What Is the Fundamental Philosophy of the Law and Economics School

The private legal system must perform three functions, all related to property and property rights. First, the system must define property rights; This is the task of property law itself. Second, the system must allow for the transfer of ownership; This is the task of contract law. Finally, the system must protect property rights; This is the function of tort law and criminal law. These are the most important questions that are examined in law and economics. Lawyers and economists also apply the tools of economics, such as game theory, to purely legal issues, such as the litigation strategies of different parties. Although these are aspects of law and economics, they are of more interest to lawyers than to students of economics. “Law and economics,” also known as the economic analysis of law, differs from other forms of legal analysis in two main ways. First, theoretical analysis focuses on effectiveness. Simply put, a legal situation is said to be effective when a right is granted to the party who would be willing to pay most for it. There are two different theories of legal effectiveness, and lawyers and economists support arguments based on both. The positive theory of legal effectiveness asserts that the common law (judicial law, the most important body of law in England and its former colonies, including the United States) is effective, while normative theory asserts that the law should be effective.

It is important that the two theories remain separate. Most economists accept both. The second characteristic of law and economics is its emphasis on incentives and people`s reactions to those incentives. Thus, compensation in accident law (tort) does not serve to compensate injured parties, but rather to encourage potential injured parties to take effective (cost-justified) precautions to avoid the accident. Law and economics share with other branches of economics the assumption that individuals are rational and respond to incentives. If penalties for an act increase, people will take fewer actions. Law and economics are more likely to use empirical or statistical methods than other branches of legal analysis to measure these responses to incentives. The discipline is now well established, with eight associations, including the American, Canadian and European legal and trade associations, and several journals.1 Law and economics articles also appear regularly in major economic journals, and the approach is common in legal journal articles. Most law schools have a faculty trained in economics, and most offer courses in law and business. Many faculties of economics also teach courses in this area. A law and economics course is very useful for students considering law school. Several consulting firms specialize in providing economic expertise in litigation.

The right of exchange is crucial for a market economy. Most of the lessons of contract law seem to be compatible with economic efficiency. The study of contract law in law and economics has shown that it is generally effective for parties to draft their own contracts and, under normal circumstances, for courts to enforce agreed terms, including the agreed price. Courts will generally not enforce contracts if the service would be inefficient, but will allow damages to be paid. For example, if I agree to build something for you for $50,000, but in the meantime the cost goes up so that the thing would cost me $150,000, it is inefficient for me to build it. Instead, the courts that recognize this allow me to compensate you with a monetary payment. It is effective. However, not all teachings are effective. The parties sometimes determine damages (called “liquidated damages”) to be paid in the event of a breach. If the courts decide that these damages are too high – that they are more of a penalty than actual damages – they will not apply the contractually agreed amount of liquidated damages. This failure to enforce agreed conditions is a great mystery to lawyers and economists; It seems that the courts would do better to enforce the parties` agreement, just as they do with respect to price and other contractual clauses. Here, the positive theory of the effectiveness of the law appears to be violated, but the researchers argue that the courts should enforce these agreements.

Criminal law has been the subject of the most extensive empirical work in law and economics, probably because of the availability of data (see Crime). Economic theory predicts that criminals, like others, respond to incentives, and it is clear that increasing the likelihood and severity of sentences in a jurisdiction leads to a reduction in crime in that jurisdiction. The issue of the deterrent effect of the death penalty has been more controversial, but several recent articles using advanced econometric techniques and comprehensive data have found a significant deterrent effect. Each execution deters between eight and twenty-eight murders, eighteen being the best estimate. No peer-reviewed empirical criticism of this work has been published. Studies on procedural rules have shown that more rights for accused can lead to an increase in crime. A controversial paper by John Donohue and Steven Levitt empirically argues that the easing of abortion restrictions has led to a drop in crime because unwanted children are more likely to become criminals. There is also significant debate in the literature about the impact of laws facilitating the carrying of hidden weapons on crimes. Some, like John Lott, see a significant drop in crime as a result of these laws, while others see a much smaller impact, although there is little evidence of an increase in crime. Modern law and economics date back to 1960, when Ronald Coase (who later won a Nobel Prize) published “The Problem of Social Cost.” Gordon Tullock and Friedrich Hayek also wrote in the area, but the expansion of the field began with Gary Becker`s work on crime in 1968 (Becker also received a Nobel Prize).

In 1972, Richard Posner, a lawyer and economist and leading proponent of positive effectiveness theory, published the first issue of Economic Analysis of Law and founded the Journal of Legal Studies, both important events in the creation of the field as a thriving scientific discipline. Posner became a federal judge while remaining a prolific scholar. A major factor that led to the proliferation of law and economics in the 1970s was a series of seminars and law courses for economists and economics courses for lawyers, organized by Henry Manne and partly funded by the Liberty Fund.