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Yair Listokin, Law and Macroeconomics (2019).
Ronen Avraham

Ronen Avraham

Not every day do we encounter a work of research that enables us to study the law through a whole new lens. Indeed, over the last fifty or so years, legal scholars have discovered new ways to apply well-established bodies of knowledge to the research of law, helping us to both give normative meaning to existing rules and formulate new ones. No better example of this “interdisciplinary revolution” comes to mind than the world of law and economics, which in all fairness should be deemed the world of law and microeconomics. Prior to the publication of Yair Listokin’s book, Law and Macroeconomics, we as researchers have applied economic insight to legal research solely by examining specific actors’ response to incentives provided by law—a microeconomic perspective.

Listokin’s book challenges this paradigm with an invitation to consider how Macroeconomic thinking should also affect the way we understand and interpret the law, when unique conditions call for such an interpretation. It is an invitation to broaden our perspective: away from the world of local incentives intended to optimize behavior of specific players, into ways we can harness the law to address problems such as unemployment, total output, and economic growth.

Particularly relevant today, Listokin’s book shows that when countries and economies face the terrible days of recession—and they have already exhausted the possibility to stimulate the economy through traditional monetary and fiscal policies—making use of the law for macroeconomic purposes provides a powerful tool, albeit one that might contradict more traditional forms of legal analysis. Consider one of the examples given in chapter 11 of the book, in which a real estate developer intends to build a block of apartments and is facing push back from a local neighbor worried of noise and depreciation of his home’s market value. Such examples have been discussed tirelessly in legal literature over the last decades, and every law student who graduated from the basic Law and Economics introductory course can recite Coase’s and Calabresi & Melamed’s seminal work on transaction costs, and property and liability rules; in short, a microeconomic analysis requires the judge to consider several factors in making the decision of granting the plaintiff an injunction. Among these considerations, the judge may attempt to balance the harm imposed upon the plaintiff by the defendant with the cost imposed on the defendant by refraining from harm.

Alternatively, the judge may realize that the parties will likely reach a deal—ensuring the neighbors’ entitlements are well-protected and that transaction costs (broadly defined) between the parties are small enough. It is possible the court will be convinced that granting an injunction is efficient, under the assumption that the neighbor will be able to set a price tag on the harm the project will impose on him.

The important thing to notice is that this analysis rests upon the assumption that to achieve an efficient decision, the court needs to take into account only the interests and incentives of the two parties in dispute, as these are the only interests and incentives relevant to the case. At this point, Listokin asks us to imagine such a case coming before the court not in ordinary economic times, but during a recession—when unemployment is high, and interests’ rate is already at its lowest levels. In such grim economic reality—with construction projects already a scarce commodity—postponing the construction project by way of an injunction will probably lead to the unemployment of the developer’s employees. This in turn will further diminish overall consumer spending and negatively affect growth. It is apparent that the parties cannot be trusted to account for such massive costs, as they do not directly internalize them. It follows that the court cannot simply leave it for the parties to reach an efficient outcome even if transaction costs between them are low, and must take a much more active role in settling the dispute for the benefit of all involved. It is therefore wise for the judge—from a macroeconomic perspective, rather than a microeconomic one—to favor defending the neighbors’ entitlements by use of a liability rule, namely ordering the developer to pay damages and continue with the construction of the project in order to stimulate the economy.


One can imagine several ways that one would apply the ideas in Listokin’s book to judicial decisionmaking. Going back to the earlier example, one might argue the court can take into account unemployment considerations through the familiar term of negative externalities, which already made its way into conventional legal thinking. By granting an injunction, the argument will follow, the court will allow the neighbors to externalize costs to the developer’s employees. The judge is therefore obliged, even by way of ‘traditional’ microeconomic thinking, to consider the interests of the employees when giving its ruling. Although tempting, I find such attempts to conceptualize Listokin’s work unhelpful because they mask first and second order effects. Listokin’s point is not that there is a second-order externality which policy makers fail to account for and that not accounting for it distorts the analysis. My colleague Dick Markovitz has been correctly arguing something similar to that for decades. Rather, Listokin argues that in times of recession, these Macro externalities dwarf any gains and losses traditional, parties-focused, microeconomic analysis of law has been analyzing. Turning a blind eye to this critical macroeconomic element will result, in our example, in a poor understanding of the merits of liability rules during a recession and why such rules should be applied by the courts. This is exactly what differentiates between a microeconomic and a macroeconomic analysis of the law, and a major part of what makes Listokin’s book so exciting.

It is with the last point, the appliance of macroeconomically-merited rules by the court, with which I would like to end this review. It must be admitted that Listokin’s intellectually challenging proposal to integrate macroeconomic notions into the ruling of the law might pose an institutional problem: how will judges, most of them lacking in economic education, be able to apply this knowledge into their rulings? Listokin proposes that whenever a law is promulgated as an open-ended legal standard lawyers should educate the judge so that she takes into account macroeconomic considerations, or else we might conclude it has erred in its decision.

Although Listokin’s proposal is an elegant solution enabling us to create legitimacy for the introduction of macroeconomically efficient decisions into the law, it is still questionable whether judges will know which decisions are macroeconomically efficient. I would like to offer a different approach to this problem. In my view, the solution lies in crafting certain laws as rules rather than standards; These will be “on-the-shelves” laws, taking effect whenever they are macroeconomically called for—that is, mostly in times of recession, as certain economic criteria are met (such as unemployment levels or negative growth rate). The laws, articulated as rules, will aim to achieve macroeconomic goals by directly instructing the court on how it should make its ruling; legislation will instruct courts—under specified circumstances—to grant damages rather than injunctions, discharge debtors’ debt (as also discussed on chapter 11 of the book), modify utility regulation rules, deny petitions aimed against government spending that would otherwise be inhibited by procurement rules, disregard regulations normally imposed by zoning rules that postpone spending and growth, or apply whichever other macroeconomic policy seen fit by the legislator. That policies change automatically in bad times is not foreign to our legal system. The Unemployment Insurance Extended Benefits program provides extended benefits using automatic triggers such as state-wide unemployment rates. FEMA can use the Disaster Relief Fund to alleviate the suffering and damage which result from disasters once the President has declared an emergency or a major disaster had occurred. Legislatures could provide similar stand-by authority to courts.

But then, the question that must follow is whether such laws can be used other than in times of recession. Indeed, Listokin himself admits that the high complexity involved with trying to implement macroeconomic ideas within the law might render such at attempt efficient only in times of despair, after fiscal and monetary policies have ran their course. Yet the ideas first brought forth in Listokin’s book ignite our imagination as to how we can design the law to address other issues macroeconomic scholars concern themselves with—such as price levels, economic growth, and more. While Listokin’s book focuses mainly on recession, its ideas offer a new platform for exploring such macroeconomic subjects and open a door for a whole new field of law and economics research.

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Cite as: Ronen Avraham, Towards a new branch of law and economics?, JOTWELL (October 26, 2020) (reviewing Yair Listokin, Law and Macroeconomics (2019)),