California Law Review VOL. 78 JULY 1990 No. 4 Copyright © 1990 by California Law Review, Inc. Positivism in Law & Economics Herbert Hovenkampt The term 'positivism" does not describe a universalscientific method- ology, but rather a variety of methods that are unique to different disci- plines. Positivism in law and in economics are not the same, for the concerns of the two disciplinesand their underlying assumptionsare differ- ent. In addition, the activities of selecting relevant concerns and of identi- fying appropriate assumptions are, in both economics and law, purely normative. In this Article, the author argues that the unconstrainedappli- cation of economic positivism to legal analysis produces an impoverished view of the goals of lawfor a number of reasons. First,identifying the state of affairs that maximizes wealth, or allocative efficiency, is a normative, rather than positive, endeavor. Second, the economic concept of wealth maximization, or allocative efficiency, fails to captures all that the legisla- tive policymaker has in 'mind when she speaks of the welfare, or "well- being," of individuals in the legal community. The author asserts that alternative measures of welfare are equally scientific within their respective disciplines and are better at accountingfor the legal policymaker's appro- priate concerns. The author examines one example-the notion that wel- fare (efficiency) and equity must be traded against each other-and concludes that strict economic analysis is both normative and impover- ished. The author argues that under alternative, equally 'positive, " con- ceptions of welfare, an increase in equity may imply an increase in welfare. I INTRODUCTION The Chicago School of law & economics seeks to apply the eco- nomic methodology called "positivism" to the study of law. This essay t Ben V. & Dorothy Willie Professor of Law, University of Iowa. My thanks to Michael Saks and Mark Linder for comments on an earlier draft, and to the Nellie Ball Trust for financial support. CALIFORNIA LAW REVIEW [Vol. 78:815 argues that positivism has, at best, a poor analogue in the law. Further, many of the economic concerns of legal policy fall within the domain of welfare economics, a branch of economics where positivism is most con- troversial and least practiced. Of all the theories of welfare, the welfare theory called "wealth maximization" is the most comprehensive attempt to apply neoclassical welfare economics to the law. For all its claims to science, however, wealth maximization measures a society's welfare by making many assumptions that must be characterized as normative. The other social sciences offer alternative measures of welfare, which I term "well-being," that are neither more normative nor less positive. The legal policymaker who adopts an approach to measuring well-being drawn from sources other than economics does not give up any of her claim to being scientific, given that this claim was weak in the first place. In addition, these alternative measures of well-being do a better job of accounting for the goals of legal policy than does the economic concept of welfare. A. Economic Positivism Economists often use the word "positive" to refer to economic anal- ysis that is descriptive rather than normative. A positive economic anal- ysis says simply that, given a certain set of premises, A, B, and C, some conclusion D will follow. A positive economic proposition is: "If domestic manufacturing is not competitive, quotas on foreign imports will result in higher prices."' By contrast, normative economics involves policy choices among alternatives. A normative economic proposition is: "Input quotas are bad policy, particularly if domestic manufacturing is not competitive."2 A growing body of economics literature argues that what often pass for positive issues are really normative issues in disguise.3 Milton Friedman believed the converse. In his famous essay, The Methodology of Positive Economics,4 he argued that many or perhaps even most dis- putes that appear to be normative are actually positive disputes. For example, Friedman surmised that economists generally agree on the nor- 1. The use of "positive" in this fashion is quite old. See, e.g., Bihm-Bawerk, The Positive Theory of Capitaland Its Critics (pts. 1-3), 9 Q.J. ECON. 113, 235 (1895), 10 Q.J. ECON. 121 (1896); Hawley, A Positive Theory of Economics, 16 Q.J. ECON. 233 (1902); Ward, Scientific Basis of Positive PoliticalEconomy (pts. I & 2), 12 INT'L REV. 352, 439 (1882). 2. On the development of the positive-normative distinction in economics, see T. HUTCHISON, 'POSITIVE' ECONOMICS AND POLICY OBJECTIVES (1964). 3. For a summary of the literature on this subject, see Symposium on Post-ChicagoLaw and Economics, 65 Cri.-KENrr L. REv. 3 (1989). For example, the argument is stated in Posner, The Future of Law and Economics: A Comment on Ellickson, 65 CHI.-KENT L. REV. 57, 61 (1989). 4. M. FRIEDMAN, The Methodology of Positive Economics, in ESSAYS IN POSITIVE ECONOMICS 3 (1953). 1990] POSITIVISM IN LAW & ECONOMICS mative proposition that a livable wage for every worker is a good thing.5 They differ only on whether the minimum wage law will achieve this goal. Some say that it will, but others say that minimum wage regulation will cause unemployment and even greater hardship among the poor. These differences rest on empirical propositions and can be tested. A positive methodology that shows which side of the minimum wage debate is empirically correct will therefore eliminate the "normative" controversy.6 The successful application of a positive methodology iso- lates those elements in economic controversy that are strictly normative, while producing consensus about everything else. A positivist describes his methodology as a procedure by which one formulates a hypothesis and then tests its reliability by attempting to fal- sify it through empirical observation. To the extent that a hypothesis cannot be falsified, it is said to be robust, or predictive. Friedman advo- cates such "positivism" as the method for economics.' Under Friedman's positivist methodology, the usefulness of a proposition is determined not by its plausibility or verisimilitude, but rather by its pre- dictive power. Positive economics is designed to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its scope, and conformity with performance is to be judged by the precision,8 experience of the predictions it yields. Positivist economists prefer stripped-down models that account for few of the world's facts but have great predictive power, over complex models that account for everything but make prediction difficult. In fact, Friedman argued that not only is descriptive realism unimportant, but it is positively bad. "A hypothesis is important if it 'explains' much by little, that is, if it abstracts the common and crucial elements from the mass of complex and detailed circumstances surrounding the phenomena to be explained and permits valid predictions on the basis of them alone." 9 The best model will have only a small number of variables even 5. Id. at 5. 6. Id. at 5-6. 7. See generally M. FRIEDMAN, supra note 4. The method was first suggested in the 1930s by Lionel Robbins. See D. O'BRIEN, LIONEL ROBBINS, ch. 3 (1988); see also I. LrrrLE, A CRITIQUE OF WELFARE ECONOMICS (1957). Friedman's methodology was strongly influenced by the positivist critique of science generally. See, eg., K. POPPER, THE LOGIC OF SCIENTIFIC DISCOVERY (1959). See generally Blaug, Kuhn Versus Lakatos or ParadigmsVersus Research Programmesin the History of Economics, in METHOD AND APPRAISAL IN ECONOMICS 149-80 (S.Latsis ed. 1976). 8. M. FRIEDMAN, supra note 4, at 4. 9. Id. at 14. For a criticism of this viewpoint, see T. KOOPMANS, THREE ESSAYS ON THE STATE OF ECONOMIC SCIENCE 137-42 (1957); Bear & Orr, Logic and Expediency in Economic Theorizing, 75 J.POL. ECON. 188 (1967); Nagel, Assumptions in Economic Theory, 53 AM. ECON. REV. PAPERS & PROC. 211, 214 (1963); Samuelson, Problems of Methodology: Discussion, 53 AM. ECON. REV. PAPERS & PRoC. 231 (1963). CALIFORNIA LAW REVIEW [Vol. 78:815 though the real world has many, yet the model will yield results that are consistent with real world observations. B. Legal Positivism We also use the words "positivism" and "positive" to talk about the nature of law or the method for studying it. To speak of the positive law of a society is to describe its legal rules as they actually exist, rather than as we think they should be."0 But legal positivism also means the study of a community's law that is scientific in some sense. Legal positivism has come to refer to a collection of theories that law consists of a set of rules produced by the sovereign, rather than from some higher place.11 The legal positivist believes as a normative proposition that law must be separated from morals. This last statement must be qualified, however, and legal positivists do not agree about its meaning. Some legal posi- tivists treat moral statements as social conventions that might rise to the level of legal rules; others might go even further and permit a judge to consult her own morality in difficult cases where the results are otherwise indeterminate. 12 The positivist who studies a society's law will almost certainly find it necessary to study its morals, but she conducts this study in a scientific rather than a normative way, as the psychologist or sociologist of religion studies dogma. For example, the statement that "the Puritan legal sys- tem penalized Sunday work in order to enforce a religious belief that sabbath desecration is contrary to God's Word" is positive both because (1) it purports to be descriptive and (2) it can (probably) be verified or falsified.