Transnational Corporations Review Vol. 3, No.

1, March 2011
www.tnc-online.net info@tnc-online.net 27-46

Opportunities for and Limits to an Economic Analysis of

International Law
Anne van Aaken

Abstract: The paper investigates the opportunities and the limits of economic analysis in international
economic law. Based on a legal theory approach, it highlights the different epistemological statements in
law and explores where and how social sciences, and especially economics, may play a role in law-
making (external view) and law-application (internal view). International Economic Law is in special need
of economic insights (economics as a subject-matter). Economics as a methodology (and its empirical
insights) can also be used to explain noneconomic issues in international economic law, such as treaty
negotiations. Examples from trade and investment law highlight the need for economic analysis in
international economic law as well as its limits

Keywords: International Law, International Trade Law, International Investment Law

1. Introduction

Different scholars attribute different roles to social science, and more specifically to economic theory, 1
when analyzing law: the economic analysis of law has become conventional in the United States and
Israel but is still perceived very critically in most of Europe and other jurisdictions. Many European
scholars explicitly eschew this approach or declare it incompatible with a Kantian-based approach to law,
stressing a non-consequentialist, deontological approach fearing the neglect of justice and stressing
doctrinal work as the foremost task of a lawyer. The reception of economic analysis of law including its
development as behavioral law and economics has thus been cautious and slow, especially in public law
such as constitutional or public international law (PIL). This includes international economic law (IEL),
although to a lesser degree than the rest of PIL. Reservations about the neglect of justice seem to apply
more forcefully in public law and PIL than in areas that deal with markets, such as private law or IEL.

I would like to thank the participants of the panel Approaches to International Economic Law: History, Ideology and Method of
the Biannual Meeting of the Society of International Economic Law in Barcelona, July 2010 for useful suggestions. The usual caveat
applies.

1
The biologist Edward O Wilson, Consilience: The Unity of Knowledge (1998) 195, considers that This discipline [economics]...
deserves the title often given to it, Queen of the social sciences.Likewise Robert D. Cooter, Law and Unified Social Theory (1995)
22 Journal of Law and Society 50.

27
 Opportunities for and Limits to an Economic Analysis of International Law

Two main characteristics of law and economics lead to objections: one is the normative relevance of the
efficiency criterion and the other is the positive rational choice approach. Whereas the former is seldom
used in IEL, the latter has been softened, at least in national law and economics through the
developments in behavioral economics. Its relevance for international law and economics has yet to be
analyzed, especially for trade and investment negotiations and (alternative) dispute settlement.
Nevertheless, it may be a way to narrow the gap between more constructivist approaches to international
relations (IR) and rational choice approaches to IR. To quote Moravcsik: Theory synthesis is not only
possible and desirable but is constitutive of any coherent understanding of international relations as a
progressive and empirical social science theories ought to be treated as instruments to be subjected to
empirical testing and theory synthesis. 2

The discussion about the merits of international law and economics is twofold. One aspect concerns the
relationship between social science and the law generally: if and where social science approaches may be
relevant to legal analysis. This is a very old, but still ongoing debate in legal theory. The second aspect
concerns the question which social science paradigm is best suited to answer questions related to law.

The first part of this paper uses an old classification of epistemic approaches to law, thereby trying to
clarify methodologically where social science, and more precisely rational choice analysis, has its place in
the realm of international legal scholarship. This should help to mitigate some still prevailing
misunderstandings and confusions in the discussion on the place of law and economics in PIL, including
IEL. The second part briefly describes where economic theory can contribute to an understanding of IEL,
especially for treaty making and scholarly analysis of the law. The third part highlights the possibilities of
using economic insights in interpreting IEL, using examples mostly from investment law. The next part
analyzes the limits to economic theory in PIL as well as in IEL, and the last part concludes.

2. Some methodological clarifications

Traditionally, three categorical statements are possible in law, which in turn means that lawyers can take
three different perspectives or roles. The first to introduce this distinction was Hermann Kantorowicz, 3
followed by Max Weber. 4 Kantorowicz composes an epistemological trilogy 5 consisting of the normative
perspective (Wertwissenschaft) 6 (in the social science sense: normative science), the sociological

2
Andrew Moravcsik, Theory Synthesis in International Relations: Real Not Metaphysical (2003) 131 International Studies
Review 5.
3
Hermann Kantorowicz, Rechtswissenschaft und Soziologie (first published 1911, 1962 ed).
4
Daniel Bodansky, International Law in Black and White (2006) 285 Georgia Journal of International and Comparative Law 34,
attributes this classification to Max Weber. Weber neither used this categorization in Sociology of Law (1921) nor in Objectivity in
Social Science and Policy (1904) though of course he always made a sharp distinction (as did Kantorowicz) between normative and
empirical knowledge. Weber also knew the Kantorowiczs paper; he commented on the paper Rechtswissenschaft und Soziologie of
Kantorowicz at the First German Days of Sociologists (Deutscher Soziologentag) in Frankfurt in 1910, see Max Weber,
Gesammelte Aufstze zur Soziologie und Sozialpolitk in Marianne Weber (ed) (1988) 476-484.
5
Kantorowicz, above fn 4, 69 (erkenntnistheoretischer Trialismus).
6
Bodansky, above fn 5, 285 calls this the ethical perspective.

28
 Anne Van Aaken

perspective (Realwissenschaft; positive science), and the doctrinal perspective (Normwissenschaft).

He also distinguishes between the general and the specific level of knowledge within those three
categories. 7 The normative and the sociological perspective take an external point of view on the law,
whereas the doctrinal perspective takes an internal point of view. 8

The normative perspective includes questions of how (international) law ought to be. On a general
knowledge level, this is meant to be legal philosophy: what kind of goals should PIL pursue? The specific
level includes legal policy questions, e.g. how to design international institutions (de legeferenda) to
achieve the stated goals, including the effectiveness of the law. The discussion about which goals to
pursue and how to justify them (e.g. efficiency, peace, justice, sustainability) thus belongs to the
normative perspective. The question of how best to pursue them, though, necessarily includes social
science knowledge; norm idealism without a reality check is at best nave, at worst untruthful. Whereas
the normative criterion of efficiency was much criticized in Europe and the US, 9 it is less important and
rarely used in PILs economic analysis. 10 It is, however, used in IEL, e.g. in the question of the efficiency
of trade agreements. Here, it usually refers to Paretoefficiency, that is, mutual economic gains from trade
for the countries involved. It may also refer to the gains from trade to one country only.

The second category is the sociological perspective or positive explanation in the social science sense.
Here, descriptive, explanatory, and predictive questions can be asked. Usually one proceeds by developing
a hypothesis that can (and should) be empirically tested. The causes and effects of PIL come to the fore,
depending on whether PIL is used as explanans (independent variable) or explanandum (dependent
variable). Only this kind of knowledge enables international law scholars to look at the problem structure
underlying PIL and to explain or prescribe specific lawmaking procedures or monitoring mechanisms for
specific issue areas of PIL. Explaining the effectiveness of international human rights treaties or
international trade treaties, e.g. requires a view of the underlying problem structure (mostly modeled in
game theoretical terms) in order to know why some monitoring mechanisms work in one issue area but
not in another. Here again, one can distinguish the general from the specific level. Whereas, on the general
level, the merits of different social science theories and their respective hypotheses are discussed (e.g.
rationalist vs. constructivist views of how PIL functions), on the specific level, a scholar can work
empirically on a specific issue and try to invalidate a hypothesis.

Last, but not least, there is the third category, the traditional domain of international lawyers: the doctrinal
perspective, which Kantorowicz called Normwissenschaft (science of the application of law). Here,
hermeneutics is the primary methodology, something economics cannot contribute to at first sight. Here
again, there are two different levels: the general level of methods of interpretation and the specific level of

7
Kantorowicz, above fn 4, 92 (generalisierende und individualisierende Erkenntnis).
8
Seminal: Herbert L. A. Hart, The Concept of Law (1961).
9
See e.g. the articles in Symposium on Efficiency as a Legal Concern (1980) 485 8 Hofstra Law Review.
10
See Joel P.Trachtman, The Economic Structure of International Law (2008) 146-147, who also argues that economic efficiency
should not be the sole standard of interpretation.

29
 Opportunities for and Limits to an Economic Analysis of International Law

doctrinal analysis. An example of the first is the discussion whether a consequentialist argument is
permissible as an interpretative method. The systematic starting point for the interpretation of treaties is
Arts. 31 and 32 of the Vienna Convention on the Law of Treaties. 11 Art. 31 (1) VCLT states as the general
rule for interpretation (1) the ordinary meaning of the terms of the treaty, (2) the context, and (3) that the
treaty must be interpreted in light of its object and purpose. 12

Reconsidering the debate on interpretative methods of Art. 31 (1) VCLT is beyond the scope of this paper.
Nevertheless, the object and the purpose of a treaty can be of special interest for opening a door for
consequentialist interpretation. Furthermore, consequentialist reasoning is also found in the principle of
proportionality. Whenever means/end relationships are in question, social science can contribute to law
interpretation. If this is accepted, economics as a social science methodology and especially empirical
insights can enter the interpretation, since real world consequences of laws or of their interpretations are
the domain of social scientists. If teleological interpretation and parts of the proportionality principle are
not confined to legal consequences but also include real world consequences, as is often done either
implicitly or explicitly, social science insights are needed, be they hypotheses or, better, empirical insights
into causal relationships.

Kantorowiczs three categories or perspectives are connected. Positive explanation can be used to derive
normative critique; positive explanation is indispensable for the pursuit of certain goals. 13 This shows
again how closely interconnected the three categories are. On questions of legal policy and institutional
design, there is broad consensus that social science should be taken into account. Opinion differs more
forcefully on the question of law application, i.e., the extent to which and the way in which the normative
and the sociological perspective can enter the doctrinal perspective. There is certainly more room for the
integration of social science insights about institutional design than about law application. But the
difference between law-making and law application in the reception of social science insights is a matter
of degree, not principle.

Having said that, legal science as taught in most parts of the world lacks social science competence; the
doctrinal perspective is strong as a hermeneutical science only. Once it is accepted that reality (and
theories about it) are relevant (even) to law application, lawyers are forced to look at their neighboring

11
Vienna Convention on the Law of Treaties, opened for signature 23 May 1969, 1155 UNTS 331, Art .31 and 32 (effective 27
January 1980) (VCLT). See e.g. Richard K Gardiner, Treaty Interpretation (2008); Sir Robert Jennings and Sir Arthur Watts (eds.),
th
Oppenheims International Law (first published 1905, 9 ed, 1992) vol I, part 2 to 4 (Peace) 1266. These rules of interpretation are
accepted as customary international law. For supplementary means of interpretation such as contra preferentem, in dubio mitius, or
expression unius est exclusion alterus, see ibid., 1277 et seq.
12
For different schools of thought on treaty interpretation, see Gerald Fitzmaurice, Law and Procedure of the International Court
of Justice 1951-4: Treaty Interpretation and Other Treaty Points (1957) 33 British Yearbook of International Law 203; Thomas
Wlde, Interpreting Investment Treaties: Experiences and Examples in Christina Binder, Ursula Kriebaum, August Reinisch, and
Stephan Wittich (eds), International Investment Law for the 21st Century. Essays in Honour of ChristophSchreuer (2009) 724. See
also Kenneth J.Vandevelde, Treaty Interpretation form a Negotiatiors Perspective (1988) 21 Vanderbilt Journal of Transnational
Law 281 with a special reference to investment law.
13
Daniel A. Farber, Positive Theory as Normative Critique (1995) 68 Southern California Law Review 1565.

30
 Anne Van Aaken

disciplines. Anne-Marie Slaughters famous statement that a social science approach to international
relations can make international lawyers better lawyers 14 reflects this understanding. But elements of
social science often enter interpretation through the respective law interpreters everyday
intuition, 15 sometimes smuggling in either her own social science intuition (sociological perspective) or
hidden value judgments (thus a category from the normative/ethical perspective) without making the
epistemological status of the argument clear and thus without enabling open critique and discussion. 16
Epistemological obscurities thus contribute to misunderstandings, especially concerning the application of
Law and Economics; an epistemologically clear discussion could mitigate such misunderstandings.

3. An external view: the birds eye

There is no doubt that economic analysis allows very different views and highlights different problems in
IEL. Clearly, economics as a social science takes primarily an external point of view and this point of
view, or flight height, can vary immensely, depending on the research question. Furthermore, economics is
very diverse. It not only includes subjects like international trade theory, but also subjects like public
choice or political economy, just as it is the correct choice of science if trade damages need to be
calculated. The methodology, and not the subject matter, unites all these approaches. As in any social
science, it aims at forming a testable hypothesis. In that pursuit, economists assume that all actors,
whether individuals, states or any other entity, behave rationally in the pursuit of their goals. Recently, this
approach has been enriched by behavioral economics. 17

Furthermore, economics no longer relies solely on models, such as trade models or investment models ,but
also tests them ever more empirically, with the result that some of the textbook wisdoms, e.g. of trade or
investment theory, have had to be modified and differentiated. These insights are highly relevant for
lawmaking and application. The following provides a more general comment on the potential of using
economics in analyzing states behavior and a short overview of economic insights on trade and
investment. In both areas, IEL may be used either as an explanandum or as an explanans as described
above.

14
Anne-Marie Slaughter, International Law and International Relations: Millennial Lectures (2001) 9 Receuil de Cours/Hague
Academy of International Law 26. See also Anne-Marie Slaughter et al., International Law and International Relations Theory: A
New Generation of Interdisciplinary Scholarship (1998) 92 American Journal of International Law 367 and, for an early argument,
Kenneth Abbott, Modern International Relations Theory: A Prospectus for International Lawyers (1989) 14 Yale Journal of
International Law 335.
15
Robert D.Cooter, The Minimax Constitution as Democracy (1992) 12 International Review of Law and Economics 292: For
two millennia lawyers and legal theorists in the West used the same reasoning as the man in the street to predict how people will
respond to laws. Legal scholarship knew no behavioral theory beyond common sense. The same criticism can be found in Europe,
e.g. Peter Noll, Gesetzgebungslehre (1973) 27.
16
The latter was one of Hans Kelsens main criticisms of his colleagues, see Hans Kelsen, ReineRechtslehre (Pure Theory of Law)
(first published 1934, 1994), Foreword. It was obviously one motivation for developing his pure theory of law.
17
See generally Cass R.Sunstein (ed), Behavioral Law and Economics (2000); for PIL, see Kenneth Abbott, Enriching Rational
Choice Institutionalism for the Study of International Law (2008) Illinois Law Review 5; Anne van Aaken, Towards Behavioral
International Law and Economics? Comment on Kenneth W. Abbott (2008) Illinois Law Review 47.

31
 Opportunities for and Limits to an Economic Analysis of International Law

3.1. Analyzsing states behaviorgenerally

The analysis of states behavior is traditionally the domain of international relations scholarship. Insofar as
this scholarship uses rational-choice methodology, it is usually indistinguishable from economics. Lately,
law and economics scholars have begun to decrease their distance, analyzing international law in more
detail by using rational-choice methodology. Furthermore, empirical legal studies in this field are
growing. 18 In the analysis of the behavior of states, the questions usually asked are 1) why states make
international law in the first place, 2) how they design it, and 3) whether and under what circumstances
they comply with international law. Following realist or institutionalist rational-choice international
relations scholarship, the state is usually viewed as a black box. The three seminal books on international
law and economics of the last years take this approach. 19 Normally, game theoretical methodology is used,
sometimes combined with contract theory and/or transaction cost theory. Political-economy approaches,
however, do open up the black box of the state, as described above for trade theory, and since very
recently also for investment law. A hint at these more general analyses should suffice here, since
economists, lawyers, and international relations scholars have written prolifically on this topic. The
application of the methodology of economics to PIL is also relevant for IEL.

3.2. Economic insights in trade

It is obviously impossible to present all of economic theorys insights into trade law here. I will mention
only a few of the possibilities for using economic theory from an external point of viewin international
trade law. First, economic trade theory is about the subject matter of economics; it does not analyze trade
institutions or law. Starting with Ricardos theory of comparative advantage, 20 it tells us why
international trade is advantageous in the first place. This theory has of course developed much further
since him.21It can also inform us what the economic consequences of certain norms in trade law are, e.g.
the consequences of tariffs or of quantitative restrictions. Second, traditional trade theory faces the puzzle
that, since it is economically beneficial for countries to liberalize unilaterally, trade agreements are not
necessary. The classic explanation holds that unilateral free trade is the optimal policy for a country,
certainly for a small country that cannot influence its terms of trade. Why do we find them anyway? In
economics, two big strands of explanation for international multilateral trade negotiations can be
distinguished: the terms of trade story22and the political economy or public choice story,23 the former

18
The American Society of International Law held a panel discussion on this topic for the first time in 2010.
19
Goldsmith and Posner, The Limits to International Law (2005); Andrew Guzman, How International Law Works: A Rational
Choice Theory (2008); Trachtman, above fn 11.
20 rd
David Ricardo, On the Principles of Political Economy and Taxation (first published 1817, 3 ed 1821).
21
For an overview, see Robert C.Feenstra, Advanced International Trade: Theory and Evidence (2004).
22
Seminal: Kyle Bagwell and Robert W.Staiger, An Economic Theory of GATT (1999) 89 American Economic Review 215, but
they include as well distributional concerns as emphasized in political economy models.
23
Gene M. Grossman and Elhanan Helpman, Protection for Sale (1994) 84 American Economic Review 833; Gene M.
Grossman and Elhanan Helpman, Trade Wars and Trade Talks (1995) 103 Journal of Political Economy 675. See also Warren F.

32
 Anne Van Aaken

assuming a benevolent, unified state actor maximizing national welfare, the latter introducing a two-level
game of trade negotiations, assuming that trade negotiators are responsive to internal pressures and
lobbying. They are maximizing their own political welfare.

Economists have lowered the flight height when analyzing single norms in the trade agreements. They
have tried to explain the sanctioning system of the WTO, 24 the Safeguards Agreement, 25 and many other
clauses, for example the consequences and rationale of the Most Favored Nation clause (MFN) or the
National Treatment clause, two of the constitutional principles of the WTO. Other scholars explain the
WTO as an incomplete contract, highlighting the rationale and the importance of exceptions in WTO
law. 26 Those explanations provide insight into the rationale and the functioning of the trading system.

It should be clear by now that all the above refers to theory of trade and trade law. What about empirical
findings? Lets have the trade economists themselves answer: The folklore of international economics
holds that there is a simple difference between the sub-fields of international finance and international
trade. In international finance, every theory ever proposed is decisively rejected by the data. In
international trade, no theory ever proposed has ever been touched by data. This is, of course, a parody.
But like many parodies, it contains a grain of truth. 27 They conclude: The field of international trade is
falling short in its central mission. That mission is to understand the causes and consequences of trade in
the world we actually inhabit. Trade economists can justly take pride in the theoretical achievements of
our field. But these have not been matched with equally illustrious progress on the empirical side. Indeed,
data analysis has long played a marginal role in the professional life of our field. Notable individual
contributions notwithstanding, virtually all of the most important empirical questions remain open and at
times nearly untouched. 28 So trade models should be viewed with caution and we should look out for
new, empirically based research that could provide useful insights for trade negotiations.

Ever more relevant are the economic insights into the interrelationship between trade, growth, and the
environment. Traditionally, it has been held that environmental degradation increases with economic
growth and then declines, once an economy has reached a certain per capita income: the so-called
Environmental Kuznets Curve. Since trade leads to the growth of an economy, trade should also increase

Schwartz and Alan ONeil Sykes, Toward a Positive Theory of the Most Favored Nation Obligation and its Exceptions in the
WTO/GATT System (1996) 16 International Review of Law and Economics 27, 28.
24
Warren F. Schwartz and Alan ONeil Sykes, The Economic Structure of Renegotiation and Dispute Resolution in the World
Trade Organization (2002) 31 Journal of Legal Studies 179 (supplement); Alan ONeil Sykes, Public vs. Private Enforcement of
International Economic Law: Of Standing and Remedy (2005) 34 Journal of Legal Studies 631; Alan ONeil Sykes, Trade Remedy
Laws, (Olin Working Paper No. 240, U Chicago Law & Economics, 2005) <http://ssrn.com/abstract=698381>accessed on 23 July
2010.
25
Alan ONeil Sykes, The Safeguards Mess: A Critique of WTO Jurisprudence, (Olin Working Paper No 187, U Chicago Law &
Economics, 2003) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=415800>accessed on 23 July 2010.
26
Simon Schropp, Trade Policy Flexibility and Enforcement in the WTO.A Law and Economics Analysis (2009).
27
Donald R. Davis and David E. Weinstein, What Role for Empirics in International Trade? (Working Paper No 8543, National
Bureau of Economic Research (NBER), 2001) 4.
28
Ibid., 27.

33
 Opportunities for and Limits to an Economic Analysis of International Law

pollution, ceteris paribus. The explanation was given by the so-called Displacement Hypothesis and the
Pollution Haven Hypothesis. Again, the evidence is mixed and needs to be examined carefully. 29

3.3. Economic insight in investment

Just as in international trade theory, economic writings on foreign direct investment (FDI) take many
different viewpoints. First, economics as a subject matter informs us whether, how, and under what
circumstances FDI is beneficial for host countries. Second, whether economics as a methodology can,
again, be applied to investment law as an explanans or an explanandum. If it is used as an explanans, we
may ask why states sign investment treaties 30 and how investment treaties are designed. The latter question
is an object of contract theory applied to international investment law. 31 Again, some short highlights are
in order. All of these insights may be important for the design of investment treaties, a task always
involving lawyers.

Let us start again with the purely economic rationale of BITs, including the empirical evidence on the
theory. The classical causal chain assumed by treaty-makers is that BITs foster FDI, FDI leads to
economic growth, and growth leads to enhanced welfare of the population. Clearly, international
investment agreements (IIAs) mitigate the political risk of investing and thus reduce the risk premium
necessary for an investment. This, in turn, induces more investors to invest because it reduces the rate of
return required to compensate for an investments risk. But the causal connection between BITs or FDI
and enhanced welfare is not unequivocal, although the assumption often seems to be that not only
investment as such, but also foreign investment contributes to growth. Precisely this belief, coupled with
immense and sometimes costly efforts to attract FDI, has triggered extensive research by academics,
mainly by economists.

By now we know that some of these causal assumptions are empirically fragile or that the assumed causal
link exists only under certain circumstances. Lets go step by step. The empirical evidence on the
correlation of the first relationship between BITs and FDI is mixed; 32 even if studies find a positive
correlation between the conclusion of IIAs and FDI, there is agreement that factors other than IIAs, such
as market size and market potential, are economically much more important for an investment decision. It
is also unclear whether IIAs lead to investment or vice versa. 33 Furthermore, the positive relationship
between FDI and growth, although aclassical economic textbook wisdom, is empirically shaky: in

29
See Soumyananda Dinda, Environmental Kuznets Curve Hypothesis: A Survey (2004) 49 Ecological Economics 431.
30
Andrew T. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties (1998)
38 Virginia Journal of International Law 639.
31
Anne van Aaken, International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis (2009) 12
Journal of International Economic Law 507.
32
For a summary of the empirical findings, see UNCTAD, The Role of International Investment Agreements in Attracting Foreign
Direct Investment to Developing Countries (2009).
33
See the IIA plans of the European Union, Q&A: Commission launches comprehensive European international investment
policy<http://trade.ec.europa.eu/doclib/press/index.cfm?id=590>accessed on 7 July 2010.

34
 Anne Van Aaken

general, the results of these studies indicate that the size of inward FDI stocks or flows, relative to GDP, is
not related in any consistent way to rates of growth. 34 There is no consensus on the relationship between
FDI and growth; rather, one can distinguish three positions: 35 1) the Washington Consensus that FDI is
good in any case for development, no matter under what conditions (as long as there are no externalities).
2) Skeptics have interpreted the mixed results as reflecting extravagant claims about positive spillovers
from FDI that are not corroborated by the sobering evidence, thus holding that one Dollar of FDI is
worth no more (and no less) than a Dollar of any other kind of investment; 36 there would thus be no
case for special treatment of FDI. 37 3) Dirigisme resurrected to be found in some developing countries,
where the host country development is to be achieved only by imposing joint venture requirements or
performance requirements on investors, e.g. technology transfer or domestic content requirements in order
to ensure that reverse linkages to the local economy occur. A new paper finds that the effects of FDI
depend on 1) the size of the investment under different market conditions and 2) the political situation.
Very concentrated investment in autocratic societies is not beneficial. Investment in competitive market
structures in democracies is. 38

The empirical results on positive spillovers of FDI (usually meant as knowledge spillovers to domestic
firms) have been mixed and greatly depend on the sector and type of FDI (all else being equal). The value
added by foreign investment is usually assumed to be better technological or management knowledge,
thereby enhancing productivity (which is the key driver for growth). 39 Also, certain conditions must
prevail in the host country, such as a certain level of human capital, competitive market and good
governance conditions, trade openness, etc., for the host country to be able to reap the benefits of FDI. As
for the third relationship between growth (usually measured as a change in GDP) and welfare, there is
usually a high correlation, but if judges that welfare is better measured by the Human Development Index
(which in addition to GDP includes social indicators like education and health), a more differentiated
picture emerges, since here environmental factors, for example, are partially included in the health
indicator.

By no means does a political economy perspective see the protection of FDI as solely positive. Restricting
the policy space by means of IIAs is usually deplored. And there is certainly a trade-off between the
attraction of capital (in competition with other countries 40 ) and the regulatory constraints imposed by

34
Robert E.Lipsey, Home and Host Country Effects of FDI (Working Paper No W9293, National Bureau of Economic Research
(NBER), 2002) 55.
35
Cf. Theodore Moran et al., Introduction and Overview, in Theodore Moran, Edward Graham, and Magnus Blomstrm (eds),
Does Foreign Direct Investment Promote Development?(2005) 1.
36
Dani Rodrik, Making Openness Work: The New Global Economy and the Developing Countries (1999) 37.
37
Beata S. Javorcik, Can Survey Evidence Shed Light on Spillovers from Foreign Direct Investment? (2008) 23 World Bank
Research Observer 139, 140.
38
Witold Henisz, Concentrated Power, Foreign Direct Investment and Economic Growth (paper presented at the Annual
Conference of the International Society of New Institutional Economics, Berkeley, 18-20 June 2009), available at
<http://papers.isnie.org/berkeley.html>accessed on 23 July 2010.
39
See for example Moran et al., above fn 40, with an overview of the empirical studies.
40
Guzman, above fn 35.

35
 Opportunities for and Limits to an Economic Analysis of International Law

IIAs. 41 Nevertheless, for an incumbent government it might make sense to sign IIAs, since the expected
positive (net) effect of FDI may be captured rather quickly and help re-election, whereas the problems and
costs arising through investment protection, i.e., cases coming up and damages being paid to foreign
investors, might be borne by subsequent governments alone, especially if long-term contracts are at stake.
A recent empirical political economy study of the provision of investment incentives for firms found that
politicians are more likely to be re-elected if they offer investment incentives to firms in order to lure them
to their jurisdiction, even if these incentives surpass the potential economic benefit of the investment.
Thus, FDI incentives pay off politically but not economically. 42

4. An internal view: economic analysis in the interpretation of the law

Social science insights are undisputedly more relevant to institutional design de legeferenda than to law
application. Nevertheless, the difference between the reception of social science insights in treaty making
and in law application is a matter of degree, not principle. But the differences are greater in law
application, i.e., the extent to which and the way in which the normative and the sociological perspective
enter the doctrinal perspective. Here, the argument is that any social science insights should be used, in a
methodological transparent manner, in law interpretation.

4.1. Economic content of the norm

Clearly, if the norms require economic insights and analysis, the law interpreter must integrate economic
insights into the interpretation. This can apply to the elements of the norm (if) or to the legal
consequence (then). An example of the former is the norms for competition, (e.g. affecting trade or
distorting competition 43 ); an example of the latter is the calculation of damages, e.g. in trade law 44 or in
investment law. 45 The integration of economic insights into law is not greatly debated here since the norm
itself demands economic insights. There is more discussion about what the law interpreter is to do if the
economic insight is disputed because there are either competing theories or contradicting empirical
evidence. The viewpoint taken here is that the law interpreter should integrate these insights as much as
possible but must ultimately judge which theories or empirics are relevant.

41
For details, see van Aaken, above fn 36.
42
Nathan M. Jensen and Edmund J. Malesky, FDI incentives pay - politically (2010) 26 Columbia FDI Perspectives.
43
See Treaty ofLisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, 13
December 2007, 2007/C 306/01, Art.101 (formerlyArt. 81 TEC) (effective 1 December 2009) (Treaty of Lisbon). See also the
articles in Josef Drexl, Laurence Idot, Joel Monger (eds), Economic Theory and Competition Law (2009).
44
See the contributions in Chad Bown and Joost Pauwelyn (eds), The Law, Economics and Politics of Retaliation in WTO Dispute
Settlement (2009).
45
Calculating damages in investment law, especially when using the Discounted Cash Flow Method, as is done in every valuation
of firms, is an art of accountants. For the legal perspective, see Sergey Ripinsky and Kevin Williams, Damages in International
Investment Law (2008); Thomas Wlde and BorzuSabahi, Compensation, Damages and Valuation in International Investment Law,
in Peter Muchlinski, Federico Ortino, and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (2008),
1049; Philippe Pinsolle, Damages in Investment Arbitration (2005) 6 Journal of World Investment and Trade 45.

36
 Anne Van Aaken

4.2. Non-economic content of the norm

Already more debated is the use of social science or economic insights to interpret norms where no strict
economic subject matter is at stake. Some interpretative methods not only leave a window open for social
science knowledge but even demand it, e.g. in teleological interpretation (object and purpose as mentioned
in Art. 31 (1) VCLT), in comparative interpretation, in openly consequentialist argumentation, or within
the principle of proportionality (e.g. necessity under Art. XX (b) GATT 46 or Art.1 of Protocol No. 1 to the
ECHR 47 ). 48 Thus, rational choice, if accepted as social science paradigm, can enter the interpretation of
(international) law through various interpretative methods and already does. Here we will examine two
main entry points for social science (and economics) when interpreting IEL: First, the object and purpose
of the norm and second the principle of proportionality. Both have in common a means/end rationality that
should not be left solely to the intuition of the law interpreter, but rather subjected scientific insights. I will
deal with both in turn.

4.2.1. Object and purpose of a treaty

Although the argument above applies when interpreting all kinds of PIL, the point is even easier to make
for IEL, since here the treaties and the norms therein are connected mostly to economic purposes, such as
economic or sustainable development. So if the object and the purpose of a treaty, as stated in the
preamble, are of economic nature, how should this be taken into account? No one disputes that a preamble
serves as one means for the teleological interpretation of treaties. There is no great debate, but there
should be, on the degree to which this interpretation may be dynamic in the sense that not only the
purpose as such but also current economic insights, including empirical findings, can be applied.

Finding the object and the purpose of a treaty is not an easy task. Several questions arise for a law
interpreter: what is the meaning of the object and purpose, how to identify them, what is the relationship
between the object and the purpose, how to balance different stated purposes of a treaty, how to interpret
the object and the purpose, and whether and how to take into account social science when interpreting the
object and the purpose. Often, there are several, possibly conflicting stated purposes. 49 So either possible
trade-offs arising between these purposes should be admitted or other conflict solutions should be found.
Several issues have to be acknowledged: First, the object should not be confounded with the purpose.
Second, for interpretation, the purpose is more important than the object. And third, there might be
different layers of purposes; just as in a decision matrix, there are sometimes complex means/end

46
Marrakesh Agreement Establishing the World Trade Organization, opened for signature 15 April 1994, 1867 UNTS 3 (effective
1 January 1995), annex 1A (General Agreement on Tariffs and Trade) 1867 UNTS 190 (GATT).
47
Convention for the Protection of Human Rights and Fundamental Freedoms, opened for signature 4 November 1950, 213
UNTS 221 (effective 3 September 1953) (ECHR).
48
Anne van Aaken, Defragmentation of International Law through Constitutional Interpretation: A Methodological Proposal (2009)
16 Indiana Journal of Global Legal Studies 483.
49
Vandevelde, above fn 13, 288 et seq.

37
 Opportunities for and Limits to an Economic Analysis of International Law

relationships. Depending on what level one examines, an end might become a means. 50 In investment
treaties, e.g. these layers may be the protection of investors rights, the promotion of investment, or
economic (or sustainable) development. Or the object of the treaty may be investor protection, while the
underlying purpose is development.

Let me illustrate this problem with an example from investment law. Assume a tribunal has to interpret the
norm of fair and equitable treatment, the norm of indirect expropriation, or an MFN clause. It may use the
object and purpose of an investment treaty as a means of interpretation. The question is then what the
purpose of the investment treaty is. To my mind, it is questionable that the only purpose of BITs is the
protection of investment. Citations in tribunals decisions that state that the purpose of a BIT is the
protection of the investments abound, e.g. The Tribunal shall be guided by the purpose of the Treaty as
expressed in its title and preamble. It is a treaty to protect and to promote investments It is to create
favorable conditions for investments and to stimulate private initiative. 51 It seems undisputed that
(factually) the object and purpose of the BIT is (solely) the protection of the investment. In the view of
some tribunals, BITs are instruments for the maximization of investor protection and that, accordingly,
uncertainties about ambiguous treaty provisions, including the MFN clause, should be resolved in favor of
foreign investors. 52

It is already questionable that the only purpose of BITs is the protection of investment. Rather, as most
preambles reveal, protection of investment is rather a means to an end, i.e., welfare, development, or
prosperity (of home and host states). The US Model BIT 2004, 53 the Swiss Model BIT, 54 and the
Norwegian Draft Model BIT (discarded), 55 for example, state that prosperity is the goal, 56 and some

50
Seminal: Gunnar Myrdal, Das Zweck-Mittel-Denken in der Nationalkonomie (1933) IV Zeitschrift fr Nationalkonomie 305.
51
Siemens A.G. v The Argentine Republic (Decision on Jurisdiction) ICSID Case No ARB/02/8 (3 August 2004) para 81. Very
clearly also Vandevelde, abovefn13, 299.
52
See e.g. SGS SocitGnrale de Surveillance S.A. v Republic of the Philippines, ICSID Case No ARB/02/6(29 January 2004)
para 116: It is legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments.See also
Noble Ventures, Inc. v. Romania, ICSID Case No ARB/01/11, (12 October 2005) para 52 (concerning the teleological interpretation
of an umbrella clause: The object and purpose rule also supports such an interpretation. While it is not permissible, as is too often
done regarding BITs, to interpret clauses exclusively in favour of investors, here such an interpretation is justified.).
53
Recognizing that agreement upon the treatment to be accorded such investment will stimulate the flow of private capital and
the economic development of the Parties; Agreeing that a stable framework for investment will maximize effective utilization of
economic resources and improve living standards;Desiring to achieve these objectives in a manner consistent with the protection
of health, safety, and the environment, and the promotion of internationally recognized labor rights (emphasis added).
54
Recognizing the need to promote and protect foreign investments with the aim to foster the economic prosperity of both States
(emphasis added).
55
Recognizing that the promotion of sustainable investments is critical for the further development of national and global
economies as well as for the pursuit of national and global objectives for sustainable development (emphasis added).
56
Of course, the ICSID was created in 1965 under the auspices of the World Bank with the goal of fostering private capital flows
to developing countries (international cooperation for economic development), see the Preamble of the ICSID Convention. For the
ICSID Convention, see Christoph Schreuer, The ICSID Convention. A Commentary on the Convention on the Settlement of
Investment Disputes Between States and Nationals of Other States (2001), preamble, para 11: The ICSID Conventions primary aim
is the promotion of economic development. Ibid. Art. 25, para 88: Therefore, it may be argued that the Conventions object and
purpose indicate that there should be some positive impact on development. Similarly, Prosper Weil invokes the purpose of the

38
 Anne Van Aaken

commentators have followed this approach. 57 Also the broad purpose of the ICSID Convention is to
establish an effective means of settling disputes that, by providing security for foreign investment in
developing countries, will promote the capital flows needed for economic development in the developing
world. The ICSID Convention was set up under the auspices of the World Bank 58 not primarily to protect
private property as such, but to foster development. 59 One may therefore well argue that the object and
purpose of the investment regime is broader: it is (by now: sustainable) development. 60

All these texts reveal a means/end relationship between investment and development. Nowhere is
investment protection as such the goal of the treaty. It seems puzzling how tribunals could mistake the
means (investment) for the end (development) when identifying the purpose of a treaty. Why would a state
conclude a treaty to protect foreigners for the sake of protecting foreigners? The purpose of BITs must be
seen as contributing to the welfare or prosperity of home and host states by means of investment
protection and promotion.

Only one reason suggests itself why tribunals take the protection of investment as the purpose of a BIT.
They must assume that there is an unproblematic and unconditional (causal) link from the protection of
investors in IIAs to growth and development and that therefore investors protection can be used as a
proxy for development; that is, if protection of FDI and development are so closely connected that
protection of FDI almost equals development, then it does not matter which of the two is to be taken as a
purpose of a BIT. As the Amco Tribunal held: To protect investments is to protect the general interest of
development and of developing countries. 61 As we have seen above, this assumption is empirically shaky
and so tribunals should take this shakiness into account when interpreting a BIT; thus, investor protection
cannot be assumed to contribute necessarily to economic development.

My point here is not that the assumed relationship does not exist, but rather that one needs to take a more
cautious and differentiated approach than investment tribunals have usually done. Investment protection
does not equal development and can therefore not be taken as a proxy purpose. Rather, the first layer,

ICSID Convention in his dissenting opinion in TokiosTokeles v Ukraine, Case No ARB/02/18, Decision on Jurisdiction (29 April 2004),
available at <http://ita.law.uvic.ca/documents/Tokios-Jurisdiction_000.pdf>accessed on 12 July 2008.
57
Nicholas DiMascio and Joost Pauwelyn, Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the
Same Coin? (2008) 102 American Journal of International Law 48.
58
See also the Articles of Agreement of the International Bank for Reconstruction and Development (World Bank), Art. 1 (i): To
assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive
purposes.
59
Preamble of the ICSID Convention: Considering the need for international cooperation for economic development, and the role
of private international investment therein.
60
Let me clarify that I do not intend to say that tribunals should deny their jurisdiction ratione materiae on grounds of nonfulfillment
of an extensive investment definition that includes a contribution to economic development, as in Malaysian Historical Salvors SDN,
BHD v Malaysia (Award on Jurisdiction) ICSID Case No ARB/05/10 (17 May 2007). In my view, that goes a step too far. Investment
tribunals are not well placed to judge the contribution of an investment to development in the stage of investing. Nevertheless, the
purpose should enter the interpretation of the substantive norms of an IIA.
61
Amco Asia Corporation and others v. Republic of Indonesia (Decision on Jurisdiction) ICSID Case No ARB/81/1 (25 September
1983), 23 ILM 351 (1984), para 23.

39
 Opportunities for and Limits to an Economic Analysis of International Law

investment protection, is the object of the treaty, investment promotion an intermediary purpose, and
development the ultimate purpose of an IIA. If this is accepted, then this may lead to different approaches
in the interpretation of IIAs. If it is true that welfare is the goal, then e.g. host country measures to foster
welfare, e.g. through environmental or human rights measures, must be respected to a greater extent than
if protection of investment is the goal. Therefore, the ultimate purpose also needs to be considered, and
this cannot be done by fostering only the means (investment) while neglecting the end (development).

Second, the question arises whether development by now has evolved to mean sustainable development,
especially in light of the aforementioned empirical insights. Whereas the traditional rule affirms that the
treaty has to be interpreted in the light of the law in force at the time when the treaty was concluded, the
other rule would require that the interpretation be guided by the rules of international law in force at the
time when the treaty is applied. 62 Much depends on the treaty language. A term itself may be not static,
but evolutionary, such as expropriation. 63 Also, the object and purpose of a treaty may hint that
interpretation should take into account progressive development. 64 Thus, just as the general exceptions in
Art. XX GATT are intended to adjust to the situation as it develops over time, 65 investment law would be
more open to interpretation in line with the economic insights of trade-offs if the second approach to
intertemporality were taken. If one accepts that sustainable development is evolving into a customary law
principle, 66 then it should also be used as a principle in investment arbitration, not only by the WTO,
where it is expressly written in the preamble.

4.2.2. The proportionality principle

Let us turn to the second entry point for social science (and economics) in the interpretation of PIL: the
proportionality principle. The arguments presented here apply equally to international trade law.
Originating in German constitutional law, the proportionality principle diffused to most legal systems
around the world and deeply into international law. 67 Proportionality is recognized today as a general

62
International Law Commission, Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of
International Law. Report of the Study Group of the International Law Commission, finalized by Martti Koskenniemi (13 April 2006)
A/CN.4/L.682, para 475. In Aegean Sea Continental Shelf (Greece v Turkey) [1978] ICJ Rep 32, the ICJ applied the presumption
according to which a generic term is intended to follow the evolution of the law and to correspond with the meaning attached to the
expression by the law in force at any given time.
63
International Law Commission, above fn 65, para 478 (a), using expropriation as one example.
64
Case concerning the Gabkovo-Nagymaros Project (Hungary/Slovakia) [1997] ICJ Rep 76, paras 132-147, where the Court
states that the treaty is not static, but open to adapt emerging norms of PIL.
65
United States - Import Prohibition of Certain Shrimp and Shrimp Products, T/DS58/AB/R, DSR 1998:VII, (12 October 1998)
2795-2796, para 130: From the perspective embodied in the preamble of the WTO Agreement, we note that the generic term
natural resources in Article XX (g) is not static in its content or reference but is rather by definition, evolutionary.
66
Case concerning the Gabkovo-Nagymaros Project, abovefn67, 78, paras 140-141 and Pulp Mills on the River Uruguay
(Argentina v Uruguay) (Provisional Measures Order 13 July 2006), ICJ Rep 133, para 80 as well as Pulp Mills on the River Uruguay
(Argentina v Uruguay) (Judgment of 20 April 2010) 54, para 177, available at <http://www.icj-
cij.org/docket/files/135/15877.pdf>accessed on 25 July 2010: the balance between economic development and environmental
protection that is the essence of sustainable development.
67
For an extensive description of the diffusion, see Alec Stone Sweet and Jud Mathews, Proportionality Balancing and Global
Constitutionalism (2008) 47 Columbia Journal of Transnational Law 73.

40
 Anne Van Aaken

principle of international law 68 and can thus also be viewed as a meta-principle in PIL. Although
proportionality may take other names and its application may vary in detail, it is widely applied in all
countries that have constitutional review, as well as in international law (for example, by the European
Court of Human Rights and by the Appellate Body of the WTO). 69

Robert Alexy has provided a legal-theoretical elaboration of the principle of proportionality. His work has
been cited as one of the most penetrating, analytically refined, and influential general accounts of
constitutional rights available 70 and arguably the most important and influential work of constitutional
theory written in the last fifty years. 71 Two main propositions are central to Alexys theory. First, the
distinction between rules and principles, and second, that principles are optimization programs; that is,
they have to be realized to the greatest extent possible, given factual and legal constraints. Rules may or
may not be applicable, but principles must be more or less fulfilled and command optimization under
consideration of the factual and legal possibilities, thus also giving more space to social science
considerations. 72

Conventionally, legal methodology distinguishes between subsumption on the one hand and balancing or
weighing on the other hand. The first is used in dealing with rules, the latter in dealing with principles.
Rights as well as collective goods or goals formulated in norms or preambles, such as environmental
protection, are seen as principles. 73 Proportionality is thus not confined to individual rights balancing. This
should be kept in mind, since the original and still most common application of the principle of
proportionality is in human rights adjudication (on the national as well as the international level), where a
legitimate state or public interest might be used to limit human rights or where the human rights of one
person are balanced against those of another. But the principle of proportionality may also be used if two
competing public purposes or state interests are at stake, such as free trade and the environment, as in Art.
XX GATT. In trade and investment law, different constitutional principles are applied in adjudication:
the whole trade and as well as investment and (environment, human rights, etc.) problems are
engrained here. 74

68
Beit Sourik Village Council v The Government of Israel, HCJ 2056/04 [2004] 37, available at
<http://www.unhcr.org/refworld/docid/4374ac594.html>accessed on 23 July 2010.This is widely confirmed, see Jost Delbrck,
Proportionality in Rudolf Bernhardt (ed), Encyclopedia of Public International Law (1997) vol. 3, 1140.
69
For the necessity test in WTO law, see Panagiotis A.Delimatsis, Determining the Necessity of Domestic Regulations in
Services: The Best is Yet to Come (2008) 19 European Journal of International Law 365,370-76.
70
Mattias Kumm, Constitutional Rights as Principles: On the Structure and Domain of Constitutional Justice (2004) 2
International Journal of Constitutional Law 574, 596.
71 rd
Sweet and Mathews, above fn 70, 14 (referring to Robert Alexy, Theorie der Grundrechte (first published 1985, 3 ed 1996). For
an English translation, see Robert Alexy, A Theory of Constitutional Rights (2002) 388-425).
72
For the difference between rules and principle as applied here, see ibid., 72.
73
Ibid., 98; Robert Alexy Zum Begriff des Rechtsprinzips in Robert Alexy (ed), Recht, Vernunft, Diskurs: Studien zur
Rechtsphilosophie (1995), 177 (also discussing Dworkins understanding this distinction); see also Ronald Dworkin, Taking Rights
Seriously (1978) 82, 90 (confining the notion of principle to rights and names of public goods as policies).
74
See Gabrielle Marceau, WTO Dispute Settlement and Human Rights (2002) 13 European Journal of International Law 753;
Joost Pauwelyn, Conflict of Norms in Public International Law. How WTO Law Relates to Other Rules of International Law (2003);
Anne van Aaken, Fragmentation of International Law: The Case of International Investment Law in Finnish Yearbook of
International Law (2008) vol XVII, 91; Moshe Hirsch, Interactions between Investment and Non-Investment Obligations in

41
 Opportunities for and Limits to an Economic Analysis of International Law

Principles are thus applicable even if they are not fully satisfied. They are norms that can be more or
less realized; for example, the democratic principle, the right to freedom of opinion, or the principle of
free trade. One may also call them concepts that need to be formalized in the discourse of legal application
to find (common) conceptions. 75 Concepts such as justice, fairness, human rights, peace, and security are
concretized as values in PIL, be it through treaties, custom, or general principles, but they have to be
further concretized in the discourse of law application to find (common) conceptions, because they
sometimes compete. One realization of this imperative is the proportionality principle.

I will argue here, in accord with Alexy, that balancing is mainly a rational procedure and very close to the
reasoning of optimization (or cost-benefit analysis, Paretooptimality). 76 In normative decision theory
terms, this means the optimality of measures generally and regulations, laws, and legal acts specifically, in
the context of a defined system of goals (the international constitutional principles) and under
consideration of (legal) constraints. A constitution is viewed as a multicriterial or multidimensional
decision system. Thus, different decision alternatives can be compared in terms of their contribution to the
constitutional objectives. The optimal decision is the alternative that maximizes the net surplus, defined
as benefits minus the costs of a measure. Benefits and costs are defined in legal terms and include the
positive effects of the measure in question on all relevant constitutional principles as benefits and the
negative effects as costs. To evaluate different decision alternatives, the proportionality principle of
balancing is used.

The most encompassing proportionality principle usually comprises four sub-principles (international
tribunals do not always apply all of them): a legitimate goal, the principle of suitability, the principle of
necessity, and the principle of proportionality in a narrow sense. Whereas the first and the last do not lend
themselves to social science analysis, the other two sub-principles (suitability and necessity) lend
themselves easily to consequentialist and instrumental reasoning, because they require comparative
institutional analysis of the measures impact on the principle in question. Here, principles have to be
optimized, given factual constraints. The principle of suitability covers the question whether the measure
or the law is in principle suitable to achieve its goal. The principle of necessity covers the question of
whether there are other, less intrusive, equally effective means of implementing the principle and
achieving the measures stated goal. Applying the principle of proportionality as has been done by the
investment tribunals, human rights courts, and the Appellate Body under Art. XX GATT thus necessarily
includes consequentialist reasoning.

International Investment Law in ChristophSchreuer, Peter Muchlinski and Federico Ortino (eds), Oxford Handbook of International
Investment Law (2008), 154.
75
Wesley N.Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning, in Walter W. Cook (ed),
Fundamental Legal Conceptions as Applied in Judicial Reasoning and Other Essays (1923); Walter B.Gallie, Essentially Contested
Concepts (1956) 56 Proceedings of the Aristotelian Society 167.
76
For an extensive discussion of this issue and a reformulation of the principle of proportionality, see Anne van Aaken, Rational
Choice in der Rechtswissenschaft (2003), 288 et seq.; for its application in PIL, see idem, Defragmentation of International Law
through Constitutional Interpretation: A Methodological Proposal in Indiana Journal of Global Legal Studies (2009) 16, 483.

42
 Anne Van Aaken

This method of reasoning in turn requires social science analysis if one does not want to rely on the
everyday intuitions of judges. In particular, empirical insights into relationships between means and ends
in IEL, it should be used if available for the case at hand. The last sub-principle, the principle of
proportionality in a narrow sense, weighs the affected principles, e.g. human rights concerns against free
trade. This balancing requires a value judgment for which economists have no special methodology.
Economists only contribution is in the evaluation of how high the opportunity costs will be if one value is
chosen over the other (without denying valuation problems).

5. The limits to economic analysis

It goes without saying that there are many limits to economic analysis. First, economics shares the limits
of all social science: analyzing a complex social world necessarily involves limited and dynamically
changing knowledge. Social systems are very complex, making causal effects difficult to disentangle; in
addition, they are learning systems, that is, knowledge of causal relationships is not static and eternal. In
my view, this nevertheless does not dispense lawyers from examining social science theories and evidence
when applying the law. Being shortsighted is usually better than being blind. If lawmaking and
lawapplication should be firmly grounded in reality and fact-based, IEL lawyers should greatly welcome
the use of social science and economics insights. Lawyers, like everybody else, have to put up with
limited human knowledge. But not using it at all would be a mistake.

Second, there are limits to the normative category, that is, what values should be pursued. Economics
cannot tell us whether the international legal order should pursue sustainable development, economic
development, human rights, or peace. Economics strength lies in positive science, not in legal philosophy.
What economics can do and is good at is to inform us how to optimize or maximize given values and how
much it costs to achieve them. Many economists and law and economics scholars meanwhile accept this.
They use economics mainly as a positive theory, trying to describe, explain, and predict the conduct of
states, but not postulating that the international legal order should be efficient. Nevertheless, normative
statements are sometimes deduced from positive insights; for example, postulating that states should
maximize joint social utility. This concept is based on utilitarianism with all its known problems. 77
Therefore, many ILE scholars do not advocate this approach, but rather recommend balancing competing
and incommensurable public policy goals as stated in PIL. 78 Nevertheless, in IEL, a normative approach
using efficiency or other economic values is more permissible than in other field of PIL. If the purpose of
the treaties states economic goals, these can be used in interpreting the law, with the caveats analyzed
above. Since IEL is part of PIL, other values of PIL, such as human rights, environmental protection, etc,
should not be neglected but reconciled, either in treaty making or in treaty interpretation.
Third, economics is not a hermeneutical science, as legal interpretation is. It has no methodology for
interpreting texts, which is what lawyers usually do. Thus, the classical legal interpretational task stays

77
Extensively ibid.
78
See van Aaken, above fn 17; Trachtman, above fn 11, 221-248.

43
 Opportunities for and Limits to an Economic Analysis of International Law

with the law interpreter. He also decides which interpretational methods to choose and which economic
insights to integrate. Interpretational sovereignty clearly lies with the legal interpreter.

Fourth, traditional economic analysis uses classical rational choice and, when analyzing international
relations, treats the state as a black box. Both approaches limit the insights of economic analysis, not in
principle but in practice. This is slowly changing. First, economists and especially political economists,
too, no longer view the state as a black box in international relations. But this eschewal can make analyses
very (too) complex. Second, the rational choice model takes the preferences of actors (be they individuals
or states) as given. It does so mainly for methodological reasons: only if one variable is held constant (the
preferences) is it possible to test the hypothesis of the consequences for actors behavior when there is a
change in the restrictions (law) that actors face. If both variables were allowed to vary, it would be
impossible to say why a change in behavior occurs. This is well accepted also by IR scholars.
Nevertheless, other theories in IR the constructivist approach focus on the change of preferences. The
two approaches can be and are ever more fruitfully combined, depending on the research
question. 79 Economic research on changing preferences is only slowly beginning and models often ignore
it because of its complexity, but progress is to be expected here. Very slowly, behavioral economics is
also beginning to be applied to international relations theory, 80 although to my knowledge not yet to IEL.
This promises further venues for research, especially on negotiation and dispute settlement.

6. Conclusion

Lawyers and economists can learn a lot from each other and they might profit from collaboration. This is
true of any kind of law, but is especially necessary in IEL. There is no superiority of either lawyers or
economists; both have different core competences. But depending on the questions to be solved,
collaboration promises to be very fruitful. Both sides need to be aware of their strengths but also of their
limits. And they should have at least a basic understanding of what the other discipline is about. From the
legal perspective, social science insights are needed not only for treaty making but also for treaty
interpretation. Nevertheless, the ultimate decision on where and when to use social science rests with the
lawyers. If it is desirable that law, including PIL and IEL, becomes more fact-based, lawyers should be
transparent about when they use what kind of arguments. Transparent methods of interpretation, stating
clearly the epistemological status of the argument made, enhance the transparency and legitimacy of legal
reasoning, which is an old concern of legal theorists, especially legal positivists.

79
James Fearon and Alexander Wendt, Rationalism v. Constructivism: A Skeptical View in Walter Carlsnaes, Thomas Risse,
and Beth A. Simmons (eds), Handbook of International Relations, (2002) 52; Kenneth W. Abbott and Duncan Snidal, Values and
Interests: International Legalization in the Fight Against Corruption (2002) 31 Journal of Legal Studies 141; Duncan Snidal, Rational
Choice and International Relations, in Walter Carlsnaes, Thomas Risse, Beth A. Simmons (eds), Handbook of International
Relations, (2002) 73.
80
Abbott, above fn 21; van Aaken, above fn 21.

44
 Anne Van Aaken

Selected References

Aaken, A. v. (2008). "Fragmentation of International Law: The Case of International Investment Law." Finnish
Yearbook of International Law XVII: 91-130.

Aaken, A. v. (2009). "International Investment Law between Commitment and Flexibility: A Contract Theory
Analysis." Journal of International Economic Law 12(2): 507-538.

Bown, C. and J. Pauwelyn, Eds. (2009). The Law, Economics and Politics of Retaliation in WTO Dispute Settlement.
Cambridge, Cambride University Press.

Cooter, R. D. (1995). "Law and Unified Social Theory." Journal of Law and Society 22: 50-67.

Delimatsis, P. A. (2008). "Determining the Necessity of Domestic Regulations in Services: The Best is Yet to
Come." European Journal of International Law 19(2): 365-408.

DiMascio, N. and J. Pauwelyn (2008). "Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two
Sides of the Same Coin?" American Journal of International Law 102(1): 48.

Fearon, J. and A. Wendt (2002). Rationalism v. Constructivism: A Skeptical View. Handbook of International
Relations. W. Carlsnaes, T. Risse and B. A. Simmons. London, Sage: 52-72.

Fitzmaurice, G. (1957). "Law and Procedure of the International Court of Justice 1951-4: Treaty Interpretation and
Other Treaty Points." British Yearbook of International Law 33: 203-293.

Guzman, A. T. (1998). "Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment
Treaties." Virginia Journal of International Law 38(4): 639-688.

Hirsch, M. (2008). Interactions between Investment and Non-Investment Obligations in International Investment
Law. Oxford Handbook of International Investment Law. C. Schreuer, P. Muchlinski and F. Ortino. Oxford,
Oxford University Press: 154-181.

Hohfeld, W. N. (1923). Some Fundamental Legal Conceptions as Applied in Judicial Reasoning. Fundamental Legal
Conceptions as Applied in Judicial Reasoning and Other Essays. W. W. Cook. New Haven, Yale University
Press.

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About the Author

Anne van Aaken is the Max-Schmidheiny Tenure Track Professor for Law and Economics, Public,
International and European Law at the University of St. Gallen, Switzerland. Before that she was a Senior
Research Fellow at the Max Planck Institute for the Research of Collective Goods as well as at the Max
Planck Institute for Comparative Public Law and International Law. She holds a PhD in Law from the
University of Frankfurt/Oder. She is the Vice-President of the European Association of Law and
Economics. Her main research areas are international law with a special focus on international investment
law and its interaction with other areas of international law, (international) legal theory, (behavioural) law
and economics as well as corruption.

Contact Information

University of St. Gallen, Law School, Switzerland, email: anne.vanaaken@unisg.ch; Academic year
2010/2011: Fellow at the Institute for Advanced Study, Berlin. Email: anne.vanaaken@wiko-berlin.de; Tel:
+49-179-1013612, Fax: +49-30-89001300

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.