Law and Economics

Economic analysis of law is the use of micro economic theory in analyzing law. It uses economic concepts to assess the rules that are economically efficient, to analyze the effects of the law, and to predict the promulgation of the legal rules.

Legal scholars and lawyers use “law and economics” to refer to the function of micro economic analysis to law. Due to the overlapping of political and legal systems, common discussions can be noted in political science, constitutional economics, and political economy.

But, issues from critical theory and Marxist perspectives do not count as “law and economics” discussions. For instance, sociology of law and important legal studies movement may consider fundamental issues of “law and economics,” but in a different perspective.

A non-neoclassical approach is the Continental tradition that views the concept as a result of the German historical school of economics and public policy and governance approach.

Origin and History of Economics Analysis in Law

Focusing on mercantilist legislation, Adam Smith deliberated on its economic effects in the 18th century. But, the application of economics in analyzing law that regulates non-market activities is new. Guido Calabresi and Ronald Coase published separate articles that started the modern school of economics and law in 1961.

In 1946, Volker Fund head Harold Luhnow funded Friedrich von Hayek and Aaron Director to set up center for scholars in economics and laws in the US. Historians Philip Mirowski and Robert van Horn, together with Bruce Caldwell, wrote about these developments in their books. Director established the Journal of Law and Economics in 1958 that united the fields of economics and law. He also founded the Committee on a Free Society in 1962.

Henry Manne wanted to create a center for law and economics as early as the 1970s. He made George Manson as the center for the education of judges. John M. Olin Foundation supported Manne and accelerated the movement. Currently, many universities have Olin centers for Law and Economics.

Sub-fields of Economic Analysis of Law

Positive law and economics

Using economic analysis, positive law and economics predict the results of different legal rules. For instance, it predicts the results of strict liability of tort law compared to the results of negligence law. Also, it can explain how the legal rules developed. For example, common law developed because of economic efficiency.

Normative law and economics

Normative law and economics create policy recommendation founded on economic effects of different policies. The significant concept in this sub-field is allocative efficiency. The Pareto efficiency is a common concept, which states that a legal rule cannot be changed to make one person better off without making another individual suffer.

Influence of Law and Economics

Influential in many countries, judicial opinions use the law and economic theories, and economic analysis regularly. This influence affected legal education through the textbooks about law and economics. Various law schools employ faculty members, who have an economics graduate degree. Also, professional economists study and write about the connection between legal doctrines and economics.


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