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Encyclopedia > 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.[1] This article is about law in society. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... There are several measures of economic efficiency: Pareto efficiency Kaldor-Hicks efficiency X-efficiency Allocative efficiency For applications of these principles see: Efficient market hypothesis Welfare economics Production theory basics See also Business efficiency Inefficiency ...

Contents

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. A lawyer, according to Blacks Law Dictionary, is a person learned in the law; as an attorney, counsel or solicitor; a person licensed to practice law. ...


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. The Politics series Politics Portal This box:      Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. ... The Politics series Politics Portal This box:      Political Science is the field concerning the theory and practice of politics and the description and analysis of political systems and political behaviour. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ... Marxism is both the theory and the political practice (that is, the praxis) derived from the work of Karl Marx and Friedrich Engels. ... In the humanities and social sciences, critical theory has two quite different meanings with different origins and histories, one originating in social theory and the other in literary criticism. ... Max Horkheimer (front left), Theodor Adorno (front right), and Jürgen Habermas in the background, right, in 1965 at Heidelberg The Frankfurt School is a school of neo-Marxist social theory (which is more akin to anarchism than communism), social research, and philosophy. ... Critical legal studies refers to a movement in legal thought that applied methods similar to those of critical theory (the Frankfurt School) to law. ...


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" [2] and "Some Thoughts on Risk Distribution and the Law of Torts". [3] This can been seen as the starting point for the modern school of law and economics.[4] (17th century - 18th century - 19th century - more centuries) As a means of recording the passage of time, the 18th century refers to the century that lasted from 1701 through 1800. ... Adam Smith FRSE (baptised June 5, 1723 O.S. / June 16 N.S. – July 17, 1790) was a Scottish moral philosopher and a pioneering political economist. ... Mercantilism is the economic theory that a nations prosperity depended upon its supply of gold and silver, that the total volume of trade is unchangeable. ... Year 1961 (MCMLXI) was a common year starting on Sunday (link will display full calendar) of the Gregorian calendar. ... Ronald Harry Coase (b. ... Judge Guido Calabresi (born 1932 in Milan, Italy) is currently a judge on the United States Court of Appeals for the Second Circuit. ...


In the early 1970's, 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. Considered a founder of the Law and economics discipline. ... John M. Olin Foundation was a grant-making foundation established in 1953 by John M. Olin, president of the Olin Industries chemical and munitions manufacturing businesses. ...


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. In the common law, a tort is a civil wrong for which the law provides a remedy. ...


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. Economic efficiency is a general term for the value assigned to a situation by some measure designed to capture the amount of waste or friction or other undesirable economic features present. ... Allocative efficiency is the market condition whereby resources are allocated in a way that maximizes the net benefit attained through their use. ...


The weakest 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. (By weak, economists mean that Pareto efficiency makes very few normative assumptions, not that it is supported by weak arguments.) A stronger conception of efficiency is Kaldor-Hicks efficiency. A legal rule is Kaldor-Hicks efficient if it could be made Pareto efficient by a side payment. Pareto efficiency, or Pareto optimality, is an important notion in neoclassical economics with broad applications in game theory, engineering and the social sciences. ... Pareto efficiency, or Pareto optimality, is an important notion in neoclassical economics with broad applications in game theory, engineering and the social sciences. ... Kaldor-Hicks efficiency is a type of economic efficiency that occurs only if the economic value of social resources is maximized. ...


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 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.[5] Nobel Prize medal. ... Ronald Harry Coase (b. ... Gary Stanley Becker (born December 2, 1930) is an economist and a Nobel laureate. ... The United States Court of Appeals for the Seventh Circuit is a federal court with appellate jurisdiction over the following United States district courts: Central, Northern, and Southern Districts of Illinois Northern and Southern Districts of Indiana Eastern and Western Districts of Wisconsin The court is based at the Dirksen... Frank Hoover Easterbrook (born 1948) has been a judge on the United States Seventh Circuit Court of Appeals since 1985. ... Richard A. Posner Richard Allen Posner (born January 11, 1939 in New York City) is currently a judge on the United States Court of Appeals for the Seventh Circuit. ... William M. Landes is an economist who has written widely about the economic analysis of law. ... Judge Guido Calabresi (born 1932 in Milan, Italy) is currently a judge on the United States Court of Appeals for the Second Circuit. ... The Cost of Accidents: A Legal and Economic Analysis (1970) by Guido Calabresi is a very important work in the law and economics tradition because it provides an economic efficiency analysis of the rules of tort law. ...


Influence

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 doctrine.


Critique

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 [6] 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[1] and Mark Kelman. Rational choice theory assumes human behavior is guided by instrumental reason. ... In criminology, the Rational Choice Theory adopts a Utilitarian belief that man is a reasoning actor who weighs means and ends, costs and benefits, and makes a rational choice. ... Human rights are rights which some hold to be inalienable and belonging to all humans. ... Distributive justice - Wikipedia, the free encyclopedia /**/ @import /skins-1. ... Critical legal studies refers to a movement in legal thought that applied methods similar to those of critical theory (the Frankfurt School) to law. ... Duncan Kennedy (*1942 in Washington, D.C.) is the Carter Professor of General Jurisprudence at Harvard Law School. ...


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.[7] Allocative efficiency is the market condition whereby resources are allocated in a way that maximizes the net benefit attained through their use. ... Pareto efficiency, or Pareto optimality, is a central concept in economics with broad applications in game theory, engineering and the social sciences. ... The Theory of the Second Best concerns what happens when one or more optimality conditions are not satisfied in an economic model. ...


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. The phrase research and development (also R and D or R&D) has a special commercial significance apart from its conventional coupling of scientific research and technological development. ... This article or section cites very few or no references or sources. ...


Essentially, the "first-best" neoclassical analysis fails to properly account for various kinds of general-equilibrium feedback relationships that result from intrinsic Pareto imperfections.[7]


Responses

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. Game theory is often described as a branch of applied mathematics and economics that studies situations where multiple players make decisions in an attempt to maximize their returns. ... Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ... For Wikipedia statistics, see m:Statistics Statistics is the science and practice of developing human knowledge through the use of empirical data expressed in quantitative form. ... Econometrics literally means economic measurement. It is a combination of mathematical economics and statistics. ... Socioeconomics is the study of the social and economic impacts of any product or service offering, market intervention or other activity on an economy as a whole and on the companies, organization and individuals who are its main economic actors. ... Neoclassical economics refers to a general approach (a metatheory) to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. ...


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. John M. Olin Foundation was a grant-making foundation established in 1953 by John M. Olin, president of the Olin Industries chemical and munitions manufacturing businesses. ...


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 and Ronald Coase, 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 Chicago Law School, having recently celebrated its centennial in the 2002-2003 school year, has established itself as a high profile part of the University of Chicago. ... Judge Richard Allen Posner (born 1939) is currently a judge on the United States Court of Appeals for the Seventh Circuit. ... Ronald Harry Coase (b. ... George Mason University School of Law is the law school of George Mason University, a state university in the U.S. Commonwealth of Virginia. ... Gordon Tullock (born February 13, 1922 in Rockford, Illinois) is currently professor of law and economics at the George Mason University School of Law in Arlington, Virginia. ... The Vanderbilt University Law School (VULS) is the law school at Vanderbilt University in Nashville, Tennessee. ...


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. 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. Judge Richard Allen Posner (born 1939) is currently a judge on the United States Court of Appeals for the Seventh Circuit. ...


Journals

Open access (OA) means immediate, free and unrestricted online access to digital scholarly material[1], primarily peer-reviewed research articles in scholarly journals. ...

Regional and international associations

  • Asia - Asian Law and Economics Association
  • Australia - Australian Law and Economics Association
  • 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
  • Greece - Greek Association of Law and Economics
  • Israel - Israeli Association for 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
  • USA - American Law and Economics Association
  • USA - Midwestern Law and Economics Association

Bibliography

  • 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, 3rd edition, 2000) ISBN 0-321-06482-8
  • David Friedman (1987). "law and economics," The New Palgrave: A Dictionary of 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)) [2]
  • Richard Posner, Economic Analysis of Law (Aspen, 7th edition, 2007) ISBN 978-0-735-56354-4 .

Boudewijn Bouckaert is a Belgian liberal thinker and politician, adhering to more radical-liberal views than the vast majority of Flemish liberals. ... Ronald Harry Coase (b. ... There are very few or no other articles that link to this one. ... David D. Friedman (b. ... Duncan Kennedy (*1942 in Washington, D.C.) is the Carter Professor of General Jurisprudence at Harvard Law School. ... Richard A. Posner Richard Allen Posner (born January 11, 1939 in New York City) is currently a judge on the United States Court of Appeals for the Seventh Circuit. ...

See also

This is a sub-article of fiqh and Law and economics. ... Public choice theory is a branch of economics that studies the decision-making behavior of voters, politicians and government officials from the perspective of economic theory, namely game theory and decision theory. ... New institutional economics (NIE) may be characterized as a new perspective in economics. ... The Politics series Politics Portal This box:      Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. ... This article is about law in society. ... Contract theory comprises many different theories and various interpretations of the various body of rules and subrules that define Contract Law. ... Face-to-face trading interactions on the New York Stock Exchange trading floor. ... In economics, the Legal Origins Theory states that many aspects of a countrys economic state of development are the result of their legal system, most of all where a particular country received its law from. ...

Notes

  1. ^ David Friedman (1987). "law and economics," The New Palgrave: A Dictionary of Economics, v. 3, p. 144.
  2. ^ 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.
  3. ^ Guido Calabresi, "Some Thoughts on Risk Distribution and the Law of Torts", Yale Law Journal, Vol.70 (1961).
  4. ^ Richard Posner, The Economics of Justice 1983, p.4.
  5. ^ Litan, Robert (1988). Liability: Perspectives and Policy. Brookings Institution Press. ISBN 0815752717. 
  6. ^ ISBN 0-674-80280-2
  7. ^ a b Markovits, Richard (Vol. 73, 1998). Second-Best Theory and Law & Economics: An Introduction. Chicago-Kent Law Review. 

  Results from FactBites:
 
Law and Economics, by David D. Friedman: The Concise Encyclopedia of Economics: Library of Economics and Liberty (1580 words)
The economic analysis of law deals with legal rules, whether made by legislatures or by courts, from this second viewpoint—not as a way of handing out rewards and punishments to those who deserve them, but as a system of incentives intended to affect behavior.
So one implication of economic analysis of law is a presumption in favor of freedom of contract—the legal rule permitting parties to a contract to set any terms mutually acceptable and have them enforced by the courts.
In contract law, as in many other areas of law, economic analysis affects not only conclusions about what the law should be, but the whole form of the arguments on which such conclusions are based.
Law and economics - Wikipedia, the free encyclopedia (1509 words)
Law and economics, or economic analysis of law, is the term usually applied to an approach to legal theory that incorporates methods and ideas borrowed from the discipline of economics.
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.
Two of the leading Law Schools focusing on Law and Economics are the University of Chicago Law School, whose distinguished faculty includes Judge Richard Posner and Ronald Coase, and the George Mason University School of Law, whose faculty includes Nobel winner Vernon Smith, and perennial Nobel finalist, Gordon Tullock.
  More results at FactBites »

 
 

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