EMORY
School of Law
Law & Economics Research Paper Series
Why Was the Common Law Efficient?
Paul H. Rubin
Emory University Department of Economics
and
Emory University School of Law
Working Paper No. 04-06
This paper can be downloaded without charge from the
Social Science Research Network Electronic Paper Collection:
http://ssrn.com/abstract=498645
WHY WAS THE COMMON LAW EFFICIENT?
Paul H. Rubin
*
Introduction
A basic question for law and economics is the efficiency of law. Hayek, (1960
and 1973) although writing before the law and economics movement and writing from
another perspective, had argued that common or judge-made law was better than statute
law; we return to Hayek’s arguments below. Posner (1973; 2003) has of course argued
often and forcefully that the common law is efficient. His arguments are based on
examination of particular legal doctrines. I call this the “micro” argument for legal
efficiency. The evolutionary models were aimed at explaining this micro efficiency.
There is more recent literature that uses empirical methods to compare various legal
systems. This literature generally finds that common law is more efficient than other
forms of law. I call this the “macro” argument for efficiency. It is ultimately a Hayekian
argument, based on the idea that in common law systems, governments have less power
than in other systems. I first discuss micro efficiency, and them macro.
“Micro” Efficiency
Micro efficiency is based on an examination of particular legal doctrines and
attempts to determine if they are efficient. This was the method used by Posner. (Much
of my own work is of this type; see for example Rubin, 1983). The difficulty with this
method of analysis, is that often the conclusion regarding the efficiency of a particular
rule depends on unmeasured transactions costs of various sorts; if the analysts’ intuition
1
about relative magnitudes of costs is incorrect, then doctrines claimed to be efficient may
not be so. Nonetheless, Posner’s analysis has been the intellectual spark behind the
growth of law and economics, and questions about efficiency of the sort he was the first
to raise, have dominated the literature. Much of this literature may be considered as
detailed attempts to answer the positive efficiency question first posed by Posner, and
much of the rest aims at deriving normative conclusions as to what is efficient.
This method of analysis is fundamentally different from efficiency analysis in
other branches of economics. There, a process (market competition) is postulated and it
is shown that the process leads to efficient outcomes. Economists do not generally
examine consumers to see if they are equating ratios of marginal utilities to prices, or
firms to see if they are charging marginal cost. Rather, the process by which outcomes
are generated is shown to lead to efficiency. It is for this reason that many economists
are uncomfortable with the efficiency arguments of law and economics. Nonetheless,
because this is the standard method in law and economics, any analysis of the efficiency
of any particular body of law can be considered as evidence for or against Posner's
hypothesis. If some law is found efficient, then this is evidence for the hypothesis. If
some law is found inefficient, or if there are proposals for reform, then this is evidence
against the hypothesis. In this sense, much of law and economics is aimed at testing this
fundamental hypothesis.
Evolutionary Models
Scholars are of course aware of these difficulties and have sought to identify a
process that would lead to efficiency. I first proposed the evolutionary model of legal
2
efficiency in an attempt to solve this problem (Rubin, 1977). The evolutionary models
are attempts to explain judicial behavior without resort to preferences or utility functions.
Initially, these models aimed at explaining Posner's putative observation that the common
law was efficient. It is fair to say that the models failed in this endeavor, perhaps because
the law is not so efficient as Posner argued. Nonetheless, these models have had an
important impact on the literature because they have called attention to forces other than
judicial preferences in explaining the law. The evolutionary models are ultimately based
on the model of the litigation process first set forth by Landes (1971).
In the first paper applying an evolutionary model to the common law, I argued
that most cases are settled, rather than litigated, and that it is only litigated cases that can
lead to legal change. Cases are settled when the expected value to the plaintiff of a case
is less than the expected cost to the defendant, which is generally true if stakes are
symmetric. However, inefficient laws can sometimes create asymmetric stakes because
the inefficiency means that there are deadweight losses than cannot be bargained away in
the settlement process. That is, an inefficient rule creates a loss to one party that is
greater than the gain to the other because of future stakes in similar type cases. Thus,
litigation becomes more likely when rules are inefficient, and so inefficient rules are
subject to greater selection pressure, and more likely to be overturned. (Note that this
model, like many of its successors, depends on parties having ongoing interests in
disputes of a certain sort, rather than merely in the matter at hand.)
Following this initial contribution were several extensions and modifications.
Priest (1977) argued that inefficient rules generated larger stakes and so were more likely
3
to be litigated, again subjecting them to increased selection pressure. Goodman (1979)
argued that efficient precedents were worth more to parties who would benefit than
inefficient precedents were worth to their beneficiaries, and that parties to whom a
decision was worth more would spend more litigating and so would be more likely to
win. In other words, efficient precedents were more likely to win in litigation and thus
survive than were inefficient precedents. Katz (1988) expanded on this notion in the
context of presenting a model of litigation expenditures. Terreborne (1981) also presented
a model of efficient legal evolution.
Other scholars began critically examining these models, and the general notion of
legal efficiency. For example, Tullock (for example, 1997) has long argued that the
English common law process is less efficient than Continental processes. Rizzo (1980a
and b) argues from an Austrian perspective that the amount of information needed for
judges to achieve efficiency is excessive, although in a critique I have argued that Rizzo’s
criticism might apply to efficiency in all of economics, not merely in law and economics
(Rubin, 1980). Aranson (1992) argues that it is impossible for judges to seek efficiency
because the calculations required are equivalent to those required to make central
planning work . Hadfield (1992) has argued that because judges see only a biased sample
of potential cases, depending on the rules in existence, it is impossible for judges to move
towards efficiency, even if they desire to do so. Landes and Posner (1979) in a
symposium paper published in the Journal of Legal Studies argued that the earlier models
had erred by modeling precedent as an all or nothing issue, when the proper question was
whether a precedent was stronger or weaker. That is, litigation might strengthen or
4
weaken a precedent without overturning it completely. Thus a party with an interest in
overturning an inefficient precedent would also have to consider the possibility that
litigation could strengthen as well as weaken the precedent. This consideration greatly
weakens the evolutionary pressures for efficiency. Parsons (1983) combined Priest's
point (that inefficient precedents would lead to increasing litigation) with the Landes and
Posner point (that precedents that were litigated might become entrenched) to argue that
there is a tendency for the common law to become “reckless”—to favor rules that
inefficiently lead to increased accidents. Cooter and Kornhauser (1980) present a
complex evolutionary model in which there are some tendencies towards efficiency, but
in which both efficient and inefficient rules will be observed at any time. This model,
and alternative definitions and implications of efficiency, are discussed in Kornhauser
(1980). Von Wagenheim (1993) presents a model with similar results.
Hirshleifer (1982), building on my discussion of inefficiency when stakes in
precedent are asymmetric, provided what may be one of the most useful and influential
criticisms of the evolutionary models. Recall that in my original model and in some
others, including Goodman (1979) and Landes and Posner (1979), evolutionary forces
moved the law towards efficiency only if the party with an interest in efficiency had an
ongoing interest in the form of he law. Hirshleifer generalized this point to show that the
law could come to favor whichever party could most easily organize and mobilize
resources for litigation of unfavorable precedents. This movement would be independent
of efficiency. I used this point to argue that common law was more like statute law than
many want to admit: interest groups could use either common or statute law to achieve
5
their goals (Rubin, 1982). I argued that the apparent efficiency of the common law was
because most common law was developed at a time when organization of interest groups
was expensive, and that more recently both common and statute law have been subject to
interest group pressures. Crew and Twight (1990) expanded on this point and found
common law less subject to rent seeking than statute law. Rowley and Brough (1987)
and Barzel (2000) find that contract and property might be expected to be efficient, but
not tort.
Martin Bailey and I extended this theme in a formal model of the influence of
interest groups on the law (Bailey and Rubin, 1994), and we have shown that plaintiffs'
attorneys have been responsible for the shape of modern tort law, using an evolutionary
mechanism to shape the law Rubin and Bailey (1994). In Rubin, Curran and Curran
(2001) we modeled an interest group deciding whether to use litigation or lobbying as a
method of rent seeking; Osborne (2002) presents a similar model. Fon and Parisi (2003)
provide an additional mechanism to explain expansion of tort (mainly product liability)
law: since plaintiffs chose courts in which to file, judges who are in favor of expansive
law will see more cases and have more influence than more conservative judges.
Although shaped by evolutionary forces, this law is socially quite inefficient.
An interesting set of hypotheses regarding legal evolution is in Roe (1996). Roe
argues that the notion of evolution towards efficiency is an important determinant of legal
form, but it is not the only determinant. He incorporates three subsidiary notions into an
efficiency framework - the importance of initial conditions (borrowed from chaos
theory), path dependence, and evolutionary accidents. The result of these processes
6
would be that laws would be well, but not perfectly, adapted. However, while these
notions are interesting, as Roe himself admits, they do not as of yet provide refutable
hypotheses. It would also be interesting to see if these propositions can be generalized to
provide some implications.
In a recent important paper, Zywicki (2003) has added what he calls a “supply
side” to the efficiency of law models. He points out that the evolutionary models
discussed above are “demand side” models, with litigants demanding efficient rules.
Following Berman (1983), Zywicki shows that during the formative period of the
common law there was competition between several court systems. There was first
competition between civil and ecclesiastical courts. Within the civil system, there were
royal law, feudal law, manorial law, urban law and mercantile law courts, all competing
for the fees and business of litigants. There were courts of the King’s Bench, the
Exchequer, and the Court of Common Pleas, and four more obscure royal courts as well.
All of these courts competed for business and fees; for example, church courts’
jurisdiction over testamentary succession could be used to increase the domain of these
courts. This created an incentive for each court to provide unbiased, accurate and quick
resolution of disputes. This is the supply side: judges and courts competed to supply
efficient rules to get the business of disputants. Courts could also borrow remedies and
rules from each other, which facilitated the evolution and spread of efficient rules and
remedies.
In this competition, the Law Merchant (Lex mercatoria) played a major role in
commercial law, including contract law (Benson, 1989). Ultimately the common law
7
under Mansfield adopted the law merchant and this is the source of the efficient contract
and commercial law rules that many have observed in the common law. It is important to
note that in many circumstances (and particularly in business or contractual disputes) the
parties would pick the forum ex ante, so that both would have an incentive to choose
efficient courts. Thus, in this large class of disputes, there would be no pro-plaintiff bias
as might exist when plaintiffs choose courts after a dispute has arisen.
In this view, an important source of efficiency is the existence of competing
courts and bodies of law. Where such competition exists, rules will tend towards
efficiency; where competition is lacking, there will be weak or non-existent tendencies
for efficiency. This explains the actual path of the common law. In its formative stages,
there was competition, and the law became efficient. More recently, there has been less
competition, and the law has moved towards some inefficiencies. For example in the
U.S., federal and state common law originally competed. This competition ended in
1938, as a result of the case Erie Railroad v. Tompkins (304 U.S. 64). After that period
there was less competition as the federal courts were required to use the relevant state
law. Now, arbitrators do compete with the courts for commercial business.
What can we say about the evolutionary models? By focusing on the role of
litigants and, with the addition of the important Zywicki analysis on the role of
competing courts, the models have a good deal of explanatory power. They do not, as
first thought, indicate that the common law will always be efficient. However, they do
explain both why common law was efficient in the past and why it is now less efficient.
They also provide some guidance for methods of channeling the law towards efficiency
8
(for example, Rubin, 1994 and 2004). Additionally, by demonstrating the difficulty of
achieving the goal of efficiency, they have helped scholars to understand when the law
may be efficient and when it is likely not to be. Moreover, an important component of
the evolutionary models was their focus on the litigation decision as driving legal
evolution. Other models of legal evolution, both economic and non-economic, either
leave mechanisms for evolution unspecified or assume that the preferences of judges are
the driving forces. The economic models were the first to focus on the motives of
litigants, realizing that judges can decide only those cases that come before them. As
Elliott (1985: 71) in a study of the history of evolutionary models, indicates: “Moreover,
the economic school of evolution has broadened our view of the legal system to include
the role of litigants, as well as judges, in making law.” The literature associated with
Priest and Klein (1984) on selectivity bias in case selection is a result of the focus on
litigants' decisions, which has come out of the evolutionary models. (For an analysis of
theories of legal evolution from 1880-1940, which thus omits analysis of the economic
theories, see Hovenkamp, 1985).
“Macro” Efficiency
In addition to the literature that examines the efficiency of particular rules, there is
a newer literature examining the overall efficiency of common law. The theoretical basis
for this literature is the work of Hayek. Hayek argued that common law was created
from the bottom up, rather than from the top down. The recent literature has elaborated
this point to argue that common law does a better job than code law of protecting
property rights from predation by the state itself.
1
9
The two major legal systems in Europe are the common law and code or civil law.
Common law is the British legal system, and is now used in former British colonies,
including the U.S. It is sometimes referred to a “judge-made law” since the law itself is
not written down anywhere, but is the product of judicial decisions, and in particular the
decision of appellate courts in resolving actual disputes between individuals, or between
individuals and the state. Scully (1992) identifies 54 countries as using common law. In
contrast, legal codes are passed by legislatures and interpreted by judges. Thus, in code
countries judges are said to interpret the law, but not make it. In practice, this distinction
between the roles of judges is not the major difference between code and common law
systems. Rather, as discussed below, the major difference is in the amount of deference
given to the state. Scully (1992) identifies 94 countries in his sample as following code
law. (The term “civil law” refers to code countries, but also to the non-criminal part of
the common law and sometimes to non-ecclesiastical law. To avoid confusion, I refer
throughout to “code” law.)
If property rights cannot be effectively protected, then there are several
detrimental effects on income and wealth. First, people will invest less in creating wealth
because returns are uncertain. Second, some people will spend their time in the
fundamentally unproductive activity of trying to predate against others as, for example,
by becoming thieves, or by becoming corrupt bureaucrats. The potential productivity of
these people in producing goods and services is lost to the economy. Third, productive
people will spend part of their time and effort in protecting themselves from predators, as
by guarding resources from thieves or hiding resources from corrupt tax collectors. The
10
effort spend in these activities is also lost to the economy. Finally, to the extent that
people invest in less productive but more easily protected resources, then the economy
becomes less productive. For example, if people invest in gold because it is portable and
easily concealed, then the possible productivity of houses or businesses that could have
been built is lost.
The modern conception of the “rule of law” was defined by Dicey (1914): “In
England no man can be made to suffer punishment or to pay damages for any conduct not
definitely forbidden by law; every man's legal rights or liabilities are almost invariably
determined by the ordinary Courts of the realm… These principles mean that there can
be no punishment or taking of property without an explicit law, and all persons (including
officers of the government) are subject to the power of the courts.” Numerous scholars
have documented the importance of a rule of law and protection of property rights for
economic growth. This has been done both by examining the historical record (time
series analysis) and by comparing countries at a point in time (cross section analysis.)
Time Series Analysis
Consider first time series or historical analysis. In modern times, the first
example was probably North and Thomas (1973). Rosenberg and Birdzell (1986)
provided a detailed historical analysis of the economic growth of the West in response to
property rights and market facilitating institutions. In a recent paper, Acemoglu, Johnson
and Robinson (2002) show that the major impetus for European growth beginning in the
16
th
century was Atlantic trade. This trade strengthened the power of merchants and
enabled them to obtain changes in institutions that strengthened the power of markets and
11
the rule of law. An interesting approach is in Jones (2001) who argues that it was
specifically the increase in protection of intellectual property rights that has led to
economic growth. Pipes (1999) has also argued for the efficiency of a private property
regime from a historical, not economic, perspective. The form of property rights can
change over time as costs and benefits change; for example, Smith (2002) shows that in
England land went from individually owned to commons fields (albeit with strict usage
rules) back to individuals use, as values changed.
Cross Section Analysis
There are also numerous cross section studies that find that the existence of
economic freedom and a rule of law are associated with higher levels of economic
growth. Barro (1991) began this line of research, focusing on rates of growth. Scully
(1992) was also an early pioneer. Other important recent contributions include Barro
(1997), Hall and Jones (1999), Acemoglu, Johnson and Robinson (2001a, 2002), and
Knack and Keefer (1997). Rodrik, Subramanian and Trebbi (2002) find that institutions,
measured either as a “rule of law” variable or as a measure of low risk of expropriation
(following Acemoglu, Johnson and Robinson, 2001a,) are much more important than
openness or geography in explaining levels of incomes in a sample of eighty countries for
1995. Acemoglu, Johnson and Robinson (2001b) also find that institutions are more
important than geography in explaining incomes. Carlsson and Lunstr?m (2001)
decompose the effect of indices of economic freedom and find that, while the overall
index is significant in explaining economic growth, some components are not significant.
12
Notably for our purposes, they find that the variable “Legal Structure and Security of
Private Ownership” is significant and robust in explaining growth.
Scully (1992: 162) finds a significant relationship between protection of
individual liberties and the common law, “…the probability of having one’s civil liberties
protected is 2.5 times greater in common law nations than in countries with a codified
legal tradition.” He also finds that Marxist-Leninist and Muslim countries have
significantly less political and civil freedom than non-Marxist and non-Muslim countries
(Scully, 1992: 161). Additionally, politically open societies grew at a compound real per
capita annual rate of 2.5 percent per annum, compared to a 1.4 percent growth rate for
politically closed societies (Scully, 1992: 176). Societies that obey the rule of law grew
at a 2.8 percent rate, compared to a 1.2 per cent rate in societies where state rights take
precedence over individual rights. Societies that subscribe to private property rights and
a market allocation of resources grew at a 2.8 percent rate, compared to a 1.1 percent rate
in nations where private property rights are circumscribed and the government intervenes
in resource allocation. Scully (1992: 179) summarizes his results: “Thus, societies where
freedom is restricted are less than half as efficient in converting resources into gross
domestic product as free societies. Alternatively, more than twice the standard of living
could be obtained with these same resource endowments in these societies, if liberty
prevailed.”
La Porta et al. (1999) examine the relationship between legal systems and “good”
government, where good government is defined as “good-for-economic-development”
and includes measures of government intervention, public sector efficiency, provision of
13
public goods, size of the public sector, and political freedom. They find that countries
with socialist legal systems are more interventionist, in that they provide less protection
to property rights, more regulation and higher tax rates. Systems with French origin legal
systems are also more interventionist than common law systems. Scandinavian countries
are more interventionist than common law, but German law countries are about the same.
Mahoney (2001) in an explicitly Hayekian analysis compares incomes and legal systems.
He looks at growth rates for a sample of 102 countries from 1960-1992. He finds that
common law countries grew .71 percent faster than did code countries. These results are
approximately robust through many alternative specifications. He concludes that
common law origin legal systems lead to significantly increased economic growth
because they provide more stable property rights and better contract enforcement.
Common law has also been shown to be more efficient in governing finance (see for
example La Porta, et al., 1998).
Why Does Law Matter?
The argument for the importance of institutions is this: There may be differences
in incomes between countries because of different amounts of capital per worker, of
education, and of technology. But none of these differences are fundamental. Capital is
mobile internationally, and it should be profitable for owners of capital to move it to low
capital countries by investing in these countries because capital will have higher returns
where it is scarcer. Similarly, education should have a higher return in countries with
low levels of human capital, and some individuals should find it worthwhile to undertake
the investment. Educated persons can also migrate to places where their education is
14
more valuable. Technology is also mobile across countries, through licensing or direct
investment. But if institutions differ across countries, and if property rights are not well
protected in some countries, then the above results do not hold. For example, capital will
not flow into countries where property rights are not secure, even with very high potential
returns. Rather, capital may actually flow out of such countries into countries with lower
returns but more security. Thus, most scholars studying differences across countries
recently have focused on institutions, and particularly the rule of law and the existence of
property rights, to explain income differences.
It might appear that less successful countries could adopt institutions from more
successful countries and so copy their success. But there are factors limiting this
possibility. Powerful individuals or groups would often lose from the adoption of more
efficient institutions and are often in a position to block the adoption of these advances
(Acemoglu and Robinson, 2002). Moreover, because long-term commitments for
compensation from those who would gain from new institutions to those who would lose
are unworkable, there is no possibility of paying off these elites to get them to allow more
efficient institutions (Acemoglu, 2002).
There may be a link between the macro and micro views of efficiency. Recall
that an important source of micro efficiency is the competition between legal systems.
But this competition itself is a function of the reduced power of the state in common law
systems. Thus, it is more likely that a common law system will allow competition among
legal systems, and this competition itself will generate micro efficiency. This point is
clearly worth further research.
15
Conclusion
Following Posner, Law and economics scholars initially focused on the efficiency
of particular legal rules – what I call “micro” efficiency. My evolutionary model and
similar models were devised to explain this sort of efficiency. More recently, research
has examined the overall efficiency of the legal system – what I call “macro” efficiency.
The basic underlying paradigm in Hayekian; it is argued that common law systems give
less power to the state than do civil law systems. There is substantial empirical evidence
in favor of the macro efficiency of common law. The link between the two may be the
willingness of the common law to allow competition between competing legal systems.
Recent work by Zywicki has emphasized the benefits of this competition.
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*
This is an expanded and updated version of Rubin (2000).
1
An more complete discussion of these issues in available in Rubin (2004).
22
