Economic Analysis of Law

Abstract

What has law got to do with economics? Most lawyers will probably say ‘nothing’ or ‘not much’. However, if the question posed is ‘What has law got to do with the economy?’ , most lawyers are bound to answer, ‘quite a lot’. The laws of property and contract allow people to trade in goods and services. Consumer protection laws place restrictions on how traders may conduct trade. Labour laws regulate the labour market. Competition law aims to increase competition and prevent monopolies. Tort law gives protection to person and property from wilful or negligent harm, without which trade and commerce would be seriously restricted. How can farmers grow wheat and sell their crops if their land is not secure from trespass and their crops are not protected from theft? How can General Motors or Ford make and sell cars if they have no ownership of the cars that they produce? International trade and investment law promotes trade and investment among nations. There will be little foreign trade or investment if states do not recognise the rights of citizens of other states. Even laws concerned with private morality have economic effects. Prohibition of trade in alcoholic beverages in the United States gave rise to a new industry known as bootlegging dominated by criminal gangs. Price controls are notorious for promoting black markets. Most lawyers accept that laws affect the economy, directly or indirectly. Lawyers also have no difficulty in recognising that economic factors have quite a lot to do with legislation passed by parliaments. Governments, depending on their philosophies, react to economic forces in different ways. They may promote or suppress competition. They may enact laws to counter what they think is inequitable wealth distribution caused by markets. They may seek to limit rising costs of products through price controls, or try to support producers through subsidies. They fight inflation and deflation using whatever legislative or administrative devices they can find. So, what can economic science teach lawyers about law that lawyers do not already know? It turns out to be quite a lot. This chapter examines the contributions that economic science has made to the understanding of law.