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Introduction to Economics of Law

Judge Richard A. Posner, in his work "Essays In Law And Economics (1989) says "To me, the most interesting aspect of the law and economics movements have ben its aspiration to place the study of law on a scientific basis, which coherent theory, precise hypotheses deduced from the theory and empirical tests of the hypotheses. Law is a social institution of enormous antiquity and importance, and I can see no reason why it should not be amenable to scientific study. Economics is the most advanced of the social sciences, and the legal system contains many parallels to and overlaps with the systems that economists have studies successfully."

It is quite easy to agree with this statement, especially considering how wide and extensive economics is. There many who don't understand the scientific aspect of economics yet. They look at it only from the perspective of businesses and the growth of markets. But things are changing rapidly today as economic studies take a different road. As a student of economics, law, and economics are some of the main subjects, you will be encountering. Since economics is a major determinant for the development of markets and social interactions, legal issues are bound to exist. This is a good reason for studying law, and economics is a serious aspect of economic education.

During the Great Recession that resulted from the 2008 financial market failure, many governments rushed to create and implement different fiscal and monetary policies in an attempt to save their economies. For instance, National Banks reduced the rates of lending and injecting money into the economy. In such situations, policymakers have to come up fast to create these policies. Such procedures show the importance of policy in economics. When public policy is implemented, it affects the whole economy, making it crucial to look at the structure that makes such laws.

History and significance

For long, law confined the use of economics to antitrust law, regulated industry, tax, and a few special topics like determining monetary damages, until recently. And even though these topics, not much was covered. Experts only sort to answer simple questions like 'how many shares of the market does the defendant own?' 'what is will be the effects on price control on the automobile, in terms of availability?' 'Who is the true bearer of the burden in capital gains tax?' and 'how much future income children lose due to the mother's death?"

From the early 1990s, however, more doors to the study of this subject opened up. There was a sudden change from this limited interaction resulting from the expansion of economic analysis of law, spreading into more traditional areas of the law, like property, contracts, torts, criminal law, procedure, and constitutional law. With the new use of economics in law-related process, it becomes easy to resolving issues, whether private ownership of the electromagnetic spectrum would encourage efficient application, or the possible remedy for breach of contract and its possibility to cause efficient reliance on promises, or what amount of precaution business should take when law holds them strictly liable for injuries to users of their products. It is even easier to answer more questions, like "Will harsher punishment stop violent crimes?"

As if that is not enough, economists have altered the nature of legal scholarships, the common understanding of legal in rules and institutions, as well as the practice of law. When the law is considered from the perspective of law, there, there are now many things that emerge. And experts are finding better ways to explain certain situations that would have been very hard to understand without economic approaches. And there is a lot of proof to this effect. For instance, by 1990, at least one economics was on the top leadership bench on each of the best law schools in North America, and some in Western Europe. Many prominent universities are teaching joint degree programs like Ph.D. in economics and J.D in law. There is even more as law reviews keep publishing articles based on the economic approach, and there are large volumes of articles dedicated to this field. A recent study reported that articles using the economic framework and model are cited in the major American law journals, more than articles using different approaches. In America, many law schools' courses America are now taking courses that include at least a brief summary of the law's economic analysis under study. And 1990, there are many professional organizations in law across the continents, all of them serving the interest of economies and law. Between 1991 and '92, the field was highly recognized when there was consecutive Nobel Peace Prize winner in Economics, Ronald Coase and Gary Becker, where recognized for the efforts in finding the economic analysis of law. And this list does not end without mentioning Professor Bruce Ackerman of the Yale Law Scholl, who defined in economics in law as the most crucial development in legal scholarships of the modern times.

It is not only in universities where the impact of this field has been felt but in the practice of law and the implementation of public law as well. Economics has been understood to provide the intellectual framework for deregulation movement in the 70s, which led to crucial changes in America, is the dissolution of regulatory bodies that came up with prices and routes for air, road and rail transport. Economics was also instrumental as the intellectual force behind the antitrust law. Another policy was used by the Congress in 1984, in which criminal sentencing was reformed as the courts applied findings of law and economics in finding the best solutions. There are many other areas that have been particularly set on the application of economics in law. The prominent law-and-economics scholars have gained high positions as federal judges and apply economic analysis in their opinions.

No one can deny today that economics is indeed the biggest field both in academics and real-life application that is helping shape humanity. On the other, the law ensures order in society, keeping every human being safe and giving them a chance to look at life from a better perspective. Economics is the backbone of society since it is the economic activities that show how much it has grown and developed. The legal system takes care of everything concerned with disagreements among members of the same society. When these two subjects are combined; therefore, one can only expect the best outcomes. Law has been for long an important aspect of economics, and now economics has found its rightful place with law, especially in modern society.

Economic analysis of law

Economic law is also called the economic analysis of law. Some experts have wondered why this field has succeeded in the way that no one would ever imagine, especially on the U.S. We can compare the significance of this subject to the rabbit Australia, whereby, economist discovered an unexplored niche in the 'intellectual ecology' of the law and used every energy they had to fill it. Explaining this area requires some understanding of some kinds of law, or defining law - An obligation backed by state sanction.

When lawmakers are analyzing any regulation, they often seek to find out how the sanction affects behavior. For instance, if the damages are imposed on the producer of a defective product, what happens to the same product's safety and price in later days? Or, what is the chance that the crime rate will reduce is third-time offenders are jailed without trial? Answers to such questions have always come from consulting institutions and looking at the available facts.

But economics offers something better. It came up with a scientific theory to predict the impact of legal sanctions on behavior. Economics always seeks to understand human behaviors, studying how consumers and firms would react to specific situations. And it is this psychological aspect that makes economics a crucial pillar in law. Consider that we always have to make decisions and respond to situations. When prices of commodities go high, people respond by consuming less on more expensive goods. I can be presumed as well that individuals respond to more severe legal sanctions by doing less of the activities that lead to these sanctions. Economics has used more precise mathematical theories, like the price theory and the game theory, and empirically connect approaches like statistics and econometrics in the analysis of the effect of implicit prices attached to behavior through law.

Look at this example. That supposes the manufacturers already know there are chances their product may sometimes harm the consumer. What extent of safety will the product have? To answer this question, they will have to consider profit maximization, in which case they will base their arguments on three costs. They will first consider how much it will cost to improve product safety, which depends on its design and manufacture. And then, they will consider a manufacturer's legal liability for the extent of the injuries. Last, they will look at the degree to which the injuries discourage consumption. A firm seeking profit maximization will consider improving the product's safety until the cost of adding safety balance with the benefit from reduced liability and higher demand for the product.

Economical offers a behavioral theory to predict people's responses to the law. This is model ha surpass intuition. It is important to note that people's response is always important for making, revising, repealing, and interpreting laws. It seeks to explain why people make certain decisions, helping involve parties to find more suitable approaches.

Economic analysis of law is different from other forms of legal analysis because: One, the theoretical study dwells solely on efficiency. In other words, a legal scenario is only efficient if a right is given to the party willing to pay more it. Legal efficiency use to distinct theories, both of which have been supported by law and economic scholars. The positive theory of legal says that law is efficient, whereas the normative theory states that law should be efficient. Most scholars find both models very useful, and they quote in their arguments.

According to law and economics, markets are more efficient than courts. The positive theory continues that whenever possible; the legal system will force transactions into the market. And where it is not possible in the system tries of 'mimic a market,' and guess the parties would have been happy if markets were feasible. Law and economics emphases on incentives and how people respond to these incentives. For instance, the purpose of paying for damages in an accident (tort) is no compensation for the injured parties, but to give potential injurers more careful not to cause the accident. Where the penalty for bad action increases, people will get less involved in that action.

The three functions that private legal systems must provide are all related to property rights. The first function is that the system needs to clearly define property rights, which is the property law's task itself. The second aspect is that the system must allow the transfer of property rights, the contract law's function. And finally, the system has the mandate to protect property rights, played by tort law and criminal law. Economics and law together seek to discover the understanding of major issues related to these fields. Many scholars have also applied economics tools, like the game theory, to answer purely legal questions, like the litigation strategies of parties.


The modern study of law and economics dates back to the 1960s, starting with the publication of "The Problem of Social Cost," by Ronald Coase. Other scholars like Gordon Tulloch and Friedrich Hayek followed with more expansive ideas. But they all had one goal of bringing more light to the application of economic methods in law. Today, the discipline is already well established, features eight associations, including in American, Canadian, European law, and economics associations. There is a wide range of journals and other literature linked to the study law economics. Many articles also appear every now and then in major economic journals. The bottom line isEconomics of Law, this is a broad subject of study that stands alone.

Author: James Hamilton

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