Research Project on Law and Economics

Law and economics are inseparable as they mutually reinforce each other and depend on each other. No economy can function, survive and thrive without the force of law. There is law of economics and economics of law. Nothing happens in economic vacuum and in today’s era of globalisation and conflicts emerging due to it; we see that interaction is a critical area.

Law and economics are the two sides of the same coin. Law has to govern the economic behaviour and life of the economic man. Homo Sapiens are essentially Homo Economicus. It is the economy and economic changes that define how life unfolds for most of the people. Individual and collective life is impacted increasingly by emerging forces of economics. Law decides the framework for the economy to operate and economic changes contextualise the very function of legal frameworks. The future of law is the future of economics and vice versa. Sound insightful understanding of core areas such as theoretical foundations of law and economics, economic analysis of law, behavioural law and economics, public law and economics, behavioural economics and law, amongst others will give a fresh perspective of how law and economics go hand in hand in human affairs.

It pays for both lawyers and economists to study for developing insightful understanding of each other’s domain, at least a bird’s eye view. Economy cannot function without law and law is shaped and reshaped by economic forces which decide human psychology, behaviour and choices both rational and irrational.

Knowledge Fountain’s unique research project on Law and Economics is a path breaking study in that it focuses on enriching both lawyers and economists through the insights the project garners. This is not merely academic inquiry for some doctoral degree or research papers.

Law firms are invited to participate in this study. It will be an investment of enduring value.

Participating law firms will depute a team of lawyers to participate in this study. They will be given necessary grounding in critical areas of economics that have direct relevance to the legal fields and will cover areas such as macro and micro, economic environment of business, current trends, forces of globalisation shaping international economic order, geopolitical forces impacting geoeconomics, sustainability crisis, case studies of cases, etc.

Participation is by invitation only.

For participation in this research project please call + 8600178825 email: knowledgefountain@gmail.com

Law and economics – two sides of the same coin

Definitive work is happening in the field of law and economics. This is not just an academic discipline restricted to university scholars as it has critical relevance and significance for the professional economists and lawyers. Nothing happens in economic vacuum. Law is not the only norm system in a jurisdiction, and law does not evolve without interaction with the evolution of the other norm system, that is, social norms, nor without interaction with technological evolution. All three systems’ evolution is influenced by the state and the change of the respective other systems.

Lawyers are economists too and economists cannot ignore law. Both require knowledge of each other’s domain. Today we see various economic models of law which provide vital insights into law. The application of economic analysis to law has a long history, dating back at least to the criminal law theories of Beccaria (1986 [1764]) and Bentham (1969 [1789]). Surprisingly, however, the idea that laws could be interpreted as creating incentives for behaviour did not seem to resurface again until the 1960s with the work of Coase (1960) on externalities, Calabresi (1961) on accident law, and Becker (1968) on criminal law. Since then, of course, the application of law to economics has blossomed into a major field in both law and economics.

Law is an ideal subject matter in this respect because, like economics, it is largely concerned with incentives. According to the axiom of rationality, which is the foundation of economic decision-making, individuals act to maximize their well-being (however that is measured), subject to the various constraints that they face. In a market setting, these constraints consist of income and prices; in law they consist of legal sanctions. The application of economic analysis to law specifically presumes that individuals view the threat of sanctions—whether in the form of fines, damages, or imprisonment—as implicit prices that can be set to guide behaviour in certain socially desirable directions. In this view, notions of “legality” and “illegality” are stripped of their moral or ethical connotations and instead are interpreted according to a functionalist view of law.

A cursory look at history tells us how law and economics came to interact and intersect. Jeremy Bentham’s economic analysis of criminal law having been forgotten, economics was thought relevant to only a few fields of law, all commercial—antitrust law, public utility and common carrier regulation, and tax law. By the end of the 1960s, as a result of articles (and the occasional book) by William Baxter, Gary Becker, Guido Calabresi, Ronald Coase, Harold Demsetz, William Landes, Henry Manne, and others, economics was understood to be relevant to the entire domain of the law—relevant both to understanding the law (positive analysis) and to reforming it (normative analysis). That was half a century ago. In the intervening period the evolution of law and economics has been shaped by a number of forces: the increased mathematization of economics (including advances in techniques of statistical analysis); the increased availability of statistical data usable in empirical analyses utilizing the latest statistical techniques, as a result of the computer revolution; the broadening of the scope of economics both conceptually (as in the rise of game theory and the advent of behavioural economics—the invasion of economics by psychology) and in the areas of human activity that are studied by economists (marriage and divorce, for example); the increased size and “academification” of the legal professoriat; and, related to a number of these developments, increased specialization of academic law. The early contributors to the field of law and economics were economists and lawyers—not lawyer-economists—and they tended to write across legal domains.

It began to be felt that legal training alone would not enable a lawyer to do sophisticated economic analysis of law, and so economic analysis of law increasingly became the province of law professors who had a Ph.D. in economics, as well as of economists specializing in the application of economics to law who did not have a law degree. During the 1970s, economic analysis of law began to permeate legal teaching as well as scholarship, and economic consultants and expert witnesses became fixtures of commercial litigation in a variety of fields—in part because lawyers were learning in law school how economics could be used in legal analysis. Most of these consultants and witnesses were not and are not economic analysts of law, but rather analysts of business practices challenged in litigation. The trend toward increased economic sophistication in the 1970s, which has continued ever since, has had a side effect of increasing the separation between academic economic analysis of law and the practice of law.

Meanwhile there was massive and pervasive explosion and expansion of critical studies in how law and economics interact with each other. The expansion of a field leads to the multiplication of its subspecialties. These developments have increased, and will continue to increase, the rigor of economic analysis of law. The search for new worlds to conquer that is a hallmark of a progressive research program has already paid off. One example is increased attention to the economics of foreign and international law and, concomitantly, increased exploitation of the opportunities that cross-country comparison provides for empirical study. Another example is the empirical study of judicial behaviour, where insights from labour economics and the economics of organizations are being used to interpret.

Economic analysis of law has intrinsic intellectual interest (like jurisprudence) and is an invaluable component of a modern legal education, but one would also like to see it contribute to the solution of legal problems and the reform of our costly and cumbersome legal institutions. And for that the economic analyst needs to understand law from the inside, which no one, however bright, can do without legal experience (though it might be acquired, on the side as it were, after one had begun an academic career) as well as legal training, for law is like a foreign language. There is also need for economic analysts of law, whether they are lawyers or economists or lawyer-economists, to interact with, and sometimes collaborate with, economists in economic departments and business schools who may be interested in law and may have special economic skills to bring to its study, an example being Andrei Shleifer of the Harvard economics department.

Most critics of the economic approach to law argue that it is inappropriate to evaluate the law based on the norm of efficiency. The goal of the law should instead be to pursue justice or fairness, however those objectives are defined. Richard Posner, one of the Economic Models of Law of 21 founding fathers of law and economics, has responded to this criticism in two ways. First, he argues that justice in the sense of distributional equity is a value that most economists also recognize, along with efficiency, as relevant in judging the performance of the market or the legal system. And although economists have no special insight into what degree of distributional equity is desirable, they have a lot so say about the feasibility of attaining different outcomes and the amount of sacrifice of overall wealth that would be necessary to achieve a particular distributional goal. Second, he argues that one meaning of “justice” may in fact be efficiency because “in a world of scarce resources waste should be regarded as immoral” (Posner, 2003)

Corporate Law and Economics interact and intersect overwhelmingly. One area of law and economics where empirical work has been slow to adopt the modern quasi-experimental approach is corporate law and economics. In this area, the standard approach to empirical inquiry involves the use of event studies to deduce the effect of various public policies or internal corporate governance mechanisms on firm value. Event studies can yield critical insights for both lawyers and economists when there are hostile takeovers, etc.

Empirical work in law and economics has come a long way over the last quarter-century or so. Just as the credibility revolution brought additional attention to identification concerns across a range of fields in microeconomics generally, empirical researchers in law and economics have begun to focus seriously on the nature and quality of the variation that identifies would-be estimates of policy effects. This trend has been especially strong in certain law and economics subfields, with the economic analysis of crime being a particular success story.

To read the full note please email: prakashalmeida@knowledgefountain.org

Research Project on Law and Economics

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