The New Yorker has an article (Chicago School Betrayal) that highlights the conversion of Judge Posner away from the Chicago School of economic theory, particularly its disproportionate reliance on the market (rather than more invasive approaches such as increased regulation) as the solution for all problems. 

For anyone marginally familiar with the current financial crisis and Judge Posner's opinion in Jones v. Harris, the conversion is widely known.  Whatever one may think of Judge Posner's opinions in general, it is clear that he has allowed the present circumstances to modify his views.  In other words, he did not stick to a theoretical approach once the facts demonstrated otherwise.  Or, as Mark Twain observed in Connecticut Yankee (p. 58):  "This was the report; but probably the facts would have modified it."  Judge Posner allowed the facts to modify the report. 

One can quibble on the timing.  It was an overdue revelation.  The law and economics approach to corporate law had been on life support even before the current crisis. The Chicago School both relied on the Delaware approach to corporate law (an enabling approach for management) and placed disproportionate reliance on the market for corporate control as the mechanism to discipline inefficient management (thereby eschewing the need for regulation). 

The very enabling approach supported by these adherents ultimately undercut their entire theory.  The Delaware courts "enabled" mangement to use defensive measures (mostly poison pills) to all but shut down hostile tender offers.  With the hostile market for corporate control eviscerated, there was no meaningful market disciplining mechanism that could be used to support reliance by the Chicago School on the corrective ability of the market.  All of this is discussed in greater detail in The Irrelevance of State Corporate Law in the Governance of Public Companies.  Without a market disciplining method, adherents to the Chicago School in the corporate area have had a tough time justifying how the market can ensure efficient systems of management and corporate governance. 

Nonetheless, while it may have taken a financial crisis to alter his views, Judge Posner has done so.  The same can't be said for a number of other prominant adherents to the approach. We have yet to hear a mea culpa from Daniel Fischel and, from the tone of Judge Easterbrook's opinion in Jones v. Harris, he has moved little in his views despite the "facts" produced in the current crisis.  Jon Macey at Yale and I had a mild go round on the merits of the market v. regulation on CNBC (Bonuses, Do They Get It?  Street Signs, CNBC, Thurs. Dec. 10 2009).  Macey's recent and thoughtful book on Corporate Governance acknowledges the well known problems with the board of directors (particularly capture by the CEO) but continues to rely on the market as the best method for ensuring proper governance (read efficiency). 

And, while the phrase "law and economics" has fallen into disuse, many of the ideas have been repackaged in the form of "private ordering."  In effect, private ordering has become to law and economics what "intelligent design" became for creationism.  And, the drum of private ordering has been particularly loud with respect to the SEC's efforts with shareholder access (see Majority Voting, Delaware Statutory Reform, and Shareholder Access to the Proxy Statement: A Comment to the Securities and Exchange Commission ), it suffers from the fundamental flaw of the Chicago School:  There is no market.  See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.

Yet this same movement (the Chicago School) in fact provided the intellectual justification for Delaware's approach to corporate governance.  In effect, Delaware could claim that its pro-managment approach was the most efficient approach.  Yet, back to Mark Twain, the facts ought to conclusively modify this view.  We'll consider this in the next post.