In a recent essay, David Bernstein accuses the Law and Political Economy (LPE) movement of being “A Solution in Search of a Problem.” While the essay makes several broad critiques of LPE — including its failure to address the decline of the two-parent family and the fact that egalitarian democracy is “literally impossible” — the primary claim of the paper is that LPE’s founding text has overstated the power and pervasiveness of the Law and Economics movement in society and in legal scholarship. LPE, Bernstein argues, has overplayed its hand: deregulation was not much of a thing, Law and Economics does not have a big role in legal scholarship, the legal academy is very progressive, and LPE exaggerates the victory of neoliberalism.
Yet our own recent research leads us to the exact opposite view of Bernstein’s. In our view, neoliberalism emerged victorious. Law and Economics played an essential part in that victory and continues to play a prominent role in other areas of law, where it advantages dominant classes and lends support to policies that further enrich the wealthy. In this brief post, we consider each of Bernstein’s central claims in turn and explain why we believe they are mistaken.
“Law and Economics plays a relatively small role in legal scholarship. Moreover, much of contemporary law and economics scholarship is empirical or critical of Posnerian assumptions, or both…”
Bernstein claims that by assigning Law and Economics a central role in legal scholarship, the LPE movement is tilting at windmills. This is not, however, the view within Law and Economics. For example, one of the leading textbooks in Law and Economics states this in its preface:
The economic analysis of law has already had a profound impact on legal scholarship. It has been said that the study of law and economics is the most important development in the field of law in the last fifty years. A course in law and economics has become a part of the standard curriculum in the leading law schools, and most of those law schools have at least one full-time economist as a member of the law faculty. Centers for the study of law and economics have been established at Stanford, Chicago, Columbia, George Mason, Miami, and other distinguished schools of law. A majority of the federal judiciary has received formal training in law and economics in short courses provided by several of these centers. Many of those appointed to the federal bench in the last several years have been academic lawyers who specialized in law and economics—to name only a few, Judges Richard Posner and Frank Easterbrook of the Seventh Circuit; Judge Steven Breyer of the First Circuit [now Supreme Court]; Judge Robert Bork of the D.C. Circuit; Judge Bernard Siegan of the Ninth Circuit; and Justice Antonin Scalia of the United States Supreme Court.
Or consider a source closer to Bernstein’s home. According to George Mason’s Law and Economics Center’s website (quoting George L. Priest), “Law and economics can be identified today as the dominant academic discipline in understanding the rule of law in the United States and, increasingly, around the world. It informs—directs—obvious economic areas such as antitrust, regulation, and corporate organization but also all other areas of law: torts, contracts, property, and environmental law, among many others.”
(We here pass over the fact that Bernstein is dismissing the influence of Law and Economics while writing at a law school that touts Law and Economics, for the Journal of Law, Economics & Policy, and presenting such scholarship at the “Henry G. Manne Program in Law & Economics Studies.”)
Bernstein argues, moreover, that Law and Economics no longer focuses on wealth maximization, and that current scholarship is hostile to free markets and/or empirical in nature. Thus, the Law and Economics movement as LPE thinks of it is dead. In Monty Python terms: Is it dead, is it not quite dead, or is it not dead and getting better? Judging from Westlaw, it appears to be the latter: thus far this year there are 73 articles that mention “Wealth Maximization,” and 8 that discuss “Pareto Efficiency” or “Pareto Optimality” (my coauthors and I are guilty of some of them). Consumer welfare, the offspring of wealth maximization, is mentioned 115 times (again, my coauthors and I are guilty of a few of those). These are, for the most part, not empirical studies.
Bernstein then pivots, questioning Law and Economics’ impact on policy. As he points out, the LPE authors allege “that Law-and-Economics scholarship led to reforms, often at the state level, that reined in the plaintiffs’ bar, limited class-action lawsuits, and empowered judicial ‘managerialism’ and, more recently, arbitration.” Bernstein balks at this, saying the LPE allegations lack sources. We are fine with Bernstein’s critique here and encourage LPE scholars to muster evidence in those realms.
Bernstein’s focus on those particular areas is striking, however, given Law and Economics’ widely recognized victories in deregulating financial markets, hamstringing antitrust enforcement, and emboldening corporate law. Why diminish them?
More broadly, Law and Economics played a fundamentally important role in the neoliberal revolution. The neoliberal revolution arose in response to the “stagflation” crisis of the 1970s. That crisis was devastating to high incomes. It lowered corporate rates of return, and those wealthy enough to invest in the stock market experienced a lack of investment growth because in the long run, stock prices tend to track the trend in profits. Rising inflation also resulted in low and occasionally negative real interest rates.
High incomes, meanwhile, had already been eroded by the policies of the New Deal Consensus that emerged in the 1930s and extended until the middle 1970s. Its high taxes, regulation of the financial sector, unionization, and other policies had resulted in what Claudia Goldin and Robert Margo referred to as the “great compression,” a period of historic wage compression spanning the 1940s to the 1970s. As a result, by the 1970s, high incomes were increasingly difficult to maintain, and the share of income of the top 1 percent of income earners had fallen to its lowest historical point, just below 9 percent.
While New Deal policies were not favorable to the rich, they resulted in spectacular economic performance, characterized by economic historians as “the most technologically progressive of any comparable period in the U.S. economic history,” and “one of the greatest achievements of all of economic history.”
The economic situation facing corporations, finance, and the wealthy in the 1970s sparked a major political backlash, spawning what John Saloma referred to as the conservative labyrinth of well-funded think tanks, corporate groups, and other organizations that grew in size and influence during that decade.
Lewis Powell’s 1971 memo “Attack on American Free Enterprise System” inspired a movement to fund numerous groups, in which Law and Economics played an important role. For instance, the economic historian Peter Temin suggests that Charles Koch “was galvanized by the Powell Memo and formed the Cato Institute” to promote free market ideas in academia and in politics, and according to New York Times columnist Binyamin Applebaum, “[t]he beer magnate Joseph Coors said he was inspired by Powell’s memo to create the Heritage Foundation.” Political scientists Jacob Hacker and Paul Pierson described the ensuing counterattack of business as “a domestic version of Shock and Awe.”
Conservative think tanks sprung up. Those already existing flourished. As Roger E. Backhouse argued, these foundations were successful because they focused their support on a small group of conservative academics promoting neoliberal academic centers. Examples include the Coase-Sandor Institute for Law and Economics at Chicago, Public Choice at the University of Virginia, and Bernstein’s own George Mason University.
Money flowed more freely for hires, academic programs, and research support. As Elizabeth Popp Berman writes, “During the 1960s, big business felt increasingly threatened, by antitrust enforcement in particular, and by anti-business sentiment in general. As a result, organized business, which had not been associated with a particular school of economics, became more interested in Chicago ideas.” She describes how large corporations began to support Chicago economics as a means of defending against progressive policies.
The primary supplier of funds was the Olin Foundation, who supplied money to Chicago, Harvard, Yale, Columbia, Stanford, Berkeley, Virginia, Duke, Georgetown, and other schools. As described by Steven Teles, the goal of Olin Foundation funding was to promote Law and Economics as a free market counterweight to the legal theories of the New Deal consensus. Berman quotes Henry Manne: “At this point, the [corporate] world knew that Chicago economics was the only thing saving them from an antitrust debacle.”
While we are not suggesting that those receiving funding are bought and paid for, we are asserting that the Chicago School of economics in general and Law and Economics in particular was a normative movement that was both shaped by and aimed to further the neoliberal agenda. Law and Economics scholarship played a central role in those reforms. Bernstein should not diminish its impact.
One reason Bernstein seeks to minimize Law and Economics’ influence on government, along with its normative prescriptions, is so he can project those qualities on LPE. As he writes in an early footnote in the paper, “Despite LPE purportedly being an academic project, this goal is quite explicitly political and ideological.” As the brief history recounted above makes clear, however, Law and Economics was part of a straightforwardly ideological movement. Indeed, as no less an authority than Richard Posner candidly conceded, “wealth maximization” supports the interests of “dominant groups” in the economy: “Wealth maximization is an ethic of productivity and social cooperation—to have a claim on society’s goods and services you must be able to offer something that other people value… And an ethic of productivity and cooperation is more congruent with the values of the dominant groups in our society than the pure utilitarian ethic would be.”
The “US government currently spends and regulates much more than it did in the 1970s.”
Turning now to LPE’s purportedly misguided assessment of recent history, Bernstein argues that LPE is mistaken in claiming that liberals and conservatives pursued an agenda of deregulation, and that in the wake of the stagflation crisis described above, “[w]hat remained of the state was chastened.” As Bernstein writes:
Economic thought sympathetic to freer markets and more skeptical of government intervention in the economy made a comeback starting in the 1970s. This helped lead to a brief wave of deregulation of a few industries in the late 1970s and early 1980s. But the implication that this led to a significant cutback in government spending, and to a rollback of New Deal and Great Society programs in particular, is fallacious.
The “brief wave” of “deregulation” of which Bernstein speaks eliminated or severely curtailed cost-of-service ratemaking in the United States, at the federal and state level. But it did much more than that. The most powerful regulator of commerce in the country, the Interstate Commerce Commission, disappeared in 1995. Electricity deregulation commenced in 1978 with the Public Utility Regulatory Policies Act. The Natural Gas Act similarly created competition in natural gas transportation. Airlines, of course, were deregulated during the same time period, bequeathing us monopoly hubs and inferior service. In 1999, the wall between investment and commercial banking came down with the repeal of the Glass-Steagall Act. Rail and motor carriers were subject to similar deregulatory efforts in 1980. We will detail financial deregulation, spanning Republican and Democratic administrations, later in this article. None of these deregulatory actions have been reversed.
The question becomes, what does Bernstein mean by “regulation?” Bernstein starts by looking at government spending, but expenditures are rarely meaningful. (Indeed, nowhere in the article he is critiquing do the authors claim that overall government spending decreased). History is full of agencies that are funded that do little or nothing, or even strongly endorse neoliberal agendas. The Surface Transportation Board, for instance, is an agency that has rarely met a merger it didn’t like.
Bernstein then looks at the number of regulations issued. He writes:
Nor has the scope of the regulatory state been reduced. While the Trump administration was much less aggressive about regulation than were its immediate predecessors, the Obama administration issued 28,239 new final rules encompassing 201,046 pages in the Federal Register; the George W. Bush administration issued 31,634 regulations encompassing 178,571 pages in the Federal Register; and the Clinton administration issued 37,366 rules for a total of 161,766 pages. These included dozens of major rules.”
If by “more regulation,” Bernstein simply means an increase in the raw number of rules, then we will trust his count of the number of regulations issued. But that does not demonstrate degree of regulation or deregulation. He does not, for instance, define what a “major rule” is, nor how to compare these rules to those in place (in terms of size and scope) during the cost-of-service ratemaking period of yesteryear. Moreover, Congressional Research Service reports do not necessarily verify Bernstein’s point. Rules are listed that are “routine matters,” repeals of rules (deregulatory moves), and sometimes are not even rules at all (but merely documents that relate to final rules). Even without these caveats, the number of rules may increase for a variety of reasons. One of which might be regulatory evasion. Another is the fact that the economy is growing—raw rule counting does not account for increases in GDP.
“In public law, the legal academy is dominated by progressives whose views are much closer to the authors’ than to the Supreme Court’s.”
Bernstein also claims that economics (and, in particular, Law and Economics) is actually progressive and friendly towards government:
To the extent more “traditional” law and economic scholarship has survived, much of its energy has gone into critiques of traditional Posnerian law and economics, as reflected in the vast behavioral law and economics literature. This literature and other contemporary law and economics scholarship is generally skeptical of if not hostile to limited government and free markets. Like academic economists more generally, most law and economics scholars are progressives and liberals, not free market aficionados.
This is not at all the view of Law and Economics. As Posner himself noted:
All modern societies depart from the precepts of wealth maximization. The unanswered question is how the conditions in these societies would change if the public sector would be somehow cut all the way down to the modest dimensions of the night watchman state that precepts of wealth maximization seem to imply [emphasis added].
Bernstein cites Jolls, Sunstein, and a few others as the new wave of “liberal” Law and Economics. We could go back and forth, with us picking others, often in his own university. More fundamentally, however, Bernstein’s central point — that the existence of “progressive” or “liberal” law professors in the legal academy refutes the conservative influence of Law and Economics — simply misses the mark and misunderstands the history of neoliberalism. Both within the academy and the broader governing and policy world, Democrats were just as smitten with the conservative theory as Republicans. As Elizabeth Popp Berman explains, conservative economic tools permeated the Democratic left:
Repeatedly, the liberal analytic establishment—which saw its techniques as apolitical and value-neutral—found itself allying with moderate Republicans, and against liberal Democrats, in its policy arguments. Its prioritization of efficiency led its members to favor cost-sharing and means-testing in social programs over less efficient universal options. Its belief that economic regulation—government control over prices and market entry—was inefficient helped produce bipartisan support to deregulate first transportation and then other industries. And its emphasis on cost-effectiveness in government regulation led adherents to form alliances with conservatives and industry in support of cost-benefit analysis.
One example of where this happened is in the financialization of the economy. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which phased out Regulation Q and allowed banks to pay interest on demand accounts. The Depository Institutions Act of 1982, among other things, sanctioned certain cross-state mergers by banks. The Competitive Equality in Banking Act of 1987 expanded the ability of banks to acquire non-healthy banks across state lines. The Federal Deposit Insurance Corporation Improvement Act of 1991 initiated the process of removing the separation between investment and commercial banking for certain well-capitalized banks. The culmination of these deregulation processes was the passage in 1994 of the Riegle-Neal Interstate Banking and Branding Efficiency Act, removing restrictions on interstate banking, and the 1999 wholesale repeal of the Glass Stegall Act by the Gramm-Leach-Bliley Act. These were bipartisan pieces of legislation, signed by Republican and Democratic presidents alike.
President Trump and President Obama brought roughly the same number of monopolization cases—next to none. President H.W. Bush had an AAG who was keen on vigorous antitrust enforcement, much like Biden’s AAG and FTC Chair. In short, when it comes to specific policies, the meaning of one’s vote seems very unclear. Bernstein states, “Progressive egalitarians don’t need to reform the legal academy to push constitutional law in their favored direction; rather, they just need to win more presidential and senatorial elections, and have more luck with regard to the timing of vacancies.” However, winning the presidential elections that elevated Jimmy Carter, Bill Clinton, and Barack Obama did nothing to help progressive egalitarians in the realm of economic regulation, such has been the stranglehold of Law and Economics across the political spectrum.
“And finally, the [LPE] authors wildly exaggerate the supposed victory of libertarian and neoliberal economic ideas.”
Were libertarian and neoliberal economic ideas victorious? Bernstein’s claim to the contrary raises an interesting question: what, in his view would count as victory? After conservatives began successfully advocating their neoliberal policies, the high incomes of the top 1 percent that had been held down by the policies of the New Deal Consensus were restored. The share of income of the top 1 percent steadily increased after 1980. By 2017, it had reached levels nearly higher than prior to the Great Depression. The percent of wealth owned by the top 1 percent similarly increased dramatically beginning at the end of the 1970s, reaching levels just below those of the 1920s by 2013.
While high incomes to the top 1 percent were restored, overall economic performance deteriorated under the neoliberal free market policies. Comparing, for example, 1947–1973 with 1980–2015, in the later period growth of GDP was lower, labor productivity was lower, real wage growth was lower, and unemployment was higher. Some of this decline in performance is a result of less competition. As Thomas Philippon shows, for example, the decline in investment rates beginning in the late 1990s is due to a reduction in competition in the economy.
In addition to deregulation of finance and hamstringing antitrust, several other policy initiatives were aimed at releasing constraints on high income. First and foremost was the attack on labor. Republican appointees to the NLRB passed measures that significantly eroded union strength and ultimately resulted in a continued decline in union membership in the United States. By 2013 only 11.3% of the workforce belonged to a union. Reducing union strength is a transfer of labor rents to profits, not a growth strategy. The same is true of lowering high tax brackets: their primary impact is distributional. There is virtually no evidence that lower taxes increase macroeconomic growth, and in the US in the neoliberal period it did the opposite.
The advance of the neoliberal agenda can also be seen, as Quinn Slobodian has argued, in the move toward free trade and globalization. Investment abroad primarily involved a shift of manufacturing activity from industrialized countries to developing countries, with a significant number of U.S. companies moving their production, and sometimes their headquarters location, offshore. U.S. multinational firms then exported much of their off-shored production back to the United States. The incentives behind these adjustments are obvious. Corporations can extract significant concessions from American labor by threatening to move production facilities abroad. Further, corporations can avoid corporate taxes by moving to lower tax locations.
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In conclusion, Bernstein’s article, which is part of a larger “Research Roundtable on the Emerging Law & Political Economy Movement” hosted by the “Law and Economics Center” at George Mason’s Antonin Scalia School of Law, argues that LPE has overstated the power and influence that Law and Economics has had in legal scholarship and in terms of influence on society. Given the powerful changes that Law and Economics has wrought on our economy and society, it strikes us as disingenuous for Bernstein to market his movement’s own lack of success in order to strike out at the LPE project. As outlined above, Law and Economics has (unfortunately) had much success in making antitrust enforcement lenient, hamstringing regulation, promoting market solutions that fail ordinary consumers and workers, and raising the status of the wealthy to glorious new heights. Sometimes, you get what you pay for.
