Epilogue: The “new” new science of law, ca. 1965–1995

Summary

Since the mid-1960s or thereabouts, the explanatory approach to law has once again grown fashionable among mainstream economists. Before we take the measure of this “new” institutional economics, let us consider a few of its wellsprings.

First of all, we should mention the reaction against what was perceived as the excessive naïveté of Pigovian welfare economics. It is useful to recall, in this connection, the argument from chapter 1 that the original new science was born in part from skepticism toward the sanguine reformism of many Classical economists. Something similar was brewing in the midtwentieth century, except that the enemy was now not natural law, but rather Progressive “social engineering.” Even at the climax of Progressivism in the interwar years, there remained a subset of economists who thought administrative fiat a poor substitute for the rule of law.

Pigou's proposed solution to the problem of externality was a lightning rod of sorts for this discontent. A disinterested government agency, Pigou argued, should estimate the social cost of spillovers and set corrective taxes and subsidies accordingly. This solution won many adherents (and is articulately defended to this day): considering that it took allocative efficiency as its end, and the price mechanism as its means, this is not surprising. But already in 1924, Frank Knight rebutted that the Pigovian approach neglected the fact that the mere existence of legal rights could, under plausible conditions, solve the problem of externality without recourse to bureaucratic intervention. Knight's objection and his alternative vision were restated more formally, and famously, in Coase's 1960 article “The Problem of Social Cost.”