and methods of law and economics, including game theory. Ultimately, the chapter concludes that, although the Hand Formula may have led to one of the possible efficient results, there is little reason to be confident, and some reason to doubt, that Judge Hand reached the most efficient outcome. The difficulties inherent in selecting the efficient rule through litigation present a significant challenge to the positivist case for legal economics.

The second part of the chapter considers both the normative support for efficiency and the range of challenges to, and refinements of, the normative position that have developed in recent years. The chapter highlights some of the trade-offs inherent in the law and economics approach and concludes that law and economics has, like any legal theory, both costs and benefits.

* * *

Again, you can download the paper for free here.  For a sample of related Situationist posts, see “Tushnet on Teles and The Situation of Ideas – Abstract,” “Deep Capture – Part X,” “Behavioral Economics and Policy,” and “Emotional Reactions to Law & Economics – Abstract.”

The Situation of Mortgage Defaults

Brent White recently posted his thoughtful paper, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” on SSRN.  Here’s the abstract.

* * *

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

* * *

You can download the paper for free here.  For a sample of related Situationist posts, see “Barbara Ehrenreich – a Situationist,” “The Situation of Subprime Mortgage Contracts – Abstract,” “Retroactive Liability for our Financial Woes,” “The Situation of Credit Card Regulation,” “The Financial Squeeze: Bad Choices or Bad Situations?” “The Situation of the American Middle Class,” “Warren on the Situation of Credit,” “Are Debtors Rational Actors or Situational Characters?,” and “The Situation of College Debt” – Part I, Part II, Part III, and Part IV.

Tushnet on Teles and The Situation of Ideas – Abstract

Mark Tushnet‘s excellent review of Steven Teles’s book, “The Rise of the Conservative Legal Movement” (forthcoming 87 Texas Law Review, 2008) is now available on SSRN.  Here’s the abstract.

* * *

Steven Teles’s book, The Rise of the Conservative Legal Movement, is a case study of ideological challenge. Teles, a political scientist, emphasizes the institutional dimensions of such challenges. Relying on interviews and internal documents produced by conservative organizations, he examines the development of conservative litigating groups (i.e., conservative public interest law firms), the growth of the Federalist Society, and the embedding of law and economics within the legal academy. There have been similar studies of liberal public interest law firms and of the rise of liberal legalism in the academy, but Teles’s is the first to look on the other side of the ideological divide. And, given the dominance of liberal legal ideology, his analysis brings out in sharp relief many new insights into the institutions that affect the outcomes of ideological contests. In addition, Teles connects his analysis to a broader theme in recent studies of American political development. The rise of the conservative legal movement was intimately connected to changes in the dominant political order that have occurred over the past thirty years: the decay of the New Deal-Great Society political order, and the Reagan Revolution and its limits. In these ways Teles provides a firm foundation for thinking (or perhaps merely speculating) about future developments in the institutional apparatuses associated with conservative and liberal legal thought.

This Review summarizes and critiques Teles’s analysis of the three components of the conservative legal movement, beginning with the least important, law and economics in the legal academy, and then turning to conservative public interest law firms and the Federalist Society. It concludes with some speculations about the future of that movement, in light of the connection Teles rightly draws between that movement and the American political regime of the late twentieth century.

* * *

To read a related Situationist post, see “Deep Capture – Part X.”

Taking Behavioralism Seriously (Part I) – Abstract and Top Ten List

Doug Kysar and Situationist contributor Jon Hanson recently posted on SSRN their important 1999 article, Taking Behavioralism Seriously: The Problem of Market Manipulation (74 N.Y.U.L. Rev. 363) on SSRN. Here is the article’s abstract.

* * *

For the past few decades, cognitive psychologists and behavioral researchers have been steadily uncovering evidence that human decisionmaking processes are prone to nonrational, yet systematic, tendencies. These researchers claim not merely that we sometimes fail to abide by rules of logic, but that we fail to do so in predictable ways.

With a few notable exceptions, implications of this research for legal institutions were slow in reaching the academic literature. Within the last few years, however, we have seen an outpouring of scholarship addressing the impact of behavioral research over a wide range of legal topics. Indeed, one might predict that the current behavioral movement eventually will have an influence on legal scholarship matched only by its predecessor, the law and economics movement. Ultimately, any legal concept that relies in some sense on a notion of reasonableness or that is premised on the existence of a reasonable or rational decisionmaker will need to be reassessed in light of the mounting evidence that humans are “a reasoning rather than a reasonable animal.”

This Article contributes to that reassessment by focusing on the problem of manipulability. Our central contention is that the presence of unyielding cognitive biases makes individual decisionmakers susceptible to manipulation by those able to influence the context in which decisions are made. More particularly, we believe that market outcomes frequently will be heavily influenced, if not determined, by the ability of one actor to control the format of information, the presentation of choices, and, in general, the setting within which market transactions occur. Once one accepts that individuals systematically behave in nonrational ways, it follows from an economic perspective that others will exploit those tendencies for gain.

That possibility of manipulation has a variety of implications for legal policy analysis that have heretofore gone unrecognized. This article highlights some of those implications and makes several predictions that are tested in other work.

* * *

SSRN has just announced its Journal of Behavioral & Experimental Economics and Journal of Behavioral Economics Top Ten lists for papers posted in the last 60 days.  Taking Behavioralism Seriously made both lists.

To download the paper for free click here.  That link will direct you to the abstract and various download options.  To download the companion article, Taking Behavioralism Seriously: Som Evidence of Market Manipulation (112 Harvard L. Rev. 1420) click here. For a sample of related Situationist posts, see “Promoting Smoking through Situation” and “The Situation of Subprime Mortgage Contracts – Abstract.”

The Methodology of the Behavioral Analysis of Law – Abstract

Avishalom Tor has written an article, “The Methodology of the Behavioral Analysis of Law” (forthcoming  4 Haifa Law Review 237 (2008)) that will be of particular value for our readers interested in economic behavioralism. You can download the paper for free on  SSRN.  Here’s the abstract.

* * *

This article examines the behavioral analysis of law, meaning the application of empirical behavioral evidence to legal analysis, which has become increasingly popular in legal scholarship in recent years. Following the introduction in Part I, this Article highlights four central propositions on the subject. The first, developed in Part II, asserts that the efficacy of the law often depends on its accounting for relevant patterns of human behavior, most notably those studied by behavioral decision scientists. This Part therefore reviews important behavioral findings, illustrating their application and relevance to a broad range of legal questions. Part III then argues that the behavioral approach is empirically driven, engaging in both the theoretical application of extant empirical findings to the law and the generation of new, legally relevant, experimental and observational evidence. As this Part shows, moreover, each of these behavioral genres possesses different methodological strengths and weaknesses, and they therefore both substitute for and complement one another, in different respects. Part IV explains that the behavioral approach encounters a series of “gaps” between the type of empirical evidence provided by behavioral decision researchers and the data required to resolve legal questions. Legal scholars should therefore be aware of these gaps, which may limit the usefulness of extant behavioral evidence for legal analysis. This Part also addresses what legal scholars may do to overcome these gaps and distinguish real gaps from imaginary ones. Part V completes the body of the Article, arguing that the behavioral analysis of law is simultaneously normatively neutral and normatively relevant. It is normatively neutral because the behavioral analysis of law is not committed to any specific legal goal or value system. This fundamental neutrality, in turn, makes the behavioral approach a versatile instrument, which can help generate important normative conclusions in the service of scholars evaluating the law based on any normative criteria – from justice to welfare and more. Part VI concludes.

A Situationist Critique of Legal Theory – Abstract

Situationist contributor David Yosifon has recently posted his excellent article, “Legal Theoretic Inadequacy and Obesity Epidemic Analysis” (forthcoming 15 George Mason Law Review (2008)) on SSRN.  Here’s the abstract.

* * *

This Article explores crucial analytic and normative limitations in presently dominant and ascendant approaches to legal theory. The approaches’ failure to provide a satisfying framework for analyzing the obesity epidemic presently raging undeterred in American society reveals these limitations. Conventional law and economics scholars writing on the subject have deployed familiar frameworks to reach predictable conclusions that are neither intellectually nor morally justifiable. This Article argues that recent theoretical innovations promulgated within the burgeoning law and behavioralism movement have thus far provided no more reliable a framework for legal analysis of the obesity epidemic than has conventional law and economics. This Article critiques in particular the behavioral law and economics concepts of “libertarian paternalism” and “asymmetric paternalism,” as well as the concept of “expressive overdeterminism,” recently developed by proponents of “cultural cognition theory.” This project is undertaken as part of a broader effort to develop an alternative approach to legal theory that previous co-authors and I call “critical realism.” The theoretical arguments herein are broad, but this Article aims to also advance obesity epidemic analysis in particular. Part V briefly discusses specific public policy implications of my assessment, with special reference to a policy innovation based in the reform of corporate law.

* * *

To download a copy of Professor Yosifon’s paper for free, click here.

For those interested, here is a list of related Situationist posts to date: “Big Calories Come in Small Packages,” “The Situation of Eating – Part II,” “The Situation of Eating,” “The Situation of the Dreaded ‘Freshman 15′,” “Our Situation Is What We Eat,” “Social Networks,” “Common Cause: Combating the Epidemics of Obesity and Evil,” “The Situation of Fatness = Our ‘Obesogenic’ Society,” “Innovative Policy: Zoning for Health,” “Situational Obesity, or, Friends Don’t Let Friends Eat and Veg,” “McDonalds tastes better than McDonalds, if it’s packaged right,” “The Science of Addiction, The Myth of Choice,” “The Situation of our Food – Part I,” “The Situation of Our Food – Part II,” “The Situation of Our Food – Part III,” and “The Situation of our Food – Part IV.”

Gatekeepers Inside Out – Abstract

Situationist contributor Sung Hui Kim’s article, “Gatekeepers Inside Out,” was published in the latest issue of Georgetown Journal of Legal Ethics, Vol. 21, p. 411, 2008. The article is available to download for free on SSRN. Here is the abstract.

* * *

Gatekeepers Inside Out challenges the conventional wisdom that in-house counsel are simply “too captured” by their senior managers in their corporations to serve as effective gatekeepers of our securities markets. The author revises classical gatekeeping theory introduced by Prof. Reinier Kraakman in his seminal article (Gatekeepers: Anatomy of a Third Party Enforcement Strategy, 2 J.L. Econ. & Org. 53 (1986)). In that article, Kraakman clarified that a gatekeeping strategy requires gatekeepers “who can and will prevent misconduct reliably, regardless of the preferences and market alternatives of wrongdoers.” Although Kraakman did not make much of the distinction, he recognized that successful gatekeepers must not only be “willing” but also “able” to prevent misconduct. Now, consider also that gatekeepers must not only be prepared to “interdict” misconduct but also to “monitor” to detect such happenings in the first place. By combining these two simple observations, we see that potential gatekeepers can be evaluated by their: (1) willingness to interdict, (2) willingness to monitor, (3) capacity to monitor, and (4) capacity to interdict. Using this new framework of analysis, the author compares inside and outside counsel for the gatekeeping role. Along the way, the author departs from traditional gatekeeping theory’s exclusive reliance on rational choice theory and imports empirical findings from social psychology and sociology that illuminate the four conditions of effective gatekeeping. By running inside and outside counsel through this rigorous mill of analysis, the author comes to unexpected conclusions. The analytical framework set forth by the author can also be used to evaluate the effectiveness of other traditional gatekeepers, including investment bankers, securities analysts, accountants, and, yes, even credit agencies.

* * *

Here is a quotation from the article:

[T]o understand the willingness of gatekeepers to interdict misbehavior, it may not be most illuminating to consider costs and benefits consciously calculated based on the model of the rational actor. Indeed, the efficacy of sanctions in constraining behavior may be seriously eroded by various psychological factors. Instead, as social psychology teaches us, we may be inclined toward certain behaviors through cognitive processes guided by the the situation and the roles we inhabit in those situations.

* * *

To link to the entire article, click here. To access a related article by Professor Kim, see “The Banality of Fraud: Re-Situating the Inside Counsel as Gatekeeper.” For related Situationist posts by Professor Kim, see “Why Do Lawyers Acquiesce In Their Clients’ Misconduct?” — Part I, Part II, and Part III.

Gatekeepers Inside Out – Abstract

Situationist contributor Sung Hui Kim recently posted her forthcoming article, “Gatekeepers Inside Out” (forthcoming in the Georgetown Journal of Legal Ethics), on SSRN. Here’s the abstract.

* * *

Gatekeepers Inside Out challenges the conventional wisdom that in-house counsel are simply “too captured” by their senior managers in their corporations to serve as effective gatekeepers of our securities markets. The author revises classical gatekeeping theory introduced by Prof. Reinier Kraakman in his seminal article (Gatekeepers: Anatomy of a Third Party Enforcement Strategy, 2 J.L. Econ. & Org. 53 (1986)). In that article, Kraakman clarified that a gatekeeping strategy requires gatekeepers “who can and will prevent misconduct reliably, regardless of the preferences and market alternatives of wrongdoers.” Although Kraakman did not make much of the distinction, he recognized that successful gatekeepers must not only be “willing” but also “able” to prevent misconduct. Now, consider also that gatekeepers must not only be prepared to “interdict” misconduct but also to “monitor” to detect such happenings in the first place. By combining these two simple observations, we see that potential gatekeepers can be evaluated by their: (1) willingness to interdict, (2) willingness to monitor, (3) capacity to monitor, and (4) capacity to interdict. Using this new framework of analysis, the author compares inside and outside counsel for the gatekeeping role. Along the way, the author departs from traditional gatekeeping theory’s exclusive reliance on rational choice theory and imports empirical findings from social psychology and sociology that illuminate the four conditions of effective gatekeeping. By running inside and outside counsel through this rigorous mill of analysis, the author comes to unexpected conclusions. The analytical framework set forth by the author can also be used to evaluate the effectiveness of other traditional gatekeepers, including investment bankers, securities analysts, accountants, and, yes, even credit agencies.

* * *

To read related Situationist posts by Professor Kim, see “Why Do Lawyers Acquiesce In Their Clients’ Misconduct?,” Part I, Part II, and Part III.

Deep Capture – Part X

This is the tenth part of a series on what Situationist Contributor David Yosifon and I call “deep capture.” The most basic prediction of the “deep capture” hypothesis is that there will be a competition over the situation (including the way we think) to influence the behavior of individuals and institutions and that those individuals, groups, entities, or institutions that are most powerful will win that competition.

Previous posts in this series (which are summarized at the bottom of this entry), reviewed a sample of the evidence indicating that pro-commercial dispositionism has been widely accepted as the presumptive starting place for policy analysis. The previous post in this series described the strategy of relying on credible third-party messengers. This post suggests how that strategy may have influenced legal theory and law.

(Situationist artist Marc Scheff is providing the remarkable illustrations in this series.)

* * *

There is a vast range of interconnected evidence (too vast to do justice to in this subsection) of pro-commercial interests investing to deeply capture the many “credible third parties” that might influence the many “targeted audiences” (including all of us) to accept pro-commercial worldviews. In this subsection we will focus on a small sample of that evidence. Although the sample is small, it will hit close to home for much of our audience and will, we hope, strike a more direct and personal chord than the Galileo discussion may have.

Consider the world of legal scholarship. Large business interests have attempted to locate, create, and sponsor the production and dissemination of pro-commercial legal scholarship by legal scholars who have served as credible, if often unwitting, spokespeople for business ends. More specifically, consider some of the evidence regarding the goals and influence of the John M. Olin Foundation.

According to the Olin Foundation’s Web site,

the general purpose of the John M. Olin Foundation is to provide support for projects that reflect or are intended to strengthen the economic, political and cultural institutions upon which the American heritage of constitutional government and private enterprise is based. The Foundation also seeks to . . . encourag[e] the thoughtful study of the connections between economic and political freedoms, and the cultural heritage that sustains them.

To advance that goal the Olin Foundation has, among other things, awarded tens of millions of dollars to prominent law schools for the promotion of law and economics scholarship. Over the past twenty years, Olin money has established law and economics programs, or “centers,” at several prominent law schools: the University of Chicago, Yale, Stanford, Harvard, Columbia, Georgetown, Duke, the University of Michigan, the University of Pennsylvania, George Mason, and the University of Virginia. In 1999, a year in which the Foundation paid out almost $20 million in grants to organizations around the country, \Harvard Law School’s John M. Olin Center for Law, Economics, and Business was in the middle of a four-year, $6 million grant, Yale Law School’s John M. Olin Program in Law and Economics was in the middle of a three-year, $1.9 million grant, and the University of Chicago Law School’s John M. Olin Program in Law and Economics was in the middle of a six-year, $2.5 million grant. In May 2003, Harvard received another grant from the Olin Foundation, this time for $10 million, “the largest foundation grant in the law school’s 186-year history.”

Olin money, as we will describe in more detail in subsequent work, has a significant influence not only in encouraging certain types of scholarship, but also in increasing the credibility of that scholarship. It establishes “centers” dedicated to law and economics theory, provides funding for journals through which law and economics scholarship can be stamped with the legitimacy of “peer review” by other legal economists, finances a series of workshops to encourage efficiency-oriented scholars to share and test their views at elite law schools, and gives scholarships and fellowships to top law students who participate in law and economics seminars and produce law and economics scholarship. In short, Olin money has helped to create and advance a critical mass of legal scholars, who begin with the strong dispositionist axioms of neoclassical economics, who write largely for one another and policymakers, and who view themselves (and are viewed by many others) as the only genuinely social scientific members of the legal academy.

The success of the Olin Foundation’s funding of law and economics seems fairly dramatic. Professor Steven Shavell, the director of Harvard Law School’s Olin Program, recently provided one measure of that achievement. Professor Shavell surveyed the academic appointments at the “top 10” law schools over the last decade. Of forty-three total placements, he found that, twenty-three were Harvard Law School graduates, and ten of those had been Olin fellows. As Professor Shavell told the Boston Globe, “[i]n the long run, we’re going to have a heck of an impact on who’s teaching at the leading law schools, and what the students are learning.”

We would go further. The Olin Foundation and the law and economics scholarship that it has subsidized have already had “a heck of an impact.” Indeed, the scholarly project that the Olin money has sponsored is the same project that is widely understood today to be the dominant paradigm for policy analysis. Professor Shavell has emphasized that the economic analysis of law “has changed the nature of legal scholarship, influenced legal practice, and already proven its tremendous value in policymaking and business.” Furthermore, the Olin Foundation’s Board of Trustees recently declared that their contributions have “supported a wide range of scholars and writers who significantly changed the content and direction of American academic and political discussion.”

Of course, the fact that the Olin Foundation poured millions of dollars into promoting law and economics does not necessarily imply that those investments played a significant causal role in the stunning success of the now-dominant paradigm. It may be, as most of its proponents presume, that law and economics was destined for greatness solely on the merits, and that Olin money simply facilitated an inevitable process that was already underway.

* * *

There are several reasons to suspect, however, that the Olin Foundation’s support, combined with numerous other situational influences, has played a pivotal causal role in the success of the law and economics movement. First, the success of law and economics appears to map closely with the precise ambitions and strategies of the key individuals behind the Olin Foundation: John Olin, the founder of the organization, and William Simon, its longtime president. After leaving his position as Treasury Secretary in the Nixon and Ford Administrations, Simon wrote two best-selling books that outlined his conservative and pro-commercial beliefs and his agenda for implementing them. Simon was a prominent, early exponent of the dispositionist, neoliberal worldview that seeks to promote private enterprise and to minimize the role of government–a worldview shared by John Olin. They also shared a belief that American universities at the time produced ideas and graduates that were dangerously antithetical to those ends. To Simon, this problem was tantamount to a war of liberty versus totalitarianism–a war with three fronts:

1. Funds generated by business . . . must rush by multimillions to the aid of liberty, in the many places where it is beleaguered.
. . . .
. . . [Foundations established by such funds must] serve explicitly as intellectual refuges for the non-egalitarian scholars and writers in our society who today work largely alone in the face of overwhelming indifference or hostility. They must be given grants, grants, and more grants in exchange for books, books, and more books.
2. Business must cease the mindless subsidizing of colleges and universities whose departments of economics, government, politics and history are hostile to capitalism and whose faculties will not hire scholars whose views are otherwise.
. . . .
. . . America’s major universities are today churning out young collectivists by legions, and it is irrational for businessmen to support them.
. . . .
3. Finally, business money must flow . . . to media which are either pro-freedom or, if not necessarily ‘pro-business,’ at least professionally capable of a fair and accurate treatment of procapitalist ideas, values and arguments. The judgment of this fairness is to be made by businessmen alone–it is their money that they are investing.

These are the three fronts on which to act aggressively if we are to create a sophisticated counter-force to the rising despotism. One of my own first actions on leaving the post of Secretary of the Treasury was to accept the job of president of the John N. [sic] Olin Foundation, whose purpose is to support those individuals and institutions who are working to strengthen the free enterprise system.

Thus, Simon, with the support of the Olin Foundation, was trying to alter the playing field on which academic debate takes place–and trying to do so situationally. Furthermore, he understood that the dispositionism of law and economics is pro-business and that many alternative views, otherwise successful in the marketplace of ideas, are not. Simon presented American individualism, much as ad agencies presented the Marlboro Man, as the American tradition and the source of America’s greatness. However, like the Marlboro Man’s creators, Simon seemed to appreciate that such individualism, to be embraced as deeply as Philip Morris, Simon, and others desired, had to be heavily promoted, and reinforced if it is to be widely accepted. And he further understood that the situation can and should be manipulated by, among other things, choosing particular academics, programs, and scholarly camps to give “grants, grants, and more grants in exchange for books, books, and more books.”

In light of Simon’s (and thus the Olin Foundation’s) pro-business mission, there is good reason to believe that the Olin Foundation’s sizeable law and economics investment was money well spent. The point is strengthened when one considers that the Foundation engaged in a kind of “stage financing” of these programs: grants were intended to last for only a few years, at which point the Foundation would consider whether to renew its contribution to a particular program. The fact that the Foundation continued to renew many grants provides strong evidence that it believed that its investments were generating worthwhile returns in terms of encouraging pro-commercial worldviews (and discouraging alternatives) among students, academics, and policymakers.

* * *

Part I of this series explained that our “deep capture” story is analogous to the (shallow) capture story told by economists (such as Nobel laureate George Stigler) and public choice theorists for decades regarding the competition over prototypical regulatory institutions. Part II looked to history (specifically, Galileo’s recantation) for another analogy to the process that we claim is widespread today — the deep capture of how we understand ourselves. Part III picked up on both of those themes and explains that Stigler’s “capture” story has implications far broader and deeper than he or others realized. Part IV examined the relative power (measured as the ability to influence situation) of large commercial interests today, much like the power of the Catholic Church in Galileo’s day. Part V described other parallels between the Catholic Church and geocentrism, on one hand, and modern corporate interests and dispositionism, on the other. Part VI laid out the “deep capture hypothesis” a bit more and began loosely testing it by examining the role that it may have played in the “deregulatory” movement. Part VII provided some illustrative examples of how atypical “regulators,” from courts to hard-hitting news networks, reflect and contribute to deep capture. Part VIII contrasted different cultures for evidence of commercial interests in promoting dispositionism. Part IX described the strategy of employing third-party messengers.