Legal and economic reasoning

Legal reasoning and economic reasoning are two different subjects. Economists view the law as a subject for altering incentives whereas legal scholars tend to look at laws as rules and regulations that guide the function of a society. Economists see the law as a ‘giant pricing machine.’ This points towards the economic approach of incentives and the concepts of actions and outcomes. One way to put the idea of economic analysis in law is by applying the ideas of prices and taxes towards human behaviour and thereby influence their actions by the imposition of economic theories to get people to act in a particular way. This is by the imposition of sanctions or providing incentives. Economic reasoning of law is also referred to as economic analysis of law. Economic reasoning analyses law using price theory and statistical method to interpret and explain laws. 

The major difference between legal reasoning and economic reasoning is that legal reasoning is post, i.e., from after whereas economic analysis is an ante, i.e., from before. Legal analysis is retrospective or backward-looking. They seek to answer questions such as, When were rights violated? Which were the violated rights? The approach is more right-based and is also dependent on theories of fairness. Economic reasoning on the other hand is forward-looking or prospective in nature. They seek to answer questions such as that the impact of affirmative actions. It is more policy-oriented and is based on institutionalism and legal activism.

Economic reasoning in law talks about providing incentives. This idea of economic reasoning has been implemented very recently in the formulation and the execution of the said laws. Initially, the impact of economics on the law was limited to certain areas like taxation, banking, etc, but today economic theories have been used to explain the law. The first approach in using economic principles to explain law is using price law theories to explain antitrust cases. The idea of competition law being assimilated by economic theories was revolutionary. The debate between economists and lawyers in regard to the application of “Price theory” in a non-competitive versus competitive market was another massive step taken.  The idea of economic analysis of law started from Coase’s theory to the idea of Pigouvian taxes to the idea of institutionalization. The Chicago school of law is considered among the pioneers of economic analysis of law.

One of the best ways to understand this theory of economic analysis of law is to use it to explain legislation and the application of legislation. It would be easy to take the economic theory put forth by Coase which spoke about lowered transaction costs to achieve Pareto efficiency to explain legislation and enforcing laws. The main outcome of Coase’s theorem was the idea of negotiation in the assimilation of law. Coming to agreements or negotiating Coase felt would be the best way to achieve Pareto efficiency with low transaction costs. The benefits outweigh the costs in an exchange according to the Coasean approach. This should be kept in mind before embarking on the application of the Coasean approach. This means reaching settlements, coming to a common consensus in the simplest language. This has a widespread application ranging from the law of torts, from civil to criminal to even contract matters. The idea of negotiating has become extremely popular in recent times.

Economic analysis of law helps in assimilating laws, understanding the legislative intent, and breaking down laws. It makes the application more correct. Economic principles have many a time be applied to understand various other legal sectors like property rights, competition, patents, etc. Economic reasoning in law is more practical-based than legal reasoning which restricts itself to a theoretical forte. Application of economic reasoning in a real-life is more efficient as people would follow laws better when there is an incentive associated with it (Coasean approach) or would be more careful when sanctions are imposed (Pigouvian approach). Perceiving law as a ‘giant pricing machine’ can be effective when it comes to implementation of the laws.

Aishwarya Says:

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