1. Introduction to Inter-relationship between Law and Economics by Dr. T
Introduction to Inter-relationship between Law and Economics by Dr. T.SN.Sastry Prof & Head Dept of Law University of Pune Lecture in the State Level Workshop on Legal Research and Interdisciplinary approach November 2009 1

2. Introduction
The Relationship between Law and Economics is discussed from the early 18th century.
Economic Approaches to Law could be traced in the works Beccaria-bonesara (1764); Karl Marx (1867); Adam Smith and Marx Weber and many other scholars in the 19th and 20th century.
In majority of the writings of these scholars one could see mostly economic effect of mercantilist legislation. 1

3. introduction
However application of economics to Law regulating nonmarket activities is relatively a new concept started from 1960’s.
The high interactive course of application of economic approach to law and vice versa has started with Ronald Coase and Guido Calabresi’s path breaking works on the “Problem of Social Cost” and “some thoughts on Risk Distribution and the Law of Torts” 1

4. Approaches of an economist and a lawyer
An economist approach typically opt for social rules that rely on positive self-interest incentives as a means for beneficial outcomes
A Lawyer’s approach more tends towards command and control.
The approach of an economist usually involves a more subtle reliance on positive incentives than that of the lawyer. 1

5. Economic Approach to Law
The approaches to Law are mainly based on the point that any law is likely to have economic implications, even if it bears little relation to market activities and relates to behaviour . However, this does not mean to explain non-behaviour in terms of the language of a market analogy.
The aim of the economic approach is on the effective way of utilizing the resources that are to be devoted to the effective enforcement of Law. 1

6. Economic Approaches to Law
Positive Economics :
Positive economics is the empirical branch of economics. It generate a set of testable, that is potentially refutable, predictions that can be verified by the empirical evidence. Or
The positive approach uses economic analysis to predict the effect of a various legal rules. 1

7. Economic Approaches to Law
For example: a positive economic analysis of tort law would be to predict the effect a strict liability as opposed to negligence rule.
This is the reason why it is often referred to as predictive and empirical economics. It only deal with partial relationships and pay less importance to the behavior 1

8. Economic Approaches to Law
It is mostly useful in impact studies of the Law. Legal impact studies seek to identify and quantify the effects of law on measurable variables. The impact of legislations deals with safety in reducing accidental rates.
Economics Provides fundamental organising principles for the whole body of law 1

9. Economic Approaches to Law
Economics helps in simplifying the Legal Aspects (avoiding the evils of legal formalism)
It focuses on the real-life effects of the Law, including possible adverse effects such as rent, control, protection of weak contract parties. 1

10. Economic Approaches to Law
NORMATIVE ECONOMICS:
Normative economics or other wise popularly referred to as Welfare economics is the study of criteria that can be used to rank alternative economic situations and suggest policy formulations based on economic efficiency, distributive and social justice. Hence it prescribes corrective measures to improve social welfare 1

11. Economic Approaches to Law
Great economists J.S. Mill, Francis Edgesworth, Henry Sigwick, Alfred Marshall and A.C. Pigou are the main leaders of this school of economic thought.
Though this school of thought suffered a set back with the development of positive and normative analysis of economic of law in the early 40’s to 60’s, the legal thought of August comet , Dean Roscoe Pond’s social engineering concept of justice once again came to limelight that the policies of a state need to welfare centric 1

12. Economic approaches to Law
Taking the aspects of Normative economics, Amartya sen in his Idea of Justice analyses John Rawl’s focus on transcendental institutionalism in his Principles of Justice is mostly motivated by the Normative economic analysis.
He contends that Rawls use of perspective of resources in his principles of justice through the index of primary goods and ignored the conversion variations between resources and capabilities. 1

13. Economic approaches to Law
At the same time, analyzing the concept of Ronald Dworkin, he contends that the use of the resource perspective of Dworkin is more institutionalized and market oriented. But at the same time it is difficult to have such highly discipline oriented institutionalism.
He contends that the success of welfare economics approach to law mainly depends upon efficiency in particular, allocative efficiency 1

14. Economic Approaches to law
Descriptive Economics:
Descriptive economics attempts to model/analyse actual process and to describe the economic influences that affect them. It is thus based on assumptions that are more or less realistic and therefore subject to empirical verification.
It is different than the theoretical perspectives of positive economics. It studies the existing laws and specifies its results on empirical study. 1

15. Concept and Models Pareto Efficiency :
The Pareto optimality and superiority was introduced to help solve a serious objection to the widely held moral theory utilitarianism. The main underlying principle of Pareto is one person better off without making another person worse off. 1

16. Value of Coase
The first Path breaking development in law and economics in 1960 by Nobel Prize winner Richard Coase theorem of Social Cost laid the interaction between law and economics in the contemporary era.
The theorem suggests when parties are free to bargain costless they will succeed in reaching efficient outcomes regardless of the initial allocation of legal rights. 1

17. Coase…..
According to Coase social costs are external effects: effects of one person’s conduct or consumption on the welfare of others.
The external effects are positive, i.e., they increase another’s well-being. Others are negative i.e., they decrease another’s welfare externalities are inefficient external effects, non-Pareto optimal, external effects of one person’s activity on another’s welfare or utility. 1

18. Coase…
In economic analysis of law is primarily concerned with the concept of marginal gain/profit /loss.
Though Coase is considered as a model to start empirical research in analyzing the relationships of law and economics, many critics Alvazian and Callen argued that, when more than two parties are involved, one cannot always expect costless bargaining to lead to Pareto optimal outcomes. 1

19. Application of Economics to Law
One distinguishing feature is that much of this work focuses on various areas of law that were not much studied by economists prior to the advent of law and economics; these areas include tort law, contract law, property law, and rules governing the litigation process. 1

20. Application of Economics to Law
A second feature of work within law and economics is that it often employs the normative criterion of “wealth maximization” (R. Posner 1979) rather than that of social welfare maximization – not, for the most part, on the view that society should pursue the maximization of wealth rather than social welfare. However, in reality, law and economics generally favors addressing distributional issues that bear on social welfare solely through the tax system (Shavell 1981) 1

21. Application of Economics to Law
Finally, a third distinguishing feature of much work within law and economics is its sustained interest in explaining and predicting the content, rather than just the effects, of legal rules. While a large body of work in economics studies the effects of law outside of work associated with law and economics only political economy has generally given central emphasis to analyzing the content of law, and then only from a particular perspective. 1

22. Application of Economics to Law
Recently, with the introduction of utilitarianism and other sociological approaches of economics, the researchers of both the fields started analyzing the cost and benefit factor through the institutional policies of the state. 1

23. Application of Economics to Law
The modern researchers in both fields started advocating that in order to arrive at definite results in law must seriously take quantitative and qualitative methods need to be applied.
A number of judgments of Indian courts especially, that of public interest litigation and human rights can also be interpreted through economic analysis whether the compensation awarded in a case is sufficient or meaningful or unbecoming. 1

24. Relationship between law and economics
Bharat Kumar K. Palicha V State AIR 1997 Ker 291 where in the court took the fundamental rights in case of a bundh. However, a deeper examination clearly specifies the economic imperatives which play a vital role in preventing the individual and also the loss that is going to be caused to the State economy and its wider impact in the long run. 1

25. Relationship between law and economics
In Consumer Education and Research Centre V UOI AIR SC 922 highlighting the significance of the Social Justice and social Security concepts as engulfed in the preamble, the court has observed, that “the aim of social justice is to attain substantial degree of social, economic and political equality, which is the legitimate expectation. 1

26. Relationship between law and economics
In this case the court specifying the role of the State rightly observed that, Social security , just and human conditions of work, and leisure to workman are part of this meaningful right to life and to achieve, self-expression of his personality and to enjoy the life with dignity, the state should provide facilities and opportunities to them to reach the minimum standard of health, economic security, and civilized living while sharing according to the capacity, social and cultural heritage. 1

27. Relationship between law and economics
In olga tellis; M.C.Mehta; Laxmikant Pandey; Bandh Mukti Morcha; Bhim Singh; in these cases though the court considered the act of omission on the part of the state in not protecting the properties of the respondents, but lost an opportunity in analyzing the obligations of the state in the protection of the property of the citizens. These judgments therefore are of no much help to the respondents. 1

28. Relationship between law and economics
But at the same, if the economic analysis is taken into consideration, it would have been helped the respondents in protecting the properties of theirs and also laid down the policy formulations that need to be extended by the state in sustainable growth. The economic analysis would have shaped the legal policy in accordance with the objectives of the preamble of the constitution of India. 1

29. Relationship between law and economics
The field of Law and Economics asks two basic issues: (1) What are the effects of legal rules on the behaviour of relevant factors?
(2) Are these effects of Legal rules socially Desirable?
The Objective is: Applying an economic approach not merely to the areas of economic regulation, but to all areas of law, in particular, to the core of Common Law 1

30. Anti Trust Law and Economics30
U.S. V. Microsoft:
The Government of US and 19 states sued Microsoft on three grounds alleging that:
(1) it Monopolized the market for operating systems of personal computers and took anti-competitive actions to illegally maintain its monopoly 1

31. Anti Trust Law and Economics
(2) It attempted to monopolize the market for internet browsers because such browsers would create competition for operating systems;
(3) it bundled its browser with Windows; and that it engaged in a number of other anti-competitive exclusionary arrangements with computer manufacturers, Internet service providers, and content providers attempting to thwart, the distribution of Netscape’s browser 1

32. Microsoft case
After a long drawn battle , Microsoft agreed to severe restraints on its conduct. The case raised issued about liability and the effectiveness of the remedies including the breakup of Microsoft in two companies. 1

33. Impact of Economics on Law
Today economics occupies a prime place in many areas of law: They are consumer protection; environment; IPR;IT; Medical Malpractice; Criminal Justice; Marriage and Divorce; Accident Protection; Human Rights; Humanitarian Law; Land use Planning; Social Justice; Social Transformation; and to achieve the objects of law 1

34. Research on Law and Economics
With the development of Law and Economics a number of Institutes in India and abroad are offering special courses; University of Chicago Law School; Harvard University; Yale; Oxford; University of Toronto’s Law School, et.al.,
In India: IIT, Kanpur offers regular courses to Lawyers, Practitioners and Professionals and to Engineers and Scientific Professionals 1

35. Research on Law and Economics
Indira Gandhi Institute of Development Research; Mumbai
For materials of electronic form:
of Berkeley University
For Articles 1

36. Conclusion
A great number of legal scholars criticize the economic approach to law.
One such criticism commonly employed is that economists cannot explain the problems of their own subject especially recession cum inflation, they have nothing to say to lawyers about the legal system. 1

37. Conclusion
Since economics has limitations in its own sphere, its approach to law is also limited. Hence economics need not poke their nose in legal aspects.
In this perspective if we consider every subject has limitations. In the era of globalization, liberalization and in a competitive border less world of science and technology , every branch of social science need to be studied in an integrated manner. 1

38. Conclusion
The need for interaction between law and economics is more required in the fields of human rights, international economic law and even in the municipal sphere in the competition laws. If seriously examined the relationship between the two, they apply equally to civil law especially even to family laws. 1

39. Conclusion
Explaining the significance of law and economics, Justice Brandies of the US Supreme Court in his Brandies Brief observed that, “ a lawyer who has not studies economics is very apt to become a public enemy”
In the Words of Fali Nariman” it is hand maiden of modern economics and should be part of laws that reflect societal values known as sociological jurisprudence”. 1

40. conclusion
Lawyers being heirs of inventiveness, the significance of Law and economics which has been recognized in many countries around the world and also by the Bar council of India, it is that we the researchers maxim pleasure and happiness.
Thank you 1