Law Quadrangle (formerly Law Quad Notes)


How much deference should be given to the views of those who back them up with cash, and how much to the regulators and academics who are paid to think?

This essay is based on a speech delivered to The Journal of Corporation Law annual banquet in Iowa City on March 4, 1994.

In the first chapter of The Economic Structure of Corporate Law, Frank Easterbrook and Daniel Fischel make an arresting statement: ... [P]eople who are backing their beliefs with cash are correct; they have every reason to avoid mistakes, while critics (be they academics or regulators) are rewarded for novel rather than accurate beliefs. Market professionals who estimate these things wrongly suffer directly; academics and regulators who estimate wrongly do not pay a similar penalty. Persons who wager with their own money may be wrong, but they are less likely to be wrong than are academics and regulators, who are wagering with other peoples' money.

In other words, society should trust decisions to people who put their money where their mouths are.

When I first read this passage, I was a bit perturbed. Now that Easterbrook and Fischel had published the book that pulled together their many important contributions to corporate law, it looked like they wanted to put the rest of academia out of business. More dispassionate reflection, however, reveals that there is something to what they have to say.