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Complexity and the Cathedral: making law and economics more Calabresian

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Abstract

This article argues that Calabresi and Melamed’s “Cathedral” framework of property rules, liability rules, and inalienability rules needs to be extended using the tools of complex systems theory in order to capture important institutional features of the law. As an applied field, law and economics looks to law in choosing the appropriate analytical tools from economics—something that Calabresi has identified (in strong form) as law and economics as opposed to economic analysis of law. Recognizing law as a complex system requires a rethinking of some Realist-inspired assumptions that underpin economically inspired analysis of law. These assumptions include a preference for narrow, concrete concepts and a skepticism about traditional doctrines and baselines—and ultimately Legal Realism’s extreme nominalism and the strong bundle of rights picture of property. The article shows how the Calabresi and Melamed (C&M) framework exhibits gaps that can be addressed by systems theory; these include narrow entitlements to engage in specific activities, liability rules that allow an affected party to buy out an activity (Rule 4), opportunistic behavior by parties that destabilizes liability rules, and the role of equity as an institutional response. Extending the C&M framework to treat it as a system helps prevent the C&M framework from flattening the law out. If we supplement the C&M framework to take account of law as a system, we can bring it closer to Calabresian law and economics.

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Notes

  1. Coase was trying, as Calabresi notes, to change economics in light of the law, and he was not that interested in explaining the law itself.

  2. Klick and Parchomovsky cite Alexander (2016), advocating the legislation as an unalloyed good, which in turn cites other pro-legislation voices and literature.

  3. Sichelman and Smith (2017) extend the technique in Newman and Girvan (2004) of divisive clustering for locating “communities” (i.e., modules) within a network. We take basic disaggregated legal relations like rights to use and then ask how they cluster, by removing edges with highest “betweenness”—i.e., edges that lie “between” rather than “within” communities—to locate modules, recalculate and remove again. In this way, one can determine the overall modularity of the system, Q, which is the difference between the number of edges within the emergent groups and the expected number in an equivalent network in which edges were placed at random.

  4. The modular structure can even be found in the law of torts, despite its apparent complexity (Smith 2011a). Traditional doctrines for which Realists and their successors had little use can be seen as devices for managing information, by making decisions depend on only some contextual information, and crucially, by making party decisions less interdependent. Thus, for example, some economic analyses of two-party interactions such as accidents make behavior highly interdependent and therefore information-intensive (Bayern 2010). Despite the economic case for decisions to be “correct” on the margin, including their dependence on others’ activities (Cooter 1985), the law typically truncates the decisional factors (Anderson 2007; Smith 2011a). Moreover, the decisions asked of an actor and the duties that are organized around them sound in everyday local forms of morality—again the stuff of traditional law that has received a less than sympathetic hearing from most legal economists (e.g., Coleman 2001, 16–27). Perhaps even notions of ordinary care in negligence fit this pattern, and through complexity we have a functional and even economic reason not to think that “reasonableness” in negligence is synonymous with cost–benefit analysis (Zipursky 2007, 2013–2026, 2029–2040; Goldberg and Zipursky 2019).

  5. A somewhat parallel development towards systems thinking in corporate law can be seen in the Realist-inspired nexus of contracts view being supplemented with a greater appreciation of the property-like asset partitioning features of organizational law (Armour and Whincop (2007); Hansmann and Kraakman (2000, 393–394)).

  6. What the underlying “thing” is that is the subject to the entitlement can also change in response to legal rules, as where a mandated product warranty might under certain conditions lead to lower quality along nonregulated dimensions. (Smith 2000; see also Barzel 1976).

  7. Whether and to what extent to include such factors in the economic analysis of law has been controversial, as have more recent supplementations of bounded rationality. For example, the law of equity (about which more in Section III.C) may be responsive to different individual motivations and moral priming (Feldman and Smith 2014). The argument here is that very basic systems considerations point in a different direction than the usual import ascribed to the C&M framework.

  8. Interestingly, attention to the possibility of unraveling through asymmetric information makes ex post evaluation through legal rules looks better and causes efficiency and moral accounts to converge (Gold and Smith 2016). I leave these bigger threads for another day.

  9. I invoke opportunism, not because opportunism is inconsistent with rationality combined with asymmetric information, but because a category of such behavior appears to pose a problem for “first order” legal rules and invite a response by “second order” interventions that operate to change the result that first-order law would otherwise produce. For example, unconscionability can be treated as a problem that invites an override of ordinary legal results, and a suspension of enforceability of contracts (Smith 2017).

  10. This opportunism can be a problem regardless of how the new entitlement holder is protected. The process of taking or actions taken soon after may make the resource unsuitable for the original owner’s purpose. Or the prospect of takings may erode the incentive to develop the information about future demand in the first place. Recent work suggesting that property rule protection is less warranted or warranted for reasons of myopia tend to overlook the role that remedies pay in protecting the complexity-managing function of entitlement structures (Bar-Gill and Persico 2016; Posner and Weyl 2017).

  11. In a sense the Lemons-like feature of the interaction causes a macro effect on the liability system (Akerlof 1970; Schelling 1978). This type of problem is also what complex systems theory concerns itself with.

  12. Moreover, a system of property rules implemented through the traditional equitable standards is not only robust to feedback in the forms of opportunism. Equity allowed for the legal system to learn and adapt: equity picked up on and responded to new forms of fraud, and its institutional responses would sometimes eventually make their way into the common law itself (Smith 2017).

  13. Complex systems theory allows one, in Herbert Simon’s (1981 [1969], 195) words, to be a an “in-principle reductionist” and a “pragmatic holist.” That’s what Guido is. Or is it the reverse?

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Acknowledgements

For very helpful comments, I would like to thank participants at the conference on the Future of Law and Economics, and especially Doug Melamed for his insightful commentary, as well as John Goldberg, Mark Ramseyer, and audiences at the American Law and Economics Annual Meeting at the Boston University School of Law, and the Private Law Consortium Conference at Harvard Law School. Special thanks to Guido for his inspiration and friendship. For all errors I am not only the cheapest cost avoider, but fully to blame.

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    Henry E. Smith

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Smith, H.E. Complexity and the Cathedral: making law and economics more Calabresian. Eur J Law Econ 48, 43–63 (2019). https://doi.org/10.1007/s10657-018-9591-x

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