The Production of Law: Towards a Capital Law Theory

Abstract

Economists often treat law as a homogenous variable in the background of economic models. It is often assumed that only the state produces law in the form of a statute. Moreover, the methodology used to ascertain the appropriate law scientifically is inadequately dealt with in law and economics literature if it is addressed at all. This paper examines law production and demonstrates that just as firms produce most of the capital and consumer goods, they also produce most law in society as discrete heterogeneous units. The current conception of law as a set of “rules” that are widely enforced is challenged, and it is shown that law is a factor of production produced and bundled with other goods at each stage of production. With few exceptions, all law that is significant for economic analysis is contractually produced. Contracts are best seen as not mere legal “promises to do something” but are transfers and licenses of private property. The transaction costs involved with creating and enforcing law as incomplete contracts are central problems the entrepreneur faces when coordinating factors. The nature of the firm is reexamined as not only a possible governance structure but as the primary governance structure in society. The limits of vertical integration of law production within the firm are examined, and it is shown that vertical integration of governance is limited by the ability of the firm to engage in economic calculation. It is shown that external markets for governance can never be eliminated without severe discoordination. This paper analyzes current utility and welfare, transaction cost, and incomplete contract approaches to law and economics and other topics related to governance structures like clubs, constitutions, and the state. This paper provides a rigorous methodology for scientific analysis of law and economics literature and adheres strictly to value-free analysis, even when the literature deviates from this standard.