C. METHODOLOGY
III. L IMITATIONS OF THE ECONOMIC ANALYSIS OF LAW
From the beginning of its development, the scientific methodology of law and eco-nomics has been subject to criticism.69 In particular, the neoclassical fundament the eco-nomic analysis of law is predominantly based on, provokes critique.70 The subsequent presentation of the main objections is split in a paragraph on
▪ disagreement with the homo oeconomicus model, and
▪ objections against the Kaldor-Hicks efficiency criterion.
66 Hans-Bernd Schäfer and Claus Ott, The Economic Analysis of Civil Law (Cheltenham: Edward Elgar Publish-ing Limited, 2004), 32.
67 Robert Cooter and Thomas Ulen, Law & Economics (Boston: Pearson Education, Inc., 2008), 10.
68 Ibid, 11.
69 Richard A. Posner, Economic Analysis of Law (Boston: Little, Brown and Company, 1992), 25.
70 Hans-Bernd Schäfer and Claus Ott, The Economic Analysis of Civil Law (Cheltenham: Edward Elgar Publish-ing Limited, 2004), 34, 59.
1. Criticism of the homo oeconomicus model
Most notably, the artificial model of the homo oeconomicus has aroused antago-nism.71 Critics point out that the neoclassical model of decision-making does not accurately describe human decision-making. One of the main critiques is discussed under the key-word “bounded rationality”: This literature demonstrates that people do neither have the necessary information, nor the mental capacity to act fully rational in making their deci-sions.72 Further critique is treated under the headline of “behavioral anomalies”: People tend to deviate from rationality under certain circumstances which can be summarized as follows: Framing, scenario thinking, overconfidence bias, opportunity cost anomaly, hind-sight bias, anchoring, prospect theory, sunk costs, and probabilities.73
Yet, as Hayek (1955) pointed out, the power of the “generic figure” homo oeconomicus lies in its ability to explain the general nature of real world phenomena “and not in the accuracy of any particular instance”.74 Hence, the economic science does not draw on the perfect precision of the assumptions in every single case but infers predictions from as-sumptions “that can be considered to be broadly true”.75 Deviations from the homo oeco-nomicus model can therefore not broadly be interpreted as falsifications of the assump-tion.76
Anyhow, there have been efforts to specify the homo oeconomicus model in order to meet the criticism in recent years. The most noted approach in this field is behavioral economics, and for a short time, neuroeconomics.77 Behavioral economics studies consumer´s choices using the insights of psychology.78 The above-named behavioral anomalies are results of this field of study that shall help to improve our understanding of human choice behavior.
Yet, the paradigm of behavioral economics has not yet succeeded in offering a workable model of consumer choice that is as simple and elegant as the neoclassical homo oeco-nomicus.79
71 Ibid, 34, 56.
72 Ibid, 59.
73 For a detailed description of the behavioral anomalies see ibid, 60-62.
74 Ibid, 57. With reference to F. A. v Hayek, "Scientism and the Study of Society. Part I," Economica Vol. 9, no.
35 (1942), 267-291.
75 Karl R. Popper, The Poverty of Historicism (London: Routledge and Kegan Paul: 1957).
76 Hans-Bernd Schäfer and Claus Ott, The Economic Analysis of Civil Law (Cheltenham: Edward Elgar Publish-ing Limited, 2004), 57.
77 N. Gregory Mankiw, Principles of Economics (Mason: South-Western Cengage Learning, 2008), 494.
78 Hal R. Varian, Intermediate Microeconomics (New York: W.W. Norton & Company, 2006), 549.
79 Ibid, 548.
Hence, despite of its weaknesses in accuracy for individual cases, the homo oeconomicus model of rational choice remains the core of economic analysis. This conclusion can be well defended based on Hayek´s and Popper´s insights on its practical benefits in making general predictions. It will therefore be employer in this work.
2. Criticism of the Kaldor-Hicks efficiency criterion
Another criticism mainly put forward by Eidenmüller (1995) refers to the Kaldor-Hicks criterion.80 Eidenmüller attacks the ability of the efficient social state under the Kal-dor-Hicks criterion to be consensual. The assumption that the disadvantaged group would be satisfied with waiting for a long-term compensation in the shape of a higher level of welfare is rejected by him as unrealistic.81
Although there is some justification for the Eidenmüller argument, there is empirical sub-stance for the general compensation principle. It can be shown that rich industrialized nations having “instituted policies of wealth maximization” are generally better off than those nations without wealth maximizing institutions.82 Furthermore, the philosophical de-bate about hypothetical consensus with regard to a certain social state should not hide the fact that the use of economic tools in legal analysis helps to clarify value conflicts as well as reach “given social ends by the most efficient path”.83
In conclusion, the weaknesses highlighted above should not lead to a rejection of the methodology of the economic approach to law as a whole.84 Some of the assumptions made in neoclassical economics prove to be pretty sound for general predictions. Moreo-ver, there are many constellations that allow for a relaxation of the strict neoclassical framework and still yield convincing results. An effort will be made in this work to highlight the boundaries of the interpretation of results found on the basis of economic models to obtain a sound argumentation.
80 Hans-Bernd Schäfer and Claus Ott, The Economic Analysis of Civil Law (Cheltenham: Edward Elgar Publish-ing Limited, 2004), 34. With reference to Horst Eidenmüller, Effizienz als Rechtsprinzip (TübPublish-ingen: Mohr Sie-beck, 1995).
81 Ibid.
82 Ibid.
83 Richard A. Posner, Economic Analysis of Law (Boston: Little, Brown and Company, 1992), 25.
84Ibid.