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Law and economics would superficially appear to be two disciplines with little interdisciplinary overlap. However, the marriage of the two fields of study has proven to be invaluable in the process of gaining a better understanding of social and political institutions. While the Virginia and Chicago Schools of political-economic have cozy relationships with legal studies, neither were the first to incorporate law and economics. It was the New Institutionalists who first melded the two fields together. The New Institutionalists built upon the work of  Thorstein Veblen and Ken Galbraith with the powerful tool of Marshallian econometrics. Through adapting neoclassical methodology the New Institutionalists were able to provide simultaneously quantitative and qualitative analysis. Progressing both law and Institutional into the realm of the soft sciences.

Welding the overlay of neoclassical economics can legal studies apply equations and utility functions to make accurate decisions on legal issues? Quite possibly. Applying this method in both fields of study can lead to faulty conclusions. Economic modeling assumes ceteris paribus, “all things being equal”.  In other words, presuming all variables remain constant. Such conditions can only be truly held under experimental conditions. However, the resulted yielded may provide us with some important insights even if they do not perfectly mirror actual market conditions.

One nagging issue afflicting court decisions is determining liability in Tort law. Where does the responsibility of the litigant begin and the liability of the defendant end? Ascertaining negligence in many of these scenarios may not be clear cut without precise standards. Thankfully Judge Learned Hand devised an interesting solution that intertwines the methods of law’s sister discipline of economics. Back in 1947 (P.193), Judge Hand formulated an algebraic equation to assess blame in tort law. It is a relatively simple set of computations:

 P= “The probability of Injury”

 L=  “Extent of injury or loss”

C= “The Cost of implementing measures to prevent the accident”

The Equation fully expressed reads as  P X L > C (P.193). Per Hand’s equation, a business or individual is negligent and liable for damages “ if the probable injury to the victim exceeds the costs of avoiding the accident” (P.193).  This equation does condense the decision down to neatly packaged economic contingency. For that alone, this is quite the feat.  Even though I am a layman when it comes to law and economics, there are cases where I could see Hand’s formula failing to accurately assess liability. In terms of ligation for medical costs associated with foodborne-illness, this matter becomes much murkier. In some instances, such as the lawsuits laid against Jack in the Box in 1993, the question of probability is much more clear. Some of the individuals infected with E.coli were served undercooked hamburgers. Serving undercooked meat increases your risk of transmitting food borne-illnesses. Properly training your staff to thoroughly cook the burgers is relatively cost-efficient.

However, let’s consider an example of a food poisoning case whereby metric of Hand’s formula we may run into some difficulties.  For instance the 2009 case against Caudill Alfalfa Sprouts. Many people who consumed the produce cultivated by this company were sickened with Salmonella. How would this company have been able to prevent this outbreak of salmonella? Were officials at the CDC even able to pinpoint the source of the bacteria? Was it due to contaminated water from the irrigation system? Was it due to wildlife defecating on or near Caudill’s crops? When it comes to the ligation involving contaminated crops Hand’s formula is maybe too simplistic. If it is well-established knowledge that irrigation systems have a propensity for harboring salmonella, the accessibility of low-cost water testing procedures and filtration devices may place liability upon the company. How do you gauge salmonella bacterium getting into the water supply that irrigates the crops what if this occurrence is somewhat of an anomaly? Some would retort back stating that this would be weighted in the equation by the probability value.  Unfortunately, there are qualitative attributes specific to the context of the case that cannot simply be quantified.

Despite its faults, in most applications, Hand’s formula provides a reasonable approach to determining negligence.  In certain circumstances, I would be wary of applying the equation. However, in most instances such as a car accident or a slip-and-fall scenario, the formula should work swimmingly. Having devised this computational approach was quite innovative on Judge Hand’s part.

2 thoughts on “P X L > C and Liability

    1. I believe so. However, I learned about it from a much less scholarly source.

      He doe mention Posner’s text I regards to the study of Econ and law. But attributes the equation to Hand.

      Overall, underrated book. Excellent intro/ overview of the history of economic thought (New Ideas From Dead Economists).

      My independent study of Economics has been kind of narrow :

      Austrian School: I have had a lot of exposure to.

      Classical Economics: Moderate exposure

      Public Choice: Moderate to heavy exposure

      Chicago School: Some

      New Institutional: Some

      Keynesianism : why bother. ( As anti- intellectual as that sounds).

      The biggest hurdle as a layman is the math.

      Liked by 1 person

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