Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes (Cambridge, Mass: Harvard University Press, 1991).
Classical liberal scholars have long observed that it is possible to have law without legislation; and several noted analysts such as Bruno Leoni, Murray Rothbard, David Friedman, and most recently Bruce Benson, have applied economic analysis to customary and judge-made law. Robert Ellickson, professor of law at Yale University, takes the argument one step further in his Order Without Law: Not only is legislation unnecessary for law, but law is unnecessary for order. After studying dispute resolution among ranchers and farmers in Shasta County, California, Ellickson came to realize that most people find the costs of learning about the law (judge-made or statutory) and submitting to formal resolution procedures to be so high that it is easier to fall back on common-sense norms. He finds that all three of the functions of law - dispute resolution, rule formation, and enforcement - get supplied by means of these informal norms. Ellickson derives this observation about the importance of informal dispute resolution from "law and society" scholars, but firmly rejects their characteristic disinterest in economic analysis. The frequent use of informal rules is in fact an implication of the Coase Theorem, though one that Coase himself did not recognize. Says Ellickson: "Coase overstates the influence of law. His error lies in his implicit assumption that people can effortlessly learn and enforce their inital legal entitlements, and that they confront transaction costs only when they attempt to bargain from their legal starting positions. In a world of costly information, however, one cannot assume that people will both know and honor law." (p.281) Among law-and-economics scholars, the usual debate is whether transaction costs under bilateral monopoly are high or low: if low, they think that the government should let actors solve problems by bargaining; if high, the government should solve the problems by picking proper laws. What Ellickson points out is that if the transaction costs of learning the law are high, then there is little use for governmental re-molding of the law, since actors will ignore it anyway. Hence, high transaction costs (of learning and using the law) becomes an argument for bargaining rather than governmental solutions to property rights conflict.
Ellickson also makes extensive use of game theory. He predictably elaborates on the strategy of tit-for-tat to show how cooperation can emerge when agreements cannot be directly enforced. But he also considers interesting variant repeated games and their appropriate strategies. For example, he considers a game called Even-Up, in which unilateral defection can enhance total wealth; he argues that players would make "side-payments" to preserve cooperation. Happily, Ellickson's forays into game theory remain quite readable, and he carefully chooses games and strategies that have plausible real-world applications.
It is indeed hopeful to see work of this kind coming from a professor at one of our most prestigious law schools. Though not himself a classical liberal, he shows appreciation of classical liberal thinkers thoughout the book. But Ellickson does not merely repeat and popularize for academia the same points that earlier thinkers have made. He also explores the frontiers of our understanding of social order, and the aid that economics may give for that understanding. The only weakness of the work is that Ellickson has no economic theory to explain how efficient norms tend to outcompete inefficient ones. Perhaps we may look forward to such a theory in his next book.