The Use of Law on Economics and Vice Versa
We live in a society where law and order must be observed. And this extends all the way into economic applications. Economic analysis of law, or simply law and economics, is one of the biggest economics and law subjects. It has become a major and very important field, especially for law students. The movement concerned with law and economics stands for the economic theory and methods involved in the law's proper practice. It confirms the economic reasoning, which offers the best possibility for justification and consistency of legal practice. There may be no other dominant theory of jurisprudence, that that involves law and economics.
In general, the law is best seen as a social tool that encourages efficiency, which can very well guide legal practice. Human beings are rational decision makes, and this is best explained through different economic theories, like the game theory and the consumer theory, among others. It is generally considered how legislation should be used to improve its practices, stating the economic analysis and efficiency can be used as crucial tools in offering legal guidance. In the same manner, it follows a though where legislation can be used to improve market conditions in return.
In other words, the law has always found a way to influence economics as economics has done to law. Law and economics provided a framework with which to model and affect the outcome. And the common objectives for unifying disparate areas of legal activities. Bringing together legal theory and economic t reasoning has also created a new approach to defining behavioral economics. It helps to understand how rationality affects people’s behavior in legal situations. The public choice theory seeks to understand how people react to different incentives and how they should affect legislation. Another area that involves legal processes and economics is the game theory, which can be used to predict an individual's possible decision. Besides these, understanding strategic action in the legal context is key to finding important legal field answers.
In this topic, we seek to expound on the relation between law and economics, explaining the importance of studying the subject at different levels. Markets need to understand the law that relates people to businesses and firms to firms. Most economic theories are based on the fact that humans are social beings, and every decision they make affects others.
The Autonomous Nature of Law
Many jurisprudence thoughts seek to uncover the essential or definitive aspects of law as an industry. Two of these theories, the Legal Positivism and Dworkin’s Law as Integrity, are the most applied at all levels. These two may differ in their definition of law and legal reasoning. There are several central assumptions they agree on, mostly in establishing the conclusions that two philosophical investigations depend on the same aim and achieve similar goals. For this reason, it becomes important to acknowledge some of the assumptions that hold these instances together.
The theories agree on the conceptual nature of jurisprudence. They both work on the basis of the philosophical theory of law in determining the core aspects of the right legal practice in fulfilling the work of philosophical jurisprudence. In most cases, the philosophical discussion of law follows assumptions that these characterizations are the jurisprudence's main aims. Techniques for discovering these issues determine the importance of studying law. Another common assumption is that the best way to understand legal practice is to know the necessary and sufficient qualities that create some rule or statement into law.
Theorists in the law and economics field have approached the study of law from a different angle than this, instead of attempting to identify the conceptual aspect of the law, players in this industry advocate for an investigation of legal practices through economic analysis. They then conclude that the best definition of legal practice is in its purported function as a social tool aimed at promoting economic efficiency. This is something it has in common with other social practices.
Law for Economic Efficiency
Law can be used as a tool to encourage economic efficiency. The practitioner of law and economics considers law as a social tool, forgetting the unique and defining features of the law. Economists majorly assume that human beings are rational decision-makers, who base their decisions on what satisfies them the most, and, respond to incentives. In rational maximization of personal satisfaction, the decision-maker adjusts a means to an end in the most efficient way possible. They weight their actions based on what will make them happier. One of the biggest descriptive claims concerning law and economics is in its tools for encouraging economically efficient social relationships. But this is not a claim that can be easily understood without properly laying the foundation.
One essential tool for understanding law and economics is a set of fundamental concepts. The most pivotal assumption in economics is the rationality of human beings, which we have seen above. There is more net value of resources where more efficient allocation is involved. Efficiency in allocating resources is differentiated from equity, which as more concerned with justice in the proper distribution of wealth. And since people value some goods higher or lower than others, economic efficiency can be achieved through the voluntary transfer of properties. When decisions are made involving two people, one person ends up with more benefits than the other. Some economists have extended into the arguments that in contractual exchange is morally optimal because it fits within both Kantian and utilitarian theories of morality. They argue that a contract is seen as a good representation of the relationships between free and rational agents. Economists use different approaches and terms to describe the possible outcome of economic exchanges.
Law can be used to encourage economic efficiency in different ways. According to law and economics, there are different ways in which the institution can be used to encourage efficient transactions. One of the best ways this can work in helping to avoid situations that leads to market failures. Consider the 2008-2009 Great Recession that started with the failure of financial markets. It seemed many financial companies did not consider some of the risks that come with lending. Since the housing industry was booking, and properties were selling high, lenders were more flexible in giving out their money. And the prices of the prices, most of which were used as collateral, dropped and could not be used to recover invested money. Therefore, it was necessary for governments to come up with different methods of ensuring the economy is shielded from complete failure. Apart from this, the existence of monopolies can also be seen as market failures, where one party is able to extract more profit from a product than a healthy market would advocate for.
Law can use to ensure that such situations never occur. And when they happen, policy-makers sit down to come up with different policies of making what they do count. They ensure compliance with contract terms, where courts can give participants in contract confidence that the other party will hold their end of the bargain. Some types of market failures are less obvious, though, and require a subtler approach. One of the main issues with the market process is the presence of externalities – costs not reflected in the product's price, and hence the market price will not truly reflect the reals. Considering Pigou suggest that legal means should be followed to impose a marginal tax on the offending party. But the economist Coase, argue against such an approach, stating that it is too global, even though warranted. Coase’s argument continues to quote market transaction ta are costless, and where people do not follow strategic action, stating there is no relevance in the right assignments since the results are already predetermined as economically efficient. The Coase Theorem state states where transaction costs are not applicable; the assignment of entitlement will not be relevant to the goal of allocative efficiency. If this case is followed, there will be no need for the law to internalize the costs because consumers will bargain for the best deals possible. Where transaction cost is high in the ideal markets, it will not matter how property rights are assigned. Based on these arguments, we can conclude that law can be used to encourage economic efficiency.
Law in explaining the nature of economics
Some scholars have always sought to discover how low can be used to define the economy's real nature. It may not come as big surprise the law encourages efficient exchanges, but then, claiming that the institution of law is best explained in economic terms is something else. Viewing all law as based on market principals is kind of strange. In the economic analysis of law, desperate areas are seen as a contract, tort, and criminal laws based economic goals. In many cases, courts have applied and used economic theories to explain why people behave the way they do and to come up with the best punishment. Most of these laws are majorly applied in the private sector, as Richard Posner agrees. He says that a tort case involving private harm can be contractual, where the two parties involved agreed to cause the accident voluntarily. Another case could be that the quantity of punishment incentivizes criminals; it exceeds the gain offered by the act of crime they committed. Over the years, scholars have tried to extend the tools of economic analysis into areas that would generally seem economical in nature. Economic analysis has widely applied the rules of evidence and legal ethics, which can now be changed through economic analysis. Despite this, it is also easy to argue that an economic analysis of law fails because it does not do much justice to daily legal conceptions, and that is may not well account for the internal point of view, which is crucial to an understanding of the law. Nevertheless, law and economic and be, or not be, an accurate description of the law in society.
Developments in Law and Economics
There is another approach that handles the economic analysis of law is the one that has spawned a number of ideas that seem to further explain the legal institution. Three of the most important of these tools are as discussed below:
Behavioral Economics of law
Experts in the fields of law and economics attempt to examine human limits in means-end rationality. Behavioral economics offers many varying outcomes, one of them being the economics is the idea of bounded rationality – information is not processed following the perfect model of means-end rationality, but is distorted because of the limits of our cognitive ability. This effect states, therefore, that owning an object creates an irrational evaluation of it. There are overwhelming events that may induce one to make specific decisions. These are the same ideas followed when discovering issues within law and economics.
The theory adds strategic action to economic modeling. People make decisions and judgments based on their environment's competitive nature, which influences how they react to incentives. Dealing with strategic actions strengthens the economic analysis of law to great extends. The game theory is used to predict a move that one person is like to make under certain circumstances. For instance, a buyer may act not interested in buying a product so that the seller reduces the price for them. It is a good bargaining strategy that works most of the time. Court these strategies to argue cases or extract information from defendants who cannot help themselves.
Public Choice Theory
The legislative process and collective decision-making influence the law's nature, which can best be explained through public choice theory. This is the application of economic models of decision-making and their repercussions on political science's classic problem, like Arrow’s Theorem. Some main claim that public choice theory offers the best understanding of collective decision processes, which help judges establish their positions in the judicial system. Where collective decisions cannot be avoided, as influenced by those with powers to frame the debate questions to influence voting, in this case, agenda-setter, there is a need to interpret public legislation differently. These theories and their results make a strong case for courts and legislations.
Author: James Hamilton