Murray L. Weidenbaum, R.I.P.

by Thom Lambert

Truth on the Market
March 23, 2014

The world of economics and public policy has lost yet another giant. Joining Ronald Coase, James Buchanan, Armen Alchian, and Robert Bork is a man whose name may be less familiar to TOTM readers but whose ideas have been hugely influential, particularly on me.

As the first chairman of President Reagan’s Council of Economic Advisers, Murray Weidenbaum lay much of the blame for the anemic economy President Reagan “inherited” (my, how I’ve come to hate that word!) on the then-existing regulatory state. Command and control dominated in those days, and there was virtually no consideration of such mundane matters as the costs and benefits of regulatory interventions and the degree to which regulations were tailored to fit the market failures they purported to correct. Murray understood that such an unmoored regulatory state strangled innovation and would inevitably become co-opted by regulatees, who would use the machinery of the state to squelch competition and gain other advantages. He counseled the President to do something about it.

The result was Executive Order 12291, which subjected major federal regulations to cost-benefit analysis and stated that “[r]egulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society.” Such basic cost-benefit balancing seems like nothing more than common sense these days, but when Murray was pushing the idea at Washington University back in the late 1970s, it was considered pretty radical. Many of the Nixon era environmental statutes, for example, proudly eschewed consideration of costs. Murray helped us see how silly that was.

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Robert D. Cooter & Ariel Porat, "Getting Incentives Right: Improving Torts, Contracts, and Restitution"

Princeton University Press
February 2014

Lawyers, judges, and scholars have long debated whether incentives in tort, contract, and restitution law effectively promote the welfare of society. If these incentives were ideal, tort law would reduce the cost and frequency of accidents, contract law would lubricate transactions, and restitution law would encourage people to benefit others. Unfortunately, the incentives in these laws lead to too many injuries, too little contractual cooperation, and too few unrequested benefits. Getting Incentives Right explains how law might better serve the social good.

In tort law, Robert Cooter and Ariel Porat propose that all foreseeable risks should be included when setting standards of care and awarding damages. Failure to do so causes accidents that better legal incentives would avoid. In contract law, they show that making a promise often causes the person who receives it to change behavior and undermine the cooperation between the parties. They recommend several solutions, including a novel contract called "anti-insurance." In restitution law, people who convey unrequested benefits to others are seldom entitled to compensation. Restitution law should compensate them more than it currently does, so that they will provide more unrequested benefits. In these three areas of law, Getting Incentives Right demonstrates that better law can promote the well-being of people by providing better incentives for the private regulation of conduct.

Robert D. Cooter is the Herman F. Selvin Professor of Law at the University of California, Berkeley. His books include Solomon's Knot, The Strategic Constitution (both Princeton), and Law and Economics. Ariel Porat is the Alain Poher Professor of Law at Tel Aviv University and the Fischel-Neil Distinguished Visiting Professor of Law at the University of Chicago. His books include Tort Liability under Uncertainty, Torts, and Contributory Fault in the Law of Contracts.

How 'Law and Finance' transformed scholarship, debate

by Steven Neil Kaplan & Luigi Zingales

Capital Ideas
Spring 2014

It has been 15 years since the publication of “Law and Finance,” the paper Robert W. Vishny, Myron S. Scholes Distinguished Service Professor of Finance, wrote alongside three collaborators who were all at Harvard at the time: Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. In that relatively short space of time, Vishny and his coauthors have helped to transform the study of finance and comparative economics. “Law and Finance” became not only one of the most important papers in finance, but one of the most cited papers in social science overall.

Indeed, the paper has had such influence on subsequent scholarship that its innovation and ambition are not always immediately apparent to researchers who were not immersed in the relevant research in the 1980s and 1990s.

At the time, academic research in finance generally examined securities in terms of what they paid off under different circumstances. Theorists had thought about the various “control rights”—the ability of shareholders to vote on directors’ tenure, and of debt-holders to repossess collateral—that come with securities, but there was little empirical work on the subject. Vishny and his coauthors were among the first researchers to look empirically at the rights that accompany securities, in addition to the cash flows.

That would have been innovative in itself, but “Law and Finance” approached the subject with tremendous breadth, with the team collecting data from no fewer than 49 countries. This breathed new life into comparative economic analysis, which, until the fall of the Berlin Wall, had been dominated by an old literature that compared the functioning of socialist and nonsocialist countries. That had died with the end of the Cold War, but it had not yet been replaced by a new framework for international comparisons that was rigorous and could be tested. As Vishny and his coauthors note in 1998, “Comparative statistical analysis of the legal underpinnings of corporate finance—and commerce more generally—remains uncharted territory.”

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