Beyond Individualism in Law and Economics

8/13/2019 Beyond Individualism in Law and Economics

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BEYOND INDIVIDUALISM IN LAW AND ECONOMICSRO RTAHDIEH

INTRODUCTION 44I. THEMEANING S)OF METHODOLOGICAL INDIVIDUALISM 48A. The Origins of Methodological Individualism 49B. Individualism asOught Is, and How 52C. Individuals and Institutions in Explanations 53II. THE LIMITS OF METHODOLOGICAL INDIVIDUALISM 57A. Social Norms 58B. Network Externalities 61C. Coordination Games 62D. Knowledge and Information 65E. Individualism and Interdependence in Economic Analysis 67III. THECONSEQUENCESOF METHODOLOGICALINDIVIDUALISM 70A. Community and Consent 70B. Change and Evolution in Law and Economics 74C. The Regulation ofKnowledge and Information 77

D. Crisis and Coordination in the Financial Markets 79CONCLUSION 82The study of law and economics was built up on twopillars. The first is thefamiliar assumption of individual rationality. Thesecond less familiar, is theprinciple of methodologicalindividualism.Over the last twentyyears law andeconomics has largely internalized behavioral critiques of the rationalityassumption. Bycontrast the field has failed to appreciate the implications ofgrowing challenges to its methodological individualism. Where social normsshape individual choices network externalities arestrong coordination is the

operative goal, or information is a substantial determinant of value, amethodology strongly oriented to the analysis of individuals overlooks at leastas much as it reveals. Among other potential distortions indicia of consent Associate Dean of Faculty, Professor of Law Director, Center on Federalism and

Intersystemic Governance, Emory University School of Law. My appreciation to RickBrooks, Bill Buzbee, Amy Cohen, Bob EUickson, David Fontana, Vicki Jackson, MichaelKang, Don Langevoort, Orly Lobel, David Luban, Richard McAdams, Marc Miller, JimNickel, Sten Nyberg, Patrick O'Donnell Mike Seidman, Robert Schapiro, Peter Siegelman,Alex Stein, A.J. Sutter, and Michael Walzer, for their invaluable insights. Thanks also toattendees of the American Law and Economics Association annual meeting, and toworkshop participants at Georgetown University, the University of California at Davis, and


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44 BOSTON UNIVERSITYL AW REVIEW [Vol.9 1 :43mayb egiven greater weight than theyde s e r v e the evolution of law and normsmay beunderemphasized and our regulation of information knowledge andeven the flnancial markets may be flawed.As with the shift toward a morecareful approach to rationality then attention to the limits of methodologicalindividualism may leadu s to a richer account of law ande conomics.

It is a touchstone of accepted economics that all explanations must run interms of th e actions and reactions of individuals. Our behavior injudgingeconomic research, in peer review of papers and research, and inpromotions includes the criterion that in principle the behavior weexplain and the policies we propose are explicable in terms of individualsnot of other social categories. I want to argue today that a closeexamination of even the most standard economic analysis shows thatsocial categories are in fact used in economic analysis all the time andthat they appear to be absolute necessities of th e analysis, not just figuresof speech that can be eliminated if need be.

- Kenneth J. Arrow'INTRODUCTION

At the foundation of the neoclassical economics on which law andeconomics is built, two elements have been seen as essential: first, theassumption of rationality, and second, the mandate of methodologicalindividualism.^ Together, these generate the classic constmct of homoeconomicus - the rational actor paradigm that Holmes advanced in law, withhis emphasis on the bad man as the appropriate focus of legal analysis.Since Herbert Simon's influential work on bounded rationality, however,the assumption of rationality has been under siege.'' Experimental studies byboth economists and psychologists have revealed systematic deviations fromrationality across a wide array of settings.^ In the works of On Amir, ChristineJoUs Russell Korobkin, Don Langevoort, Orly Lobel, Cass Sunstein, TomUlen, and others, in tum, these findings have been applied in the legal

' Kenneth J. Arrow,Methodological Individualism and Social Knowledge 84 A M . E C ON .R E V . 1,1 (1994).

2See Robert C. EUickson, Law and Economics Discovers Social Norms 27 J. L E G A LSTU D . 537, 539 1998).

3SeeOliver Wendell Holmes,The Path of the Law 10 H A R V . L . R E V .457, 459 (1897). See Herbert A. Simon,A Behavioral Model of Rational Choice 69 Q.J. EcoN. 99, 99(1955).^See e.g. Werner Guth et al..An Experimental Analysis ofUltimatumBargaining 3 J.

E C O N . B E H A V . & O R G . 367, 385 (1982) (using ultimatum bargaining games to show that


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2011] EYONDINDIVIDUALISM INLA WANDECONOMICS 45literature - generating the vibrant sub-discipline of behavioral law andeconomics.^ This healthy dialecticof thesis, counterthesis,andsynthesisinlawand economics' treatmentofrationality standsincontrast, however, withits less thoughtful approach to methodological individualism.Giventheoriginsof their discipline,if nothing else, scholarsof lawandeconomics tendtosee themselvesasmethodological individualists.'' Generaldescriptionsoflawandeconomicsare to similar effect, intheir referencetomethodological individualism as a basic principle ofthe discipline.^ Arguably,in fact, methodological individualism is even more foundational to law andeconomics than the rationality assumption, serving as a kind of framingconstraint, rather than simply an assumption.^As often as not, however, invocations of themantra of methodologicalindividualism leave the author's intended meaning unclear. * Where adefinitionisoffered, meanwhile, one finds striking variation among authors -including the common assertionofdefinitions that are simply wrong. Beyondsuch definitional ambiguity liesamore fundamental challenge. While law andeconomics' orientation to the analysisofindividualsisnot faced with the kind

^ See e.g..On Amir & Orly Lobel,Stumble Predict Nudge: How Behavioral EconomicsInforms Law and Policy 108 COLUM.L.R E V . 2098, 2109-10 (2008); Christine JoUs, CassR . Sunstein R ichard Thaler, A Behavioral Approach to Law and Economics 50STAN .L .R E V . 1471,1473(1998); R ussell B.Korobkin Thomas S. Ulen,Law andBehavioralScience: Removing the Rationality Assumption from Law a nd Econom ics 88 CALIF.L .R E V .1051, 1053 (2000); Donald C. Langevoort, Behavioral Theories of Judgment and DecisionMakinginLegal Scholarship: Literature Review 51V AND. L .R E V . 1499, 1501 (1998)(indicating that workbymany researchers has suggested that thereare heuristics, biasesand other departures from rational decision-making processes ).

' See e.g. EUickson,supranote 2,at539.^ See e.g. Jason Scott Johnston,Law Economics and Post-Realist Explanation 24 LAW

& Soc'Y R E V .1217, 1244(1990) ( Even the most superficially functional econom icanalystsoflaw ultimately adoptamethod ological individualist research program . ); F redS.McChesney, Positive Economics and ll That 61G E O .WASH . L .R E V .272, 295(1992)(reviewing E R A N K H. E A S T E R B R O O K D A N I E LR. F I S C H E L , THEE CONOMIC STR UCTUREOFC O R P O R A T E L A W( 1991 )).

' SeeGeoffrey M.H odgson, Meanings of Methodological Individualism 14 J.ECON .METHODOLOGY 211, 211 (2007) ( [I]n so far as economists make their philosophicalassumptions explicit, claimstoadhereto 'methodological individualism' areuppermost. );see also Patrick B. Crawford, The Utility of the Efficiency/Equity Dichotomy inTax PolicyAnalysis 16V A. TAX R E V . 5 01 , 506-07 (1997) ( The desire to createan objective, scientificbasisforthe social goodiscapturedinthe paramount methodological principleofpositivisteconomics: methodological individualism. ).

' SeeH odgson, supra note9, at 212; Gary Lawson, Efficiency andIndividualism 42DUKE L .J .5 3,58(1992). Notuncommonly,thedictatesof methodological individualismhave been equated with the distinct demands of the rationality assumption. No lessan


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46 BOSTON UNIVERSITY LAW REVIEW [Vol. 91 :43of frontal assault that behavioral psychology and economics advanced againstthe rationality assumption, it is increasingly under pressure as well.

As with critiques of the rationality assumption, much of this challengecomes from within. My emphasis in what follows, as such, is not asociological preference for methodological holism - an orientation to races,classes, and the like. Rather, I advance the more challenging claim thatstrands ofthe economics literature /tee// undercut the individualistic orientationof law and economics.Notwithstanding the attention given many of these critical strands -including social norms, network extem alities, and coordination games - in thelegal literature, their conflict with methodological individualism has gonelargely unacknowledged. Law and economics scholars have thus failed toappreciate the tensions between these observations and the continued practiceof m ethodological individualism.' The issue, as such, is not simply one of labeling. It is not that students oflaw and economics call themselves methodological individualists when theyare not - although that is surely tme in some ca se s. The concem herein,rather, is the law and economics literature's persistent emphasis on theindividual - its continued attempt to practice methodological individualism -even in settings in which that approach is inadequate.The uncritical invocation of methodological individualism as a foundationalprinciple of law and economics proves to be of real consequence for legalanalysis. As I suggest below, it may - among other potential harms - distortlegal doctrine in environmental regulation, takings law, and elsewhere;encourage reliance on flawed indicia of consent; and generate inadequate orinappropriate regulation in areas where knowledge or information areimportant determinants of value. The methodological individualism oflaw and

Se eEllickson,supra note 2, at 542.'2 Thus, the analysis herein holds implications for a wide array of legal scholarship. Seee.g. Yochai Benkler, Sharing Nicely: On Shareable Goods and the Emergence of Sharing

as a Moda lity of Economic Produ ction 114 YALEL.J. 273 , 358 (2004) (describing a class of shareable go ods as an instance of the social phenomena at work in various markets); LisaBernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation ThroughRules Norms and Institutions 99 MiCH. L.REV. 1724, 1725 (2001) (exam ining the rules,norm s, and institutions that regulate the cotton industry); Michael Klausner, CorporationsCorporate Law and Networks of Contracts 81 VA. L .REV. 757, 758 (1995) (questioningthe assumption that contracting parties reach socially optimal contractual arrangement thataffect neither other contracts nor the parties to other contracts); Mark A. Lemley & DavidMcGowan,Legal Implications of Network Econo mic Effects 86 CALIF. L. REV. 479, 482-83(1998) (exam ining the legal implications of network extema lities).

'3 In the abstract, the principles of metho dologica l individualism are widely accepted by


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2011] EYONDIND IVIDUALISM IN LA WANDECONOMICS 47economics may even helpto explain someof our confusion as tohowtorespond to the recent financial crisis.'''

The critique herein is not directed, as such, to a narrow group of traditional,classical, or Chicago-oriented law and economics scholars. Rather, much ofthe law andeconomics literature comes within itsambit.'^ It is notthatscholars of law andeconomics do notrecognize that groups exist, thatinstitutions have influence, or that social dynamics matter. To the contrary, theliterature has devoted substantial attentiontoquestionsofcollectives, socialand group dynamics, and the like. These factors are comm only assignedanarrow role in the analysis, however, helping to shape individual preferences,but not serving as direct determinants of observed social outcomes. They arenot, as economist Geoffrey Hodgson has put it, made part ofthe explanation.'^That, in fact, is the whole point of methodological individualism.'^Consider, by way of example, theplace of community in law andeconomics.'^ In Selling Mayberry:Communities andIndividualsin Law andEconomics Gideon Parchomovsky and Peter Siegelman forceftilly challengedconventional law and economics accounts of pollution extemalities, collectiveaction, and takings.'^ Law and econom ics' traditional, individualistic approachto these issues, they argued, could not explain what happened tothe town ofCheshire, Ohio, which the ownerof a nearby power plant purchasedin itsentirety. Only by integrating community into the analysis as well,Parchomovsky and Siegelman counseled, could we properly understandthedynamicatwork. For all the forceoftheir argument, however, there w assimply no room for community within the entrenched methodologicalindividualism oflaw and economics. Evenaslaw and economics scholarshave cited other strands of Parchomovsky and Siegelman's analysis, not once

'' See infraPart 111.'^ Like Stephen Marglin,inhis rece nt critiqueofhis fellow econo mists' inattentiontocommunity, I have been urged to recognize thevariety within economics by some

qualification suchas'niainstream'or'standard'or'neoclassical. ' STEPHEN A. MARGLIN,THE DISMAL SCIEN CE: HOW THINKING LIKE AN ECON OMIST UNDERMIN ES COMMUNITY 5-6(2008). I would echo his response, however, that notwithstanding the variety,themainstream, in my view,isso dominant that the other streams have become mere trickles.Id at 6.

Se eHodgson,supranote 9, at220-21. Even Ludwig von Mises- among the founders ofmethodological individualism -

acknowledged that collective wh oles matter. Inhis view, how ever, the only wayto anunderstanding of such wholes wasthrough ananalysis of . . . individuals' actions.LUDWIG VON MISES, HUMAN ACTION :ATREATISE ON ECON OMICS42-43 (2d ed. 1963).

'*Ireturn to this example infraPart III.A.


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48 BOSTON UNIVERSITYLA W REVIEW [Vol.9 1 : 43has their challenge to the discipline's individualistic focus been acknowledged,let alone engaged.^'

To begin to untie this Gordian Knot in the thinking of law and economics.Part I describes ambiguities in the economic discourse of methodologicalindividualism, and suggests how we might understand its invocation in law andeconom ics. Part II highlights the ways in which a single-minded em phasis onindividuals constitutes a flawed approach to questions of great interest to legalscholars, including social norms, network extemalities, coordination games,and aspects of information economics.In each case, I suggest, a methodologically individualist approach leads lawand economics to overlook the dynamico f interdependen ethat is at work, andthereby distorts both the normative and positive conclusions we derive. Tohighlight as much. Part III reviews a handfiil of such distortions, including lawand economics' faulty equation of consent with efficiency, its inadequateattention to evolution and change, and its flawed approach to the regulation ofknowledge and information and to the management of financ ial crises.

I . TH E M EA NIN G(S) OF METHOD OLOGICAL INDIVIDUALISMLaw and economics - a sub-discipline of neoclassical economics - standsupon a pair of critical principles borrowed from the latter.^^ ^g RobertEUickson succinctly puts it: The core of [the law and economics] paradigm

was borrowed from economics. It consists of methodological individualism(the assumption that individuals are the only agents of human action) and theassumption that individuals are self-regarding and rational. ^3The limitations of the rationality assumption, of course, have been thesubject of a rich literature in recent decades. ^ Psychologists Daniel2 A simi lar example might b e t h ework o fGeorg e Aker lof and Rach el Kranton o n wha t

they have terme d ident i ty eco nom ics. See e.g. G E O R G E A . A K E R L O F & R A C H E L E .K R A N T O N , I D E N T I TY E C O N O M I C S : H O W O U R ID E N T IT IE S S H A P E O U R W O R K , W A G E S ,A N DW E L L - B E I N G 6 ( 2 0 1 0 ) ; G e o r g e A . Aker lo f & Rache l E .Kran ton , Economics an d Identity1 1 5 Q . J .ECON. 7 1 5 , 7 1 5 ( 20 0 0) . They have a rgued over t h e last decad e that a p ropercalculat ion o f individu al uti l i ty requi res integra tion o f relevant social categorie s, at te ndantnorms , a n dthe potent ia l ly substant ia l co nsequ ences o fconformity wi th ( o rdev iati on from)those norms . S ignif icant impl icat ions fo l low for th eregulat ion o f labor a n d employment ,corporate governance, d iscr iminat ion law, and the f inancing of publ ic and pr ivate educat ion- all issues o fcentra l impor tance in th estudy o f law. With t h eexcep t ion o f a handful o fre levant scholars , however , thei r work h a s gone unexplo red i n t h e l a w a n d economicsli terature.

22 & e R O B E R T C O O T E R & T H O M A S U L E N , L A W A N D E C O N O M I C S 1 5 - 5 2 ( 1 9 8 8 ) ; R o nHarr is , TheUses of H istory i n Law and Economics 4 T H E O R E T I C A L I N Q . L . 6 5 9 , 6 6 6 ( 2 0 0 3 ) .

2 3 EUickson, supra note 2, at 539;see also Christian Kirchner, The Diff icul t Reception ofLaw and Econom i c s i n Ge rm any 11 INT'L REV. L. & EcON. 2 77, 283 (19 9 1); McChesney,


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2011] BEYOND INDIVIDUALISM IN LAW AND ECONOMICS 49Kahneman andAm os Tversky, andeconomists including H erbert Simon,jointly laid the foundations forthis critique.^^ Legal sc holars, how ever, havesince picked up - and significantly advan ced - the ball of behavioralanalysis.26 Ba ld asse rtions of ratio nality are, asaresult, far less comm on in thelaw and economics literature than they used to be.By contrast, the second principle borrowed from neoclassical economics -methodological individualism - has been analyzed far less criticallybystudents of law and economics.^' ' In the sub-sections that follow,Ibegin witha brief review of the historical origins of methodological individualism. Ithenconsider the tendency to insert questionsofwhat ought to be and whatistheplace of individuals into invo cations of methodological individualism - aconcept properly understood to speak only to how we analyze relevant social,economic, and political phenomena. I conclude by suggesting that those whoinvoke methodological individualism may wishtohave their cake a nd eatitto o- acknowledging, and even analyzing, social and institutional factors, butinappropriately marginalizing their role in the analysis.A . The Origins of M ethodolog ical Individualism

In its earliest origins, theterm methodo logical individualism hasbeentraced to the work of Joseph Schumpeter, in 1908.2 As Schumpeter defined it,however ,itsmeaning wasfarnarrower than w hat we co mm only intend byittoday. Schu mp eter 's argument was simply that the economist starts fromtheindividualin order to describe certain econo mic relationsh ips. ^' H e rejected,by contrast, thepractice ofwhat he termed sociological individualism -essentially what we have since embraced under the mbricof methodologicalindividualism. In this flawed analytical ap proach , the self-govemingindividual constitutes the ultimate unit of the social sciences; and. . . all social

Korobkin, Multi-Disciplinary Approach toLegal Scholarship: Econom ics BehavioralEconom ics and Evolutionary Psychology 41 JURIMETRICSJ. 319, 321-22 (2001); TaninaRostain,Educating Homo Economicus; Cautionary Notes on the New Behavioral Law andEconomics Movement 34 LAW&SO C 'Y R E V .97 3, 977 (2000).

25See supranotes 4-5 and accompanying text.2 See sources citedsupranote 6.2 Cf AKERLOF &KRANTON , supra note 21,at113 (proposing to modify and broadeneconomic analysis to include identity ).28See Joseph Schumpeter, OntheConceptofSocial Value 23Q.J. EcON . 213,231

(1909) (citing J O S E P H S C H U M P E T E R , DAS W E S E N UND DER HAUPTINHALT DERTH E O R E T ISC H E N N A TIO N A L KO N O M IE [ TH E N A TU R E AN D E SS E N C E O F E C O N O M IC T HE O R Y ]91(1908)); see also Hovenkamp, supra note 13,at33; Lars U dehn, The Changing FaceofMethodological Individualism 28 AN N . R E V . SO C .479 , 484 (2002).


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50 BOSTON UNIVERSITY LA W REVIEW [Vol. 9 1: 43phenomena resolve themselves into decisions and actions of individuals thatneed n ot or cannot b e further a nalyzed in terms of supe rindividual factors. ''^

Before Schumpeter, notions of methodological individualism can likewisebe seen in the literature of the Austrian School of Economics - best known tous through the work of Friedrich Hayek, but initially founded on CariM ang er 's atomistic me thod and Ludw ig von M ise s' additions thereto.^'Mises thus cast the methods of economic analysis as exclusivelyindividualistic: If we scrutinize the mea ning of the various actions performedby individuals we must necessarily learn everything about the actions ofcollective wholes. ^^The intent of the Austrian School, however, was not to deny the importanceof institutions or to rende r groups irrelevant. Rather, the School hoped to moreftilly and properly explain collective entities by way of individual actions.Their project was, in a sense, a version of neoclassical economics' effort toexplain prices in purely individual terms.^^ Au strian econom ics ultimatelymoved away from a rigid individualism, moreover, as in evident in the work ofHayekhimself. As he states in one of his later wo rks:The overall order of actions in a group is in two respects more than thetotality of regularities observable in the actions of the individuals andcannot be who lly reduced to them . It is so not only in the trivial sense inwhich the whole is more than the mere su m of its parts but presupposesalso that these elements are related to each other in a particular manner.It is more also because the existence of those relations which are essentialfor the existence of the whole cannot be accounted for wholly by theinteraction of the parts but only by their interaction with an outside woridboth of the individual par ts and the h l ^ *It was during the Twentieth Century, however, that the rhetoric ofme thodolog ical individualism becam e more widespread.^^ Standard use of theterm thus arose out of conflicts betw een econ omists and sociologists - definedin significant part by their contrasting cho ice of method.^^ W hile so ciology

' JOSEPH A. SC HUMPETER, HISTORY OF ECONOM IC ANALY SIS 888 1954).3' SeeUdehn,supranote 28 , at 484, 486. Other strands of the concept might be traced tothe work of Jeremy Bentham, John Locke, and John Stuart Mill, among other nineteenthcentury sources. See id.at 480, 482. MISES,supranote 17, at 42. SeeUdehn,supran ote 28, at 484.' F.A. HAYEK, Notes on the Evolution of Systems of Rules of Conduct, in STUDIES IN

PHILOSOPHY, POLITICS AND ECONOMICS 66, 70-71 (1967); see also Marc Amstutz, Global Non-)Law: The Perspective of Evolutionary Jurisprudence, 9 GERMAN L.J. 465, 468-69(2008);c f Christopher T. Wonnell,C ontract Law and the Austrian Sch ool of Economics 54FOR H ML .REV.507, 523 (1986).


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2011] EYONDINDIVIDUALISM IN LAW ANDECONOMICS 51thus embracedamethodological holism,inwhich collectives suchasstates,ethnic groups, classes, and the like were anthropomorphized for purposesofanalysis, economics held itself out as the only tme social science, by virtue ofits m ethodological individualism.^Econom ics thus came to be defined by the idea that the individualistheirreducible unit of positive economic analysis - an approach in whichindividual behaviors are the only possible[] objects of social scientificstudy. '^ AsKenneth Arrow succinctly puts it, each individual makesdecisions to consume different commodities, to work at one job or another,tochoose production methods, to save, and to inv est. Methodologicalindividualists assume that these individual decisions, in tum , form a completeset of explanatory variables.' *

Ina methodologically individualist approach, thus, analysisof the socialmust occur by way of the individual. ' As Lars Udehn forcefully putsit inreviewing our varied definitions of methodological individualism, noeconomic explanationisconsidered successful untilall exogenous variableshave been reduced to psychological states of individuals and naturalconstraints. Social institutions may appear in themodels of neoclassicaleconom ics, but only as endogenous variables.' '^3 ' See id38 See Law son,supranote 10, at 58, 59 (emphasis om itted); seealso Dau-Schmidt, supranote 36, at 395(asserting that the individual is the dominant unit of analysis ineconom ics ). James Buchanan offersacharacteristically strong statemen t of the principle:

Those who prefer to conduct inquiry into the relationships among classes, states, and otherorganizations assuch, and without attempts to reduce analysis to theindividuals whoparticipate, do not,inmy v iew, pass m uster as social sc ientistsinany useful sense of theterm. JAMES M . BUCH ANAN , EXPLORATIONS INTO CONSTITUTIONAL ECONOM ICS47 (1989).

3 ' Arrow,supranote 1, at 1.' ' Id . Beyond its core emphasisonthe individualasthe n ecessary unitofanalysis,

methodological individualism is often also linked to two cognate principles: theSchumpeterian conception of preference formation as exogenous to economic analysis, se eDau-Schmidt, supra note 36, at 396, 401-02, and the notion of thesubjectivityofpreferences, see Crawford, supra note 9, at 507-08 (describing the link betweenmethodological individualism and the prohibitionon interpersonal utility comparisons );Herbert Hovenkamp, Knowledge About Welfare: Legal Realism and the Separation of Lawand Economics, 84 MiNN. L. REV. 805, 841 (2000). Irettimtothe implicationsofthesecognate p rinciples infraPart I.C.

Social phenom ena shouldbeexplainedintermsofindividu als, their ph ysical andpsych ic states, actions, interaction, social situation and physical enviro nm ent. Udeh n,supra note 28,at499 g.2; see also Crawford, supra note9, at507 ( The only wayto acognitionofcollectivesis the analysisofthe conductofits mem bers. (quoting LUDW IGVON MISES, HUMAN ACTION: A TREATISE ON ECONOMICS 42 (Henry Regnery Co. 1966)(1949))); f Edward L.Rubin, Putting Rational Actors in Their Place: Economics and


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52 BOSTON UNIVERSITYLAW REVIEW [Vol.9 1 :43B . IndividualismasOught Is, and How

Now common references to methodological individualism in boththeeconomicsandthe law and economics literatures, however, continuetoleaveagreat deal to theimagination.'' Most foundationally, there is significantambiguity as to relevant authors ' intent to capture distinct normative,ontological, and/or methodological claims. Even where referenceismadetomethodologi lindividualism, thus, other claims are often intended.Quite commonly,tobegin, assertionsofmethodological individualismtumoutto begroundedinsome normative claimofindividualism. In theworkofJames Buchanan, Hayek, andothers, much ofthe motivation behindanindividualistic methodisthe perceived needforrobust individualism in thedesignof a moral, sustainable,or efficient social order.' ' Inthese cases,theintertwiningof methodologyandideology is bydesign.'' Atleastasoften,however, such ambiguitymayarise becausethe line between normativeandmethodological claimsisdifficult to draw.''^

Ontological claimsof individualism likewise stand behind many referencesto methodological individualism. AsMargaret Thatcher famously put it: Thereis nosuch thingassociety.. . . Thereareindividualmen andwomen,and there are families.' *^ Here, the claimisstillnotone of method, but neitherisitnormative. Instead,it isan ontological statementof the stateofreality.Individuals, the claim goes, are the basic units ofthe social andeconomicorder. Assuch, theyare the necessary decision-makersandactorsas to anyrelevant question. *^Methodological individualism,bycontrast, requiresno normative embraceof individualism,norevenanyontological conclusionas to theactual placeofthe individualin thesocialandeconomic order.' Rather,itsimply suggests

'^ ^ [W]earedealing withone of those plastic words which mean very different thingstodifferent people; evenfor thesame person,itsmeaning varies accordingtocontext. Indeed,I would attribute much of the hold that individualism hason themodem mindto a confijsionof meanings. MARGLIN,supra note 15,at58. ''SeeA rrow,supra note1,at1. Itbears emphasizing that n othing hereinis inconsistentwithastrong normative comm itmentto individualism.W

*Seeid.;Hodgson,supra note9, at213 . '' THECOLL ECTED SPEECHES OF MA RG A RET THATCHER 576 n.l (Robin Harris ed., 1997)(quoting Interview byWOMAN'S OWN with Margaret Thatcher, Prime Minister, UnitedKingdom (Oct. 31 , 1987)).''^ This meaning of methodological individualism may be what Elster famously

characterizedas trivially true . Se eELSTER,supranote 10,at1 3. It islikewisetheconceptat work inA martya Sen's embraceofindividualism as a manifest realityinthe worid.AMARTYA SEN, THEIDEAOFJUSTICE245(2009 ). Some have also seeninSen 's capabilityapproach, however, anethical ornormative individualism. SeeIngrid Robey ns, Sen's


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2011] BEYOND INDIVIDUALISM IN LA WAND ECONO MICS 53thatasamatterof social scientific method,thecorrect approachtoexplanationis to focus on theindividualas theoperative unit ofanalysis. W ithin thisapproach, talkofcollectives- groups, networks, communities,and the like -hasnoplace. Itcanlargelybedismissedasloose talk. Atvery best,itmightservetocapture some ag gregationof individual preferences andchoices. AsLarry Summershas put it: It isthebasisofmuch economic analysis thatthegoodis anaggregation ofmany individuals' assessments oftheir own well-being,and notsomething thatcan beassessed apart from individual judgme ntsonthebasisofsome overarchingorseparate theory. ' For the methodologicalindividualist, then, explanation mustbereducedtoindividuals.^'

The contribution of the foundational principle of methodologicalindividualism tolaw and economics, then,isproperly understoodto beaboutmethod not the various normative or ontological claims that are oftenadvanced in its shado w. Even after we recognize as much, however ,significant ambiguity remainsas towhatitmeansforlaw andeconomicstobemethodologically individualist.C. Individuals andInstitutions in Explanations

What doesitmean, thus,toreduce explanationsto individuals? Intryingtonavigate this question, thosewhoembrace m ethodological individualism w indup between Scylla andCh ary b d i s . As Geoffrey Hodg son suggests,twopossibilities would seem to present themse lves: either explanations m ustbereduced to individuals alone or they m ust em brace individuals and theirinteractions- essentially, individualsandinstitutions.^'

The first possibility is problematic on its face. AsHodg son pointsout,meaningful explanation of social andeconomic phenomena is likely to beimpossible without some acknowledgement of interaction and institutions.^ *This would seem especially tmeofthe legal analysis inlaw and economics.

offer apositive theory of the role of roupsinsocial ordering. Among the seminal effortsinthat vein, however,isSober and W ilson's workongroup selectioninevolutionary biology.See ELLIOTT SOBER & DAVID SLOAN WILSON, UNTO OTHERS: THEEVOLUTIONANDPSYCHOLOGYOFUNSELFISHBEHAVIOR4-7 (1998).

5 M ARGLIN, supra note 15,at63 (quoting S umm ers).5' See Jon Elster, Marxism Functionalism and Game Theory: The Case for

Methodological Individualism 11 THEORY & SOC'Y 453, 453 (1982) (denn ingmethodological individualismas thedoctrine thatall social phenomena (their structureandtheir change) are inprinciple explicable only intermsof individuals- their properties,goals,andbeliefs ). U nder this appro ach, [t]he individu al, along withhis or herassumedbehavioral characteristics,istakenas theelemental building blockin thetheory of the socialor economic system. Geoffrey M . Hodgson, Hayek Evolution andSpontaneous Order inNATURAL IM AGESINECONOM IC THOUGHT: M ARKETS READINTOOTH AND CLAW 408, 410(Philip M irowskied.,1994).


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54 BOSTON UNIVERSITYL W REVIEW [Vol.91 :43Given the institutional orientation of law, the extreme reductionism of anexplanation grounded in individuals alone would seem entirely out of place.

The second possibility, on the other hand,' would seem to concede too much.If both individuals and their interactions - and hence social dynamics,institutions, and the like - are part of the explanation, there is nothingespecially individualistic about the latter. We might equally cast the mandateas methodological institutionalism or at least as what Joseph Agassi hastermed institutional individualism. ^^In responding to this dilemm a, students ofl wand economics might be seenas trying to have their cake and eat it too. Social factors - interactions andresulting institutions - are acknowledged, and even analyzed, but they are

placed at the margins in the actual explanation of observed states of theworld. ^ By way of two cognate principles of methodological individualism,thus, its practitioners have respectively sought to exogenize or endogenizesocial and institutional factors. Either way, we get to the same result: thesefactors wind up at the margins, rather than at the heart, of the analysis.The first cognate principle of methodological individualism is thus the viewthat the formation of preferences is exogenous to the analysis.^'' Given thisposition, the role of social and institutional factors as determinants ofpreferences can simply be put aside. Such questions are thereby placed beyondthe scope of standard economic - and hence law and econom ics - analysis.^^

As we will see, however, this approach often proves problem atic. It isunsustainable, for example, where the exogenized factors are so obviouslycentral that their absence renders the analysis vacuous.Where the exogenization of social and institutional factors cannot besustained, a second principle of methodological individualism kicks in: thesubjectivity of preferences.^' The latter, in practice, is simply another means tothe same end. According to the principle of subjective preferences, anypreference can be reconciled with rationality analysis, and hence must beaccepted within a methodologically individualist approach. Anything,basically, can be endogenized into an individual's utility fiinction.* Thissecond principle thus creates a kind of dumping ground for difficult or

See id.at 220-22; Udehn,supranote 28 , at 489.^* Such states are what I will refer to, in the context of Coleman's famous diagrams, asthe social outcom es of interest See infranotes 62-63 and accompanying text. See Dau-Schmidt, supranote 36 , at 396, 401-02.^ See supra note 41 . In a sense, one might think of the question as one of what data to

consider. Se e Hovenkamp, supra note 40, at 842-43. Methodological individualism looksto a narrower set of data than I would suggest is appropriate for the meaningful analysis ofsocial norms, network extem alities, and the other phenom ena explored infraPart II.


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2011] BEYONDINDIVIDUALISM INL WANDECONOMICS 55problematic elements ofth analysis - including social and institutional factorsthat might otherwise loom large in our evaluation.^'

By way of such endogenization, thus, the methodological individualisteffectively downgrades the place of social and institutional factors in heranalysis. Such elements are not part ofth explanation; they are not evaluatedas causes. No longer, in this approach, are social and institutional factorsdirect determinants of observed results. At best, they become indirect causes ,through their impact on the individual preferences that the analysis sees todictate our actual choices.^^To appreciate what these twin principles exclude from the analysis, aslightly modified depiction of the so-called Coleman diagram - whichsociologist James Coleman developed to suggest a middle ground between themethodological individualism of economics and the methodological holism ofsociology - may be useful.

Social Structure (4) Social Outcom es

Individual Preferences Individual Action(2)Capturing the narrowest form of methodological individualism, Coleman'sframework depicts individual action as generated by individual values andpreferences (2), and grounds social outcomes in the actions of individuals (3).It further recognizes the aforementioned endogenization of social andinstitutional factors, in its linkage of individual values and preferences to socialstructure (1). 3Beyond the foregoing, however, Coleman's schema also recognizes thatsocial structure not only shapes individual preferences, but likewise providesthe context and framework within which individual actions interact - and may*' As with the attempt to exogenize social and institutional factors, endogenization of the

latter has its limits. W henever we push too much into an indiv idua l's utility function, itbegin s to look incoheren t. SeeM ARG LIN, supra note 15 , at 65-6 6. This is particulariy so,however, when the relevant additions are of a social, institutional, or altruistic nature.Individual utility thus looks a great deal less individual when it consists of preferences thatare so exp licitly socialin their construction. Id .

' If metho dological individua lists do consider social factors to be part of theexplanation, conversely, it becomes difficult to know what it means to be a methodological


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56 BOSTON UNIVERSITY LA W REVIEW [Vol.9 1 : 43thus shape social outcomes more directly as well (4). Social stmcture takesthe form of a set of interdependent positions that are prior to the interactionbetween the individuals occupying these positions. *'' Contrary to the dictatesof methodological individualism, therefore, talk about 'aggregation' ismisleading: 'for the phenomena to be explained involve interdependence ofindividuals' actions, not merely aggregated individual behavior. '*5

Where it attempts to exogenize preference formation - whether by socialand institutional factors or otherwise - methodological individualism paints theformation of individual preferences by social stmctures (i.e., the first axis) asbeyond the scope of relevant analysis. Where it endogenizes social andinstitutional variables, in tum, it seeks to deny the direct effects - along thefourth axis of Coleman's diagram - ofsoci lstmcture on social outcomes.In a methodologically individualist approach, as a result, the constraints ofinterest are not social and institutional ones. Rather, they are the more tangiblelimits of budgets, income, and the like. As Dau-Schmidt notes, wheneconomists talk about constrained choices they are focusing on how scarcityand people's budgets affect their choices rather than how culture mightinfluence what people choose within the confines of their budget. ** Contrastthis limited perspective with the more institutional approach described by KarlPopper: I propose to use the name 'social institution' for all those thingswhich set limits or create obstacles to our movements and actions almost as if

they were physical bodies or obstacles. Social institutions, he counseled, areexperienced by us as almost literally forming part of the fumiture of ourhabitat. *'In the methodological individualism of law and economics, when culture -as well as social dynamics and institutions more generally - appear, they donot function as constraints of direct interest to the analysis, but at best, asindirect influences on individual values and preferences. As we shall see,however, this approach offers a poor window into important areas of legal andeconomic analysis. In these areas, it is essential to go beyond anindividualistic focus, and engage the place of social and institutional factors as

direct causes, and not merely indirect influences, in the explanation of socialand economic phenomena.

Id at 49 4. Akerlof and Kranton see identity in just this light. See AKERLOF &KRANTON, supra note2 1 , at 10 - 1 1 .

Udehn, supra note 2 8, at 49 4 (emphasis added) (quoting JAMES S . COLEMAN,F O U N D AT I O N S O F S O C IA L T H E O R Y 2 2 1990)).

^^ Dau-Schmidt,supranote 36, at 401 n.77. K A RL R . PO P PE R , T H E M Y T H O F T HE F R AM E W O R K : IN D E F E N C E O F S CIE N C E A N D


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2011] BEYONDINDIVIDU LISM INL W NDECONOMICS 57II. TH E LIMITS OF METHO DOLOGICAL INDIVIDUALISM

[T]he foundational assumptions of economics . . . limit the ability ofeconomists to understand the parts of the world in which we mustperforce take an interest. An economist need not care about community,but it is harder to avoid such issues as the determinants of saving andinvestment, or the role of the distribution of income in assessingeconomic outcomes, or even in addressing the question of why marketsare good for people. In all of these areas, the foundations of the disciplinenot only undermine community; they undermine economic analysis.

- Stephen A. Marglin^^The methodological individualism of the law and economics literature, as

we have seen, encourages a strong orientation to individuals as the focus ofexplanation. While social dynamics and institutions are acknowledged, andeven analyzed, they are not evaluated as direct causes. At best, they may helpto explain individual preferences, which are emphasized as the operativepredictor of individual action and, in tum, of social outcomes.In important areas of law and economics analysis, however, this approachproves faulty - at least minimizing the insight we can gain, if not leading usastray. Before tuming to these areas, however, it is useful to acknowledge aneven broader tension between the economics literature today, and themethodological individualism ofl wand economics.Some conflict within methodological individualism might thus be found inthe very framework of modem economic analysis - general equilibrium theory.Most commonly, equilibrium theory has been cast as the paradigmaticexpression of methodological individualism. Lars Udehn, for example, hasemphasized the strong individualistic rhetoric of Kenneth Arrow - thepreeminent economic theorist of equilibrium.^'It is especially notable, thus, to recall Arrow's 1994 address to the AmericanEconomic Association - a passage of which I highlighted at the outset. Inthat address. Arrow challenged his fellow economists' persistent commitmentto methodological individualism, objecting that every economic model onecan think of includes irreducibly social principles and concepts. ' Contrary toUdehn, moreover. Arrow argued that general equilibrium theory itself shouldbe understood as social in nature. Minimally, prices can be understood associal because they are chosen on the market and not by individuals. Morebroadly, the very concept of the market - particularly in its ftinc tion as aresource-allocation mechanism - might be cast as inconsistent with

** MARGLIN,supranote 15, at 4.


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58 BOSTON UNIVERSITYLA W REVIEW [Vol.91 :43methodological individualism: Tastes maybesocially caused; expectationsare influenced by others; flrm s are organizations, and the like.''

Beyondany such broad tension, however,it isuseful tonoteanumberofareas inwhich a method that marginalizes social andinstitutional factors,whether by their exogenization or their endogenization, is not likelytogenerate meaningful insight. In this section, I highlight four areasinparticular: social norms, network extemalities, coordination games,andknowledge andinformation. Across each of these spheres, I ultimatelyconclude,a common strandofinterdependence underminesthebenefitsofamethodologically individualist appro ach .A. ocialNorms

Perhaps the most important area of conflict with methodologicalindividualisminlaw andeconomicsisthestudyofsocial norm s.'''' Inrecentyears, social norms have beenasubjectofgrowing interest among studentsofphilosophy, psychology, sociology, economics, and law. hi law andeconomics, their study has been shaped by a characteristic methodologicalindividualism.^5 -p ig hardly seemsanaturalfit however, given social norm s'obvious emphasisonthe W^

72Id.at 4. The very discussion ofextema lities. A rrow suggests, might beseentoconflict withthepracticeof methodological individualism. Seeid.at5-6. Others have alsohighlighted tensions between economic theoryand methodological individualism, includingan inabilitytodefme goo ds absent some social construction,seePaul N.Cox,The PublicThe Privateandthe Corporation 80M AR Q .L .R E V . 39 1, 429-30 (19 97) ,oreventoengageintheexercise of welfare economics,seeCrawford, supranote9, at513.

'3 Beyond thestudy ofsocial no rms, network extemalities, coordination games,andknowledge and information, other literaturesmay also conflict witha continued insistenceon metho dological individualism . These potential conflicts includeatleast thehistoricalstrand ofinstitutional e conom ics ex emplified bythe work of Douglass North, see e.g.Douglass North, Economic Performance Through Time 84A M .ECON. R E V .359, 360(1994) , ifnot also thetransaction-cost strand ofOliver Williamson, see e.g. OliverE.Williamson, Transaction-Cost Economics: The GovernanceofContractual Relations 22J.L. &E CON 233,233-34 (19 79). R ecent work in search theory andE linor Ostrom'sanalysisofcommon pool resourcesmayalso fall into this category,asmight certain strandsof the social psychologyandorganizational theory literature.

7 See e.g. ROBERT C. E L L I C K S O N , O R D E R W I T H O U T LAW: HOW NEIGHBOR S SETTLEDISPUTES 123(19 9 1 ) (offering atheory designedtoilluminateinwhat social contextandwith what content informal norms emergetohelp people achieve order without law ); E R ICA. PosNER , L AW ANDSOCIAL NORM S 3 (2000); Bemstein, supra note 12, at 1725(highlightingtherole of norms withinthecotton industry's private legal system).

75SeeSusanD.Cade,Theorizing Agency 55A M . U . L .R E V . 307,319(2005); E llickson,supra note2, at539. M ethodological individualism characterizes even much ofthe non-


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2011 ] EYONDINDIVIDUALISM IN LA WANDECONOMICS 59The social norms literature has,toasignificant degree, been orientedto theroleofsocial normsassubstitutesforlaw. Theoperationof social norms,

however, involvesafundamentally different dynamic from thatoflaw. Whilestudentsof social norms have identified avarietyofwaysin which socialnorms might exert influence - from intemalization to shaming andotherspeciesofthird-party enforcement- all shareacommon distinction with legalenforcement: theefficacy of a social norm depends,at itsfoundation,on aperceptionofit being em braced broadly.'''' Asocial norm is only so becauseitis seen to be so. ^Asaconsequence, community matters critically to social norms. The socialnorms literature's various frameworks of norm compliance - from first-through third-party accounts-all require some baseline community stmctureoutofwhichthe given mechanismofcompliancemayarise. Some extantsocial framework, as such, must precede the operation ofsoci lnorms.Givenasmuch,a distinct emphasisonindividualistic analysisishardtoreconcile withtheanalysisofsocial norms. The whole discussionofsocialnorms goes to social and community dynamics. The interesting question is notonly why individuals comply with norms, but what causes norms to emerge,toevolve,and topersistorbeabandoned. Ourattentioninthestudyofsocialnorms thus seems most appropriately directedto the relevant social dynamicsthemselves, and to the social conceptions they engender.Social normsare ftirther distinct fromlaw inthat social norms serveabroadersetofftinctionshanthelatter. Inprimary part,lawservestosolvecollective action problems. As Edna UUmann-Margalit points out, however,social norms also doother, more social andcommunity-oriented things.'Specifically, they maybeimportantinaddressing coordination problems,aswell as distributional andequity concems.^ Taking an individualisticapproach to social norms necessarily downplays these contributions.Recent workofGeorge Akerlof and Rachel Krantonon theneedto factor identity into economic analysis- toconsider theindividualinthesocialsetting ^'-might also be cited in this regard, given their emphasis on See BiCCHiERl,supranote 75.'8 The pointiseven clearer when one considersthe related dynamicofconvention. ee

MARGLIN,supranote 15,at 148;see also DAVID K , LEWIS, CONVENTION:AP HILOSOPHICALSTUDY97 (1969); E D N A U L L M A N N - M A R G AL I T , T H E E M ER G EN C E O F N O R M S76 (1977).

See ULL MANN-MARGALIT, supranote 78,at134-37.8Seeid*' AKERLOF&KRANTON,supranote2 1 ,at 28.82 See id.at18-20, 28;see alsoAkerlof& Kranton, supranote21;George A. Akerlof &

RachelE.Kranton, Identity and Schooling: Some Lessonsfor the Economics of Education40J.ECON. LIT. 1167, 1167-68 (2002) (positing that school quality actually correlatesto astuden t's identityinrelationtothe scho ol's social settings); George A. Akerlof& RachelE,


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60 BOSTON UNIVERSITY LAW REVIEW [Vol. 91 :43Evenaseconomists have cometo engage more closely withthereal world-through their engagement with more realistic tastes, and subsequently throughthe insightsof behavioral economics- Akerlof and Kranton argue they havecontinued to give inadequate attention to thesocial context andcategorieswithin which individuals define their utility.^^ JQ ^g useful, they counsel, anyattemptto specify individual utility must incorporate these categories andthenorms that follow from them.^''

Itishard to overstate the implications oft isapproachinimportant areasoflegal analysis, including labor and employment, education, discrimination, andeven corporate governance. Yet a strongly individualistic orientationnecessarily minimizestheplaceofsocial categories, identities,andresultingnormsinour analysis. While Akerlof and Kranton do not explicitly challengemethodological individualism, their emphasisonidentity standsinsignificanttension with the persistent methodological individualism of law andeconomics.In sum, methodological individualism operatestomarginalize social norms.For many scholars oflawandeconom ics, social norms are functionallyirrelevant, given theexogeneityofpreference formation.^' Methodologicalindividualism confines even those who attendtosocial norms, however,to anapproachinwhich normsareendogenized into individual utility functions, *As noted, this minimally reduces attentiontoother,atleast equally important,

functionsofsocial norms. More significantly, an individualistic approachtosocial norms does not see them asconstr intsofthesort cognizable to law andeconomics.^'' Suchan approach thus failsto engage norms' potential directcausal effects- not simply their influenceonindividual preferences, but theirshapingofthe architectureof choice within which those preferences playoutand interact.^^

GeorgeA.Akerlof, Social DistanceandSocial Decisions 65ECONO METRICA 1005, 1005(1997) (discussing social distance as afactor forunderstanding decision making, giventhe fact that decisions are shapedby social factors and their effectsonindividuals); GeorgeA. Akerlof, The Missing Motivation inMacroeconomics 97A M .ECON . R EV.5, 6(2007)(criticizing prior economic doctrineforfailure to consider norms of decision makers).

^ ^ eeAKERL O F&K R AN T O N ,supranote2 1 ,at 7.^ ^ Akerlof and Kranton offeranapproach that still begins with individual tastes, but thenproceeds through a three-step process - associating individuals with relevant social

categories, specifying theprevailing norms within those categories, andthen positingindividual gains andlosses arising from p articular d ecision s, given said c ategoriesandnorms- to integrate identity as well. See id.at14, 17-18.

*^ SeesupraPart I.C .* See id


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2011] BEYONDINDIVIDUALISM INL WANDECONOMICS 61B. Network Externalities

Beyond social norms, so-called network extemalities are similarly ill-suitedto individualistic analysis, and likewise familiar to law and economicsscholars.^ ' Such effects arise where the utility of a good to a consumerincreases with its consumption by others.' As to such network goods - thetelephone and fax machine being among the most obvious examples - networksize (i.e., the number of other users) very much matters .Where network extemalities are present, the analysis of individual utilitybecomes difficult to separate out from the assessment of social utility. As withsocial norms, consequently, a distinctly individualistic methodology is prone tomiss as much as it captures.To appreciate as much, recall Joseph Schumpeter's original coining of theterm methodological individualism. '^ He concludes that:Marginal utilities do not depend on what society as such has, but on whatindividual mem bers have. Nobody values bread according to the quantityof it which is to be found in his country or in the world, but everybodymeasures the utility of taccording to the amount that he hashimself andthis in tum depends on his general means.^'

In network settings, however, individuals value a good precisely according to the quantity of twhich is to be found in [their] country or in the world. '''This point is obvious, of course, with regard to telephones, fax machines,and similar technologies. But we can see it in a far broader range of networks as well. Some network dynamic will often be present in efforts attechnological innovation, and even in economic growth generally, givenpositive feedback loops arising from individual initiative in each regard.'^Similarly, Parchomovsky and Siegelman highlight the importance of network-type interactions in explaining the need for law and economics to attend tocommunity: [E]ach resident in a community has a stake in the continuedpresence of other members and simultaneously bestows a benefit on others byhis own presence. '* Most broadly, one might cast human social existence^' See Robert B. Ahdieh, Law s Signal: A Cueing Theo ry of Law in Market Transition,

11 S. CAL. L .REV . 215, 223-26 (2004) (discussing network effects in securities markets);Michael L . Katz & C arl Shapiro,Systems C ompetition and Network Effects,J. EcoN.PERSP.,Spring 1994, at 93 , 105-06.

^ See Lemley & McGowan,supran ote 12, at 599. See Ahdieh, supra note 89, at 223-26; Katz & Shapiro, supra note 89, at 105-06.

Thus, network extemalities have occasionally been described asdemand-side economies ofscale. See Robert P. Merges & Jeffrey M . Kuhn, An Estoppel Doctrine for PatentedStandards,97 C ALIF. L .REV .1, 5 n.21 (2009 ).

'2 See supranote 30 and accompanying text. Schumpeter, swpra note 28 , at 214.


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62 BOSTON UNIVERSITYL W REVIEW [Vol.9 1 :43generally as defined by network dynam ics of a sort: Hum an behavior is theproduct of various factors that together make up a dynamic field, in the sensethat the state of nypart of the field depends on every other part of the field. '''This is not to suggest that Schumpeter was wrong to suggest the absence of social utility in the abstract.' Nor does this approach dictate an embrace ofsociology's methodological holism an approach in which social masses -classes, races, and the like - are analyzed as determinative actor s.'' It simplysuggests that we cannot ignore collective - and interdependent - determinantsof individual utility if we are to meaningiUy engage questions of individualutility in network settings. The methodological individualism referenced bySchumpeter is necessarily less useful, then, where his baseline assumptionsabout individual utility ftinctions do not hold tm e.'

With network extemalities, as with social norms, one can see howmethodological individualism's desire to endogenize social and institutionalfactors avoids the critique I offer. One might justify a methodologicallyindividualistic approach in network settings, thus, by characterizing networkextemalities as simply inputs into the utility functions of relevant individuals.In the presence of network effects, a methodologically individualist approachsees network extemalities, such as the consumption pattems of others, orpredictions about future consumption, as factors to be endogenized intoindividual utility flinctions along with more standard inputs, including relevantindividual tastes and preferences.This response, however, is equally complete and unsatisfying. Such anaccount stretches the confines of individual utility too far, essentially equatingindividual utility with social utility where network extem alities are present. Toso completely socialize individual utility, however, undermines the exercise.Recall that the question herein is one ofmethod What analytical approachwill yield the greatest insight? Given the distortion attendant to a wholesaleendogenization of network extemalities - or social norms - into individualutility functions, it seems unlikely to constitute an ideal methodologicalapproach.' 'C. CoordinationGames

As with the study of social norms and network extemalities, the growinginterest of law and economics in coordination games is difficult to reconcilewith a strongly individualistic approach.' ^ Viewed broadly, one might see Rostain,supranote 24, at 987.'^ See Hovenkamp, supra note 13, at 33 (identifying this suggestion in Schu mp eter'sviews). See supranote 11 and accompanying text.'00See supranote 93 and accompanying text.


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2011 ] EYONDINDIVIDUALISM IN LA WANDECONOMICS 63tension betweentheprescriptionsof methodological individualismandgametheory analysis generally. Game theory is often cast as classicallymethodologically individualist, given its emphasis on individual strategychoices.'* Themiesof any given game, however,are necessarily socialinnature.' '' Individuals must define and agree on the mies collectively.Whatever the limitsofa methodologically individualistic approachtogametheory generally, these are particularly acute in so-called coordinationgames. As Richard McAdams hashighlighted, legal scholars' fascinationwiththePrisoner's Dilemm a dwarfs their attentionto other strandsofgametheory, including the important realmofcoordination games.' ^ As McAdamscompellingly demonstrates, however, coordination game dynamicsare atleastas applicable in areas of interest to legal scholars - from bargainingandintemational law,tostandard-setting and property law.' *In these coordination settings, participants' critical aimis tocoordinate theirbehavior. Each player's choice of sfrategy thus depends on the choice made byher counterparts. Ifyouaregoingto go to onepotential location,Iwillgothere as well, and vice-versaifyou go to the other. Whatever preferenceImayhave betweenthechoices,it isdwarfedbythe payoffs attendanttogettingtothe same place-i.e., to coordinating our strategies.' ''Thisis not to suggest that conflict isabsentin coordination settings. Thefamous gameofChicken,inwhich two cars race toward each other to see whowill swerve first, is a classic, if highly conflictual, coordination game.' ^Rather thanalackofconflict, thus, the critical featureofcoordination games-in contrastto Prisoner's Dilemma games- isthat the parties lackadominantstrategy:a strategy they will play regardlessof the strategy chosenbytheir

Preference in Contract Negotiation: The Psychological Power of Default Rules andFormTerms,51 V AND.L .REV . 1583, 1586 (1998); Richard H. McAdams, Beyond the PrisonersDilemma: Coordination, Game Theory, and Law,82 S.CAL.L .REV .209, 211 (2009).

' 3 ee Arrow, supra note 1, at 4-5;see also SHAUNP. HARGREAVES HEAP& Y A N I SV AROUFAKIS, GAME THEORY:A CRITICAL INTRODUCTION 33 (1995) (describing potential forthe origin of structures to be obscured in game theory, given its distinctive attempt toseparateoutchoice and structure); U dehn,supranote 28,at483. Evolutionary game theoryis not to the contrary, given its emphasisonstrategic choice rather than chan gesinthe rulesof the game. See Arrow,supra note 1,at 3.

' '' See Arrow,supra note 1,at4-5; Udehn,supranote 28,at495.' 5 McAdams,supra note 102,at216.' 6 See idat236-54.' 7 See Ahdieh,supranote 89,at233-38.' *Themo st fam iliar reference for thegameofChickenmay be thedramatic scenein

Rebel Without a Cause, when Jim (played by James Dean) and Buzz race toward aprecipice. Buzz wins the game,but only by going off the cliff with his car. REBEL


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64 BOSTON UNIVERSITY LAW REVIEW [Vol. 91 :43counterpart.' ' Instead, their strategies are interdependent such that eachone's choice depends on the other's .

Because of this interdependence, there are multiple equilibria incoordination games: more than one set of choices from which neither playerwill deviate, absent a change in strategy by their counterpart as well. As aresult, the solution to coordination games - and hence the determination andprediction of relevant social outcomes - does not lie in any single individualalone. An individualistic mode of analysis tells us little. Rather, as RichardMcAdams points out, history and culture - the institutional context in whichindividual choices are made - are essential to effective analysis in coordinationsettings.'That economists and scholars oflaw and economics have tended to resist theidentification of such multiple equilibrium dynamics should consequentlycome as little surprise. The presence of multiple equilibria conflicts directlywith an insistence on methodological individualism as the sine qua non of tmesocial science. ^ In multiple equilibrium settings, methodologicalindividualism falls short.This conflict highlights an even deeper tension between multiple equilibriaand the self-identification of economics, as well as law and economics, aspositive sciences directed to the project of prediction.^^^ Such predictionbecomes all but impossible once we accept the necessary role of social and

institutional factors in multiple equilibrium set ting s. As two students ofgame theory have summarized it:[T]he recurring difficulty with the analysis of many games is that thereare too many potential plausible outcomes [i.e., multiple equilibria, ingame theoretic language]. There are a variety of disparate outcomeswhich are consistent with (Humean) individuals qua individualsinteracting. Which one ofaset of potential outcomes should we expect tomaterialise? We simply do not know. Such pluralism might seem astrength. On the other hand, however, it may be taken to signify that the

See Adrian Vermeule, Foreword: System Effects and the Constitution 123 HARV. L.REV. 4,49 (2009).

One might see the collective dynamic in shareholders' response to tender offers assuggestive of this pattem. See Parchomovsky & Siegelman,supranote 19, at 119-20 (citingLucian Arye Bebchuk, Toward Undistorted Choice and Equal Treatment in CorporateTakeovers 98 HARV. L. REV. 1693, 1696 (1985)),

' Se eMcAdams,supranote 102, at231 -33. 2 See supranotes 36-40 and accompanying text. 3 See ELLICKSON, supranote 74, at 158;cf. MARGLIN, supra note 15, at 9 ( Economicstakes very much to heart the famous dictum of the nineteenth-century physicist Lord K elvin

that we know only what we can m easure. Indeed, economics takes the dictum a step further,


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2011] BEYONDINDIVIDUALISM IN LAW AND ECONOMICS 65selection of one historical outcome is not simply a matter ofinstrumentally rational individuals interacting. There must be somethingmore to itoutside theindividuals preferences theirconstraintsandtheircapacityto maximiseutility.The question is: what? ^

Economics,aswellas law andeconomics, thus ceaseto bereadily predictivein the presence of multiple equilibria. Minimally, the task of predictionbecomesa farmore complex exercise, given the social and institutional factorsat work. ^An insistenceon methodological individualism avoids these difficulties,ofcourse,but at thecostofmeaningful insight. The avoidanceofuncertaintybyan insistent focus on the individual thus condemns us to mistake ormischaracterize what is happening in important - and perhaps increasinglyimportant- coordination settings. '' Wedo better, then,to putasideourrigidmethodological individualism and embrace the uncertainty attendant to thepresence of multiple equilibria, given the important windowsitcan open up . *This is especially crucial given that the multiple equilibria and attendantuncertainty that arise in coordination settings are not limited to thosecircumstances. Theyare farmore common phenomena, thus, than economistsand scholars of law and economics have been willing to admit. Multipleequilibria may even characterize general equilibrium theory itself Adistinctly individualistic orientationto law andeconomics,as aresult, maybehighly m isleading.D . KnowledgeandInformation

The necessarily social dimensions of the analysis of coordination gamessuggest a fourth area of legal and economic analysis ill-suited to amethodologically individualist approach: the study of knowledge andinformation.'2 Ultimately,thesolutiontocoordination games liesinplayers'possessionofacertain common know ledge -some shared set of priors about

' HARGREAVES HEAP&VAROUFAKIS,supranote 103,at33(emphasis added). * Rostain,supranote 24,at986-87 (citations om itted). ' Parchomovsky's and Siegelman's analysisis acaseinpoint. Seesupra notes18-20

and accompanying text. 1suggest othersinAhdieh, supranote 102,at580-81. * SeeJulieE.Cohen, Copyrightandthe Perfect Curve 53VAND. L .R E V .1799, 1817-

19(2000).' See Alan Kirman, TheIntrinsic Limits of Modern Economic Theory: TheEmperor

Has No Clothes 99EcON .J. 126,127 (198 9).'^^See,e.g. Frank Pasquale, Copyrightin an Era of Information Overload: Towardthe

Privileging ofCategorizers 60VAND. L .R E V .135, 140(2007) (arguing that cop yrightlawshould look beyond individual infractionsto the negative externalities createdbycopyrightinfringers); Lior Jacob Strahilevitz, Reputation Nation: Law in an Era of Ubiquitous


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66 BOSTON UNIVERSITY LAW REVIEW [Vol.91:43the world, its occupants, andtheir likely be hav ior. '2' It is through suchcommon knowledge that players develop accurate expectationsofone another,and thus coordinate their behavior successilly.'^^ Bydefinition, how ever,such common knowledge is necessarily social innature. '2 ' An analysisofitorientedtoindividualsistherefore likelyto be uninteresting, if not misleading.

Beyond thequestion ofcomm on knowledge incoordina tion settings,onecansee thelimitsofan individua listic ap proachtoknowledgeand informationintheaspiration toreduce uncertainty more generally. Ignorance- a lackofrelevant information - can beaddressedby wayof algori thmic knowledge : the knowledge of a calculating, maximizing homo economicus.'''^^ Toovercome ignorance, thus, weneed simply to find and/or provide missinginformation. Toaddress uncertainty, bycontrast, algorithmic kno wledge willnot suffice. W hatisneeded, instead,isexperiential knowledge . '^ ' AsStephenMarglinhassuggested, coping with uncertaintyis. . .predominantlyamatterof experiential knowledge,andwill rem ainso nomatter how adeptatclimbingdecision trees orma nipulatin g subjective probabilities wemight become. '^*Experiential knowledge, however, is rooted incomm unity . Thetransferofknowledgebyexperience tumsonthe presenceof relevant associations andthenecessary context for transfer.'^' The engagement of uncerta inty, then,requiresasocial a nalysis.

The rise ofprediction markets,aswell asthe related dynamic of efficientcapital markets, can be understood in this light.'^^ These concretemanifestations of the so-called wisdom of cro wd s '^ ' recognize the

'2 ' SeeAhdieh,supra note89,at256-5 7; R ichardH.McAdams, The Expressive Powerof Adjudication, 2005 U.I I I .L.REV. 1043, 1064 n.73 (citing MICHAEL S. C H W E ,RATIONAL RITUAL 25-26 (2001)).

'22 See sM/ira notes 107-111 and a ccom pany ing text.'23AsArrow pointsout, common poolsofknowledge are inherently socialinnature.

See Arrow,supra note 1,at1-2;se ealso MARGLIN,supra note 15,at 147.'2 See MARGLIN,supra note 15,at 128.'25 Seeidat148.'2Idat146-47. Seeid.at147;cfDonald C. Langevoort, Organized Illusions:ABehavioral Theory ofWhy Corporations M islead Stock Market Investors (and Cause Other Social Harms), 146U.

P A.L .REV. 101, 137(1997).'2* See, e.g. M I C H A E L A B R A M O W I C Z , P R E D IC T O C R A C Y : M A R K E T M E C H A N I S M SFOR

P U B L I C A N D P R I V A T E D E C I S I O N M A K I N G ix-xv (2007); C A S SR. SUNSTEIN, INFOTOPIA:HOWMANY MINDS PRODUCE KNOWLEDGE 132-33 (2006); Ronald J. Gilson & Reinier H.Kraakman, TheM echanismsofMarket Efficiency, 70VA.L.REV.549, 552 (1984); LiorJacob Strahilevitz, How'sMyDriving? For Everyone (And Everything?), 81N .Y .U .L.REV. 1699, 1702 (2006) (exploring the useofinformation aggregation technolo giestodeter, detect, and punish citizen misconduc t ).


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2011] BEYONDINDIVIDUALISM IN LA WAND ECONOMICS 67necessarily collective nature of efforts to grapple with uncertainty. Thedynamic in such settings is emphaticallynot individual. To thecontrary,itreflects the nature ofgroupsas more than the sumoftheir parts.Ultimately, however, we can cast the limits of a methodologicallyindividualist approach to knowledge and information even more broadly.Recall, once again,thestriking dismissalof methodological individualismbyKenneth Arrow: [E]very economic model one can think of includesirreducibly social principles and concepts. '^ The prime example of thenecessarily social dimensionof economic analysis that Arrow highlighted,ittumsout, isknowledgeandinformation. As hesuggests, theimportanceoftechnical information in theeconomy is an especially significant caseof anirreducibly social categoryinthe explanatory apparatusofeconom ics. '^'

Broadly,thetransferofknowledgeis notindividualistic. Rather,asArrowquotes Thorstein Veblen, [t]he comm onplace knowledgeofw ysand means,the accumulated experienceofmankind,isstill transmittedinand by the bodyof the community at large. '^^ The same is tme of the creation ofnewknowledge, to which Arrow suggests economists havenotbeen sufficientlyattentive, givenitscentralityto economic growth.'^^ Aswiththetransferofexisting knowledge, the acquisition of new knowledge is, in primary part,socialinnature.'3'' An individualistic approachtoknowledge would thus seemill-advised.E. IndividualismandInterdependence inEconomic nalysis

Behind thedynamicsat work ineachof the areas above- social norms,network extemalities, coordination games,andknowledgeandinformation -lies a common strand of interdependence. Kenneth Dau-Schmidt hashighlightedtheimportanceofthis feature: [I]twould seem importanttotakeaccount of the fact that people are not always independent actors,but aremembers of groups, and that such membership can sometimes affect theiractions. This fact seems particularly relevantinanalysisofthe regulationofgroup-based activity suchas racial discrimination. '^' In essence,theclaimherein isthatthebreadthofsuch group-based activity is broader thanwe

'^0 Arrow,supra note 1,at 2.'^ ' Id at 1. Arrow thus identifies socially held technical know ledge as a main

determinant of economic activity in every economy. Id at 6 (citing Thorstein Veblen,Professor Clark s Economics,22 Q.J. EcON. 147 (1908 ),reprinted in TH E PL ACE OF SCIENCEIN M ODERN C IVILISATION AN D OTH ER ESSAYS 180-230 (1919)). This conclusion isincreasingly true with each passing day. M odem industrialized economiesarethus definedmore and morebyfirms whose value liesintheir infonnation advantages. See id.at 8.

' Id at 6(quoting Veblen,supra note 131,at186).' Se eid at 6-1.


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68 BOSTON UNIVERSITYLA W REVIEW [Vol.9 1 :43have commonly assumed. Properly understood, thedynamicsatwork in thepresence of social norms, in theoperation of network extemalities, incoordination game settings,and in thecreationandtransferofknowledgeandinformation, all come within this sphere. The critical question inevaluatingthe effectiveness of a methodologically individualist approach consequentlybecomes the relative importanceofsuch interdependence inunderstandingagiven socialoreconomic setting.

As Lynne Dallas posits: To thesocioeconomist, interdependenciesarepartof the human condition. . . . Interdependencies exist throughout the economy.... Law and economics analysis largely overlooks such interdependency,however,by wayofitsmethodological individualism. Stephen Marglin thuspointstohis fellow economists' preference for anarrow definition ofself-interest- oneinwhich self-interest is afocus onone'sown self, wheremyperception of howIoughtto act, how Ioughttobe ,iscompletely independentof what anybody else in society is consuming or doing. ' Whythepreferenceforthis approach? Because afocuson theself eliminatesthe webof interconnections associated withabroader notionof self-interest; thatis,anarrow notion of self-interest eliminates a whole class of extemalities thatmight rob markets of their Pareto optimal properties. *

It bears emphasizing, however, that the interdependencyatworkin theareasconsidered aboveis not one ofsome vague, sentimental sort. Rather, whatwefind inthepresenceofsocial norms, network extemalities,andthe likeiswhatwe might more formally characterizeas acorrel tionacross individual u tilities- what Alan Kirman describes assimilar, even collective, de m an d.' Therelevant dynamic isoneofpositive feedback effects, inwhich the strategicchoices and consumption pattems ofany given individual pull others in asimilar- or atleast in some particular - direction.''* Given asmuch,anindividualistic methodology must necessarily prove more limited inunderstanding such situations.

An understanding of interdependence as highlighting the categoryofsettings in which law and econom ics' reliance on methodologicalindividualism is flawed also helpstoemphasize the distinction betweenthepresent argument and more familiar behavioral critiquesoflaw and economics.

'36 LynneL.Dallas,Law andSocioeconomics inL egal Education 55RUTGERS L .REV.855, 859(2003).

'37 MARGLIN, suprd note 15 ,at 66.'3* Id Inasimilar v ein,seeAkerlof and K ranton 's discussion of the derivation of certain

tastes from social contextandidentity. AKERLOF&KRANTO N, supranote21 , at32-33.'3 ' SeeKirman,supra note 119 ,at 138.'' ' Inother terms,the settings reviewed abovearecharacterizedby increasing retum s,

including leaming effects, coordination dynamics, and self-reinforcing adaptive


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2011] BEYONDINDIVIDUALISM INL WANDECONOMICS 69Here, the critical question is not one of individual rationality or irrationality.Rather, it is the impact of individual choices - rational or otherwise - onothers. Kirman captures as much in contrasting the behavioral work of HerbertSimon with his own critique of individualism in economic analysis:

Yet it should be noted that provided the basic model is one in whichindividuals react in the same continuous way to signals (prices) [Simon'saccount] is formally equivalent to the Arrow-Debreu m odel. Indeed, aswill be shown below, unless it could be proved that individual behaviourof the type invoked by Simon imposes restrictions on the collectivebehaviour because it leads people to behave similarly, we are no furtheradvanced.' 'A critique of methodological individualism - and the attendant inattention tointerdependence - in economics and law thus goes to the foundations ofneoclassical economics and the law and economics built on it, even more sothan behavioral critiques.The argument herein endorses neither the view of classical law andeconomics that widespread individual rationality drowns out isolated cases ofirrationality, nor the view of behavioral law and economics that widespreadirrationality drowns out isolated cases ofrationality. Rather, the point it seeksto emphasize is the presence of more systematic determinants of - andresulting con tinuities in - individual behavior than either approach ordinarilyacknowledges. My argument thus highlights the need for a more contextualapproach, in which individual preferences and utility ftinctions aredeterminative in some cases - and hence the appropriate methodological focus- while group factors are the necessary determinant in others. In any givencase, we must ask, how much does the relevant social context, institutionalsetting, and resulting interdependence matter in the shaping of individualaction and social outcomes?' ^Ultimately, then, [t]he idea that we should start at the level of the isolatedindividual is one which we may well have to abandon. ' ^ The rote invocationand practice of methodological individualism in law and economics isunwarranted. Just as traditional assertions of rationality produced lessnuanced, less accurate, and less interesting accounts of law and economics, a

' ' Kirman,supranote 119, at 127.'''2 As Kirman aptly concludes:If we look back briefiy to the result that underlies the whole problem expressed here itis clear that in the standard -amework we have too much freedom in constructingindividuals. The basic artifact em ployed is to find individuals each of whose demandbehaviouris completely independent of the others. This independence of individu als'behaviour plays an essential role in the construction of economies generating arbitraryexcess deman d functions. As soon as it is remov ed the class of functions that can begenerated is limited. Thus mak ing individual behaviour dependent or similar may


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70 BOSTON UNIVERSITYL W REVIEW [Vol. 9 1 : 43conceptualization of individuals as the necessary focus of study in law andeconomics, including even in the evaluation of social norms, networkextemalities, coordination, knowledge and information, and other settings ofinterdependence, has the potential to greatly distort our analysis. In fact, as wewill see in the following section, it oftendoesjust that. *

III . TH E CONSEQUEN CES OF METHO DOLOGICAL INDIVIDUALISMA methodologically individualist approach is ill-advised with regard toimportant aspects ofleg l and economic analysis. Minimally, these include thestudy of social norms, network extemalities, coordination games, andknowledge and information. More broadly, one might consider settings

characterized by multiple equilibria, by uncertainty, and by interdependence asill-suited to an individualistic approach. At the extreme, one might even seeanalysis of the market, price formation, and equilibrium generally to conflictwith a strongly individualistic orientation. What, then, are the consequences ofthe continued practice of methodological individualism in law and economics?I have already hinted at some of the ways in which the methodologicalindividualism of law and economics distorts our analysis. The tendency ofsocial norms scholars to focus on their role as substitutes for law might betraced to this approach. ^ The comm itment to methodological individualismmay likewise help explain legal scholars relative inattention to coordination

games, by comparison with the Prisoner s Dilemm a. *Closer examination of a handful of additional consequences of law andeconomics persistent methodological individualism, however, may help tohighlight the importance of the analysis herein. The ensuing discussion, ofquestions of consent, the study of evolution and change, and the regulation ofinformation and financial markets, is far from an exclusive enumeration of theways in which methodological individualism may distort our understanding oflaw and economics. Other implications might be cited as well. It issuggestive, however, of why it is cmcial that we be more attentive to ourpractice of methodological individualism, and more selective in its use.A. CommunityandConsent

To appreciate the consequences of the methodological individualism of thelaw and economics literature, one might begin with Gideon Parchomovsky andPeter Siegelman s article.Selling Mayb erry: Com munities a ndIndividuals inLaw and Econom ics,which analyzes the purchase of nearly the entire town of^ ^ Ag ain, it bears emphasizing that the critique herein is directed exclusively to th e

question of method, to which methodological individualism is properly understood to speak,and not to the normative or ontological claims that are often attached to it. See supra PartI.B. In the settings described in the section just con cluded, I argue, an in dividual-oriented


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2011] BEYOND INDIVIDUALISM IN LAW AND ECONO MICS 71Cheshire, Ohio by American Electric Power Company, given the company'songoing environm ental degradation of the tow n.' ' ' In the standa rd,individualistic account of such pollution extemalities in the law and economicsliterature, they point out, such a buyout should have been difficult (if notimpossible) to accomplish, given attendant transaction costs, as well asindividual incentives to hold out.' ^ Y et the deal proce eded with littledifficulty, and no evidence of holdouts.

In seeking to explain as much, Parchomovsky and Siegelman critique thetraditional analysis of pollution extemalities ftom a purely individualisticperspective. This approach, they argue, causes us to miss much of what isreally going on:

Although the economic analysis of pollution has been enormouslyinfluential, in terms of both theory and policy, the analysis has beenconducted entirely from a perspective of methodological individualism.That is, law and economics scholars see victims in pollution disputes asacting independently of each other, with no interdependencies and nosense of social embedd edness. Although we acknow ledge that the . . .assumption of atomistic individualism can be powerful and productive inmany cases, we argue that it is a highly incomplete description of humanbehavior, one that can be misleading in some important settin gs. ' 'It is critical, Parchomovsky and Siegelman argue, for law and economics

scholars to likewise attend to com mu nity - which they characterize in termsechoin g the analysis herein.'^ The re w as, they sugges t, a stronginterdepe ndenc e am ong the utility functions of residen ts of the villa ge. '^'Residents shared an interest in a comm on asset. ^ Com mun ity thus emergesas a kind of positive extem ality that can exercise a profound effect on theoutcomes of economic transactions. '^^Disregarding the latter, the traditional, methodologically individualisticapproach of law and econom ics m isses the essential joint nes s of decisionmaking in environments characterized by strong interpersonal tie s. ' ' Onc ewe allow ourselves to recognize the collective dynamic at work, by contrast, itprove s fairly easy to buy out an entire town . It ma y even be too easy, inParchom ovsky and Sieg elm an's view .'^ ' Jurispmdential adjustments in theregulation of such buyouts thus become necessary, including a distinct

'''^ Se e Parchomovsky & Siegelman,supranote 19, at 78.' 8 Id at 78-80.' Id at 78 (citation omitted).'5 See id at 79,'51See id at 82.'52 See iW, at 79.' W a t 81.


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2011] EYONDINDIVIDUALISM INLA WANDECONOMICS 73More directly to the point herein, as a matter of methodology, it is unclearthat indicia of consent are especially relevant to the analysis of settings of

interdependence. In Cheshire, thus, what happened tumed on the impact ofcommunityon individual residen ts' decisions to sell. The fact of individualconsent, as such, tells us little.Most explicitly, one might see this point as relevant to our notions offreedom of contract. In the setting of Cheshire, individuals chose to sell theirhomes, free of coercion. Given as much, their decisions can plausibly be castas manifestations of the freedom of contract. Given the critical role ofcommunity in shaping those decisions, on the other hand, such an accountwould be woefully incomplete. Residents' nominal freedom of contract inCheshire thus may not tell us nearly as much as we think.Methodological individualism's distortion of our analyses of consentlikewise implicate study of the firm.'*'' Absent a rigidly individualisticapproach, one might more readily question contractarian notions ofthefirm.'*^Minimally, though, a more complex account of consent would challenge thenormative claims of efficiency that a nexus of contracts approach posits.'**This, of course, was the critical insight Michael Klausner and Marcel Kahanpressed in highlighting the potential for network extemalities in the choice ofcorporate charter terms.'*'' Given such network extemalities, they argued, anindividual firm's selection of particular terms might or might not suggest theirefficiency.'*^ Mere individual consent, once again, may tell us less than wecommonly think.

between constraint and coercion. See MARGLIN, supra note 15, at 70; see also Timothy L.Fort & James J. N oone, Banded Contracts, Mediating Institutions, and CorporateGovernance: A Naturalist Analysis of C ontractual Theories of the Firm, L AW& CONTEMP.PROBS., ummer 1999, at 163, 184.

''' See Fort & N oone,supranote 163, at 165, 177-78.'*5 W e might likewise question conventional attitudes toward entity theories of the firm.See Eric W . Orts, The Complexity and Legitimacy of Corporate Law, 50 W A S H . & L EEL .REV. 1565,1567-1612(1993).'** Cf Armen A. Alchian & H arold Dem setz, Production, Information Costs, andEconomic Organization,62AM. ECON. REV .7 77, 794 (1972); Ronald H . Coase,The Natureof the Firm,4ECONMICA386, 390 (1937).'*' See Marcel Kahan & M ichael Klausner,Standardization and Innovation in C orporateCon tracting (or The Econ omics of Boilerplate ), 83 V A . L . REV. 713, 716 (1997);Klausner, supra note 12, at 765. Incorporation or re-incorporation in Delaw are may thushave far less to do with individual choice and consent than with the surrounding socialcontext, and particularly its network characteristics. * The failure of Klausner's and Kahan's analysis to put any significant dent in the


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74 BOSTON UNIVERSITY LA W REVIEW [Vol.9 1 : 43B . hangeand EvolutioninL aw and Economies

B eyond distortions in the implications we derive from consent, a furtherconsequence of methodological individualism in law and economics may be arelative inattention to change, evolution, and dynamic effects more generally.Law and economics has thus largely oriented itself to static analyses of onesort or another. As Ronald Coase concisely states it, the way we look at theworking of the economic system has been extraordinarily static . . . . '^^Others have echoed as much, highlighting law and econom ics' focus[] on thepresent and weakness in explain[ing] circumstances that change overtime, ''' and criticizing its use of highly reductionist and static neoclassicalmodels that abstract severely from essential features of the human conditionand the social pro cess. 'Consider, for example, the relative inattention of law and economics toquestions of where markets come from. Rather than analyze the latter, theliterature simply assumes the existence of markets,

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Beyond Individualism in Law and Economics