Some Coasian Problems with Posnerian Law and Economics

Abstract

The methodological approaches of Ronald Coase and Richard Posner are compared and contrasted with regard to microeconomic theory and its application to law and economics. The central divide is whether positive transaction cost requires a major reworking of the core of neoclassical price theory (Coase: yes; Posner: no). Evidence is provided by examining the basic price theory tools (demand curve, demand/supply model) that Posner uses in Chapter 1 of his treatise Economic Analysis of Law and their application in Chapter 11 to labor and employment law. It is demonstrated that these tools and derivative conclusions about labor law are not robust with respect to variation in transaction cost and the institutional structure of production. Hence, standard price theory is subject to irreducible indeterminacy and the welfare effects of labor and employment law can only be decided on empirical grounds, thus supporting the position of Coase and original institutionalists over Posner.