RELEVANCE OF ECONOMICS TO LAW

Law consists of rules made by the authority for proper regulation of the
community or society. According to Austin, “Law is a rule laid down for
the guidance of a being by an intelligent being having power over him”.
Law means any set of uniform principles, which is generally followed. It
refers to those rules which are laid by the state for determining the
relationship of men in the organized society. The purpose of law is to
regulate and control human actions in the society.

Economics is a study of mankind in the ordinary business of life. It

examines that part of individual and social actions, which are most
closely connected with the attainment and with the attainment and
with the use of material requisites of well-being. Further, according to
Robbins, “Economics is a science which studies human behavior as a
relationship between ends and scare means which have alternative
uses”. Thus, economics is related to human welfare with scarce
resources. The unlimited wants of the people and the scarce resources
of the community lead to the origin of economic problem in production
and distribution including that of economic inequalities. The state has
to enact legal laws to solve these problems.

In a market – based economy based on private enterprise as in India,

people can privately own all the property. They are also free to use
their time and means as they like. But, in reality there are rules and
regulations to control activities laid down by the government of any
country.

However, the classical economists did not envisage the role of

government in market economy. For them, the role of government was
restricted only to maintain law and order and enforce the core laws to
facilitate interpersonal relations. They actually advocated laissez-faire
theory, meaning that the government should not interface in the
market economy. This view was nursed probably because in the times
of Adam Smith, the government was thought to be corrupt. It was felt
that an economic system could do better without interference from the
government.

The classical economists believed in an unseen force or invisible hand,

which made the market work automatically. J.M. Keynes developed
new ideas and changed the economic perception. New economics was
against the laissez-faire theory of old economists, who favored the
capitalist class to work freely without any government interference.

There was a growth of welfare state concept, which focused on

increasing role of government in laying down policies that aimed at
ameliorating the market conditions. Under the umbrella on welfare
state, the government drew up many development plans aiming at
social justice. These policies entailed planned intervention of the
government and could not be given up in the face of intolerable
situation of economic depression, unemployment, poor health of
housing situation.

As many popular theories suggest the system and the state during early
times was of anarchy. People i.e. the early man used to wander from
one place to other and fulfilled his /her wants through whatever one
could acquire be it fruits, vegetables from plants or meat of animals.

People were self dependant and looked after their needs on their own.
Homo sapiens gradually evolved their way of living and learnt the art of
farming and as agriculture flourished people began settling close to
their lands where access to essentials was easy.
As the concept of private property, economic activity of agricultural
produce evolved conflicts began and as a solution for conflicts was
seeked a need of law to govern all, to reduce and solve disputes, to
support peaceful coexistence was felt.

WHAT IS ECONOMICS AND HOW IS IT RELATED TO LAW:

When we talk about economics, we say economics is a problem of

choice. The resources available are scarce and they have alternatives
uses that means many resources have more than one uses, and utilizing
only these scarcely available resources the unlimited wants of the
world have to be fulfilled. To maintain a balance between the wants
and their fulfillment a lot of analysis has to be done technique has to be
applied, various studies have to be taken up. There exists various
problems of choice and this problem of choice is called economics.
When we search for standard definition of economics, the very first
definition that google mentions is a social science directed at the
satisfaction of needs and wants through the allocation of scarce
resources. The branch of knowledge concerned with production,
consumption and transfer of wealth.

The central problems that we study are:

1) What to produce and in what quantity.

2) How to produce

3) Whom to produce

If we analyze and try to think at every step there is a system of

allocation of resources.
The first question- What to produce and in what quantity, the producer
has to analyze the whole situation and has to compile all the resources
available and put them to use.

At this stage itself the laws have a major role to play. Law regulates the
method, means of acquisition and compilation of resources. Example of
this could be…

The 2nd problem which states how to produce is concerned with two
basic techniques: the first is labor intensive technique and second is
machine intensive technique.

In this we can take example of labor laws, various rules and statues
regulating working conditions. They help to create a holistic situation so
that economy can flourish well along with moral and human values.
They aim at human welfare. In the pursuit of economic activities such
laws try to provide justice and a regulating system to the producers and
the workers. Labor laws prevent the producers and the employers from
exploiting the workers. They provide freedom to the workers and
empower them to put forward and demand their rights. Had it been the
case that proper laws were not in force disparity and exploitation must
have prevailed.

The 3rdcentral problem is for whom to produce means how the

allocation of the total output is to be made. How the output has to be
distributed among various sections of society.

The laws try to maintain our system of equality and fairness. It prevents
the producers from manipulating the market and protects the lights of
the consumer. If someone tries to override the set fair and just norms
they are certainly made answerable in the court of law by consumers
who are aware of the right which are guaranteed under law . Looking at
such repercussions of unfair means the producer tries that the
allocation made is justifiable. The prices set are appropriate and not
exaggerated and in the same way many crucial decisions and made
keeping in mind the norm set by law.

In any society, individual have to first of develop an environment for

them where existence is possible. To support existence one of the main
necessities is security. Law ensures to maintain such a system that basic
life necessities in the form of the rights and duties are provided to all.
We know that law act as a regulating force and control human behavior
and prevents at it best any wrong to an individual, or if any right of the
individual is infringed, laws ensures that justice is done in those cases .
Also law acts as a deterrence for the offender or people with similar
likewise mind.

Only when people are at peace they can think of making advancements
and moving on the path of development. Economic developments and
planning for the some are possible only when there is a sense of
security among people.

If we see the top 10 countries ranked according to their GDP we will

notice that they are such nations where rule of law prevails. The
government and judicial branches of those countries are looking and
investing will to maintain law and order.

Let's take an example, suppose you are a producer a capitalist wishing

to invest and set up a factory. What will be your favorable location to
do so? Are you willing to setup your factory at a place which is a region
where conflicts and aggression are common? Your probable answer will
be no and probable reason will be lack of law, order and security.
ROLE OF LAW IN CONTROLLING ECONOMIC ACTIVITIES

The role of law is also seen in controlling the price level in the market.
There is an increasing misuse of scare resources, which can be
detrimental to environment safety. Government has to pass various
acts to prevent over exploitation of these resources.

Law steps in to protect the consumer and see that producer does not
exploit the consumer. Further, there is an increasing production of
luxury items, which could be detrimental to the production of
consumer items. The government has to check production of luxury
items and see that the consumer goods are easily available in the
market.

The private enterprises close their eyes on social cost of their

production. They are only concerned with the private cost of
production. Government is required to pass legislation related to
controlling the social cost. Cases of river pollution and Bhopal gas
tragedy are live examples of its social cost, where people have to pay
for production activities for the private companies.

The state lays down the economic framework, laws and rules for
controlling the economic activities. It helps to tackle the problems of
unemployment, inflation, etc. and stabilize the pace of economic
growth. We know that the basic problem in economics is to allocate the
limited resources optimally and to prevent its extravagant use.
INTERACTION BETWEEN LAW AND ECONOMICS

Both law and economics influence each other manually. In fact, there is
growing interrelationship between the two. It has been observed that
certain economic considerations have bearing on legal concepts like
ownership, contract, tort, taxation, etc. Law also has to keep pace with
new developments.

(i) We can take example of property rights. Property ownership is

associated with economic growth. The property rights provide an
incentive for efficient use of resources. Recent advancements and
revolution in the field of technology have forced a new definition of
property. It has now come to include, apart from physical property, the
intellectual property such as goodwill, patent, copyright, etc.

(ii) In past years, the incidence of black marketing, tax avoidance and
evasion, etc. have increased so much that it has become essential for
government to pass certain rules and regulations to check the
development of these economic as well as social evils. The fiscal policy
has been developed to check these problems. The fiscal law undertakes
administration of taxes. The taxation law contains a number of
incentives and disincentives to achieve the planned objectives.
Government derives taxes through direct and indirect means. Every
item we buy has an amount which is deducted under tax also the
Government employees and various Industries have to pay an amount
of tax from their income to government. They are a major source of
income of government. The government plants its activities and policies
keeping in mind this income source. But, it is seen lot of a illicit means
to evade from paying taxes and save their wealth. It is counted as Black
money, and we have often heard of how this tax evasion causes a great
harm to economy.

Hence, government has always tried to bring in transparency and better

laws to deal with this subject. Such laws prevent the unfair means and
allow fair tax collection method. Also, it brings in its radar the ones who
are creating difficulties and halt the function and make them
accountable for the same.

Therefore, the taxation laws and other such laws are indirectly linked
with economy which in turn has a huge impact on development as well.

(iii) Contract is another feature of market economy. We know that

contract is a written agreement between two parties and it is binding
on both parties. No third party is allowed to interfere. Initially, the
courts did not allow the state to interfere in these contracts. But, there
were many developments which forced the law courts to take action in
these contracts. The incidences of child labor, bonded labor, etc. forced
to disregard the sanctity of contract. Further, the state was required to
pass labor laws, whereby it gave protection to the workers against the
risk of exploitation, sickness, unemployment, Old age, etc. In England,
there is a system of social insurance. The law of Contract has been
passed to reduce the transaction cost and uncertainly by supplying a
set of standard items.

(iv) Consumer Protection Act has been passed to protect the interests
of the customer. This is also an example of law of contract making
inroads in the sanctity of contract. Because of Consumer Protection Act
now, it has become essential for the companies to maintain quality
control. The marginal cost of resources put to quality control is less
than marginal cost of legal actions. This is better that they devote their
resources to quality control. The doctrine of “caveat-emptor” has now
been replaced by the policy of “let the sellers beware”.

(v) Initially, Trust was designed in America to protect the rights of

children belonging to aristocratic families to property. Thus, Trust Laws
were passed. Obviously, the concept of trust has undergone changes.
Now, it also works as a system providing protection to trade union,
religious organizations, educational organizations, etc.

(vi) Considering the social evils associated with our agrarian system,
Land Reform Act had to be passed. The peasants of our country form a
large chunk of the population. In post independent India, their
condition was really pathetic. It took a lot of efforts on the part of
Indian Government to take action against the class of intermediaries,
which had grown between the state and the peasants. Many
organizational changes were made in the land tenure system to bring
about land reforms and tenancy reforms.

(vii) Well conceived Labor Laws were laid down to protect the rights of
child labourers, bonded labourers, women labourers, wage earners,
etc. All are dealt with regard to specific social context in mind.

(viii) Economic analysis of crime law involves a cost analysis of the

victim, the offender and the overall society. The criminal faces the
liability of being caught and convicted; the victim faces the damage cost
and society has to bear the damage cost and the cost to prevent or
control crime.
(ix) If we see the working of FATF which is an intergovernmental
organization, it works to set standard and promote effective
implementation of legal, regulatory and operational measures for
combating money laundering, terrorist financing and other related
threats to the integrity of International Financial system.

The countries listed in the black and grey list are the ones which face
repercussions due to this labeling and this hampers their trade and
transactions. Institutions like World Bank and IMF may refrain from
providing finances to such countries which no doubt halts the economic
progression. Also it may be difficult for such countries to find
independent investors.

Hence it can be concluded that security and rule of law helps a region
to make economic advance. So law and economy though are different
concepts with different subjects but support each other’s co-existence.

Relation between economy and law can also be traced if we try to

analyze the pandemic situation and its effect on the world economy. A
major portion of the world had to enforce strict lock down because of
rapid spreading illness, unseen number of deaths and uncertainty of
facing such a situation. In India laws like epidemic diseases act
1897were evoked. The government also took major steps to restrict
people in their homes. As we remember only essential services were
functional. The rules implied were very strict obviously for a good
cause. But a point worth noting is that many countries with great
economic capabilities had their GDP falling in the ambit of negatives
(value in minus)

(x) Due to restriction in free movement and just confinement of people

within their home the demand of many non essential services
decreased. Many new businesses were shut down and a large part of
people lost their jobs.

If we try to recall, the country of America was reluctant in the

beginning to impose such restrictive loss as it hinder the economic
growth. But after the situation worsened it finally decided to take strict
measures. Hence it can be seen that how change in approach and law
can affect economy and that too not of a limited region but that of the
whole world.

In the era of globalization where a lot of emphasis is lead upon the

concept of open economic market, that is, countries are persuaded to
allow foreign players to invest in their Nations market to sell and buy in
their market system. This in a way affects the indigenous market of a
nation and hence can affect the local producers. To combat this we see
the countries have various laws to regulate and balance the economy of
the nation and the contribution of local people in their Nation's
economic growth. Laws assist economy in a positive way if formulated
to do so.

EONOMIC OFFENCES AND LEGISLATIONS

Economic offences form a separate category of crimes under criminal

offences. These are often referred as white/ blue collar crimes.
Indulgence by technocrats, highly qualified persons, well to do
businessmen, corporate persons, etc. in various scams and frauds
facilitated by the technological advancements, is often seen. In
economic offences, not only individuals get victimized with pecuniary
loss. Such offences often damage the national economy and defence.

Increase in economic offences during the recent years has by far

outstripped the increase of conventional crime. This scenario is likely to
further aggravate in the coming years. Also, the coming years are likely
to witness various new types of economic crimes an account of
increased globalization, enhance reliance on internet banking, use of
plastic money and expansion of primary as well as secondary capital
market. While the economic offences wing will have to continue to take
up investigations of various types of offences listed below. Some of
these crimes are likely to require full-fledged units for their
investigation and prosecution in future.

(i) Import-export frauds.

(ii) Banking frauds.

(iii) Insurance frauds.

(iv) Foreign exchange frauds.

(v) Frauds through manipulation of prices of share listed on stock

exchanges, insider trading, etc.

(vi) Smuggling of narcotics and psychotropic substances.

(vii) Forgery of travel documents, identity papers and overseas job

rackets.

(viii) Counterfeit currency and fake government stamps/papers.

(ix) Smuggling of antiques, arts and treasure.

(x) Cyber crimes.

(xi) Violations of Intellectual Property Rights, audio and video privacy,

Software privacy, etc.

(xii) Wildlife and environmental crimes.

The Ease of Doing Business Report ranks the nations on basis of

favorable conditions which allow a business to flourish and grow nation.
The ranking is given by evaluating these 10 factors as mentioned below:
 Starting a business – Procedures, time, cost, and minimum capital
to open a new business
 Dealing with construction permits – Procedures, time, and cost to
build a warehouse
 Getting electricity – procedures, time, and cost required for a
business to obtain a permanent electricity connection for a newly
constructed warehouse
 Registering property – Procedures, time, and cost to register
commercial real estate
 Getting credit – Strength of legal rights index, depth of credit
information index
 Protecting investors – Indices on the extent of disclosure, the
extent of director liability, and ease of shareholder suits
 Paying taxes – Number of taxes paid, hours per year spent
preparing tax returns, and total tax payable as a share of gross
profit
 Trading across borders – Number of documents, cost, and time
necessary to export and import
  Enforcing contracts – Procedures, time, and cost to enforce a debt
contract
 Resolving insolvency – The time, cost, and recovery rate (%)
under a bankruptcy proceeding
Here we see a lot many points are directly or indirectly governed by
law and policies. If the law gives relaxations, are flexible and provide
scope the business may develop well affecting the economy as well
and if laws and policies are strict they inhibit and restrict and inhibit
the growth of business which affects the economy adversely.

CONCLUSION:

(i)

The relationship between law and economics is a mutual one. Both

influence each other. It has been shown by Dais that the mode of
economy determines the nature of laws and the status of the
adjudicating bodies and legal professional. This shows as to how the
economy can influence law. On the other hand, various legislations
passed by the government bring new dimensions in economy. For
instance, the social cost, etc.

In a nation, where market is determined in terms of its efficiency, law

plays a very important role. The laws and legal policies help to
determine the economic behavior. The laws can both impede and
promote economic efficiency. It helps in preventing waste and misuse
of resources, thereby increasing economic efficiency. Apart from this
side, the laws have also furnished the whole framework of rules within
which economic factors and interests have worked. A good law always
encourages economic development and a bad law inhibits it. Law
imparts trust in actual government procedure and provides security to
the society. This is done through and appropriate system of property
right, contracts and extra contractual liability, which can generate
efficient use of resources.

(ii)

Dias states that the mode of economy determines the nature of floors
and the status of adjudicating bodies and legal professionals.

This is in actual very appropriate in every sense. If we notice in general

we see that a nation having prosperous economy has laws which have
welfare feature in them, both for the people and growth of the nation.

If we see the other way round, other side of the coin, we find that
because the legislation and laws are having welfare feature for people
and the nation the economy has scope of growth. The legal policies of
the state determine the efficacy and ethics of the market, the economic
behavior of the masses and its social effects.

The laws, legislation and policies are a detriment factor of the

economy they actually indicate whether the economic market is closed
or open, supports growth or restrict it, is the system socialist or
capitalist?

The remedies for an inhibited economy, all are directly or indirectly

related to Laws. We started from analysis what economy means and
found out that it deals with the fact that the resources are scarce and
wants are plenty in number and generally a choice has to be made to
balance the both, it will be appropriate to state that yes, laws direct us
to make a rational choice whenever the problem of choice occurs, so
that the society can benefit at large.