There are many paths to LPE, but one of the most common starts from a frustration with law-and-economics’ (“L&E”) approaches to policy problems and a search for alternatives. Those who walk this path—including both of us—often wrestle with the same questions and the same models as our law-and-economics peers. But we usually find ourselves critiquing those models, which mostly derive from the neoclassical tradition, and reframing those questions. This is, in part, because we draw on theoretical approaches that are incongruent or in conflict with those accepted in the neoclassical tradition. Some of these frameworks—such as Post-Keynesian, Marxist, Institutionalist, Stratification, Feminist, and Capability Approach economics—emerged out of the same tradition of political economy that eventually became modern economics but were marginalized as “heterodox” theories by the mainstream as it became more thoroughly neoclassical at midcentury. Others—including economic sociology, economic anthropology, complex systems theory, and decision-making under deep uncertainty—emerged out of different traditions and have often been ignored economists.
It is understandable that these efforts would garner skepticism from L&E scholars. Our hope has been that this skepticism would give rise to productive dialog, in which these different camps could map out clear disagreements, find common ground, and, ideally, advance their understanding. In our experience, these conversations can happen in private, including with some of the L&E authors in the Chicago symposium. But the public response—of which the Chicago symposium is indicative—has been much more disappointing.
One tendency is to dismiss LPE critiques of L&E as focused on something outdated—to argue that L&E has moved on from the Chicago School, both in the sense of being more ideologically diverse and being less committed to theoretical work that focuses on a self-correcting market. This response, by denying the distinctiveness of the neoclassical tradition is, to use Sarath Sanga’s characterization of LPE, “curiously unlettered.” It blinds itself to the possibility of alternative rigorous methods of social science (as Amy Kapczynski argues) and even of alternative methods of economics (as we want to emphasize).
Sometimes, as with the Chilton, Macey, and Versteeg’s essay, it seems like the claim is that economics (and L&E, by consequence) has moved on from the highly structural theory-driven models of the 1970s and ‘80s and has dissolved into any form of rigorous social science. Yet this is simply false. L&E is something more specific than “any rigorous social science.” Even if modern approaches no longer involve such a totalizing commitment to neoclassical theory, they nevertheless grow out of the assumptions and lines of inquiry that neoclassical domination produced. We concede to Chilton, Macey, and Versteeg that mainstream economics—and the L&E it informs—has become much more pluralistic and empirical. This pluralism is itself worthy of critical inquiry (e.g., are the simplifying assumptions in the macroeconomics used to analyze interest rates consistent with those in the I/O used to litigate antitrust cases?), but the common origin does real work in shaping the field’s inquiries and in excluding other inquiries as not “economic” in the relevant sense.
We think recognizing these methodological commitments—and how they diverge from the heterodox traditions used in various strands of LPE—are essential to the sort of productive inquiry that could emerge from a better confrontation between LPE and L&E. Let’s have some Methodenstreit! To get us started, we use the remainder of this post to point to some examples of non-neoclassical approaches that LPE has drawn upon to make important contributions.
Post-Keynesian Theory: Money, Macro, Banking
Many LPE-ers draw from the most developed heterodox tradition in the US: Post-Keynesian economic theory. Post-Keynesians “regard modern economies as systems of cash-flows, not systems of equilibria between real variables.” They reject neoclassical and classical models in which money must first be saved to be spent. Instead, they see money as created through credit (by banks, governments, and sometimes others) or fiat (by a money-issuer with the ability to compel payments, usually in taxes). On this view, investment is not constrained in any mechanical sense by the amount of “surplus” saved from previous periods of production, but rather by the various conditions that affect the availability of credit—including expectations about effective demand, the direction of exchange rates, credit regulation, the expected direction of conventional wisdom, and government policies on interest rates and fiscal money issuance. Accordingly, this view rejects the idea that there is a “natural” rate of interest or a “natural” rate of unemployment—there are multiple possible trajectories for each that depend to a large degree on governing policy regimes.
This set of theoretical moves (adumbrated above in only the most skeletal terms—for more, a very good accessible introduction was just published) has a number of implications for economically-informed legal analysis. The best developed legal literature drawing out these implications is LPE work on money and banking—that of Morgan Ricks, Saule Omarova, Bob Hockett, Chris Desan, Katharina Pistor, Lev Menand, Rohan Grey, Raúl Carrillo, and others. This work has argued against mainstream L&E approaches that treat banks as intermediaries (rather than money creators), that assume monetary policy should aim toward monetary “neutrality,” and that fail to sufficiently account for cyclicality, liquidity preference, the role of effective demand in validating financial investment, and the distinctiveness of deposit-issuing banks relative to other quasi-monetary insitutions (and wannabe money issuers like crypto companies). This work has already deeply influenced both scholarship and policy, including by forcing law-and-economics scholarship on the topic to develop more sophisticated models and arguments.
In addition to opening space for new perspectives on the Federal Reserve, financial regulation, fiscal policy, and the like, Post-Keynesian thinking laid the foundation for a form of “law and macroeconomics” well before Yair Listokin introduced the term, and the macroeconomic analysis it opens space for goes well beyond the “New Keynesian” foundations that Listokin and others have taken up. From a Post-Keynesian perspective, one does not need to approach the “zero lower bound” (i.e., the point at which monetary policy runs out in a New Keynesian model) to begin to look beyond central bank policy to manage investment cyclicality. Rather, as Hyman Minsky argued, cyclicality and instability are inherent in an economy shaped by large long-term investments in capital stock, and the government has multiple levers to manage these destabilizing features.
Post-Keynesian thinking also has many underexplored implications for areas that have long been dominated by neoclassically inflected economic analysis of law. For example, the Post-Keynesian rejection of interest rates as tradeoffs between present and future consumption should encourage reconsideration of how interest and discount rates are used in cost-benefit analysis.
More generally, the point is that Post-Keynesian theory is an approach to modeling economic phenomena that grows out of a rejection of the neoclassical tradition while still being deeply tuned into social science (of both quantitative and qualitative varieties) and informed by the broader political economy tradition that Smith and Ricardo inaugurated. The fact that it has been the foundation for a whole swath of LPE scholarship would thus seem to create a space of potentially useful engagement across traditions. No need to argue about the value of quantitatively informed social science or the value of making mathematical models or the distinctiveness of the economics tradition—just get into the weeds!
And yet no law-and-economics response to LPE we have seen even mentions LPE scholarship on money and finance, let alone engages with it (even when the scholars in question already know about this work). Notably, this reinforces the treatment that Post-Keynesians have received in economics departments. They were pushed out of most mainstream departments a couple generations ago due to a combination of ideological and methodological closures (with exceptions like Stephen Marglin at Harvard, who hid his politics and method until he was tenured), and the work they do in the few marginalized departments that will take them is largely ignored until a crisis creates a demand for a limited influx of heterodoxy.
Market Governance and Heterodox Micro
Other strands of LPE analyze market governance institutions like antitrust, regulated industries, labor, and consumer protection law by building on heterodox traditions, including different versions of Post-Keynesian micro/meso models, economic sociology, and old institutionalist economics. Unlike with Post-Keynesian macro, nothing like a coherent cross-cutting alternative framework to L&E has congealed to unite these strains of skepticism and reconstruction. But there are some common threads: an insistence on situating markets within cross-cutting macro- and meso-level institutions rather than treat their outcomes as self-contained, a skepticism about the markets’ self-stabilizing tendencies, a focus on disequilibration and the active coordination that counteracts it, and a rejection of allocative efficiency as incoherent.
Sanjukta Paul has led the way on antitrust and its intersection with labor and corporate law, drawing on the work of heterodox (largely Post-Keynesian) economist Fred Lee, among others, in addition to developing her own critiques of agency cost theory and transaction cost theories of the firm, to formulate an account of markets as always coordinated and law as allocating “coordination rights.” Sandeep Vaheesan, Lina Khan, Brian Callaci, Hiba Hafiz, and John Newman have also made indispensable contributions, highlighting the limits of “output” as a guidepost to decisions, identifying the non-price impacts of concentrated power, teasing out the doctrinal arbitrage in labor protection that outsourcing makes possible, and so on. Mark Glick, Gabriel Lozada, and Darren Bush have levied fundamental critiques at the assumptions applied in standard I/O surplus-focused welfare analyses used in antitrust cases, arguing that they rely on theories whose assumptions have long since been rejected by even the mainstream of welfare economics. Erik Hovenkamp’s contribution to the Chicago symposium mostly ignores this work (and the doctrinal critiques that have accompanied it), merely restating the assumptions of the purported “consumer welfare” model. He dismisses the work he has read, from Lina Khan, Zephyr Teachout, and Tim Wu, as “populist,” with little attention to the more technical side of their arguments, let alone to the other work just summarized.
In regulated industries, the major effort has come from Ganesh Sitaraman and Morgan Ricks, including through their NPU casebook (in collaboration with Shelly Whelton, Lev Menand, and Danielle D’Onfro) and through several articles and conferences. They have nurtured a growing community of scholars with diverse interests and methods–including, ironically (since he doesn’t acknowledge any of this work in his symposium contribution), Josh Macey. While this effort has been more focused on the recovery of a regulatory tradition than on traditions of economic analysis, the tendency to emphasize the importance of cross-subsidy, non-marginal-cost pricing, and resilience and geographic diversity over efficiency—as well as the fact that the initial theorizing of regulated industries emerged out of the American (old) institutionalist tradition—has meant that non-standard economic analysis has played an important role. Scholars like William Boyd and Shelley Whelton, meanwhile, have focused more directly on interrogating neoclassical assumptions involved in the policy analysis of price regulation in capital-heavy industries and control over infrastructure and incorporating non-neoclassical frameworks in their analysis.
A smattering of heterodoxy has also appeared in consumer law. Abbye Atkinson, drawing from economic sociology and anthropology, has challenged many of the assumptions that have motivated increasing reliance on credit as a form of social provision, arguing that credit regimes work poorly as consumption smoothers and entrench inequality of opportunity between those with and without assets. Her work triggered a fruitful response from Jonathan Macey that draws on law-and-economics but moves beyond standard “consumption smoothing” models to develop an account of household debt that brings in both sides of the balance sheets—an account that would be a useful first step toward a bridge with Post-Keynesian accounts, such as that offered by JW Mason and Arun Jayadev. Atkinson’s work also helped inspire further critical inquiry into the relationship of consumer debt regulation and the politics of social provision.
Separately, one of us (Luke) has challenged the way that behavioral economics of consumer markets claims to move beyond neoclassical analysis while actually reifying its model of markets and welfare. This work draws on heterodox traditions to sketch a more inductive approach to modeling consumer choice and evaluating how firms shape it, but also points to ways that mainstream theorists might contribute to this style of analysis if they abandon the commitment to a baseline of perfect competition and rationality.
Since so much of this scholarship is recent and emerges out of a variety of traditions, much work remains to be done to sort out how much of it can be brought under one theoretical roof, so to speak. But each strand has much to say on its own. And it is all motivated by close attention to economic theory, institutional reality, empirical (social) science, and careful normative inquiry. It is often self-consciously developed in opposition to the mainstream of law-and-economics, but there is certainly plenty of room for common ground and for useful debate.
Climate Change, Complexity, and Uncertainty
As elaborated above, many LPE scholars are certainly not uninterested in economics, but interested in particular kinds of economics. Indeed, many exciting developments in climate economics are turning away from neoclassical models to rediscover old methods like input-output analysis, which better capture the fact that economic processes are geographically embedded in particular places.
There are also LPE scholars, however, who are more focused on turning away from economics altogether, and delegitimizing its gatekeeping function. LPE recognizes that other fields are sometimes better able to capture the truth about a problem. In environmental regulation, much has been lost because policymakers have relied on economists, rather than scientists, to set policy goals. Crucially, we have long known enough about climate change to know that we should stop burning fossil fuels—translating climate science into economics ultimately obscured that truth.
This is one instance where L&E defenders’ emphasis on rigor and methods becomes frustrating. Sarath Sanga, for example, insists that without the tools of modern economics, scholars will be left unable to determine right from wrong, including in the field of environmental regulation. According to Sanga, LPE “conjures images of a planet on fire while dismissing nuanced work” in economics. But what we know about the likelihood of increased wildfire comes from physics-based models, far more complex and data-intensive than any economics model. Causal inference through statistical regression—the bread and butter of the economics practiced by Sanga—is a useful method for analyzing certain problems—those for which backward-facing data is available, cause and effects can be isolated and analyzed, and there is some certainty that understanding what happened in the past can be neatly mapped to what will happen in the future.
But this holds for a very narrow set of problems worth studying. As (economist!) Mariana Mazzucato has observed, “had we evaluated the Apollo program by each individual project’s cost-benefit ratio, we would have concluded it was a failure.” The total value of the Apollo program emerged from cross-sectoral spillovers and innovations that could not have been precisely predicted based on backward-facing empirics. Its benefits were systemic, complex, and wholly new. These are characteristics that modern economics’ narrow focus on advanced regressions cannot capture, and thus ignore. Relatedly, climate economic models, and the law and economics scholarship that builds upon them, are unable to tell us useful information about the future because they can only analyze economic responses to relatively small historical changes in temperature. As one of us (Madison) has emphasized, there are tools outside the mainstream of economics, including the science of physics-based models, but also frameworks for decision-making under deep uncertainty, that can help us navigate the turbulent climate future. But these tools fall outside of the proffered L&E definition of rigorous statistical analysis. L&E critics seem to think that LPE bases its claims on vibes alone, and misunderstand that there are ways of determining truth beyond statistics.
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The strands of LPE identified above seek to force a productive confrontation with more mainstream approaches. Ideally, such a confrontation would leave all traditions better off by helping to uncover each tradition’s blind and weak spots, clarifying areas of common ground, and identifying sources of enduring disagreement. But that confrontation cannot happen if L&E simply pretends that these differences do not exist or only exist insofar as economists are doing the rigorous analysis and everybody else is ignorant or compromised.
