Political Economy of Law

Rukamanee Maharjan Roll No. 14/2065 LL.M. II Year

Background: Political Economy
Political economy is the science of wealth in simple sense and is sometimes defined as the science of National wealth.1 The science of political economy seems to be rested upon few notions of an apparently simple character such as utility, wealth, value, commodity, labour, land and capital.2 The theory of political economy draws heavily on the subject of economics, political science, law, history and sociology or different closely related branches of economics to explain the politico-economic behaviour of a country.3 For instance, free trade between countries is the result of economic and political considerations. Countries may undertake free trade agreements to promote sale of goods between them which will result in increased export earnings. It may also lead to specialization on the lines of “comparative advantage” and large scale production with falling costs. The benefits of the economies of scale can also be reaped through this process. The origin of the term “Political Economy” dates back to the period when it was used to study the way production was carried out in countries born out of the new capitalist system. More specifically, it was the relation between the production system and law, customs and the government. 4 The term political "Political Economy" was first coined by the French Mercantilist Anton De Montchrestein in his "Treatise of Political Economy (1615)" that primarily referred to the study of the political basis of economic actions. In the 18th century, the term underwent a major change when the “Labour Theory of Value”5 came into being, which replaces theories that used to claim “Land” to be the source of all wealth. Moreover, political economy formerly rested on the writings of Adam Smith (An Inquiry into Nature and Causes of the Wealth of Nations (1776)), David Ricardo (On the Principles of Political Economy and Taxation (1817)), John Stuart Mill(Principles of Political Economy with some of their Applications to Social Philosophy (1848)) and William Stanley Jevons (The Theory of Political Economy (1871)). However, it should be noted that Hobbes and Locke are typically linked with the early foundation of political economy as it was the form initially taken by the political philosophy.
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Electronic Copy of book- The elements of Political Economy by Francis Wayland. http://www.econlib.org/library/YPDBooks/Jevons/jvnPE1.html#Chapter%201. Last visited on April 4, 2011. ( Ebook- The Theory of Political Economy by William Stanley Jevons) 3 http://www.economywatch.com/political-economy/political-economy-theory.html. Last visited on April 4, 2011. 4 Id 5 The labour theory of value, propounded by David Richardo states that the relative price of two goods is determined by the ratio of the quantities of labour required in their production. However, this theory requires several assumptions: 1- both sectors have the same wage rate and the same profit rate; 2- the capital employed in production is made up of wages only; 3- the period of production has the same length for both goods.

Now, political economy has come a long way from the “invisible hand” 6 of Adam Smith as a discourse on Capitalism, the theory of “rent”7 of David Ricardo, the “social philosophy” aspect of J.S. Mill and the “utility as the origin of value” put forward by William Stanley Jevons. The theory of political economy now encompasses a wide range of subjects from anthropology to history from psychology to human geography and from law to ecology.8 In this light, it is crucial to make an inquiry 'what is the political economy behind law?', ' how do the theories of political economy (including positive political theories9) affect laws and law making process?' and 'Is the law concerned about the promotion of economic efficiency?. The answer to these questions depends upon the political understanding of a person responding them. For instance, the believer in the free market and laissez faire economics will answer in the affirmative in case of the question relating to the law's primarily concerned with promoting economic efficiency whereas the more left learning individual will counter that law should be more about justice, rights and redistribution. In other words, such question-answer relates with the political economy of law. It is because political economy of law most commonly refers to interdisciplinary studies drawing upon economics, law and political science in explaining how political institutions, the political environment, and the economic system influence each other. Likewise, when narrowly construed, it refers to applied topics in economics implicating public policy such as monopoly, market protection, governmental fiscal policy etc. In both case, the interdependency vis-a-vis relationship thereof is clear and obvious.

Political Economy of Law:
As the whole series of the theories of the political economy in one or another way are related with the science of wealth and associated concepts, the political economy of law revolves around the interdependent relationship of economic, law and political sciences. In a broader sense, it refers to the interdisciplinary studies explaining how political institutions, the political environment, and the economic system influence each other and in a narrow sense, it refers to applied topics in economics implicating public policy. In other words, political economy of law pursues a substantially different notion. It seeks to understand the ways in which society structures its political, economic and legal institutions. This notion suggests neither a conceptual nor a political concept of law but a social-scientific one that would help understanding the social world in general, the emergence and persistence of social groups over time and the causes and consequences of different governmental structures.

Invisible hand, known as invisible hand of the market that is created by the conjunction of the forces of selfinterest, competition, and supply and demand, plays a crucial role in allocating resources in society. This is also seen as the founding justification for the laissez-faire economic philosophy. 7 Ricardo has developed theories of rent, wages, and profits. He defined rent as "the difference between the produce obtained by the employment of two equal quantities of capital and labour." 8 Supra note 3. 9 Positive political theory is the study of politics using formal methods such as social choice theory, game theory, and statistical analysis.

There is one opinion which suggests political economy of law does not directly denote Marxist Approach to law and neither economic analysis of law put forward by Chicago School. However, while drilling the notion in relation to the economic determination of law and the role of law in promoting economic efficiency, both get attached to the political economy of law. Regarding the economic analysis of law, it not only advocates that the law ought to be concerned with economic efficiency, but also claims to put forward a descriptive theory in which law is simply and straightforwardly concerned with promotion of economic efficiency and the protection of wealth as a value.10 On the other hand, Karl Marx himself has used the term 'classical political economy' in order to designate that strand in economic theory originating in France with 'Boisguillebert (1646-1714)'11 and in Britain with 'William Petty (1623-87)'12 and reaching its high point with the work of Smith and Ricardo (1772-1823) who ‘gave to classical political economy its final shape’.13 However, the meaning that Marx gave to 'classical political economy' was different as Marx, as a materialist, understood that the categories of political economy were a product of historical development and specifically of the historical development of the social relations of production.14 In this regard, a critique of political economy and Marxist analysis of law has a great significance. Notwithstanding things mentioned above, in more specific sense, "the political economy of law is a branch of Law and Economics that applies positive political theory optimizing models of individual behavior applied to political decision making to study the development of law. Positive political theory of Law is primarily a positive theory of rational strategic behavior in the presence of imperfect information that seeks to explain and predict the content of the law. These theoretical predictions are derived from information about the preferences of citizens, elected officials and government civil servants and the design of relevant political institutions, including electoral processes and the legislative, executive and judicial branches of the government. It also includes a normative component that evaluates the effects of the structure and processes of governance in terms of economic efficiency, distributive justice and democratic legitimacy. It provides a positive theory of the link between political institutions and policy outcomes."15 Additionally, the political economy of law shares a great deal of relationship with liberalism, nationalism and even with globalization in today's context as the international political

McCoubrey, Prof. Hilaire & Nigel D. White, Textbook on Jurisprudence, (Blackstone Press Limited, 1999, 275-296). 11 Boisguillebert was opposed to the economic policy of Jean-Baptiste Colbert, finance minister to Louis XIV, who attempted to increase the manufacturing potential of France by keeping agricultural prices at a low level in the hope that low-wage goods would be an incentive to industry. Like his Physiocratic successors, Boisguillebert thought that national wealth was dependent on the prosperity of agriculture. 12 His most important theories are on fiscal contributions, national wealth, the money supply and circulation velocity, value, the interest rate, international trade and government investment. He is attributed as having started the philosophy of 'laissez-faire' in relation to government activity. 13 http://www.marxists.org/archive/pilling/works/capital/geoff1.htm. Last visited on April 12, 2011. 14 Id 15 Electronic Copy of article ' The Political Economy Of Law:Decision-Making By Judicial, Legislative, Executive And Administrative Agencies' by McNollgast.

economy of law can been seen with the advent of international and regional organizations such as WTO. a) The Economic Analysis of Law In general, economic analysis of law seeks to answer two basic questions about legal rules. Namely, what are the effects of legal rules on the behavior of relevant actors? And are these effects of legal rules socially desirable? In answering these positive and normative questions, the approach employed in economic analysis of law is that used in economic analysis generally: the behavior of individuals and firms is described assuming that they are forward looking and rational, and the framework of welfare economics is adopted to assess social desirability. The economic approach to the law (i.e. Chicago School) grew out of the United States in the early 1960s with work by Ronald Coase, Guido Calabresi and Richard Posner. Likewise, the economic approach grew out of American Realism with desire to better explain law in terms of non legal factors such as economics. At the same time, there is somewhat similarity between the economic approach to law and critical legal studies as 'both treat law as a political phenomenon; and both undermine the image of law as an autonomous discipline'. Moreover, it is also true that the economic approach to law is to view it as an improved model of utilitarianism. Bentham's utilitarianism was based on the 'felicific calculus', the greatest happiness to the greatest number. The inherent uncertainty of law making within this method is remedied to a large extent by the economic analysis of law. Additionally, in this economic approach to law, the assumption is made that human is a rational maximize of his satisfactions. Within the framework of the economic analysis of law, Richard Posner is often viewed as the greatest contributor thereof, not undermining Coase theorem and Calabresi's 'efficiency and equity'. i) Coase Theorem16: Coase theorem is based on 'the problem of social cost'. For instance, a factory is emitting smoke, thereby damaging the laundry hung out at five nearby houses. In legal terms the question is whether the residents have the right to clean air or whether the factory has the right to pollute in these circumstances. Human's natural instinct is to favour the residents in that it is causing the damage. However, for the economists the issue is not one of causation in that, although the factory has caused the damage, that damage would not have occurred if the houses were not so close to the factory. In this regard, Ronald Coase observed, 'If we are to discuss the problem in terms of causation, both parties cause the damage.' The solution of such problem lies in finding 'efficient solution'. The efficient solution depends on whether there are transaction costs or not. It is not possible to be zero transaction costs and positive transaction costs are not anticipated. Therefore, the preferred legal rule is the rule that minimizes the effects of transaction costs.


Supra note 10

ii) Calabresi's economic analysis to law17: Calabresi have addressed two issues more clearly, first the narrow issue of efficiency and second, the nature of a right and the issue of its distribution. He has listed three groups of reasons for deciding in favour of one entitlement over another, for instance- the right to clean air over the right to pollute: 'economic efficiency, distributional preferences and other justice considerations. iii) Richard Posner's economic analysis to law18: Posner made two claims: first, Common law legal rules are, in fact, efficient; and second, legal rules ought to be efficient. In both claims, "efficient" means maximization of the social willingness-to-pay. Later, two more claims were articulated- third, Legal processes select for efficient rules; and fourth, individuals respond to legal rules economically. Later, fifth claim was made 'on the best interpretation of law, common law doctrines promote efficiency'. In more simple form, Posner argued that the various doctrines of the common law can best be explained as wealth maximizing. Posner believes that wealth maximization is an ethically attractive guide not only for the common law but for social institutions generally. In this way, the economic analysis of law is absolutely correct in one sense that the large parts of the law are based on the concept of wealth maximization within a free market. It is because that is the political and economic environment within which the law operates and which the law facilitates. b) Marxist Analysis of law19: Marxist thought is founded upon an economic and political analysis to which legal theory is, at most, an adjunct. Classical Marxist theory, as developed by Karl Marx and Friedrich Engels sought a 'scientific analysis of the process of social development'. There are three separate, but connected, strands of thought within Marx's philosophy: i) Dialectical materialism: This is a mode of thought based upon a materialist conception of the universe and the dialectical method, which examines the interconnections of, and contradictions within, all phenomena. All things are in flux; to understand the laws of change is essential. ii) Laws of economic production: Production under capitalism is based on exploitation of the workers, who have only their labour power to sell, by the capitalists, who own the instruments to production. Crises are endemic and result in the workers intensifying their organization so that, eventually their every experiences in the productive apparatus teach them how to overthrow their exploiters. iii) Historical materialism: The history of the society is the history of the class struggle. The mode of production within society conditions the general process of intellectual life. Revolution will occur only when the contradictions created by the capitalist mode of production cannot be solved.
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Supra note 10 http://plato.stanford.edu/entries/legal-econanalysis/. Last visited on April 10, 2011. 19 Curzon, L B, Jurisprudence, (Cavendish Publishing Limited, 1993, 133-144).

The basis of society is its economic foundations. Upon the base, society erects a political and legal superstructure. Ideas, theories, ideologies reflect economic activity. Jurisprudence is no exception to this rule. Legal institutions, rules, procedures, theories arise in response to the needs perceived by the ruling class. Law is an instrument of class oppression that benefits the ruling class through oppression of the proletariat. The state came into existence only when classes appeared within society. Therefore, after the socialist revolution, classes will disappear, Bourgeois law will be rendered obsolete and the state will have withered away.

Market, state, and international community are now in mutual relationship as the world is getting more advanced in terms of technology, development, commercial transaction. International political economy that is applicable among the states' relationship and transactions. For instance, international migration affects employment, income, living standards and local to international communities along with much influence on globalization and global political economy. The legal, economic and political regime have been interacting with each other and affecting each other. In today's context, the political economy of law directly applies in the connection to the fact that 'economic forces determine government policies' whether it be local, regional or international level. Though law and economics movement have failed at many points, the relevance is not reduced at all. Therefore, it is expedient to study the nexus and intricacies among economics, law and political science in explaining how political institutions, the political environment, and the economic system influence each other.

1. McCoubrey, Prof. Hilaire & Nigel D. White, Textbook on Jurisprudence, (Blackstone Press
Limited, 1999, 275-296) 2. Curzon, L B, Jurisprudence, (Cavendish Publishing Limited, 1993, 133-144) 3. Ebooks- 'The Theory of Political Economy' by William Stanley Jevons and 'The elements of Political Economy' by Francis Wayland.

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