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Law's Order: What Economics Has to Do with Law and Why It Matters

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David Friedman presents a well organized, clear and concise treatise of Law and Economics from a positive perspective. This book is orgainzed into twenty-two chapters dealing with everything from the efficiency of law to antitrust enforcement. Friedman uses excellent examples and writes in a clear manner making this book easily understood by the layman, first year law students or undergraduate economics students.

As soon as I was finished with this book, I turned around and read it again. Friedman is picking up a theme that he introduced towards the end of the revised Machinery of Freedom, in which he states that in order to understand certain mechanisms, we must undertake the economic analysis of law. This discipline was generally considered to have been initiated by Ronald Coase and taken up and popularized by Richard Posner. Friedman's own work advances the study into areas of law that relate to the internet and computers.
This particular book, however, concentrates on advancing the work done by Posner to a wider audience. Posner's perspective is that of a very, very talented legal theorist attempting to apply economic tools to law; Friedman's is that of a very talented economist applying his own discipline to law.
The complete book is available online; in fact the book was intended to be an off-line anchor for a number of other links. Friedman does away with references to landmark cases, mathematics, and other references in the book, and moves them all to the online version. While it seemed like a good idea at thte time, I ultimately found it to be annoying.

I would say that this is the first book I've read that connects technical economic ideas - like efficiency, the Coase Theorem, externalities, and rent-seeking - to the real world with practical applications.

Like whether or not voodoo practice should be punishable as attempted murder (huh? Read the book - this and other stories are both entertaining and enlightening).

This book, as its title suggests, is on the ECONOMICS of law. And as Dr. Friedman skillfully illustrates in the text, economics has a great deal to say about both the theory and application of law. In particular anyone interested in understanding how modern systems of law arose will find fascinating information in this book that isn't often discussed in your run-of-the-mill law, history, or economics courses. This is just the sort of information that is important to achieving a better understanding of the structure of legal systems, yet is, perhaps necessarily, left out of most courses in law (or history or economics) because it doesn't neatly fit into any one category.

The use of economic tools and ideas to analyze and understand legal systems is a relatively new idea. Yet as you'll discover when reading this book, it is a very GOOD idea. One that yields immediate and satisfying results. The book places modern legal systems in their proper historical context. It compares private and public methods of handling a variety of legal issues and disputes.

What does economics have to do with law? Suppose legislators propose that armed robbers receive life imprisonment. Editorial pages applaud them for getting tough on crime. Constitutional lawyers raise the issue of cruel and unusual punishment. Legal philosophers ponder questions of justness. An economist, on the other hand, observes that making the punishment for armed robbery the same as that for murder encourages the muggers to kill their victims (since they are less likely to be caught if there are no surviving witnesses). This is the cut-to-the-chase quality that makes economics not only applicable to the interpretation of law, but beneficial to its crafting.

Buy this book or steal your friend's copy. It, along with David Friedman's other works, are well worth reading.

At the outset, I must acknowledge that this proved to be one of the most challenging books I have read in recent years. (You can thus understand why it was also among the most thought-provoking books I have read in recent years.) The subtitle informed me that Friedman would explain "what economics has to do with law and why it matters." In the Introduction, he observes:

"The legal rules that we are most familiar with are laws created by legislatures and enforced by courts and police. But even in our society much of the law is the creation of not of legislatures but of judges, embedded in past precedences that determine how future cases will be decided; much enforcement of the law is by private parties such as tort victims and their lawyers rather than by police; and substantial bodies of legal rules take the form, not the laws, but of private norms, privately enforced."

Friedman helps his reader to "understand various systems of legal rules by asking what consequences they will produce in a world in which rational individuals adjust their actions to the legal rules they face." He cites two possible objectives of the economic approach to achieve such understanding the logic of law: the law may have no logic to understand or the law does have a logic "but that it is, or at least ought to be, concerned not with economic efficiency but with justice." These are indeed critically important issues. How to address them? Friedman does so with an economic analysis of the law in terms of both economic ideas and areas of the law. First, he examines basic economic concepts (e.g.) "that can be used to to understand a wide range of legal issues. Then he shifts his attention to various questions raised what that examination reveals. For example: Why do other legal systems differ so much from ours? Why have two legal systems -- tort law and criminal law -- which "do roughly the same thing [but] in different ways?" Why not eliminate one of them? What arguments can be made to support or oppose the view that "judge-made law" is economically efficient? In the final chapter, he summarizes "what we have learned about systems of legal rules" throughout his extended analysis of the interaction of law with economics.

If I correctly understand what Friedman has shared throughout the book (and I may well do not), his ultimate objective is to create what is (in effect) a rough draft of what in final form would be a much more efficient legal system. Such a system would presumably increase the efficiency of other domestic systems (e..g. political and economic) as well as, in all probability, the efficiency of those systems' interaction with counterparts in other countries. For me at least, this was not an easy book to read, in part because I lack any formal education in either law or economics but also because of the inherent difficulty of drawing correlations and suggesting cause-and-effect relationships between two such complex human enterprises...

Anyone who has had the privilige of debating David Friedman on the Internet knows that he is though-provoking. Most books about law discuss this loophole or that bias or perhaps the outrage du jour. What is missing, though, is an alterative system.

David Friedman comes at the subject from a different angle. What if the legal system operated like any other market system?

Well, not just ANY other market system. One of the presumptions is that to be truly efficient the market must be completely free. Any system today is encumbered by vested interests, many of which can be traced back to an economic concern. Why not bring that out into the open?

Would you subscribe to a traffic court where penalties were based on how much economic damage your behavior caused? In a way, you already do!

You'll be thinking that way about all manner of legal issues after reading this book. A good addition to anyone's shelf, especially those of us who enjoy a philosphical reality check.

The layman's view of law is that it has to do with justice, and the layman's view of Economics is that it has to do with who gets what. This is not correct. The early legal scholars, Grotius, Pufendorf, Locke and others, despite their disagreements, all stressed that property rights law was justified by the fact that an individual will not invest in the improvement of a valuable resource (land, idea, factory) unless he can expect to enjoy the fruits of this investment, and secure ownership is the best means of ensuring that this is the case. In other words, the legal institution of property rights served to improve economic efficiency, not justice. Or rather, as David Friedman would say, our ideas of the justice of property rights are the effect of the efficiency of the institution of property rights, and not vice versa.

Law's Order is a wonderful, exciting, and hugely informative book. It never lowers its standard of rigor (a very high standard), but avoids all mathematical modeling and never makes a silly argument simply because there is some outlandish economic model that supports it. One need not always agree with Friedman in order to appreciate the power of his argumentation and the limpidity of his writing.

The most important theoretical term that must be mastered is that of `economic efficiency.' The concept is not simple, and only by many varied examples will the reader come away with an appreciation for the strengths and weaknesses of the concept. Basically, an economic arrangement is efficient if there is no alternative arrangement that can make all individuals, even those not participating directly in the arrangement better off according to their own preferences. We also say that moving from situation A to situation B improves efficiency if the winners from moving to B could compensate the losers so that all are better off.

A perfect example of an efficiency improvement is where a firm produces harmful effluents that contribute to polluting the natural environment. A firm that releases harmful effluents can simply be prevented from doing so, thus likely leading to the closing of the firm. However, if the cost to society from, say, a ton of effluent can be accurately measured, the firm can be asked either to pay a price per ton of effluent equal to this cost or cease production. The firm can then find a profit-maximizing level of effluent production, and if profits are positive at this level, the new situation, with a lower level of effluent and a tax on the effluent, may be more efficient than either the original situation or simply closing down the firm.

Friedman's central assertion is "the thesis, due to Judge Richard Posner, that the common law, that part of the law that comes not from legislatures but from the precedents created by judges in deciding cases, tends to be economically efficient." (p. 15) Most of the book consists of an extended argument supporting the above statement. If Friedman is correct, and he may well be (I cannot think of an exception to his assertion, although of course I am not a legal scholar in any way), common law is then an incredibly stunningly useful social institution. For instance, many people, especially right-wing ideologues, claim that that free markets are efficient, but economic theory does not support this statement (there are externalities, public goods, increasing returns industries, and dynamic fragilities, all of which reduce the efficiency of markets and may possibly be improved through some non-market intervention). Here we have a true expert in Law and Economics, our author, who claims that the dynamics of common law in America "tends to be economically efficient" with no systematic deviations at all. I come from this book not only marveling at the author's analytical and exegetical skills, but also wondering why common law has this character. Many human social institutions contribute strongly to our success as a species and our happiness as individuals and families, but I know of none other that can truly be said to be efficient, without some systematic deviations from efficiency. Friedman does not say why common law is efficient, and I know of no one who has developed a model to explain this fact.

Note that legislative law is often inefficient. For instance, a free market in body parts is illegal in virtually every country around the world. This creates huge inefficiencies. For instance, thousands die each year waiting for kidney transplants from compatible donors, but it is illegal to buy a kidney from a healthy person who would love to sell it, perhaps to by an IPod and a pair of Nike sneakers, or perhaps to pay for a life-saving surgical procedure for his mother. I am sure also there are rich people who would be willing to pay for human eyes that it pleases them to float in a crystal prism while they eat breakfast, and poor people who would gladly give an eye for the money to send their children to decent schools. But these efficiency enhancing exchanges are forbidden by law. According to Friedman, if the issue were left to common law, such exchanges would be allowed, and I cannot see that he is wrong.

Of course, this does not mean that all legislated law is inefficient. Indeed, quite the opposite is the case. Consider, for instance, laws that oblige sellers to truthfully represent their wares. Without this sort of law, honest sellers would be driven out of the market by dishonest sellers unless the honest sellers could find an alternative way of guaranteeing the quality of their products (e.g., warranties or reputation). In general there is no way short of government regulation by independent judgmental bodies of experts to achieve this, because when a firm is in financial trouble, it will ineluctably sacrifice long-term profitability in favor of short-term survivability. Experience, in addition, shows that when the level of corruption in a society is low, its government tends to frame and enforce such truth in advertizing laws rather competently. It is a rather difficult exercise in economic modeling to show that truth in advertizing improves efficiency (it does, after all, harm the dishonest seller), but it can usually be done.

Product safety regulations, however, are generally inefficient. Take the American FAA, which specifies complex safety regulations for private and commercial airlines. Their philosophy is "one size fits all," so travelers who are willing to take a higher risk of an accident are not permitted to do so. A libertarian would probably suggest that airlines be forced to reveal the risks involved in flying with them, but no regulation beyond that.

Friedman's thesis implies that when justice conflicts with efficiency in common law, efficiency always wins out. Friedman supports this statement in two ways. First, we tend to consider a law just when it is efficient. For instance, if a lawnmower manufacturer can prevent a certain type of accident at low cost by installing a flange near the mower blade, but the user cannot prevent the risk of injury through normal prudence, then a common law precedent of holding the producer liable for injuring the user will be perceived as just. However, if the user can avoid injury through normal prudence, but the producer cannot prevent injury through user carelessness, both justice and efficiency will place negligence liability with the user.

Friedman's second defense of the efficiency principle is based on a very famous argument first made by Nobel prize economist Ronald Coase in his article "The Problem of Social Cost" in 1960---a paper that really started the whole Law and Economics research area. Coase noted that if one party causes harm to another, and if there are no transactions costs, then In law and economics, the Coase theorem, attributed to Ronald Coase, describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are no transactions costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. Therefore the careful and unambiguous specification of property rights, which can be accomplished in common law through precedence, will promote efficiency.

Consider, for instance, the issue that Coase dealt with before publishing his 1960 paper: eliminating interference between radio stations in the broadcast frequencies they use. He reasoned that so long as the law clearly stated who has rights to what (for instance, the conditions under which a new radio station can broadcast on a certain frequency band), then bargaining among broadcasters would eventually lead the right to broadcast in the hands of the entrepreneur who stands to gain the most from broadcasting on that frequency band by putting the radio station to its most economically valued use. Of course it matters to the broadcasters which one initially has the right, but standard property rights law (e.g., the Lockean right to appropriate from nature by mixing one's labor with an unutilized resource, plus the justice of voluntary exchange) might well speak to this problem.

Perhaps the Coase Theorem might be the basis for explaining why common law is efficient and why efficiency tends to justify patterns of ownership. At any rate, I am sure that most readers will find this book very valuable, and if there is a major critique of Friedman's argument that I have not expressed, perhaps a reader will relay this to me in a comment.

I had heard a lot about David Friedman over the years... mostly words like "loony" and "anarchist." Being a great admirer of his father's work I decided to give this book a read despite the warnings. I was asolutely shocked to discover that there is absolutely nothing nutty in this book at all! In fact, I dare say it is a rather generic law and economics text book. Like Milton, David succeeds in presenting economic concepts in an entertaining easy-to-read (and perhap more importantly, easy-to-understand) manner. If you've never studied law and econ this seems like a great place to start! If you've already studied the topic, however, I just don't see anything new or terribly interesting here.

A book on an interesting topic, written more for the layman than for the specialist (but with references for the latter), Law's Order introduces the basic economic aparatus necessary for the analysis of the effects of different legal rules. Friedman (more than his father) is an especially good author for people who quickly dismiss economic models as overly simplistic, both because he is aware of the real limitations of simplified models and because he defends the real benefit in understanding that they often provide. Here he applies his clarity to the questions of why the law is the way it is, and what impact its features have on its effects. Especially interesting to me were the discussions, near the end, of the legal systems in place in Iceland and England centuries ago, and how sets of social norms can function in place of legal rules, and be subject to the same analysis. Throughout the book he implies that the book is meant as something of a rejoinder to Posner's theory that common law is economically efficient, but this becomes a small dog being wagged by the broad discussion needed to bring most of his readers up to speed; when he does take on Posner's thesis directly, it is interesting, respectful, and well-reasoned, but is only a small part of the appeal of the book, which is based more on the survey that precedes it.

David Friedman is anarcho-capitalist who teaches economics to law students. This book, written mainly for laymen, shows both sides of him. He explains the relevant ideas from economics quite well and applies them to legal questions. He argues that even apart from moral arguments, many laws can be justified by economic efficiency.

The logic is something like this: Stealing is a process where someone takes something away from someone without the consent of that person. One loses, one gains. So what's the problem? The problem is that the thief spends energy on stealing, the potential victims on securing themselves and to some degree they produce less, since they may not keep everything. Therefore stealing is inefficient in a certain sense. Many laws can be justified on such grounds.

He also describes the legal system of ancient Iceland, a system that worked without government. Inspired by that, Friedman proposes some rather radical ideas like allowing murderes to buy themselves free. It also happens that the more radical ideas are the ones with the worst arguments in favor of them. He makes some rather strange assumptions (like that murderes are able to pay millions of dollars...).

The book is clearly biased, but it is well written and explains economic ideas quite nicely. It's also pobably the only book on law and economics that is written for laymen.

Liked the book. But instead of using citations and footnotes, he uses icons that point to his web site. This is supposed to be make it easier to read, but it's very annoying. I hope this doesn't become a trend.