Law and economics

Law and economics

Law and Economics, or economic analysis of law is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. [David Friedman (1987). "law and economics," "", v. 3, p. 144.]

Relationship to other disciplines and approaches

As used by lawyers and legal scholars, the phrase "law and economics" refers to the application of the methods of economics 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 and political science. Most formal academic work done in law and economics is broadly within the Neoclassical tradition. 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 considers many of the same fundamental issues as does work labeled "law and economics". The one wing that represents a non-neoclassical approach to "law and economics" is the Continental (mainly German) tradition that sees the concept starting out of the "Staatswissenschaften" approach and the German Historical School of Economics; this view is represented in the "Elgar Companion to Law and Economics" (2nd ed. 2005) 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 (and administrative/governance) problems.

Origin and history

As early as in the 18th century, Adam Smith discussed the economic effect on mercantilist legislation. However, to apply economics to analyze the law regulating nonmarket activities is relatively new. In 1961, Ronald Coase and Guido Calabresi independently from each other published two groundbreaking articles: "The Problem of Social Cost" [Ronald Coase, "The Problem of Social Cost", "The Journal of Law and Economics" Vol.3, No.1 (1960). This issue was actually published in 1961.] and "Some Thoughts on Risk Distribution and the Law of Torts". [Guido Calabresi, "Some Thoughts on Risk Distribution and the Law of Torts", "Yale Law Journal", Vol.70 (1961).] This can been seen as the starting point for the modern school of law and economics. [Richard Posner, "The Economics of Justice" 1983, p.4.]

In the early 1970s, Henry Manne (a former student of Coase) set out to build a Center for Law and Economics at a major law school. He began at Rochester, worked at Miami, but was soon made unwelcome, moved to Emory, and ended at George Mason. The latter soon became a center for the education of judges -- many long out of law school and never exposed to numbers and economics. Manne also attracted the support of the John M. Olin Foundation, whose support accelerated the movement. Today, Olin centers (or programs) for Law and Economics 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 has 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 stronger 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 as to offset their loss.

Important scholars

Important figures include the Nobel Prize winning economists Ronald Coase and Gary Becker, U.S. Court of Appeals for the Seventh Circuit, judges Frank Easterbrook and Richard Posner, and other distinguished scholars such as Robert Cooter, Henry Manne and William Landes. Guido Calabresi, judge for the U.S. Court of Appeals for the Second Circuit, author of the 1970 book, "The Cost of Accidents: A Legal and Economic Analysis", wrote in depth on this subject, with "Costs of Accidents" being cited as influential in its extensive treatment of the proper incentives and compensation required in accident situations.cite book
title = Liability: Perspectives and Policy
first = Robert
last = Litan
publisher = Brookings Institution Press
year = 1988
id = ISBN 0815752717
] Calabresi took a different approach in his 1985 book, "Ideals, Beliefs, Attitudes, and the Law", where he argued , "who is the cheapest avoider of a cost, depends on the valuations put on acts, activities and beliefs by the whole of our law and not on some objective or scientific notion (69)."


In the United States, economic analysis of law has been extremely influential. Judicial opinions utilize economic analysis and the theories of law and economics with some regularity. The influence of law and economics has also been felt in legal education. Many law schools in North America, Europe, and Asia have faculty members with a graduate degree in economics. In addition, many professional economists now study and write on the relationship between economics and legal doctrines. Anthony Kronman, former dean of Yale Law School, has written that “the intellectual movement that has had the greatest influence on American academic law in the past quarter-century [of the 20th Century] ” is law-and-economics. [Anthony T. Kronman, The Lost Lawyer 166 (1993).]


Despite its influence, the law and economics movement has been criticized from a number of directions. This is especially true of normative law and economics. Because most law and economics scholarship operates within a neoclassical framework, fundamental criticisms of neoclassical economics have been applied to work in law and economics.

Rational choice theory

Within the legal academy, law and economics has been criticized on the ground that rational choice theory in economics makes unrealistic simplifying assumptions about human nature (see rational choice theory (criminology)); Posner's application of law and economic reasoning to rape and sex ISBN 0-674-80280-2] may be an example of this. Liberal critics of the law and economics movements have argued that normative economic analysis does not capture the importance of human rights and concerns for distributive justice. Some of the heaviest criticisms of the "classical" law and economics come from the critical legal studies movement, in particular Duncan Kennedy [] and Mark Kelman.

Pareto efficiency

Relatedly, additional critique has been directed toward the assumed benefits of law and policy designed to increase allocative efficiency; when such assumptions are modeled on "first-best" (Pareto optimal) general-equilibrium conditions. Under the theory of the second best, for example, if the fulfillment of a subset of optimal conditions cannot be met under any circumstances, it is incorrect to conclude that the fulfillment of "any" subset of optimal conditions will necessarily result in an increase in allocative efficiency.cite book
title = Second-Best Theory and Law & Economics: An Introduction
first = Richard
last = Markovits
publisher = Chicago-Kent Law Review
year = Vol. 73, 1998

Consequently, any expression of public policy whose purported purpose is an unambiguous increase in allocative efficiency (for example, consolidation of research and development costs through increased mergers and acquisitions resulting from a systematic relaxation of anti-trust laws) is, according to critics, fundamentally incorrect; as there is no general reason to conclude that an increase in allocative efficiency is more likely than a decrease.

Essentially, the "first-best" neoclassical analysis fails to properly account for various kinds of general-equilibrium feedback relationships that result from intrinsic Pareto imperfections.

Another critique comes from the fact that there is no unique optimal result. Warren Samuels in his 2007 book, "The Legal-Economic Nexus", argues, "efficiency in the Pareto sense cannot dispositively be applied to the definition and assignment of rights themselves, because efficiency requires an antecedent determination of the rights (23-4)."


Law and economics has adapted to some of these criticisms (see "contemporary developments," below). One critic, Jon D. Hanson of Harvard Law School, argues that our legal, economic, political, and social systems are unduly influenced by an individualistic model that assumes "dispositionism" -- the idea that outcomes are the result of our "dispositions" (economists would say "preferences"). Instead, Hanson argues, we should look to the [ "situation"] , both inside of us (including cognitive biases) and outside of us (family, community, social norms, and other environmental factors) that have a much larger impact on our actions than mere "choice." Hanson has written many [ law review articles] on the subject and has books forthcoming.

Contemporary developments

Law and economics has developed in a variety of directions. One important trend has been the application of game theory to legal problems. Other developments have been the incorporation of behavioral economics into economic analysis of law, and the increasing use of statistical and econometrics techniques. Within the legal academy, the term socio-economics has been applied to economic approaches that are self-consciously broader than the neoclassical tradition.

Universities with law and economics programs

Almost every major American law school offers courses in law and economics and has faculty working in the field; until 2005, many of these programs received funding from the John M. Olin Foundation, which was an early supporter of the field.

Two of the leading Law Schools focusing on Law and Economics are the University of Chicago Law School, whose distinguished faculty includes Judge Richard A. Posner, Ronald Coase and Gary Becker, and the George Mason University School of Law, whose faculty includes Nobel laureate Vernon Smith, and perennial Nobel finalist, Gordon Tullock. In the spring of 2006, Vanderbilt University Law School announced the creation of a new program to award a [ Ph.D. in Law & Economics] .

The University of Toronto Faculty of Law offers a combined J.D. / M.A. Economics, as well as a J.D. / Ph.D. Economics.

In Europe, a consortium of universities from ten different countries is running the [ European Master Program in Law and Economics] which is the leading European program in the field since 1990. A newer [ European Doctorate program in Law and Economics] is operated by three leading European centers in Law and Economics.

The Collegio Carlo Alberto in Turin, Italy hosts an [ International Ph.D. Program in Institutions, Economics and Law] . Members of the teaching staff come from various academic institutes in Europe and the United States. A separate Doctoral Program in Law and Economics is currently run by the School of Economics at the [ University of Siena] . Also in Italy, the International University College of Turin [] , with students and faculty from worldwide, runs a biennial Master of Sciences in Comparative Law, Economics and Finance which challenges mainstream views on the subject.

Switzerland's University of St. Gallen has a [ Law and Economics Program] on both the undergraduate (Bachelor of Arts in Law and Economics) and graduate levels (Master of Arts in Law and Economics). The graduate program was initiated in October 2005 at the first international scientific conference on Law and Economics by the President of the University, Ernst Mohr and the St.Gallen Professor and leading business lawyer [ Peter Nobel] . The Law and Economics Program is supported by an [ International Academic Council] lead by leading experts in the field of law and economics, such as Richard A. Posner, Ronald J. Gilson, Victor Goldberg or Geoffrey P. Miller.

Operating outside this particular framework, the Utrecht University offers students the possibility to major in law and economics as part of their undergraduate studies, or to specialize in law and economics in a one-year post-graduate programme.

University of Economics, Prague, namely Department of Institutional Economics at the Faculty of Economics and Public Administration, offers Law and Economics as a possible specialization for graduate students, while complete graduate program is being prepared.

The University of Cambridge also has a specific course called 'Land Economy', who combines law, economy and the environment into one discipline. [] Nottingham University Business School and City University Law School, London both have undergraduate courses in Law and Economics. In India, the National University of Juridical Sciences (NUJS) offers two courses in Law and Economics to its undergraduate students. [] In the National University of Singapore, a highly selective [ Double Honours Programme in Law and Economics] was launched in 2005, whereby students complete two Bachelors' degrees in five years.


* [ American Law and Economics Review]
* [ Asia Pacific Law and Economics Review]
* [ Erasmus Law and Economics Review] (open access)
* [ European Journal of Law and Economics]
* [ Review of Law and Economics]
* [ International Review of Law and Economics]
* [ Journal of Law, Economics, and Organization]
* [ Journal of Law, Economics & Policy]
* [ Journal of Law and Economics]
* [ Journal of Legal Studies]
* [ Supreme Court Economic Review] (USA)

Regional and international associations

* Asia - [ Asian Law and Economics Association]
* Australia - [ Australian Law and Economics Association]
* Austria - [ Verein zur Pflege der Rechtsökonomik / Joseph von Sonnenfels Center for the Study of Public Law and Economics]
* Canada - [ Canadian Law and Economics Association]
* China - [ MILES Institute of Law and Economics]
* Europe - [ European Association of Law and Economics]
* Finland - [ Finnish Association of Law and Economics]
* Germany - Gesellschaft für Recht und Ökonomik
* Greece - [ Greek Association of Law and Economics]
* Israel - [ Israeli Association for Law and Economics]
* Italy - [ Italian Society of Law and Economics]
* Japan - [ Law & Economics Association of Japan]
* Korea - [ Korean Law and Economics Association]
* New Zealand - [ Law and Economics Association of New Zealand]
* Scandinavia - [ Scandinavian Association of Law and Economics]
* Switzerland - [ Master in Law and Economics Foundation, University of St.Gallen] [ The Swiss Law and Economics Students' Society, St. Gallen, Switzerland]
* USA - [ American Law and Economics Association]
* USA - [ Midwestern Law and Economics Association]


*Boudewijn Bouckaert and Gerrit De Geest, eds., "Encyclopedia of Law and Economics" (Edward Elgar, 2000) [ Online version.]
*Ronald Coase, "The Firm, The Market, and the Law" (Chicago: University of Chicago Press, reprint ed. 1990) ISBN 0-226-11101-6.
*Robert Cooter and Thomas Ulen, "Law and Economics" (Addison Wesley Longman, 5th edition, 2007) ISBN 0321336348
* David Friedman (1987). "law and economics," "", v. 3, pp. 144-48.
* Duncan Kennedy, "Law-and-Economics from the Perspective of Critical Legal Studies" (from "The New Palgrave Dictionary of Economics and the Law" (1998)) []
*Richard Posner, "Economic Analysis of Law" (Aspen, 7th edition, 2007) ISBN 978-0-735-56354-4 .

ee also

*Competition policy
*Contract theory
*Islamic economical jurisprudence
*Legal origins theory
*Legal theory
*New institutional economics
*Political economy
*Property rights (economics)
*Public choice theory


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