Director also influenced the trend of free-market thinking in the United States when he persuaded the University of Chicago Press to publish an American edition of Friedrich A. Hayek’s The Road to Serfdom in September 1944, after it had first appeared in Great Britain in March of that year. In addition, Director was a founding member of the Mont Pelerin Society, attending its first meeting in Switzerland in April 1947. Organized by Hayek, the Society became an association of classical-liberal and free-market thinkers who wished to revive an interest in the ideas of freedom following World War II.

It is sometimes difficult for people today to realize how greatly the world was threatened by the ideology of socialism in the years immediately after the war. The spread of Soviet power into eastern and central Europe following the defeat of Nazi Germany, and the Marxian idea that the demise of capitalism and the triumph of socialism were historically “inevitable,” had a powerful impact on Western intellectuals who had become sympathetic to the notion of government “planning” to solve the ills of society.

Socialism was made even more appealing to many of these intellectuals because they were persuaded that government control of a society’s economic affairs did not require any significant loss of personal freedom or civil liberties.

Aaron Director was one of a handful of careful and serious thinkers at the time who clearly understood that securing personal freedom was inseparable from the preservation of economic liberty in a free, competitive market. He made this case in a paper delivered at a conference on Freedom and the Law at the University of Chicago Law School in 1953. The paper was published shortly afterwards under the title “The Parity of the Economic Market Place” and was reprinted over a decade later in The Journal of Law and Economics (October 1964).

He explained that many intellectuals failed to see the connection between personal and economic freedom because they live in a rarified and secluded academic world separate from the everyday affairs of ordinary citizens who go about earning a living in the marketplace. Furthermore, these intellectuals snobbishly and arrogantly presumed that while they were concerned with the big and important issues—virtue, justice, beauty, “the good”—the ordinary people pursued mere material satisfactions that have a far lower order of importance. The free market of ideas, therefore, is more important than any free market for material goods.

In addition, the intellectuals had a bias toward believing that the most significant competition in society occurs in the arena of democratic decision-making. Thus the exchange of ideas in political discourse is far more essential to a free society than any exchange of goods and services. Society “speaks” through the trading of ideas, not products.

Aaron Director responded with three arguments. First, he said that this attitude on the part of too many intellectuals shows a total disregard of and disrespect for the essential importance of market freedom for the general public. “For these people,” he said, “freedom of choice as owners of resources in choosing within available and continually changing opportunities, areas of employment, investment, and consumption is fully as important as freedom of discussion and participation in government.” Director also quoted from Alexis de Tocqueville, who in Democracy in America pointed out the character-building qualities that self-interested conduct taught men in the everyday marketplace.

Fewer Choices

Second, Director noted that choices and opportunities were far fewer and less frequent in the arena of politics. “It is only under a system of voluntary exchange that freedom is maximized,” he explained. The democratic process was inherently coercive, with the losing minority having to accept the choices of the winning majority. There was little room for the minority to opt out between elections. “The choice for a minority which does not consent to socialist institutions . . . is that of departing with bare feet.” He added, sarcastically, “And such restriction is described as regulation of possessions or property rather than of men.”

In the competitive arena of supply and demand each individual has the ability to select what options he finds most attractive, and the relative degrees to which he finds them desirable, without needing to persuade many others in society to “vote” his way. The marketplace, therefore, offers pluralistic outcomes open to change every day through the consumption choices each of us makes, unlike the majoritarian winner-take-all outcomes of the democratic process.

Finally, Director warned that without the separation of politics from economics, the preservation of our civil liberties is far from certain. For example, he said, “The privilege against self-incrimination may not be an important protection of freedom . . . when the state becomes the principal employer or determines the conditions of employment. . . . [A]ny legal protection of this general type will become an empty piece of ceremonial apparatus when its exercise and protection are accompanied by the loss of one’s livelihood.”

When Director made this argument in 1953, he clearly had in mind the events going on in the United States during the McCarthy era, when suspicion of “disloyalty” resulted in loss of a government job. The existence of a large private sector meant that whether accused truthfully or falsely of un-American beliefs or conduct, an individual could continue to earn a living outside of government, and therefore did not have to be afraid to follow his conscience and refuse to testify at a congressional hearing.

The close connection between the free market and personal freedom may be better understood today than it was in 1953, but if this is so, it is due to the well-reasoned and articulate arguments of people like Aaron Director.

Law and economics, or the economic analysis of law, is a relatively new discipline. It was launched in the late 1950s and early 1960s and has grown in importance and in the number of its practitioners ever since. It uses key principles of economics—such as self-interest, rationality, efficiency, and externalities—to predict the intended and unintended effects of different legal rules and to explain why we have the particular legal rules we do and why some legal rules might be considered better than others. Aaron Director and Ronald Coase, to whom the book is dedicated, and Judge Richard Posner, to whom the author refers in several chapters, have been major contributors to the field.

David Friedman is an economist and a professor of law at the University of Santa Clara School of Law. This book is one of his best efforts. His style makes it great fun to read, and it is filled with intriguing insights. Because of its comprehensive scope, it could easily be used as a text in an introductory course in law and economics. For example, it includes a chapter on antitrust law that I wish Joel Klein and Judge Thomas Penfield Jackson had read before they proceeded to punish Microsoft for being too effective a competitor.

Friedman’s early chapters explain basic economic concepts vital to understanding law. A transition chapter explains the structure of the American legal system, and the later chapters apply economics to the analysis of such things as criminal law, tort law, contract law, and marriage, sex, and babies. One especially interesting chapter is devoted to a law-and-economics analysis of three alternative legal systems—saga-period Iceland, eighteenth-century England, and Shasta County, California.

Law’s Order is more than an introductory text, however. For example, in Chapter 5 Friedman goes far beyond the usual exposition of the Coase Theorem. He illuminates the differences between property rights and liability rights and how the choice of efficient rules depends on such things as the free-rider problem among joint buyers and holdouts among joint sellers. A reader is well advised to read this chapter carefully, with pencil and paper at hand since it is basic to much that comes later.

Friedman introduces each new concept with an actual or hypothetical example that puts the reader in the center of the issue. Frequently, he comes to what seems a reasonable conclusion and in the very next paragraph he explains why it is wrong. In one case, the issue of whether, on efficiency grounds, we need criminal law at all, he goes through seven rounds of arguments changing his answer each time. He offers this “as evidence of how risky it is to go from the existence of an argument for the efficiency of some particular rule to the conclusion that the rule is in fact efficient.” It is also an effective expository device because it engages the reader. I tried to anticipate the arguments in each round before I read them. I was often wrong, but I learned something useful every time.

Judge Posner is famous for his conjecture that the common law, which develops over time through judicial precedents and decisions, consists of legal rules that are, for the most part, economically efficient. Friedman gives many examples—for example, the negligence doctrine in torts—consistent with Posner’s conjecture, but he also gives a few—such as product liability rules—that aren’t. Posner’s great contribution, according to Friedman, has been to direct attention to the question of economic efficiency in the law. “We do not know whether the law is efficient. We do know that the question ‘What is the efficient legal rule?’ converts the study of law from a body of disparate doctrines into a single unified problem.”

The book is filled with elegant, instructive arguments. Consider just one. Burglary, Friedman argues, should be a tort rather than a crime, and denting a fender should be a crime rather than a tort. The basis of those startling assertions is the incentive for potential victims to undertake efficient preventative measures. In tort law, successful plaintiffs are made whole through compensatory damages. In criminal law, victims do not receive compensation. If the penalty is a fine, it is the state that receives the money, not the victim. If the penalty is imprisonment, the victim suffers an additional loss in taxes to pay for the incarceration. Therefore, potential victims of crimes are more likely to undertake efficient prevention measures than are potential victims of torts. Preventative measures are more effective for dented fenders than burglaries. Under the general rule that incentives should be placed where they do the most good, denting a fender should be a crime, and burglary a tort.

Finally, the book has no footnotes and very few references. Friedman and his publisher have set up a Web site for his readers to obtain the missing information online. Friedman chose this option to make the book more user-friendly for the intelligent layman who will read it for general information and entertainment rather than as an academic resource. Icons in the margins of the hard copy point to corresponding online icons. I think this bit of entrepreneurship will pay off and thus become widely imitated.

Charles Baird, a professor of economics and the director of the Smith Center for Private Enterprise Studies at California State University at Haywood, is a quarterly columnist for Ideas on Liberty.