Reviews

Research in experimental economics, edited by Vernon L. Smith. Greenwich, Connecticut: JAI Press Inc., Vol, 1, 1979, 374 pp.

It is not usual to review new journals, and other publishers may put this review down to bias. Indeed, it probably is so caused. I have been biased in favor of experimental work in economics and other social sciences, since I first advocated them in the Organization o f Inquiry. It seems to me this is a research tool which we have tended to ignore, and which should have received a good deal more resources than it has. With this background, naturally I welcome the appearance of what is intended to be the first volume of a series of annual volumes on experimental economics.

All of the articles, except one theoretical article by Shubik, recount experiments. Most of the prominent people in the field like Noll, Smith himself, Kage, and Battalio are represented, but there are a number of people who I, at least, did not know were involved in such experiments. Plott is not represented, but presumably this omission will be made up in the next issue. The individual accounts of experiments are lengthy, averaging about forty pages apiece. In part, this length comes not from highly verbose presentation, but from the fact that the entire experimental apparatus, including instructions for participants and a large number of tables and graphs, is included. As the most extreme example, the Smith piece takes up 100 pages, of which only 37 are devoted to text. The rest are tables, appendices, and figures.

Probably, for a new approach, it is sensible to include all of this material. I would hope, however, that as people become more accustomed to experi- mental technique, this presentation of detail can be cut down. A simple offer to provide it to anyone interested would save a good deal of space for presentation of more experiments.

On the whole, this book is not only a step forward simply because it exists, but also because the quality of the experiments reported is high, and they are selected in such a way as to throw considerable light on a number of important unsolved problems. Although I will not be reviewing future issues of the annual, I feel confident they will keep up the high standards of this one.

Gordon Tullock Center for Study o f Public Choice

Virginia Polytechnic Institute & State University

July 1979

Public Choice 35 (1980) 253-256. All rights reserved. Copyright © 1980 Martinus Ni]hoff Publishers by, The Hague/Boston/London.

254 Reviews

The transformation of American law, 1780-1860, by Morton J. Horwitz. Cambridge and London: Harvard University Press, 1977, 266 pp.

Morton Horwitz's careful study of the impact of private law (tort, contract, property, commercial law) on nineteenth-century economic development is an important step for, vard in our understanding of the relationship between institutions and economic change. He argues that for this understanding too much effort has been concentrated on studying constitutional law and not enough on the more mundane, but more important lower court enforce- ments of common law rules. Thus Horwitz does a masterful job of bringing together information from numerous court cases, lawyers papers, and legal journals to shed light on this important facet of legal history. The main thrust of his argument is that in the decades following the American Revolu- tion, the courts worked a major transformation of the rules governing property and its exchange and that these changes were significant in promoting economic growth.

Horwitz examines numerous aspects of the legal system in making his case. He argues that by 1820 law was seen much more as an instrument of social policy that an eternal set of rules and as such was available for use in promoting development. He also discusses changes in the concept of what constituted property rights and alterations in just compensation and liability rules. All of these changes are seen as subsidies for economic deve- lopment, often times at the expense of the poor and the powerless. A similar argument is made for the impact of the movement towards general freedom of contract and away from the necessity of determining the fair- ness or justice of any given exchange. Horwitz concludes by arguing that just prior to the Civil War the entrepreneurs and other agents of development chose to consolidate their gains and moved to again transform American law, this time to protect their economic position from further legal change. Thus 'legal formalism' arose which served to protect the privileged from the use of the legal system against their newly won status.

Although Horwitz's presentation of historical evidence is impressive and useful for individuals doing further work in legal history, his work is also an unfortunate example of the pitfalls inherent in attempting to write about economic change with little or no understanding of economic theory. In the introduction Horwitz does cite Coase and hisfamous theorem, but it is clear that he does not understand that the distribution of rights is not an issue in determining efficiency. Therefore he builds most of his argument that legal change subsidized development upon the false premise that trans- ferring rights to businesses and entrepreneurs was necessary for efficient economic growth. He of course could have argued that certain changes lowered transacting costs or better defined certain rights, thus aiding in exchanges that allowed resources to move to their highest valued used, but

Reviews 255

he does not do so. This means his major premise that 'one of the crucial choices made during the antebellum period was to promote economic growth primarily through the legal, not the tax system . . .' ._(p. xv) is seriously in error. Knowledge of property rights theory would have aided significantly in classifying and understanding the impact of the changes he considers important.

Changes which did better define rights and improve property alienation aided economic growth; others which weakened rights and allowed pre- viously internalized costs to be externalized decreased economic efficiency. For instance, changes in the English concept of waste of land was helpful for growth in that it removed a state imposed restriction upon the ability of the land owner to use his property as he saw fit. Under English common law any significant alteration of the land (e.g., removal of timber) was waste for which the land owner was liable. The law was transformed so that the United States land owner was much freer to use his resource in productive ways. On the other hand, allowing uncompensated takings of land was not in the interest of efficiency (unless one makes a reduced transactions cost argument). Horwitz feels that permitting mill owners to build mill ponds that flooded adjacent farm lands without compensation to the land owners was a significant boost to development. However, it could well have been that such a change in liability rules actually hindered development, particu- larly if the mill owners would not have been willing to pay the land owners for the right to flood. Horwitz continually presents cases where businesses could avoid paying the full social costs of their actions and contends that they promoted economic development.

The various acts to encourage the constructions of mills offer some of the earliest illustrations of American willingness to sacrifice the sanctity of private property in the interest of promoting economic development. (p. 47)

Although he does not use the term efficiency, this implies that the legal system improved resource allocation. But not having to bear full costs (or not being able t o capture full benefits) of one's actions clearly leads to the opposite.

At one point Professor Horwitz does ask the right question. 'Was legal subsidization socially efficient? Did it encourage investment in areas in which, as the welfare economist would put it, social benefits exceeded social costs even though private costs were greater than private benefits?' (p. 100) However, he never attempts to answer that question in the rest of the book and does not appear to understand its significance. Horwitz has done the ground work for what could be a truly significant work in American legal history. Unfortunately, the lack of a coherent theory of the relationship between institutions and economic change makes his book much less useful. The reader must exercise extreme caution in accepting his conclusions at all points. Some are correct; many are not.

256 Reviews

It may well be that these were substantial transfers of power among various competing groups through the legal system during the period Horwitz considers. If so, the traditional attitude that the first half of the nineteenth century was not a period of major redistributional pressure will have to be rethought. Morton Horwitz believes that 'the reality of the private law system was that it invariably tolerated and occasionally encour- aged disguised forms of judicially sanctioned economic redistribution that actually increased inequality.' (p. 255) This conclusion, along with his premise about the impact of the changes in the legal system on economic growth, will require much more careful theoretical and empirical attention.

Peter J. Hill Montana State University