• Traditional ideas of justice and morality in the law now face a radical challenge from economists and economically trained lawyers.

• A novel form of interdisciplinary research has become a movement.

• In some areas, such as antitrust and unfair competition law, economic understanding is indispensable.

  • But the devotees of Law & Economics make their most challenging contributions in other fields of law where economics has had, until recently, no apparent bearing.

• The battleground for this new way of thinking about law has been torts or accident law.

• The insight that initiated this challenge was Yale law professor Guido Calabresi’s reconceptualization of the field of accident law and its goals.

  • He began by noting that both accidents and accident prevention generate costs that can be measured in a single common denomination of dollars and cents.

  • Accidents cost money, as reflected in the dollar sign that juries place on the victims’ physical and emotional harm, medical bills, lost wages, and pain and suffering.

  • Accident prevention also costs money—the funds expended, for example, on making cars, airplanes, and microwave ovens safer.

    • These, plus the costs of administering the legal system, constitute the total costs of accidents.

  • The aim of tort law, Calabresi inferred, should be to minimize the sum of these costs. As expressed in economic language, the goal of tort law should be to bring about an optimum number of accidents.

    • This optimum is reached at the equilibrium point where the marginal cost of one more accident exactly equals the marginal cost of preventing that accident.

    • An optimum number of accidents is also considered the efficient solution to the accident problem.

      • These terms optimum and efficient are now common parlance in American law.

• The quest for efficiency has led to efforts to restructure, or at least reinterpret, the traditional criteria for making one person pay for harm caused to another.

• Submerged in this search for efficiency is the recognition that economics itself contains diverse schools of thought.

Voluntary Markets and Pareto Efficiency

• One influential notion of efficiency derives from the ideal of trading in a frictionless market.

• Aristotle’s view: The traded goods are equal in value, and therefore no one is better or worse off as a result of the exchange.

  • Modern economic theory departs radically from this premise of equality in the exchange.

    • The guiding assumption today is that both sides benefit from the exchange. If they would not benefit, economists now say, they would have no incentive for making the trade.

• Trade makes the world better off, insofar as it makes at least one of the parties better off and it makes no one worse off.

  • This is the definition of a Pareto–superior move, a trade that benefits at least one side and harms no one.

• In the economic view of the world, if parties have the same stack of goods in front of them, trade occurs only because the trading partners have different sets of preferences.

• As a matter of principle, economists claim that there is nothing to know economically about the relative merits of different Pareto–optimal states.

• The Pareto–optimal state might be a roughly equal distribution, or it might be a situation in which one player possesses all the goods.

  • In either case would a move be possible that would not leave someone worse off.

  • All of these Pareto–optimal states are equally efficient in the sense that no readjustment of the goods can bring about a better state of affairs.

  • Optimality or efficiency in this economic sense has nothing to do with the justice or desirability of the distribution.