Beware of Falling Prey to the Promise of Reducing Complexity

(This interview appeared in SAFE Newsletter Q2 2018)

In this interview, Katja Langenbucher, Professor of Law at Goethe University, talks about differences in legal and economic thinking and about the implications of economic transplants – concepts taken from the economic into the legal world. Langenbucher has held a full professorship for Private Law, Corporate and Financial Law in Goethe University’s House of Finance since 2007 and is an affiliated professor at Sciences- Po, Paris. Her main research focuses on corporate and capital markets law and includes selected topics of European Legal Theory.

The title of your recently published book is “Economic Transplants”. How do you define this concept?

In the book, I describe European law making as done from an “internal point of view.” This means trying to reconstruct the legal text and to apply it to the world. By contrast, I have described a lot of US legal research as relying on an “externalist point of view.” Compare this to a natural scientist or even an anthropologist, focused on observing what legal actors say and do in a certain situation and suggesting ways forward. Economic transplants are at the intersection of these points of view.

What drew your interest on that topic?

I come from a continental legal background which means we work a lot with the interpretation of text and rely on hermeneutic methods. But at the same time, if you work on corporate and financial markets law, you will be drawn to the US legal system with their long tradition of financial markets and securities law and perceiving economic insight as a natural part of law making. I wanted to understand more deeply how this interaction between law and economics works out in practice over there and why it is not commonplace over here.

Which promises do economic transplants offer?

In the book, I outline three promises. The two more philosophical promises are “measurability” and “reducing complexity.” Remember that a lot of legal theory deals with how to interpret text and how to understand whether something will or should fit under a vague legal rule. In this process, words are the natural methodological tool. What did the legislator say? Did he want to capture this case? What can we find in a judge’s opinion, and what are scholarly arguments on the matter? On this basis, you reach what we call a “reasoned decision”. Faced with this complex, cumbersome process, economic transplants hold out a promise: It might be more attractive to look somewhere else, to use a more “hard and fast”, “objective” – perhaps “scientific” – method. The last, more pragmatic promise is the offer of a “common language” for European lawmaking. Remember that today we have 27 member states in the European Union with 27 different legal orders. Economics can be an attractive common language on a “metalevel”, beyond the intricacies of each jurisdiction.

You write that “communication across disciplines may face cultural problems”. Can you give an example?

Financial markets law offers many examples. In the book I use, for instance, the assumption of “rational actors” in efficient capital markets as a basis of some of the theoretical models. Transplanting this idea into the law, we encounter the term “reasonable investor” in the Market Abuse Regulation of 2017. Using the concept of a “reasonable investor” decides, for example,on timely disclosure of inside information or on a prohibition to trade on the basis of suchinformation. Take the Volkswagen scandal: When was the company obliged to tell the markets that there was a problem? Ask an economist and ask a lawyer. The economist may answer on the basis of a theoretical model – under strict assumptions trying to figure out what type of information will trigger which type of market reaction. Or he will try to find comparable empirical data or run an event study. The “externalist” lawyer might happily defer to this assessment and decide his case accordingly. The “internalist” lawyer, however, will also ask: Is this what the legislator wanted? Will deferring to economic insight fit in with more general legal rules and principles? Can we reach a fair and just result in the case at hand?

Economics is often perceived as “hard science”. Is the legal world too uncritical?

To the extent that lawyers expect economics to give us “objective” and “tested” answers to legal intricacies, I do think so. And moving beyond the legal world in a narrow sense towards the broader regulatory and parliamentary areas of law making, we still encounter this challenge. Transforming an economic argument into either a strictly legal or a more political argument risks losing complexity. In the book, I call such transplants “economic clichés”. We find them, for instance, when we see references to economists’ papers without carefully pointing out the underlying assumptions, potential biases, or even flaws. If economic transplants enter the legal – or the political – dialogue in this way, they cannot live up to any of the promises they hold out. In that sense, a lawyer must beware of falling prey to the promises of measurability and reducing complexity.

To what extent do economic transplants have an impact on adjudication and law making in Europe?

On judges, the impact is relatively small. Obviously, judges are not trained in economics. In one case, I show the ensuing risks of applying economic transplants without such training in assessing empirical data. In another case, by contrast, I portray a conscious judicial decision to reason from an “internal point of view” instead of deferring to economic transplants. For the legislator, things are different. Economic transplants often play a role in promoting certain policy goals. A case I discuss in the book is the regulation of shareholder activism. In other instances, economic transplants can offer help to understand how a specific goal might be achieved by highlighting, for example, certain incentive structures. They may also, in the form of so called “regulatory impact assessments”, help us to figure out whether regulation passed was successful in achieving its goals.

You write that economic transplants might help rationalize legal and political debate. How optimistic are you about that?

Can political debate ever be rationalized? But seriously, even if I am skeptical, it is not as bad as it looks. Law making is not only done in parliament but involves careful legal drafting by highly trained staff in ministries. They will often face the tricky task of fitting the goals stemming from a certain economic policy into one legal order. They have to make sure an isolated change in the law does not cause unwanted “ripple effects” elsewhere in the legal universe.

Should lawyers get more economic training, or should they rely more often on experts?

We should probably distinguish between different legal actors. If this is about practicing lawyers and judges, I am hesitant. Quite pragmatically, I do not see how we could ensure meaningful and up-to-date economic training of large parts of the legal profession nor do I consider this a necessary part of their work. As to relying on experts in the way we see them in, for example, a medical malpractice suit, this applies only to questions of fact. However, many economic transplants are questions of law, such as, for instance, the “reasonable in vestor”. For these, experts are not an option. As to regulators and lawmakers, I am more hopeful – maybe not for training in economics in the strict sense, but for more transparency. Avoiding the “economic clichés” I referred to earlier requires carefully distinguishing between what we can robustly infer from an economic study and what is being claimed as a seemingly “scientifically proven” policy goal. We can only try to get better at this important communicative endeavor, working towards ever more transparency.

REFERENCES

Langenbucher, K. (2017), “Economic Transplants: On Lawmaking for Corporations and Capital Markets”, Cambridge University Press.