Law and economics – is there a connection between the two? The purpose of law is to regulate society in such a way as to provide, among other things, economic benefits. Economics provides fundamental organizing principles for the whole body of law and a scientific theory to study the effects of legal sanctions on behavior. It simplifies the law and focuses on the real-life effects of the law such as protection of weak contract parties.

Although Adam Smith studied the economic effect on mercantile legislation in the 18th century, economic analysis of law is relatively new. The origin can be traced to two path breaking articles – “The Problem of Social Cost” by Ronald Coase published in 1960 and “Some Thoughts on Risk Distribution and the Law of Torts” by Guido Calabresi published in 1961. Over the years, this field has developed in a variety of directions. It has been one of the most successful of all the outward expeditions of economics since the 1960s. There are two basic questions involved in economic analysis of law – what are the effects of legal rules on the behavior of the concerned parties, and are these effects of legal rules socially desirable? The objective of this field is to apply an economic approach to all areas of law. In the U.S., this field is most active in the area of antitrust laws. Recent decisions of the Supreme Court have been shown to be influenced increasingly by the discipline of law and economics (e.g., the Microsoft case). Although the U.S. is the birth place of law and economics, it is now gaining ground worldwide.

Why should an economist have any knowledge about the law? Economics does not operate in an institutional vacuum. Economists can model their theories on real life situations.

There are two main features which make the study of law and economics an important field. Firstly, the courts allocate and reallocate resources, and the courts’ decisions necessarily affect the use of society’s limited resources. The second feature is that the legal system is concerned with behavior, just like economics. Law tries to influence behavior by establishing rules of conduct and imposing sanctions for their breach. These rules and sanctions must be made with the resource implications in mind.

Major economic, political, and social changes inevitably question the public policies underlying legal rules. With so much economic and social changes, it has become important to take stock of our laws, to inquire if they truly reflect the society’s ever changing values, and to assess their economic and social implications.

The two apparently dissimilar subjects of law and economics should be integrated to make their application more effective. It is an integral part of any democratic set up and enables policymakers to implement their strategies on basic healthcare, education, etc. Ownership, endowment, and numerous other economic concepts have a legal underpinning. The integration of law and economics is good not only for both disciplines but also to the societal goals they are serving in the development process.

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