The challenge of ‘institutional calculation’

In the debate on socialist calculation, Mises, Hayek, and M. Polanyi showed that the idea that scientific calculation could direct myriads of individual decisions about production, trade, and consumption was wrong. The main reason is that economic activities rely mostly on dispersed local knowledge that is time- and space-specific, subjective, and often tacit. This realisation was one of the impetuses that led many economists to focus on the institutions or ‘rules of the game’ of economic life rather than allocative decisions within existing rules (Brennan and Buchanan, Reference Brennan and Buchanan1985; North, Reference North1990). Thus, the analytical focus on institutions implicitly acknowledges the limits of what an academic economist or a policymaker can possibly know.

As both theories and empirical methods developed, economists became increasingly involved in designing or improving institutions themselves – from auctions and regulated markets in developed countries to fine-tuning policies in Africa. The results were predictably mixed. The knowledge problem has resurfaced on the institutional level and necessitates an ‘institutional calculation debate’ (Boettke and Candela, Reference Boettke, Candela, Coyne and Storr2015). Its central question is ‘How do individuals rationally calculate the institutional context for rational economic calculation itself?’ (ibid: 6) At its heart, this continues an old debate since the Scottish Enlightenment about the possibility of designing an institution by any one mind, in contrast with the spontaneous evolution of traditions.Footnote ² What is new is the massive development of the scientific tools of institutional economic analysis in recent decades. Economists who specialise in the institutional analysis may now be better equipped to design or improve institutions. But to what extent? What can they accomplish? And what are lawyers still better at? To answer these questions, we need to clarify (i) what types of knowledge are needed for designing institutions, and (ii) to what extent economists and lawyers can produce them. I review the state of debate among economists on these issues and then offer a critique of the emerging consensus.

How some prominent economists see the challenges of institutional design

I provide a brief overview of how four prominent economists, each with a distinct background, see the knowledge needs of institutional design and the potential of their work to contribute to it. While I acknowledge differences, I look for common elements in their reflections.

Dani Rodrik, (Reference Rodrik2007) is interested in institutions that national governments can influence to support economic growth. He argues that economic science can identify the general institutional prerequisites of prosperous economies, but the actual institutions always need to be ‘context-specific’. Finding them must utilise ‘local knowledge’ and experimentation rather than abstract blueprints (Rodrik, Reference Rodrik2007). Accordingly, an economic scholar has two roles, as suggested by the title of his book, One Economics, Many Recipes, and explained more fully in Rodrik, (Reference Rodrik2015). First, he engages in the ‘science’ of explaining general economic phenomena that include abstract institutions, such as property rights or contract enforcement. Second, he pursues the ‘craft’ of building models that are suitable for specific contexts.

Alvin Roth’s interests are very different, but his views on institutional design are surprisingly similar. As one of the pioneers who applied game theory to the design of regulated markets, he found that, compared to the rules assumed by game-theoretic models, actual market institutions involve much more context-specific detail. Their improvement often relies on historical knowledge of the specific market and ‘tinkering with new designs, based on early experience’ (2002: 1345). This experience led him to make a distinction that is similar to Rodrik’s. Roth distinguishes economic theory from what he calls design economics. While the former seeks to understand the general principles of economic interactions, the latter seeks ‘to further the design and maintenance of markets and other social institutions (2002: 1341). While an economic theorist is likened to a physicist, a designer is more like an engineer, who has ‘a responsibility for detail’ and ‘to deal with complications’ (ibid.) To succeed, he must also listen to people who will actually use the institution, such as physicians or public officials.

Esther Duflo accepts Roth’s distinction between the economist as a theoretical scientist and as an engineer but moves even further by suggesting a third role as a ‘plumber’ (2017). Institutional details and complications are so numerous and idiosyncratic that even careful, context-specific design is insufficient to get them right. Success requires continuous, hands-on involvement. Like Rodrik and Roth, she emphasises that ‘every INSTITUTION… is realized on the ground, through many specific local institutions’, whose numerous details and marginal changes matter (Banerjee and Duflo, Reference Banerjee and Duflo2011: 243, emphases in original).

Elinor Ostrom did not subscribe to the metaphors of society as machinery and of economists as mechanistic fixers of its problems.Footnote ³ Nonetheless, her views on institutions share some important features with those of the preceding scholars. Extensive work on the governance of common-pool resources led her to distinguish between underlying design principles that characterise robust common-property institutions and their manifestations in hugely diverse, specific rules (2005: 255–288). She argued that design principles, distilled by theorists, ‘can be used as a practical guide for increasing the efficacy of groups, although local tailoring is usually required for their implementation’ (Wilson et al., Reference Wilson, Ostrom and Cox2013: 22). They are ‘not blueprints’ (Ostrom, Reference Ostrom2005: 257); the appropriate goal is ‘a more effective blend of scientific information with local knowledge’ (Ostrom, Reference Ostrom2005: 283).

Ostrom was more reticent about academic economists acting as practical institution builders (McGinnis, Reference McGinnis, Herzberg, Boettke and Aligica2019). Instead, she forcefully argued that theory should explicitly account for the diversity and context-specific nature of institutions. Theory must acknowledge that (i) affected actors are capable of designing their own institutions, (ii) designing rules is rarely a simple analytical task, and (iii) organisation is often polycentric rather than centrally directed (2005: 237–240). A scientist ought to become a ‘tinkering craftsman patiently learning from trial and error and extracting knowledge from local uses’ (Labrousse, Reference Labrousse2016: 298). As such, he will be able to give advice to local actors about how things may be done better through institutional change (Ostrom, Reference Ostrom2005: 30–31; see also Ostrom, Reference Ostrom, Sepúlveda, Harrison and Lin2013).

Despite significant differences in these authors’ approaches, some common points emerge. All share the view that institutions are best designed by combining scientific and dispersed, context-specific knowledge. Institutions that govern similar social phenomena are comprised of some common general elements or design principles as well as context-specific manifest forms and details. Scientific knowledge relates primarily to the first component, while dispersed, local knowledge relates to the second. For economists who engage in institutional design, a crucial question is how they deal with dispersed, institutionally relevant knowledge among social actors. On the one hand, it is a significant constraint on what economic analysis can achieve. On the other hand, economists can and must find ways to combine scientific and dispersed knowledge.

The missing element between scientific and dispersed knowledge

The prevailing view in economics about the knowledge requirements of institutional design retains the distinction between scientific and dispersed knowledge that Hayek initially developed for allocative decisions and applies it to institutional choices (Boettke and Candela, Reference Boettke, Candela, Coyne and Storr2015). How can we define the characteristics of legal knowledge in this conceptual framework? While economists often emphasise the need to collaborate with other professionals, the nature of their institutional knowledge is rarely explored. Legal knowledge is not dispersed since it is largely systematised and formalised. It is primarily not scientific, either, as it is produced mostly in legal practice. The binary categories of dispersed/scientific seem inadequate. I propose to add a third category to grasp the special character of law: systematic practical knowledge.

It is worth returning to Hayek’s original discussion. He defined ‘scientific’ knowledge broadly as ‘knowledge of general rules’ wielded by experts (Hayek, Reference Hayek1945: 521). Such a concept of ‘science’ extends well beyond academic scholarship. To contrast it with dispersed knowledge, he provides the following illustration: ‘We need only to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and special circumstances’ (522). While the knowledge imparted in vocational training concerns general rules and is organised and best wielded by experts, it is not necessarily scientific in a narrow sense. It is often systematic practical knowledge accumulated and transmitted by members of a practical trade or profession. The term ‘practical’ does not mean ‘useful’ here since scientific knowledge can be useful for institution building in many ways, as the cited economists attest. It is a descriptive term that refers to knowledge emerging from and tied directly to the practice of working with social rules.

Practical professions, such as lawyers, accountants, managers, engineers, and so on generate a large amount of systematic knowledge about and for designing institutions with which they are concerned. To appreciate their role, we need to take seriously the notion that real-life institutions are ‘crafted’ (Ostrom, Reference Ostrom2005, 133). Craftsmen in the traditional sense of the word, such as jewellers, mechanics, or even plumbers, are not lone combinators of dispersed knowledge but belong to crafts, guilds, and trades. They partake in systematic, articulated bodies of knowledge. Similarly, there exist ‘intellectual crafts’ dedicated, mainly or partly, to designing and running institutions. The most ancient and probably most developed such craft is the legal profession. To some extent, all developed trades and professions generate systematic knowledge that pertains to the design of the institutions used by their members. They remain firmly rooted in practice even as they develop their own academic disciplines in aid of practice.Footnote ⁴

Therefore, it seems helpful to distinguish three types of knowledge relevant to institutional design: dispersed, systematic practical, and scientific knowledge. While all three appear in both law and economics, I propose that the core type of institutional knowledge produced in economics is scientific, while in law, it is systematic practical knowledge. The epistemic cores of these two professions limit their potential contributions to institutional design and define their comparative advantages.Footnote ⁵ I first show the importance of systematic practical knowledge generated by lawyers. I then take up the main task of comparing this with the social scientific knowledge produced by economists.

Three concepts of law in economics: rules, enforcement, and rule articulation

Much of economic analysis identifies law as a body of rules (Shavell, Reference Shavell, Parisi and Rowley2005: 397) and asks how certain given rules influence the behaviour of people who are subjected to them. The interest is in the end result of the legal process: what social rules are applied by courts or public authorities, and how people respond to these rules as they predict them. The process that leads to predictable legal rules remains a black box.

The box is opened when questions of enforcement are raised. Many take for granted that legal rules are determined and enforced by the state (Shavell, Reference Shavell, Parisi and Rowley2005) but realise that courts, administrative agencies, organisations of prosecution and policing can play diverse roles more or less efficiently ‘within the state’ in the enforcement of legal rules (Polinsky and Shavell, Reference Polinsky and Shavell2000; Pistor and Xu, Reference Pistor and Xu2002). Still, others point to the role of non-state actors in enforcing the law, such as market actors, communities, and formal private associations (Brousseau, Reference Brousseau, Brousseau and Glachant2006). In this perspective, the law is not seen simply as a body of enforced rules but as a special type of enforcement mechanism for social rules. For the ‘law as rules’ approach, the main question is: What are the rules, and what should they be? By contrast, the ‘law as enforcement’ approach asks: How are rules enforced, and how should they be?

Viewing law as a mechanism of enforcement hardly grasps the whole or perhaps even the greater part of its social reality. It is based on the implicit assumption that finding and articulating the appropriate rules for governing people’s behaviour is relatively easy, and the real difficulty lies in their enforcement. In fact, the application of a sanction may be easier than figuring out what the sanction ought to be. The articulation of rules is in itself a fundamental social function of law. Juridical decisions would play a role in clarifying social rules even if they were unenforced by a public apparatus. They provide disputing parties with common knowledge about clear classifications of right and wrong conduct (Hadfield and Weingast, Reference Hadfield and Weingast2012). At least since the iurisperiti and praetors of Roman law, a great deal of social effort has been put into the improvement of legal rules (Brundage, Reference Brundage2008). The development of a legal system is as much or perhaps even more about an improved articulation of a system of social rules as it is about the improved enforcement of that system.

Even if one takes the view of ‘law as an articulation of rules’ (Hayek, Reference Hayek1982; Hadfield and Weingast, Reference Hadfield and Weingast2012), as I do here, one need not accept that it involves – or should involve – the deliberate designing of rules. A strong current in economics argues that efficient law arises from spontaneous evolution rather than conscious design. The knowledge problem in law is usually discussed in terms of the relative ability of common law versus civil law or that of judge-made law versus codification to produce more efficient legal rules (e.g. Rubin, Reference Rubin1977; Hayek, Reference Hayek1982; Posner, Reference Posner1986; Friedman, Reference Friedman2001). An extreme form of the argument in favour of judge-made law assumes that judges simply respond to incentives of the legal process without making any conscious effort to improve their decisions. Litigants’ differential efforts push courts to change precedents marginally in efficient directions, as if by an invisible hand (Friedman, Reference Friedman2001). In a somewhat more realistic version, judges are assumed to labour on establishing or improving rules but accomplish little with deliberate efforts.

Although unplanned evolution is certainly a key feature of law, it does not imply that conscious design is unimportant. As Hayek, (Reference Hayek1982) acknowledged, the ‘gradual perfection [of rules of just conduct] will require the deliberate efforts of judges (or others learned in the law) who will improve the existing system by laying down new rules’ (96). Although a complex system of rules cannot be designed from scratch, conscious marginal contributions to the design process still matter. A closer reading of jurisprudential literature reveals a very broad range of lawyers’ actions that pertain to the designing of legal rules.

The nature of rules and the ubiquity of rule-designing in law

The main classical roles of lawyers are judge, advocate, and counsellor (Llewelyn, Reference Llewellyn1940). Consider adjudication first. Do judges design legal rules? It seems useful to examine judges where they have the least opportunity to design rules, for example, in civil law jurisdictions that restrict their function to ‘interpreting’ and ‘applying’ rather than ‘making’ law. To comprehend what judges do, we must have a clear understanding of the nature of social rules.

Social rules in the broadest sense can be thought of as ‘instructions’ or ‘prescriptions’ for human behaviour that structure interactions (Ostrom, Reference Ostrom2005: 3–19). Using a rule, an actor must be able to reason with some confidence that ‘if I do X, Y will happen’. However, rules rarely prescribe actions and their consequences unambiguously. In fact, the very idea of a rule is that actors replace case-by-case decisions that define precisely what to do in a situation by appealing to more general principles to which behaviour must conform. This is true not only of norms that do not specify sanctions (e.g. ‘Do not walk on the lawn!’) but also of seemingly quite specific regulative rules (e.g. ‘You must pay 10 dollars if you walk on the lawn’). (Consider the following ambiguities: What counts as ‘the lawn’: can one trample on the flower beds? Who is ‘you’: are children included? What if someone is running to save a life? and so on) Unless a rule applies to very few nearly identical situations (or perhaps even then), it remains ‘indeterminate’ (Hart, Reference Hart2012) or ‘incomplete’ (Pistor and Xu, Reference Pistor and Xu2002) in the sense that it will not unambiguously predict the outcomes of actions in a particular case. We may not know which rules are relevant to it or how (Cardozo, Reference Cardozo1928; Wilburg, Reference Wilburg1950). Hence, a rule needs to be ‘completed’ by interpreting it for the specific situation.

For any type of rule, its completion is a process during which a rule takes shape up to the point when it can be applied meaningfully to a given situation. The difference is in the way the tasks of completion are allocated.Footnote ⁶ The formal process may begin with legislative codification, administrative decreeing, or judicial judgements serving as precedents. However, these are never really the first steps of articulation because they inevitably rely on a broad range of existing rules as articulated more or less clearly before. The usual endpoint is a judicial or an administrative decision. As Pistor and Xu put it, judicial or regulatory ‘interpretation, even if narrowly construed, involves an element of law-making’ (Reference Pistor and Xu2002: 947). It always involves deciding if a rule applies to a given situation, which clarifies (or sometimes obscures) the content of a rule. It often involves making a general rule more concrete or detailed, too. Trials are often needed not (only) to discover facts but also to clarify which rules apply to a given case and how (Cardozo, Reference Cardozo1928). The experience of civil law jurisdictions proves that even if judicial decisions are not accepted as sources of law, judicial interpretations can transform a legal system of legislated codes (Gény, Reference Gény1915; Wilburg, Reference Wilburg1950). The actions of legislators, courts, and regulators can all be (possibly marginal but still real) instances of designing in a long and never-ending process of rule-articulation.

The advocate’s role is to try to influence the decision of the judge. Hence, he directly contributes to the rule-designing that is involved. A good advocate will place himself imaginatively in the place of the judge and think with his head, as it were (Kronman, Reference Kronman1987: 870). Indirectly, a legal counsellor may do the same when advising their client about a contract or some other affair. He will need to consider how a judge would decide the rules applicable to the given case. A counsellor’s role often involves designing working rules for various cooperative efforts, such as contracts, partnerships, or corporations. While this may be a purely technical administrative exercise, it is often an imaginative invention of a set of rules that accommodate diverse interests and support common endeavours (Kronman, Reference Kronman1987).

Other social roles that lawyers fulfil involve rule design, too. They act as codifiers in all fields of legislation.Footnote ⁷ Throughout history, they have been involved as public officials in designing and handling rules for public organisations and policies (Brundage, Reference Brundage2008). It seems that wherever there is a need for general knowledge and skills in designing rules, the demand for professional lawyers emerges. This is unsurprising once we accept that legislation, interpretation, and application are closely connected steps in the articulation process of rules that involve instances of design all along.

What kind of knowledge do lawyers use when they engage in rule crafting? Judges, advocates, and counsellors must become knowledgeable of the specific circumstances of the conflictual or cooperative situations with which they deal. Codifiers must also obtain knowledge of many aspects of the practical situation in which legislation takes place. The same holds for administrative officials in the implementation phase. That is, lawyers rely on the dispersed, time-and-place knowledge of social actors. Indeed, a crucial professional skill expected of lawyers is the ability to deal with facts and evidence and quickly grasp the full context of an event or a dispute (Schauer, Reference Schauer2009). In addition, they rely on systematic practical knowledge that abstracts from any given case. They need to know how to interpret, apply, and design rules in diverse situations. This requires much more than factual knowledge of a set of legal principles and rules: the know-how of legal reasoning (Schauer, Reference Schauer2009). A lawyer must be able to formulate and put forward arguments about rules and be able to defend them against (potential) objections. A lawyer does not simply use an existing body of systematic knowledge but, by formulating his own arguments in concrete situations, he also contributes (if only marginally) to it. In effect, he participates in an ongoing intellectual debate that links past, present, and future cases. By doing so, he moves within and makes advances to an existing system of thought (cf. Hayek, Reference Hayek1982: 112–3).

The concept of ‘intellectual order’

How does the systematic practical knowledge of lawyers differ from the social scientific knowledge of economists? I take an institutional approach to this question. I compare the institutionalised processes of knowledge generation in law and economics and ask what kind of knowledge their respective processes can generate. This requires a general institutional theory that covers both the processes of a social science (economics) and a practical profession that has its own academic discipline (law). To provide such a theory, I draw on Michael Polanyi’s concept of ‘intellectual orders’ (Reference Polanyi1998 [1951]).

Like Hayek, Polanyi was a theorist of spontaneous social order, but, unlike Hayek, he was especially interested in differences between types of spontaneous orders within society (Jacobs, Reference Jacobs1999; Reference Jacobs and Leeson2015; Jacobs and Mullins, Reference Jacobs and Mullins2008; Mullins, Reference Mullins2013). He distinguished the spontaneous orders of an exchange-based economy from spontaneous ‘intellectual orders’, science being his primary example. Building on his work, differences between markets and science have been explored by economists of science in the Austrian tradition (McQuade and Butos, Reference McQuade and Butos2003), but comparisons between different intellectual orders have not. One reason is that, besides science, Polanyi only sketched applications of his theory to other kinds of organised intellectual life, first in The Growth of Thought in Society (Reference Polanyi1941), then in The Logic of Liberty (Reference Polanyi1998 [1951]) and finally in his lesser known, posthumous Meaning, co-authored with Prosch, (Reference Polanyi and Prosch1976).Footnote ⁸ Building on his concept, I propose a comparative institutional theory of knowledge generation.

According to Polanyi, (Reference Polanyi1998 [1951]), science, law, literature, the various arts and professions and ‘many other branches of human culture’ are organised as spontaneous orders in a similar sense as a catallactic (i.e. exchange-based) economy consists of such orders: ‘order is achieved among human beings by allowing them to interact with each other on their initiative – subject only to laws which uniformly apply to all of them’ (195). His main explanation is epistemological. All human knowledge is personal and at least partly tacit, that is, unspoken, intuitive, and non-codified. This is because in the act of knowing, a person always integrates many unspoken subsidiary details to support the focal point of his attention (Malik, Reference Malik2023; Bíró, Reference Bíró2025). Even the production of highly formalised knowledge, such as science, law, and literature, involves tacit and dispersed elements that are learnt and transmitted in networks and communities of practice. The sharing and use of tacit knowledge is necessarily decentralised or ‘polycentric’ as it relies on personal involvement. An orderly accumulation of knowledge is supported by norms and rules that coordinate these personal acts of knowledge use and generation (Aligica and Tarko, Reference Aligica and Tarko2012; Festré, Reference Festré2021; Hess and Ostrom, Reference Hess, Ostrom, Hess and Ostrom2007).

While the coordinating process of an exchange-based order is competition, an intellectual order is supported by three processes: consultation, competition, and persuasion (Polanyi, Reference Polanyi1998 [1951]; Mike, Reference Mike2017). First, actors must be able to consult an intellectual heritage, which provides them with a means of mutual understanding, an already existing body of knowledge as well as methods for moving beyond it. For example, ‘a scientist, wrestling with a problem, accepts as his premise a great mass of previously established knowledge and submits to the guidance of scientific standards’; or a judge refers ‘to precedent and statute and interpret[s] them in the light of contemporary thought’, while he sticks to standards of legal reasoning (Reference Polanyi1998 [1951]: 201). Second, actors must be able to compete in the sense that they must be free to pursue their conjectures and lines of reasoning and should be rewarded for their contributions. Third, those who advance competing arguments must persuade the participants of a debate. Their lines of reasoning must be pitted against one another in a sincere and fair controversy, which compels participants to adjust their ‘arguments to what has been said before and thus all divergent and mutually exclusive aspects of a case are in turn revealed’ (Reference Polanyi1998 [1951]: 202).

The processes of consultation, competition, and persuasion are institutionalised in ‘associations of free, self-governing persons’ committed to the pursuit of certain intellectual ends (Polanyi and Prosch, Reference Polanyi and Prosch1976: 211). These associations build up ‘disciplining traditions’ that provide standards for acceptable arguments. They may develop formal collective bodies, such as in modern science, jurisprudence, and some professions, or remain informal communities as we often see in the arts and among public intellectuals. The rules of an association must support all three processes of the intellectual order. The three sets of rules are interrelated and must be consistent. They reflect shared intellectual convictions about the subject matter and nature of knowledge to be discovered. The institutional differences between intellectual orders reflect differences in these underlying convictions. To understand how the intellectual order of law differs from the order of economics as social science, we need to identify their respective convictions and how they manifest themselves in their rules. Polanyi (Reference Polanyi1941; Reference Polanyi1998 [1951]) made forays into the analysis of common law but more as an illustration of his general concept than an exhaustive examination. I depart from Polanyi’s narrow focus on evolutionary judge-made law. As I discussed in Section 3, the legal profession in any developed legal system is a system of continuous and decentralised knowledge generation. Thus, it can be interpreted as a spontaneous intellectual order.

Differences between the intellectual orders of law and economics

A useful starting point for comparing the intellectual orders of law and economics is examining how their basic intellectual convictions differ. In other words, how does the kind of knowledge sought by law differ from that sought by economics? An important theme of legal philosophy is how specifically legal knowledge differs from other potential ideas about law. H.L.A. Hart introduced the distinction between an ‘internal view’ of the law and ‘external views’. An internal view of law is adopted by members of a social ‘group that accepts and uses them as guides to conduct’ (Hart, Reference Hart2012, 89). This is the view of legal practice, followed by lawyers as they carry out their tasks. It is also the fundamental view of doctrinal jurisprudence taught in professional schools, which grew out of and directly serves legal practice (Schwartz, Reference Schwartz1992, Cserne, Reference Cserne, Cserne and Malecka2019). Tellingly, jurisprudence means both ‘skill in law’ and ‘the science of law’. Thus, the academic discipline of law forms an integral part of the systematic practical knowledge of the legal profession.

Law’s truth-statements are participative in the sense that they are made from the position of one of the actors involved in working with legal rules (e.g. legislator, judge, or advocate). This is reflected in the view that it is a basic error of legal reasoning to confuse from which position an argument is made (Twining and Miers, Reference Twining and Miers2010). Legal knowledge is internal to practice: it emerges from the institutional practice of law, is a constituent part of it, views it from within, and is to be used directly by it. As the legal realist Karl Llewellyn put it, formal law and legal knowledge only make sense as far as they enable and support ‘law jobs’ (Reference Llewellyn1940).

An ‘external view’ of law is characteristic of an ‘observer who does not himself accept them’ (Hart, Reference Hart2012, 89). The philosophy, sociology, history, and economics of law all take such a view and formulate truth-statements about law from the observational position of an outside spectator. While doctrinal jurisprudence makes propositions of law, social sciences make propositions about law (Patterson, Reference Patterson1993). While social science, such as economics, can have great practical relevance, it is not directly (or at all) tied to legal practice. In its core, such a body of knowledge about law is external to the institutional practice of law in the sense that, typically, it does not emerge from it, is not constitutive of it, views it from without, and is not directly used in it. This corresponds to the fact that an economist remains an ‘outsider’ to the intellectual order of law, while he generates knowledge within the order of economics as a social science.

The internal/external distinction is an ideal-typical comparison, which abstracts from many nuances. In jurisprudence, an exclusively internal view of law would result in excessive formalism (Schwartz, Reference Schwartz1992, Cserne, Reference Cserne, Cserne and Malecka2019). Legal theory often subjects doctrines to critical examination according to philosophical, comparative legal, policy, or social scientific criteria that are external to the given legal system. Practicing lawyers must also regularly consider the non-legal – practical and moral – consequences of their decisions and how non-lawyers view them. Nonetheless, external insights serve to improve but never replace the internal view of the legal system. For economics as social science, the external viewpoint can arguably never be absolute because human behaviour, which it seeks to understand, is, at least partly, intentional and meaningful action, understandable for the actors themselves (Weber, Reference Weber1947; Hayek, Reference Hayek1943). Economists also create knowledge that becomes internal to law. Antitrust and European common market law are obvious examples. Still, even in such areas, economics only influences (perhaps heavily) rather than constitutes the internal institutional knowledge of legal practice. Hence, ideal types highlight the key differences and comparative advantages of each profession. They are also useful starting points for exploring their possible convergence.

The rules of consultation, competition, and persuasion reflect the epistemic differences of the two intellectual orders. In law, the central forum of persuasion is a legal dispute in a broad sense. It is an instance of practical decision-making where the goal is to arrive at a decisive judgement about rules and their applications. A court trial is the classical form of dispute that brought the legal profession into existence (Brundage, Reference Brundage2008). However, disputes take many forms that include legislative and regulatory debates, arbitration, mediation, settlements, bargains, and decisions about administrative commands.

In economics as social science, the central forum takes the form of publications in which analytical reflection aims to provide interim judgements subject to corrections about what is true as a general pattern. In law, social actors affected by rule design are involved in the debate and provide feedback about arguments. In contrast, social scientists use affected actors as sources of information, at most. A third difference is in the focus of inquiry. While lawyers typically strive to consider the full context and all details of a concrete situation and weigh them according to salience for affected parties, social scientists usually select just one or a few aspects of similar situations and weigh them according to the salience of theoretical interest rather than significance for actors.

The primary process of consultation bridges sequences of disputes in law and sequences of publications in social science, respectively. In the first case, consultation communicates knowledge about prudential judgements guiding action and fits new pieces of knowledge into an internal view of a system of rules. The outcome is one (largely) consistent set of sophisticated concepts and doctrines that express practical wisdom. In social science, the communicated explicit knowledge takes the form of hypotheses and proofs. It must be fitted into external views about systems of rules or developed into such new perspectives. The outcome is an articulation of theories and methods that aim at ‘objective truth’ in the sense of apprehending rationality in our world in ever more accurate and profound ways, following (dynamic) standards of validity set by the scientific community (Polanyi, Reference Polanyi1962, 2–17, 142–50).Footnote ⁹

Competition is supported by professional autonomy in both orders. However, lawyers must deal with problems as they come by and have relatively little freedom in selecting which to pursue. In social science, the basic rule is that of freedom of inquiry, that is, problems can be selected according to their capacity to contribute to advancing theoretical knowledge as the scientist sees fit. What drives competition? In science, the dominant mechanism is reputation among peers (McQuade and Butos, Reference McQuade and Butos2003). This appears in law, too – especially among jurisprudential scholars. However, the more direct mechanism is market reputation among social actors whose problems they ought to solve, as with advocates and counsellors, and careers related to success in solving such problems, such as with judges and attorneys.

Table 1 summarises the ideal-typical differences between the two intellectual orders, both in terms of the nature of knowledge sought and the institutional details. As we see, these differences are manifold and significant. Both orders are institutionalised in highly sophisticated ways that reflect the primary type of knowledge sought: participative and internal to legal practice versus observational and external to that practice.

Table 1. An ideal-typical comparison of the intellectual orders of law and economics

Narrowing the gap between law and economics

How can the gap between the ideal types of legal and economic knowledge be narrowed? The analysis suggests a general answer: by moving the knowledge produced in one profession closer to the ideal type of the other.

For economists, one way is to engage in applied or field research and become ‘engineers’, ‘plumbers’, or ‘craftsmen’ of an institution, as suggested by the economists discussed above. What the analysis here clarifies is that they must combine general scientific knowledge, not just with dispersed social knowledge, but also the systematic practical knowledge accumulated by lawyers and other professionals. It also reinforces the view that a continuous and deep engagement with solving concrete institutional problems is a precondition for useful advice. Moreover, it highlights that the challenge is to produce knowledge that is comprehensible and useful for actors who have their own internal view of the institutional practice in which they participate.Footnote ¹⁰

Another, complementary, way for economists to narrow the gap on law is to turn to jurisprudence for institutional ideas that can enrich economic theory. In fact, economics has borrowed freely key concepts from various practical professions, such as contract or property from law, interest or capital from accounting, and infrastructure from engineering. To give two concrete legal examples, Ronald Coase studied nuisance cases in the common law to clarify the problem of social cost and externalities. In his analysis of governance structures, Oliver Williamson (Reference Williamson1979, Reference Williamson1996) relied on the legal realist jurisprudence of Karl Llewellyn for the idea of contracts as frameworks as well as the relational contract theory of Ian Macneil.

Searching for general patterns, economists often make borrowed concepts even more abstract, shedding a large part of their meaning in their original institutional context (Hodgson, Reference Hodgson2015). This is perhaps inevitable to some extent, but can also impoverish theory and detach it from differentiations that have great practical significance. Revisiting the systematic practical knowledge of lawyers may often be an important corrective to this tendency. A recent example may be the reconsideration of the meaning of ‘property rights’ in economic analysis initiated by Merrill and Smith (Reference Merrill and Smith2001). Attempts to identify the general institutional framework of a market economy by a closer reliance on specific legal institutions also fall into this category (Acemoglu et al., Reference Acemoglu, Johnson, Robinson, Aghion and Durlauf2005; Adelstein, Reference Adelstein2017; Cooter and Schäfer, Reference Cooter and Schäfer2011; Eucken, Reference Eucken1950; Hodgson, Reference Hodgson2015; Ostrom, Reference Ostrom2005; Williamson, Reference Williamson1985).

In a related effort, economic analysis can be extended to explore how lawyers and other professionals generate systematic practical knowledge for institutional design. What kind of practical intellectual order exists in a social situation? Does it generate relevant and effective knowledge? How does it influence institutional design? The institutionalised processes of consultation, persuasion, and competition can be explored.

For lawyers, a move towards the economic type of knowledge means a move towards an external viewpoint of law. The challenge is to incorporate external economic knowledge into their internal perspective. This largely explains the struggles of law and economics scholars to influence actual law. A general implication is that they must take seriously the question how extra-legal arguments can fit into legal reasoning (Cserne, Reference Cserne, Cserne and Malecka2019; Patterson, Reference Patterson1993; Schwartz, Reference Schwartz1992). Perhaps, the deepest challenge, at least to the core areas of law, is conceptual. Legal rules define duties and obligations, and legal reasoning focuses on corrective justice in individual cases of rule-breaking. By contrast, economics treats rules from the perspective of allocative efficiency or social welfare. Thus, for economic arguments to be relevant, the criteria of corrective justice and efficiency must be reconciled at least to some extent.Footnote ¹¹ One possible response is to restrict the application of economic arguments to legal questions for which prudential arguments are relevant (Craswell, Reference Craswell1993; Cserne, Reference Cserne and Mathis2011). Examples include defining the level of due care in tort law, allocating risks in contracts, or considering the social effects of leniency in criminal law.

However, the economic analysis of law tends to have a much broader ambition: even those aspects of law that strictly follow the logic of justice have efficiency or welfare effects and are considered valid subjects of economic analysis and recommendations. To have influence on legal reasoning, economic arguments must be ‘translated’ into the language of corrective justice. Some economic theories seem better suited to this than others. In The Morality of Law, Fuller (Reference Fuller1964) argued that within economics, the catallactic approach (Buchanan, Reference Buchanan1964) has an especially close affinity with law. While an unrestrained efficiency calculus admits no limits of justice, exchange shares with law an implicit adherence to the ‘morality of duty’. Voluntary exchange is a procedural guarantee of efficiency. Voluntary consent is also the basic criterion of interpersonal justice. Much of the law, including contracts, property, torts, and crimes, aims at punishing and rectifying infractions or lack of consent. While this allows for a broad reconciliation of efficiency and corrective justice, tensions remain. For example, efficient deterrence from causing involuntary harm would often require a sanction that (far) exceeds the harm caused, due to latency. However, legal justice often insists on a sanction proportionate to harm or the severity of individual action (Adelstein, Reference Adelstein2017; Miceli, Reference Miceli2023). An economist must respect this internal limitation of legal reasoning if he wants to be heard. On a more general note, a careful inclusion of interpersonal justice into institutional economics may make it more compatible with legal reasoning (and may even improve it on its own terms).