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November 10, 2003

Law and Economics (Chicago School)

What is the value of Chicago School style Law and Economics?

Exhibit 1: A scene from "Fight Club" in which the Narrator (played by Ed Norton) is on a plane describing his job to a fellow passenger:

Narrator: "A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now: should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don't do one."

Business woman on plane: "Are there a lot of these kinds of accidents?"

Narrator: "You wouldn't believe."

Business woman on plane: "Which car company do you work for?"

Narrator: "A major one."

Exhibit 2: Judge Learned Hand's decision in U.S. v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947) in which Hand describes how to determine a barge owner's duty to provide against injuries caused by barge acccidents. Hand says the duty is a function of three variables:

(1) The probablility that she will break away; (2) the gravity of the resulting injury, if she does; (3) the burden of adequate precautions. Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B: liability depends upon whether B is less than L multiplied by P: i.e., whether B [is less than] PL.


Posted November 10, 2003 07:53 AM | law general law school

Norton's discourse is based upon the Ford Motor Co. Pinto case. Ford knew the Pintos were liable to explode if struck from behind (if you ever saw the movie Top Secret, and wondered what that scene with the car referred to, now you know. That car was the Pinto).

Even though Ford was aware of the danger, and even though the part would be relatively inexpensive to replace, Ford had calculated the possibility of such an accident happening and (based upon previous similar cases) multiplied it by the expected payout per case. The result of the math was lower than the cost per car to replace times the number of cars out there. So they let it slide. Right up until that leaked out. Then punitive damages went through the roof, and Ford recalled the Pintos. The damage was done, though, and the Pinto soon left the market.

Someone at Ford mustn't have studied their history, or listened to George Santayana, because 20 years later, they go and do the same thing with the Explorer.

Posted by: greg at November 10, 2003 10:04 PM

Well yeah, but wasn't Ford just running the BPL like Judge Hand said it should? It makes sense that Ford was eventually held liable, but according to a strict reading of the BPL, it shouldn't have had to pay a cent because it wasn't negligent, right?

I'm assuming this strict reading of the BPL is the Chicago school of law and economics, and that it's more theoretical than practical. But really I don't know. Perhaps it's time to visit ProfTorts in office hours...

Posted by: ambimb at November 11, 2003 05:15 AM

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