A Preface to Neoclassical Legal Thought

Most legal historians speak of the period following classical legal thought as “progressive legal thought.” That term creates an unwarranted bias in characterization, however, creating the impression that conservatives clung to an obsolete “classical” ideology, when in fact they were in many ways just as revisionist as the progressives legal thinkers whom they critiqued. The Progressives and New Deal thinkers whom we identify with progressive legal thought were nearly all neoclassical, or marginalist, in their economics, but it is hardly true that all marginalists were progressives. For example, the lawyers and policy makers in the corporate finance battles of the 1920s, who advocated for the abolition of par value stock and the adoption of more forward looking theories of corporate valuation, were thoroughly marginalist in their reasoning, but by and large they were regarded by Progressives as the enemy. Indeed, corporate finance and minimum wage policies are areas where progressive and corporation lawyers flipped against each other. On the minimum wage question, corporate interests in the early twentieth century generally clung to the classical and backward looking “wage fund” theory, which set an absolute limit on wages based on historically accumulated capital. Progressives embraced a forward looking marginal productivity theory. By contrast, in corporate finance, corporate interests generally rejected the view that corporate value should be driven by historically paid in capital as reflected in stated “par” value of shares. Rather, they believed that stated corporate value should be based on reasonable economic prospects, and that this made the concept of par value obsolete. Neoclassicism in both economics and law was a big tent that fed different and inconsistent ideologies. Describing the successor ideology to classical legal thought as “progressive” does not do justice to the range of views that the successors had. Marginalism in economics led to influential legal theories about policy making, and about the relationship between interest groups and welfare. On one side, it led to progressivity in tax policy, championed by Progressive marginalist economist Edwin R.A. Seligman; and the idea that workers’ wages were limited by nothing more than the marginal contribution of each worker to the employer. Marginalism’s strong environmentalism also eventually led to greater egalitarianism in race policy, although that change was not reflected in the writing of the Progressives, who attempted to be both marginalist and genetic determinist. On the other side, marginalism also led to a comprehensive revision of corporate finance theory and the modern theory of the large corporation, in which shareholders are all but irrelevant. Marginalism also gave us public choice theory and its deep distrust of government, developed by such writers as Mancur Olson and Buchanan and Tullock in the 1960s. The theory was derived directly from models of competition in neoclassical economics, and the authors were all economists. This essay briefly describes the contours of neoclassical legal thought, including its dramatic impact on constitutional adjudication and regulatory theory, corporate law and finance, labor law, race relations, and competition policy