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Comment on Richard A. Posner's organization economics

JÜRGEN G. BACKHAUS

Journal of Institutional Economics / Volume 6 / Issue 01 / March 2010, pp 55 - 57DOI: 10.1017/S1744137409990142, Published online: 25 January 2010

Link to this article: http://journals.cambridge.org/abstract_S1744137409990142

How to cite this article:JÜRGEN G. BACKHAUS (2010). Comment on Richard A. Posner's organization economics.Journal of Institutional Economics, 6, pp 55-57 doi:10.1017/S1744137409990142

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Journal of Institutional Economics (2010), 6: 1, 55–57C© The JOIE Foundation 2010 doi:10.1017/S1744137409990142

Comment on Richard A. Posner´sorganization economics

J U R G E N G . B A C K H A U S ∗

University of Erfurt, Germany

Abstract: The intellectual roots of law and economics, institutional economics,and the possible science of organization economics are here explored for a betterunderstanding of what Posner is pushing for. The purpose is, of course, to gainbetter acceptance of his proposal. As it turns out, organization economics comesclose to what has come to be called ‘the science of State’, i.e. treating law,economics, sociology, and political science as approaches to one and the samesubject always to be taken together.

Richard Posner (2010) argues for broadening law and economics into a moregeneral organization economics that should be more capable of comparativelyanalyzing issues of governance and performance of government agencies, suchas the judiciary. This is particularly important for contexts where different legalcultures (Rechtskreise) need to be reconciled. This is, in particular, the case inthe European Union with its three legal cultures that sometimes clash in Brussels,Luxemburg, and Strassburg (not to mention, Frankfurt, the seat of the EuropeanCentral Bank).

Law and economics was jumpstarted as a discipline for research and instructionby Richard Posner’s Economic Analysis of Law and by launching the twinjournals Journal of Law and Economics and Journal of Legal Studies. Oftenoverlooked in this context is the entrepreneurial role of the University of ChicagoPress. A great facilitator in this endeavour was the arcane structure of the Anglo-American common law (including equity) which defies logic and is thereforehard to teach. It can only be taught on a case-by-case basis with the method ofdistinguishing (Tullock, 1971). In its stead, Posner essentially adopted Alchianand Allen’s basic price theory and used it as the structure on which to hang thestandard cases.

With the exception of Hein Kotz, and the University of Constance, moregenerally, European universities were slow to introduce law and economicscourses or even programs as they exist today. The obvious reason is thatEuropean law (with the exception of Britain) is code based, hence law andeconomics − in the sense of an economic analysis of legislation, court decisions,

∗Email: juergen.backhaus@uni-erfurt.de.

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56 JURGEN G. BACKHAUS

and legal practices − have a long-standing tradition in Germany.1 This shows upin the names of the two oldest German language economics journals, i.e. Journalfor the Entire Science of State2 and Journal for Legislation, Administration andPolitical Economy in Germany.3 The geographical delineation emphasizes thatthe analysis deals with real and existing institutions, not with imagined ones suchas Robinson Crusoe on his island or Walras’ auctioneer.

The notion of an organization science harps back to this earlier tradition,which fell victim to the increasing and deepening division of labor in the socialsciences. What used to be looked at, researched, and taught as one projectcentring around a real-world and pressing question to be resolved by means oflegislation or adjudication, integrating legal, economic, political, and sociologicalapproaches, is now separately considered from a legal, economic, political,administrative, or sociological point of view, where the disciplinary paradigmsdrive the analysis in different directions and the choice of topics for research andinstruction is driven by these disciplinary developments. Pressing problems inthe economy or polity are no longer systematically posed as research questions,as they were when an organization science, in the form of the science of State,reigned supreme (Lindenfeld, 1997).

As editor of the European Journal of Law and Economics, I witness an ever-growing degree of specialization and a professionalization of law and economicsas a self-sufficient subdiscipline with its own rules and paradigms. Paradigmsreplace problems; it was therefore high time for Richard Posner to fire his warningshot. ‘Science of State’ sounds a bit old fashioned. Let us do the same thing andcall it ‘organization economics’.

In this context, it can only come as a surprise that the list of referencescontaining about one hundred titles does not reflect this tradition. With theexception of Hayek, none of the names which appear in my Elgar Companionto Law and Economics (Backhaus, 2005) is even mentioned in the bibliography.The ignorance of this tradition is already bearing bitter political fruits. Mysuspicion is that the current German Minister of Justice ignores the methodof legal-economic analysis since some of her initiatives are so obviously selfdefeating, such as introducing a price-driving tort reform simultaneously withthe Euro as a common currency. This impression was borne out by her answer tomy recent question here in Erfurt; she is aware of sociology of law, but unawareof law and economics. To paraphrase James M. Buchanan: No economics – badlaw!

1 This context has been more extensively explained in Backhaus (2006 39–49).2 Zeitschrift fur die gesamte Staatswissenschaft3 Jahrbucher fur Gesetzgebung, Verwaltung und Volkswirtschaft im Deutschen Reiche

Comment on Richard A. Posner’s organization economics 57

References

Backhaus, Jurgen G. (2005), Elgar Companion to Law and Economics, vol. 2, Cheltenham:Edward Elgar.

Backhaus, Jurgen G. (2006), ‘The sciences of state as a research paradigm’, in G. Meijer,W. J. M. Heijman, J. A. C. van Ophem, and B. H. J. Verstegen (eds.), Heterodox Viewson Economics and the Economy of the Global Society, vol. 1, Mansholt publicationseries, The Netherlands: Wageningen Academic Publishers.

Lindenfeld, David F. (1997), The Practical Imagination: The German Sciences of State in theNineteenth Century, Chicago and London: The University of Chicago Press.

Posner, R. (1973), Economic Analysis of Law, Boston: Little Brown.Posner, R. (2010), ‘From the new institutional economics to organization economics: with

applications to corporate governance, government agencies, and legal institutions’,Journal of Institutional Economics, 6(1): 1–37.

Tullock, Gordon (1971), The Logic of the Law, New York: Basic Books.