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This paper argues that law and economics has not come to grips with Arrow's limitation on social welfare economics nor with the evolutionary character of economic and legal institutions. Arrow's theorem makes the concept of a socially efficient economic institution dependent on a prior allocation of property rights. A socially efficient result is efficient only within the bounds of the initial allocation of property rights. A differing initial
allocation would have resulted in a different efficient result. The participants in economic and legal systems are aware of this fact. They see that their positions can be improved both by market trades and by adjustments to property rights. This fact is the engine by which evolutionary law and economic change occurs. Furthermore, evolutionary law and economics has not recognized the fundamentally complex nature of evolution. Contrary to early arguments in law and economics, institutions do not evolve toward efficiency. They do not evolve toward a single point of any kind. Instead, they evolve in a complex and partially unpredictable way; driven by the actions of numerous participants and subject to path dependency and other evolutionary phenomena. The ideas that legal institutions form in an evolutionary manner and that social efficiency is a weak concept have been well-argued in the literature (for reviews see Barry 1991, Samuels 1991). However, the modern development of evolutionary economics has provided tools and metaphors that can strengthen the presentation (Roe 1996). 1 have chosen zoning as my illustration in part because of the numerous attempts by economists to analyze its efficiency and in part because it provides a compelling illustration of the evolutionary view.
This paper first discusses welfare economics and Arrow's theorem. It argues that the persistent focus on social efficiency is misguided and misleading. It is misguided because of its ignorance of the allocation issue; misleading because of its willingness to voice policy conclusions. The paper goes on to discuss evolutionary thought as an alternative to the traditional view. Finally, the paper recounts the development of zoning law as an illustration of the evolutionary phenomena that aggregate welfare economics overlooks.
Zoning is a central element of land use control in the United States. Virtually every city and town in the U.S. has a zoning ordinance. The major exception is Houston, the residents of which repeatedly defeat proposals for zoning.
