Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. There are two major branches of law and economics. The first branch 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. This second branch of law and economics thus overlaps more with work on political institutions and governance institutions more generally.
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. 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, to apply economics to analyze the law regulating nonmarket activities is relatively new. A European law & economics movement around 1900 did not have any lasting influence.
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 this "Chicago School". The University already had Frank Knight, George Stigler, Henry Simons, and Ronald Coase—a strong base of libertarian scholars. 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.
The historians Robert van Horn and Philip Mirowski described these developments, in their "The Rise of the Chicago School of Economics" chapter in The Road from Mont Pelerin (2009); and historian Bruce Caldwell (a great admirer of von Hayek) filled in more details of the account in his chapter, "The Chicago School, Hayek, and Neoliberalism", in Building Chicago Economics (2011). 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, both 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 (a former student of Coase) set out to build a center for law and economics at a major law school. He began at the University of Rochester, worked at the University of Miami, but was soon made unwelcome, moved to Emory University, and ended up at George Mason. The last 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.
Important scholars
Forerunners
Founders
- Aaron Director, University of Chicago
- Ronald Coase, University of Chicago, 1991 Nobel Memorial Prize in Economic Sciences
- Richard Posner, University of Chicago
- Guido Calabresi, Yale University. Calabresi, judge for the U.S. Court of Appeals for the Second Circuit, wrote in depth on this subject; his book The Costs of Accidents: A Legal and Economic Analysis (1970) has been cited as influential in its extensive treatment of the proper incentives and compensation required in accident situations. Calabresi took a different approach in Ideals, Beliefs, Attitudes, and the Law (1985), 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).
- Henry Manne, George Mason University
Important figures
Other important figures include:
- Nobel Prize–winning economist Gary Becker, a leader of the Chicago School of Economics
- U.S. Court of Appeals for the Seventh Circuit judge Frank Easterbrook
- Andrei Shleifer
- Robert Cooter
- Harold Demsetz
- Hans-Bernd Schäfer
- William Landes
- W. Kip Viscusi
- A. Mitchell Polinsky
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 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 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" (2016: 21-22), 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".
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 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 governance and public policy (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.
Law and economics is closely related to jurimetrics, the application of probability and statistics to legal questions.
