Tuesday, October 17, 2006

Law and economics as if it mattered

Edmund PhelpsEdmund Phelps is the winner of the 2006 Nobel Prize in economics. By now this is old news, to be sure, but the impact of Phelps on legal scholarship, particularly the corner called "law and economics," deserves closer examination.

The Swedish Academy's press release announcing Phelps's Nobel provides a compelling case for this award:

The work of Edmund Phelps has deepened our understanding of the relation between short-run and long-run effects of economic policy. His contributions have had a decisive impact on economic research as well as policy.

Low unemployment and low inflation are central goals of stabilization policy. During the 1950s and 1960s the view of a stable tradeoff between inflation and unemployment was established, the so-called Phillips curve. According to this, the price for reduced unemployment was a one-time increase of the inflation rate. Phelps challenged this view through a more fundamental analysis of the determination of wages and prices, taking into account problems of information in the economy. Individual agents have incomplete knowledge about the actions of others and must base their decisions on expectations. Phelps formulated the hypothesis of the expectations-augmented Phillips curve, according to which inflation depends on both unemployment and inflation expectations.

The Phillips Curve, in a very familiar format
As a consequence, the long-run rate of unemployment is not affected by inflation but only determined by the functioning of the labor market. It follows that stabilization policy can only dampen short-term fluctuations in unemployment. Phelps showed how the possibilities of stabilization policy in the future depend on today's policy decisions: low inflation today leads to expectations of low inflation also in the future, thereby facilitating future policy making.

Another issue where intertemporal tradeoffs are of central importance concerns the desirable rate of capital formation. By foregoing consumption for investment in physical as well as human capital (education and research), today's generation can raise the welfare of future generations. Phelps clarified possible distributional conflicts among generations. He also showed that all generations may, under certain conditions, gain from changes in the savings rate. Phelps also pioneered the analysis of the importance of human capital for the diffusion of new technology and, hence, for growth.

Within the world of law-related weblogs, Tyler Cowen's assessment is comprehensive and authoritative. Tyler's striking bottom line deserves to be quoted verbatim:
What this Prize means: The big questions still matter. Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention. Phelps contributed to all of those areas. Normative questions matter. Relevance and breadth triumph over narrow technical skill.
All of which leads to this question: Why has American legal academia given Phelps so little attention?

To be sure, a Westlaw search for edmund +2 phelps yielded 144 hits on JLR as of October 17, 2006. That is a very modest number. Of those hits, 39 mentioned inflation, and another 77 mentioned human capital. The work that the Swedish academy deemed most worthy within Phelps's portfolio has gotten relatively little play in legal academia. Quite understandably, legal writers have probably cited Edmund S. Phelps, The Statistical Theory of Racism and Sexism, 62 Am. Econ. Rev. 659 (1972), more than anything else Phelps has written, but it is still puzzling why Phelps's "analysis of intertemporal tradeoffs in macroeconomic policy" drawn so little attention from legal scholars. Phelps has been writing prolifically on these issues since the early 1960s, which after all places his overall body of work on temporal par with The Problem of Social Cost. A total of 144 Westlaw hits over those decades compares quite unfavorably with any number of less consequential works on more esoteric, less socially significant issues within economics.

Mark Kelman, speaking on behalf of "those of us whose implicit social welfare functions . . . weigh gains for the relatively disadvantaged quite heavily, while believing that gains for the relatively prosperous have few real utility effects," has declared that "unemployment is the economic problem." Could Lawyers Stop Recessions? Speculations on Law and Macroeconomics, 45 Stan. L. Rev. 1215, 1224-25 (1993). It is entirely possible, if not affirmatively probable, that Mark Kelman has grossly overestimated the number of law professors who care about issues of this sort. (I hasten to add that human misery outside the United States is greater, deeper, graver than most Americans know or care to learn.) And as Tyler Cowen says, Phelps is arguably "a murky writer, and often he is frustrating to read and hard to pin down." Still, matters such as "[u]nemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations" are questions of enormous significance. They deserve our attention.

To all this, I have a simple suggestion. Perhaps the legal academy might try writing about law and economics as if it mattered.


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