(FORTUNE Magazine) – BY THE TIME Ronald Reagan heads back to the ranch for good, he will have appointed about half the judges on the federal district and appeals courts. Will this judicial legacy transform America as many liberals worry? Based on the decisions of the judges he has already appointed, almost certainly not. Reagan's judges are generally conservative in their outlook, but the implications for business and society are far from clear. They are more inclined than their predecessors to be harsh with criminals and to favor business over labor or consumer groups. But they are deferential to the other branches of government, hesitant to question the decisions of regulatory agencies or to broadly interpret laws enacted by Congress or state legislatures. The lower courts play a large role in society. District judges handle more than 300,000 federal lawsuits a year, of which only about 35,000 are carried to the courts of appeal. The Supreme Court reviews fewer than 150. Yet Reagan's deepest impact on the courts will be made not by the many Reaganites at the district level but by a small group of exceptionally smart and influential legal theoreticians he has appointed to the courts of appeal. Several of the brightest preach a philosophy born in the 1950s at the University of Chicago Law School called ''law and economics.'' Free markets usually allocate resources most efficiently, say the Chicago schoolers, and the law should aim to help the markets work. Law and economics is now a dominant intellectual current in U.S. law schools. By putting its proponents on the bench, Reagan is pushing the theory out of the textbooks and into the mainstream of American law. The Reaganization of the courts will stop well short of revolution if no further opportunities arise for tilting the Supreme Court in a more conservative direction. Two or more additional Reagan appointees might produce significant changes in the constitutional interpretation of social questions such as free speech, abortion, and school prayer, as well as business issues such as affirmative action.

Despite the alarms raised by some liberals that Reagan is ''packing'' the courts, he is not appointing an unusually large proportion of the judiciary. (See table.) He will name more judges than any other President, partly because he is a two-term President and partly because the number of federal judgeships has been growing. The number shot up 29% during the Carter presidency, when the Democratic Congress created 152 new judgeships. The number has grown another 12% during the Reagan Administration. The federal bench now includes 576 district judges and 168 appellate judges. The Reagan judges, on average, are not much younger than those named by other recent Presidents. One thing new about Reagan's judges is the care with which they are being selected. Traditionally, a President solicited suggestions from the American Bar Association but gave greatest weight to recommendations from Senators of his own political party. The Senators favored loyal party members but did not dig much into legal or social philosophies. The Reagan Administration has taken firm control of the process, diminishing the role of the Senate and the ABA. The Justice Department uses an exhaustive screening process to evaluate how potential judges will perform. Justice staff members interview several candidates for each opening, usually in lengthy sessions. They pore over anything the would-be judge has written and quiz colleagues, local politicians, and judges on the candidate's suitability. After this winnowing, they send recommendations to a White House committee that includes Attorney General Edwin Meese and Chief of Staff Donald Regan. This committee makes final recommendations to the President, who usually okays them. Meese and his aides say they are uninterested in the political ideas of a candidate; they just want to know how he sees his role as a judge. What's important? As Meese tells it, commitment to ''judicial restraint'' ranks first. The Reagan Administration wants judges who think the courts should play a limited role in society. Such judges should aim to apply the law rather than amplify or interpret it broadly. They should also share the Administration's commitment to ''original intent'': Judges, as they read the Constitution or the statutes, should be guided by what the drafters had in mind. Sheldon Goldman, a political scientist at the University of Massachusetts at Amherst, thinks that all the talk about restraint and original intent is part of the Reagan political agenda: ''Not since the Roosevelt Administration have we seen such a systematic attempt to place on the bench people whose judicial philosophy and political views are compatible with those of the Administration.'' Laurence H. Tribe of Harvard Law School calls the selection process ''an ideological test so fine and narrow that it is excluding quality.'' Some of Reagan's appointments give credence to the complaint, such as that of Daniel A. Manion to a seat on the court of appeals for the seventh circuit in Chicago. Staunchly conservative, son of a founder of the John Birch Society, Manion has had an undistinguished legal career. But there is no evidence of a wholesale slide in professional qualifications under Reagan. In the ABA evaluations, his appointees have done about as well as Carter's. To see how Reagan's judges differ from their peers, Jon Gottschall, a political science professor at the State University of New York at Plattsburgh, compared decisions in the appeals courts during 1983 and 1984. Appellate judges sit in panels of three and reach a unanimous decision in most cases. Carter and Reagan appointees agreed three-quarters of the time. But in cases where they split, the differences were dramatic. In civil liberties cases such as those involving race and sex discrimination or the rights of suspects to due process, the Reagan judges were likely to opt for the ''liberal'' outcome -- favoring the plaintiff -- in only 26% of the cases, vs. 63% for Carter judges. In economic cases such as labor disputes and personal injury suits, the liberal score was 33% for the Reaganites, 69% for Carter's judges. Reagan's hope that his judges will be practitioners of judicial restraint is being fulfilled. The most careful assessment of the Reagan judiciary on this score is a case-by-case review done by the Center for Judicial Studies, a conservative think tank. The center found that half the Reagan judges exercised restraint in all their significant cases, and another quarter in nearly all of them. The remaining quarter tended to interpret the law broadly and exercised restraint less than half the time. THE CONCEPT of judicial restraint has mixed implications for business. Applying it, Reagan's judges tend to limit access to the courts by questioning whether plaintiffs are entitled to sue. A private party who wants the government to enforce, say, a regulation of the Environmental Protection Agency against a company may be thrown out of court if the applicable law fails to specify that private citizens can initiate such actions. On the other hand, Reagan's judges are unwilling to second-guess the decisions of government agencies as long as their statutory authority is clear. In the current deregulatory climate this reticence should be beneficial to business, but it can cut both ways. Since many regulatory lawsuits have companies arguing both sides of a case, whether or not you like the result depends on which side you are on. Some of these regulatory decisions will come under close scrutiny at the appellate level. There, a small number of brilliant Reagan judges, many in their 30s and early 40s, are carrying the law and economics crusade into the courts. Their force has been felt most fully on the court of appeals for the District of Columbia circuit. It decides most cases involving government agencies and is often called the second most important court in the country. ; Reagan has appointed six of the 11 sitting judges and has one vacancy to fill. Robert H. Bork was Reagan's first appointee to this court. At 59, Bork is an elder statesman of the law and economics movement. He studied at the University of Chicago Law School in the 1950s. His teachers included Aaron Director, a key thinker in law and economics (and a brother-in-law of free- market guru Milton Friedman). Bork holds that the sole function of antitrust law should be to promote consumer welfare. In the 1960s and 1970s, while teaching at Yale Law School, he wrote widely and critically (sometimes in FORTUNE) questioning the popular notion that all mergers should be looked upon with great suspicion. In 1978 he wrote a book setting forth his views. Now he is implementing them. In a recent suit, eight local moving companies accused Atlas Van Lines, a nationwide mover, of illegally barring them from competing for interstate business. Bork sweepingly reviewed 90 years of Supreme Court precedent in finding Atlas's conduct efficient rather than illegal. Says a corporate attorney: ''He just took a few of the themes from his book and wrote them into law.'' Reagan's most recent appointee to the D.C. court is Douglas H. Ginsburg, 40, a graduate of the University of Chicago Law School who headed the antitrust division of the Justice Department and taught at Harvard before joining the Reagan Administration in 1983. Stephen F. Williams, 50, a former professor at the University of Colorado School of Law recently appointed to the court, is also identified with law and economics. Corporate lawyers hail the D.C. court's new look. Michael Boudin, a partner with Covington & Burling who has argued cases for AT&T and the railroad industry, compares the intellectual firepower of the D.C. appeals court to that of famous courts of the past, such as the second circuit court of appeals during the 1930s and 1940s, the tenure of legendary Judge Learned Hand. ''When you're dealing with such smart people, you can live with the decisions that go against you, because they are the kind of decisions you should have figured out would go against you anyway,'' says Boudin. The court was once considered both liberal and unpredictable. Says Stephen Bokat, general counsel for the U.S. Chamber of Commerce: ''Six or seven years ago, if there was any way of avoiding litigating a business case there, we would find it. That's not the case now.'' THE HOTBED of law and economics, suitably enough, is Chicago, seat of the * court of appeals for the seventh circuit. Here, Reagan's first appointee was Richard A. Posner, 47, a former professor at the University of Chicago Law School, the most influential figure in the law and economics movement, and author of its first and most widely used textbook. Posner types his own decisions on a word processor and writes some 100 a year -- more than twice the average output of his peers. Posner warns that judges of his ilk are not necessarily pro-business: ''I can imagine the appointment of these judges having made the courts a little more knowledgeable in business, maybe a little more sympathetic -- but only where business interests coincide with the interests of the free market.'' Last year Posner was joined on the bench by Frank H. Easterbrook, 38, a former colleague at the University of Chicago Law School. If Posner is the archpriest of law and economics, Easterbrook is the Young Turk. Brilliant and brash, Easterbrook has been known to bang out an opinion in two hours, and brag about it. Together the two ex-professors are creating intellectual ripples throughout the legal system. Their opinions are read widely by other judges and lawyers. In a recent securities case, Posner struck down an Indiana anti-takeover statute that CTS Corp., an Elkhart, Indiana, maker of electrical components, had used in trying to fend off a takeover by Dynamics Corp. of America, a Connecticut-based manufacturer. The statute denied voting rights to a would- be acquirer that had bought 20% or more of an Indiana company's stock unless a majority of other shareholders agreed to extend them. The law, Posner wrote, was designed to impede ''the important market for corporate control . . . an interstate, indeed international market that the State of Indiana is not authorized to opt out of.'' Securities lawyers around the country were even more interested in the three pages of the 28-page opinion that Posner devoted to a withering critique of a poison pill provision CTS had adopted. He suggested that nearly all such devices are illegal. Dynamics is back in court challenging a new attempt to block the takeover. Though the Reagan Administration has appointed seven of the 11 judges sitting on the seventh circuit court (again there is a vacancy), only Posner and Easterbrook are law and economics devotees. Other judges sometimes find their arguments persuasive. Jokes Richard D. Cudahy, a Carter appointee who concurred with Posner in the Dynamics case: ''We're sort of the branch campus * of the University of Chicago.'' OVERALL, this injection of free-market thinking should be a plus for the business community. ''Taking a look at court decisions from the standpoint of the economy, and how the total population is best served, is a very healthy thing,'' says Philip M. Knox Jr., general counsel of Sears Roebuck & Co. Other lawyers think the intrusion of economic commentary serves only to confuse legal issues in a case. When Posner, Bork, and other Chicago school judges use economic theory in their opinions, they are often accused of abandoning the doctrine of judicial restraint. This is a seeming inconsistency, since they are among the theory's most articulate proponents. But in defining restraint, they draw a critical distinction: A judge should be deferential to the executive and legislative branches of government, but is less bound by precedents established by the courts, other than those of his own court or the Supreme Court. This distinction becomes especially important in the context of constitutional law. Both Bork and Posner have been mentioned as potential Supreme Court appointees, and anyone else Reagan might pick would surely be an advocate of judicial restraint. So far Reagan has promoted William Rehnquist, a Nixon appointee and adherent to the philosophy, to Chief Justice and named only two new justices: Sandra Day O'Connor and Antonin Scalia, a former professor of the University of Chicago Law School. Both also espouse restraint. Any further Reagan additions to the Court, says Herman Schwartz, a professor of law at American University, could create a conservative majority that would cite the ''original intention'' of the Constitution to overrule years of precedents that have advanced the definition of civil liberties. He says, ''What these people really want to do is to take the Supreme Court out of the business of protecting individual rights.'' A First Amendment issue with implications for the publishing industry is freedom of speech. The original intent of the drafters of the Constitution, Reagan's judges might argue, was to protect political expression. Floyd Abrams, a partner in the New York firm of Cahill Gordon & Reindel, worries that two or more additional Reagan Supreme Court appointments could produce ''a major turnabout in the First Amendment protections we have historically had in this country.'' He is concerned that it might become easier for individuals or the government to quash a story before publication, or for the courts to assess enormous damages against the press in libel actions. The Supreme Court has already eroded the protection of commercial speech, which covers such businesses as advertising and credit reporting. The Court, with Rehnquist writing the majority opinion, ruled five to four that Puerto Rico could prohibit truthful advertising by casinos in order to discourage gambling by local residents. The dissenting justices saw the law as an unconstitutional infringement of First Amendment rights. One oft-stated goal of the Administration is to outlaw affirmative action plans, especially those of state and local governments, on the grounds that the original intent of the 14th Amendment to the Constitution prohibits any discrimination, even that designed to reverse past discrimination. The Supreme Court has not agreed with this interpretation so far. But if a majority of justices were to rule against such state and local programs, corporate affirmative action policies would be attacked as well. SOME CONSERVATIVE libertarians are also troubled by the prospect of a Reagan Supreme Court. Up until the mid-1930s the court tended to be ''activist'' in protecting industry from government regulation, routinely knocking down statutes that limited employees' wages and hours and declaring New Deal regulatory legislation unconstitutional. Then it flip-flopped, becoming activist in expanding individual rights but allowing government an essentially free hand in regulation. Harvard political scientist Stephen Macedo thinks Reagan's judges would use the doctrine of restraint to turn back the clock on civil rights activism and to continue the hands-off policy toward economic rights that has existed since the New Deal. He gives an example: If a local government rezoned industrial land owned by a company without paying compensation as the Constitution suggests it should, judges following judicial restraint would be unlikely to intervene. Says Macedo, ''Reagan judges would further corrode the protection of economic liberties.'' Even if Reagan succeeds in recasting the Supreme Court as dramatically as he has the lower courts, the worst nightmares of his critics may not come true. Landmark cases like Brown v. Board of Education, the 1954 decision that banned school segregation, pose questions that can be answered only deep in a judge's soul. Like racehorses, the most carefully picked judges don't always run according to form.

CHART: JUDGES APPOINTED TO THE FEDERAL BENCH* PRESIDENT TOTAL AVERAGE AGE AT PERCENT APPOINTMENT Reagan 288 49.3 39.4% Carter 258 50.2 39.8% Ford 64 49.7 12.9% Nixon 224 50.0 45.0% Johnson 162 51.6 36.9% *District courts and courts of appeal