prior probability

Richard Craswell, a law professor at Stanford, once posed the following question in his paper titled “Promises and Prices”: why do economists and philosophers who study law differ so greatly in the relevance they assign to price effects. Here is an excerpt:

 “… when economists evaluate a proposed change in the law, they will usually want to determine just how many buyers would prefer to pay the higher prices … By contrast, philosophers seem to evaluate legal changes without worrying about the effect on prices …”

This question has haunted us ever since we saw Craswell present his paper five years ago at a 2011 symposium on “The Future of Contract Theory” at Suffolk University in Boston. Let’s consider contract law, for example. When should mere promises by legally enforceable, and what remedy, if any, should the law provide for breach of contract? Broadly speaking, an economist might argue that a world with stronger legal remedies will lead to higher contract prices than a world with weaker legal remedies, all other things being equal.

There are several possible replies to Craswell’s point about price effects. For starters, one could point out that the relation between contract law and price effects can be unclear in the real world (cf. Eric Posner). All other things are rarely if ever equal, so price effects could be indeterminate and thus hard to predict ahead of time. Another reply is to emphasize the “virtue effects” of law, not just price effects. Professor Seana Shiffrin, for example, has argued that the rationale of our legal rules must be acceptable to a virtuous moral agent. At a minimum, the law should not erode our moral characters or make it difficult to develop our moral capacities. But putting aside the fact that there can be conflicting virtues, how would we even begin to measure the level of virtue in a given community?

For this post, however, let’s assume that both price effects and virtue effects can be measured with a high probability of precision. If we were to combine the insights of Professors Craswell and Shiffrin into a single analytical framework, every change in law could potentially produce four possible outcomes:

Notice that B is the ideal outcome: a change in law that leads to lower prices and to higher levels of virtue on average or in total (again, assuming we could really predict or measure these things with any degree of accuracy), while C, by contrast, is the worst possible outcome. But what if we had to choose between A and D: between a change in law that led to higher prices and higher levels of virtue and a change in law that led to lower prices and lower levels of virtue? In any case, doesn’t our analysis reveal the bogus nature of the debate between Craswell and Shiffrin, since price and virtue effects are, in fact, impossible to measure in the real world?