From the Coase theorem to the Myerson-Satterthwaite theorem: Is Chicago law and economics facing an existential crisis?XVII Annual Conference of the Latin American and Caribbean Law and Economics Association (2013)
AbstractDespite a relatively short lifespan, law and economics has moved on to a second paradigm. Beginning in the early 1960s, Anglo American law and economics scholars produced a vast literature. The intellectual breakthrough that made this approach to legal studies possible was the development of transaction-cost economics within mainstream microeconomic theory. Mainstream economics is defined by strict adherence to the social-science methodology developed in the 1930s in the wake of the ordinalist revolution, which Milton Friedman restated famously at the beginning of the 1950s. The rise of Chicago economics as the dominant force within the discipline is also directly related to the mathematization of economics. However, in the early 1940s and 1950s, John Von Neumann and John Nash sneered at the slide-rule mathematics of Newtonian mechanics employed by mainstream economics. With their sights instead on the recondite mathematics of quantum mechanics, they developed a game theory using probability theory—which violates core ordinalist principles. Accordingly, Milton Friedman and mainstream economists resisted game theory throughout the 1970s. Nevertheless, game theory has expanded not only into mainstream economics, but throughout the social sciences. Remarkable as this story is, it describes only the first phase of law and economics. Now, at the beginning of the second decade of the 21st century, law and economics is poised to move beyond transaction cost economics, with mechanism design theory, which, with the same sleight of hand used in reverse mathematics, generalizes, albeit incompletely, game theory. As transaction costs are replaced with information costs and, in some cases, incentive costs, a brave new world of economic modeling is open to legal scholars. However, this new paradigm abandons core Chicago-school methodological principles. This article explores why Latin American legal scholars may be able to profit (to a substantially greater degree than scholars who work within the common law tradition) as the field develops, as long as they don't lose sight of core Chicago-school insights into the nature and limits of economic inquiry as a social science.
Publication DateJune 17, 2013
Citation InformationJuan Javier del Granado. "From the Coase theorem to the Myerson-Satterthwaite theorem: Is Chicago law and economics facing an existential crisis?" XVII Annual Conference of the Latin American and Caribbean Law and Economics Association (2013)
Available at: http://works.bepress.com/juan_javier_del_granado/76/