AN ANALYSIS OF ECONOMIC FOUNDATIONS OF LAW

Origin and History
 As early as in the 18th century, Adam Smith discussed the

economic effect of mercentalist legislation.  However, to apply economics to analyze the law regulating nonmarket activities is relatively new.  In 1961, Ronald Coase, an economics Nobel Lauriat published a paper, “The Problem of Social Cost” and "Some Thoughts on Risk Distribution and the Law of Torts" dealt with economic and social justice.  In 1972, Posner and Parisi published a book “The Economic Analysis of Law” in which they said, "Law and Economics is probably the most successful example of the recent surge of Applied Economics into areas that once were regarded as extraneous to economic analysis.”
 This can be seen as the starting point for the modern

school of law and economics

An American Judge Justice Brandies said,” A Lawyer who has not studied Economics and Sociology is very apt to become a public enemy” 2. The emergence of Welfare State radically restructured Capitalism and increased the role of the state. 3. In the words of Myrdal, "the Govt. interventions that we mean by welfare state policies were unpremeditated , caused by events not by ideology. Thus the need for Govt. intervention in market economy has been accepted by the economists.” 4. There is growing trend of Economic offences in every country, which requires the knowledge of economic principles under different economic and social structures.
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IMPORTANCE OF ECONOMICS IN LAW

Influence of Economics on Law in USA
 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.

PREAMBLE OF INDIAN CONSTITUTION
 THE OBJECTIVES MENTIONED IN THE PREAMBLE

OF OUR CONSTITUTION ARE JUSTICEECONOMIC, SOCIAL AND POLITICAL.  THIS IMPLIES : 1. To remove economic inequalities,2. to provide a decent standard of living and 3. to promote the interests of the weaker sections of the society.  The above are mentioned in the Directive Principles of the Constitution (Part-IV) which are to be achieved within the economic system of our country.  A lawyer must be able to asses the economic system in which decisions are taken and disputes arise.

LAWS RELATING TO FACTORS OF PRODUCTION
There are four factors of production. Some laws are mentioned here relating to the factors: 1. Land: land ceiling Acts , contract farming, tenancy acts 2. Labor: Minimum wages act, social security, labor laws. 3. Capital : Socialist Acts against accumulation of Capital and wealth, law of Banking and Finance, Tax laws, International Capital flow regulation, etc., 4. Organization : Monopoly and Restrictive Trade Practices Act (MRTP) now Competition Law, Companies Acts, Law of Contracts, Mergers, etc.,

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 Koldar-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.

EQUITY VS EFFICIENCY
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One of the major goals of Indian policy makers is to achieve ‘growth with social justice’. While growth is purely an economic strategy, ensuring social justice in in the purview of executive and judiciary. The interaction of economic principles and legal proceedings, some times create confusion and contradiction. While efficiency is needed for achieving economic growth, equity is the ultimate goal in any welfare state. Judiciary should be proactive and the laws have to be appropriately framed in order to achieve equity without adversely affecting efficiency.

MARKET AND LAW
 Law and economics stresses that markets are more efficient

than courts. When possible, the legal system, according to the positive theory, will force a transaction into the market. When this is impossible, the legal system attempts to “mimic a market” and guess at what the parties would have desired if markets had been feasible.  Law and economics shares with other branches of economics the assumption that individuals are rational and respond to incentives. When penalties for an action increase, people will undertake less of that action. Law and economics is more likely than other branches of legal analysis to use empirical or statistical methods to measure these responses to incentives.

Contemporary developments
 Law and economics have 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 socioeconomics has been applied to economic approaches that are self-consciously broader than the neo-classical tradition.

THE FUTURE OF LAW
Economics and law can provide insights in places where traditional legal analysis fails to penetrate. It is the essentially complementary nature of the two disciplines that makes us optimistic the collaboration between lawyers and economists will be increasingly fruitful in the future. Two facts emerge from the above analysis : 1. The study of law without the knowledge of other related social sciences like economics, sociology, political science, and history is incomplete. 2. In any law curriculum, the study of economics and law and their interaction is increasingly found necessary.