In 1989 the Columbia Law Review published “Contractual Freedom in Corporate Law,” a collection of influential essays drawn from a symposium held the prior year. The participants, which included such American corporate law luminaries as Lucian Bebchuk, Frank Easterbrook, and Roberta Romano, sparred over the role of economics—or, more specifically, the nascent school of “law and economics”—within the discipline.
As one of the contributors with a more traditionalist perspective, Melvin Eisenberg argued in support of certain mandatory rules to constrain corporate opportunism. Although known for his skepticism of a purely market-oriented approach, Eisenberg couched much of his analysis in economic terms. “Determining the balance between the costs and benefits of private ordering and mandatory rules in any given case,” Eisenberg concluded, “is a matter for the exercise of prudential judgment, informed by economic analysis, quantitative data, the insights of psychology, and other empirical propositions.”
In his published response to Eisenberg’s piece, Fred McChesney—one of the earliest joint-degree Law and Economics scholars—opened his essay with the following passage:
As American history demonstrates, the colonization of one territory by inhabitants of another creates at least two problems. First, the colonizers and colonized usually do not speak the same language, and thus must learn to communicate. Ordinarily, the language of the colonizers comes to dominate, a development rarely pleasing to the colonized. Second, patterns of property ownership will likely be disrupted, as colonizers acquire (often by force) rights previously held by the colonized.
The colonization of some fields of law by economic analysis fits this historical pattern. Economics provides a powerful “tool kit” with which to analyze law. It has proven difficult, however, for some adherents of more traditional approaches to law to come to understand the different form of analysis that the use of economic methods entails. Moreover, the economic approach has reduced the value of lawyers’ more traditional but less powerful methods of legal analysis. Not surprisingly, many lawyers have objected to the intrusion of economic analysis into law on both grounds.
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For roughly the last four decades, the school of law and economics (L&E) has been the preeminent interdisciplinary framework for the study of law. Through books, articles, judicial opinions, classes, well-funded conferences, and law school centers, the undercurrent of this ideology courses through the American legal system. Its market-oriented cost-benefit framework dominates fields like contracts, torts, corporate law, and antitrust and has established strong footholds in many others. No school of thought has come close to the impact that law and economics has had on U.S. law.
Somewhat surprisingly, however, the Law and Political Economy (LPE) movement seems to have prompted a crisis of confidence within the halls of its august rival. In response to LPE’s challenges to traditional L&E dogma, a kinder, gentler, more ecumenical L&E has suddenly emerged from the firmament. It’s not only inaccurate, we are told, but also unfair and benighted to ascribe the traditional precepts of L&E—efficiency, rational actors, deregulation, freedom of contract—to the contemporary L&E community.
In their article “Contemporary Law & Economics,” Adam Chilton, Joshua Macey, & Mila Versteeg propose a new definition of law and economics: one focused on the social scientific method of inquiry, rather than classical economic precepts. This L&E concerns itself with empirical research and is open to a variety of disciplines and methodologies, embracing even qualitative and anthropological approaches. Sarath Sanga’s “The LPE Critique of Law & Economics” makes a similar case, albeit more obliquely and more disdainfully. He seems to agree with LPE’s critique of traditional L&E dogma, but he contends that critique is aimed at a straw man—and a dead one, at that. Modern L&E scholarship not only cares about power and inequality, he maintains, but does so “at a level of sophistication beyond the LPE critique’s wildest comprehension.”
As Amy Kapczynski discusses in her excellent LPE Blog post on the subject, the abnegating counterpoise of recent L&E defenders is both welcome and confusing. Welcome because they aver that L&E is not the neoliberal, market-affirming, Kaldor-Hicks-maximizing, regulation-destroying cadre from the past. Confusing because, as she asks, “where are the renunciations of welfarism, efficiency, and of Coase, Posner, and other canonical works, by a new generation of L&E scholars?”
An obvious candidate for the new and improved L&E to start showing its bona fides would be corporate law scholarship. It has been twenty-five years since coauthors Henry Hansmann (the 2024 Coase awardee at ALEA) and Reinier Kraakman famously proclaimed: “There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value.” This maxim remains the focus of L&E corporate law scholarship, which constitutes the overwhelming share of all corporate law scholarship, especially from elite schools. The premise of shareholder primacy is so ingrained that it need not even be spelled out or reaffirmed; it is just taken for granted.
How did we get here? The foundation of L&E corporate law theory is the work of Frank Easterbrook and Daniel Fischel, encapsulated in their book The Economic Structure of Corporate Law. Easterbrook and Fischel started from the premise of traditional efficiency and utility maximization, but this soon was transmuted into wealth maximization as a handy proxy. Imagining a nexus of contracts between the various participants in the corporation, Easterbrook and Fischel argued that shareholders are awarded a right to the residual value of the corporation because their claims are the most contingent. With the other stakeholders to a corporation all having fixed contractual claims, maximizing the corporation’s residual—namely, the profits going to shareholders—thereby maximizes societal efficiency as well. From this it follows that shareholders should be in control of the corporation, giving them the right to elect the board of directors and approve transformative transactions. A robust market for corporate control and stock options for executives provide further mechanisms to discipline managers in the direction of shareholder wealth.
There are many problems with this narrative, which many scholars (including Grant Hayden and I) have repeatedly raised over the years. But L&E scholars have refused to give them a serious hearing. Instead, the entire edifice of L&E corporate law rests on the premise of shareholder wealth maximization, as Roberta Romano explained in 2005:
. . . [P]olicy disputes are, at least in principle, resolvable empirically when there is consensus on ends, as there is among most U.S. corporate law scholars since the field was transformed with the application of finance and the theory of the firm (a consensus that the objective of public, for-profit corporations is to maximize shareholder wealth).
Thus, the claim that L&E scholarship has shed its former ideological cast for a new empiricism is misleading, at least in the corporate context. Corporate law empirical work is centered around share price effects because of the shared normative framework of shareholder primacy.
I do think Chilton, Macey, & Versteeg are correct that the new generation of L&E corporate law scholars—both those knowingly and unknowingly falling within their label—are not as committed to the wealth maximization mindset as the generation that installed these precepts as gospel. But neither has there been sufficient effort to question and reexamine the existing foundational principles. There are many possible reasons for this, and I’d be happy to continue the dialogue with folks both formally and informally. But suffice to say that at least part of the obeisance to shareholder primacy has been the unwillingness of powerful L&E corporate law faculty to entertain any heretics.
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The 1989 Columbia Law Review symposium closed with an essay from future Nobel Prize winner Oliver Hart. His essay, entitled “An Economist’s Perspective on the Theory of the Firm,” opened as follows:
An outsider to the field of economics would probably take it for granted that economists have a highly developed theory of the firm. After all, firms are the engines of growth of modern capitalistic economies, and so economists must surely have fairly sophisticated views of how they behave. In fact, little could be further from the truth. Most formal models of the firm are extremely rudimentary, capable only of portraying hypothetical firms that bear little relation to the complex organizations we see in the world. Furthermore, theories that attempt to incorporate real world features of corporations, partnerships and the like often lack precision and rigor, and have therefore failed, by and large, to be accepted by the theoretical mainstream.
I agree with Chilton, Macey, Versteeg, and Sanga that L&E scholarship cannot be ignored, no matter how defined. Like almost everyone in my fields, I have devoted much of my scholarship to building on and responding to L&E research and theory. Many of my pieces could be characterized as L&E; I’ve presented at ALEA four times. The LPE community, however, is much more representative of what I consider to be the appropriate response to the traditional (and still predominant) L&E normative framework. As we tear down the temples built to utility maximization, contractual freedom, and shareholder primacy, we should recognize that these structures were built with an imperial design. Theorists with the modesty of Hart worked contemporaneously with colonizers like McChesney. Thankfully, contemporary L&E researchers are signaling openness to alternative forms of discovery, broader perspectives of truth, and keener concern for justice. It may in fact be the twilight of the old gods. But as the myths tell, the gods do not go quietly.
