ankush sharma final draft of juris.docx

8/17/2019 ankush sharma final draft of juris.docx

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LAW AND ECONOMICS MOVEMENT

TERM PAPER IN

JURISPRUDENCE

SUBMITTED ON

PARTIAL FULFILLMENT OF THE DEGREE OF

B.A. LL.B. (HONS.) VIII SEMESTER

SUBMITTED BY:

Ankush Shara

R!"" N!.#$%&

B.A. LL.B. (HONS.) VIII SEMESTER

2016

National University of Study and Researc in La!" Ranci

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Introduction$

The paper seeks to enquire into the premises and methodology of the economic analysis of

law to see if the economic analysis of law presents a descriptive or normative account of law.

The researcher believes that the law and economics theory has aspects of both descriptive and

normative theories; though there is flaw in its normative part as the normative analysis is very

narrowly restricted to efficiency criterion.

Teory$

Law and Economics movement can be defined as the use of economic theory –

primarily microeconomics and the basic concepts of welfare economics – to examine

the formation, structure, processes, and economic impact of law and legal institutions.1

The works of Coase2 and Calabresi3 formed the foundation for the economic analysis of law

by arguing that many legal rules and principles lead to costs and benefits and thus such legal

rules and principles can be analysed on the touchstone of economic efficiency. Coase

propounded that law can be and thus should be tested on the counts of economic concepts so

that legal rules and principles can also be made economically efficient. ! The "aw and

# $%C&'"() *+,C-,' )T+/+$ 0. *+1+*( +C'$'*%C) ( $1 T&+ "(4 5,'* P')$+,

T' P')T 6 *'1+,$%)* 3 7#st ed. #8889.

2 ,onald &. Coase The Problem of ocial !ost 3 :ournal of "aw and +conomics # 7#8


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+conomics movement encompasses various schools of thought viA. Chicago approach to law

and economics public choice theory institutional law and economics and the new

institutional economics.

Chicago approach to law and economics is regarded as the dominant school within the

economic analysis of law. The Chicago approach is a simplistic application of economic

concepts to legal rules. (s such the approach has following premises4

a. %ndividual as rational maBimiAer of satisfaction 6 The rational individual contrasts

with the reasonable man of traditional legal and social theories. The reasonability of

such man is conditioned by the norms and conventions of the society in which heshe

lives. (ny deviation from these norms and conventions will be considered

unreasonable but under the economic approach certain behaviour can be considered

rational even if it conflicts with social norms.

b. %ndividuals respond to price incentives 6 This premise flows from the first premise

and based on the basic economic logic that when prices rise the demand will decrease

and vice versa. %n the economic analysis of law price is in the form of fine

punishment compensation etc for engaging in unlawful activities. Thus a rational

individualDs decision is guided by the relative prices of the options faced by himher.

c. +fficiency 6 The Chicago approach employs efficiency as a criterion to decide thedesirability of any policy. +fficiency is a concern of the welfare economics. +fficiency

can be understood by following quote4

Efficiency corresponds to the %si&e of the pie', while e(uity has to do with how it

is sliced .)

The reliance on efficiency is partly due to its obEectivity as Chicagons are sceptical of

the motives of those who use Eustice and fairness as the touchstone for policy making. F

Chicago approach preGdominantly follows wealth maBimiAation or ?aldorG&icks

criterion of efficiency as it is supported by :ustice ,ichard Posner. ealth

*+,C-,' supra note # at #


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maBimisation has been widely accepted as the efficiency criterion by the advocates of

economic analysis of law and it forms the basis of their argument that economic

analysis of law is a normative theory.

Understandin' Descri(tive and Nor)ative Teory" in 'eneral

Hy descriptive theory it is meant that the theory does not argue to Eustify or legitimiAe any

aspect of its subEect matter 8 and that such theory Eust outlines what is. 1escriptive theory does

not go into any question of value Eudgement but charts out the premises on the basis of which

one can predict or eBplain the content of the concept under study. +conomists often use the

word IpositiveI to refer to economic analysis that is descriptive rather than normative. #(" L(*%,( H(,(? *+1%$( "( +C'$'*%C) ( $1 *',("%T> #2 7#st ed. 2


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determine what should be the legal rules 7normative9 in the absence of substantial

information about the effects of the rules 7descriptive9. This is applicable in the case of

utilitarianism under which determination of legal rule is based on the consequence of the

rules. )ometimes the positivedescriptive aspect works as constraint on normative aspect of a

theory.#

Nature of Econo)ic Teory of La!

+conomics as a social science can be broadly divided into two fields viA. positive and

normative economics. Positive economics is quite similar to the descriptive legal theory and

these two are used interchangeably under the economic approach of law.#! Positive economics

can be referred as an obEective assessment of the subEect matter under consideration.

$ormative economics deals with the JoughtK question but it is not independent of the positive

economics. -nder the normative analysis in economics any policy decision is based on

predicted effect of doing one thing and the other and such prediction is essentially derived

from the positive analysis in economics. Therefore it is not apt to say that normative analysis

can be independent of positive analysis. (lso economists are tempted to shape positive

conclusions in accordance with normative preGsuppositions and reEect those positive

conclusions whose normative implications are not desirable.# 5or eBample an economist

has his normative commitment to purely capitalist mode of distribution and in order to correct

#3 (ndrian /ermeule !onnecting Positive and ormative Legal Theory #< :ournal of

Constitutional "aw 3F=38


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the slowdown in the market he might resort to measures of state interference yet Eustifying

the positive step of interference in light of his normative commitments as happened in 2


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Wealt Ma-i)isation 6 legal change is efficiency enhancing if the gains to the winners

exceed the losses to the losers or, alternatively stated, if the wealth of society, as measured by

willingness to pay, is increased .#8 The aim of wealth maBimisation is to increase social wealth

by promoting such transactions which result into maBimisation of social wealth. %n relation

to the law Posner suggests that this approach attempts to reconstruct the li#ely terms of a

mar#et transaction in circumstances where instead a forced exchange too# place – to mimic

or simulate the mar#et, in other words.2<

The idea is simple that law will always or mostly deal with the situations which cannot be

performed in voluntary market situations and thus in such scenario Posner says that the state

shall simulate or mimic the mar#et and accordingly dispense Eustice in line with the goal of

efficiency.2#

The concept of wealth maBimisation can be better understood by applying it to +elvin v.

"eid // which was discussed by Posner. The facts are that a prostitute was tried for murder

and was acquitted. "ater on she led a blameless life in a new town with changed name.

ithout any conteBt a local newspaper published an article eBposing the woman. )he filed a

suit against the newspaper and obtained damages.23

#8 *+,C-,' supra note # at #

2< , %C&(,1 (. P')$+, +C'$'*%C ( $(">)%) '5 "( # 7!th ed. #88F9.

2# ,ichard (. Posner The 0ustice of Economics, # Economia $elle celte Pubbliche #!.

22 ##2 Cal. (pp. 2F! 28= P. 8# 7#83#9.

23 ,ichard (. Posner tilitarianism, Economics, and Legal Theory F 7#9 :. "egal )tudies

#


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Posner believes that the award of damages by the court is problematic because dishonest

behaviour in this case concealing her own identity to enter into social transaction with others

is a cause of high transaction costs. &e draws analogy with a seller of a product concealing

any material defect in the product and argues that the consequence identical to this analogy

shall be borne by the lady because the efficiency demands that the transaction costs and the

detriment from the transaction shall be least.2 Hut there is a fundamental flaw in drawing

such simulation of the mar#et because in the given analogy of material defect it is a

necessary result of such defect that the product will cause damage to the buyer but the act of

concealing the past by woman may or may not result into detriment to the persons entering

into social transactions with her. Therefore he ignores certain other relevant considerations

such as social conditioning values of society how society reacts to such disclosures and that

such values are not universal but differs in every society thus giving a blanket answer seems

problematic. The efficiency notion of Posner has the possibility of taking away the chance of

the lady to come into the mainstream of the society.

The strongest argument for wealth maBimisation he says now is pragmatism4 2e loo#

around the world and see that in general people who live in societies in which mar#ets are

allowed to function more or less freely not only are wealthier than people in other societies

but have more political rights, more liberty and dignity, are more content 3 so that wealth

maximisation may be the most direct route to a variety of moral ends./4

This allegedly strongest argument for PosnerDs efficiency criterion is flawed because of the

logical fallacy of undistributed middle. &is first assertion is that all societies in which

markets are free have more political rights liberty and dignity and on the basis of this

assertion he argues that more political rights liberty and dignity are necessarily results of

free markets. Thus he ignores all other reasons 7undistributed middle9 which might be the

cause of these and other societies having more political rights liberty and dignity.

2 5d.

2! , %C&(,1 (. P')$+, T&+ P,'H"+*) '5 :-,%)P,-1+$C+ 3F2 7#st ed. #88


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Nor)ative 0la! in te Econo)ic Analysis$

5rom the discussion on wealth maBimisation it is clear that the efficiency criterion employed

by the law and economic theorists is problematic in its operation but there is a normative flaw

in a more fundamental stage which is in the claim of the economic analysis that the

efficiency criterion is the sole basis of determination of the claims of Eustice. +ven the

supporters of the economic analysis of law cannot deny this fundamental normative flaw in

this theory.2

The efficiency criterion of the economic analysis tends to ignore those ethical and social

norms which at times become instrumental in legal decision 6 making or which even have

unconscious effect in the value Eudgement of a society for eBample deliberately harming

other people is considered inherently immoral. This depicts the consequentialist nature of law

and economics theory as it denies any intrinsic value to any factor other than the effect of

outcomes. 'n the other hand deontological moral theories assign some importance to

goodness of outcomes but hold that it is not the only morally relevant factor and accords a

higher value to the inherent goodness of the act in decision making.2= )uch nature of the

theory makes economic analysis of law as an incomplete normative understanding of law.

A((lication$

Posner discussed four ethical questions viA. the death penalty the right to privacy trade in

babies and organs and freedom as wealth on the touchstone of wealth maBimisation. &is

analysis of these ethical questions was basically a cost benefit analysis in light of the

efficiency criterion. %t will be redundant to restate the reasoning given by him under each of

the questions but a new ethical question can be taken to understand the application of the

economic analysis theory.

2 "ewis (. ?ornhauser 6n 0ustifying !ost7-enefit nalysis 28 :. "egal )tud. #


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2o)ose-uality 6 %t is a much debated question in the recent times and there is range

of arguments in support of it and against it. There are a number of issues in the

homoseBuality debate but for the current discussion a specific question is set out as follows4

whether homoseBuality be legaliAed while deGcriminalising it@ %n application of the law and

economics theory the relevant costs are following4

#. The social costs attributable to deviation in the social structure and harm resulting

from such deviation.

2. The additional costs of trial and punishment of homoseBuals.

3. The reduction in social costs resulting from preventing deviation in the social

structure by criminalising homoseBuality.

. The social costs of restricting individual freedom.

'n the analysis of these costs the theorists will see in what situation the costs are minimum

or wealth of the society is maBimised and that situation will be recommended by the

normative legalGeconomic analysis. %n this eBample we can see that the efficiency itself has

incorporated the consideration of morality of the society 7# and 39 but that is not the case in

all the situations such as death penalty. Posner believes that the question with respect to

death penalty can be decided by weighing the benefits of death penalty in reducing the social

cost of criminal activities and the cost of imposition of death penalty2F )uch enquiry evades

morality or otherwise of any claim under the death penalty debate. Thus the efficiency

criterion does not go into the question of morality of awarding death to a human by the

human laws.

Conclusion$

2hen efficiency reduces general productivity, worsens the structures of distribution and

destroys the economic and political flexibility of the system as a whole, then one of the

foremost victims is 8ustice./9

2F Posner supra note 23 at #3

28 *(T&%) supra note ! at 2


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The strong point of the economic analysis of law is that it presents a detailed evaluation of

the economic effect of a legal rule or principle. Hut the method cannot be used in questions

which necessarily involve deliberation on social norms customs etc. as in such scenario it

becomes difficult to present such values in monetary terms. Thus the normative aspect of the

economic analysis of law is not comprehensive in itself and that its monistic normative

analysis also proves to be a flaw in the normative economic analysis of law.

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