Law and economics, or economic analysis of law, is the application of

microeconomic theory Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics foc ...

to the analysis of

law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...

, which emerged primarily from scholars of the Chicago school of economics.

Economic An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...

concepts are used to explain the effects of laws, to assess which legal rules are

economically efficient In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts: * Allocative or Pareto efficiency: any changes made to assist one person would harm another. * Productive efficiency: no addit ...

, and to predict which legal rules will be

promulgated Promulgation is the formal proclamation or the declaration that a new statutory or administrative law is enacted after its final approval. In some jurisdictions, this additional step is necessary before the law can take effect. After a new law ...

. There are two major branches of law and economics; one based on the application of the methods and theories of

neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...

to the positive and normative analysis of the law, and a second branch which focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.

History

Origin

The historical antecedents of law and economics can be traced back to the

classical economists Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...

, who are credited with the foundations of modern economic thought. As early as the 18th century,

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...

discussed the economic effects of

mercantilist Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce ...

legislation; later,

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British Political economy, political economist. He was one of the most influential of the Classical economics, classical economists along with Thomas Robert Malthus, Thomas Malthus, Ad ...

opposed the British

Corn Laws The Corn Laws were tariffs and other trade restrictions on imported food and corn enforced in the United Kingdom between 1815 and 1846. The word ''corn'' in British English denotes all cereal grains, including wheat, oats and barley. They wer ...

on the grounds that they hindered agricultural productivity; and Frédéric Bastiat, in his influential book '' The Law'', examined the unintended consequences of legislation. However, to apply economics to analyze the law regulating nonmarket activities is relatively new. A European law & economics movement around 1900 did not have any lasting influence.

Harold Luhnow Harold W. Luhnow (September 25, 1895 – August 1978) was an American businessman, philanthropist, and political activist. He is most well known for his management of the influential William Volker Fund during the period between 1947 and 1964 in t ...

, the head of the Volker Fund, not only financed

F. A. Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, Jurisprudence, legal theorist and philosopher who is best known for his defense of classical lib ...

in the U.S. starting in 1946, but he shortly thereafter financed

Aaron Director Aaron Director (; September 21, 1901 – September 11, 2004) was a Russian-born American economist and academic who played a central role in the development of the field Law and Economics and the Chicago school of economics. Director was a profe ...

's coming to

the University of Chicago The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the be ...

in order to set up there a new center for scholars in law and economics. The University was headed by

Robert Maynard Hutchins Robert Maynard Hutchins (January 17, 1899 – May 14, 1977) was an American educational philosopher. He was president (1929–1945) and chancellor (1945–1951) of the University of Chicago, and earlier dean of Yale Law School (1927–1929). His& ...

, a close collaborator of Luhnow's in setting up the Chicago School, as it became commonly known. The university faculty then included a strong base of libertarian scholars, including

Frank Knight Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago School. Nobel laureates Milton Friedman, George ...

George Stigler George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist. He was the 1982 laureate in Nobel Memorial Prize in Economic Sciences and is considered a key leader of the Chicago school of economics. Early life and e ...

, Henry Simons,

Ronald Coase Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...

and

Jacob Viner Jacob Viner (3 May 1892 – 12 September 1970) was a Canadian economist and is considered with Frank Knight and Henry Simons to be one of the "inspiring" mentors of the early Chicago school of economics in the 1930s: he was one of the leading fig ...

. Soon, it would also have not just Hayek himself, but Director's brother-in-law and Stigler's friend

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...

, and also

Robert Fogel Robert William Fogel (; July 1, 1926 – June 11, 2013) was an American economic historian and scientist, and winner (with Douglass North) of the 1993 Nobel Memorial Prize in Economic Sciences. As of his death, he was the Charles R. Walgreen D ...

, Robert Lucas,

Eugene Fama Eugene Francis "Gene" Fama (; born February 14, 1939) is an American economist, best known for his empirical work on portfolio theory, asset pricing, and the efficient-market hypothesis. He is currently Robert R. McCormick Distinguished Servic ...

Richard Posner Richard Allen Posner (; born January 11, 1939) is an American jurist and legal scholar who served as a federal appellate judge on the U.S. Court of Appeals for the Seventh Circuit from 1981 to 2017. A senior lecturer at the University of Chic ...

, and

Gary Becker Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...

. Historians Robert van Horn and

Philip Mirowski Philip Mirowski (born 21 August 1951 in Jackson, Michigan) is a historian and philosopher of economic thought at the University of Notre Dame. He received a PhD in Economics from the University of Michigan in 1979. Career In his 1989 book ''More ...

described the development of modern economic concepts in "The Rise of the Chicago School of Economics", a chapter of ''The Road from Mont Pelerin ''(2009); and historian Bruce Caldwell (a great admirer of von Hayek) filled in more details of the account in his chapter, "The Chicago School, Hayek, and Neoliberalism", in ''Building Chicago Economics'' (2011). The field began with Gary Becker’s 1968 paper on crime (Becker also received a Nobel Prize). In 1972, Richard Posner, a law and economics scholar and the major advocate of the positive theory of efficiency, published the first edition of Economic Analysis of Law and founded ''

The Journal of Legal Studies ''The Journal of Legal Studies'' is a law journal published by the University of Chicago Press focusing on interdisciplinary academic research in law and legal institutions. It emphasizes social science approaches, especially those of economics, ...

'', both are regarded as important events. Gordon Tullock and Friedrich Hayek also wrote intensively in the area and influenced to spread of law and economics.

Founding

In 1958, Director founded ''The'' ''Journal of Law & Economics'', which he co-edited with Nobel laureate

, and which helped to unite the fields of law and economics with far-reaching influence. In 1960 and 1961, Ronald Coase and

Guido Calabresi Guido Calabresi (born October 18, 1932) is an Italian-born American legal scholar and Senior United States circuit judge of the United States Court of Appeals for the Second Circuit. He is a former Dean of Yale Law School, where he has been a pr ...

independently published two groundbreaking articles, "

The Problem of Social Cost "The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Co ...

" and "Some Thoughts on Risk Distribution and the Law of Torts". This can be seen as the starting point for the modern school of law and economics. In 1962, Aaron Director helped to found the Committee on a Free Society. Director's appointment to the faculty of the University of Chicago Law School in 1946 began a half-century of intellectual productivity, although his reluctance about publishing left few writings behind. He taught antitrust courses at the law school with Edward Levi, who eventually would serve as Dean of Chicago's Law School, President of the University of Chicago, and as U.S. Attorney General in the

Ford administration Gerald Ford's tenure as the 38th president of the United States began on August 9, 1974, upon the resignation of Richard Nixon from office, and ended on January 20, 1977, a period of days. Ford, a Republican from Michigan, had served as vic ...

. After retiring from the

University of Chicago Law School The University of Chicago Law School is the law school of the University of Chicago, a private research university in Chicago, Illinois. It is consistently ranked among the best and most prestigious law schools in the world, and has many dis ...

in 1965, Director relocated to California and took a position at Stanford University's

Hoover Institution The Hoover Institution (officially The Hoover Institution on War, Revolution, and Peace; abbreviated as Hoover) is an American public policy think tank and research institution that promotes personal and economic liberty, free enterprise, an ...

. He died September 11, 2004, at his home in Los Altos Hills, California, ten days before his 103rd birthday.

Later development

In the early 1970s, Henry Manne (a former student of Coase) set out to build a center for law and economics at a major

law school A law school (also known as a law centre or college of law) is an institution specializing in legal education, usually involved as part of a process for becoming a lawyer within a given jurisdiction. Law degrees Argentina In Argentina, ...

. He began at the

University of Rochester The University of Rochester (U of R, UR, or U of Rochester) is a private university, private research university in Rochester, New York. The university grants Undergraduate education, undergraduate and graduate degrees, including Doctorate, do ...

, worked at the

University of Miami The University of Miami (UM, UMiami, Miami, U of M, and The U) is a private research university in Coral Gables, Florida. , the university enrolled 19,096 students in 12 colleges and schools across nearly 350 academic majors and programs, incl ...

, but was soon made unwelcome, moved to

Emory University Emory University is a private research university in Atlanta, Georgia. Founded in 1836 as "Emory College" by the Methodist Episcopal Church and named in honor of Methodist bishop John Emory, Emory is the second-oldest private institution of ...

, and ended up at

George Mason George Mason (October 7, 1792) was an American planter, politician, Founding Father, and delegate to the U.S. Constitutional Convention of 1787, one of the three delegates present who refused to sign the Constitution. His writings, including ...

. The last 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.

Chicago School notable figures

Modern forerunners of economic thought developed at the Chicago School include

, and Frédéric Bastiat. Founders include: *

University of Chicago The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...

, University of Chicago, 1991

Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

, University of Chicago *

Yale University Yale University is a private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the third-oldest institution of higher education in the United States and among the most prestigious in the wo ...

. Calabresi, judge for the

U.S. Court of Appeals for the Second Circuit The United States Court of Appeals for the Second Circuit (in case citations, 2d Cir.) is one of the thirteen United States Courts of Appeals. Its territory comprises the states of Connecticut, New York and Vermont. The court has appellate juri ...

, wrote in depth on this subject; his book '' The Costs of Accidents: A Legal and Economic Analysis'' (1970) has been cited as influential in its extensive treatment of the proper incentives and compensation required in accident situations. Calabresi took a different approach in ''Ideals, Beliefs, Attitudes, and the Law'' (1985), where he argued, "who is the cheapest avoider of a cost, depends on the valuations put on acts, activities and beliefs by the whole of our law and not on some objective or scientific notion" (69). * Henry Manne, George Mason University Other notable individuals include: *

Nobel Memorial Prize The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

–winning economist and a leader of the Chicago School of Economics *

Frank Easterbrook Frank Hoover Easterbrook (born September 3, 1948) is an American lawyer, jurist, and legal scholar who has served as a United States circuit judge of the U.S. Court of Appeals for the Seventh Circuit since 1985. He was the Seventh Circuit's chief ...

, U.S. Court of Appeals for the Seventh Circuit judge * Andrei Shleifer *

Robert Cooter Robert D. Cooter (born May 2, 1945) is the Herman F. Selvin Professor of Law at the University of California, Berkeley, School of Law. Cooter works in the field of law and economics. He is co-editor of the ''International Review of Law and Econom ...

Harold Demsetz Harold Demsetz (; May 31, 1930 – January 4, 2019) was an American professor of economics at the University of California at Los Angeles (UCLA). Career Demsetz grew up on the West Side of Chicago, the grandchild of Jewish immigrants from centra ...

Hans-Bernd Schäfer Hans-Bernd Schäfer (born 25 May 1943 in Münster, Germany) is a German economist and a pioneer in the field of law and economics in Germany and Europe. Schäfer is professor emeritus at the University of Hamburg and former director of the Insti ...

* William Landes * W. Kip Viscusi *

A. Mitchell Polinsky Alan Mitchell Polinsky (born 1948) is the Josephine Scott Crocker Professor of Law and Economics at Stanford Law School. At Stanford, Polinsky is the founder and director of the John M. Olin Program in Law and Economics. He is also a past presiden ...

Michael Trebilcock Michael J. Trebilcock (born 1941) is a New Zealand-born, Canadian-based law academic. He is currently distinguished university professor and professor of law at the University of Toronto, specializing in law and economics. Early life Trebilcock at ...

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 A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishabl ...

would predict the effects of a strict liability rule as opposed to the effects of a

negligence Negligence (Lat. ''negligentia'') is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as ''negligence'' involves harm caused by failing to act as a ...

rule. Positive law and economics has also at times purported to explain the development of legal rules, for example the

common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omnipresen ...

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 Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...

. A common concept of efficiency used by law and economics scholars is

Pareto efficiency Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engi ...

. 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

Kaldor–Hicks efficiency A Kaldor–Hicks improvement, named for Nicholas Kaldor and John Hicks, is an economic re-allocation of resources among people that captures some of the intuitive appeal of a Pareto improvement, but has less stringent criteria and is hence appl ...

. A legal rule is Kaldor–Hicks efficient if it could be made Pareto efficient by some parties compensating others as to offset their loss. Nonetheless, the possibility of a clear distinction between positive and normative analysis has been questioned by Guido Calabresi who, in his book on "The future of Law and Economics" (2016: 21-22), believes that there is an "actual - and unavoidable - existence of value judgments underlying much economic analysis" Uri Weiss proposed this alternative: "It is common in law and economics to search for the law that will lead to the optimal outcome, providing the maximum size 'pie,' and to think about maximizing happiness instead of minimizing pain. We prefer another approach: We do not try to identify games that will lead to the optimal result but to prevent games in which it is in the best interests of the players to come to an unjust result".

Criminal law

In 1968, Gary Becker, who would later win the Nobel prize for economics, published ''Crime and Punishment: An Economic Approach''. This work relied on the economic concept of utility as the basic unit of analysis. In 1985, in ''An Economic Theory of the Criminal Law'', Posner set out an alternative approach that relied instead on wealth as the basic unit of analysis.

Relationship to other disciplines and approaches

As used by

lawyer A lawyer is a person who practices law. The role of a lawyer varies greatly across different legal jurisdictions. A lawyer can be classified as an advocate, attorney, barrister, canon lawyer, civil law notary, counsel, counselor, solic ...

s and legal scholars, the phrase "law and economics" refers to the application of microeconomic analysis to legal problems. Because of the overlap between legal systems and political systems, some of the issues in law and economics are also raised in

political economy Political economy is the study of how Macroeconomics, economic systems (e.g. Marketplace, markets and Economy, national economies) and Politics, political systems (e.g. law, Institution, institutions, government) are linked. Widely studied ph ...

constitutional economics Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...

and

political science Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and la ...

. Approaches to the same issues from

Marxist Marxism is a Left-wing politics, left-wing to Far-left politics, far-left method of socioeconomic analysis that uses a Materialism, materialist interpretation of historical development, better known as historical materialism, to understand S ...

and

critical theory A critical theory is any approach to social philosophy that focuses on society and culture to reveal, critique and challenge power structures. With roots in sociology and literary criticism, it argues that social problems stem more from soci ...

Frankfurt School The Frankfurt School (german: Frankfurter Schule) is a school of social theory and critical philosophy associated with the Institute for Social Research, at Goethe University Frankfurt in 1929. Founded in the Weimar Republic (1918–1933), dur ...

perspectives usually do not identify themselves as "law and economics". For example, research by members of the

critical legal studies Critical legal studies (CLS) is a school of critical theory that developed in the United States during the 1970s.Alan Hunt, "The Theory of Critical Legal Studies," Oxford Journal of Legal Studies, Vol. 6, No. 1 (1986): 1-45, esp. 1, 5. Se DOI, 10.1 ...

movement and the

sociology of law The sociology of law (legal sociology, or law and society) is often described as a sub-discipline of sociology or an interdisciplinary approach within legal studies. Some see sociology of law as belonging "necessarily" to the field of sociology, ...

considers many of the same fundamental issues as does work labeled "law and economics", though from a vastly different perspective. The law and political economy movement also analyzes similar concepts using an entirely different approach. 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 governance and public policy (''Staatswissenschaften'') approach and the German

Historical school of economics The historical school of economics was an approach to academic economics and to public administration that emerged in the 19th century in Germany, and held sway there until well into the 20th century. The professors involved compiled massive econ ...

; 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. Law and economics is closely related to

jurimetrics Jurimetrics is the application of quantitative methods, and often especially probability and statistics, to law. In the United States, the journal '' Jurimetrics'' is published by the American Bar Association and Arizona State University. The '' J ...

, the application of

probability Probability is the branch of mathematics concerning numerical descriptions of how likely an Event (probability theory), event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and ...

and

statistics Statistics (from German language, German: ''wikt:Statistik#German, Statistik'', "description of a State (polity), state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of ...

to legal questions.

Applications

* Affirmative action (

Coate-Loury model The Coate-Loury model of affirmative action was developed by Stephen Coate and Glenn Loury in 1993. The model seeks to answer the question of whether, by mandating expanded opportunities for minorities in the present, these policies are rendered ...

) *

Antitrust law Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...

( Herfindahl–Hirschman Index) *

Calculus of negligence In the United States, the calculus of negligence, also known as the Hand rule, Hand formula, or BPL formula, is a term coined by Judge Learned Hand which describes a process for determining whether a legal duty of care has been breached (see n ...

Congestion pricing Congestion pricing or congestion charges is a system of surcharging users of public goods that are subject to congestion through excess demand, such as through higher peak charges for use of bus services, electricity, metros, railways, tele ...

Corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...

* Cost-benefit analysis **

Criminal law Criminal law is the body of law that relates to crime. It prescribes conduct perceived as threatening, harmful, or otherwise endangering to the property, health, safety, and moral welfare of people inclusive of one's self. Most criminal law i ...

Mass surveillance in the United States The practice of mass surveillance in the United States dates back to wartime monitoring and censorship of international communications from, to, or which passed through the United States. After the First and Second World Wars, mass surveillan ...

Surveillance Surveillance is the monitoring of behavior, many activities, or information for the purpose of information gathering, influencing, managing or directing. This can include observation from a distance by means of electronic equipment, such as c ...

*Crime enforcement *

Deregulation Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...

(

Airlines An airline is a company that provides air transport services for traveling passengers and freight. Airlines use aircraft to supply these services and may form partnerships or alliances with other airlines for codeshare agreements, in whic ...

communications Communication (from la, communicare, meaning "to share" or "to be in relation with") is usually defined as the transmission of information. The term may also refer to the message communicated through such transmissions or the field of inquir ...

energy In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of heat a ...

, surface freight) *Design of contracts ( Contract theory) **

Efficient breach In legal theory, particularly in law and economics, efficient breach is a voluntary breach of contract and payment of damages by a party who concludes that they would incur greater economic loss by performing under the contract. Development of th ...

Discrimination Discrimination is the act of making unjustified distinctions between people based on the groups, classes, or other categories to which they belong or are perceived to belong. People may be discriminated on the basis of race, gender, age, relig ...

** Statistical discrimination (economics) *

Drug policy A drug policy is the policy regarding the control and regulation of psychoactive substances (commonly referred to as drugs), particularly those that are addictive or cause physical and mental dependence. While drug policies are generally implemen ...

( Iron law of prohibition) *

Evidence Evidence for a proposition is what supports this proposition. It is usually understood as an indication that the supported proposition is true. What role evidence plays and how it is conceived varies from field to field. In epistemology, evidenc ...

Evolution Evolution is change in the heritable characteristics of biological populations over successive generations. These characteristics are the expressions of genes, which are passed on from parent to offspring during reproduction. Variation ...

of the

(

Evolutionary game theory Evolutionary game theory (EGT) is the application of game theory to evolving populations in biology. It defines a framework of contests, strategies, and analytics into which Darwinian competition can be modelled. It originated in 1973 with John Ma ...

) * Financial regulation (

Efficient market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...

) **

Fraud-on-the-market theory The fraud-on-the-market theory is the idea that stock prices are a function of all material information about the company and its business. It applies to securities markets, where it can be assumed that all material information is available to inv ...

*Governance of the

commons The commons is the cultural and natural resources accessible to all members of a society, including natural materials such as air, water, and a habitable Earth. These resources are held in common even when owned privately or publicly. Commons ...

Tragedy of the commons Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy i ...

* Institutional origins ** ''The Colonial Origins of Comparative Development: An Empirical Investigation'' **

Constitutional economics Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...

Legal origins theory The legal origins theory claims that the two main legal traditions or origins, civil law and common law, crucially shape lawmaking and dispute adjudication and have not been reformed after the initial exogenous transplantation by Europeans. Theref ...

Property rights The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically ...

Intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...

(

Economics and patents Patents are legal instruments intended to encourage innovation by providing a limited monopoly to the inventor (or their assignee) in return for the disclosure of the invention. The underlying assumption is that innovation is encouraged because ...

) *

Natural monopoly A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...

regulation (

Averch–Johnson effect The Averch–Johnson effect is the tendency of regulated companies to engage in excessive amounts of capital accumulation in order to expand the volume of their profits. If companies' profits to capital ratio is regulated at a certain percentage ...

) *

Peltzman effect Risk compensation is a theory which suggests that people typically adjust their behavior in response to perceived levels of risk, becoming more careful where they sense greater risk and less careful if they feel more protected. Although usually ...

Principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...

Adverse selection In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expe ...

Moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...

Quarantine A quarantine is a restriction on the movement of people, animals and goods which is intended to prevent the spread of disease or pests. It is often used in connection to disease and illness, preventing the movement of those who may have been ...

measures for

public health Public health is "the science and art of preventing disease, prolonging life and promoting health through the organized efforts and informed choices of society, organizations, public and private, communities and individuals". Analyzing the det ...

* Prudent investor rule (

Modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificati ...

) *

Rent control Rent regulation is a system of laws, administered by a court or a public authority, which aims to ensure the affordability of housing and tenancies on the rental market for dwellings. Generally, a system of rent regulation involves: * Price con ...

Rent-seeking Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effi ...

Transaction costs In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

(

Coase theorem In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low tra ...

) *

Value of a statistical life The value of life is an economic value used to quantify the benefit of avoiding a fatality. It is also referred to as the cost of life, value of preventing a fatality (VPF), implied cost of averting a fatality (ICAF), and value of a statistical li ...

Voting systems An electoral system or voting system is a set of rules that determine how elections and referendums are conducted and how their results are determined. Electoral systems are used in politics to elect governments, while non-political elections m ...

(

Social choice theory Social choice theory or social choice is a theoretical framework for analysis of combining individual opinions, preferences, interests, or welfares to reach a ''collective decision'' or ''social welfare'' in some sense.Amartya Sen (2008). "Soci ...

) *

Water law Water resources law (in some jurisdictions, shortened to "water law") is the field of law dealing with the ownership, control, and use of water as a resource. It is most closely related to property law, and is distinct from laws governing wate ...

Influence

The economic analysis of law has been influential in the United States as well as elsewhere. Judicial opinions use economic analysis and the theories of law and economics with some regularity, in the US but also, increasingly, in Commonwealth countries and in Europe. The influence of law and economics has also been felt in legal education, with graduate programs in the subject being offered in a number of countries. The influence of law and economics in civil law countries may be gauged from the availability of textbooks of law and economics, in English as well as in other European languages (Schäfer and Ott 2004; Mackaay 2013). 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 f the 20th Century is law and economics.

Criticisms

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 drawn from other, competing frameworks, though there are numerous internal critiques as well. Yet other schools of economic thought have emerged and have been applied to the work of law and economics in, for example, the work of Edgardo Buscaglia and

in the book "Law and Economics of Development".

Rational choice theory

Critics of the economic analysis of legal questions have argued that normative economic analysis does not capture the importance of

human rights Human rights are Morality, moral principles or Social norm, normsJames Nickel, with assistance from Thomas Pogge, M.B.E. Smith, and Leif Wenar, 13 December 2013, Stanford Encyclopedia of PhilosophyHuman Rights Retrieved 14 August 2014 for ce ...

and concerns for distributive justice. Some of the heaviest criticisms of law and economics come from the

movement, in particular Duncan Kennedy and

Mark Kelman Mark Kelman (born August 20, 1951) is jurist and vice dean of Stanford Law School. As a prominent legal scholar, he has applied social science methodologies, including economics and psychology, to the study of law. He is one of the most cited law ...

. Jon D. Hanson, of

Harvard Law School Harvard Law School (Harvard Law or HLS) is the law school of Harvard University, a private research university in Cambridge, Massachusetts. Founded in 1817, it is the oldest continuously operating law school in the United States. Each class ...

, argues that our legal, economic, political, and social systems are unduly influenced by an individualistic model of behavior based on

preferences In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision the ...

, instead of a model that incorporates cognitive biases and

social norm Social norms are shared standards of acceptance, acceptable behavior by groups. Social norms can both be informal understandings that govern the behavior of members of a society, as well as be codified into wikt:rule, rules and laws. Social normat ...

Pareto efficiency

Additional criticism has been directed toward the assumed benefits of law and policy designed to increase

when such assumptions are modeled on "first-best" (

Pareto optimal Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engin ...

) general-equilibrium conditions. Under the

theory of the second best In welfare economics, the theory of the second best (also known as the general theory of second best or the second best theorem) concerns the situation when one or more optimality conditions cannot be satisfied. The economists Richard Lipsey and ...

, 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. Consequently, any expression of public policy whose purported purpose is an unambiguous increase in allocative efficiency (for example, consolidation of

research and development Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...

costs through increased

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect ...

resulting from a systematic relaxation of antitrust 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. Essentially, the "first-best" neoclassical analysis fails to properly account for various kinds of general-equilibrium feedback relationships that result from intrinsic Pareto imperfections. Another critique comes from the fact that there is no unique optimal result. Warren Samuels in his 2007 book, ''The Legal-Economic Nexus'', argues, "efficiency in the Pareto sense cannot dispositively be applied to the definition and assignment of rights themselves, because efficiency requires an antecedent determination of the rights (23–4)".

Responses to criticism

Law and economics has adapted to some of these criticisms and been developed in a variety of directions. One important trend has been the application of

game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...

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 Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8 ...

techniques. Within the legal academy, the term

socio-economics Socioeconomics (also known as social economics) is the social science that studies how economic activity affects and is shaped by social processes. In general it analyzes how modern societies progress, stagnate, or regress because of their local ...

has been applied to economic approaches that are self-consciously broader than the neoclassical tradition. Property rights, which are analyzed using economic analysis, are seen as

fundamental human rights Human rights are moral principles or normsJames Nickel, with assistance from Thomas Pogge, M.B.E. Smith, and Leif Wenar, 13 December 2013, Stanford Encyclopedia of PhilosophyHuman Rights Retrieved 14 August 2014 for certain standards of hum ...

by defenders of law and economics.

References

External links

"Law and Economics"
article in the ''

Internet Encyclopedia of Philosophy The ''Internet Encyclopedia of Philosophy'' (''IEP'') is a scholarly online encyclopedia, dealing with philosophy, philosophical topics, and philosophers. The IEP combines open access publication with peer reviewed publication of original pape ...

''
Law & Economics LAB

Paper describing the effects of law and economics on inequality
{{Authority control Philosophy of law