German Working Papers in Law

and Economics
Volume  Paper 

ECONOMICS OF LAW AS A
JURISPRUDENTIAL THEORY
Mariusz Golecki
University of Lódz

Copyright 2002
c by the authors.
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 ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY
Abstract
Economics of law is thought to be a relatively new discipline. As a matter of fact
it seems to be a Herculean effort to explain what economics of law in reality is.
Some authors draw attention to its origins rooted deeply in a well known article
of Ronald Coase and his theorem. It is Coase who has shown how much econ-
omy depends on sound legal system, especially on acknowledgement of private
rights and liabilities. Others regard Garry Beckers’ efforts to provide a solid
and objective basis for social theory and legal reforms as the origins of contem-
porary law and economics. In this essay I will claim that methodology of law
and economics should be changed from implementing price theory and welfare
economics (economisation of law) into the interdisciplinary project embracing
jurisprudence. The basis for such project is purported by Coase theorem, but
may also be found in the writings of Hayek and “old institutionalist”, such as
Veblen, Hale and Commons. These efforts are visible as far as new institutional
economics and transaction cost economics are concerned. The aim of this es-
say is thus threefold: firstly, to present briefly the most powerful and popular
approach to economics of law, being at the same time influential legal theory
as presented by the Chicago school, predominantly by Judge Richard Posner,
and to point out limits of this approach from jurisprudential, economic and
methodological point of view. The second aim is to analyse the existing alter-
native approaches to economics of law, related to Austrian school (Hayek), “old
institutional” economics (Commons) and transaction cost economics (Coase) as
well as the social systems theory (Pearsons, Luhman and Teubner). The first
three theories I call foundationalist because they regard law as a foundation
of economic order. Foundationalism also seems to admit the existence of the
universally accepted foundations of law as well as economy regarded as human
activity concentrated on managing of resources. The last theory, namely the
system theory emphasising autonomy of both economy and law as social sys-
tems, is thus antifoundationalist. This division seems to be significant in the
context of the present discussion within jurisprudence, especially concerning the
difference between modern and post-modern legal theories. The third objective
is to present an alternative point of view on both economy and law from ju-
risprudential perspective. I would claim that only an interdisciplinary project
on law and economics is apt to supersede the dichotomy in contemporary ju-
risprudence between foundationalism and antifoundationalism. In this paper
the term economics of law will be used in the same meaning as the majority of
scholars use the term law and economics. I would like however to avoid the as-
sociation of this term with the theory purported by Posner. Therefore, Posner’s
approach will be named economic analysis of law. Economics of law as well as
law and economics have certainly a broader meaning. The meaning is associ-
ated with a methodological approach - the economic analysis of law as well as
the revision within economics itself. I prefer the name economics of law to law
and economics because it seems more realistic at the moment - the insight of
law in economics is either poor or redefined in economic terms. The impact of
economics on law is enormous and a realistic approach cannot neglect this fact.
At the same time, while the impact of law on economy is essential, it is not,
however, reflected in theory. I use the term jurisprudence when referring to gen-
eral reflection upon law and justice. The philosophy of law is its synonym. The
particular type of reflection within jurisprudence I call jurisprudential theory.
Golecki et al.: ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY 1

Mariusz Golecki LLM Cam.

Fellow at the University of Łód

ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY

Introductory remarks
Economics of law is thought to be a relatively new discipline. As a matter of fact it
seems to be a Herculean effort to explain what economics of law in reality is. Some authors
draw attention to its origins rooted deeply in a well known article of Ronald Coase and his
theorem.1 It is Coase who has shown how much economy depends on sound legal system,
especially on acknowledgement of private rights and liabilities. Others regard Garry Beckers’
efforts to provide a solid and objective basis for social theory and legal reforms as the origins
of contemporary law and economics.2
In this essay I will claim that methodology of law and economics should be changed
from implementing price theory and welfare economics (economisation of law) into the
interdisciplinary project embracing jurisprudence.3 The basis for such project is purported by
Coase theorem, but may also be found in the writings of Hayek and “old institutionalist”, such
as Veblen, Hale and Commons. These efforts are visible as far as new institutional economics
and transaction cost economics are concerned.
The aim of this essay is thus threefold: firstly, to present briefly the most powerful and
popular approach to economics of law, being at the same time influential legal theory as
presented by the Chicago school, predominantly by Judge Richard Posner, and to point out
limits of this approach from jurisprudential, economic and methodological point of view.
The second aim is to analyse the existing alternative approaches to economics of law,
related to Austrian school (Hayek), “old institutional” economics (Commons)4 and transaction
cost economics (Coase) as well as the social systems theory (Pearsons, Luhman and Teubner).

The author wishes to thank Dr Simon Deakin, Robert Monks Professor of Corporate Governance, University of
Cambridge, Dr Eli Salzberger, University of Haifa, Dr Jochen Bigus, University of Hamburg, for their helpful
comments on the earlier drafts of the paper.
1
Coase (1960).
2
Posner (2001) pp. 52-61.
3
About the “jurisprudential niche”, cf. Mercuro and Medema (1997) pp. 3-21. The authors seem to adopt a
descriptive approach, presenting different styles and schools within the mainstream of law and economics,
whereas my aim is rather to review the law and economics concepts from the perspective of its jurisprudential
content; i.e. to treat law and economics as a general theory of law.

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2 German Working Papers in Law and Economics Vol. 2002, Paper 13

The first three theories I call foundationalist because they regard law as a foundation of
economic order. Foundationalism also seems to admit the existence of the universally
accepted foundations of law as well as economy regarded as human activity concentrated on
managing of resources. The last theory, namely the system theory emphasising autonomy of
both economy and law as social systems, is thus antifoundationalist. This division seems to be
significant in the context of the present discussion within jurisprudence, especially concerning
the difference between modern and post-modern legal theories.5
The third objective is to present an alternative point of view on both economy and law
from jurisprudential perspective. I would claim that only an interdisciplinary project on law
and economics is apt to supersede the dichotomy in contemporary jurisprudence between
foundationalism and antifoundationalism.
In this paper the term economics of law will be used in the same meaning as the
majority of scholars use the term law and economics. I would like however to avoid the
association of this term with the theory purported by Posner. Therefore, Posner’s approach
will be named economic analysis of law.6 Economics of law as well as law and economics
have certainly a broader meaning. The meaning is associated with a methodological approach
- the economic analysis of law as well as the revision within economics itself. I prefer the
name economics of law to law and economics because it seems more realistic at the moment -
the insight of law in economics is either poor or redefined in economic terms. The impact of
economics on law is enormous and a realistic approach cannot neglect this fact. At the same
time, while the impact of law on economy is essential, it is not, however, reflected in theory. I
use the term jurisprudence when referring to general reflection upon law and justice.7 The
philosophy of law is its synonym.8 The particular type of reflection within jurisprudence I call
jurisprudential theory.

4
I am perfectly aware that some basic assumptions of the “old institutionalism” are at the moment unacceptable
for the majority of present mainstream economists. The more interesting thing is however the influence of
Commons methodology upon Coase, the fact that should not be ignored – cf. Medema (1994) pp. 24-26.
5
Morton (1998) p. 196 About the revision of traditional legal doctrine based on historical justice - Simmonds
(1984) p. 128.
6
As suggested by Deakin (1999) p. 31.
7
It is worth defining the term “jurisprudence”, since according to Lord Denning’s verdict:„Jurisprudence was
too abstract a subject for my liking. All about ideologies, legal norms and basic norms, “ought” and “is”, realism
and behaviourism, and goodness knows what else.”, Lord Denning, The Family Story, London 1983, p. 38.
8
Simmonds (2002) p. 1.

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Golecki et al.: ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY 3

Economic analysis of law

Economics of law is most often associated with the so called Chicago school of law
and economics.9 According to R. Posner, the popularity of this approach results from two
factors: the crisis of traditional legal doctrine and the success of the economics of non-market
behaviour.10
The starting point for economic analysis of law is the assumption that decisions may
be based either on intuition and vague moral beliefs or on scientific data. If economics is just
a theory of choice it should prima facie be an excellent data provider for judges and
legislators.
Thus the rationale of the economic analysis of law is rather simple: to implement
economics to legal decision-making process. The Chicago school implemented welfare
economics with its theory of self-interest, price and efficiency. The basic assumption of the
theory regards human nature: it assumes that people are rational and they maximise their
satisfactions in a nonmarket as well as in market behaviour. Their preferences may be
represented by utility function. The “economic man” may be perfectly rational while breaking
legal norms if it maximises his utility11.
The second pivotal assumption of the economic analysis of law states that individuals
respond to price incentives in nonmarket behaviour in the same way as if they were on
market. It means that legal sanctions are treated as prices.12
The third assumption is that legal decision-making process should imitate market. It
means that law should be analysed from the perspective of economic efficiency. The Chicago
approach derives from Kaldor-Hicks criterion of wealth maximisation.13
The other theory stemming from this methodology is a hypothesis about the internal
efficiency of common law, efficiency achieved due to the process of selection of norms by
virtue of litigation.14 The Chicago approach includes both: positive and normative theory of
law. The first claims that law, at least common law, is in fact based on efficiency principle
and that judges, even if using other terms such as justice, still treat efficiency enhancement as

9
Mercuro and Medema (1997) chap. 2.
10
Posner (2001) p. 31-46.
11
About the notion of economic man (resourceful evaluating maximizing man) in social and economic sciences
cf. Schäfer and Ott (2000) p. 56-69
12
Cooter and Ulen (1997) p. 3.
13
Posner (1992) p. 10, Cooter and Ulen (1997) p. 41.
14
Priest (1977) p. 65.

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4 German Working Papers in Law and Economics Vol. 2002, Paper 13

the main purpose of law.15 The normative theory states that if some parts of legal system are
not promoting efficiency, such rules should be changed to reflect the efficiency-enhancing
attitude of the whole legal system.
At the moment economic analysis of law might be regarded as one among equal trends
of the contemporary jurisprudence.16 As such the movement found strong opposition among
many authors.17 One of the strongest critics is Ronald Dworkin who opposes the recognition
of wealth as a basic value within society and the dependence of other values and allocation of
rights upon wealth maximization.18 Dworkin points out that the initial allocation of rights
cannot be instrumental, i.e. based on efficiency principle because the argument is deteriorated
by its circularity.19 Other critics debunked the pretended empirical and scientific character of
Posners analysis: there is nothing scientific in his approach which turns out to be a purely
normative and perfectly unverifiable project.20 Another group of critics is associated with
CLS movement.21
The crucial issue, however, seems to be the scepticism among economists or
economically oriented lawyers. Ronald Coase in his polemics with Richard Posner refuted not
only his economic imperialism, but rather the whole methodology attached to welfare
economics.22 For Coase economics of law was to overcome narrow and artificial approach of
the welfare economics, especially concentrated on the price theory and equilibrium model. He
directly opposed the expansion of principles of traditional economy to non-market sectors.23
Another problem with economic analysis of law is firmly related to the notion of
efficiency. For the Chicago school the idea of efficiency is central and indisputable.24
According to Kaldor-Hicks criterion the notion of efficiency is perceived as a static factor
whereas other concepts of efficiency are not attached to allocation of resources between
economic agents. H. Leibenstein’s concept of “X” efficiency refers to the internal
productivity of economic institution.25 Deakin and Hughes purported with the notion of

15
It is not strange, if according to Posner „A second meaning of justice,(...) is simply efficiency”. Posner (1975)
p. 777.
16
A. Kronman describes it as: „the most powerful current in American teaching today. (It) now completely
dominates some fields and is a significant presence in others”, Kronman (1993) p. 226.
17
Fried (1977) p. 180, Coleman (1980) p. 531, Weinrib (1995) pp. 46-50.
18
Dworkin (1998) pp. 276-80.
19
Dworkin (1980) pp. 191-95.
20
Bebchuk (1980) pp. 671-709, Kornhauser (1980) pp. 597-603, Rizzo (1980), p. 641, Malloy (2000), pp. 2-22.
21
Kennedy (1981), p. 378.
22
Coase-Posner debate; Posner (1993b) pp. 200-9, Coase (1993b) pp. 96-8.
23
Coase (1988) pp. 3-5. His approach is influenced by A. Smith and J. R. Commons - Medema (1994) pp. 24-
26, 168.
24
Posner (1980) pp. 487, Posner (1983).
25
Leibenstein (1981) pp. 97-110.

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Golecki et al.: ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY 5

efficiency in context of legal regulation, the so called technical efficiency.26 H. Eidenm ller
stresses the importance of the so called “costs of intervention” by which he understands an
additional cost of changing existing legal regulation or creating a new one27. On the other
hand Zerbe as well as Sen called for broadening the notion of efficiency so that also
sentimental value could have been encapsulated.28
Summarising, it may be stated that economic analysis of law substitutes the notion of
justice by the notion of efficiency and wealth maximisation29. Nevertheless the deconstruction
of the notion of efficiency results with refutation of the static model of wealth maximisation
based on the price theory.
The economic imperialism is however, not only a theoretical project. It rather reflects
a wider social, political and historical phenomenon: the “economisation” of social life. In the
last twenty years moral or ideological debate in politics as well as a wider part of social
discourse have been dominated by economic debates.30 Economy plays a more and more
important role within the society, due to the long historical process of the collapse of
traditional moral and political thinking, technical progress, civilisation changes, globalisation
process and the bankruptcy of the centrally planed economies.31 It is perhaps also due to the
expansion of the social attitude called by Ch. Taylor an “instrumental reason”.32 Social
sciences, legal theory and moral philosophy admit the omnipotence of economic relations
within the contemporary society. In democratic and liberal pluralistic societies the only
linkage among individuals seems to be economic exchange.33 The contemporary society is no
longer solely based on moral consensus but on free market and liberal democracy being
values themselves34. This observation is shared by pragmatists, functionalists (Rorty) and
communitarians (MacIntyre).35
In these circumstances it is not strange that traditional legal doctrine can hardly
explain judicial decisions,36 and that modern antifunctionalist conceptions explain little about

26
Deakin and Hughes (1999) pp. 173-175.
27
Eidenm ller (1998) p. 106-111.
28
Zerbe (2001) pp. 14-31, 152-158, Sen (1995) p.15.
29
Coleman (1980) p. 531-535,
30
For example, after 1989 economic issues were regarded as of highest importance within the debate on
transition in the postcommunist countries of Eastern Europe.
31
Fukuyama (1989) p. 8.
32
Taylor (1991) pp. 8, 97, 111-112, 120.
33
One of the best exponents of the thesis is Hayek (1976) p. 114.
34
Morton (1998) pp.16-18.
35
Golecki (2000) pp. 130-132.
36
Deakin (1997) p. 288.

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6 German Working Papers in Law and Economics Vol. 2002, Paper 13

the contemporary legal order in which large part of regulations is based on economic
reasoning.37
The modern economics of nonmarket behaviour is based on philosophical assumptions
regarding human nature, ethics and political philosophy. These assumptions and other axioms
of economic theory, especially its abstract character and repugnance of realism, are too rigid
and narrow when applied to such complex social reality as law.38
The formalism and axiomatisation of economics was purported principally by
Marshall, who believed that economics had to limit its scope to processes that had a price
measurement. According to this approach, the economic laws are simple generalisations about
human behaviour measured in terms of a utility.39 Thus economics has been definitively
founded on models based on axioms abstracting from the real world.40 Such models embrace
the set of ideas such as the notion of equilibrium as stated by Marshall or the concept of the
system of markets and general equilibrium endorsed by Walras and then definitely formalised
by Arrow and Debreu.
This evolution in one word lead from economics regarded as political economy
studying historical society as it was understood by A. Smith, to formalised abstract study of
interrelated variables applicable to any system of production or exchange, and after Becker’s
discovery of the economics of nonmarket behaviour, even to any social relations.41
The majority of economic analysis remains a normative project rather than a positive
description or explanation.42 According to Friedman’s methodology, the purpose of
economics is to predict, not to explain. Posner claims it advantageous43 but such a defence
seems doubtful.44 In order to explain legal phenomena a richer ontology and a broader
scientific perspective are needed. Therefore, a new methodological approach is necessary in
order to introduce a truly interdisciplinary research. The possibility of such methodological
endeavour may be historically illustrated.

37
Such a conception is e.g. Weinrib’s concept of private law based on Kantian idea of right and Aristotelian
concept of commutative justice. Cf. Weinrib (1995) pp. 75-83, cf. Deakin (1997) p. 284.
38
Bell (1981) pp. 76-79.
39
Ibid p. 56.
40
Ibid pp. 57-58.
41
Becker (1976).
42
Cf. Kornhauser (1980), p. 634, Eidenm ller (1998), pp. 393-395, T. Lawson points out Carl Menger as the
author of this approach - Lawson (1997) pp. 113-26.
43
Posner (1992) p. 17, Friedman (1953) p. 14, Medema (1994) pp.135-136.
44
A. Sen comments, that “We want a canonical form that is uncomplicated enough to be easily usable in
theoretical and empirical analysis. But we also want an assumption structure that is not fundamentally at odds
with the real world, nor one that makes simplicity take the form of naivety”, Sen (1985) p. 341.

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Golecki et al.: ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY 7

I would like to concentrate on two basic approaches: firstly, law and economics as
embodied in the works of Commons, Coase and Hayek and secondly, on the group of “social
systems theories”. Then I would like to point out methodological problems regarding the
interdisciplinary approach and to suggest some solutions.

Foundationalist theories on law and economics

One of the earliest interdisciplinary approaches to law and economics may be found in
the theory of J.R. Commons. Commons searched for legal foundations of economy. His
theory of property gave rise to more general observations regarding the evolution of law and
economy.45 He defined market as a process and a flow of transactions. Market was possible
only if there were at least two transactions - one actual and the next best alternative.46 The
price system operated in a real environment influenced by inequalities between parties.47 This
inequality was connected to the distribution of economic power which created a basis of
managerial transactions. The transactions between legal and economic superior and legal and
economic inferior took place not on market but within economic institutions. As far as those
managerial transactions were concerned the legal framework reflected economic inequality.48
Thus the economic position of parties of transaction also induced a legal power. The notion of
legal power and of different categories of legal rights implemented by Commons were closely
connected to the Hohfeld’s theory of legal power and legal rights. This lead to the
development of the concept of managerial transaction and economic institutions.
The version of institutional insight into economics endorsed by Commons was to some
extent shared by Ronald Coase. Coase seems to have adopted the distinction between
bargaining and managerial transactions, stressed by Commons . The former referred to market
exchanges, the latter to economic institutions “superseding” price mechanism, such as firms
and government. The institutional analysis included in The Nature of the Firm passed
unnoticed within the mainstream economics.49 It is rather The Problem of Social Cost that
raised extensive references and comments both by economists and lawyers. In this article

45
Commons (1924) pp. 11-46.
46
Ibid p. 66.
47
Ibid pp. 90-97.
48
Commons (1934) p. 634.
49
Medema (1994) p. 21.

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8 German Working Papers in Law and Economics Vol. 2002, Paper 13

Coase noted that the world of Zero Transaction Costs (ZTC world) made the initial
allocations of rights irrelevant.50
But we do not live in such world, says Coase.51 In a real world of positive transaction
costs allocation of rights affects outcome of economic activity. This means that law may
increase or decrease transactional costs and allocative efficiency. It forms the ground for the
so called normative Coase theorem which states that judges taking up any legal decision
should be aware of its economic implications. They should also take them into account as to
minimise transactional costs “insofar as this is possible without creating too much uncertainty
about the legal position itself”52.
The Chicago school plainly states that law should be based on efficiency calculations.
In fact normative Coase theorem does not offer a basis for such unanimous and
straightforward interpretation. Coase in his discussion with Pigou suggested limitation of
regulation by means of tax law and tax policy. It does not mean however, that he uncritically
pushed for liberalisation and limitation of transactional costs by virtue of freedom of contract,
liability rules and protection of property. This solution would rather comply with basic
assumptions of welfare economics, especially with policy recommendations formulated by K.
Arrow referring to the General Equilibrium Model.53
There is another way of reducing transactional costs: by substituting market by firm
perceived as an institution with its own hierarchy of power of decision-making. The firm
however needs its own internal regulations (e.g. company law, insolvency law, etc.). It is
somehow paradoxical that there is no escape from law. One can try to maintain ZTC like
world but the price would be sometimes extensive regulation (e.g. securities law, stock-
exchange law, etc.). But firm has yet another meaning, not linked with economic activity- it is
an institution, where transactional costs are reduced by virtue of power and limitation of
individual preferences submitted to the purposes of the organisation.
The question arises why law is so necessary for reducing transactional costs? It seems
to be jurisprudential theory the endeavour to answer this question.54

50
The proposition was then called by Stigler as “Coase Theorem”. Coase (1988), p. 14.
51
It is perhaps the most important conclusion drawn from his analysis. Coase thus put himself on the opposite
side of the contemporary mainstream economics, denying accurateness of formal analysis in economics
including modern price theory as implemented in economic analysis of law.
52
Coase (1988) p. 119.On the other hand the problem with operationalisation of the notion of transaction costs
should be taken into account. The measurability of those costs is very difficult if only possible. In the absence of
empirical date it is very difficult to treat the minimising of transactional costs as a recommendation for
legislative policy. Cf. Eidenm ller (1998) p. 103-106.
53
Arrow (1969) pp. 56-60.
54
This issue addresses also a question about the ontological nature of law as underpinning of the economic
activity and specifically as a foundation of the market.

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Golecki et al.: ECONOMICS OF LAW AS A JURISPRUDENTIAL THEORY 9

But the most jurisprudential question is related directly to the normative Coase
theorem. Is Coase suggesting that law should enhance efficiency? Should it promote free
exchange and property rights? The answer to these questions depends on how seriously do we
treat the ZTC world. For Coase this is the world of welfare economics. But is it a model-
world which should be established in reality? In other words, should we intend to transform
the real world of positive TC into ZTC world of economic models? Coase does not directly
answer those questions, but to some extent he suggests the solution.55 The institutional
framework arises if the TC are too high. In case of high TC firm will substitute free exchange.
On the other hand Coase in one place suggested that ZTC world as for example in case of
stock exchange requires massive regulation. Such complex regulation will tend to generate
additional TC, if it is too complicated. But the observation endorsed by Coase vicariously
opposes this “pro-market” solution. Coase seems to be more sceptical when he suggests, that
there is no escape from law in the artificial ZTC world. The world reminding ZTC world may
technically be built by virtue of massive regulations, and in fact transforms stock exchange in
sort of firm with its internal power and organisational hierarchy.56
In conclusion I would like to suggest that the common interpretation of the normative
Coase theorem is somehow based on oversimplification. Coase simply observed a kind of
economic regularity, perhaps even economic right concerning the relationship between market
as decentralised institution regulated by the price theory and economic institutions regulated
by internal relations of power. Neither of them is better - there are complementary elements of
economic system. As far as law is concerned, there is no trace of proposition that either public
or private, statutory or judicial law is better. Coase analyses only the basic influence of law
upon both market and firm or government. His legal analysis is perhaps not extensive but it is
profound. Law seems to rule economic system shifting some sectors of economic activity
between market, firm and government by virtue of the level of TC. At the same time there is
no escape from law. Similarly to Commons, Coase emphasised that economic goods are
bunches of rights assigned to legal individuals in accordance with legal rules. Law thus
creates the kind of framework of economic system.57 One of the most important features of
this framework remains the certainty about legal position which is the limit of the
instrumental purpose oriented legal decision-making process.

55
About the indeterminacy of Coase normative theorem see Deakin (1999) pp. 34-39, who suggests three
possible interpretations. According to Deakin none of those is correct, and empirical research is necessary to
solve the problem, ibid p. 39.
56
Coase (1988) p. 10.
57
Coase even suggested that economy seemed to be a function of law. See Medema (1994) p. 133.

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The close analysis of Coase theory provides the view that economics of law seems to
be a more profound theory of the relationships between two systems of values, two
frameworks of society: law regarded as a normative system providing order and stability for
any actions of individuals, and market economy: economic order maintained by legal rules
and consisting of activities of individuals. This landscape of the spontaneous social order
delimited by law demarcation lines is very akin to Hayek’s theory of nomos, taxis and
cosmos.
The starting point for Hayek is the epistemological assumption that knowledge and
information is dispersed. Individual agents have limited access to whole information
regarding complex milieu of social interrelations. Spontaneous order is founded upon the
notion of free individual action. Nevertheless the liberty of agents is limited by the so called
“abstract rules of just conduct”. Those rules are prior to legal regulations and evolved in the
course of the evolutionary process. Hayek draws distinction between the rules of just conduct
identified with nomos and the purpose-oriented rules resulting from legislative process- thesis.
According to Hayek nomos includes rules without any detailed purpose, but the purpose of
nomos as a set of “principles of just conduct” is to maintain cosmos i.e. spontaneous order. On
the other hand thesis refers to the purpose oriented norms whose main task refers to the aims
of organisation e.g. state. There are also two types of social order; cosmos and taxis. Cosmos
refers to spontaneous order, typical for Great Society with its pluralistic approach to values
and forms of social as well as individual life whereas taxis is the purpose-oriented order of
state.
The interrelationship between those two orders and respective two types of rules is a
central issue for Hayek. He refers nomos to the rules of private law whereas thesis rather to
public law58. According to Hayek thesis and nomos should not be blend but rather separate
since there is a real threat of domination of public law over private law, because the state has
a natural inclination to growing and broadening the scope of the public regulation. This
assumption is however difficult to reconcile with contemporary structure of legal order, where
the norms of private and public law interfere between themselves. Another problem with
Hayek’s theory regards the origin and essence of rules of just conduct. Those rules seem to
evolve in course of evolutionary process very similar to the history of common law.59 In
reality they were always effected by public law, but Hayek seems to refer nomos rather to
ideal model than historically developed and existing in reality set of rules. For him rules of

58
Hayek (1973) p. 132.
59
Ibid pp. 17-24.

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just conduct may be identified with three fundamental rights as stated by Hume; “that of
stability of possession, of its transference by consent, and of the performance of promises”.60
Hayek opposes constructivism of the type evolving from Descares’ rational
philosophy. He does not recognise the link between constructivism and the moral basis of
above stated rules of just conduct. One has to admit, that what for Hayek is just a kind of
natural foundation of spontaneous order is in reality nothing more than a special category of
moral foundationalism and constructivism based on secularised version of natural law and
morality as it was perceived by the Enlightenment philosophers: Hume and Kant.61
This is perhaps the reason for certain similarity between Hayek’s idea of nomos and
Weinrib’s concept of private law.62 To some extent both are antifunctionalist, even if Hayek
agrees, that nomos as a whole is to some extent purpose-oriented. For Weinrib the purpose of
law is to maintain and sustain legal order stemming from the formality and autonomy of
individual freedom and individual rights. It is irrelevant that many other concepts, the notion
of a total separation of private and public law including, are similar. Nomos is set up
predominantly by courts and judges. Taxis refers rather to the politically oriented legislation.63
Another problem regards the role and ontological nature of law. According to Hayek’s
account law seems to be both frame (nomos) of the social order and the instrument of state
(taxis). Thus one may sum up that according to Hayek’s theory, legal system plays double
role: it provides expectation of behaviour of economic agents and it ensures enforcement of
legal obligations.

Antifoundationalist theories on law and economics

The system theory may be traced back to Talcot Parsons and his structural-
functionalism64 but the paradigm shift from foundationalist to antifoundationalist social
systems theory is associated with the functionalist-structuralism and the theory of law as
autopoiesis endorsed by Luhman.65 According to his theory law is characterised as
operationally closed self-referential and self-replicating autopoietic social subsystem.66 Law
may also be defined as a systematically and institutionally generalised normative behavioural
expectation. This means that law is regarded as a kind of information about the possible

60
Hayek (1976) p. 40.
61
About the weaknesses of the “Enlightenment project” cf. Simmonds (1984) pp. 48, 60-64, Golecki (2000) p.
134.
62
Weinrib (1995) pp. 1-21.

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actions taken by the legal system and by the subjects of legal norms - legal actors.67 Thus for
Luhman the enforcement of legal norms has no separate significance. According to this theory
it has only the signalling function, spreading information about the fact that state mechanism
enforced or has not enforced the legal rule.68
On the other hand the system theory of law does not refer exclusively to legal system.
Social communication is common for all subsystems as a kind of inter-systemic interface.
Law is “the product of an emergent reality, the inner dynamics of legal communications”.69
Law emerges in course of the communication process which is not linear but circular. The
same is to be said about economy, which is also a closed system. According to Teubner law
encodes information regarding legality/illegality whereas economy concerns information
about utility/non-utility. Both systems are totally autonomous, but intellectually some
influence is possible while decoding and translating information.70 The example of such
process of translation of the legal information into economic language is e.g. sanction. Legal
sanction is translated by economic environment as a mere cost or price.71 If than such
rationale is put into the circulation within legal system of communication some kind of
“economisation” of legal system takes place. Teubner mentions “hand formula” and “doctrine
of efficient breach” as examples of such process.72 It does not mean, that law depends on
economics or vice versa. Both systems are operationally closed, and the possible interaction is
possible only due to the process of communication and spread of information within the
system of social communication.73 At the same time law and economics evolve and the
process of evolution is in fact a kind of co-evolution of the whole social system74.
Teubner states that legal evolution is based on circularity. Circularity may seem
inadmissible way of scientific explanation, but law is paradoxical so that the only way to deal
with this problem is “to shift the paradox from the world of thinking about law into the social

63
The difference between taxis and nomos seems to reflect the dichotomy between policy and principle adopted
by Ronald Dworkin, cf. Dworkin (1998) pp. 221-224.
64
Parsons (1937) pp. 166-191.
65
B llesbach [in:] Kaufman et al. (1994) pp. 381-393.
66
Luhman (1985) p. 283.
67
Ibid p. 82.
68
Ibid pp. 78, 83, 206-226.
69
Teubner (1993) p. 45.
70
Ibid p. 92.
71
Ibid p. 94.
72
Ibid p. 79.
73
Ibid p. 88.
74
Teubner criticised both Hayek’s and Posner’s theory of legal evolution. According to him Hayek’s theory of
spontaneous order “leads to a grotesque overvaluation of traditional customary law and similar “spontaneously”
formed orders and to a devaluation of political law making as “constructivist”. In the case of Posner’s theorem, it

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reality of law”.75 Thus law seems to be a kind of hypercycle defined by legal procedure, the
notion of legal act, legal norm and legal doctrine, but perhaps the most important observation
is that “Legal norms are thus defined by reference to legal acts; that is legal components are
produced by legal components”.76
The process of co-evolution of law and economy requires a new regulatory attitude:
instead of a traditional “command-and-control” approach, law should adopt “option policy”
which is generally a type of reflexive regulation. Such regulation has an influence upon the
economic system in more appropriate way because it is based on the observation that legal
acts affect both systems and therefore should be effective not only within the scope of legal
order but also from the perspective of the economic agents.77 In these circumstances the
regulatory success would only be possible if the legal regulation respected the autonomy of
economic system, transforming legal commands into the language adequate to the
institutional environment of the economic system.78
Summarising, it should be admitted that the social systems theory provides an
interdisciplinary insight into law-economy relations. Subsystems are autonomous but at the
same time the process of translation between them occurs. Why is it possible? The crucial
issue seems to be the idea of law regarded as a process of communication. The enforcement of
law is perceived as closed to reality. For Luhman physical power and its use are the ultimate
foundations of pre-modern law.79 Due to the evolution decision-making process has become
proceduralised and dispersed legal information sufficient to enhance legal conformity does no
longer need sanction. The last thread with reality has thus been broken. The circularity and
autopoiesis is a next step on the road to the cognitive perspective on law. The social system is
substantialised - it is a real ontological being.80 The rest is just an element of the system.
To some extent the social systems theory is an antithesis of Hayek’s theory of
catalaxy. The borders between private and public law does no longer exist. The process of

leads to a systematic failure to note the capacity of the legal system to select economic input. If we are to find a
way out of the impasse, we must adopt models of the co-evolution of economic and legal processes” Ibid p. 57.
75
Ibid p. 8.
76
Ibid p. 41.
77
Ibid p. 80.
78
From the traditional perspective of economic analysis of law, legal sanctions are perceived sometimes as an
equivalent to prices. This position assumes however that legal norms are perfectly understandable for economic
agents who can than compute hypothetical outcomes of both compliance and non- compliance and to opt for the
better, “more efficient” option, by virtue of cost-benefit analysis. In recent literature the problem has been raised
whether this assumption is realistic, taking into account the complexity and instability of legal rules. Cf. Deakin
and Hughes (1999) pp. 179. On the topic of reflexive regulation cf. Lenoble (1994) and Lenoble (1999).
79
Luhman (1985) p. 88.
80
Cf. Kaufmann et al. (1994) p. 19.

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fragmentation of private law and decomposition of the historical idea of justice is thus finally
approved.81

Toward the new interdisciplinary paradigm

The foundationalist and antifoundationalist theories of law and economics seem to

contradict each other. This contradiction may be explained within the historical perspective.
The problem is in reality closely connected with the controversy on historical justice in
private law.82 The notion of historical justice is often derived from Aristotelian theory of
justice. In my opinion there is no possibility of finding solid bases for interdisciplinary project
combining law and economics without explaining the path-dependant co-evolution of both
disciplines.
One general remark may be added: both economists and lawyers trace back very often
to Aristotle. Karl Polanyi called him the founder of economics,83 whereas Ernst Weinrib
points out that Aristotle invented private law.84 In fact the fifth book of Nicomachean Ethics
on justice seems to be an interdisciplinary reflection on both; economic exchange and the
basis of legal relations and obligations.85 The fundamental difference between utility-value
and exchange-value was discovered by Aristotle.86 He referred commutative justice to what is
now called market exchange. Accordingly, the price and exchange-value is usually defined by
market forces. Only in case of collapse of voluntary exchange the judge determines the price.
He represents not only state but a kind of justice no longer based on commutative but rather
on distributive justice.87 But Aristotle rejected the possibility of founding social life on market
exchange. For Aristotle did not distinguish between society and community - Greek polis was
based on interpersonal relations, on friendship rather than on exchange.88 The difference
between those two types of relationships is based on the assumption, that friendship stems
from the care about others - friends, and not from the self-interest, as in case of market
relations. Therefore Aristotelian notion of friendship seems as a kind altruistic behaviour,
which from the economic perspective may be characterised as irrational or at least
unexplainable.

81
Tamanaha (1997) pp. 112-114. Cf. Weinrib (1995) p. 215.
82
On the notion of historical justice: Simmonds (1984) p. 25.
83
Polanyi (1968) p. 81.
84
Weinrib (1995) p. 56.
85
Aristotle Nicomachean Ethics V, 1129-1133.
86
The best exponent of the thesis is Soudek (1952), p. 45.
87
Aristotle, Nicomachean Ethics, 1132a22.

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As Polanyi had pointed out, according to Aristotelian tradition there were three levels
of social interaction: “gift”, “exchange” and “threat”. “Gift” operated on a level of friendship
and morality, “exchange” on level of market transactions, and “threat” on level of law and
state sanctions.89 Perhaps the most dramatic process in the history of economic thought was
its concentration solely on market exchange. This was not the case as far as Adam Smith and
his Lectures on Jurisprudence or Wealth of Nations are concerned.90 Such identification of all
possible social interactions with market exchanges resulted with “economic imperialism”. The
true interdisciplinary project should be based on more pluralistic assumptions, taking into
account the multiplicity of social relations and differences between economic exchange,
moral obligations and legal system.91
According to this one can differentiate among various levels of reality and different
aspects of the same social relations.92 Therefore, it may be suggested that there are two basic
aspects of law.
Firstly, law may be perceived as a centralised information in form of a cognitive
resource maintaining the expectation about behaviour of other agents.93 The nature of law as a
cognitive resource is related to the legal norms and principles communicated in advance and
used as a kind of mechanism harmonising social co-operation. This is, what would be called
the essence of law, according to the theory of social systems’ or the autopoietic theory of law.
Secondly, law is an institutionalised normative mechanism for dispute settlement and
as such it seems to be regarded as a foundation of social order. The reality of enforcement is
not virtual as system theory suggests, but rather vicarious. Many legal rules are in fact self-
imposing and may resemble conventions.94 This may happen if the certainty of “natural
sanction” is an observable fact. The pay-off is visible and obvious.95 It is not the case with
complex social interactions. As Cooter states, conformity to legal rules is a process composed
of self-imposing and externally-enforced mechanisms.96 The ultimate character of legal
sanction gives rise to law as a unique normative system.

88
The theory is embodied in Politics I.8-10. See Lewis (1978) p. 83, Meikle (1979) pp. 163-169.
89
Polanyi (1957) p. 250.
90
In this respect Smith continued Aristotelian tradition. Cf. his notion of jurisprudence as a science on
commutative and distributive justice in Lectures on Jurisprudence (Smith (1982) pp. 5, 397-401). About the
wider scope of Smith’s analysis, not limited to the notion of “economic man”, but embracing morality, sympathy
and generosity – Sen (1995) p. 15.
91
Deakin and Michie (1997) p. 2.
92
Lawson (1997) pp. 56-61, who finds the basis for social relations in “human intentional agency” implementing
the methodology he names “transcendental realism”.
93
Hayek (1973) pp. 101-109.
94
Baird et al. (1994) pp. 224-232.
95
Lewis (1969) p. 124.
96
Cooter (1996) pp. 1661-1690.

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Parties of transactions behave according to economic rights and normative

expectations but this take place only in limited extent, namely if the parties agree to co-
operate.97 Then they rely on conventions, trust or other quasi normative patterns of co-
operation, even if self interest is the only purpose of their activity. The situation changes when
the transaction encapsulated in legal form needs to be interpreted or if parties cease to co-
operate out of an opportunistic behaviour or any other reason. Then the third party- namely
arbiter is needed in order to solve potential conflict. Thus we shift from free market to the
scope of internal relationship within institution. Such exemplary institution may be the firm -
acting according to its procedure e.g. company, but eventually it is a state as a “special type of
firm” that should provide with legal solutions to the conflicts. Such an ultimate response is
necessarily connected with court and judiciary process.98
Concluding, one may state that the limits of market are identical to the limits of the
process of formation of exchange-value. The regular market exchange takes place without any
direct intervention of legal institutions. Law is only a kind of information. But if there is a
collapse within the process of exchange, if parties are unable to determine exchange-value in
course of bargaining process, when the problem of interpretation of conditions of exchange or
the problem of enforcement of freely made contract arises, law takes over. Thus judiciary
becomes the ultimate value-determining institution.99 Judges certainly operate in an
institutionalised legal environment and their activity is confined by the set of overlapping
rules and principles, including the rules on interpretation of legal texts or the norms expressed
in precedent. In accordance with legal rules and principles judges establish new conditions
and resolve the conflict between parties. This solution is generally guaranteed by state
enforcement.
Normative legal order operates only on the level of legal system which does not refer
to reality in a direct way - the sanctions and “pay-offs” have conventional and variable
meaning (as in system theory). The artificiality of the system means that it is based on
axioms.100 Tony Lawson claims that contemporary economic system is such a deductive
system.101 According to its positivistic version the legal system is another kind of normative

97
Baird et al. (1994) pp. 261-278.
98
Hayek (1973) pp. 94-100.
99
According to Aristotelian tradition Weinrib (1995) p. 218, according to Hegelian tradition Kojève (1981) pp.
73-94.
100
Keynes (1921) p. 4, Hicks (1946) p. 5, Hahn (1984) pp. 136, 142, 308.
101
Lawson (1997) p. 91-126.

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set of axioms, rules and principles.102 The normative nature of economic model is parallel to
the notion of legal one but on the normative level both systems do not interfere.103

Epilogue

The crisis of jurisprudence enabled economic analysis of law to penetrate legal

practice, legal theory, legal education. Legal theory is in crisis because the contemporary
jurisprudential theories attacked by pragmatism give very weak basis for legislation and
adjudication. Economics seems more solid. But the model of perfect market has been revised.
Various theories of market imperfections attract attention. Economics as well as jurisprudence
requires a broadened perspective, more realistic assumptions, a richer ontology. These
propositions may be satisfied by an interdisciplinary approach addressing the question how
law as well as economy are possible, how they work within social reality - the reality of
complex networks, patterns of exchange, systems of communication. Jurisprudence based on
moral foundations has been refuted - because no moral foundation, common value system for
complex society are possible to identify. Change in legal theory is thus necessary because
jurisprudence does not reflect the paradigm shift from non democratic to democratic law
making process.104 The central institution of society is market; it is in fact market society. It
does not mean that morality does no longer play any important role - but morality, custom or
convention are not characteristic for market society; they are limited to small groups and
communities. According to N. Simmonds, the jurisprudence of market society should be
based on assumption, that “property is distributed by means of innumerable individual
transactions between consenting parties, and which is pervaded by relationships of an
essentially limited, contractual and often transitory nature”.105
Within the landscape of such market society we have a free exchange on the market,
based on the principles such as protection of property, freedom of contract and institutions
with their hierarchy, power and common purposes. What we really need, however, is a theory
on law and economics embracing the complexity of mutual relations between market and
institutions. Such theory should be based on assumption, that legal norms play a double role
in society. On the one hand there are providing expectation about the behaviour of other

102
Such model is also adopted by institutional theory of law. Cf. Morton (1995) pp. 67-70, 151-195.
103
I adopt the theory which contradicts Luhmans’ approach to sanction, in accordance with: King (1993) p. 226,
Tamanaha (1997) p. 113.
104
Morton (1998) p. 67.
105
Simmonds (1984) p. 28.

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agents and thus may form a kind of cognitive resources; on the other law as enforceable
normative system protects rights and physically or conventionally enforces obligations.106

106
Such approach is shared by Tamanaha (1997) pp. 93-128, who says about „two fundamental categories of the
concept of law”, ibid p. 93.

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