Law and economics


Law and economics, or economic analysis of law, is the application of microeconomic theory to the analysis of law. The field emerged in the United States during the early 1960s, primarily from the work of scholars from the Chicago school of economics such as Aaron Director, George Stigler, and Ronald Coase. The field uses economics concepts to explain the effects of laws, assess which legal rules are economically efficient, and predict which legal rules will be promulgated. There are two major branches of law and economics. One is based on the application of the methods and theories of neoclassical economics to the positive and normative analysis of the law. The second branch focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.

History

Origin

The historical antecedents of law and economics can be traced back to the classical economists, who are credited with the foundations of modern economic thought. As early as the 18th century, Adam Smith discussed the economic effects of mercantilist legislation; later, David Ricardo opposed the British Corn Laws on the grounds that they hindered agricultural productivity; and Frédéric Bastiat, in his influential book The Law, examined the unintended consequences of legislation. However, applying economics to analyze the law regulating nonmarket activities is relatively new. A European law & economics movement around 1900 did not have any lasting influence. In a 1917 article analyzing the study of law and economics in American universities, Eugene Allen Gilmore concluded, "the relation between law and economics seems either not to be perceived, or, if perceived, not to be regarded as a relationship desirable or feasible of very much cultivation."
Harold Luhnow, the head of the Volker Fund, not only financed F. A. Hayek in the U.S. starting in 1946, but he shortly thereafter financed Aaron Director's coming to the University of Chicago in order to set up there a new center for scholars in law and economics. The university was headed by Robert Maynard Hutchins, a close collaborator of Luhnow's in setting up the Chicago School, as it became commonly known. The university faculty then included a strong base of libertarian scholars, including Frank Knight, George Stigler, Henry Simons, Ronald Coase and Jacob Viner. Soon, it would also have not just Hayek himself, but Director's brother-in-law and Stigler's friend Milton Friedman, and also Robert Fogel, Robert Lucas, Eugene Fama, Richard Posner, and Gary Becker.
Historians Robert van Horn and Philip Mirowski described the development of modern economic concepts in "The Rise of the Chicago School of Economics", a chapter of The Road from Mont Pelerin ; and historian Bruce Caldwell filled in more details of the account in his chapter, "The Chicago School, Hayek, and Neoliberalism", in Building Chicago Economics. The field began with Gary Becker's 1968 paper on crime. 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, both of which are regarded as important events. Gordon Tullock and Friedrich Hayek also wrote intensively in the area and influenced to spread of law and economics.

Founding

In 1958, Director founded The Journal of Law & Economics, which he co-edited with Nobel laureate Ronald Coase, and which helped to unite the fields of law and economics with far-reaching influence. In 1960 and 1961, Ronald Coase and Guido Calabresi independently published two groundbreaking articles, "The Problem of Social Cost" and "Some Thoughts on Risk Distribution and the Law of Torts". This can be seen as the starting point for the modern school of law and economics.
In 1962, Aaron Director helped to found the Committee on a Free Society. Director's appointment to the faculty of the University of Chicago Law School in 1946 began a half-century of intellectual productivity, although his reluctance about publishing left few writings behind. He taught antitrust courses at the law school with Edward Levi, who eventually would serve as Dean of Chicago's Law School, President of the University of Chicago, and as U.S. Attorney General in the Ford administration. After retiring from the University of Chicago Law School in 1965, Director relocated to California and took a position at Stanford University's Hoover Institution. He died September 11, 2004, at his home in Los Altos Hills, California, ten days before his 103rd birthday.

Later development

In the early 1970s, Henry Manne set out to build a center for law and economics at a major law school. Ultimately, Manne established a center at George Mason, which became a center for the education of judges—many never previously exposed to the concepts of law and economics. Manne also attracted the support of the John M. Olin Foundation; Olin centers for Law and Economics now exist at many universities.

Positive and normative law and economics

Economic analysis of law is usually divided into two subfields: positive and normative.

Positive law and economics

'Positive law and economics' uses economic analysis to predict the effects of various legal rules. So, for example, a positive economic analysis of tort law would predict the effects of a strict liability rule as opposed to the effects of a negligence rule. Positive law and economics have also at times purported to explain the development of legal rules, for example, the common law of torts, in terms of their economic efficiency.

Normative law and economics

Normative law and economics goes one step further and makes policy recommendations based on the economic consequences of various policies. The key concept for normative economic analysis is efficiency, in particular, allocative efficiency.
A common concept of efficiency used by law and economics scholars is Pareto efficiency. A legal rule is Pareto efficient if it could not be changed so as to make one person better off without making another person worse off. A weaker conception of efficiency is Kaldor–Hicks efficiency. A legal rule is Kaldor–Hicks efficient if it could be made Pareto efficient by some parties compensating others so as to offset their loss.
Nonetheless, the possibility of a clear distinction between positive and normative analysis has been questioned by Guido Calabresi, who, in his book on "The future of Law and Economics", believes that there is an "actual - and unavoidable - existence of value judgments underlying much economic analysis."
Uri Weiss proposed this alternative: "It is common in law and economics to search for the law that will lead to the optimal outcome, providing the maximum size 'pie,' and to think about maximizing happiness instead of minimizing pain. We prefer another approach: We do not try to identify games that will lead to the optimal result but to prevent games in which it is in the best interests of the players to come to an unjust result".

Criminal law

In 1968, Gary Becker, who would later win the Nobel Prize in Economic Sciences, published Crime and Punishment: An Economic Approach. This work relied on the economic concept of utility as the basic unit of analysis. In 1985, in An Economic Theory of the Criminal Law, Posner set out an alternative approach that relied instead on wealth as the basic unit of analysis.

Relationship to other disciplines and approaches

As used by lawyers and legal scholars, the phrase "law and economics" refers to the application of microeconomic analysis to legal problems. Because of the overlap between legal systems and political systems, some of the issues in law and economics are also raised in political economy, constitutional economics and political science.
Approaches to the same issues from Marxist and critical theory/Frankfurt School perspectives usually do not identify themselves as "law and economics". For example, research by members of the critical legal studies movement and the sociology of law considers many of the same fundamental issues as does work labeled "law and economics", though from a vastly different perspective. The law and political economy movement also analyzes similar concepts using an entirely different approach.
The one wing that represents a non-neoclassical approach to "law and economics" is the Continental tradition that sees the concept starting out of the governance and public policy approach and the German Historical school of economics; this view is represented in the Elgar Companion to Law and Economics and—though not exclusively—in the European Journal of Law and Economics. Here, consciously non-neoclassical approaches to economics are used for the analysis of legal problems.
Law and economics is closely related to jurimetrics, the application of probability and statistics to legal questions.

Applications

  • Affirmative action
  • Antitrust law
  • Calculus of negligence
  • Congestion pricing
  • Corporate governance
  • Cost–benefit analysis
  • *Criminal law
  • *Mass surveillance in the United States
  • *Surveillance
  • Crime enforcement
  • Deregulation
  • Design of contracts
  • *Efficient breach
  • Discrimination
  • *Statistical discrimination
  • Drug policy
  • Evidence
  • Evolution of the common law
  • Financial regulation
  • *Fraud-on-the-market theory
  • Governance of the commons
  • *Tragedy of the commons
  • Institutional origins
  • *The Colonial Origins of Comparative Development: An Empirical Investigation
  • *Constitutional economics
  • *Legal origins theory
  • *Property rights
  • Intellectual property
  • Natural monopoly regulation
  • Peltzman effect
  • Principal–agent problem
  • *Adverse selection
  • *Moral hazard
  • Quarantine measures for public health
  • Prudent investor rule
  • Rent control
  • Rent-seeking
  • Transaction costs
  • Value of a statistical life
  • Voting systems
  • Water law