This is part 9 of my review of New Ideas from Dead Economists by Todd Buchholz. Here are parts 1 (Adam Smith), 2 (Thomas Malthus), 3 (David Ricardo), 4 (John Stuart Mill), 5 (Karl Marx), 6 (Alfred Marshall), 7 (Thorstein Veblen) and 8 (John Kenneth Galbraith) if you’d like to look back. Any of the entries can stand alone, of course.
At the law school I went to, every student is required to write what we commonly referred to as the R&W (for research and writing), which is basically the equivalent of what most people would call a thesis. We could write in on pretty much anything we wanted, as long as the professor we were working with signed off on it. There really weren’t many requirements, just that it be of publishable quality. Inspired by several of my professors who viewed the law through an economic lense and especially inspired by having been forced to read many, many legal opinions by Judge Posner during my time as a law student, I wrote mine about economics and the law.
Todd Buccholz briefly touches on just a few of the major areas where economics and the law have collided over the years. He begins his section with a quote from former Supreme Court Justice Louis Brandeis, saying that any:
“lawyer who has not studied economics…is very apt to become a public enemy.”
Buchholz focuses on four specific areas: the laws of tort, property, crime and corporate finance. I’ll start where he starts, with tort law, and specifically, negligence (I’m going to skip the others for now – possibly coming back to crime at a later date). Torts is a class that every first year law student is required to take, and I specifically remember studying this case, and reading Hand’s opinion, and the notes in the textbook afterward, because to me, his analysis makes so much sense. Buchholz gives us another great example that I’ll try to recreate in part here.
If someone slips on a banana peel and injures themselves, a lawyer will argue that the supermarket was negligent for leaving the banana peel on the floor and will probably win. I won’t bore you with the elements of negligent (yes I will – duty, breach, actual cause, proximate cause, and damages). The question arises, though, should any person or business be held liable for any accident that arises on their premises? Buccholz’s example: A storm shipwrecks Gilligan and the Skipper on an otherwise deserted island. 200 monkeys also inhabit the island. The monkeys run a banana liqueur export business. While they’re peeling and squeezing the bananas, they leave peels out on the beach. Suppose Gilligan wanders around on the island and slips on a banana peel – should a court hold the banana business negligent? Probably not.
The key difference between the supermarket and the deserted island are based on probability and cost. The probability of someone walking in the supermarket is high, but on the island the probability is low. The cost works the same way. A supermarket can cheaply prevent having banana peels on the floor, but the cost of keeping a bunch of banana peels off of the island is pretty high. Judge Learned Hand used these factors to establish a formula for the economic analysis of negligence. He identified 3 key factors: (1) the probability of the injury (P), (2) the extent of injury or loss (L) and (3) the cost of preventing the accident (C). A person is negligent if the probable injury to the victim exceeds the cost of avoiding the accident. In algebraic terms, a person is negligent if, P x L > C.
Let’s say the probability that an accident will occur is 30%, and the loss will be $60,000, then if the cost of preventing the accident is less than $18,000, the person is negligent according to Hand’s formula. Based on Hand’s analysis, we shouldn’t waste money trying to prevent accidents that are unlikely to occur. Hand’s formula is basically Marshall’s (see part 6) cost/benefit analysis. It’s not exactly the approach that’s used today, but it provides the basic framework. Isn’t it cool that the guy’s name was Learned Hand? Let me know what you think of the approach by email or in the comments. Thanks for reading.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
