Law and economics
Law and economics is the term usually applied to an approach to legal theory that incorporates methods and ideas borrowed from the discipline of economics.
Relationship to Other Disciplines and Approaches
As used by lawyers and legal scholars, the phrase "law and economics" refers to the application of the methods of economics to legal problems. Because of the overlap between legal systems and political systems, some of the issues in law and economics are also raised in political economy and political science. Most formal academic work done in law and economics is broadly within the Neoclassical tradition. Approaches to the same issues from Marxist and critical theory/Frankfurt School perspectives usually do not identify themselves as "law and economics." For example, research by members of the critical legal studies movement considers many of the same fundamental issues as does work labeled "law and economics".
Positive and Normative Law and Economics
Economic analysis of law is usually divided into two subfields, positive and normative.
Positive Law and Economics
Positive law and economics uses economic analysis to predict the effects of various legal rules. So, for example, a positive economic analysis of tort law would predict the effects of a strict liability rule as opposed to a negligence rule.
Normative Law and Economics
Normative law and economics goes one step further and makes policy recommendations based on the economic consequences of various policies. The key concept for normative economic analysis is efficiency. The weakest concept of efficiency used by law and economics scholars is Pareto efficiency. A legal rule is Pareto efficient if it makes at least one person better off and it makes no person worse off. (By weak, economists mean that Pareto efficiency makes very few normative assumptions, not that it is supported by weak arguments.) A stronger conception of efficiency is Kaldor-Hicks efficiency. A legal rule is Kaldor-Hicks efficient if it could be made Pareto efficient by a side payment.
Influence of the Law and Economics Movement
In the United States, economic analysis of law has been extremely influential. Among the key figures in the law and economics movement are the Nobel Prize winning economist Ronald Coase and Richard Posner, formerly a colleague of Coase at the University of Chicago and currently a judge on the United States Court of Appeals for the Seventh Circuit. This influence has, in turn influenced legal education. Another prominent legal scholar from the Law and Economics movement is Robert Bork, a former Supreme Court nominee. Many law schools in the North America, Europe, and Asia have faculty members with a graduate degree in economics. In additon, many professional economists now study and write on the relationship between economics and legal doctrine.
Criticisms of Law and Economics
Despite its influence, the law and economics movement has been criticized from a number of directions. This is especially true of normative law and economics. Because most law and economics scholarship operates within a neoclassical framework, fundamental criticisms of neoclassical economics have been applied to work in law and economics. Within the legal academy, law and economics has been criticized on the ground that rational choice theory makes unrealistic simplifying assumptions about human nature; Posner's infamous application of law and economic reasoning to rape and sex  may be an example of this. Liberal critics of the law and economics movements have argued that normative economic analysis does not capture the importance of human rights and concerns for distributive justice.
Law and economics has developed in a variety of directions. One important trend has been the application of game theory to legal problems. Another development has been the incorporation of behavioral economics into economic analysis of law. Within the legal academy, the term socio-economics has been applied to economic approaches that are self-consciously broader than the neoclassical tradition.
- Boudewijn Bouckaert and Gerrit De Geest, eds., Encyclopedia of Law and Economics (Edward Elgar, 2000) Online version.
- Richard Posner, Economic Analysis of Law (Aspen, 5th edition, 1998) ISBN 1567065627.
- Ronald Coase, The Firm, The Market, and the Law (Chicago: University of Chicago Press, reprint ed. 1990) ISBN 0226111016.