economics

ASSIGNMENT

FACULTY OF LAW
SESSION: 2021-2022
COURSE & SEMESTER: B.A. L.L.B. (FIRST SEMESTER)
PRESENTED BY: RITIK ANAND
ASSIGNMENT TOPIC: RELATION BETWEEN ECONOMICS AND LAW
ROLL NUMBER: 21225BLT060
PRESENTED TO: DR. ANJALI AGRAWAL
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Acknowledgement

First and foremost, I would like to record my sincere thanks to faculty of

law, Banaras Hindu University for bestowing upon me this golden
opportunity to explore and present my understanding of a highly
pertinent and crucial topic of:
“Relation between Economics and Law”
This assignment surely would prove to be a great boon towards my
comprehension of the subject and would augment well in broadening my
horizons regarding the same.
I am also greatly indebted to respected faculty member Dr. Anjali
Agrawal, without whose pivotal support, culmination of this project
would be near impossible. The tedious job done by her in teaching and
helping me at every step is very much commendable. I offer my sincere
gratitude to her for this great act of kindness and for being my constant
source of inspiration and motivation.
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INDEX

Content Page Number

Acknowledgement 1
Introduction 3

Law and economics 4

History of law and economics 4
Relation between law and economics 4
Characteristics of law and economics 5

Economic analysis of various fields of law 6

Property 6
Contract law 8
Tort law 9

Criticism of economic analysis of law 9

Conclusion 10
Citations 11
Bibliography 12
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Introduction

“We shall never have a science of economics unless we learn to discern

the operation of law even among the most perplexing complications and
apparent interruptions.”
~ William Stanely Jevons
Economics is a subject matter that is based upon human behaviour
which plays a very prominent role in many aspects of the law. While, the
jurisprudence of a society is the expression of its thinking and experience
with regard to ethics, religion, economy, and expediency.
This idea is well expressed in work of French economist Gide, who
speaks of law, ethics, and political economy as the “sister sciences”. [1]
Comte too contends that any separation of the sciences which deal with
human societies is irrational; that there is but one single science
embracing all aspects of these societies.
The law and the economy, thus, interact in many ways. Whereas private
law assists individuals and groups who are willing to enter into
agreements in a free market, public law seeks to correct the outcomes of
a free market system by means of economic and social regulation.
Hence, it would be pertinent to note that Law & Economics includes
elements of current societal most basic social structures into some kind
of single topic, providing for a multi-faceted examination of major issues
in each topic. While economic theory is a branch of law which is focused
on human nature and social cognition and plays a significant part in
several areas of the law.
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Law and Economics

History of Law and Economics

Modern law and economics dates from about 1960, when Ronald Coase
(who later received a Nobel Prize) published “The Problem of Social
Cost.” Gordon Tullock and Friedrich Hayek also wrote in the area, but
the expansion of the field began with Gary Becker’s 1968 paper on crime
(Becker also received a Nobel Prize). In 1972, Richard Posner, a law and
economics scholar and the major advocate of the positive theory of
efficiency, published the first edition of “Economic Analysis of Law and
founded the Journal of Legal Studies”, which became one of the classics
and foundational texts of the discipline.

Relation between Law and Economics

The fundamental and basic laws of economics are discoverable in the

nature of things by a series of rigorous exercises in abstract thinking. The
observation and study of concrete data are primarily valuable for the
confirmation of general principles deductively reached. These economic
laws being of the natural order of things control and ultimately give all
other laws. Any system of jurisprudence must ultimately give expression
to these economic laws. Economic laws and economic life being prior to
legal system, determine the form of laws.
The law is the outward manifestation; the social, and especially the
economic, fact is the living force.
“The formal juristic conception may remain the same; its content must
be modified by every change of economic life. Legal history is really a
handmaid to economic history; legal development is inexplicable apart
from economic forces. The economic fact in this sense is the cause; the
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legal situation is the result. Life indeed consists of a perpetual adaption

of outward forms to inner forces, and thus the economic basis of a legal
system is really the important fact to the social philosopher. In practical
life, however, we deal with outward forms, and thus the legal shape of
economic relations must never be lost from sight. In economics and
jurisprudence there is continual action and reaction.” [2]

Characteristics of Law and Economics

Law and economics, also known as the economic analysis of law, differs
from other forms of legal analysis in two main ways. First, the theoretical
analysis focuses on efficiency. In simple terms, a legal situation is said to
be efficient if a right is given to the party who would be willing to pay the
most for it. There are two distinct theories of legal efficiency, and law
and economics scholars support arguments based on both. The positive
theory of legal efficiency states that the common law (judge-made law,
the main body of law in England and its former colonies, including the
United States) is efficient, while the normative theory is that the law
should be efficient. It is important that the two theories remain separate.
Most economists accept both.
Law and economics stresses that markets are more efficient than courts.
When possible, the legal system, according to the positive theory, will
force a transaction into the market. When this is impossible, the legal
system attempts to “mimic a market” and guess at what the parties
would have desired if markets had been feasible.
The second characteristic of law and economics is its emphasis on
incentives and people’s responses to these incentives. For example, the
purpose of damage payments in accident (tort) law is not to compensate
injured parties, but rather to provide an incentive for potential injurers
to take efficient (cost-justified) precautions to avoid causing the
accident. Law and economics shares with other branches of economics
the assumption that individuals are rational and respond to incentives.
When penalties for an action increase, people will undertake less of that
action. Law and economics is more likely than other branches of legal
analysis to use empirical or statistical methods to measure these
responses to incentives.
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Economic analysis of various fields of

law

The starting point for economic analysis of law is the assumption that
decisions may be based either on intuition and vague moral beliefs or on
scientific data. The rationale behind the economic analysis of law is
rather simple: to implement economics to the legal decision-making
process.
In simple words, economic analysis of law refers to the applying of
economic theories to the matters of law which is specifically the
microeconomic theories rather than the macro-economic theories. The
application of economics into the law system originated from the
scholars of Chicago school of Economics, where they used to explain the
effect of laws and rules of law with the help of economic concepts.
Moving further, economic analysis of law can be taken as an application
of economic tools to the law for the better understanding of the economy
as well as monitoring the economic factors in law and society.

Property

A legal system should provide clear definitions of property rights. That

is, for any asset, it is important that parties be able to determine
unambiguously who owns the asset and exactly what set of rights this
ownership entails. Ideally, efficiency implies that, in a dispute regarding
the ownership of a right, the right should go to the party who values it
the most. But if exchanges of rights are allowed, the efficiency of the
initial allocation is of secondary importance. The Coase theorem—the
most fundamental result in the economic study of law—states that if
rights are transferable and if transactions costs are not too large, then
the exact definition of property rights is not important because parties
can trade rights, and rights will move to their highest-valued uses (see
externalities).
In many circumstances, however, who owns the right will matter.
Transactions costs are never zero, and so if rights are incorrectly
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allocated, a costly transaction will be needed to correct this

misallocation. If transactions costs are greater than the increase in value
from moving the resource to the efficient owner, there may be no
corrective mechanism. This can happen in any sort of economy. An
extreme example is Russia, where the courts have not been able to
provide clear definitions of property rights, and those persons with
control of firms are not necessarily the owners. That is, those with
control over a firm cannot sell it and keep the proceeds. This creates
incentives for inefficient use of the assets, such as sale of valuable raw
materials for below-market prices, with the proceeds deposited outside
the country. In such circumstances, the Coase theorem will not operate,
and correctly defining property rights becomes important. More
generally, experience in Russia and its former satellites has emphasized
the importance of the legal system for development of a market economy
and, thus, has shown the importance of law and economics in
influencing policy.
One important finding of law and economics is that, in market
economies, property rights are defined efficiently in many
circumstances. The characteristics of efficient property rights are
universality (everything is owned), exclusivity (everything is owned by
one agent), and transferability. Law and economics can also explain the
results of inefficient property definitions. For example, because no one
owns wild fish, the only way to own a fish is to catch it. The result is
overfishing (see tragedy of the commons). intellectual property is an
important area of current research because new copying and duplicating
technologies are having profound effects on the definition of this form of
property rights and on incentives for creating such property.
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Contract law
The law governing exchange is crucial for a market economy. Most of the
doctrines of contract law seem consistent with economic efficiency. Law
and economics study of contract law has shown that, in general, it is
efficient for parties to be allowed to write their own contracts, and under
normal circumstances, for courts to enforce the agreed-on terms,
including the agreed-on price. The courts will generally not enforce
contracts if performance would be inefficient, but, rather, will allow
payment of damages. If, for example, I agree to build something for you
in return for $50,000, but meanwhile costs increase so that the thing
would cost me $150,000 to build, it is inefficient for me to build it.
Courts, recognizing this, allow me to compensate you with a monetary
payment instead. This is efficient.
Contracts and contract law are also designed to minimize problems of
opportunism. The danger of opportunism arises when two parties agree
to something, and one makes irreversible investments to carry out his
side of the bargain. So, for example, a company invests in a railroad spur
to a coal mine, making a contract in advance to ship the coal at a specific
price. Once the railroad is built, the mine owner can refuse to honor his
contract and can hold out for a lower shipping rate. As long as this rate
exceeds the railroad’s incremental costs, the railroad owner will be
tempted to accept. If he does so, he will not receive the full return on the
spur line that he needed to make the investment worthwhile. Doctrines
such as a duty to mitigate (to reduce the harmful effects of breach of
contract) are easily explained as being efficient.
However, not all doctrines are efficient. Contracting parties will
sometimes specify damages (called “liquidated damages”) to be paid if
there is a breach. If the courts decide that these liquidated damages are
too high—that they are a penalty rather than true damages—they will not
enforce the amount of contractual liquidated damages. This failure to
enforce agreed-on terms is a major puzzle to law and economics
scholars; it appears that the courts would do better to enforce the parties’
agreement, just as they do with respect to price and other terms of a
contract. Here, the positive theory of the efficiency of law seems to be
violated, but scholars argue that the courts should enforce these
agreements.
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Tort law
Tort law and criminal law protect property rights from intentional or
unintentional harm. The primary purpose of these laws is to induce
potential tortfeasors (those who cause torts, or accidents) or criminals to
internalize—that is, take account of—the external costs of their actions,
although criminal law has other functions as well.

Tort law is part of the system of private law and is enforced through
private actions. The economic analysis of tort law has stressed issues
such as the distinction between negligence (a party must pay for harms
only when the party failed to take adequate or efficient precautions) and
strict liability (a party must pay for any injury caused by its actions).
Because most accidents are caused by a joint action of injurer and victim
(a driver goes too fast, and the pedestrian he hits does not look
carefully), efficient rules create incentives for both parties to take care;
most negligence rules (negligence, negligence with a defense of
contributory negligence, comparative negligence) create exactly these
incentives. Strict liability is important when the issue is not only the care
used in undertaking the activity, but also whether the activity is done at
all and the extent to which it is done (the level of the activity); highly
dangerous activities (e.g., blasting with explosives or keeping wild
animals as pets) are generally governed by strict liability.

Criticism faced by economic analysis of law

1. As per critics, economic analysis of law missed out various important
variables.
2. According to the people are not rational maximizes of individual
3. preferences which eminent economists assume them to be.
4. Economic analysis of law is interdeterminant in nature.
5. Sometimes economic analysis of law generates undesirable and unjust
outcomes.
6. According to critics, economic analysis of law resulted in the
generation of commodification which is a serious problem
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Conclusion

The legal doctrines represent the embodiment of the predominant and

prevailing notions of the community as what is desirable and proper in
the light of ethics, economics, and expediency. They manifest concretely
the formal expression of an economic and ethical theory of society. A
legal system always rests in part upon certain economic theories, which
have become embodied in law. Hence, to get a holistic understanding of
either of them, it is highly pertinent to comprehend the mutual relation
between economics and law.
The changing contours of jurisprudence have also helped the economic
analysis of law to penetrate deep into the legal practice, legal theory and
legal education and created new research agendas in the fields of
behavioural and legal economics. Hopefully, this interaction would play
key role in broadening their perspectives and continue to have positive
impact on them for ages to come.
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Citations

[1] Charles Gide (1913); Political Economy; Third edition

[2] Seligman (1914); Principles of Economics

Bibliography

1. Eugene Allen Gilmore (1916); The relation of law and economics

2. Relation between Economics and Law. (2016, Jul 23)
3. D. R. Dewey, "Observation in Economics,"