Law and Economics CIA3

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 6

CIA-3

Law and Economics

The Law and Economics Movement by Richard A. Posner: Summary

SUBMITTED TO: SUBMITTED BY:

Freddy Thomas Sakshi Jain

1750564

4 BBA LLB (B)


SUMMARY

The law and economics movement applies economic theory and method to the practice of
law. It asserts that the tools of economic reasoning offer the best possibility for justified and
consistent legal practice. It is arguably one of the dominant theories of jurisprudence. The law
and economics movement offers a general theory of law as well as conceptual tools for the
clarification and improvement of its practices. The general theory is that law is best viewed as
a social tool that promotes economic efficiency, that economic analysis and efficiency as an
ideal can guide legal practice.  It also considers how legislation should be used to improve
market conditions in return. Law and economics offers a framework with which to model
legal outcomes, and common objectives with which to unify disparate areas of legal activity.
The bringing together of legal theory and economic reasoning has also created new research
agendas in the fields of behavioural economics: how rationality affects people's behaviour
within legal scenarios; public choice theory and how collective behaviour should have an
effect on legislation; and game theory: understanding strategic action in a legal context.

Further, Posner sheds some light on the economic analysis of "nonmarket" law so as to
convey its feasibility. He adheres to the fact that the economic analysis of "nonmarket" law is
based on two basic premises:

a) People act as rational maximizers of their satisfactions in making such nonmarket


decisions as whether to marry or divorce, commit or refrain from committing crimes, make
an arrest, litigate or settle a lawsuit, drive a car carefully or carelessly, pollute (a nonmarket
activity because pollution is not traded in the market), refuse to associate with people of a
different race, fix a mandatory retirement age for employees.

b) Rules of law operate to impose prices on (sometimes subsidize) these nonmarket activities,
thereby altering the amount or character of the activity.

A third premise guides some research in the economics of nonmarket law:

c) Common law (i.e., judge-made) rules are often best explained as efforts, whether or not
conscious, to bring about either Pareto or Kaldor-Hicks efficient outcomes. The first two
premises lead to such predictions as that an increase in a court's trial queue will lead to a
reduction (other things being equal-a qualification applicable to all my examples) in the
number of cases tried, that awarding prejudgment interest to a prevailing plaintiff will reduce
settlement rates, that "no-fault" divorce will redistribute wealth from women to men, that no-
fault automobile accident compensation laws will increase the number of fatal accidents even
if the laws are not applicable to such accidents, that substituting comparative for contributory
negligence will raise liability and accident insurance premium rates but will not change the
accident rate (except insofar as the increase in the price of liability insurance results in fewer
drivers or less driving), that increasing the severity as well as certainty of criminal
punishment will reduce the crime rate.

Thus far in the discussion of the economic analysis of legal regulation of nonmarket
behaviour, Posner has focused on the effects of legal change on behaviour. One can reverse
the sequence and ask how changes in behaviour affect law. To make this reversal, though,
one needs a theory of law, parallel to the rational-maximization theory of behaviour. The
economic theory of the common law, defined broadly as law made by judges rather than by
legislatures or constitutional conventions or other non-judicial bodies, is that the common law
is best understood not merely as a pricing mechanism but as a pricing mechanism designed to
bring about an efficient allocation of resources, in the Kaldor Hicks sense of efficiency. This
theory implies that when behaviour changes, law will change.

Two objections to this branch of economic analysis of law must be considered:

One is that a theory of law is not testable, because when one is examining the effects of
behaviour on law rather than of law on behaviour, the dependent variable tends not to be
quantitative: it is not a price or output figure but a pattern of rules. However, the scientific
study of social rules is not impossible

Second theory is asserted by James Buchanan along with a number of neo-Austrian


economists, who hold that law should not be an instrumental variable designed to maximize
wealth. Judges should not be entrusted with economic decisions--they lack the training and
information to make them wisely. They should use custom and precedent to construct a stable
but distinctly background framework for market and nonmarket behaviour. But this is an
objection to normative economic analysis of law- to urging, for example, that the common
law (and perhaps other law) be changed to make it approximate the economic model of
efficient law better-and the more interesting and promising aspect of economic analysis of
law is the positive. I say this not because of a general preference for positive to normative
inquiry, but because so little of a systematic nature is known about law. Law is not so well
understood that one can hold a confident opinion about whether the right way to improve it is
to make the judges more sophisticated economically or more obedient to precedent and
tradition.

Then the focus of the article shifts towards analysing the economics behind free-speech laws
which has been funnelled down to the First Amendment of the United States of America. In
the evolution of free-speech law, the first mode of regulation to go is censorship of books and
other reading matter; the law's greater antagonism to censorship than to criminal punishment
or other ex post regulation (for example, suits for defamation) being expressed in the rule that
"prior restraints" on speech are specially disfavoured. Censorship is a form of ex ante
regulation, like a speed limit. The less common the substantive evil (the costs resulting from
an accident due to carelessness, in the case of the speed limit, or the costs resulting from a
treasonable or defamatory newspaper article, in the case of censorship), and also the more
solvent the potential injurer, the weaker the case for ex ante regulation is. Posner in light of
the previous observation now asks us to consider the onerous limitations that the Supreme
Court has placed on efforts to sue the media for defamation. If we assume that news confers
external benefits, then, since a newspaper or television station cannot obtain a significant
property right in news, there is an argument for subsidizing the production of news. A direct
subsidy, however, would involve political risks though we have run them occasionally, as in
the establishment of the Corporation for Public Broadcasting. A form of indirect subsidy is to
make the victims of defamation bear some of the costs of defamation that the tort system
would otherwise shift to the defamer. The Supreme Court has distinguished between public
and private figures, giving private figures a broader right to sue for defamation than public
ones. This distinction may make economic sense. The external benefits of information about
public figures are greater than those of information about private figures, and therefore the
argument for allowing some of the costs to be externalized is stronger. Moreover, a public
figure, being by definition newsworthy, has some substitute for legal action: he can tell his
side of the story, which the news media will pick up.

The First Amendment also forbids the government to make any law (1) respecting an
establishment of religion or (2) prohibiting the free exercise of religion. To make economic
sense of the recent Supreme Court judgements Posner highlights how any public
establishment of religion will tend to favour major religious groups over minor ones and can
thus be compared to government's placing its thumb on the scales in a conventional
marketplace, by granting subsidies or other benefits to politically influential firms. Refusing
to accommodate fringe religious groups will have effects similar to those of establishing a
religion because employment policies, and other public policies and customs, are chosen to
minimize conflict with the dominant religious groupings." It is no accident that the official
day of rest in this country is the Sabbath recognized by the mainline Christian groups. Fringe
groups will therefore benefit from a rule requiring accommodation of their needs.

But since the costs of accommodation are borne by employers, consumers, taxpayers, other
employees, etc., few cases actually subsidize fringe religious groups. And since it is no more
efficient for government to subsidize weak competitors than strong ones, it may not be
possible to defend the accommodation cases by reference to notions of efficiency.. The most
important point to note, however, is that the Supreme Court has required government to
subsidize fringe religious groups both directly and by discouraging religious establishments
that inevitably would favour the beliefs and practices of the dominant sects in the community.
By doing these things, the Court probably has increased religious diversity and may therefore
have promoted religion, on balance, notwithstanding the "anti- religion" flavour of some of
its establishment cases.

It may be hard to believe that the moral tone of our society has actually improved since the
Supreme Court adopted its aggressively secularist stance, but economic analysis suggests that
the situation might be worse rather than better if the Court had weakened private religious
organizations by allowing government to compete more effectively with them in inculcating
or requiring moral behaviour. Since government and organized religion are substitutes in
promoting moral behaviour, an expansion in the government's role as moral teacher might
reduce the demand for the services of organized religion. Posner says "might" rather than
"would" because, to the extent that the government's role as moral teacher is taken seriously,
a government that seeks to promote religiously based moral values may help "sell" religious
values, and the organizations that promote them, over their secular substitutes. But this
assumes what history suggests is unlikely: that the government will find a way of supporting
religion on a genuinely non-sectarian basis rather than establishing a particular sect and
thereby weakening competing sects and maybe religion as a whole.

Posner throughout the length of the article discussed about free speech and religion which can
be connected as follows. One possible reading of the First Amendment is that it forbids
government to interfere with the free market in two particular "goods"-ideas, and religion.
Government may not regulate these markets beyond what is necessary to correct externalities
and other impediments to the efficient allocation of resources. This seems an appropriate
description of how modern courts interpret the amendment; the principal though not only
exceptions are the cases that forbid what might be called "efficient" establishments
(establishments that do not involve a subsidy to religious persons beyond what can be
justified on secular grounds) and the cases requiring accommodation of religion in the sense
of subsidizing fringe religious groups. There is no compelling economic argument for such a
subsidy unless something can be made of Adam Smith's point that the more separate religious
sects there are, the more effective religion is in bringing about moral behaviour and morals
supplement law in correcting negative externalities such as crime and fostering positive ones
such as charity.

Posner ends his article on the note that this particular theory holds promise and is thus worth
pursuing. He iterates that what may be called the economic theory of law has a significant
potential to alter received notions, generate testable hypotheses about a variety of important
social phenomena, and in short enlarge our knowledge of the world.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy