Abstract

In the twentieth century, two Nobel-Prize winning economists wrote two seemingly unrelated characterizations of the processes constraining human behavior. One, Ronald Coase, wrote a short article entitled The Nature of the Firm,1 in which he reduced all managerial decision-making to a fundamental choice between making the factors of production, or buying them. This article and the idea of the "make or buy" decision for which it has come to be known, have proven to be among the most seminal in the history of financial economics and organizational behavior. The second economist, Friedrich Hayek, wrote what he thought to be a comprehensive treatment of the approach that ought to be taken to the generation of rules constraining human interaction. This voluminous work, Law, Legislation and Liberty, characterized the creation of legal rules as the product of either spontaneous or planned orders. Hayek argued that spontaneous orders like "law" were more efficient mechanisms for governing human behavior than planned orders like "legislation." 2 This thesis received a lukewarm reception generally, and virtually no reception at all in legal circles. This Article demonstrates that Coase and Hayek were actually making the same observation, albeit in different contexts. Hayek's conception of the two sources of order is, in fact, a more abstract application of Coase's "make or buy" decision. Had Hayek understood his characterization of legal processes to be a variant of Coase's "Theory of the Firm," his ideas may have received more traction. Lawyers, judges, and lawmakers may also have understood some of the implications of Hayek's thesis for constraining legal actors, as well as its applications in current debates on the scope of administrative agency authority, tort reform, or the use of legislative history in litigation.