AUSTRIAN ECONOMICS AND THE CURRENT

DEBATE BETWEEN CRITICAL LEGAL STUDIES

AND LAW AND ECONOMICS
Linda A. Schwartzstein*

Professor Schwartzstein identifies common ground between the

frequently competing schools of Law and Economics and Critical
Legal Studies. She finds a bridge between these ideologies by exam-
ining key concepts endemic to the Austrian School of economic
theory.
The Article begins with a description of the basic tenets of
both Law and Economics and Critical Legal Studies. Professor
Schwartzstein explores the philosophical and political differences
between the schools concerning their outlook on law and human
nature.
Next, Professor Schwartzstein examines the Austrian economic
view of law and the nature of rules. First,Austrian theory posits a
subjective approach to economics that considers economic choices
from the perspective of the individual. Additionally, by conceptualiz-
ing law as an evolving institution, the Austrian position accepts an
inherent degree of indeterminacy as part of the process. Legal inter-
pretation is therefore viewed as an ongoing mediation between legal
theory and specific facts. Since the Austrian School addresses the
same issues as Law and Economics and Critical Legal Studies,
Professor Schwartzstein suggests that it should prove a useful tool
in bridging the existing gulf between Law and Economics and Criti-
cal Legal Studies.

INTRODUCION
Contemporary jurisprudence is marked by a polarization of theo-

* Associate Professor of Law, George Mason University; A.B., 1973, Brandeis Univer-
sity; J.D., 1976, University of Michigan; LL.M in Taxation, 1977, New York University;
M.A. Economics, 1991, George Mason University. I would like to thank Henry Manne, Rich-
ard Wagner, Stephen Crafton, Karen Vaughn, Don Lavoie, and Edward Damich for their
helpful comments. Julie Harry Heiden and Susan Piarulli provided valuable research assis-
tance. I am grateful to the Sarah Scaife Foundation and the John M. Olin Foundation, Inc.
for their financial support. The opinions expressed are solely my own.
 HOFSTRA LAW REVIEW [Vol. 20.1105

retical constructs represented by Law and Economics at one end of

the spectrum and Critical Legal Studies at the other. To date, there
has been only increasing fission between these competing schools of
legal philosophy. This paper is an attempt to demonstrate how the
principles of Austrian Economics may provide some common ground
for discussion, and an alternative viewpoint to these two conflicting
paradigms.
Austrian Economics sees law and the economy as evolutionary
processes which form a spontaneous order. Austrian Economics stress-
es subjectivism in contrast to the objectivism of neoclassical econom-
ics, upon which Law and Economics is based. This subjectivist van-
tage point and an increasing awareness of hermeneutics makes Austri-
an Economics more open to the critical legal scholars. The Austrians'
rejection of equilibrium economics and its underlying assumptions
allows for consideration of competing values. However, Austrian
Economics shares many other central concepts of neoclassical eco-
nomics regarding how persons interact through the market, and thus
forms a bridge with traditional Law and Economics.

I. BACKGROUND TO LAW AND ECONOMICS

AND CRITICAL LEGAL STUDIES

Critical Legal Studies ("CLS") and Law and Economics both

emerged as reactions to legal realism. Legal realism, which arose
mainly in the 1920s and 1930s, suggested that law was not systematic
and objective.' Rather, any interpretation of the law could be justi-
fied. Judicial decisions were not the result of applying a set of neutral
precepts in order to reach the logically inevitable and correct conclu-
sion. In addition, precedent could not be relied on to the extent it had
been in the past because courts were taking on issues and problems
that were not traditionally part of their sphere of influence.2 The
Realists sought to dejustify legal rules and turned to sociology as the
social science best suited to guide judicial decisionmaking.3
CLS and Law and Economics represent opposite reactions to the

1. See Allan C. Hutchinson & Patrick J. Monahan, Law, Politics, and the Critical
Legal Scholars: The Unfolding Drama of American Legal Thought, 36 STAN. L. REV. 199,
204 (1984).
2. Id.
3. See id.; Edmund W. Kitch, The Intellectual Foundations of "Law and Economics,"
33 J. LEGAL EDUC. 184 (1983); John H. Schlegel, Notes Toward an Intimate, Opinionated,
and Affectionate History of the Conference on Critical Legal Studies, 36 STAN. L. REV. 391
(1984).
1992] AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

Realist movement. CLS generally shares the Realists' goals of reveal-

ing the indeterminacy of legal reasoning and showing that there are
no "correct" decisions or policies.4 The political agenda of the CLS
movement, however, is generally farther left than the realists.5
The Law and Economics movement was a response to the search
for objective analytic tools that would help judges with the issues
with which they were being confronted. The openness to the social
sciences that resulted from the Realist movement brought attention to
economics as useful to judicial decisionmaking. Although there are
liberal Law and Economics academics, generally the movement is
associated with conservative political agendas.6
In addition to their opposing political bents, these two schools of
thought generally have had disdain for each other. This paper will
examine each of these schools and their criticisms of each other in
more detail below. The paper will then examine how Austrian Eco-
nomics can provide a bridge between these two schools and form the
basis for a dialogue.

11. CRITICAL LEGAL STUDIES

This section will examine the basic precept of CLS, the "funda-
mental contradiction," followed by a discussion of "trashing," the
debunking of theories and doctrine in order to reveal their inconsis-
tencies and indeterminacy. Following these two sections is a discus-
sion of a CLS vision of how a better society would be constituted.

A. The Fundamental Contradiction

CLS posits that there is a fundamental contradiction in that we
simultaneously want both individual freedom and community with
others.7 However, these two goals are at once interdependent and
incompatible. The fundamental contradiction was originally articulated
by Duncan Kennedy as follows:
Most participants in American legal culture believe that the
goal of individual freedom is at the same time dependent on and
incompatible with the communal coercive action that is necessary to
achieve it ....

4. Hutchinson & Monahan, supra note 1, at 201.

5. See id. at 205.
6. See MARK KELMAN, A GUIDE TO CRITICAL LEGAL STUDIES 114 (1987).
7. See Hutchinson & Monahan, supra note 1, at 208.
 HOFSTRA LAW REVIEW [Vol. 20:1105

But at the same time that it forms and protects us, the uni-
verse of others (family, friendship, bureaucracy, culture, the state)
threatens us with annihilation and urges upon us forms of fusion
that are quite plainly bad rather than good .... Through our exis-
tence as members of collectives, we impose on others and have
imposed on us hierarchical structures of power, welfare, and access
to enlightenment that are illegitimate, whether based on birth into a
particular social class or on the accident of genetic endowment.
The kicker is that the abolition of these illegitimate structures,
the fashioning of an unalienated collective existence, appears to
imply such a massive increase of collective control over our lives
that it would defeat its purpose ....
The fundamental contradiction-that relations with others are
both necessary to and incompatible with our freedom-is not only
intense. It is also pervasive.'
Thus, although we want to live in a closely connected collective
community, such a collective threatens our individual freedom. In
order to protect our individual freedom, we create societal institutions
that are alienating.
This insight is the leading principle of CLS and is used to ex-
plain the inherent contradiction in any set of legal concepts which
leads to the indeterminacy of law.9 This contradiction is evident in
several distinct ways. First, there is a conflict between the use of
rules and standards.1" Rules confine the discretion of legal
decisionmakers to the mechanical application of a particular rule to a
set of facts, even with the recognition that this will result in some
unintended consequences." Standards are informal, general policy
commands, which allow ad hoe fact sensitive decisions. 2 Rules are
associated with self-reliance and individualism, standards with altru-
ism.' 3 Rules and standards are each simultaneously good and bad.
Rules are good because they will produce predictable outcomes and
are stabilizing. 4 Rules are bad because they can be over-inclusive or
under-inclusive and will have gaps which make them difficult to

8. Duncan Kennedy, The Structure of Blackstone's Commentaries, 28 BUFF. L. REV.

205, 211-13 (1979).
9. See, e.g., KELMAN, supra note 6, at 3, 62.
10. See generally id. at 15-63.
11. See 1d. at 40.
12. See id. at 41.
13. Id. at 54.
14. See id at 44.
1992] AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

apply mechanistically in many cases.15 Further, it is possible for

people to manipulate rules counterpurposively, and the legal system
becomes increasingly complex as new rules are needed to prevent
evasion. 16 In addition, as more people come to believe others can
manipulate the rules, noncompliance becomes widespread. Standards
are good because in theory they cannot be over-inclusive or under-
inclusive and because their efficiency cost may be low or they may
simply be more efficient.17 In this view, legal uncertainty may not
be a significant source of risk. Standards are bad because people do
not know what the consequences of their action will be.18 Ultimately
however, CLS scholars ("Critics") believe that it is impossible to have
a rule-based regime, given the ambiguity and vagueness of language
and instances where two conflicting rules cover the same set of cir-
cumstances, without guidance concerning which one should prevail.19
This rules/standards dichotomy is seen to correspond to the fun-
damental contradiction inherent in each person. The belief in the
politics of individualism leads us to embrace rules, while the belief in
the politics of altruism-that our own desires and purposes have no
normative priority over others-leads us to embrace standards."
Rules are associated with classical liberalism and conservative
thought. Critics believe rules make people believe that there is fair-
ness or justice in society that in fact is nonexistent. Kelman summa-
rizes 1 this point by saying that "[r]ules are the opiate of the mass-
2
es."
Further, the Critics attack the concept that values are subjective
since this suggests that the role of government should be facilitative
of individual objectives only. The fundamental contradiction is again
seen in the desire for freedom to pursue one's subjectively chosen
ends and the desire for order. The Critics suggest that this leads to
indeterminateness, for 22there is no reason for one person's desires to
prevail over another's.
Critics believe that by exposing the contradictions and indetermi-
nateness of law, the CLS movement will lead the way to legal rules

15. See id. at 44-45.

16. See 1d. at 44.
17. See id. at 43-44.
18. See id. at 43.
19. See id. at 46-47.
20. See 1. at 16-17.
21. Id. at 63.
22. See id. at 66-67.
 HOFSTRA LAW REVIEW [Vol. 20:1105

that are more just.23 In addition, Critics seek to show how contradic-
tions and indeterminacy are repressed and the status quo presented as
a natural and not contingent set of affairs.24 One of the difficulties,
however, is that people live with "false consciousness," that is, they
do not realize that their views are shaped by the culture in which
they live. Thus, Critics posit that the choices people make do not
really reflect their values, as evidenced by the fact that they may later
regret their actions" 5 or because their choices and values have al-
ready been manipulated by the capitalist system.26 In addition, since
Critics realize that law and society are mutually constituting, interact-
ing in complex and multidirectional ways, one must attempt to tran-
scend the dichotomy between the intellectual and the material worlds
of humankind.27
Many Critics believe that law is used as a way for some groups
in society to dominate others.2" The dominant group manipulates the
legal rules so as to strengthen its position to the detriment of less
advantaged and less empowered groups. Others, such as Kelman,
believe that law is so indeterminate that no one group can ever domi-
nate.29 At any time, any position can prevail.

B. Trashing
Trashing is a technique designed to expose weaknesses in argu-
ments and theories and to reveal how they are shaped by underlying
ideological beliefs. Kelman describes this technique as follows: "Take
specific arguments very seriously in their own terms; discover they
are actually foolish ([tragi]-comic); and then look for some (external
observer's) order (not the germ of truth) in the internally contradicto-
30
ry, incoherent chaos we've exposed.,

23. See Schlegel, supra note 3; David M. Trubek, Where the Action Is: Critical Legal
Studies and Empiricism, 36 STAN. L. REV. 575 (1984).
24. See Hutchinson & Monahan, supra note 1, at 217.
25. See Mark Kelman, Choice and Utility, 1979 Wis. L. REV. 769, 784-87.
26. See Mark Hager, Against Liberal Ideology, 37 AM. U. L. REv. 1051, 1072-73
(1988) (reviewing KELMAN, supra note 6).
27. See Trubek, supra note 23, at 609.
28. See, e.g., CATHARiNE A. MACKNON, FgMINISM UNMODIFIED: DIscOURSES ON LI;E
AND LAW 26 (1987); William 3. Chambliss, Toward a Radical Criminology, in THE POLITICS
OF LAW 230, 234 (David Kairys ed., 1982); Hager, supra note 26, at 1063; Nadine Taub &
Elizabeth M. Schneider, Perspectives on Women's Subordination and the Role of the Law, in
THE POLITICS OF LAW 117, 117-39 (David Kairys ed., 1982).
29. See KELMAN, supra note 6, at 261.
30. Mark G. Kelman, Trashing, 36 STAN. L. REV. 293 (1984) (punctuation and empha-
1992] AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

CLS focuses on ambiguity and does not try to find synthesis.

One goal of this approach is to upset theoretical world views that
imply that the way things are is also the way things have to be.31
As people's awareness of the limitations of theory is raised, the con-
straints that these theories place on people's evaluation of choices
may be lessened.32 An example of this approach is Duncan
Kennedy's article on cost/benefit analysis.r3 In this article, Kennedy
attacks what he calls "liberal law and economics." 3' He suggests that
any cost/benefit analysis is manipulable by the way costs and values
are determined. The analyst simply sets valuations which reach the
result his or her personal political or ethical beliefs deem appropri-
ate.3 s The article proceeds to analyze cost/benefit analysis as indeter-
minate, even given costless bargaining, set factor shares and set defi-
nitions of entitlements.3 6 There will be many efficient outcomes that
are consistent with any given set of assumptions about factor shares
and entitlements.37 The decisionmaker can then choose among the
range of possible outcomes according to his or her social welfare
function.3" Kennedy's conclusion is as follows:
It is nonetheless unlikely that the enthusiasm for efficiency will
abate, given its enormous apologetic usefulness. In this discussion, I
have touched on only one of those apologetic uses-that of generat-
ing an apparently "scientific" justification for liberal reformist pro-
posals. In this phase, the primary function of efficiency has been to
drive the right crazy by using their weapons against them. But
efficiency serves not only as a justification but also as a restraint on
reformist enthusiasm. The concept will now appear as a way to
drive the left crazy by showing that its naive hopes of reconciling
social justice with material plenty are inconsistent with elementary
economic laws.39
The article thus trashes all cost/benefit analysis. Such analysis is seen
as being used to reach any conclusion desired.

sis in original).
31. See id. at 327-29.
32. See id. at 299.
33. Duncan Kennedy, Cost-Benefit Analysis of Entitlement Problems: A Critique, 33
STAN. L. REV. 387 (1981).
34. Id.
35. Id. at 410-11.
36. Id. at 422-42.
37. Id. at 444.
38. Id.
39. Id. at 445 (emphasis in original).
 HOFSTRA LAW REVIEW [VCol. 20:1105

More generally, and perhaps to a greater extent than many in the

CLS movement, Kennedy eschews any belief in doctrine and abstract
philosophy. Despite the fact that he created the concept of the funda-
mental contradiction and that it has been a central tenet of CLS doc-
trine, Kennedy himself has recanted it because it was being used as
doctrine.4' Despite Kennedy's statement, the concept of the fumda-
mental contradiction still dominates most CLS work, a testimony
perhaps to the fact that literary works have a life of their own.

C. Alternative Visions
There is some disagreement among Critics as to whether it is
possible or desirable to proscribe a vision of a better world. Some
believe that if the movement is to be of lasting significance, some
alternative to the present system must be advanced. However, concern
is also expressed that any vision offered will have no more normative
justification than any other view of society. These Critics believe that
CLS theory cannot seek to impose its structure of thought on others.
Otherwise they are doing what they are criticizing others for. This
position leads to the view that each individual must be left to act
alone, free from the constraints of any superimposed thought struc-
ture. Hutchinson and Monahan suggest that:
The transformation of society must be effected by spontaneous
individual action. It cannot be orchestrated in tune with any score,
no matter how elaborate or simple. As a theory for political action,
therefore, Critical theory alone is impotent. The most it can do is
put the individual in the right frame of mind to achieve his or her
own emancipation.41
This view suggests that CLS can raise people's consciousness about
the conditions under which they live, but not try to impose a different
view as to how they should live.
One attempt to set forth a concept of a better world is contained
in Roberto Unger's The Critical Legal Studies Movement.42 Unger
envisions what he calls a program of "empowered democracy."
Unger would multiply the branches of government so that for every
important aspect of the social order there is an arena for arguing and

40. See Peter Gabel & Duncan Kennedy, Roll Over Beethoven, 36 STAN. L. REV. 1, 15-
16 (1984).
41. Hutchinson & Monahan, supra note 1, at 229.
42. ROBERTO M. UNGER, THE CRITICAL LEGAL STUDIES MOVEMENT (1986).
43. See id. at 22-24.
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

resolving conflicts." The purpose of this, apparently, is to broaden

democracy and make government institutions more accessible to the
electorate. Unger objects to the current structure of the market and
the formulation of property rights because he believes it allows rela-
tively small groups to control investment decisions that then affect
collective prosperity or impoverishment, and also because it lets such
groups reduce others to dependence.45 He also believes it discourag-
es innovation because it keeps workers assigned to particular roles."
His economic plan would establish a rotating capital fund. Capital
would be made temporarily available to teams of workers under con-
ditions set by the central government. These conditions might include
limits on the disparities of income or authority within the organiza-
tion, on capital accumulation, and on the distribution of profit as
income. The interest charged on the capital would be the main source
of government finance, and the differentials among interest rates
would be used to encourage risk taking and socially responsive in-
vestment. The fund would be administered in a way that would en-
sure a constant stream of new entrants into markets. Enterprises could
not consolidate market positions or use other means to protect them-
selves against market instabilities.47
Legally, property rights would be disaggregated. Each individual
would have four types of rights.4" The first is the right to immunity,
which is the "nearly absolute claim of the individual to security
against the state, other organizations, and other individuals."49 The
second is a destabilization right which includes claims to disrupt
established institutions and forms of social practice that have encour-
aged the entrenchment of social hierarchy and division.' Market
rights would give the individual provisional and conditional claims to
divisible portions of social capital.51 Conscious collective decisions
would determine how provisional and conditional these claims would
be. The last right is the right to the solidarity of communal life. This
right has two components. The first incorporates standards of good-
faith loyalty or responsibility. The second sets boundaries on the exer-

44. Id. at 31.

45. See id. at 32-35.
46. See id.
47. See id. at 35.
48. See id. at 38.
49. Id. at 39.
50. See id. at 39, 52-56.
51. See id. at 39.
 HOFSTRA LAW REVIEW [Vol. 20:1105

cise of the right according to the actual effect exercising the right
seems likely to have upon others.52
Unger says that these changes could be made gradually and even
partially. His aim is to create what he calls a "superliberalism," which
he describes as follows:
It pushes the liberal premises about state and society, about freedom
from dependence and governance of social relations by the will, to
the point at which they merge into a large[r] ambition: the building
of a social world less alien to a self that can always violate the
generative rules of its own mental or social constructs and put other
rules and other constructs in [its] place.53
Unger believes changing the economic structure and the system of
legal rights will lead to more community.54

III. LAW AND ECONOMICS

Law and Economics takes an attitude towards law which is dia-

metrically opposed to Critical Legal Studies. The Law and Economics
movement sees law as a system that can be illuminated by econom-
ies. Posner has been one of the most prolific and influential of the
law and economists, and his book, Economic Analysis of Law" sets
out a basic framework for analyzing the legal system from an eco-
nomic viewpoint.
The economic assumption that humans rationally maximize their
ends in life-that is, they act in their self-interest and will respond to
incentives-is a basic precept. 56 Building on this premise, one is led
to the belief that "resources [will] tend to gravitate [to] their most
valuable uses if voluntary exchange ... is permitted .... When
resources are being used57 where their value is [the] highest they are
being [used] efficiently."
Posner posits that legal doctrines and institutions aim at increas-
ing efficiency. The common law is best seen as a vehicle for maxi-
mizing the wealth of society. Positive Law and Economics can de-
scribe the impact of current legal doctrines and outcomes. 5 Justice

52. See id. at 39-40.

53. Id.at 41.
54. Id. at 36-42.
55. RcHARD A. POSNER, ECONOMIC ANALYsIs OF LAW (3d ed. 1986).
56. See id. at 3-4.
57. Id. at 9.
58. See id. at 21.
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

can be equated with efficiency.59 Thus, Posner suggests:

We shall see, among many other examples, that when people de-
scribe as unjust convicting a person without a trial, taking property
without just compensation, or failing to make a negligent automobile
driver answer in damages to the victim of his negligence, this
means nothing
60
more pretentious than that the conduct wastes re-
sources.

Law and Economics does not address distributive justice. Posner

suggests that positive economic analysis is not normative. Economics
does not tell us whether a particular social distribution of income is
just, and efficiency is not the ultimate criterion of the public good.61
In addition, economics does not suggest whether "consumer satisfac-
tion should be the dominant value of society. ' '62 Instead, positive
economics starts from a given distribution of income and a given set
of institutions and explains the outcomes that will result.
Generally, Posner believes that society is better off if courts
solely try to promote wealth maximization and not redistribution. The
common law should focus on efficiency. Redistribution of wealth is
the proper domain of the legislature. Legislation that redistributes
wealth tends to be efficiency reducing.63
Economics can also be helpful in analyzing legislation by reveal-
ing the efficiency costs of legislation. Economics can identify what
society must sacrifice in order to achieve a particular legislative ob-
jective. Thus, economics can aid in value clarification. Further, Posner
suggests that due to interest groups, legislatures may not in fact pro-
mote either efficiency or equity.'
Prior case law can be viewed as a stock of capital goods. 65
This stock is a stock of knowledge. Precedent promotes efficiency by
reducing legal uncertainty. Judges have an incentive to follow prece-
dent. Adherence to the tradition of not frequently overruling precedent
means that the judge's own decisions will not be lightly overturned.
A judge's influence over law depends on his or her decisions having
an effect beyond the particular case being decided. Over time, like

59. See, e.g., id. at 25.

60. Id.
61. Id. at 13.
62. Id.
63. Id. at 495-96.
64. See id. at 24-25; see also A. MrrCHELL POLINSKY, AN INTRODUCION TO LAW AND
ECONOMICS (1983).
65. See PoSNER, supra note 55, at 509.
 HOFSTRA LAW REVIEW [Vol. 20:1105

any capital stock, the value of some precedents will depreciate and be
replaced with new precedents. This process will occur more quickly
in eras where the rate of technological progress is rapid.'
With respect to the rules/standards dichotomy, which the Critics
tend to approach philosophically, Law and Economics focuses on the
tradeoffs between laws adopting specific rules and those adopting
more general standards as economic. More particularized rules cost
more to produce and deteriorate faster as conditions change than do
general standards. However, the benefits of rules are several. By
providing more guidance to judges, they limit the scope and the cost
of judicial proceedings. Rules also have more of a deterrent effect.
Violators will discount the cost of violating a more general standard
both by the probability of being apprehended and by the probability
that the law will be found to apply to them. Although the specificity
of a rule makes it easier to find loopholes, one remedy is to make
the law over-inclusive. An example is reducing the speed limit by
five miles more than the speed limit desired.67
A largely-used methodological approach of Law and Economics
is based on the Coase Theorem.68 The Coase Theorem posits that in
the absence of transaction costs, an initial assignment of rights will
not affect efficiency.69 Given an initial assignment of rights, parties
will bargain to the result that maximizes wealth for the society. Law
and Economics analysis often tries to reconstruct the likely terms of
market transactions which would occur if there were no transaction
costs in order to determine what the efficient outcome is given an
initial assignment of rights.
In addition, Law and Economics uses the methodology of neo-
classical microeconomics. Neoclassical microeconomics posits an
economy in equilibrium in order to isolate the effect of a change in
one variable. Underlying equilibrium models are the assumptions of
perfect competition. Perfect competition assumes the following: each
economic agent acts as a price taker-that is, as if prices are given;
the product is homogenous; there is free entry into the market; and
all economic agents in the market possess complete and perfect
knowledge about the relevant prices. Further, equilibrium models are

66. See id at 509-12.

67. See id. at 512-14.
68. Id. at 7, 43-48. Ronald H. Coase won the Nobel Prize for Economics in 1991. The
Coase Theorem is based on his classic article, R.H. Coase, The Problem of Social Cost, 3
J.L & EcoN. 1 (1960).
69. See POsNsR, supra note 55, at 43-44.
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

generally static, focusing on a point in time. Other simplifying as-

sumptions may be made in order to make the particular effect the
model is designed to study tractable. The economy described by these
assumptions is not meant as a description of reality. Rather, the mod-
el is to be judged on its ability to predict the result of the changes
being studied.70

IV. THE BATLE JOINED

One of the unifying themes of CLS is its disdain for Law and
Economics. Thus, there is more CLS literature directly attacking Law
and Economics than vice versa. This section will discuss three major
areas of conflict between CLS and Law and Economics. These re-
volve around views of human nature, the belief in markets, and
objectivism.

A. View of Human Nature

One of the main thrusts of CLS criticism of Law and Economics
is the claim that Law and Economics asserts that values and desires
are the arbitrary assertions of individuals, unbounded by any underly-
ing moral or political imperatives. The Critics claim that Law and
Economics reduces all behavior to individuals pursuing their own
selfish interests. Kelman states:
The sense of contradiction that dominates CLS writing is utterly
absent in legal economic literature. At the technical level of the
choice of form of legal pronouncement, the rules-standards "dilem-
ma" is reduced to an argument over the relative costs of substan-
tively misgoverned conduct and administratively costly case-by-case
fact-finding. At the philosophical level, the conflict between individ-
ualism and altruism is unfathomable. It is simply reduced to (even
perhaps defined as) an individual's arbitrary taste to incorporate the
interests of others in making his own selfish calculations, and like
other tastes it is neither to be condemned nor encouraged. 7'
The critical literature tends to use the term "selfishly" as opposed to
in one's "self-interest" to describe the economic view of the way
people act. Selfish, which is not used in the economic literature,

70. Id. at 15-17.

71. KMIAN, supra note 6, at 119 (citing POSNER, supra note 55, at 129, 512-14); see
also Isaac Ehrlich & Richard Posner, An Economic Analysis of Legal Rulemaking, 3 . LEGAL
STUD. 257 (1974).
 HOFSTRA LAW REVIEW [Vol. 20:1105

connotes people taking care of their own comfort, pleasure or interest,

excessively or without regard for others.72 This connotation inappro-
priately characterizes the concept that economics is describing. The
fact that one's self-interest may include the happiness or well-being of
others is routinely recognized in the economics literature. Unfortunate-
ly, economics is vulnerable to this type of attack, since after stating
that considerations such as equality, happiness, and other people's
welfare may enter into people's determination of their self-interest,
these considerations tend not to be given much attention since they
cannot be quantified. Rather, the simplifying assumption is made that
all costs and benefits can be measured in dollars. 73 It is not made
clear in either the Economics or the Law and Economics literature
how these more social concerns impact on the outcomes posited.
Critics also reject the view that people make utility maximizing
choices.74 First, they suggest that people sometimes make choices
that are not truly in their self-interest, which is evidenced by the fact
that people sometimes experience ambivalence and regret over the
choices they have made. The argument suggests that there can be a
divergence between what a person chooses and what that person
actually values. Further, what a person values is not a static concept,
but will change over that person's lifetime.7 5 This concern has led
Duncan Kennedy to justify "ad hoc" paternalism, based on love and
altruism and an intimate understanding of what is in another person's
best interest.7 6 Kennedy suggests that the legal system can incorpo-
rate this "ad hoc" paternalism.' However, no guidance is available
as to when it is appropriate to override individual decisionmaking,
and no serious effort is made to refute the concerns that such pater-
nalism will lead to a more totalitarian state. Law and Economics
would reject the idea that people do not act in their self-interest and
do not have stable preferences. Further, Law and Economics would
not condone government interference in private decisionmaking.
Second, CLS suggests that people's choices are determined by

72. RANDOM HOUSE DICTIONARY OF THE ENGLISH LANGUAGE 1737 (2d ed., unabridged,
1987).
73. See PoLINsKY, supra note 64, at 10.
74. See KELIAN, supra note 6; Duncan Kennedy, Distributive and Paternalist Motives
In Contract and Tort Law, with Special Reference to Compulsory Terms and Unequal Bar-
gaining Power, 41 MD. L. REv. 563 (1982).
75. Hager, supra note 26, at 1065-68.
76. See Kennedy, supra note 74, at 638-49.
77. See id.
1992] AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

the societal conditions in which they live. If society were different,

other choices would be available. An example of this is the battered
woman who "chooses" to remain with her husband because she can-
not support herself and her children given the lack of opportunity for
women in the society. Law and Economics tends to beg this issue by
using only positive analysis, a description of results based on a given
distribution of income and not a normative one.
Finally, the rules-standards debate is seen very differently. Critics
see rules and standards as a dichotomy between individualism and
altruism. Law and Economic advocates view this issue as a question
of efficiency.

B. Belief in the Market

Critics attack what they assert is the Law and Economics view
of the market. For example, Hutchinson states:
For instance, the ostensibly hard-headed practitioners of law and
economics view life as a perfect market, populated by rational, risk-
neutral, perfectly informed egoists who voluntarily maximize their
stable preferences in conditions of relative scarcity. Not only is this
objectionable as utopian speculation, but it is used as the basis for
explaining and organizing our present society.7
This description of Law and Economics is simply inaccurate and
confuses simplifying assumptions with descriptions of reality. No
advocate of Law and Economics would assert that perfect competi-
tion, along with its assumption of perfect information, actually exists.
Rather, these assumptions are clearly used in order to make the eco-
nomic variable under study more tractable.
The Critics also believe that there is no politically neutral way to
determine whether a decision is potentially efficient, wealth maximiz-
ing or whether its benefits outweigh its costs. A judgment about
whether society is better off or not by a change in legal rules neces-
sarily involves a view of what makes a particular society better or
worse. Thus, they criticize economic concepts as being as indetermi-
nate as legal conceptualizations. One response to this is to suggest
that if the Critics are correct in this assertion, Law and Economics
can do no more good or harm than other legal concepts.79 A more

78. Allan C. Hutchinson, Introduction, in CRITICAL LEGAL STuDEs 9 (Allan C. Hutchin-

son, ed., 1989).
79. See Bruce A. Ackerman, Law, Economics, and the Problem of Legal Culture, 1986
 HOFSTRA LAW REVIEW [Vol. 20:1105

affirmative response is that Law and Economics does produce a sys-

tematic view of the legal system and suggests possible outcomes
based on its assumptions. Given that judges and lawmakers must
make decisions, Law and Economics provides one way of influencing
their decisions or helping to illuminate the issues while CLS suggests
there is no way to reach a rational decision.
Kelman further asserts that Law and Economics treats law as an
objective price constraint that tells actors what it will cost them to act
in a particular way, and is a guide to the effect of self-determined ac-
tion.8" The Critics contend that this view does not give consideration
to law as a moral force. Since Law and Economics claims not to be
asserting a moral viewpoint, this attack is not clearly answered other
than to repeat that Law and Economics gives a positive description of
human behavior under a particular set of rules. This latter claim at
times appears disingenuous. For example, in the Economic Analysis of
Law, Posner discusses the effect of a market for babies:
There is, it is argued, no assurance that the adoptive parents who
are willing to pay the most money for a child will provide it with
the best home. But the parents who value a child the most are
likely to give it the most care, and at the very least the sacrifice of
a substantial sum of money to obtain a child attests to the serious-
ness of the purchaser's desire to have the child ....

Opponents of the market approach also argue that the rich

would end up with all the babies, or at least all the good ba-
bies .... Such a result might of course be in the children's best
interest, but it is unlikely to materialize. Because people with high
incomes tend to have high opportunity costs of time, the wealthy
usually have smaller families than the poor .... Moreover, the
total demand for children on the part of wealthy childless couples
must be very small in relation to the supply of children, even high
quality children, that would be generated in a system where there
were economic incentives to produce children for purchase by child-
less couples.8"
Posner also suggests that one need not worry about people acquiring
babies for the wrong motivations, such as for abuse, because of the
laws against such behavior.8"

DUKE U. 929, 938.

80. See KELMAN, supra note 6, at 120.
81. POSNER, supra note 55, at 141-42.
82. Id. at 141.
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

It is difficult to regard this passage as just a positive model of

what would happen if there was a market for babies. Normative judg-
ments appear implicit in statements that suggest that a child's best
interest may be tied to the parents' wealth. The fact that poorer peo-
ple are without the means to demonstrate their commitment to a child
is not given serious consideration. In addition, reliance is placed on
child abuse laws that are well known not to be very effective. The
impression is given that Posner believes a market for babies would
have beneficial results. CLS's claim that moral judgments are embed-
ded in these arguments, or that the arguments result in normative
implications seems well founded.

C. Objectivism v. Relativism v. Subjectivism

Critics see Law and Economics as promoting a conservative
ideology, while professing to be objective and value free. Thus the
use of efficiency as a guideline and decisionmaking as impersonal,
general, and unbiased, is central to preserving the status quo and
making the distribution of benefits appear impersonally justified.83
The Critics argue that the indeterminacy of legal and economic con-
cepts precludes any objective result. Critics claim that Law and Eco-
nomics suggests that legal rules follow an inevitable path, when in
fact there are many possible outcomes and courses of legal evolution
that could occur."
The general criticism of CLS is that it leads to a dead end. 5
Even if one accepts that law is indeterminate, in reality, judges and
lawmakers must make decisions. At the point at which a judge recog-
nizes that there are two conflicting interpretations of a statute, for
example, with no clear guidance as to legislative intent, CLS has
nothing more to offer than that the result is indeterminate. Whatever
the judge decides, he could have decided something else. Law and
Economics provides a vehicle which, while not perfect, may help
illuminate potential outcomes of the judge's decisions.
This debate can be characterized as one between objectivism and
relativism. Objectivism means there is some system or framework that
can be appealed to in determining the nature of truth or knowledge.
Relativism suggests that there is a plurality of such frameworks, and
so concepts cannot have a determinate and unequivocal meaning.

83. See KELMAN, supra note 6, at 114-26.

84. See id. at 127-29.
85. Ackerman, supra note 79, at 933-34.
 HOFSTRA LAW REVIEW [Vol. 20:1105

There is no way to adjudicate between conflicting theories.86 Law

and Economics is an objectivist viewpoint, and CLS a relativist one.
Austrian Economics and hermeneutics, as will be discussed below,
can help to steer between these two positions.
Critics further reject the belief that values are subjective. They
assert that this claim is simply a rationale for laissez faire govern-
ment. "Since there is no objective good, only preference satisfaction
has any moral claim . . " Critics believe, though they do not
tend to develop this analysis, that there are shared societal values
which can be incorporated into the legal system. Law and Economics,
however, does not tend to concern itself with the subjectiveness of
values. Rather, value is used solely to mean what a person is willing
to pay for something, which is an objective measure."8

D. Alternative Vision
Law and Economics, as a positive discipline, does not suggest
alternative visions, except in the sense of analyzing the effect of
individual changes given a static equilibrium. It is useful in suggest-
ing what might happen if a particular rule is changed.
As discussed above, generally Critics also do not suggest an
alternate vision. Rather, they stress the indeterminacy of law and
"trash" theories that try to systemize legal decisions. Without an
alternative vision, however, trashing amounts to grousing. Critics,
themselves, have recognized this lack of an alternative as a problem.
Unger does attempt to envision an alternative. However, his
approach ignores many basic economic principles, such as compara-
tive advantage and the gains from specialization. He also does not
consider the effect on incentives when government money, as opposed
to one's own capital, is being invested. Further, Unger relies on gov-
ernment as a benevolent entity capable of directing innovation. Unger
does not discuss how collective decisions will be made, or how peo-
ple will be prevented from using their rights to the disadvantage of
others. If Unger wishes to reject these economic insights, he should at
least discuss his rationale for doing so. Further, Unger does not ad-
dress why his system has never evolved anywhere, and does not
address the concerns advanced by Hayek and others as to the dangers
of collectivism. 9

86. See RIcHARD J. BERNsTEIN, BEYOND OBJEcTviSM AND RELATIVISM (1988).

87. KELMAN, supra note 6, at 73.
88. POsNER, supra note 55.
89. See FRERiCH A. HAYEK, THE ROAD TO SERFDOM (1944); LUDWIG VON MISES,
1992] AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

V. AUSTRIAN ECONOMICS
At present, Law and Economics and CLS appear to be at a
standoff. Austrian Economics can add another view that may provide
a common ground on which to join the debate.

A. A Brief History of the Austrian School of Economics

The Austrian school of economics began with the work of Carl
Menger, who published his Principles of Economics in Austria in
1871. Menger is credited as one of three economists who indepen-
dently discovered the principles leading to the "Marginalist Revolu-
tion" in economics. Contrary to the classical economists who believed
that value was determined by resource costs in the past, Menger
believed that value expressed judgments about future usefulness to
consumers." Unlike other theorists of the time, Menger stressed that
values were determined solely by the actions of consumers in the
framework of existing production possibilities.91 Menger called his
school of thought the "subjective value" school because he believed
that economic phenomena had to be traced to human motivations and
to individuals' interpretations of events.' Menger stressed the uncer-
tainty surrounding economic decision-making in contrast to the classi-
cal and neoclassical models that assumed perfect information. Further,
Menger believed that it was the fact that economic processes took
place over time which caused much of the uncertainty.93 Since pro-
duction takes time, for example, producers can never know for sure
what market conditions they will face when their goods are ready for
sale. At that point, their costs are irrelevant to what price they will
receive for their product.' Menger also stressed the importance of
information and entreprenuers as important parts of the economic pro-
cess.95 These contributions to economic thought were further studied

HUMAN ACTION (1949).

90. Israel M. Kirzner, Austrian School of Economics, in 1 THE NEW PALGRAVE: A
DICTIONARY OF ECONOMICS 145, 147 (John Eatwell et al. eds., 1987).
91. Id. at 146.
92. See Erich Streissler, The Intellectual and Political Impact of the Austrian School of
Economics, 9 HIST. EUR. IDEAS 191 (1988), reprinted in I AUSTRIAN ECONOMICS 24, 26
(Stephen Littlechild ed., 1990) [hereinafter AUSTRIAN ECONOMICS]; Karen I. Vaughn, Carl
Menger, in 3 THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS 438 (John Eatwell et al.
eds., 1987).
93. Streissler, supra note 92, at 26.
94. See id.
95. See id. at 27.
 HOFSTRA LAW REVIEW [Vol. 20:1105

and developed by other Austrian scholars, notably Bhm Ritter von

Bawerk and Fredrich Freiherr von Wieser, and remain distinctive
features of modem Austrian Economics.
Menger became a full professor at the University of Vienna in
1879 where he lectured law students.' Bfhm-Bawerk and Wieser,
although not among his students, were instrumental in bringing atten-
tion to Menger's ideas, and themselves made important contributions
to Austrian theory.97 Both became professors at the University of
Vienna, and B8hm-Bawerk's seminar, attended by Joseph Schumpeter
and Ludwig von Mises, became famous as the intellectual focal point
of Austrian ideas prior to B6hm-Bawerk's death in 1914. 9'
After the war, younger scholars further promoted the Austrian
School. Chief among these were Ludwig von Mises and Hans Mayer,
who had studied under Wieser. Several of their students became influ-
ential economists, including Friedrich August von Hayek, Fritz
Machup and Oskar Morganstein. Mises conducted discussion groups
which included not only these young scholars, but also those in other
social sciences such as Felix Kaufnan, Alfred Schutz and Erik
Voegelin." Among Mises' many books, Human Action is probably
the most thorough exposition of his views of economic theory."
As the name implies, Mises stressed that the purpose of economics
was the study of purposeful human action. 1 '
Lionel Robbins, the British economist, became exposed to Austri-
an ideas at the University of Vienna and later incorporated several of
them into his 1932 book, The Nature and Significance of Economic

96. Friedrich A. Hayek, Carl Menger, 10 INT'L ENCYCLOPEDIA SOC. SC. 124-27 (David
L. Sills ed., 1968), reprinted in AUSTRIAN ECONOMICS, supra note 92, at 47, 48.
97. Bbhm-Bawerk's treatise, CAPrrAL AND INTEREST, was recognized as an important
advance in capital theory. Wieser's major contributions were his analyses of innovation and
of large scale business organizations. His most important work was THE THEORY OF SOCIAL
ECONOMICS which he published in 1914. See Erich Streissler, Anna Virumque Cano:
Friedrich von Wieser, the Bard as Economist, DIE WIENER SCHULE DER NATIONALOKONOMIE
83, 91 (Norbert Leser ed., 1986), reprinted in AUSTRIAN ECONOMICS, supra note 92, at 71,
80; see also Robert B. Ekelund, Jr. & Mark Thornton, Wieser and the Austrian Connection
to Social Economics, in 16 FORUM SOC. ECON. 1-12 (Spring, 1987), reprinted in AUSTRIAN
ECONOMICS, supra note 92, at 96. Bbn-Bawerk was married to Wieser's sister.
98. See Kirzner, supra note 90, at 147.
99. See id.
100. See Israel M. Kirzner, Mises and the Renaissance of Austrian Economics, in HOM-
AOE TO MISES 14 (John K. Andrews, Jr. ed., 1981), reprinted in AUSTRIAN ECONOMICS,
supra note 92, at 113.
101. See Edwin G. Dolan, Austrian Economics as Extraordinary Science, in THE FOUN-
DATIONS OF MODERN AUSTRIAN ECONOMICS 3, 6 (Edwin G. Dolan ed., 1976).
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

Science. In this way, some of the Austrian concepts came to be

adopted by neoclassical economics. Robbins was also responsible for
inviting Hayek to the London School of Economics, from which he
was able to increase awareness of Austrian theory.' 2 In the 1930s,
the Austrian school was to have its greatest influence on the econom-
ics profession generally.
However, the outbreak of World War II dispersed the Austrian
economists and there was no longer an intellectual center for the
school; Hayek was in London and Mises was in the United States.
Mises and Hayek, however, did engage in an intellectual battle with
the leading socialist economists, most notably Oskar Lange, on wheth-
er a centrally planned economy could prosper."04
During this debate, distinctive features of Austrian Economics
were articulated. Specifically, Austrians stressed the role of prices as
dispersing knowledge in the market, which in turn gives rise to entre-
preneurial activity as new opportunities are created and discovered in
an open-ended process embodying expectations and uncertainty.'0 5
These ideas remain central to scholarship in Austrian Economics to-
day.
After the war, interest in Austrian Economics began to wane.
Many of the Austrians insights had been incorporated into neoclas-
sical economics. In addition, neoclassical economics became increas-
ingly mathematically oriented, as work on partial and general equilib-
rium theory developed. Austrians, as explained more fully below, do
not use mathematical constructs in their theories or empirical work.
Further, the Austrian school was eclipsed by Keynesian economics in
the late 1930s.'06
Austrian economists, such as Israel Kirzner, Murray Rothbard,
and Ludwig Lachmann, along with the continuing work of Hayek,
helped keep the Austrian school alive in the years following World
War II by emphasizing the unique contributions of Austrian theory to
economics. Hayek's award of the Nobel Prize in economics in 1974
brought greater recognition to Austrian Economics. Recently, there
has been a revival of interest in Austrian theories, notably in the
United States, although Austrians are now generally considered out-

102. Kirzner, supra note 90, at 147.

103. See id. at 148.
104. Id.
105. Id. at 149.
106. Streissler, supra note 92, at 25.
 HOFSTRA LAW REVIEW (Vol. 20:1105

side of the mainstream of economics. Currently, there are major aca-

demic centers for Austrian Economics at New York University and
George Mason University. Austrian economists are often associated
with libertarianism and free market ideology, but there are also Aus-
trians with other political philosophies. 7

B. Austrian View of Issues

This section will consider the Austrian viewpoint on the four
issues discussed above: the view of human nature, the belief in the
market, objectivism, and alternative visions. Attention will be given to
the contribution of hermeneutics.

1. View of Human Nature

Austrians view people as social beings.108 Hayek, in The Fatal
Conceit," suggests that people are instinctively social, not individu-
alistic. Primitive cultures consisted of small groups, where collectivist
practices were followed. These small groups shared aims and percep-
tions that were coordinated among members, who were readily identi-
fiable. t 0 Only as society evolved into a more complex order was it
necessary to suppress these collectivist impulses and apply them to
more intimate groupings, such as families, in order to survive."' As
society became more complex, it was both impossible and unneces-
sary for there to be agreement on aims, for knowledge was dispersed,
people became more specialized and exchange developed as a way to
satisfy diverse ends.112
However, that has not changed basic human nature, which still
strives for community. In effect, people live in two worlds; their
small group, in which collectivist practices prevail, and the world

107. See Kirzner, supra note 90, at 149; Richard E. Wagner, Carl Menger's Contribution
to Economics: Introduction, 6 ATLANTIC J. ECON. 1 (1978). In THE ESSENCE OF HAYEK 281
(Chiald Nishiyama & Kurt R. Leube eds., 1984), Hayek expresses his political beliefs gener-
ally as "liberal" in the classical sense. By liberal, he means a set of ideals that consistently
opposes all arbitrary power. Liberals, he asserts, are ready to let change run its course, even
though one cannot predict to where it will lead. For Hayek, the acceptance of liberal princi-
ples means that one will not try to force others to believe in or serve any particular set of
principles, even though those may be the principles the liberal prefers, and even though this
requires toleration of views that one finds personally disagreeable.
108. See FRIEDRICH A. HAYEK, THE FATAL CONCEIT (1988); VON MISES, supra note 89.
109. See HAYEK, supra note 108.
110. See id. at 11.
111. See id. at 18.
112. See id. at 38-40.
1992l AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

external to this group, for which collectivist practices are not suitable.
Different rules apply within each world. Our small group would not
survive if we tried to apply the rules of the external world to it;
similarly, the complex order of the larger society would not survive if
we applied the rules of our small group to it." 3
Hayek's concept of human nature is very similar to CLS's view
of the fundamental contradiction. Although he would find it under-
standable, I believe Hayek would disagree with CLS's attempt to
attack legal rules on the basis of the fundamental contradiction, or
suggestion that society can be based on more altruistic rules of be-
havior. Such rules are appropriate for small groups, with common
aims and shared habits, knowledge, and beliefs about what is possi-
ble. They are not appropriate for an extended order, which evolves
spontaneously and is beyond the comprehension of any one individual
mind.
Further, Hayek rejects the individual/altruism dichotomy. In Law,
Legislation and Liberty, he states:
The freedom to pursue his own aims is, however, at least as im-
portant for the complete altruist as for the most selfish ....
We need not return here to the undeniable fact that the benefi-
cial effects on others of one's efforts will often become visible to
one only if one acts as part of a concerted effort of many in accor-
dance with a coherent plan, and that it may often be difficult for
the isolated individual to do much about the evils that deeply con-
cern him. But it is, of course, part of his freedom that for such
purposes he can join (or create) organizations which will enable him
to take part in concerted action. And though some of the ends of
the altruist will be achievable only by collective action, purely self-
ish ends too will as often be achieved through it. There is no neces-
sary connection between altruism and collective action, or between
egotism and individual action." 4
Thus, Hayek views the individualism/altruism distinction as a false
dichotomy.
The Austrian view of law and the nature of rules provides a
different framework for considering the rules/standards debate. Law is
an institution, a set of rules that evolve as part of the extended order.
The system of rules evolves as a spontaneous order, not as the result
of the design of judges or legislators. The rules evolve both from the

113. See id. at 18.

114. 1 FRIEDRICH A. HAYEK, LAW, LEGISLATION AND LIBERTY 56 (1973).
 HOFSTRA LAW REVIEW [Vol. 20:1105

growth of customs and deliberate action taken by judges and legisla-

tors where there are gaps in the rules. Hayek's vision of the role of a
judge in a legal dispute is as follows:
In this it will often be impossible to distinguish between the mere
articulation of rules which have so far existed only as practices and'
the statement of rules which have never been acted upon before but
which, once stated, will be accepted as reasonable by most. But in
neither case will the judge be free to pronounce any rule he likes.
The rules which he pronounces will have to fill a definite gap in
the body of already recognized rules in a manner that will serve to
maintain and improve that order of actions which the already exist-
ing rules make possible." 5
Thus, Hayek accepts indeterminacy in legal rules. However, if
one adopts his view of the evolution of the extended order and of
legal institutions as a part of that, then this indeterminacy does not
lead to a dead end. Nor is the indeterminacy unbounded. Rather, the
judge must decide in the context of the society of which he is a part.
In effect, the judge is applying standards within the context of rules.
His discretion is limited by the rule as it has evolved. His goal is to
fill in the gaps in the rule. His purpose is to prevent the recurrence
of the conflict.
Over time, groups that adopt rules that are more conducive to an
effective order will prosper over groups with a less effective order.
Certain rules will predominate by successfully guiding expectations
among people acting independently. 6 This does not mean that the
rules do not change. Rather, they evolve over time. Certainly, the law
in the United States demonstrates such evolutionary changes, though
the changes may not occur as quickly as some would like, and too
quickly for others.

2. Belief in the Market

Austrians view the market as i spontaneous order. The spontane-
ous order results from individuals adapting themselves to circumstanc-
es they perceive in the market. Prices send signals to producers and
consumers, who in turn interpret this information and use it to guide
their actions. It is unnecessary and impossible for any person to know
or understand the full complexity of the extended order." 7 Austrians

115. Id. at 99-100.

116. Id. at 99.
117. FRIEDRICH A. HAYEK, INDIVIDUALISM AND ECONOMIC ORDER 77 (1948).
1992] AUSTRL4N ECONOMICS AND THE CURRENT DEBATE

emphasize the market as a process, rather than a configuration of

prices, qualities and quantities in equilibrium.
The market order is not complete, nor is it possible to predict its
future evolution. Entrepreneurship is an evolutionary process, whereby
new opportunities are discovered. The market is not in equilibrium,
but in disequilibrium due to ignorance. Market ignorance is responsi-
ble for the emergence of market opportunities.' In this view, the
market'is an ongoing process, evolving as new knowledge and tech-
nology is discovered.
Austrians do not view the economy as being in equilibrium, and
some Austrians reject the concept of equilibrium totally. For example,
Kirzner believes that the economy tends towards equilibrium, but this
tendency is agitated by entrepreneurs discovering new opportunities in
the market on one hand, and business failures on the other. Others,
such as Lachmann believe that there is no need to think of the econ-
omy proceeding towards a particular equilibrium, but instead as a
market process. 9 Just as one would not think of there being an
end-state to the process of evolution towards which the evolutionary
process is moving, one need not think of there being a particular end-
state to the economic process.
The neoclassical constructs of perfect competition and of "com-
petitive equilibria" assume that all data are known." Hayek asserts
that in such a setting there is no room for true competition because
all opportunities have been utilized.' Austrians view competition
as a more dynamic process, in which individual expectations based on
uncertainty and incomplete information are coordinated by the market.
The fundamental characteristics .of this process, however, are assumed
away in static analysis." The Austrians' dynamic view of competi-
tion avoids the implication of neoclassical economics that there are no
unexploited opportunities.
This view of the market, along with subjectivism, leads Austrians
generally to reject mathematical and quantitative analyses as appropri-
ate methodologies for economics. In Human Action, von Mises wrote:
The impracticability of measurement is not due to the lack of tech-

118. See ISRAEL M. KmZNER, PERCEPTION, OPPORTUNITY AND PROFIT 8 (1979).

119. See LUDWIG M. LACHMANN, THE MARKEr AS AN ECONOMIC PROCESS (1986).
120. See HAYEK, supra note 117, at 94.
121. See id. at 92-106.
122. Id. at 94; FRIEDRICH A. HAYEK, NEW STUDIES IN PHILOSOPHY, POLITICS, ECONOM-
ICS AND THE HISTORY OF IDEAS 179 (1978).
 HOFSTRA LAW REVIEW [Vol. 20:1105

nical methods for the establishment of measure. It is due to the

absence of constant relations. If it were only caused by technical
insufficiency, at least an approximate estimation would be possible
in some cases. But the main fact is that there are no constant rela-
tions. Economics is not, as. ignorant positivists repeat again and
again, backward because it is not "quantitative." It is not quantita-
tive and does not measure because there are no constants." '
Hayek, in his 1974 Nobel Memorial Lecture, expressed related
concerns. In contrast to the physical sciences, Hayek asserted that in
the study of the market, with all its complexities, all the factors
which are important to the outcome will rarely be "observable or
measurable." 4 Further, Hayek stated:
And because the effects of these facts in any particular instance
cannot be confirmed by quantitative evidence, they are simply disre-
garded by those sworn to admit only what they regard as scientific
evidence: they thereupon happily proceed on the fiction that the
factors
1
which they can measure are the only ones that are rele-
vant. 2
Hayek does not reject the use of mathematics 1 26
totally. He rather cau-
tions against losing sight of its limitations.
Austrian methodology is easily applicable to law and accessible
to non-economist lawyers and judges. In fact, when one examines
many areas of the law, such as contracts, one sees that the thrust of
the law is an attempt to determine what the intentions of the parties
were, to provide legal rules which approximate these intentions, and
provide remedies to respond to situations where unanticipated events
or unintended consequences frustrate the purposeful action of the
parties to the contract.
The evolution of the extended order is not determinate in the
sense that one can predict what will happen in the future. It also does
not suggest that what exists now is inevitable, or that it is the best
possible outcome, or that the rules upon which it is based cannot be
altered. In The Fatal Conceit, Hayek states, "Recognizing that rules
generally tend to select, via competition, on the basis of their human
survival-value certainly does not protect those rules from critical
scrutiny. This is so, if for no other reason, because there has so often

123. VON MISES, supra note 89, at 56.

124. Friedzich A. Hayek, The Pretence of Knowledge, 79 AM. ECON. REv. 3 (1974).
125. Id.
126. Id. at 5.
19921 A USTRIAN ECONOMICS AND THE CURRENT DEBATE

been coercive interference in the process of cultural evolution." 27

The Austrian view of legal institutions takes into account the
richness and complexity of society. Law is seen as a dynamic institu-
tion, and legal rules can be seen in that context. Further, Austrians do
not tend to assume away the uncertainty and incomplete knowledge
that face economic actors. Austrians recognize that preferences are
being formed and reformed constantly. People often have inconsistent
preferences that are competing with one another and which have to
find a resolution. Economics and law are part of a creative, ongoing
process in which new discoveries are always being made.
Thus, Austrians do not have the static orientation of Law and
Economics. While their view of the market as an evolving extended
order makes them more amenable to the Critics claim of indetermina-
cy, however, the Austrian view sees this indeterminacy as simply a
part of the evolutionary process, and not a cause for despair.

3. Objectivism v. Relativism v. Subjectivism

Austrians view the claim to objectivism of neoclassical econom-
ics as misplaced. There is no way to rid oneself of the context in
which one views the world. Neither is it desirable. Austrians study
human action by attending to the economic actor's view of his ac-
tions from the standpoint of the investigator.12 Subjectivism asserts
that what drives the real processes observed by economics is what the
agents think they are doing.
As Edwin G. Dolan wrote in Austrian Economics as Extraordi-
nary Science:
The Austrian method, simply put, is to spin out by verbal deductive
reasoning the logical implications of a few fundamental axioms.
First among the axioms is the fact of purposeful human action.
Supplementary axioms are that human beings are diverse in tastes
and abilities, that all action takes place through time, and that peo-
ple learn from experience.129
Austrians' view of costs as subjective lead them to see choice
differently than most neoclassical economists. While the concept of
opportunity cost, that is, that the true cost of a given choice is the
highest valued forgone opportunity, is accepted by neoclassical econo-

127. HAYEK, supra note 108, at 20.

128. See CARL MENGER, INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES
WITH SPECIAL REFERENCE TO ECONOMICS (1985); VON MISES, supra note 89.
129. Dolan, supra note 101, at 7.
 HOFSTRA LAW REVIEW [Vol. 20:1105

mists, it is not given the same far-reaching implications that it is in

Austrian Economics. Thus, for example, in neoclassical economics,
economic activity is often a matter of maximizing utility given a
defined set of choices, prices, and a budget constraint. As James M.
Buchanan noted in Cost and Choice:
Cost as just defined is faced in the strict sense only by the autom-
aton, the pure economic man, who inhabits the scientist's model. It
is the behavior-inhibiting element that is plugged into the purely
mechanistic market model. The conversion of objective data reflect-
ing prospective money outlays into the subjective evaluations made
by real-world decision-makers is of no concern to the predictive
theorist. In the strict sense, this theory is not a theory of choice at
all. Individuals do not choose; they behave predictably 30in response
to objectively measurable changes in their environment.
In a theory of choice, there are several different "costs" that
must be considered. In a subjective theory of choice, there is first ex
ante cost.13 ' This cost is subjective and is based on the individual's
expectations. Cost in this sense cannot be measured because subjec-
tive experience cannot be directly observed.13 1 There is also ex post
cost. 133 This is the cost that results, from the choice made. Finally,
in the predictive science of economics, which is generally the ap-
proach of neoclassical economics, cost is the directly observable dol-
lar amount. Using a subjective view of cost, there is no difficulty in
reconciling the fact that people may make choices that they later
regret with the view of people acting in a rational way. As Karen
Vaughn suggests:
Individual economic actors always operate under conditions of un-
certainty, and in such an environment, error is the norm and the
correction of error the raison d'etre of markets. In this setting, there
can be no question that subjective evaluations of cost bear little
predictable relation to objectively measured outlays. Each person
evaluates alternatives open to him within the context of uncertainty
about the likelihood of expected outcomes, ignorance of the total
realm of alternatives open to him and the possibilities of error in
judgment about the value to him of the alternatives he does per-

130, JAMES M. BUCHANAN, COST AND CHOIcE 42 (1969).

131. Buchanan calls this "choice-influencing cost." Id. at 45.
132. Id. at 43. Buchanan also suggests other attributes of ex ante cost, particularly that it
is borne entirely by the chooser and that it is never realized, because that which is given up
can never be enjoyed.
133. Buchanan refers to this also as "choice-influenced cost." Id. at 45.
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

ceive. In such a world, it would seem to be purely happenstance if

two separate individuals were to evaluate the same set of altema-
tives in the same ways. Thus the central problem of economic anal-
ysis in this context is to explain how millions of separate individu-
als with differing perceptions of reality and differing valuations and
expectations about the future ever manage to achieve any kind of
coordination of economic activity."3
Some modem Austrians have used hermeneutics as a means of
examining human action. Hermeneutics is the philosophy of interpre-
tation. 135 Gadamer, one of the leading hermeneutic philosophers,
suggests that there is no truly "objective" or "positive" science. Any
interpretation of events is subject to the perspective of the interpreter.
To try to transcend this perspective is futile and artificial. However,
unlike the Critics, Gadamer believes that one's perspectives are
thresholds, not limits. Thus, when an issue is encountered, although
one approaches it from one's own point of view, one learns from the
process of attempting to understand. As the interpreter strives for an
understanding of others and their actions, the interpreter's own under-
lying assumptions are amended and he moves to a deeper and more
sophisticated understanding of the events and their surrounding issues.
A social science such as economics, or law, involves a double herme-
neutic. There is the subject's own viewpoint, and the interpreter's
view from which he is examining the subject's behavior. In this
sense, subjectivism does not mean arbitrariness. Striving for
objectivism is misplaced. Hermeneutics recognizes that it is only our
subjective knowledge of our society, much of which is tacit knowl-
edge, that makes it possible to interpret our world and to communi-
cate with one another. The purpose of hermeneutics is to take advan-
tage of our shared understandings to further our knowledge. As
Lavoie suggests:
[E]lements of shared understandings which are "passed down" to us
as traditions, are what make the mutual communication among sci-
entists possible. We only understand our world because we under-
stand one another. We only understand each other, in turn, because

134. Karen I. Vaughn, Does it Matter that Costs are Subjective?, 46 S. ECON. J. 702,
708 (1980) (footnote omitted).
135. See HANS-GEORG GADAMER, PHILOSOPHICAL HERMENEUTICS (1976); HANS-GEORG
GADAMER, TRUTH AND METHOD (2d ed. 1991) [hereinafter GADAMER, TRUTH AND METHOD];
PAUL RicoEUR, HERMENEUTICS AND THE HUMAN SCIENCES (1981); GEORGIA WARNKE,
GADAMER: HERMENEUics, TRADITION AND REASON (1987); JOEL C. WEINSHEIMER,
GADAMER'S HERmENEuTiCS (1985).
 HOFSTRA LAW REVIEW [Vol. 20:1105

we all spent some substantial part of our lives being enculturated

into the life-world, a specific domain we have in common. 36
It is our shared intersubjective tacit understanding that makes rational
discourse possible. The interpreter must mediate between his own
theory of what he thinks is going on and the purposes of agents as
best he can determine them. The hermeneutical view would say that
law evolves, as does all other knowledge, from the interaction of
theory and facts. This is the hermeneutical circle. Gadamer describes
the role of legal hermeneutics as follows:
The judge who adapts the transmitted law to the needs of the pres-
ent is undoubtedly seeking to perform a practical task, but his inter-
pretation of the law is by no means merely for that reason an arbi-
trary revision. Here again, to understand and to interpret means to
discover and recognize a valid meaning. The judge seeks to be in
accord with the "legal idea" in mediating it with the present. This
is, of course, a legal mediation. It is the legal significance of the
law-and not the historical significance of the law's promulgation or
of particular cases of its application-that he is trying to under-
stand ....

The work of interpretation is to concretize the law in each

specific case-i.e., it is a work of application. The creative supple-
menting of the law that is involved is a task reserved to the judge,
but he is subject to the law in the same way as is every other
member of the community. It is part of the idea of a rule of law
that the judge's judgment does not proceed from an arbitrary and
unpredictable decision, but from the just weighing up of the
whole.'37
The Austrian approach to both law and economics is that of an
evolutionary process. Economic insights can be derived from human
action as part of this process without adopting the neoclassical eco-
nomic apparatus. The process is indeterminate, but not arbitrary. Rath-
er, legal interpretation is an ongoing mediation between legal theory
and the facts of actual cases. Legal knowledge grows through the
process of the hermeneutical circle. Law is interpreted when it is ap-

136. Don Lavoie, The Accounting of Interpretations and the Interpretation of Accounts:
The Communicative Function of "The Language of Business," 12 AccT. ORG. & SOC'Y 579,
586 (1987). Although beyond the scope of this paper, it should be noted that this hermeneu-
tical perspective leaves Austrian theory more open to the insights of feminist legal theory.
137. GADAMER, TRuTH AND METHOD, supra note 135, at 328-29.
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

plied. Each new application adds to our understanding of the law. As

Lavoie has suggested:
A spontaneous order is not designed and never really under our
control, since it evolves according to a logic all its own. This does
not mean, however, that we are utterly helpless to exert influence
over the workings of such ordering processes. Its order may be
intelligible in terms of general principles, and these principles may
well show us that some environments are more conducive to its
self-ordering process than others. Understanding a spontaneous order
may enable 138
us to tailor the general conditions for its
flourishing.
Austrians have emphasized the market and the legal process as a
system of communication. The information that is being communi-
cated must be interpreted. This view of the law and the economy is
considerably more dynamic and rich than the neoclassical equilibrium
viewpoint.
Austrian Economics and hermeneutics provides a path between
the objectivism of Law and Economics and the relativism of CLS by
emphasizing the ongoing nature of the process of evolution. The
future is not predictable. Rather, there is an ongoing interaction be-
tween the institutions and participants that shape and change the
nature of the institutions and the nature of the participation.
The subjectivism of Austrian Economics stresses the role of indi-
vidual expectations, knowledge, and awareness. Economic changes
arise not so much from the circumstances that exist as from a
person's awareness of these circumstances. 39 Subjectivity means
that it is not the intrinsic characteristics of a good that gives it value.
Rather, it is its meaning to the person who buys or sells it. Subjectiv-
ity underlines the importance of understanding this meaning as it is
perceived by the subject and not by the observer. 140 Although Aus-
trians do predominantly favor free markets, it is not because they do
not believe there cannot be shared values. Rather, it is because they
believe no one mind, or group of minds, can possess the knowledge
necessary for central planning. Shared social values are incorporated

138. Don Lavoie, Economic Chaos or Sponataneous Order? hnplications for Political
Economy of the New iew of Science, 8 CATO J. 613, 621 (1989).
139. See Kirzner, supra note 90.
140. See Don Lavoie, Hermeneutics, Subjectivity, and the Lester/Machlup Debate: Toward
a More Anthropological Approach to Empirical Economics, in ECONOMICS AS DISCOURSE 167
(Warren J. Samuels ed., 1990).
 HOFSTRA LAW REVIEW [Vol. 20:1105

in institutions such as law as the spontaneous order evolves. 141

4. Alternative Vision
Austrians generally adopt a comparative system approach: Gener-
ally, the comparison has been to a world under socialism or central
planning. 142 Much of what Austrians have said in this regard can be
used to challenge Unger's vision of an alternative structure of society.
Unger's vision depends on the government being able to determine
where the economy's resources should be allocated. Unger also de-
pends on people behaving collectively and using their destabilizing
rights in ways that are not detrimental to society. Also, Unger as-
sumes that people would invest their resources despite the fact that
the order could be readily destabilized. Hayek's vision of the evolu-
tion of the extended order would posit that such a system would
destroy the order. Government or any central planning agency 14is3
incapable of understanding the complexity of the extended order.
In addition, Hayek sees the value of the extended order as being able
to embody the knowledge of all its members, and to serve the ends
of individuals in all their variety and contrariness. Many individual
purposes are served, which are not known to any single individual or
small group of individuals. 1"

VI. CONCLUSION

Given the various viewpoints suggested by CLS, Law and Eco-

nomics, and Austrian Economics, the question arises as to how to
progress from here. Theories are like lenses through which to see the
world. Those that show us the world most clearly are most influen-
tial. The problem of theory choice poses the fundamental methodolog-
ical issue of how to choose what theory to believe in.1 45 Hermeneu-
tics suggests that by engaging in dialogue about our alternative inter-
pretations, we will be able eventually to determine which theory is
more persuasive, and perhaps reach some agreement on what are the
important questions to be asked.146

141. See generally Hayek, supra note 114, at 9-11.

142. See HAYEK, supra note 89; Ludwig von Mises, SOCIALIsM (1951).
143. Hayek, supra note 108, at 85.
144. Id. at 86-87.
145. See generally, THOMAS S. KUHN, THE STRUCTURE OF SCIENTIcC REVOLUTIoN (2d
ed. 1970).
146. One could envision having a direct debate among Critics, Law and Economics
advocates, and Austrian Economists over specific issues concerning the legal system. Parallel
19921 AUSTRIAN ECONOMICS AND THE CURRENT DEBATE

Austrian Economics provides insight into the debate between

Critical Legal Studies and Law and Economics. Austrian Economics
shares elements of each of these schools, and provides an alternative
vision of the debate. At the least, the Austrian school of economics
provides an alternative lens through which to analyze issues and
events. A focused dialogue on specific issues would enable a more
direct comparison of theories and a further understanding of the un-
derlying issues and concerns.

papers that analyze the same topic from each point of view could be prepared and then
discussed and published. This would allow all those interested to try on different lenses to
view the same central question, and to be persuaded or not. Such an approach was effective-
ly used to advance the argument concerning antitrust law. See INDUSTRIAL CONCENTRATION:
THE NEW LEARNING (Harvey J. Goldschmid et al. eds., 1974).