Economics is the branch of knowledge concerned with the production, consumption, and transfer of wealth. It is the condition of a region or group as regards material prosperity. It is the social science that analyzes the production, distribution, and consumption of goods and services. Now the Question is whether Economics is a science or not?
Economics is a science that treats of those social phenomena that are due to wealth getting and wealth using activities of Man. The word “Economics” is derived from the Greeks word “Oikonomos” which means to manage the house. So it means the management of a household especially in those matters, which are relating to the income and expenses of the family.After sometime, political economy term was also used for this topic and slowly political economy adopted the shape of Economics. There are numerous definitions of Economics offered from time to time but there is no clear and concise definition. Keeping in view this situation J.M. Keynes has rightly, stated “Political Economy is said to have strangled itself with definition.”
However, Economics is considered to be a science as well as an art. Some of its features like, self corrective nature, systematic body of knowledge, own laws and theories, universal validity of its laws (law of demand, marginal utility, law of diminishing returns etc) support economics to be a science, but its other features like lack of predictability and lack of accurate observation and experimentation prevents the same.
Moreover economics has some features in common with art i.e. the applicability of theories and principles into practical use. For this reason Marshall took out a midway and regarded economics as a science, pure and applied, rather than a science and an art.
Law, as a social science, is closely related to many cognate disciplines in the social and natural sciences. And law does not operate in a vacuum. Its relevance must relate to the overall values of society. Economics, it is said, is the science of rational choices in a world of limited resources. And the term ‘resources’ here does not relate only to money but can be of any type.
Law and economics is the application of economic methods to analysis of law. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. In other words “Law and economics,” also known as the economic analysis of law, differs from other forms of legal analysis in two main ways.
First, the theoretical analysis focuses on Efficiency. The second characteristic of law and economics is its emphasis on incentives and people’s responses to these incentives. A legal situation is said to be efficient if a right is given to the party who would be willing to pay the most for it.
There are two distinct theories of legal efficiency, and law and economics scholars support arguments based on both. The positive theory of legal efficiency states that the common law is efficient; while the normative theory is that the law should be efficient. It is important that the two theories remain separate. Most economists accept both.
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 economy, constitutional 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 and the sociology of law considers many of the same fundamental issues as does work labeled “law and economics”.
The one wing that represents a non-neoclassical approach to “law and economics” is the Continental tradition that sees the concept starting out of the Staatswissenschaften approach and the German Historical School of economics. Here, consciously non-neoclassical approaches to economics are used for the analysis of legal problems.
Law and economics stresses that markets are more efficient than courts. When possible, the legal system, according to the positive theory, will force a transaction into the market. When this is impossible, the legal system attempts to “mimic a market” and guess at what the parties would have desired if markets had been feasible.
Law and economics shares an assumption with other branches of economics that individuals are rational and respond to incentives. When penalties for an action increase, people will undertake less of that action. Law and economics is more likely than other branches of legal analysis to use empirical or statistical methods to measure these responses to incentives.
Economic analysis of law is usually divided into two subfields, positive and normative.
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 the effects of a negligence rule. Positive law and economics has also at times purported to explain the development of legal rules, for example the common law of torts, in terms of their economic efficiency.
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, in particular, allocative efficiency.
A common concept of efficiency used by law and economics scholars is Pareto efficiency. A legal rule is Pareto efficient if it could not be changed so as to make one person better off without making another person worse off. A weaker conception of efficiency is Kaldor-Hicks efficiency. A legal rule is Kaldor-Hicks efficient if it could be made Pareto efficient by some parties compensating others as to offset their loss.
In the United States, economic analysis of law has been extremely influential. Judicial opinions utilize economic analysis and the theories of law and economics with some regularity. The influence of law and economics has also been felt in legal education. Many law schools in North America, Europe, and Asia have faculty members with a graduate degree in economics.
In addition, many professional economists now study and write on the relationship between economics and legal doctrines. Anthony Kronman, former dean of Yale Law School, has written that “the intellectual movement that has had the greatest influence on American academic law in the 20th Century” is law and economics.
Major issues studied in law and economics are as follows; definition of property rights; this is the task of property law. Second, transfer of property; this is the role of contract law. Finally, protection of property rights; this is the function of tort law and criminal law.
Law and economics scholars also apply the tools of economics, such as game theory, to purely legal questions, such as various parties’ litigation strategies. While these are aspects of law and economics, they are of more interest to legal scholars than to students of the economy.