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Abstract

A great deal of Law & Economics scholarship focuses on the economic efficiency of a legal doctrine, judicial decision, statute, regulation, or proposed change in the law. This Article argues that virtually all such research is flawed (1) by its failure to consider the impact of the “law” it is analyzing on many of the categories of economic inefficiency whose magnitudes the “law” affects and (2) by its assumption that any “law” that reduces the number or magnitude of the (Pareto) imperfections in the economy (types of imperfections one of whose exemplars would cause economic inefficiency if it were the only imperfection in the system) will increase economic efficiency on that account. This Article explains that this assumption is wrong because it ignores the central lesson of The General Theory of Second Best: since in general any such individual imperfection will be as likely to counteract as to compound the net tendency of the other imperfections in the system to cause economic inefficiency, unless one can make a complicated argument to the contrary that focuses on the different ways in which an economy’s Pareto imperfections interact to cause various categories of economic inefficiency and the incidence of all types of Pareto imperfections in the economy, one must assume that laws that reduce the Pareto-imperfectness of the economy without rendering the economy Pareto-perfect will have no tendency to increase economic efficiency on that account. More positively, the Article outlines and attempts to justify a protocol for economic-efficiency prediction or postdiction that responds economically efficiently to both The General Theory of Second Best and the reality that research is always allocative-costly and its conclusions are almost-always imperfect. The Article also contains a coda that explains why, contrary to the belief of most economists, policies that reduce poverty and/or income-wealth inequality will tend to increase economic efficiency on that account.

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