Theory to Practice:
Scott, Goetz Lead Nation's Top Team on Law and Economics of Contracts
By Cullen Couch
Last fall, scholars from Europe and the United States traveled to Charlottesville to attend a festschrift honoring the work of Professors Robert Scott and Charles Goetz in the field of Law and Economics. A festschrift—German for a celebration in writing—is a presentation of papers by different scholars in tribute to the work of a colleague whom they admire. In this instance, the event lauded Scott and Goetz for providing “a foundation for the remarkable progress in the economic understanding of contract law over the past two decades.” According to Professor Scott, while it was a “singular honor” for him and Professor Goetz, the festschrift was more about the leadership role that the Law School faculty holds in the field nationwide.
But first, a little history.
In the 1930s a group of legal scholars, who came to be known as the Realists, began challenging bedrock principles upon which our legal system rested. They argued that the law was not some metaphysical concept certain in its outcome, but instead an unpredictable system that relied on anticipating correctly how a judge or jury will decide a given issue. The Realists adopted Oliver Wendell Holmes’s definition that “the prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law.”With this principle in hand, the Realists wandered far from pure doctrinal scholarship and into the behavioral sciences and moral theory, seeking to identify the universal principles shared by the “family of man” that guide the legal process.
“The Legal Realists essentially challenged the notion that law was a self-contained discipline derived from first principles,” says Professor Scott. “They said that law is policy and we have to ask the question, ‘why are we doing this?’ That question forces you to look outside the law school to other disciplines that answer questions about why people behave the way they do, what are the impacts of certain forces on their behavior, what are the moral foundations of our society, and the like.”
Some of the more radical members of this group—historians number their ranks at around 40—believed that legal doctrines were irrelevant to a judge’s or jury’s ultimate decision. Others in the group were more moderate, arguing that courts certainly started with, and were influenced by, legal rules and principles, but that background, experience, and context colored their judgment to a much greater degree.
Whatever the relative differences within the group, at its core the Realists challenged directly the American constitutional system of a government “by the people.” They viewed with bemused aloofness the laws and regulations created by popularly elected officials. The Realists advocated adherence instead to an amorphous body of universal principles that they themselves found hard to define. They began foundering in their effort to divine our society’s collective motivations and beliefs and apply them to goals that they believed the law ought to be promoting. The Realists’s anti-democratic impulses, not to mention the shaggy-youth insouciance that their older colleagues found unseemly, were their eventual undoing. By the late 1940s, all that remained of the movement was their initial epiphany: that the law must look beyond itself to understand how and why it impacts society.
Twenty-five years ago, when the Realists’s fireworks were but a fading glimmer on the academic horizon, Professors Scott and Goetz found themselves converging upon a common scholarly point. Scott was researching his ideas regarding the behavior and expectations of parties to a contract, while Goetz, an economist, was weighing whether to make a career change.
“I came here in 1974,” says Scott, “and Charlie came the next year. Our relationship developed almost from the beginning. He was contemplating a rather dramatic career change because he was a tenured economics professor at Virginia Tech. The Law School had invited him to spend a year as a visiting professor and they invited him to stay as a law professor, which in those days was quite unusual. Law professors had law degrees, and he did not.”
“I agonized over the decision for about six weeks,” says Goetz. “One of the things I had decided—and it was a good move—was that I was going to give myself five years to learn enough law that my colleagues would accept me as being a legal scholar and not just an economist. I thought the challenge would be to show that the kind of work that Bob and I did, using economic principles to explain and critique legal doctrines, could make some contribution in core areas of law.”
Professor Goetz remembers the day their professional relationship began. “I was seated in my office down the hallway with the door open and I heard an argument in the hall between Bob and Warren Schwarz, who was also an early advocate of Law and Economics. They were arguing over the economic rationale of the traditional rule against penalties. Economists had actually been in favor of the rule against penalties because it prevented what they call ‘inefficient performances,’ and Schwarz had just read an article by a couple of economists. He was arguing with Bob that the penalties doctrine was efficiency-enhancing and Bob was arguing back. I jumped up and said, ‘Bob’s right, and what’s more, I can prove it!’”
Goetz went to work and within a day had “created an economic model that was the basis of our first article on liquidated damages.” Scott and Goetz together built upon the Realists’s central principle—that the law must look beyond itself—and wrote the first of a series of six major articles that Law School Professor George Triantis calls “path breaking works” in the development of the Law and Economics movement.
As Director of the John M. Olin Program in Law and Economics and co-editor of the Journal of Law and Economics, Triantis is a noted expert on business law and contracts. His research has built upon the work of Goetz and Scott, and he leads the effort at the Law School to promote scholarship in Law and Economics through workshops and other academic events.
“I think that collection of articles may be the most important contribution in the Law and Economics of contract in the last 30 years,” says Triantis. “The articles were sustained contributions to economic methodology. They analyzed a series of issues in contract law and showed just how powerful the methodology was.”
Professor Alan Schwartz, Sterling Professor of Law at Yale Law School, says Goetz and Scott’s work “changed Contract Law scholarship forever. They made the first sustained law and economics analysis of Contract Law. Their work treated every important subject in the field with insight, thoroughness, and creativity. The research agenda for the law and economics of contract is largely their agenda, and just about everything that has been written since they began bears the mark of their influence.”
“Law and Economics has a very powerful way of explaining certain things,” says Scott. “It deals with incentives and how people’s behavior is influenced by carrots and sticks, so to speak, and within certain arenas it allows us to understand simple notions like deterrence and subsidies.”
Scott doesn’t pursue this theoretical approach for its own sake. He puts it to work in the minds of his students so that they can leave the Law School with a practical understanding of the likely effect of the advice they will give their future clients.
“My whole shtick is that theory works.” he says, “If you understand better how people behave and how the law affects their behavior, you will be able to predict better how a court is going to decide the next case.What the Legal Realists essentially made clear to us is that there is a river underneath the legal doctrine and you have to understand what’s driving the legal rules. Then you need to translate your intuition into the language of the law. You have to be a good linguist so that you don’t throw around jargon that academics may use in their law review articles and expect the judge to understand it. But those concepts are powerful because they explain so much.”
Some critics argue that adherents try to extend Law and Economics principles too broadly. According to Scott, that’s a fair point, but “in the areas that comprise business law, Law and Economics has emerged as the dominant mode for analyzing legal problems.”
“Law and economics is often criticized for taking economics into areas it doesn’t seem to belong,” adds Triantis, “but I think that’s the nature of the academic exercise. Just because it doesn’t work in some area doesn’t mean it was a mistake to try it out.”
Prior to the work of Scott and Goetz, first-year contracts courses taught the basic rules that governed transactions between parties, but not necessarily the reasons underlying them. “There were a lot of people in law schools during that time who were hostile to Law and Economics” says Goetz. “They attacked it as a laissez-faire, grinding-the-faces-of-the-poor kind of analysis, which is not true at all. There were people who thought we were letting the devil in through the back door.”
Over time, the simple power of the analysis gained converts. “Before, you learned the rule, but nobody told you why the rule was the way it was,” says Goetz. “One of the things that began to happen is that people started using these principles in first-year contracts classes, at least the people who followed Law and Economics at the University of Virginia. Now, I think it’s become pretty widespread and accepted.”
The festschrift last fall was an acknowledgment by leading scholars that Goetz and Scott are seminal figures in a movement that flourished early at the University of Virginia and has since grown here as the source of its continuing intellectual drive.
According to Triantis, “the strength of the Law and Economics tradition at Virginia is not limited to the people who are currently here, but also former colleagues who have moved on to other schools and have continued to distinguish themselves. There is this ‘diaspora’ of Virginia Law and Economics scholars that we’re very proud of.”
“Just look at some of the data,” adds Scott. “You go to a law and economics workshop at any other law school and you’ll get five or six professors and some students. Every one of the law and economics workshops that George Triantis runs here will have 16 to 20 professors. So, just in terms of the numbers of people who are using this as their scholarly framework and are serious about it as academics, our leadership is undisputed. Then if you look at the faculty who are here, and put that together with the faculty who learned their game here and have now gone to Chicago, Harvard, Yale, Penn, NYU—and the list goes on—I just don’t think there is any doubt that the University of Virginia has been the academic breeding ground for both the first and second generation of law and economics scholars. I think it is undeniably the best. Or, to put it this way: Virginia is second to none.”
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